Fair welfare maximization

We consider the general problem of finding fair constrained resource allocations. As a criterion for fairness we propose an inequality index, termed “fairness ratio,” the maximization of which produces Lorenz-undominated, Pareto-optimal allocations. The fairness ratio does not depend on the choice of any particular social welfare function, and hence it can be used for an a priori evaluation of any given feasible resource allocation. The fairness ratio for an allocation provides a bound on the discrepancy between this allocation and any other feasible allocation with respect to a large class of social welfare functions. We provide a simple representation of the fairness ratio as well as a general method that can be used to directly determine optimal fair allocations. For general convex environments, we provide a fundamental lower bound for the optimal fairness ratio and show that as the population size increases, the optimal fairness ratio decreases at most logarithmically in what we call the “inhomogeneity” of the problem. Our method yields a unique and “balanced” fair optimum for an important class of problems with linear budget constraints.     

Individual sense of fairness: an experimental study

Many prior studies have identified that subjects in experiments demonstrate preferences for fair allocations. We present an experimental study designed to test whether a similar concern for fairness manifests itself when the decision maker is choosing among differing probabilistic allocation mechanisms that will all generate an ex post unfair allocation by assigning an indivisible prize to one individual. This investigation is inspired by Karni and Safra (Econometrica, 70, 263–284, 2002 ) in which a structure for preferences for fairness in such an environment was developed. Here we use this model to design experiments that allow us to test for the presence of concern for fairness in individual choice behavior and examine some factors that may affect the intensity of the concern for fairness.

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Altruism in Anonymous Dictator Games

We conduct double-anonymous dictator experiments to explore the role of altruism in motivating subjects' behavior. We vary the extent to which an anonymous recipient is deserving of aid and investigate its effect on the allocation of a fixed pie by student subjects. This is accomplished by including as treatments: (1) an anonymous student subject and (2) an established charity. We find that a significant increase in donations occurs when we increase the extent to which a donation goes to a recipient generally agreed to be “deserving.” We conclude that subjects are rational in the way they incorporate fairness into their decisions.Journal of Economic LiteratureClassification Numbers: A13, C91, D64.     

Two criteria for social decisions

This paper studies the ethical underpinnings of two social criteria which are prominent in the literature dealing with the problem of evaluating allocations of several consumption goods in a population with heterogenous preferences. The Pazner-Schmeidler criterion [Pazner-Schmeidler, Egalitarian equivalent allocations: a new concept of economic equity, Quart. J. Econ. 92 (1978) 671-687] and the Egalitarian Walras criterion [Fleurbaey and Maniquet, Utilitarianism versus fairness in welfare economics, in: M. Salles, J.A. Weymark (Eds.), Justice, Political Liberalism and Utilitarianism: Themes from Harsanyi and Rawls, Cambridge University Press, Cambridge, 1996, forthcoming] are prima facie quite different. But it is shown here that these criteria are related to close variants of the fairness condition that an allocation is better when every individual bundle in it dominates the average consumption in another allocation. In addition, the results suggest that the Pazner-Schmeidler criterion can be viewed as the best extension of the Walrasian criterion to non-convex economies.     

On the fair division of greenhouse gas abatement cost

This paper introduces a solution for the fair division of emission reduction costs in the climate change regime. Our primary focus is on the fair division of efficiency gains that arise from exchanging the initial allocation of emission entitlements, rather than the initial allocation itself. We propose to complement the competitive Walrasian solution with welfare bounds, the ethical justification of which rests on commonality of ownership. Simulations with an intertemporal computable general equilibrium model illustrate the relevance of such welfare bounds. For a wide range of initial allocations of emission entitlements – including an equal per capita allocation – we find that developing countries should be fully compensated for their emission abatement efforts, but should not receive any further transfers.     

Economics and emotion: Institutions matter

In two different types of institutions, English and Dutch auctions, we collect heart rate data, a proxy for emotion, to test hypotheses based on findings in neural science about the effect of emotion on economic behavior. We first demonstrate that recording heart rates does not distort prices in these auctions. Next we ask if knowledge of the intensity of a participant's emotional state improves our ability to predict price setting behavior beyond predictions of price based on usual economic variables. Our answer is that “institutions matter.” In the Dutch (English) auctions we find (no) evidence that knowledge of emotional intensity affects our ability to predict price setting behavior. We then entertain the proposition that the cardiac system is an information system that processes economic events. We are able to show that this hypothesis is consistent with our observations and furthermore that the processes differ across institutions.     

Does uncertainty justify intensity emission caps?

