Campaign spending regulation in a model of redistributive politics

Summary. We consider a model in which parties that differ in perceived valence choose how to allocate electoral promises (money, pork-barrel projects) among voters. The party perceived to be less valent has a greater incentive to “sell out” to a favored minority and completely expropriate a fraction of the electorate. By reducing the difference in perceived valence, campaign-finance regulations may reduce the extent of the expropriation and achieve a more equitable political outcome. We analyze various instruments of campaign-finance regulation from this perspective.Received: 20 Februay 2003, Revised: 25 January 2005, JEL Classification Numbers: D72, H2.Nicolas Sahuguet: Correspondence toWe thank Alessandro Lizzeri, George Mailath, and Andrew Postlewaite for their comments. We also thank the editor Dan Kovenock and an anonymous referee. The second author is grateful to the National Science Foundation for financial support under grant SES-0078870.     

Anonymous yes–no voting with abstention and multiple levels of approval

Symmetric (3,2) simple games serve as models for anonymous voting systems in which each voter may vote “yes,” abstain, or vote “no,” the outcome is “yes” or “no,” and all voters play interchangeable roles. The extension to symmetric (j,2) simple games, in which each voter chooses from among j ordered levels of approval, also models some natural decision rules, such as pass–fail grading systems. Each such game is determined by the set of (anonymous) minimal winning profiles. This makes it possible to count the possible systems, and the counts suggest some interesting patterns. In the (3,2) case, the approach yields a version of May's Theorem, classifying all possible anonymous voting rules with abstention in terms of quota functions. In contrast to the situation for ordinary simple games these results reveal that the class of simple games with 3 or more levels of approval remains large and varied, even after the imposition of symmetry.     

Player Types and Self-Impression Management in Dictatorship Games: Two Experiments

Recent experimental research on dictatorship games shows that many dictators share their outcomes with unknown, anonymous others. The data suggests that dictators can be “typed” as rational (taking the maximum), equal (splitting outcomes equally), or “other.” This paper experimentally tests the self-impression management model, which predicts that individuals act to show themselves in a positive light, even when they are the only observer of their own behavior. The model predicts that the “other” type of dictator will avoid being greedy by taking more only as their choices are increasingly restricted. Results from two experiments support the model's predictions. The conclusion advocates differentiating basic psychological motivations in modeling individual behavior. Journal of Economic Literature Classification Numbers: C78, C91, D63.     

Home country effects of foreign direct investment: From a small economy to a large economy

Previous studies on home country effects mainly focused on FDI from large developed economies to other countries. But today's super recipient is a relatively larger economy than its investors and many of these investors are not classified as “developed economies.” A simple Ak type model implies that a small and more developed country investing in a large and less developed country will experience decreases in both employment and income disparity (compared to the recipient country) as the less-developed recipient country gains the higher technology of production through FDI inflows. The empirical results for the Four Tigers (source countries) and China (recipient country) are consistent with our theoretical model of FDI outflows. We also find that FDI outflows to China decrease the ratio of exports to GDP only for small source countries, even though a higher investment in China raises the share of these countries' exports-to-China to China's total imports.     

Strategic pattern recognition—experimental evidence

The repeated play of an asymmetric Battle of the Sexes is analyzed from the perspective of “strategic pattern recognition.” Convergence to equilibrium patterns (in finite histories) and related concepts like breaking-an-equilibrium-pattern are defined and applied to the data. More than half of 202 pairs of subjects are characterized as weakly converging to a fixed equilibrium pattern. The results also show that subjects tend to break their best pattern in cases where their partners' payoffs are relatively low and that convergence initiation does not pay off. While female subjects frequently reject the males' best equilibrium with anonymous matching, behavior gets more cooperative when pairs are introduced to each other before the beginning of the game.     

Gender-Based Focal Points

The subjects behaved significantly more “hawkish” in an experimental battle of the sexes game when the co-player was a woman compared to when it was a man. Discrimination helped the parties to coordinate and increase the average earnings in the subject group of mixed sex, compared to the unisex groups. Journal of Economic Literature Classification Numbers: J7, C7, C9.     

