Voters,bureaucrats and legislators: A rational choice perspective on the growth of bureaucracy

The claim that government is excessively bureaucratic can be interpreted as an assertion about inefficient factor proportions in the production of public goods. The rational choice theory of electoral competition is extended in this paper to include the election of representatives from separate districts, ombudsman activities by legislators, self-interested bureaucrats and production functions for public activities that have bureaucratic and nonbureaucratic arguments. If the demand for public goods grows exogenously through time, the model predicts increasingly inefficient factor proportions yet a growing advantage for incumbent legislators when they seek reelection.     

University patents,R&D competition,and social welfare

Although university patenting has increased dramatically over the past three decades, debates persist regarding the broad economic implications of the phenomenon. This article examines the social welfare implications of university patenting in a model of R&D competition in which firms develop innovations on the basis of the disclosure of a university invention. When such disclosure does not preempt the patenting of downstream innovations, university patenting enhances social welfare only if a regime of open access to university inventions is characterized by excessive aggregate R&D from the viewpoint of social welfare. When the university invention disclosure preempts patenting on firms’ innovations, the nature of the open access equilibrium in the R&D market depends on the threat of imitation ex post. Only when the threat of imitation is sufficiently strong firms will not invest in downstream R&D in the open access regime. In this case, university patenting promotes R&D investment and increases social welfare.     

European competition policy modernization: From notifications to legal exception

Council Regulation (EC) 1/2003 came into force in May 2004 and replaced the mandatory notification of agreements by a regime of ex post monitoring. This paper shows that ex post monitoring is the optimal audit regime when the competition authority's probability of error is low. On the other hand, the notification system becomes optimal when the competition authority's probability of error is high. The paper also shows that block exemptions and black list (regimes of per se (il)legality) should be implemented when the agreements’ expected welfare impact is very high and very low, respectively.     

Optimal antibribery policy when bribery type is endogenous

This paper analyzes the optimal allocation of antibribery resources when bribery type is endogenously determined by corrupt bureaucrats. A firm is supposed to invest to get licenses for production from bureaucrats. The bureaucrat commits to a bribes schedule that specifies bribes demanded from compliant firms (therefore, engaging in extortion) and noncompliant firms (engaging in collusion) as a precondition of granting the license. The allocation of antibribery resources determines the probability that each type of bribery is detected and prosecuted and thus affects the bureaucrat's choice of bribes schedule and the equilibrium bribery type. We find that the government should prioritize combating collusion when the resources are sufficiently scarce, should abstain from combating extortion after it wipes out collusion when the resources are less scarce, and should eradicate both types of bribery when the resources are sufficiently abundant. When there are multiple investment dimensions, however, there exists a special case where the government targets both types of bribery when the resources are at some intermediate level.     

The effects of bureaucracy on political accountability and electoral selection

This paper examines how bureaucracy affects political accountability and electoral selection, using a three-tier political agency model consisting of voters, politicians and bureaucrats. In the model’s hierarchy, politicians are constrained by elections while bureaucrats are controlled by budgets. If voters and bureaucrats prefer different types of politicians (i.e. they have a conflict of interests), incumbents pass oversized budgets to prevent bureaucrats from engaging in strategic behaviours that damage incumbents’ reputations. If, instead, voters and bureaucrats prefer the same type of politicians (i.e. they have an alignment of interests), bureaucrats cannot obtain a concession from politicians. In the latter case, however, bureaucrats send voters a credible signal regarding an incumbent’s type, which improves electoral selection. This paper also shows that political appointment systems improve political accountability in the conflict-of-interests case while they weaken electoral selection in the alignment-of-interests case.     

Dynamic efficiency of Cournot and Bertrand competition: input versus output spillovers

We consider the efficiency of Cournot and Bertrand equilibria in a duopoly with substitutable goods where firms invest in process R&D that generates input spillovers. Under Cournot competition firms always invest more in R&D than under Bertrand competition. More importantly, Cournot competition yields lower prices than Bertrand competition when the R&D production process is efficient, when spillovers are substantial, and when goods are not too differentiated. The range of cases for which total surplus under Cournot competition exceeds that under Bertrand competition is even larger as competition over quantities always yields the largest producers’ surplus.     

