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Book of Abstracts


PET07 - Vanderbilt University




Tradable Permit System in an Intertemporal Economy


Ken-Ichi Akao          School of Social Sciences, Waseda University,  akao@waseda.jp
Shunsuke Managi          Faculty of Business Administration, Yokohama National University,  managi@ynu.ac.jp
 

Tradable permit schemes are market-based instruments that have potential for use in many countries to improve the management of natural resources and to reduce pollution emissions. This study analyzes the intertemporal allocation of tradable permits including founding a bank of permits. We show that Tinbergen''s policy principle applies to the intertemporal permit system and thus the merits of artificial market system analyzed by Montgomery (1972) reduce in an intertemporal setup.

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Intertemporal decision making with present biased preferences

Zafer Akin          TOBB University of Economics and Technology,  zaferakin@gmail.com
 

We are going to examine the role of time inconsistency in inter-temporal decisions and in bargaining situations. This kind of behavior that cannot be completely explained by conventional economic theory is modeled by introducing special discounting frameworks. One special kind of discounting is the " Hyperbolic Discounting" . The basic intuition behind using this hyperbolic preference is to be able to model the preferences of the agents who give more credit to their instant or immediate gratifications than distant future payoffs, which make them behave inconsistently overtime. In this paper, by taking the economic agent''s non-stationary preferences as given, we apply this specific formulation of time-inconsistent preferences in a two stage game framework that is first self-investment decision making followed by an alternating-offer bargaining game.

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The collective household, household production, and efficiency of marginal reforms

Sam Allgood          University of Nebraska-Lincoln,  sallgood@unl.edu
 

Most research on the welfare properties of taxes employs the unitary model of the household and ignores household production. In this paper, a simple model that builds on past work of Apps and Rees (1988, 1999) and Allgood and Snow (1998) provides simple expressions for the changes in individual utility that occur for marginal reforms to government policy. These simple expressions make very clear how the collective household model and household production interact to alter the distributional effects of marginal reforms. The analytical models and the numerical calculations identify which elements of the collective model and household production are important for understanding the welfare effects of marginal reforms. Numerical calculations place the model in context with past research to quantity the efficiency costs of marginal reforms with recent work on the welfare implications of the collective household model.

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The welfare effects of government''s preferences over spending and its financing

C. Emre Alper          Bogazici University,  emre.alper@boun.edu.tr
Oya Ardic          Bogazici University,  pinar.ardic@boun.edu.tr
Ayse Mumcu          Bogazici University and University Of Pennsylvania,  ayse@sas.upenn.edu
Ismail Saglam          Bogazici University and MIT,  saglam@MIT.EDU
 

In this paper we examine the welfare effects of government''s preferences over consumption and investment spending under different methods of financing in a two-period OLG model. The government has a utility function defined over the decomposition of her spending over two periods and raises funds by issuing bonds and by printing money. She allocates her funds into consumption expenditure that benefits the current population and investment expenditure which benefits the future population. The model is calibrated using data on the U.S. economy for the period 1981-2004. The findings reveal that the government''s choice of financing as well as composition of spending into consumption-investment have differing impacts on the welfare of the young and old generations.

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Weakly fair allocations and strategy-proofness

Tommy Andersson          Department of Economics, Lund University,  tommy.andersson@nek.lu.se
 

This paper considers a fair division problem with two types of indivisible objects, like jobs, houses etc., and one divisible good(money). Each individual consumes exactly one object and some money. It is assumed that the money that associated with each object cannot fall short of an exogenously given level. In order to guarantee existence, the concept of fairness is extended, and we define a new concept of fairness, called weak fairness. The class of weakly fair allocation rules that are coalitionally strategy-proof is characterized. It turns out that a weakly fair allocation rule is coalitionally strategy-proof if and only if it is optimal, where optimality means it must maximize the use of money subject to some upper quantity bounds.

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Rent-Seeking in Emerging Polities

Calin Arcalean          Indiana University Bloomington,  carcalea@indiana.edu
 

The legal system and the property rights can be considered a public good, similar in nature to infrastructure. However, unlike physical capital, legal arrangements are sensitive to the underlying political agreement at constitutional level. Thus, a change in the political regime may destroy a part or all of the accumulated stock of legal infrastructure. The paper studies the level of rent-seeking in economies where the initial stock of legal infrastructure is very low, such as after a recent regime change. I present a simple model of rational politicians subject to reelection and study different anti-corruption policies. I find that, depending on the initial conditions, the under-accumulation of public capital induces persistent corruption. Also, the results are consistent with relatively ineffective anticorruption policies. The main predictions of the model are supported by empirical evidence in a cross-section of countries that experienced major political changes during the last 45 years.

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Network effects in risk sharing and credit market access: Evidence from Istanbul

Oya Pinar Ardic          Bogazici University,  pinar.ardic@boun.edu.tr
Fikret Adaman          Bogazici University,  adaman@boun.edu.tr
Didem Tuzemen          University of Maryland, College Park,  tuzemen@econ.bsos.umd.edu
 

It is a truism that households in developing countries that face idiosyncratic income/expenditure shocks may face difficulties in smoothing consumption through formal credit institutions, and hence rely, at least partially, on informal ties. While this issue has been explored extensively in the literature for rural areas, the picture reflecting the urban setting remains relatively uninvestigated. This paper aims to fill this gap by presenting an exclusively designed survey implemented in Istanbul. The results of a multi-stage logit estimation of the survey data indicate that monetary transfers from social networks and formal loans are complements, while general usage of network help implies an increased likelihood of asking for network help for easy and/or favorable access to credit. In addition, material security emerges as the key determinant of both eligibility for and use of a formal loan, and of having network help available in easing the loan approval process by banks.

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Incentives and competition under moral hazard

Andrea Attar          IDEI, University of Toulouse I,  anattar@cict.fr
 

The work introduces a simple framework to study the relationship between competition and incentives under non-exclusivity. We characterize the equilibria of an insurance market where intermediaries compete over the contracts they offer to a single consumer in the presence of moral hazard. Non-exclusivity is responsible for under-insurance and positive profits in an otherwise competitive set-up. A relevant notion of optimality is also introduced and it is argued that market equilibria fail to be constrained-efficient.

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Domestic Political Survival and International Conflict: Is Democracy Good for Peace?

Sandeep Baliga          Northwestern Unversity,  baliga@kellogg.northwestern.edu
David Lucca           Federal Reserve Board,  david.o.lucca@frb.gov
Tomas Sjostrom          Rutgers University,  tsjostrom@economics.rutgers.edu
 

Abstract: If conflict is sufficiently costly to the average citizen, then full democracies are unlikely to be at war with each other. However, they may be become very aggressive in their interactions with other types of regimes, so democracy is not always good for peace. Moreover, limited democracies will be the most aggressive regime types, if the leader thinks he can stay in power only by appealing to an aggressive minority. Empirically, we find that a dyad of limited democracies is more likely to be involved in a militarized dispute than any other pair of political regimes (including two dictatorships). A dyad of full democracies is less likely to be involved in a militarized dispute than any other pair. Thus, there seem to be strong non-linearities in the relationship between democracy and peace, with limited democracies inherently more aggressive than other regime types. This effect is not limited to a period of transition from democracy to dictatorship. Finally, we find that as the environment becomes more hostile as a country becomes less democratic, the probability of conflict increases most dramatically when it faces a democracy.

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" Assessing the redistributive effects of local public investments and the property tax incidence"

marc BAUDRY          Universite de Rennes 1 & CREM (UMR CNRS 6211),  marc.baudry@univ-rennes1.fr
 

The hedonic price approach to real estate values generally serves as a basis for Cost Benefit Analysis of local public investments. However, a traditional drawback of Cost Benefit Analysis is that both redistributive effects and tax incidence are commonly disregarded. This paper proposes an attempt to remedy to theses problems. For this purpose we go back to the theory of hedonic prices and derive a model that explicitly links the form of the hedonic price function, the distribution of a housing quality index, the distribution of income among inhabitants and the type of residence they choose. We then take advantage of this link to assess the willingness to pay for local public investments conditionally on the income and compare it to the effective contribution of each individual as measured by the increase of property tax paid to finance the investment. Moreover, since fiscal capitalisation is also included in our hedonic price model, we are able to take account of fiscal incidence and assess the corresponding loss of welfare. We finally propose an econometric method to estimate the hedonic price function and to assess the redistributive effects of local public investments and the property tax incidence without explicitly knowing the distribution of income and the distribution of the housing quality index. Data from the real estate market of the city of Rennes (France) are used for illustrative purposes.

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Fighting Income Tax Evasion with Positive Rewards: Experimental Evidence

Cé cile Bazart          Université Montpellier I,  cbazart@univ-montp1.fr
michael Pickhardt.          Chemnitz University of Technology,  michael@pickhardt.com
 

This paper introduces a new experimental design that allows for testing the influence of both negative sanctions and positive rewards on income tax evasion behavior. In particular, we consider the probability of detection and the penalty rate (or tax rate on undeclared income) as deterrence variables and take two kinds of positive rewards into account the provision of public goods and individual lottery winnings. The introduction of the experimental design is preceded by some background on tax evasion and the following sections deal with strategy issues, offer some results and conclude. Among other things, we find that under both a benevolent and a leviathan government positive rewards in form of individual lottery winnings induce a high rate of tax compliance, which supports the findings of Alm, Jackson and McKee (1992). Moreover, we find evidence for a gender effect as male tax evaders show a particular positive response to the lottery scheme. To this extent, our results also indicate that a revenue maximizing combination of the four tested instruments &lsquo detection rate'', &lsquo penalty rate'', &lsquo public good'' and &lsquo lottery winnings'' may exist. Finally, our results cast some doubt on the view that comparatively high voluntary contribution levels observed in public good experiments can be explained predominantly by the provision of the public good itself.

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Fiscal competition in space and time: an endogenous-growth approach

Daniel Becker          University of Rostock,  daniel.becker@uni-rostock.de
Michael Rauscher          University of Rostock,  michael.rauscher@uni-rostock.de
 

Is tax competition good for economic growth? The paper addresses this question by means of a simple model of endogenous growth. There are many small jurisdictions in a large federation and individual governments benevolently maximise the welfare of immobile residents. Investment is costly: Quadratic installation and de-installation costs limit the mobility of capital. The paper looks at optimal taxation and long-run growth. In particular, the effects of variations in the cost parameter on economic growth and taxation are considered. It is shown that balanced endogenous growth paths do not always exist and effects of changes in intallation costs are ambiguous.

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Political polarization and the electoral effects of media bias

Dan Bernhardt          University of Illinois,  danber@uiuc.edu
Stefan Krasa          University of Illinois,  skrasa@uiuc.edu
Mattias Polborn          University of Illinois,  polborn@uiuc.edu
 

Many political commentators diagnose an increasing polarization of the U.S. electorate into two opposing camps. However, in standard spatial voting models, changes in the political preference distribution are irrelevant as long as the position of the median voter does not change. We show that media bias provides a mechanism through which political polarization can affect electoral outcomes. In our model, media firms'' profits depend on their audience rating. Maximizing profits may involve catering to a partisan audience by slanting the news. While voters are rational, understand the nature of the news suppression bias and appropriately, important information is lost through bias, which can lead to inefficient electoral outcomes. We show that polarization increases the profitability of slanting news, which raises the likelihood of electoral mistakes. We also show that, if media are biased, then there are some news realizations such that the electorate appears more polarized to an outside observer, even though citizens'' policy preferences do not change.

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Beyond Revealed Preference: Choice Theoretic Foundations for Behavioral Welfare Analysis

Douglas Bernheim          Stanford University,  bernheim@stanford.edu
Antonio Rangel          CalTech,  rangel@hss.caltech.edu
 

Beyond Revealed Preference: Choice Theoretic Foundations for Behavioral Welfare Analysis

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Modernizing the IRS The Forgotten Anti-Evasion Action

Martin Besfamille          Departamento de Economí a, Universidad Torcuato Di Tella,  mbesfamille@utdt.edu
 

Tax evasion is an important problem that most governments have to deal with. As a consequence of the quantitative importance of tax evasion, governments adopt a broad set of actions to combat it. The public finance literature has examined some of these anti-evasion actions, like the organizational relationship between the government and the tax administration, the design of tax schedules that reduce stakes for evasion and the enforcement of the tax law. If one looks carefully to all articles devoted to the analysis of these anti-evasion actions, we can observe that they share a common feature: in all them, the audit cost function is exogenously given. This assumption seems unsatisfactory: governments also invest resources to modernize their tax administration and thus, to reduce audit costs. To our knowledge, investments made by governments to modernize their tax administration, considered as an anti-evasion measure, have not been rigorously studied so far. This is precisely the purpose of our paper. In order to characterize the optimal anti-evasion policy, we include this kind of investments in the set of possible measures that governments can adopt. We find the optimal investments and we show how they interact with the other anti-evasion measures already analyzed by the public finance literature. We also show some numerical examples, that yield to very interesting quantitative predictions.

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Why Fuel Poverty? Dynamics of Income and Expenditure of Households in Yorkshire England

Keshab Bhattarai          Lecturer in Economics,  K.R.Bhattarai@hull.ac.uk
 

Fuel poverty is analysed using the Stone-Geary preference with evidence from the family expenditure survey of England and Yorkshire. Major reasons for fuel poverty are lower growth rates of income of households in low income group, rising prices of fuel and commodities, changing pattern of consumption, rise in the dependency ratio because of reduction in proportion of working age people in population and falling rates of public transfers to low income households. A dynamic programming model based on Bellman value function is used for determining optimal consumption and saving at individual and national level is presented analytically for optimal decisions that can solve this problem with suggestions for the best dynamically optimal path for the economy till the target is achieved by the end of model horizon. If implemented such choices raise the aggregate growth rates of the economy and of the low income households and uplifting their living standard above the poverty level.

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Collectively incentive compatible tax systems

Felix Bierbrauer          Max Planck Institute for Research on Collective Goods,  bierbrauer@coll.mpg.de
 

This paper assumes that individuals possess private information both about their abilities and about their valuation of a public good. Individuals can undertake collective actions on order to manipulate the tax system and the decision on public good provision. Consequently, an implementable scheme of taxation has to be collectively incentive compatible. If preferences are additively separable, then an implementable tax systems has the following properties: (i) tax payments do not depend on public goods preferences and (ii) there is no scope for a collective manipulation of public goods preferences. For a quasilinear economy, the optimal tax system is explicitly characterized.

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Unit versus ad valorem taxes: the private ownership of monopoly in general equilibrium

Charles Blackorby          University of Warwick, Dept of Economics,  c.blackorby@warwick.ac.uk
Sushama Murty          Univeristy of Warwick,  s.murty@warwick.ac.uk
 

In an earlier paper we showed that if a monopoly sector is imbedded in a general equilibrium framework and if monopoly profits were taxed at one hundred percent, then unit and ad valorem taxation are welfare-wise equivalent. In this paper we consider the more general case where monopoly profits are privately owned and show that neither unit (specific) nor ad valorem taxation dominates the other.

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Dividend Taxes versus Dividend Payouts: New Evidence

Alan Blankley          Accounting Department, UNC at Charlotte,  aiblankl@email.uncc.edu
Stanislav Radchenko          Economics Dept., UNC at Charlotte,  sradchen@email.uncc.edu
Benjamin Russo          Economics Dept., UNC at Charlotte,  brusso@uncc.edu
 

Long-running debate has not resolved the relationship between dividend taxes and dividend payouts. The Traditional View assumes dividend taxes reduce payouts. The New View assumes they do not. Partial Adjustment Models (PAM) provide one approach to estimating the relationship. This paper tests the robustness of conclusions based on PAM along many dimensions. First, we use firm-level data to focus on &ldquo mature&rdquo (dividend-paying) firms and study whether all mature firms respond similarly to the dividend tax. We find that some mature firms reduce dividends in response to dividend taxes. Many mature firms that appear not to respond, nevertheless, appear to target dividends. Second, we include proxies for size and investment opportunity in PAM because theory and empirical work indicate these variables could be correlated with dividend payouts. Third, and perhaps most important, we replace common earnings with measures more likely to reflect dividend targeting, namely operating earnings and operating cash flows. Operating earnings consist of relatively transitory accruals and relatively stable operating cash flows. We decompose operating earnings, include both parts in PAM, and conduct a novel test of dividend behavior. Our results support the view that dividend taxes reduce dividend payouts in the long run. However, the size of the tax effect appears smaller than in previously published PAM estimates.

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Optimal Tax Design And Enforcement With An Informal Sector

Robin Boadway          Queen''s University,  boadwayr@econ.queensu.ca
 

Using the Mirrlees optimal income tax model with a maxi-min social welfare function, we derive conditions for a decreasing marginal tax rate throughout the skill distribution, a strictly concave tax function in income and a single-peaked average tax schedule. With additive preferences and a constant labor supply elasticity, marginal tax rates are decreasing below the modal skill level, and will also decrease above the mode if aggregate skills are non-decreasing with the skill level. In this case and with a bounded skill distribution or with a constant hazard rate, the tax function is strictly concave in income and the average tax rate single-peaked. When quasilinear utility functions apply in either consumption or leisure, under fairly mild restrictions on the truncated or untruncated distribution function, marginal tax rates are decreasing in skill and the average tax profile is single-peaked. The distribution of skills has the same qualitative influence for either case of quasilinearity. These results continue to hold when there is bunching at the bottom due to a binding non-negativity constraint. We also illustrate how relaxing the assumption of constant elasticity of labor supply, generally used in the literature, modifies the results.

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On Dynamic Compromise

Renee Bowen          Georgetown University,  trb23@georgetown.edu
Zaki Zahran          Georgetown University,  zz4@georgetown.edu
 

What prevents majorities from extracting surplus from minorities in a dynamic legislative process? In this paper we study an infinitely repeated game where legislators determine the division of a surplus each period. A division proposal is made at the beginning of the period by a randomly ed legislator and is then voted on. Proposals that are accepted by a simple majority are implemented, otherwise the status quo allocation prevails. We show existence of a symmetric Markov perfect equilibrium in which more than a minimum winning majority receive a positive allocation for an intermediate range of discount factors. However, the equilibrium outcome is sensitive to initial conditions: compromise is achieved when initial allocations are well distributed, otherwise the equilibrium spirals towards a complete absence of compromise. We find that, contrary to intuition, compromise becomes easier to sustain as the number of legislators increases.

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Is Equal Opportunity Enough? A Theory of Persistent Group Inequality

Sam Bowles          Santa Fe Institute,  bowles@santafe.edu
Glenn Loury          Brown University,  Glenn_Loury@brown.edu
Rajiv Sethi          Barnard College, Columbia University,  rs328@columbia.edu
 

We explore the dynamics of group inequality when segregation of social networks places the initially less affluent group at a disadvantage in acquiring human capital. We demonstrate that (i) group differences in economic success can persist across generations in the absence of discrimination, credit constraints, or group differences in ability, provided that social segregation is sufficiently great, (ii) there is threshold level of integration above which group inequality cannot be sustained, (iii) this threshold varies systematically but non-monotonically with the population share of the disadvantaged group, (iv) crossing the threshold induces convergence to a common level of human capital.

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Tradable Deficit Permits: A Way to Ensure Sub-National Fiscal Discipline?

Marie-Laure Breuillé           Wissenschaftszentrum Berlin fü r Sozialforschung (WZB),  breuille@wz-berlin.de
 

This paper proposes a system of tradable deficit permits for implementing budgetary austerity at the local level. We evaluate the efficiency of the fiscal retrenchment allocation in a dynamic setting with a commitment problem. The way rights are allocated and traded on the market turns out to be decisive for the cost-effectiveness of the system. Indeed, the inability of the State to commit dynamically on a sharing rule of deficit rights generates perverse incentives which affect the local market. The market turns out to be inefficient - with heterogeneous jurisdictions - unless the State allows local decision-makers to trade permits through time.

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Do Intangible Assets Explain High U.S. Foreign Direct Investment Returns? The Role of Multinational Taxes

Benjamin Bridgman          Bureau of Economic Analysis,  Benjamin.Bridgman@bea.gov
 

U.S. investors abroad receive a higher return on their assets than their counterparts that invest in the United States. I examine the degree to which excluding intangible assets from the measurement of foreign direct investment can account for this gap. Using a growth accounting framework, I estimate intangible capital stocks for foreign-owned affiliates. Accounting for intangible assets significantly reduces the long-run gap in returns since U.S. affiliates abroad hold a relatively large share of their assets as intangible capital. American owned foreign affiliates are taxed at the relatively high U.S. corporate rate, giving them an incentive to hold more intangible assets relative to those owned by other countries. I find that multinational tax policy is quantitatively consistent with both the size and the persistence of the gap.

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Irreducibility, taxes and the existence of equilibrium

William Bryant          Macquarie University,  tbryant@efs.mq.edu.au
 

The seminal result on the existence of competitive equilibrium in Arrow and Debreu (1954) contains, as one of its conditions, the requirement that each consumer has an endowment which is in the interior of his or her consumption set. The authors assert that such a condition, or something like it, is necessary for the existence of competitive equilibrium. They also remark that it is desirable to find a more reasonable condition than that of interior of endowments, particularly in the context of establishing the existence of competitive equilibrium. Irreducibility provides an interesting alternative to the Arrow-Debreu interior endowment condition and Florenzano (2003) has shown that one form of irreducibility namely, Bergstrom-Florig irreducibility, is indeed necessary for existence (at least when preferences are not price dependent). However, like the interior of endowments condition, irreducibility requires that certain relationships hold across the economy &ndash relationship which don''t have any obvious theoretical motivation and which may well fail in reality. In this paper we show that a breakdown of irreducibility can be repaired by certain tax and transfer schemes, at least as far as the existence of equilibrium is concerned.

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Tiebout Sorting and Inefficiency

Stephen Calabrese          Carnegie Mellon University-Qatar Campus,  sc45@qatar.cmu.edu
 

The analogy between competition among firms in providing private goods and &ldquo Tiebout competition&rdquo among jurisdictions in providing local public goods is central to the economic study of local public finance. The basic idea is that household mobility will induce jurisdictions to provide efficient mixes of local public goods and taxes, or they will fail to attract residents. A large literature examines when the analogy is sufficiently compelling so that inter-jurisdictional competition is efficient and the nature of departures from efficiency when these conditions are not fulfilled. For efficiency, essentially the tax system and housing-market price must control any externalities in residential choice with also efficient governmental choice of the level(s) of the local public good(s). While standard models frequently fail to meet the conditions for efficiency, economic intuition suggests that some Tiebout competition is better overall than none: The alternative of centralized provision will do nothing to match heterogeneous preferences to provision of local public goods. This paper challenges this intuition by showing that Tiebout competition can lead to an aggregate welfare loss in a standard model for realistic parameter values.

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A Theory of Policy Expertise

Steven Callander          Northwestern University,  scal@kellogg.northwestern.edu
 

This paper presents a new theory of policy expertise. In contrast to existing theories, I define expertise as direct knowledge of the policy process itself. Thus, expertise represents an understanding of how policies are transformed into outcomes, and does not reduce to the possession of a single piece of information (as in standard models). The theory offers several theoretical and conceptual advantages, and resonates more closely with common understandings of expertise. To establish the usefulness of the theory, I apply it to the well-studied problem of delegation and show that it provides a solution to the commitment problem of legislative-bureaucratic policy making. The theory also provides a measure of issue complexity, and predicts that only complex issues are delegated, consistent with empirical observation. The conceptual novelty of the theory also opens up many further questions and applications, several of which are considered here.

