Segmented Work and Divided Workers: A Review Article

The Coase theorem is often interpreted as demonstrating why private negotiations between polluters and victims can yield efficient levels of pollution without government interference. It is considered by many to provide the theoretical underpinnings for "free-market" solutions to environmental problems. This article explains why misinterpreting Coasian negotiations as a market driven process leads to erroneous conclusions. More importantly, this article demonstrates why negotiations between polluters and victims would fail to yield efficient outcomes even if property rights were well-defined, even if there were only a single victim, even if negotiations entailed no transaction costs, and even if negotiators behaved rationally and reached a successful agreement. Unlike other critiques of the Coase theorem that focus on irrational behavior and transaction costs, our critique identifies perverse incentives that arise even under conditions most favorable to the theorem. By accepting, rather than challenging, the premises of the theorem, our analysis provides an "internal" critique that strengthens well-known "external" criticisms.     

Fiscal policies,frictional labor market,and endogenous growth

This paper considers the spillover effects from public spending, and studies optimal fiscal policies in frictional labor markets. We obtain that the optimal shares of government spending in production and consumption are the same as those in a frictionless labor market under the Hosios condition. However, as higher capital accumulation increases the cost of job creation and maintenance, the optimal tax rate of capital income is positive. In addition, when the labor market is frictional, the marginal benefit of labor is larger than the marginal utility of leisure. Thus, consumption and labor should not be taxed uniformly any more. Our calibration suggests that all of the three tax rates should be positive. Moreover, in the situation in which the Hosios condition does not hold, the shares of public productive spending and public consumption both increase when the worker’s bargaining power is greater than the elasticity of search in the matching function.     

The Time‐Consistent Public Goods Provision

In this study, we reconsider the optimal nonlinear tax problem with the public good from the perspective of the commitment issue and examine how it affects the condition of the public good provision. We show that the Samuelson rule should be modified when the government cannot commit and the skill types of taxpayers are revealed in the first period. This is true even if the preference of the taxpayers is separable and additive with respect to consumption and leisure. Our analysis also shows how the lack of commitment affects the formula of the marginal cost of public funds and the level of public good provision. Our findings imply that the level of the public good may be excessive in comparison to the case where the government can commit to its tax policy.     

Is there any scope for corporatism in macroeconomic policies?

This paper studies corporatism as the outcome of bargaining between the government and a representative labor union. We show that if negotiations between these two parties only relate to macroeconomic policies and unions are not assumed to be inflation-averse, corporatism can never be beneficial to both parties. As corporatist policies are nevertheless commonly observed in this context, we discuss possible explanations that reconcile the theory with actual observations. The policy implications of these explanations are also discussed.     

Economic Diplomacy

We study bilateral conflicts that affect the welfare of third parties, the stakeholders. The conflict takes the form of a war of attrition and intervention is modeled as the possibility that the stakeholder “aids” the agreement with transfers to the contenders. We characterize the optimal policy when the stakeholder limits its intervention to a unilateral commitment to compensate the contenders if the conflict is resolved, and show that if contenders must be treated equally after agreement, then the optimal policy cannot eliminate the delay in resolving the conflict, and intervention is only advisable when the stakes are high enough. Economic diplomacy is modeled as a three‐player game where the stakeholder is actively involved in the negotiation where transfers are discussed simultaneously with a settlement for the conflict. We prove that, provided that none of the parties involved is too impatient, diplomacy benefits the third party in all conflicts.     

Nonlinear Pricing, Redistribution, and Optimal Tax Policy

This paper examines the role of nonlinear pricing by public (or regulated) utilities as a redistributive mechanism in presence of an optimal nonlinear income tax. It models an economy with many types of persons who differ in two unobservable characteristics (earning abilities and tastes). We show that nonlinear pricing does have a redistributive role; it is not a substitute for an ill-designed tax policy. We prove, assuming separable preferences, that a person whose valuation of the public sector output is smaller than the average valuation of the population (all measured at the same consumption bundle) must face a marginal price for the good above its marginal cost. Further assuming that tastes and earning abilities are perfectly correlated, we prove that everyone must face a marginal price for the public sector's output which strictly exceeds its marginal cost if correlation is positive. These properties provide an economic rationale for the provision of "support for low-income consumers" as mandated by the universal service and similar regulatory policies. Finally, we show that with correlated characteristics, implementation can be achieved through two separate functions: a pricing function that depends only on the public sector output and a tax function that depends only on income.     