RETAIL PRICE REGULATION AND THE OPTION TO DELAY

ABSTRACT ** :  This paper examines a two-period model of an investment decision in a network industry characterized by demand uncertainty, economies of scale and sunk costs. In the absence of regulation we identify the market conditions under which a monopolist decides to invest early as well as the underlying overall welfare output. In a regulated environment, we consider a monopolist who faces no downstream (final good) competition but is subject to retail price regulation. We identify the welfare-maximizing regulated prices when the unregulated market outcome is set as the benchmark. We show that if the regulator can commit to ex post regulation – that is, regulated prices that are contingent to future demand realization – then regulated prices that allow the firm to recover its total costs of production are welfare-maximizing. Thus, under ex post price regulation there is no need to compensate the regulated firm for the option to delay that it foregoes when investing today. We argue, however, that regulators cannot make this type of commitment and, therefore, price regulation is often ex ante – that is, regulated prices are not contingent to future demand. We show that the optimal ex ante regulation, and the extent to which regulated prices need to incorporate an option to delay, depend on the nature of demand uncertainty.     

Access Regulation and the Timing of Infrastructure Investment

This paper examines infrastructure investment incentives under a system of 'regulation by negotiation'. We demonstrate that an appropriately specified access pricing rule can induce private firms to choose to invest at a socially optimal time. The optimal regulatory regime allocates investment costs to the access provider and seeker based on their relative use-values of the facility. It is superior to an unregulated environment because it commits firms ex ante to an access charge that allows for sunk cost recovery. In addition, we show that when the time that access is sought is flexible both replacement- and historical-cost asset valuation methodologies can lead to optimal investment incentives. However, when seeker timing is restricted, historical cost can give rise to distorted incentives.     

A Perpetual Race to Stay Ahead

This paper presents a model of dynamic competition between two firms that repeatedly engage in an innovative activity. The state of competition—measured by the difference between the number of innovations introduced by the firms—evolves stochastically according to their effort level. The structure of Markov perfect equilibria is identified. It is generally not true that competition is fiercest when firms are closest. Rather, firms invest under two distinct circumstances: while sufficiently ahead, to outstrip their rival and secure a durable leadership; while behind, to regain leadership and prevent the situation from worsening to the point where their rival outstrips them.     

Socially excessive dissemination of patent licences

Abstract .  Compared with the social optimum, a monopolist usually sells too little. This result seemingly includes the case of a lab that licences its patented cost innovation: Katz and Shapiro (1986) find 'conditions under which [the lab] will issue fewer than the socially optimal number of licences.' However, I find instead that its incentives can be socially too high; the monopoly seller may sell too much. For example, it can be profit maximizing to sell several licences, while it is socially optimal that none is sold.     

BERTRAND Vs. COURNOT COMPETITION WITH UPSTREAM FIRM INVESTMENT

This paper compares Bertrand and Cournot competition in a vertical structure in which the upstream firm sets the input price and makes R&D investments. We show that from the downstream firms’ point of view, Cournot competition has the advantage of a more monopolistic effect, leading to the setting of a higher price, but has the disadvantage of inducing a lower incentive for the upstream firm to invest. On the other hand, Bertrand competition has the advantage of providing a greater incentive for the upstream firm to invest but has the disadvantage of a more competitive effect, leading to the setting of a lower price. Our main findings are as follows. First, R&D investment level is greater under Bertrand competition than under Cournot competition. Second, from the standpoint of the upstream firm and industry, Bertrand competition is more efficient than Cournot competition. Third, from the standpoint of the downstream firms, Bertrand competition is more efficient than Cournot when investment is sufficiently efficient and products are sufficiently differentiated.     

Asymmetric information, optimal money growth targets, and fed secrecy in a monetary policy game

This paper analyzes the impact on inflation of requiring the monetary authority to announce money supply targets and punishing it for deviations from same. Two regimes are considered. In one, called the ex ante regime, the target is announced prior to the authority's obtaining information concerning relevant economic shocks. In the other, called the ex post regime, the announcement is made after the authority obtains relevant information and thus provides the public with data concerning the authority's private information. It is shown that the ex ante regime may dominate the ex post regime. This follows because an ex post regime may yield a higher mean inflation rate as the monetary authority attempts to exploit the relationship between its announcement and expected inflation.     

Fiber deployment in Spain

Next generation access networks will be critical for future economic growth and access to these infrastructures will have major consequences for territorial and social cohesion. This paper examines the economic and competition determinants that serve as incentives for operators to invest in fiber-to-the-home technology. We draw on a dataset comprising 6603 Spanish municipalities with access to broadband services to examine the incumbent’s (Telefónica) deployment of fiber in the period 2010–2013. We show that local loop unbundling competition had a strong positive impact on Telefónica’s fiber deployment, while bitstream competition had a negative effect. Moreover, the incumbent was more likely to invest in municipalities with a large presence of cable operators. We also consider how the municipalities’ sociodemographic characteristics affected the operator’s deployment decision. While market size and population density had a positive effect on investment, the level of unemployment and the percentage of elderly population had a negative impact.     

