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Journal of Public Economic Theory

Impact factor: 0.494 5-Year impact factor: 0.511 Print ISSN: 1097-3923 Online ISSN: 1467-9779 Publisher: Wiley Blackwell (Blackwell Publishing)

Subject: Economics

Most recent papers:

  • The optimal minimum wage with regulatory uncertainty.
    John Bennett, Ioana Chioveanu.
    Journal of Public Economic Theory. October 20, 2017
    For two different regulatory standards, we examine the optimal minimum wage in a competitive labor market when the government is uncertain about supply and demand. Solutions are related to underlying supply and demand conditions, and to the extent of uncertainty and of rationing efficiency. With expected earnings maximization, greater uncertainty widens the range of parameter values for which a minimum wage should be set. With expected worker surplus maximization and sufficiently efficient rationing, a minimum wage should always be set. However, in both cases regulatory uncertainty may require a low minimum wage that may not bind in equilibrium.
    October 20, 2017   doi: 10.1111/jpet.12276   open full text
  • Tax incidence on competing two‐sided platforms.
    Paul Belleflamme, Eric Toulemonde.
    Journal of Public Economic Theory. October 04, 2017
    We analyze the effects of various taxes on competing two‐sided platforms. First, we consider nondiscriminating taxes. We show that specific taxes are entirely passed to the agents on the side on which they are levied; other agents and platforms are left unaffected. Transaction taxes hurt agents on both sides and benefit platforms. Ad valorem taxes are the only tax instrument that allows the tax authority to capture part of the platforms' profits. Second, regarding asymmetric taxes, we show that agents on the untaxed side benefit from the tax. At least one platform, possibly the taxed one, benefits from the tax.
    October 04, 2017   doi: 10.1111/jpet.12275   open full text
  • On public opinion polls and voters' turnout.
    Esteban F. Klor, Eyal Winter.
    Journal of Public Economic Theory. September 18, 2017
    This paper studies the effects that the revelation of information on the electorate's preferences has on voters' turnout. The experimental data show that closeness in the division of preferences induces a significant increase in turnout. Moreover, for closely divided electorates (and only for these electorates), the provision of information significantly raises the participation of subjects supporting the slightly larger team relative to the smaller team. We show that the heterogeneous effect of information on the participation of subjects in different teams is driven by the subjects' (incorrect) beliefs of casting a pivotal vote. Simply put, subjects overestimate the probability of casting a pivotal vote when they belong to the team with a slight majority, and choose the strategy that maximizes their utility based on their inflated probability assessment. Empirical evidence on gubernatorial elections in the United States between 1990 and 2005 is consistent with our main experimental result. Namely, we observe that the difference in the actual vote tally between the party leading according to the polls and the other party is larger than the one predicted by the polls only in closely divided electorates. We provide a behavioral model that explains the main findings of our experimental and empirical analyses.
    September 18, 2017   doi: 10.1111/jpet.12274   open full text
  • Royalties, entry, and spectrum allocation to the broadcasting industry.
    Michael Ralph Caputo, Benoit Pierre Freyens.
    Journal of Public Economic Theory. September 11, 2017
    We characterize the socially optimal trajectory of spectrum royalty and firm entry in a deregulated over‐the‐air broadcasting industry. A social planner maximizes consumers' lifetime utility by setting royalties for the use of publicly owned spectrum. As the number of broadcasters adjusts to profits over time, the quality of service improves through greater variety but also deteriorates through intensified interferences. Contrary to observed consolidation and return to concentration in past deregulatory reforms, we find that optimal royalty control that accounts for these quality effects steers the socially optimal trajectory of royalties and firms to a more competitive steady state.
    September 11, 2017   doi: 10.1111/jpet.12267   open full text
  • Does transparency reduce political corruption?
    Octavian Strîmbu, Patrick González.
    Journal of Public Economic Theory. September 08, 2017
    Does a better monitoring of officials' actions (transparency) lower the incidence of corruption? Using a common agency game with imperfect information, we show that the answer depends on the measure of corruption that one uses. More transparency lowers the prevalence of corruption but raises the average bribe as it motivates the corruptor to bid more aggressively for the agent's favor. We show that transparency affects the prevalence of corruption at the margin through a competitive effect and an efficiency effect.
    September 08, 2017   doi: 10.1111/jpet.12265   open full text
  • Discounting and welfare evaluation of policies.
    Jean‐François Mertens, Anna Rubinchik.
    Journal of Public Economic Theory. September 05, 2017
    We start with the premise that if policy discounting is to have any welfare relevance, one has to accept it being a derivative of a social welfare function (SWF). We show that if that derivative is to have a net present value (NPV) form, then the baseline allocation must be stationary. In addition, we show that at a stationary baseline in an overlapping generations growth economy, the intergenerationally fair discount rate equals the growth rate of per‐capita consumption, which is, roughly, 2% for the United States. This differs from the interest rate, even in the golden rule equilibrium, unless population growth is null. The last result is based on the main theorem in Mertens and Rubinchik (2012) and is demonstrated for a policy space that might naturally arise in applications.
    September 05, 2017   doi: 10.1111/jpet.12266   open full text
  • Environmental protection without loss of international competitiveness.
    Sajal Lahiri, George Symeonidis.
    Journal of Public Economic Theory. August 02, 2017
    We develop a two‐country Cournot oligopoly model with product differentiation across countries and production‐generated pollution. The abatement of pollution by the firms in response to emission taxes is endogenous, and the number of firms can be fixed or there may be free entry and exit of firms in both countries. We propose particular unilateral and multilateral piecemeal policy reforms of emission taxes and production subsidies such that domestic industries will not suffer any loss of international competitiveness (defined in terms of either market share or profits), emission levels will be lower, and welfare could be higher in both countries.
    August 02, 2017   doi: 10.1111/jpet.12264   open full text
  • Heterogeneity, impatience, and dynamic private provision of a discrete public good.
    Subhra K. Bhattacharya, Oleksiy Tokovenko, Kavita Sardana.
    Journal of Public Economic Theory. August 02, 2017
    We analyze dynamic private provision of a discrete public good by heterogeneous agents, who differ in terms of their levels of impatience, in a differential game framework. In contrast to the strategic complementarity result for homogeneous individuals, we show that an asymmetric completion Markov perfect equilibrium exists, where the individual contributions and the strategic behaviors depend crucially on an impatience differential: the difference in rates of time preference across groups of individuals. When this differential is insignificant, contributions of both types of individuals are strategic complements. On the other hand, when this impatience differential exceeds a threshold, the contributions of impatient individuals become strategic substitutes, whereas the contributions of patient individuals remain strategic complements. We show that group size has an interesting role to play in the strategic behavior: increasing the number of patient individuals aggravates the incentives to free‐ride by the impatient agents. We also derive a condition under which all the socially beneficial projects get completed in the equilibrium.
    August 02, 2017   doi: 10.1111/jpet.12263   open full text
  • Dominance solvable approval voting games.
    Sébastien Courtin, Matías Núñez.
    Journal of Public Economic Theory. June 26, 2017
    This work provides necessary and sufficient conditions for the dominance solvability of approval voting games. Our conditions are very simple since they depend just on the number of possible winners when voters play weakly undominated strategies. If there are at most two possible winners, then the game is dominance‐solvable and the outcome coincides with the Condorcet winner. If every candidate is a possible winner, the game is not dominance‐solvable. If none of the previous conditions holds, then the game need not be dominance‐solvable, and the outcome need not coincide with the Condorcet winner.
    June 26, 2017   doi: 10.1111/jpet.12251   open full text
  • On the equilibrium and welfare consequences of getting ahead of the Smiths.
    Frédéric Gavrel, Thérèse Rebière.
    Journal of Public Economic Theory. June 26, 2017
    This paper provides an analysis of the social consequences of people seeking to get ahead of the Smiths. All individuals attempt to reach a higher rank than the Smiths, including the Smiths themselves. This attitude gives rise to an equilibrium in which all individuals have equal utilities but unequal (gross) incomes. Due to a rat‐race effect, individuals devote too much energy to climbing the social scale. However, laissez‐faire equilibrium is an equal‐utility constrained social optimum. Conversely, a utilitarian social planner would not choose utility equality. Unexpectedly, this social ambition theory fairly well accounts for empirical intermediate wage inequality.
    June 26, 2017   doi: 10.1111/jpet.12261   open full text
  • Efficient tax competition under the origin principle.
    Stéphane Gauthier.
    Journal of Public Economic Theory. June 26, 2017
    This paper studies fiscal competition under the origin principle. It identifies a pattern of consumers' taste heterogeneity under which the first‐best world social optimum arises as a noncooperative Nash equilibrium. Consumers' tastes are characterized by the strength of their preference for home and foreign goods. Nash implementation of the first‐best obtains when in every tax jurisdiction the number of consumers who display a home bias (those consumers who prefer purchasing the home good to shopping abroad at equal prices) equals, for every magnitude of the home bias, the number of consumers who display an “import bias” (those who instead prefer shopping abroad) equal in magnitude.
    June 26, 2017   doi: 10.1111/jpet.12262   open full text
  • Optimal policy and the role of social contacts in a search model with heterogeneous workers.
    Yuliia Stupnytska, Anna Zaharieva.
    Journal of Public Economic Theory. June 21, 2017
    This paper develops a search model with heterogeneous workers and social networks. High‐ability workers are more productive and have a larger number of professional contacts. Firms can choose between a vacancy in the regular market and a job opening in the referral market. The model predicts that a larger number of social contacts is associated with a larger wage gap between high‐ and low‐ability workers and a larger difference in the unemployment rates. The net welfare gain of referrals is estimated at 1.2%. There are three reasons for the inefficiency of the decentralized equilibrium. First is the traditional search externality described by Hosios. Second, firms share their profits with workers, whereas the social optimum implies that full surplus should be given to firms in the referral market. This inefficiency can be internalized by means of referral subsidies. Third, there is the “pooling inefficiency” in the regular market. If high‐ability workers are sufficiently more productive they impose a positive externality on low‐ability workers and should be rewarded by positive transfers. On the contrary, if productivity differences are small, high‐ability workers achieve unreasonably high wages by referring each other and reduce employment chances of low‐ability workers. In this latter case, high‐ability workers should be penalized. If optimal policy is implemented the net welfare gain of referrals rises up to 1.8%.
    June 21, 2017   doi: 10.1111/jpet.12249   open full text
  • Conflict technology in cooperation: The group size paradox revisited.
    Sung‐Ha Hwang.
    Journal of Public Economic Theory. June 21, 2017
    This paper studies the implications of punishment‐induced conflict in a public goods game. It shows, under plausible assumptions, how larger group size sometimes enhances punishing behavior in social dilemmas and hence supports higher levels of cooperation. Unlike existing approaches that focus on uncoordinated punishment, I consider punishment as a coordinated activity that may be resisted by those being punished and study the implications of punishment‐induced conflict situations. Developing a conflict model of punishment and combining it with a standard public good game, I show that coordinated punishment can yield the concentration effect of punishment, leading to a larger group advantage; that is, the larger the group, the easier it becomes to organize cooperation. The key idea is that when punishers coordinate their punishment, punishers as a coalition successfully divide defectors and punish each defector one by one. Surprisingly, even when coordination among punishers decays as group size increases, as long as the rate of decaying remains relatively slow the larger group advantage still obtains.
    June 21, 2017   doi: 10.1111/jpet.12252   open full text
  • Transfer pricing regulation and taxation of royalty payments.
    Steffen Juranek, Dirk Schindler, Guttorm Schjelderup.
    Journal of Public Economic Theory. June 21, 2017
    The digital economy is characterized by the use of intellectual property such as software, patents, and trademarks. The pricing of such intangibles is widely used to shift profits to low‐tax countries. We analyze the implications of different OECD methods to regulate transfer pricing and the role of a source tax on royalty payments for abusive transfer pricing. First, we show that under the traditional transfer pricing methods mispricing of royalty payments does not affect investment behavior. In contrast, the Transactional Profit Split Method that is promoted by the OECD for evaluating firms in the digital economy triggers higher investment in order to facilitate higher profit shifting. Second, royalty taxation is effective in reducing (such) abusive profit shifting, but always reduces investment. Third, a royalty tax rate below the corporate tax rate leads to overinvestment in a tax system with allowance for corporate equity (ACE).
    June 21, 2017   doi: 10.1111/jpet.12260   open full text
  • The most ordinally egalitarian of random voting rules.
    Anna Bogomolnaia.
    Journal of Public Economic Theory. June 20, 2017
    Aziz and Stursberg propose an “Egalitarian Simultaneous Reservation” rule (ESR), a generalization of Serial rule, one of the most discussed mechanisms in the random assignment problem, to the more general random social choice domain. This article provides an alternative definition, or characterization, of ESR as the unique most ordinally egalitarian one. Specifically, given a lottery p over alternatives, for each agent i the author considers the total probability share in p of objects from her first k indifference classes. ESR is shown to be the unique one which leximin maximizes the vector of all such shares (calculated for all i, k). Serial rule is known to be characterized by the same property. Thus, the author provides an alternative way to show that ESR, indeed, coincides with Serial rule on the assignment domain. Moreover, since both rules are defined as the unique most ordinally egalitarian ones, the result shows that ESR is “the right way” to think about generalizing Serial rule.
    June 20, 2017   doi: 10.1111/jpet.12258   open full text
  • Information transmission during the trial: The role of punitive damages and legal costs.
    Ana Espínola‐Arredondo, Felix Munoz‐Garcia, Pitchayaporn Tantihkarnchana.
    Journal of Public Economic Theory. June 20, 2017
    This paper studies an incomplete information model in which a preventable accident occurred. The judge determining punitive damages observes the firm's (defendant) investment decisions, but is uninformed about the firm's experience adopting safety measures. Our model allows firms to file an appeal if the judge's verdict is incorrect, which the judge may accept or reject. We identify under which conditions a separating equilibrium exists where the firm's investment decisions signal its type to the judge, who responds with a correct verdict, thus avoiding future appeals. Our paper also finds conditions under which a pooling equilibrium exists whereby the firm's investment in precaution conceals its type from the judge, who can respond with an incorrect verdict thus giving rise to appeals. Furthermore, we show that the separating equilibrium is more likely to arise if the percentage of revenue that defendants are required to pay in punitive damages decreases, if the punitive‐to‐compensatory ratio increases, and if the legal cost of filing an appeal increases.
    June 20, 2017   doi: 10.1111/jpet.12259   open full text
  • Democracy and competition: Vertical differentiation and labor in a general equilibrium model.
    Amani Kahloul, Rim Lahmandi‐Ayed, Hejer Lasram, Didier Laussel.
    Journal of Public Economic Theory. June 15, 2017
    We consider a general equilibrium model with vertical preferences and one or two firms, where workers and consumers are differentiated, respectively, by their sensitivity to effort and their preference for quality. The question in this paper is whether a decentralized choice through majority vote would lead to more or less competition. We compare the duopoly and the monopoly cases from the viewpoint of each individual, then we deduce the choice of the majority. We prove that, under concentrated ownership (where owners have a null density), duopoly is always preferred by the majority; while under egalitarian ownership (where firms are equally shared by all the population), the choice of the majority depends on the relative size of workers' and consumers' segments.
    June 15, 2017   doi: 10.1111/jpet.12256   open full text
  • Taxation of a digital monopoly platform.
    Marc Bourreau, Bernard Caillaud, Romain Nijs.
    Journal of Public Economic Theory. June 15, 2017
    This paper investigates the impact on fiscal revenues of taxing a two‐sided monopolistic platform offering personalized services to users and targeted advertising to sellers, based on the collection of users' personal data. We show that the introduction of a small tax on data collection, which has been proposed in the French context by Collin and Colin, fails to increase fiscal revenues if the value‐added tax (VAT) rate is high enough, due to a tax base interdependence effect between the two taxes. Under a supermodularity condition on the platform's profit function as a function of its prices, this result generalizes to any per‐unit tax. However, in some cases, an ad valorem tax on subscriptions or on advertising may raise fiscal revenues, irrespective of the VAT rate, as well as welfare.
    June 15, 2017   doi: 10.1111/jpet.12255   open full text
  • Taxation in digital media markets.
    Hans Jarle Kind, Marko Koethenbuerger.
    Journal of Public Economic Theory. June 13, 2017
    Digital media goods and digital media platforms exhibit cost structures and network effects that might imply that price and quantity effects of consumption taxes are qualitatively different compared to what we typically find for physical goods. For instance, in most European countries and U.S. states, printed newspapers and books face favorable value added taxes (VATs) or sales taxes. This has probably increased their circulation. In contrast, reducing the VAT rate on digital newspapers has the opposite effects; it increases prices and leads to lower sales. This is not true for ebooks, but a low‐tax policy is still ineffective if the aim is to reduce prices. The primary effect of exempting ebooks from VATs is to increase profits for publishers.
    June 13, 2017   doi: 10.1111/jpet.12257   open full text
  • Illiquid life annuities.
    Hippolyte d'Albis, Johanna Etner.
    Journal of Public Economic Theory. June 02, 2017
    In this paper, we consider illiquid life annuity contracts and show that they may be preferred to those illustrated by Yaari. In an overlapping generations economy, liquid life annuities are demanded only if the equilibrium is dynamically inefficient. However, an equilibrium displaying a positive demand for illiquid life annuities is indeed efficient. In this latter case, the welfare at steady state is larger if illiquid life annuity contracts are available.
    June 02, 2017   doi: 10.1111/jpet.12253   open full text
  • Tax competition, tax coordination, and e‐commerce.
    Maya Bacache Beauvallet.
    Journal of Public Economic Theory. June 02, 2017
    This paper contributes to the political debate on commodity tax coordination in Europe. It examines, within Nielsen's setting, the impact of online shopping on taxes and tax competition and contrasts destination‐based taxation with origin‐based taxation. Heterogeneous consumers surf the Internet at a cost. It is assumed that fiscal leakage occurs during transactions on the Internet either because of tax evasion or of the existence of a tax liability threshold. Whereas cross‐border shopping effectively results in taxes being levied at origin, this model by adding e‐commerce shows that taxing online trade based on the origin principle softens tax competition and allows sustaining the destination principle on brick‐and‐mortar shops. Tax competition is reduced if tax is origin‐based, because the Internet helps the small country expand its tax base, which induces tax convergence.
