Participation constraints of matching mechanisms

Matching mechanisms have been proposed to improve public good provision in voluntary contributions. However, such decentralized subsidizing mechanisms may not be Pareto‐improving and may suffer from incomplete information and incredible commitment. This paper examines participation constraints of matching mechanisms with small matching rates in two cases of equilibria. At interior equilibria, there always exist small Pareto‐improving matching schemes regardless of preferences. This universal existence is useful for cooperation among heterogeneous players in the context without global information of preferences or at the international level without central governments. At corner equilibria, matching schemes work in different ways and have distinct welfare effects in certain cases, and the existence of Pareto‐improving matching schemes is not universal but is possible under certain conditions. The paper further characterizes Pareto‐improving matching schemes, and shows that it is easier to reach Pareto‐improving matching outcomes if players value more on public goods and have stronger substitution between private and public goods.     

Global public goods and coalition formation under matching mechanisms

This paper links coalition theory with matching mechanisms in the presence of global public goods among heterogeneous players. This matching coalition may achieve Pareto‐improving outcomes while avoiding side payments. The paper characterizes conditions of coalition profitability and stability at both interior and corner equilibria. It is generally much harder to satisfy stability conditions than profitability conditions. A matching coalition is more profitable but less stable with a larger matching rate. Empirically there is no stable coalition but this can be overcome by introducing reputation mechanisms. There always exists a stable grand matching coalition if players value their reputation. The matching coalition faces a trade‐off between matching depth and breadth.     

Budget Balancedness and Optimal Income Taxation

We make two contributions to the theory of optimal income taxation. First, assuming conditions sufficient for existence of a Pareto optimal income tax and public goods mechanism, we show that if agents' preferences satisfy an extended notion of single crossing called capacity constrained single crossing, then there exists a Pareto optimal income tax and public goods mechanism that is budget balancing. Second, we show that, even without capacity constrained single crossing, existence of a budget balancing Pareto optimal income tax and public goods mechanism is guaranteed if the set of agent types contains no atoms.     

On the voluntary provision of “weakest‐link” public goods: The case of private information

We characterize equilibria in a private‐provision public‐good game where individuals are allowed arbitrary contribution levels and the level of the public good equals the least contribution made by an individual. Equilibrium comparative statics are derived for the interim Pareto‐dominant equilibrium. First, improvements in the cost distribution of even only one player benefit all. Second, even with such “weakest‐link” public goods, for which greater similarity of preferences would seem to facilitate coordination, decreased heterogeneity can actually decrease payoffs. Indeed, increasing the riskiness of cost distributions has an ambiguous effect on welfare. Two mechanisms are provided for improving equilibrium payoffs: Technology transfer and cheap‐talk communication. While substantial welfare gains are possible, examples show that (a) technology transfer may be futile if a “regularity” condition is not satisfied and (b) cheap talk may be useless if the language for communication is not sufficiently rich.     

A STABLE NASH MECHANISM FOR QUASI-ADDITIVE PUBLIC-GOOD ENVIRONMENTS*

In this paper we present a simple game form implementing Lindahl allocations as Nash equilibrium outcomes, which has nice stability properties. we show that if the preferences of eaach consumer are representable by a utility function of the form a(y)x_i+b_i(y), where x_i(y), where x_i is the amount of private good and y, the amount of public good, then the Nash equilibrium of our geme is locally stable under the gradient adjustment process. This restriction on the preferences has been known in hte literature as the necessary and sufficient condition for the Pareto optimal amount of pukic goods to be independent of the private goods distribution. This type of preference includes quasi-linear preferences as a special case. but unlike quasi-linearity, this allows a non zero income effect of demand for public goods as well as private goods, which is often supported by empirical evidence. Our result shows how an equilbirium can be achieved over time by a decentralized strategy adjustement process for a fairly general class of environments, even in the absence of a dominant-strategy equilibrium.     

The overprovision anomaly of private public good supply

It is well known that private provision of a public good may lead to a higher supply than that in some Pareto optimal allocation. The traditional view attributes this overprovision anomaly to a specific kind of preferences. The present paper, however, shows that preferences do not play a decisive role. Assuming normality, overprovision will occur only if the distribution of income is extremely skewed and Pareto optimal allocations are not within the set of cost-share equilibria.     