Competition and investment in telecommunications

This study examines the relationship between competition and investment by Incumbert Local Exchange Carriers (ILECs) in US telecommunications markets. A panel data model and a dynamic panel data model that have not been used in previous studies are applied in this analysis. Results of the panel data model suggest that investment by ILECs is positively related to the market share of Competitive Local Exchange Carriers (CLECs), and negatively to the absolute number of CLECs. However, once the persistence in ILECs’ investment behaviour is controlled for using the dynamic model, our measures of the existing competition from CLECs, at best, have a weak effect on ILECs’ investment. Therefore, while strengthening competition in the telecom sector may be key to restoring telecom investment, it is uncertain that competition spurred by the mandatory sharing policy in this sector stimulates ILECs’ incentives to invest in new infrastructure.     

Advertising Subsidy and International Oligopolistic Competition

This paper examines the strategic role of advertising subsidies in a third‐country trade model in which two firms located in different countries export their products to a third country. First a basic model of advertising in oligopolistic industries is developed in which firms decide how much to invest in either predatory or cooperative advertising and then engage in product market competition either as Cournot competitors or as Bertrand competitors. It is shown that firms invest in only one form of advertising; which form they invest in depends on the relative effectiveness of the two types of advertising, the degree of product differentiation, and the form of product market competition. The paper then studies strategic industrial policy and shows that an advertising subsidy is the optimal strategic policy irrespective of the form of product market competition and the form of advertising in which firms invest.     

Incentives and the Sorting of Altruistic Agents into Street‐Level Bureaucracies*

Many street‐level bureaucrats have the dual task of helping some clients, while sanctioning others. We develop a model of a street‐level bureaucracy, and we study the implications of its personnel policy on the self‐selection and allocation decisions of agents who differ in altruism towards clients. When bureaucrats are paid flat wages, they do not sanction, and the most altruistic types sort into bureaucracy. Pay‐for‐performance induces some bureaucrats to sanction, but it necessitates an increase in compensation, which can result in sorting from the top and bottom of the altruism distribution. We also explain why street‐level bureaucrats often experience an overload of clients.     

Uniform Versus Discriminatory Tariffs

We analyze the non‐cooperative interaction between two exporting countries producing differentiated products and one importing country when governments use optimal policies to maximize welfare. The analysis includes product differentiation, asymmetric costs, and Bertrand competition. For identical exporting countries we demonstrate that the importing country always prefers a uniform tariff regime while both exporting countries prefer a discriminatory tariff regime for any degree of product differentiation. If countries are asymmetric in terms of production cost then the higher‐cost exporter always prefers the discriminatory regime but the lower‐cost exporter prefers the uniform regime if there is a significant cost differential. With cost asymmetry the announcement of a uniform tariff regime by the importer is not a credible strategy since there is an incentive to deviate to discrimination. This implies an international body can play a role in ensuring that tariff agreements are respected.     

Vertical separation versus vertical integration in a macroeconomic model with imperfect competition

This paper develops a monopolistic competition macroeconomic model, and uses it to discuss the determination of relevant macro variables under both vertical separation and vertical integration regimes. Several main findings emerge from the analysis. First, in the market equilibrium aggregate output and consumption under the vertical integration regime are greater than under the vertical separation regime, while the product price index under the vertical integration regime is lower than that under the vertical separation regime. Secondly, the level of real aggregate profits under the vertical integration regime will be higher (lower) than that under the vertical separation regime if the degree of monopoly power is relatively large (small). Third, the welfare level under the vertical integration regime will be higher than that under the vertical separation regime regardless of the degree of monopoly power.     

Mini-Symposium on Property Rights

We contend that the notion of teaching effectiveness has no verifiable empirical content and therefore the question of teaching score validity is misguided. Universities create knowledge, invest in human capital, and grant degrees, yet teaching scores are ill equipped to capture and evaluate any of these outcomes. In spite of well-documented shortcomings, virtually all universities in North America use teaching scores because they allow the managerial elite to legitimize their control over the affairs of academia in the broader context of university governance. Using the enabling myth of teaching scores, the bureaucrats shift the focus from the investment in human capital to the granting of degrees in order to re-cast higher education into an authoritative, vertically organized hierarchy, better suited for managerial rent-extraction and entrenchment.