Environmental policies often set “relative” or “intensity” emission caps, i.e. emission limits proportional to the polluting firm's output. One of the arguments put forth in favour of relative caps is based on the uncertainty on business-as-usual output: if the firm's production level is higher than expected, so will be business-as-usual emissions, hence reaching a given level of emissions will be more costly than expected. As a consequence, it is argued, a higher emission level should be allowed if the production level is more important than expected. We assess this argument with a stochastic analytical model featuring two random variables: the business-as-usual emission level, proportional to output, and the slope of the marginal abatement cost curve. We compare the relative cap to an absolute cap and to a price instrument, in terms of welfare impact. It turns out that in most plausible cases, either a price instrument or an absolute cap yields a higher expected welfare than a relative cap. Quantitatively, the difference in expected welfare is typically very small between the absolute and the relative cap but may be significant between the relative cap and the price instrument.     

Dissolving a partnership (un)fairly

Summary. In an incomplete information, common values setting with risk-neutral agents, we consider mechanisms for allocating the assets of a dissolving partnership where the mechanism designer has no information about the distribution of signals of the agents. We find that the divide and choose mechanism systematically favors the chooser and hence fails on the grounds of fairness. We also examine the fairness properties of the winning and losing bid auctions and show that they systematically favor winning (resp. losing) bidder in ex post allocation of surplus. Finally, we show that a binding arbitration mechanism implements fair allocations.Received: 17 May 2002, Revised: 5 June 2003, JEL Classification Numbers: D39, D44I thank an anonymous referee for extremely helpful suggestions. I also gratefully acknowledge the support of the National Science Foundation and the Hoover Institution.     

Cooperation through imitation

This paper characterizes long-run outcomes for broad classes of symmetric games, when players select actions on the basis of average historical performance. Received wisdom suggests that when agent's interests are partially opposed, behavior is excessively competitive: “keeping up with the Jones' ” lowers everyones' welfare. Here, we study the long-run consequences of imitative behavior when agents have sufficiently long memories and evaluate past actions in terms of (weighted) average payoff. Imitation robustly leads to cooperative outcomes (with highest symmetric payoffs) in the long run. Furthermore, lengthening memory reinforces this effect. This provides a rationale, for example, for collusive cartel-like behavior without collusive intent.     

The economics of shortage and problems of reform in Chinese industry

This paper employs the economics of shortage framework to examine post-Mao reforms in Chinese state-owned industry. Performance has been disappointing because reforms through 1985 failed to fundamentally alter economic agent behavior. The “soft” budget constraints at the enterprise and local government levels continue to generate “quantity” and “expansion” drives. The resultant inflationary pressures have necessitated administrative interventions and thwarted reform progress. The Maoist legacy of active participation by local governments in economic management is high-lighted as a major obstacle to the elimination of paternalism in state-enterprise relations.     

Mechanism design with partial state verifiability

We study implementation in environments where agents have limited ability to imitate others. Agents are randomly and privately endowed with type-dependent sets of messages. So sending a message becomes a partial proof regarding type. For environments where agents can send any combination of available messages, we develop an Extended Revelation Principle and characterize the incentive constraints which implementable allocations must satisfy. When not all message combinations are feasible, static mechanisms no longer suffice. If a ‘punishment’ allocation exists for each agent, then implementable allocations can be characterized as equilibria of a “Revelation Game,” in which agents first select from the menus of allocation rules, then the mediator requests each agent to send some verifying messages. When a punishment allocation fails to exist for some agent, dynamic games in which agents gradually reveal their evidence implement a larger set of outcomes. The latter result provides a foundation for a theory of debate.     

Coping with Technology Divergence Policies and Strategies for India’s Industrial Development

Recent studies on innovation have demonstrated the relationship between technology and growth. However, as most of them are centered on the experience of the highly industrialized nations, a different approach to technology policy must be taken. As late industrializers, developing countries lag in adopting foreign technologies. Institutional factors and economic policy also influence the diffusion process. With decentralized decision making, the coexistence of diverse technologies in a given industrial branch is inevitable. Consequently, social costs tend to be high because of duplication of efforts, reduced learning opportunities, and adoption of inefficient technologies. This article examines the coexistence of diverse technologies leading to technology fragmentation in India’s steel industry. Recent innovative behavior in the Japanese and Korean steel industry indicates that the effects of fragmentation can be contained through a policy of “system integration.” This is an institutional process by which industry-specific applications of scientific knowledge are fused with basic research itself. This demands a forward-looking policy that rejuvenates older industries, such as steel, in socially acceptable ways and organically creates new knowledge for national development and social welfare.     

Run equilibria in the Green–Lin model of financial intermediation

We study the Green–Lin model of financial intermediation [E.J. Green, P. Lin, Implementing efficient allocations in a model of financial intermediation, J. Econ. Theory 109 (2003) 1–23] under a more general specification of the distribution of types across agents. We derive the efficient allocation in closed form. We show that, in some cases, the intermediary cannot uniquely implement the efficient allocation using a direct revelation mechanism. In these cases, the mechanism also admits an equilibrium in which some (but not all) agents “run” on the intermediary and withdraw their funds regardless of their true liquidity needs. In other words, self-fulfilling runs can arise in a generalized Green–Lin model and these runs are necessarily partial, with only some agents participating.     

Bundling, product choice, and efficiency: Should cable television networks be offered à la carte?