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Stereotype formation as trait aggregation

Burak Can          Bilgi University,  burakcan1@gmail.com
Remzi Sanver          Bilgi University,  sanver@bilgi.edu.tr
 

We propose an aggregation model which explains stereotype formation under the attribution hypothesis. We show, under very mild axioms, that an observer can be thought of perceiving a group in terms her subjective opinion about the representativeness of subgroups as well as a possible prejudice she might have.

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On the uniqueness of Groves Mechanisms

Juan Carbajal-Ponce          Department of Economics, Washington University in St. Louis,  cblponce@wustl.edu
 

We present a set of necessary and sufficient conditions for Groves mechanisms to be unique among all possible efficient, dominant strategy revelation mechanisms, in a social choice setting with quasi-linear preferences, private valuations and multi-dimensional types. We first show that equi-Lipschitz continuity of the valuation functions, relative to the individual type spaces, is sufficient to guarantee almost everywhere differentiability of the value functions that arise from the individual and the social optimization problems. A condition on the generalized one-sided directional derivatives of the valuation functions with respect to individual types, imposed at certain equilibrium points, is then shown to be necessary and sufficient to characterize any efficient, dominant strategy revelation mechanism as a member of the class of Groves mechanism. We provide some examples of our main result and carry out extensions to Bayesian Nash environments, for which a payoff equivalence result is also proven.

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Why are high ability individuals from poor backgrounds under-represented at university?

Buly Cardak          La Trobe University,  b.cardak@latrobe.edu.au
Chris Ryan          RSSS, Australian National University,  Chris.Ryan@anu.edu.au
 

We analyse data in which individuals from low socioeconomic status (SES) backgrounds have lower university participation rates than those from higher SES backgrounds. Our focus is on the role played by credit constraints in explaining these different participation rates. We propose a multistage model of education where university participation is contingent on ability to pay and high school academic performance, which depends on family SES and innate student ability. We find no evidence that credit constraints deter high achieving students from attending university in Australia, a country with an income contingent loan scheme for higher education tuition fees. We do, however, find that how students convert their earlier school performance into the scores on which university entrance is based is contingent on their SES. That is, for students of similar ability, those from higher SES backgrounds are more likely to obtain university entrance scores and achieve higher scores if they do. Hence, policy interventions that rectify the credit constraint problem that faces individuals at the time they make university entrance decisions are not sufficient to equalize university participation across social groups.

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On the Measurement of Fragmentation

Jean-Franç ois Caulier          Faculté s Universitaires Saint-Louis Brussels,  caulier@fusl.ac.be
 

A set of elected political parties is grouped in a decision-making body. According to the decision rule and the size of each party, negotiation takes place between parties. A variety of coalitions is contemplated in order to attain a majority of seats. In that case we say that the political body is {\it fragmented}. Our objective is to study fragmentation, and to provide a theory of its measurement. We take special care to follow the long-standing intuition of fragmentation in our conceptualization. Fragmentation of a decision-making body measures the extent to which influence is spread among the members (parties). When measured by an Effective-Number index, the index allows one to compare the body with a fictious one where each member would have the same influence on the decision. It is our contention to distinguish our theory from the theory of inequality measurement. We propose and characterize a new index and show that it is the unique to satisfy all the reasonable properties we impose for a fragmentation index.

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Embracing Liberalism for Collective Identity Determination

Murat Ali Cengelci          University of Minnesota,  acengelci@gmail.com
M. Remzi Sanver          Istanbul Bilgi University,  sanver@bilgi.edu.tr
 

A Collective Identity Function (CIF) is a rule which aggregates personal opinions on whether an individual belongs to a certain identity into a social decision. We characterize CIFs which can be expressed in terms of winning coalitions. We also explore the e¤ ect of imposing conditions that ensure the equal treatment of individuals as voters or as outcomes. We show that liberalism arises as the unique simple CIF that satis?es axioms which are very natural in the collective identity determination context.

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Corruption and the Quality of Public Capital

Shankha Chakraborty          University of Oregon,  shankhac@uoregon.edu
Era Dabla-Norris          IMF,  edablanorris@imf.org
 

This paper examines whether quality differences in public capital can substantively account for cross-country income differences. Existing evidence suggests a 2-to-3 fold quality difference in public capital across countries. For this quality difference to matter for income levels, existing theoretical models require the productivity of public capital to be unrealistically high. We propose a dynamic general equilibrium model where (a) public capital affects total factor productivity by encouraging greater product diversification, and, (b) quality differences in public capital arise due to bureaucratic corruption. The model implies observed quality differences in public capital can explain up to 40% of observed income gaps between rich and poor nations.

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Contracting and Regulatory Policy Design in an Uncertain World

Robert Chambers          University of Maryland, College Park,  rchambers@arec.umd.edu
Tigran Melkonyan          University of Maryland, College Park,  tmelkonyan@arec.umd.edu
 

The paper examines principal-agent relationships in uncertain environments where beliefs of the contracting parties (the regulator and the firm) are represented by sets of probabilities. In addition to fully characterizing the first-best and the second-best solutions, we examine optimality of fixed-payment schemes (standards) and the relationship between the first-best and the second-best solutions. In the second-best world, where the regulator can only contract on the quality of the good, a standard is optimal when the firm has beliefs that are so ambiguous that the firm''s marginal rate of transformation belongs to the set of the firm''s relative probabilities. We also compare the second-best quality to the quality that the regulator would implement if it controlled production directly and possessed a singleton prior (which the regulator uses in the second-best problem). When the regulator is more " pessimistic" than the firm, the regulator implements a quality pattern that is more dispersed in the former case than when it controls production directly. Conversely, when the regulator''s beliefs are less pessimistic, it implements a less dispersed quality scheme in the second-best world.

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Endogenous Formation of Networks for Local Public Goods

Myeonghwan Cho          Pennsylvania State University,  muc152@psu.edu
 

The paper studies the situation where agents can make a binding agreement both on the quantity of local public goods and on the form of networks through which they share the benefits of public goods. An agent can enjoy the benefit of public goods produced by other agents who are directly or indirectly connected to him, and he has to pay a cost to maintain a link as well as a cost to produce a public good. Since agents can choose the amount of public goods, the value of a link is endogenously determined. First, we characterize the core allocations. A core allocation consists of a minimally connected network and an action profile in which at most one agent does not produce the maximum amount of public good. Next, we consider two different models of sequential bargaining games through which a contract on an allocation is made. In the first model, we allow agents to propose an allocation and show that there is no symmetric stationary perfect equilibrium if agents are sufficiently patient. Agents, in the second model, are allowed to propose a distribution on allocations. Then, we can find a symmetric stationary perfect equilibrium in which probabilistic choices are made on an equivalent class of allocations. Furthermore, efficiency is obtained with probability one in any symmetric stationary perfect equilibrium if agents are sufficiently patient.

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Queueing problems with two parallel servers

Youngsub Chun          Department of Economics, Seoul National University,  ychun@snu.ac.kr
Eun Jeong Heo          Department of Economics, University of Rochester ,  eheo@troi.cc.rochester.edu
 

A group of agents are waiting for their job to be processed in a facility. We assume that each agent needs the same amount of processing time and incurs waiting costs. The facility has two parallel servers, being able to serve two agents at a time. We are interested in finding the order to serve agents and the (positive or negative) monetary compensations they should receive. We introduce two rules for the problem, the minimal transfer rule and the maximal transfer rule. We show that these two rules correspond to the Shapley (1953) value of the queueing games with two servers, as discussed similarly by Maniquet (2003) and Chun (2006a) for queueing problems with one serve, when the worth of each coalition is appropriately defined. If the worth of a coalition is defined by assuming the coalitional members are served before the non-coalitional members, then the minimal transfer rule is obtained. On the other hand, if it is defined by assuming the coalitional members are served after the non-coalitional members, then the maximal transfer rule is obtained.

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Public Goods, Endogeneous Coalitions and Asymmetric Externalities

Sebastien Cochinard          University Paris 5 Rene Descartes (LIRAES) and Paris 1 Pantheon Sorbonne (CES),  sebastien.cochinard@univ-paris5.fr
Martial Foucault          University of Montreal and European University Institute (RSCAS),  martial.foucault@umontreal.ca
Gregoire ROTA-GRAZIOSI          University of Clermont-Ferrand - CERDI,  gregoire.rota-graziosi@u-clermont1.fr
 

This paper aims at analyzing the capacity of countries coalitions for managing transnational spillovers when they provide public good. Contrary to the classic view of internalization of public good externalities, we propose to take into account the intensity of spillovers as an explaining mechanism of the formation of countries co alition for providing public good. In this perspective, we start by developing a model with three countries providing a common public good and pursue by comparing the equilibrium solutions when two countries decide to form a coalition. This theoretical framework integers coalition spillovers and assumes policy uniformity.

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Endogenous Games, Cultural Integrity, and the Coexistence of Conventions

John Conley          Vanderbilt University,  j.p.conley@vanderbilt.edu
William Neilson          University of Tennesee, Knoxville,  wneilson@utk.edu
 

We address the issue of whether two different cultures can coexist when members of different cultures are placed in positions where they might interact but have the option of refusing to interact. Using the theory of endogenous games we find that there are no equilibria in which two groups of agents choose two different conventions, interact with others in their own group, but refuse interactions with members of the other group. Thus conventions cannot coexist in equilibrium unless artificial barriers preclude members of different groups from ever meeting, and one unless different cultural groups are kept separate one culture must assimilate the other.

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Unequal Contribution from Identical Agents in a Local Interaction Model

Luca Corazzini          Department of Economics - Bocconi University, Milan,  luca.corazzini@unibocconi.it
Ugo Gianazza          Department of Mathematics, University of Pavia,  gianazza@imati.cnr.it
 

The main findings of the theory on the private provision of public goods under the assumptions of symmetric individuals and normality of both the public good and private consumption are that: 1) there exists a unique Nash equilibrium pattern of contributions in which everybody contributes the same amount 2) this pattern is stable. We show that these findings no longer hold in a context characterized by local interaction. Individuals are distributed around a circle and enjoy the level of public good contributed in their neighborhood. Each individual belongs to a neighborhood defined as the first k individuals on her right, the first k individuals on her left, and herself. In this context, it is always possible to find preferences satisfying the assumption of normality such that the symmetric Nash equilibrium is unstable, and there exists at least one asymmetric Nash equilibrium which is locally stable.

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Cooperative Production and Efficiency

Luis Corchó n          Univesidad Carlos III ,  lcorchon@eco.uc3m.es
Carmen Beviá           Universitat Autonoma de Barcelona ,  Carmen.Bevia@uab.es
 

We characterize the sharing rule for which a contribution mechanism achieves efficiency when agents are heterogeneous in a cooperative production setting. The sharing rule bears no resemblance with those considered by the previous literature. We also show for a large class of sharing rules that if Nash equilibrium yields efficient allocations, the production function displays constant returns to scale, a case in which cooperation in production is useless.

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Spatial economies: a general equilibrium approach

Bernard CORNET          University of Kansas and Paris School of Economics,  cornet@ku.edu
 

We consider a general equilibrium model of a spatial private ownership economy with a continuum of consumers and with a finite number of producers. The space of locations K is either a finite set or a compact metric space and a finite number of physical goods are available at each location. Consumers have to choose a unique place where to work, to live and to consume, called their residence and their initial endowments are conditional to their choice of residence. This consumer behavior is the main difference with the Arrow-Debreu world, and it induces structural non-convexities (on the consumption sets) that justify to consider a continuum of consumers. The notion of spatial equilibria is precisely defined and we provide an existence theorem of such equilibria when the space of locations is either finite or infinite (a compact metric space).

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Informational lobbying and competition for access

Christopher Cotton          Cornell University,  csc35@cornell.edu
 

In competition for access, interest groups provide contributions to a politician and those that provide the highest contributions win access. Groups with access present information that may influence the politician''s beliefs about the socially optimal policy. Because equilibrium contributions are chosen endogenously, the politician learns about the information quality of all interest groups, even when he grants access to only some of the groups. Contribution limits reduce the signaling power of the equilibrium contributions, resulting in a less informed politician, and strictly reducing expected social welfare.

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Designing a linear pension scheme with forced savings and wage heterogeneity

Helmuth Cremer          University of Toulouse,  helmut@cict.fr
Dario Maldonado          Universidad del Rosario,  dario.maldonadoca@urosario.edu.co
 

This paper studies the optimal linear pension scheme when society consists of rational and myopic individuals. Myopic individuals have, ex ante, a strong preference for the present even though, ex post, they would regretnottohavesavedenough. While rational and myopic persons share the same ex post intertemporal preferences, only the rational agents make their savings decisions according to these preferences. Individuals are also distinguished by their productivity. The social objective is &ldquo paternalistic&rdquo : the utilitarian welfare function depends on ex post utilities. We examine how the presence of myopic individuals a ects both the size of the pension system and the degree of redistribution it operates. The relationship between proportion of myopic individuals and characteristics of the pension system turns out to be much more complex than one would have conjectured. Neither the impact on the level of pensions nor the effect on their redistributive degree are unambiguous. Nevertheless, we show that under some plausible assumptions adding myopic individuals increases the level of pension benefits and leads to a shift from a flat or even targeted scheme to a partially contributory one. However, we also provide an example where the degree of edistribution is not a monotonic function of the proportion of myopic individuals.

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Horizontal and Vertical Tax Externalities in a Multicountry World

Ernesto Crivelli          Department of Economics-University of Bonn ,  e.crivelli@uni-bonn.de
Christian Volpe Martincus          Inter-American Development Bank,  christianv@iadb.org
 

Recent contributions on tax competition recognize the interaction between both horizontal and vertical tax externalities in a single federation. The possibility of dominant horizontal externalities leading to excessively low taxes or dominant vertical externalities associated with excessively high taxes has been subject to different empirical tests. In this paper, we extend the theoretical analysis to a framework with multiple federations. We show that the relative size of a federation in the determines not only the extent but also the direction of the tax ine¢ ciency. The equilibrium state tax is set at a lower rate if the country is small relative to the but surprisingly, vertical externalities are more likely to dominate, i.e. for a relative small federation, the non-cooperative local tax rate will be lower than for a relative large federation but the tax rate is still higher than the one observed in the absence of tax competition. This result seems to contradict recent theoretical findings where a lower equilibrium state tax is followed by a dominant horizontal externality.

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Tenancy Default, Excess Demand and the Rental Market

Katherine Cuff          McMaster University,  cuffk@mcmaster.ca
Nicolas Marceau          UQAM,  marceau.nicolas@uqam.ca
 

We develop a model of a competitive rental housing market with an endogenous rate of tenancy default, in which potential tenants face some income uncertainty. Tenants must choose to engage in a costly search for rental housing, and must commit to a rental agreement before the uncertainty is resolved. We show that there are two possible equilibria in this market: a market-clearing equilibrium and an equilibrium with excess demand. Therefore, individuals might not have access to a rental units because they are unable to afford to look for housing, they are unable to find a rental unit or they are unable to pay their rent. We examine the effect of changes in various parameters of the model such as the costs of search (to the tenant), the cost of default (to the housing suppliers), as well as the quality of rental units. The effect of these parameters on the equilibrium variables of interest rental rate, quantity demanded and supplied, and access to rental units will depend on the type of equilibria in the market. A numerical example illustrates these results and also demonstrates that social welfare may be higher when there is excess demand in the rental housing market.

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Deterrence in rank-order tournaments

Phil Curry          Simon Fraser Univeristy,  pcurry@sfu.ca
Steeve Mongrain          Simon Fraser University,  mongrain@sfu.ca
 

In a tournament, competitors may engage in undesirable activities, or " cheating" , in order to gain an advantage. Examples of such activities include the taking of steroids, plagiarism, and " creative accounting" . This paper considers the problem of deterrence of these activities and finds that there exist special considerations that are not present in a traditional model of law enforcement. For example, an agent''s returns to cheating depend on the cheating decisions of others, and so there may exist multiple equilibria. The problem of multiple equilibria can be reduced when the first-place prize is awarded to the person that performed best without cheating. Moreover, we show that re-awarding prizes reduces the amount of monitoring required to ensure compliance. We also demonstrate that monitoring costs can further be reduced by awarding a second-place prize or by monitoring the winner of the tournament more than the loser.

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Conspicuous consumption foundations to consumer preferences

Antonio D'Agata          University of Catania,  adagata@unict.it
 

Classical consumer theory (e.g. by Arrow (1951), Debreu (1959)) is unable to explain preferences and their axioms and to deal with widely accepted phenomena like Veblen effect and menu dependent preferences. Recently, Veblen''s theory of conspicuous consumption has been introduced in economic analysis to explain micro and macro economic facts (see, e.g. Frank (1985), Bagwell and Bernheim (1996), Luttmaer (2005) and reference therein). However, these works provide no explanation of how the consumer''s utility function is obtained. The aim of this paper is to show that, following Simon''s rule-based approach (Simon (1955)) and on the basis of assumptions coherent with Veblen and modern conspicuous consumption theory''s view, it is possible to derive &ldquo rational&rdquo preferences of individuals behaving according to this theory. More precisely, preferences are obtained as solution of a two players zero-sum status game that consumers play with a malevolent society. Our model is able to provide also micro foundations to the widely known Leibenstein''s analysis of Veblen effect, to provide precise functional forms of utility functions for specific cases of status seeking behaviour, and to naturally accommodate menu dependent phenomena.

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" The race to the suburb and back: the location of the poor in a metropolitan area" ''

Charles de Bartolome          University of Colorado,  debartol@spot.colorado.edu
Stephen Ross          University of Connecticut,  stephen.l.ross@uconn.edu
 

We provide an explanation for the stylized fact that poor households are concentrated in the inner city of most U.S. metropolitan areas. We consider a metropolitan area with an inner city surrounded by a suburb and two income classes. Using numerical simulations, we show that two equilibria typically exist: one in which the inner city has a majority of poor households and the other in which it has a majority of rich households. However, at low metropolitan populations, only the former equilibrium exists. We argue that this leads the growth path to this equilibrium. In addition, at very large population levels, this equilibrium ceases to exist - an observation which explains &ldquo gentrification.&rdquo

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Life cycle of products and Endogenous fluctuations

Jean DE BEIR          University of Evry Val d''Essonne, EPEE,  jdebeir@eco.univ-evry.fr
Mouez FODHA          University of Paris 1, CES,  fodha@univ-paris1.fr
Francesco MAGRIS          University of Evry Val d''Essonne, EPEE,  francesco.magris@univ-evry.fr
 

This paper considers recycling activities in a general equilibrium model. Our study considers recycling public activities as a way for reducing pollution in order to achieve a sustainable development goal. We assume that the recycling sector has four fundamental characteristics. (i) It allows for a reduction of negative environmental externalities. (ii) The production factors are restricted by the production of preceding periods. (iii) These production factors are waste for which the price determination might be non-competitive. (iv) It produces a recycling good, which is a perfect substitute to the primary good, with less pollutant emissions. We study the dynamics and the stability properties for the simplest economy. Hence, we consider an infinitely lived agent and a life cycle hypothesis for the goods (two periods of use). We assume that there is no waste market. We show that the equilibrium is unique and is always determinated. In spite of the lack of indeterminacy, however, our system can display cyclical behaviour, depending on some usual conditions on three elasticities: the recycling production function elasticity, the elasticity of the interest rate and the elasticity of intertemporal substitution in consumption. Namely, as we will show, the steady state may undergo a Flip and a Hopf bifurcation. The impossibility of getting instead a Saddle-node bifurcation is due to the uniqueness of the steady state.

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Would letting people vote for several candidates yield policy moderation?

Arnaud Dellis          University of Hawai''i - Manoa,  adellis@hawaii.edu
 

The present paper investigates whether letting people cast a vote for several candidates instead of only one would yield more moderate policies. It does so in a setting that allows for endogenous candidate entry, strategic voting and policy-motivated candidates. Two broad classes of voting rules are considered. In the first one, each voter is given several votes to cast, with each vote weighed equally. In the second one, each voter is asked to submit a ranking of the candidates. In both cases, three types of ballots are considered: completely-filled ballots, truncated ballots and cumulated ballots. The paper identifies conditions under which a voting procedure yields policy moderation. It also shows that if any of those conditions does not hold, then letting people vote for several candidates may have the opposite effect, i.e., yield policy extremism instead of policy moderation.

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Development and the Interaction of Enforcement Institutions

Amrita Dhillon          University of Warwick,  a.dhillon@warwick.ac.uk
Jamele Rigolini          World Bank,  jrigolini@worldbank.org
 

We examine how institutions that enforce contracts between two parties, producers and consumers, interact in a competitive market with one-sided asymmetric information and productivity shocks. We compare an informal enforcement mechanism, {\it reputation}, the efficacy of which is enhanced by consumers investing in ``connectedness,'''' with a formal mechanism, {\it legal enforcement}, the effectiveness of which can be reduced by producers by means of bribes. When legal enforcement is poor, consumers connect more with one another to improve informal enforcement in contrast, a well-connected network of consumers reduces producers'' incentives to bribe. In equilibrium, the model predicts a positive relationship between the the frequency of productivity shocks, bribing, and the use of informal enforcement, providing a {\it physical} explanation of why developing countries often fail to have efficient legal systems. Firm-level estimations confirm the partial equilibrium implications of the model.

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Noncooperative Formation of Coalitions in Hedonic Games

Effrosyni Diamantoudi          Concordia University, Department of Economics,  ediamant@alcor.concordia.ca
 

We study endogenous coalition formation in the class of hedonic games, where players'' preferences depend solely on the coalition they belong to. We show that if a hedonic game is totally balanced then for every core element there exists a stationary perfect equilibrium that supports it. The reverse is not true and it is established with the means of a counter example that admits a unique core element. We also identify a condition that guarantees both uniqueness of the core as well of stationary perfect equilibria. When the core of the game is empty we identify a condition that guarantees the emptyness of the core as well as the non-existence of stationary perfect equilibria. Moreover, we show that if the game has an empty core then the stationary perfect equilibrium, if it exists, will involve unacceptable offers.

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Bargaining in voting and efficiency of voting rules

Pavel Diev          Banque de France and GREQAM,  pavel.diev@banque-france.fr
Christophe Deissenberg          GREQAM,  deissen@univ-aix.fr
 

We analyse a model where before voting individuals with heterogeneous preferences are bargaining about the formation of a winning coalition. We show a condition under which this bargaining admits solutions. The outcome is characterized by a probability distribution about the implemented policy such that extreme policies are excluded (bias to the centre) and there are big chances to observe the formation of left or right minimum winning coalitions (alternance). We use this result to assess the relationship between the majority threshold and the expected social welfare. We compute the exact relationship between the optimal majority threshold and the distortion (bargaining) cost of coalition formation. We find that unanimity is an optimal rule only when there exist no such distortions.

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Inventor''s quandary: In-house or start-up?

