Which hat to wear? Impact of natural identities on coordination and cooperation

As the workforce becomes increasingly diverse, motivating individuals from different backgrounds to work together effectively is a major challenge facing organizations. In an experiment conducted at a large public university in the United States, we manipulate the salience of participants' multidimensional natural identities and investigate the effects of identity on coordination and cooperation in a series of minimum-effort and prisoner's dilemma games. By priming a fragmenting (ethnic) identity, we find that, compared to the control, participants are significantly less likely to choose high effort in the minimum-effort games, leading to less efficient coordination. In comparison, priming a common organization (school) identity significantly increases the choice of a rational joint payoff maximizing strategy in a prisoner's dilemma game.     

Strategic complexity in repeated extensive games

This paper studies a machine (finite automaton) playing a two-player repeated game of a simple extensive-form game with perfect information. We introduce a new complexity measure called multiple complexity which incorporates a strategyʼs responsiveness to information in the stage game as well as the number of states of the machine. We completely characterize the Nash equilibrium of the machine game. In the sequential-move prisonerʼs dilemma, cooperation can be sustained as an equilibrium.     

Trade policies, concentration, growth and welfare

The aim of this paper is to analyse, through a theoretical model, the effects that the trade integration of two countries may have on industrial location, growth and welfare.The conclusions reached finally depend both on whether the import or the export costs are affected by the trade policies on which the integration process is based and on whether the rich or the poor country introduces them. In general, when integration leads to an increase of industrial concentration in the rich country, the growth rate increases and welfare improves in both countries. If integration means that industry moves to the poor country, the growth rate decreases; in spite of this, in this case the poor country can also improve its welfare.     

Ethics,welfare, and capital markets

We examine implications of a society's cultural emphasis on moral sentiments. Entrepreneurs and investors interact in a game that entails both adverse selection and moral hazard; entrepreneurs may attempt to breach their contracts and expropriate investors. An agent is born into a particular culture but chooses whether to develop a moral conscience and thereby subject himself to moral sentiments. In equilibrium, societies that place less emphasis on guilt exhibit a lower risk of expropriation in contracts, a greater net price of capital, a larger size of firms, increased capital inflows and greater social welfare. The results of a greater emphasis on pride are in the same direction.     

Money,liquidity and welfare

This paper develops an analytically tractable Bewley model of money demand to shed light on some important questions in monetary theory, such as the welfare cost of inflation. It is shown that when money is a vital form of liquidity to meet uncertain consumption needs, the welfare costs of inflation can be extremely large. With log utility and parameter values that best match both the aggregate money demand curve suggested by Lucas (2000) and the variance of household consumption, agents in our model are willing to reduce consumption by 3–4% to avoid 10% annual inflation. The astonishingly large welfare costs of inflation arise because inflation increases consumption risk by eroding the buffer-stock-insurance value of money, thus hindering consumption smoothing at the household level. Such an inflation-induced increase in consumption risk at the micro level cannot be captured by representative-agent models or the Bailey triangle. Although the development of financial intermediation can mitigate the problem, with realistic credit limits the welfare loss of moderate inflation still remains several times larger than estimations based on the Bailey triangle. Our findings provide a strong justification for adopting a low inflation target by central banks, especially in developing countries where money is the major form of household financial wealth.     

Borrowing constraints,parental altruism and welfare

This paper investigates the welfare impact of a borrowing constraint that does not allow children to borrow against future income. In an overlapping-generations model with altruistic parents, the inability to borrow increases children’s savings and parental transfers, raising children’s welfare as well as average welfare in the short-run and in the long-run.Additionally, the borrowing constraint raises aggregate savings and, hence, physical capital. Consequently, when prices are flexible, the positive welfare impact of the constraint is higher.     

Lying,Integrity, and Cooperation

While talk is cheap to some, it is expensive to others for whom moral considerations come into play. We employ a simple two-stage modified prisoner's dilemma game where integrity is endowed on a continuum to analyze when agents will lie in random economic interactions. If there is sufficient integrity in the population, all agents make a promise in the first stage to cooperate in the second. Some agents always lie, some always tell the truth, and some behave conditionally. Enhanced cooperation is a byproduct of integrity. In a second random interaction without the possibility of exit, some agents “switch” their behavior, that is, some who lied in the first period now tell the truth in the second (they've “reformed”), and some who told the truth in the first period now lie in the second (they've become “cynical”).     

Innovation and imitation under imperfect patent protection

The paper develops a model in which the spillover of R&D is a consequence of a rational investment in imitation. The model incorporates the innovator's choice between patenting and secrecy as a protection device. The analysis demonstrates that an increase in patent breadth always discourages resorting to secrecy, whereas the influence of increased patent life is the opposite with large spillovers. An increase in patent life can also reduce innovative activity with large spillovers. Under endogenous imitation, short patents are socially optimal.     

