Decentralization and electoral accountability: Incentives, separation and voter welfare

This paper provides a systematic analysis of fiscal decentralization on the quality of government by studying jointly its effects on electoral discipline and selection, in a setting where, realistically, voters only have limited information about fiscal policy in other jurisdictions, ruling out yardstick competition. Fiscal centralization reduces the extent of electoral discipline, as a corrupt (rent-seeking) incumbent can target good behavior only at a “minimum winning coalition” of regions (selective rent-diversion) in order to retain office, but thus makes it more profitable for bad incumbents to pool with good ones, thus increasing the probability of electoral discipline occurring at all. Voters tend to prefer centralization when politicians are low quality i.e. more likely to be corruptible. Centralization with uniform taxes can dominate both unconstrained centralization and decentralization, explaining why uniform taxes are so widely observed.     

Altruism,Warm Glow and the Willingness-to-Donate for Green Electricity: An Artefactual Field Experiment

The ongoing liberalization of electricity markets in most western countries forms the background of our artefactual field experiment. Using a Cheap talk design [R.G. Cummings and L.O. Taylor. American Economic Review 89 (1999) 649–665] with supplementary monetary incentives, we test for presence of “warm glow” motivations [J. Andreoni. Journal of Political Economy 97 (1989) 1447–1458; Economic Journal 100 (1990) 464–477] in the willingness-to-donate for electricity generated from renewables. Our data from 200 participants supports impure altruism, that is, individuals benefit from both contributing to environmental quality and its current level when opting in favor of green electricity. Furthermore, we find evidence of crowding-out as well as crowding-in effects. Depending on the knowledge of people about electricity markets and the types of electricity contracts offered, “all-or-none” contracts are most likely to bring about crowding-out effects.     

Driving forces of chemical risks for the European biodiversity

In the framework of the EU-funded research project ALARM (Assessing LArge-scale environmental Risks with tested Methods), an original method combining the DPSIR (driving forces–pressures–state–impacts–responses) framework and an analysis based on the distinction between the four spheres of sustainability (environmental, economic, social and political) has been developed. This paper presents the application of this method, called “the tetrahedral DPSIR” for the identification and analysis of driving forces of environmental chemicals risks for biodiversity, in Europe. The purpose of this methodology is to help reduce the pressures on biodiversity through modifying the driving forces behind them by offering scientific advice to policy makers. We frame our analysis in the context of the current policy, namely the implementation of REACH (Regulation on the Registration, Evaluation, and Authorization of CHemicals).     

Endogenous transfers in the Prisoner's Dilemma game: An experimental test of cooperation and coordination

We test a two-stage compensation mechanism for promoting cooperation in Prisoner's Dilemma games. Players first simultaneously choose binding non-negative amounts to pay their counterparts for cooperating, and then play the induced game knowing these amounts. In our games, all payment pairs consistent with mutual cooperation in subgame-perfect equilibrium transform these games into coordination games, with both mutual cooperation and mutual defection as Nash equilibria in the second stage. When endogenous transfer payments are not permitted, cooperation is much less likely. Mutual cooperation is most likely when the (sufficient) payments are identical, and it is also substantially more likely with payment pairs that bring the mutual-cooperation payoffs closer together. Both the Fehr–Schmidt and Charness–Rabin models predict that transfers that make final payoffs closer are preferred; however, they do not explain why equal transfers are particularly effective. Transfers are also effective in sustaining cooperation even when they are imposed and not chosen.     

Probability Logic for Type Spaces

Using a formal propositional language with operators “individual i assigns probability at least α” for countably many α, we devise an axiom system which is sound and complete with respect to the class of type spaces in the sense of Harsanyi (1967–1968, Management Science, 14 159–182). A crucial inference rule requires that degrees of belief be compatible for any two sets of assertions which are equivalent in a suitably defined natural sense. The completeness proof relies on a theorem of the alternative from convex analysis, and uses the method of filtration by finite sub-languages. Journal of Economic Literature Classification Numbers: D80, D82.     

Worst-case optimal redistribution of VCG payments in multi-unit auctions

For allocation problems with one or more items, the well-known Vickrey–Clarke–Groves (VCG) mechanism (aka Clarke mechanism, Generalized Vickrey Auction) is efficient, strategy-proof, individually rational, and does not incur a deficit. However, it is not (strongly) budget balanced: generally, the agents' payments will sum to more than 0. We study mechanisms that redistribute some of the VCG payments back to the agents, while maintaining the desirable properties of the VCG mechanism. Our objective is to come as close to budget balance as possible in the worst case. For auctions with multiple indistinguishable units in which marginal values are nonincreasing, we derive a mechanism that is optimal in this sense. We also derive an optimal mechanism for the case where we drop the non-deficit requirement. Finally, we show that if marginal values are not required to be nonincreasing, then the original VCG mechanism is worst-case optimal.     

