Fiscal policy as a temptation control device: Savings subsidy and social security

In an environment where individuals suffer from temptation and self-control problems, there are induced preferences for commitment devices. We show that the savings subsidy and social security programs can be properly designed to mitigate the adverse effect of succumbing to temptation and release severity of self-control. Moreover, we disentangle the mechanics behind the two fiscal programs and find that the driving forces are quite different. Welfare gains associated with a social security program result mainly from releasing self-control costs. Conversely, welfare gains associated with a savings subsidy program are mainly driven by mitigating inter-temporal allocation distortions. Interestingly, the direction and size of welfare effects vary substantially when general equilibrium channels are in play. Our results have implications for designing an effective temptation control device using fiscal policy.     

Voting as a signaling device

In this paper, citizens vote in order to influence the election outcome and in order to signal their unobserved characteristics to others. The model is one of rational voting and generates the following predictions: (i) The paradox of not voting does not arise, because the benefit of voting does not vanish with population size. (ii) Turnout in elections is positively related to the importance of social interactions. (iii) Voting may exhibit bandwagon effects and small changes in the electoral incentives may generate large changes in turnout due to signaling effects. (iv) Signaling incentives increase the sensitivity of turnout to voting incentives in communities with low opportunity cost of social interaction, while the opposite is true for communities with high cost of social interaction. Therefore, the model predicts less volatile turnout for the latter type of communities.     

Redistribution as a selection device

This paper studies the role of the wealth distribution for the market selection of entrepreneurs when agents differ in talent. It argues that the redistribution of initial endowments can increase an economy's surplus because more talented individuals get credit for their risky investment projects. Moreover, the redistribution of initial endowments may lead to a Pareto-improvement although all agents are non-satiable. An agent's entrepreneurial ability is his private information and there is moral hazard in production. I find conditions such that unproductive rich entrepreneurs crowd out productive poor ones on the capital market. Then redistribution of initial endowments may lead to a new equilibrium where market participants are better informed about the entrepreneurs’ ability. The new equilibrium is characterized by (i) the selection of better entrepreneurs, (ii) a higher riskless rate of return on capital, (iii) lower repayments of successful entrepreneurs to their creditors and (iv) the fact that all agents are better off.     

Antidumping law as a collusive device

Abstract. In the United States many antidumping petitions are withdrawn before the investigations are completed. Prusa (1992) argues that petitions are used by domestic industries to induce foreign industries into collusive agreements. In his model, all antidumping petitions should be withdrawn, which is not the case. This paper provides a model in which only some petitions are withdrawn. Withdrawal depends on two key parameters: coordination cost and bargaining power of domestic and foreign industries. A new data set is constructed to test the model on the U.S. experience for the period 1980–97. The econometric analysis supports the theoretical conclusions of the model. JEL classification: F13; D43     

Excess capacity as a policing device

A great deal of recent work has been devoted to the question of whether an incumbent firm can successfully deter entry by investing in excess capacity. This paper demonstrates that a dominant firm may invest in excess capacity even when it is certain that this will not deter entry. Rather, the excess capacity is held by the dominant firm in order to ensure that its competitors will exercise appropriate restraint in their own output decisions. An example is provided that illustrates that the rate of return on the capital invested in excess capacity may be very high.     

Advance-purchase discounts as a price discrimination device

In an intertemporal setting in which individual uncertainty is resolved over time, advance-purchase discounts can serve to price discriminate between consumers with different expected valuations for the product. Consumers with a high expected valuation purchase the product before learning their actual valuation at the offered advance-purchase discount; consumers with a low expected valuation will wait and purchase the good at the regular price only in the event where their realized valuation is high. We characterize the profit-maximizing pricing strategy of the monopolist. Furthermore, adopting a mechanism design perspective, we provide a necessary and sufficient condition under which advance-purchase discounts implement the monopolist's optimal mechanism.     

Remittances as a social status signaling device

Like all human beings, migrants may have a concern about their prestige or social status in the eyes of left-home family and friends. They can remit money in order to signal their economic success and increase their status. We show that if migrants’ income is private information, unsuccessful migrants might accept a worsening of their living conditions and send back home large amounts of remittances only in order to make residents believe that they are successful. In some cases, successful migrants can signal their true favorable economic situation by remitting an even larger amount. The game presents various equilibria that differ with respect to the proportion and nature of the migrants who sacrifice consumption opportunities to status revealing actions.     

Profit sharing as a worker discipline device

A synthesis of profit-sharing and efficiency wage models is constructed to provide a preliminary account of how a firm determines its pay parameters, and why it chooses to be a profit-sharing or a fixed-wage firm. We find that the properties of the worker's effort function crucially influence the firm's choices between different compensation systems, and that the adoption of a profit-sharing scheme cannot guarantee the attainment of full employment. Other findings of the paper also seem to be very different from those of Weitzman's share model.     

Advertising as special service provision under non-price vertical restraints: exclusive territories in beer distribution

This article presents statistical evidence which supports Lester Telser's 1960 hypothesis, that when vertical restraints are made illegal, intrabrand competition results which diminishes the provision of point-of-sale, special services. This results because of the public goods problem exhibited by the special services. Increased special service provision by the national manufacturer must then substitute for the special service provision left unfilled by the wholesaler. Evidence relating to the efficacy of such substitution is also presented.     

