Ethnic segregation and the quality of government: the importance of regional diversity

It has recently been argued that the regional segregation of ethnic or linguistic groups leads to lower government quality and that this is partly due to the negative effect of segregation on inter-group trust. In this paper I show that the relationship between ethnic segregation, trust and government quality is mediated by another dimension of regional diversity namely, regional income disparities. Accounting for regional disparities reduces the estimated impact of segregation and trust on the quality of government and reduces the statistical robustness of ethnic segregation. The analysis highlights the usefulness of identifying other factors which may be driving regional diversity, beyond ethno-linguistic characteristics.     

Income distribution,fiscal policy,and delays in stabilization

This paper presents an explanation of the cycles of large fiscal expansions and macroeconomic stabilizations that are frequently observed in developing countries. In the model, different coalitions form and change depending on the position of three groups over the degree of redistribution and the timing of debt repayment. I show that seemingly unsustainable fiscal policies arise from a coalition of the poor and the rich when the distribution of income is highly unequal. When income is distributed more equally, instead, the patterns of fiscal policy and of the trade balance are consistent with the standard predictions of representative agent models. These features of the model seem consistent with available empirical evidence.     

Population heterogeneity and growth

I investigate the robustness of the link between growth and heterogeneity in a population along ethnic, linguistic, religious, and socio-economic class lines using cross-country data covering the period 1960–92 and 72 countries. In addition to 21 distinct explanatory variables extensively used in the empirical growth literature, I consider several fragmentation and polarization indices capturing the heterogeneity in a population to deal with measurement uncertainty, and utilize Bayesian Model Averaging techniques to address uncertainty issues regarding model specification. My results indicate that while substantial data evidence favors the inclusion of population heterogeneity as a theory when proxied by fragmentation indices, it does not support the inclusion of this theory when proxied by polarization indices. Furthermore, the religious fragmentation index has the strongest evidence in favor of its inclusion as opposed to ethnic and linguistic fragmentation indices and income inequality.     

DIMENSIONS,TRANSACTIONS COSTS AND COALITIONS IN LEGISLATIVE VOTING*

Dimensional studies of Congressional voting have found a single dominant “ideological” dimension, while regression estimates find that constituency variables and party are dominant. Koford (1989b) recalibrated the dimensional studies, and found that several dimensions are important. This study reviews those findings, and then considers additional reasons why dimensional studies might understate the number of dimensions. It then examines the regression estimates for biases that overstate the number of dimensions. Overall, fewer dimensions are found than seem consistent with the wide variety of constituents' preferences on issues. A model is developed in which the transactions costs of building coalitions reduces the number of dimensions visible on roll-call votes below the underlying dimensionality of preferences in the issue space. When legislative parties build internal coalitions to pass and defeat bills, voting on randomly drawn bills has a single party-oriented dimension. Natural ideological dimensions are reinforced when parties write bills and logroll along natural lines of cohesion. Numerical examples suggest that these effects could be important, and suggest lines for empirical investigation of the underlying issue space.     

Ethnic Diversity,Civil War and Redistribution*

In a game‐theoretic framework, we analyse the circumstances under which self‐enforcing redistribution and power‐sharing coalitions can be used to peacefully resolve ethnic conflict. The existence of a pacific equilibrium depends crucially on ethnic diversity (the number of ethnic groups). The risk of civil war is comparatively high at intermediate levels of ethnic diversity. The risk is low if a society is either very homogeneous or very diverse. Predictions of the model are consistent with evidence on the incidence of civil war.     

Minorities and Democratization

We analyze the process of democratization in a polity with groups that are divided along ethnic as well as economic lines. We show that: (i) the presence of ethnic minorities, in general, makes peaceful democratic transitions less likely; (ii) minorities suffer from discriminatory policies less in democracies with intermediate levels of income inequality; and (iii) in new democracies with low levels of income inequality, politics is divided along ethnic lines, and at greater levels of inequality economic cleavages predominate.     

The Middle Class Consensus and Economic Development

A middle class consensus is defined as a high share of income for the middle class and a low degree of ethnic divisons. The paper links a middle class consensus to resource endowments, along the lines of the provocative thesis of Engerman and Sokoloff (1997 and 2000). This paper exploits this association using tropical resource endowments as instruments for inequality. A higher share of income for the middle class and lower ethnic divisions are associated with higher income and higher growth, as well as with more education, better health, better infrastructure, better economic policies, less political instability, less civil war and ethnic minorities at risk, more social modernization and more democracy.     

