Exit from Rent‐Seeking Contests

The object of this paper is to investigate the long‐run behaviour of rent‐seekers in a situation where they incur negative expected payoffs due to increasing returns to rent‐seeking expenditures. To this end, we embed the one‐shot rent‐seeking game presented by Tullock (1980) in the war‐of‐attrition framework. In this multi‐period setting, each player not only determines his or her rent‐seeking expenditure but also chooses a mixed strategy on whether to stay in or exit from rent‐seeking competition in each period. JEL Classification Numbers: D72, C72, L12     

Rent‐Seeking,Market Structure,and Growth

We study the role of productive and unproductive entrepreneurship in economic growth, in a setting where firms compete in both economic and political markets. Specifically, firms compete for market share through cost‐reducing technological innovation, and they vie for influence over government transfer policy through rent‐seeking activities. We find that rent‐seeking affects growth in two ways: it allows firms to ignore economic competition, leading to less innovation, and it alters the number of firms that are supported in equilibrium. The former effect is negative, while the latter is ambiguous. We show how these effects depend on various characteristics of economic and political markets.     

Public Goods and Tax Competition in a Two‐Sided Market

A rather neglected issue in the tax competition literature is the dependence of equilibrium outcomes on the presence of firms and shoppers (two‐sided markets). Making use of a model of vertical and horizontal differentiation, within which jurisdictions compete by providing public goods and levying taxes in order to attract firms and shoppers, this paper characterizes the noncooperative equilibrium. It also evaluates the welfare implications for the jurisdictions of a popular policy of tax coordination: The imposition of a minimum tax. It is shown that the interaction of the two markets affects the intensity of tax competition and the degree of optimal vertical differentiation chosen by the competing jurisdictions. Though the noncooperative equilibrium is, as it is typically the case, inefficient such inefficiency is mitigated by the strength of the interaction in the two markets. A minimum tax policy is shown to be effective when the strength of the interaction is weak and ineffective when it is strong.     

The Impact of Unionization Structures with Heterogeneous Firms and Rent‐Sharing Motives

How are unemployment and output affected if wages are set on the sector level rather than firm level? We take a new look at this question, allowing for heterogeneous firms and rent‐sharing motives. Without these motives, employment and output are lower under sector‐level wage‐setting due to higher wage markups. With rent‐sharing motives, however, firm selection is higher under sector‐level wage‐setting, which tends to increase employment and output, thus counteracting the markup effect. Simulations show that the firm‐selection effect decreases the difference between the two unionization structures substantially but it does not change the signs of the effects on output and employment.     

One‐off export events

Isolated single‐month, one‐off export transactions (observed once in a 49‐month window) turn out to be the dominant spell length in granular firm–product–destination trade data. Moreover, on average, for an export‐active firm, such one‐off events generate a significant part of foreign sales. These patterns cannot be explained by the lumpiness of trade (e.g., seasonal shipments), nor do they sit well with available trade models. To reconcile theory with the data, we introduce passive (i.e., unsolicited buyer‐side driven) exporting in addition to proactive exporting. Our empirical investigation establishes novel stylized facts on firm and destination characteristics associated with one‐off exporting.     

Multiunit Pay‐Your‐Bid Auction with One‐Dimensional Multiunit Demands*

An arbitrary number of units of a good is sold to two bidders through a discriminatory auction. The bidders are homogeneous ex ante and their demand functions are two‐step functions that depend on a single parameter. We characterize the symmetric Bayesian equilibrium and prove its existence and uniqueness. We compare this equilibrium with the equilibrium of the multiunit Vickrey auction and with the equilibria of the single‐unit first price and second price auctions. We examine the consequences of bundling all units into one package. We study the impacts that variations of the “relative” supply have on the equilibrium, on the bidders' average payoffs per unit, and on the efficiency of the equilibrium allocation.     

