Mandating behavioral conformity in social groups with conformist members

Social interaction among individuals with a preference for conformity gives rise to coordination externalities which are not internalized in a non-cooperative setting. Mandating behavioral conformity, by centrally imposing a common, group-wide action, internalizes these coordination externalities, but also comes at a cost of restraining individuals’ self-regarding goals. We explore a framework of social interaction among privately informed individuals with conformist preferences to examine when mandating behavioral conformity improves group welfare. Our analysis elucidates how the desirability of mandating behavioral conformity is shaped by the group's socio-economic structure. We find that mandating behavioral conformity is not desirable in social groups that are ex ante homogeneous—either with respect to members’ contribution to group welfare or their innate conformist tendency. In contrast, mandating behavioral conformity can be beneficial in those ex ante heterogeneous social groups where the individuals who contribute most to group welfare also exhibit the strongest preference for conformity.     

Spatial welfare economics versus ecological footprint: modeling agglomeration,externalities and trade

A welfare framework for the analysis of the spatial dimensions of sustainability is developed. It covers agglomeration effects, interregional trade, negative environmental externalities, and various land use categories. The model is used to compare rankings of spatial configurations according to evaluations based on social welfare and ecological footprint indicators. Five spatial configurations are considered for this purpose. The exercise is operationalized with the help of a two-region model of the economy, that is, in line with the ‘new economic geography.’ By generating a number of numerical ‘counter-examples,’ it is shown that the footprint method is inconsistent with an approach aimed at maximum social welfare. Unless environmental externalities are such a large problem that they overwhelm all other components of economic well-being, a ‘spatial welfare economic’ approach delivers totally different rankings of alternative land use configurations than the ecological footprint.      

EFFICIENCY EFFECTS OF CHANGES IN COMMONWEALTH GRANTS TO THE STATES: A CGE ANALYSIS*

This paper describes CSF, a general equilibrium model encompassing factors of relevance to economic efficiency in Federal/State funding including: interstate differences in tax bases and unit costs of State‐provided goods; factor mobility; congestion; State‐government behaviour incorporating the possibility that governments in subsidised States embark on expenditures with low benefit/cost ratios (flypaper effects); fiscal externalities; and non‐discretionary expenditures in each State associated with special national responsibilities. The model is applied to Australia where Federal/State funding is a major political and economic issue. Welfare effects of moving from the present Australian funding system based on fiscal equalisation to a system of equal‐per‐capita grants are calculated. CSF implies that the welfare gain from this move would be small. The most important source of potential welfare gain is a reduction in flypaper effects. The recognition of congestion externalities can eliminate the small welfare gain, but only under seemingly extreme assumptions. The results are not very sensitive to variations in assumptions concerning population mobility and fiscal externalities.     

Bureaucracy, Tax System, and Economic Performance

This paper investigates the consequences for government size, growth and welfare if a selfish bureaucracy provides a congested input. Alternative exogenous tax systems are introduced and numerical analyses are carried out. The welfare optimum is only met under very specific assumptions: proportional congestion, a tax system only consisting of distortionary taxes and a bureaucracy that maximizes the budget's growth rate. Otherwise the relative size of the public sector becomes suboptimally large thus inducing welfare losses. From a welfare economic point of view bureaucratic selfishness is worse than a suboptimal taxing regime that does not (completely) internalize the congestion externalities.     

Information design,externalities, and government interventions

We consider a model of Bayesian persuasion with spillovers. A sender provides information to persuade a receiver to take an action with external effects. We consider how government interventions, including corrective subsidy and tax, affect social welfare. In addition to internalizing externalities, government interventions affect social welfare through an informational channel. Subsidies to the sender's preferred action incentivize the sender to reveal less information, but taxes on the sender's preferred action incentivize the sender to reveal more information. Because of such an informational effect, the optimal subsidy and tax may be different from the size of the externalities. In some cases, social welfare is maximized with no government intervention.     

Price vs. quantity-based approaches to airport congestion management

This paper analyzes price and quantity-based approaches to management of airport congestion, using a model where airlines are asymmetric and internalize congestion. Under these circumstances, optimal congestion tolls are differentiated across carriers, and a uniformity requirement on airport charges (as occurs when slots are sold or tolls are uniform) distorts carrier flight choices. Flight volumes tend to be too low for large carriers and too high for small carriers. But quantity-based regimes, where the airport authority allocates a fixed number of slots via free distribution or an auction, lead carriers to treat total flight volume (and thus congestion) as fixed, and this difference generates an efficient outcome as long as the number of slots is optimally chosen.     

