Contracts and externalities: How things fall apart

A single principal interacts with several agents, offering them contracts. The crucial assumption of this paper is that the outside-option payoffs of the agents depend positively on how many uncontracted or “free” agents there are. We study how such a principal, unwelcome though he may be, approaches the problem of contract provision to agents when coordination failure among the latter group is explicitly ruled out. Two variants are considered. When the principal cannot re-approach agents, there is a unique equilibrium, in which contract provision is split up into two phases. In phase 1, simultaneous offers at good (though varying) terms are made to a number of agents. In phase 2, offers must be made sequentially, and their values are “discontinuously” lower: they are close to the very lowest of all the outside options. When the principal can repeatedly approach the same agent, there is a multiplicity of equilibria. In some of these, the agents have the power to force delay. They can hold off the principal's overtures temporarily, but they must succumb in finite time. In both models, despite being able to coordinate their actions, agents cannot resist an “invasion” by the principal and hold to their best payoff. It is in this sense that “things [eventually] fall apart”.     

The double trap: Institutions and economic development

The empirical growth literature has established that institutional quality is a deep determinant of economic growth. We examine whether institutional quality in low income countries converges to the level witnessed in high income countries, or whether they are trapped in convergence clubs that stagnate or even deteriorate over time. Using the log-t-test suggested by Phillips and Sul (2007), we find evidence of multiple equilibria in institutional quality, with several countries stuck in poor quality institutions traps. We further find that per capita incomes of some of the developing countries are also stuck in low-level traps. Finally, using bivariate probit estimations, we establish that poor institutional traps are major determinants of low income traps. These results indicate that these countries are caught in a double trap where their incomes are stuck in low-level traps from which it is difficult to escape, because the institutions that enable growth are also stuck in low-quality traps.     

Poverty traps,aid, and growth

This paper examines the empirical relevance of the poverty trap view of underdevelopment. We calibrate simple aggregate growth models in which poverty traps can arise due to either low saving or low technology at low levels of development. We then assess the empirical relevance of these specific mechanisms and their consequences for policy. We find little evidence of the existence of poverty traps based on these two mechanisms. When put to the task of explaining the persistence of low income in African countries, the models require either unreasonable values for key parameters, or else generate counterfactual predictions regarding the relations between key variables. These results call into question arguments in favour of a large scaling-up of aid to the poorest countries that are premised on the existence of such poverty traps.     

Equilibria in systems of social interactions

In this paper, we establish existence and uniqueness results for equilibria in systems with an infinite number of agents and with local and global social interactions. We also examine the structure of the equilibrium distribution and derive a “Markov”property for the equilibrium distribution of a class of spatially homogeneous systems.     

THE SIZE AND DISTRIBUTION OF THE POVERTY GAP IN CANADA: A MICRO ANALYSIS OF VARIATIONS AMONG DEMOGRAPHIC GROUPS

Poverty is a much used term by politicians, economists, sociologists, the media and interest groups. Although there is some common consensus that the word poverty means some type of deprivation, there is a lack of comprehensive measures to quantify this term. Although deprivation can relate to a number of areas such as health and education, the focus in policy development has been aimed at economic deprivation or more specifically, income adequacy. Even in this perspective, the availability of comprehensive measures are limited. The United States is the only major industrial nation that has an official poverty line. Several unofficial poverty lines have been developed in Canada, but the poverty measures have not gone beyond head counts of people who fall below these lines. In an environment where the goal is to further progressive social development constrained by inadequate public resources, the emphasis has been on first directing scarce resources to those "most in need". To get a better perception of economic need, this paper provides a micro analysis of the size and distribution of the poverty gap so that meaningful comparisons can be made between demographic groups. The results of this analysis yield some interesting findings. For example, there are virtually no poor elderly couples and although there are a large number of poor single elderly, their income shortfalls are relatively small and are highly concentrated near the poverty line; the poverty rate among families with children is quite low but their incomes on average fall well below the poverty line and are widely dispersed; and single parents fare badly on all measures.     

Work values,endogenous sentiments redistribution

We examine the interactions between individual behavior, sentiments and the social contract in a model of rational voting over redistribution. Agents have moral “work values”. Individuals' self-esteem and social consideration of others are endogenously determined comparing behaviors to moral standards. Attitudes toward redistribution depend on self-interest and social preferences. We characterize the politico-economic equilibria in which sentiments, labor supply and redistribution are determined simultaneously. The equilibria feature different degrees of “social cohesion” and redistribution depending on pre-tax income inequality. In clustered equilibria the poor are held partly responsible for their low income since they work less than the moral standard and hence redistribution is low. The paper proposes a novel explanation for the emergence of different sentiments and social contracts across countries. The predictions appear broadly in line with well-documented differences between the United States and Europe.     