    June 02, 2017   doi: 10.1111/jpet.12254   open full text
  • Corruption and the public display of wealth.
    Simona Fabrizi, Steffen Lippert.
    Journal of Public Economic Theory. May 16, 2017
    We study an agent–client model of corruption, in which potential corruptors are uncertain about the probability with which officials are subjected to an audit, either high or low. We characterize a signaling equilibrium, in which officials who are less likely to be audited engage in public conspicuous consumption, whereas those who are more likely to be audited do not. In this equilibrium, officials are better off than in the equilibria without conspicuous consumption. The signaling equilibrium exists if the officials' bargaining power vis‐à‐vis potential corruptors is sufficiently high, which implies that corruption can be curbed by creating competition among officials.
    May 16, 2017   doi: 10.1111/jpet.12247   open full text
  • The technological determinants of long‐run inequality.
    Andrea Canidio.
    Journal of Public Economic Theory. May 15, 2017
    I explore the effect of skill‐biased technological change and unbiased technological progress on long‐run inequality using a theoretical model in which the supply of skilled and unskilled workers is endogenous. The main assumption of the model is that young agents can finance their education and become skilled workers by borrowing against their future income on an imperfect credit market. I show that whenever the rate of unbiased technological progress is sufficiently high there is no steady‐state inequality, independent of the degree of skill bias. If instead the rate of unbiased technological progress is low, then the long‐run skill premium increases with the technological skill bias. Therefore, similarly to the short run, in the long run higher technological skill bias may cause higher inequality. However, contrary to the short run, in the long run unbiased technological progress is more important than technological skill bias in determining inequality. I also discuss how the efficiency of the educational technology and the degree of financial development affect long‐run inequality.
    May 15, 2017   doi: 10.1111/jpet.12248   open full text
  • Tax competition for foreign direct investments and the nature of the incumbent firm.
    Oscar Amerighi, Giuseppe Feo.
    Journal of Public Economic Theory. May 10, 2017
    We investigate tax/subsidy competition for foreign direct investments (FDI) between countries of different size when a domestic firm is the incumbent in the largest market and we study how the nature (public or private) of the incumbent firm affects policy competition. We show that, differently from the case of a private firm, the country hosting the incumbent always benefits from FDI if the domestic firm is a public welfare‐maximizing firm. We also show that the public firm acts as a disciplinary device for the foreign multinational that will always choose the efficient welfare‐maximizing location. An efficiency‐enhancing role of policy competition may then arise only when the domestic incumbent is a private firm, whereas tax competition is always wasteful in the presence of a public firm.
    May 10, 2017   doi: 10.1111/jpet.12245   open full text
  • Prices versus quantities in the presence of a second, unpriced, externality.
    Guy Meunier.
    Journal of Public Economic Theory. May 08, 2017
    This paper analyzes whether the presence of a second unregulated externality influences the choice between a price and a quantity instrument to address an externality. The author studies a situation in which two goods jointly generate an externality but only one of them is regulated. The two instruments differ because of the presence of uncertainty regarding the private value of the two goods. To ignore the unregulated good and apply Weitzman's classical result on the comparison of the slopes of marginal benefit and cost could be misleading because of the randomness of the unregulated good's quantity. Beside the relative slope of the marginal damage, the substitutability and the distribution of shocks play a role in the comparison. If there is a “cocktail effect” and the regulated and unregulated goods' quantities are negatively correlated, which occurs if they are substitutes, this reinforces the appeal of a price instrument. Furthermore, if the two goods are weak substitutes with correlated demands, the variance of the quantity of the unregulated good is larger under a quota than a tax, which further reinforces the appeal of the tax instrument.
    May 08, 2017   doi: 10.1111/jpet.12250   open full text
  • Public expenditure distribution, voting, and growth.
    Lorenzo Burlon.
    Journal of Public Economic Theory. April 26, 2017
    In this paper, we study why the misallocation of resources across different productive sectors tends to persist over time. To this end, we propose a general equilibrium model that delivers two structural relations. On one hand, the public expenditure distribution influences the future sectoral composition of the economy. On the other hand, the distribution of vested interests across sectors determines public policy decisions. The model predicts that different initial sectoral compositions entail different future streams of public expenditure and therefore different development paths.
    April 26, 2017   doi: 10.1111/jpet.12246   open full text
  • Emissions abatement R&D: Dynamic competition in supply schedules.
    Flavio M. Menezes, Jorge Pereira.
    Journal of Public Economic Theory. March 30, 2017
    This paper investigates the optimal environmental policy (the mix of emissions tax and research and development [R&D] subsidy) in a dynamic setting when two firms, producing differentiated products, compete in the output market over time. Firms compete in a differential game setting over supply schedules, which encompasses a continuum of imperfect competition equilibria from Bertrand to Cournot. Although production generates environmentally damaging emissions, firms can undertake R&D that has the sole purpose of reducing emissions. In addition to characterizing the optimal policy, we examine how the optimal tax and subsidy, and the optimal level of abatement, change as competition intensifies, as the dynamic parameters change, and as the investment in abatement technology changes. In this setting, competition increases welfare through its impact on the final goods price. However, lower prices result in larger quantities and more pollution. Our key contribution is to show how the impact of increased competition on welfare depends on the extent of the market and the nature of preferences and technology.
    March 30, 2017   doi: 10.1111/jpet.12241   open full text
  • Are the Laffer curve and the green paradox mutually exclusive?
    Stefano Bosi, David Desmarchelier.
    Journal of Public Economic Theory. March 30, 2017
    In this paper, we study the relationship between the Laffer curve and the green paradox in the context of a Ramsey model with endogenous labor supply in which pollution increases consumer demand (through a compensation effect). We find that—in the long run—the conditions under which a Laffer curve and a green paradox emerge are mutually exclusive. Indeed, the Laffer curve exists under a weak compensation effect, while the green paradox requires a strong effect. Also, we find that, in the short run, limit cycles may arise in the presence of a Laffer curve, while they never occur under a green paradox.
    March 30, 2017   doi: 10.1111/jpet.12242   open full text
  • Taxation and privacy protection on Internet platforms.
    Francis Bloch, Gabrielle Demange.
    Journal of Public Economic Theory. March 28, 2017
    This paper studies data collection by a monopolistic Internet platform. We show that the optimal strategy of the platform is either to cover the market or to choose the highest data exploitation level, excluding users with high privacy costs from the platform. For plausible parameter values, the platform chooses an excessive level of data exploitation from the point of view of users. We study how different tax instruments can be used to reduce the level of data collection and analyze the effect of an opting‐out option, letting users access the platform with no data collection. We show that a differentiated tax, taxing access revenues and data revenues at different rates, is the most effective instrument and that the introduction of an opting‐out option may harm users as it induces the platform to raise the level of data exploitation.
    March 28, 2017   doi: 10.1111/jpet.12243   open full text
  • The company you keep: Qualitative uncertainty in providing a club good.
    Bipasa Datta, Clive D. Fraser.
    Journal of Public Economic Theory. March 27, 2017
    Clubs are typically experience goods. Potential members cannot ascertain precisely beforehand their quality (dependent endogenously on the club's facility investment and number of users, itself dependent on its prices). Members with unsatisfactory initial experiences discontinue visits. We show that a monopoly profit maximizer never offers a free trial period for such goods. For quality functions homogeneous of degree of at least minus one, a welfare maximizer, motivated by distributional concerns to mitigate disappointed consumers' losses, always does. We demonstrate the robustness of this finding by showing that (i) without qualitative uncertainty (thus, no disappointed customers), neither welfarist nor monopolist offers free trials; and (ii) if the planner pursues an objective mixing welfare maximization with profit maximization, the likelihood of free trials increases with the weight put on welfare maximization. Regarding club quality and usage, the monopolist provides a socially excessive level of quality to repeat buyers when the quality function is homogeneous of degree zero. With nonhomogeneous quality functions, the monopolist permits too little club usage; quality may or may not be socially excessive.
    March 27, 2017   doi: 10.1111/jpet.12244   open full text
  • Taxation of firms with unknown mobility.
    Johannes Becker, Andrea Schneider.
    Journal of Public Economic Theory. March 15, 2017
    We analyze optimal business tax policy when some firms are able to escape taxation by moving abroad. In contrast to the existing literature, we assume that the true number of mobile firms is ex ante unknown. While the government may learn from the firms' location responses to past tax rate changes, firms may anticipate this and adjust their choices accordingly. We find that incomplete information on mobility substantially affects the properties and the implications of equilibrium policy choices. First, the government may find it optimal to set a tax rate that triggers partial firm migration but full revelation of the true number of mobile firms. Second, we show that, if the firms' outside option is attractive (i.e., relocation cost and foreign tax rates are low), expected tax rates and expected firm migration are higher if the degree of mobility is unknown. Third, there is a positive value of learning, i.e., commitment on future tax rates cannot increase the government's expected revenue. However, if the government can commit to a rule‐based learning mechanism, i.e., credibly tie its future tax policy to present policy outcomes, it may obtain a Pareto improvement.
    March 15, 2017   doi: 10.1111/jpet.12240   open full text
  • Design of reforms with time‐inconsistent voters.
    Jisoo Hwang, Johanna Möllerström.
    Journal of Public Economic Theory. February 07, 2017
    Widespread agreement that a political reform is necessary is no guarantee that it is actually undertaken in a timely manner. There is often a delay before action is taken and reform packages that would be most efficient to implement all at once are often done only gradually. We propose a theoretical model explaining this behavior and show that when voters have present‐biased, time‐inconsistent preferences, gradualism can arise in equilibrium and be welfare‐enhancing. This is because without the possibility for gradualism, time‐inconsistent voters would delay implementing the reform even more. Using a citizen candidate model, we allow the agenda setter, who decides which reform schedule to put to vote, to be endogenously determined. We show that voters who are aware of their own time inconsistency can use the election of the agenda setter as a commitment device and appoint an agent who is more patient than the median voter in order to avoid full procrastination and to achieve efficiency‐maximizing gradualism.
    February 07, 2017   doi: 10.1111/jpet.12229   open full text
  • Long‐term care policy with lazy rotten kids.
    Helmuth Cremer, Kerstin Roeder.
    Journal of Public Economic Theory. February 07, 2017
    This paper studies the determination of informal long‐term care (LTC) provided by children in a scenario which is somewhere in between perfect altruism and selfish exchanges. Parents are altruistic but children are purely selfish, and neither side can make credible commitments. The model is based on Becker's “rotten kid” specification except that it explicitly accounts for the sequence of decisions. In Becker's world, with a single good efficiency is achieved. We show that when family aid is introduced the outcome is likely to be inefficient. Still, the rotten kid mechanism is at work and ensures that a positive level of LTC is provided as long as the bequest motive is operative. We identify the inefficiencies by comparing the laissez‐faire (subgame perfect) equilibrium to the first‐best allocation. We first assume that families are identical ex ante and then consider the case where dynasties differ in wealth. We study how the provision of LTC can be improved by public policies. Interestingly, crowding out of private aid by public LTC is not a problem in this setting. With an operative bequest motive, public LTC will have no impact on private aid. More amazingly still, when the bequest motive is (initially) not operative, public insurance may even enhance the provision of informal aid.
    February 07, 2017   doi: 10.1111/jpet.12237   open full text
  • Private takings.
    Alessandro Marchesiani, Ed Nosal.
    Journal of Public Economic Theory. February 07, 2017
    This paper examines the implications associated with a recent Supreme Court ruling, Kelo v. City of New London (2005). Kelo can be interpreted as supporting eminent domain as a means of transferring property rights from one set of private agents—landowners—to another private agent—a developer. Under voluntary exchange, where the developer sequentially acquires property rights from landowners via bargaining, a holdout problem arises. Eminent domain gives all of the bargaining power to the developer and, as a result, eliminates the holdout problem. This is the benefit of Kelo. However, landowners lose all their bargaining power and, as a result, their property investments become more inefficient. This is the cost of Kelo. A policy of eminent domain increases social welfare compared to voluntary sequential exchange only when the holdout problem is severe, and this occurs only if the developer has very little bargaining power. We propose an alternative government policy that eliminates the holdout problem but does not affect the bargaining power of the various parties. This alternative policy strictly dominates a policy of eminent domain, which implies that eminent domain is an inefficient way to transfer property rights between private agents.
    February 07, 2017   doi: 10.1111/jpet.12235   open full text
  • Job creators, job creation, and the tax code.
    Adrian Masters.
    Journal of Public Economic Theory. February 07, 2017
    This paper considers the role of the tax code in determining income dispersion and vacancy creation. A “span‐of‐control” model is embedded into a search and matching environment. A cut to the tax on profits in isolation improves job creation and reduces before‐tax income inequality. The impact of a budget‐balancing increase in the wage tax depends on the bargaining power of firms. When it is high, firms pick up the lion's share of the tax burden. The tax acts like a barrier to entry: it benefits large firms at the expense of marginal ones. Net effects are an increase in unemployment and before‐tax income dispersion. Low firm bargaining power means workers pick up more of the tax burden. It acts like a subsidy to entrepreneurship reinforcing the impact of the profit tax reduction. Taxes on the returns to capital leave everyone worse off.
    February 07, 2017   doi: 10.1111/jpet.12230   open full text
  • Preemptive bribery and incomplete information: Does prior knowledge matter?
    Ajit Mishra, Andrew Samuel.
    Journal of Public Economic Theory. February 07, 2017
    This paper studies bribery between a firm and a supervisor who monitors the firm for regulatory compliance. Bribery occurs preemptively, that is before the supervisor exerts costly effort to discover the firm's level of noncompliance and collect evidence for successful prosecution. In contrast to previous papers, preemptive bribery is modeled as a Bayesian signaling game because the supervisor is uninformed about the firm's level of noncompliance. We show that under normal informational assumptions, some (possibly all) firms always engage in preemptive bribery. However, if knowledge of the firm's level of noncompliance has implications for the supervisor's ability to collect evidence and prosecute (prior knowledge), preemptive bribery can be completely eliminated. Results which apply to preemptive bribery under complete information do not apply here.
    February 07, 2017   doi: 10.1111/jpet.12238   open full text
  • Mandating vaccination with unknown indirect effects.
    Charles F. Manski.
    Journal of Public Economic Theory. February 07, 2017
    Social interactions make communicable disease a core concern of public health policy. A prevalent problem is scarcity of empirical evidence informative about how interventions affect illness. Randomized trials, which have been important to evaluation of treatments for noninfectious diseases, are less informative about treatment of communicable diseases because they do not fully reveal the indirect preventive (herd immunity) effect of vaccination on persons who are not vaccinated or are unsuccessfully vaccinated. This paper studies the decision problem faced by a health planner who observes the illness rate that occurs when persons make decentralized vaccination choices and who contemplates whether to mandate vaccination. The planner's objective is to minimize the social cost of illness and vaccination. Uncertainty about the magnitude of the indirect effect of vaccination implies uncertainty about the illness rate that a mandate would yield. I first study a simple representative‐agent setting and derive conditions under which the planner can determine whether mandating vaccination is optimal. When optimal policy is indeterminate, I juxtapose several criteria for decision making—expected utility, minimax, and minimax‐regret—and compare the policies they generate. I then extend the analysis to a more general setting in which members of the population may have heterogenous attributes. I have benefitted from the opportunity to present this work in seminars at the Booth School of Business, University of Chicago, the Department of Economics, University of California at Santa Barbara, and the Schaeffer Center for Health Policy and Economics, University of Southern California. I have also benefitted from the comments of an anonymous reviewer and associate editor.
    February 07, 2017   doi: 10.1111/jpet.12234   open full text
  • Fairness in tax compliance: A political competition model.
    Ángel Solano‐Garcia.
    Journal of Public Economic Theory. February 07, 2017
    This paper analyzes the political economy of income redistribution when voters are concerned about fairness in tax compliance. We consider a two‐stage model where there is a two‐party competition over the tax rate and over the intensity of the tax enforcement policy in the first stage, and voters decide about their level of tax compliance in the second stage. We find that if the concern about fairness in tax compliance is high enough, a liberal middle‐income majority of voters may block any income redistribution policy. Alternatively, we find an equilibrium in which the preferences of the median voter are ignored in favor of a coalition formed by a group of relatively poor voters and the richest voters. In this equilibrium income redistribution prevails with no tax enforcement.
    February 07, 2017   doi: 10.1111/jpet.12232   open full text
  • A normative foundation for equity‐sensitive health evaluation: The role of relative comparisons of health gains.
    Juan D. Moreno‐Ternero, Lars Peter Østerdal.
    Journal of Public Economic Theory. February 07, 2017
    We explore in this paper the relationship between equity‐sensitive population health evaluation measures and normative concerns for relative comparisons of health gains. Such a relationship allows us to characterize focal equity‐sensitive models for the evaluation of population health. Instances are the so‐called multiplicative Quality Adjusted Life Years (QALYs) and multiplicative Healthy Years Equivalents (HYEs), as well as generalizations of the two. Our axiomatic approach assumes social preferences over distributions of individual health states experienced in a given period of time. It conveys informational simplicity, as it does not require information about individual preferences on health.
    February 07, 2017   doi: 10.1111/jpet.12233   open full text
  • Regulation and rent‐seeking: The role of the distribution of political and economic power.
    Fernando Del Rio, Francisco‐Xavier Lores.
    Journal of Public Economic Theory. February 07, 2017
    It is shown that the joint distribution of economic and political power plays a key role in determining regulatory and tax policies of national and subnational governments. If both economic and political power are evenly distributed across individuals, then regulatory and tax policies are efficient, but if they are unevenly distributed and positively correlated, then regulatory policy is used by subnational governments to redistribute income in favor of individuals with higher economic and political power at the expense of productivity and output. Consequently, the national government has to raise the tax rate to finance public expenditure. Moreover, if there exists a positive correlation between economic and political power, then the higher the fiscal gap, the larger the gap between equilibrium and efficient policies because subnational governments underestimate more the fall of public revenues caused by inefficient policies.
    February 07, 2017   doi: 10.1111/jpet.12231   open full text
  • Optimal income taxation with a stationarity constraint in a dynamic stochastic economy.
    Marcus Berliant, Shota Fujishima.
