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 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 political cycles

We study how the proximity of elections affects policy choices in a model in which policymakers want to improve their reputation to increase their reelection chances. Policymakers' equilibrium decisions depend on both their reputation and the proximity of the next election. Typically, incentives to influence election results are stronger closer to the election (for a given reputation level), as argued in the political cycles literature, and these political cycles are less important when the policymaker's reputation is better. Our analysis sheds light on other agency relationships in which part of the compensation is decided upon infrequently.     

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 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 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 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 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 permissible illegal immigration

In many countries laws are not enforced against visibly present illegal immigrants. The visibly present illegal immigrants also tend to be concentrated in particular sectors. We explain such permissible illegal immigration in an endogenous-policy model where selective sector-specific illegality transforms illegal immigrants from non-sectorally specialized to sector-specific factors of production. Under initial conditions where no immigrants are present, the median voter opposes immigration. When, however, a population of illegal immigrants has accumulated, ongoing illegal immigration becomes an endogenous equilibrium policy, at the same time that a majority of voters opposes legal immigration and opposes amnesty that would legalize the immigrants' presence. We also establish a basis for domestic voters preferring that illegal immigrants be employed in service rather than traded-goods sectors.     

A theory of subjective compound lotteries

We develop a Savage-type model of choice under uncertainty in which agents identify uncertain prospects with subjective compound lotteries. Our theory permits issue preference; that is, agents may not be indifferent among gambles that yield the same probability distribution if they depend on different issues. Hence, we establish subjective foundations for the Anscombe-Aumann framework and other models with two different types of probabilities. We define second-order risk as risk that resolves in the first stage of the compound lottery and show that uncertainty aversion implies aversion to second-order risk which implies issue preference and behavior consistent with the Ellsberg paradox.     

A positive theory of government debt

A government that cannot commit to future policy choices faces a trade-off that explains the level of debt. On the one hand, there is an incentive to increase debt and delay taxation, so as to reduce current distortions. On the other hand, inflating current prices lowers the real value of nominal debt and so there is a motive to reduce it now. The size of long-run debt will depend on the interaction of these two opposing incentives. The critical determinant is the willingness of households to substitute away from goods being taxed by inflation. Numerical simulations show that the model matches some qualitative and quantitative properties of U.S. policy variables, including the fact that wars are frequently financed with a mix of instruments. The theory interprets the unusual post-World War II inflation and fast liquidation of accumulated debt as being due to higher long-run debt and expenditure in the period leading up to the war.     

A bargaining theory of the firm

Suppose that a firm has several owners and that the future is uncertain in the sense that one out of many different states of nature will realize tomorrow. An owner’s time preference and risk attitude will determine the importance he places on payoffs in the different states. It is a well-known problem in the literature that under incomplete asset markets, a conflict about the firm’s objective function tends to arise among its owners. In this paper, we take a new approach to this problem, which is based on non-cooperative bargaining. The owners of the firm play a bargaining game in order to choose the firm’s production plan and a scheme of transfers which are payable before the uncertainty about the future state of nature is resolved. We analyze the resulting firm decision in the limit of subgame-perfect equilibria in stationary strategies. Given the distribution of bargaining power, we obtain a unique prediction for a production plan and a transfer scheme. When markets are complete, the production plan chosen corresponds to the profit-maximizing production plan as in the Arrow–Debreu model. Contrary to that model, owners typically do use transfers to redistribute profits. When markets are incomplete, the production plan chosen is almost always different from the one in a transfer-free Drèze (pseudo-)equilibrium and again owners use transfers to redistribute profits. Nevertheless, our results do support the Drèze criterion as the appropriate objective function of the firm.     

A spatial theory of party formation

Members of an assembly that chooses policies on a series of multidimensional ideological issues have incentives to coalesce and coordinate their votes, forming political parties. If an agent has an advantage to organize a party at a lower cost, a unique party forms and the policy outcome moves away from the Condorcet winning policy, to the benefit of party members. If all agents have the same opportunities to coalesce into parties, at least two parties form. The results are robust to the consideration of an endogenous agenda and to generalizations of the distribution of preferences.     

A theory of self-fulfilling political expectations

In their pursuit of being re-elected, politicians might not choose high-quality policies but just conform to popular wisdom. The larger are the office spoils, and the more precise is an incumbent's knowledge of voter opinion, the more likely that she will resort to such populism. My main result is that the public's trust or distrust in politicians' behavior may be self-fulfilling. When voters assess the quality of an incumbent politician, they will compare her policy choices with their own prior opinion. If voters think that the incumbent was just trying to conform, a failure to do so will be even more damaging for the incumbent's election chances. However, this only increases the incumbent's incentives to conform, which indeed confirm voters' skepticism. Loosely put, a skeptic voter attitude tends to generate conformist politicians, while a trusting attitude tends to generate confident ones.     

A quantitative theory of tax evasion

I present a simple, unified approach to study the tax evasion practices often observed in developing countries. I develop a general equilibrium model where heterogeneous establishments optimally select themselves into informality, tax compliance, and formal tax evasion. Informal firms evade taxes by staying small, while larger, formal firms can engage in costly tax evasion. In equilibrium, tax revenues rely on medium-sized firms, which are scarce. In a calibration exercise using data from Mexico, I find that reducing the returns to tax evasion by formal firms increases tax revenues by up to 68%. However, economies where such returns are too high face a trade-off between tax collection and aggregate efficiency, as cracking down on formal tax-evading firms pushes some firms into informality. Last, as the economy develops, the informal sector shrinks, while the tax-evading sector expands, thus limiting potential collection. If lower informality is a byproduct of development, and not vice versa, a solid tax base can be achieved by fiscal authorities effectively by focusing on formal tax evasion.     

A constitutional theory of public enterprise

This article rationalizes public enterprise by analyzing the constitutional choice between private and public ownership of production arrangements. Arguing that results depend on who does the choosing, the article compares choices by self-governing citizens with choices by self-directed governmental officials. The resulting institutional theory identifies four conditions that cause citizens to favor public over private ownership. None of the conditions refers to the standard concept of economic efficiency, which guides most economic comparisons of public and private enterprise.