Congestion and tax competition in a parallel network

The purpose of this paper is to study the effects of tolling road use on a parallel road network where each link can be tolled by a different government. Using both theoretical and numerical models, the paper analyses the potential tax competition between countries that each maximise the surplus of local users plus tax revenues in controlling local and transit transport. Three types of tolling systems are considered: (i) toll discrimination between local traffic and transit, (ii) only uniform tolls on local and transit transport are acceptable, (iii) tolls on local users only. The results suggest that the welfare effects of introducing transit tolls are large, but that differentiation of tolls between local and transit transport as compared to uniform tolls does not yield large welfare differences. Also, the welfare effects of toll cooperation between countries are relatively small in comparison with the welfare gains of non-cooperative tolling of transit. The numerical model further illustrates the effects of different transit shares and explicitly considers the role of asymmetries between countries. Higher transit shares strongly raise the transit toll and slightly decrease local tolls. With asymmetric demands, the welfare gains of introducing differentiated tolling rise strongly for the country with lower local demand.     

CONSUMPTION EXTERNALITIES, PREFERENCE CHANGES AND THE 'SAMARITAN'S DILEMMA'

This paper examines the desirability of an exogenously induced change in the preferences of individuals in an economy characterized by (i) asymmetrical, localized positive consumption externalities, (ii) private, non-market, negotiation-free transfers, and (iii) the ‘Samaritan's dilemma.’ A model is analysed in which a benefactor (individual 1) makes an unrestricted voluntary transfer to a beneficiary (individual 2) who ran use the transfer to increase 2's consumption of either a purely private good x or a good y that generates external benefits for 1. Once 1 makes a transfer to 2, 1 cannot control how 2 spends it. If 2 fails to take into account this externality, then good y is under consumed and a loss in social welfare results. When such externalities and their concomitant welfare losses arise, conventional solutions are frequently inappropriate, impractical or impossible. This power shows that exogenously inducing the adoption of new externality internalizing preferences by the benefactor and the beneficiary not only increases the benefactor's transfer and the beneficiary's consumption of good y but also produces a ‘socially superior’ state. The welfare improvement is measured in terms of a welfare criterion that is based on the initial and new preferences of each individual     

A cost‐benefit analysis of R&D tax incentives

Abstract.  Although technical knowledge generates spillover benefits, production of technical knowledge creates congestion externalities; thus, private R&D investment could be inefficient. A computable general equilibrium model is used to rank tax incentives by their effects on research effort and measure welfare effects. Five results stand out: R&D tax credits produce relatively large increases in research effort and welfare. Lower corporate income tax rates and ITCs for downstream users of high‐tech production inputs rank second. Revenue losses from lower personal income tax rates can produce welfare losses. Ironically, ITCs for upstream producers of innovative inputs are ineffective. Incremental R&D credits dominate comprehensive credits. JEL Classification: E62, H21, O38     

GENUINE SAVING AND POSITIONAL EXTERNALITIES

Much evidence suggests that people are concerned with their relative consumption. Yet, positional externalities have so far been ignored in savings‐based indicators of sustainable development. This article examines the implications of relative consumption concerns for measures of sustainable development by deriving analogues to genuine saving when people are concerned with their relative consumption. Unless the positional externalities have been internalized, an indicator of such externalities must be added to genuine saving to arrive at the proper measure of welfare change. We also show how relative consumption concerns affect the way public investment ought to be reflected in genuine saving.     

An Overlapping-generations Model of Escape Clause Protection

The paper explores the efficiency consequences of using temporary protection to ease adjustment following an unexpected, permanent improvement in a country's terms of trade. In the model, workers trade off the potentially higher wage that the export sector has to offer with a lower job acquisition rate. An unexpected improvement in the terms of trade surprises old workers who cannot undo the decisions they made while young. Some old workers who had not planned to search for work in the export sector end up changing their plans, adding to the pool of searchers, creating congestion. Temporary protection can reduce congestion and make the transition to the new steady state smoother. Moreover, there are conditions under which the congestion externalities lead to multiple steady‐state equilibria that can be Pareto‐ranked. Temporary protection may lead to a permanent change in the allocation of resources, and this permanent change may be welfare‐enhancing.     

Optimal social security in a dynastic model with human capital externalities,fertility and endogenous growth

In this paper we investigate the optimal scale of pay-as-you-go social security in a dynastic family model with human capital externalities, fertility and endogenous growth. Human capital externalities reduce the return to human capital investment and hence lead to under-investment in human capital and over-reproduction of the population. If the taste for the number of children is sufficiently weak relative to the taste for the welfare of children, social security can be welfare enhancing by reducing fertility and raising human capital investment per child.     

