Public education and redistribution when talents are mismatched

In democratic countries, elected policymakers determine public spending. The level of public spending depends on taxes that are decided by a voting mechanism. Policymakers also decide how to allocate funds among different policies, such as public education and pure redistributive transfers. How are the levels of funding for public education and redistribution determined in the political process? What impacts do votes on these two policies have on inequality, growth and social mobility? We develop a politico-economic model that highlights a novel mechanism: public education provides opportunities for the children of the poor to be recognized for their talent. This reduces the probability of a mismatch, which takes place when individuals with low talent who come from rich families find jobs that should go to people with high talent (and vice versa). Hence, the poor may prefer public spending on education to direct redistribution, while the rich prefer redistribution, as education implies more competition for good jobs from the poor.     

Optimal pension plan default policies when employees are biased

What is the optimal default contribution rate or default asset allocation in pension plans? Could active decision (i.e., not setting a default and forcing employees to make a decision) be optimal? These questions are studied in a model in which each employee is biased regarding her optimal contribution rate or asset allocation. In this model, active decision is never optimal and the optimal default is, depending on parameter values, one of three defaults. The paper explores how the parameters affect the average loss in the population at the optimal default.     

Optimal unemployment insurance and redistribution

We characterize optimal income taxation and unemployment insurance in a search‐matching framework where both voluntary and involuntary unemployment are endogenous and Nash bargaining determines wages. Individuals decide whether to participate as job seekers and if so, how much search effort to exert. Unemployment insurance trades off insurance versus search and participation incentives. We also allow for different productivity types so there is a redistributive role for the income tax and show that a piecewise linear wage tax internalizes the macro effects arising from endogenous wages. Type‐specific lump‐sum taxes and transfers can then redistribute between individuals of differing skills and employment states. Our analysis embeds optimal unemployment insurance into an extensive‐margin optimal redistribution framework where transfers to the involuntarily and voluntarily unemployed can differ, and nests several standard models in the literature.     

Optimal use of futures markets when input and output prices are uncertain

The purpose of this paper is to extend the analysis of the use of futures markets by a competitive firm facing an uncertain market price for its output to the case where both input and output prices are uncertain.     

Optimal menu when agents make mistakes

This paper studies how an optimal menu chosen by a social planner depends on whether agents receive imperfect signals about their true tastes (imperfect self-knowledge) or the properties of available alternatives (imperfect information). Under imperfect self-knowledge, it is not optimal to offer fewer alternatives than the number of different tastes present in the population, unless noise is infinite (agents have no clue about their true preferences). As noise increases, the social planner offers menu items that are closer together (more similar). However, under imperfect information, as noise increases, it could be optimal to construct a menu with more distinct alternatives, restrict the number of options, or, for some finite noise, offer a single item.     

Optimal growth when consumption takes time

This article analyzes a one‐sector growth model where the consumption takes time. When the consumption takes time, the consumption set is compact and we meet satiety. However, we prove that dynamic constraints are binding. This result is crucial to prove that, under well‐known assumptions in macroeconomic dynamic programming, the optimal path is monotonic and always converges to a unique nontrivial steady state as in the case where consumption is timeless.     

Optimal redistribution with unobservable disability: Welfarist versus non-welfarist social objectives

This paper examines the optimal non-linear income and commodity tax when the same labor disutility can receive two alternative interpretations, taste for leisure or disability, but the disability is not readily observable. We compare the optimal policy under alternative social objectives, welfarist and non-welfarist, and conclude that the non-welfarist objective, in which the planner gives a higher weight to the disutility of labor of the disabled individuals, is the only reasonable specification. It has some foundation in the theory of responsibility; further, unlike the other specifications it yields an optimal solution that may involve a lower labor supply requirement from disabled individuals.     

Regulating collateral-requirements when markets are incomplete

In this paper we examine the effects of default and collateral on risk sharing. We assume that there is a large set of assets which all promise a risk less payoff but which distinguish themselves by their collateral requirements. In equilibrium agents default, the assets have different payoffs, and there are as many linearly independent assets available for trade as there are states of the world. We derive necessary and sufficient conditions for equilibria to be Pareto-efficient in the presence of uncertainty. We explore some examples for which the collateral equilibrium allocation is identical to the Arrow–Debreu allocation, either when agents have a high preference for the durable good, or when the endowment distribution of the durable good is relatively homogeneous. We examine a series of examples to understand which collateral-levels prevail in equilibrium and under which conditions there is scope for regulating margin-requirements, that is, restricting the sets of tradable assets through government intervention. In these examples equilibrium is always sub-optimal but regulation never leads to a Pareto-improvement. While the competitive equilibria are constrained efficient, there do exist regulations which make large groups of agents in the economy better off. These regulations typically restrict all trades to take place in the low-collateral loans and benefit the poor and the rich agents in the economy through their effects on the equilibrium interest rate and the equilibrium prices of the durable goods.     

