Social Conflict and Gradual Political Succession: An Illustrative Model*

This paper studies the evolution of political institutions in the face of conflict. We examine institutional reform in a class of pivotal mechanisms—institutions that behave as if the resulting policy were determined by a “pivotal” decision maker drawn from the potential population of citizens and who holds full policy‐making authority at the time. A rule‐of‐succession describes the process by which pivotal decision makers in period t + 1 are, themselves, chosen by pivotal decision makers in period t. Two sources of conflict—class conflict, arising from differences in wealth, and ideological conflict, arising from differences in preferences—are examined. In each case, we characterize the unique Markov‐perfect equilibrium of the associated dynamic political game, and show that public decision‐making authority evolves monotonically downward in wealth and upward in ideological predisposition toward the public good. We then examine rules‐of‐succession when ideology and wealth exhibit correlation.     

Lobbying Bureaucrats*

We study how interest group lobbying of the bureaucracy affects policy outcomes and how it changes the legislature's willingness to delegate decision‐making authority to the bureaucracy. We extend the standard model of delegation to account for interest group influence during the implementation stage of policy. We analyze how the decision to delegate changes when the bureaucratic agent is subject to external influence. The optimal degree of delegation as well as the extent to which interest groups influence policy outcomes differ depending on whether the system of government is characterized by unified or divided control. The result is a comparative theory of bureaucratic lobbying.     

INTERACTION BETWEEN MONETARY AND FISCAL AUTHORITIES UNDER INCOMPLETE INFORMATION

This paper analyzes the interaction between monetary and fiscal authorities under incomplete information. The inflation goal of the central bank is assumed to be unknown to the fiscal authority and the public. The central bank signals the goal by choosing the first‐period monetary policy before the fiscal authority joins the policy‐making game. If the central bank would like the fiscal authority and the public to believe that it is wet (dry), the central bank would distort the money supply upward (downward) in order to reveal its actual type.     

A note on redistributive fairness and economic reform

To understand reasons for possible failures of ‘good’ economic reforms, we consider an institution which is always successful in making the best public decision from the utilitarian perspective. We show it is bound to introduce inequality if costs of a reform are privately known: the losers can not be always compensated. Thus, if equity is a primary concern, then some reforms with positive aggregate net gain might not be undertaken. If the utilitarian welfare is the only guide for making public decisions, implementing a reform might require the ability to ignore the associated social costs of inequality.     

Central governance or subsidiarity: A property-rights approach to federalism

We consider a model where one region in a federation can realize a public project after undertaking value-increasing investments. While negotiations on the federal level ensure that an efficient project size is implemented in equilibrium, non-contractibility of investments causes the overall outcome to differ across regimes. If the region bears the entire implementation costs of its policies, underinvestment prevails and subsidiarity (centralized governance) is superior when spillovers are weak (strong). Conversely, if linear cost sharing arrangements are feasible, decentralized authority often admits a socially optimal outcome while centralized authority (with majority or unanimity rule) does not.     

Commitment and matching contributions to public goods

We study multi-stage processes of non-cooperative voluntary provision of public goods. In the first stage, one or more players announce contributions that may be conditional on the subsequent contributions of others. In later stages, players choose their own contributions and fulfill any commitments made in the first stage. Equilibrium contributions are characterized under different assumptions about the commitment ability of players, the number of public goods and whether players commit to matching rates or to discrete quantities. We focus on contribution mechanisms that can emerge and be sustainable without a central authority, and that may be particularly relevant for international public goods. Efficient levels of public goods can be achieved under some circumstances, while in others commitment is ineffective.     

Priorities in the location of multiple public facilities

A collective decision problem is described by a set of agents, a profile of single-peaked preferences over the real line and a number of public facilities to be located. We consider public facilities that do not suffer from congestion and are non-excludable. We characterize the class of rules satisfying Pareto-efficiency, object-population monotonicity and sovereignty. Each rule in the class is a priority rule that selects locations according to a predetermined priority ordering among “interest groups”. We characterize the subclasses of priority rules that respectively satisfy anonymity, avoid the no-show paradox, strategy-proofness and population-monotonicity. In particular, we prove that a priority rule is strategy-proof if and only if it partitions the set of agents into a fixed hierarchy. Any such rule can also be viewed as a collection of generalized peak-selection median rules, that are linked across populations, in a way that we describe.     

