Book of Abstracts Income based price subsidies, parallel imports and innovations in health care market Rajat Acharyya      Department of Economics, Jadavpur University, racharya@cal2.vsnl.net.in Maria Garcia-Alonso      Department of Economics, University of Kent, M.C.Garcia-Alonso@kent.ac.uk      ,       ,       ,    In health markets, government policies tend to subsidize poorer groups of society so that they can have access to medicines. An example of this are the exemptions applied for medicines to children and pensioners in the UK. In the US, on the other hand, Medicaid covers poorer sections of the society. The purpose of this paper is to analyze the optimal income-based subsidy policy on the incentives of countries to implement price arbitrage and of firms to invest in health care innovation. We establish two results. First, for any exogenously given innovation level, if the poor country subsidizes its poor buyers, the rich country may not find it optimal to allow parallel imports of the drug from the poor country. Second, setting the cooperative level of subsidies is self-enforcing for the two countries and is also the unique Nash equilibrium. This actually involves both countries setting a lower subsidy than they would if universal coverage of the subsidy was only unilateral, resulting in both lower prices and lower innovated quality. But the price decline compensates for the lower quality and accordingly NE (and cooperative) subsidies are Pareto optimal. =================================================================== Interregional Redistribution as a Cure to the Soft Budget Syndrome in Federations Nobuo Akai      Osaka University, akai@osipp.osaka-u.ac.jp Emilson Silva      Georgia Institute of Technology, emilson.silva@econ.gatech.edu      ,       ,       ,    The soft budget syndrome is ubiquitous in federations. It emerges whenever a high tier in a fiscal system provides extra resources to a lower tier to prevent the latter from failing to reach a mutually agreeable predetermined target. Interregional income redistribution is also an endemic feature of most federations. We show that the center''s ability of making interregional transfers ex-ante and ex-post cures the soft budget syndrome whenever the center is perfectly informed ex post. Under these circumstances, the interregional transfer scheme makes it a dominant strategy for each regional government to truthfully reveal its privately held information ex-ante. =================================================================== Optimal forest program when the carbon sequestration service of a forest has value Ken-Ichi Akao      School of Social Sciences, Waseda University, akao@waseda.jp      ,       ,       ,       ,    This paper develops an optimal forest program for even-aged and uneven-aged forest management when the carbon sequestration service of a forest has value. It is shown that for even-aged forest management, the optimal rotation may be longer or shorter compared with when the carbon sequestration service is not considered. For uneven-aged forest management, it is shown that the optimal sustainable forest is characterized with the optimal rotations for an even-aged forest. The optimal rotation is affected by how to value the carbon released after harvesting, which is a central concern of the issues of "harvested wood products" in the United Nations Framework Convention on Climate Change. =================================================================== Competitive equilibrium in a warm glow economy Nizar Allouch      Queen Mary, University of London, n.allouch@qmul.ac.uk      ,       ,       ,       ,    Andreoni [1989,1990] proposed warm glow model of public good contributions. His approach introduces a direct utility for individuals from their own contribution to the public good. Contrary to the standard public good model, this ensures that an individual contribution is not a perfect substitute for the contributions of others. As a result of warm glow, free riding is not pervasive and crowding out is not complete. These findings are mirrored by experimental data. Despite widespread application of the warm glow model, surprisingly only a little attention has been devoted to its competitive equilibrium. This paper shows the existence of competitive equilibrium in this model under a set of mild assumptions. =================================================================== On the economics of ex-post transfers in a federal state: a mechanism design approach Martin Altemeyer-Bartscher      Chemnitz University of Technology, altma@hrz.tu-chemnitz.de Thomas Kuhn      Chemnitz University of Technology, t.kuhn@wirtschaft.tu-chemnitz.de      ,       ,       ,    In this paper we show that central governments cannot offer grants ex ante in a federal states with informational asymmetries as well as inter-temporal commitment problems. We analyze incentives for local governments to supply public goods if the central government offers grants-in-aid ex post and investigate in which way the timing of transfer payments play a role for allocative and redistributive efficiency. We show that local governments'' incentives to provide public goods are distorted if they rely on federal grants-in-aid offered ex post. Furthermore it becomes obvious that local governments are apt to substitute tax revenue for higher grants-in-aid if relevant local data are private information. Local governments can mispresent or hide these data in order to justify policy shortfalls in the region. To which extend ex post transfer mitigate local governments'' incentives crucially depends on the information structure predominant in the federation. =================================================================== Voting in small networks with cross-pressure Ascension Andina-Diaz      Universidad de Malaga, aandina@uma.es Miguel A. Melendez-Jimenez      Universidad de Malaga, melendez@uma.es      ,       ,       ,    We present a model of participation in elections in small networks, in which citizens suffer from cross-pressures if voting against the alternative preferred by some of their social contacts. We analyze how the existence of cross-pressures may shape voting decisions, and so, political outcomes and how parties may exploit this effect to their interest. We characterize the strong perfect equilibria of the game and show that, in equilibrium, the social network determines which party wins the election. We also show that to dispose of the citizens better connected in the network with the other faction is not a guarantee to win the election. =================================================================== A closer look at the relationship between life expectancy and economic growth Theophile Azomahou      UNU-MERIT, azomahou@cournot.u-strasbg.fr Raouf Boucekkine      Universite Catholique de Louvain and CORE, Raouf.Boucekkine@uclouvain.be Bity Diene      Universite Louis Pasteur, Strasbourg, diene@cournot.u-strasbg.fr      ,       ,    We first provide a nonparametric inference of the relationship between life expectancy and economic growth on an historical data for 18 countries over the period 1820-2005. The obtained shape shows up convexity for low enough values of life expectancy and concavity for large enough values. We then study this relationship on a benchmark model combining perpetual youth and learning-by-investing. In such a benchmark, the generated relationship between life expectancy and economic growth is shown to be strictly increasing and concave. We finally examine a model departing from perpetual youth by assuming age-dependent survival probabilities. We show that life-cycle behavior combined with age-dependent survival laws can reproduce our empirical finding. =================================================================== The Optimal and Efficient Auction Mechanisms with Complements Yumiko Baba      Aoyama University, soprano@music.email.ne.jp      ,       ,       ,       ,    We analyze a problem of selling complementary items under asymmetric information. The seller tries to sell m complementary indivisible items to n potential buyers. Buyers are heterogeneous in two senses. First, they value each item and each bundle of items differently and these are private information of buyers. In addition, different buyers are interested in different sets of items. We assume both buyers and the seller know ex-ante who is interested in which set of items. In other words, this information is common knowledge. When items are homogeneous, we call a buyer "a size k buyer" if his/her marginal utility is strictly positive up to kth units. We show that auctions can implement the optimal selling mechanism and efficient mechanisms however, no simple auction mechanism can be efficient and optimal at the same time. Furthermore, the optimal auction systematically gives advantage to a particular size of bidder. We also examine the case where size of a bidder is also private information and characterize the optimal and efficient selling mechanisms. 1. Introduction =================================================================== Multi-Stage Elections, Sequential Elimination and Condorcet Consistency Parimal Bag      National University of Singapore, ecsbpk@nus.edu.sg Hamid Sabourian      University of Cambridge , Hamid.Sabourian@econ.cam.ac.uk Eyal Winter      Hebrew University of Jerusalem, mseyal@mscc.huji.ac.il      ,       ,    A class of sequential elimination voting eliminating candidates one-at-a-time based on repeated ballots is shown to always induce an outcome in the ''top cycle'' and is thus Condrocet consistent, when voters behave strategically. It is also well-known that multi-stage binary agenda procedures with voters always voting over only two choices, but each choice involving one or more candidates, yield outcomes in the top cycle. Thus, multi-stage elections with one-by-one elimination and without the binary choice restriction during stage games offer new ways of inducing the Condorcet winner as the unique voting outcome, when the Condorcet winner exists. This class is important as several sequential elimination voting are essentially non-binary in nature. We also show that in the class of voting games involving one or more stages and voters typically having more than two choices, Condorcet consistency often fails. This is true of all well-known one-shot voting (plurality rule, negative voting, Borda rule, instant runoff voting) as well as some multi-stage voting rules (plurality runoffs, exhaustive ballot method). =================================================================== Valuing bundled academic journals Ted Bergstrom      University of California at Santa Barbara, tedb@econ.ucsb.edu      ,       ,       ,       ,    Commercial publishers currently sell bundles of academic journals to libraries. Since they price discriminate by library, prices are frequently negotiated. Libraries are at a loss as to how to value these packages since they extend across many disciplines and include hundreds of journals. I describe a revealed preference method of determining reservation prices and apply a bit of bargaining theory to suggest how libraries should set their reservation prices. =================================================================== Explaining the size distribution of cities: x-treme economies Marcus Berliant      Washington University in St. Louis, berliant@artsci.wustl.edu Hiroki Watanabe      Washington University in St. Louis, watanabe@wustl.edu      ,       ,       ,    The methodology used by theories to explain the size distribution of cities takes an empirical fact and works backward to first obtain a reduced form of a model, then pushes this reduced form back to assumptions on primitives. The induced assumptions on consumer behavior, particularly about their inability to insure against the city-level productivity shocks in the model, are untenable. With either self insurance or insurance markets, and either an arbitrarily small cost of moving or the assumption that consumers do not perfectly observe the shocks to firms'' technologies, the agents will never move. Even without these frictions, our analysis yields another equilibrium with insurance where consumers never move. Thus, insurance is a substitute for movement. Even aggregate shocks are insufficent to generate consumer movement, since consumers can borrow and save. We propose an alternative class of models, involving extreme risk against which consumers will not insure. Instead, they will move. =================================================================== Optimal taxes and penalties for evaders under no commitment to the audit policy Martin Besfamille      Departamento de Economía, Universidad Torcuato Di Tella, mbesfamille@utdt.edu Leandro Arozamena      Universidad Torcuato Di Tella, larozamena@utdt.edu      ,       ,       ,    This paper presents a two-period model, with a government and a continuum of taxpayers. In the first period, the government designs the tax law (taxes and fines to evaders), but cannot commit to any future audit policy. In the second period, evasion and costly enforcement take place. Taxpayers report their income. Based on these reports, the government decides to audit taxpayers to detect and penalize evaders. We solve the model backwards. In the second period, the dynamic inspection game has, depending on parameter values and first-period choices, either (i) a pure strategy full evasion equilibrium or (ii) a mixed strategy equilibrium, with partial evasion and random auditing. These equilibria characterize two regimes, whose emergence depends upon whether the audit cost is above or below an endogenous threshold. Next, we find the optimal tax law, first, for each regime and then, we take the overall maximum. The main results are the following. First, the form of the optimal tax law crucially depends upon the existence of honest taxpayers. Second, in the partial evasion regime, the tax monotonically decreases with the audit cost whereas, in the other regime, the tax weakly increases. Third, for some parameter values, it may be optimal for the government to impose no fines for evaders as a way to commit not to audit. Finally, expected social welfare can be non monotonic in the audit cost. In order to illustrate these results, we present some numerical simulations. =================================================================== OPENNESS AND ECONOMIC GROWTH Keshab Bhattarai Dr.     