Manfred Dix          Tulane University,  mdix@tulane.edu
Ram Orzach          Oakland University,  orzach@oakland.edu
 

We analyze a model where a financially constrained inventor has to decide whether to work as an employee in a firm''s lab or establish a start-up company. Only the inventor knows whether he is a high or low type. If he chooses to set up a start-up, it reduces his productivity, as he has to deal with the bureaucracy himself. We show that in high payoff projects and the inventor employed in the lab, the compensation of the inventor will be a proportion of the prevailing (non-invention) market wage. Furthermore, we characterize the case, when, despite the productivity reduction, a start-up increases his expected compensation. The preference of the inventor for a start-up works opposite for the financing firm. This may be a possible explanation for the tension that may arise between the inventor and the financing firm, because the latter may try to convince the former to leave the bureaucracy to a professional manager and concentrate on inventions in the firm''s lab.

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Hiding, Seeking, and the Evolution of Privacy Behavior

Stefan Dodds          Carleton University,  sdodds@ccs.carleton.ca
 

This paper uses an evolutionary approach to study the existence and dynamics of `privacy behavior'' in economic environments. I examine these features in a game where randomly-matched individuals follow simple rules of thumb about hiding private endowments before contributing to a common pool. The baseline model, populated by `hiders'' and `non-hiders'', predicts that `hiders'' either come to dominate the population or are driven out entirely. The introduction of `seeking'' behavior generates a stable equilibrium where `hiding'' is only adopted by a fraction of the population. Simulations suggest that the dynamic adjustment to such an equilibrium after a change in hiding or seeking costs may be lengthy or incomplete, with the population oscillating between episodes of much hiding and/or much seeking.

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Transfer of tax revenue and rent-seeking activity: An appraisal of Japan''s fiscal decentralization

TAKERO DOI          KEIO UNIVERSITY,  tdoi@econ.keio.ac.jp
Toshihiro Ihori          University of Tokyo,  ihori@e.u-tokyo.ac.jp
NOBUO AKAI          OSAKA UNIVERSITY,  akai@biz.u-hyogo.ac.jp
 

Recently Japan intends to shift a significant amount of tax revenue from the central government to local governments in a decentralization reform. We investigate empirically how the tax-revenue shifting tends to exaggerate inefficient local expenditure from the viewpoint of flypaper effects. First, in the urban area where per-capita income is high, useful local public goods are provided more than in the rural area. This is because in the urban area the general voters conduct more monitoring effort so that the rent-seeking local politicians have to take care of the general voters'' wellbeing more to maintain the office than in the rural area. Second, it is desirable to transfer tax revenue by raising a tax share of local governments on local income tax base, rather than by using a lump-sum subsidy from the central government. When the tax share on local income is raised, the rent-seeking government has an incentive to enhance the tax base. Since the reservation utility is raised due to more public investment, local governments would face more pressure from the general voters. Finally, the flypaper effect is not common to all publicly provided items but may vary considerably across expenditure categories. Namely, if a lump-sum subsidy to local governments are raised, wasteful public spending alone is stimulated, while an increase in income of the general voters stimulates useful public spending. Our empirical results are mostly consistent with the above analytical conjectures.

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Fiscal policy, maintenance allowances and macroeconomic (in)stability

Nicolas DROMEL          CREST and Universite de la Mediterranee (GREQAM-IDEP),  nicolas.dromel@ensae.fr
 

This paper assesses the stabilizing effects of fiscal policy with capital depreciation and maintenance expenditure allowances in a real business cycle model with mild empirically-plausible increasing returns. It is shown that progressivity of such a fiscal scheme can immunize the economy against belief-driven fluctuations, by affecting the necessary and sufficient condition for the occurence of local indeterminacy. Most importantly, the required degree of fiscal progressivity to rule-out indeterminacy, sunspots and cycles can be arguably small, which contrasts with the related literature in segmented asset markets economies. For realistic parameters values, this analysis shows how maintenance and repair allowances, as featured by tax codes prevailing in many countries, may strengthen the stabilizing power of progressive fiscal rules.

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The asset specificity issue in the private provision of environmental services: evidence from agro-environmental contracts

Geraldine Ducos          INRA,  geraldine.ducos@rennes.inra.fr
Pierre Dupraz          INRA,  pierre.dupraz@rennes.inra.fr
 

The agro-environmental contract is a widely used policy-instrument in Europe dedicated to produce environmental services in rural areas. This is a contract between the State and the farmer who benefits a compensation to comply with environmental friendly practices he freely chooses. Since asset specificity has a major role on environmental outcomes, it is crucial to identify the driving factors of farmers'' behaviour as regard to specific practices. Despite a large empirical literature on adoption behaviour, the choice over asset specificity has not been explored yet. This paper addresses this issues by assuming a utility maximizing farmer who compares practice compensation payment with compliance costs. Given that private transaction costs are not taken into account in the calculation of compensation payments, their variability across practices is expected to affect farmers'' choice. By identifying conditions in which these costs vary, we derived testable propositions about these conditions'' effect on the choice over asset specificity. The empirical analysis is based on a sample of 328 French farmers interviewed in 2005. Estimations support that distrust in the State, uncertainty stemming from the opacity of public decisions and the non-similarity of transactions have a significant negative effect on the probability farmers choose specific assets.

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Are IP rights correctly enforced? An econometric analysis of the outcome and duration of IPRs litigation.

beatrice DUMONT          Universite de Rennes 1, CREM (UMR CNRS 6211) & College of Europe,  beatrice.dumont@univ-rennes1.fr
marc BAUDRY          Universite de Rennes 1 & CREM (UMR CNRS 6211),  marc.baudry@univ-rennes1.fr
 

It is worth keeping in mind that the economic value of IP rights and the strategic use of IP litigation by competing firms strongly depend on the way IP rights are granted but also enforced by public authorities. In order to assess whether IP rights are correctly enforced, we consider that the outcome and the duration of an IP litigation should not a priori be influenced by the characteristics of the parties involved and/or the type of the IP right at stake. The aim of the paper is to test this key idea. In a first stage, it is assumed that the judge in charge of the suit modifies his belief regarding which party is within his rights according to the arrival of noisy information. Following Bayes rule, the probability distribution of the minimal time required until the process reaches an upper or lower bound serves as a basis to define the probability distribution of the outcome and duration of a suit. In a second stage, the two parties are assumed to interact through the choice of an initial investment conditioning the information flow so that the duration and the outcome of the suit may depend on the characteristics of the two parties. A genuine database on IP litigation for France is then used to estimate the model. We find some statistical evidence that the characteristics of the parties influence the outcome and/or duration of an IP suit, which calls for a strengthening of the rules used to grant IP rights and thus make them more correctly enforced.

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Strategic Consensus: Performance Voting with Electoral Uncertainty

Jayasri Dutta          University of Birmingham,  J.Dutta@bham.ac.uk
Toke Aidt          Faculty of Economics, University of Cambridge,  tsa23@econ.cam.ac.uk
 

The purpose of this paper is to evaluate the consequences of random voter turnout in a dynamic political agency with repeated elections, retrospective voting, and heterogenous groups of voters. We show that all equilibrium paths (supported by subgame perfect history-independent strategies) exhibit what we call strategic consensus and explore this property in two public finance applications to the choice between transfers and universal public goods and fiscal federalism.

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Living standard, social welfare and the redistribution of income in a heterogeneous population

Udo Ebert          University of Oldenburg,  ebert@uni-oldenburg.de
 

The paper considers a population in which households may differ by type. Then the redistri¬ bution of income has to be based on differences in living standard and a principle of between-type-progressive transfers (BTPT). We characterize the relationship between a social welfare ordering satisfying the BTPT principle and the concept of living standard the principle is based on. There is a close link: The ordering of living standard can be derived from the social welfare ordering. Conversely, the class of welfare orderings fulfilling the BTPT principle for a given concept of living standard can be completely described.

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Private investment in higher education: comparing alternative funding schemes

Bernhard Eckwert          Bielefeld University,  beckwert@wiwi.uni-bielefeld.de
 

This paper uses an overlapping generations framework to analyze the implications of different financing regimes in the education sector for human capital formation and economic welfare. Agents privately invest in education after they have received a noisy information signal about their abilities. The incentives of the individuals to invest in education are determined by the financing regime under which the economy operates. The paper analyzes and compares three financing regimes. Under each regime, the payback obligation of an educational loan is contingent, to some extent, on an individual''s future income.

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Efficient CO2 emissions control with national emissions taxes and international emissions trading

Thomas Eichner          University of Siegen,  eichner@vwl.wiwi.uni-siegen.de
Ruediger Pethig          University of Siegen,  pethig@vwl.wiwi.uni-siegen.de
 

In a group of countries like the EU all countries are committed to a national CO2 emissions target to be achieved by a joint emissions trading scheme (ETS) covering some part of each country''s economy (trading sector) and by a national emissions tax in the rest of the economy (nontrading sector). In addition, we allow for emissions taxes overlapping with the ETS in the trading sector that either can be freely chosen or exist and are inert. In such a setting of hybrid pollution control, welfare maximizing national governments need to determine the tax rates in both sectors as well as the split of the national emissions cap into two sectoral caps. It is shown that allocative efficiency requires each country to refrain from taxing emissions in the trading sector and to set the tax rate in its nontrading sector equal to the equilibrium permit price. In the small-country case the competitive equilibrium turns out to be efficient if tax rates in the trading sectors are flexible. Otherwise it is (second-best) optimal to violate cost effectiveness and to choose an excessive endowment of emissions permits. If in the large-country case tariffs cannot be applied, emissions taxes (or subsidies!) are shown to serve as a perfect surrogate for optimal tariffs. Fiscal externalities are specified and the equilibrium allocations of the large- and small-country case are compared with respect to the countries'' welfare positions.

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Democratic Errors

Chris Ellis          University of Oregon,  cjellis@uoregon.edu
John Fender          University ,  J.Fender@bham.ac.uk
 

We introduce asymmetric information into the Acemoglu-Robinson model of political regime change. This has several interesting implications: First democracy may emerge as an inefficient " mistake" when the appropriate preconditions are not present, second democracy may fail to emerge when these preconditions are met, finally the presence of asymmetric information allows us to model the political protests that lead to regime change by employing information cascades to " solve" the collective action problem. The analysis explains both peaceful and violent regime transitions.

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Free-riding and cooperation in environmental games

Ana Espinola-Arredondo          University of Pittsburgh,  afe4@pitt.edu
 

This paper examines the negotiation of an international environmental agreement in which different countries determine the (nonenforceable) promises of investment in clean technologies to be included in the agreement. Furthermore, it analyzes countries'' optimal investments in clean technologies, considering that, in addition to the utility that a country perceives from an improved environmental quality, it is also concerned about the fulfillment of the terms specified in the international agreement by itself or by others, what enters as a reference point in the country''s utility function. This paper shows, first, why countries may prefer to shift most promises of investment in clean technologies included in the agreement to other countries, despite the fact that these promises are usually nonenforceable by any international organization. Second, I determine countries'' optimal investments in these technologies, and analyze how their particular investments depend on how demanding is the international agreement, and on the importance that countries assign to other countries'' fulfillment of their part of the treaty.

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Trade integration, strategic tax policy and labour market regime.

Nelly Exbrayat          CREUSET, University of Saint-Etienne,  Nelly.Exbrayat@univ-st-etienne.fr
Carl Gaigné           INRA-ESR Rennes,  Carl.Gaigne@rennes.inra.fr
Sté phane Riou          CREUSET, University of Saint-Etienne,  Stephane.Riou@univ-etienne.fr
 

We analyse how tax policies can induce a minimum wage policy into a model of tax competition with imperfect competition and trade costs. We adopt a game-theoretic approach where governments choose non-cooperatively the labour fiscal policy by anticipating the location of firms and the outcome on the labor market. Firstly, we show that the implementation of a minimum wage in both countries strengthens tax competition as compared with the case where both labour markets are competitive. Secondly, we show that the adoption of a minimum wage in a country induces a lower corporate taxation in this country.

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Information transmission through cheap talk in multiple dimensions without commitment

Sven Feldmann          Northwestern University,  sven-feldmann@northwestern.edu
 

Cheap talk games with a multi-dimensional state space have become very useful in the context of lobbying and expert advice. This paper argues that Battaglini''s (2002) equilibrium construction for these games requires the receiver to commit to a mechanism since the message space has to be of lower dimensionality than the state space. I present a much simpler fully-revealing equilibrium without restriction of the messages that can be sent. The receiver uses the cheapest possible punishments off the equilibrium path, and a behavioral justification for such punishments is offered.

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Biased informative lobbying: targets and timing

Mike Felgenhauer          Mannheim University,  felgenha@rumms.uni-mannheim.de
 

This paper investigates the role of biased informative lobbying on political decision making. A lobby, holding relevant information, may send a biased message to the politician and / or to the public before and / or after an irreversible decision. It turns out that ex post comments are often best for the interest group, with desastrous welfare consequences. Furthermore, the optimality of different " target and timing" strategies renders the decision quality non-monotonic in the politician´ s quality.

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Public sector capital and the transition from dictatorship to democracy

John Fender          University of Birmingham,  J.Fender@bham.ac.uk
Christopher Ellis          University of Oregon,  cjellis@uoregon.edu
 

A model where a ruling elite decides on both the level of public sector capital and whether to democratise is constructed. Workers may under certain circumstances have a credible threat of revolution and this may induce democratisation. The possibility of a &lsquo political development trap'', where the elite stifles development in order to stay in power emerges. The model gives insight into the relationship between regime change and development. The model is used to explain both the effects of the 1832 Reform Act in the United Kingdom and the positive correlation between income and democracy.

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Financing Higher Education and Mobility

Robert Fenge          Ifo Institute and CESifo,  fenge@ifo.de
 

This paper analyzes how mobility of students affects the way higher education is financed. For the benchmark of a closed, steady-state economy, we find that the chosen level of education in a fee-financed system is efficient while it is sub-optimally high in a tax-financed system. If students and skilled workers are mobile we show that an inner solution for the migration equilibrium can only result if the level of education in the fee-country exceeds the one in the tax-country. We analyse the effects of imperfect capital markets on the optimal choice of financing when both countries are linked via migration.

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Consensual and Conflictual Democratization

Piergiuseppe Fortunato          UN Department of Economic and Social Affairs,  fortunato@un.org
Matteo Cervellati          University of Bologna,  cervellati@spbo.unibo.it
Uwe Sunde          IZA Bonn,  sunde@iza.org
 

We study the process of endogenous democratization from inefficient oligarchic systems in an economy where heterogeneous individuals can get involved in predation activities. The features of democracies are shown to be crucially related to the conditions under which democratization initially takes place. The political regime and the extent of redistribution that it implies depend on the allocation of de facto political power across the different social groups. The cost of public enforcement of property rights is determined by the extent of predation activities in the economy. The theory highlights the importance of inequality in natural resources and availability of human capital for endogenous democratic transitions. Multiple politico-economic equilibria can be sustained conditional on expectations about property rights enforcement. This generates history dependence. Democratic transitions supported by a large consensus serve as coordination device and lead to better protection of property and more stable political systems than democratic transitions imposed in conflictual environments. The novel predictions are in line with existing evidence and are not contradicted by results obtained with newly collected data on constitutional principles.

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A class of chronic poverty measures

James Foster          Vanderbilt University,  james.e.foster@vanderbilt.edu
 

This paper presents a new family of chronic poverty measures based on the P&alpha poverty measures of Foster, Greer,and Thorbecke (1984). The chronically poor are identified using two cutoffs: a standard poverty line, which identifies the time periods during which a person is poor and a duration cutoff, which is the minimum percentage of time a person must be in poverty in order to be chronically poor. The new family of chronic poverty measures is constructed by raising the (per-period) normalized gaps of the chronically poor to a power &alpha > 0 and then aggregating. The resulting indices, which can be viewed as duration adjusted P&alpha measures, satisfy a battery of properties for chronic poverty indices, including time monotonicity and population decomposability. An illustrative application of the family is provided using data from Argentina.

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A Scale Invariant Endogenous Growth Model With Scientific Advances

Katsufumi Fukuda          Kobe University,  g99701@yahoo.co.jp
 

This article constructs a scale-invariant endogenous growth model with scientific advances. Empirical evidence shows that the expenditure for scientific research dramatically increased over the last fifty years. Also, not uncommonly, historians and empirical economists views scientific research as a driving force behind high technological and per capita GDP growth. Then, the per capita GDP growth rate should have dramatically increased, as R& D based growth model prodicts. But per capita GDP growth rates across OECD countries have been almost constant in the period. Why ? This article offers an answer to this question: the growth rate of technological knowledge is positively affected by the stock of scientific knowledge, but negatively depends on the stock of technological knowledge. On the other hand, the growth rate of scientific knowledge negatively depends on the stock of technological stock, but is positively related to scientific knowledge. Furthermore, the model eplicitly considers the economic effects along the saddle path. Finally, the effects on per capita GDP growth rate of two kinds of tax, over profit and wage for skilled workers, are considered.

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Contributing or Free-Riding? A Theory of Endogenous Lobby Formation

Taiji Furusawa          Hitotsubashi University,  furusawa@econ.hit-u.ac.jp
Hideo Konishi          Boston College,  konishih@bc.edu
 

We consider a two-stage public good provision game: In the first stage, players simultaneously decide if they join a contribution group or not. In the second stage, players in the contribution group simultaneously offer contribution schemes in order to influence a third party agent''s policy choice (say, the government chooses a level of public good provision). We first consider an " intuitive" hybrid (and second best) solution concept free-rider-proof core, and analyze its properties. Interestingly, it is not necessary true that the formed group is the highest willingness-to-pay players, nor is a consecutive group with respect to their willingnesses-to-pay. Second, we consider a fully noncooperative two stage game, and show the equivalence between the free-riding-proof core and the perfectly coalition-proof Nash equilibrium (Bernheim, Peleg and Whinston, 1987 JET) in their outcomes.

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Two experts are better than one

Wolfgang Gick          Department of Economics, Dartmouth College,  w.gick@dartmouth.edu
 

This paper proposes a communication mechanism between a receiver and two senders who are perfectly informed about the state of nature, and biased in the same direction. We show that by threatening the two senders to not change the status quo of an earlier decision when receiving conflicting messages, the receiver can render a simultaneous disclosure mechanism more informative compared to only consulting the less biased sender. The findings of the paper are robust to a wide range of bias combinations and differ from the results of the literature on sequential disclosure. In particular, this paper offers a novel rejoinder to the work of Krishna and Morgan (2001), who show that when senders act in sequence, a single sender at best transmits as much information as do multiple like-biased senders. Such a mechanism is naturally applies to public organizations and to decision making in legislature and committees. In many budget decisions, the floor of Congress often consults similarly influenced groups, both agencies and committees, before passing a bill. Similarly, the president, before writing an executive order, typically consults both the CBO and the OMB. The paper generalizes the unidimensional setting, extending it to a wide range of bias differences between the players, and discusses particular parametric and also nonmonotonic cases. A draft of the paper is available at www.dartmouth.edu/~wgick/submission.pdf

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On the Optimal Design of Disaster Insurance in a Federation

Timothy Goodspeed          Hunter College,  tgoodspe@hunter.cuny.edu
Andrew Haughwout          Federal Reserve Bank of New York,  andrew.haughwout@ny.frb.org
 

Recent experience with disasters and terrorist attacks in the US indicates that state and local governments rely on the federal sector for support after disasters occur. But these same governments are responsible for investing in infrastructure designed to reduce vulnerability to natural and man-made hazards. This division of responsibilities leads to the tension that is at the heart of our analysis. We explore these tensions building on the model of Persson and Tabellini (1996). We show that when the federal government is committed to full insurance against disasters, states will have incentives to underinvest in costly protective measures. We then show that when the central government cannot verify state investment choices, the optimal insurance system would be designed to reward states that succeed in avoiding disasters and punish those that do not, thereby giving states an incentive to increase investment in protective infrastructure. However, this raises the question of whether the central government can credibly commit to such a scheme, and we find in a simple political model that it cannot. In our political model, the central government will decrease transfers ex-post if a state provides protective infrastructure that increases its expected uncertain income, generating a soft-budget constraint for states. This provides an additional incentive for states to underinvest in protective infrastructure.

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Enhanced Intergenerational Risk-Sharing with Unbalanced Social Security

Luciano Greco          University of Padua,  luciano.greco@unipd.it
 

We consider a simple overlapping generations model a'' la Enders and Lapan (1982): individuals live two periods, working when young and being retired when old generations'' productivity is affected by a random shock - i.i.d. across periods there is no accumulation of capital and the only storable asset is money. Assuming that the government is Ricardian, hence that it balances the inter-temporal public budget (including the social security budget), we show that social security programs imposing a budget-balance rule for each period, as it is common in the existing literature, are Pareto-inferior to programs allowing for (possibly limited) budget unbalance (deficit and surpluses) in different periods. This result holds for any specification of the pension program (say, defined benefit or defined contribution) and it is based on the improvement of risk-sharing capacity of social security.

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Genesis of Inequality Counts More than Inequality Per se.

Daniel Haile          Acadia University,  daniel.haile@acadiau.ca
 

This paper presents a theoretical model and uses both single period cross-section as well as panel data for the period 1980-1999 to identify the effect of genesis of inequality on economies growth rates. It attemps to deconstuct the concept of inequality and analyzes the idea that what often matters is not the degree of inequality per se but rather the way in which it is actually perceived by members of society (e.g. whether it is perceived as being fairly or unfaily generated). I find that the negative effect of inequality, if any, operates only in highly corrupt countries suggesting that it only matters when its generation if perceived as unfair by members of a society.

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Does monetary policy help least those who need it most?

Michael Hanson          Welseyan University,  mshanson@wesleyan.edu
 

We estimate the impact of U.S. monetary policy on the cross-sectional distribution of state economic activity for a 35-year panel. Our results indicate that the effects of policy have a significant history dependence, in that relatively slow growth regions contract more following contractionary monetary shocks. Moreover, policy is asymmetric, in that expansionary shocks have less of a beneficial impact upon relatively slow growth areas. As a result, we conclude that monetary policy on average widens the dispersion of growth rates among U.S. states, and those locations initially at the low end of the cross-sectional distribution benefit least fromany given change in monetary policy.

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School Choice: Traditional Mechanisms and Extending the Poor''s Ability to Choose

Eric Hanushek          Stanford University,  hanushek@stanford.edu
Sinan Sarpca          Koc Universitesi,  ssarpca@ku.edu.tr
Kuzey Yilmaz          Koc Universitesi,  kuyilmaz@ku.edu.tr
 

We develop a multi-community urban land use framework to investigate the implications of increasing school choice opportunities on educational and residential choices of a city''s residents. When deciding on the location and the size of land, the households care about the distance to the business district, and a local public good: education. There is a private education alternative that breaks the link between choosing a residence area and choosing a school. The households differ in their incomes and preferences for education. In five models that differ in various aspects of choice and financing, we study the housing and education choices of the city residents, and the endogenously determined education provision levels in equilibrium. The results of the article support reformist arguments: We first show that the presence of a private alternative benefits every household, whereas school district consolidation hurts everyone. We then examine two policies that aim to increase choice. An untargeted local government support (financed by property taxes) that can be used at the private school can improve things for talented poor. A policy that supports the talented poor (using city income taxes) with funds that can be used for public as well as private schools can also improve welfare of all talented students, rich or poor.

