Wage/tenure contracts with heterogeneous firms

This paper investigates equilibria where firms post wage/tenure contracts and risk averse workers search for new job opportunities whether employed or unemployed. We generalize previous work by assuming firms have different productivities. Equilibrium implies more productive firms always offer more desirable contracts. Thus workers never quit from more productive firms for less productive firms. Nevertheless turnover is inefficient as employees with long tenures at low productivity firms may reject outside job offers from more productive firms. A worker who quits to a more productive firm may accept a wage cut. Such wage cuts are compensated by faster “promotion” rates to higher wage levels in the future. We also generalize previous arguments by showing equilibria exist where the distribution of offers contains interior mass points and find equilibrium wage/tenure contracts need not be smooth.     

The structure of strategy-proof social choice — Part I: General characterization and possibility results on median spaces

We define a general notion of single-peaked preferences based on abstract betweenness relations. Special cases are the classical example of single-peaked preferences on a line, the separable preferences on the hypercube, the “multi-dimensionally single-peaked” preferences on the product of lines, but also the unrestricted preference domain. Generalizing and unifying the existing literature, we show that a social choice function is strategy-proof on a sufficiently rich domain of generalized single-peaked preferences if and only if it takes the form of voting by issues (“voting by committees”) satisfying a simple condition called the “Intersection Property.”Based on the Intersection Property, we show that the class of preference domains associated with “median spaces” gives rise to the strongest possibility results; in particular, we show that the existence of strategy-proof social choice rules that are non-dictatorial and neutral requires an underlying median space. A space is a median space if, for every triple of elements, there is a fourth element that is between each pair of the triple; numerous examples are given (some well-known, some novel), and the structure of median spaces and the associated preference domains is analysed.     

Crime and punishment in the “American Dream”

We observe that countries where belief in the “American dream”(i.e., effort pays) prevails also set harsher punishment for criminals. We know that beliefs are also correlated with several features of the economic system (taxation, social insurance, etc). Our objective is to study the joint determination of these three features (beliefs, punitiveness and economic system) in a way that replicates the observed empirical patterns. We present a model where beliefs determine the types of contracts that firms offer and whether workers exert effort. Some workers become criminals, depending on their luck in the labor market, the expected punishment, and an individual shock that we call “meanness”. It is this meanness level that a penal system based on “retribution” tries to detect when deciding the severity of the punishment. We find that when initial beliefs differ, two equilibria can emerge out of identical fundamentals. In the “American” (as opposed to the “French”) equilibrium, belief in the “American dream” is commonplace, workers exert effort, there are high powered contracts (and income is unequally distributed) and punishments are harsh. Economists who believe that deterrence (rather than retribution) shapes punishment can interpret the meanness parameter as pessimism about future economic opportunities and verify that two similar equilibria emerge.     

Managerial incentives and collusive behavior

I characterize the effects of empirically observed managerial incentives on long-run oligopolistic competition. When managers have a preference for smooth time-paths of profits - as revealed by the empirical literature on “income smoothing” - manager-led firms can sustain collusive agreements at lower discount factors. Capped bonus plans and incumbency rents with termination threats make collusion supportable at any discount factor, independent of contracts' duration. When managers have these preferences/incentives and demand fluctuates, “price wars during booms” need not occur: the most collusive price may then be pro-cyclical.     

Are incentives against economic justice?

We consider the problem of fairly allocating a social endowment of indivisible goods and money when the domain of admissible preferences contains, but is not restricted to, quasi-linear preferences. We analyze the manipulability of the Generalized Money Rawlsian Fair (GMRF) solutions. (i) We show that the Nash and strong Nash equilibrium correspondences of the “preference revelation game form” associated with each GMRF solution coincide with the no-envy solution (in equilibrium, efficiency is preserved according to agents' true preferences). (ii) A corollary is that the GMRF solutions “naturally implement” the no-envy solution in Nash and strong Nash equilibria.     

Intergenerational transmission of preferences

We propose a perfect empathy model of cultural transmission to capture the evolution of preferences in a population. Unlike existing imperfect empathy models, focusing on stable interior equilibria, we demonstrate that a corner outcome will eventuate. However, which corner outcome emerges is unknown, and depends on the interplay of “history” and “expectations”.     

Differentiating ambiguity and ambiguity attitude

The objective of this paper is to show how ambiguity, and a decision maker (DM)'s response to it, can be modelled formally in the context of a general decision model. We introduce a relation derived from the DM's preferences, called “unambiguous preference”, and show that it can be represented by a set of probabilities. We provide such set with a simple differential characterization, and argue that it is a behavioral representation of the “ambiguity” that the DM may perceive. Given such revealed ambiguity, we provide a representation of ambiguity attitudes. We also characterize axiomatically a special case of our decision model, the “α-maxmin” expected utility model.     

