Experimenting and learning with localized direct communication

We report an experiment in which subjects may learn from each other. Specifically, a “queue” of players who are identically informed ex ante make decisions in sequence over two lotteries. Every player except the first in the queue observes (only) his immediate predecessor’s choice and payoff before making his own decision. In equilibrium decisions are identical from the first or second player onwards in all experimental conditions. However, complete adherence to equilibrium play is seldom observed in our experiment. We further analyze our data using a quantal response equilibrium approach and test for behavioral regularities related to base rate fallacy/conservatism bias, social conformity/rebelliousness, and preference for experimentation (preferring the lottery with potentially more information spillover value). Our estimations reveal a consistent preference for experimentation across conditions, and further analysis offers some support to our surmise that this behavioral regularity is due, in part, to an attempt to influence others behind in the queue.     

Correlated Equilibrium,Conformity, and Stereotyping in Social Groups

We argue that a social norm and the coordination of behavior within social groups can be expressed by a correlated equilibrium. Given a social group structure (a partition of individuals into social groups), we propose four conditions that one may expect of a correlated equilibrium consistent with social norms. These are: (1) within‐group anonymity (conformity within groups), (2) group independence (no conformity between groups), (3) homophily (individuals in the same group have similar attributes), and (4) predictable group behavior (ex post stability). We demonstrate that correlated equilibrium satisfying (1)–(3) exist very generally and equilibrium satisfying (1)–(4) exist in games with many players. We also consider stereotyped beliefs—beliefs that all individuals in a social group can be expected to behave in the same way—and show that stereotyping is not costly to the person who stereotypes but may or may not be beneficial to society.     

Unequal uncertainties and uncertain inequalities: an axiomatic approach

In this paper, we provide an axiomatic characterization of social welfare functions for uncertain incomes. Our most general result is that a small number of reasonable assumptions regarding welfare orderings under uncertainty rule out pure ex ante as well as pure ex post evaluations. Any social welfare function that satisfies these axioms should lie strictly between the ex ante and the ex post evaluations of income distributions. We also provide an axiomatic characterization of the weighted average of the minimum and the maximum of ex post and ex ante evaluations.     

Reproductive health,fairness, and optimal policies

We consider an overlapping generations economy in which agents differ through their ability to procreate. Ex‐ante infertile households may incur health expenditure to increase their chances of parenthood. This health heterogeneity generates welfare inequalities that deserve to be ruled out. We explore three different criteria of social evaluation in the long‐run: the utilitarian approach, the ex‐ante egalitarian criterion and the ex‐post egalitarian one. We propose a set of economic instruments to decentralize each solution. To correct for the externalities and health inequalities, both a preventive (a taxation of capital) and a redistributive policy are required. We show that a more egalitarian allocation is associated with higher productive investment but reduced health expenditure and thus, lower population growth.     

Information acquisition and welfare effect in a model of competitive financial markets

We analyze welfare effect of information acquisition for a model of competitive financial markets with diverse information and rational expectations. We show that in the fully revealing rational expectations equilibrium, each agent’s gain from trade in ex ante utility decreases as more agents become informed. An implication of the result is that market efficiency and ex ante Pareto optimality are not compatible in competitive financial markets with diverse information and rational expectations. Our result can be viewed as complementary to the Grossman paradox, which shows that market efficiency and individuals’ incentives to acquire information are not compatible. This paper is the first step in a projected exploration of welfare effect of information acquisition in models with diverse information.     

Social security and risk sharing

In this paper we identify conditions under which the introduction of a pay-as-you-go social security system is ex ante Pareto-improving in a stochastic OLG economy with capital accumulation and land. We argue that these conditions are consistent with realistic specifications of the parameters of the economy. In our model financial markets are complete and competitive equilibria interim Pareto efficient. Therefore, a welfare improvement can only be obtained if agents? welfare is evaluated ex ante, and arises from an improvement in intergenerational risk sharing. We also examine the optimal size of a given social security system as well as its optimal reform.     

The public management of risk: Separating ex ante and ex post monitors

When a firm undertakes risky activities, the conflict between social and private incentives to implement safety care requires public intervention which can take the form of both monetary incentives and also ex ante or ex post monitoring, i.e., before or after an accident occurs. We delineate the optimal scope of monitoring depending on whether public monitors are benevolent or corruptible. We show that separating the ex ante and the ex post monitors increases the likelihood of ex post investigation, helps prevent capture and improves welfare.     