Heterogeneous Preferences, Education Expenditures and Income Distribution

This paper introduces heterogeneous preferences to a growth model which incorporates human capital, accumulated through either public or private education. The implications of heterogeneous preferences for income and its distribution are the focus of the paper. Public education expenditure is determined through a voting mechanism where the median preference rather than median income household is the decisive voter. The paper extends the work of Glomm and Ravikumar (1992) and shows first, that heterogeneous preferences increase income inequality in the private education model and second, public education can overcome the added heterogeneity and reduce income inequality. The results strengthen the arguments for public education as a redistributive mechanism.     

Truthtelling in Matching Markets

We analyze a search and matching model with non‐transferable utility and asymmetric information. Randomly paired agents go through an evaluation phase, at the end of which they discover each other's types and choose to match or not. Before deciding to enter this phase, agents can communicate through cheap talk. We provide conditions for this communication to be informative, and we examine how it affects agents' welfare. We show that communication is Pareto‐improving only when the matching is assortative in the absence of communication and left unchanged by information transmission.     

Pareto-Improving Redistribution and Pure Public Goods

In the pure public good model, the Nash equilibrium associated with one initial income distribution may Pareto dominate the equilibrium associated with another distribution of the same aggregate income. We explore this possibility and examine its implications for Pareto-improving policy intervention by undertaking a comparative static analysis of Pareto-improving tax-financed increases in pure public good provision. Under some circumstances, a government can engineer policies that raise public good provision while increasing the well-being of contributors and non-contributors. Crucial factors promoting this outcome involve a large number of non-contributors, a high marginal valuation for the public good by non-contributors and a large aggregate response of contributors to changes in their income.     

COURSE BIDDING AT BUSINESS SCHOOLS*

Mechanisms that rely on course bidding are widely used at business schools in order to allocate seats at oversubscribed courses. Bids play two key roles under these mechanisms: to infer student preferences and to determine who have bigger claims on course seats. We show that these two roles may easily conflict, and preferences induced from bids may significantly differ from the true preferences. Therefore, these mechanisms, which are promoted as market mechanisms, do not necessarily yield market outcomes. We introduce a Pareto‐dominant market mechanism that can be implemented by asking students for their preferences in addition to their bids over courses.     

Democratic public good provision

This paper analyzes an overlapping generation model of redistribution and public good provision under repeated voting. Expenditures are financed through age-dependent taxation that distorts human capital investment. Taxes redistribute income both across skill groups and across generations. We focus on politico-economic Markov equilibria and contrast these with the Ramsey allocation under commitment. The model features indeterminate equilibria, with a key role of forward-looking strategic voting. Due to the lack of commitment to future policies, the tax burden may be on the wrong side of the dynamic Laffer curve. Moreover, restrictions on government policies can in some cases be welfare improving.     

On poverty traps,thresholds and take-offs

Recent studies on economic growth focus on persistent inequality across countries. In this paper we study mechanisms that may give rise to such persistent inequality. We consider countries that accumulate capital in order to increase the per capita income in the long run. We show that the long-run growth dynamics of those countries can generate a twin-peak distribution of per capita income. The twin-peak distribution is caused by (1) locally increasing returns to scale and (2) capital market constraints. These two forces give rise to a twin-peaked distribution of per capita income in the long run. In our model investment decisions are separated from consumption decisions and we thus do not have to consider preferences. Empirical evidence in support of a twin-peak distribution of per capita income is provided.     

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).     

On the evolution of conditional cooperation

A long series of laboratory and field experiments, as well as conventional empirical studies, has established that (1) individuals voluntarily provide themselves with public goods at levels exceeding those predicted by the Nash voluntary contributions mechanism, and (2) agents reciprocate increases in the contributions of their counterparts in such settings (conditional cooperation). This paper presents a simple model of the evolution of preferences for conditional cooperation in the presence of a public good, which explains these two empirical findings without employing reputational or group selection arguments. In this model, individuals inherit preferences to match other agents' contributions to the provision of a public good, at some specified “matching rate.” Agents whose preferences induce them to be relatively successful – in material terms – increase in number, from one generation to the next. Under complete information and with randomly matched groups of N agents who have quasilinear preferences over the public good and a private good, the unique evolutionarily stable matching rate is 1, leading to Pareto optimal voluntary provision of the public good, regardless of group size N. The evolutionarily stable matching rate can be viewed as an endogenous social norm.     