    Journal of Public Economic Theory. February 02, 2017
    We consider the optimal nonlinear income taxation problem in a dynamic, stochastic environment when the government cannot change the tax rule as uncertainty resolves. Due to such a stationarity constraint, our taxation problem is reduced to a static one over an expanded type space that incorporates type evolution. We strengthen the argument in the static model that the zero top marginal tax rate result is of little practical importance because it only applies to the top of the expanded type space. If the maximal type increases over time, the person with top ability in any period but the last has a positive marginal tax rate.
    February 02, 2017   doi: 10.1111/jpet.12239   open full text
  • Dynamic dissolutions and unifications.
    Christopher J. Ellis.
    Journal of Public Economic Theory. February 02, 2017
    I reexamine the key results from the literature on the size and number of countries under different political institutions in a simple dynamic model. I find that the canonical static results that democracies lead to too many too‐small countries and that Leviathans lead to too few too‐large countries no longer necessarily hold. The key dynamic element that drives the new results is that public goods are modeled as public capital; this changes the incentives to unify or divide countries. I also show that there are hysteresis effects on the size and number of countries; that is, arbitrary initial configurations of national boundaries may tend to persist because of the initial public capital location decisions they promote.
    February 02, 2017   doi: 10.1111/jpet.12236   open full text
  • Consumption adaptation, anticipation‐bias, and optimal income taxation.
    Thomas Aronsson, Ronnie Schöb.
    Journal of Public Economic Theory. December 14, 2016
    Adaptation is omnipresent but people systematically fail to correctly anticipate the degree to which they adapt, leading them to make irrational intertemporal decisions. This paper concerns optimal income taxation to correct for such anticipation‐biases in a framework where consumers adapt to earlier consumption levels. The analysis is based on a general equilibrium OLG model with endogenous labor supply and savings where each consumer lives for three periods. The results show how a paternalistic government may correct for the effects of anticipation‐bias through a combination of time‐variant marginal labor income taxes and savings subsidies/taxes. The optimal policy mix remains the same, irrespective of whether consumers commit to their original life time plan for work hours and consumption or reoptimize later on when realizing that they have already adapted more than expected.
    December 14, 2016   doi: 10.1111/jpet.12227   open full text
  • A Comment on Dehez and Tellone, “Data games: sharing public goods with exclusion”.
    Anna Khmelnitskaya, Theo Driessen.
    Journal of Public Economic Theory. December 13, 2016
    This comment shows that the data cost game introduced in Dehez and Tellone (Journal of Public Economic Theory, 2013) coincides with the nonadditive component of the library cost game studied in Driessen, Khmelnitskaya, and Sales (TOP, 2012) where the core, nucleolus, and Shapley value were also investigated.
    December 13, 2016   doi: 10.1111/jpet.12228   open full text
  • Optimal fiscal policy in sunspot‐driven oligopolistic economies.
    Rodolphe Dos Santos Ferreira, Frédéric Dufourt.
    Journal of Public Economic Theory. August 25, 2016
    Economies with oligopolistic markets are prone to inefficient sunspot fluctuations triggered by autonomous changes in firms equilibrium conjectures. A well‐designed taxation‐subsidization scheme can eliminate these fluctuations by coordinating firms in each sector on a single equilibrium, left unaffected. The optimal taxation scheme must select the number of active firms that makes the best trade‐off (in terms of consumer welfare) between the markup and the scale inefficiency distortions. Implementing such stabilization policy leads to significant welfare gains, attributable to an “efficient stabilization effect,” typically ignored in usual computations of the welfare costs of fluctuations.
    August 25, 2016   doi: 10.1111/jpet.12219   open full text
  • Optimal rationing within a heterogeneous population.
    Philippe Choné, Stéphane Gauthier.
    Journal of Public Economic Theory. August 25, 2016
    A government agency delegates to a provider (hospital, medical gatekeeper, school, social worker) the decision to supply a service or treatment to individual recipients. The agency does not perfectly know the distribution of individual treatment costs in the population. The single‐crossing property is not satisfied when the uncertainty pertains to the dispersion of the distribution. We find that the provision of service should be distorted upward when the first‐best efficient number of recipients is sufficiently high.
    August 25, 2016   doi: 10.1111/jpet.12220   open full text
  • Altruism, Liquidity Constraint, and Investment in Education.
    Toshihiro Ihori, Kimiyoshi Kamada, Takashi Sato.
    Journal of Public Economic Theory. August 17, 2016
    In Japan and other East Asian societies, household educational expenditures per child (especially private tutoring expenditures) have increased sharply, perhaps to an excessive degree. This paper suggests a rationale for many families to invest extensively in education, whereas other relevant literature rarely addresses the possibility of excessive educational investment. Introducing altruism and liquidity constraints into a model in which parent and child interact for determining investment in the child's education, we show that educational investment may be excessive unless the family is profoundly liquidity‐constrained. Our result extends previous findings incorporating the Samaritan's Dilemma. We also discuss public policy designed to remedy the inefficiency in educational investment.
    August 17, 2016   doi: 10.1111/jpet.12208   open full text
  • The Time‐Consistent Public Goods Provision.
    Shigeo Morita.
    Journal of Public Economic Theory. August 17, 2016
    In this study, we reconsider the optimal nonlinear tax problem with the public good from the perspective of the commitment issue and examine how it affects the condition of the public good provision. We show that the Samuelson rule should be modified when the government cannot commit and the skill types of taxpayers are revealed in the first period. This is true even if the preference of the taxpayers is separable and additive with respect to consumption and leisure. Our analysis also shows how the lack of commitment affects the formula of the marginal cost of public funds and the level of public good provision. Our findings imply that the level of the public good may be excessive in comparison to the case where the government can commit to its tax policy.
    August 17, 2016   doi: 10.1111/jpet.12209   open full text
  • Emission Taxes and Product Differentiation in the Presence of Foreign Firms.
    Luis Gautier.
    Journal of Public Economic Theory. August 16, 2016
    Industries characterized by differentiated products are important contributors of greenhouse gases and currently subject to market‐based policies such as emission taxes. In the context of developing countries, fears about foreign investment leaving the country are often used as an argument not to address industry emissions through emission taxes. This paper develops a Cournot model with product differentiation in the presence of abatement efforts where host and foreign firms are subject to an emission tax. The analysis indicates that abatement efforts and differences in pollution intensity coefficients across firms may play a significant role in the characterization of optimal policy. The analysis also suggests that the government may opt to encourage foreign, less pollution‐intensive firms via higher taxation. Additionally, this paper examines how an optimal emission tax may be adjusted as products become more differentiated; industry emissions may fall/rise as a result of more differentiated products. One important contribution of this paper is that it emphasizes the role of abatement efforts, product differentiation, and differences in pollution intensity coefficients across firms in the characterization of the optimal emission tax.
    August 16, 2016   doi: 10.1111/jpet.12204   open full text
  • Asymmetric Punishment as an Instrument of Corruption Control.
    Karna Basu, Kaushik Basu, Tito Cordella.
    Journal of Public Economic Theory. August 16, 2016
    The control of bribery is a policy objective in many developing countries. It has been argued that asymmetric punishments could reduce bribery by incentivizing whistle‐blowing. This paper investigates the role played by asymmetric punishment in a setting where bribe size is determined by Nash bargaining, detection is costly, and detection rates are set endogenously. First, if whistle‐blowing is infeasible, the symmetry properties of punishment are irrelevant to bribery deterrence but not to bribe size. Bribery disappears if expected penalties are sufficiently high; otherwise, bribe sizes rise as expected penalties rise. Second, when the bribe‐giver may whistle‐blow, a switch from symmetric to asymmetric punishment eliminates bribery only if whistle‐blowing is cheap and the stakes are low. When bribery persists, multiple bribe sizes could survive in equilibrium. The paper derives parameter values under which each of these outcomes occurs, and discusses implications for welfare and the design of policy.
    August 16, 2016   doi: 10.1111/jpet.12212   open full text
  • Can Minimum Wages Raise Workers’ Incomes in the Long Run?
    George Economides, Thomas Moutos.
    Journal of Public Economic Theory. August 12, 2016
    Using an intertemporal model of saving and capital accumulation with two types of agents we demonstrate that it is impossible for any binding minimum wage to increase the after‐tax incomes of workers if the production function is Cobb–Douglas with constant returns to scale, or if there are no differences in ability among workers. Moreover, it is impossible to increase the incomes of employed workers through minimum wage legislation, even under decreasing returns to scale and heterogeneity of ability among workers, unless the support provided to unemployed workers is far below what they would earn in the absence of minimum wages.
    August 12, 2016   doi: 10.1111/jpet.12216   open full text
  • Optimal Universal and Categorical Benefit Provision with Classification Errors and Imperfect Enforcement.
    Sean Slack, David Ulph.
    Journal of Public Economic Theory. August 12, 2016
    We determine the optimal combination of a universal benefit and categorical benefit when individuals differ in their ability to work and, if able to work, their productivity. The categorical benefit is conditioned ex ante on applicants being unable to work and ex post on recipients not working. The awards test makes Type I/II errors. If the ex post condition is (i) not enforced, the optimal categorical benefit is positive only if the awards test has discriminatory power, while maximum welfare falls with both error propensities; but if (ii) fully enforced, the optimal categorical benefit is positive always and maximum welfare can increase with the Type II error propensity.
    August 12, 2016   doi: 10.1111/jpet.12218   open full text
  • Group Structure and Public Goods Provision in Heterogeneous Societies.
    Jo Thori Lind.
    Journal of Public Economic Theory. August 12, 2016
    I consider a society with heterogeneous individuals who can form organizations for the production of a differentiated public good. A decentralized arrangement of organizations is said to be split‐up stable whenever there is no majority to split any of the organizations. Compared to the social optimum, decentralization yields too few organizations if they provide broad services and potentially too many if they are highly specialized. Conclusions are broadly similar in the presence of an outside opportunity where only some individuals join organizations.
    August 12, 2016   doi: 10.1111/jpet.12213   open full text
  • Relational Political Contribution under Common Agency.
    Akifumi Ishihara.
    Journal of Public Economic Theory. August 12, 2016
    Motivated by commitment problems of contracts in lobbying, this paper studies a model of a repeated common agency where monetary transfers must be voluntary. First, we show that the optimal punishment strategy for a principal takes a two‐phase scheme, which is similar to the punishment characterized by Goldlücke and Kranz. Second, we investigate whether an outcome of standard menu auctions with binding contracts can be supported by implicit contracts. We define the environment to be more preference‐diverse if an efficient decision is less attractive to each principal. We show that the discount factor must be high to support the outcome of the standard menu auction if the environment is preference‐diversified.
    August 12, 2016   doi: 10.1111/jpet.12215   open full text
  • Information Provision in Procurement Auctions.
    JoaquÍn Coleff, Daniel Garcia.
    Journal of Public Economic Theory. August 11, 2016
    We study the optimal provision of information in a procurement auction with horizontally differentiated goods. The buyer has private information about her preferred location on the product space and has access to a costless communication device. A seller who pays the entry cost may submit a bid comprising a location and a minimum price. We characterize the optimal information structure and show that the buyer prefers to attract only two bids. Further, additional sellers are inefficient since they reduce total and consumer surplus, gross of entry costs. We show that the buyer will not find it optimal to send public information to all sellers. On the other hand, she may profit from setting a minimum price and that a severe hold‐up problem arises if she lacks commitment to set up the rules of the auction ex ante.
    August 11, 2016   doi: 10.1111/jpet.12217   open full text
  • Comparable Axiomatizations of Two Allocation Rules for Cooperative Games with Transferable Utility and Their Subclass of Data Games.
    Sylvain BÉal, Marc Deschamps, Philippe Solal.
    Journal of Public Economic Theory. August 11, 2016
    The axiom of balanced collective contributions is introduced as a collective variant of the axiom of balanced contributions proposed by Myerson. It requires the identical average impact of the withdrawal of any agent from a game on the remaining population. It turns out that the axiom of balanced collective contributions and the classical axiom of efficiency characterize the equal allocation of nonseparable costs, an allocation rule that is extensively used in cost allocation problems and in accounting. In particular, the equal allocation of nonseparable costs coincides with the nucleolus on the class of data games within the European REACH legislation. While our result does not hold on data games, extra axioms enable provision of comparable characterizations of the equal allocation of nonseparable costs and the Shapley value on this class of games.
    August 11, 2016   doi: 10.1111/jpet.12205   open full text
  • Uncertainty and the Voluntary Provision of a Pure Public Good in a Two‐Moment Decision Model.
    Arthur J. Caplan.
    Journal of Public Economic Theory. August 11, 2016
    In this paper, we explore the potential benefits of uncertainty that may arise in a two‐moment model of the voluntary provision of a pure public good. We find that an increase in a given contributor i’s risk associated with the aggregate contribution level of the other contributors (i.e., an increase in social uncertainty) induces that contributor to increase his own contribution level if and only if the uncertainty's incremental effect on the expected value of his net marginal utility is negative. Contributor i’s welfare likewise increases when a closely related condition is met, namely that the uncertainty's marginal effect on his expected marginal utility value of the public good exceeds its countervailing effect on the numeraire. Further, the corresponding aggregate contribution to the public good increases in the presence of free‐riding if and only if the incremental effect of contributor i’s contribution on the aggregate expected value of all other contributors’ net marginal utilities is small‐enough positive. We derive similar conditions for the case of private uncertainty, where the increase in contributor i’s risk is associated with his own marginal valuation of the public good. A simple example illustrates these conceptual results. Numerical analysis demonstrates that an increase in private uncertainty can have a nonmonotonic impact on contributor i’s welfare.
    August 11, 2016   doi: 10.1111/jpet.12214   open full text
  • Nonconvergent Electoral Equilibria under Scoring Rules: Beyond Plurality.
    Dodge Cahan, Arkadii Slinko.
    Journal of Public Economic Theory. August 11, 2016
    We use Hotelling's spatial model of competition to investigate the position‐taking behavior of political candidates under a class of electoral systems known as scoring rules, though the model also has a natural interpretation in the firm location context. Candidates choose ideological positions so as to maximize their support in society. Convergent Nash equilibria in which all candidates adopt the same policy were characterized by Cox (1987). Here, we investigate nonconvergent equilibria, where candidates adopt divergent policies. We identify a number of classes of scoring rules exhibiting a range of different equilibrium properties. For some of these, nonconvergent equilibria do not exist. For others, nonconvergent equilibria in which candidates cluster at positions spread across the issue space are observed. In particular, we prove that the class of convex rules does not have Nash equilibria (convergent or nonconvergent) with the exception of some derivatives of Borda rule. We also look at “two‐party” equilibria. Implications for the firm location model are discussed.
    August 11, 2016   doi: 10.1111/jpet.12207   open full text
  • On the Cost of Opportunistic Behavior in the Public Sector: A General‐Equilibrium Approach.
    Aleksandar Vasilev.
    Journal of Public Economic Theory. August 11, 2016
    This paper studies the wasteful effect of bureaucracy on the economy by addressing the link between opportunistic behavior of government bureaucrats and the public sector wage bill. In particular, public officials are modeled as individuals competing for a larger share of those public funds. A simple extraction technology in the government administration is introduced in a standard real‐business‐cycle setup augmented with detailed public sector. The model is calibrated to German data for the period 1970–2007. The main findings are: (i) the model performs well vis‐à‐vis the data; (ii) due to the existence of a significant public sector wage premium and the high public sector employment, a substantial amount of working time is spent in opportunistic activities, which, in turn, leads to significant losses in terms of output; and (iii) the model‐based loss measures obtained for the EU‐12 countries are highly correlated to indices of bureaucratic inefficiency.
    August 11, 2016   doi: 10.1111/jpet.12206   open full text
  • Media Plurality: Private versus Mixed Duopolies.
    Armando JosÉ Garcia Pires.
    Journal of Public Economic Theory. August 11, 2016
    In this paper, we analyze the level of media plurality in a market with two private news firms (private duopoly) and in a market with a private news firm and a public news firm (mixed duopoly). In the private duopoly news firms maximize profits. In the mixed duopoly, the private news firm maximizes profits, while the public news firm maximizes social welfare. We show that, in spite of the public news firm maximizing social welfare, neither media plurality nor social welfare needs to be higher under the mixed duopoly compared with the private duopoly. This will depend on the relation between the costs of adapting news to readers' political preferences, the intensity of the readers' political preferences, and the size of the advertising market.
    August 11, 2016   doi: 10.1111/jpet.12210   open full text
  • Difference‐Form Persuasion Contests.
    Stergios Skaperdas, Amjad Toukan, Samarth Vaidya.
    Journal of Public Economic Theory. August 11, 2016
    We explore the equilibrium properties of two types of “difference‐form” persuasion contest functions derived in Skaperdas and Vaidya in which contestants spend resources to persuade an audience. We find that both types of functions generate interior pure strategy Nash equilibria unlike Baik and Che and Gale with characteristics different to existing literature. For one type of function, we find that the reaction function of each player is “flat” and nonresponsive to the level of resources devoted by the rival so that the “preemption effect” as defined by Che and Gale is absent. Further, the equilibrium is invariant to the sequencing of moves. For the second type of function, which applies when there is asymmetry among contestants with regard to the quality of evidence, we find that the reaction functions of the stronger and weaker players have gradients with opposite signs relative to Dixit and therefore their incentive to precommit expenditures in a sequential move game is also different. For both types of functions, the extent of rent dissipation is partial. From the equilibrium analysis, we are also able to establish the potential effects of some specific factors affecting persuasion such as evidence potency, the degree of truth, and bias on aggregate resource expenditures and welfare.
    August 11, 2016   doi: 10.1111/jpet.12211   open full text
  • Marginal Subsidies in Tullock Contests.
    Jonathan P. Thomas, Zhewei Wang.
    Journal of Public Economic Theory. August 11, 2016
    In a general Tullock contest, we examine a situation where a limited resource can be used to provide marginal subsidies to either player (weak or strong), or to increase the prize directly. We show that to maximize total effort, subsidizing the weak/strong player is preferred when the contest is sufficiently accurate/inaccurate. This result generalizes to n‐player lottery contests. In a lottery contest (Tullock contest with r=1), we derive the optimal scheme for a full range of resource: when the resource is small, it is optimal to only subsidize the weak player; when it is large, both players should be subsidized simultaneously.
    August 11, 2016   doi: 10.1111/jpet.12203   open full text
  • Competing for Attention: Lobbying Time‐Constrained Politicians.
    Christopher Cotton.
