Do Consumers Purchase Too Much Health Insurance? The Role of Market Power in Health‐Care Markets

Several authors have suggested that consumers purchase too much health insurance in private markets. We readdress this issue within a model that combines excess health‐care demand due to health insurance with market power due to monopolistic production of health‐care services. We evaluate the market equilibrium in terms of consumer welfare and social welfare. The consumer welfare criterion suggests that in the market equilibrium consumers in fact purchase too much health insurance coverage. The social welfare criterion, in contrast, suggests that because profits of the health‐care industry are properly accounted for, consumers should purchase more insurance coverage than they choose to do in the market equilibrium.     

THE POLITICAL ECONOMY OF PUBLIC‐PRIVATE PARTNERSHIPS AND ANALYSIS OF THEIR SOCIAL VALUE*

ABSTRACT: This article applies political economy theory to public‐private partnerships (PPPs). First, we propose that social welfare is the appropriate normative evaluation criterion to evaluate the social value of PPPs. Second, we specify the goals of PPP participants, including private‐sector partners and governments. Third, we review the observed outcomes of PPPs and analyze them from both a political economy perspective and a social welfare perspective. Fourth, based on a comparison of the actual outcomes of PPPs to normatively desirable social welfare outcomes, we propose some ‘rules for governments’ concerning the design of government PPP institutions and the management of PPPs. We argue that if governments were to adopt these rules there would be fewer PPPs in total, they would be more like traditional government contracts and there would be a greater likelihood of improved social welfare. However, political economy theory also explains why implementation of any reform will be difficult.     

STATUS QUO IN THE WELFARE ANALYSIS OF TAX REFORMS

The welfare analysis of tax reforms most often consists of comparing the post‐reform distribution of individual welfare with the pre‐reform distribution or possibly that obtained from another reform as if they were completely independent. Such an “anonymous” approach does not take into account “changes” in individual situations, generally the main source of contention in any tax reform debate. This paper proposes a welfare criterion that allows comparison of reforms while taking into account individual status quo—i.e. pre‐reform—situations. This is done by extending standard utilitarian social welfare criteria to the case where individual utilities depend on initial income and income change.     

OPTIMISM AND PESSIMISM IN GAMES

This article considers the impact of ambiguity in strategic situations. It extends the existing literature on games with ambiguity‐averse players by allowing for optimistic responses to ambiguity. We use the CEU model of ambiguity with a class of capacities introduced by Jaffrray and Philippe (Mathematics of Operations Research 22 (1997), 165–85), which allows us to distinguish ambiguity from ambiguity‐attitude, and propose a new solution concept, equilibrium under ambiguity (EUA), for players who may be characterized by ambiguity‐preference. Applying EUA, we study comparative statics of changes in ambiguity‐attitude in games with strategic complements. This extends work in Eichberger and Kelsey (Journal of Economic Theory 106 (2002), 436–66) on the effects of increasing ambiguity if players are ambiguity averse.     

“Better off,as judged by themselves”: a comment on evaluating nudges

Many nudges are designed to make people better off, as judged by themselves. This criterion, meant to ensure that nudges will increase people’s welfare, contains some ambiguity. It is useful to distinguish among three categories of cases: (1) those in which choosers have clear antecedent preferences, and nudges help them to satisfy those preferences (often by increasing “navigability”); (2) those in which choosers face a self-control problem, and nudges help them to overcome that problem; and (3) those in which choosers would be content with the outcomes produced by two or more nudges, or in which ex post preferences are endogenous to nudges, so that without additional clarification or work, the “as judged by themselves” criterion does not identify a unique solution for choice architects. Category (1) is self-evidently large. Because many people agree that they suffer self-control problems, category (2) is large as well. Cases that fall in category (3) create special challenges, which may lead us to make direct inquiries into welfare or to explore what informed, active choosers typically select.     

AN EMPIRICAL MODEL OF LEARNING UNDER AMBIGUITY: THE CASE OF CLINICAL TRIALS*

This article presents a two‐dimensional structural model of learning under ambiguity in the context of clinical trials. Clinical trials offer an ideal environment to study learning under ambiguity. The randomization process found in these studies leaves patients uncertain to their actual group assignment. Therefore, patients cannot immediately attribute changes in health to the experimental drug. The article proposes the use of “learning instrumental variables” to simultaneously update patients’ beliefs of the treatment effect and group assignment. Patient learning is found to be faster when observable side effects are incorporated to account for the uncertainty in group assignment.     

Sustainability,Optimality, and Development Policy

Considering sustainability a matter of intergenerational welfare equity, this paper examines whether an optimal development path can also be sustainable. It argues that the general “zero‐net‐aggregate‐investment” condition for an optimal development path to be sustainable in the sense of the maximin criterion of intergenerational justice is too demanding to be practical, especially in the context of developing countries. It further argues that while the maximin criterion of sustainability may be appealing to the rich advanced industrial countries, for the poor developing countries it implies equalization of poverty across generations, and as such is too costly a moral obligation to be acceptable. The paper suggests that a compromise development policy that follows the optimal growth approach but adopts certain measures to mitigate both the intergenerational and intragenerational welfare inequalities may be more appropriate for these countries. Some of the principal elements of such a policy are highlighted.     

