The Paternalistic Bias of Expert Advice

Using a theoretical model of noisy expert advice, I show that language inflation can be a rational response to the vagueness of language. Experts will tend to overstate their positions to a like‐minded decision maker (DM) and this constitutes a Pareto improvement over sending a sincere message. When the message space is bounded, overstatement may interfere with the DM's ability to aggregate the experts' information, because communication is less precise when the same message is sent for many states of the world. Despite this, I show that experts are willing to send either the most extreme message to the DM, or a partially overstated message, because by doing so the expert can decrease the likelihood the DM makes a suboptimal decision due to his subjective interpretation of the advice. Because the expert inflates his message toward the policy he believes the DM would be better off choosing, rather than sincerely revealing his information, I refer to this behavior as a paternalistic bias.     

Biased recommendations from biased and unbiased experts

When can you trust an expert to provide honest advice? We develop and test a recommendation game where an expert helps a decision maker choose among two actions that benefit the expert and an outside option that does not. For instance, a salesperson recommends one of two products to a customer who may instead purchase nothing. Subject behavior in a laboratory experiment is largely consistent with predictions from the cheap talk literature. For sufficient symmetry in payoffs, recommendations are persuasive in that they raise the chance that the decision maker takes one of the actions rather than the outside option. If the expert is known to have a payoff bias toward an action, such as a salesperson receiving a higher commission on one product, the decision maker partially discounts a recommendation for it and is more likely to take the outside option. If the bias is uncertain, then biased experts lie even more, whereas unbiased experts follow a political correctness strategy of pushing the opposite action so as to be more persuasive. Even when the expert is known to be unbiased, if the decision maker already favors an action the expert panders toward it, and the decision maker partially discounts the recommendation. The comparative static predictions hold with any degree of lying aversion up to pure cheap talk, and most subjects exhibit some limited lying aversion. The results highlight that the transparency of expert incentives can improve communication, but need not ensure unbiased advice.     

Strategy-proofness, core, and sequential trade

We extend the Shapley-Scarf (1974) model - where a finite number of indivisible objects is to be allocated among a finite number of individuals - to the case where the primary endowment set of an individual may contain none, one, or several objects and where property rights may be transferred (objects inherited) as the allocation process unfolds, under the retained assumption that an individual consumes at most one object. In this environment we analyze the core of the economy and characterize the set of strategy-proof and Pareto efficient mechanisms. As an alternative approach, we consider property rights implicitly defined by a strategy-proof and Pareto efficient mechanism and show a core property for the mechanism-induced endowment rule.Received: 19 February 2004, Accepted: 14 April 2005, JEL Classification: C71, C78, D71, D78We would like to thank two anonymous referees for valuable comments. Financial support from The Swedish Council for Research in the Humanities and Social Sciences is gratefully acknowledged by Lars-Gunnar Svensson. Financial support from The Jan Wallander and Tom Hedelius Foundation is gratefully acknowledged by Bo Larsson.     

Organizational structure and innovative activity

A model is analyzed in which agents exert effort to create innovations within an organization. When payments are infeasible, the decision on the implementation of a proposal is shown to be made by simple monotonic decision rules. Organizational structure is then determined by a collection of decision rules. A trade-off arises between the use of information and the incentives created by a rule. If the former dominates it will currently be optimal to install a hierarchy. Otherwise decentralization by granting autonomy to innovators may be better. Requiring unanimous decision-making is optimal if a strong filtering of proposals is necessary.Received: June 2001, Accepted: May 2002, JEL Classification: D23, D71, L22I am grateful to Anke Kessler, Matthias Kräkel, Sabine Lindenthal, Patrick Schmitz, Urs Schweizer and Thomas Tröger as well as two anonymous referees for helpful comments and discussions. I am especially grateful to one anonymous referee who made numerous extremely useful suggestions.     

A responsive voting system

To say that a democratic system of government ought to be responsive to the opinions of the citizens sounds like a truism which could hardly be expected to generate much controversy. Yet, the notion of responsiveness turns out to be open to several nonequivalent interpretations: Condorcet-consistency, monotonicity, invulnerability to the no-show paradox, to name the most important ones. Several results have been achieved to establish incompatibilities between these properties. We shall review some of these and discuss some similar notions and their relationships with those just mentioned.Received: 5 August 2003, Accepted: 19 March 2004, JEL Classification: D70This work has been supported by the Academy of Finland and the Yrjö Jahnsson Foundation. The author is grateful to Donald G. Saari for perceptive comments on an earlier version. Also the comments of Elina Kestilä, Kai A. Konrad, Maria Suojanen, Matti Wiberg and an anonymous referee are gratefully acknowledged.     