Information externalities and intermediaries in frictional search markets

In frictional matching markets with heterogeneous buyers and sellers, sellers incur discrete showing costs to show goods to buyers who incur discrete inspection costs to assess the suitability of the goods on offer. We study how brokers can help reduce these costs by managing the level and mix of goods in their inventory. Intermediaries emerge and improve social welfare when there is sufficient heterogeneity in the types of goods and preferences. Learning and inventory management enable search intermediaries to internalize information externalities generated in unintermediated private search.     

The role of vaccine effectiveness on individual vaccination decisions and welfare

This paper examines a theoretical model designed to characterize a static, individual vaccination decision environment. I identify and characterize both equilibrium and socially optimal vaccination behavior and determine how this behavior changes as the effectiveness of the vaccine changes. I also evaluate the individual and social welfare implications of a change in vaccine effectiveness. I find that under certain conditions, an increase in vaccine effectiveness can decrease the number of agents vaccinating in equilibrium due to the positive external effects of vaccination. Notably, it is also possible for individual and total welfare to decrease. This is an undesirable, and perhaps unexpected, consequence of better vaccines. Fortunately, welfare at the social optimum always increases as vaccine effectiveness increases. However, equilibrium behavior often falls short of the social optimum due to the positive externalities created by vaccinating.     

INFORMATIONAL CASCADES ELICIT PRIVATE INFORMATION*

We introduce cheap talk in a dynamic investment model with information externalities. We first show how social learning adversely affects the credibility of cheap talk messages. Next, we show how an informational cascade makes truth‐telling incentive compatible. A separating equilibrium only exists for high‐surplus projects. Both an investment subsidy and an investment tax can increase welfare. The more precise the sender's information, the higher her incentives to truthfully reveal her private information.     

The welfare effect of quality degradation in the presence of network externalities

This paper examines how the presence of network externalities affects a monopolist's incentive for quality degradation and its welfare consequence. The software and Internet service industries provide our primary motivation. The network externality may lead to a Pareto-improving quality degradation that would not be realised in the absence of network externalities. However, it may also overturn a potentially Pareto-improving quality degradation to a welfare-reducing one, or result in the realisation of a welfare-reducing quality degradation that would be avoided without network externalities. We also endogenise the firm's forward and backward compatibility decisions between the original and degraded goods.     

Pricing and Investment Decisions for a Tollway With Possible Route Substitution onto Alternative Congested Roads

Socially optimal pricing and investment decisions are analysed for a tollway that experiences competition from unpriced, congested roads. The resulting 'second-best' problem has a simple qualitative structure: optimal tolls are set lower than they would be without the unpriced congestion. The impact of such low tolls would be to induce higher levels of tollway traffic demand than would occur without route substitution possibilities. However, such demands are offset by installing less capacity than would be installed without route substitution.     

Consumption aspirations in dirty and clean goods and economic growth

This paper builds a two-sector, two-factor environmental model in which agents optimally choose the clean and dirty goods in order to display their social status. In contrast to the conventional notion, we show that greater social aspirations in consumption regardless of either clean or dirty goods have an ambiguous impact on growth, depending on whether the production of conspicuous goods is relatively labor- or capital-intensive, whether the production of conspicuous goods generates more or fewer emissions, and whether labor supply is or is not responsive to social status seeking. By connecting two conflicting aspects of consumer preference involving social aspirations and environmental concerns, our analysis offers a novel explanation for the environmental Kuznets curve and a theoretical support for the empirical possibility of a negative employment-growth relationship and the so-called Green New Deal. Our welfare analysis shows that social comparisons in consumption may increase, rather than decrease, social welfare. The Pigovian tax may only be socially sub-optimal in the two-sector economy because it is unable to completely correct the distortion caused by consumption externalities.     

POLITICAL ECONOMY AND THE EFFICIENCY OF COMPENSATION FOR TAKINGS

To assess compensation for regulation-induced "takings," the authors model political support for regulation as a function of externalities, landowner wealth, and tax burdens. When competing social interests have equal influence on political outcomes, compensation should not be paid. However, when environmentalists and property owners have unequal influence, the model yields several counterintuitive implications. For example, disenfranchised environmentalists should support takings compensation, since it reduces landowner opposition to regulation. The authors also show how compensation rules can limit the deadweight social costs of income transfers, while recognizing their effects on regulator and landowner behavior. (JEL K11 , D72 , L51 )     

WELFARE‐MAXIMISING PRICING IN A MACROECONOMIC MODEL WITH IMPERFECT COMPETITION AND CONSUMPTION EXTERNALITIES

This paper develops a simple macroeconomic model with imperfect competition and consumption externalities, and uses it to examine whether the marginal cost pricing rule in the partial equilibrium framework can apply to the general equilibrium framework. It is shown that, for welfare to be maximised, average revenue should be set equal to marginal cost if consumption externalities are either absent or positive. However, for welfare to be maximised, average revenue should be set higher than marginal cost in the presence of negative consumption externalities.