Economies with observable types

We study economies of asymmetric information with observable types. Trade takes place in lotteries. Individuals face a standard budget constraint, while the incentive compatibility constraints are imposed on the production set of the intermediaries. This formalization encompasses moral hazard, as in [Jerez, 2003] and [Jerez, 2005], and private information economies. Equilibrium allocations are constrained efficient, but, contrary to what stated for example in Jerez (2005), the set of equilibrium allocations may be empty and the Second Welfare Theorem may fail. This happens for two reasons. First, constrained efficient allocations may violate the necessary and sufficient conditions of price supportability for the individuals. Second, even when constrained efficient allocation are price supportable, they may fail to be a profit maximizing choice of the firm at the individual supporting prices. To restore existence of an equilibrium the firm has to be restricted to supply allocations with support in the set of incentive compatible contracts.     

Distribution of tastes and skills and the provision of local public goods

This paper introduces into the Tiebout model individuals with different skills. It is shown that the production techniques, the distribution of tastes and skills and intercommunity trade will affect the pattern of communities. In the suggested model competition with local public goods is Pareto optimal: communities will not be composed of identical people. The optimal solution requires that every community will tax everybody according to his marginal social cost. A Pareto efficient redistribution policy can be carried out only by a central government using lump-sum taxes. A federal income tax will affect community patterns and therefore is inefficient.     

Ownership and Cost‐Sharing Contracts

We discuss the relative merits of public and private ownership in an incomplete contract framework developed by Hart, Shleifer and Vishney (HSV). We add two new elements to their model. First, the government may offer cost‐sharing contracts when procuring the good. Second, the owner of a private firm may divert resources that increase their own profit/utility but increase total costs. The cost sharing contract allows the government to reduce the private firm's incentives to dump quality in order to save on costs. However, this also leads to resource diversion, which increases total costs. We derive the preferred mode of ownership when the government optimally chooses the power of the cost sharing scheme. We find that the presence of quality‐reducing cost reductions only favours government ownership if the scope for resource diversion is substantial. A discussion of when resource diversion is likely to be important is also provided.     

Optimal Taxation with Private Government Information

The Ramsey model of fiscal policy implies that taxes should be smooth in the sense of having small variances. In contrast, empirical labour tax processes are smooth in the sense of being random walks; they provide prima facie evidence for incomplete government insurance. This paper considers whether private government information might lie behind such incomplete insurance. It shows that optimal incentive compatible policies exhibit limited use of state contingent debt and greater persistence in taxes and debt, and it argues that they are better approximations to empirical fiscal policies than those implied by the Ramsey model. The paper also establishes that optimal incentive compatible allocations converge to allocations such that the government's incentive compatibility constraint no longer binds. Generally, these limiting allocations are ones in which the government is maximally indebted. Their credibility and the interaction of incentive compatibility and credibility is briefly discussed.     

DISTRIBUTING THE GAINS FROM TRADE WITH INCOMPLETE INFORMATION*

We argue that the incomplete information which the government has about domestic agents means that tariffs become an optimal instrument to protect them from import competition. Using a model where agents have private information about their endowments, we solve for the optimal government policy subject to the political constraint of ensuring Pareto gains from trade, the incentive compatibility constraint, and the government's budget constraint. We find that the optimal policy takes the form of nonlinear tariffs. These tariffs are never complete, in the sense of bringing prices back to their initial level, but always allow some individuals to be strictly better off than at the initial prices.     

Judicial review and the power of the executive and legislative branches

The legal system can affect what policies a government can implement. In particular, when there is separation of powers, the strength of the judiciary to review and overturn actions of the executive and legislative branches can affect such things as how much redistribution these policy-making branches can do. Surprisingly, having judicial review helps the policy-making branches—the stronger is the judiciary, the more redistribution they are able to do. This occurs because the policy-making branches must make promises on and off the equilibrium path to individuals in order to make redistribution possible. However, in many circumstances, the government wants to renege on these promises, either to do more redistribution than promised or to not carry out severe threats against any individuals who lied. Judicial review can prevent reneging on these promises, thus making them credible.We develop this in the context of an optimal income tax model with a finite number of individuals where the government knows the exact distribution of types but not which individual is of which type. In this finite model, the government can detect misrevelation by even a single individual so that an individual׳s taxes can depend not just on one׳s own actions but also on others’ actions. Piketty (JET, 1993) showed that the government could implement any full-information Pareto optimal allocation if the government could commit to its announcements, even to infeasible allocations in circumstances after some individuals misreveal. We derive the sequential equilibrium allocations when individuals reveal their types by simple announcements when feasibility on and off the equilibrium path is imposed. Increasing the degree of judicial review expands the set of achievable allocations on the full-information utility possibility frontier. We also relate the different possible legal rules to different solution concepts in game theory.     