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Why enter a tax sparing agreement?

Nigar Hashimzade          University of Exeter,  n.hashimzade@ex.ac.uk
Gareth Myles          University of Exeter and Institute for Fiscal Studies,  gdmyles@ex.ac.uk
Sirikamon Udompol          University of Exeter,  s.udompol@ex.ac.uk
 

Double taxation is an issue at the heart of the tax treatment of multinational companies. Bilateral tax treaties are typically negotiated between capital-exporting and capital-importing country to minimise the double taxation problem and many countries provide tax credits for taxes paid abroad. For the past 40 years capital-importing countries, who are mostly under-developed, have been trying to convince developed countries that they should give tax credits not only on tax which has been paid to developing country but also on taxes which have been spared by the developing country as part of a tax incentive scheme. It seems obvious that the capital-importing country would gain from tax sparing because it would empower their tax inventives in the eyes of foreign investors. What compensates the capital-exporter for their revenue loss is less clear. Regardless of this, empirical evidence shows that many capital-exporters enter into tax sparing agreements. This paper studies the rationale for tax sparing. It can arise as the cooperative outcome of a Nash bargain between capital-exporter and capital-importer but only when the capital-importer has higher bargaining power. This seems an unlikely scenario. Tax sparing can also emerge as a privately-rational equilibrium in a game played between a capital-exporter and competing capital-importers. In this case it benefits the exporter to the detriment of the importers. The latter model seems a more convincing explanation of tax sparing.

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Revenue decentralization, the local income tax deduction, and the provision of public goods

John Hatfield          Stanford University, Graduate School of Business,  hatfield@stanford.edu
 

We consider a model where local and national governments both tax income and use the revenue to invest in both productive and consumptive public goods. We show that a positive national income tax will lead to underprovision of local productive public goods, while the local consumptive public good will be produced efficiently. However, the introduction of a local income tax deduction incentivizes local districts to produce an optimal amount of the productive public good however, such districts will now overinvest in local consumptive public goods. In both cases the central government will underinvest in both types of public goods. A national government that sets one, national tax rate, and gives grants to the states will also underinvest in both types of national goods, and will result in underprovision of the local productive public good. Further, this type of centralized revenue collection mechanism will result in lower welfare in equilibrium than the mechanism detailed earlier if the national government can choose the percentage of local tax deduction.

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Equilibrium Participation in Public Goods Allocations

Paul Healy          The Ohio State University,  healy.52@osu.edu
 

An alternative notion of individual rationality for mechanism design is studied in which mechanisms suggest public goods allocations and individuals then choose whether or not to submit their requested transfer to the central planner. The set of allocations that are robust to non-participation is shown to be sub-optimal in a wide variety of environments and shrinks to the endowment as the economy is replicated. Therefore, any non-trivial mechanism suffers from non-participation in the ed outcome when agents cannot be coerced to contribute.

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The nature of university prestige: research, teaching and money

Marisa Hidalgo          Universidad Pablo de Olavide,  mhidalgo@upo.es
Guadalupe Valera          Universidad Pablo de Olavide,  guadavalera@upo.es
 

The higher education sector has experienced a boom in the last 30 years. At the same time, there is an increasing interest in improving quality at college. The problem of policy makers is how to a system for higher education that balances the demands of excellence and mass access. This paper provides a theoretical model of higher education in which two universities compete in quality and variety (teaching/research). Both universities try to maximize their excellence by choosing the quality of the education/research services they provide and the main activity (teaching/research) they undertake. The government uses different funding schemes to finance teaching and research. We analyze the effect of the funding system on the optimal decisions of the universities. This makes the model useful for the analysis of reforms in funding and also for international comparisons.

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The determinants of governance

Ana Hidalgo-Cabrillana          Universidad Carlos III de Madrid,  ahidalgo@eco.uc3m.es
Piergiuseppe Fortunato          Università di Bologna and UNDE-SA,  fortunato@un.org
 

Empirical works show that good corporate governance is positively correlated with investor''s confidence and firm performance. It is therefore important, from a theoretical point of view, to disentangle the causalitiy direcction and to understand which factors determine the quality of governance. To this end, we endogenize the choice of governance practices at the firm level. Managers have to raise money on the financial market. These markets are subject to imperfection arising from the non-observability of output for financiers, but corporate governance at the firm level can be adopted to amend these frictions. Shareholders only observe a signal that is correlated with the returns. Managers optimally decide about the quality of the signal (and therefore about the " quality of governance" ) trading off the possibility of expropriating a bigger share of the profits against the opportunity of rising more capital on the market. The model have interesting predictions in terms of investment cost, competition among firms, capital markets dimensions, investor''s protection and quality of governance at the firm level.

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Efficiency and stability in a model of wireless communication networks

Sunghoon Hong          Seoul National University,  eigenspace@paran.com
Youngsub Chun          Seoul National University,  ychun@snu.ac.kr
 

We introduce a model of (wireless communication) networks: a group of agents want to communicate with each other. Each agent is characterized by his position in a real space. Then each agent can choose his communication range. Any two agents can directly communicate if each agent belongs to another agent''s communication range. Also, they can indirectly communicate if two agents are connected through a sequence of direct communications. Agents can benefit through the communication, but building a communication range is costly. Although efficiency and stability are not compatible in a general context, we identify an interesting subclass of problems where an efficient and stable network exists: the uniform interval model, the uniform circle model, and the communication favorable domain. Also, we investigate the consequence of allowing agents to relocate their positions. As it turns out, for a certain network, relocation-proofness is equivalent to stability.

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Asymmetric trade integration and growth

Seppo Honkapohja          University of Cambridge,  smsh4@cam.ac.uk
Arja Turunen-Red          University of New Orleans,  ared10@cox.net
Alan Woodland          University of Sydney,  A.Woodland@econ.usyd.edu.au
 

We consider a three country endogenous growth model with international trade in complementary capital goods. The model generates multiple balanced growth solutions which can be classified using the criterion of adaptive learning. We assume that countries impose tariffs on imported capital goods and that two of the three countries can enter into a regional trade liberalization agreement (e.g., a customs , free trade agreement). We analyze the impact of such regional trade integration on the rate of economic growth in the long and short run. Long run equilibria feature a common rate of growth with differences in the levels of local technological innovation, production, and consumption the level differences are a function of trade policies of all countries, including the regional policy agreements. Whether a country innovates at all can also depend on the pattern of trade policies (asymmetric innovation solutions can occur). In the short run, economic agents forecast future growth in each economy using an adaptive learning rule (heterogeneous learning) national growth rates can deviate in during the adjustment toward a stable long run steady state. The presence of multiple equilibria in the model s the possibility of policy induced growth jumps and growth cycles.

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On the uniqueness of bayesian equilibrium in a pure public good economy

Shlomit Hon-Snir          Department of Economics, The Max Stern Academic Colloge of Emek Yezreel,ISRAEL,  shlomith@yvc.ac.il
Benyamin Shitovitz          Department of Economics, Haifa University,ISRAEL,  binya@econ.haifa.ac.il
Menahem Spiegel          Department of Finance and Economics, Rutgers,NJ, USA,  mspiegel@rbs.rutgers.edu
 

It is well known that a Bayesian equilibrium of a pure public good economy with differential information exists under the assumptions that the set of states of nature is a finite set and the (strict) cardinal normality conditions hold. In this paper we prove its uniqueness for any number of consumers in two settings: (a) the information of consumers can be ranked from the finest to the coarsest and (b) there exist only two types of consumers (even when no consumer holds superior information).

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Perfect Equilibria in a Negotiation Model with Different Time Preferences

Harold Houba          VU University Amsterdam,  hhouba@feweb.vu.nl
Quan Wen          Vanderbilt University,  quan.wen@vanderbilt.edu
 

The cuurent literature fails the full equilibrium characterization in the negotiation model when players have different time preferences. We show that players behave quite differently under different time preferences than under common time preferences. Conventional analysis in this literature relies on the key assumption that all continuation payoffs are bounded from above by the bargaining frontier. However, when players have different time preferences, intertemporal trade may lead to continuation payoffs above the bargaining frontier. We provide a thorough study of this problem without imposing the conventional assumption. Our results tie up all the previous findings, and also clarify the controversies that arose in the past.

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A Legislative Bargaining Approach to Earmarked Public Expenditures

Jeremy Jackson          Washington University in St. Louis,  jeremy.j.jackson@wustl.edu
 

This paper develops a model of legislative spending in which the legislature must choose how much revenue to spend on a public good and a distribution of revenue to each legislator. This legislative choice is modeled in a Baron Ferejohn style legislative bargaining game in which the bargaining is divided into two stages: an earmarking stage and a general fund stage. Earmarking is characterized as providing a dynamic link across time periods while spending at the general fund stage is entirely static. A subgame perfect equilibrium of the static game is derived and then the steady state of the dynamic process induced by the static equilibrium behavior is analyzed. This steady state involves the full earmarking of public revenue. Public good provision in this steady state is shown to be less than the efficient level but greater than the level of provision that would be chosen by a dictator. This model is the first to show that earmarking behavior can be derived as the equilibrium outcome of a legislative bargaining game.

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Testing for structure in general equilibrium models

Michael Jerison          SUNY Albany,  m.jerison@albany.edu
 

Policy conclusions drawn from computable general equilibrium analysis can be unreliable if they depend on inappropriate functional forms for preferences or technology. Direct tests of these functional forms may not be possible. At the same time, the empirical content of more general models remains unclear. With finite data on prices, individual wealth levels and aggregate consumption from a pure exchange economy, it is impossible to tell whether or not every equilibrium is locally stable (Brown and Shannon 2000). On the other hand, in a generic economy, a continuum of such data uniquely determine all individual demand functions around each equilibrium, so local stability is testable (Chiappori et. al. 2004). This last result requires accurate observations of prices and aggregate consumption. I show that individual demand functions can no longer be recovered in the presence of arbitrarily small errors in price observations. But I show that it is still possible to test for such properties as local stability and comparative static predictions using available household expenditure data and consumption experiments as in Sippel (1997). The tests rely on nonparametric average derivative estimates using individual net trade data. They allow for measurement errors in prices and net trades, without functional form assumptions. Estimates using U.K. Family Expenditure Survey data support the assumption of stable equilibrium in models with 70 aggregate commodities.

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Power and efficiency in pillage games

Jim Jordan          Penn State,  jxj13@psu.edu
 

A pillage game is a formal model of Hobbesian anarchy as a coalitional game. The technology of pillage is specified by a power function that determines the power of each coalition as a function of its members and their wealth. A coalition can despoil any other coalition less powerful than itself. The present paper studies the problem of achieving an efficient allocation of resources when the required reallocation changes the distribution of power. For example, land redistribution may increase total production, but may also deprive the original owners of the power they need to compel compensation. In this case the original owners would block the redistribution. Previous work on pillage games has focused on the stable set (von Neumann-Morgenstern solution) as a representation of a stable balance of power. However, the balance of power is typically too delicate to support a efficient allocations. In particular stable sets are necessarily finite. The present paper shows that for certain power functions, a recently developed extension of the stable set, called the legitimate set, can be rich enough to support efficient reallocation with enforceable compensation.

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Group strategy-proof in the commons problem

Ruben Juarez          Rice University,  ruben@rice.edu
 

Every agent reports his preference for one unit of good. A mechanism collects these preferences, allocates some goods and the cost to some agents. We characterize the group strategy-proof mechanisms that satisfy two versions of continuity: upper and lower continuity. Upper continuity captures the mechanisms that naturally define a supermodular cost function, whereas lower continuity captures the submodular cost functions. The continuous mechanisms that are group strategy-proof are only the fixed cost mechanisms. We provide optimal group strategy proof mechanism using the worst absolute surplus loss measure.

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Alternative pension systems and growth

Michael Kaganovich          Indiana University,  mkaganov@indiana.edu
Itzhak Zilcha          Tel Aviv University,  izil@post.tau.ac.il
 

Demographic trends in most developed economies endanger the sustainability of the current public pension systems. Therefore social security reform proposals are on the agenda in many countries. This paper demonstrates that the analysis of fiscal sustainability of social security must include the education funding dimension of public policy. Indeed, the productivity growth of future workers due to investment in education may outweigh the impact of the demographic problem. This is true under both pay-as-you-go (PAYG) and fully funded social security system. We compare the two pension systems in OLG economy where government also funds education by means of taxes collected from the current workers. When education tax rates are exogenously given we show that fully funded regime strictly dominates PAYG in capital accumulation and output growth, and it also results in less intragenerational income inequality. However, when we introduce a political mechanism where education tax rates are chosen in each period by a majoritarian rule among the relevant constituents, we find that under some conditions, other things equal, the PAYG social security regime leads to the choice of relatively higher respective levels of education tax rates in all generations, and thereby to relatively higher rates of economic growth.

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Optimal enforcement policy and firm''s decisions on R& D and emissions

Fatih Karanfil          Galatasaray University,  fkaranfil@gsu.edu.tr
Bilge Ozturk          Galatasaray University,  bozturk@gsu.edu.tr
 

In this paper we develop an environmental regulation model with asymmetric information where the enforcement mechanism should be designed based on the emission reports chosen by the firms and the emission signals that the enforcement agency receives. We consider two cases: first firms choose their emission levels and their emission reports second we include the technological progress. The effect of technological progress is twofold: it increases the production level and abates the emissions. We compare the equilibrium results with imperfect monitoring where the enforcement agency uses two different mechanisms with the perfect monitoring results. The mechanism using the gap between the emission signals and reports gives the same results with the perfect monitoring case whereas if only the emission signals are used for the enforcement mechanism we obtain better results compared with the perfect monitoring case: emissions are reduced, investments are increased. We conclude that if the aim of the enforcement agency is truthful revelation then the first mechanism does definitely better than the other. Instead, if the enforcement agency is concerned with the social welfare the other mechanism will be chosen.

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The demand for private health care in Poland

Waldemar Karpa          Univeristy of Paris 1,  waldemar.karpa@malix.univ-paris1.fr
 

This paper intends to estimate the demand for private health care in Poland. In this transition country, deteriorating, underfunded and undermanaged health system struggles with rapidly increasing demand for services. This situation interferes with a fast-growing middle class showing a strong will to pay for good and immediate health services. Our paper examines the factors of choice between public and private health care. Economic model based on Goddard and Smith (1998) model of demand for medical care is econometrically tested. Multinomial logit model (MNL) of use of public and private care is estimated. Within this specification it is possible to explore the impact of income, price and quality of the public alternative, attitudes to the role of state in the provision of health care, and past use of care on the current demand for private care. Data set used for estimations is &ldquo Social diagnosis: objective and subjective quality of life in Poland&rdquo . Health care is the most extensive part of this data set, pertaining to households. This extremely rich and detailed data permits to control for demographic, professional and personal characteristics. The results indicate a difference between users of private and other care and the importance of past use as a predictor of current use. Surprisingly, the use of private health care is not exclusively linked to high income. Our study indicates a much more complex relationship in public/private sector use.

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Fiscal Competition and a Potential Growth Effect of Centralization

Kersten Kellermann          University of Fribourg,  kerstenkellermann@bluewin.ch
 

I discuss a dynamic version of the Zodrow-Miezskowski model, where world capital supply is not fixed. The time horizon of the welfare maximizing government is assumed to be infinite whereas the household sector is designed according to the two-period overlapping-generations model. Thus social evaluation is involved which is not directly based on individual preference ordering. The model produces a type of inefficiency caused by a head tax on immobile workers. From the viewpoint of the global economy, head taxes reduce global saving and thus s a negative externality on global capital supply. The lower-level government thus financed the public goods supply with too little reliance on source taxes. In this case, centralization of investment decisions has the potential of welfare improvement. It can lead to an increase in private and public investment and enhances transitory growth.

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Is fiscal autonomy desirable in a fiscal federation?

Hubert Kempf          Centre d''economie de la Sorbonne, Universite Paris-1 Pantheon-Sorbonne,  kempf@univ-paris1.fr
Jean-Pierre Vidal          European Central Bank,  jean-pierre.vidal@ecb.int
 

To be d.

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Policy interactions among nations: when do cooperation and commitment matter?

Hubert Kempf          EUREQua, Universite Paris-1,  kempf@univ-paris1.fr
Leopold von Thadden          European Central Bank,  Leopold.Von_Thadden@ecb.int
 

This paper offers a comprehensive framework to study commitment and cooperation issues in games with multiple policymakers. To reconcile some puzzles in the recent literature on the effects of policy interactions among nations, we prove that games characterized by different commitment and cooperation schemes can have the same equilibrium outcome if certain spillover effects vanish at the common solution of these games. We provide a detailed discussion of these spillovers, showing that, in general, commitment and cooperation are non-trivial issues. Yet, models of the linear-quadratic variety with multiple policymakers can generate a `symbiotic'' result where commitment and cooperation issues are irrelevant, in the sense that the social optimum can be implemented under arbitrary commitment and cooperation schemes. The proposed framework can be extended to a stochastic environment and is sufficiently general to allow for a broad discussion of policy interactions, both within monetary s and among fully sovereign nations.

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Continuity of beliefs in network games

Willemien Kets          CentER, Tilburg University,  w.kets@uvt.nl
 

Social networks are important for determining economic outcomes. Networks are typically large and complex, so that individuals may not know the exact structure of the network they belong to. This paper studies the role of beliefs in games on networks in which players have incomplete information about the network structure. Suppose players are located on a network, and play a fixed game with their neighbors. Players have a common prior on a set of networks. This defines a network belief system. In addition, each player knows the number of neighbors he has, i.e., his type is his degree. This paper asks under what conditions on two network belief systems it holds that for any network game with one of those network belief systems, for any equilibrium of that game, there is an approximate equilibrium in the game with the other network belief system such that ex ante payoffs are close in both equilibria. We show that in order for this to hold, both the distribution of player types and the correlation between neighbor types should be similar under both network belief systems.

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A Minimax Procedure for Electing Committees

Marc Kilgour          Wilfrid Laurier University,  mkilgour@wlu.ca
Steven Brams          New York University,  steven.brams@nyu.edu
Remzi Sanver          Istanbul Bilgi University,  sanver@bilgi.edu.tr
 

A new voting procedure for electing committees, called the minimax procedure, is described. Based on approval balloting, it chooses the committee that minimizes the maximum Hamming distance to voters'' ballots, where these ballots are weighted by their proximity to other voters'' ballots. This minimax outcome may be diametrically opposed to the outcome obtained by aggregating approval votes in the usual manner, which minimizes the sum of the Hamming distances and is called the minisum outcome. The manipulability of these procedures, and their applicability when election outcomes are restricted in various ways, are also investigated. The minimax procedure is applied to the 2003 Game Theory Society election of a council of 12 new members from a list of 24 candidates. The composition of the council would have changed by 4 members there would have been more substantial differences between minimax and minisum outcomes if the number of candidates to be elected had been endogenous rather than being fixed at 12. The minimax procedure, which renders central voters more influential but does not antagonize any voter too much, may produce a committee that better represents the interests of all voters than a minisum committee.

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The Political Economy of an International Environmental Agreement

Geum-Soo Kim          Hoseo University,  gsgim@office.hoseo.ac.kr
 

This paper analyzes two small open countries that share a natural environment and consider an environmental agreement. The government representative in each country does not just maximize the general welfare, but picks a policy partially in response to ''functionally specialized'' industrial and environmental lobbies. It is shown that an IEA (International Environmental Agreement) will be made as a subgame-perfect equilibrium if in both countries under the IEA industrial lobby''s profit reduction fall short of the sum of general welfare gain and environmental lobby''s benefit.

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The optimal degree of commitment in a tax policy

Yusuke Kinai          Graduate School of Economics, Osaka University,  ykinai@js8.so-net.ne.jp
 

In analyzing economic policies such as fiscal or monetary policies, a serious problem is the time-inconsistency problem. From this viewpoint, it is necessary for the government to strengthen its commitment to the policy. However, this decision (rule vs. discretion) engenders a tradeoff of flexibility and credibility, and it is not realistic to consider that a government never changes its policy. For that reason, it might be allowed to adopt the discretionary policy to some extent, but past studies do not clarify the degree to which a government exercises a discretionary option, either qualitatively or quantitatively. This paper describes the optimal degree of commitment using the framework of a repeated game based on the idea of Chari and Kehoe (1990). We show that the optimal degree of commitment differs depending on the accuracy of monitoring.

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Social identity and preferences over redistribution

Esteban Klor          The Hebrew University,  eklor@mscc.huji.ac.il
Moses Shayo          The Hebrew University,  mshayo@huji.ac.il
 

We design an experiment to study the effects of social identity on preferences over redistribution. The experiment highlights the tradeoff between social identity concerns and maximization of monetary payoffs. Subjects belonging to two distinct natural groups are randomly assigned gross incomes and vote over alternative redistributive tax regimes, where the regime is chosen by majority rule. We find that a significant subset of the subjects systematically deviate from monetary payoff maximization towards the tax rate that benefits their group when the monetary cost of doing so is not significantly high. These deviations cannot be explained by efficiency concerns, inequality aversion, reciprocity, social learning or conformity.

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Open Access and Dynamic Efficiency

Tilman Klumpp          Emory University,  tklumpp@emory.edu
Xuejuan Su          Bates Wite LLC,  xuejuan.su@bateswhite.com
 

We consider a market in which production of the final good requires access to an upstream resource, the network. The network is an excludable public good and controlled by a single vertically integrated firm (the incumbent), which competes with other firms (the entrants) in the downstream market. The network''s quality depends on the investment made by the incumbent and impacts the demand curve in the downstream market. We examine open access regulation that forces the incumbent to share its network with the entrants. We show that the equilibrium investment in the network exceeds the monopoly level, provided that ex-post each firm''s share of the network cost equals their downstream market share (revenue neutral access). Furthermore, the more competitive the downstream market the higher the incumbent''s investment. Thus, open access leads to a welfare gain relative to monopoly because it (i) facilitates competition in the downstream market, and (ii) induces a higher quality of upstream facilities. However, this result is sensitive to the cost-sharing rule employed, and with a highly competitive downstream market even a slight departure from the revenue neutrality principle drastically decreases upstream investments (including the possibility of an effective shutdown of upstream facilities). This effect has practical relevance in light of the access pricing methodology currently employed by regulatory agencies such as the FCC.

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Marriage Matching: A Conjecture of Donald Knuth

Vicki Knoblauch          University of Connecticut,  vicki.knoblauch@uconn.edu
 

Variations of the Gale-Shapley algorithm have been used and studied extensively in real world markets. Examples include matching medical residents with residency programs, the kidney exchange program and matching college students with on-campus housing. The performance of the Gale-Shapley marriage matching algorithm (1962) has been studied extensively in the special case of men''s and women''s preferences random. We eliminate the assumption that women''s preferences are random and show that En/n log n approaches 1, where En is the expected number of proposals made when the men-propose Gale-Shapley algorithm is used to match n men with n women. This establishes in spirit a conjecture of Donald Knuth of thirty years standing. Under the same assumptions, we also establish bounds on the expected ranking by a woman of her assigned mate. Bounds on men''s rankings of their assigned mates follow directly from the conjecture.