Economics of public good provision: auditing, outsourcing, and bribery

Abstract .  This study investigates a government's contracting decision to audit or outsource the provision of a public good given a potential hidden bribe and information asymmetries. The key findings are the following. First, the bribe and price of the public good are increasing in the corruptibility of the department. Second, the bribe is decreasing in the firm's bargaining power. Third, a bribery equilibrium exists when the department's corruptibility is sufficiently high given the firm's bargaining power. A bribe involves extortion or a compensatory payment depending on the department's corruptibility. Only a compensatory bribe affects the department's contracting decision.     

Local public goods, inter-regional transfers and private information

Suppose that the centre wishes to make transfers between member states of a federation to reduce inequality. However, it lacks precise information concerning the cost differences that are responsible for the initial income inequality. We examine the implications of asymmetric information for the design of the transfer scheme. We show that if member states’ inherent cost levels as local public good providers take discrete values, the first best, or ‘complete information’, transfer scheme may or may not violate incentive compatibility. If inherent cost is a continuous random variable, such a scheme certainly violates incentive compatibility. We also explore the possibility of binding participation constraints. In our model, a binding incentive compatibility constraint leads to a reduction in effort devoted to cost reduction, and a binding participation constraint will also lead to a violation of Samuelson's optimality condition for public good provision.     

HOW DELEGATING AUTHORITY BIASES SOCIAL CHOICES

Delegating authority can bias social choices. The bias derives from the persuasion process that accompanies social decision making. When decision makers can decide to delegate their authority, asymmetries in decision makers' persuasiveness and openness to persuasion can play an important role in distorting the outcomes of social choices. When permitted in social decision making, such ad hoc delegating may favor extreme points of view and may force more group decisions to formal, social-choice mechanisms such as voting.     

Is Transparency To No Avail?*

Transparent decision‐making processes are widely regarded as a prerequisite for the working of a representative democracy. It facilitates accountability, and citizens might suspect that decisions, if taken behind closed doors, do not promote their interests. Why else would there be the secrecy? We provide a model of committee decision‐making that explains the public's demand for transparency, and committee members' aversion to it. In line with case study evidence, we show how pressures to become transparent induce committee members to organize pre‐meetings away from the public eye. Transparency does not improve accountability, but it might improve the decision.     

The political economy of regionalism

We examine the incentives of regions to unite and separate. Separation allows for greater influence over the nature of political decision making while unification allows regions to exploit economies of scale in the provision of government. Our paper explores the influence of size, location and the diversity within regions in shaping this trade-off. We then examine the way in which alternative political institutions aggregate regional preferences and thereby define the number of countries.     

Incomplete integration and contagion of debt distress in economic unions

This paper compares different fiscal integration schemes on the basis of their ability to finance public investments and resilience to debt distress and contagion. Complete integration schemes, where a central authority chooses the level of public investments with productivity‐enhancing externalities across different jurisdictions, are shown to be superior to incomplete integration schemes, where member governments choose public investments unilaterally. As a result, equilibrium income is greater for citizens of both member states under a complete integration scheme. Moreover, complete integration schemes are shown to be more resilient to idiosyncratic shocks and more effective in limiting contagion of debt distress. This is mainly because the central authority can credibly borrow more without risking default than member states taken together can and it can “transfer resilience” across them if needed. These findings inform discussions on structural aspects of secular stagnation in Europe by emphasizing a potential challenge in the institutional design of fiscal responsibilities.     