Attitude toward imprecise information

This paper presents an axiomatic model of decision making under uncertainty which incorporates objective but imprecise information. Information is assumed to take the form of a probability–possibility set, that is, a set P of probability measures on the state space. The decision maker is told that the true probability law lies in P and is assumed to rank pairs of the form (P,f) where f is an act mapping states into outcomes. The key representation result delivers maxmin expected utility (MEU) where the min operator ranges over a set of probability priors—just as in the MEU representation result of Gilboa and Schmeidler [Maxmin expected utility with a non-unique prior, J. Math. Econ. 18 (1989) 141–153]. However, unlike the MEU representation, the representation here also delivers a mapping, , which links the probability–possibility set, describing the available information, to the set of revealed priors. The mapping is shown to represent the decision maker's attitude to imprecise information: under our axioms, the set of representation priors is constituted as a selection from the probability–possibility set. This allows both expected utility when the selected set is a singleton and extreme pessimism when the selected set is the same as the probability–possibility set, i.e., is the identity mapping. We define a notion of comparative imprecision aversion and show it is characterized by inclusion of the sets of revealed probability distributions, irrespective of the utility functions that capture risk attitude. We also identify an explicit attitude toward imprecision that underlies usual hedging axioms. Finally, we characterize, under extra axioms, a more specific functional form, in which the set of selected probability distributions is obtained by (i) solving for the “mean value” of the probability–possibility set, and (ii) shrinking the probability–possibility set toward the mean value to a degree determined by preferences.     

Optimal Time-of-use Access Charges

This paper examines the setting of optimal time-of-use access charges in a deregulated network industry environment. Firms, which may include the incumbent, compete in the final retail market. The regulator sets an access fee for use of the essential facility, allowing the incumbent to recover fixed costs. If the retail market is perfectly competitive the optimal access charge varies with time-of-use according to the Ramsey–Boiteux elasticity rule. However, with downstream market power the regulator needs to correct retail price distortion, as well as recover fixed costs efficiently. As a result, the regulators initial impulse to set higher access charges during peak periods may be reinforced, moderated or even reversed — and optimal access charges diverge from a Ramsey–Boiteux pattern.I would like to thank John Panzar and Julian Wright for helpful comments. The helpful and detailed remarks of an anonymous referee have greatly improved this paper and are gratefully acknowledged.     

Environmental Enforcement with Endogenous Ambient Monitoring

We consider an inspection game between n polluting firms and an environmental enforcement agency. If the cost of monitoring ambient pollution is low enough, the optimal inspection policy consists in imposing the maximal possible fine, and mixing between observing ambient pollution and not conducting any inspection at all. However, with stringent upper limits on the fine, the agency mixes between observing ambient pollution and inspecting all firms. The observation of ambient pollution is always followed by sequentially rational firm inspections. Comparisons with Franckx (2002a, Journal of Environmental Economics and Management 43, 71–92, 2002b, Topics in Economic Analysis Policy 2(1), Article 1) show that commitment power has a very strong impact on the value of prior information.     

The indeterminacy of equilibrium city formation under monopolistic competition and increasing returns

We study the indeterminacy of equilibrium in the Fujita–Krugman [When is the economy monocentric?: von Thünen and Chamberlin unified, Reg. Sci. Urban Econ. 25 (1995) 505–528] model of city formation under monopolistic competition and increasing returns. Both the number and the locations of cities are endogenously determined. Assuming smooth transportation costs, we examine equilibria in city-economies where a finite number of cities form endogenously. For any positive integer K, the set of equilibria with K distinct cities has a smooth manifold of dimension K-1 as its interior for almost all parameter values in a regular parameterization. The disjoint union of these sets over all positive integers K constitutes the entire equilibrium set.     

A general impossibility result on strategy-proof social choice hyperfunctions

A social choice hyperfunction picks a non-empty set of alternatives at each admissible preference profile over sets of alternatives. We analyze the manipulability of social choice hyperfunctions. We identify a domain D^λ of lexicographic orderings which exhibits an impossibility of the Gibbard–Satterthwaite type. Moreover, this impossibility is inherited by all well-known superdomains of D^λ. As most of the standard extension axioms induce superdomains of D^λ while social choice correspondences are particular social choice hyperfunctions, we are able to generalize many impossibility results in the literature.     

What level of decentralization is better in an environmental context? An application to water policies

This paper analyses the optimal division of environmental policymaking functions among the different levels of government. Using fiscal federalism theory, we identify the most appropriate level of decentralization in each case. The paper focuses on water resources policies, with an application to Spanish regions during the 1996–2001 period. A simulation allows the implementation of more efficient policies in the context of water resources. The results of the empirical exercise show that a decentralized scenario is preferred under strong differences among preferences.      

Regulation of a Risk Averse Firm

We extend the Laffont–Tirole regulation model to the case of risk-averse firms. Our main results are:

• The impact of risk aversion is to shift the optimal contract toward a cost-plus contract.

• As compared with the risk-neutral case, distortions are greater and informational rents are smaller.

• For high levels of risk aversion, the optimal contract involves cost ceilings and the less efficient firms are bunched together.

Journal of Economic LiteratureClassification Numbers: D8, L5.     