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Welfare Effects of Tax and Price Changes and the CES-UT Utility Function

Munk Knud.          University of Aarhus,  kmunk@econ.au.dk
 

Dixit''s 1975 paper " Welfare Effects of Tax and Price Changes" constitutes a seminal contribution to the theory of tax reform within a second-best general equilibrium framework. The present paper clarifies ambiguities with respect to normalisation which has led to misinterpretation of some of Dixit''s analytical results. It proves that a marginal tax reform starting from a proportional tax system will improve social welfare if it increases the supply of labour, whatever the rule of normalisation adopted. In models which impose additive separability between consumption and leisure in household preferences this insight cannot be articulated. This paper proposes as an alternative a parameterised utility function with explicit representation of the use of time, the CES-UT, which allows a flexible representation of the relationship between consumption and leisure. It also demonstrates how standard compensated price elasticities can be derived from the parameters of the CES-UT and how it may be used for applied tax reform analysis.

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Dynamic Cost-Sharing

Laurence Kranich          University at Albany, SUNY,  lkranich@albany.edu
 

This paper extends the traditional atemporal cost-sharing problem to the intertemporal setting. In the new formulation, each agent has a sequence of homogeneous demands, and it is necessary to allocate costs over time. We first argue that it would not suffice to consider the single period (homogeneous) problem obtained by discounting future values to the present. Nor would it be adequate to treat output in different periods as arbitrary distinct or heterogeneous commodities since this would fail to take into consideration the special relationship between such outputs. After arguing in favor of an explicit treatment of the intertemporal problem, we propose several axioms specifically formulated for such problems. We then extend two prominent cost-sharing rules, average cost-sharing and serial cost-sharing, to the intertemporal setting, and we consider the axiomatic properties of each.

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A Tax Reform Analysis of the Laffer Argument

Alan Krause          University of York,  ak519@york.ac.uk
 

This paper shows that tax reform techniques are well-suited to an examination of the Laffer argument, i.e., the possibility that an increase in a tax rate may reduce tax revenues (and vice versa). Our methodology allows us to examine the Laffer argument directly, without deriving the Laffer curve, which in turn allows us to conduct the analysis in a very general setting. Despite the high level of generality, we are able to reach some clear conclusions that provide formal support for the established intuitions that the Laffer effect requires: (i) a &lsquo high'' labour-income tax rate, and (ii) a &lsquo large'' labour supply response to wage changes. The notions of &lsquo high'' and &lsquo large'' are made precise in our framework. The analysis also provides indirect support for the intuition that it is never optimal for a government to operate on the downward-sloping segment of the Laffer curve. Finally, we show that our methods provide a theoretical framework for an empirical investigation.

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" Voluntary Contributions to Multiple Public Goods in a Production Economy with Widespread Externalities"

Fan-chin Kung          City University of Hong Kong,  kungfc@cityu.edu.hk
 

In a production economy, multiple public goods are produced by firms in competitive markets, and provided by the government together with contributions from consumers. There are widespread externalities: all consumers' consumption and contributions and all firms' production enter into utility functions. Public goods can be imperfectly substitutes or complements, and they can be coalition or club goods. Zero bounds that require consumers to make nonnegative contributions complicate the differentiable approach. Applying parametric transversality theorem for smooth economies in a regular parameterization, we obtain the existence of a contribution equilibrium and generic regularity of equilibria.

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Core equivalence for residential land use models

Courtney LaFountain          The University of Texas at Arlington,  cllafountain@uta.edu
 

In the monocentric city model, an allocation is in the core if and only if it is an equilibrium allocation, as long as households are endowed with strictly positive quantities of a composite consumption good, enjoy any net trade bundle at least as much as they enjoy one on the boundary of their choice set, have monotonic preferences, have preferences and endowments that are not too different, and as long as there is land at every location. Since equilibria exist in these circumstances, the core is not empty.

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Social memory and evidence from the past

Roger Lagunoff          Georgetown University,  lagunofr@georgetown.edu
Luca Anderlini          Georgetown University,  la2@georgetown.edu
Dino Gerardi          Yale University,  donato.gerardi@yale.edu
 

This paper examines the role of social memory &mdash a society''s vicarious beliefs about the past &mdash in creating and perpetuating destructive conflicts. We analyze an infinite-horizon model in which two countries face off each period in an extended Prisoner''s Dilemma game in which an additional possibility of mutually destructive &ldquo all out war&rdquo yields catastrophic consequence for both sides. Each country is inhabited by a dynastic sequence of individuals who care about future individuals in the same country, and can communicate with the next generation of their countrymen using private messages. The two countries'' actions in each period also produce physical evidence a sequence of informative but imperfect public signals that can be observed by all current and future individuals. We find that, provided the future is sufficiently important for all individuals, regardless of the precision of physical evidence from the past there is an equilibrium of the model in which the two countries'' social memory is systematically wrong, and in which the two countries engage in all out war with arbitrarily high frequency. Surprisingly, we find that degrading the quality of information that individuals have about current decisions may &ldquo improve&rdquo social memory so that it can no longer be systematically wrong. This in turn ensures that arbitrarily frequent all out wars cannot take place.

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Visa Screening and Collateral Import of Terrorism

Sajal Lahiri          Southern Illinois University Carbondale,  lahiri@siu.edu
Satya Das          Indian Statistical Institute, Delhi Centre,  das@isid.ac.in
 

The paper addresses the issue of imperfect visa scrutiny by the government and the sponsoring of foreign scholars by institutions offering higher education. A static game-theoretic model between the higher-education sector and the government is postulated. In the presence of delay costs, both the numbers of foreign scholars sponsored and the intensity of visa screening are higher than their efficient levels. As the proportion of bad applicants (who are potential terrorists) for visa increases, the number of foreign scholars sponsored may increase or decrease, but the number of bad applicants who succeed in obtaining visa may very well decrease, lowering the security risk.

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Concerning Kuznets Curves, Persistent Inequality, Inflation, and Redistribution

Radhika Lahiri          Queensland University of Technology,  r.lahiri@qut.edu.au
Jayne Dillon          Queensland Treasury,  jayne.dillon@treasury.qld.gov.au
 

In this paper we examine the dynamics of the link between inequality and inflation from a political economy perspective. We consider a series of simple dynamic general equilibrium models in which agents vote over the desired inflation rate in each period, and inequality is persistent. Inflation in our models is a mechanism of redistribution, and we find that the link between inequality and inflation within any period or over time depends on institutional and preference related parameters. Furthermore, we find that differences in the initial distributions of wealth can yield a diverse set of patterns for the evolution of the inflation and inequality link. In some cases there appear to be limit cycles the pattern for inequality resembles a series of Kuznets curves &ndash i.e, inequality increases and then decreases over time, and this pattern appears to repeat itself. Interestingly, in some cases, the corresponding pattern for inflation may also be very similar. In other cases, inequality initially appears to follow a Kuznets curve type of pattern, and then increases again the corresponding pattern for inflation is similar. Some of the inflation-inequality patterns produced by our model are also observed in data sets across countries.

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Order Independent Individual Rationality

Laurent Lamy          CREST-INSEE,  laurent.lamy@ensae.fr
 

We consider the implementation of an economic outcome under complete information when the principal cannot commit to a simultaneous participation game. From a class of sequential participation games, we introduce the concept of implementability under order independent individual rationality. We characterize the set of implementable mechanisms, which is possibly a non-convex set, and we solve the optimal design program: the principal raises a lower revenue but economic efficiency is not damaged.

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New Technology, Human Capital and Growth for Developing Countries.

CUONG LE VAN          Unversity Paris 1, CNRS, CES,  levan@univ-paris1.fr
 

We consider a developing country with three sectors in economy: consumption goods, new technology, and education. Productivity of the consumption goods sector depends on new technology and skilled labor used for production of the new technology. We show that there might be three stages of economic growth. In the first stage the country concentrates on production of consumption goods in the second stage it requires the country to import both physical capital to produce consumption goods and new technology capital to produce new technology and finally the last stage is one where the country needs to import new technology capital and invest in the training and education of high skilled labor in the same time.

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On the Optimality of a Minimum Wage: New Insights from Optimal Tax theory

Etienne LEHMANN          CREST,  etienne.lehmann@ensae.fr
Mathias Hungerbü hler          University of Namur,  mathias.hungerbuhler@fundp.ac.be
 

We build a theoretical model to study whether a minimum wage can be welfare-improving if it is implemented in conjunction with an optimized nonlinear income tax. We consider this issue in a framework where search frictions on the labor market generate unemployment. Workers differ in productivity. The government does not observes workers'' productivity but only their wages. Hence, the redistributive policy solves an adverse ion problem. We show that a minimum wage is optimal if the bargaining power of the workers is relatively low. However, if the government controls the bargaining power, then it is preferable to set a sufficiently high bargaining power.

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One Size Fits All? Decentralization, Corruption, and Development

Christian Lessmann          Ifo Institute for Economic Research,  lessmann@ifo.de
Gunther Markwardt          Dresden University of Technology,  gunther.markwardt@tu-dresden.de
 

Theoretical studies analyzing the impact of decentralization on corruption lead to ambiguous results. Models based on tax competition or yardstick competition frameworks favor decentralization, while other models predict double marginalization effects or increasing pressure of local interest groups in decentralized systems. In contrast to the ambiguous theoretical findings, almost all empirical studies found corruption lower in decentralized countries. But these studies do not consider the development stage of a country, although this might affect the relationship between decentralization and corruption, because the information infrastructure is much worse in less-developed countries. This paper considers the development stage of countries and tests for non-linear relationships between decentralization and corruption using new cross-country as well as panel data. Our main finding is that decentralization counteracts corruption in highly developed countries, whereas less developed countries suffer from decentralization.

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Policy Platforms, Campaign Spending and Voter Participation

David Levine          Washington University in St Louis,  david@dklevine.com
Helios Herrera          ITAM,  helios@itam.mx
Cesar Martinelli          ITAM,  martinel@itam.mx
 

We model electoral competition between two parties in a winner-take-all election. Parties choose strategically first their platforms and then their campaign spending under aggregate uncertainty about voters'' preferences. We use the model to examine why campaign spending in the United States has increased at the same time that politics has become more polarized. We find that a popular explanation more accurate targeting of campaign spending is not consistent. While accurate targeting may lead to greater spending, it also leads to less polarization. We argue that a better explanation is that voters preferences have become more volatile from the point of view of parties at the moment of choosing policy positions. This both raises campaign spending and increases polarization. It is also consistent with the observation that voters have become less committed to the two parties.

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The Provincial Effects of Monetary Policy Shocks in China

Ying Liu          Université de la Mé diterrané e,  yingliulau@yahoo.com
Eric Girardin          GREQAM ,  girardin@univ-aix.fr
 

This paper studies the regional effects of China''s monetary policy shocks using a satellite VAR framework. We find that coastal provinces, in particular those located in the south, responde more significantly to monetary policy shocks. The inland provinces, on the other hand, respond little to those shocks. Using a wide ion of provincial indicators to explain the provincial repsonses, we find that provinces with higher GDP growth respond more strongly to monetary policy shocks, while many traditional indicators such as concentration of interest-sensitive industries and the size of business are less important in explaining the variation in provincial responses to monetary policy shocks. Construction activity is strongly associated with important output effects of interest rate shocks money supply shocks. This may provide some evidence to support using monetary policy to cool down the real estate frenzy. Finally we document the presence of the aggregation bias in the Chinese case, since the weighted sum of the provincial responses of output or price to an interest shock is smaller than the national response.

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Parental Guidance and Supervised Learning

Alessandro Lizzeri          NYU,  alessandro.lizzeri@nyu.edu
Marciano Siniscalchi          Northwestern University,  marciano@northwestern.edu
 

We propose a simple theoretical model of supervised learning that is potentially useful to interpret a number of empirical phenomena relevant to the nature-nurture debate. The model captures a basic trade-off between sheltering the child from the consequences of his mistakes, and allowing him to learn from experience. We characterize the optimal parenting policy and its comparative-statics properties. We then show that key features of the optimal policy can be useful to interpret provocative findings from behavioral genetics.

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National labor markets, international factor mobility and macroeconomic instability

Teresa Lloyd-Braga          Universidade Cató lica Portuguesa-FCEE, Lisbon, Portugal,  tlb@fcee.ucp.pt
Marta Aloi          University of Nottingham, UK,  marta.aloi@nottingham.ac.uk
 

We analyze how global economic integration of factor markets affects the stability of the macroeconomy, with respect to expectations-driven fluctuations, when countries differ in their labor market institutions. It is shown that, due to the occurrence of equilibrium indeterminacy, liberalization of capital movements is likely to be accompanied by persistent fluctuations at the world level, while allowing also for labor movements may bring macroeconomic stability. Whether this also implies higher welfare in the long run depends on differentials in average firm size across countries. If the average firm size in a country operating under perfect competition and full employment is small relative to a country with rigid wages and unemployment, then free migration reduces unemployment, narrows wage differentials and expands world output.

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When will workfare work? An optimal tax perspective

Tim Lohse          Leibniz University Hannover,  Lohse@fiwi.uni-hannover.de
 

This paper analyzes work requirements as they have become stan- dard in several Western welfare states by extending a discrete version of the Mirrlees (1971) optimal income tax model with the concept of workfare. Whereas unproductive workfare is never part of a second-best tax-transfer-scheme, productive workfare can be an optimally chosen instrument. Optimality depends on the relation between the productivity of the work obligation and the related marginal rate of substitution between consumption and working time. Work requirements as well as transfers are independent of individual productivities. The second-best tax schedule has positive marginal tax rates everywhere. This is also true when assuming workfare productivities that are positively correlated to the individual market wage. The implementation of workfare as part of an optimal tax mix does not only lead to an overall welfare increase but can even yield a Pareto improvement.

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Social capital as economic overlap

Richard Lowery          Carnegie Mellon University,  jlowery@andrew.cmu.edu
 

Social capital plays an essential role in economic activity, but difficulties with measure and, more fundamentally, definition have limited the ability of economics to treat the concept formally. The model in this paper considers the role of social capital in facilitating cooperation by defining this asset as the degree to which agents'' private economic activity overlaps. Such a definition has a natural spatial interpretation. Agents who locate close together will inevitably have to share certain resources. In this sense, a location decision can be viewed as a decision about the creating of a commons, or, equivalently, a public good. Public goods have notorious inefficiencies associated with voluntary provision, and thus voluntarily generating a commons would seem unwise and therefore unsustainable. This paper shows that another element of the economic space, namely the opportunities for cooperation on increasing returns to scale (primitive) technologies, can induce individuals to locate close enough to generate endogenous public goods that link them together.

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Two-stage boundedly rational choice procedures: theory and experimental evidence

Paola Manzini          Queen Mary, University of London,  p.manzini@qmul.ac.uk
Marco Mariotti          Queen Mary, University of London,  m.mariotti@qmul.ac.uk
 

We study and test a class of boundedly rational models of decision making which rely on sequential eliminative heuristics. We formalize two sequential decision procedures, both inspired by plausible models popular among several psychologists and marketing scientists. However we follow a standard `revealed preference'' economic approach by fully characterizing these procedures by few, simple and testable conditions on observed choice. Then we test the models (as well as the standard utility maximization model) with experimental data. We find that the large majority of individuals behave in a way consistent with one of our procedures, and inconsistent with the utility maximization model.

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Two Stage Bargaining Solutions

Marco Mariotti          Queen Mary University of London,  m.mariotti@qmul.ac.uk
Paola Manzini          Queen Mary University of London,  p.manzini@qmul.ac.uk
 

We introduce and characterize a new class of bargaining solutions: those which can be obtained by sequentially applying two binary relations to eliminate alternatives. As a by-product we obtain as a particular case a partial characterization result by Zhou (1997) of an extension of the Nash axioms and solution to domains including non-convex problems, as well as a complete characterizations of solutions that satisfy Pareto optimality, Covariance with positive affine transformations, and Independence of irrelevant alternatives.

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Categorical-aid to poor schools: a tide that lifts all boats?.

Francisco Martinez Mora          University of Leicester,  fmm14@le.ac.uk
 

I extend a standard two community model to account for the existence of households with no children at school age. I show their interaction with households with children in the community-school choice game gives rise to a new perspective on the equity-efficiency trade-off in education. The model has two school districts that differ in the quality of schooling and in their intrinsic quality. A school quality depends on spending per pupil and on students'' socioeconomic background. I first prove the existence of a trade-off between the quality gap across public schools and the degree of income segregation across districts. The intuition is transparent: as school quality differentials vanish, segregation occurs only in the basis of community quality differentials and according to household income. Thus, any attempt to equalise quality across public schools will have the unexpected and counterintuitive effect of increasing the level of income segregation across school districts. Second, I demonstrate that equity and efficiency can be complements instead of substitutes in this context. I prove it is possible to design a transfer from the rich to the poor district that not only reduces the quality differential across schools but it is also Pareto-improving. This is possible because a reduction in the quality gap redistributes population in such a way that the quality of the peer group increases in both schools and the inverted tax price ratio rises in the rich district.

===================================================================

Farsightedly Stable Matching

Ana Mauleon          FNRS and CEREC, FUSL and CORE, UCL,  mauleon@fusl.ac.be
Vincent Vannetelbosch          FNRS and CORE, UCL,  vannetelbosch@core.ucl.ac.be
Wouter Vergote          CEREC, FUSL and CORE, UCL,  vergote@fusl.ac.be
 

In this paper we characterize the link between core-stable outcomes in matching problems and farsighted stability, a stability concept in network theory. One can easily interpret a matching problem as a (restricted) network. A commonly used (weak) solution concept is that of pairwise stability (Jackson and Wolinsky (1996)). It is well known that some matchings are pairwise stable while not core stable. This is due to the fact that pairwise stability only allows for one link to be changed at each time and assumes agents are myopic. In order to rhyme core stable matchings with stability concepts in network theory, one needs to strengthen the stability requirement. We keep the assumption that agents are only allowed to make one move at the time but we introduce the idea that they take into account the fact that their move can potentially provoke a move from other agents and this eventually may harm them. If an agent considers the latter to be possible, the agent does not wish to change his or her link. This idea was labeled pairwise farsighted stability of sets of networks (Herings et al. (2006)). We show, for one-to-one matching problems, that pairwise farsightedly stable matchings belong to the core and all elements of the core are pairwise farsightedly stable. We extend the equivalence result in two directions. First, we show that it also holds for many-to-one matching. Secondly, we study whether it is true in the roommate problem (Diamantoudi et al. (2004), Chung (2000)).

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Brands as Status Symbols

Rogerio Mazali          Tulane University,  jarn01@hotmail.com
 

Brands are commonly used as status symbols. In our model, firms produce and sell different brands of status goods to a population of strategic consumers willing to signal their individual abilities to potential matches belonging to another population. There is a stratified equilibrium, with a finite number of brands. If the government maximizes Walrasian welfare, it either charges suitable progressive taxes, when there is competition, or an adequate flat tax rate to all brands, when the market is monopolistic. In both cases, cum-tax prices are increasing and convex functions of the status level they provide.

===================================================================

Position-specific Information in Social Networks: Are You Connected?

Michael McBride          UC Irvine,  mcbride@uci.edu
 

Individuals in social networks often imperfectly monitor others'' network relationships and have incomplete information about the value of forming new relationships. This paper formally examines these informational limitations in a simple model of network formation. Although incomplete information and imperfect monitoring each lead to the existence of inefficient equilibria that would not exist if participants had full information, each generates a different type of inefficiency. These inefficiencies increase in number and scope as information becomes more localized. Thus, my results suggest that actual social networks will be structured inefficiently in general.

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The aggregation of individual distributive preferences through the distributive liberal social contract: Normative analysis.

Jean Mercier Ythier          Université de Metz,  jean.mercier-ythier@wanadoo.fr
 

We consider social systems of private property, made of individuals endowed with non-paternalistic interdependent preferences, who interact through exchanges on competitive markets and Pareto-efficient lump-sum transfers. The transfers follow from a distributive liberal social contract defined as a redistribution of initial endowments such that the resulting market equilibrium allocation is both Pareto-efficient relative to individual interdependent preferences, and unanimously weakly preferred to the initial market equilibrium.

===================================================================

Optimal nonlinear redistributive taxation and public good provision in an economy with Veblen effects

Luca Micheletto          University of Milan,  luca.micheletto@unimi.it
 

Since the time of the publication of Veblen''s book, his idea of pecuniary emulation has nourished a minority line of research, spurring among others Duesenberry''s (1949) relative income hypothesis according to which when one person increases his income, he imposes utility losses on others. The tax consequences of these kinds of interdependencies in individuals'' utilities has been explored by, among others, Boskin and Sheshinski (1978), Oswald (1983), Jha and Murty (1986), Seidman (1987), Persson (1995), and Corneo (2002). The standard conclusion that has been derived is that efficiency requires an increase in the marginal tax rates in order to induce people to internalize the externality that they impose when earning an additional unit of income. However, as suggested first by Runciman (1966) and later by Bowles and Park (2006), the evidence seems to be that people mainly bother about the income of those close to them in the income distribution and do not suffer greatly from the riches of the rich (or of the poor), unless they happen to be nearly rich (poor) themselves. If this is the case and the government uses a nonlinear income tax for redistributive purposes, we show in a simple model with a finite number of agent types how, due to the effects on binding self- ion constraints, the optimal policy might actually be to reduce the marginal income tax rates. The consequences for the efficient level of public good provision are also considered.

===================================================================

Long-Run monetary and fiscal policy trade-off in an endogenous growth model with transaction costs

alexandru minea          University of Orleans,  alexandru.minea@univ-orleans.fr
patrick villieu          University of Orleans,  patrick.villieu@univ-orleans.fr
 

In this paper, we study maximizing long-run economic growth trade-off in monetary and fiscal policies in an endogenous growth model with transaction costs. We show that both monetary and fiscal policies are subject to threshold effects, a result that gives account of a number of recent empirical findings. Furthermore, the model shows that, to finance public expenditures, maximizing-growth government must choose relatively high seigniorage (respectively income taxation), if &ldquo tax evasion&rdquo and &ldquo financial repression&rdquo coefficients are high (respectively low). Thus, our model may explain why some governments resort to seigniorage and inflationary finance, and others rather resort to high tax-rate, as result of maximizing-growth strategies in different structural environments (notably concerning tax evasion and financial repression). In addition, the model allows examining how the optimal mix of government finance changes in response to different public debt contexts.

===================================================================

Tax rate variability and public spending as sources of indeterminacy

Leonor Modesto          FCEE-Universidade Cató lica Portuguesa,  lrm@fcee.ucp.pt
Teresa Lloyd-Braga          FCEE-Universidade Cató lica Portuguesa,  tlb@fcee.ucp.pt
Thomas Seegmuller          CES and CNRS,  Thomas.Seegmuller@univ-paris1.fr
 

We consider a constant returns to scale, one sector economy with segmented asset markets, encompassing both the Woodford (1986) and overlaping generations models. We analyze the role of public spending, financed by (labour or capital) income and consumption taxation, on the emergence of indeterminacy. We find that what is relevant for indeterminacy is the variability of the distortion introduced by government intervention. We further discuss the results in terms of the level of the tax rate, its variability with respect to the tax base and the degree of externalities in preferences due to the existence of a public good. We show that the degree of public spending externalities affects the combinations between the tax rate and its variability under which indeterminacy occurs. Moreover, in contrast to previous results, we find that consumption taxes can lead to local indeterminacy when asset markets are segmented.