Resource-monotonic allocation when preferences are single-peaked

Summary. We consider the problem of allocating an infinitely divisible commodity among a group of agents with single-peaked preferences. Thomson (1994a), S?nmez (1994), and Moulin (1999) introduce three different resource-monotonicity conditions. In each characterization they derive, the axioms are independent. Under Pareto-optimality, the three resource-monotonicity conditions are equivalent. We investigate whether the interchange of these conditions still yields a valid characterization, and when the characterization still holds, whether it is a tight result or not. We strengthen each of the results, that is either the used resource-monotonicity condition can be replaced by a weaker one, or by using another resource-monotonicity condition, the result is not tight. Our main result is that when at least three agents are present, the class of fixed-path rationing methods is characterized by weak one-sided resource-monotonicity, strategy-proofness, and consistency. Received: April 24, 2000; revised version: April 10, 2001     

Optimal interregional redistribution and local borrowing rules under migration and asymmetric information

Assuming two types of regions that differ only in the discount rate, Huber and Runkel show that optimal federal redistribution is from impatient to patient regions, and optimal local public debt is higher in impatient regions than that in patient regions. This paper extends their analysis by allowing for interregional migrations and by considering two alternative regional goals. When the regional governments maximize their respective residents’ welfare, considering the interregional migrations does not change Huber and Runkel's analysis. When the regional governments maximize their respective natives’ welfare, incorporating migrations would reverse Huber and Runkel's conclusions when migration intensity is sufficiently high and the regional difference is sufficiently large.     

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.     

Optimal pricing when rational consumers anticipate monitoring cost

This article considers a monopolistic firm’s optimal pricing decision over two periods among dynamic pricing, preannounced pricing and single pricing. In the models, consumers rationally determine whether to exhibit strategic waiting by weighing their costs against prospectively lower price. Our analysis yields three main results. First, single pricing that completely eliminates strategic waiting surely would be dominated by intertemporal pricing when facing rational consumers. Second, preannounced pricing may actually yield lower revenue than dynamic pricing when considering its effect on the reduction of consumer monitoring cost. Only when monitoring costs under dynamic pricing and under preannounced pricing are equal, is firm revenue weakly greater under preannounced pricing than under dynamic pricing. Third, in dynamic pricing equilibrium, increasing monitoring cost may increase firm revenue, consumer surplus and social welfare simultaneously.     

Estimating entrants' productivity when prices are unobserved

Entrant firms are constrained to set lower price–cost markups than incumbents due to idiosyncratic demand shocks faced in the startup phase. Productivity indices suffer from micro-level markup variation and underestimate entrants' productivity, when productivity is measured by nominal sales and expenditures but not quantities. This study makes the first attempt to estimate entrants' productivity by controlling for their markup difference, when prices or quantities are unobserved at the firm-level. The econometric methodology introduces demand side into a structural model of production to account for the price variation. The estimation routine deals with the endogeneity due to unobserved productivity using a control function approach, and retrieves average markups for entrants and incumbents together with a markup-adjusted productivity index. My findings show that entrants set on average lower markups than incumbents in Japanese manufacturing. When productivity is adjusted to markups, entrants are as productive as incumbents, while the standard measures of labor and total factor productivity indicate low productivity for entrant firms.     

Currency Boards when Interest Rates are Zero

In a fixed exchange rate system, any expectation that the peg may be abandoned will normally be reflected in an interest rate differential between instruments denominated in domestic and anchor currencies: the possibility of a revaluation will drive domestic interest rates below those in the anchor currency, for example. However, when interest rates are close to the zero lower bound, there is limited scope for exchange rate expectations to be reflected in interest rate differentials. Here we introduce a new mechanism, based on the central bank balance sheet, which works to bring about equilibrium in currency markets even when interest rates are zero. An expectation of exchange rate appreciation will cause foreign exchange reserves to swell, increasing the cost to policy‐makers of allowing an appreciation and, therefore, lowering the likelihood of the fixed exchange rate being abandoned. Under normal circumstances, this channel reinforces the equilibrating effect of interest rate differentials. When interest rates cannot adjust only this channel operates, implying that much larger changes in reserves are required to equilibrate currency markets. We develop a simple model to illustrate these arguments and find support for the predictions of the model using data for Hong Kong, the world's largest economy with a currency board.     

International outsourcing when labour markets are unionized

Abstract. We consider the implications of international outsourcing in a simple general equilibrium model where the wage rate is the outcome of negotiations between a firm and a trade union. The effects of potential, but non‐realized, international outsourcing, is a reduction in the wage rate and an increase in employment. Aggregate welfare increases, but the trade union becomes worse off while owners of capital become better off. Realized international outsourcing gives rise to an increase in the wage rate and a reduction in employment. Aggregate welfare decreases, but the trade union becomes better off, while owners of capital become worse off.     

Testing for complementarity when strategies are dichotomous

We show that it is not possible to extend Arora (1996) reduced form test for the existence of complementarity to evaluate the relationship between a couple of dichotomous strategies as it leads to an incoherent simultaneous discrete response model.     

Taxation of profits when there are profits

Profits taxes fall on both pure profits and the use of capital as an input. Simulations of a Cournot oligopoly suggest that gains from the former are not outweighed by losses from the latter.     

Efficiency and equilibrium when preferences are time-inconsistent

We consider an exchange economy with time-inconsistent consumers whose preferences are additively separable. If consumers have identical discount factors, then allocations that are Pareto efficient at the initial date are also renegotiation-proof. In an economy with a sequence of markets, competitive equilibria are Pareto efficient in this sense, and for generic endowments, only if preferences are locally homothetic.