Factor supply interruption, welfare loss and shortage management

Factor supply shortage is a common problem faced by a firm. Solutions for allocating the limited supply include rationing, interruption and pricing. While previous research has examined the welfare losses generated by each solution, there is little evidence on their relative magnitudes within a common framework. The objective of this paper is to specify a model of firm behaviour under service interruption to estimate the welfare loss of service interruption. The same model is used to estimate the loss due to a price increase intended to resolve a supply shortage. Using water consumption data collected for Hong Kong, we find that relative to pricing, service interruption is inefficient for water shortage management.     

Demography and welfare economics

The focusing on demographic issues as an important part of welfare-economic assessment shifts the evaluative space in the direction of public discussion and social concern. A commoditycentred view of individual success and social welfare is often used in economics. But the linkage between our economic wealth and our ability to live as we would like has strong limits. This is partly because of interpersonal variations between individuals, but also because of variations in public and social arrangements (for example, for public health care, education and social security). The use of demographic perspectives can enrich economic analysis in several ways. In particular a demographically oriented system of evaluation can not only focus on variables that we all value, but it also gives us the freedom to decide what weights would be most appropriate for the exercise in which we might be engaged. The problem of valuation in welfare economics is ultimately a social-choice issue, requiring the use of explicit judgments on which the society can achieve some consensus through political processes.Lecture presented to the annual meeting of the Austrian Economic Association in Vienna, 24 May 1994. The author is grateful for support from the National Science Foundation for the research on which this paper draws.     

Model uncertainty,economic development,and welfare costs of business cycles

Some researchers argue that the welfare gains from eliminating consumption fluctuations for the United States are not small once model uncertainty is taken into account. This paper presents new evidence on the welfare gains from eliminating model uncertainty using a data set from a broad range of countries. It quantifies exactly the effect of model uncertainty on the welfare gains using an analytical formula. The results indicate that most countries derive much larger gains from the reduction of model uncertainty compared with the United States. Countries at higher stages of economic development tend to have lower welfare gains because their gains from eliminating model uncertainty become smaller. This relationship does not depend on country size or trade openness.     

Fertility,income and welfare in an OLG model with regulated wages

We analyse the effects of the regulation of wages in a standard one-sector OLG model of neoclassical growth extended to account for endogenous fertility decisions of households and unemployment benefit policies financed at balanced budget. In contrast with the prevailing literature, which has failed to pay due attention to inter-temporal contexts, our conclusion is that minimum wages may be introduced not only for equity reasons, that is, to increase the income of low-paid workers, but under suitable conditions—i.e., if production is sufficiently capital oriented and the unemployment benefits are high enough—minimum wage legislation might be considered as a source of increased economic performance despite unemployment, i.e. a regulated-wage economy performs better than a market-wage economy. As a consequence, since higher minimum wages raise per capita income together with increasing unemployment, our results imply that a positive correlation between unemployment and long-run income per-capita may exist. Further, the lifetime welfare of the representative generation may be increased as well. Finally, the wage rate may also be treated as a policy instrument for the control of population growth.

Price competition,free entry,and welfare in congested markets

In this paper we study the problem of price competition and free entry in congested markets. In particular, we consider a network with multiple origins and a common destination node, where each link is owned by a firm that sets prices in order to maximize profits, whereas users want to minimize the total cost they face, which is given by the congestion cost plus the prices set by firms. In this environment, we introduce the notion of Markovian Traffic Equilibrium to establish the existence and uniqueness of a pure strategy price equilibrium, without assuming that the demand functions are concave nor imposing particular functional forms for the latency functions. We derive explicit conditions to guarantee existence and uniqueness of equilibria. Given this existence and uniqueness result, we apply our framework to study entry decisions and welfare, and establish that in congested markets with free entry, the number of firms exceeds the social optimum.     

The welfare cost of imperfect competition and distortionary taxation

The welfare cost of imperfect competition in the product and labor markets in the United States is quantified in a dynamic general equilibrium model. We find that the welfare cost of imperfect competition in the product market is 3.62 percent while it is 0.58 percent in the labor market, taking the transition path from the distorted to the optimal steady state into account. If we also take into account that the US economy is characterized by distortionary taxation, the welfare cost of the product market distortion increases to 13.51 percent and the labor market distortion to 4.35 percent.     

To react or not? Technology shocks, fiscal policy and welfare in the EU-3

This paper develops a dynamic stochastic general equilibrium (DSGE) model to examine the quantitative macroeconomic implications of counter-cyclical fiscal policy for France, Germany and the UK. The model incorporates real wage rigidity and consumption habits, as the particular market failures justifying policy intervention. We subject the model to productivity shocks and allow policy instruments to react to the output gap and the debt-to-output ratio. A welfare analysis reveals that the most effective instrument-target combination is to use public consumption to stabilize the output gap. Moreover, welfare gains from counter-cyclical fiscal policy are much stronger in the presence of wage rigidities compared with consumption habits. Finally, since active policy and automatic stabilizers are substitutes, it is possible that relatively undistorted economies may be in need of countercyclical fiscal action due to inadequate automatic stabilizers.     

