ABSTRACT Mandated annuitization is often proposed to eliminate the inefficiency caused by the positive correlation between risk type and purchase level in insurance markets. We revisit this solution in a mandatory annuity program with partial waiver, which is empirically relevant. With the standard assumptions of positive health—wealth correlation as well as gender gaps in health and wealth, we obtain two main results. First, under gender‐based pricing, the correlation of risk type and purchase level is still positive even though annuity purchases are mandatory. Second, based on decomposing the severity of distortion due to mandated annuitization under gender‐neutral pricing into the within‐group and between‐group effects, it is shown that risk type and purchase level may be negatively correlated if the between‐group effect is stronger than the within‐group effect.
ABSTRACT I analyze a two‐period model of political competition where voters care about candidates' integrity. Candidates must trade off implementing their preferred policy against maintaining their electoral promises. Voters punish candidates who deviate from electoral promises by voting for their opponent. I find that punitive voting can exert political discipline only if candidates face low levels of uncertainty about voters' preferences. In this case, candidates' electoral promises are a compromise between their preferred policy and voters' preferences, and when elected, they implement their promise. Finally, I show that when one candidate's ideal policy is closer to the median voter, an equilibrium exists where one candidate is disciplined and the other is not.
ABSTRACT We study pure exchange economies with consumption externalities, where agents' preferences depend on others' consumption and may be non‐convex. Adopting a cooperative approach, we allow agents to form coalitions and introduce a notion of generalized fuzzy core. We show that core allocations can be decentralized via suitable price systems. We establish a core equivalence theorem for A‐equilibria , which generalizes Walras‐Nash and Berge equilibria with externalities. We also prove a corresponding equivalence result for economies with Arrowian markets, where generalized fuzzy core allocations can be supported as Information equilibria with personalized and market prices.
ABSTRACT This paper studies optimal R&D policy in a Cournot oligopoly with network‐based knowledge spillovers. Generalizing the standard two‐stage model of Kamien et al. (1992), we characterize the socially optimal policy by decomposing the net externality of private innovation into three channels: the market expansion effect, direct knowledge spillovers, and the market rivalry effect. Contrary to the standard duopoly results that subsidies achieve the second‐best allocation, we show that in oligopolies with more than two firms, the optimal policy becomes taxation when knowledge spillover rate is sufficiently low or the spillover network is sufficiently sparse. We further show that the tax‐optimal region survives in non‐regular networks including complete bipartite, core‐periphery, scale‐free, and spatial networks.
This paper examines the total cost of public good provision when contributors face heterogeneous quadratic cost functions. We demonstrate that while the total cost of equal provision depends only on the arithmetic mean of marginal cost slopes, the total cost of cost-effective provision depends on their harmonic mean. This relationship reveals that greater heterogeneity monotonically increases the cost savings from cost-effective instead of equal provision. We propose a zero-sum transfer system that implements cost-effective levels while achieving equal cost sharing. Our framework offers a practical method to operationalize principles like Common but Differentiated Responsibilities (CBDR) in international environmental agreements, resolving the tension between cost-effectiveness and equity concerns.
This paper examines the potential role of higher education subsidies as an insurance device against the risk of having a short life, that is, as a device reducing the variance in lifetime well-being due to unequal longevities. We use a two-period dynamic OLG economy with human capital and risky lifetime to study the impact of a subsidy on higher education (financed by taxing labor earnings at older ages) on the distribution of lifetime well-being between long-lived and short-lived individuals. It is shown that, whereas the subsidy on higher education necessarily improves the lot of short-lived individuals in comparison to the laissez-faire, it is only when the subsidy is higher than a critical threshold that this can reduce inequalities in lifetime well-being between long-lived and short-lived individuals. Whether one adopts the utilitarian or the ex post egalitarian social welfare function, the optimal subsidy on higher education lies above the critical threshold, but is larger under the latter social objective.
We analyze a novel tax mechanism in imperfectly competitive product markets. The government announces a per unit (or excise) tax rate and auctions-off a number of tax exemptions. Namely, it invites the firms in the market to acquire the right to be exempted from the per unit tax. The highest bidders are exempted by paying their bids; and all other firms remain subject to it. The mechanism has a number of desirable features. First, it allows the government to collect more revenues than the standard tax policies. Further it reduces distortions as fewer firms pay the per unit tax. The mechanism reduces also the excess entry of firms that often occurs in oligopolistic markets. It creates no discrimination as all firms end up having the same net payoff, and it is voluntary as the firms choose whether to participate in the auction or not (and hence choose how to be taxed). Our mechanism can be seen as the product-market analog of the income tax buyout fiscal mechanism (Del Negro et al. 2010).