Moral hazard contracts: Does one size fit all?

We show that firms' practice of anonymous contracts (“one-size-fits-all”) can be reconciled with standard agency theory if careers are marked by frequent transitions between employers, and agents have career concerns because complete long-term contracts are not feasible.     

Quasi-weightings, Trading, and Desirability Relations in Simple Games

We investigate the problem of simultaneously characterizing various classes of simple games in three different ways: (i) the existence of “quasi-weightings” in which smaller numerical values are assigned to losing coalitions than are assigned to winning ones, (ii) the robustness of “winningness” with respect to trades involving groups of players, and (iii) the acyclicity of certain strict “orderings” that intuitively correspond to the idea of one player being more desirable than another.Journal of Economic LiteratureClassification Number: C71.     

Portfolio delegation under short-selling constraints

Summary. In this paper we study delegated portfolio management when the manager’s ability to short-sell is restricted. Contrary to previous results, we show that under moral hazard, linear performance-adjusted contracts do provide portfolio managers with incentives to gather information. We find that the risk-averse manager’s effort is an increasing function of her share in the portfolio’s return. This result affects the risk-averse investor’s choice of contracts. Unlike previous results, the purely risk-sharing contract is now shown to be suboptimal. Using numerical methods we show that under the optimal linear contract, the manager’s share in the portfolio return is higher than what it is under a purely risk sharing contract. Additionally, this deviation is shown to be: (i) increasing in the manager’s risk aversion and (ii) larger for tighter short-selling restrictions. As the constraint is relaxed the deviation converges to zero.Received: 25 July 2002, Revised: 12 December 2004, JEL Classification Numbers: D81, D82, J33.Juan-Pedro Gómez: Correspondence toAn earlier version of the paper was circulated under the title “Providing Managerial Incentives: Do Benchmarks Matter?” We are grateful to an anonymous referee whose comments helped to improve the paper. We also thank comments by Viral Acharya, Alexei Goriaev, Ernst Maug, Kristian Rydqvist, Neil Stoughton, Rangarajan Sundaram, Fernando Zapatero and seminar participants at the 1999 SED meetings in Sardinia, the 1999 Workshop in Mutual Fund Performance at EIASM, Brussels, the 2000 EFA meetings in London, the Bank of Norway, the Stockholm Schools of Economics, the Norwegian School of Management and the 2001 WFA meetings in Tucson. Sharma gratefully acknowledges financial support from the Asociacion Mexicana de Cultura.     

The effects of information on strategic investment and welfare

Summary. The paper analyses the influence of uncertainty and competition on the strategic considerations of a firm’s investment decision, where the firm receives imperfect signals about the profitability of an investment project. We find a preemptive or an attrition equilibrium depending on a trade-off between first and second mover advantages. We show that welfare can be negatively affected by decreasing uncertainty, i.e. more and/or better information. Furthermore, simulations indicate that duopoly leads to higher welfare than monopoly if there are few and relatively non-informative signals, whereas the opposite holds if there are many and relatively informative signals.Received: 13 May 2004, Revised: 22 March 2005, JEL Classification Numbers: C61, D43, D81.Jacco J. J. Thijssen: Correspondence toDolf Talman is acknowledged for many inspiring discussions and meticulous proof-reading. Jan Boone, Thomas Sparla, participants in the workshop on “Recent Topics in Real Options Valuation”, July 2002, Krems, Austria, and an anonymous referee are thanked for helpful comments. The usual disclaimer applies.     

Consistent representative democracy

We study axioms which define “representative democracy” in an environment in which agents vote over a finite set of alternatives. We focus on a property that states that whether votes are aggregated directly or indirectly makes no difference. We call this property representative consistency. Representative consistency formalizes the idea that a voting rule should be immune to gerrymandering. We characterize the class of rules satisfying unanimity, anonymity, and representative consistency. We call these rules “partial priority rules.” A partial priority rule can be interpreted as a rule in which each agent can “veto” certain alternatives. We investigate the implications of imposing other axioms to the list specified above. We also study the partial priority rules in the context of specific economic models.     

