From “tax state” to “debt state”

The paper is motivated by Joseph A. Schumpeter's The Crisis of the Tax State. It inquires whether the buildup of government debt in peacetimeprosperity is a threat to the stability, existence or creation of viable tax states. The paper begins by setting out Schumpeter's conception of the tax state and the nature of recent political-economic events which have reinvigorated the concept. Next the paper sets out some simple debt dynamics and sketches a debt-induced business cycle arising from heavy reliance on debt finance in peacetimeprosperity. Finally, the paper assesses threats to the tax state in light of recent work on path dependence and positive feedback. An attempt is made to throw some light on whether the plethora of new, and often small, states spawned by the demise of communism can be viable tax states.Essay on Government, the Tax State and Economic Dynamics submitted to the Third Schumpeter Prize Competition.     

“Buy Domestic” Campaigns and Optimal Tariffs

This paper attempts to analyze the strategic use of optimal tariffs and to examine the effects of national bias on the optimal trade policy and social welfare in a two-country, two-good, price competition model derived from Neven et al. (1991). The major findings are as follows. (1) If all consumers prefer the domestic good, then buy domestic campaigns will decrease the prohibitive tariff rate and increase local welfare. (2) If at least some consumers prefer the foreign good, but not to a great extent, then buy domestic campaigns will not change the optimal tariff rate, but may improve local welfare. (3) When all consumers greatly prefer the foreign good, then promotion of buy domestic decreases the optimal tariff rate, but it cannot improve social welfare. With this framework, we also prove that buy domestic campaigns serve as a substitute for tariffs with respect to a strategic trade policy.     

Agency in a market setting

This paper examines a market in which a continuum of principals and agents interact in a game. Principals offer contracts while agents decide on sets of acceptable contracts. A mechanism from a class satisfying efficiency, unbiasedness, and continuity properties then matches principals and agents. With risk neutral agents, when the contribution of principals and agents to the total gains from trade in a pairing are additively separable, the equilibria of the game coincide with the competitive equilibria for the market. In particular, all contracts used in Nash equilibrium induce first-best effort levels. Both principals and agents have exogenous opportunities outside this market. In equilibrium, agents have endogenously determined outside opportunities available from employment by another principal, and this may be the binding participation constraint in a principal-agent pairing. The results are extended to special non-separable cases and to the case of identical risk averse agents.We are grateful to seminar participants at Indiana University, the University of Kentucky, and Vanderbilt University for comments on earlier versions of this work. Referees' comments led us to generalize the model and to more clearly specify the point of the paper.     

Climate Policies and Induced Technological Change: Which to Choose, the Carrot or the Stick?

Policies to reduce emissions of greenhousegases such as CO₂, will affect the rate andpattern of technological change in alternativeenergy supply and other production processes.Imperfections in markets for non-pollutingtechnologies imply that a decentralised economydoes not deliver a socially optimal outcome,and this could justify policy interventionssuch as subsidies. This paper considers thewelfare effects of technology subsidies as partof a carbon abatement policy package. We arguethat the presence of spillovers in alternativeenergy technologies does not necessarily implythat subsidy policies are welfare improving. Weillustrate this point in the context of ageneral equilibrium model with two forms ofcarbon-free energy, an existing alternative energy which is a substitute for carbon-basedfuels, and new vintage energy which providesa carbon-free replacement for existing energyservices. Subsidisation of alternative energyon the grounds of spillover effects can bewelfare-worsening if it crowds-out new vintagetechnologies.     

Ein ‚Wirtschaftswissenschafter‘ von heute über Wirtschaftswissenschaft von heute

Ohne ZusammenfassungIch bin den Herausgebern, der Schriftleitung und dem Verlag der Zeitschrift für Nationalökonomie zu besonderem Dank verpflichtet für die Veröffentlichung dieses Artikels, der im wesentlichen meine Stellungnahme zu dem im Weltwirtschaftlichen Archiv von 1954 erschienenen und in Anm. 2 genau zitierten Aufsatz A. Zottmanns Wirtschaftswissenschaft von heute? enthält.Daß ich nicht am nämlichen Ort antworten wollte, werden die Leser verstehen.     