University of Hull, Yorkshire, England, UK, K.R.Bhattarai@hull.ac.uk      ,       ,       ,       ,    Four different versions of the macroeconomic models popular in policy analysis are specified and numerically implemented. Each provides a framework to experiment fiscal, monetary and trade policy issues for a small open economy or for economies that are interdependent in the global economy. Simulations and non-linear optimisation techniques are employed to find optimal tax, trade and monetary policies. Results in the dynamic model are founded on prices that guarantee the general equilibrium in each period that satisfy inter-temporal budget constraint for households, government and the economy as a whole. =================================================================== ON ECONOMIC MODEL FOR NEW NEPAL Keshab Bhattarai      University of Hull, K.R.Bhattarai@hull.ac.uk      ,       ,       ,       ,    Transition from feudalism to full fledged democracy in Nepal has proven difficult because of the conflicts in the interest of political parties on the ground of ethnicity and regional basis. Only a cooperative game based on more scientific approach to economic modelling incorporating interests of all regions and ethnicity for a more decentralised and efficient dynamic market economy and unflinching commitment of political and economic participants on grow Nepal contract can generate a sensible solution and bring growth with redistribution to open Nepal''s way for faster growth like that in her neighbouring countries China and India. =================================================================== Externalities, consumption constraints and regular economies Jean-Marc Bonnisseau      Paris School of Economics and Université Paris 1 Panthéon-Sorbonne, Jean-Marc.Bonnisseau@univ-paris1.fr Elena L. del Mercato      DISES and CSEF, Universia degli Studi di Salerno, edmercat@unisa.it      ,       ,       ,    We consider a general model of pure exchange economies with consumption externalities. Households may have different consumption sets and each consumption set is described by a function called possibility function. Utility and possibility functions depend on the consumptions of all households. Our goal is to give sufficient conditions for the regularity of such economies. We prove that, generically, economies are regular in the space of endowments and possibility functions. =================================================================== On the role of progressive taxation in a Ramsey model with heterogeneous households Stefano Bosi      EQUIPPE, University of Lille 1, stefano.bosi@orange.fr Thomas Seegmuller      PSE, CNRS, Thomas.Seegmuller@univ-paris1.fr      ,       ,       ,    The aim of this paper is to study the role of progressive tax rules on the steady state allocation and the dynamic stability in a Ramsey economy with heterogeneous households and borrowing constraints. Since labor supply is elastic, it is relevant to consider that capital and labor incomes are affected by different tax rates. The analysis of steady states allows us to show that there exist many types of stationary equilibria. Indeed, depending on the degree of marginal progressivity on capital taxation, impatient agents do or do not supply capital, while we are able to exhibit stationary equilibria where all consumers do not supply labor. Analyzing comparative statics and local dynamics, we focus on the steady state where the population split in two classes: most patient households hold all the capital stock and only impatient ones supply labor. We prove the existence of persistent cycles and expectation-driven fluctuations according to the degree of capital-labor substitution and the degree of marginal progressivity of taxation on capital and labor incomes. In contrast to many contributions, progressive tax rules can promote indeterminacy and endogenous cycles. Therefore, this paper argues that progressivity can be inappropriate to stabilize the macroeconomic volatility. =================================================================== Overlapping soft budget constraints Marie-Laure Breuillé      INRA, breuille@enesad.inra.fr Marianne Vigneault      Bishop''s University, mvigneau@UBishops.ca      ,       ,       ,    At a time when the virtues of decentralization are widely extoled, this paper emphasizes an additional limit. The transfer of responsibility from the central to the regional governments for carrying out transfers policy at the local level undermines macroeconomic discipline under decentralized leadership. Empowering regional governments s an overlapping equalization policy which worsens the soft budget constraint issue in the country. Contrary to Qian and Roland (1998), we also show that the fiscal competition among regional rescuers does not act as a commitment device to harden the local budget constraint. =================================================================== Regulation Consistency in Australia Robert V Breunig      Australian National University, Robert.Breunig@anu.edu.au Flavio M Menezes      University of Queensland, f.menezes@uq.edu.au      ,       ,       ,    There are a myriad of regulators across different industries and jurisdictions in Australia. A major policy concern is the extent to which these different regulators are making decisions that are consistent with each other. We have developed a comprehensive database covering infrastructure businesses in Australia in electricity and gas generation and transmission, water provision, and rail services. We use this database to examine the consistency of regulatory decisions across national and state-level regulators. We find consistency of regulatory decision across most of the south-eastern part of the country. Victoria, South Australia, New South Wales and the Australian Capital Territory behave essentially identically. Queensland, over time, has become more like south-eastern Australia and less like Western Australia, which remains quite different than the other states. The national regulator, the Australian Competition and Consumer Commission, behaves distinctly from the state-level regulators. We also find that there does seem to be a significant, positive effect of "private" ownership. This suggests that either privately-owned firms are more aggressive than their public counterparts in their cost claims or that they are treated somewhat more stringently by regulators or both. =================================================================== The ideology trap: explaining polarization and persistence in politics Benno Buehler      Munich Graduate School of Economics, benno.buehler@lrz.uni-muenchen.de Anke S. Kessler      Simon Fraser University, CIFAR and CEPR, akessler@sfu.ca      ,       ,       ,    This paper develops an explanation of why office holders may act partisan even on non-partisan issues. To this end, we analyze a dynamic model in which politicians that are both policy-motivated and office-motivated are better informed than the voting public about an underlying state of nature that determines the desirability of a given policy measure. We show that partisanship and polarization may emerge in equilibrium even if politicians and voters are in complete agreement as to which is the optimal course of action. In particular, politicians may act partisan simply because voters expect them to act partisan in the future and therefore elect only those candidates whose (partisan) policy choices they expect to be appropriate given the uncertain state of the economy. Since choosing the efficient (non-partisan) policy choice conveys information about the state of the world, while choosing the inefficient (partisan) alternative does not, a sufficiently office-minded incumbent has an incentive to conceal the true state by implementing the partisan policy, thereby confirming voters'' expectations. The result is a) political failure in the sense that the equilibrium policy sequence is Pareto dominated, and b) persistence in the sense that equilibrium polices are less volatile and less responsive to changes in the underlying state than efficient policies. =================================================================== Regulation and the Option to Delay Fernando T Camacho      University of Queensland, f.camacho@uq.edu.au Flavio M Menezes      University of Queensland, f.menezes@uq.edu.au      ,       ,       ,    This paper examines a simple three-period model of an investment decision in a network industry characterized by demand uncertainty, economies of scale and sunk costs. In the absence of regulation we identify the market conditions under which an unregulated monopolist bears the demand uncertainty and invests early. In a regulated environment, we identify the minimum regulated prices at which the investment decision output remains the same as the unregulated case. Moreover, we show that when the regulator cannot commit to demand contingent ex-post prices current regulatory price setting practices that provides a NPV equivalent to zero will distort the unregulated market investment decision output, except when the option to delay value is equal to zero. =================================================================== Two agents and the theory of search Edward Cartwright      University of Kent, E.J.Cartwright@kent.ac.uk      ,       ,       ,       ,    We consider a model of search in which there are two agents who can observe each others search. We demonstrate that one agents optimal search strategy depends on the strategy of the other agent leading to both free-riding and over-search. Different types of Nash equilibria are discussed and compared to illustrate the consequences of social learning on search behavior and expected payoffs. =================================================================== On refutability of the Nash-Walras equilibrium hypothesis andres Carvajal      University of Warwick, a.m.carvajal@warwick.ac.uk      ,       ,       ,       ,    This paper studies whether the hypothesis of competitive equilibrium can be rejected upon observation of the response of commodity prices to changes in individual real incomes, for an economy where there are externalities. Some of the results are negative: even under refined classes of preferences, requiring, for instance, strategic complementarity in the demand for the externality, the hypothesis of Nash-Walras equilibrium is not refutable. Some separability, at least between two commodities and the externality, suffices for testable restrictions to exist. Information on individual demands for the commodity that causes the externality yields only extremely mild restrictions. Importantly, for the particular case of a public good some restrictions do exist. =================================================================== Testable Implications of the Cournot Model Andres Carvajal      Warwick University, a.m.carvajal@warwick.ac.uk John K.