When and why not to auction

Summary. Standard auctions are known to be a revenue-maximizing way to sell an object under broad conditions when buyers are symmetric and have independent private valuations. We show that when buyers have interdependent valuations, auctions may lose their advantage, even if symmetry and independence of information are maintained. In particular, simple alternative selling mechanisms that sometimes allow a buyer who does not have the highest valuation to win the object will in general increase all buyers willingness to pay, possibly enough to offset the loss to the seller of not always selling to the buyer with the greatest willingness to pay.Received: 18 June 2003, Revised: 7 September 2004, JEL Classification Numbers: D44, D82. Correspondence to: Colin M. CampbellWe thank Richard McLean, Dan Kovenock, two referees, and seminar participants at the University of Pittsburgh, Johns Hopkins University, Washington University, the Federal Communications Commission, the Institute for Advanced Studies at Princeton, UC-Santa Barbara, UC-Santa Cruz, and the Ohio State University Department of Finance for helpful suggestions. We thank the NSF for funding.     

When Carry Trades in Currency Markets are not Profitable

The success of the carry trade in international currency and money markets is related to the extent of the forward premium anomaly. We present evidence that the anomaly is a very time dependent phenomenon. We also formulate a model where the ex post returns from the carry trade are functionally related to the relative difference between the interest rate on the funding currency and the interest rate associated with the target currency; i.e. the relative interest rate opportunity (RIRO). We estimate a nonlinear smooth transition regime model that relates the RIRO to the returns on the carry trade, and the estimated transition function then represents the time periods when the carry trade was profitable and when it was not. The analysis indicates that the desirability of carry trading has declined and for many currencies has actually become unprofitable since the financial crisis of 2008.     

Capital income taxation when inherited wealth is not observable

This paper extends the Atkinson-Stiglitz model of direct and indirect taxation to a dynamic setting with two unobservable characteristics: productive ability and inherited wealth. Bequests are motivated by the ‘joy of giving’. A child’s inheritance is a random variable with a probability distribution that depends on his parent’s investment in a ‘bequest technology’. Public borrowing is assumed and implies the modified golden rule. We study the optimal tax policy when two instruments are available: a non-linear (wage) income tax and a proportional tax on capital income. We show that the second instrument ought, in general, to be used but that the tax rate is not necessarily positive. However, a positive tax rate is more likely when there is a positive correlation between inherited wealth and innate ability.     

Taxes and subsidies to change eating habits when information is not enough: an application to fish consumption

A calibrated model is used to determine the welfare impacts of various regulatory instruments for improving health. The results of a lab experiment are integrated in a partial equilibrium model representing demands for two kinds of fish, one with higher nutritional benefits (canned sardines) and one with higher contamination risks (canned tuna) in France. In the laboratory, information about health effects leads to a statistically significant decrease (increase) in the willingness to pay for tuna (sardines). Simulations with the laboratory results show that, for most cases, a per-unit tax on tuna and a per-unit subsidy on sardines without any information revealed to consumers lead to the highest welfare, because both the tax and subsidy directly internalize health characteristics. The information policy combined with a per-unit tax on tuna and a per-unit subsidy on sardines is socially profitable only if a large proportion of consumers (greater than 95%) receives health information.      

Factor Price Equalization when the World Equilibrium is not Unique

It is shown that, whatever the multiplicity of the integrated world equilibrium, (i) factor prices are equalized if and only if the distribution of primary factors between trading countries can be represented by a point in or on the boundary of a certain convex subset of R ^m , where m is the number of primary factors, and (ii) the likelihood of factor price equalization is independent of the multiplicity of the equilibrium.     

Voluntary contributions when the public good is not necessarily normal

We argue that there are interesting examples of privately provided public goods that do not satisfy the assumption of strict normality, and reconsider voluntary-contribution games in a more general framework. We show that, in general, (1) equalizing transfers between individuals with identical tastes can increase total supply of the public good, and (2) more of the public good can be supplied if agents move sequentially rather than simultaneously. These results are in sharp contrast to earlier conclusions derived in the literature under the assumption of strict normality.     

The shading and distancing of commerce: When internalization is not enough

A political economy of degradation and of sustainability should account not only for the full range of production costs but the sources of those costs. It should consider how the pursuit of wealth can, deliberately or not, lead to uncounted costs and unaccountable actors. This article explores the conditions of cost generation and externalization, especially those that are largely unintended and inadvertent. It shows how the pursuit of wealth, the expansion of markets, the mobility of capital, and the entanglements of production processes can lead to the unwitting generation and displacement of costs. It analyzes competitive business strategy and patterns of production and consumption for their contribution to such costs. Business strategy and state policy tend to create a never-ending search for frontiers, however simulated and however unecological they may be. The costs generated in those frontiers are a function of shading, that is, obscuring of costs, and distancing, the separation of production and consumption decisions, both of which impede ecological and social feedback and create cognitive, institutional, and ethical lags between initial benefits and eventual full costs. As distance increases along dimensions of geography, culture, bargaining power, or agency, negative feedback loops are severed, stakeholders expand while decision making contracts, environmental problems are displaced, and shading and cost externalization increase. The likelihood of sustainable resource use increases as distance is lowered, as institutions locate decision authority in those who receive negative ecological feedback and who have the capacity and incentives to act on that feedback, and as the burden of proof for economic interventions shifts to the interveners.     

When Redistribution Leads to Regressive Taxation

We introduce labor contracts in a framework of optimal redistribution: firms have some local market power and try to discriminate among heterogeneous workers. In this setting we show that if the firms have perfect information, i.e., they perfectly discriminate against workers and take all the surplus, the best tax function is flat. If firms have imperfect information, i.e., if they offer incentive contracts, then (under some assumptions) the best redistributive taxation is regressive.     

On the undesirability of commodity taxation even when income taxation is not optimal

An important result due to Atkinson and Stiglitz (1976) [Atkinson, A.B., Stiglitz, J.E., 1976. The design of tax structure: Direct versus indirect taxation. Journal of Public Economics 6, 55–75.] is that differential commodity taxation is not optimal in the presence of an optimal nonlinear income tax (given weak separability of utility between labor and all consumption goods). This article demonstrates that this conclusion holds regardless of whether the income tax is optimal. In particular, given any commodity tax and income tax system, differential commodity taxation can be eliminated in a manner that results in a Pareto improvement. Also, differential commodity taxation can be proportionally reduced so as to generate a Pareto improvement. In addition, for commodity tax reforms that neither eliminate nor proportionally reduce differential taxation, a simple efficiency condition is offered for determining whether a Pareto improvement is possible.     

Competition for foreign direct investment when countries are not sure of site values

The fiscal tug-of-war between two countries to play host to a foreign-owned firm is like a Nash game. Suppose that the countries are not sure how much the firm values the sites that they offer to it. Also suppose that the countries fashion their expectation of site value by assigning the same likelihood to each value that they deem possible. Then, if they are quite unsure about site values, they will offer small subsidies to the firm. If they are pretty sure about site values, they will offer large subsidies. Here is the intuition behind the results: When a country is unsure about the value of its site, it is also unsure if a stingy offer will drive the firm to its rival, so it may take the chance and make a stingy offer rather than a generous one.