Optimal ownership of public goods reconsidered

Consider a non-governmental organization (NGO) that can invest in a public good. Should the government or the NGO own the public project? In an incomplete contracting framework with split-the-difference bargaining, Besley and Ghatak (2001) argue that the party who values the public good most should be the owner. We demonstrate the robustness of their insight when the split-the-difference rule is replaced by the deal-me-out solution. Our finding is in contrast to the private good results of Chiu (1998) and De Meza and Lockwood (1998), who show that the optimal ownership structure crucially depends on whether the split-the-difference rule or the deal-me-out solution is used.     

WAGE BARGAINING AND MERGER INCENTIVES WITH ASYMMETRIC COSTS

This paper examines how wage bargaining within each firm influences the relationship between an equilibrium ownership structure and the most preferred ownership structure from the viewpoint of social welfare, in a unionized oligopoly of asymmetric firms with respect to productivity of capital. We consider the merger incentive of each firm’s owner when the wage level is determined through bargaining between the firm’s owner and union. We derive a condition for both the degree of cost asymmetry among existing firms and the relative bargaining power of each firm’s owner to her/his union such that each ownership structure can be observed in equilibrium. We also show that although the two types of ownership structures with the merger involving the least efficient firm can be equilibria and socially optimal, these structures are observed only when both the degree of cost asymmetry and the relative bargaining power of each firm’s owner are moderate. Finally, we analyse the relationship among the cooperative game approach employed in this paper and two non‐cooperative merger formation approaches, and examine the robustness of the results obtained in this paper against the change in the assumption regarding each firm’s cost function.     

Partial ownership and cross-border mergers

Partial ownership can be used as a screening device by a foreign firm which wants to merge with a local firm whose productivity is private information. As partial ownership is confined to sharing future merger profits, it cannot achieve complete separation in all cases but improves expected merger gains also in an equilibrium which is not fully separating. Without partial ownership, the foreign firm potentially discriminates against high productivities. In a pooling equilibrium with partial ownership, however, it will potentially discriminate against intermediate productivities.     

A BARGAINING THEORY OF INEFFICIENT REDISTRIBUTION POLICIES*

When two policies are available to achieve the same goal why is the relatively inefficient one often observed? We address this question in the context of policies used to redistribute income towards special interest groups (SIGs) where in the first stage the constraints on policy instruments are chosen and in the second the government bargains with SIGs over the level of the available policies. Restrictions on the use of efficient policies and the use of inefficient ones reduce the surplus over which SIGs and governments can bargain but it also improves the government's bargaining position thus increasing its share of the surplus. The positive effect for the government dominates under plausible conditions. Inefficient policies are the equilibrium outcome under alternative policy selection mechanisms, e.g., election of policymakers and bargaining between SIGs and the government. The model also explains the coexistence of transfer policies. Moreover, we show why a weak government is more likely to choose the inefficient transfer and discuss how this result may be tested.     

The bargaining set of a large economy with differential information

Summary. We study the Mas-Colell bargaining set of an exchange economy with differential information and a continuum of traders. We established the equivalence of the private bargaining set and the set of Radner competitive equilibrium allocations. As for the weak fine bargaining set, we show that it contains the set of competitive equilibrium allocations of an associated symmetric information economy in which each trader has the “joint information” of all the traders in the original economy, but unlike the weak fine core and the set of fine value allocations, it may also contain allocations which are not competitive in the associated economy. Received: February 15, 1999; revised version: August 9, 1999     

On mixed markets with asymmetric information

In asymmetric information exchange economies involving both non-negligible and negligible agents, one should expect the failure of the private Core-Walras Equivalence Theorem. This paper shows that if “large” traders are similar to each other, then they lose their market power and hence the Equivalence Theorem can be restored. We also investigate on weaker equivalences among Walrasian expectations allocations, Aubin private core and private core allocations of the original mixed economy and the atomless one associated to it, without the assumption that all atoms are of the same type. Furthermore, extensions of Hervés-Moreno-Yannelis and Schmeidler Theorems (compare Hervés et al. in J Math Econ 41:844–856, 2005a; Schemidler in Econometrica 40:579–580, 1972) are given for differential information economies in which the feasibility constraints are imposed with an equality (exact feasibility).     

Bargaining under incomplete information, fairness, and the hold-up problem

In the hold-up problem incomplete contracts cause the proceeds of relationship-specific investments to be allocated by bargaining. This paper investigates the corresponding investment incentives if individuals have heterogeneous fairness preferences. Individual preferences are taken to be private information. Investments can then signal preferences and thereby influence beliefs and bargaining behavior. In consequence, individuals might choose high investments in order not to signal information that is unfavorable in the ensuing bargaining.     