-H. Quah      Oxford University, john.quah@economics.ox.ac.uk      ,       ,       ,    Consider an industry with N firms producing a homogeneous product. We make $t^*$ observations of this industry, with each observation consisting of the market price and the output and profit of each firm. We identify conditions that such a data set must satisfy so that each observation can be rationalized as the Cournot outcome after a change in the demand function, with each firm having a common cost function across observations. =================================================================== Organized Crime, Unemployment, and the Optimal Law Enforcement Juin-jen Chang      Research Fellow, Institute of Economics, Academia Sinica, jjchang@econ.sinica.edu.tw Huei-chung Lu      Professor, Department of Economics, Fu-Jen Catholic University, 026958@mail.fju.edu.tw Ping Wang      Chair, Department of Economics, Washington University in St. Louis, pingwang@wustl.edu      ,       ,    In this paper we extend a dynamic general search model of crime and unemployment to incorporate a criminal organization, say, Mafia. In contrast with the existing literature, our framework not only considers interactions between the formal labor market and the criminal sector, but also explores the factors that determine the market structure for crime (i.e., the population of individual crime and the size of the criminal organization). By shedding light on the risk-sharing and peer-learning effects of organized crimes, we will reexamine the unemployment-crime relationship with particular emphasis on the endogenously-determined market structure for crime. In addition, we also investigate what is the socially optimal law enforcement and how does the government''s enforcement react to various market structure for crime. This investigation will provide notable policy implications for us. =================================================================== Strategic judgment proofing Yeon-Koo Che      Columbia University, yc2271@columbia.edu Kathryn E. Spier      Harvard Law School, kspier@law.harvard.edu      ,       ,       ,    A liquidity-constrained entrepreneur needs to raise capital to finance a business activity that may cause injuries to third parties - the tort victims. Taking the level of borrowing as fixed, the entrepreneur finances the activity with senior (secured) debt in order to shield assets from the tort victims in bankruptcy. Interestingly, senior debt serves the interests of society more broadly: it s better incentives for the entrepreneur to take precautions than either junior debt or outside equity. Unfortunately, the entrepreneur will raise a socially excessive amount of senior debt. Giving tort victims priority over senior debtholders in bankruptcy prevents over-leveraging but leads to suboptimal incentives. Lender liability exacerbates the incentive problem even further. A \emph{Limited Seniority Rule}, where the firm may issue senior debt up to an exogenous limit after which any further borrowing is treated as junior to the tort claim, dominates these alternatives. Shareholder liability, mandatory liability insurance and punitive damages are also discussed. =================================================================== Labor-Market Frictions, Human Capital Accumulation,and Long-Run Growth: Positive Analysis and Policy Evaluation Hung-Ju Chen      Dept. of Economics, National Taiwan University, hjc@ntu.edu.tw Been-Lon Chen      Academia Sinica, bchen@econ.sinica.edu.tw Ping Wang      Washington University in St. Louis and NBER, pingwang@wustl.edu      ,       ,    We construct a dynamic search model with endogenous human capital accumulation to study the long-run growth effects of short-run labor-market frictions and to evaluate the effectiveness of human capital policy. We assume that both vacancy creation and job search are costly and that vacancies and job seekers are brought together by a matching technology exhibiting constant returns. Our model departs from the prototypical labor search literature by allowing each firm to multiple vacancies and each household to choose labor-market participation and search intensity endogenously. We find that employment, learning effort and output growth rise with an increase in the effectiveness of human capital accumulation or the degree of labor-market matching efficacy, or a decrease in the separation rate or the vacancy creation cost. Our calibration exercises suggest that output growth, employment, vacancy creation, and learning and search effort are most responsive to changes in the discretionary human capital accumulation parameter. We also find that, a discretionary human capital enhancement policy is more effective in promoting economic growth but need not be more beneficial in the welfare sense. Moreover, the effects of these public policy programs become larger as the severity of labor-market frictions rises, indicating that a quantitative evaluation of the effectiveness of human capital policy in a frictionless Walrasian world is expected to be severely downward biased. =================================================================== Poisson games, strategic candidacy, and Duverger''s law Yuelan Chen      University of Queensland, yuelan.chen@gmail.com      ,       ,       ,       ,    Duverger''s law predicts a long-run two-candidate stable outcome under a plurality voting system. Duverger (1954) explains the law using the waste vote argument, which emphasizes voters'' tendency to abandon candidates commonly perceived to have the least support. Palfrey (1989) formalizes Duverger''s argument by modeling a three-candidate voting situation as a Bayesian game, and shows that there are only two-candidate equilibrium outcomes in very large electorates. However, Palfrey (1989) does not examine non-generic cases where two or more weak candidates have the same expected equilibrium vote share, so there is no unique candidate for voters to abandon and a three-candidate equilibrium outcome is possible. We show that the incentive of candidates to strategically withdraw from elections in order to avoid extreme outcomes eliminates such non-Duvergerian equilibria. We add uncertainty about the number of voters to Palfrey''s framework, and model the election situation as a two-stage game where candidates first make strategic entry decisions, followed by plurality voting, which is modeled as a Poisson game a la Myerson (2000). In this framework, the two-party tendency for both generic and non-generic cases in Palfrey (1989) are explained, as is an anomaly to Duverger''s law, viz. in India there persists a strong central party and two weak parties with similar strength. =================================================================== Sequential Equilibrium in Legislative Bargaining Gyoung-Gyu Choi      Dongguk University, gchoi@dongguk.edu      ,       ,       ,       ,    In this study, a simple model of legislative bargaining under asymmetric information in the discounting factors is constructed. To emphasize the importance of uncertainty and heterogeneity, we consider three-person legislative game with asymmetric information and heterogeneity among members of the legislature. If the relatively patient player reveals her type, other players may not include her in the coalition due to the high price to buy her vote. Therefore, there may exist the incentive not to reveal the true type, and it is possible to have no fully separating equilibrium. Pooling equilibrium may be realized in which oversized coalitions can be rationalized due to the bargaining position of the coalition partner. =================================================================== Population solidarity, population fair-ranking,and the egalitarian solution Youngsub Chun      Seoul National University, ychun@snu.ac.kr      ,       ,       ,       ,    We present two axiomatic characterizations of the egalitarian solution for TU games, which assigns to each agent an equal share over an individual utility level. Our first result is based on population solidarity, which requires that an arrival of new agent should affect all of the original agents in the same direction: all gain together or all lose together. We show that the egalitarian solution is the only solution satisfying population solidarity together with efficiency, symmetry, strategic equivalence, and equal-gains monotonicity. Our second result is based on population fair-ranking, which requires that an arrival of new agent should not affect the relative positions of the original agents. The egalitarian solution is the only solution satisfying population fair-ranking together with efficiency, symmetry, and strategic equivalence. =================================================================== Public Goods, Bounded Attention Spans and Equilibrium in the Internet Economy John P. Conley      Vanderbilt University, j.p.conley@vanderbilt.edu Paul Healy      The Ohio State University, healy.52@osu.edu      ,       ,       ,    We consider a pure public goods economy with a continuum of agents. In the standard model, the optimal public good levels will generally be infinitely larger than the private good consumption levels. This does not seem to be a reasonable or even a comprehensible limit of a large economy. We propose instead to model internet and other intellectual content as our canonical public goods. We argue that in such an environment, agents consume finite amounts of a finite number of public goods. Limited attention spans prevent agents from consuming all, or even a large number, of public goods. We show that the infinitely large aggregate public goods contributions in such an economy end up being absorbed in an infinite diversity of public goods rather than by infinite levels of any finite set of public goods. We conclude by showing that while approximately Pareto optimal allocations exist, price systems that satisfy the standard welfare theorems are difficult to define. Because price systems do not signal profit opportunities in equilibrium, there may indeed be opportunities for economic profits in the internet economy. =================================================================== Voting as a Lottery Luca Corazzini      University of Padova, luca.corazzini@unipd.it Giuseppe Attanasi      University of Tolouse, giuseppe.attanasi@unibocconi.it Francesco Passarelli      University of Teramo, francesco.passarelli@unibocconi.it      ,       ,    Voting is a lottery in which an individual wins if she belongs to the majority or loses if she falls into the minority. The probabilities of winning and losing depend on the voting rules. The risk of losing can be reduced by increasing the majority threshold. This however has thenegative e¤ect of also lowering the chance to win. We compute the individual''s preferred majority threshold, as a function of her risk attitudes, her voting power and her priors about how the other individuals will vote. We find that the optimal threshold is higher when an individual is more risk averse, less powerful, and less optimistic about the chance that the others will vote like her. De facto, raising the threshold is a form of protection against the higher risk of being tyrannized by an unfavorable majority. =================================================================== Risk aversion in symmetric and asymmetric contests RICHARD CORNES      ANU and University of Nottingham, rccornes@aol.com ROGER HARTLEY      University of Manchester, roger.hartley@manchester.ac.uk      ,       ,       ,    We analyze existence, uniqueness and properties of equilibria in incompletely discriminating Tullock contests with logistic contest success functions, when contestants are risk averse. We prove that a Nash equilibrium for such a contest exists, but give an example of a symmetric contest with both symmetric and asymmetric equilibria, showing that risk aversion may lead to multiple equilibria. Symmetric contests have unique symmetric equilibria but additional conditions are necessary for general uniqueness. We also study the effects on incumbents of additional competitors entering the contest under these conditions and examine the effects of risk aversion on rent dissipation in symmetric and asymmetric contests. =================================================================== Financial equilibria with restricted participation Bernard CORNET      University of Kansas and Paris School of Economics, cornet@ku.edu      ,       ,       ,       ,    Investors facing restrictions on the portfolios that they can trade, is more of a norm than an exception. We consider a model in which agents portfolio sets are constrained, i.e. their participation is restricted. As in Siconolfi (1986), Balasko, Cass and Siconolfi (1990) these constraints are exogenously given (possibly arising due to some institutional reasons). Moreover, we consider very general restrictions on portfolio where each agents portfolios set is assumed to be convex and containing zero. This paper primarily examines the characterization of equilibrium asset prices with arbitrage free asset prices, in a multiperiod model when investors face such general portfolio restrictions. In the absence of such portfolio constraints the approach initiated by Cass (1984), has been extensively used to characterize equilibrium asset prices with arbitrage free asset prices. See Cass (1984), Duffie (1987) and Florenzano and Gourdel (1994). Moreover this approach is also useful in showing the existence of an equilibrium. See Magill and Shafer (1991), Florenzano and Gourdel (1994), Magill and Quinzii (1996), Rocha and Triki (2005), Hahn and Won (2003) and Angeloni and Cornet (2006) among others. Another approach to prove existence in a differentiable economy is to show existence in a numeraire asset economy and infer the existence in the nominal asset economy (See Villanacci et al. 2002 and Magill and Quinzii 1996). =================================================================== Myopia, redistribution and