COALITION FORMATION WITH LEARNING FROM PREDECESSORS: A CASE OF DYNAMIC POSITIVE EXTERNALITY

We consider a simple multi‐period model where the entry cost varies with respect to the number of firms that have entered previously. In the non‐cooperative outcome, there is clustered entry among the firms in the last period; hence, the full potential of learning is not expropriated. When firms are allowed to form coalitions, the non‐cooperative outcome is dominated; thus, there is a gain in efficiency. We also find that full efficiency is obtained when a grand coalition is formed. The implications of policies on coalitions as well as on individual firms are also discussed.     

THE RELATIONSHIP BETWEEN CONSUMPTION, INCOME AND WEALTH IN HONG KONG

Abstract. This paper estimates a consumption function for Hong Kong along the lines of the standard life‐cycle model. I find a stable relationship between consumption, labour income and wealth with plausible long‐run estimates of the implied marginal propensity to consume out of income and wealth. The marginal propensity to consume out of housing wealth is estimated to be lower than in other industrialized economies, which is consistent with a relatively uneven distribution of wealth in Hong Kong. Arithmetically, the decline in housing wealth in Hong Kong since 1997 can more than account for the weakness of consumption since then.     

Toward Farsightedly Stable International Environmental Agreements

The stability of International Environmental Agreements (IEA) is analyzed by using game theory. The integrated assessment model FUND provides the cost-benefit payoff functions of pollution abatement for sixteen different world regions. The farsighted stability concept of Chwe (1994) is used and solved by combinatorial algorithms. Farsighted stability assumes perfect foresight of the players and predicts which coalitions can be formed when players are farsighted. All farsightedly stable coalitions are found, and their improvement to environment and welfare is considerable. The farsightedly stable coalitions are refined further to preferred farsightedly stable coalitions, which are coalitions where the majority of coalition members reach higher profits in comparison with any other farsightedly stable coalitions. Farsightedly stable coalitions contribute more to the improvement of environment and welfare in comparison to D'Aspremont et al.'s (1983) stable ones. Considering multiple farsighted stable coalitions, participation in coalitions for environmental protection is significantly increased, which is an optimistic result of our game theoretical model.     

A test of the household income process using consumption and wealth data

The evolution of household income can be explained almost equally well by rival models. However, rival models have very different implications for other household behaviours, such as consumption. I therefore test between two prominent models in the UK using panel data on consumption and wealth, as well as income, over 1991–2006. To operate the test, I show that long-lived income shocks transmit far less than one-for-one through to consumption, and particularly so for younger households. I then compare these estimates of transmission with estimates of households’ ability to smooth shocks, captured by the data on wealth. Conditional on the suitability of the consumption model, my estimates provide evidence against the restricted income process (RIP) and in favour of an alternative heterogeneous income process (HIP). This finding also explains why cross-sectional consumption inequality grew slowly over the period even though the variance of long-lived shocks was high. Finally, I conclude that it is important to consider mean reversion of shocks when constructing life-cycle consumption models.     

The impact of income distribution on structural transformation: The role of extensive margin

I study the impact of income distribution on structural transformation. Empirical results suggest that income inequality induces lower share of employment in services sector, and this negative effect gets stronger as income level rises. To explain these facts, I present a multi-sector model with non-homothetic preference and heterogenous agents in terms of different income levels. In equilibrium, the individuals will not consume all the goods available in the market. While the income elasticity falls as income increases at the individual level, it may not at the aggregate level. The extensive margin of consumers is important to understand this result. Within this framework, I show that income inequality may have negative effects on an industry with income elasticity larger than 1. More importantly, this effect is getting stronger as income levels increase.     

A simple model of coalitional bidding

Summary. We analyze a model of coalitional bidding in which coalitions form endogenously and compete with each other. Since the nature of this competition influences the way in which agents organize themselves into coalitions, our main aim is to characterize the equilibrium coalition structure and the resulting bids. We do so in a simple model in which the seller may have good reason to allow joint bidding. In particular, we study a model in which the agents are budget constrained, and are allowed to form coalitions to pool their finances before engaging in the first price auction. We show that if the budget constraint is very severe, the equilibrium coalition structure consists of two coalitions, one slightly larger than the other; interestingly, it is not the grand coalition. This equilibrium coalition structure is one which yields (approximately) the maximum expected revenue. Thus the seller can induce the optimal (revenue maximizing) degree of cooperation among budget constrained buyers simply by permitting them to collude. Received: June 25, 1999; revised version: November 13, 2000     