The pace of fiscal consolidations,fiscal sustainability,and welfare: An overlapping generations approach

This study investigates expenditure- and tax-based consolidations under the rule of reductions in debt-to-GDP ratios to the target level and the effects of these consolidations on fiscal sustainability and welfare, using an overlapping generations model with exogenous growth settings. We derive (i) a threshold (ceiling) of public debt to ensure fiscal sustainability, (ii) sustainable paces of these consolidations, and (iii) the optimal pace of consolidations under both expenditure- and tax-based consolidations, examining whether these consolidations are effective in the sense that they are sustainable, increase welfare, and induce fairness of welfare distribution across generations (lower intergenerational conflicts over welfare). We find that the pace of tax-based consolidation required to ensure fiscal sustainability is higher than that required for expenditure-based consolidation. As for welfare, countries may differ in their choice of the type of consolidation, which depends on the size of outstanding debts relative to capital, the economy’s productivity, tax rate levels, and the extent of utility derived by individuals from public goods and services. More importantly, it may also depend on whether policymakers emphasize social welfare or fairness of welfare distribution between generations. By contrast, a common result from the viewpoints of both social welfare and fair distribution of welfare across generations is that fiscal consolidation cannot persist much longer than 30 years (one period in the model). This result will support the pace of consolidation in the EU: the Stability and Growth Pact.     

Globalization,welfare, and the attitudes toward higher education

In this paper we study how the attitudes toward higher education may affect labor market outcomes in the context of globalization. In particular, we show that different educational attitudes are responsible for differences in the wage differential among countries. Using a matching model with two types of workers and firms, we find that there is a trade-off between the wage differential and the workers’ welfare, namely, that an economy that is less willing to educate itself will display a lower wage differential but will lose in terms of welfare. Moreover, from a policy perspective, we show that the negative effects on welfare due to this disinclination to study can be offset by increased labor market flexibility. All things considered, policy makers ought to keep in mind that both a positive attitude toward higher education and labor market flexibility, can lead to improved overall performance in this increasingly globalized world.     

Export,FDI and the welfare gains from trade liberalization

This paper extends Melitz and Redding (2015) to analyze the welfare gains from trade liberalization by adding foreign direct investment(FDI). Our model predicts that with FDI activities, welfare gains from trade liberalization will be strictly lower than those in a model without FDI, but only takes exports into account. In addition, the calibrated model indicates that with FDI activities, aggregate welfare reaches its maximum when the fixed export costs are positive rather than 0. Furthermore, we decompose the welfare gains induced by trade liberalization from continuing exporters, and switchers. The results show that in any case, with or without FDI, continuing exporters contribute a larger share to welfare gains than status switching firms.     

Optimal fiscal decentralization: Redistribution and welfare implications

The literature has been inconclusive regarding the welfare effects of fiscal decentralization (FD), defined here as the extent to which local governments collect and spend local tax revenues. We present an original model to investigate formally the distributional and welfare implications of FD. In contrast to the standard approach that compares the implications of full FD with that of centralization, we consider that the central government chooses the level of FD to maximize welfare in a heterogeneous country. Noncooperatively, local governments choose their tax collection effort to maximize local utility. We show that an increase in the tax rate leads optimal FD to increase so as to compensate for the welfare loss from decreasing optimal local tax effort. Hence, welfare and income distribution improve in FD at its intermediate, rather than extreme, levels. We coin this result as the decentralization-Laffer curve. As regional spillovers increase, FD is less desirable as it deteriorates welfare and income distribution. This finding provides a novel support for the decentralization theorem and contributes to the fiscal policy debate.     

Equilibria under deferred acceptance: Dropping strategies,filled positions,and welfare

We study many-to-one matching markets where hospitals have responsive preferences over students. We study the game induced by the student-optimal stable matching mechanism. We assume that students play their weakly dominant strategy of truth-telling.Roth and Sotomayor (1990) showed that equilibrium outcomes can be unstable. We prove that any stable matching is obtained in some equilibrium. We also show that the exhaustive class of dropping strategies does not necessarily generate the full set of equilibrium outcomes. Finally, we find that the ‘rural hospital theorem’ cannot be extended to the set of equilibrium outcomes and that welfare levels are in general unrelated to the set of stable matchings. Two important consequences are that, contrary to one-to-one matching markets, (a) filled positions depend on the equilibrium that is reached and (b) welfare levels are not bounded by the optimal stable matchings (with respect to the true preferences).