A theory of reciprocity

People are reciprocal if they reward kind actions and punish unkind ones. In this paper we present a formal theory of reciprocity. It takes into account that people evaluate the kindness of an action not only by its consequences but also by its underlying intention. The theory is in line with the relevant stylized facts of a wide range of experimental games, such as the ultimatum game, the gift-exchange game, a reduced best-shot game, the dictator game, the prisoner's dilemma, and public goods games. Furthermore, it predicts that identical consequences trigger different reciprocal responses in different environments. Finally, the theory explains why outcomes tend to be fair in bilateral interactions whereas extremely unfair distributions may arise in competitive markets.     

A theory of citations

We propose a model in which researchers maximize the number of times they are cited in later papers. The equilibrium is inefficient, because researchers distort their effort toward writing on popular topics. This inefficiency is affected by various factors, policies and customs. We explored the effect of a variety of such factors. In particular, we argue that the inefficiency is likely to be higher in disciplines (areas of research) in which talent is uniform across topics rather than more topic specific. We also determine conditions under which assigning a higher weight to citations in papers published in higher-ranked journals enhances efficiency.     

A theory of commerce

The theory of commerce advanced here captures prominent features of retail trade: large employment, congestion effects, anonymous posted prices, and quantity discounts. This theory is built around a directed search model where buyers’ preferences are private information. The analytical solution is easily inserted in a Neoclassical growth framework. In this framework, the parameters of retail trade are calibrated using commercial margins and employment. Welfare properties depend on the sellers’ ability to charge two-tier prices. With two-tier prices, the directed search equilibrium is efficient. Otherwise, it is not. This contrasts with the full information benchmark, where directed search is always efficient.     

A theory of tolerance

We propose a theory of tolerance where endogenous lifestyles and exogenous traits are invested with symbolic value by people. Value systems chosen by parents for their children affect the esteem enjoyed by individuals in society. Intolerant individuals attach all symbolic value to a small number of attributes and are irrespectful of people with different ones. Tolerant people have diversified values and respect social alterity. We study the formation of values attached to various types of attributes and identify circumstances under which tolerance spontaneously arises. Policy may affect the evolution of tolerance in distinctive ways, and there may be efficiency as well as equity reasons to promote tolerance. An empirical investigation of tolerance of homosexuality demonstrates that our theory helps to shed light on survey data of endorsed values.     

A theory of natural addiction

Economic theories of rational addiction aim to describe consumer behavior in the presence of habit-forming goods. We provide a biological foundation for this body of work by formally specifying conditions under which it is optimal to form a habit. We demonstrate the empirical validity of our thesis with an in-depth review and synthesis of the biomedical literature concerning the action of opiates in the mammalian brain and their effects on behavior. Our results lend credence to many of the unconventional behavioral assumptions employed by theories of rational addiction, including adjacent complementarity and the importance of cues, attention, and self-control in determining the behavior of addicts. We offer evidence for the special case of the opiates that “harmful” addiction is the manifestation of a mismatch between behavioral algorithms encoded in the human genome and the expanded menu of choices faced by consumers in the modern world.     

A theory of conscious parallelism

In this paper the ‘rationality’ of conscious parallelism is studied within the context of a dynamic oligopoly model. The doctrine of conscious parallelism is modelled as the outcome of a signalling game in which the rules of response are specified axiomatically. This will result in a unique solution to the oligopoly problem that is based on firms' need to have consistent expectations that subsequently generate collusive behaviour.This model can then be used to more precisely define the conditions that facilitate or limit oligopolistic coordination, as found in the traditional industrial organization literature.     

A theory of sequential reciprocity

Many experimental studies indicate that people are motivated by reciprocity. Rabin [Amer. Econ. Rev. 83 (1993) 1281] develops techniques for incorporating such concerns into game theory and economics. His theory is developed for normal form games, and he abstracts from information about the sequential structure of a strategic situation. We develop a theory of reciprocity for extensive games in which the sequential structure of a strategic situation is made explicit, and propose a new solution concept—sequential reciprocity equilibrium—for which we prove an equilibrium existence result. The model is applied in several examples, and it is shown that it captures very well the intuitive meaning of reciprocity as well as certain qualitative features of experimental evidence.     

A theory of policy advice

This article analyzes a model of the policy decision processin ministerial governments. A spending minister and a financeminister are involved in making a decision concerning a publicproject. The two ministers have partially conflicting preferences.Policy decisions are made in two stages. In the first stagethe spending minister consults a technical expert to obtaininformation about the technical consequences of the project.If the technical consequences are favourable, in the secondstage the finance minister consults a financial expert to obtaininformation about the financial consequences. The finance ministercan veto a proposal for undertaking the project. This articleillustrates the consequences of specialization for informationtransmission. A drawback of specialization is that projectsare evaluated on the basis of their individual consequencesrather than on the basis of their total consequences.     