===================================================================

Endogenous Mechanisms and Nash Equilibrium in Competitive Contracting Games

Paulo Monteiro          EPGE/FGV,  pklm@fgv.br
Frank Page          Indiana University,  Fhpagejr@cs.com
 

We model strategic competition in a market with asymmetric information as a noncooperative game in which each firm competes for the business of a buyer of unknown type by offering the buyer a catalog of products and prices. Due to ties within catalogs and/or across catalogs, corresponding any catalog profile offered by firms there may be multiple possible expected firm payoffs, all consistent with the rational optimizing behavior of the agent for each of his types. The resolution of these indeterminacies depends on the tie-breaking mechanism which emerges in the market. Because each tie-breaking mechanism induces a particular game over catalogs, a reasonable candidate would be a tie-breaking mechanism which supports a Nash equilibrium in the corresponding catalog game. We call such a mechanism an endogenous Nash mechanism. The fundamental question we address in this paper is, does there exist an endogenous Nash mechanism - and therefore, does there exist a Nash equilibrium for the catalog game? We show under fairly mild conditions on primitives that catalog games naturally possess tie-breaking mechanisms which support Nash equilibria.

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Strategic Militarization, Deterrence, and Wars Between Nations

Massimo Morelli          Columbia Universtiy,  morelli.10@osu.edu
Matt Jackson          Stanford University,  jacksonm@stanford.edu
 

We study the likelihood of war and peace when the relative power of the countries who could enter conflict is endogenous. We show that if commitment to future transfers is difficult then all equilibria involve the coexistence of at least three levels of militarization, ``hawks, doves, and deterrents''''. The probability of war is strictly positive in any given period. All wars are between ``uneven contenders'''' (hawks and doves) and the frequency of wars is tempered by the presence of deterrents. We show that as the sensitivity of the probability of winning a war to power advantages increases, the frequency of wars goes down. Moreover, we show that as the probability of being able to find settlements to appease hawks goes up, the overall probability of war goes down, but the probability of war conditional on failure of appeasement may well go up and welfare consequences are ambiguous. Last but not least, we show that our predictions, about the dynamic trends in terms of disputes, wars, and the distribution of military expenditures across countries, match the historical data.

===================================================================

Increasing Returns and the Frequency of Price Changes

Michael Morris          Oklahoma State University,  michael.ds.morris@okstate.edu
Wei Xiao          State University of New York at Binghamton,  wxaio@binghamton.edu
 

The parameters typically used to fit macro data with a standard New Keynesian model indicate that firms change their prices much less frequently than what is found when looking at the micro data on firm behavior. As such, a key parameter on price stickiness in the model does not match with the behavior of firms in the economy. This paper modifies an otherwise standard New Keynesian monetary model to allow for increasing returns. Introducing even mild increasing returns allows the parameter determining price-stickiness to be much more closely in line with the behavior of firms found in micro studies. We use standard simulation and calibration exercises to examine the relationship between increasing returns and price rigidity. We also estimate the model parameters using maximum likelihood and again find results suggesting with even mild increasing returns supported by other empirical work, the prices are much less sticky and price changes much more closely match that in the micro data.

===================================================================

Dual income taxation and the location of industry

Olaf Muenster          University of Passau, Germany,  olaf.muenster@uni-passau.de
Michael Pflueger          University of Passau, DIW Berlin, IZA,  michael.pflueger@uni-passau.de
 

Dual income taxation which was pioneered by the Nordic countries at the beginning of the 1990s has received growing international interest, recently. The contribution of the present paper is to analyse the location effects of dual income taxation from the perspective of the new theories of trade and economic geography drawing on a ''footloose capital-model" . For governments which care about their national share of industry, our analysis provides the lesson that the need to implement a dual income tax reform (i.e. to reduce the tax rate on capital income well below the tax rate on labor income), is the more urgent, the smaller the size of the economy, and the higher the level of integration with its trading partners. Large countries have more scope in adapting to such a dual income tax. However, unless a country is absolutely dominant in size relative to its trading partners, an exodus of industry is almost inevitable when trade integration is deep enough.

===================================================================

Repeated contests with asymmetric information

Johannes Munster          Free U Berlin and WZB,  muenster@wz-berlin.de
 

The same contestants often meet repeatedly in contests. Behavior in a contest potentially provides information with regard to one''s type and can therefore influence the behavior of the opponents in later contests. This paper shows that if effort is observable, this can induce a ratchet effect in contests: high ability contestants sometimes put in little effort in an early round in order to make the opponents believe that they are of little ability. The effect reduces overall effort and rent dissipation.

===================================================================

Investment-Specific Technological Change, Capital Obsolescence and Productivity Dynamics

Patrick Musso          GREDEG (CNRS & University of Nice),  musso@gredeg.cnrs.fr
 

In a recent work, Karl Whelan [2003] argues that the hypothesis of balanced growth is firmly rejected by postwar U.S. data. There is some clear evidence that the ratio of real investment to real consumption has exhibited an upward trend since the late 1950s. In this case, the traditional one-sector model of economic growth provides a poor description of the long-run behavior of the U.S. economy. In this paper, I develop a simple two-sector model of economic growth in which the obsolescence of capital goods is endogenous. Numerical simulations of unbalanced growth paths suggest that the rapid decline in the relative price of equipment goods observed since the late 1950s in the U.S. has shortened the average service-life of equipment, which, in turn, induced a long-lasting underestimation of the growth rate of Total Factor Productivity.

===================================================================

The paradox of voting with coalition formation

Gareth Myles          University of Exeter and Institute for Fiscal Studies,  gdmyles@ex.ac.uk
Nigar Hashimzade          University of Exeter,  n.hashimzade@ex.ac.uk
 

The paradox of voting with two parties questions the private rationality of participating in voting procedures. The introduction of a third party opens the possibility of coalition formation and raises the probability that an individual is pivotal. The paper computes the probability and uses simulation to show that it can be raised significantly above the value in the two party case. Voting may therefore be individually rational in the three-party election.

===================================================================

Optimal taxation in presence of tax evasion.

Maria Dolores Navarro Bergas          IDEA program at UAB ,  mdnavarro@idea.uab.es
 

This paper studies the optimal linear income taxation problem when there are possibilities of tax evasion. The decision about how much to work is made simultaneously with the decision of how much income to report. Government audits according to a decreasing function of taxpayers'' reported income. The following main results are obtained. First the tax system is regressive. Second, the audit probability and the penalty are jointly set with the tax system, and they determine a cut-off level that separates evaders from non-evaders in equilibrium. We perform a numerical exercise to show the different equilibrium scenarios that can be obtained in this particulat setting.

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Imprecise Preferences, WTA - WTP Disparities, and Impulse Shopping

William Neilson          University of Tennessee, Knoxville,  wneilson@utk.edu
 

Rather than having precise preferences consistent with a single utility function over commodity bundles, individuals are assumed to have imprecise preferences with a set of possible utility functions, and one bundle is preferred to another if the first bundle is preferred by all of the utility functions in the set. Imprecision can lead to deviations between marginal willingness to accept and marginal willingness to pay. Contractions of the set of possible utility functions correspond to increases in precision, which lead to increases in willingness to pay and decreases in willingness to accept. This provides an explanation of impulse shopping.

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Trade integration, international public good spillovers and asymmetric tax competition

Exbrayat Nelly          University of Saint-Etienne CREUSET FRE CNRS,  nelly.exbrayat@univ-st-etienne.fr
Madiè s Thierry          University of Fribourg,  thierry.madies@unifr.ch
Riou sté phane          University of Saint-Etienne CREUSET FRE CNRS,  stephane.riou@univ-st-etienne.fr
 

We study the impact of public good spillovers on tax competition between two imperfectly integrated countries with different levels of productivity. We compare the outcomes at the decentralized Nash equilibrium with and without public spending spillovers. We show that decentralized tax policies are inefficient for two reasons: taxes on mobile firms are too low and the tax gap is too high. While public good spillovers foster the first inefficiency, they attenuate the second one. Finally, we show that by promoting public good spillovers, governments would reduce welfare inequality between countries.

===================================================================

On Equity-First and Efficiency-First Principles in Production Economies and Its Application to Optimal Taxation

Yukihiro Nishimura          Yokohama National University and Queen''s University,  ynishimu@ynu.ac.jp
 

This paper studies the class of economic states rationalized by means of social preference relations based on Pareto efficiency and equity as no-envy. Following Tadenuma''s (2002) formulation of two principles to socially rank allocations, equity-first criterion and efficiency-first criterion, we examine the properties of two principles and their variants in production economies where agents have different productivities. In the first-best environment, we show that the maximal elements of the efficiency-first criterion would be empty in some economies, whereas in other economies the maximal elements are non-empty even though Pareto efficiency and no-envy are incompatible, so that a criterion based on Pareto efficiency and no-envy can still be useful to allocations. The existence depends on the degree of efficiency loss accrued in envy-free states. We also examine the second-best taxation issue, based on the conventional optimal taxation model. The efficiency loss of the envy-free allocations is large in this setting. We use refined orderings by Feldman and Kirman''s (1974)-Suzumura (1996) and Chaudhuri (1986)-Diamantaras-Thomson (1990). It turns out that the efficiency-first criterion amended by these concepts is very suggestive in socially ranking second-best allocations with different progressivities.

===================================================================

Hyperbolic discounting and the standard model

Jawwad Noor          Boston University,  jnoor@bu.edu
 

Experiments on time preference document numerous findings that seem to contradict the standard model of intertemporal choice. These findings are based on how subjects choose between delayed rewards. This paper shows that if subjects integrate such rewards with their anticipated future consumption levels, and expect changes in future consumption, then except for violations of basic properties like transitivity, the standard model (with CRRA utility) can rationalize all the popular experimental findings: preference reversals, dynamic inconsistency, hyperbolic discounting, magnitude effect, sign effect, delay-speedup asymmetry etc. An analysis reveals that without strong assumptions on non-observables (such as utility or expectations), the model has no peculiar testable implications that can be examined in experimental settings. A testable implication of the model is derived in the special setting with risky prospects as rewards and under the assumption that subjects respect the expected utility model.

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ON THE EFFECTIVENESS OF LEGAL PROCESSES FOR EQUITY-BASED INCENTIVES.

mike Nwogugu          Self,  mcn111@juno.com
 

This article analyzes some socio-legal issues and sanctions/penalty economics issues pertaining to Non-Common-Stock Equity-Based Incentives (&ldquo EBIs&rdquo ) and also introduces new theories pertaining to legal processes for EBIs, and the degree of government regulation of EBIs. The major findings are that its most efficient to regulate EBIs with one set of laws the degree of government regulation of EBIs should be a variable and depends on classification of EBIs as debt or equity the penalty regime (criminal or civil) for illegal activities in EBI-related matters should also be variable and should depend on several key factors such as company size and employee tenure. Hence, the current methods (and methods proposed by accounting regulators and trade associations) for accounting for stock options in the US and UK (and most developed countries) are not accurate or efficient, and will increase the propensity for fraud. The various problems in regulation, monitoring and enforcement of EBIs have not been addresses properly by existing legal and accounting systems.

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Optimal banking sector recapitalization

P Marcelo Oviedo          Iowa State University,  oviedo@iastate.edu
Shiva Sikdar          Iowa State University,  shiva@iastate.edu
 

More than 100 banking crises have hit developing and developed countries alike since the late 1970''s. They have mostly been resolved by resorting to government-financed bank restructuring programs costing as much as 50% of GDP at times. We analyze the problem from the point of view of a government that has already decided to recapitalize the banking system, and ask the following public finance question: what is the optimal path of a program that weighs recapitalization benefits and the program''s costs? Banks act as financial intermediaries between households and firms (which require bank credit due to a working capital constraint). We formulate a Ramsey problem to characterize the optimal bank restructuring program, considering alternative sources of government financing and the benefits of alternative bank recapitalization paths. We find that only when the government has access to international credit, or financial support from multilateral agencies like the IMF, is it optimal to recapitalize the banking system in the period following the banking crisis. When the lack of external credit forces the government to finance the recapitalization program domestically, it is never optimal to recapitalize the banks in one period even when non-distortionary taxes are available. With access to international debt a banking crisis results in a welfare loss of 0.74%, while the use of domestic distortionary taxes results in a welfare loss of 3.31%.

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Coalitional stability and efficiency of partitions in matching problems

Ipek Ö zkal-Sanver          Bilgi University,  isanver@bilgi.edu.tr
Duygu Salar          Bilgi University,  dsalar@bilgi.edu.tr
 

Ozkal-Sanver (2005) studies stability and efficiency of partitions of agents in two-sided matching markets where agents are allowed to form partitions only by individual moves, and within each coalition of a partition a matching rule determines the matching. In this paper, the relationship between stability and efficiency of partitions is analyzed for several matching rules and under various membership property rights codes. Here, we analyze stability and efficiency of partitions of agents in two-sided matching markets as well, now allowing agents to form partitions also by coalitional moves. Again, the coalitional stability of a partition depends on the existing membership property rights code which is the list of agents who have the right to object when an individual desires to exit from the coalition he belongs to and enter another coalition. When we use the code Free Entry and Free Exit (FE-FX), our coalitional stability notion turns out to be the well-known Strong Tiebout equilbrium.

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A Characterization of Bird''s Rule

Hatice Ozsoy          Rice University,  ozsoy@rice.edu
 

We consider covert-merging and overt-merging as forms of strategic behavior in minimum cost spanning tree games. There is no covert-merge proof cost allocation rule. Several rules studied in the literature are vulnerable to overt-merging as well. Bird''s rule, on the other hand, is characterized by overt-merge proofness, core ion, and tree invariance.

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Fair revenue sharing for public transportation system in Seoul metropolitan area

Sunyoung Park          Seoul National University,  psy0906@gmail.com
Sunyoung Park          Seoul National University,  psy0906@gmail.com
 

With an introduction of a new payment card for public transportation system, a new fare schedule was announced in Seoul metropolitan area from July 1, 2004. Since the card makes it possible to figure out the traffic patterns of public transportation users, a user''s fare depends on his/her traffic pattern. Moreover, the city allocates its revenue between various bus and subway companies based on the traffic patterns. In this paper, we investigate the properties of various revenue sharing rules by taking cooperative game theoretic approach.

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A theory of " stovepiping"

John Patty          Harvard University,  jpatty@gov.harvard.edu
 

Information provision is a central, practical feature of political and economic governance from advice rendered to the President and Congress regarding what strategy is best in foreign conflicts to that offered to firm executives regarding the desirability/legality of different accounting practices, more decisions than not depend upon and are defended ex post in terms of information made available to the decision maker by one or more of his or her agents. This paper examines a model of information provision by a strategic expert who is aware of the ultimate decision maker''s preferences. I show that, even if both the decision maker and the expert have an ex ante preference for unbiased information, per se, the information provided in equilibrium will be slanted in favor of the decision maker''s preferences over what actions to take based on that information.

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Monopolistic Competition, Growth and Public Good Provision

Paul Pecorino          University of Alabama,  ppecorin@cba.ua.edu
 

In the standard model, provision of a pure public good is increasing in group size if it is a normal good. I develop a model of public good provision in which private goods are supplied in a monopolistically competitive market. In this context, increases in the size of the group are increases in the population of a society. I find that increases in population lead to reduced public good provision. The reason is quite simple: As population increases, the number of private goods available for consumption also increases. This raises the marginal utility of income and increases the opportunity cost of contributing to the public good.

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The Spatial Model with Non-policy Factors: A Theory of Policy-Motivated Candidates

Michael Peress          University of Rochester,  mperess@mail.rochester.edu
 

We consider a multi-dimensional spatial model of two-candidate competition where voters care both about policy (which the candidates can compete over) and non- policy factors (which the candidates cannot compete over). Non-policy factors can include &lsquo valance'', partisan identification, retrospective evaluations of the candidates'' performance, and incumbency. When the candidates are vote-maximizers, all equilibria involve both candidates converging to the same position. Particular specifications of the voters'' utility function can lead to both a median-voter theorem and a mean-voter theorem. Surprisingly, this result holds even when non-policy factors are present. Alternatively, if the candidates care about policy outcomes, then a divergent equilibrium will result. A candidate with a non-policy advantage will move away from the vote- maximizing equilibrium and towards his policy ideal point. We then apply our theory to analyze how threats by interests groups to encourage their supporter to abstain from voting influence candidate positioning.

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Sectoral Heterogeneity, Resource Depletion, and Directed Technical Change: Theory and Policy

Karen Pittel          ETH Zurich,  kpittel@ethz.ch
 

We analyze an economy in which the sectors are heterogenous with respect to the intensity of resource use, the productivity of R& D, and specialization gains. The long-term dynamics of the economy are characterized by the essential use of a non-renewable natural resource and two types of research allowing for directed technical change. We first study the balanced growth path and determine the impact of heterogeneity on the stability conditions. Then we focus on two different types of policies that aim at abetting sustainable development. According to the nature of the problem, we look at the impact of actors which are especially interested in the long run: pension funds. We show that a disproportionate investment in stocks of specific firms has no impact on economic growth, whereas development is influenced when supporting sector-specific knowledge creation.

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Stochastic costly state verification and dynamic contracts

Latchezar Popov          University of Iowa,  latchezar-popov@uiowa.edu
 

I consider a dynamic costly state verification environment in which the principal can verify the true state of the agent at a cost. The model is an extension of previous work by Townsend (1979 1988), Mookherjee and Png (1989), Wang (2005) and Monnet and Quintin (2005) in the environment of Thomas and Worrall (1990). A risk-averse agent enters into a contract with a risk-neutral principal. The agent has random income which is unknown to the principal but can be verified at a cost. The principal can commit to executing random verifications. I analyze the problem with standard recursive methods. I find conditions to ensure that a solution exists. It is optimal to set verification probabilities strictly less than 1. For a certain class of utility functions the principal would use verification regardless of the cost of verification. If the agent''s income is verified then she would get consumption and continuation utility strictly higher than if her income is not verified.

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Enfranchisement, Intra-Elite Conflict and a Weak Median Voter

Eugenio Proto          Warwick University,  e.proto@warwick.ac.uk
 

Does power sharing between competing elites result in franchise extension to non-elites? In this paper, we argue that competing, risk-averse elites will enfranchise a numerically large but weak non-elite as insurance against future, uncertain imbalances in relative bargaining power. We show that even when enfranchisement results in negligibly small changes in the distribution of power between elites and the non-elite, there are discontinuous and dramatic changes in equilibrium surplus distribution among the elites, with the possibility that only a small amount of surplus reaches the newly enfranchised non-elite. We argue that our formal analysis accounts for the stylized facts that emerge from a comparative analysis of Indian democracy and an historical analysis of the democratization of some Western European countries.

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From Separate Accounting to Formula Apportionment: Analysis in a Dynamic Framework

Doina Radulescu          CES, University of Munich,  radulescu@lmu.de
 

This paper analyzes the switch from Separate Accounting to Formula Apportionment in a dynamic framework. The model features both purely domestic corporations and a domestic multinational which invests at home and abroad as well as a purely foreign corporation and a foreign multinational which invests in the foreign economy as well as in the domestic country. Using such a framework we can show that since the new FA rules apply only to multinational firms, this will affect the domestic activitity of purely domestic or foreign corporations since these stick to SA and thus the marginal product of labour and capital will be different for the two firm types. This in turn will affect the investment incentives and distort capital and labour allocation between the different types of enterprises operating in an economy.

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Strategic consumption complementarities: can price flexibility eliminate inefficiencies and instability?

Emanuela Randon          University of Bologna-Department of Economics,  emanuela.randon@unibo.it
Peter Simmons          Department of Economics-University of York,  ps1@york.ac.uk
 

Generally, two stylised facts occur with strategic complementarities and fixed prices: i) multiple equilibria, and ii) if the complementarities are strong, the law of demand is violated and there is instability of the equilibrium. In this paper, we analyse the effect of price flexibility on these results and on market welfare properties. Assuming an exchange economy with H agents consuming two goods with one strategic complement, we show that flexibility of prices may remove the multiplicity of the equilibria and the instability of behaviour when the externalities are strong. We show that the equilibrium with beneficial externality is Pareto optimal while the equilibrium with detrimental externality requires corrections.

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A theory of optimal government waste

Leslie Reinhorn          University of Durham,  reinhorn@hotmail.com
 

When the government must use distortionary taxes to achieve a second best optimum, it may be desirable for supply to exceed demand in some markets. The excess supply is purchased by the government and dumped in a stockpile. This seems wasteful, and clearly it would be sub-optimal if the government had access to discretionary lump sum transfers. But when redistribution must be achieved by using taxes that distort the price system, then it can indeed be optimal. This analysis may help to rationalize the existence of government stockpiles of agricultural products.

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Converging to Efficiency: the Ramó n y Cajal Program Experience

Antonio Romero Medina          Universidad Carlos III de Madrid,  aromero@eco.uc3m.es
Cesar Alonso Borrego          Universidad Carlos III de Madrid,  casar.alonso@uc3m.es
Matteo Triossi          Collegio Carlo Alberto,  matteo.triossi@collegiocarloalberto.it
 

This paper analyzes the evolution on the design of a policy measure promoted by the Spanish government: the Ramó n y Cajal Program. An important feature of the program is that initially for a researcher to enter the ion it needs a preacceptance from at least one research institution in Spain. According to the Spanish legislation Universities have the exclusive right to hire their personnel and no researcher can be imposed to then. They use this legal right in their negotiations with the Government to impose a preacceptance phase in the design of the Program. In the third call of the Program this requisite was partially removed and cancels in the fourth call. We model the process as a two-sided matching model. Research departments have the possibility to play two different games the Ramó n y Cajal marching in place in the calls of the years 2001 and 2002 or the procedure in place from 2004 onwards. They decided which one to play by majority voting. We study the incentives of the research centers to impose first and remove after the candidate preapproval to enter the procedure. Our theoretical results proves that in a repeated game under the assumption that research personnel are rare even endogamic institution will prefer the system without preacceptance to the original one after a finite number of calls. In the second part of the paper we shall analyze the data from the years 2001 to 2005 and test if our assumptions and results are supported by the data.

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Optimal investment policy with fixed adjustment costs and irreversibility

Nicolas Roys          University of Paris I, University College London and Institute for Fiscal Studie,  nicolas.roys@ensae.org
 

This paper proves the optimality of an (S, s) policy in a discrete-time model of investment with fixed adjustment costs and irreversibility. Neither functional forms nor calibration are imposed and there is no need for numerical procedures. The result holds for a wide class of shocks. In the case of complete irreversibility, the proof uses the concept of K-convexity introduced by [Scarf, 1960]. In the case of partial irreversibility, a new form of concavity is introduced. It allows the characterization of the optimal policy in several relevant situations.