From equality to inequality: The Diamond–Sen criticism of Harsanyi's criterion of social justice

It is difficult to resolve conflicts of interests even in a society consisting of identical persons. Such an issue has been perceived as a serious difficulty posed to Harsanyi's axiomatic utilitarianism by Diamond's critique which Sen seemed to approve. Recent treatments tried to resolve this criticism by modifying Harsanyi's analytical framework so as to render it immune to Diamond's view about fairness. This paper shows that Diamond's view of fairness may be read as a "simple form" of Rawls' justice as fairness; and hence its clash with Harsanyi's social welfare criterion reflects the Harsanyi–Rawls debate about social justice. Sen's position on the debate is also discussed. In the case where individual preferences share some common characteristics in the manner described in Harsanyi's 1955 axiomatization of utilitarianism, various conceptions of equal treatment of equals are possible. To each of these conceptions corresponds a specific social welfare function, and there is no way to find which one is the best, from the scientific or ethical points of view.     

THE RISK PREMIUM FOR EQUITY: IMPLICATIONS FOR RESOURCE ALLOCATION,WELFARE AND POLICY*

Analysis of the equity premium puzzle has focused on private sector capital markets. The object of this paper is to consider the welfare and policy implications of each of the broad classes of explanations of the equity premium puzzle. As would be expected, the greater the deviation from the first‐best outcome implied by a given explanation of the equity premium puzzle, the more interventionist are the implied policy conclusions. Nevertheless, even explanations of the equity premium puzzle consistent with a general consumption‐based asset pricing model have important welfare and policy implications.     

IMMIGRATION AND NATIVE WELFARE*

This article unifies two approaches for identifying the welfare and wage effects of immigration, one emphasizing the immigration surplus, the other stressing a potential welfare loss due to a terms‐of‐trade effect. We decompose the native welfare effect into a standard complementarity effect, augmented by a Stolper–Samuelson effect, and a terms‐of‐trade effect. We illustrate the welfare and wage effects of endogenous goods prices in a stylized‐specific factors model. Finally, we calibrate this model to a generic OECD economy and provide simulation results. The key insight is that endogenous goods prices play a quantitatively important role, sometimes even overturning received results.     

Monetary union and the Maastricht inflation criterion: The accession countries*

We model an accession country facing a Maastricht‐type inflation criterion that specifies an inflation ceiling. In addition to deciding whether or not to satisfy this criterion, the country must decide how much costly economic reform to undertake. If the country puts enough weight on the future that it can credibly meet the inflation criterion no matter what the ceiling is, then the inflation criterion benefits the country but lowers reform. If the country puts less weight on the future, then a criterion with a properly chosen inflation ceiling can increase reform. We derive the inflation ceilings that maximize the country's welfare and its reform.     

Measuring the Level and Inequality of Wealth: An Application to China

We construct and compare three distinct measures of household asset wealth that complement traditional income‐ or expenditure‐based measures of socioeconomic status. We apply these measures to longitudinal household survey data from China and demonstrate that household asset wealth has been increasing over time, a theme consistent with many previous studies on the process of development in China. Unlike other studies that have shown rising income inequality over time, however, we show that asset wealth inequality has actually been declining in recent years, indicating widespread participation in the benefits of economic reforms. Furthermore, the evolution in the cumulative distribution of household welfare is such that social welfare has been increasing with the passage of time, despite rising inequality in the early years of the survey.     

Scientific Ambiguity and Climate Policy

Economic evaluation of climate policy traditionally treats uncertainty by appealing to expected utility theory. Yet our knowledge of the impacts of climate policy may not be of sufficient quality to be described by unique probabilistic beliefs. In such circumstances, it has been argued that the axioms of expected utility theory may not be the correct standard of rationality. By contrast, several axiomatic frameworks have recently been proposed that account for ambiguous knowledge. In this paper, we apply static and dynamic versions of a smooth ambiguity model to climate mitigation policy. We obtain a general result on the comparative statics of optimal abatement and ambiguity aversion, and then extend our analysis to a more realistic, dynamic setting, where we introduce scientific ambiguity into the well-known DICE model of the climate-economy system. For policy-relevant exogenous mitigation policies, we show that the value of emissions abatement increases as ambiguity aversion increases, and that this ‘ambiguity premium’ can in some plausible cases be very large. In these cases the effect of ambiguity aversion on welfare is comparable to that of other much studied welfare parameters. Thus ambiguity aversion may be an important neglected aspect of climate change economics, and seems likely to provide another argument for strong abatement policy.     

OPTIMUM-WELFARE AND MAXIMUM-REVENUE TARIFFS UNDER BERTRAND DUOPOLY

This article derives the maximum‐revenue tariff and the optimum‐welfare tariff under Bertrand duopoly with differentiated products. It is shown that both tariffs are lower under Bertrand duopoly than under Cournot duopoly. Also, the optimum‐welfare tariff may exceed the maximum‐revenue tariff under both Bertrand duopoly and Cournot duopoly. This result is more likely the lower the costs of the home firm relative to the costs of the foreign firm, and the greater the degree of product substitutability. Also, it is shown that the optimum‐welfare tariff is less likely to exceed the maximum‐revenue tariff under Bertrand duopoly than under Cournot duopoly.     