Benefit and Distance Functions

We explore the relationship between R. W. Shephard's input distance function (“Cost and Production Functions,” Princeton Univ. Press, Princeton, 1953) and D. G. Luenberger's benefit function (J. Math. Econ.21(1992a), 461–481). We point out that the latter can be recognized in a production context as a directional input distance function which can exhaustively characterize technologies in both price and input space. D. McFadden's (Cost, revenue, and profit functions,in“Production Economics: A Dual Approach to Theory and Applications, “North-Holland/Elsevier, New York, 1978) composition rules for input sets and input distance functions are then extended to the directional input distance function.Journal of Economic LiteratureClassification Numbers : D21, D24, D29.     

A general structure theorem for the Nash equilibrium correspondence

I consider n-person normal form games where the strategy set of each player is a non-empty compact convex subset of an Euclidean space, and the payoff function of player i is continuous in joint strategies and continuously differentiable and concave in the player i's strategy. No further restrictions (such as multilinearity of the payoff functions or the requirement that the strategy sets be polyhedral) are imposed. I demonstrate that the graph of the Nash equilibrium correspondence on this domain is homeomorphic to the space of games. This result generalizes a well-known structure theorem in [Kohlberg, E., Mertens, J.-F., 1986. On the strategic stability of equilibria. Econometrica 54, 1003–1037]. It is supplemented by an extension analogous to the unknottedness theorems in [Demichelis S., Germano, F., 2000. Some consequences of the unknottedness of the Walras correspondence. J. Math. Econ. 34, 537–545; Demichelis S., Germano, F., 2002. On (un)knots and dynamics in games. Games Econ. Behav. 41, 46–60]: the graph of the Nash equilibrium correspondence is ambient isotopic to a trivial copy of the space of games.     

Forecasting the Forecasts of Others in the Frequency Domain

This paper studies a class of models developed by R. M. Townsend (1983, J. Polit. Econ.91, 546–588) and T. J. Sargent (1991, J. Econom. Dynam. Control15, 245–273). These models feature dynamic signal extraction problems and an infinite regress in expectations. This paper uses frequency domain methods to compute an analytical solution to the fixed point problem posed by the infinite regress in expectations. The advantage of a frequency domain approach vis-à-vis a time domain approach derives from the fact that these models produce equilibria with non-fundamental moving average representations, in which market observations do not reveal the underlying shocks to agents' information sets. As a result, decision rules contain moving average components that are more easily handled in the frequency domain than in the time domain.     

Evolution and Mixed Strategies

Selten (1980, J. Theoret. Biol., 84, 93–101) showed that no mixed equilibria are evolutionarily stable when players can condition their strategies on their roles in a game. Alternatively, Harsanyi's (1973, Int. J. Game Theory, 2, 1–23) purification argument implies that all mixed equilibria are approximations of strict, and hence evolutionarily stable, equilibria of games with slightly perturbed payoffs. This paper reconciles these results: Approximations of mixed equilibria have high invasion barriers, and hence are likely to persist, when payoff perturbations are relatively important and role identification is relatively noisy. When payoff perturbations are unimportant and role identification is precise, approximations of mixed equilibria will have small invasion barriers and are unlikely to persist. Journal of Economic Literature Classification Numbers: C70, C78.     

Projecting soviet energy requirements using a vintage capital model

A Solow-type vintage capital model with capital utilization is used to estimate the long-term average embedded rate of improvement in energy efficiency of Soviet fixed-capital commissionings: 2.6% per year. The results are combined with planned Soviet capital stock growth to forecast cap Soviet energy requirements through 1990. The implied Soviet capital utilization goals call for greater energy savings than have been achieved in the past. The results also identify an upper bound for rates of hidden inflation contained in Soviet capital commissionings data. It appears an estimate such as S. Cohn's 1% (Soviet Stud. 33, 2:269–299, 1981) is far more likely than A. Nove's 6 to 7% (Soviet Stud. 33, 1:142–145, 198 1).     

Sequentially complete markets remain incomplete

We show by means of an example that the result of Arrow [Arrow, K.J. (1953), Le rôle des valeurs boursières pour la répartition la meilleure des risques, Econométrie, 41–47, CNRS, Paris; translated as The role of securities in the optimal allocation of risk bearing, Review of Economic Studies, 31, 91–96] is problematic when there exist multiple equilibrium continuations to the initial-period component of an intertemporal equilibrium.     

Human Capital, Growth, and Inequality in Russia

Our model captures the fact that Russia has both much human capital and an education system that produces the wrong skills for a market economy. We define a rule for the timing of educational restructuring that is Pareto optimal and that dominates all later times in a Paretian sense while simultaneously reducing inequality. We demonstrate that failure to implement restructuring early in the transition process is likely to produce a very long delay that will significantly reduce Russia's human capital. A retreat from subsidizing public education is likely to be counterproductive. We argue that early educational restructuring should be emphasized in Russia's transition strategy. J. Comp. Econom., December 1999, 27(4), pp. 618–643. Lingnan University, Tuen Mun, N.T., Hong Kong, People's Republic of China; University of Colorado, Denver, Denver, Colorado 88217; and Royal Holloway College, University of London, Egham, Surrey TW20 OEX, United Kingdom.