A Democracy Principle and Strategy-Proofness

In some social choice applications we want more than one alternative to be selected in some situations. This allows the construction of strategy-proof social choice rules that are not dictatorial. But if we also require x alone to be selected if it is at the top of some ordering that is submitted by more than half of the individuals then the rule cannot be strategy-proof. We prove this for rules that sometimes select one alternative, and sometimes two, but never more than two.     

Poverty,competition, democracy,and ownership: A general equilibrium model with vertical preferences

We consider a general equilibrium model where individuals are simultaneously workers, consumers, and shareholders, with two possible market structures: Monopoly and Duopoly, and two extreme ownership structures: egalitarian and concentrated. Considering three standard poverty indicators, the questions are, whether more competition generates more or less poverty for a given ownership structure; and whether a democratic choice between Monopoly and Duopoly leads to the alternative with less poverty. When the ownership is concentrated, we show that Duopoly generates less poverty than Monopoly and the majority votes for the alternative with less poverty. When the ownership is egalitarian, Duopoly may generate more or less poverty and democratic choice alleviates poverty regarding at least one poverty indicator and worsens poverty regarding at least another one, the three poverty indicators never converging. An empirical study on the effect of competition on poverty supports to some extent our theoretical findings.     

A characterization of consistent collective choice rules

We characterize a class of collective choice rules such that collective preference relations are consistent. Consistency is a weakening of transitivity and a strengthening of acyclicity requiring that there be no cycles with at least one strict preference, which excludes the possibility of a “money pump.” The properties of collective choice rules used in our characterization are unrestricted domain, strong Pareto, anonymity and neutrality. If there are at most as many individuals as there are alternatives, the axioms provide an alternative characterization of the Pareto rule. If there are more individuals than alternatives, however, further rules become available.     

The Internationalization of the World Economy and its Implication for National Welfare

There is no generally accepted definition of internationalization or globalization. The present paper offers three alternative definitions, in terms of (i) an enlargement of the set of trading countries, (ii) an enlargement of the set of traded commodities, or (iii) the international sharing of technology. It is shown that if each country adopts a Paretian scheme of internal compensation then internationalization in each sense leaves at least one country better off, and that if international compensation is admitted then internationalization in each sense makes every country better off.     

On the universally beneficial manipulation conjecture

The universally beneficial manipulation conjecture of Campbell and Kelly states that for a social choice rule, if everyone gains as a result of any optimal manipulation, then the rule satisfies universally beneficial manipulation, i.e., everyone gains as a result of any manipulation, optimal or not. We prove the conjecture for three alternatives and any number of individuals. We also construct a counterexample in a general form with more than three alternatives and at least two individuals.     

Up/Downward Preference Aggregation

Two strict preference aggregation mechanisms are suggested. One determines the collective preference from the most preferred to the least preferred alternative using as inputs the individuals' most preferred alternatives once the alternatives already assigned a position in the collective preference have been removed. The other mechanism does the same the other way around, constructing the preference starting from the least preferred alternative and using the least preferred remaining alternatives as inputs. It is shown that if both procedures are assumed to generate the same collective preference then the resulting aggregation rule must be dictatorial or constant. Weaker versions of these procedures also yield a dictatorial aggregation rule when combined with mild versions of unanimity or surjectivity.     

Age-related taxation of bequests in the presence of a dependency risk

This paper studies the properties of the optimal taxes on bequests when individuals differ in wage and in their risks of mortality and old-age dependance. Survival is positively correlated to income but dependency is negatively correlated with it. The government cannot distinguish between bequests motives, that is whether bequests resulted from precautionary reasons or from pure joy of giving reasons. Instead, it observes the timing of bequests and the health status at death. Under the utilitarian social welfare criterion, we show that bequests taxation results from a combination of equity, insurance, and public revenue motives. If redistribution concerns dominate insurance concerns, it is desirable to tax the most bequests of those individuals living long in good health and to tax the least bequests of those dying early. This is a direct consequence of the socio-demographic structure we assumed where richer agents live longer and in better health than poorer agents. To the opposite, if insurance concerns dominate redistributive concerns, early bequests should be the most taxed and, bequests under dependency the least taxed. Under the Rawlsian criterion, we find that early bequests should be the least taxed and bequests left by the healthy long-lived individuals should be the most taxed.     