A prospective on macrocybernetic process management systems

In an editorial in the February 1996 issue of Technological Forecasting and Social Change Professor Linstone noted that “the rapid pace of technology has not been matched by the pace of human change.” Were we to drop our perspective a bit lower, a similarly troublesome imbalance within technology itself becomes apparent: the rapid rate of increase in the complexity of process-related technologies relative to the much slower rate of increase in the sophistication of process control systems. The conclusion at which most technological forecasts seem to arrive is that there will be a continuation—perhaps even an acceleration—of the trend toward more intricate and sweepingly extensive processes (production-related and otherwise). If so, there is the specter of a steadily increasing shortfall between requirements and capabilities, and hence the likelihood of even grander technological embarrassments. This article considers two ways in which this shortfall might be kept in check. Increases in the intricacy of processes can be met, and to a considerable extent are already being met, by exchanging conventional process control facilities for enhanced alternatives. Less certain is how expansions of project scope might best be accommodated. One possibility is to consider exchanging process control systems for broader-purview process management systems. Hence the focus in this article is on prospects for the development of macrocybernetic constructs.     

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.     

Eliciting Preferences to Assign Positions and Compensation

We describe strategy-proof rules for economies where an agent is assigned a position (e.g., a job) plus some of a divisible good. For the 2-agent–2-position case we derive a robust characterization. For the multi-agent–position case, many “arbitrary” such rules exist, so we consider additional requirements. By also requiring coalitional strategy-proofness or nonbossiness, the range of a solution is restricted to the point that such rules are not more complex than those for the Shapley–Scarf housing model (no divisible good). Third, we show that essentially only constant solutions are immune to manipulations involving “bribes.” Finally, we demonstrate a conflict between efficiency and strategy-proofness. The results extend to models (without externalities) in which agents share positions. Journal of Economic Literature Classification Numbers: C72, D70.     

Contracts and externalities: How things fall apart

A single principal interacts with several agents, offering them contracts. The crucial assumption of this paper is that the outside-option payoffs of the agents depend positively on how many uncontracted or “free” agents there are. We study how such a principal, unwelcome though he may be, approaches the problem of contract provision to agents when coordination failure among the latter group is explicitly ruled out. Two variants are considered. When the principal cannot re-approach agents, there is a unique equilibrium, in which contract provision is split up into two phases. In phase 1, simultaneous offers at good (though varying) terms are made to a number of agents. In phase 2, offers must be made sequentially, and their values are “discontinuously” lower: they are close to the very lowest of all the outside options. When the principal can repeatedly approach the same agent, there is a multiplicity of equilibria. In some of these, the agents have the power to force delay. They can hold off the principal's overtures temporarily, but they must succumb in finite time. In both models, despite being able to coordinate their actions, agents cannot resist an “invasion” by the principal and hold to their best payoff. It is in this sense that “things [eventually] fall apart”.     

Can Japan succeed in “Chigyo-ka” (intelprise-formation)?

There are two aspects in today's information revolution that started in the late 1970s. The first is an aspect referred to as “the third industrial revolution,” which triggers the transition to the “21st century system of Industrialization.” The information revolution in this sense brings the creation of new “breakthrough industries (new multimedia industries).” And the second aspect of the information revolution possesses the characteristics of both a technological revolution and a social revolution and brings about the arrival of the third phase of the historical evolutionary process of the modern civilization, which proceeds through three phases, namely “militarization, industrialization, and then informatization.”If the bearers of modern industrialization are a “group of enterprises” that have been engaged in the race in order to gain “wealth” (generalized means of exchange/exploitation power), and if these enterprises' activities have been exercised in the world market where their products have been sold, then it is appropriate to call the bearers of informatization a “group of intelprises.” They will be engaged in the race to gain “wisdom” (generalized means of persuasion/induction power), then stages of their activities can be called a “global intelplace” where “sharables,” that is, information and knowledge, will be disseminated. And now, toward the 21st century, the third phase of modernization, which can be called the “informatization/intelprise formation” or the “wisdom game” (intellectualism), is about to begin.Japan's “ie society (a society based on the ie principle—literally, it means “house” but here it is interpreted as cultural principle for organizing a society), which has been going through the process of evolution on the Japan Archipelago, has developed a network-based organization with little stratification within its infrastructure. In this sense, Japanese society can be characterized as a “network-oriented society” in which intelprises and an intelplace in the broad sense have functioned as the essential components of the society since Middle Ages. In general, an intelplace and intelprises that operate actively within this framework serve as the flexible bases for different types of social relations and institutions, such as states and markets and eventually integrate these into the society to a certain extent. In fact, it took place quite regularly during the modernization “in the narrow sense,” or Westernization of Japanese society after the Meiji Restoration. There exist some problems, however. Some of the characteristics found in Japanese society may become obstacles to activities aimed at the sharing and promotion of information and knowledge in the global intelplace and Japanese participation in the “wisdom game.” Badly needed are serious efforts for Japanese intelprise-formation to reduce these obstacles as much as possible.     

