Import Quotas and Entry Deterrence

Using a simple version of the Milgrom and Roberts entry deterrence model, it is shown that adjusting a quota so that a greater volume of imports is allowed, can facilitate entry into the domestic industry. That is, the easing of a quota, can cause the domestic incumbent to shift from deterring entry to accommodating entry.     

Credible redistribution policy and skilled migration

We analyze the joint determination of income redistribution and migration flows across fiscally independent regions. In our model, regional governments lack commitment so their policy announcements must be credible, and redistribution between skilled and unskilled workers is bounded by informational constraints. In any given region, the welfare of all workers is increasing in the share of skilled workers, as after-tax incomes increase for both skilled and unskilled workers. When skilled workers are more geographically mobile than unskilled ones, the endogenous response of redistribution policy can induce regional agglomeration of skilled workers. We also find that the equilibrium features symmetry-breaking if migration costs are relatively low; and that worker mobility tends to amplify pre-existing welfare differences in income and welfare across regions.     

Takeover Contests, Toeholds and Deterrence

We consider a setting in which two potential buyers, one with a prior toehold and one without, compete in a takeover modeled as an ascending auction with participating costs. The toeholder is more aggressive during the takeover process because she is also a seller of her own shares. The non-toeholder anticipates this extra-aggressiveness of the toeholder. Thus, he is deterred from participating unless he has a high valuation for the target company. This leads to large inefficiency losses. For many configurations, expected target returns are first increasing then decreasing in the size of the toehold.     

Credible communication in dynastic government

This paper studies information disclosure in a model of dynastic government. When information about past policy choices comes exclusively from the reports of previous administrations, each administration has an incentive to choose its (suboptimal) one-shot expenditure policy, and then misrepresent its choice to its successor. Consequently, it has been suggested that “horizontal accountability,” i.e., a system of governance where auditing functions lie outside the executive branch, can ensure credible disclosure of a government's activities. This paper suggests a cautious approach to that view.The baseline model examines the reporting incentives of an external auditor who can independently verify the information each period. Even with auditing, credible disclosure is shown to be problematic. Various extensions to this baseline model are examined. In one extension, “liberal” (i.e., those prefering larger government expenditures) and “conservative” (those prefering smaller expenditures) regimes and auditors evolve over time. It is shown that “conservative” (“liberal”) auditors are not credible when the current regime is also “conservative” (“liberal”). Moreover, because information transmission stops when the auditor's and the regime's biases coincide, effective deterrents even in the “good” periods (when the auditor's and the administration's biases differ) are difficult to construct. In all periods the equilibrium requirement of auditor neutrality constrains the dynamic incentives for efficient policy choices. These constraints are shown to bind away from optimal policies in standard constructions of equilibrium. Various ways in which auditing protocols can overcome these problems are discussed.     

Credible Currency: A Constitutional Perspective

By contrast to private banks, public monetary authorities – central banks and currency boards – have limited credibility in making redemption or fixed-exchange-rate commitments. Their sovereign immunity obviates legal penalties for devaluing, and their monopoly status weakens reputational penalties. The softness of central bank promises invites speculative attack and currency crises. Privatization and decentralization of exchange-rate commitments provides a more credible currency by making redemption commitments legally enforceable and reputable. This contrast sheds light on (1) the breakdown of the classical gold standard and (2) the costs and benefits of dollarization. JEL Classification: E42, H42.     

Detection Avoidance and Deterrence: Some Paradoxical Arithmetic

This paper extends Malik's analysis to the case where criminals' avoidance efforts and public expenditures in the detection of criminals are strategic complements in the aggregate technology of control of illegal behaviors. In this set up, we show that whenever criminals' avoidance efforts are more sensitive to the frequency than to the severity of sanctions, it is always socially efficient to set the fine at the maximal possible level. However, several paradoxical consequences occur: there may exist overdeterrence at optimum; more repressive policies lead to fewer arrests of offenders while more crimes may be committed; at the same time, the society may be closer to the first best number of crimes.     

Entry Deterrence and the Efficient Component Pricing Rule

This note comments on the article 'Entry and Entry Deterrence under the New Access Code' by Amiti and Maddock, published in the Australian Economic Review, 3rd quarter 1996. It is found that Amiti and Maddock do not show that efficient component pricing by an incumbent vertically-integrated monopolist will deter socially efficient entry of a new competitor.     

Regulating Multiple Polluters: Deterrence and Liability Allocation

We consider regulation of multiple polluters when individual emissions are unobservable. The tension between pollution deterrence and funding of remediation is examined under two constraints: that penalty revenues fully fund remediation costs and that the regulator cannot make positive transfers to firms. To isolate the effect of increasing the number of polluters, we compare an industry consisting of a single large firm with one in which many small firms in aggregate mimic the large firm. Contrary to previous findings, both the number of firms and the ability to monitor individual firms affect the welfare of a large class of regulators.     