Tax evasion and tax morale: A social network analysis

We study the effects of tax morale and social norms on tax evasion when individuals interact in a network. We present a model that incorporates incentives for tax compliance in the form of punishment and fines, tax morale, and reputation for social behaviour. We assume that individuals adjust their tax morale by observing the neighbours' tax morale. We simulate the model for different values of the parameters and show that the steady-state share of taxpayers as opposed to tax-evaders is affected by the probability of finding like-minded peers in the reference group (network integration), the weight that individuals attribute to reputation, and the share of individuals who update their tax morale. Last, we consider the possibility of a fiscal authority using the knowledge of the network structure and targeting ‘central’ individuals. We show that by positively affecting the tax morale of individuals whose influence within the network is high, a fiscal authority can increase tax compliance.     

Crowding out and crowding in: When does redistribution improve risk-sharing in limited commitment economies?

When the risk of default constrains financial contracts, public insurance policies can significantly affect private risk-sharing. This is because by changing income expectations and volatility, redistribution changes the attractiveness of default and thus endogenous borrowing constraints. Extending results by Krueger and Perri (2011) [8], this paper analyses the conditions under which redistribution can improve private insurance by making default less attractive to the income-rich, whose income it reduces. I first explain why public redistribution typically crowds out private insurance in the two-income economy, and identify the role of income persistence and saving after default. Second, I show how, in endowment economies with three income states or more and in economies with capital, redistributive taxes can improve, or “crowd in”, private consumption insurance. Finally, in a quantitative exercise using a realistic income process calibrated to US micro-data, moderate redistribution crowds in private insurance with production but not in an endowment economy.     

Viewpoint: Decision-making in committees

Abstract .  This article reviews recent developments in the theory of committee decision-making. A committee consists of self-interested members who make a public decision by aggregating imperfect information dispersed among them according to a pre-specified decision rule. We focus on costly information acquisition, strategic information aggregation, and rules and processes that enhance the quality of the committee decision. Seeming inefficiencies of the committee decision-making process such as over-cautiousness, voting, and delay emerge as partial remedies to these incentive problems.     

Collective decisions with interdependent valuations

Many collective decision problems have in common that individuals’ desired outcomes are correlated but not identical. This paper studies collective decisions with private information about desired policies. Each agent holds private information which mainly concerns his own bliss point, but private information also affects all other agents. We concentrate on two specific mechanism, the median and mean mechanisms establish the existence of symmetric Bayesian Nash equilibria of the corresponding games and compare the performance of the mechanisms for different degrees of interdependencies. Applications of our framework include the provision of public goods and the design of decision processes in international organizations.     

Preventing bank panics: The role of the regulator's preferences

How do the preferences of a banking authority affect its decision making in periods of distress and thus financial stability? We study this question in a version of Diamond and Dybvig (1983) with a monopolistic bank and a time-consistent policy response by a banking authority. We show that limited commitment on the part of the banking authority may induce fragility but the banking authority's incentives are also an important determining factor in the degree of financial stability. In particular, under a simple suspension scheme, delegating a banking authority who places sufficient weight on a banker's welfare acts as a commitment device and prevents runs, in analogy with how a Rogoff (1985) “conservative” central banker helps reduce inflation bias. In contrast, once interventions take the form of payment rescheduling, the scope for the bank's susceptibility to a panic increases should the banking authority put more weight on monopoly rents. Identifying such an aspect of vulnerability suggests that appointing a banking authority whose objective function deviates from that of depositors may have unintended consequences.     

“Almost” subsidy-free spatial pricing in a multi-dimensional setting

Consider a population of citizens uniformly spread over the entire plane. The population faces a problem of locating public facilities financed by its users, who face an idiosyncratic private access cost to the facility. We show that, under mild assumptions, an external intervention that covers a tiny portion of the facility cost is sufficient to guarantee secession-proofness or no cross-subsidization, where no group of individuals is charged more than the cost incurred if it had acted on its own. Moreover, we demonstrate that in this case the Rawlsian access pricing is the only mechanism that rules out secession threats.     

Regret aversion and opportunity dependence

This paper provides an axiomatic model of decision making under uncertainty in which the decision maker is driven by anticipated ex post regrets. Our model allows both regret aversion and likelihood judgement over states to coexist. Also, we characterize two special cases, minimax regret with multiple priors that generalizes Savage's minimax regret, and a smooth model of regret aversion.