The expert problem: a survey

The survey is focused on the typical problems in information transmission from experts to non-experts. Attention is paid to the factors that can affect information disclosure in models that apply a game-theoretic approach to the use of professional advice. In the economic literature expertise is mainly analyzed as a special case of asymmetric information between expert and non-expert. The contributions are reviewed according to a double criterion, that takes into account both the preferences of the experts and the properties of communication. On one side, either the non-expert plays the role of a decision-maker, who chooses an action that is payoff-relevant for the expert, or the preferences of the expert directly depend on some measure of his reputation as a high-ability forecaster. On the other side, communication can range from pure cheap talk to completely verifiable messages.     

The rise of environmentalism, pollution taxes and intra-industry trade

This paper develops a political-economy model to investigate to what extent a rise of environmentalism can successfully encourage higher pollution taxes and reduce pollution. The model focuses on special-interest group politics, intra-industry trade and a transnational environmental externality. The main finding is that a rise of environmentalism is not sufficient to protect the environment when pollution is relatively immobile and environmentalists are concerned with pollution in other countries than their own.Received: January 2004, Accepted: November 2004, JEL Classification: D72, Q28, F12I am grateful to Rolf Bommer, Jan Rose Skaksen, Per Fredriksson and Torsten Persson for comments and suggestions.     

Redistribution and individual characteristics

I study a model where personal income is a function of two different groups of individual characteristics, called “talent” and “effort” respectively. The distinction between these two groups is that society has taken the prior decision that the influence of traits from the first group needs to be moderated by any fair redistribution mechanism while differences in income due to traits from the second group must be preserved. I present two solutions that satisfy several intuitive properties of fairness and I use these properties to characterize both of them. Received: 29 October 1995 / Accepted: 6 January 1997     

The break-up of municipalities: Voting behavior in local referenda

This paper examines the economic and political conditions that influence peoples attitudes regarding a municipality break-up. The theoretical model predicts intra-municipal differences in tax bases, political preferences, and population size to affect the expected gain from secession. The predictions of the model are tested using data on local referenda about municipality partitioning in Sweden. The data support one of the three effects; voters in municipality parts that are wealthy compared to other parts of the same municipality are more positive to secession.Received: April 2003, Accepted: September 2003, JEL Classification Numbers: H11, H73Anna Brink: I thank Henry Ohlsson, Lars-Erik Borge, Matz Dahlberg, Katarina Nordblom, Magnus Wikström, seminar participants at Göteborg University and Uppsala University, and two anonymous referees for useful comments. This research was financially supported by the Swedish Research Council and Ejnar Lindhs kommunalvetenskapliga stiftelse.     

Public goods provision: Unit-by-unit cost-sharing rules and the core

In a simple model of one public good producible from one input, we show that unit-by-unit cost-sharing rules have two properties. First, a unit-by-unit cost-sharing rulealways chooses a core allocation. Second, every allocation in the core will be chosen by at least one unit-by-unit cost-shring rule. We argue that costs should be shared on a unit-by-unit basis. We propose a simple mechanism to implement the family of unit-by-unit rules. Received: 18 May 2005, Accepted: 6 December 2005 JEL Classification: H41, C72, D78 I thank Hervé Moulin for helpful comments and discussions. All errors are mine. Financial support from the Hong Kong Research Grants Council under grant RGC-DAG99/00.BM52 is gratefully acknowledged.     

The efficiency of decomposition vs direct solution with implications for the question of decentralized or centralized planning

Conclusion The investigation provides overwhelming evidence that decomposition tends to become increasingly more efficient than direct solution as the number of subproblems becomes greater.Further investigation would be required to obtain a comparable picture of the behaviour of decomposition with respect to an increasing number of variables in the master problem as their range of variation in the present study is rather restricted.It is gratefully acknowledged: that in implementing the decompositional procedure on the computer I have benefitted from Mr. A. C. McKay's advice on matters relating to the computer programmes; also that I enjoyed the pleasant and friendly co-operation of the staff of the computer Centre, University of Birmingham, without which the difficulties involved in carrying out the present task would have been compounded manifold; that Dr. C.-L. Sandblom carefully studied this paper and suggested a number of valuable improvements. Finally, I should like to thank Professor Kronsjö for the encouragement that he has given to me in executing this project and to the research council which made this investigation possible.     