    Journal of Public Economic Theory. May 31, 2016
    We develop a model of lobbying in which a time and resource constrained policymaker first chooses which policy proposals to learn about, before choosing which to implement. The policymaker reviews the proposals of the interest groups who provide the highest contributions. We study how policy outcomes and contributions depend on policymaker constraints and the design of the “Contest for Attention.” Among other results, awarding attention to the highest contributors generally guarantees the first best policy outcome. It can also lead to the highest possible contributions, suggesting that a policymaker may not need to sacrifice policy in order to maximize contributions. Our results also give insight into other settings where agents compete for a decision maker's attention.
    May 31, 2016   doi: 10.1111/jpet.12202   open full text
  • The Efficiency of Tenure Contracts in Academic Employment.
    Bruce Cater, Byron Lew, Marcus Pivato.
    Journal of Public Economic Theory. May 31, 2016
    Academic research is a public good whose production is supported by the tuition‐paying students that a faculty's research accomplishments attract. A professor's spot contribution to the university's revenues thus depends not on her spot research production, but rather on her entire cumulative research record. We show that, under a broad range of education market conditions, a profit‐maximizing university will apply a “high” minimum retention standard to the production of a junior professor who has no record of past research, but a “zero” retention standard to the spot production of a more senior professor whose background includes accomplishments sufficient to have cleared the “high” probationary hurdle. But if and when those education market conditions change, tenure‐based contracts may cease to be optimal.
    May 31, 2016   doi: 10.1111/jpet.12201   open full text
  • Debt Policy Rules in an Open Economy.
    Keiichi Morimoto, Takeo Hori, Noritaka Maebayashi, Koichi Futagami.
    Journal of Public Economic Theory. May 31, 2016
    In a small open economy model of endogenous growth with public capital accumulation, we examine the effects of a debt policy rule under which the government must reduce its debt–GDP ratio if it exceeds the criterion level. To sustain public debt at a finite level, the government should adjust public spending rather than the income tax rate. The long‐run debt–GDP ratio should be kept sufficiently low to avoid equilibrium indeterminacy. Under sustainability and determinacy, a tighter (looser) debt rule brings welfare gains when the world interest rate is relatively high (low).
    May 31, 2016   doi: 10.1111/jpet.12197   open full text
  • A Strategy‐Proofness Characterization of Plurality Rule.
    Donald E. Campbell, Jerry S. Kelly.
    Journal of Public Economic Theory. May 31, 2016
    Assuming at least four individuals and at least four alternatives, a social choice function on the domain of profiles at which there is an alternative ranked first by more individuals than any other alternative is nondictatorial, strategy‐proof, and has full range if and only if it is plurality rule.
    May 31, 2016   doi: 10.1111/jpet.12198   open full text
  • Contests with Alternative Public‐Good Prizes.
    Kyung Hwan Baik.
    Journal of Public Economic Theory. May 31, 2016
    I study contests in which a society of players compete, by expending irreversible effort, over which one of alternative prizes should be awarded to them by the decision maker. The prizes are public goods and/or public bads for the players. The players choose their effort levels simultaneously and independently. I define each player's valuation spread as the difference between his valuations for the two public‐good/public‐bad prizes. I establish that the players' equilibrium effort levels depend solely on their valuation spreads, and that the players never expend positive effort for both prizes in equilibrium. Further, I establish that in equilibrium only players with the widest positive valuation spread and players with the widest negative valuation spread expend positive effort. Finally, I establish that the equilibrium effort level expended for each prize and the equilibrium total effort level are determined only by the widest positive valuation spread and the widest negative valuation spread.
    May 31, 2016   doi: 10.1111/jpet.12196   open full text
  • Does the Cost Paradox Preclude Technological Progress under Imperfect Competition?
    Rabah Amir, Christine Halmenschlager, Malgorzata Knauff.
    Journal of Public Economic Theory. May 30, 2016
    We consider a two‐stage model of R&D/Cournot competition with isoelastic demand satisfying the cost paradox (i.e., that equilibrium profits increase with unit cost). The R&D process has a binary structure, with spillover effects. We provide a negative answer to the question in the title: Under noncooperative R&D, firms will conduct R&D for a broad parameter range, despite the presence of the cost paradox, as a result of being caught in a prisoner's dilemma. A second‐best social planner is shown to have a higher propensity for R&D than the noncooperative scenario. However, if firms engaged in any of the known R&D cooperation scenarios, the answer to the question in the title would become affirmative. It follows that R&D cooperation leads to lower producer and consumer surpluses. This constitutes a major departure from the conclusions of the standard R&D model. Therefore, R&D cooperation in such environments should not receive favorable antitrust treatment.
    May 30, 2016   doi: 10.1111/jpet.12199   open full text
  • The Dynamics of Pharmaceutical Regulation and R&D Investments.
    Rosella Levaggi, Michele Moretto, Paolo Pertile.
    Journal of Public Economic Theory. May 30, 2016
    The paper uses a real option approach to investigate the properties of two widely used schemes of regulating the reimbursement of new pharmaceutical products: standard cost‐effectiveness thresholds and performance‐based risk‐sharing agreements. The use of the latter has been quickly spreading and often criticized in recent times. The results show that the exact definition of the risk‐sharing agreement is key in determining its economic effects. In particular, despite the concerns expressed by some authors, the incentive for a firm to invest in R&D may be the same or even greater than under cost‐effectiveness thresholds. The greater flexibility on the timing of commercialization allowed by risk‐sharing schemes plays a key role, by increasing the value of the option to invest in R&D under uncertainty. Under this scheme, a higher value for the firm is associated with earlier access to innovations for patients. The price for this is less value for money for the insurer at the time of adoption of the innovation.
    May 30, 2016   doi: 10.1111/jpet.12195   open full text
  • The Welfare and Employment Effects of Centralized Public Sector Wage Bargaining.
    Gabriele Cardullo.
    Journal of Public Economic Theory. May 30, 2016
    In many countries, the government pays almost identical nominal wages to workers living in regions with notable economic disparities. By developing a two‐region general equilibrium model with endogenous migration and search frictions in the labor market, I study the differences in terms of unemployment, real wages, and welfare between a regional wage bargaining process and a national one in the public sector. Adopting the latter makes residents in the poorer region better off and residents of the richer region worse off. Private sector employment decreases in the poorer region and it increases in the richer one. Under some conditions, the unemployment rate in the poorer region soars.
    May 30, 2016   doi: 10.1111/jpet.12200   open full text
  • Audits or Distortions: The Optimal Scheme to Enforce Self‐Employment Income Taxes.
    Eduardo Zilberman.
    Journal of Public Economic Theory. May 28, 2016
    I investigate the optimal auditing scheme for a revenue‐maximizing tax collection agency that observes not only reported profits, but also a single factor of production at each firm. Each firm is owned by a single entrepreneur whose managerial ability is random. The optimal auditing scheme is discontinuous and nonmonotone in ability. In intermediate audit costs, less productive entrepreneurs face auditing probabilities that increase in ability, whereas the ablest ones are not audited. Finally, the effective tax rate is higher in the middle of the managerial ability distribution; thus, the overall regressive (or progressive) bias that arises from evasion is unknown.
    May 28, 2016   doi: 10.1111/jpet.12193   open full text
  • Optimal Subsidization of Business Start‐Ups.
    Hakki Yazici.
    Journal of Public Economic Theory. May 27, 2016
    This paper studies efficient allocation of resources in an economy in which agents are initially heterogeneous with regard to their wealth levels and whether they have productive ideas or not. An agent with an idea can start a business that generates random returns. Agents have private information about (1) their initial types, (2) how they allocate their resources between consumption and investment, and (3) the realized returns. I show that, under informational frictions, a society that targets productive efficiency should subsidize poor agents with ideas, and choose the amount and timing of subsidies carefully in order to ensure that other agents do not mimic poor agents with ideas and receive subsidies. Then, I provide an implementation of the start‐up subsidies in a market framework that resembles the U.S. Small Business Administration's Business Loan Program.
    May 27, 2016   doi: 10.1111/jpet.12194   open full text
  • Taxing the Financially Integrated Multinational Firm.
    Niels Johannesen.
    Journal of Public Economic Theory. May 22, 2016
    This paper develops a theoretical model of corporate taxation in the presence of financially integrated multinational firms. Under the assumption that multinational firms use some measure of internal loans to finance foreign investment, we find that the optimal corporate tax rate is positive from the perspective of a small, open economy. This finding contrasts the standard result that the optimal‐source‐based capital tax is zero. Intuitively, when multinational firms finance investment in one country with loans from affiliates in another country, the burden of the corporate taxes levied in the latter country partly falls on investment and thus workers in the former country. This tax exporting mechanism introduces a scope for corporate taxes, which is not present in standard models of international taxation. Accounting for the internal capital markets of multinational firms thus helps resolve the tension between standard theory predicting zero capital taxes and the casual observation that countries tend to employ corporate taxes at fairly high rates.
    May 22, 2016   doi: 10.1111/jpet.12192   open full text
  • The Dynamics of Growth and Income Inequality under Progressive Taxation.
    Murat Koyuncu, Stephen J. Turnovsky.
    Journal of Public Economic Theory. April 13, 2016
    This paper develops an endogenous growth model having a progressive income tax structure in which heterogeneous agents, who differ in terms of their rates of time preference, supply labor elastically. We analyze the dynamic adjustment to an increase in progressivity and show that the economy will converge to an equilibrium growth path with nondegenerate distributions of both income and wealth. The role of the endogeneity of labor supply is emphasized and shown to have a major impact on the nature of the transitional path, as a result of the impact of the progressive tax on agents’ work incentives. Our theoretical analysis is supplemented with, and supported by, numerical simulations, which generally match the empirical evidence rather closely. We also show that the responses of the different income groups contrast sharply from one another so that focusing on the economy‐wide average provides an incomplete picture.
    April 13, 2016   doi: 10.1111/jpet.12191   open full text
  • Partially Revealing Campaign Promises.
    Elena Panova.
    Journal of Public Economic Theory. April 07, 2016
    Candidates competing for political office give promises to voters. There are no legal restraints preventing incumbents from breaking their electoral promises. This paper models campaign promises as pure cheap talk and asks why is it influential. We propose that a candidate's campaign promises are a partially revealing signal of her policy preference type. The incumbent's policy choice is yet another signal of her type. Policy choice is a costly signal (unlike campaign promises). The incumbent keeps her electoral promises in order to preserve ambiguity about her type, which is necessary to assemble a winning majority for reelection. She keeps her promises regardless of information about the efficiency of different public policies which she receives upon taking office. Therefore, campaign promises generate inefficiencies in public policy.
    April 07, 2016   doi: 10.1111/jpet.12189   open full text
  • Can Trade Be Good for the Environment?
    Harvey E. Lapan, Shiva Sikdar.
    Journal of Public Economic Theory. April 01, 2016
    We analyze the impact of trade in a differentiated good on environmental policy when there is local and transboundary pollution. In autarky, the (equivalent) pollution tax is set equal to the marginal damage from own emissions. If the strategic policy instrument is a tax, leakage occurs under trade and tends to lower the tax. The net terms of trade effect, due to the exportable and importable varieties of the differentiated good, tends to increase the tax. We derive conditions under which pollution taxes under trade are higher than the marginal damage from own emissions, i.e., higher than the Pigouvian tax and than that under autarky. Then, pollution falls under trade relative to autarky. When countries use quotas/permits to regulate pollution, there is no leakage, while the net terms of trade effect tends to make pollution policy stricter. The equivalent tax is always higher than the marginal damage from own emissions, i.e., always higher than the Pigouvian tax and than that under autarky; hence, pollution always falls under trade. Our analysis provides some insight into the findings in the empirical literature that trade might be good for the environment.
    April 01, 2016   doi: 10.1111/jpet.12176   open full text
  • Dragon Slaying with Ambiguity: Theory and Experiments.
    David Kelsey, Sara Le Roux.
    Journal of Public Economic Theory. April 01, 2016
    This paper studies the impact of ambiguity in the best‐shot and weakest‐link models of public good provision. The models are first analyzed theoretically. Then, we conduct experiments to study how ambiguity affects behavior in these games. We test whether subjects' perception of ambiguity differs between a local opponent and a foreign one. We find that an ambiguity‐safe strategy is often chosen by subjects. This is compatible with the hypothesis that ambiguity aversion influences behavior in games. Subjects tend to choose contributions above (respectively, below) the Nash equilibrium in the best‐shot (respectively, weakest‐link) model.
    April 01, 2016   doi: 10.1111/jpet.12185   open full text
  • Organizational Cultures of Corruption.
    Patrick Schneider, Gautam Bose.
    Journal of Public Economic Theory. April 01, 2016
    Systematic differences in the incidence of corruption between countries can be explained by models of coordination failure that suggest that corruption can only be reduced by a “big push” across an entire economy. However, there is significant evidence that corruption is often sustained as an organizational culture, and can be combated with targeted effort in individual organizations one at a time. In this paper, we propose a model that reconciles these two theories of corruption. We explore a model of corruption with two principal elements. First, agents suffer a moral cost if their corruption behavior diverges from the level they perceive to be the social norm; second, the perception of the norm is imperfect; it gives more weight to the behavior of colleagues with whom the agent interacts regularly. This leads to the possibility that different organizations within the same country may stabilize at widely different levels of corruption. Furthermore, the level of corruption in an organization is persistent, implying that some organizations may have established internal “cultures” of corruption. The organizational foci are determined primarily by the opportunities and (moral) costs of corruption. Depending on the values of these parameters, the degree of corruption across departments may be relatively uniform or widely dispersed. These results also explain another surprising empirical observation: that in different countries similar government departments such as tax and education rank very differently relative to each other in the extent to which they are corrupt. This is difficult to explain in incentive‐based models if similar departments face similar incentives in different countries.
    April 01, 2016   doi: 10.1111/jpet.12174   open full text
  • Private Information in the BBV Model of Public Goods.
    Stefano Barbieri, David A. Malueg.
    Journal of Public Economic Theory. April 01, 2016
    To analyze the private provision of a public good in the presence of private information, we explore the connections between two frameworks: the binary public good model with threshold uncertainty and the standard continuous model à la Bergstrom et al. Linearity of best responses in others' contributions is key to matching the two frameworks. We identify all utility functions that display this linearity, and we provide conditions ensuring that the minimal properties that Bergstrom et al. require for utilities are satisfied. Using techniques developed in the threshold uncertainty framework, we show existence and uniqueness of the Bayes‐Nash equilibrium—thus generalizing existing results—and we analyze its comparative statics properties. In particular, under the reasonable assumption that agents' income is stochastic and private information, we complement the full‐information crowding‐out and redistribution results of Bergstrom et al. If the government taxes agents' income proportionally and redistributes (expected) revenues lump sum, equilibrium public good provision can increase or decrease, even if the set of contributors is unchanged. Similarly, we show that crowding‐out can be one‐for‐one, less than one‐for‐one, or more than one‐for‐one. Finally, we extend our results to a multidimensional framework in which agents' unit costs of contributions are also private information.
    April 01, 2016   doi: 10.1111/jpet.12178   open full text
  • Prices and Deadweight Loss in Multiproduct Monopoly.
    Rabah Amir, Jim Y. Jin, Gerald Pech, Michael TrÖge.
    Journal of Public Economic Theory. March 30, 2016
    The paper investigates prices and deadweight loss in multiproduct monopoly with linear interrelated demand and constant marginal costs. We show that, with commonly used models for linear demand such as the Bowley demand and vertically or horizontally differentiated demand, the price for each good is independent of demand cross‐effects and of the characteristics and number of other goods. This contrasts with the oft‐expressed view that prices critically depend on demand cross‐effects. We also show that for these linear models, the deadweight loss due to monopoly amounts to half the total monopoly profit. Finally, we show how a production subsidy might restore social efficiency.
    March 30, 2016   doi: 10.1111/jpet.12173   open full text
  • Fairness versus Efficiency in Public School Assignments.
    Umut Özek.
    Journal of Public Economic Theory. March 30, 2016
    A critical element in the sustainability of any public policy is the fair treatment of similar individuals. This paper introduces a new dimension of merit to evaluate public school assignment mechanisms based on this notion of equity. I show that there exists no assignment mechanism that is both constrained‐efficient and fair. The findings also reveal that all of the prominent assignment mechanisms discussed in the literature fail to satisfy this fairness criterion.
    March 30, 2016   doi: 10.1111/jpet.12188   open full text
  • Schooling and the Intergenerational Transmission of Values.
    Marina Della Giusta, Nigar Hashimzade, Gareth D. Myles.
    Journal of Public Economic Theory. March 30, 2016
    We present a model of the evolution of identity via dynamic interaction between the choice of education and the transmission of values in a community from parents to children, when parents care about the preservation of their traditional community values, different from the values of the host society. We compare the educational and socioeconomic outcomes in different scenarios (melting pot versus multiculturalism). If schooling shifts children's identity away from their parents' values, parents may choose lower levels of education for their children, at the cost of reducing their future earnings. We show how this effect can be attenuated and reversed when the school or, indeed, the host society are willing to accommodate the values of the community and/or to adjust to these values; otherwise the community gradually becomes alienated. This approach may be applied to the analysis of temporal changes in values and attitudes in a community of immigrants, as well as ethnic, religious, or other minority groups.
    March 30, 2016   doi: 10.1111/jpet.12184   open full text
  • A Strategic Implementation of the Shapley Value for the Nested Cost‐Sharing Problem.
    Youngsub Chun, Cheng‐Cheng Hu, Chun‐Hsien Yeh.
    Journal of Public Economic Theory. March 30, 2016
    When agents have different needs for a public facility but serving a given agent allows serving all agents with smaller needs than his without any extra cost, how should the agents divide the cost of the facility among themselves? We provide a strategic implementation of the Shapley value for this class of cost‐sharing problems. We introduce a three‐stage extensive form game that respects individual rationality and show that there is one and only one subgame‐perfect equilibrium outcome of the game. Moreover, it is the allocation assigned by the Shapley value.
    March 30, 2016   doi: 10.1111/jpet.12190   open full text
  • Discrimination via Exclusion: An Experiment on Group Identity and Club Goods.
    Surajeet Chakravarty, Miguel A. Fonseca.