Effects of vertical integration on price and volume: An empirical inquiry

A simple model with two stages of production is used for deriving some empirically testable hypotheses. Firms (two upstream and two downstream) in the industry are either vertically integrated or not, hence the industry has three alternative patterns: Complete unintegrated, partially integrated, or fully integrated.Final good prices, outputs and profits of firms are different in each integration pattern but what is optimal can not be stated (i.e., pay-offs are much too complicated in order to solve the sub-game equilibrium).The essential feature of the model is that there are external markets for the intermediate inputs. Hence input trade between the four firms/divisions need not balance since excess supply or demand is traded at the external market. With this feature purely downstream exogenous shocks have no effect on upstream pricing nor production decisions if all four firms are unintegrated. Such exogenous shocks have non-zero effects if at least one firm is vertically integrated. There are also other dissimilarities in comparative statics of each industry integration pattern.An indirect method to test the effects of vertical integration on price and volume is presented and empirically tested. Depending on the vertical integration pattern of an industry exogenous shocks have dissimilar effects on prices and outputs of the final and intermediate good. A four equations system is estimated by using Finnish forest industry firm data. Final good demand rise has a reducing effect on both paper and pulp prices. Stumpage prices (upstream marginal costs) have a negative impact on paper and pulp production and a positive impact on prices. These effects from upstream (downstream) stage into downstream (upstream) market should not occur when all firms are unintegrated.This is a revised version of a paper which was presented at seminars at Brussels, Turku, Vienna, and Stuttgart. I would like to thank seminar participants (specially Frank Schmid) and anonymous referees for helpful comments. Financial support from the Marcus Wallenberg Foundation is gratefully acknowledged.     

The price of the market: pursuit of self-interest as annihilation of self

The paper criticizes the view that the market provides for the well-being of individuals by offering the widest field for the pursuit of self-interest. It argues, first, that this view is disastrously mistaken because it misunderstands what individuals are, but, second, that proponents of this view??notably Adam Smith in The Wealth of Nations and the neoclassical economists??actually show the opposite of what they claim: that is, they show that pursuit of self-interest in the market is the annihilation of self. Thus, the proponents of the view show that it is untenable and at least point toward the terms necessary for a more adequate alternative. The paper then asks whether the market must be like this, first, through considering a line of thought on the possibility of a non-predatory market that runs from Aristotle, through the Italian Civil Happiness school, to modern socialist writers. Second, it offers an alternative view of the individual, according to which individuality is in part constituted through substantial relations with other individuals, a version of which can be found in Smith??s Theory of Moral Sentiments and Lectures on Jurisprudence. On the basis of these two discussions, a market order that sustains rather than destroys individuals can be imagined. However, this order would have lost many central characteristics of the capitalist market order.     

Nash implementation with partially honest individuals

We investigate the problem of Nash implementation in the presence of “partially honest” individuals. A partially honest player is one who has a strict preference for revealing the true state over lying when truthtelling does not lead to a worse outcome than that which obtains when lying. We show that when there are at least three individuals, all social choice correspondences satisfying No Veto Power can be implemented. If all individuals are partially honest and if the domain is separable, then all social choice functions can be implemented in strictly dominant strategies by a mechanism which does not use “integer/modulo games”. We also provide necessary and sufficient conditions for implementation in the two-person case, and describe some implications of these characterization conditions.     

Government financing in an endogenous growth model with financial market restrictions

Summary. In this paper, we develop an endogenous growth model with market regulations on explicitly modeled financial intermediaries to examine the effects of alternative government financing schemes on growth, inflation, and welfare. In the presence of binding regulation, there is always a unique equilibrium. We perform four alternative policy experiments; a change in the seigniorage tax rate, a change in the seigniorage tax base, a change in the income tax and a change in the fiscal-monetary policy mix. We find that in the presence of binding legal reserve requirements, a marginal increase in government spending need not result in a reduction in the rate of economic growth if it is financed with an increase in the seigniorage tax rate. Raising the seigniorage tax base by means of an increase in the reserve requirement retards growth and it has an ambiguous effect on inflation. An increase in income tax financed government spending also suppresses growth and raises inflation although not to the extent that the required seigniorage tax rate alternative would. Switching from seigniorage to income taxation as a source of government finance is growth reducing but deflationary. From a welfare perspective, the least distortionary way of financing an increase in the government spending requirements is by means of a marginal increase in the seigniorage tax rate. Under the specification of logarithmic preferences, the optimal tax structure is indeterminate. Received: March 20, 2000; revised version: June 26, 2001     

A wide range no-regret theorem

In a sequential decision problem at any stage a decision maker, based on the history, takes a decision and receives a payoff which depends also on the realized state of nature. A strategy, f, is said to be as good as an alternative strategy g at a sequence of states, if in the long run f does, on average, at least as well as g does. It is shown that for any distribution, μ, over the alternative strategies there is a strategy f which is, at any sequence of states, as good as μ-almost any alternative g.     

Pareto violations of parliamentary voting systems

It has been known for a long time that many binary voting rules can select a Pareto dominated outcome, that is an outcome such that there exists some other alternative which is preferred by every voter. In this paper, we show that some of these rules can select an outcome Pareto dominated in a much stronger sense. Furthermore, our main results are concerned with the evaluation of the likelihood of Pareto dominated outcomes under four social choice rules commonly used in Parliaments or in committees. Given a set of four alternatives and a set of n individuals, we assume anonymous profiles and using analytical methods we compute the proportion of profiles at which the Pareto criterion is violated. Our results show that one should not be especially worried about the existence of the possibility as such. We are grateful to two anonymous referees for very helpful remarks and suggestions.     