UNION–FIRM BARGAINING AGENDA REVISITED: WHEN UNIONS HAVE DISTINCT PREFERENCES

In this paper we revisit the issue of the scope of bargaining between firms and unions by considering a more general union's utility function with distinct preferences and sequential negotiations. First, we compare exogenously given labour market institutions; i.e., right‐to‐manage (RTM) and sequential efficient bargaining (SEB). We show that the conventional wisdom, which states that firms always prefer RTM, no longer holds. In fact, when unions are adequately wage aggressive and have strong enough bargaining power, firms may prefer SEB negotiations; however, firms switch their preference to RTM when unions are very strong. Moreover, we show that a conflict of interest between the parties may emerge when unions are sufficiently employment oriented as well as sufficiently wage aggressive and not too strong or too weak in bargaining. Second, we analyse the endogenous choice of the bargaining agenda. We show that a rich plethora of equilibria may occur and new situations of conflict/agreement of interests between the bargaining parties arise in particular when unions are sufficiently wage‐aggressive.     

Donations in a recursive dynamic model

Abstract.  This paper studies how donations respond to unexpected permanent changes in income and tax rates in a recursive dynamic model. The dynamic approach yields several interesting insights. If marginal tax rates are progressive, a permanent jump in a household's income increases its consumption and donations in the short run, but has no effect in the long run. The permanent income elasticity of current donations is likely to exceed one. If the marginal tax rate is flat, the jump in income raises consumption and donations in both the short and the long run. A permanent marginal tax rate cut raises consumption and donations in the long run if marginal tax rates are progressive, while it reduces donations in the short run if it has little direct impact on tax payments. If the marginal tax rate is flat, a tax cut has a positive effect on consumption in both the short and the long run, but has an ambiguous effect on donations.     

Positioning and negotiations: The case of pharmaceutical pricing

We study a positioning game prior to negotiations where each party invests into influential activities in order to raise voter support for their preferred bargaining outcome. The case chosen for our analysis is a bilateral monopoly where a purchaser meets a pharmaceutical firm and where the two negotiate on the price of a new and innovative medicine. We identify factors that influence on the negotiated price such as treatment effects of the new and the existing drug, production costs of the new drug, the price of the existing drug, the marginal cost of public funds and patient group size. Furthermore, it is shown that the negotiated price, depending on the characteristics of a political cost function with regard to the influential activities, is influenced by the order of moves taken by the parties. Regardless of the strategic interrelationships between the two parties, likely positioning games to be played are those where one of the two negotiating parties acts as a leader while the rival acts as a follower.     

Strategic step-by-step negotiation

We analyze a specific type of negotiation process where parties proceed in stages taking into consideration that negotiation may end prematurely with an inefficient agreement. Parties negotiate only one increasing pie, thereby avoiding inefficiencies which are typical for issue-by-issue negotiations. For ann-stage game, we prove the existence of a unique subgame-perfect equilibrium. We then show that step-by-step negotiation can only improve players' expected payoffs if negotiation in stages reduces the difference between their equilibrium offers. For this to occur, however, the risk of negotiation must be affected by the agenda of the bargaining problem.     

The Design of Pension Pay Out Options When the Health Status during Retirement Is Uncertain

This paper examines the optimal design of pension plans when the health status during retirement is uncertain. Assuming that the health status affects both life expectancy and the marginal utility of consumption, choice between a lump-sum payment and an annuity can be welfare-enhancing if the health status is not observable by pension plan providers. This result holds if the marginal utility of consumption and life expectancy are negatively correlated. On equity grounds, a lump-sum option can be justified even if the marginal utility of consumption is independent of life expectancy.     

Environmental Policy, Tax Incidence, and the Cost of Public Funds

This paper studies under what conditions a double dividend may occur in the sense that both environmental quality and employment rise. A simple static general equilibrium model is employed in which tax policy faces the dual task of internalising a negative environmental externality and raising revenue to finance public consumption. The model features a clearing labour market with both labour demand and supply and a fixed factor of production (e.g. capital). Hence, we can study tax incidence and its effect on employment, environmental quality, and the marginal cost of public funds. It is shown for the case of an upward sloping labour supply curve and less than full tax shifting by employers that a shift towards greener preferences cannot yield a double dividend, even if the fixed factor is important. However, if labour supply curve bends backwards, more environmental concern confers a double dividend.     

Keynesian Multipliers, Direct Crowding Out, and the Optimal Provision of Public Goods

This paper studies Keynesian multipliers in a macroeconomic model with monopolistic competition. We allow public and private consumption goods to be perfect substitutes in private utility. This enables us to study the effect of direct crowding out on the size of national income, profit and employment multipliers for a given rise in real public spending. A positive real national income multiplier is obtained if consumers value public consumption less than private consumption. In addition, we determine the effective marginal cost of public funds and the optimal provision of public goods, both in the short run and in the long run.     