Oligopsony and the distribution of wages

We propose a simple model of wage dispersion arising from oligopsonistic competition in the labor market. Our model has workers who are equally able but who have heterogeneous preferences for non-wage characteristics, while employers have heterogeneous productivity characteristics. We completely and explicitly solve for the equilibrium wage distribution and show that “inside” and “outside” forces interact in wage determination. This interaction generates spillover effects of minimum wages in a manner which is consistent with the empirical evidence.     

Imprecise probabilistic beliefs as a context for decision-making under ambiguity

Coherent imprecise probabilistic beliefs are modeled as incomplete comparative likelihood relations admitting a multiple-prior representation. Under a structural assumption of Equidivisibility, we provide an axiomatization of such relations and show uniqueness of the representation. In the second part of the paper, we formulate a behaviorally general “Likelihood Compatibility” axiom relating preferences and probabilistic beliefs and characterize its implications for the class of “invariant biseparable” preferences that includes the MEU and CEU models among others.     

A behavioral characterization of plausible priors

Recent decision theories represent ambiguity via multiple priors, interpreted as alternative probabilistic models of the relevant uncertainty. This paper provides a robust behavioral foundation for this interpretation. A prior P is “plausible” if preferences over some subset of acts admit an expected utility representation with prior P, but not with any other prior Q≠P. Under suitable axioms, plausible priors can be elicited from preferences, and fully characterize them; also, probabilistic sophistication implies that there exists only one plausible prior; finally, “plausible posteriors” can be derived via Bayesian updating. Several familiar decision models are consistent with the proposed axioms.     

Can micro-credit bring development?

We examine the long-run effects of micro-credit on development in an occupational choice model similar to Banerjee and Newman (JPE, 1993). Micro-credit is modeled as a pure improvement in the credit market that opens up self-employment options to some agents who otherwise could only work for wages or subsist. Micro-credit can either raise or lower long-run GDP, since it can lower use of both subsistence and full-scale industrial technologies. It typically lowers long-run inequality and poverty, by making subsistence payoffs less widespread. Thus, an equity-efficiency tradeoff may be involved in the promotion of micro-credit. However, in a worst case scenario, micro-credit has purely negative long-run effects. The key to micro-credit's long-run effects is found to be the “graduation rate”, defined as the rate at which the self-employed build up enough wealth to start full-scale firms. We distinguish between two avenues for graduation: “winner” graduation (of those who earn above-average returns in self-employment) and “saver” graduation (due to gradual accumulation of average returns in self-employment). Long-run development is not attainable via micro-credit if “winner” graduation is the sole avenue for graduation. In contrast, if the saving rate and self-employment returns of the average micro-borrower are jointly high enough, then micro-credit can bring an economy from stagnation to full development through “saver” graduation. Thus the lasting effects of micro-credit may partially depend on simultaneous facilitation of micro-saving. Eventual graduation of the average borrower, rather than indefinite retention, should be the goal of micro-banks if micro-credit is to be a stepping stone to broad-based development rather than at best an anti-poverty tool.     

Arrovian aggregation in economic environments: how much should we know about indifference surfaces?

Arrow's celebrated theorem of social choice shows that the aggregation of individual preferences into a social ordering cannot make the ranking of any pair of alternatives depend only on individual preferences over that pair, unless the fundamental weak Pareto and non-dictatorship principles are violated. In the standard model of division of commodities, we investigate how much information about indifference surfaces is needed to construct social ordering functions satisfying the weak Pareto principle and anonymity. We show that local information such as marginal rates of substitution or the shapes “within the Edgeworth box” is not enough, and knowledge of substantially non-local information is necessary.     

Consumer inertia, firm growth and industry dynamics

We develop a model of firm size, based on the hypothesis that consumers are “locked in,” because of search costs, with firms they have patronized in the past. As a consequence, older firms have a larger clientele and are able to extract higher profits. The equilibrium of this model yields: (i) A downward sloping density of firm sizes. (ii) Older firms are less likely to exit than younger firms. (iii) Larger firms spend more on R&D.     