The testable implications of competitive equilibrium in economies with externalities

Suppose that one has a data set consisting of prices and individual endowments for some economy. Brown and Matzkin (Econometrica 64:1249–1262, 1996) have shown that there are conditions that the data have to satisfy, if the observed prices are determined by the competitive equilibrium process, given the observed endowments, when there are no external effects in the economy’s interactions. The results here show that the same conclusion does not apply, in general, if the economy exhibits externalities. On the other hand: (i) some restrictions exist if there exist at least two commodities on which the individuals’ preferences are weakly separable; (ii) although extremely mild, restrictions exist too if one observed individual consumption for the economy that causes the external effects; and (iii) importantly, even if the previous two cases do not apply, restrictions exist when the externalities that exist are in the form of a public good.     

Tropical cyclones and post-disaster reconstruction of public infrastructure in developing countries

When natural disasters destroy public capital, these direct losses are exacerbated by indirect losses arising from reduced private output during reconstruction. These may be large in developing countries that lack access to external finance. We develop a general equilibrium model of a small open economy that highlights the relation between public infrastructure and private capital, to examine the effects of natural disasters and alternative reconstruction paths. Calibrating the model to data from the Caribbean Catastrophic Risk Insurance Facility (CCRIF), we examine alternative post-disaster financing mechanisms including reserve depletion, budget reallocation, sovereign disaster insurance, debt and taxation. Disaster insurance is shown to play a limited role in financing reconstruction, while budget re-allocations are potentially damaging especially if they cannibalize operations and maintenance expenditures. Absent donor grants or concessional borrowing, tax financing – where feasible – remains the least damaging financing instrument, particularly if the country risk premium on external debt is high.     

Capacity Choice and Preemption of a Foreign Market

This paper studies the strategic role of foreign direct investments (FDIs) when specified as a device for a multinational enterprise (MNE) to precommit capacity. This captures the idea of an MNE preempting the host market or, at least, achieving more profitable outcomes by setting the initial conditions of the post-entry competition with local rivals. Here, the MNE chooses FDI even if "exporting costs" (e.g., tariffs) are not considered. Market preemption is an alternative justification for FDI, but not the only one; sometimes the tradeoff between advantages of strategic leadership and cost of establishing offshore facilities, alone, justifies FDI.     

Of morals,markets and mice: Be careful drawing policy conclusions from experimental findings!

Sometimes experimentalists draw far-reaching policy conclusions from their findings. However, this is dangerous if there is ambiguity with respect to the right interpretation of the results. A good example for this danger is the well-known study by Falk and Szech (Science, 2013), who conclude that “markets erode moral values”. If this were true, economists, who have emphasized the efficiency enhancing effects of markets for centuries, would have to reconsider their judgments fundamentally. In this note we demonstrate that the claim made by Falk and Szech is unfounded for at least four reasons and that their experimental results can be (and should be) interpreted, if anything, in the opposite way.     

A multistage game representation of sophisticated voting for binary procedures

Farquharson [5] was instrumental in creating the concept of sophisticated voting, in which voters are assumed to successively eliminate dominated strategies. However, his “matrix reduction” procedure is so cumbersome that little use has been made of his insights. Here we define, for binary procedures, a multistage method of sophisticated voting which is easy to apply and intuitively understandable. Our approach allows us to prove that if a majority alternative exists, sophisticated voting leads to an outcome at least as good as and sometimes preferred to the outcome of sincere voting. Our approach yields different sophisticated strategies than Farquharson's method, but we conjecture that both approaches always yield the same outcome.     

NATIONAL INCOME, WELFARE, AND THE ENVIRONMENT

This article explores the assumptions underlying present definitions of national income in its principal uses, and considers the alterations that would be needed to allow for the inclusion of environmental quality. A numerical example illustrates the impact of alternative measures. The discussion concludes that if we want national income to conform more closely to theoretical concepts of welfare indices, then we need to include a proxy for those environmental services that would not be completely free goods if it were possible to overcome their inherent non-marketability. The least unsatisfactory proxy would be the spending on environmental protection.     

KEEPING UP WITH THE JONESES, GROWTH, AND DISTRIBUTION

A recent class of models on ‘keeping up with the Joneses’ suggests that comparison with the consumption of other individuals affects individual utility. This paper nests three variants of the ‘Joneses’ effect into an otherwise standard growth model. Under some conditions, growth and distribution are jointly determined, presenting thus a unification of the relevant theories. These variants are however not equivalent in terms of their effects on growth and distribution. It is also shown that, at least if comparisons‐in‐mean predominate, rises in the mean skills level and in the exogenous skills variance increase both growth and inequality with ambiguous effects on aggregate welfare.