Environmental Degradation,Longevity, and the Dynamics of Economic Development

I construct a two-period overlapping generations model in which longevity is positively affected by public spending on health services and negatively affected by pollution. It is shown that the parameters which determine the extent of environmental degradation (i.e., emission rate and pollution abatement) may also represent additional factors affecting the dynamics of the economy, the likelihood of multiple (non-trivial) steady-state equilibria and the emergence of poverty traps. The distribution of public spending between public health care and pollution abatement that maximizes equilibrium income is also derived. This distribution of spending minimizes the threshold which the economy needs to surpass in order to avoid a poverty trap while, under certain circumstances, it can maximize equilibrium welfare as well.     

Geography and Poverty Traps

We test the view that the large differences in income levels we see across the world are due to differences in the intrinsic geography of each country against the alternative view that there are poverty traps. We reject simple geographic determinism in favor of a poverty trap model with high- and low-level equilibria. The high-level equilibrium state is found to be the same for all countries while income in the low-level equilibrium, and the probability of being in the high-level equilibrium, are greater in cool, coastal countries with high, year-round, rainfall.     

浅析贫困、经济增长与脱贫时间——基于中国城镇居民调查数据的分析

20世纪90年代以来，经济增长和收入分配不平等对于城镇人口脱贫时间产生了消极影响。研究发现，城镇贫困在1997年达到高峰，然后逐渐缓和；贫困人口的收入增长在初期能使脱贫时间迅速减少，但边际效果是递减的；贫困人口之间的收入分配不平等延长了脱贫时间，如果贫困人口的初始收入增加，则会明显缩短脱贫时间。     

Informality and Long‐Run Growth

One of the most salient features of developing economies is the existence of a large informal sector. In this paper, we use quantitative theory to study the dynamic implications of informality on wage inequality, human capital accumulation, child labor, and long‐run growth. Our model can generate transitory informality equilibria or informality‐induced poverty traps. Its calibration reveals that the case for the poverty‐trap hypothesis arises: although informality serves to protect low‐skilled workers from extreme poverty in the short run, it prevents income convergence between developed and developing nations in the long run. Then we examine the effectiveness of different development policies to exit the poverty trap. Our numerical experiments show that using means‐tested education subsidies is the most cost‐effective single policy option. However, for longer time horizons, or as the economy gets closer to the poverty trap threshold, combining means‐tested education and wage subsidies is even more effective.     

Undominated Nash Implementation with Collusion and Renegotiation

This article looks at implementation in economic environments when agents have perfect information about the state of the world, but cannot commit not to renegotiate bad outcomes or to collude against each other. If renegotiation satisfies a weak condition of disagreement point monotonicity, then any Pareto-efficient social choice function can be implemented if there are at least three agents who play undominated Nash equilibria. The mechanism does not use modulo or integer games, has no bad mixed strategy equilibria, and is “bounded.”Journal of Economic LiteratureClassification Number: D71.     

Symbolic values, occupational choice, and economic development

Channeling human resources into occupations with high social productivity has historically been a key to economic prosperity. Occupational choices are not only driven by the material rewards associated with the various occupations, but also driven by the esteem that they confer. We propose a model of endogenous growth in which occupations carry a symbolic value that makes them more or less attractive; the evolution of symbolic values is endogenously determined by purposive transmission of value systems within families. The model sheds light on the interaction between cultural and economic development and identifies circumstances under which value systems matter for long-run growth. It shows the possibility of culturally determined poverty traps and offers a framework for thinking about the transition from traditional to modern values.     

Imitation and evolutionary stability of poverty traps

This paper develops a bioeconomic model applying evolutionary game theory to the notion of poverty traps. We study the evolution of the social norm of being either a high-type or low-type in a dynamic environment where agents are driven by an imitative behavior. History matters because given initial conditions, agents imitate according to their current success in payoffs and the current profile of economic agents in the economy. We define a poverty trap as an evolutionarily stable strategic profile and steady state of the replicator dynamics. We show that in poor economies with a large fraction of low-type agents imitative strategies do not support a take-off into sustained growth. To achieve that take-off, society should subsidize critical parameters of the expected payoffs such that economic agents may change the initial conditions and the economy gets a critical mass of high-type economic agents, and so to overcome the poverty trap.     