Optimality and Robustness of the English Auction

In Milgrom and Weber's (1982, Econometrica50, 1089–1122) “general symmetric model,” under a few additional regularity conditions, the English auction maximizes the seller's expected profit within the class of all posterior-implementable trading procedures and fails to do so among all interim incentive-compatible procedures in which “losers do not pay.” These results suggest that appropriate notions of robustness and simplicity which imply the optimality of the English auction for a risk-neutral seller must impose “bargaining-like” features on the set of feasible trading mechanisms. Journal of Economic Literature Classification Numbers: D44, D82.     

Institutions and economic development: How strong is the relation?

This paper investigates the relationship between institutions and economic development (output per worker). As in Hall and Jones (1999), we find that a 1% improvement in institutions (as we measure them) generates on average a 5% increase in output per worker. However, this relationship is not linear and the data have important heterogeneity. Countries with the same value of institutions have different levels of income per worker. We ask whether the “returns to institutions” are the same across countries conditional on the level of institutions. Using quantile regression methods, we show that for countries at the top of the conditional distribution of international incomes, the “returns to institutions” are lower (around 3.8%,) than for countries at the bottom of this distribution (around 6.2%). We show that this result is robust for different model specifications and definitions of institutions. We also provide evidence that, conditional on the level of institutional development, the distribution of output per worker tends to become less disperse as countries improve their institutional framework. In other words, having better institutions is essential in order to close the output-per-worker gap across countries. Finally, we provide the rationale behind the results through a modified version of a Neoclassical Growth Model with time varying wedges, representing policy distortions and institutions.We thank Lee Alston, Roger Koenker, and Stephen L. Parente for helpful discussion, Werner Baer for useful comments, and Chad Jones for facilitating access to the data set. We are also indebted to an anonymous referee and an associate editor for important suggestions that improved the final paper. The analysis, opinions and findings expressed herein represent the views of the authors, they are not necessarily those of the Banco de Portugal. Any remaining errors are our responsibility.First version received: May 2001/Final version received: August 2003     

War and peace: Third-party intervention in conflict

This paper develops a simple sequential-move game to characterize the endogeneity of third-party intervention in conflict. We show how a third party's “intervention technology” interacts with the canonical “conflict technologies” of two rival parties in affecting the sub-game perfect Nash equilibrium outcome. From the perspective of deterrence strategy, we find that it is more costly for a third party to support an ally to deter a challenger from attacking (i.e., to maintain peace or acquiescence), as compared to the alternative case when the third party supports the ally to gain a disputed territory by attacking (i.e., to create war), ceteris paribus. However, an optimally intervening third party can be either “peace-making”, “peace-breaking”, or neither depending on the characteristics of the conflict and the stakes the third party holds with each of the rival parties.     

Do voters vote ideologically?

In this paper we address the following question: To what extent is the hypothesis that voters vote “ideologically” (i.e., they always vote for the candidate who is ideologically “closest” to them) testable or falsifiable? We show that using data only on how individuals vote in a single election, the hypothesis that voters vote ideologically is irrefutable, regardless of the number of candidates competing in the election. On the other hand, using data on how the same individuals vote in multiple elections, the hypothesis that voters vote ideologically is potentially falsifiable, and we provide general conditions under which the hypothesis can be tested.