Vertical and Horizontal Trust Networks in Bureaucracies: Evidence from the Third Reich

In a seminal contribution to the literature on bureaucracy, Breton and Wintrobe (The Logic of Bureaucratic Conduct: An Economic Analysis of Competition, Exchange, and Efficiency in Private and Public Organization. New York, NY: Cambridge University Press, 1982) develop a model wherein subordinates and superiors in a bureaucratic structure trade with each other to advance the objectives of the superiors. The success of such an organizational arrangement (for superiors) is based upon the development of vertical trust networks in a way that facilitates the promise of informal payments by superiors in return for informal services provided by their subordinates. Breton and Wintrobe [Journal of Political Economy 94 (1986) 905] also provide a theoretical application of their model by describing the Nazi bureaucracy as a conglomeration of competing agencies that zealously carried out the Final Solution to the Jewish question. As an extension, this note develops two compelling empirical examples of vertical and horizontal trust networks within the Nazi regime: Einsatzgruppen As (Special Action Detachments) attempt to liquidate all Lithuanian Jews after the German invasion of the U.S.S.R. in 1941 and the 20 July 1944 attempt to assassinate Adolf Hitler.JEL Classification: D23, D73.     

Strategy-proof and individually rational social choice functions for public good economies

Summary We consider the problem of choosing an allocation in an economy in which there are one private good and one public good. Our purpose is to identify the class of procedures of choosing an allocation which satisfy strategy-proofness, individual rationality, no exploitation and non-bossiness. Any such procedure is a scheme of semi-convex cost sharing determined by the minimum demand principle.I wish to thank Professors Salvador Barbera, Matthew Jackson, Herve Moulin and William Thomson for their helpful suggestions and two anonymous referees for their detailed comments. Conversations with Professors Hideo Konishi, Shinji Oseto Ken-ichi Shimomura and Stephen Ching were helpful. This work is supported by the Japan Economic Research Foundation and Research Grants PB89-0294 and PB89-0075 from the Direcion General de Investigacion Cientifica y Tecnica, Spanish Ministry of Education.     

Nachfragesysteme für österreich

Summary This paper gives an empirical reexamination of the Linear-Expenditure-hypothesis for Austria. It starts with a brief theoretical discussion of the principal properties and restrictions of the Linear-Expenditure-System (LES). To obtain empirical estimates of the parameters of the LES two different estimation procedures are applied, i.e. the original method used byStone and a simplified version of the Systems-Least-Squares-approach (following theMarquardt-algorithm). There are no essential differences between these estimates. They all seem plausible and satisfy the theoretical restrictions.Usually the stability (i.e. time-invariance) of the parameters is accepted without proof. Using the Moving-Window-Regression-technique, however, most of the estimates vary significantly in time. To obtain a direct proof of the time-dependence of the parameters the LES is reestimated now including trend-factors. Especially results considering time-dependent marginal-budget-shares are considerably better than the static-model results.The conclusion of this paper is that the static version of the LES does not explain the consumer behaviour in Austria and that much more effort should be spent on the estimation of dynamic demand systems.     

Inter-industry wage differentials and strategic trade policy

Recent studies suggest that inter-industry wage differentials exist which are neither caused by different endownments of the workers with human capital, nor by different working conditions, nor by institutional rigidities. Higher employment in high-wage sectors due to exports, therefore, raises welfare. According to empirical evidence presented here more likely than not net exports from sectors paying wage premia lead to some extra gains from trade (that cannot be explained by trade policy promoting primary sectors by high amounts of subsidies per employee) for the German economy. A case is made, however, against strategic trade policy in favour of these sectors pointing to uncertainty about the amount of the differentials, their international (dis)similarity, and their sources.

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Zusammenfassung Empirische Untersuchungen deuten darauf hin, daß auch in der Bundesrepublik Deutschland Arbeitskräfte mit gleicher Humankapitalausstattung, die unter gleichen Arbeitsbedingungen in Unternehmen gleicher Größe in einer Region arbeiten, unterschiedlich entlohnt werden, wenn sie in unterschiedlichen Sektoren arbeiten. Bestehen solche Sektorlohndifferentiale, dann hat eine Ausweitung der Beschäftigung in Hochlohnsektoren positive Wohlfahrtseffekte. Es wird daher vielfach gefordert, diese primären Sektoren vor internationaler Konkurrenz zu schützen und sie durch Subventionen zu fördern. Die vorliegende Arbeit präsentiert empirische Evidenz dafür, daß die Bundesrepublik Deutschland Extra-Gewinne aus dem Außenhandel bezieht, weil zwischen der Netto-Exportquote und der Höhe des Sektorlohndifferentials ein positiver Zusammenhang besteht, ohne daß sich die Subventionspolitik an diesen Differentialen orientiert. Gegen eine gezielte Förderung der Hochlohnsektoren im Rahmen einer strategischen Handelspolitik werden dann drei Argumente vorgebracht, die mit Unsicherheiten über Höhe, internationale Ähnlichkeit und Ursachen der Differentiale zusammenhängen.