pensions Helmuth Cremer      Toulouse School of Economics, helmut@cict.fr      ,       ,       ,       ,    The last decade has seen the emergence of behavioral economics exploring the possible conflict between our preferences for the long run and our short-run behavior. The discrepancy between long-run intentions and short-run action is apparent for a wide range of circumstances and particularly for savings decisions and for the consumption of so called sin goods. Quite interestingly, self-control problems vindicate the idea of a paternalistic role for the government that has for long been highly controversial. I study how the presence of myopic individuals affects policy design when individuals differ also in productivity. This double heterogeneity gives rise to an interesting interplay between paternalistic and redistributive considerations. The first part is devoted to pension design when myopic individual do not save “enough” for their retirement because their “myopic self” emerges when labor supply and savings decisions are made. I examine how the proportion of myopic individuals affects the generosity of the pension system and the degree of redistribution it operates. I consider both linear and non linear tax and pension systems. Several different issues are considered in the second part. For instance, I show that the combination of habit formation (present consumption creating additional consumption needs in the future) and myopia may explain why some retirees are forced to “unretired”, i.e., unexpectedly return to work. Finally, I deal with the issue of “sin taxes”. =================================================================== The optimal prevention of epidemics Hippolyte d'ALBIS      Toulouse School of Economics, hippolyte.d-albis@univ-tlse1.fr Emmanuelle AUGERAUD      University of La Rochelle, eaugeraud@univ-lr.fr      ,       ,       ,    This article studies the optimal intertemporal allocation of resources devoted to the prevention of a deterministic epidemics that affects the labor force. In a stylized “yeoman-farmer” economy, the long run optimal prevention is shown to be crucially linked to the labor productivity, a minimal level being necessary to reduce the share of infected individuals within the population. The dynamics of the optimal prevention is then studied and the importance of the initial conditions is highlighted. Conditions for an eradication of the epidemics are finally proposed. =================================================================== Poverty and Time Conchita D'Ambrosio      Universita'' di Milano-Bicocca and DIW Berlin, conchita.dambrosio@unibocconi.it Walter Bossert      University of Montreal, walter.bossert@umontreal.ca      ,       ,       ,    We examine the measurement of individual poverty in an intertemporal context. Suppose we observe individual incomes in a society over several years. A dynamic individual poverty index is employed to compare matrices composed of these individual income streams. Earlier approaches to the measurement of poverty with a fixed poverty line over time usually employ independence properties with respect to the order of aggregation across individuals and across time periods – the index value should be independent of the aggregation order chosen. The procedure based on aggregating across individuals first is limited to situations where there is a fixed poverty line and the individual poverty gaps can be calculated without reference to the incomes of others. Thus, we restrict attention to the alternative order of aggregation only – aggregate across periods first and then aggregate the resulting individual measures into a societal dynamic measure of poverty. We focus on the phenomenon of persistence in states of poverty in the sense that we assume consecutive periods in poverty to be worse, ceteris paribus, than the same number of periods in poverty when these are interrupted by periods of non-poverty. We characterize a class of poverty measures with this property and illustrate the difference this new approach makes by comparing the resulting poverty values when applied to EU data. =================================================================== The interaction between unemployment insurance and human capital policies. Carlos E da Costa      Fundação Getulio Vargas, carlos.eugenio@fgv.br      ,       ,       ,       ,    Using a two period representation of life-cycle choices we show that, in the presence of an optimally designed unemployment insurance (UI) program, it is optimal for the government to encourage human capital acquisition. This raises the opportunity costs for those who intend to free ride on the program. We also show that, at the constrained optimum, human capital investments should be driven up to the point where its expected return equals the risk free rate, even though human capital is ''risky'' from a private perspective. We also address the problem under the assumption of non-observed savings, in which case non-convexities are pervasive and the use of a first order approach, unreliable. The financing of the UI program is changed in this case, but the encouragement of human capital acquisition still characterizes the optimal policy. =================================================================== Environmental Protection and Trade Liberalization in a Small Open Dual Economy Ichiroh Daitoh      Tohoku University, Graduate School of International Cultural Studies, idaito@intcul.tohoku.ac.jp      ,       ,       ,       ,    We investigate the conditions under which environmental protection and trade liberalization might improve urban unemployment and welfare in a small open Harris–Todaro model with polluting urban manufacturing. While a tariff reduction decreases manufacturing employment, a rise in the pollution tax rate may increase it when a dirty input is complementary to capital. Environmental protection and trade liberalization are consistent in reducing the level of urban unemployment, because they lower it under the same conditions. They are consistent in increasing GDP if a rise in the pollution tax rate decreases manufacturing employment. Otherwise, trade liberalization will mitigate a decrease in GDP because of environmental protection if the degree of urbanization is low and if rural technology exhibits weak diminishing returns to labor. This GDP effect plays a central role in welfare improvement. =================================================================== Constrained efficient taxation of capital Julio Davila      Paris School of Economics, julio.davila@univ-paris1.fr      ,       ,       ,       ,    In this paper I show that, in the overlapping generations economy with production of Diamond (1965), the laissez-faire competitive equilibrium steady state is constrained inefficient and can be Pareto-improved upon by a government following an active fiscal policy that taxes or subsidizes linearly the returns to savings while balancing the budget period by period through a lump-sum transfer or tax, respectively, on second period income. Each period tax/subsidy rate and lump-sum transfer/tax is determined as a function of past saving decisions. The constrained inefficiency is not due to any precautionary over-saving since there is no uncertainty in the model. Nor does this policy intend to finance any public spending, since there is none in the model either. The only purpose of the intervention is to make possible to implement in a decentralized way as a competitive equilibrium the constrained efficient steady state that maximizes the utility of the representative agent among all the steady state allocation attainable through the market. =================================================================== `The Child is Father of the Man:'' Implications for the Demographic Transition David de la Croix      Univ cath Louvain, david.delacroix@uclouvain.be Omar Licandro      European Institute, omar.licandro@iue.it      ,       ,       ,    We propose a new theory of the demographic transition based on the evidence that body development during childhood is an important predictor of adult life expectancy. Fertility, childhood development, longevity, education and income growth all result from individual decisions. Parents face a trade-off between the number of children they have and the spending they can afford on each of them in childhood. These childhood development spending will determine children longevity when adults. It is in this sense that we refer to Wordsworth''s aphorism that ``The Child is Father of the Man.'''' Parents face a second trade-off in allocating their time between increasing their own human capital and rearing children. The model displays different regimes. In a Malthusian regime with no education fertility increases with adult life expectancy. In the modern growth regime, life expectancy and fertility move in opposite directions. The dynamics display the key features of the demographic transition, including the hump in both population growth and fertility, and replicate the observed rise in educational attainment, adult life expectancy and economic growth. Consistent with the empirical evidence, a distinctive implication of our theory is that improvements in childhood development precede the increase in education. =================================================================== Corporate Control and Multiple Large Shareholders Amrita Dhillon      University of Warwick, a.dhillon@warwick.ac.uk      ,       ,       ,       ,    Many firms have more than one blockholder, but finance theory suggests that one blockholder should be sufficient to bestow all benefits on a firm that arise from concentrated ownership. This paper identifies a reason why more blockholders may arise endogenously. We consider a setting where multiple shareholders have endogenous conflicts of interest depending on the size of their stake. Such conflicts arise because larger shareholders tend to be less well diversified and would therefore prefer the firm to pursue more conservative investment policies. When the investment policy is determined by a shareholder vote, a single blockholder may be able to choose an investment policy that is far away from the dispersed shareholders'' preferred policy. Anticipating this outcome reduces the price at which shares trade. A second blockholder (or more) can mitigate the conflict by shifting the voting outcome more towards the dispersed shareholders'' preferred investment policy and this raises the share price. The paper derives conditions under which there are blockholder equilibria. =================================================================== The Taxation of Life Annuities Under Adverse Selection Alexis Direr      Paris School of Economics, direr@ens.fr      ,       ,       ,       ,    This paper studies how annuities should be taxed in a model à la Mirelees (1971) in presence of adverse selection and a positive link between income and longevity. It is shown that the taxation can address the adverse selection problem by setting a progressive tax schedule on annuities. Moreover, as the rich are more likely to attain old age, a government can reduce lifecycle inequalities by taxing annuities insofar as they signal consumption by high incomes. Numerical simulations show that the last effect shifts upward the level of taxation while dampening the degree of progressivity. They also suggest that the level of taxation on annuities is significant, progressive and increases when annuitants get older. =================================================================== Corporate taxes, profit shifting and the location of intangibles within multinational firms Matthias Dischinger      University of Munich, matthias.dischinger@lrz.uni-muenchen.de Nadine Riedel      University of Munich, nadine.riedel@lrz.uni-muenchen.de      ,       ,       ,    Intangible assets are one major source of profit shifting opportunities due to a highly intransparent transfer pricing process. Using a simple theoretical framework with multinational entities and transfer pricing, we show that multinational enterprises (MNEs) have an incentive to locate their shifting–relevant assets like intangibles at affiliates with a low statutory corporate tax rate within the MNE, since this optimizes their intra–group profit shifting opportunities. We test this hypothesis with panel data of European MNEs and by calculating for each affiliate the average tax rate difference to other affiliates of the corporate group. The smaller the statutory tax rate of a subsidiary relative to all other affiliates of the MNE, the larger is the probability of holding intangible assets and, furthermore, the larger is the share of intangible to total assets of this subsidiary. We employ various robustness checks to ensure that this result is indeed driven by profit shifting considerations. =================================================================== Micro and small firm performance in vietnam: what determines? T. Q. Trang DO      CES - University of Paris 1, Pantheon-Sorbonne, dootrang@yahoo.com Gerard Duchene      CES - University of Paris 