On evolutionarily stable behavior in contests

It is argued in this paper that the solution concept of an evolutionary stable strategy (ESS) is an adequate analysis tool for contest theory. Moreover, it is shown that in a contest ESS always differs from Nash equilibrium, the hitherto dominant solution concept in contest theory. Finally, an interpretation of finite population ESS contest behavior in terms of Nash behavior is supplied.Received: 10 February 2002, Accepted: 8 July 2002, JEL Classification: C79, D72, D 74Wolfgang Leininger: I have benefited from the comments and suggestions of Burkhard Hehenkamp and two anonymous referees.     

Contracting under ex post moral hazard and non-commitment

This paper characterizes the optimal insurance contract in an environment where an informed agent can misrepresent the state of the world to a principal who cannot credibly commit to an auditing strategy. Because the principal cannot commit, the optimal strategy of the agent is not to tell the truth all the time. Assuming that there are T > 1 possible losses, and that the agent cannot fake an accident (he is constrained only to misreport the size of the loss when a loss occurs), the optimal contract is such that higher losses are over-compensated while lower losses are on average under-compensated. The amount by which higher losses are over-compensated decreases as the loss increases. The optimal contract may then be represented as a simple combination of a deductible, a lump-sum payment and a coinsurance provision.Received: 29 January 1999, Accepted: 26 June 2001, JEL Classification: D82, G2, C72.I would like to thank my dissertation committee Stanley Baiman, David Cummins, Georges Dionne, Neil Doherty and Sharon Tennyson (supervisor) for their insights, as well as Keith Crocker, Steve Coate, Richard Derrig, Michele Piccone and Pascale Viala. The financial help received during my doctoral studies from the Social Sciences and Humanities Research Council of Canada (SSHRC) and the S. S. Huebner Foundation are gratefully acknowledged. This research has been funded by the Fonds pour la Formation de Chercheurs et d'Aide à la Recherche (FCAR-Québec), SSHRC-Canada and the Risk Management Chair at HEC Montréal. The continuing financial support of CIRANO is also appreciated. I am responsible for all errors.     

The Pazner-Schmeidler social ordering: A defense

It is shown that the Pazner-Schmeidler social ordering appears as a very natural solution to the problem of defining social preferences over distributions of divisible goods. The paper analyses various ways of deriving this social ordering from minimally egalitarian conditions and informational parsimony requirements.Received: 10 October 2003, Accepted: 4 April 2005, JEL Classification: D63, D71This paper was written while I was a research fellow at the ZiF (Bielefeld), for the project “Procedural Approaches to Conflict Resolution”, and the last version was prepared during my sabbatical year at Nuffield College, Oxford. I thank my hosts for their hospitality. D. Dimitrov and F. Maniquet have provided valuable comments on an earlier draft. I also thank the audience of a seminar at the U. of Montreal. Finally, the comments of three anonymous referees and the Associate Editor have been very helpful.     

Manipulation of the Walrasian mechanism in production economies with unbounded short-selling

Hurwicz (1979) and Otani and Sicilian (1982, 1990) characterized the Nash equilibrium allocations of the Walrasian demand manipulation game in successively more general exchange environments. In this paper, I extend the analysis to production economies with short-selling. First, I generalize Hurwicz’s and Otani and Sicilian’s theorem that any allocation at which each agent’s consumption bundle lies above her true offer curve can be supported in Nash equilibrium. I then show that for finite economies of any size the set of such allocations is often topologically large.Received: 17 January 2003, Accepted: 4 April 2005, JEL Classification: D51, D82For comments on this and earlier versions of the paper, I wish to thank Rick Bond, Bhaskar Chakravorti, Tom Gresik, Costas Syropoulos and William Thomson. I would especially like to thank Mike Jerison for helping to overcome a difficulty with a previous version. Also, the comments of the anonymous referees are gratefully acknowledged.     