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Earlier versions of this paper were presented at the annual meeting of the international economists' group of the Verein für Socialpolitik at Hohenheim University in May 1991, at the Sixth Annual Congress of the European Economic Association in Cambridge in September 1991, and at the Universities of Hamburg and Bielefeld. I would like to thank participants at the discussions and four anonymous referees for helpful comments. The usual disclaimer applies.     

Sector-specific capital, “Bang-bang” investment,and the Filippov solution

Bang-bang investment in a two-sector growth model with immobile capital is rational and leads to a unique and globally stable long-run equilibrium along a sliding trajectory. This steady state coincides with the stationary equilibrium in the traditional model with non-sector-specific capital.This article was written while the authors were visiting scholars at Cornell University. We gratefully acknowledge financial assistance from the Erasmus University Trust Fund and the Netherlands Scientific Organization. We would like to thank, without implicating, two anonymous referees, Martijn Herrmann, Jean-Marie Viaene, Claus Weddepohl, and the participants of seminars at the University of Maryland, the University of Montreal, and Erasmus University Rotterdam for perceptive remarks and useful comments. Jeroen Hinloopen and Rien Wagenvoort provided able graphical assistance. The views expressed in this article are those of the authors and not necessarily those of the World Bank.     

Some notes on trichotomous choice discrete valuation

For some respondents, the bid offered by the dichotomous choice format used in the discrete choice technique can in fact be the true optimum. In this case the correct answer is neither yes or no, but indifferent. We shall show results from a trichotomous choice format and analyse whether it produces welfare measures with narrower confidence intervals than the dichotomous technique. Another well known problem in contingent valuation (CV) studies is that the volume of the good to be purchased from hypothetical markets is not, in many cases, defined in precise terms. We show how the trichotomous choice technique can be used to test for possible vagueness in the volume of the project to be valued.     

Individual Decision Making in a Negative Externality Experiment

The experimental treatments analysed in this paper are simple in that there is a unique Nash equilibrium resulting in each player having a dominant strategy. However, the data show quite clearly that subjects do not always choose this strategy. In fact, when this dominant strategy is not a focal outcome it does not even describe the average decision adequately. It is shown that average individual decisions are best described by a decision error model based on a censored distribution as opposed to the truncated regression model which is typically used in similar studies. Moreover it is shown that in the treatments where the dominant strategy is not focal dynamics are important with average subject decisions initially corresponding to the focal outcome and then adjusting towards the Nash prediction. Overall, 66.7% of subjects are consistent with Payoff Maximization, 27.8% are consistent with an alternate preference maximization and 5.6% are random.     

Austrian economic policy

Zusammenfassung Die österreichische Wirtschaftspolitik wird in Österreich vielfach als austro-keynesianisch etikettiert. Der vorliegende aufsatz versucht zu zeigen, daß das Keynesianische dieser Politik nicht in einer Stop-and-go-Politik besteht, was üblicherweise als Keynesianismus bezeichnet wird. Vielmehr zielt die österreichische Wirtschaftspolitk darauf ab, intrinsische Instabilitäten des Marktprozesses als Folge von Unsicherheiten oder wechselnden Erwartungen durch gesamtwirtschaftliche Arrangements zu reduzieren: Sozialpartnerschaft, stabiler Finanzsektor, Unabhängigkeit der Investitionsentscheidungen von monetären Faktoren sowie Dominanz automatischer Stabilisatoren. Diese Reduktion von Marktinstabilitäten kann als fundamentale Politikempfehlung Keynes' angesehen werden.Der Terminus Austro in der Bezeichnung der österreichischen Wirtschaftspolitik weist darauf hin, daß es ein hausgemachtes Konzept ist, welches neben keynesianischen Elementen auch klassische Relikte, neoklassische Erweiterungen, monetaristische Vermutungen oder einfach Wirtschaftspolitik à la Hausverstand beinhaltet. Dies gilt insbesondere für eine Vielzahl von selektiven Eingriffen wie Investitions-, Spar- oder Exportförderung. Gemeinsam ist diesen selektiven Eingriffen, daß sie üblicherweise als Erklärungen für die Erfolge der österreichischen Wirtschaftspolitik herangezogen werden; der konkrete Beweis hiefür steht jedoch aus.Der Aufsatz unternimmt den Versuch, das austro-keynesianische Konzept theoretisch wie auch empirisch kritisch zu prüfen.

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Revised joint version of two papers presented at the Premier colloque du Club européen des associations d'économistes: Les politiques économiques des années 1980, Paris, March 1983. The conference volume will be published under the editorship of P. Maillet, Association Française de Science Economique.     