Voluntary formation of communities for the provision of public projects

In this paper we examine a group formation problem, where heterogeneous individuals partitioned themselves into communities, each choosing its own public project from the given space of feasible projects. The model is that of “horizontal product differentiation” where individuals display distinct preferences over the policy space. We consider the notion of “efficient” configuration that minimizes the total project-related costs and aggregate personalized costs of all individuals, and “sustainable” configurations, those are immune against breakaways by subgroups of individuals. Our main result is that, with a unidimensional project space and single-peaked personalized costs, every efficient partition is sustainable.     

A new necessary condition for implementation in iteratively undominated strategies

We uncover a new necessary condition for implementation in iteratively undominated strategies by mechanisms that satisfy the “best element property” where for each agent, there exists a strategy profile that gives him the highest payoff in the mechanism. This class includes finite and regular mechanisms. We conclude that either the quasilinearity-like assumptions of available sufficiency results cannot be completely dispensed with or some mechanisms that do not satisfy the best element property must be employed. We term the condition “restricted deception-proofness.” It requires that, in environments with identical preferences, the social choice function be immune to all deceptions, making it then stronger than incentive compatibility. In some environments the conditions for (exact or approximate) implementation by mechanisms satisfying the best element property are more restrictive than previously thought.     

To be consumed with moderation

We study the optimal behavior of a hyperbolic discounting agent who has incomplete information about his own preferences and can only learn them through consumption. We show that, even if moderate current consumption and moderate future consumption always dominates abstinence, the agent may optimally decide not to consume as a commitment device against inefficient learning that would lead to future excesses. This provides a rationale for why smokers, gamblers or compulsive buyers stick to second-best personal rules of behavior - such as “abstinence” - without invoking standard habit formation arguments. We also study how urges modify the strategy of the individual.     

Strategy-proof assignment on the full preference domain

We consider the problem of efficiently allocating several indivisible objects between agents who are to receive at most one object and whose preferences are private information. We examine this standard “assignment” problem from the perspective of mechanism design giving up the usual assumption of linear preferences and instead using a full preference domain (with indifferences permitted). We characterize two classes of mechanisms: (i) Bi-polar Serially Dictatorial Rules by Essential Single-Valuedness, Pareto Indifference, Strategy-Proofness and Non-Bossiness; and (ii) all selections from Bi-polar Serially Dictatorial Rules by Single-Valuedness, Efficiency, Strategy-Proofness and Weak Non-Bossiness. We compare the outcomes from the (Bi-polar) Serially Dictatorial Rules with the outcomes obtained using a market based approach, namely the “core” of the market. We show that all strongly efficient outcomes in the core can be generated using Serially Dictatorial Rules. Moreover, we argue that Serially Dictatorial Rules have an advantage over the market based approach in that they yield strongly efficient solutions for all preference profiles, making it possible to use randomization to restore equity. When preferences are private information, this type of ex ante equity cannot be implemented using the market based approach.     

The trade-offs from pattern bargaining with uncertain production costs

Pattern bargaining is a negotiating strategy that is often employed by industry-wide unions in oligopolistic industries to set wages. The conventional wisdom is that pattern bargaining “takes labor out of competition” and therefore softens bargaining between the union and firms, resulting in higher industry wide wages. However, this does not explain why firms agree to pattern bargaining. We introduce a model in which the agents face uncertainty about the relative product-market positions of the firms and compare the trade-offs involved in adopting different bargaining mechanisms. We show that with sufficient heterogeneity in non-labor costs, there are situations in which both the union and the firms prefer pattern bargaining. We also show that in such situations, the adoption of pattern bargaining harms consumers. This provides an explanation as to how pattern bargaining can arise in equilibrium and why there is often strong political opposition to it.     

Minimum wage,on-the-job search and employment: On the sectoral and aggregate equilibrium effect of the mandatory minimum wage

We study the impact of a minimum wage in a segmented labor market in which workers are at different stages of their careers. At the end of a learning-by-doing period, workers paid the minimum wage quit “bad jobs” for better-paying “good jobs”, following an on-the-job search process with endogenous search intensity. A rise in the minimum wage reduces “bad jobs” creation and prompts workers to keep their “bad jobs” by reducing on-the-job search intensity. The ambiguous impact on unqualified employment replicates and explains the findings of several empirical studies. However, a minimum wage rise reduces overall employment and output.     

Dynamically stable preferences

In the framework of dynamic choice under uncertainty, we define dynamic stability as a combination of two assumptions prevalent in the literature: dynamic consistency and the requirement that updated preferences have the same “structure” as ex ante ones. Dynamic stability also turns out to be a defining characteristic of the multiplier preferences of Hansen and Sargent (2001) [24] within the scope of variational preferences. Generally, for any class of invariant preferences, dynamic stability is shown to be connected to another independent property — consequentialism.