1, Pantheon-Sorbonne, Gerard.Duchene@univ-paris1.fr      ,       ,       ,    We analyze the performance of non farm micro and small firms in Vietnam. This analysis brings some more light to a sector that has the most dynamic growth and has been an effective tool in creating welfare and job in Vietnam since the economic reform. Firms in our analysis have been drawn from the survey on household''s living standard in 2004. No restriction on industries has been imposed. Firm performance, in our study, is measured by the qualitative evaluation of entrepreneurs on their changes in total sales. We use the multinominal logit model to investigate empirically determinants that might affect the firm''s growth. Beside two usual variables, size and age, we stress our analysis on firms'' legal status, financial access and firm location. The main results are resumed as follow: (a) firm size, in term of income in logarithm is positively related to growth, while (b) the role of firm size, in term of labor number, is not significant (c) young firms tend to have better performance (d) being in rural area plays a positive effect on performance (e) the legal status and financial access appear to have no significant effect. =================================================================== The Loss of Trade: A Theory of North-South Intra-industry Trade Baomin Dong      University of International Business and Economics, baomindong@vip.163.com Lasheng Yuan      University of Calgary, yuan@ucalgary.ca      ,       ,       ,    We examine the effects of intra-industry trade in the presence of imperfect competition and heterogeneous technologies. Contrary to the common belief that intra-industry trade always improves the world welfare due to reduction of market power, we show that even in the absence of transportation costs, it may generate a net global welfare loss. With technology heterogeneity across countries, the direction of production displacement in equilibrium when opening up trade, is critical to welfare changes domestically as well as globally. When a South country has a relatively less concentrated industry and small demand, the output of the North country may contract after opening up trade. The inefficiency in production can outweigh the gain due to competition and lower price in trade, resulting in a net loss in the global welfare. In some circumstances, voluntary technology transfer, managed trade through VERs or tariff can improve both trading partners'' welfare. =================================================================== Assessing the Local Stability Properties of Three-Dimensional Discret Time Dynamical Systems: A Geometrical Argument with Triangles and some Applications to Consumption Complementarities within Suboptimal Competitive Economies< Jean-Pierre Drugeon      Cnrs-Ces, jpdrug@asterix.univ-paris1.fr      ,       ,       ,       ,    The di?culties associated with the appraisal of the determinacy properties of a three- dimensional system are circumvented by the introduction of a new geometrical argument. It ?rst brings about a complete and easy-to-use typology of the eigenvalues moduli in discrete time three-dimensional dynamical systems and then provides a new apparatus for assessing from a geometrical standpoint the emergence of local bifurcations. The argument is then applied through an extensive characterisation of the stability properties of two simple benchmark models of intertemporal economic analysis that are augmented by comparison utility arguments. =================================================================== Equilibrium environmental policies under differentiated oligopoly Kenji Fujiwara      School of Economics, Kwansei Gakuin University, kenjifujiwara@kwansei.ac.jp      ,       ,       ,       ,    Constructing a model of differentiated oligopoly with environmental pollution, this paper studies how product differentiation, together with the presence and absence of free entry, affects the optimal environmental policies. We find that two parameters which measure pollution damage and product differentiation play a significant role for characterization of the optimal tax-subsidy policy. In our context, pollution taxation has a secondary role as an entry policy, which also affects welfare significantly. =================================================================== Public Budget Composition, Fiscal (De)Centralization and Welfare Gerhard Glomm      Indiana University, gglomm@indiana.edu      ,       ,       ,       ,    Abstract We present a dynamic two-region model with overlapping generations. There are two types of productive public expenditure, education and infrastructure funding, and governments decide optimally on budget size (tax rate) and its allocation across the two outlays. Productivity of government infrastructure spending can differ across regions. This assumption follows well established empirical evidence, and highlights regional heterogeneity in a previously unexplored dimension. We study the implications of three different fiscal regimes for capital accumulation and aggregate national welfare. Full centralization of revenue and expenditure decisions is the optimal fiscal arrangement for the country when infrastructure spending productivity is similar across regions. When regional differences exist but are not too large, the partial centralization regime is optimal where the federal government sets a common tax rate, but allows the regional governments to decide on the budget composition. Only when the differences are sufficiently large does full decentralization become the optimal regime. National steady state output is instead highest when the economy is decentralized. This result is consistent with the “Oates conjecture” that fiscal decentralization increases capital accumulation. However, in terms of welfare this result can be reversed =================================================================== Trials, tricks and transparency: How disclosure rules affect clinical knowledge Paula González      Universidad Pablo de Olavide, pgonzalez@upo.es Nicolás Porteiro      Universidad Pablo de Olavide, nporteiro@upo.es Matthias Dahm      Universitat Rovira i Virgili, matthias.dahm@urv.net      ,       ,    Randomized controlled clinical trials constitute one of the main tools of scientific medicine. Accordingly, the appropriate design of the incentives to conduct clinical research is considered to be of enormous importance. Recently, however, there have been a number of highly publicized cases in which pharmaceutical firms have selectively disclosed evidence on marketed drugs. These scandals have underlined the need for more transparency in clinical trials. To achieve this transparency there are mainly two policy proposals discussed: clinical trial registries and clinical trial results databases. In this paper, we provide a theoretical framework to investigate how the incentives of the firms to perform trials are affected through different hotly debated regulatory environments. Our model predicts selective reporting by firms of the trial results and yields three key findings concerning the optimal intervention. First, a compulsory clinical trial registry complemented through a voluntary clinical trial results database can implement full transparency (the existence of all trials as well as their results is known). Second, full transparency comes at a price. It has a deterrence effect on the incentives to conduct clinical trials, as it reduces the firms'' gains from trials. Third, in principle, a voluntary clinical trial results database without a compulsory registry is a superior regulatory tool but we provide some qualified support for additional compulsory registries. =================================================================== Managers, entrepreneurs and investors: The consequences of corporate cheating for firm structure under different wealth distributions Brishti Guha      Singapore Management University, bguha@smu.edu.sg      ,       ,       ,       ,    When a manager, an entrepreneur and outside investors interact under asymmetric information, outsiders limit their stake to eliminate insider cheating and entrepreneurs offer managers a contractual wage sufficient to deter cheating. When capital is too expensive, this contract is infeasible, and owner-managers rule, otherwise entrepreneurial-managerial pairs emerge. Individuals with managerial ability endogenously prefer working for entrepreneurs to establishing their own firms, and the latter to playing a non-managerial role while hiring another manager. We endogenize firm formation and structure and establish a unique equilibrium for any distribution of wealth and managerial ability. The model has many developmental applications. =================================================================== No arbitrage condition and existence of equilibrium in infinite or finite dimension with expected risk averse utilities. Thai Ha Huy      PhD Student, thai.ha-huy@polytechnique.org      ,       ,       ,       ,    We consider a general equilibrium model in asset markets with a countable set of states and expected risk averse utilities. The agents do not have the same beliefs. We use the methods in Le Van - Truong Xuan (JME, 2001) but one of their assumptions which is crucial for obtaining their result cannot be accepted in our model when the number of states is countable. We give a proof of the existence of equilibrium when the number of states is infinite or finite. =================================================================== Nature of human capital, technology and ownership of public goods Maija Halonen-Akatwijuka Dr     University of Bristol, Maija.Halonen@bristol.ac.uk      ,       ,       ,       ,    Besley and Ghatak (2001) show that public good should be owned by the agent who values the public good most. They state that their result holds irrespective of technological factors. In this paper we show that relative valuations are not the sole determinant of optimal ownership structure but also technology and nature of human capital matter. =================================================================== Aggregation of State Dependent Utilities Chiaki Hara      Kyoto University, hara@kier.kyoto-u.ac.jp      ,       ,       ,       ,    In an exchange economy under uncertainty populated by consumers having state-contingent utility functions, we analyze the nature of the efficient risk-sharing rules and the representative consumer''s state-contingent utility function. We show that the representative consumer''s responsiveness to state variables will typically depend on aggregate consumption levels even when the individual consumers'' responsiveness do not depend on own consumptions. We also find that the heterogeneity in the individual consumers'' responsiveness to state variables gives rise to a “convexifying effect” on the representative consumer''s utility function, in a sense to be made precise. We also present applications of this result to the cases of heterogeneous beliefs and heterogeneous impatience. =================================================================== Tax incentives and the decision to purchase long-term care insurance Daifeng He      Washington University in St. Louis, dhe@wustl.edu Charles Courtemanche      Washington University in St. Louis, cjcourte@artsci.wustl.edu      ,       ,       ,    This paper studies the impact of the tax incentive prescribed in the Health Insurance Portability and Accountability Act of 1996 (HIPAA) on individuals'' long-term care (LTC) insurance purchasing behavior. Using data from the Health and Retirement Study, we find that the tax incentive in HIPAA increased the take-up rate of private LTC insurance by 3.2 percentage points, or 25%, for those eligible. Despite this strong response, our results imply that even an above-the-line tax deduction would not increase the coverage rate of seniors beyond 13%, indicating that tax incentives alone are unlikely to expand the market substantially. We also present, to our knowledge, the first estimate of the price elasticity of demand for LTC insurance of around -3.5, suggesting that demand is highly elastic at the current low ownership rate. Finally, we conduct a cost-benefit analysis and find that the tax deductibility of LTC insurance premiums leads to a net revenue loss for the federal government, as the reduced tax revenue from granting the tax incentive exceeds the savings in Medicaid''s LTC expenditures. =================================================================== The Social Benefit of War Magnus Hoffmann      University of Hannover, Institute of Microeconomics, hoffmann@mik.uni-hannover.de      ,       ,       ,       ,    Recent findings in economic theory show that cooperation (settlement) between two identical players with conflicting interests in a valuable and contestable resource always Pareto dominates violent dispute (war), given that cooperation is presented using a symmetric bargaining norm. Necessary conditions for settlement to arise are the destructibility of war, and the costless and exogenous enforcement of any agreement made by the two