Exchange rates and bertrand oligopoly

The impact of exchange-rate changes on industrial prices seems ambiguous. Incomplete and even perverse pass-through has been observed: the import prices in the depreciating country decrease while those in the appreciating country increase. To explain these counterintuitive price reactions we consider a situation of international Bertrand competition: two firms, based in different countries, are selling in both countries simultaneously. The profit-maximizing duopolists set the prices for their products in each of the two markets which are segmented on the demand side. We then study the qualitative effect of an exogenous exchange-rate change on the Bertrand-Nash equilibrium. Under the strong assumption of linear demand and cost functions we have normal exchange-rate pass-through. However, allowing for more general cost structures in this simple static model enables us to show that the import prices in both countries might move in counterintuitive directions.     

Fully endogenous mechanism selection on finite outcome sets

Summary This paper defines a choice process over social outcomes in which agents choose the institutional rules ormechanisms themselves without outside interference. Truly endogenizing the mechanism selection process in this way, however, involves facing an infinite regress problem in which outcomes are chosen by games which are themselves chosen by games, ad infinitum. This paper allows the possibility of such an infinite regress which we callfully endogenous mechanism selection.We introduce the notion ofFree Choice which restricts the class of mechanisms in the regress to those which prevent agents from being locked in to an equilibrium outcome by the actions of others. Under this condition, the infinite regress is shown to get truncated with the number of selection iterations endogenously determined. It turns out that the outcomes resulting from a Free Choice-constrained regress are (Weakly) Pareto optimal; in particular, these outcomes solve a weighted Rawlsian Maxmin criterion. We also show that these outcomes are invariant to the equilibrium concept used to evaluate games in the regress.This paper is based on the author's dissertation from the University of Minnesota (November, 1989).I am very grateful for the guidance, advice, and encouragement from my advisor, Marcel K. Richter, and for the many helpful suggestions from David Levine. I have also benefited from conversations with Nabil Al-Najjar, Gerhard Glomm, Leonid Hurwicz, James Jordan, Ramon Marimon, Andrew McClennan, Ariel Rubinstein, and William Thomson.     

Risk Aversion, Intergenerational Equity and Climate Change

The paper investigates a climate-economy model with an iso-elastic welfare function in which one parameter measures relative risk-aversion and a distinct parameter measures resistance to intertemporal substitution.We show both theoretically and numerically that climate policy responds differently to variations in the two parameters. In particular, we show that higher but lower leads to increase emissions control. We also argue that climate-economy models based on intertemporal expected utility maximization, i.e. models where = , may misinterpret the sensitivity of the climate policy to risk-aversion.     

Auction markets for dispatchable power: How to score the bids

Competitive bidding for electric generating capacity is becoming based on economic dispatch rather than the PURPA must-take norm. Incorporating economic dispatch into bidding requires different price scoring procedures. The avoided cost of a dispatchable project is determined by the energy price offered. Price scoring methods based on a percentage of avoided cost approach are uneconomically biased against baseload projects, because they neglect the duration effects of their dispatch. This bias is illustrated in a simple model of economic dispatch. A number of utilities use the percentage of avoided cost method for dispatchable capacity. They can correct the bias by using a net benefits per kW measure of economic value.     

Corporate Lobbying, Regulatory Conduct and the Porter Hypothesis

Michael Porter, the influential Harvard management guru, has promoted the idea that compliance with stricter environmental regulations can afford secondary benefits to firms through improved product design, innovation, corporate morale and in other ways. Once these secondary benefits are factored, the net cost of compliance is argued to be lower than conventionally thought and may even be negative. Whilst environmental economists have rejected the Porter Hypothesis as being based on excessively optimistic expectations of the likely size of such secondary benefits the underlying ideas do enjoy significant credence in the business community. In the context of a lobbying model of regulatory policy-making we argue that the EPA should change the way it conducts regulatory policy to take account of Porter's views – even if it knows those views to be misguided. The model serves to illustrate the more general point that fashions in management thinking can be expected to impact the optimal conduct of regulatory policy.     

Wilhelm Weber—50 Jahre

Ohne ZusammenfassungFerner zahlreicheBuchbesprechungen, insbesondere in der Zeitschrift für Nationalökonomie, und Zeitungsartikel.     

The measurement of entry rates: Recondiseration and resolution

This paper extends the recent analysis of Audretsch and Fritsch on entry rates, and suggests a resolution to the possible policy confusion which they discuss. British data also show very different results for the determinants of entry depending on whether the ecological or labour market entry rate is used. It is shown that, in addition to the static, size-distribution effect discussed by Audretsch and Fritsch, there are dynamic factors at work which may lead to this result. However, there need be no conflict in policy signals arising from this, because the labour market approach can be shown to be a superior measure of entry rates where spatial analysis is undertaken.