A theory of efficient coexistence

Abstract

Neighbours have to coexist over an infinite horizon. Neither of them can eradicate the other or extricate him or herself from the bondage. Their respective resources regenerate themselves periodically. Hence, the capacities for production and war repeatedly recuperate from exhaustion. This paper uses a simple dynamic model to study the cooperation and conflict between two neighbours. It is shown that the way for one party to enhance its own prosperity without inducing a war with its neighbour is to collaborate on mutually beneficial projects and divide the output according to each side's contribution. Rejecting potential collaboration or dividing the joint output disproportionately risks the eruption of war. If the duration that one side is prepared to fight exceeds that of the other, the one with a shorter duration will concede defeat before the war starts. Nonetheless, when the planned durations of war of both sides are identical, the first-strike advantage induces them to wage war simultaneously.     

A nonbehavioral theory of saving

The article presents a demand-driven model, where the saving rate of households at the bottom of the income distribution becomes the endogenous variable that adjusts for full employment to be maintained over time. An increase in income inequality and the current account deficit and a consolidation of the government budget lead to a decrease in the saving rate of the household sector. Such a process is unsustainable because it leads to an increase in the debt-to-income ratio of the households and its maintenance depends on some kind of asset bubble. This framework allows us to better understand the factors that led to the Great Recession in the United States and the dilemma of the present and the future regarding a repeat of this unsustainable process or secular stagnation.     

A theory of anticipated utility

A new theory of cardinal utility, with an associated set of axioms, is presented. It is a generalization of the von Neumann-Morgenstern expected utility theory, which permits the analysis of phenomena associated with the distortion of subjective probability.     

A theory of reverse retirement

The retirement system is usually regarded as giving a fair reward for a long working career. However, only workers who have a sufficiently long life benefit from that reward, but not workers who die prematurely. To re‐examine the fairness of retirement systems under unequal lifetime, this paper compares standard retirement (i.e., individuals work before being retired) with—hypothetical—reverse retirement (i.e., individuals are retired before working). We show that, under standard assumptions, an economy with reverse retirement, once in place, converges towards a unique stationary equilibrium. At the normative level, we show that, when labor productivity declines with age, reverse retirement cannot be optimal under the utilitarian criterion (unlike standard retirement), whereas reverse retirement can be optimal under the ex post egalitarian criterion (giving priority to the worst‐off in realized terms). Finally, we show that there exists a set of policy instruments that allow a government to organize a successful transition from standard to reverse retirement.     

A theory of user-fee competition

We develop a two-region model where the decentralized provision of spillover goods and other public expenditures is financed by means of user fees. We show that a decentralized solution tends to be inefficient. If the regional spillover goods are substitutes, user fees tend to be inefficiently low, whereas they tend to be inefficiently high if the spillover goods are complements.     

A theory of legal presumptions

This article analyzes how legal presumptions can mediate betweencostly litigation and ex ante incentives. We augment a moralhazard model with a redistributional litigation game in whicha presumption parameterizes how a court 'weighs' evidence offeredby the opposing sides. Strong prodefendant presumptions forecloselawsuits altogether, but also engender shirking. Strong proplaintiffpresumptions have the opposite effects. Moderate presumptionsgive rise to equilibria in which both shirking and suit occurprobabilisitically. The socially optimal presumption tradesoff agency costs against litigation costs, and could be eitherstrong or moderate, depending on the social importance of effort,the costs of filing suit, and the comparative advantage thatdiligent agents have over their shirking counterparts in mountinga defense. We posit three applications of our model: the litigationrate effects of the 1995 Private Securities Litigation ReformAct, the business judgment rule in corporations law, and fiduciaryduties in financially distressed firms.     

A theory of firm decline

We study the problem of an investor that buys an equity stake in an entrepreneurial venture, under the assumption that the former cannot monitor the latter's operations. The dynamics implied by the optimal incentive scheme is rich and quite different from that induced by other models of repeated moral hazard. In particular, our framework generates a rationale for firm decline. As young firms accumulate capital, the claims of both investor (outside equity) and entrepreneur (inside equity) increase. At some juncture, however, even as the latter continues to grow, invested capital and firm value start declining and so does the value of outside equity. The reason is that incentive provision is costlier the wealthier the entrepreneur (the greater is inside equity). In turn, this leads to a decline in the constrained-efficient level of effort and therefore to a drop in the return to investment.