players. We show that endogenous enforcement of the agreements alters the incentives of the players to bargain. This causes a shift in the Pareto frontier so that - under certain conditions - war Pareto dominates settlement. =================================================================== Hacking-proofness and stability in a model of information security networks Sunghoon Hong      Vanderbilt University, sunghoon.hong@vanderbilt.edu      ,       ,       ,       ,    We introduce a model of information security networks. A group of agents can form directed information links and use security systems called firewalls. Each agent benefits from direct or indirect information. However, it is costly to maintain an information link or a firewall. In this context, we introduce the probability of being hacked. If an agent is not secured by his firewall and obtains a large enough benefit, then he is attacked with positive probability and loses some fraction of his benefit. We then introduce the notions of stability and hacking-proofness. Stability requires that each agent maximizes his expected utility for a given network, while hacking-proofness requires that no agent is attacked with positive probability. We first present examples of stable networks, and study whether they are hacking-proof. Then we investigate their relation in a general context. As it turns out, under a certain condition, any stable network is hacking-proof. We also provide an upper bound of the probability of being hacked under a stable network. =================================================================== Dual Poverty Trap: Intra and Intergenerational Linkages Ryo Horii      Tohoku University, horii@econ.jpn.org Masaru Sasaki      Osaka University, sasaki@econ_dot_osaka-u.ac.jp      ,       ,       ,    This paper constructs an overlapping generations model of search equilibrium that analyzes intergenerational and coordination traps simultaneously. When parents are uneducated, their children often face difficulty in finishing school and therefore are likely to remain uneducated. In addition, if children expect that other children of the same generation will not receive an education, they expect that firms will not enough jobs for educated people and thus are discouraged from schooling. These two mechanisms of poverty trap reinforce each other, creating a dual poverty trap. Escaping from the trap requires a combined, not separate, implementation of financial assistance for schooling, and policies for changing expectations. =================================================================== Fiscal Policy, Home Production and Growth Dynamics Yunfang Hu      Graduate School of Economics, Kobe University, hu@econ.kobe-u.ac.jp Kazuo Mino      Graduate School of Economics, Osaka University, mino@econ.osaka-u.ac.jp      ,       ,       ,    Using an endogenous growth model with physical and human capital, we analytically explore short-run as well as long-run effects of fiscal policy in the presence of households'' production activities. Unlike the existing indeterminacy or non-existence result in models with distortion policies, the present model exhibits well-behaved equilibrium dynamics. The policy experiments both in and out of the balanced-growth equilibrium reveal distinctive implications of home production activities. For example, our formal setting of the home production sector reveals a weaker policy effect result compared to the ones without home capital, which is consistent with the numerical output in the existing literature. =================================================================== A Simple Test on the Convergence of Social Security Transfer in OECD Countries Jinyoung Hwang      Hannam University, jyh17@hnu.kr      ,       ,       ,       ,    The growing trend toward globalization not only has aggravated international competition but also has increased interdependence among countries, inducing the need for harmonization and convergence of socioeconomic policies across countries. This paper examines whether the convergence phenomenon holds for social security transfers as a percentage of GDP in OECD countries, applying the traditional methodology of s- and ß-convergence. =================================================================== Efficiency and endogeneity in the institutions governing public disclosure of tax compliance information Jin Kwon Hyun      Ajou Univerisity, jkhyun@ajou.ac.kr Iljoong Kim      Professor, ijkim@skku.edu      ,       ,       ,    This paper seeks to probe into the optimal degree (or level) of public disclosure regarding ''tax compliance information (TCI),'' an area not yet fully explored in existing literature. Starting from the recognition that the issue can be portrayed as an ''allocation of the competing rights'' regarding a property among various parties involved, we heuristically examine the legal institution corresponding to such an optimal allocation that minimizes the relevant total social cost. In particular, from a perspective of new institutional economics, we highlight the endogeneity embedded in determining the degree of public disclosure by associated law enforcers it tends to lower the actual disclosure degree. We also explore the existence of the ''bilateral causality'' between the disclosure degree and tax compliance, although existing studies have empirically focused only on the unilateral effect of the former on the latter. This can be one convincing explanation why some countries are trapped in a ''vicious cycle'' of a very low degree of TCI disclosure and a pervasively high level of tax evasion. In this regard, this paper is a scrutiny of a so-called bad equilibrium. Finally, just as a starting mark calling for further rigorous and empirical research, the paper offers some policy-oriented thoughts on how to escape from the bad equilibrium. =================================================================== International Tax Competition with Endogenous Sequencing Tomoya Ida      Oita University, ida@cc.oita-u.ac.jp      ,       ,       ,       ,    This paper examines an international tax rate competition with endogenous sequencing. Unlike existing studies, we assume that each country can decide not only its corporate tax rate on international traded capital but also the timing of whether they decide it firstly or secondly. A consideration of Nash equilibrium derives two conclusions with respect to alternative international double tax allowance. First, the deduction method derives a simultaneous move game whereas the credit method causes a sequential one. Second, a capital-exporting country would be better than under the deduction, while a capital-importing country could have a highest economic welfare under the credit method. =================================================================== National Adversity: Managing Insurance and Protection Toshihiro Ihori      University of Tokyo, ihori@e.u-tokyo.ac.jp Martin McGuire      University of California-Irvine, mcmcguir@uci.edu      ,       ,       ,    This paper concerns self-insurance and self-protection that countries may implement at a national level in pursuit of their security. The distinctions self-insurance, self-protection, and market insurance were first made by Ehrlich and Becker (1972). Nevertheless, extensions of their models to international security where market insurance for entire countries is usually unavailable is surprisingly sparse. We show that in the absence of market insurance self-insurance alone raises important new issues as to the definition of “fair pricing” and as to the relations between pricing, optimization, risk aversion, and inferiority that are significantly different from the standard, conventional market analysis. We also discover a hitherto unrecognized tendency for misallocation between self-protection and self-insurance when both are available and considered together. Because of external effects running from self- protection to self-insurance, governments trying to find the right balance face incentives that encourage extreme, self-inflicted moral hazard, to the detriment of self-protection. =================================================================== Bundling and Competition for Slots Doh-Shin Jeon      Universitat Pompeu Fabra, doh-shin.jeon@upf.edu Domenico Menicucci      Universita degli Studi di Firenze, domenico.menicucci@dmd.unifi.it      ,       ,       ,    We study competition among upstream firms when each of them sells a portfolio of distinct products and the downstream firm has limited slots (or shelf space). In this situation, we study how bundling affects competition for slots. When the downstream has k number of slots, social efficiency requires that it purchases the best k products among all upstream firms'' products. We find that under bundling, the outcome is always socially efficient but under individual sale, the outcome is not necessarily efficient. Under individual sale, each upstream firm faces a trade-off between quantity and rent extraction due to the coexistence of the internal competition (i.e. competition among its own products) and the external competition (i.e. competition from other firms'' products), which can inefficiency. On the contrary, bundling removes the internal competition and the external competition among bundles makes it optimal for each upstream firm to sell only the products belonging to the best k. This unambiguous welfare-enhancing effect of bundling is novel and robust. =================================================================== Opportunity Equilibrium and Nash Implementation Biung-Ghi Ju      Korea University, bgju@korea.ac.kr      ,       ,       ,       ,    Extending the formulation of market institution in general equilibrium analysis, an economic institution is formulated by a system “opportunities” the institution offers to its members. An opportunity system is a non-empty set of profiles of individual opportunity sets (subsets of alternatives). An alternative is an opportunity equilibrium under a system if there is an opportunity profile in the system such that the alternative maximizes each agent''s well-being over his opportunity set in the profile. Examples are Walrasian equilibrium, Lindahl equilibrium, valuation equilibrium by Mas-Colell (1980), equal opportunity equilibrium by Thomson (1994), etc. The main results show that this formulation of economic institutions by opportunity systems is closely related with the alternative formulation by game forms in Implementation Theory and that in some well-known environments, they are equivalent. A useful by-product is a decomposition of implementation procedure into two steps: the first is to identify an opportunity system supporting a rule, and the second is to use this system to design a game form implementing the rule. Thus, informational efficiency in the opportunity system, if any, can be embedded in the game form implementing the rule. =================================================================== A dynamic analysis of auction with reputation effects Wei-Torng Juang      Academia Sinica, wjuang@econ.sinica.edu.tw Chiu-Yen Huang      National Chengchi University, loveseconomics@gmail.com      ,       ,       ,    It has been recognized empirically that in internet auctions, seller''s reputation has a positive, statistically significant, but small impact on the price. However, by examining the data collected from internet auctions taking place in Yahoo! Taiwan and Yahoo! Singapore, we found that sellers with high reputation sometimes charge lower prices for the goods they sell. In this regards, we construct a model on internet auctions trying to explain the inconsistence stated above. This can be solved by delineating the above “small impact” with two factors. First, good reputation is crucial for sellers to sell goods with higher prices. Second, to accumulate sufficiently high reputation on internet auction websites, a seller must sell sufficiently many items without frauds. In order to sell goods quickly, a seller may be tempted to charge lower prices for some of his commodities. Thus, to maximize expected profits, a seller may opt to accumulate good reputation so that he may sell more “expensive” goods. An efficient way to accumulate high reputation is to lower the price of “cheap” goods. By this way one can boost the sale of “cheap” commodities to increase his reputation score quickly, which hence benefits the sale of “expensive” goods and the total profits. Therefore, a strategic choice with reputation concerns renders positive impact on prices of “expensive” goods and negative impact on prices of “cheap” ones, which results in a positive but small aggregate impact. =================================================================== Production relocation and endogenous growth in a model with heterogeneous firms Jaewon Jung      THEMA, Université de Cergy-Pontoise, jwjung@u-cergy.fr      ,       ,       ,       ,    This paper analyzes the growth and welfare effects of production relocation to the South, when the North is populated by heterogeneous firms and workers. By adapting Yeaple''s (2005) heterogeneous