    Journal of Public Economic Theory. March 30, 2016
    We study using laboratory experiments the impact on cooperation of allowing individuals to invest in group‐specific, excludable public goods. We find that allowing different social groups to voluntarily contribute to such goods increases total contributions. However, a significant proportion of that contribution goes toward the group‐specific club good rather than the public good, even when the latter has higher financial returns to cooperation. We find significant evidence of in‐group biases, which are manifested by positive in‐group reciprocity. That is, club goods allow subjects to display their preferences for interaction with their in‐group members, as well as positive in‐group reciprocity.
    March 30, 2016   doi: 10.1111/jpet.12182   open full text
  • Voluntary Contributions to a Mutual Insurance Pool.
    Louis LÉvy‐Garboua, Claude Montmarquette, Jonathan Vaksmann, Marie Claire Villeval.
    Journal of Public Economic Theory. March 30, 2016
    We study mutual‐aid games in which individuals choose to contribute to an informal mutual insurance pool. Individual coverage is determined by the aggregate level of contributions and a sharing rule. We analyze theoretically and experimentally the (ex ante) efficiency of equal and contribution‐based coverage. The equal coverage mechanism leads to a unique no‐insurance equilibrium while contribution‐based coverage develops multiple equilibria and improves efficiency. Experimentally, the latter treatment reduces the amount of transfers from high contributors to low contributors and generates a “dual interior equilibrium.” That dual equilibrium is consistent with the co‐existence of different prior norms which correspond to notable equilibria derived in the theory. This results in asymmetric outcomes with a majority of high contributors less than fully reimbursing the global losses and a significant minority of low contributors less than fully defecting. Such behavioral heterogeneity may be attributed to risk attitudes (risk tolerance vs risk aversion) which is natural in a risky context.
    March 30, 2016   doi: 10.1111/jpet.12181   open full text
  • Fiscal Federalism and Electoral Accountability.
    Toke S. Aidt, Jayasri Dutta.
    Journal of Public Economic Theory. March 30, 2016
    We evaluate how governance uncertainty—exemplified by turnout uncertainty—affects the trade‐off between internalization of externalities and political accountability in the design of the fiscal state. We show that centralization only weakens political accountability in the presence of negative externalities. Unlike positive externalities, negative externalities allow federal politicians to extract higher rents. This yields two new insights. First, decentralization can only Pareto dominate centralization in economies with negative externalities. Second, centralization may not be Pareto efficient in economies with positive externalities despite the fact that policy can be tailored to regional taste differences and centralization internalizes the positive externality.
    March 30, 2016   doi: 10.1111/jpet.12179   open full text
  • The Provision of Language‐Specific Public Services.
    Alex Armstrong.
    Journal of Public Economic Theory. March 30, 2016
    I consider the optimal provision of public services when individuals' effective consumption of the services depends on their proficiency in the language they are provided in. A social planner chooses levels of provision in both a dominant and minority language which are financed by a linear tax on labor income. Minority language speakers make a costly investment to increase their proficiency in the dominant language. In doing so they increase their wage and, possibly, gain access to higher levels of public services provided in the dominant language. The planner faces a trade‐off between compensating minority language speakers for their lower wages and encouraging their integration by rewarding higher levels of dominant language proficiency. Under majority voting, it is possible that the level of public services is increasing in the relative size of the minority language community. This result contrasts with what is typically assumed in the literature on fractionalization and public good provision—that cultural heterogeneity decreases the level of public goods.
    March 30, 2016   doi: 10.1111/jpet.12175   open full text
  • Signaling in a Rent‐Seeking Contest with One‐Sided Asymmetric Information.
    Pim Heijnen, Lambert Schoonbeek.
    Journal of Public Economic Theory. March 30, 2016
    We consider a two‐player rent‐seeking Tullock contest where one player has private information about his valuation of the prize, which can be high or low. This player can send a costly signal to his opponent, i.e., he can commit to reduce the prize either by some absolute amount of money or proportionally, conditional on winning it. We show that both kinds of signaling imply completely opposite results for separating equilibria, both in terms of conditions for existence and the type of player who sends the costly signal.
    March 30, 2016   doi: 10.1111/jpet.12171   open full text
  • Regulated Competition under Increasing Returns to Scale.
    Thomas Greve, Hans Keiding.
    Journal of Public Economic Theory. March 16, 2016
    In the classical models of regulation economics, a mechanism that secures truthful revelation involves paying a subsidy to the firm. In this paper, we investigate whether it is possible to create a regulatory mechanism under a no‐subsidy constraint that induces the firm to report its private information truthfully. We consider a number of firms operating under regulated competition and with increasing returns to scale technology. It is shown that in equilibrium each firm chooses to report truthfully without receiving any subsidy. The use of competition may give rise to an efficiency loss due to the increasing returns to scale. However, we show that our mechanism may still be better, from a social welfare point of view, than the case of monopoly regulation that involves no subsidy.
    March 16, 2016   doi: 10.1111/jpet.12172   open full text
  • Optimal Fines under Announced and Surprise Inspections.
    Emmanuel Dechenaux, Andrew Samuel.
    Journal of Public Economic Theory. March 16, 2016
    This paper examines optimal fines in a regulatory framework where the regulator can choose either surprise or announced inspections to monitor a firm for compliance. The firm can invest in detection avoidance, but it receives a fine if the regulator discovers that it is noncompliant. In the welfare maximization problem, we focus on the trade‐off between the frequency of inspections and the magnitude of the fine. We find that when inspections are unannounced, the optimal fine is maximal, but when they are announced, the optimal fine may be less than maximal.
    March 16, 2016   doi: 10.1111/jpet.12166   open full text
  • Optimal Growth Strategy under Dynamic Threshold.
    Cuong Le Van, ÇaĞrı SaĞlam, Agah Turan.
    Journal of Public Economic Theory. March 16, 2016
    We consider an economy in which the technology exhibits nonconvexities due to fixed costs associated with production. Taking into account the incentives for investment to decrease fixed costs, we characterize the circumstances under which an underdeveloped economy can catch up with the developing ones. We show that it is optimal to get rid of the fixed costs inherent in production in finite time provided that the initial level of fixed costs are not too high and the technology for reducing fixed costs is sufficiently efficient. Indeed, we obtain that even though the income disparities may be very persistent and can be perceived as poverty traps, economies with not very high initial fixed costs and sufficiently efficient technology for reducing fixed costs would ultimately converge to the same steady state level of per capita income.
    March 16, 2016   doi: 10.1111/jpet.12167   open full text
  • Strategic Transparency and Electoral Pressure.
    Laura Moretti, Toru Suzuki.
    Journal of Public Economic Theory. March 16, 2016
    This paper investigates how an office‐motivated incumbent can use transparency enhancement on public spending to signal his budgetary management ability and win re‐election. We show that, when the incumbent faces a popular challenger, transparency policy can be an effective signaling device. It is also shown that electoral pressure can have a nonmonotonic effect on transparency, but a higher electoral pressure always increases the informativeness of signaling and the voter's utility.
    March 16, 2016   doi: 10.1111/jpet.12164   open full text
  • Private, Social, and Self‐Insurance for Long‐Term Care in the Presence of Family Help.
    Ph. De Donder, P. Pestieau.
    Journal of Public Economic Theory. March 16, 2016
    We study the political determination of the level of social long‐term care insurance when voters can top up with private insurance, saving and family help. Agents differ in income, probability of becoming dependent and of receiving family help, and amount of family help received. Social insurance redistributes across income and risk levels, while private insurance is actuarially fair. The income‐to‐dependency probability ratio of agents determines whether they prefer social or private insurance. Family support crowds out the demand for both social and, especially, private insurance, as strong prospects of family help drive the demand for private insurance to zero. The availability of private insurance decreases the demand for social insurance but need not decrease its majority‐chosen level. A majority of voters would oppose banning private insurance.
    March 16, 2016   doi: 10.1111/jpet.12163   open full text
  • Ambiguity and Accident Law.
    Surajeet Chakravarty, David Kelsey.
    Journal of Public Economic Theory. March 16, 2016
    Environmental accidents often involve ambiguous risks, i.e., the relevant probabilities are unknown. This paper studies how liability rules are affected by ambiguity. The injurer and the victim choose a level of care, which is observable, and an unobservable action. Both actions may affect the size and/or likelihood of loss. We analyze the welfare implications of tort rules. First, we show that with ambiguity, negligence is likely to perform better than strict liability. Second, we propose a tort rule of negligence and punitive damages, which gives the efficient levels of both care and unobserved actions.
    March 16, 2016   doi: 10.1111/jpet.12160   open full text
  • A Revelation Mechanism for Soft Information under Moral Hazard.
    Guillaume Roger.
    Journal of Public Economic Theory. March 16, 2016
    This paper constructs a revelation mechanism to address a problem of moral hazard under soft information. The agent alone observes the stochastic outcome of her action, which she reports to the principal. Therefore the principal also faces a problem of ex post adverse selection. Economically relevant restrictions induce constraints on the principal's choice of mechanism and the Revelation Principle fails to apply. Specifically, a direct mechanism induces some pooling, which does not replicate the allocation obtained using a larger message space. Pooling also weakens the ex ante incentives. The Revelation Principle is extended to obtain type separation. A better audit relaxes frictions.
    March 16, 2016   doi: 10.1111/jpet.12169   open full text
  • Quantifying Optimal Growth Policy.
    Volker Grossmann, Thomas M. Steger, Timo Trimborn.
    Journal of Public Economic Theory. March 11, 2016
    We determine the optimal growth policy within a comprehensive endogenous growth model. The model accounts for important elements of the tax transfer system and for transitional dynamics. It captures the three main growth engines based on standard ingredients in order to understand the quantitative policy and welfare implications of the existing theory. Our calibrated model indicates that the current policy leads to severe underinvestment in both R&D and physical capital, implying that both R&D and capital investment subsidies should be increased substantially. We argue that previous research has overlooked a strong evidence for the welfare significance of the quest for the optimal growth policy by failing to calibrate the distortionary tax system.
    March 11, 2016   doi: 10.1111/jpet.12151   open full text
  • Capital Mobility—Resource Gains or Losses? How, When, and for Whom?
    Hikaru Ogawa, Jun Oshiro, Yasuhiro Sato.
    Journal of Public Economic Theory. March 11, 2016
    This paper investigates which of the two types of countries—resource‐rich or resource‐poor—gains from capital market integration and capital tax competition. We develop a framework involving vertical linkages through resource‐based inputs as well as international fiscal linkages between the two types of countries. Our analysis shows that capital market integration causes capital flows from resource‐poor to resource‐rich countries and improves global production efficiency. However, such gains accrue only to resource‐poor countries, and capital mobility might even negatively affect resource‐rich countries. Furthermore, we show that resource‐rich countries can exploit the gains when taxes on capital are available.
    March 11, 2016   doi: 10.1111/jpet.12145   open full text
  • Unemployment Compensation and the Allocation of Labor in Developing Countries.
    Olivier Charlot, Franck Malherbet, Mustafa Ulus.
    Journal of Public Economic Theory. March 11, 2016
    This paper studies the effects of the introduction of unemployment compensation (UC) in countries characterized by pervasive informality. We provide a simple framework to analyze the impact of UC on the allocation of workers between formal and informal activities, as well as the allocation of workers between sectors featuring different incentives to go informal. We show that a reasonable amount of UC may reduce informality, while larger amounts of UC induce large disincentives to go formal because of the level of taxation involved. We also argue that the financing of UC should be part and parcel of a well‐conceived UC system. We show that UC finance based on payroll taxes is likely to entail an excess level of informality resulting from cross‐subsidies between heterogenous sectors. The introduction of a simple layoff tax meant to finance the UC system is then shown to reduce informality, hence highlighting how a well‐designed financing scheme may be used as a supplementary instrument to curb informality.
    March 11, 2016   doi: 10.1111/jpet.12144   open full text
  • The Increase in College Premium and the Decline in Low‐Skill Wages: A Signaling Story.
    Pau Balart.
    Journal of Public Economic Theory. March 11, 2016
    The increase in the college premium over the last 30 years in the United States is to a large extent driven by a reduction in noncollege wages. We show that the signaling effects triggered by an improvement in the incentives to attend higher education can explain this fact, as well as the increase in the number of college graduates. Under imperfect credit markets and wealth heterogeneity, higher education is not only a signal of ability but also of individuals' (parents') wealth. General conditions on the distribution of wealth guarantee that after an increase in incentives to attend higher education, the absence of a college degree becomes a more evident signal of low ability. This results in a reduction in low‐skill wages but not necessarily in increased high skill wages. The increased incentives to enroll in college can either arise from a skill‐biased technology change or an improvement in access to higher education. An important difference is that while skill‐biased technology change always results in an increase in the college premium, that is not necessarily the case when the increased incentives to enroll arise from improved access to higher education.
    March 11, 2016   doi: 10.1111/jpet.12146   open full text
  • Should the Carbon Price Be the Same in All Countries?
    Antoine D'autume, Katheline Schubert, Cees Withagen.
    Journal of Public Economic Theory. March 11, 2016
    International differences in fuel taxation are huge, and may be justified by different local negative externalities that taxes must correct, as well as by different preferences for public spending. In this context, should a worldwide uniform carbon tax be added to these local taxes to correct the global warming externality? We address this question in a second best framework à la Ramsey, where public goods have to be financed through distortionary taxation and the cost of public funds has to be weighted against the utility of public goods. We show that when lump‐sum transfers between countries are allowed for, the second best tax on the polluting good may be decomposed into three parts: one, country‐specific, dealing with the local negative externality, a second one, country‐specific, dealing with the cost of levying public funds, and a third one, global, dealing with the global externality and which can be interpreted as the carbon price. Our main contribution is to show that the uniformity of the carbon price should still hold in this second best framework. Nevertheless, if lump‐sum transfers between governments are impossible to implement, international differentiation of the carbon price is the only way to take care of equity concerns.
    March 11, 2016   doi: 10.1111/jpet.12162   open full text
  • Green Technology and Optimal Emissions Taxation.
    Journal of Public Economic Theory. March 11, 2016
    Unless an active environmental policy exists, firms have no incentive to engage in abatement or environmental R&D so policy design is of paramount importance. This design heavily depends on the way R&D spillovers operate. There are two distinct types of R&D spillover: output spillover and input spillover. An input spillover operates on the expenditure toward pollution reduction, whereas an output spillover manifests as the achieved abatement. Under optimal emissions taxation, significant differences arise due to this distinction, in particular, when the spillover operates on R&D inputs. In an oligopolistic setting, the result is higher R&D expenditure, but also higher aggregate emissions and, consequently, higher emissions taxes. By contrast, when spillovers occur in R&D output, there is a U‐shaped relationship between the optimal tax and the spillover, showing a trade‐off between the optimal tax rate and spillovers when these are low. In terms of the relative effectiveness of different R&D organization setups, combining emissions taxes with R&D cooperation, this paper shows that under low levels of R&D spillover R&D cooperation gives higher emissions reductions, whereas when spillovers are high this is not the case.
    March 11, 2016   doi: 10.1111/jpet.12165   open full text
  • Strategic Network Disruption and Defense.
    Britta Hoyer, Kris De Jaegher.
    Journal of Public Economic Theory. March 11, 2016
    We study a game between a network designer, who uses costly links to connect nodes in a network, and a network disruptor who tries to disrupt the resulting network as much as possible by deleting either nodes or links. For low linking costs networks with all nodes in symmetric positions are a best response of the designer under both link deletion and node deletion. For high linking costs the designer builds a star network under link deletion, but for node deletion excludes some nodes from the network to build a smaller but stronger network. For intermediate linking costs the designer again builds a symmetric network under node deletion but a star‐like network with weak spots under link deletion.
    March 11, 2016   doi: 10.1111/jpet.12168   open full text
  • Optimal Drug Policy in Low‐Income Neighborhoods.
    Sheng‐Wen Chang, N. Edward Coulson, Ping Wang.
    Journal of Public Economic Theory. March 11, 2016
    The control of drug activity currently favors supply‐side policies: drug suppliers in the United States face a higher arrest rate and longer sentences than demanders. We construct a simple model of drug activity with search and entry frictions in labor and drug markets. Our calibration analysis suggests a strong “dealer replacement effect.”  As a result, given a variety of community objectives, it is beneficial to lower supplier arrests and raise the demand arrest rate from current values. A 10% shift from supply‐side to demand‐side arrests can reduce the population of potential drug dealers by 22–25,000 and raise aggregate local income by $380–$400 million, at 2002 prices.
    March 11, 2016   doi: 10.1111/jpet.12147   open full text
  • Beliefs and Public Good Provision with Anonymous Contributors.
    Wilfredo Leiva Maldonado, Jose A. Rodrigues‐Neto.
    Journal of Public Economic Theory. March 11, 2016
    We analyze a static game of public good contributions where finitely many anonymous players have heterogeneous preferences about the public good and heterogeneous beliefs about the distribution of preferences. In the unique symmetric equilibrium, the only individuals who make positive contributions are those who most value the public good and who are also the most pessimistic; that is, according to their beliefs, the proportion of players who most like the public good is smaller than it would be according to any other possible belief. We predict whether the aggregate contribution is larger or smaller than it would be in an analogous game with complete information and heterogeneous preferences, by comparing the beliefs of contributors with the true distribution of preferences. A trade‐off between preferences and beliefs arises if there is no individual who simultaneously has the highest preference type and the most pessimistic belief. In this case, there is a symmetric equilibrium, and multiple symmetric equilibria occur only if there are more than two preference types.
    March 11, 2016   doi: 10.1111/jpet.12161   open full text
  • Long‐Term Contracts, Irreversibility, and Uncertainty.
    Malin Arve.
    Journal of Public Economic Theory. March 11, 2016
    Long‐term contracting implies contracting based on expected future demand. In this paper, I develop a multiperiod procurement model where, once the actual level of demand is realized, the irreversible initial provision level may be supplemented by additional provisions. This paper shows that, with the possibility of additional upward adjustments, the first‐period provision level will be lower than when no additional adjustments are possible. This reduction in first‐period provision level is higher under complete contracting than under incomplete contracting, and because of the reduction in information rents it yields a higher expected utility to the principal but lower total welfare.
    March 11, 2016   doi: 10.1111/jpet.12148   open full text
  • Program Quality Competition in Broadcasting Markets.
    Changying Li, Jianhu Zhang.