This study clarifies the effects of population aging due to rising life expectancy on the ratio of public debt to GDP and economic growth rate using an endogenous growth model with social security. A previous empirical study demonstrates that population aging increases the ratio of public debt to GDP. Population aging can significantly impact national finances through the pay-as-you-go pension system. Therefore, this study demonstrates that population aging increases the ratio of public debt to GDP by introducing a pay-as-you-go pension system into the overlapping generations model. Additionally, we demonstrate that population aging due to rising life expectancies reduces the rate of economic growth under realistic conditions, which is consistent with the empirical results. Furthermore, although an increase in the replacement rate in the pay-as-you-go pension system monotonically reduces the economic growth rate, there is a replacement rate that maximizes social welfare under certain conditions.
We propose and study the following mechanism: Agents simultaneously make contributions. If the total contribution is below the cost, contributions are refunded; otherwise the public good is provided and budget surplus, if there is any, is shared equally among the agents. Our mechanism mitigates the incentive to under-contribute in the well-studied "subscription mechanism" where budget surplus is retained by the mechanism designer. We identify conditions under which our mechanism achieves the maximal total expected gain among all Bayesian mechanisms that are incentive compatible, individually rational, and budget-balanced.
This study designs an optimally funded pension scheme for consumers with self-control problems. The model assumes that consumers' self-control costs are private information and that they can borrow against their future pension benefits. Pension plans are offered to consumers to maximize social welfare, including self-control costs. Results demonstrate that, under certain assumptions, a fully funded pension scheme with benefits equal to the return on contributions is Pareto efficient and satisfies the incentive compatibility constraint. Under this scheme, consumers more likely to feel temptation choose smaller premiums. In implementing this scheme, the government does not even need to know the distribution of types.
We analyze the effects of the presumption of patent validity on litigation incentives and outcomes. We develop a litigation game between a patent holder and an alleged infringing firm. A court resolves the dispute if there is a trial. We model the court's decision-making as a learning process based on evidence and consider the presumption as a factor influencing the court's prior belief of patent validity. The presumption affects the trial outcome in two ways-directly by biasing the prior, and indirectly by affecting the incentives to invest in evidence-seeking activities. We show that its effect on the likelihood of trial is ambiguous. Moreover, when patent validity is uncertain, the presumption generates a trade-off: it reduces resource dissipation, but increases the probability of judicial errors. With pre-trial settlement, even low-merit patents are profitably asserted, and a stronger presumption raises the settlement payments extracted through credible enforcement threats. Taken together, our results suggest a cautious or limited application of the presumption, especially in environments where patent validity is highly uncertain.
Competitive markets feature minimal informational complexity; agents only need to know prices to implement an efficient allocation. However, the standard formulation of competitive equilibrium neglects the mechanism of price formation, treating prices as exogenous. Here, we study explicit price formation mechanisms: trade intermediated by market-makers and trade via search and bargaining. We find that as the number of types in the economy grows, the informational complexity of random search diverges to infinity relative to the competitive market. This divergence can be avoided if market makers intermediate trade. Thus, this analysis provides a novel rationale for organized markets if agents' capacity to manage informational complexity is bounded.
The -player Tullock contest with complete information is known to admit explicit solutions in special cases, such as (i) homogeneous valuations, (ii) constant returns, and (iii) two contestants. But can the model be solved more generally? In this paper, we show that key characteristics of the equilibrium, such as individual efforts, winning probabilities, and payoffs, cannot, in general, be expressed in terms of the primitives of the model using only basic arithmetic operations and the extraction of roots. In this sense, the Tullock contest is intractable. We argue that our formal concept of tractability captures the intuitive notion of the term.
In this paper, we are motivated by empirical evidence of persistent, implicit or explicit, bailouts in federations from high-tier (e.g., center) governments to low-tier (e.g., state) governments. We build a novel dynamic model for a federation containing identical regional governments and a central government. We assume that regional governments care about the wellbeing of residents and bureaucrats. Residents derive utility from consumption of numeraire and regional public goods. The utility of the bureaucracy depends on habit formation. The bureaucrat derives utility from consumption of current and past regional public good levels. The central government's objective function is the sum of regional utilities. Regional and central governments play an infinite-horizon sequential game in which regional governments are policy leaders with respect to their choices of public-good levels. These choices produce regional deficits. The central government observes regional deficits and then choose deficit-relief federal transfers to reduce regional costs of fiscal insecurity faced by regional residents. There is a common-pool property associated with federal funds. The federal transfers do not eliminate regional deficits. Observing this, regional governments raise additional funds to eliminate deficits. We derive the steady-state equilibrium, examine its properties and compare it with alternative equilibria, which provide useful benchmarks. We show that the dynamic model produces equilibrium outcomes that are consistent with empirical evidence; namely, they involve persistent deficits and partial federal bailouts. Deficits increase as the federation expands in size.