Entry Deterrence in a Unionized Oligopoly

We investigate wage determination between an incumbent firm and its labour union under threat from another firm entering its product market. In equilibrium, it may be optimal for a labour union of the incumbent firm to lower its wage demand. This may make it possible for the incumbent firm to maintain a higher employment level, in that the lower wages can help the firm deter the entry of a rival firm. This will yield a higher profit for the incumbent firm and a lower utility level for the labour union compared with those in an equilibrium with no threat of entry.
JEL Classification Numbers: J51, L10     

Using Credible Advice to Overcome Framing Effects

A framing effect occurs when different, but logically equivalent,words or phrases (e.g., 10% employment or 90% unemployment)cause individuals to alter their decisions. Demonstrations offraming effects challenge a fundamental tenet of rational choicetheory and suggest that public opinion is so malleable thatit cannot serve as a useful guide to policymakers. In this articleI argue that most previous work overstates the ubiquity of framingeffects because it forces experimental participants to makedecisions in isolation from social contact and context. I presenttwo experiments where I show that some widely known framingeffects greatly diminish and sometimes disappear when participantsare given access to credible advice about how to decide. I discussthe implications of my findings for rational choice theory,and public opinion and public policy.     

Credible Collusion in Spatially Separated Markets*

In an infinitely repeated game, sellers employ a trigger strategy of mutual forbearance from invasion of each other's markets, stabilized against invasion by the threat of Bertrand pricing. Contrary to conventional static models, this article shows stability for a wide range of transportation costs and present value parameters, and that increases in transportation costs tend to destabilize the collusive agreement.     

Search Profiling With Partial Knowledge of Deterrence

Consider the choice of a profiling policy where decisions to search for evidence of crime may vary with observable covariates of the persons at risk of search. I pose a planning problem whose objective is to minimise the social cost of crime and search. The consequences of a search rule depend on the extent to which search deters crime. I study the planning problem when the planner has partial knowledge of deterrence. I show how the planner can eliminate dominated search rules and how he can use the minimax or minimax-regret criterion to choose an undominated rule.     

Deterrence, Lawsuits, and Litigation Outcomes Under Court Errors

This article presents a strategic model of liability and litigationunder court errors. Our framework allows for endogenous choiceof level of care and endogenous likelihood of filing and disputes.We derive sufficient conditions for a unique universally divinemixed-strategy perfect Bayesian equilibrium under low courterrors. In this equilibrium, some defendants choose to be grosslynegligent; some cases are filed; and some lawsuits are dropped,some are resolved out of court, and some go to trial. We findthat court errors in the size of the award, as well as damagecaps and split awards, reduce the likelihood of trial but increasefiling and reduce the deterrence effect of punitive damages.We derive conditions under which the adoption of the Englishrule for allocating legal costs reduces filing.     

Campaign War Chests, Entry Deterrence, and Voter Rationality

It is often claimed that the accumulation of "war chests" by incumbents deters entry by high–quality challengers in Congressional elections. This paper presents a game–theoretic analysis of the interaction between an incumbent, potential challengers, an interest group, and a representative (rational) voter, where the incumbent's "quality" (or "legislative effectiveness") is known to the interest group, but not to the voter or to potential challengers. Under certain conditions, a perfectly revealing equilibrium exists; the incumbent signals her quality by raising funds from the interest group to accumulate a war chest. The entry deterrence effect thus operates solely through the role of war chests in signaling incumbent quality.     

Credible redistributive policies and migration across U.S. states

We ask whether worker mobility has undermined the ability of U.S. states to redistribute income. We build a tractable model where both migration decisions and redistribution policies are jointly determined. Our model features a large number of heterogeneous regions and skilled and unskilled workers with idiosyncratic migration costs. The calibrated model is able to account for the main features of interstate migration, as well as some qualitative features of the cross-sectional distribution of redistributive policies. We conduct a counterfactual experiment in order to isolate the effect of worker mobility on state-level redistributive policies. We find that migration has induced substantial convergence in tax rates across U.S. states, but no race to the bottom. Interestingly, the degree of convergence has been much lower for transfers due to an offsetting tax-base effect.     

Word-Of-Mouth Communication and Community Enforcement

We study a repeated game where a seller, who has a short-term incentive to supply low quality, is periodically matched with a randomly selected buyer. Buyers observe only the outcomes of their neighbors' games and may receive signals from them. When the buyer population is large, the seller may sell high quality even when each buyer observes her action in any given period with an arbitrarily small probability. When networking among buyers is costly, low quality is always supplied with a positive probability. For this case, we characterize an equilibrium where the seller randomizes between high and low quality.     

Law Enforcement and Legal Presumptions

We compare two alternative legal presumptions, one more pro-defendant than the other, with the objective of reducing bureaucratic corruption to any target level at minimum social costs, broadly defined to include law enforcement costs, trial costs, and verdict error costs. In the absence of collusion possibilities between law enforcers and offenders, presumption of innocence involves lower social costs for low corruption targets while presumption of guilt has a cost advantage for high corruption targets. Allowing for collusion enlarges the corruption range over which the presumed innocence rule will dominate. However, there are two possible exceptions to this outcome, namely, if the government's law enforcement budget is limited and if the offenders can be penalized only up to a maximum permissible limit. In each of these cases, presumption of guilt may become the cost-effective rule. J. Comp. Econ., December 2001, 29(4), pp. 722–748. Bilkent University, Bilkent 06533, Ankara, Turkey; and Department of Economics and Finance, Birkbeck College, University of London, 7-15 Gresse Street, London W1T 1LL, United Kingdom. © 2001 Elsevier ScienceJournal of Economic Literature Classification Numbers: D73, D78, K41, K42.     

Tax Enforcement Problems

We study an income tax enforcement problem using a principal-agent model where the government sets the tax and inspection functions. These are announced to the agents and there is no commitment problem. The penalty function for dishonest taxpayers is given exogenously and satisfies certain social norms. We prove that, for a large family of penalty functions, this policy is such that honesty implies regressiveness. This result does not depend on the fact that agents know the true probability of inspection.