A mechanism for computing an efficient system of wastes emission quotas

Presented is a mechanism that coordinates producers' wastes disposal decisions and consumers' demands for a clean environment. The mechanism imposes emissions' quotas on firms and levies taxes or subsidies on both firms and consumers. It is shown that a competitive equilibrium relative to the mechanism is Pareto optimal, and that the mechanism provides an incentive for each agent to communicate true marginal information in equilibrium.     

Behavioral explanations of efficient public good allocations

Theorists have studied decentralized allocation mechanisms by characterizing the Cournot-Nash equilibria of the mechanism. However, when a mechanism is operationalized by an iterative decision process, and agents derive utility only from the final outcome, Cournot behavior may not be an appropriate solution concept. We suggest two alternative behavioral models, reservation behavior and satisficing behavior, which recognize the impact of the iterative process upon incentives, yet maintain some of the critical simplifications that have made Cournot behavior an attractive model.We report on nine public good experiments with a Groves-Ledyard general equilibrium mechanism. Overall, the experiments attain highly efficient allocations, despite widespread violations of Cournot behavior. We suggest the explanation that most subjects initially followed reservation behavior, and then came to adopt satisficing behavior.     

Comparing Regulations to Protect the Commons: An Experimental Investigation

In a laboratory experiment we test three regulations imposed on a common-pool resource game with heterogeneous users: an access fee and subsidy scheme, transferable quotas and non-transferable quotas. We calibrate the game so that all regulations improve users’ profits compared to free-access extraction. We compare the regulations according to five criteria: resource preservation, individual profits, profit difference, Pareto-improvement from free-access and sorting of the most efficient users. One of the main findings is that, even though it performs better in sorting out the most efficient subjects, the fee and subsidy scheme is not more profitable than tradable quotas.     

Fishing Technology and Optimal Distribution of Harvest Rates

This paper examines the problem of the optimal management of a joint-ownership fishing exploitation, where agents use different fishing gears. We consider a model in which the fishing activity may affect resource growth, not only through the harvest function but also through the natural growth rate of the resource. This allows us to capture the fact that some fishing gears alter the natural growth rate of the resource. We find that when the natural growth of the resource is altered by the fishing technology, the optimal stock is not independent of how harvest quotas are distribute among the agents. As a result, a fishing policy that firstly determines the optimum stock and, secondly, decides how to distribute the harvest among the different agents, will not be efficient. We also analyze the joint determination of optimal stock and harvest quotas and show that positive harvest quotas will only be optimal when countries are characterized by certain asymmetries.     

Correcting Trade Distortions in a Small Open Economy

This paper considers the second-best strategy of correcting a wide variety of trade distortions in a small open economy with perfect competition in all markets. Using the tools of duality, we obtain some general properties of the structure and the levels of the optimal taxlsubsidy rates. The paper also analyzes the welfare effects of unilateral piecemeal trade policy reforms when some of the quota distortions—imposed by the foreign countries—are unalterable. It is shown that the merits of unilateral trade policy reforms that are emphasized in the literature crucially depend on the absence of unalterable foreign imposed quotas.     

Quantities,qualities and multiple public services in the Tiebout model

This paper introduces a new, more realistic characterization of local public services. This characterization fits education, parks, and streets, none of which are a pure Samuelsonian good. It is shown that Tiebout's hypothesis holds for this new type of services, provided correct user charges are adopted. Introducing several local services considerably affects the results. The paper emphasizes the difference in tastes with regard to quality as opposed to quantity. Earlier literature is shown to apply to the role of quality and ignores the role of quantity. The effect of the latter makes mixed communities more efficient than segregated ones. It is shown that efficient allocation with mixed communities is an equilibrium in a costless mobility, Tiebout-type setting.     

Pareto efficiency for the concave order and multivariate comonotonicity

This paper studies efficient risk-sharing rules for the concave dominance order. For a univariate risk, it follows from a comonotone dominance principle, due to Landsberger and Meilijson (1994) [27], that efficiency is characterized by a comonotonicity condition. The goal of the paper is to generalize the comonotone dominance principle as well as the equivalence between efficiency and comonotonicity to the multidimensional case. The multivariate case is more involved (in particular because there is no immediate extension of the notion of comonotonicity), and it is addressed by using techniques from convex duality and optimal transportation.     