Trade Liberalization and Spatial Inequality: a Methodological Innovation in a Vietnamese Perspective

The authors calibrate two static computable general‐equilibrium (CGE) models with 16 and 5999 representative households. Aggregated and disaggregated household categories are consistently embedded in a 2000 social accounting matrix (SAM) for Vietnam, mapping on a one‐to‐one basis. Distinct differences in poverty assessments emerge when the impact of trade liberalization is analyzed in the two models. This highlights the importance of modeling micro‐household behavior and related income and expenditure distributions endogenously within a static CGE model framework. The simulations indicate that poverty will rise following a revenue‐neutral lowering of trade taxes. This is interpreted as a worst‐case scenario, which suggests that the government should be proactive in combining trade liberalization measures with a pro‐poor fiscal response to avoid increasing poverty in the short to medium term.     

Multiple equilibria, coordination, and transitional growth

We study a small open economy with two sectors and two factors of production. In one of the sectors, external economies of scale are generated through the industry-level capital input. This leads to a divergence between private and social production possibility frontiers as well as to multiple equilibria. The equilibrium selection problem that arises is solved by agents who follow a simple trial-and-error learning rule. The growth path of the economy as agents learn lies below the production possibility frontier and may display cyclical transitional dynamics. We also show that coordination problems which may prevent the economy from attaining the “good” equilibrium may be alleviated by the temporary use of policy instruments that shape the allocation of resources.     

On the Generic Finiteness of Equilibrium Outcomes in Plurality Games

In this paper we prove that for generic (noncooperative) voting games under plurality rule the set of equilibria that induce a mixed distribution over the outcomes (i.e., with two or more candidates elected with positive probability) is finite and, furthermore, each of these equilibria is regular. From that we deduce the finiteness of the set of equilibrium distributions over outcomes. Furthermore we offer an example (S. Govindan and A. McLennan, 1997, “On the Generic Finiteness of Equilibrium Outcome Distributions in Game Forms,” mimeo) that shows the impossibility of extending such results to a general framework, even just to voting games. Journal of Economic Literature Classification Numbers: C72, D72.     

Sorting by foot: 'travel‐for' local public goods and equilibrium stratification

Abstract.  We re‐examine Tiebout's hypothesis of endogenous sorting in a competitive spatial equilibrium framework, by considering both income and preference heterogeneity and by allowing agents to decide endogenously the number of visits to a 'travel‐for' local public good. The equilibrium configuration may be completely segregated, incompletely segregated, or completely integrated, depending on relative market rents and income/preference/local tax parameters. A segregated equilibrium may feature endogenous sorting purely by income or by both income and preferences. While the rich need not be closer to the local public facility site, multiple equilibria may arise when the equilibrium configuration is incompletely segregated. JEL classification: D50, H41     

Indivisibility,irreversibility, and the demand for consumer durables

A deeper understanding of the volatility of expenditures on consumer durables is sought in the properties of those goods and the transactions by which they are acquired: durability, indivisibility, and irreversibility. When these properties constrain optimization we find: 1) variation in the lengths of endogenously determined replacement cycles rather than stock-level adjustments may account for much of the volatility, 2) the qualitative nature of an individual consumer's response to a shock depends on the age of his existing unit relative to its optimal replacement age when the shock occurs, 3) the aggregate distribution of unit ages relative to their optimal replacement ages conditions the aggregate response to shocks, and 4) shocks actually change that distribution. A simple aggregation methodology is demonstrated which depicts exaggerated aggregate reactions to shocks.     

Knightian uncertainty and poverty trap in a model of economic growth

This paper explores how Knightian uncertainty affects dynamic properties in an economic growth model. The decision-making theory employed in the analysis is the theory of expected utility under a non-additive probability measure, i.e., the Choquet expected utility model of preference. We apply this decision-making theory to an overlapping generations model where producers face “uncertainty” in their technologies. When the producer is averse to uncertainty, the firm's profit function may not be differentiable. Therefore, the firm's decision to invest and hire labor becomes rigid for a certain measurable range of real interest rates. In dynamic equilibrium, the existence of firm-level rigidity causes discontinuity in the wage function; this makes multiple equilibria the more likely outcomes under the log utility and Cobb–Douglas production functions. In this paper, we show that even if aversion to uncertainty is small, the “poverty trap” can arise for a wide range of parameter values.     

Is man doomed to progress?

This paper is dedicated to the empirical exploration of the welfare effect of expectations and progress per se. Using 10 waves of the Russian Longitudinal Monitoring Survey (RLMS), a panel household survey rich in subjective variables, the analysis suggests that for a given total stock of inter-temporal consumption, agents are more satisfied with an increasing time profile of consumption: they seem to have a strong “taste for improvement”. This contributes to qualify the “Easterlin paradox” that income growth does not make people happy.