    Journal of Public Economic Theory. March 11, 2016
    This paper develops a duopoly model where broadcasters first choose their program quality and then their pricing strategy. Two alternative financing schemes are considered: pay‐TV and free‐to‐air. We find that, from a welfare perspective, a pay‐TV regime always generates inadequate quality and advertising, whereas free‐to‐air might produce excessive quality and advertising. In the case of asymmetric competition, a pay‐TV broadcaster always has a stronger incentive to conduct research and development than a free‐to‐air broadcaster does. Both platforms could either over‐ or underinvest. The pay‐TV broadcaster always shows too few advertisements, but the free‐to‐air media might act in the opposite manner.
    March 11, 2016   doi: 10.1111/jpet.12150   open full text
  • Optimal Decisions on Pension Plans in the Presence of Information Costs and Financial Literacy.
    Lorenzo Corsini, Luca Spataro.
    Journal of Public Economic Theory. June 02, 2014
    Pension reforms are on the political agenda of many countries. Such reforms imply an increasing responsibility on individuals’ side in building an efficient portfolio for retirement. In this paper we provide a model describing workers’ choices on the allocation of retirement savings in presence of a) mandatory pension contribution; b) different pension plans; c) information costs and financial literacy investment decisions. In particular, we characterise the results from both a positive and normative standpoint, by highlighting the determinants of individuals’ choice, with special focus on information costs, on the role of income and preferences, and by characterizing the optimal contribution rate to mandatory complementary pension plans. We also introduce endogenous financial literacy and analyse how its optimal level is determined and how it affects the decisions on pension plans. This article is protected by copyright. All rights reserved.
    June 02, 2014   doi: 10.1111/jpet.12121   open full text
  • Imperfect Bundling in Public‐Private Partnerships.
    Luciano Greco.
    Journal of Public Economic Theory. May 26, 2014
    We provide a first contribution to analyze how agency problems within the private consortium (i.e., imperfect bundling of private tasks) affect the performance of PPPs. When both public‐private and private‐private contracts are incomplete, the profit‐sharing rules are key to regulate private partners' incentives. In failing to consider the role of imperfect bundling, the scope for PPPs may be overrated (or underrated) if the social benefits of infrastructure quality are large (or small) as compared to the social cost of operation efficiency. Also, it may be optimal for the government to restrict the admissible governance of private consortia. This article is protected by copyright. All rights reserved.
    May 26, 2014   doi: 10.1111/jpet.12122   open full text
  • Large‐scale Risks and Technological Change: What about Limited Liability?
    Julien Jacob, Sandrine Spaeter.
    Journal of Public Economic Theory. May 26, 2014
    We consider a firm under strict liability that must choose between two risky technologies, one being safer but costlier than the other one. The total potential level of damage increases with the level of activity. We show that, under limited liability, technological change is welfare improving and leads to full risk internalization when the firms are sufficiently capitalized. Nevertheless, the percentage of firms adopting the safer technology and full risk internalization is higher under unlimited liability than under limited liability. We show how an adequate tax policy increases this percentage. We also determine the characteristics of a second‐best tax policy. This article is protected by copyright. All rights reserved.
    May 26, 2014   doi: 10.1111/jpet.12123   open full text
  • Public Input Competition under Stackelberg Equilibrium: A Note.
    Yongzheng Liu, Jorge Martinez‐Vazquez.
    Journal of Public Economic Theory. May 26, 2014
    This paper examines the Stackelberg equilibrium for public input competition and compares it with the non‐cooperative Nash equilibrium. Given two asymmetric regions, we show that under the Nash equilibrium, the more productive region tends to spend more on public input, which results in this region attracting more capital than the less productive region. The comparison of the two equilibria reveals that the leader region obtains a first‐mover advantage under the Stackelberg setting. This suggests that if regions interact with each other sequentially as in the Stackelberg equilibrium, then the regional disparity that is due to the heterogeneity of productivity is likely to be mitigated or enlarged, depending on which region performs the leadership role in the competition process. This article is protected by copyright. All rights reserved.
    May 26, 2014   doi: 10.1111/jpet.12124   open full text
  • Financing Higher Education in a Mobile World.
    Gabrielle Demange, Robert Fenge, Silke Uebelmesser.
    Journal of Public Economic Theory. April 01, 2014
    This paper analyzes how integrated labor markets affect the financing of higher education. For this, we employ a general‐equilibrium model with overlapping generations and individuals who differ in their abilities. At the first stage, governments can choose the quality of education and the financing system. At the second stage, individuals make their education and migration decisions given the governmental framework for higher education and the mobility assumptions. In a closed economy and in the presence of imperfect credit markets, a mix of tax‐ and fee‐financing is optimal. In integrated labor markets, countries have an incentive to attract skilled workers and to free‐ride on education provided by other countries. When only skilled workers are mobile, there is a suboptimal shift from taxes to fees and the number of students is too low. When also students can migrate, there is a countervailing force such that maintaining the optimal financial mix becomes possible.
    April 01, 2014   doi: 10.1111/jpet.12064   open full text
  • Ramsey, Pigou, Heterogeneous Agents, and Nonatmospheric Consumption Externalities.
    Ronald Wendner.
    Journal of Public Economic Theory. April 01, 2014
    This paper analyzes the effects of nonatmospheric consumption externalities on optimal commodity taxation and on the social cost and optimal levels of public good provision. A negative consumption externality, by lowering the social cost of public good provision, may require the second‐best level of public good provision to exceed the first‐best level. If those households who are most important for building up the consumption reference level respond the least to commodity taxation, the second‐best commodity tax rate may fall short of the first‐best rate. Moreover, in this case, heterogeneity may imply an equity‐efficiency tradeoff. This tradeoff is present only if the consumption externality is of the nonatmospheric type.
    April 01, 2014   doi: 10.1111/jpet.12066   open full text
  • Increasing Fundraising Success by Decreasing Donor Choice.
    Stefano Barbieri, David A. Malueg.
    Journal of Public Economic Theory. April 01, 2014
    Suggested contributions, membership categories, and discrete, incremental thank you gifts are devices often used by benevolent associations that provide public goods. Such devices focus donations at discrete levels, thereby effectively limiting the donors' freedom to give. We study the effects on overall donations of the trade‐off between rigid schemes that severely restrict the choices of contribution on the one hand, and flexible membership contracts on the other, taking into account the strategic response of contributors whose values for the public good are private information. We show flexibility dominates when (i) the dispersion of donors' taste for the public good increases, (ii) the number of potential donors increases, and (iii) there is greater funding by an external authority. Our theoretical results are consistent with three basic patterns we discover in the membership schemes of National Public Radio stations: stations offer a larger number of suggested contribution levels—a proxy for flexibility—as (i) the incomes of the population served become more diverse, (ii) the population of the coverage area increases, and (iii) there is greater external support from the Corporation for Public Broadcasting.
    April 01, 2014   doi: 10.1111/jpet.12068   open full text
  • Intergenerational Transmission of Noncommunicable Chronic Diseases.
    Catarina GoulÃo, AgustÍn PÉrez‐Barahona.
    Journal of Public Economic Theory. April 01, 2014
    We introduce a theoretical framework that contributes to the understanding of noncommunicable chronic diseases (NCDs) epidemics: even if NCDs are noninfectious diseases, they may spread due to the social transmission of unhealthy activities such as unhealthy diet, physical inactivity, and smoking. In particular, we study the intergenerational dimension of this mechanism. We find that, due to the social transmission of NCDs, agents choose lower health conditions and higher unhealthy activities than what is socially optimal. Taxes on unhealthy activities, that may subsidize health investments, can be used to restore the social optimum. Finally, our model is consistent with the existence of regional asymmetries regarding the prevalence of obesity and NCDs.
    April 01, 2014   doi: 10.1111/jpet.12069   open full text
  • Reducing Inefficiency in Public Good Provision Through Linking.
    Stefano Galavotti.
    Journal of Public Economic Theory. April 01, 2014
    We characterize the optimal mechanism for the provision of n public goods in an economy with m agents, binary valuations. The mechanism “links” the n problems together because decisions and transfers are based on the whole vector of valuations of the agents. In particular, the decision on whether or not to provide a public good depends not only on the valuations of the agents for that good but, in some cases, also on the valuations for the other goods reported by the low‐valuation agents. For the two‐agent case, we show that the mechanism is asymptotically efficient and we provide an example that compares its relative efficiency with optimal separate provision and with another asymptotically efficient mechanism in the literature.
    April 01, 2014   doi: 10.1111/jpet.12065   open full text
  • Dynamic Difference‐Form Contests.
    Yohan Pelosse.
    Journal of Public Economic Theory. April 01, 2014
    This study presents a multistage contest designed by an organizer who chooses the (indivisible) winner prize together with the ranking scheme. When the organizer's objective is to maximize efforts, the optimal ranking scheme that selects the prize recipient coincides with a version of the piecewise linear difference‐form success function postulated by Che and Gale (2000). Even if the organizer's objective is not necessarily to maximize agents' effort, a noisy ranking of the difference‐form remains optimal.
    April 01, 2014   doi: 10.1111/jpet.12067   open full text
  • The Simple Micro‐Economics of Public‐Private Partnerships.
    Elisabetta Iossa, David Martimort.
    Journal of Public Economic Theory. February 18, 2014
    We build on the existing literature in Public Private Partnerships (PPP) to analyze the main incentive issues in PPPs and the shape of optimal contracts in those contexts. We present a basic model of procurement in a multi‐task environment in which a risk averse firm chooses non‐contractible efforts in cost reduction and quality improvement. We first consider the effect on incentives and risk transfer of bundling building and management stages into a single contract, allowing for different assumptions on feasible contracts and information available to the government. Then we extend the model in novel directions. We study the relationship between the operator and its financiers and the impact of private finance. We discuss the trade‐off between incentive and flexibility in PPP agreements and the dynamics of PPPs, including cost overruns. We also consider how institutions, and specifically the risk of regulatory opportunism, affect contract design and incentives. The conclusion summarizes policy implications on the desirability of PPPs. This article is protected by copyright. All rights reserved.
    February 18, 2014   doi: 10.1111/jpet.12114   open full text
  • Profiling, Screening and Criminal Recruitment.
    Christopher Cotton, Cheng Li.
    Journal of Public Economic Theory. February 18, 2014
    We model major criminal activity as a game in which a law enforcement officer chooses the rate at which to screen different population groups, and a criminal organization (e.g. drug cartel, terrorist cell) chooses the observable characteristics of its recruits. Our model best describes smuggling or terrorism activities at borders, airports and other security checkpoints. The most effective law enforcement policy imposes only moderate restrictions on the officer's ability to profile. In contrast to models of decentralized crime, requiring equal treatment never improves the effectiveness of law enforcement. This article is protected by copyright. All rights reserved.
    February 18, 2014   doi: 10.1111/jpet.12115   open full text
  • Liability Insurance and Choice of Cars: A Large Game Approach.
    Sjur Didrik FlÅm, Elmar G. Wolfstetter.
    Journal of Public Economic Theory. February 18, 2014
    If a car, already on the road, is replaced by another one, more expensive to collide with, a negative externality spills over to other drivers. This paper studies such externalities, relating them to insurance and incentives. It formalizes links from liability rules to choice of car. By assumption, insurance is cooperative but car acquisition is non‐cooperative. Construing drivers' interaction as a large game, the paper considers how Nash equilibrium ‐ and its efficiency or fairness ‐ is shaped by the underlying liability regime. This article is protected by copyright. All rights reserved.
    February 18, 2014   doi: 10.1111/jpet.12116   open full text
  • Contracting for Infrastructure Projects as Credence Goods.
    Uwe Dulleck, Jiong Gong, Jianpei Li.
    Journal of Public Economic Theory. February 18, 2014
    Large infrastructure projects are a major responsibility of urban and regional governments, who usually lack expertise to fully specify the demanded projects. Contractors, typically experts on such projects due to experience with similar projects, advise of the needed design as well as the cost of construction in their bids. Producing the right design is costly. We model such infrastructure projects taking into account their credence goods feature and the costly design effort they require and examine the performance of commonly used contracting methods. We show that when building costs are homogeneous and public information, simultaneous bidding involving shortlisting of two contractors and contingent compensation of both contractors on design efforts outperforms sequential search. If building costs are private information of the contractors and are revealed to them after design cost is sunk, sequential search may be superior to simultaneous bidding. This article is protected by copyright. All rights reserved.
    February 18, 2014   doi: 10.1111/jpet.12117   open full text
  • Tax Havens, Growth, and Welfare.
    Hsun Chu, Ching‐Chong Lai, Chu‐Chuan Cheng.
    Journal of Public Economic Theory. February 18, 2014
    This paper develops an endogenous growth model featuring tax havens, and uses it to examine how the existence of tax havens affects the economic growth rate and social welfare in high‐tax countries. We show that the presence of tax havens generates two conflicting channels in determining the growth effect. First, the public investment effect states that tax havens may erode tax revenues and in turn decrease the government's infrastructure expenditure, thereby reducing growth. Second, the tax planning effect of tax havens reduces marginal cost of capital and hence encourages capital accumulation so as to spur economic growth. The overall growth effect is ambiguous and is determined by the extent of these two effects. The welfare analysis shows that tax havens are more likely to be welfare‐enhancing if the government expenditure share in production is low, or the initial income tax rate is high. Moreover, the welfare‐maximizing income tax rate is lower than the growth‐maximizing income tax rate if tax havens are present. This article is protected by copyright. All rights reserved.
    February 18, 2014   doi: 10.1111/jpet.12118   open full text
  • Corruption and Seigniorage.
    Gareth D. Myles, Hana Yousefi.
    Journal of Public Economic Theory. February 18, 2014
    There is convincing empirical evidence in cross‐section data of a positive correlation between the level of corruption and the rate of inflation. This paper explores whether this correlation can be a consequence of a government exploiting seigniorage to compensate for revenue lost to corruption. We embed corruption within an overlapping generations economy that has money as the only store of value and in which the government optimizes the rate of monetary growth. Three different forms of corruption are modelled, and it is shown that all three can be positively correlated with increased inflation. This article is protected by copyright. All rights reserved.
    February 18, 2014   doi: 10.1111/jpet.12119   open full text
  • Prosecutorial Retention: Signaling By Trial.
    Siddhartha Bandyopadhyay, Bryan C. Mccannon.
    Journal of Public Economic Theory. January 23, 2014
    We examine how retention motives affect prosecutor behavior under different evaluation criteria. In particular, we analyze how prosecutors of differing capabilities respond in choosing which cases to take to trial and which to plea bargain. We show how different criteria distort the mix of cases chosen for trial and that the direction of the distortion depends crucially on the evaluation tool used. Optimal evaluation metrics are derived that combine multiple signals of performance and are shown to achieve the first‐best outcome. This article is protected by copyright. All rights reserved.
    January 23, 2014   doi: 10.1111/jpet.12107   open full text
  • International Environmental Agreements under Endogenous Uncertainty.
    Bruno Nkuiya, Walid Marrouch, Eric Bahel.
    Journal of Public Economic Theory. January 23, 2014
    This paper explores the implications of the possibility of a shift in environmental damages on the participation in environmental treaties. Using a two‐period model where the probability of a regime shift increases with the first‐period pollution stock, we examine the issue of coalition formation under both fixed and dynamic membership. Our analysis suggests that endogenous uncertainty may increase participation. We find that full cooperation may be sustained, but only in the presence of endogenous uncertainty. Interestingly, when the shift in the environmental damage is large enough, the model provides a way to solve the ``puzzle of small coalitions” found in the literature related to International Environmental Agreements. We also find that in period 1 (period 2) endogenous uncertainty leads to a lower (higher) pollution stock under dynamic membership as compared to the fixed membership case. This article is protected by copyright. All rights reserved.
    January 23, 2014   doi: 10.1111/jpet.12108   open full text
  • Welfare Stigma Re‐examined.
    Tomer Blumkin, Yoram Margalioth, Efraim Sadka.
    Journal of Public Economic Theory. January 23, 2014
    We dissect welfare stigma into two types: traditional and statistical, and show that the latter can be employed as a desirable form of a welfare ordeal, as its costs are positively correlated with ability. This article is protected by copyright. All rights reserved.
    January 23, 2014   doi: 10.1111/jpet.12109   open full text
  • Optimal Fiscal Policy with Endogenous Time Preference.
    Evangelos V. Dioikitopoulos, Sarantis Kalyvitis.
    Journal of Public Economic Theory. January 23, 2014
    This paper studies the role of Ramsey taxation under the assumption that the individual rate of time preference is determined by the publicly‐provided social level of education. We show how intertemporal complementarities of aggregate human capital can generate multiple equilibria and we examine the role of endogenous fiscal policies in equilibrium selection. Our analysis implies a lower optimal government size due to the effect of human capital on time preference. This article is protected by copyright. All rights reserved.
    January 23, 2014   doi: 10.1111/jpet.12110   open full text
  • Cleaner Technologies and the Stability of International Environmental Agreements.
    Hassan Benchekroun, Amrita Ray Chaudhuri.
    Journal of Public Economic Theory. January 23, 2014
    This paper shows that if countries are farsighted when deciding whether to defect from a coalition, then the implementation of cleaner technologies, as embodied by a reduction in the emission per output ratio, may either improve or jeopardize the chances of reaching an international environmental agreement. A small change in the emission per output ratio can result in a discrete jump in the stable size of a coalition and global welfare evaluated under the stable coalition size. In the case of three countries, the grand coalition may be destabilized by the implementation of cleaner technologies, ultimately resulting in higher global emissions and lower global welfare. In the case of more than three countries, implementing cleaner technologies may result in a discrete jump, either upward or downward, of the largest stable coalition size and welfare. We examine both, the case of a flow and a stock pollutant. In the latter case, we show that the higher the stock of pollution at the instant when the cleaner technology is implemented, the more likely that a grand coalition of three countries is destabilized. Measures that enhance the natural rate of decay of stock pollutants are shown to have similar effects on the size of stable coalitions to reductions in the emission per output ratio. This article is protected by copyright. All rights reserved.
    January 23, 2014   doi: 10.1111/jpet.12111   open full text
  • A Political Economy Model of Earnings Mobility and Redistribution Policy.
    Ryo Arawatari, Tetsuo Ono.