Toward a “constitution” for behavioral policy-making

Behavioral policy interventions aimed at redirecting individuals’ behavior toward optimal choices are characterized by an important issue which is often overlooked: the lack of an instrument to define what “optimal” means. If agents are subject to behavioral biases leading them to make “wrong” choices, the policy-maker can no longer rely on the revealed preferences approach (e.g., what people choose is what people prefer) for defining a welfare criterion. In this article, we reiterate the argument put forward by some scholars that choosing a suitable welfare criterion once the link between observed choices and individuals’ preferences is broken becomes a problematic task. We review the state of the art in the literature and the possible approaches proposed to overcome the problem, concluding that a solution has not yet been reached. Moreover, we argue that the lack of an established welfare criterion characterizing behavioral policy-making could pave the way to government wanting to restrict individual freedom. In the absence of any legislative constraint for the executive, stating that what individuals choose is not what they prefer in principle justifies any freedom-reducing government intervention, since choices can be arbitrarily labeled “sub-optimal” or “welfare-reducing.” To avoid this risk without turning down the potential of behavioral policy-making, we propose that an independent committee establishes ex ante procedural rules and domains where behavioral policy-making can be implemented. The article suggests some possible examples of normative provisions characterizing this constitution-type document, such as the selective identification of the only sectors where behavioral policies could be effectively applied, the periodic evaluation of policy effects, and the use of sunset clauses.     

Location decisions of a polluting firm and the time consistency of environmental policy

This paper considers location decisions of a monopolist, who faces a tax on its emissions in the home country, under ex post that is, time consistent, and ex ante, that is precommitment, environmental policies. We show that the monopolist will relocate more often under ex post optimal emission taxes. A government which cannot commit to an ex ante emission tax and sets its tax ex post after abatement effort has been chosen, is unable to affect the monopolist’s location decision, because it cannot commit to strategically reduce its tax level in the first stage. Domestic welfare is often higher under ex post emission taxes whenever the monopolist relocates under both policy regimes. Otherwise, welfare is higher under government commitment to an ex ante emission tax level. Thus, government commitment to a policy is not always welfare improving.     

Should refusal to sell be illegal?

We analyse a private firm's decision of whether to refuse to sell to a particular group of consumers whose interaction with other consumers generates negative externalities. The literature has rarely incorporated this motive directly into the firm's profit-maximisation problem. Discriminatory refusal-to-sell policies can increase profits and consumer utility among those affected by the negative externality. Of course it also reduces utility among consumers who are refused, raising the possibility of an indeterminate effect on social welfare. We obtain a stark and rather surprising result: The refusal-to-sell policy is socially optimal whenever it is individually optimal for a profit-maximising firm to adopt such a policy. No legislation or regulation is required from a social-welfare perspective (under the assumptions used in the specification of the social welfare function). We prove this result analytically for the case of linear demand functions. Numerical simulations show that the result also holds for constant-price-elasticity demand functions.     

Dynamic coordination with timing frictions: Theory and applications

We present a general framework of dynamic coordination with timing frictions. A continuum of agents receive random chances to choose between two actions and remain locked in the selected action until their next opportunity to reoptimize. The instantaneous utility from each action depends on an exogenous fundamental that moves stochastically and on the mass of agents currently playing each action. Agents' decisions are strategic complements and history matters. We review some key theoretical results and show a general method to solve the social planner's problem. We then review applications of this framework to different economic problems: network externalities, statistical discrimination, and business cycles. The positive implications of these models are very similar, but the social planner's solution points to very different results for efficiency in each case. Last, we review extensions of the framework that allow for endogenous hazard rates and ex ante heterogeneous agents.     

Sequential bargaining,external effects of agreement,and public intervention

In some bargaining situations, agreement has implications for agents beyond the parties involved, and if so, delays in reaching an agreement or failing to reach an agreement, when this would be profitable, may imply significant welfare losses. The question raised in this paper is whether the intervention of a government, who has a positive valuation of agreement and therefore offers a subsidy, will reduce such delays and inabilities to reach agreement? Based on a perfect Bayesian equilibrium in a sequential bargaining game with intervention, we show that in equilibrium intervention always reduces the ex ante equilibrium inefficiency and conditionally reduces expected delays in trade. However, for intervention in the form of a subsidy to take place, the aggregate of the seller’s reservation price and the externalities must be (almost) as high as the buyer’s upper valuation limit.     

The benefits of central bank's political independence

We consider a two-tier model of monetary policy where the central banker is both subject to the explicit influence of elected political principals through contracts and the implicit influence of interest groups willing to capture monetary policy. We analyze the impact of granting independence to the central banker on the scope for capture and the agency costs of delegating the monetary policy to a central banker. Political independence increases those agency costs but significantly stabilizes the politically induced fluctuations of inflation and improves ex ante social welfare.     