On how size and composition of customer bases affect equilibrium in a duopoly with switching costs

Switching costs may facilitate monopoly pricing in a market with price competition between two suppliers of a homogenous good, provided the switching cost is above some critical level. It is also well known that asymmetric size of customer bases makes monopoly pricing more difficult. Adding consumer heterogeneity to the model we demonstrate that also composition of each firms customer base affects pricing, and this composition may aggravate or ease the incentives to break out of the monopoly pricing equilibrium.Received: 16 August 2001, Accepted: 27 September 2004, JEL Classification: D43, L10, L13This research has been sponsored by Telenor, through the Foundation for Research in Economics and Business Administration. We thank participants at the 2002 EARIE conference in Madrid, Matthew Jackson and an anonymous referee for helpful and constructive comments to an earlier version. The usual disclaimer applies.     

Influence costs and hierarchy

In an internal capital market, individual departments may compete for a share of the firm’s budget by engaging in wasteful influence activities. We show that firms with more levels of hierarchy may experience lower influence costs than less hierarchical firms, even though the former provide more opportunities for exerting influence. The unique influence-cost minimizing hierarchy is strongly asymmetric. With a linear production technology this is also the optimal hierarchy. If individual departments have different productivities, however, and the production technology exhibits decreasing returns to scale, a symmetric hierarchy that does not minimize influence costs may be optimal.Received: July 2004, Accepted: October 2004, JEL Classification: D74, G31, G34We thank Martin Hellwig, seminar participants at the University of Mannheim, and an anonymous referee for helpful comments, and Kai Konrad for handling the editorial tasks on this paper. Financial support from Deutsche Forschungsgemeinschaft, Sonderforschungsbereich 504 (Inderst and Müller) and the Bank of Sweden Tercentenary Foundation (Wärneryd) is gratefully acknowledged.     

The impact of foreign variables on domestic money demand: Evidence from the United Kingdom

This paper contributes to the existing money demand literature by developing and estimating a shopping-time model in an open economy framework. Based on this microfoundations-of-money model, United Kingdom quarterly data for the period 1973:2–1997:2 are analyzed in the empirical study. After accounting for nonstationarity in the time series processes, I find three long-run relationships among the relevant variables. Estimation of the error-correction representation implied by the model shows that the foreign exchange rates and the imports consumption, in addition to the domestic variables, have significant effects on British demand for real money. I am grateful to Kenneth D. West, Donald D. Hester, James M. Johannes, Hung-Neng Lai, two anonymous referees, and seminar participants at the University of Alabama and the University of Wisconsin for helpful comments. I also thank the Chiang Ching-Kuo Foundation for its financial support. Naturally, all remaining errors are mine.     

我国公共决策专家咨询机制研究

我国的公共决策在理论上缺少完整的可以借鉴的专家决策咨询制度,在实践中表现为形式化严重,很难取得预期的效果。在当前强调公共决策专家咨询的制度建构上,应该高度重视决策者和咨询专家的行政伦理和职业道德规范,加强决策者和咨询专家的自律,从而使公共决策专家咨询成为一种必然选择和社会共识,提高我国公共决策的水平和质量。     

Moral suasion: An alternative tax policy strategy? Evidence from a controlled field experiment in Switzerland

With data gained from a controlled field experiment in Switzerland this paper analyses the effects of moral suasion on the timely paying and the timely filling out of the tax form 2001. Comparisons of different tax filing years and multiple regression estimations have been done using these two factors as dependent variables to check if there is a significant difference between the control group and the treatment group. In February 2002 the treatment group received a letter signed by the communes fiscal commissioner containing normative appeals. Results indicate that moral suasion has hardly any effect on taxpayers compliance behaviour. The strongest effect can be observed for the variable tax payments.Received: February 2003, Accepted: June 2004 JEL Classification: H260, H710BennoTorgler: Special thanks are due to the tax administration of Trimbach, especially to Adolf Müller and Gary Bitterli, who offered me the opportunity to collect the data and assisted the project. Furthermore I acknowledge the financial support of the WWZ-Forum and Swiss National Science Foundation and comments and suggestions from Doris Aebi, René L. Frey, the editor Kai A. Konrad and two anonymous referees.