On The Distributional Effects Of Reducing Capital Taxes*

This article asks whether household heterogeneity and market incompleteness have quantitatively important implications for the welfare effects of tax changes. We compare a representative‐agent economy to an economy in which households face idiosyncratic uninsurable income risk. The income process is consistent with empirical estimates and implies a realistic wealth distribution. We find that capital tax cuts imply large welfare gains in the representative‐agent economy. However, when households are heterogeneous, substantial redistribution during transition means that only a minority will support capital tax cuts, whereas most households can expect large welfare losses.     

ESTIMATING A DYNAMIC SPATIAL EQUILIBRIUM MODEL TO EVALUATE THE WELFARE IMPLICATIONS OF REGIONAL ADJUSTMENT PROCESSES: THE DECLINE OF THE RUST BELT

This article develops and estimates a new dynamic spatial equilibrium model to study the regional transition dynamics and its impact on individual and aggregate welfare. The model consists of a multiregion, multisector economy comprised of overlapping generations of individuals with heterogeneous skills and mobility costs. The empirical findings suggest that a large fraction of the decline of the Rust Belt can be attributed to the reduction in its region‐specific comparative advantage in the goods‐producing sector. This decline generated significant differences in welfare across regions. Policy experiments show that such inequality can be significantly reduced through place‐based policies.     

Tax Havens,Growth, and Welfare

This paper develops an endogenous growth model featuring tax havens, and uses it to examine how the existence of tax havens affects the economic growth rate and social welfare in high‐tax countries. We show that the presence of tax havens generates two conflicting channels in determining the growth effect. First, the public investment effect states that tax havens may erode tax revenues and in turn decrease the government's infrastructure expenditure, thereby reducing growth. Second, the tax planning effect of tax havens reduces marginal cost of capital and hence encourages capital accumulation so as to spur economic growth. The overall growth effect is ambiguous and is determined by the extent of these two effects. The welfare analysis shows that tax havens are more likely to be welfare‐enhancing if the government expenditure share in production is low, or the initial income tax rate is high. Moreover, the welfare‐maximizing income tax rate is lower than the growth‐maximizing income tax rate if tax havens are present.     

ON THE DISTRIBUTIONAL CONSEQUENCES OF CHILD LABOR LEGISLATION*

This article studies the effects of child labor legislation on human capital accumulation and the distribution of wealth and welfare. We calibrate our model to U.S. data circa 1880 and find that the consequences of restricting child labor or providing tax‐financed education depend on the main source of individual household income. Households with significant financial assets unambiguously lose from government intervention, whereas high‐wage workers benefit most from a child labor ban, and low‐wage workers benefit most from free education. Introducing free education results in substantial welfare gains, whereas a child labor ban induces small welfare losses.     

Toward a “constitution” for behavioral policy-making

Behavioral policy interventions aimed at redirecting individuals’ behavior toward optimal choices are characterized by an important issue which is often overlooked: the lack of an instrument to define what “optimal” means. If agents are subject to behavioral biases leading them to make “wrong” choices, the policy-maker can no longer rely on the revealed preferences approach (e.g., what people choose is what people prefer) for defining a welfare criterion. In this article, we reiterate the argument put forward by some scholars that choosing a suitable welfare criterion once the link between observed choices and individuals’ preferences is broken becomes a problematic task. We review the state of the art in the literature and the possible approaches proposed to overcome the problem, concluding that a solution has not yet been reached. Moreover, we argue that the lack of an established welfare criterion characterizing behavioral policy-making could pave the way to government wanting to restrict individual freedom. In the absence of any legislative constraint for the executive, stating that what individuals choose is not what they prefer in principle justifies any freedom-reducing government intervention, since choices can be arbitrarily labeled “sub-optimal” or “welfare-reducing.” To avoid this risk without turning down the potential of behavioral policy-making, we propose that an independent committee establishes ex ante procedural rules and domains where behavioral policy-making can be implemented. The article suggests some possible examples of normative provisions characterizing this constitution-type document, such as the selective identification of the only sectors where behavioral policies could be effectively applied, the periodic evaluation of policy effects, and the use of sunset clauses.     

Dragon Slaying with Ambiguity: Theory and Experiments

This paper studies the impact of ambiguity in the best‐shot and weakest‐link models of public good provision. The models are first analyzed theoretically. Then, we conduct experiments to study how ambiguity affects behavior in these games. We test whether subjects' perception of ambiguity differs between a local opponent and a foreign one. We find that an ambiguity‐safe strategy is often chosen by subjects. This is compatible with the hypothesis that ambiguity aversion influences behavior in games. Subjects tend to choose contributions above (respectively, below) the Nash equilibrium in the best‐shot (respectively, weakest‐link) model.