Commons as insurance and the welfare impact of privatization

It is shown here that, despite the efficiency gains from privatization, when markets are incomplete, all individuals may be made worse off by privatization, even when the resource is equitably privatized. Such market incompleteness is common in the developing world and can explain the often encountered resistance to efficiency enhancing privatizing reforms, especially in the case of village level landholdings and forests. The advantage of common held property arises because of its superior insurance properties (which tend to provide income maintenance in low states). Sufficient conditions are established under which any feasible insurance scheme under private property cannot ex ante Pareto dominate allocations under the commons.     

Systematic Political Grass–Root Support for Tariffs

The leading political–economy–of–trade models are virtually silent on two fundamental questions raised by Rodrik in 1995. Why are trade policies systematically biased against trade? And why are tariffs rather than more efficient production subsidies adopted to redistribute income? This paper shows that systematic political grass–root support for trade–restricting and inefficient tariffs emerges when the government has a revenue goal and collecting taxes is costly. Even if no tax instrument enjoys an advantage with respect to collection costs and the factor ownership distribution is unbiased, more people support tariffs than import or production subsidies. More generally, the presence of tax–collection costs creates a grass–root support bias for taxes over subsidies as instruments to redistribute income.     

Social welfare,parental altruism,and inequality

When individuals have heterogeneous and persistent degrees of one‐sided parental altruism, inequality may grow large and standard social welfare criteria are problematic. If the planner selects Pareto optimal allocations based on some target level of consumption inequality, the solution implies an aggregation of individuals' utilities that is strongly asymmetric and biased toward the less altruistic dynasties. If instead, the planner uses a symmetric utilitarian criterion, the solution is likely to generate a large degree of long‐run inequality (even relative to laissez‐faire competitive equilibria), it can only be decentralized with negative estate taxes or lower bounds on bequests, and it is time‐inconsistent.     

Dynamic Optimal Taxation with Private Information

We study dynamic optimal taxation in a class of economies with private information. Optimal allocations in these environments are complicated and history-dependent. Yet, we show that they can be implemented as competitive equilibria in market economies supplemented with simple tax systems. The market structure in these economies is similar to that in Bewley (1986) ; agents supply labour and trade risk-free claims to future consumption, subject to a budget constraint and a debt limit. Optimal taxes are conditioned only on two observable characteristics—an agent's accumulated stock of claims, or wealth, and her current labour income. We show that optimal taxes are generally non-linear and non-separable in these variables and relate the structure of marginal wealth and income taxation to the properties of agent preferences.     

Endogenous Choice of Strategic Contracts in a Mixed Duopoly with Bargaining Over Managerial Delegation Contracts

We revisit the endogenous choice problem of strategic contracts for the public firm and the private firm in a managerial mixed duopoly with differentiated goods. We consider the situation wherein the managerial delegation contracts are determined by maximising social welfare within the public firm, which is equal to the objective function of its owner, and through bargaining over the content of managerial delegation contracts between the owner and manager within the private firm. We show that, in equilibrium, when the manager of the private firm has high bargaining power relative to that of the owner, the public firm chooses a price contract, while the private firm chooses a quantity contract. However, there is no equilibrium market structure under the pure strategic contract class when the manager has sufficiently low bargaining power relative to that of the owner.     

政府角色定位与企业改制的成败

由产权不清和政府寻租导致的企业家努力水平低下是造成乡镇企业经营困难的根本原因 ,企业改制是解决这一问题的主要手段。但是 ,如果改制仅仅局限于所有权易手 ,不去触动地方政府事后寻租的权力基础 ,不形成对产权的有效保护 ,那么考虑到政府的事后寻租 ,企业家仍然不会提供高水平的努力。只有进行政府机构改革 ,使企业家确立政府不会事后寻租的信念 ,企业家的激励问题才能真正得到解决。本文通过构造一个两阶段不完全博弈信号传递模型 ,解释了造成改制后地区间经济绩效差异的原因 ,阐明了机构改革是政府传递改制决心、企业家识别政府类型的关键信号。而是否进行政府机构改革则决定了改制的成败     

Optimal asset taxes in financial markets with aggregate uncertainty

This paper studies Pareto-optimal risk-sharing arrangements in a private information economy with aggregate uncertainty and ex ante heterogeneous agents. I show how to implement Pareto optima as equilibria when agents can trade claims to consumption contingent on aggregate shocks in financial markets. The first result is that if aggregate and idiosyncratic shocks are independent, the implementation of optimal allocations does not require any interventions in financial markets. This result can be extended to dynamic settings in the sense that, in this case, only savings need to be distorted, but not trades in financial markets. Second, I characterize optimal trading distortions in financial markets when aggregate and idiosyncratic shocks are not independent. In this case, optimal asset taxes must be higher for those securities that pay out in aggregate states in which consumption is more volatile. For instance, this can provide an efficiency justification for the frequently observed differential tax treatment of different asset classes, such as debt and equity claims.