    Journal of Public Economic Theory. January 23, 2014
    This paper presents a politico‐economic model that includes a mutual link between life cycle earnings mobility and redistributive politics. The model demonstrates that when an economy features a high opportunity of upward mobility and high risk of downward mobility, it attains a unique equilibrium where unskilled, low‐income agents support a low redistribution because of the hope of upward mobility in future. In contrast, the economy attains multiple equilibria when mobility opportunity and risk are low: one is an unskilled‐majority equilibrium defined by low mobility and the other is a skilled‐majority equilibrium defined by high mobility. The paper gives a comparison between the political equilibrium and the social planner's allocation in terms of mobility, and shows that the skilled‐majority equilibrium realizes mobility close to the optimal one. This article is protected by copyright. All rights reserved.
    January 23, 2014   doi: 10.1111/jpet.12112   open full text
  • Public‐Private Contracting under Limited Commitment.
    Daniel Danau, Annalisa Vinella.
    Journal of Public Economic Theory. January 23, 2014
    A government delegates a build‐operate‐transfer project to a private firm in a limited‐commitment framework. When the contract is signed, parties are uncertain about the operating cost. The firm can increase the likelihood of facing a low cost by exerting some non‐contractible effort while building the facility. Once the facility is in place, the firm learns the marginal cost and begins to operate. We characterize the contract which stipulates the efficient allocation. We study the financial structure and duration that secure its enforcement. To this end, we take into account that break‐up of the partnership occasions a replacement cost for the government and an expropriation cost for the firm and its lender. Furthermore, both these costs are higher the earlier the contract is terminated. Enforcement is achieved as follows. The firm is instructed to invest some intermediate amount of own and borrowed funds. Under the aegis of a third party that can commit, the government provides guarantees to the lender, conditional on continuation of the partnership. Duration may be shortened, though not to the point where the initial effort of the firm is uncompensated. This article is protected by copyright. All rights reserved.
    January 23, 2014   doi: 10.1111/jpet.12113   open full text
  • Optimal Capital Taxation in a Neoclassical Growth Model.
    Chia‐Hui Lu, Been‐Lon Chen.
    Journal of Public Economic Theory. December 05, 2013
    This paper studies the optimal factor tax incidence in a neoclassical growth model with a given share of government expenditure in output. In the Ramsey planner's optimization, the effect of next period's capital on government expenditure equals the given share of the marginal product of capital. Capital accumulation reduces the discounted net marginal product of next period's capital by way of increasing government expenditure. In order to internalize the distortion, it is optimal to tax capital income in the long run. This article is protected by copyright. All rights reserved.
    December 05, 2013   doi: 10.1111/jpet.12100   open full text
  • Bartering Games in the Kolm Triangle.
    Matt Van Essen.
    Journal of Public Economic Theory. December 05, 2013
    We study a public good mechanism that possesses several attractive properties. In particular, the mechanism always produces feasible allocations, induces a game where the Nash equilibria are all individually rational, and, in contrast to the voluntary contribution mechanism, supports the Lindahl allocation as a Nash equilibrium allocation. The geometric framework of the Kolm triangle is employed to illustrate the workings of the mechanism and provide intuition for the main results. This article is protected by copyright. All rights reserved.
    December 05, 2013   doi: 10.1111/jpet.12101   open full text
  • Default and Renegotiation in PPP Auctions.
    FlÁvio Menezes, Matthew Ryan.
    Journal of Public Economic Theory. December 05, 2013
    The winners of auctions for PPP contracts, especially for major infrastructure projects such as highways, often enter financial distress, requiring the concession to either be re‐allocated or re‐negotiated. We build a simple model to identify the causes and consequences of such problems. In the model, firms bid toll charges for a fixed‐term highway concession, with the lowest bid winning the auction. The winner builds and operates the highway for the fixed concession period. Each bidder has a privately known construction cost and there is common uncertainty regarding the level of demand that will result for the completed highway. Because it is costly for the Government to re‐assign the concession, it is exposed to a hold‐up problem, which bidders can exploit through the strategic use of debt. Each firm chooses its financial structure to provide optimal insurance against downside demand risk: the credible threat of default is used to extort an additional transfer payment from the Government. We derive the optimal financial structure and equilibrium bidding behaviour and show that (i) the auction remains efficient, but (ii) bids are lower than they would be if all bidders were cash financed, and (iii) the more efficient the winning firm, the more likely it is to require a Government bail‐out and the higher the expected transfer it extracts from the Government. We discuss potential resolutions of this problem, including the use of Least‐Present‐Value‐of‐Revenue (LPVR) auctions. This article is protected by copyright. All rights reserved.
    December 05, 2013   doi: 10.1111/jpet.12102   open full text
  • Pricing of Transport Networks, Redistribution and Optimal Taxation.
    Antonio Russo.
    Journal of Public Economic Theory. December 05, 2013
    We study optimal pricing of roads and public transport in presence of nonlinear income taxation. Individuals are heterogeneous in unobservable earning ability. Optimal transport tariffs depend on time costs of travel and work schedule adjustments (days and hours worked per day) as a response to commuting costs. We find that discounts for low income individuals are optimal only if the time cost of a trip is small enough. Lower travel time costs facilitate screening: therefore, redistribution provides an additional motive for congestion pricing. Finally, we investigate the desirability of means‐testing of transport tariffs. This article is protected by copyright. All rights reserved.
    December 05, 2013   doi: 10.1111/jpet.12103   open full text
  • Tax Uniformity: A Commitment Device for Restraining Opportunistic Behaviour.
    Gerda Dewit, Dermot Leahy.
    Journal of Public Economic Theory. December 05, 2013
    We show that uniform and differentiated tax systems diverge in their propensity to generate distortionary opportunistic behaviour. First, when firms choose investment before the government can commit to its taxes, the tax scheme creates strategic incentives for firms to distort their investment. Second, a system of differentiated taxes has a greater propensity to foster strategic distortions in investment than a uniform tax regime. While the paper makes these points in a set‐up in which polluting firms face an emission tax and invest in abatement, the main message is shown to hold for a wide class of tax policy games. This article is protected by copyright. All rights reserved.
    December 05, 2013   doi: 10.1111/jpet.12104   open full text
  • Government Opportunism in Public‐Private Partnerships.
    Vanessa Valero.
    Journal of Public Economic Theory. December 05, 2013
    This paper analyzes the contracting out of public services through Public‐Private Partnership (PPP) subject to government opportunism. In PPP, the building of public infrastructure and the provision of related services are procured through only one contract. On the one hand, such bundling of tasks provides incentives to invest in the infrastructure to minimize the cost of providing public services over the long‐term. On the other hand, it creates incentives for the government to behave opportunistically, by not respecting the terms of the long‐term contractual agreement. Contrarily, in the traditional procurement (TP), the public service provision tasks are contracted out separately. The purpose of this paper is two‐fold. First, we show that government commitment not to engage in opportunistic behavior is the key factor determining the cost efficiency of PPP. Second, we specify the economic determinants of government's choice between PPP and TP under government opportunism. This article is protected by copyright. All rights reserved.
    December 05, 2013   doi: 10.1111/jpet.12105   open full text
  • A Theory of Congregational Giving.
    Jonathan Rosborough.
    Journal of Public Economic Theory. December 05, 2013
    This paper proposes a model to explain a broad range of established empirical facts about giving and attendance rates in religious congregations. We treat the religious service collectively consumed by the congregation as a “participatory” public good, in the sense that while its quality increases in contributions, individual consumption varies by the amount of time devoted towards attendance. The model predicts that lower income individuals will be over‐represented in religious congregations, with giving concentrated among higher income members. Inclusive doctrine is shown to increase membership but reduce average giving and attendance, while “tithing” requirements reduce membership and increase total giving. This article is protected by copyright. All rights reserved.
    December 05, 2013   doi: 10.1111/jpet.12106   open full text
  • The “Dark Side” of Deregulation: How Competition Affects the Size of the Shadow Economy.
    Liliane Karlinger.
    Journal of Public Economic Theory. July 29, 2013
    This paper builds a theory that explains the dramatic expansion of the underground economy in the late 1990s by the sharp increase in market competition worldwide. I model an oligopoly game where firms first decide on entry and sector, and then compete in price. Operating in the underground sector reduces variable costs, but comes at the risk of being detected and fined. As competition intensifies (i.e., as consumers become more and more price‐sensitive), underground firms attract more demand, thus stealing business and profits from official firms. As a consequence, more firms enter the underground economy. A lenient policy toward the underground economy may increase welfare when markups are high, but will be welfare‐detrimental when markups are low.
    July 29, 2013   doi: 10.1111/jpet.12053   open full text
  • Voluntary Participation and Provision of Public Goods in Large Finite Economies.
    Hideo Konishi, Ryusuke Shinohara.
    Journal of Public Economic Theory. July 29, 2013
    We consider a public good provision game with voluntary participation. Agents participating in the game provide a public good and pay the fees according to a mechanism (allocation rule), while nonparticipants can free‐ride on the participants. We examine how the equilibrium public good provision level is affected by enlarging the population of an economy. We introduce a condition for an allocation rule, the asymptotic uniform continuity in replication (AUCR), which requires that small changes in the population must yield only small changes in the public good provision and which is satisfied by many mechanisms. We show that under AUCR, the equilibrium level of the public good converges to zero as the economy is replicated in the sense of Milleron.
    July 29, 2013   doi: 10.1111/jpet.12054   open full text
  • Mixed Duopoly and Environment.
    Rupayan Pal, Bibhas Saha.
    Journal of Public Economic Theory. July 29, 2013
    We show under general demand and cost conditions that in a mixed duopoly with pollution the government can implement the socially optimal outputs and abatements by a tax‐subsidy scheme and keeping the public firm fully public. The scheme requires taxing outputs and subsidizing abatements at different rates, unlike a pollution tax. Our result improves on the shortcoming of a pollution tax to implement the social optimum. We also show that when the private firm is partly foreign‐owned, the government will adopt some privatization and will not implement the social optimum, though the social optimum is implementable.
    July 29, 2013   doi: 10.1111/jpet.12056   open full text
  • Should Sales Taxes Be Imposed on E‐Commerce?
    Sami Dakhlia, Robert P. Strauss.
    Journal of Public Economic Theory. July 29, 2013
    We study the impact of E‐commerce across state lines in the United States on tax revenue, public good provision, and real income. In particular, in light of the unenforceable nature of interstate taxation, we evaluate the potential gains from coordinating sales and income state taxes among sovereign jurisdictions. We find that the revenue at risk is small and that the welfare gains or losses of any countervailing policy measures, in particular those associated with the Streamlined Sales Tax Project, are even smaller.
    July 29, 2013   doi: 10.1111/jpet.12055   open full text
  • Optimal Monetary Policy in OLG Models with Long‐Lived Agents: A Note.
    Ryoji Hiraguchi.
    Journal of Public Economic Theory. July 24, 2013
    This note reexamines Crettez, Michel, and Wigniolle (2002), who studied a two‐period overlapping generations model with cash‐in‐advance constraints and showed that a combination of saving tax and monetary policy involving positive nominal interest rates could achieve the first‐best allocation. The note shows that their result does not hold if agents live for three periods. The implementation of the first best requires the Friedman rule. If agents are long‐lived, saving tax cannot offset a distortion caused by the positive nominal interest rate.
    July 24, 2013   doi: 10.1111/jpet.12050   open full text
  • Hybrid Contests.
    Tigran Melkonyan.
    Journal of Public Economic Theory. July 24, 2013
    This paper examines hybrid contests where participants commit two types of resources to improve their probability of winning the prize. The first type is forfeited ex ante, before the prize is allocated, by winners and losers alike, while the second is committed ex ante by all contenders but expended ex post, after the prize is allocated, and only by the contestant that wins the prize. The model yields a number of interesting results. Among them is the finding that, as the number of contestants increases, the ex ante expenditures of individual contestants decrease while the ex post expenditure increases. Even more interesting, the total of the ex ante and ex post expenditures by the contenders in a hybrid contest may decrease with the number of competitors. The study also finds that there is no rent overdissipation, and compares the total expenditures in the contest and “all‐pay” allocation mechanisms.
    July 24, 2013   doi: 10.1111/jpet.12052   open full text
  • Income Taxes, Subsidies to Education, and Investments in Human Capital.
    Concetta Mendolicchio, Dimitri Paolini, Tito Pietra.
    Journal of Public Economic Theory. July 24, 2013
    We study a two‐sector economy with investments in human and physical capital and imperfect labor markets. Investments are irreversible and noncontractible, due to random matching between firms and workers. Income is allocated according to the Nash bargaining mechanism. At equilibrium, given the distribution of the agents across sectors, there is underinvestment in both human and physical capital, due to the holdup problem generated by bargaining and noncontractibility. Self‐selection of the agents into the two sectors typically induces too many workers to invest in high skills. Compared to the constrained efficient allocation, at each equilibrium, there are too many people investing too little effort in the high‐skill sector. We also study the effects of several tax policies on total expected surplus.
    July 24, 2013   doi: 10.1111/jpet.12051   open full text
  • Optimal Piecewise Linear Income Taxation.
    Patricia Apps, Ngo Van Long, Ray Rees.
    Journal of Public Economic Theory. July 16, 2013
    Given its significance in practice, piecewise linear taxation has received relatively little attention in the literature. This paper offers a simple and transparent analysis of its main characteristics. We fully characterize optimal tax parameters for the cases in which budget sets are convex and nonconvex respectively. A numerical analysis of a discrete version of the model shows the circumstances under which each of these cases will hold as a global optimum. We find that, given plausible parameter values and wage distributions, the globally optimal tax system is convex, and marginal rate progressivity increases with rising inequality. This article is protected by copyright. All rights reserved.
    July 16, 2013   doi: 10.1111/jpet.12070   open full text
  • Competitive Permit Markets and Vertical Structures: The Relevance of Imperfectly Competitive Eco‐Industries.
    Sonia Schwartz, Hubert Stahn.
    Journal of Public Economic Theory. June 30, 2013
    Permit markets lead polluting firms to purchase abatement goods from an eco‐industry which is often concentrated. This paper studies the consequences of this sort of imperfectly competitive eco‐industry on the equilibrium choices of the competitive polluting firms. It then characterizes the second‐best pollution cap. By comparing this situation to one of perfect competition, we show that Cournot competition on the abatement good market contributes not only to a nonoptimal level of emission reduction but also to a higher permit price, which reduces the production level. These distortions increase with market power, measured by the margin taken by the noncompetitive firms, and suggest a second‐best larger pollution cap.
    June 30, 2013   doi: 10.1111/jpet.12048   open full text
  • Optimal  Incentive  Schemes  for  Altruistic Providers.
    Miltiadis Makris, Luigi Siciliani.
    Journal of Public Economic Theory. June 28, 2013
    We study the optimal design of incentive schemes in the presence of adverse selection and altruistic providers. We assume that providers differ in efficiency, are partially altruistic, and have limited liability. Three types of separating equilibrium emerge. (1) For low levels of altruism the quantity of the efficient and inefficient types is distorted upwards and downwards, respectively; the inefficient type makes zero profits. (2) For moderate levels of altruism the first best is attained: no distortions and profits are zero. (3) For high levels of altruism the quantity of the inefficient type is distorted upwards, and the quantity of the efficient type is distorted either upwards or downwards; the efficient type makes zero profits. Our main result is that the first best can be obtained for some values of altruism, but not necessarily for the highest values. The purchaser is better off with providers with moderate rather than high altruism.
    June 28, 2013   doi: 10.1111/jpet.12047   open full text
  • Developing Country Second‐Mover Advantage in Competition over Environmental Standards and Taxes.
    Valeska Groenert, Ben Zissimos.
    Journal of Public Economic Theory. June 28, 2013
    We show that, in competition between a developed country and a developing country over environmental standards and taxes, the developing country may have a “second‐mover advantage.” In our model, firms do not unanimously prefer lower environmental standard levels. We introduce this feature to an otherwise familiar model of fiscal competition. Four distinct outcomes can be characterized by varying the marginal cost to firms of an environmental externality: (1) the outcome may be efficient; (2) the developing country may be a “pollution haven”—a place to escape excessively high environmental standards in the developed country; (3) the developing country may “undercut” the developed country and attract all firms; (4) the developed country may be a pollution haven.
    June 28, 2013   doi: 10.1111/jpet.12049   open full text
  • Voluntary Contributions with Risky and Uncertain Marginal Returns: The Importance of the Parameter Values.
    M. Vittoria Levati, Andrea Morone.
    Journal of Public Economic Theory. June 25, 2013
    Previous research indicates that risky and uncertain marginal returns from a public good lower contributions significantly. This paper presents experimental results showing that this effect depends on the employed parameterization.
    June 25, 2013   doi: 10.1111/jpet.12043   open full text
  • A Note on the Adverse Effect of Competition on Consumers.
    Soumyananda Dinda, Arijit Mukherjee.
    Journal of Public Economic Theory. June 25, 2013
    It is usually believed that higher competition, implying more active firms, benefits consumers. We show that this may not be the case in an industry with asymmetric cost firms. A rise in the number of more cost‐inefficient firms makes the consumers worse off in the presence of a welfare‐maximizing tax/subsidy policy. A rise in the number of more cost‐inefficient firms also reduces social welfare.
    June 25, 2013   doi: 10.1111/jpet.12044   open full text
  • Efficient Allocation of Radio Spectrum.
    BenoÎt Pierre Freyens, Chris Jones.
    Journal of Public Economic Theory. June 25, 2013
    Legislative reforms in Anglo‐American countries require governments to account for efficient spectrum usage subject to interference control. New spectrum governance regimes promote flexible and competitive usage but the broadcasting industry remains exempt from reforms, at a significant cost to society. The need to liberalize broadcast spectrum cannot be overstated, but how should we select among alternative deregulatory regimes? In a simple stylized model we formalize the welfare effects of allocating licenses for using bandwidth on broadcast spectrum. We provide optimality conditions for entry, spectrum usage, and congestion levels under different market conditions, which allows us to justify the selection of specific governance arrangements.
    June 25, 2013   doi: 10.1111/jpet.12045   open full text
  • Schools and Location: Tiebout, Alonso, and Governmental Finance Policy.
    Eric A. Hanushek, Kuzey Yilmaz.