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Global Climate Change, Technology Transfer and Trade with Complete Specialization

Dirk Rü bbelke          Chemnitz University of Technology,  dru@hrz.tu-chemnitz.de
Vivekananda Mukherjee          Jadavpur University,  mukherjeevivek@hotmail.com
 

The paper develops a model in which a country with better technology for abatement of Green House Gas (GHG) emission (the North) commits to an international protocol to keep the global GHG emission within a specified limit while it helps the mitigation effort in the other country (the South) with unconditional transfer of abatement technology. It finds out in the autarkic (&lsquo no trade'') equilibrium that the technology transfer offer from the North is always accepted by the South. The North may offer either a partial or a complete technology transfer. If partial technology transfer is offered it finds out the determinants of the extent of technology transfer. Then it compares the autarkic equilibrium with the equilibrium where trade with complete specialization occurs and finds out that trade limits the scope of technology transfer as an instrument for mitigation of global GHG emission.

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Ideological Divide within the Cabinet and Public Spending

Anna Rubinchik          Univ of CO at Boulder,  anna.rubinchik@colorado.edu
 

A budget, i.e., spending by category, is prepared by the cabinet of (three key) ministers. Finance minister wants to minimize total spending, while the rest have single-peaked preferences over budgets. The goal is to understand the effect of polarization, or a divergence of the ideal points, on the budget under two typical budgeting procedures. If the finance minister just passively compiles spending requests, as in a budgeting institution called &lsquo fiefdom'' by Hallerberg et al. (2001), more polarization increases the budget. If the procedure is more &lsquo centralized'', i.e., the initial proposal of the finance minister is costly to challenge and requires support of the other minister(s), polarization may lead to a tighter budget, as it might enlarge the set of unchallenged proposals. However, if the ideals of the spending ministers are sufficiently close, the set of unchallenged proposals shrinks with polarization.

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Fiscal Autonomy under Formula Apportionment

Marco Runkel          University of Munich, Department of Economics,  marco.runkel@lrz.uni-muenchen.de
Guttorm Schjelderup          Norwegian School of Economics and Business Administration, Department of Finance,  guttorm.schjelderup@nhh.no
 

This paper investigates the choice of apportionment factors under a corporate tax system of Formula Apportionment. In a fully decentralized system jurisdictions choose apportionment weights non-cooperatively and in equilibrium the apportionment formula contains both mobile (capital) and immobile (labor) factors. As a result, tax rates and the quantities of local public goods are inefficient. A welfare gain can be realized by delegating the decision over apportionment factors to a central planner (centralization), while at the same time allowing jurisdictions fiscal autonomy in setting tax rates. In contrast to perceived wisdom, we show that a central planner also uses mobile factors as apportionment weights. The reason is fiscal externalities arising under Formula Apportionment that have previously not been identified in the tax competition literature.

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Optimal income taxation, public good provision and informative voting

Marco Sahm          LMU Munich,  Marco.Sahm@lrz.uni-muenchen.de
Felix Bierbrauer          MPI Bonn and MIT,  bierbrauer@coll.mpg.de
Thomas Gaube          University of Vienna,  thomas.gaube@univie.ac.at
 

We jointly address the problems of optimal income taxation and public good provision in a continuum economy. Individuals differ in both earning abilities and valuations of a public project. In a situation of large skill heterogeneity and uncertainty about the aggregate valuation, the relevant incentive constraints for information aggregation must ensure that individuals behave as if they engaged in informative voting over the decision on provision. Therefore, adjustments of the transfer system are needed to discourage the more (less) productive from exaggerating (understating) the desirability of public good provision. Relative to an optimal income tax, which focuses solely on earning ability, income transfers are increased whenever the public project is installed and are decreased otherwise.

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The Emergence of Institutions

Santiago Sanchez-Pages          University of Edinburgh,  ssanchez@staffmail.ed.ac.uk
 

This paper analyzes how institutions aimed at coordinating economic interactions may emerge. We build a model in which agents play a prisoners'' dilemma game in a hypothetical state of nature. Agents can delegate the task of enforcing cooperation in interactions to one of them in exchange for a proper compensation. Two basic commitment problems stand in the way of institution formation. The first one is the individual commitment problem that arises because an agent chosen to run the institution may prefer to renege ex post. The second one is a " collective commitment" problem linked to the lack of binding agreements on the fee that will be charged by that agent. These two problems imply first that a potentially socially efficient institution may fail to emerge. Such scenario is more likely to arise in small or poor economies but with relatively high levels of trust. Second, even if the institution emerges, it may be too extractive from a social point of view when the level of trust is low. Finally, we show that the threat of secession by a subset of agents may endogenously alleviate the latter problem.

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On the Efficient Siting of Noxious Facilities

Rudy Santore          University of Tennessee,  rsantore@utk.edu
 

This paper considers the efficient siting of noxious facilities. Damages are modeled as being either monetary (e.g., increased health care costs) or non-monetary (e.g., increased pollution), or both. It is shown that if damages are non-monetary, then there can exist multiple efficient locations for a noxious facility. As a result, policy makers may be forced to use other criteria in addition to efficiency when choosing a site for a noxious facility. It is also shown that random allocations, including siting lotteries, can Pareto dominate siting with host compensation when damages are non-monetary, but not when damages are monetary. Thus, the appropriate policy prescription depends upon the nature of the damages.

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Social choice based on approval and preference

M. Remzi Sanver          Istanbul Bilgi University,  sanver@superonline.com
 

In this paper I search the truth

===================================================================

The Tiebout hypothesis under membership property rights

Remzi Sanver          Istanbul Bilgi University,  sanver@bilgi.edu.tr
Goksel Asan          Istanbul Bilgi University,  gasan@bilgi.edu.tr
 

In a society confronted to the problem of producing an impure public good, we show a tension between the stability and e¢ ciency of coalition structures. For example, when individuals can freely exit from and enter to coalitions, there are economies where stable coalition structures and Pareto optimal ones form disjoint sets. This tension is partially relaxed when entrance to and exit from a coalition requires the consent of all members of that coalition to be entered to or exited from. Such an additional requirement ensures the stability of every Pareto optimal coalition structure. We also extend our analysis to particular families of economies, classified according to agents preferences over crowding.

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Nash implementability of tournament solutions

Remzi Sanver          Bilgi University,  sanver@bilgi.edu.tr
Ipek Ozkal-Sanver          Bilgi University,  isanver@bilgi.edu.tr
 

All tournament solutions fail Maskin monotonicity - hence Nash implementability. We identify a weaker monotonicity condition (called group monotonicity) which allows Nash implementability in frame- works (such as those set by Bochet and Maniquet (2006) or Ö zkal- Sanver and Sanver (2006)) that diverge from the standard one. We ex- plore whether the main tournament solutions satisfy group monotonic- ity and show the possibility of Nash implementing the top-cycle, the iterated uncovered set, the minimal covering set and the bipartisan set in certain non-standard environments.

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Sophisticated Preference Aggregation

Remzi Sanver          Istanbul Bilgi University,  sanver@bilgi.edu.tr
Ozer Selcuk          Istanbul Bilgi University,  oselcuk@bilgi.edu.tr
 

A Sophisticated Social Welfare Function (SSWF) is a mapping from profiles of individual preferences into a sophisticated preference which is a pairwise weighted comparison of alternatives. We characterize Pareto optimal and pairwise independent SSWFs in terms of oligarchies that are induced by some power distribution in the society. This is a fairly large class ranging from dictatoriality to anonymous aggregation rules. Our results generalize the impossibility theorem of Arrow (1951) and the oligarchy theorem of Gibbard (1969).

===================================================================

Voting systems that combine approval and preference

M. Remzi Sanver          Istanbul Bilgi University,  sanver@bilgi.edu.tr
Steven Brams          New York University,  steven.brams@nyu.edu
 

Information on the rankings and information on the approval of candidates in an election, though related, are fundamentally different&mdash one cannot necessarily be derived from the other. Both kinds of information are important in the determination of social choices. We propose a way of combining them in two hybrid voting systems, preference approval voting (PAV) and fallback voting (FV), that satisfy several desirable properties, including monotonicity. Both systems may give different winners from standard ranking and nonranking voting systems. PAV, especially, encourages candidates to take coherent majoritarian positions, but it is more information-demanding than FV. PAV and FV are manipulable through voters'' contracting or expanding their approval sets, but a 3-candidate dynamic poll model suggests that Condorcet winners, and candidates ranked first or second by the most voters if there is no Condorcet winner, will be favored, though not necessarily in equilibrium.

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Regulating national firms in a common market

Biancini Sara          Université de Toulouse,  sara.biancini@univ-tlse1.fr
 

We consider the regulation of national firms in a common market in which barriers to trade are removed. A natural example is the formation of the Single Market in the European . Market integration removes barriers to trade, while regulation acts at the national level. The literature concerning the interactions between regulation and market integration is not very developed. In particular, the public finance aspect of monopoly regulation has usually been neglected. Competition can complicate the regulatory policy undermining preferred tax structures (Ramsey prices). Considering explicitly the public finance aspect of regulation, we obtain striking different results with respect to the existing literature. We analyze the regulation of national producers in the presence of a positive shadow cost of public funds. First, we show that market integration is welfare improving if and only if the positive effect of competition on efficiency compensates for the negative public finance effect (competition, through business stealing, reduces the ability of governments of enjoying the revenues of national monopolies). For this reason, regulators tend to protect national firms in a way which is inefficient from the point of view of total welfare. In the second part of the paper, we show that cooperation between regulators can emerge and solve this inefficiency. The globally efficient allocation of production can be reached, but transfers between countries are needed.

===================================================================

Specialization in higher education

Sinan Sarpca          Koc Universitesi,  ssarpca@ku.edu.tr
 

This paper investigates the implications of specialization in higher education, with particular focus on four-year degree granting institutions. In the first two parts of the paper, I provide a formal economic model and derive predictions about financial aid policies and student composition of a college. Specialization makes a school more appealing to students that have relatively strong skills for the area it specializes in. However, a school must admit students to its weaker departments as well as stronger ones. The school will try to attract strong students to its weaker departments by financial aid and fellowships. Low-income students are more responsive to such offers. My model predicts that poorer students will attend schools with specializations opposite to their relative talents, complement the weaknesses of the richer students through peer effects, and receive financial aid in return. In the third part of the paper, I conduct an empirical analysis using data on the entire set of applicants of Carnegie Mellon University. The empirical findings support the model''s predictions about the relationship between student abilities, area of specialization in the university, and financial aid awarded. These findings are of potential importance to policy makers in framing financial aid policies to assist lower-income students. Policy makers may wish to design financial aid policies to help poorer students attend colleges that are a better match to their relative talents.

===================================================================

Public-private input substitution and growth in a two-stage education system

Ioana Schiopu          Indiana University,  ischiopu@indiana.edu
Calin Arcalean          Indiana University,  carcalea@indiana.edu
 

The paper studies the interaction between public and private inputs in a two-stage education framework (K-12 and tertiary education). We find that an increase in the overall educational public spending crowds out the total level of private contributions and increases the share of total private resources that households devote to K-12 education. Given a fixed level of public funding, a higher share of K-12 public funding prompts households to spend more on education overall and in the same time, to allocate a higher share of their investments towards higher education. Looking at optimal policies, our results suggest that the share of public spending devoted to K-12 should be high irrespective of the size of the public budget. This share varies nonmonotonically with the level of total public spending on education, suggesting that even a country with a sufficiently large education budget could achieve higher growth by shifting public resources towards primary and secondary education. We also find that higher income taxes produce a reallocation of private resources towards the first educational stage.

===================================================================

The Impact of Referendums on the Centralisation of Public Good Provision: A Political Economy Approach

Jan Schnellenbach          University of Heidelberg..,  jan.schnellenbach@awi.uni-heidelberg.de
 

The paper compares decision-making on the centralisation of public goods provision in the presence of regional externalities under representative and direct democratic institutions. A model with two regions, two public goods and regional spillovers is developed in which uncertainty over the true preferences of candidates makes strategic delegation impossible. Instead, it is shown that the existence of rent extraction by delegates alone suffices to make cooperative centralisation more likely through representative democracy. In the non-cooperative case, the more extensive possibilities for institutional design under representative democracy increase the likelihood of centralisation. Direct democracy may thus be interpreted as a federalism-preserving institution.

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In-kind redistribution, altruism and relative income

Jan Schumacher          University of Regensburg,  jan.schumacher@wiwi.uni-regensburg.de
 

The existence of in-kind transfers can be explained by a joint consideration of altruist behaviour and status concerns. Where people measure status by comparing post redistribution incomes and care for the well-being of the poorest, individuals prefer that at least part of the redistribution is done in kind by the public provision of private goods to all, even if these goods are also availiable on the market. In spite of their altruist feelings, status thinking makes people reduce the progressivity of the income tax schedule. In-kind transfers will generally exceed the poorest''s true demand for the quasi-private good.

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Time consistency and fertility decisions

Mordechai Schwarz          The Open University of Israel,  mordsch@openu.ac.il
 

The common ad-hoc assumption about capital markets imperfections, leading to a reduction in fertility rates in modern economies as families prefer quality over quantity, is replaced by a general behavioral assumption of hyperbolic discounting. It is shown that the impact of parents'' human capital on the desired number of children and investment in their education depends on the ratio between relative concavity indices of utility functions regarding consumption and children, but hyperbolic discounting enlarges the &ldquo tradeoff&rdquo zone between quantity and quality of children. It is also shown that hyperbolic discounting reduces the ex-ante desired number of children in rural and neo-classical economies, but increases the ex-ante desired number of children and s time inconsistency in modern economies only (namely, reduces ex-post fertility rate). The reduction in ex-post fertility rates due to hyperbolic discounting is not accompanied by a parallel reduction in human capital accumulation, although human capital causes positive externalities.

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Be Nice, Suffer Twice: Morality, Myopia, Hyperbolic Discounting and Terrorism

Mordechai Schwarz          The Open University of Israel,  mordsch@openu.ac.il
Ronen Bar-El          The Open University of Israel,  roneneba@openu.ac.il
 

Throughout history, politicians often refrained from preemption, although they possessed reliable and sufficiently accurate information that a catastrophe is looming. Refraining from preempting is usually colored by moral arguments of restraint, or pseudo-scientific theories. In this paper, we suggest that this restraint is actually an expression of hyperbolic discounting applied by democratic politicians who evaluate the current period''s social welfare (when they are in office), relatively more than consecutive periods'' welfare (when they will be out of power). Therefore, they prefer to be judged as &ldquo prudent&rdquo in the future, leaving to their successors the task of coping with a much more severe problem. Using a novel interpretation of hyperbolic discounting, we also show that hyperbolic discounting may result in excessive use of force, and a higher level of volatility in terrorism and in anti-terrorist activity.

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Market Imperfections and Endogenous Fluctuations: a General Approach

Thomas Seegmuller          University Paris 1, CNRS,  seegmu@univ-paris1.fr
 

Recently, a lot of works have studied the role of market imperfections on the emergence of endogenous fluctuations. In this paper, we provide an unified model so as to generalize existing results and identify the central common mechanisms responsible for local indeterminacy and endogenous cycles. Indeed, the main difference between a perfectly competitive economy and a lot of models characterized by market imperfections concerns the elasticities of the real wage and the real interest rate with respect to capital and labor. Considering a finance constrained economy, we introduce a formulation of such elasticities which captures the influence of market imperfections and analyze local indeterminacy and the occurrence of endogenous cycles. We discuss the results in function of the labor intensities of the real interest rate and real wage when output factors are high substitutes. We notably exhibit configurations where indeterminacy cannot occur for sufficiently high elasticities of capital-labor substitution and labor supply, even if the elasticity of the real wage with respect to labor is significant when output factors are substitutes. We also present several examples of market imperfections and apply to them our results. These examples are based on imperfect competition, mark-up variability and taste for variety, on balanced budget rule and variable tax rates, and on a formulation of productive externalities characterized by different productivities of labor and capital.

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Optimal Capital Income Taxation in a Two Sector Economy

Sheikh Selim          Cardiff University,  selimst@cardiff.ac.uk
 

We extend the celebrated Chamley-Judd result of zero capital income tax and show that in a two sector neoclassical economy, the steady state capital income tax is nonzero, in general. In particular, we find that the optimal plan involves zero tax on capital income in investment sector and nonzero capital income tax in consumption sector. The distortions of the nonzero capital income tax can be undone by setting different rates of labour income taxes. We also show that if the government faces a constraint of keeping same capital and labour income tax rates across sectors, the optimal capital income tax rate is nonzero.

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Endogenous Lethality and Preemptive Murder

Rajiv Sethi          Barnard College, Columbia University,  rs328@columbia.edu
Brendan O''Flaherty          Columbia University,  bo2@columbia.edu
 

Murders have increased by over 60% in Newark, New Jersey since 2000, although nationally murders have not risen. Similar trends are evident in most other New Jersey cities. The rise in Newark is due primarily to increased deadliness of gunshot wounds the increase in shootings has been small relative to the increase in the probability of death contingent on either a shooting or a wound. The number of non-gunshot murders has been stable. We develop a model of murder to explain this rise. In particular, we show how games of preemption, retaliation, and witness intimidation can transform small changes in fundamentals into large changes in murder rates. We also explain why many empirical studies fail to find substantial effects for traditional deterrence measures on murder.

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House allocation with fractional endowments

Jay Sethuraman          Columbia University,  jay@ieor.columbia.edu
Stergios Athanassoglou          Columbia University,  sa2164@columbia.edu
 

In this paper we study a generalization of the well known house allocation problem. In contrast to the classical Shapley-Scarf model and its various extensions, agents are not restricted to own a full house. Rather, we assume that agents may own fractions of different houses summing to an arbitrary quantity, but that he or she has use for only the equivalent of one unit of a house. We also depart from the classical model by assuming that arbitrary quantities of each house may be available to the market. Justified envy considerations arise when two agents have the same initial endowment, or when an agent is in some sense disproportionately rewarded in comparison to his or her peers. In this context we provide an efficient algorithm that computes a fractional allocation of houses to agents that satisfies ordinal efficiency, individual rationality, and no justified envy. Our results extend to the full preference domain. We show that individual rationality, ordinal efficiency, and no justified envy conflict with weak strategyproofness in the strict preference domain. We also show that individual rationality, ordinal efficiency and strategyproofness are incompatible in the strict preference domain. Finally, we show that the strict core of the associated cooperative game is empty and that the weak strict core conflicts with individual rationality.

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Red herrings and revelations: the destabilizing and stabilizing effects of economic theory

Paul Shea          University of Oregon,  pshea@uoregon.edu
 

This paper assumes that agents form expectations based on a single, evolving mispecified model. The true model is assumed to depend on a large number of endogenous and exogenous variables. Agents do not know, however, which variables are included in the true model. An underlying economic theory process gradually reveals new variables to agents. Agents are therefore using an underparamterized model, but the degree of underparameterization is diminishing over time. When theory reveals a new variable, two outcomes may occur. The first outcome is unsurprising the revelation may improve forecasting and decrease the policy maker''s expected loss. Surprisingly, however, the revelation of a new variable may also increase expectational errors and harm welfare. The latter outcome is much more likely under adaptive learning than rational expectations.

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Budget deficit and redistribution

Jens Siebel          University of Applied Sciences Kaiserslautern,  jenspeter.siebel@fh-kl.de
 

The role of redistribution has been neglected by most strategic deficit models, besides Martimort (2001). This approach here goes beyond the model of Martimort (2001), as preferences for redistribution are endogenized by using a two-period median voter model. In both periods there is set a set of voters who differ with regard to their pre-tax earnings. The behaviour of the first period median voter is analyzed under different scenarios, e.g. an intertemporal change of median voter income as well as of the income distribution is regarded. It turns out that these forces have an impact on the budget balance, which can be ambiguous in some cases.

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Emissions Trading of Global and Local Pollutants, Pollution Havens and Free Riding

Emilson Silva          Georgia Institute of Technology,  emilson@gatech.edu
 

We examine the pollution haven hypothesis and free riding behavior when dirty goods generate global and local pollutants. Under domestic emissions trading for both pollutants, goods trade will cause the polluting industry to move to poorer countries due to higher prices of both types of emission permits in richer countries. This pollution haven effect may be weakened if global pollution permits are traded internationally, and may further be reduced or reversed through redistributive international income transfers. Cutbacks of the global pollutant by Kyoto signatories can yield &ldquo double dividends&rdquo for non-participating countries which emit more global pollutant while less local pollutant.

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Optimality Conditions and Comparative Static Properties of Optimal Nonlinear Income Taxes Revisited

Laurent Simula          EHESS, PSE and GREQAM-IDEP,  Laurent.Simula@ehess.fr
 

Comparative static properties of the optimal Mirrleesian nonlinear income tax are obtained for a finite population and quasilinear in consumption preferences. Contrary to Weymark (1987) who considers quasilinear in leisure preferences, the linearity with respect to the variable observed by the government and used as a tax base is lost. A reduced-form optimal income tax problem is derived, in which consumption levels are obtained as functions of gross incomes. The contribution of this new reduced form is twofold. First, the optimal allocation can be characterized geometrically in a simple way. Second, comparative static results with respect to individual productivities are easy to obtain.

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Strategic Interaction between Corupt Governments in a Growth Model.

Tom Skladzien          washington university in st louis,  trskladz@artsci.wustl.edu
 

This paper investigates the consequences of strategic interaction between corrupt governments on economic growth. I derive a growth model where corruption is the endogenous result of a self-seeking government. The implications of endogenous corruption on economic growth are investigated. The model is then expanded to a two-country setting and solved for both the competitive Nash and Cooperative equilibrium. It is shown that the negative consequences of corruption can be significantly reduced through inter-governmental competition, thus providing a further argument for fiscal decentralization in the context of self-seeking governments. Finally, empirical evidence is produced in support of this hypothesis in the form of cross country regressions.

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" The public economics of forecasting and insurance"

Al Slivinski          University of Western Ontario,  aslivins@uwo.ca
 

The insurance literature recognizes that individuals can deal with risk through insurance contracts as well as through self-insurance, or self-protection. One risk recent policy interest arises from meteorological events like hurricanes, tornadoes and flooding. Private insurance is often incomplete, with governments providing additional ex-post compensation. The quality of warning systems is important for the provision of self-protection. A warning system increases the return to engaging in (ex-post) self-protection from weather damage, while insurance against such damage reduces that return. We develop a model of insurance/warning system co-existence to analyze their contradictory incentives for self-protection. We find that a warning system must be more reliable (hence more costly) in the presence of insurance if warnings are to induce individuals to engage in ex-post self-protection. As a corollary, we show that greater heterogeneity in damages implies that some individuals will (rationally) ignore warnings generated by an optimal forecast system.

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Indirect Lobbying and Media Bias

Francesco Sobbrio          University of Southern California,  sobbrio@usc.edu
 

We construct an informational influence process where lobbies compete to influence voters beliefs by introducing a bias in the information that a news media outlet collects. Our results suggest that, by targeting voters, lobbies are indeed able to an ex-ante distortion in the political process. The presence of a very biased news media outlet could partially counterbalance this distortion or worsen it, depending on the direction of its bias. Moreover, the more " noisy" the information that the news media outlet collects, the more likely that the news media outlet manipulates such information. At the same time, the more likely that the news media outlet bias its report, the lower are the incentives of lobbies to engage in influence activities.