A Modest Proposal for a Two‐Sided Market Clearing Institution under Asymmetric Supply Constraints with Skewed Pricing: The Market for Adoption and Abortion in the United States

This paper presents a theoretical model matching the potential supply of terminated pregnancies with the total demand for children within certain modeling constraints. First, the demand and supply of pregnancies should be studied within the theoretical framework of a market with economic incentives. Second, a theoretical model for the demand for abortion must incorporate the total market for children, which implies the market for pregnancy, abortion, and adoption. Third, there exist in the overall market for procreative goods and services certain unique characteristics that need to be carefully considered. Producers and suppliers within the procreative goods and services market have radically different price and cost elasticity functions and unique production asymmetries that create a potential net benefit for buyer and seller alike. The market for abortion and adoption, while seemingly related and similar, suffer from a fundamental disconnect, preventing a simple exchange of goods and services: abortion implies potential supply that does not flow to potential consumersthose seeking to adopt. Studying this market inefficiency will benefit from a two‐sided market analysis used in situations where an intermediary business must attract both producers and suppliers. There are two key findings. First, I find that the producer decision to supply the good depends primarily on exogenous preference formation and not on consumer‐provided incentives. Second, I find that the market would benefit from legal framework for a market clearing institution using the market for real estate as the blueprint.     

Rent‐Sharing and Workers' Bargaining Power: An Empirical Cross‐Country/ Cross‐Industry Panel Analysis

In this paper, we study how rents are shared between capital and labour, using industry‐level panel data for 19 OECD countries from 1988 through to 2007. The first step is an explanation of the rent‐creation process. We provide evidence of a significant impact of regulation on value‐added prices at the industry level relative to the value‐added price for the overall economy (rent). In the second step, we dissect the value‐added sharing process. By running ordinary least‐squares and instrumental variables estimations, we obtain results that confirm the Blanchard–Giavazzi prediction: the impact of rents on the capital share depends on workers' bargaining power.     

Bid–Ask Price Competition with Asymmetric Information between Market-Makers

This paper studies the effect of asymmetric information on the price formation process in a quote-driven market. One market-maker receives private information on the value of the quoted asset and repeatedly competes with market-makers who are uninformed. We show that despite the fact that the informed market-maker's quotes are public, the market is never strong-form efficient with certainty until the last stage. We characterize a reputational equilibrium in which the informed market-maker influences and possibly misleads the uninformed market-makers' beliefs. At this equilibrium, a price leadership effect arises, the informed market-maker's expected pay-off is positive and the rate of price discovery increases in the last stages of trade.     

Repeated Elections with Asymmetric Information

An infinite sequence of elections with no term limits is modelled. In each period a challenger with privately known preferences is randomly drawn from the electorate to run against the incumbent, and the winner chooses a policy outcome in a one-dimensional issue space. One theorem is that there exists an equilibrium in which the median voter is decisive: an incumbent wins re-election if and only if his most recent policy choice gives the median voter a payoff at least as high as he would expect from a challenger. The equilibrium is symmetric, stationary, and the behavior of voters is consistent with both retrospective and prospective voting. A second theorem is that, in fact, it is the only equilibrium possessing the latter four conditions — decisiveness of the median voter is implied by them.     

Repeated Contests with Asymmetric Information

The same contestants often meet repeatedly in contests. Behavior in a contest potentially provides information with regard to one's type and can therefore influence the behavior of the opponents in later contests. This paper shows that if effort is observable, this can induce a ratchet effect in contests: high ability contestants sometimes put in little effort in an early round in order to make the opponents believe that they are of little ability. The effect reduces overall effort and increases equilibrium utility of the contestants when compared with two unrelated one-shot contests. It does, however, also introduce an allocative inefficiency since sometimes a contestant with a low valuation wins. The model assumes an imperfectly discriminating contest. In an extension I show that, qualitatively, results are similar in a perfectly discriminating contest (all pay auction).     

Taxes and Marriage: A Two‐Sided Search Analysis*

This article analyzes the effects of differential tax treatment of married and single individuals in the United States on marriage formation and composition, divorce, and labor supply. We develop a marriage‐market model with search frictions and heterogeneous agents that is sufficiently rich to capture key elements of the problem under consideration. We then calibrate the model and use it to evaluate the quantitative effects of several tax reforms aimed at making the tax law neutral with respect to marital status. We find that these reforms (i) systematically increase the labor supply of married females, with changes ranging from 0.3 to 10.1 percent; (ii) have substantial effects on the correlation of spouses’ incomes, which changes from 0.2 to values between 0.185 and 0.334; (iii) can lead to either an increase or decrease in the fraction of people married, with changes that range from ?0.6 to 2.4 percent.     

