Crime and income inequality: An economic approach

Conclusion When a given pie is redivided in a less equalitarian manner, it is uncertain whether those already undertaking illegal activity will increase or decrease their activities, since the return to illegal activities is countered by the loss due to punishment (which is more painful to a criminal who failed) on one hand, and from the cost of the sacrifice of utility from legitimate activities on the other hand.If the absolute level of wealth remains constant but relative position declines, an incentive is generated to re-establish a person's standing by joining the crime industry. This is certainly the case at the margin for those close to the boundary of joining, i.e., those who are almost indifferent between joining or remaining within the legal framework.Assuming an individual is already participating in illegal activities, the effect of either an absolute or relative change in his level of wealth on his level of illegal activities is indeterminate. This applies both to the case where the total wealth of the society is fixed and the share of the pie going to the rich rises and the case where the total pie rose but the entire gain went only to the rich.In summary, it has been shown that an increase in wealth inequality has an indeterminate outcome both with respect to the decision of the poor on whether or not to enter the crime industry and with respect to the decision of those already participating in illegal pursuits to increase or decrease their level of activity. This conclusion is somewhat contrary to the general consensus of the literature, which appears to hold that increases in wealth inequality will tend to increase both the level of participation in the crime industry and the level of output within the industry.     

Hard data or bleeding heart data: The value of qualitative data in research in a rural village in Matatiele District∗

Qualitative data derived from participant observation are often overlooked by development experts anxious to complete their projects speedily. But the surveys they use cannot reveal the details of poor people's lives.

This article presents the case of in‐depth research data about life in areas where development planners often intervene. It demonstrates some ways whereby poor Transkeian villagers deal with the exigencies of dependence on migrant labour, focusing on movements between domestic units and response to the availability of remittances.

It argues that developers should recognise the efficacy of such social practices as developed by the poor themselves. These practices may be usefully applied to effect development so long as this forms part of package aiming to fulfil the vital Southern African need for wealth redistribution. The development practioner's proper role is identified as one demanding direct engagement with the poor, acting as facilitators for their understanding of the structures which constrain them and intending to achieve their own carefully conceived aspirations.     

Stock price volatility in a multiple security overlapping generations model

A number of empirical studies have reached the conclusion thatstock price volatility cannot be fully explained within thestandard dividend discount model. This article proposes a resolutionbased upon a model that contains both a random supply of riskyassets and finitely lived agents who trade in a multiple securityenvironment. As the analysis shows there exist 2^K equilibriawhen K securities trade. The low volatility equilibria haveproperties analogous to those found in the infinitely livedagent models of Campbell and Kyle (1991) and Wang (1993, 1994).In contrast, the high-volatility equilibria have very differentcharacteristics. Within the high-volatility equilibria verylarge price variances can be generated with very small supplyshocks. Adding securities to the economy further reduces therequired supply shocks. Using previously established empiricalresults the model can reconcile the data with supply shocksthat are less than 10% as large as observed return shocks. Theseresults are shown to hold even when the dividend process ismean reverting.     

A Double Moral Hazard Model of Organization Design

We develop a theory of organization design in which the firm's structure is chosen by trading off ex post efficiency in the implementation of projects against ex ante efficiency in the selection of projects. Using our framework, we derive a novel set of empirical predictions regarding differences between firms with a functional structure and firms with a divisional structure. We examine how the overall profitability of the two structures is affected by various factors like size, complexity, and asymmetry in the importance of tasks and also explore the desirability of adopting a narrow business strategy.     

Cournot-Nash and Lindahl equilibria in pure public “bad” economies

Summary. Using a general equilibrium framework, this paper analyzes the equilibrium provision of a pure public bad commodity (for example pollution). Considering a finite economy with one desired private good and one pure public “bad” we explicitly introduce the concept of Lindahl equilibrium and the Lindahl prices into a pure public bad economy. Then, the Lindahl provision is analyzed and compared with the Cournot-Nash provision. The main results for economies with heterogeneous agents state that the asymptotic Lindahl allocation of the pure public bad is the null allocation. In contrast, the asymptotic Cournot-Nash provision of the public bad might approach infinity. Other results were obtained in concert with the broad analysis of the large finite economies with pure public bad commodities. Received: July 26, 2001; revised version: March 12, 2002 RID="*" ID="*" We are indebt to Nicholas Yannelis and anonymous referee for their valuable comments and suggestions. Correspondence to: B. Shitovitz     

The Dynamic Evolution of Preferences

This paper develops a general methodology for characterizing the dynamic evolution of preferences in a wide class of strategic interactions. We give simple conditions characterizing the limiting distribution of preferences in general games, and apply our results to study the evolutionary emergence of overconfidence and interdependent preferences. We also show that this methodology can be adapted to cases where preferences are only imperfectly observed. Earlier drafts of this paper were circulated under the title: “The Evolution of Perception Biases” and some of these results appeared in the earlier working paper Heifetz, Shannon and Spiegel (2003). We thank three anonymous referees for their helpful comments. Shannon thanks the NSF for research support under grant SES-0351346.     

Quantitative easing and Japanese bank equity values

One of the primary motivations offered by the Bank of Japan (BOJ) for its quantitative easing program—whereby it maintained a current account balance target in excess of required reserves, effectively pegging short-term interest rates at zero—was to maintain credit extension by the troubled Japanese financial sector. We conduct an event study concerning the anticipated impact of quantitative easing on the Japanese banking sector by examining the impact of the introduction and expansion of the policy on Japanese bank equity values. We find that excess returns of Japanese banks were greater when increases in the BOJ current account balance target were accompanied by “non-standard” expansionary policies, such as raising the ceiling on BOJ purchases of long-term Japanese government bonds. We also provide cross-sectional evidence that suggests that the market perceived that the quantitative easing program would disproportionately benefit financially weaker Japanese banks. J. Japanese Int. Economies 20 (4) (2006) 699–721.     

Price Discrimination with One-way Separated Markets

This paper extends the traditional model of third degree price discrimination which assumes complete separation between markets to the case where markets are only one-way separated. In two periods of time one can carry over quantities of the product from the present to the future but not vice versa. We show that this model provides a wide framework for analysis of several promotional marketing strategies.     

Optimal state‐contingent regulation under limited liability

We consider an optimal regulation model in which the regulated firm's production cost is subject to random, publicly observable shocks. The distribution of these shocks is correlated with the firm's cost type, which is private information. The regulator designs an incentive‐compatible regulatory scheme, which adjusts itself automatically ex post given the realization of the cost shock. We derive the optimal scheme, assuming that there is an upper bound on the financial losses that the firm can sustain in any given state. We first consider a two‐type, two‐state case, and then extend the results to the case of a continuum of firm types and an arbitrary finite number of states. We show that the first‐best allocation can be implemented if the state of nature conveys enough information about the firm's type and/or the maximal loss that the firm can sustain is sufficiently large. Otherwise, the solution is characterized by classical second‐best features.     

The optimal supply of congested public goods for homogeneous and heterogeneous customers

Impure public goods resulting from the congestion effect are discussed in the literature solely for the case of homogenous populations where consumers have identical demands. We extend this to include heterogeneous populations, where demands are rectangularly distributed. We compare the optimal values of the control variables (quantity of the public good and the number of users) for both homogeneous and heterogeneous populations, as well as the social optimum values for both cases. We distinguish between two kinds of congestion effects: (1) increased usage which negatively affects the individual consumer's utility, and (2) the affect is located on the supply side, i.e. higher production costs due to an increased number of users.