The Efficiency of Direct Public Involvement in Environmental Policymaking: An Experimental Test

In collaborative negotiation, stakeholder representatives are charged with the development of a mutually acceptable set of public policies. Although this approach has become popular in environmental negotiations, little is known about the characteristics of the outcomes that are reached. In this paper, we employ an Edgeworth box framework to investigate the nature of bargaining over public goods (environmental policies) that have multiple attributes. We then design and conduct laboratory experiments within this framework to test whether negotiated outcomes satisfy standard axiomatic bargaining predictions under a variety of conditions. Specifically, we test whether two parties with Pareto inefficient endowments of two goods will trade to Pareto improving and Pareto efficient outcomes, and to the Nash bargain in particular. We vary whether the Nash bargain coincides with or diverges from the outcome that maximizes the joint payoff, or the outcome that equalizes payoffs, and whether subjects are provided full or partial information. We find that bargainers reach Pareto improving and efficient outcomes across treatments, but withdraw support for the Nash bargain when it generates unequal payments or when payoff information is private. We conclude that this experimental framework offers a promising method for studying multi-attribute negotiations.     

Politically Determined Income Inequality and the Provision of Public Goods

Political processes may bring about Pareto improvements by increasing income inequality in a society that produces a public good by voluntary contributions. Proportional taxation funds a “governing agent.” The most endowed agent is the Condorcet winner for governing agent. When the tax rate can also be chosen by a vote, the ideal point of the agent with median initial endowment is the Condorcet winner under Cobb–Douglas utility. If Pareto improvements are possible, this ideal point corresponds to Pareto improvement. Pareto improvement may also be possible, even when a Leviathan set taxes, if there is deadweight loss from taxation. Pareto improvements are indeed always possible in “large” societies. On the other hand, no improvements may be possible if the initial distribution of wealth is very unequal in a “small” society, and Condorcet winners may not exist for other utility functions.     

Uncertainty, Commitment, and Optimal Taxation

This paper examines the optimal tax design problem in the presence of wage uncertainty. The wage has a continuous distribution, individuals are ex ante identical, preferences are separable in labor supply and goods, public policy aims at providing the population with social insurance, and the only restriction on the tax instruments is that emanating from lack of public observability of realized wages and labor supplies. We show that optimal tax structures depend crucially on whether it is labor supply or goods that consumers have to commit to before the resolution of uncertainty. Specifically, we prove that, in the absence of commitment, the social insurance problem collapses to the traditional optimal tax problem. Second, if labor supply is precommitted, it would be possible to effect a first-best outcome. Third, commitment to goods would make indirect taxation a useful instrument of tax policy even in the presence of a general income tax; it requires differential tax treatment of committed and noncommitted goods. Finally, if preferences are separable between the two types of goods, precommitted goods must be taxed at a uniform rate lower than that on the noncommitted goods.     

OPTIMAL CONTROL OF EXTERNALITIES IN THE PRESENCE OF INCOME TAXATION*

A substantial literature examines how the Pigouvian directive that marginal taxes should equal marginal external harms needs to be modified in light of the preexisting distortion due to labor income taxation. Additional literature considers distributive concerns. It is demonstrated, however, that simple first‐best rules—unmodified for labor supply distortion or distribution—are correct in the model examined. Specifically, setting all commodity taxes equal to marginal harms (and subsidies equal to marginal benefits) can generate a Pareto improvement, as can a marginal reform toward the first‐best. Qualifications and explanations for differences from previous work are also presented.     

A Case for Bundling Public Goods Contributions

We extend the model of voluntary contributions to multiple public goods by allowing for bundling of the public goods. Specifically, we study the case where agents contribute into a common pool which is then allocated toward the financing of two pure public goods. We explore the welfare implications of allowing for such bundling vis‐à‐vis a separate contributions scheme. We show that for high income inequality or for identical preferences among agents bundling leads to higher joint welfare. Interestingly, a welfare improvement can in some cases occur despite a decrease in total contributions. On the contrary, when agents are heterogenous, for low income inequality bundling can lead to lower total contributions and may decrease welfare compared to a separate contribution scheme. Our findings have implications for the design of charitable institutions and international aid agencies.