INEQUALITY COMPARISONS IN A MULTI‐PERIOD FRAMEWORK: THE ROLE OF ALTERNATIVE WELFARE METRICS

This paper considers the use of alternative welfare metrics in evaluations of income inequality in a multi‐period context. Using Norwegian longitudinal income data, it is found, as in many studies, that inequality is lower when each individual's annual average income is used as welfare metric, compared with the use of a single‐period accounting framework. However, this result does not necessarily hold when aversion to income fluctuations is introduced. Furthermore, when actual incomes are replaced by expected incomes (conditional on an initial period), using a model of income dynamics, higher values of inequality over longer periods are typically found, although comparisons depend on inequality and variability aversion parameters. The results are strongly influenced by the observed high degree of systematic regression toward the (geometric) mean, combined with a large extent of individual unexpected effects.     

Redistribution and Small Coalitions of Friends

When side marketing trade is perfect, linear taxation of retradeable commodities is the only scheme that survives attempts to arbitrage. In this paper, I discuss tax schemes when side trading is imperfect in the sense that commodities can only be re-exchanged within coalitions no larger than two people. In the framework of a two-class economy, I identify coalitions which might have an incentive to form and provide a characterisation for the Pareto-efficient tax scheme. The tax formula has a very simple form and strongly resembles the formula for the no-side-trade case. In a numerical exercise, the constraints imposed on policy by an imperfect side trading process are found to be almost as tough as those imposed by perfect side trading.     

An Enforcement-Coalition Model: Fishermen and Authorities Forming Coalitions

The paper sets up a four-stage enforcement model of fish quotas. The purpose of the paper is to show how the level of enforcement set by the authorities affects the way fishermen form coalitions. We show that a high level of control effort yields less co-operation among fishermen, while in the case of low control effort, coalitions are somewhat self-enforcing. The paper further discusses how the optimal enforcement level changes when the coalition formation among authorities changes: centralised, partly centralised and decentralised authorities. We show that decentralised authorities set a lower level of control effort compared to the centralised authorities. The theoretical results are illustrated by simulations of the Baltic Sea cod fishery.The authors acknowledge valuable comments and suggestions from Frank Jensen and Niels Vestergaard.     

Valuations and dynamics of negotiations

This paper analyzes three‐party negotiations in the presence of externalities. We obtain a closed‐form solution for the Markov perfect equilibrium of a multilateral non‐cooperative bargaining model, yielding an equilibrium value and dynamics of negotiations that are supported by experimental studies. Players’ values are monotonically increasing (or decreasing) in the amount of negative (or positive) externalities that they impose on others. Moreover, players’ values are continuous and piecewise linear on the worth of bilateral coalitions, and are inextricably related to their negotiation strategies: the equilibrium value is the Nash bargaining solution when no bilateral coalitions form; the Shapley value when all bilateral coalitions form; or the nucleolus, when either one bilateral coalition among “natural partners” or two bilateral coalitions including a “pivotal player” form.     

Redistribution with Unobservable Bequests: A Case for Taxing Capital Income

This paper addresses the question of the optimal taxation of labour and interest income in an overlapping generations model with two unobservable characteristics, ability and inheritance. We assume realistically that saving can only be taxed anonymously, whereas the tax on labour earnings can be individualized and made non-linear. In such a setting, we show that a withholding tax on interest income along with a non-linear tax on labour income is desirable. The role of interest income taxation is to indirectly tax inherited wealth.
JEL Classification D 63, H 2     

Hedonic and environmental quality: A hybrid model of product differentiation

In this paper, we analyze how strategic competition between a green firm and a brown competitor develops when their products are differentiated along two dimensions: hedonic quality and environmental quality. The former dimension refers to the pure (intrinsic) performance of the good, whereas the latter dimension has a positional content: buying green goods satisfies the consumer's desire to be portrayed as a socially worthy citizen. We consider the case in which these quality dimensions are in conflict with each other so that the higher the hedonic quality of a good, the lower the corresponding environmental quality. We characterize the equilibrium configurations and discuss the policy implications deriving from our analysis.     

Optimal income taxation with tax avoidance and endogenous labour supply

I determine the optimal income tax schedule when individuals both choose endogenously their labour supply and have the possibility of avoiding paying taxes. Considering a convex concealment cost function, I propose a formula for the optimal marginal tax rate, that generalizes the formula of the standard Mirrlees model to the case of tax avoidance. I also show that the results obtained by Casamatta (2021) in the fixed income case hold true when labour supply is endogenous: with a low enough marginal cost of avoidance, it is optimal to let some taxpayers, located in the interior of the skill distribution, avoid taxes.