agent framework to a North-South endogenous growth model, we show how the move from autarky to integration improves aggregate welfare, but at the cost of increased wage inequalities. In contrast, incremental globalization not only induces a welfare gain, but also generates a permanent long-run growth effect due to firms'' technological switching, which enables eventually to compensate the least skilled workers for their immediate welfare losses by faster income increases over time. =================================================================== Paradox of Credibility Hanjoon M Jung      Lahore University of Management Sciences, hanjoon@lums.edu.pk      ,       ,       ,       ,    In an information transmission situation, a sender''s concern for its credibility could endow itself with an invisible power to control the receiver''s decisions so that the sender can manipulate information without being detected. In this case, the sender can achieve its favored outcome without losing its credibility, which stays true even when the sender and the receiver have contradictory preferences. Therefore, the sender''s concern for its credibility could result in less truthful signals from the sender and worse payoffs to the receiver. This is the paradox of credibility. This paper models this paradoxical role of the sender''s credibility concern. =================================================================== Bailouts and the Commitment Problem in Federations Karolina Kaiser      Munich Graduate School of Economics, karolina.kaiser@lrz.uni-muenchen.de      ,       ,       ,       ,    Standard models of soft budget constraints consider bailouts as pure monetary transfers. However, in practice often additional obligations or restrictions, such as savings goals, are linked to monetary bailouts. This paper analyzes in a model of a federation if such restrictions change economic outcomes in an soft budget constraint environment and under what circumstances they can increase welfare as compared to pure soft budget and hard budget regimes. We ?find that restrictions generally harden budget constraints, but not necessarily increase welfare. The evaluation crucially depends on the tax endowment of the central government and on the shape of preferences. =================================================================== Entrepreneurship, business groups and reputation. Raja Kali      University of Arkansas, rkali@walton.uark.edu Nisvan Erkal      University of Melbourne, n.erkal@unimelb.edu.au      ,       ,       ,    Business groups, constituted of firms in disparate industries, dominate the organizational landscape of many emerging economies. We develop a theoretical framework to consider the tradeoff between individual (firm) entrepreneurship and business group affiliation when there is instability in the legal and political institutions of the economy. If there is a high degree of instability in institutions, an individual firm may not able to credibly commit to high quality, but a business group may, by pooling reputation across different markets. Business groups facilitate trade when individual entrepreneuship is not feasible, though if institutions improve, individual entrepreneurship crowds out business groups. We examine the conditions under which business groups form ab initio, and when they are formed by stretching the reputation of an existing firm. Our framework fits evidence from several emerging economies. =================================================================== On a Dynamic Public Insurance Game with Heterogeneous Agents Timothy Kam      Australian National University, timothy.kam@anu.edu.au Ronald Stauber      Australian National University, ronald.stauber@anu.edu.au      ,       ,       ,    We develop a class of dynamic taxation and public insurance games between a government whose aim is to maximize a measure of discounted expected total social welfare, and a continuum of private agents. Private agents are endogenously distributed on a nite set of individual states. We show that the sequential equilibrium payo correspondence exists and can be found recursively. If the government can commit, there exists an optimal xed tax-and-insure policy for any initial distribution of private agent states. We also prove that a socially optimal steady state exists in such a case. =================================================================== Endogenous Mergers under Multi-Market Competition Tina Kao      Australian National University, tina.kao@anu.edu.au Flavio Menezes      University of Queensland, f.menezes@uq.edu.au      ,       ,       ,    This paper examines a simple model of strategic interactions among firms that face at least some of the same rivals in two related markets (for goods 1 and 2). It shows that when firms compete in quantity, market prices increase as the degree of multi-market contact increases. However, the welfare consequences of multi-market contact are more complex and depend on how two fundamental forces play themselves out. The first is the selection effect, which works towards increasing welfare as shutting down the more inefficient firm is beneficial. The second opposing effect is the internalisation of the Cournot externality effect reducing the production of good 2 allows firms to sustain a higher price for good 1. This works towards increasing prices and, therefore, decreasing consumer surplus (but increasing producer surplus). These two effects are influenced by the degree of asymmetry between markets 1 and 2 and the degree of substitutability between goods 1 and 2. =================================================================== Ramsey pricing equilibria in commercial TV broadcasting Hans Keiding      University of Copenhagen, hans.keiding@econ.ku.dk Bodil Hansen      Copenhagen Business School, boh.eco@cbs.dk      ,       ,       ,    We consider a model of commercial television market, where private broadcasters coexist with a public television broadcaster. Assuming that the public TV station follows a policy of Ramsey pricing whereas the private stations are profit maximizers, we consider the equilibria in this market and compare with a situation where the public station is privatized and acts as another private TV broadcaster. A closer scrutiny of the market for commercial television leads to a distinction between target rating points, which are the prime unit of account in TV advertising, and net coverage, which is the final goal of advertisers. Working with net coverage as the fundamental concept, we exploit the models of competition between public and private price and quantity in order to show that privatization of the public TV station entails a welfare loss and results in TV advertising becoming more expensive. =================================================================== National electorates and international agreements Hubert Kempf      Paris School of Economics, Universite Paris-1, kempf@univ-paris1.fr Stephane Rossignol      Universite de Versailles, rossignol@math.uvsq.fr      ,       ,       ,    In this paper, we study the political economy of international agreements between two democracies. Agreements are negotiated between the two delegates chosen by majority voting. We prove that the set of feasible agreements always exists, but it may be impossible to reach an agreement depending on the rules imposed on the bargaining. We also prove that strategic delegation occurs, except in very special circumstances. =================================================================== Promoted competition : the incumbent and a new entry Miae Kim      Seould National University, younee19@snu.ac.kr      ,       ,       ,       ,    An authority with interests in the improvement of social welfare would consider promoting competition by removing monopolistic side-effects such as high prices, or limited supply. One method is to provide support to a firm considering entering the market. The incumbent thus faces a new competitive environment then lowers its price so as not to lose their existing customers. Lower price make more lots of customers can be served by the products or services. Even though the purpose is to develop a monopoly market into a competitive one, unexpected problems may arise. The entrant may desire to minimize the entry cost and thus prefer to use existing facilities to supply the goods rather than investing in facilities. The incumbent may also have some interest in recovering their losses to the competition. If the interests of each firm coincide at a point, they may deal with each other in a manner which is neither desirable for the customer nor the authority. Even in such a duopoly market, some customers continued to maintain support for the incumbent with the higher price, with the result that the new entrant was unable to poach a large portion of customers from the incumbent. Why did the incumbent dare to set a higher price than expected? While many papers have discussed the results of privatization, this paper will examine the coincidence of interests of the competitors in minimizing cost decisions and how attempts to recover losses from the competition promoted by force. =================================================================== The Department Placement Problem in Seoul National University Jinah Kim      Seoul National University, kciel99@naver.com      ,       ,       ,       ,    This paper explores the department placement problem in Seoul National University from a game theoretic perspective. How to assign students to each department can be analyzed as a many-to-one matching problem. I show that the department placement rule used in college of social sciences in Seoul National University in 2008 does not satisfy many interesting properties such as Pareto efficiency, strategy-proofness, etc. I discuss consequences of introducing the requisites for a priority-selection to the current placement rule with regards to Pareto efficiency, strategy-proofness and fairness =================================================================== Siting a Nuclear Waste Treatment Facility: an Analysis of Korean Experience Geum-Soo Kim      Hoseo University, gsgim@hoseo.edu      ,       ,       ,       ,    The voting competition implemented recently in Korea for siting a nuclear wastes treatment facility is modeled as a simple two-stages rent-seeking game. We have shown that the region with a lower environmental cost is always chosen as the host in a subgame-perfect equilibrium. However, this system is not likely to be socially efficient because the government in charge is always in deficit and the rent-seeking groups spend a lot of money in vain. =================================================================== Collective Reputation Young Chul Kim      Brown University, Young_Chul_Kim@brown.edu Glenn C Loury      Brown University, Glenn_Loury@brown.edu      ,       ,       ,    This paper is a first attempt to explain the idea of collective reputation using a dynamic expectation model. The previous statistical discrimination literature describes a situation of multiple equilibria. However, it does not talk about where the principals'' prior beliefs come from. Also, the static models could not capture the dynamic path to reach each equilibrium. Tirole (1996) derives the existence of stereotypes from history dependence and shows new members of an organization may suffer from the group''s past behavior. Based on the Tirole''s attempt, we develop a dynamic model of group reputation where both history and expectation toward the future are important in determining the group''s equilibrium. We provide conditions to reach each equilibrium point and to switch from one to another equilibrium. Policy implications leading to a pareto dominant equilibrium are discussed in the end. =================================================================== Differential time and money pricing as a mechanism for in-kind redistribution Bonggeun Kim      Sungkyunkwan University, bgkim07@skku.edu Jeremy Clark      University of Canterbury, jeremy.clark@canterbury.ac.nz      ,       ,       ,    We propose a mechanism to implement the distributional goal of “specific egalitarianism”, or that allocation of a good be independent of income, but increasing in relative strength of preference or need. Governments could offer the good at multiple “outlets” that charge different money and time prices. Individuals would self-select between outlets based on time opportunity cost. We show conditions under which differential pricing achieves specific egalitarianism more efficiently than uniform public provision funded from income tax, with or without optional private purchase. Differential pricing becomes more efficient than uniform provision as 1) the relative importance of the good rises, 2) the elasticity of substitution between goods falls, 3) variation in preferences increases and 4) income inequality rises or the proportion of the poor falls. =================================================================== Optimal Provision of Global Public Goods under Uncertainty: Strategic Transfers and Reservations in