WELFARE‐MAXIMISING PRICING IN A MACROECONOMIC MODEL WITH IMPERFECT COMPETITION AND CONSUMPTION EXTERNALITIES

This paper develops a simple macroeconomic model with imperfect competition and consumption externalities, and uses it to examine whether the marginal cost pricing rule in the partial equilibrium framework can apply to the general equilibrium framework. It is shown that, for welfare to be maximised, average revenue should be set equal to marginal cost if consumption externalities are either absent or positive. However, for welfare to be maximised, average revenue should be set higher than marginal cost in the presence of negative consumption externalities.     

Optimal Nonlinear Income Taxation with Habit Formation

It has recently been shown that incorporating “keeping up with the Joneses” preferences into a prototypical two‐ability‐type optimal nonlinear income tax model leads to higher marginal tax rates for both types of agents. In particular, the high‐skill type faces a positive marginal tax rate, rather than zero as in the conventional case. In this paper, agents’ utility functions are postulated to exhibit “habit formation in consumption” such that the prototypical two‐ability‐type optimal nonlinear income tax model becomes a dynamic analytical framework. We show that if the government can commit to its future fiscal policy, the presence of consumption habits does not affect the standard results on optimal marginal tax rates. By contrast, if the government cannot precommit, the high‐skill type will face a negative marginal tax rate, while the low‐skill type’s marginal tax rate remains positive.     

INTIMIDATION: LINKING NEGOTIATION AND CONFLICT

A challenger wants a resource initially held by a defender, who can negotiate a settlement by offering to share the resource. If Challenger rejects, conflict ensues. During conflict, each player could be a tough type for whom fighting is costless. Therefore, nonconcession intimidates the opponent into conceding. Unlike in models where negotiations happen in the shadow of exogenously specified conflicts, offers made during negotiations determine how conflict unfolds if negotiations fail. In turn, how conflict is expected to unfold determines the players' negotiating positions. In equilibrium, negotiations always fail with positive probability, even if players face a high cost of conflict. Allowing multiple offers leads to brinkmanship—the only acceptable offer is the one made when conflict is imminent. If negotiations fail, conflict is prolonged and not duration dependent.     

Sequential bargaining,external effects of agreement,and public intervention

In some bargaining situations, agreement has implications for agents beyond the parties involved, and if so, delays in reaching an agreement or failing to reach an agreement, when this would be profitable, may imply significant welfare losses. The question raised in this paper is whether the intervention of a government, who has a positive valuation of agreement and therefore offers a subsidy, will reduce such delays and inabilities to reach agreement? Based on a perfect Bayesian equilibrium in a sequential bargaining game with intervention, we show that in equilibrium intervention always reduces the ex ante equilibrium inefficiency and conditionally reduces expected delays in trade. However, for intervention in the form of a subsidy to take place, the aggregate of the seller’s reservation price and the externalities must be (almost) as high as the buyer’s upper valuation limit.     

Bargaining and separation costs in two-sided markets

A two-sided market is characterized by contract negotiations, bilateral exchanges between buyers and sellers. Separation costs endow trading partners with monopoly power, rendering this a market of bilateral monopolistic competition. Market equilibrium is defined by these negotiations, a matching of the two sides, and a set of prices; the costs of disagreement are endogenous. A bargaining strategy some players use is commitment to a position. Disagreements are possible and, contrary to the case of bilateral monopoly, these disagreements are not always inefficient.     

Simple contracts, renegotiation under asymmetric information, and the hold-up problem

In this article it is demonstrated that voluntary bargaining over a collective decision under asymmetric information may well lead to ex post efficiency if the default decision is non-trivial. It is argued that the default decision may be interpreted as a ‘simple’ contract that the parties have written ex ante. This result is used in order to show that simple unconditional contracts which are renegotiated may allow the hold-up problem to be solved, even if the parties’ valuations are private information.     

Household bargaining and the design of couples’ income taxation

This paper studies the design of couples’ income taxation when consumption and labor supply decisions within the couple are made by maximizing a weighted sum of the spouses’ utilities; bargaining weights are given but specific to each couple. Information structure and labor supply decisions follow the Mirrleesian tradition. However, while the household's total consumption is publicly observable, the consumption levels of the individual spouses are not observable. With a utilitarian social welfare function we show that the expression for a spouses’ marginal income tax rate includes a “Pigouvian” (paternalistic) and an incentive term. The Pigouvian term favors a marginal subsidy (tax) for the high-weight (low-weight) spouse, whose labor supply otherwise tends to be too low (high). The sign and the magnitude of the incentive term depends on the weight structure across couples. In some cases both terms have the same sign and imply a positive marginal tax for the low-weight spouse (who may be female) and a negative one for the high-weight spouse (possibly the male). This is at odds with the traditional Boskin and Sheshinski results. Our conclusions can easily be generalized to more egalitarian welfare functions. Finally, we present numerical simulations based on a calibrated specification of our model. The calculations confirm that the male spouse may well have the lower (and possibly even negative) marginal tax rate.