    Journal of Public Economic Theory. June 25, 2013
    Many discussions of school finance policy fail to consider how households respond to policies that change the attractiveness of different residential locations. We develop a general equilibrium model that incorporates workplace choice, residential choice, and political choice of tax and expenditure levels. Importantly, we consider multiple workplaces, a fundamental feature of today's metropolitan landscape. This basic model permits investigating how accessibility and public goods interact in a metropolitan area. The model is used to analyze two conventional policy initiatives: school district consolidation and district power equalization. The surprising conclusion is that school quality and welfare can fall for all families when these restrictions on choice are introduced.
    June 25, 2013   doi: 10.1111/jpet.12046   open full text
  • Public versus Private Provision of Public Goods.
    Sita N Slavov.
    Journal of Public Economic Theory. June 18, 2013
    It is well known that public goods are underprovided in a static setting with voluntary contributions. Public provision – in a median voter framework with proportional taxation – generally exceeds private provision. This paper compares private and public provision of public goods in a dynamic setting. In a dynamic setting, voluntary donations can result in efficient provision. Also, majority‐rule solutions exist even when taxes are not proportional to income. At low discount factors, public provision tends to exceed private provision. As patience increases, however, private provision may exceed public provision. This occurs because many outcomes with a low level of public good provision – and potentially large targeted transfer payments to particular individuals – become sustainable under public provision. Under private provision, however, large targeted transfers are unsustainable. To finance the public good, private provision tends to result in benefit taxation, and public provision tends to result in progressive taxation. This article is protected by copyright. All rights reserved.
    June 18, 2013   doi: 10.1111/jpet.12058   open full text
  • Let the punishment fit the crime: enforcement with error.
    Indranil Chakraborty, R. Preston McAfee.
    Journal of Public Economic Theory. June 18, 2013
    Given an externality function which implements a social objective, this paper examines the possibility of implementing the social objective when the action is observed with error. Provided that the signal is informative in the sense that it separates certain distributions of actions and agents are risk‐neutral, the social objective remains implementable even with observational error. In addition, when errors are small, there is a closed form second‐order approximation for the penalty function that depends only on first and second moments and two derivatives of the externality function. The formula is applicable when activity is measured reasonably accurately, which is necessary for an acceptable implementation. This formula is simple enough to lend itself to actual implementation. This article is protected by copyright. All rights reserved.
    June 18, 2013   doi: 10.1111/jpet.12060   open full text
  • Optimal Dynamic Nonlinear Income Taxes with no Commitment.
    Marcus Berliant, John O. Ledyard.
    Journal of Public Economic Theory. June 18, 2013
    We wish to study optimal dynamic nonlinear income taxes. Do real world taxes share some of their features? What policy prescriptions can be made? We study a two period model, where the consumers and government each have separate budget constraints in the two periods, so income cannot be transferred between periods. Labor supply in both periods is chosen by the consumers. The government has memory, so taxes in the first period are a function of first period labor income, whereas taxes in the second period are a function of both first and second period labor income. The government cannot commit to future taxes. Time consistency is thus imposed as a requirement. The main results of the paper show that time consistent incentive compatible two period taxes involve separation of types in the first period and a differentiated lump sum tax in the second period, provided that the discount rate is high or utility is separable between labor and consumption. In the natural extension of the Diamond (1998) model with quasi‐linear utility functions to two periods, an equivalence of dynamic and static optimal taxes is demonstrated, and a necessary condition for the top marginal tax rate on first period income is found. This article is protected by copyright. All rights reserved.
    June 18, 2013   doi: 10.1111/jpet.12061   open full text
  • Factor Endowments, Democracy and Trade Policy Divergence.
    Sebastian Galiani, Norman Schofield, Gustavo Torrens.
    Journal of Public Economic Theory. June 17, 2013
    We develop a stochastic model of electoral competition in order to study the economic and political determinants of trade policy. We model a small open economy with two tradable goods, each of which is produced using a sector specific factor (e.g., land and capital) and another factor that is mobile between these tradable sectors (labor); one nontradable good, which is also produced using a specific factor (skilled labor), and an elected government with the mandate to tax trade flows. The tax revenue is used to provide local public goods that increase the economic agents’ utility. We use this general equilibrium model to explicitly derive the ideal policies of the different socioeconomic groups in society (landlords, industrialists, labor and skilled workers). We then use those ideal policies to model the individual probabilistic voting behavior of the members of each of these socioeconomic groups. We use this model to shed light on how differences in the comparative advantages of countries explain trade policy divergence between countries as well as trade policy instability within countries. We regard trade policy instability to mean that, in equilibrium, political parties diverge in terms of the political platforms they adopt. We show that in natural resource (land) abundant economies with very little capital, or in economies that specializes in the production of manufactures, parties tend to converge to the same policy platform, and trade policy is likely to be stable and relatively close to free trade. In contrast, in a natural resource abundant economy with an important domestic industry that competes with the imports, parties tend to diverge, and trade policy is likely to be more protectionist and unstable. This article is protected by copyright. All rights reserved.
    June 17, 2013   doi: 10.1111/jpet.12057   open full text
  • The Comparison of Ad Valorem and Specific Taxation Under Uncertainty.
    Christos Kotsogiannis, Konstantinos Serfes.
    Journal of Public Economic Theory. June 17, 2013
    The comparison between specific (per unit) and ad valorem (percentage) taxation has been one of the oldest issues in public finance. In Cournot markets, with deterministic costs structures, conventional wisdom has it that ad valorem taxation tax‐revenue dominates specific. It is shown that in the presence of uncertainty, regarding firms’ cost structures, and under reasonable conditions, the conventional wisdom might not hold. The implication of this, from a policy perspective, is that the precise evaluation of the two types of taxation requires an explicit consideration of cost uncertainty. This article is protected by copyright. All rights reserved.
    June 17, 2013   doi: 10.1111/jpet.12059   open full text
  • Audit Probability Versus Effectiveness: The Beckerian Approach Revisited.
    Matthew D. Rablen.
    Journal of Public Economic Theory. June 17, 2013
    The Beckerian approach to tax compliance examines how a tax authority can maximize social welfare by trading‐off audit probability against the fine rate on undeclared tax. This paper offers an alternative examination of the privately optimal behavior of a tax authority tasked by government to maximize expected revenue. The tax authority is able to trade‐off audit probability against audit effectiveness, but takes the fine rate as fixed in the short run. I find that the tax authority's privately optimal audit strategy does not maximize voluntary compliance, and that voluntary compliance is non‐monotonic as a function of the tax authority'ss budget. Last, the tax authority'ss privately optimal effective fine rate on undeclared tax does not exceed two at interior optima. This article is protected by copyright. All rights reserved.
    June 17, 2013   doi: 10.1111/jpet.12062   open full text
  • Optimal Taxation and Monopsonistic Labor Market: Does Monopsony justify the Minimum Wage?
    Pierre Cahuc, Guy Laroque.
    Journal of Public Economic Theory. June 17, 2013
    Does monopsony on the labor market in itself justify the implementation of a minimum wage when it would not be used in a competitive economy? This issue is studied in a model of optimal taxation. We find that there is no room for the minimum wage when there are a continuum of skills with no isolated mass point at the bottom of the wage distribution. Accordingly, in the empirically relevant situation, where there is a continuum of wages at the bottom of the distribution, the minimum wage is not helpful. This article is protected by copyright. All rights reserved.
    June 17, 2013   doi: 10.1111/jpet.12063   open full text
  • Data Games: Sharing Public Goods with Exclusion.
    Pierre Dehez, Daniela Tellone.
    Journal of Public Economic Theory. June 10, 2013
    A group of firms decides to cooperate on a project that requires a combination of inputs held by some of them. These inputs are non‐rival but excludable goods, i.e., public goods with exclusion such as knowledge, data or information, patents or copyrights. We address the question of how firms should be compensated for the inputs they contribute. We show that this problem can be framed within a cost sharing game for which the Shapley value comes out as a natural solution. The main result concerns the regular structure of the core that enables a simple characterization of the nucleolus. However, compared to the Shapley value, the nucleolus defines compensations that appear to be less appropriate in the context of data sharing. Our analysis is inspired by the problem faced by the European chemical firms within the regulation program REACH that requires submission by 2018 of a detailed analysis of all the substances they produce, import, or use.
    June 10, 2013   doi: 10.1111/jpet.12040   open full text
  • Comparative Statics of Optimal Nonlinear Income Taxation with a Publicly Provided Input and a Nonlinear Production Technology.
    Craig Brett, John A. Weymark.
    Journal of Public Economic Theory. June 10, 2013
    Comparative static properties of the solution to an optimal nonlinear income tax problem are provided for a model in which the government both designs a redistributive income tax schedule and provides a public input for a nonlinear production technology. These assumptions imply that wage rates are endogenous. The endogeneity of the wages necessitates taking account of general equilibrium effects of changes in the parameters of the model that are not present when the technology is linear.
    June 10, 2013   doi: 10.1111/jpet.12037   open full text
  • Weak Moral Motivation Leads to the Decline of Voluntary Contributions.
    Charles FiguiÈres, David Masclet, Marc Willinger.
    Journal of Public Economic Theory. June 07, 2013
    We develop a model that accounts for the decay of the average contribution observed in experiments on voluntary contributions to a public good. The novel idea is that people's moral motivation is “weak.” Their judgment about the right contribution depends on observed contributions by group members and on an intrinsic “moral ideal.” We show that the assumption of weakly morally motivated agents leads to the decline of the average contribution over time. The model is compatible with persistence of overcontributions, variability of contributions (across and within individuals), the “restart effect” and the observation that the decay in contributions is slower in longer games. Furthermore, it offers a rationale for conditional cooperation.
    June 07, 2013   doi: 10.1111/jpet.12036   open full text
  • Growth and Welfare Maximization in Models of Public Finance and Endogenous Growth.
    Florian Misch, Norman Gemmell, Richard Kneller.
    Journal of Public Economic Theory. June 05, 2013
    This paper evaluates the trade‐off between growth and welfare maximization from two perspectives. First, it synthesizes and extends endogenous growth models with public finance to compare the growth‐ and welfare‐maximizing tax rates. Second, it examines the distinct model outcomes in terms of the growth rates and welfare levels. This comparison highlights the range of trade‐offs: the growth‐maximizing tax rate can lie above, below, or on the welfare‐maximizing equivalent. We find however that even relatively large differences in growth‐ and welfare‐maximizing tax rates translate into relatively small differences in growth rates, and, in some cases, welfare levels.
    June 05, 2013   doi: 10.1111/jpet.12038   open full text
  • Fiscal Decentralization and Political Budget Cycles.
    Paula Gonzalez, Jean Hindriks, Nicolas Porteiro.
    Journal of Public Economic Theory. May 30, 2013
    We analyze a problem à la Rogoff where incumbents can distort fiscal policy to signal their competency, but where fiscal policy can be centralized or decentralized. Our main focus is on how the equilibrium probability that fiscal policy is distorted in any region (the political budget cycle, PBC) differs across fiscal regimes. With centralization, there are generally two effects that change the probability of a PBC. One is the possibility of selective distortion: the incumbent can be reelected with the support of just a majority of regions. The other is a cost diversification effect, which is present unless costs are perfectly correlated across regions. Both these effects work in the same direction, with the general result that the PBC probability is lower under centralization when decentralization also involves PBC. Welfare analysis shows that voters tend to be better off when the PBC probability is lower, so voters prefer centralization when decentralization involves PBC. Our results are robust to a number of changes in the specification of the model.
    May 30, 2013   doi: 10.1111/jpet.12039   open full text
  • The Optimal Tax Treatment of Housing Capital in the Neoclassical Growth Model.
    Essi Eerola, Niku MÄÄttÄnen.
    Journal of Public Economic Theory. May 30, 2013
    Should housing capital be taxed like other forms of capital? We analyze this question within a version of the neoclassical growth model. We derive the optimal tax treatment of housing capital vis‐à‐vis business capital allowing for relatively general household preferences. In the first‐best, the tax treatment of business and housing capital should always be the same. In the second‐best, in contrast, the optimal tax treatment of housing capital depends on the elasticities of substitution between nonhousing consumption, housing, and leisure. This is because housing taxation may be used to alleviate the distorting effect of taxing labor. As a result, the optimal tax treatment of housing capital may be different from that of business capital. We complement these analytical results with a numerical analysis.
    May 30, 2013   doi: 10.1111/jpet.12041   open full text
  • To Majority through the Search for Unanimity.
    Antonio Quesada.
    Journal of Public Economic Theory. May 30, 2013
    The relative majority rule is characterized, when there are only two alternatives, in terms of axioms of unanimity, reducibility, ontoness (which expresses citizen sovereignty), and no veto power (a weakening of almost unanimity). The strongest axiom is reducibility, which embodies the preference aggregation procedure that successively synthesizes two divergent preferences until divergence disappears and, therefore, unanimity can be applied.
    May 30, 2013   doi: 10.1111/jpet.12042   open full text
  • Hotelling–Downs Competition with Free Entry When Voters Have an Option to Contest.
    Marcin DziubiŃski, Jaideep Roy.
    Journal of Public Economic Theory. April 21, 2013
    Osborne shows that for almost all distributions of voters’ preferences, a pure strategy Nash equilibrium does not exist in the classical Hotelling–Downs model of electoral competition with free entry. We show that equilibrium is generically possible if in addition one allows voters an option to announce their candidacy to compete side‐by‐side with office‐seeking players. The model studied in this paper renders Osborne and the celebrated citizen‐candidate model à la Osborne and Slivinski as two extreme cases. We characterize the equilibrium set with two central questions: (i) can there be equilibria where only voters contest? and (ii) are equilibria with contesting office‐seeking players possible? We also show that in our general setting, extremists are typically voter‐candidates so that in every two‐party contest, office‐seeking politicians stay out of competition.
    April 21, 2013   doi: 10.1111/jpet.12034   open full text
  • Identical Preferences Lower Bound for Allocation of Heterogenous Tasks and NIMBY Problems.
    Duygu Yengin.
    Journal of Public Economic Theory. April 21, 2013
    We study the allocation of collectively owned indivisible goods when monetary transfers are possible. We restrict our attention to incentive‐compatible mechanisms which allocate the goods efficiently. Among these mechanisms, we characterize those that respect the identical preferences lower bound: each agent should be at least as well off as in a hypothetical economy where all agents have the same preference as hers, no agent envies another, and the budget is balanced.
    April 21, 2013   doi: 10.1111/jpet.12031   open full text
  • Unit Versus Ad Valorem Taxes: The Private Ownership of Monopoly in General Equilibrium.
    Charles Blackorby, Sushama Murty.
    Journal of Public Economic Theory. April 21, 2013
    Employing a general equilibrium framework, Blackorby and Murty prove that, with a monopoly and under 100% profit taxation and uniform lump‐sum transfers, the utility possibility sets of economies with unit and ad valorem taxes are identical. This welfare equivalence is in contrast to most previous studies, which demonstrate the superiority of the ad valorem tax in a partial equilibrium framework. In this paper, we relax the assumption of 100% profit taxation and allow the consumers to receive profit incomes from ownership of shares in the monopoly firm. We find that, under certain regularity conditions, for any fixed vector of profit shares, the utility possibility sets of economies with unit and ad valorem taxes are not generally identical. But it does not imply that one completely dominates the other. Rather, the two utility possibility frontiers cross each other. Additionally, employing a standard partial equilibrium welfare analysis, we show that the Marshallian social surpluses resulting from the two tax structures are identical when the government can implement unrestricted transfers.
    April 21, 2013   doi: 10.1111/jpet.12033   open full text
  • The Political Economy of the (Weak) Enforcement of Indirect Taxes.
    Martin Besfamille, Philippe Donder, Jean‐Marie Lozachmeur.
    Journal of Public Economic Theory. April 21, 2013
    The objective of this paper is to understand the determinants of the enforcement level of indirect taxation in a positive setting. We build a sequential game where individuals, who differ in their willingness to pay for a taxed good, vote over the enforcement level. Firms then compete à la Cournot and choose the fraction of sales taxes to evade. We assume in most of the paper that the tax rate is set exogenously. Voters face the following trade‐off: more enforcement not only increases tax collection but also increases the consumer price of the goods sold in an imperfectly competitive market. We obtain that the equilibrium enforcement level is the one most preferred by the individual with the median willingness to pay, that it is not affected by the structure of the market (number of firms) and the firms’ marginal cost, and that it decreases with the resource cost of evasion and with the tax rate. We also compare the enforcement level chosen by majority voting with the utilitarian level. In the last section, we endogenize the tax rate by assuming that individuals vote simultaneously over tax rate and enforcement level. We prove the existence of a Condorcet winner and show that it entails full enforcement (i.e., no tax evasion at equilibrium). The existence of markets with less than full enforcement then depends crucially on the fact that tax rates are not tailored to each market individually.
    April 21, 2013   doi: 10.1111/jpet.12032   open full text
  • Government Expenditure Financing in a Two‐Sector Cash‐in‐Advance Model of Endogenous Growth.
    Wen‐Ya Chang, Hsueh‐Fang Tsai, Shu‐Hua Chen.
    Journal of Public Economic Theory. April 21, 2013
    We show that an expansion in the government size could be desirable from the viewpoint of the economy's long‐run growth, wherein factor intensity between the sectors, the mode of public spending financing, and the form of the cash‐in‐advance (CIA) constraint are crucial. We also show that when real balances are required only for consumption purchases, money financing is equivalent to consumption tax financing, but is not equivalent to income tax financing. If both consumption and gross investment are liquidity‐constrained, then the three financing methods are mutually not equivalent. The optimal financing scheme has the following features: (1) when the CIA constraint applies only to consumption purchases, any combination of the money growth rate and the consumption tax rate that satisfies the government budget constraint constitutes an optimal financing mix; (2) when the CIA constraint applies to both consumption and investment purchases, consumption tax financing only is optimal.
    April 21, 2013   doi: 10.1111/jpet.12035   open full text
  • Does Inequality Foster Corruption?
    Indranil Dutta, Ajit Mishra.
    Journal of Public Economic Theory. March 13, 2013
    In this paper, we investigate how inequality affects corruption in the presence of an imperfect credit market. We favor an explanation based on a multimarket framework where corruption in one market (or sector) arises because of imperfections exacerbated by inequality in related markets. We demonstrate that even when an individual's ability to pay bribes and benefit from engaging in corruption are not affected by wealth level, greater (wealth) inequality will lead to an increase in corruption.
    March 13, 2013   doi: 10.1111/jpet.12027   open full text