Super‐Majorites,One‐Dimensional Policies,and Social Surplus

In the setting of a one‐dimensional legislative bargaining game, we characterize qualified majority rules maximizing social surplus, that is, the sum of individual benefits. The simple majority rule maximizes social surplus when individual utilities are tent‐shaped. When the utilities are strictly concave, the surplus maximizing rule is a strict supermajority.     

Regulating a Polluting Firm Under Asymmetric Information

This paper reinterprets the Laffont-Tirole model of regulation under asymmetric information to cover the case of pollution control. The asymmetry of information concerns the firm's cost of lowering its pollution. The regulator has three objectives: Ensuring an efficient abatement level, generating 'green taxes' and securing the survival of the firm. We show that when optimal abatement is important relative to tax generation, the regulator cannot use the policy of offering the firm a set of linear tax schemes from which to choose. By contrast, this policy is optimal in the Laffont-Tirole model under certain not very restrictive assumptions. We proceed to establish a simple rule for when to shut-down inefficient types. In an example with specific functional forms, we derive the optimal tax function both analytically and graphically. We show the effect on the optimal tax system of a change in a technological parameter.     

Status‐Seeking in Criminal Subcultures and the Double Dividend of Zero‐Tolerance

This paper offers a new argument for why a more aggressive enforcement of minor offenses (zero‐tolerance) may yield a double dividend in that it reduces both minor offenses and more severe crime. We develop a model of criminal subcultures in which people gain social status among their peers for being “tough” by committing criminal acts. As zero‐tolerance keeps relatively “gutless” people from committing a minor offense, the signaling value of that action increases, which makes it attractive for some people who would otherwise commit more severe crime. If social status is sufficiently important in criminal subcultures, zero‐tolerance reduces crime across the board.     

“GATT‐think” with Asymmetric Countries*

We argue that a trade agreement which conforms to GATT’s reciprocity rule benefits the (stronger) less trade‐dependent country at the expense of the (weaker) more trade‐dependent country. Reciprocity is so unfavorable to the weaker country that it may be worse off under reciprocity than under the Nash‐ bargaining solution, a “power‐based” approach to trade negotiations that reflects power asymmetries among trading partners. Our results question Bagwell and Staiger’s (1999 , 2000 ) view of reciprocity as a rule that “serves to mitigate the influence of power asymmetries on negotiated outcomes.”     

Current Account Dynamics in a Small Open‐Economy Model of Status Seeking*

In this paper we analyze the implications of status preference, modeled as relative wealth, for the current account in a small open‐economy framework with capital stock dynamics. We demonstrate that the transitional dynamics of the economy are characterized by two distinct speeds of adjustment: a speed of adjustment arising from status preference and a speed of adjustment arising from installation costs of investment. This structure implies that the current account balance depends on both speeds of adjustment as well as on the long‐run equilibrium, which is a function of the degree of status consciousness. As a consequence, the current account can exhibit nonmonotonic behavior in transition to the steady‐state equilibrium subsequent to a productivity disturbance.     

A Model of Product Recalls with Asymmetric Information

This paper presents a model of involuntary product recall in which a firm has private information on its ability to produce safety. The ex post regulation of safety is motivated through a parametric imperfection in the product liability system which results in a firm under internalizing expected liability expenses. We treat the problem as one of mechanism design, where the regulator designs a recall procedure. This framework illuminates the point that recall is an interesting blend of ex ante and ex post regulation. We characterize a perfect recall procedure, contrast this with real world imperfect procedures, and study the interaction of the recall and the liability systems. Further, we analyze the interaction between optimal recall policy and product market structure.     

Equilibrium Partner Switching in a Bargaining Model With Asymmetric Information

We study a model in which the seller of an indivisible object faces two potential buyers and makes an offer to either of them in each period. We find that the seller's ability to extract surplus from them depends crucially on the value of the cost of switching from one buyer to the next. If the seller is pessimistic about the buyers' valuations and there is a switching cost, however small, then the market is a natural bilateral monopoly; the second buyer is never called on. If the switching cost is zero, or if the seller is optimistic, then switching, and possibly recall of the original buyer, may occur.