We explore alternate allocations of responsibility for greenhouse gas emissions policies in a small open federation. Emissions result from consumption and production of a tradeable dirty good. Emissions control policies are based on social values which depend on the allocation of policy responsibility. Policies include emissions taxes and permit trading systems and involve administrative costs that can differ by level of government. We show that federal and regional optimal emission pricing policies are variants of Pigovian taxes, and there may be a role for tariffs when regional governments are responsible for emissions policy and the federal government makes interregional transfers.
We study when ex-post efficient bilateral trade is possible under two-sided asymmetric information with two agents and two assets, subject to balanced budget and voluntary participation constraints. We characterize how the interaction between asset characteristics and ownership structure determines the possibility of efficiency. Our main finding reveals a fundamental misalignment principle when goods are heterogeneous: efficiency is possible precisely when complementarity and ownership structure are misaligned. Under concentrated ownership (one agent owns both assets), efficiency is possible when assets are substitutes but impossible when they are complements. Under dispersed ownership (each agent owns one asset), the opposite holds: efficiency is possible when assets are complements but impossible when they are substitutes. This misalignment creates asymmetric valuations that overcome the participation constraints binding efficiency. Our results shed new light on the classic Myerson-Satterthwaite impossibility and Cramton-Gibbons-Klemperer possibility theorems to multi-asset environments, showing that the structure of asset bundles fundamentally alters the rents that we need to provide to ensure truthfulness and voluntary participation.
This paper proposes a world economy growth model where countries are plagued with domestic credit market imperfections, and there are knowledge spillovers diffusing from technologically advanced countries to backward ones. Under some conditions, globalizing financial markets beget uphill international credit flows which amplify all countries' initial income gaps, giving rise to a ranking of countries in terms of their living standards. The analysis shows that, while disconnecting from the world financial market helps a country to raise its income level, it impedes growth. A redistribution of total wage income from the highest-income to the lowest-income country narrows the income distances between countries, and it may speed up growth. The world economic growth rate increases with the number of countries participating in the international financial market.
In the context of a dynamic (three-period) general equilibrium model, this paper examines the optimal tax rates on capital savings and labor income under quasi-hyperbolic discounting and idiosyncratic productivity shocks. In the absence of skill-type uncertainty, we analytically show that the marginal capital tax wedges on agents' first-period savings are negative for correcting inherent preference internalities and that these tax rates will be higher when productivity disturbances are incorporated. In the stochastic two-type setting with exogenously-given factor input prices, our calibrated numerical experiments find that the marginal capital wedges for both types on their period-1 savings are positive, indicating the government's motive to relax individuals' incentive-compatibility constraints. We also quantitatively find that the optimal tax rates for both types on their first- and second-period capital savings are ceteris paribus decreasing in the degree of quasi-hyperbolic discounting because of a stronger need to rectify negative utility internalities.
This study analyses the formation of alliances and technological partnerships in contests. Alliances enhance the probability of winning at the cost of sharing the prize if won, while technological partnerships reduce the marginal cost of the effort invested in the contest by the members. When agents exhibit extreme free-riding behaviors at equilibrium, the stabilization of the grand alliance by technological cooperation requires players to be able to block any deviation in the alliance structure involving their technological partners. Nevertheless, when the agents manifest fewer free-riding intentions, the threat of being excluded from a global technological partnership is sufficient to ensure the stability of the grand alliance in the long run. When exclusions are possible, global cooperation in technology between agents in a situation with limited free-riding behaviors between partners can completely annihilate competition in the contest. This indicates that free-riding behaviors hinder the stabilization of the grand alliances in contests. As no alliance structure is stable when the agents cannot form any technological partnership, these findings highlight that the existence of technological coalitions is a facilitating factor for the formation of alliances in contests.
The aim of this paper is to examine how the "Common but Differentiated Responsibility" (CBDR) principle embedded in international climate agreements influences the intensity of corporate tax competition between a developed and a developing country. In contrast to the standard (asymmetric) tax competition literature, our model shows that the interplay between corporate taxes and environmental regulations do not necessarily lead to a higher equilibrium corporate tax in the developed country compared to the developing country. Furthermore, we demonstrate that the developing country does not necessarily become a pollution haven. This finding nuances the argument put forward by developed countries to shrink their climate responsibility that developing countries are pollution havens.