Existence of an equilibrium with arbitrary tax schemes for financing local public goods

The existence of a public competitive equilibrium for any arbitrary (nondistortive) tax schemes (in particular, proportional taxes) for economies with local public goods, is proved. Allowing preferences to be both nontransitive and noncomplete enables an explicit introduction of the government as an (additional) agent in the economy. Moreover, we allow for “spillovers” of the public goods among localities, and for the production sets to depend on the amount of public goods produced in the economy. The only restriction on the tax system is that every individual is able to afford it and that the government's budget never runs a surplus. Since every equilibrium allocation is a Pareto optimum, every tax scheme is optimal (in the sense that its equilibrium allocation is a Pareto optimum).     

Optimal incentive contracts with multiple agents

A setting in which a single principal contracts with two agents who possess perfect private information about their own productivity is considered. With correlated productivities, each agent's private information also provides a signal about the other agent's productivity. In contrast to the setting in which there is only one agent, it is shown that such private information may be of no value to the agents. It is only if the agents are risk-averse that their private information may allow them to command rents. Moreover, when the agents are constrained only to reveal their private information truthfully as a Nash equilibrium, the Pareto optimal incentive scheme may induce the agents to adopt strategies other than truth-telling. This leads to the consideration of truth-telling equilibria that are not Pareto dominated in the subgame played by the agents. Among all such equilibria, the one preferred by the principal restricts one agent to tell the truth as a dominant strategy and the other as a Nash response to truth.     

Ethically flexible gini indices for income distributions in the continuum

A single-parameter generalization of the Gini coefficient (S-Gini) is presented for income distributions defined in the continuum. Special cases are Dorfman's formula for the Gini, and the authors' S-Ginis for finite populations. We exploit the duality between indices of relative inequality and homothetic social-evaluation functions to construct these new indices.     

Learning or lock-in: Optimal technology policies to support mitigation

We investigate conditions that amplify market failures in energy innovations, and suggest optimal policy instruments to address them. Using an intertemporal general equilibrium model we show that ‘small’ market imperfections may trigger a several decades lasting dominance of an incumbent energy technology over a dynamically more efficient competitor, given that the technologies are very good substitutes. Such a ‘lock-in’ into an inferior technology causes significantly higher welfare losses than market failure alone, notably under ambitious mitigation targets. More than other innovative industries, energy markets are prone to these lock-ins because electricity from different technologies is an almost perfect substitute. To guide government intervention, we compare welfare-maximizing technology policies including subsidies, quotas, and taxes with regard to their efficiency, effectivity, and robustness. Technology quotas and feed-in-tariffs turn out to be only insignificantly less efficient than first-best subsidies and seem to be more robust against small perturbations.     

Constraining Equitable Allocations of Tradable CO2 Emission Quotas by Acceptability

Since the signing of the Kyoto Protocol, future commitments are likely to beframed in terms of tradable quotas. The discussions on the allocation of thequotas among countries will be based – at least partly – on rulescorresponding to a certain conception of equity. For instance, allocatingquotas in direct proportion to population, in relation to GDP or accordingto past emissions has been advocated. Taking a long term perspective, wecompute such allocations of tradable quotas with a dynamic (closed-loop)model. The total amount of quotas to be distributed at each periodcorresponds to the world optimal amount of emissions to be realized at eachperiod. We observe that most equitable allocation rules do not make theagreement individually rational for every country along the entire timepath. We then propose a mechanism which determines allocations of quotasthat are as close as possible to any equitable allocation while satisfyingindividual rationality.     

Worst-case optimal redistribution of VCG payments in multi-unit auctions

For allocation problems with one or more items, the well-known Vickrey–Clarke–Groves (VCG) mechanism (aka Clarke mechanism, Generalized Vickrey Auction) is efficient, strategy-proof, individually rational, and does not incur a deficit. However, it is not (strongly) budget balanced: generally, the agents' payments will sum to more than 0. We study mechanisms that redistribute some of the VCG payments back to the agents, while maintaining the desirable properties of the VCG mechanism. Our objective is to come as close to budget balance as possible in the worst case. For auctions with multiple indistinguishable units in which marginal values are nonincreasing, we derive a mechanism that is optimal in this sense. We also derive an optimal mechanism for the case where we drop the non-deficit requirement. Finally, we show that if marginal values are not required to be nonincreasing, then the original VCG mechanism is worst-case optimal.     