Ex ante valuation of atmospheric visibility

In a world incomplete markets for environmental goods, ex ante planned expenditures rather than ex post realized outcomes explain the values which individuals attach to these goods. We use the distance function to develop restrictions from a model of ex ante consumer behaviour involving these goods. A Contigent valuation approach is then employed to estimate policy-relavant components of the ex ante economic values that recreationists attach to differing subjective probabilities of alternative atmospheric visibility levels at a wilderness location and at an urban location in Oregon. Marginal valuations of probability changes are similar at the two sites. Marginal rates of time preference for resolving uncertainities vary between 10 and 50% and are inversely related to education. Existence value averages 10% of total value, and evidence is mixed that site-specific value act as surrogates for general environmental preferences.     

Policy Discrimination with and without Interpersonal Comparisons of Utility

Can the Pareto criterion guide policymakers who do not know the true model of the economy? If policymakers specify ex ante preferences for agents, then Pareto improvements from a distorted status quo are usually possible, and with more commodities than states, one can implement almost every Pareto optimum. Unlike the standard second welfare theorem, planners cannot dictate allocations: agents must trade. Unfortunately ex ante preferences impose interpersonal comparisons. If policymakers merely aim to maximize some social welfare function then optimal policies form an open set; hence small changes in the environment do not necessitate any policy response. Planners with symmetric information about agents can sometimes intervene without making interpersonal comparisons.     

On competitive balance in the group stage of the UEFA Champions League*

This article examines competitive balance in the group stage of the UEFA Champions League over the last two decades (1999/2000–2017/2018). Competitive balance is considered both before and after a competition. Have the groups been designed in such a way as to ensure similar levels of competitive balance ex ante? Have the demonstrated strengths (ex post competitive balance) of the different groups been similar over each season? What is the relationship between the competitive balance in the designed groups and that achieved in the same groups after the competition? Are the performance achieved in terms of ex post competitive balance similar to ex ante competitive balance levels? We found that, despite expectations, the groups' ex ante competitive balance was not homogeneous. Although ex ante competitive balance serves as a good predictor, on average, of ex post competitive balance, we observed significant differences at the levels of group and seasons. Therefore, it is possible to improve the design mechanism of the groups that make up the group stage of the champions so that they are composed homogeneously in terms of ex ante competitive balance.     

THE WELFARE IMPACT OF REDUCING CHOICE IN MEDICARE PART D: A COMPARISON OF TWO REGULATION STRATEGIES*

Motivated by widely publicized concerns that there are “too many” plans, we structurally estimate (and validate) an equilibrium model of the Medicare Part D market to study the welfare impacts of two feasible, similar‐sized approaches for reducing choice. One reduces the maximum number of firm offerings regionally; the other removes plans providing donut hole coverage—consumers’ most valued dimension. We find welfare losses are far smaller when coupled with elimination of a dimension of differentiation. We illustrate our findings’ relevance under current health care reforms, and consider the merits of instead imposing ex ante competition for entry.     

Paretian dictators: constraining choice in a voluntary contribution game

We explore individuals’ preferences over limiting the choice sets of others in an environment with externalities. Specifically, we conduct public goods games in which participants can mandate the contributions of others or restrict choices to a subset of feasible contributions levels. We find that, relative to a baseline treatment in which individuals make choices from the set of all contribution alternatives, allowing individuals to constrain the choices of others results in more efficient outcomes. We discuss these results in light of the literature on behavioral theories of reciprocity and conditional cooperation and in regards to the literature on pre-constitutional design, political institutions, and social choice.     

Social context reveals gender differences in cooperative behavior

A number of previous researches indicate that men prefer competition over cooperation, and it is sometimes suggested that women show the opposite behavioral preference. In the current study the effects of social context on gender differences in cooperation are investigated. For the purpose, we compared men and women behavior under two social conditions: in groups of strangers and in groups with long-term socialization—groups of friends. The differences were found in changes in the level of cooperation, taking into account the effects of mixing social and gender variables. Social interaction and communication made cooperation of group members strength and sustainable. However, men’s and women’s cooperative behavior in groups differed. Women were initially more inclined to cooperate in interaction with strangers. Men showed greater sensitivity to sociality effects. They tended to make cooperative decisions more often if there were friends in the group. Furthermore, men cooperated with previously unknown people after socialization with them significantly more than women.     

Quality Uncertainty as Resolution of the Bertrand Paradox

It is well‐known that product differentiation eliminates the Bertrand paradox (i.e. marginal cost pricing under duopoly). While differentiation is often justified with reference to the consumer's ‘preference for variety’, the conditions under which such a preference is likely to arise are rarely considered. We investigate this question in a setting in which uncertainty about product quality can endogenously generate either convex or non‐convex preferences. We show that even when two goods are ex ante homogeneous, quality uncertainty can eliminate the Bertrand paradox.