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" Financing vaccine research in developing countries- A public good approach"

Diana Sonntag          Department of Economics Chemnitz University of Technology,  diana.sonntag@wirtschaft.tu-chemnitz.de
 

An effective AIDS vaccine is the key to stop HIV transmissions in the long run, when prevention fails. Because a vaccine for developing countries has been still not developed, an alternative approach to uncoordinated research among countries is the support of developing countries´ R& D. Yet, the neutrality theorem (Warr, 1982) indicates that income transfers to overcome shortcomings are hampered. This result based, however, on the assumption that the amount of individual efforts at the national level equals a global effort. Yet, this is not valid for the public good &ldquo developing a vaccine&rdquo . This paper examine whether funding developing countries´ vaccine-related activities can resolve shortcomings. Regarding to methodology the paper offers an extension of the theory of private provision of public goods for the best-shot case &ldquo developing an AIDS vaccine&rdquo . The interaction between a public good and financial assistance will be analysed in a Nash game instead of a Stackelberg game as done in other analyses. A leader-follower behaviour does not work in our case, because R& D is often not coordinated. We found that in contrast to a standard public good model, neutrality may not apply. If a donor does not search for a vaccine, however, transfers income to a recipient, the suboptimal provision of the public good &ldquo developing an AIDS vaccine&rdquo can be corrected. Consequently, supporting developing countries to scale up their R& D efforts is an alternative approach to overcome shortcomings.

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Migration, social discounting and capital income taxation

Luca Spataro          Dipartimento di Scienze Economiche, University of Pisa, Italy,  l.spataro@ec.unipi.it
Valeria De Bonis          Dipartimento di Scienze Economiche, University of Pisa, Italy,  debonis@ec.unipi.it
 

We tackle the issue of optimal dynamic taxation of capital income in an economy with disconnection a la Weil (1989) generated by migration and intra-family altruism. We show that, when the government aims at correcting such a disconnection through the use of time varying weights in the social welfare function, then there is room for nonzero capital income taxation, both in the short and in the long run.

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Private provision of a discrete public good: efficient equilibria in the private-information contribution game

Barbieri Stefano          Department of Economics - Tulane University,  sbarbier@tulane.edu
David Malueg          Department of Economics - Tulane University,  dmalueg@tulane.edu
 

We study the voluntary provision of a discrete public good via the contribution game. Players independently and simultaneously make nonrefundable contributions to fund a discrete public good, which is provided if and only if the contributions are at least as great as the cost of production. We study in detail the case in which players'' private values for the good follow a uniform distribution. We completely characterize continuous-strategy Bayesian equilibria and provide conditions for their existence. Generically, when one continuous equilibrium exists, a nondegenerate continuum of continuous equilibria exists. For any given cost of the good, multiple continuous equilibria cannot be Pareto ranked. Nevertheless, not all continuous equilibria are interim incentive efficient. The set of interim incentive efficient equilibria is exactly determined. Generically, when one interim incentive efficient equilibrium exists, a nondegenerate continuum of interim incentive efficient equilibria exists.

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On the Ramsey Equilibrium with Heterogeneous Consumers and Endogenous Labor Supply

Bosi Stefano          EQUIPPE (Lille 1), EPEE (Evry),  stefano.bosi@univ-lille1.fr
Seegmuller Thomas          CNRS (Sorbonne),  seegmu@univ-paris1.fr
 

In this paper we address the question of deterministic cycles in a Ramsey model with heterogeneous infinite-lived agents and borrowing constraints, augmented to take into account the case of elastic labor supply. Under usual restrictions, not only we show that the steady state is unique, but also we clarify its stability properties through a local analysis. We find that, in many cases, the introduction of elastic labor supply promotes convergence by widening the range of parameters for saddle-path stability, and endogenous cycles can eventually disappear. These results are robustly illustrated by means of canonical examples in which consumers have separable, KPR or homogeneous preferences.

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Does Incorporation Matter? Quantifying the Welfare Loss of Non-Uniform Taxation Across Sectors

Michael Stimmelmayr          CES, University of Munich and CESifo,  Stimmelmayr@lmu.de
Doina Radulescu          CES, University of Munich and CESifo,  Radulescu@ces.vwl.uni-muenchen.de
 

According to Harberger''s 1962 and 1966 seminal papers, the corporate income tax distorts the allocation of capital between the corporate and the non-corporate sector and reduces therefore aggregate output. To quantify this efficiency loss we apply a dynamic, computable, general equilibrium growth model. We compare the allocation of capital under the current, non-uniform German tax system with the allocation of capital arising from a hypothetical, sector neutral tax system where both sectors face the same effective tax burden. Our numerical results underpin the theoretical finding, that the loss in overall output is highly sensitive to the source of investment funds. Accordingly, if investments are exclusively financed via new share issues the efficiency loss amounts to nearly 2 per cent of aggregate output. However, if less than half of overall investments are financed via new equity injections the efficiency loss is almost negligible.

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Axioms for Minimax Regret Choice Correspondences

Joerg Stoye          New York University,  j.stoye@nyu.edu
 

This paper unifies the recent axiomatic literature on minimax regret. It compares some models of minimax regret, proposes a variation of them, and shows how to characterize the according choice correspondences in a unified setting. The core proof technique, and one of the main contributions, is to uncover a dualism between choice correspondences and preferences in an environment where this dualism is not obvious. This insight can be used to generate results by importing findings from the existing literature on preference orderings.

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Charting the Changes in Federal Income Tax Progressivity: Comparing the Reagan and Bush Tax Cuts

Michael Stroup          Stephen F. Austin State University,  mstroup@sfasu.edu
 

IRS data of the federal income tax burden that was paid across the various income strata is now available for the first four years of George W. Bush''s administration. The affect of the the " Bush Administration Tax Cuts" (the Economic Growth and Tax Reconciliation Act of 2001) on progressivity over the first three years of implementation can be directly compared to the first three years of the " Reagan Administration Tax Cuts" (the Tax Reform Act of 1986). Using a newly developed tax progressivity index (Stroup, 1995), the Bush tax cuts are found to increase federal income tax progressivity rather than decrease it, as the Reagan tax cuts briefly did in the late 1980s.

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Collusion in organizations and management of conflicts through job design and authority delegation

Yutaka Suzuki          Hosei University,  yutaka@hosei.ac.jp
 

We analyze a three-tier hierarchy with a principal, a supervisor and two productive agents. The agents'' efficiency parameters are unknown to the principal (hidden-characteristics element) and perfectly negatively correlated. The supervisor is used by the principal to report which agent is more efficient, but he also has a productive role and may reduce the cost of each agent''s task (hidden-action element). We show that, under asymmetric information on the true efficiency of agents and when the task assignment induces future benefits (in terms of possible promotion and reputation enhancement), there exists scope for collusion between the supervisor and the less efficient agent. Then, for some parameters, collusion-proof contracts may be a second best optimal solution, and for other parameters, equilibrium collusion may be optimal. More specifically, allowing vertical collusion (competition for the coalition formation with the supervisor) or allowing its possibility and promoting lateral collusion among agents in equilibrium may be optimal. As a characterization result, the low-powered job for the agent and the high-powered job for the supervisor are derived as a nature of optimal solution in each of the two regimes. Our model endogenously determines who should hold the real authority on the task assignment problem in organizations, and investigates under which conditions authority delegation may improve the overall efficiency.

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Monotonicity, equilibrium incentives, and efficiency in a dynamic model of hold up

Yutaka Suzuki          Faculty of Economics, Hosei University,  yutaka@hosei.ac.jp
 

We apply a framework in capital accumulation games to a dynamic context of Holdup, and perform a monotonicity analysis with the concept of Markov perfect equilibrium. The analysis reveals the existence of &ldquo monotone increasing first period incentives&rdquo , &ldquo early turnpike&rdquo and &ldquo forecast horizon&rdquo . These results show that for a sufficiently long horizon, first-period equilibrium incentives are insensitive to parameter changes after that horizon, namely, there is a bounded planning horizon in the sense that the sequences of parameters after that horizon (i.e., far future contingencies) do not affect the first-period (early-periods) equilibrium play. We interpret the results from the viewpoint of contract incompleteness that is crucial in the Holdup problems. We also prove with the monotone comparative statics method that in a more efficient accumulation system of relational-skill, more investments will be derived and higher efficiency will be dynamically attained in equilibrium.

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Fiscal Federalism and Soft Budget Constraint: Does the nature of public spending matter?

Emmanuelle TAUGOURDEAU          CNRS, CES, University of Paris 1,  taugour@univ-paris1.fr
Marie-Laure BREUILLE          ZWB, Berlin,  m.breuille@u-paris10.fr
Thierry MADIES          University of Fribourg,  thierry.madies@unifr.ch
 

This paper analyses the impact of both the nature of local public spending and the federal government choice variables on the softness of the regional budget constraint, the regional incentives to borrow and the regional public good provision. We show that, the regional budget constraint is softer when the public good is provided to households compared to the situation where the public good provided in the first period is devoted to the production process.

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Formation of customs s with internal taxes and subsidies.

Jose Luis Torres          Universidad de Malaga,  jtorres@uma.es
Pablo Revilla          Universidad P. Olavide,  revilla@upo.es
Bernardo Moreno          Universidad de Malaga,  bernardo@uma.es
 

The customs s are groups of countries with internal free trade. Each establishes a common tariff over the imported products. But the can also establish a tax or a subsidy for the firms in the . This paper analyzes the formation of custom s when (common or not) internal taxes or subsidies are imposed. We consider two types of countries, producers and consumers, and any kind of coalition or custom can be formed by them. We explore how the surplus sharing rule among the members of a determines the stable s structure.

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On the Impact of Extending the Coverage of Social Security in Developing Countries

Chung Tran          Indiana University,  chtran@indiana.edu
 

In this paper, we construct a heterogeneous agent overlapping generations model with inter-vivos transfers and bequests in a two sector economy. We evaluate the effects of extending the coverage of public social security to uninsured and low-income individuals in the informal sector. On contradiction to literature on social security reform in developed countries, we find that (i) the introduction of a well-designed public social assistance program has positive effects not only on the welfare of recipients of social pensions but also on average welfare (ii) the concentration of wealth decreases (iii) the magnitude of distortion of financing instruments plays a key role in determining the effects of the social assistance program.

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Interval values for strategic games in which players cooperate

Anne van den Nouweland          Universities of Melbourne and Oregon,  annev@uoregon.edu
 

We propose a method to associate a coalitional interval game with each strategic game. The method is based on the lower and upper values of finite two-person zero-sum games. Associating with a strategic game a coalitional interval game we avoid having to take either a pessimistic or an optimistic approach to the problem. The paper makes two contributions to the literature: It provides a theoretical foundation for the study of coalitional interval games and it also provides and studies a very natural method of associating coalitional games with strategic games. We axiomatically characterize this new method. As an intermediate step, we provide some axiomatic characterizations of the upper value of finite two-person zero-sum games.

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Contractually Stable Networks

Vincent Vannetelbosch          CORE, University of Louvain,  vannetelbosch@core.ucl.ac.be
Ana Mauleon          FNRS and FUSL,  mauleon@fusl.ac.be
Jean Franç ois Caulier          FUSL,  caulier@fusl.ac.be
 

The aim of this paper is to develop a theoretical framework that allows us to study which bilateral links and coalition structures are going to emerge at equilibrium. We define the notion of coalitional network to represent a network and a coalition structure, where the network specifies the nature of the relationship each individual has with his coalition members and with individuals outside his coalition. This new framework forces us to redefine key notions of theory of networks, value and allocation rules, and to introduce a new solution concept: contractual stability. The idea of contractual stability is that adding or deleting links needs the consent of coalition partners. Moreover, the formation of new coalition structures needs the consent of original coalition partners. We also show that the Myerson value has a corresponding allocation rule in the context of coalitional networks and we propose a characterization of this allocation rule for coalitional networks.

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Regional housing market spillovers in the US: lessons from regional divergences in a common monetary policy setting

Isabel Vansteenkiste          European Central Bank,  Isabel.vansteenkiste@ecb.int
 

In this paper, we seek to quantify the importance of state-level housing price spillovers and interest rate shocks to house price developments in the US. The econometric approach involves an application of the recently developed global VAR (GVAR) to the 31 biggest US states over the period 1986-2005. Such an approach allows not only for the empirical derivation of the impact of common shocks on US house price developments, but also for an analysis of the importance of interstate housing price spillovers. Beyond real house prices and real income per capita, each state-specific vector error correction model also includes nation-wide variables &mdash measured as a weighted average of other states &mdash and the real interest rate. These individual state models are then linked in a consistent and cohesive manner. An analysis of generalised impulse responses indicates that the importance of housing price spillovers is state dependent, with shocks occurring in states with relatively lower land supply elasticities having much stronger spillover effects that those in the other states. As regards real interest rates, the impact appears to be relatively small with an increase of 100 basis points in the real 10-year government bond yield resulting in a long run fall in house prices of between 0.5 and 2.5%. This would suggest, in line with DelNegro and Otrok (2005) that the decline in long-term interest rates is not the primary factor that has driven the recent surge in house prices in the US.

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Measuring Segregation

Oscar Volij          Ben Gurion University and Iowa State University,  ovolij@bgu.ac.il
David Frankel          Iowa State University,  dfrankel@iastate.edu
 

We propose a set of axioms for the measurement of school-based segregation with any number of ethnic groups. These axioms are motivated by two criteria. The first is evenness: how much do ethnic groups'' distributions across schools differ? The second is representativeness: how different are schools'' ethnic distributions from one another? We prove that a unique ordering satisfies our axioms. It is represented by an index that was originally proposed by Henri Theil (1971). This &ldquo Mutual Information Index&rdquo is related to Theil''s better known Entropy Index, which violates two of our axioms.

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Fiscal competition, convergence and agglomeration

Maximilian von Ehrlich          Center for Economic Studies at the University of Munich ,  vonEhrlich@lmu.de
Robert Fenge          Ifo Institute and CESifo,  fenge@ifo.de
Matthias Wrede          RWTH Aachen University and CESifo,  mwr@fiwi.rwth-aachen.de
 

This paper analyzes the impact of fiscal competition through infrastructure in a New Economic Geography framework. It is shown that fiscal competition generally leads to an overprovision of infrastructure. Furthermore asymmetries in regions'' sizes as well as infrastructural endowments are considered. While agglomeration processes due to differences in regional expenditure shares are not affected in Nash equilibrium, fiscal competition leads to convergence between regions with asymmetric infrastructural endowments. Finally, a trade off between convergence and efficiency arises since the efficient distribution of regional infrastructure implies for sufficiently low trade costs full agglomeration.

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Optimal nonlinear taxation of income and savings in a two class economy

John Weymark          Department of Economics, Vanderbilt University,  john.weymark@vanderbilt.edu
Craig Brett          Department of Economics, Mount Allison University,  cbrett@mta.ca
 

Optimal nonlinear taxation of income and savings is considered in a two-period model with two individuals who have additively separable preferences and who only differ in their skill levels. When the government can commit to its second period policy, taxes on savings do not form part of the optimal tax mix. When commitment is not possible, the optimal tax scheme distorts private savings behavior. If the types are separated in period one, it is optimal to subsidize the savings of both types of individual. If the types are pooled in period one, it is optimal for the low-skilled (high-skilled) individual to have savings taxed (subsidized). In both cases, the subsidy to the high-skilled individual helps offset his disincentive to save that arises because some of his savings will be redistributed to the low-skilled individual in the second period. The savings of the low-skilled individual in the separating case are taxed so as to relax an incentive compatibility constraint.

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Political economy of social security with endogenous preferences

Bertrand Wigniolle          CES, Université de Paris I,  wignioll@univ-paris1.fr
Pascal Belan          LEN université de Nantes,  pascal.belan@univ-nantes.fr
 

In this paper we study the interaction between economic policy and preferences when both are endogenous. Economic policy results from a vote, whereas individual preferences are influenced by specific investment in training and education. The paper focuses on a particular economic policy: the financing of the social security system. Moreover, it considers a specific education investment: parents expect a gift from their children when old and devote resources in order to arouse the altruism of their children. Therefore, preferences of the children are trained in relation to the size of the social security system, which in turn results from the preferences of the median voter. The politico-equilibrium of this economy is compared to the social optimum.

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Contract Renegotiation and Arbitration Design : The case of &ldquo Must See&rdquo Television

simon wilkie          usc,  swilkie@usc.edu
 

In 2003 News Corp.acquired a controlling interest in DirecTV, one of the two DBS satellite providers that compete with cable in the multi-channel pay TV market. News Corp. also owns Fox Television, which in many markets owns the local Fox Broadcast station and certain regional sports networks. Empirical evidence suggested that Fox would now have an incentive to raise the price for access to this programming in order to raise rivals costs in the MVPD market. To remedy this harm the FCC imposed an arbitration mechanism to be used when contract renegotiations for carriage broke down. A key issue in the design of this mechanism was the role of asymmetric information and what information should be revealed to the contracting parties. The mechanism preserves and exploits these asymmetries. Since its introduction the mechanism has been used several times and averted the withholding of programming.

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The diffusion of inflation expectations: theory and evidence

M.C. Sunny Wong          University of San Francisco,  mwong11@usfca.edu
Melody Lo          University of Texas at San Antonio,  Melody.Lo@utsa.edu
Jim Granato          University of Houston,  jgranato@central.uh.edu
 

The assumption of homogeneous representative agents with perfect rationality is challenged by recent macroeconomic literature. In this paper, we consider an asymmetric information diffusion process from more-informed to less-informed agents in a standard cobweb-type expectation model. Our main finding is that less-informed agents'' forecasts confound those of more-informed agents whenever there is misinterpretation in the information acquisition process. We term this situation the boomerang effect. Using inflation forecasting data from Survey Research Center, we find the boomerang effect exists in agents'' inflation forecasting behavior. The implication of the boomerang effect centers on policymaker''s disseminating policy/public information in a transparent manner.

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Conformity, equity and correlated equilibrium

Myrna Wooders           Vanderbilt University ,  myrna.wooders@vanderbilt.edu
Edward Cartwright          University of Kent,  E.J.Cartwright@kent.ac.uk
 

We explore the potential for correlated equilibrium to capture conformity to norms and the coordination of behavior within social groups. We propose three properties one may expect of a correlated equilibrium: within-group anonymity, group independence and stereotyped beliefs. Within-group anonymity requires that players within the same social group have equal opportunities and equal payoffs. Group independence requires that there be no correlation of behavior between groups. If beliefs are stereotyped then any two members of a social group are expected to behave identically. Our main results demonstrate that there are subjective correlated equilibrium satisfying within-group anonymity, group independence and stereotyping. A number of related issues, such as fairness, are also discussed.

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Decentralized Trade Mitigates the Lemons Problem

John Wooders          University of Arizona,  jwooders@eller.arizona.edu
Diego Moreno          Carlos III,  dmoreno@eco.uc3m.es
 

In markets with adverse ion the competitive model predicts that only low-quality units trade when the average quality of the good held by sellers is low. We show that under decentralized trade both high and low-quality units trade, although with delay. Thus, when frictions are small the surplus realized under decentralized trade is greater than the competitive surplus. This suggests a reason why these markets are often decentralized. Remarkably, payoffs are competitive as frictions vanish even though both qualities trade.

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Distortive wage tax and commuting subsidies

Matthias Wrede          RWTH Aachen University,  mwr@fiwi.rwth-aachen.de
 

Within a second-best duocentric urban economics framework, where labor income taxation distorts workplace choices because of commuting costs, this paper studies a commuting subsidy which distorts land use. It is shown that a commuting subsidy (tax) increases welfare if and only if it shifts labor supply from less to more productive business districts.

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Nonlinear Pricing, Contract Variety, and Competition

Huanxing Yang          Ohio State University,  huanxing@econ.ohio-state.edu
Lixin Ye          Ohio State University,  lixinye@econ.ohio-state.edu
 

This paper studies how increased competition a?ects nonlinear pricing, in particular the variety of contracts o?ered by firms. We present a model with both horizontally and vertically di?erentiated products, with the set of consumers served in the market being endogenously determined. Though firms are only able to sort consumers in the vertical dimension, horizontal di?erentiation a?ects screening in the vertical dimension. We characterize the symmetric equilibrium menu of contracts under di?erent market structures. When the market structure moves from monopoly to duopoly, we show that each firm o?ers more contracts (serving more types of consumers) and quality distortions decrease. As the market structure becomes more competitive (when the number of firms increases further), the e?ect of increasing competition exhibits some non-monotonic features: when the initial competition is not too weak, a further increase in the number of firms will lead to more contracts being o?ered and a reduction in quality distortions when the initial competition is weak, an increase in the number of firms will lead to fewer contracts being o?ered, though the e?ect on quality distortions is not uniform. Our predictions are largely consistent with some empirical studies. JEL: D40, D82, L10

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Petty Corruption

Seunghan Yoo          Cornell University,  sy239@cornell.edu
 

This paper analyzes a petty corruption model in which entrepreneur''s type is drawn from an absolutely continuous probability distribution function F over [0,1], and a Perfect Bayesian equilibrium is adopted as the solution concept. In a one-stage game, if there is more than one bureaucrat, no project is approved with a strictly positive probability. For an infinitely repeated game, I show that the single window policy increases the social benefit in a socially optimal equilibrium.

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Discretion and Control in Organization Decision Making

Zaki Zahran          Georgetown University,  zz4@georgetown.edu
 

The paper aims to study issues of autonomy and control in organization decision making. I describe a dynastic repeated game from one generation to the next, where agents are dynamically inconsistent and possess private information. I investigate a number of control systems. In auditing system, every T periods the agent in period T+1 tests for deviation from the expected optimal decision rule over the T-periods, and punishes accordingly. I show that the pattern of behavior over the audit period is that of increased cheating as we retreat from the audit date. Earlier agents cheat relying on subsequent agents to compensate for that in an attempt to avoid collective punishment in the future.

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Regulation through a revenue contest

Unal Zenginobuz          Bogazici University,  zenginob@boun.edu.tr
Haldun Evrenk          Suffolk University,  evrenk@suffolk.edu
 

This paper proposes a mechanism for the regulation of duopolies that involves instituting a revenue contests among the firms. The firm with the lower revenue is to pay a penalty to the firm with the higher revenue proportional to the difference between their revenues. Cournot and Stackelberg equilibrium outcomes are considered under different information structures in a homogenous good duopoly. The impact of the mechanism on price competition is also examined in a differentiated products model. In all cases studied the mechanism leads to increased total social surplus, and implements the optimal outcome in certain cases.

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The Structure and Performance of the World Market in a Cobb-Douglas Example

Ben Zissimos          Vanderbilt University,  ben.zissimos@vanderbilt.edu
 

In an international trading economy where countries set tariffs strategically, this paper studies the relationship between the structure and the performance of the world market. Using new results from monotone comparative statics, replication of such an international trading economy is studied. It is shown that, as the economy is replicated, the equilibrium converges monotonically towards the equilibrium of a competitive equilibrium model of international trade. The distributional implications of replication are also evaluated.

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