Limitations on the use of information-revealing incentive schemes in economic organizations

Hierarchical organizations often use formal information channels to facilitate communication between center and subordinate units. Unfortunately subgoal pursuit may lead subordinates to be dishonest when responding to information requests. One way to overcome this problem is to design incentive schemes that encourage honesty. While incentive schemes that successfully encourage accurate information revelation exist for certain environments, this will not always be the case. In particular, if managerial effort is considered or if the center's objective is defined net of bonuses there may not exist any incentive scheme leading simultaneously to honest reporting and to maximization of the center's objective function.     

Work incentives and uncertainty on a collective farm

The collective farm household's optimal allocation of time among work on both the collective and private plots and leisure is analyzed in certain and uncertain environments. The examination of static equilibrium solutions indicates that the collective farm need not be inefficient nor provide poor work incentives. Uncertainty is shown to exert a distinctive influence on work allocations. Implications are drawn from comparative static analysis to discuss the effects of government policy, e.g., increased crop quotas, on work incentives. The Soviet development period, recent agricultural reforms in the Khrushchev-Brezhnev era, and general policy implications are considered in the light of these new analytical results.     

Clubs,local public goods and transportation models: A synthesis

Clubs, local public goods, and transportation models are analyzed within a unified model. The emphasis is on the derivation of optimal allocation, pricing and the size of the sharing group. We derive the conditions under which optimal prices will yield surplus or deficit, as well as those under which competitive provision will be efficient. Given heterogeneous tastes we prove that segregation according to tastes is generally efficient although several cases where this result does not hold are also discussed. We show that the existing literature is unnecessarily restrictive and that the unified approach suggested here considerably extends the existing analysis of clubs' local public goods and the transportation problems.     

When is fish quota enforcement worth while? A study of the Northeast Arctic cod

Many fish stocks are controlled by fish quotas divided among individual firms. Such quota regimes need an enforcement mechanism in order to be effective. Whether or not quota management regimes are worth while depends on whether the rents generated by such regimes cover their costs. Cost-efficient quota regimes would attain an optimal deterrence through minimal control and high fines, but in practice there are likely to be socially determined limits on how high fines could be set. We analyze these questions for the Northeast Arctic cod stock, using data on enforcement of Norwegian fish quotas.     

The beneficial effects of generous unemployment benefits on profits and employment

Theories of the labor market generally predict that high unemployment benefits put upward pressure on wages, thus diminishing the profitability of employing labor and exacerbating unemployment. It remains to be explained why firms agree to contribute to generous schemes (replacement rates for general schemes in Europe and US are in the range 50–85%) that they are often willing to supplement (with sector- or firm-specific schemes that may involve even 100% replacement and long benefit duration). An answer can be found by including in the shirking–efficiency wage model, the hypotheses that workers are risk-averse and that those discharged for misconduct are not eligible to benefits. It is then optimal for risk-neutral firms (and for employment) to introduce an insurance scheme with full income coverage and with a duration limited only by the workers' participation constraint (there is no trade-off between level and duration of benefits). The more difficult it is to detect and fire shirkers, the higher is the rent workers enjoy above the competitive wage and the longer is the benefit duration consistent with the participation constraint. This result can be interpreted as a complementarity between the strictness of employment protection legislation (EPL) and the duration of benefits, which seems to conform with broad patterns observed in primary vs. secondary employment and in continental Europe vs. Anglo-Saxon countries.     

Decentralized resource allocation and increasing returns

We study the possibility of designing a decentralized resource allocation mechanism that yields optimal solutions in economies with increasing returns. After a brief review of the mechanisms already designed to cope with nonconvexities, we find out that either they fail to provide efficient solutions in Koopmans' sense, or else they use extremely complex messages. The question arises whether it is possible to define a nonwasteful and privacy-preserving mechanism over a class of environments with increasing returns using finite-dimensional vectors as messages. We show that the answer is no.     

A note on Shepherd's duality theorem

A simple proof of one of the main results in Shepherd's duality theory is given without reference to the Kuhn-Tucker theory. The proof involves only manipulation of definitions.