Managerial firms’ profitability,unions, and environmental taxes

This article examines how determining an optimal environmental tax in a Cournot duopoly with unionized labour markets and managerial firms departing from the strict profit-maximization. It is shown that firm-specific monopoly unions that set wages (1) reduce both the environmental tax and environmental damage and (2) counterintuitively, increase firms’ profitability when the abatement technology is not too “efficient”, and the public evaluation of environmental quality is sufficiently high. Within this framework, the work also develops the endogenous game played by firms that must choose between sales delegation (SD) and profit-maximization. Results show that the SD contract always emerges as the unique, deadlock sub-game perfect Nash equilibrium, thereby solving the (prisoner's) dilemma emerging in the related existing literature assuming a competitive labour market.     

Nonlinear taxation of income and education in the presence of income-misreporting

We study the joint design of nonlinear income and education taxes when the government pursues redistributive objectives. A key feature of our setup is that the ability type of an agent can affect both the costs and benefits of acquiring education. Market remuneration of agents depends on both their innate ability type and their educational choices. Our focus is on the properties of constrained efficient allocations when educational choices are publicly observable at the individual level, but earned income is subject to misreporting. We find that income-misreporting (IM) affects the optimal distortions on income and education and shed light on the reasons for it and mechanisms through which it is done. We show how and why IM strengthens the case for downward distorting the educational choices of low-ability agents. Finally, we find that IM provides another mechanism that makes commodity taxation useful.     

Can optimism solve the entrepreneurial earnings puzzle?*

In this paper, we apply a general equilibrium occupational choice model to the study of the impact of optimism on the earnings of entrepreneurs and workers. We extend the work of Lucas (1978 Bell Journal of Economics 9, 508–523) by assuming a fraction of individuals are optimistic about their ability as entrepreneurs. The model shows that optimism leads to a misallocation of talent and inputs, which raises input prices and lowers output. The model is calibrated to match salient features of the UK economy and the British Household Panel Survey. The calibration shows that optimism can account for more than half of the size of the entrepreneurial earnings puzzle in the UK.     

Teaching an old dog a new trick: Reserve price and unverifiable quality in repeated procurement

This paper shows that, in a repeated competitive procurement, a buyer can use the reserve price in a low-price auction as a “public”—hence nondiscriminatory—incentive device to elicit unverifiable quality. We study a model with many firms and one buyer, who is imperfectly informed on the firms' costs. When firms are ex ante identical, the provision of quality is sustained by a sufficiently high reserve price to reward firms for the quality provision and by the threat of setting a low reserve price forever, if quality is not delivered. The buyer can elicit the desired level of unverifiable quality provided her baseline valuation of the project is not too high and the net benefit from unverifiable quality is not too low. These results are robust to firms' heterogeneity in their time preferences when the punishment for a deviation is finite but sufficiently long.     

Health subsidies,prevention and welfare

People value healthy ageing but may underinvest in health-improving preventive care. This arises when they ignore the beneficial effects of healthy ageing on public health expenditures and hence on the tax burden of future generations. This health externality justifies public intervention. We build an overlapping generations model with a government subsidizing investment in health by the young generation and paying the health care costs of the old generation. We find that the welfare-maximizing subsidy rate depends positively on the health externality and the size of health care costs, and negatively on the discount factor. The subsidy rate should therefore be high when prevention is cost-effective and when the population is careless about the future. Moreover, the welfare-maximizing subsidy rate is lower than the health-maximizing rate but higher than the capital-maximizing rate. This underlines the trade-off for a policy maker between health and economy.     

Estimating Lower Tail Dependence Between Pairs of Poverty Dimensions in Europe

This article provides an innovative method for measuring the dependence between pairs of poverty dimensions using a semiparametric copula approach that permits us to account for the importance of extreme low values. The association between pairs of poverty dimensions at the lower tail is easily measured using the parameter estimates of the specified parametric copula, and no further calculations are needed. This approach is used to measure the bivariate lower tail dependence between the dimensions of the AROPE rate in Europe at two time points (2009 and 2018). The findings reveal a statistically significant increase in the lower tail dependence between 2009 and 2018 in several European countries.     

R&D subsidies in a duopoly market with outsourcing to the rival firm

This paper investigates the effects of a public uniform R&D subsidy policy in a downstream duopoly market in which a nonintegrated firm, which faces a lower marginal cost, outsources inputs from its vertically integrated rival. The findings show that, in this market structure, such a policy has relevant effects largely differentiated between downstream competitors, as it can significantly modify the relative market shares and profitability of competing firms. Unlike the standard Cournot setting augmented with R&D, results show that the subsidy policy can have different (counterintuitive) effects on R&D investments, output, and profits of the vertically integrated producer and the vertically separated firm, which hold in both cases of exogenous and endogenous (optimal) subsidy. Our findings offer some testable implications and suggest that a subsidy policy in a market with outsourcing to a rival should also consider the different effects of this approach on competitors.