We conduct a numerical analysis of bundling’s impact on a monopolist’s pricing and product choices and assess the implications for consumer welfare in cable television markets. Existing theory is ambiguous: for a given set of products, bundling likely transfers surplus from consumers to firms but also encourages products to be offered that might not be under à la carte pricing. Simulation of “Full À La Carte” for an economic environment calibrated to an average cable television system suggests that consumers would likely benefit from à la carte sales. If all networks continued to be offered, the average household’s surplus is predicted to increase by $6.80 (65.6%) under à la carte sales (despite a total bundle price that almost doubles) and reduced network profits would have to be such that 41 of 50 offered cable networks have to exit the market to make her indifferent. Simulation of a “Theme Tier” scenario provides intermediate benefits. The incremental marginal costs to cable systems of à la carte sales and its impact in the advertising market and on competition are important factors in determining consumer benefits.     

The pace of fiscal consolidations,fiscal sustainability,and welfare: An overlapping generations approach

This study investigates expenditure- and tax-based consolidations under the rule of reductions in debt-to-GDP ratios to the target level and the effects of these consolidations on fiscal sustainability and welfare, using an overlapping generations model with exogenous growth settings. We derive (i) a threshold (ceiling) of public debt to ensure fiscal sustainability, (ii) sustainable paces of these consolidations, and (iii) the optimal pace of consolidations under both expenditure- and tax-based consolidations, examining whether these consolidations are effective in the sense that they are sustainable, increase welfare, and induce fairness of welfare distribution across generations (lower intergenerational conflicts over welfare). We find that the pace of tax-based consolidation required to ensure fiscal sustainability is higher than that required for expenditure-based consolidation. As for welfare, countries may differ in their choice of the type of consolidation, which depends on the size of outstanding debts relative to capital, the economy’s productivity, tax rate levels, and the extent of utility derived by individuals from public goods and services. More importantly, it may also depend on whether policymakers emphasize social welfare or fairness of welfare distribution between generations. By contrast, a common result from the viewpoints of both social welfare and fair distribution of welfare across generations is that fiscal consolidation cannot persist much longer than 30 years (one period in the model). This result will support the pace of consolidation in the EU: the Stability and Growth Pact.     

Technological Progress: A Proposed Measure

The article suggests a direct measure of technological progress that can be quantified with reasonable confidence on the basis of historical data. The proposed measure is the efficiency with which resources (mainly energy sources) are converted into final services. It decomposes into two components, namely the thermodynamic efficiency of converting an energy source into mechanical work and the efficiency with which mechanical work is used to produce final services. The first part of this can be estimated, by sector, with fair accuracy. The second part can only be estimated with reasonable accuracy in a few cases (such as transportation and illumination), but the results are sufficient to permit some plausible extrapolation. The proposed measure is hopefully of interest in itself. But perhaps it is more important insofar as it suggests a way to construct an economic production function that explicitly reflects technological change, rather than treating “technical progress” as an unexplained residual.     

A social welfare function characterizing competitive equilibria of incomplete financial markets

A classic characterization of competitive equilibria views them as feasible allocations maximizing a weighted sum of utilities. It has been applied to establish fundamental properties of the equilibrium notion, such as existence, determinacy, and computability. However, it fails for economies with missing financial markets.We give such a characterization for economies with a single commodity and missing financial markets, by an amended social welfare function. Its parameters capture both the relative importance of households welfare, through the classic welfare weights, as well as the disagreements among them as to the value of the missing markets.As a by-product, we identify the dimension of the set of interior equilibrium allocations.     

The Manipulability of Fair Solutions in Assignment of an Indivisible Object with Monetary Transfers

Public decision making often involves the problem of fairly assigning one indivisible object to agents with monetary transfers. An example is the choice of the location of a garbage incineration facility where the accepting district should receive fair compensations from other districts. In this problem, we show that for broad classes of solutions satisfying a welfare lower bound and an efficiency‐oriented condition, the set of equilibrium allocations in the manipulation game associated with a given solution coincides with the set of all envy‐free allocations. This generalizes Tadenuma and Thomson's equivalence result for a class of envy‐free solutions. Our result covers the Shapley value, which is not covered by Tadenuma and Thomson's result.     

“Fair marriages”: An impossibility

For marriage markets [Gale, D. and Shapley, L.S., 1962, College admissions and the stability of marriage, American Mathematical Monthly 69, 9–15.] so-called fair matchings do not always exist. We show that restoring fairness by using monetary transfers is not always possible: there are marriage markets where no amount of money can guarantee the existence of a fair allocation.     

In defense of health-based standards

This paper explores the utilitarian ethical foundations underlying two standards for pollution control: an efficiency standard and a health-based standard. The main point is that a health-based standard can be defended quite easily on utilitarian grounds; safety proponents need not be self-serving, irrational nor ignorant. Criticism of health-based standards as “too costly” is not always persuasive since material consumption is not the only component of social welfare, nor do consumption increases necessarily increase social welfare.