Firm size distribution under horizontal and vertical innovation

This paper studies the firm size distribution arising from an endogenous growth model of quality ladders with expanding variety. The probability distribution function of a given cohort is a Poisson distribution that converges asymptotically to a normal of log size. However, due to firm entry propelled by horizontal R&D, the total distribution—i.e., when the entire population of firms is considered—is a mixture of overlapping Poisson distributions which is systematically right skewed and exhibits a fatter upper tail than the normal distribution of log size. Our theoretical results qualitatively match the empirical evidence found both for the cohort and the total distribution, and which has been presented as a challenge for theory to explain. Moreover, by obtaining a total distribution with a gradually increasing average over a long time span, the model is able to address complementary empirical evidence that points to a total distribution subtly evolving over time.     

Dual labor market hypothesis and long-run income distribution

We construct a dynamic model of dual labor market, incorporating firm investment behavior and household investment behavior on education. Education enhances the trainability of individuals and thus provides qualifications for entry into the primary market. Two specifications of the model, differing in the nature of the new entrants' market, are presented; one admitting competitive adjustment in the scarcity premium of qualified entrants, while the other, a generalization of Thurow's job competition model, allocates employment through rationing. We obtain sharply different long-run determinants of income distribution between these alternative models. The result extends and qualifies existing interpretations on the schooling paradox observed in the U.S.     

Debt as a collusive device in an oligopoly supergame

This paper explores the impact of debt holdings on the output decisions of firms in an oligopoly supergame with stochastic demand fluctuations. It is demonstrated that when perfect collusion is not feasible then there exist circumstances in which increased debt holdings may facilitate tacit collusion. This occurs because higher debt levels act as a credible commitment device which lowers the payoffs accruing to a firm when it defects from the tacitly collusive equilibrium. It is further shown that in these circumstances firms may have an incentive to hold debt for strategic purposes which promote collusion.     

A note on Keynesian unemployment as a worker discipline device

Keynesian sales constraints are introduced into a model with endogeneous wages and involuntary equilibrium umemployment. The result is a lower real wage and a higher unemployment rate.     

Equilibrium unemployment as a discipline device when finding employment is costly

Abstract In this paper, we study a model that incorporates costly job search into an efficiency wage model. We show that the relationship between wages and detection rates is ambiguous in this framework. The model can generate a positive relationship, consistent with empirically reasonable values for unemployment rates, job finding rates, and employment duration.     

The normal distribution as a model of technological substitution

A model for forecasting technological substitution, based on the use of the normal distribution, is presented. Both mathematical and graphical techniques are discussed. Examples from the literature are used to illustrate the model.     

Marketing an upgrade to a system: compatibility choice as a price discrimination device

This paper analyzes the different ways in which an innovator can market an upgrade for a basic system when the market for this system is mature and there are two different technological platforms: the innovator’s and a rival’s. Different compatibility choices result in different product lines and yield varying price discrimination opportunities. The paper studies what are the limits to the enforcement of these opportunities and concludes by showing what is the profit maximizing product line choice when consumers are brand loyal. This choice depends on the initial market share of the innovator and on the enhancement of quality that the upgrade provides.     

Dual interpersonal comparisons of utility and the welfare economics of income distribution

Interpersonal comparisons can be of utility levels and/or of utility differences. Comparisons of levels can be used to define equity in distributing income. Comparisons of differences can be used to construct an additive Bergson social welfare function over income distributions. When both utility levels and utility differences are compared, one can require the constructed additive Bergson social welfare function to indicate a preference for more equitable income distributions. This restricts the form of both the individual utility functions and the optimal distribution of income. The form of these restrictions depends on whether the levels and differences of the same utility functions are being compared.     

Notes and comments. On the sustainability area as a simplifying didactic device

Recently, the sustainability area of public finance has beenlaunched as a simplifying screening device for the analysisof fiscal sustainability. In this comment, it is argued thatthe novel notion of the sustainability area (reflecting, inturn, a simple notion of public debt sustainability) does not,by itself, have any bearing on the sustainability of publicfinances: being positioned within the sustainability area cannotserve as a reasonable criterion of fiscal sustainability.     

Focusing device as innovation mechanism and cluster growth

This paper models a focusing device of innovation in which a cluster has an o-ring type production function and each technology component endogenously upgrades its quality. We show that provided the magnitude of innovation is the same across technology components, competitive equilibrium is an efficient mechanism by which core technology-driven innovations emerge with expanding inequality among clusters. Our result is in sharp contrast to bottleneck-removed innovation which is widely accepted. The inefficiency arises, however, when low-powered incentives, such as cost plus contracting, are employed to reward innovation. In this case, the corresponding factor price provides erroneous information regarding the potential benefits of innovation, which should be corrected by some form of policy intervention.     

The Weibull distribution as a general model for forecasting technological change

This paper presents a simple and widely applicable model for technological forecasting using the Weibull distribution function. It shows the generality of the Weibull function, which can accommodate different patterns of technological change. A method for estimating parameters and some applications are presented to illustrate the usefulness of the model.