a Multilateral Treaty Obligation Jin Kim      KIPF, jkim@kipf.re.kr Seung-jin Shim      Kyungpook National University, shimsj@mail.knu.ac.kr      ,       ,       ,    This paper studies the formation and management of an international entity for promoting the provision of global public goods in a setup of international treaties on concessions and reservations. Based on the convention that there is a discrepancy between the original treaty obligation and the ratified treaty obligation in the multi-lateral treaty implementation, we select the ratification levels of the nations as the choice variables in an economic model. We explicitly analyze the optimal provision of global public goods from the optimal mechanism when the nations face asymmetric information on the ratification levels. Specifically, we characterize the environments where the optimal mechanism with incentive compatibility and participation constraint exists. The result shows that the sophisticatedly calculated transfers in the principal of quid pro quo, and incentive penalties favorably control the international concessions and reservations for the voluntary contributions to producing global public goods. =================================================================== The evolution of social security system: pension system vs. unemployment insurance Yusuke Kinai      Graduate School of Economics, Osaka University, ykinai@js8.so-net.ne.jp Masaya Yasuoka      Kobe University, yasuoka@econ.kobe-u.ac.jp      ,       ,       ,    This paper shows how the social security system evolves as attribution of voters changes. In our setting, policy determination is based on majority voting and the government has two kinds of social security policy pension and the unemployment insurance. That is, when the workers constitute the majority of voters, pension system is supported and when the unemployed is the majority, the unemployment insurance is adopted. Under such a situation, we show how the contents of the social security system evolves depending on the dynamics of capital accumulation and the unemployment rate, and show the social security system completely vanishes in certain instances. =================================================================== The Role of Technological Spillovers in an Uneven Subsidy Competition Game Hyun-Ju Koh      University of Munich, hyunju.koh@lrz.uni-muenchen.de Rainald Borck      University of Munich and DIW Berlin, rainald.borck@lrz.uni-muenchen.de Michael Pflüger      University of Passau and IZA Bonn, michael.pflueger@uni-passau.de      ,       ,    Previous works on regional competition in the presence of agglomeration economies showed that locational hysteresis is strong enough to tie industry to the agglomerated region even if regions start to compete over the industry core. Regions with an initially larger share of industry did not suffer from a relocation of firms. This paper elaborates two new aspects. First, the inclusion of technological spillovers into the model à la Martin and Rogers (1995)leads to an additional stable equilibrium where all industry is agglomerated in the less populated region. Second, we show that industry allocation resulting from a regional competition game is not necessarily efficient from a global perspective. In fact, an inefficient allocation of industry, where all firms are located in the small region can persist. We conclude that regional policies supporting the dissemination of technological spillovers are not socially desirable per se. For the case where all industry is agglomerated in the large region, strong localization economies will benefit residents of both regions. However, for the case where agglomeration occurs in the small region, strong intra-industry spillovers either detain or support to restore an efficient allocation of industry. =================================================================== Financing social security by consumption tax: a political economy perspective Hideki Konishi      Tokyo Institute of Technology, konishi@soc.titech.ac.jp      ,       ,       ,       ,    In some developed nations, e.g. Japan, France, Denmark, and Germany, consumption tax is increasingly becoming a popular way to fund social security expenditures, while wage-based taxes have been traditionally used. The paper analyzes how these taxes are combined for social security financing in a political arena of overlapping generations, placing a focus on their effects on inter- and intra-generational redistribution, and examines how population aging affects the political equilibrium. Employing the concept of structure-induced equilibrium invented by Shepsle (1979), the paper shows that a society with slow population growth is likely to have multiple equilibria with social security financed respectively by only wage tax, only consumption tax, and both, while a society with rapid population growth has a unique equilibrium with social security financed by only wage tax. =================================================================== Carpooling and Congestion Pricing: HOV and HOT Lanes Hideo Konishi      Boston College, hideo.konishi@bc.edu Se-il Mun      Kyoto University, mun@econ.kyoto-u.ac.jp      ,       ,       ,    It is often argued in the US that HOV (high occupancy vehicle) lanes are wasteful and should be converted to HOT (high occupancy vehicles and toll lanes). In this paper, we construct a simple model of commuters using a highway with multiple lanes, in which commuters are heterogenous in their carpool organization costs. We first analyze the first best allocation, and show that it can be decentralized by a simple congestion tax or by free HOV lanes together with regular lanes with a toll when the capacity of HOV lanes can be freely adjusted. Then, we assume inflexible capacities of HOV/HOT lanes and regular lanes, and analyze the second best allocation. The second best allocation can be achieved by HOV or HOT lanes, but a toll needs to be levied on regular lane users, too. Finally compare efficiency of HOV and HOT lane policies when no toll can be levied on regular lane users. We show that the result really depends on functional form and parameter values. In some case, converting HOV lanes to HOT lanes reduces every commuter''s utility. =================================================================== (Counter-)Punishment revisited Sebastian Kube      Max Planck Institute for Collective Goods, kube@coll.mpg.de Christoph Engel      Max Planck Institute for Research on Collective Goods, engel@coll.mpg.de      ,       ,       ,    While theoretical and empirical results demonstrate that the voluntary contribution of public goods frequently fails, a growing strand of literature points at possible mechanisms to mitigate this public-goods dilemma. A very prominent approach builds on decentralized punishment. Although punishing is costly to the individual and thus in this context constitutes a public good in itself, subjects regularly use the opportunity to punish non-cooperators – resulting (on average) in a strong increase of total contributions to the public goods over time. Yet, recent studies suggest that this self-government through altruistic punishment is jeopardized by anti-social punishment, especially when punished subjects are allowed on a subsequent stage to counter-punish those who previously punished them. In the present paper, we shed more light on this issue. The results from our replication question the generalizability of the previous results. They suggest that, as long as the initial contributions are sufficiently high, self-government is still possible in the presence of counter-punishment. We discuss possible reasons for our observation, and put forward the idea of probation as an alternative mechanism to foster cooperation while limiting the efficiency loss from punishment. =================================================================== New Technology, Human Capital, Total Factor Productivity and Growth Process for Developing Countries CUONG LE VAN      CNRS, University Paris 1, CES, levan@univ-paris1.fr      ,       ,       ,       ,    Abstract Solowian view on miracle growth rate in NIEs as a result of productivity growth whereas many others (e.g. Krugman [1997]) convince that broad capital accumulation is only true engine underlying NIEs'' growth. Krugman''s view is correct in the short and mid terms, however in the long term, TFP is the main engine of growth. We show that the optimal strategy for a developing country consists of accumulating physical capital first and there is no research activity. When the country reaches a certain level of development, which is endogenously determined in the model, the technological progress may be generated.Three critical factors: the amount of available human capital the relative price of technological capital and the initial income of the economy. =================================================================== The µ-value for bankruptcy problems Joosung Lee      Seoul National University , contigo@snu.ac.kr      ,       ,       ,       ,    We introduce a new solution for TU coalitional games, namely µ-value. Firstly, for n-person games, we define i-th agent''s expected payoff on k-person coalitions, m^k_i, as follows: for k=1, m^1_i = v({i}) and for 2=k=n, m^k_i = [1/{(n-1)Combination(k-1)}]·[?_{|T|=k & T?i}M^T_i]. Here M^T_i is defined as [m^{|T|-1}_i + 1/|T|·{v(T)-?_{j?T} m^{|T|-1}_j}], i.e. his expected payoff on (|T|-1)person coalition plus equal dividend from the remainder. Then we define the i-th agent''s µ-value outcome as m^n_i, the last term of his expected payoff sequence. Furthermore, we apply the solution to bankruptcy problems and inspect its properties. In a bankruptcy problem a number of agents advances claims on a certain estate in which the sum of claims is greater than or equal to the value of the estate. There are two most familiar approaches which associate a bankruptcy problem with a coalition game pessimistic and optimistic. With pessimistic approach, the µ-value allocates larger amount than Shapley value to the claimants with smaller claims, but smaller amount to those with larger claims. And with optimistic approach the result is just the opposite. However if we take the average approach its value function is defined as the average of values from the two approaches, the µ-value gives an interesting result: for two or three agents problems, it coincides with Shapley value. Unfortunately, this coincidence result does not hold with more than three agents. =================================================================== Bandwagon, underdog, and political competition Woojin Lee      University of Massachusetts at Amherst, woojin.lee@econs.umass.edu      ,       ,       ,       ,    The present paper studies the Hotelling-Downs and the Wittman-Roemer models of two-party competition when voter conformism is present and the policy space is uni-dimensional. We consider two types of voter conformism, bandwagon and underdog, and study their effects on political equilibrium of the two models. Even if voter conformism is present, the Hotelling-Downs parties propose an identical policy at the equilibrium, which is equal to the strict Condorcet winner. Thus voter conformism, both bandwagon and underdog, has no effect on the Hotelling-Downs political equilibrium. In the Wittman-Roemer model, the two parties propose differentiated equilibrium policies, and the extent of such policy differentiation depends on the degree of voter conformism. In general, the stronger the bandwagon effect is, the more differentiated the equilibrium policies are. The opposite holds when the underdog effect is present an increasing underdog effect mitigates the policy differentiation of the two parties, although the effect is not large. We also find multiple Wittman-Roemer equilibria when the bandwagon effect is sufficiently strong. =================================================================== Commodity Taxation in Welfare States Chul-In Lee      SungKyunKwan University, leeci@skku.edu      ,       ,       ,       ,    Abstract: Unemployment is a central policy issue in countries with a “generous” welfare system that is hard to reform. This paper addresses why these countries tend to adopt high commodity tax rates in the optimal taxation context. We explore the role of commodity taxation in alleviating moral hazard and hence involuntary unemployment and then provide empirical evidence using data from OECD countries. At the heart of this paper is a new dimension of distortion, the “between-states” (employment state vs. unemployment state) consumption choice distortion, which contrasts with the usual “within-state” distortion conditional on the full employment state. Our results offer an explanation for the widely observed coexistence of direct and indirect taxation as well as non-uniform taxation. =================================================================== Optimal Capital Taxation under Limited Commitment Junsang Lee      The Australian National University, junsang.lee@anu.edu.au Yili Chien      Purdue University, ychien@purdue.edu      ,       ,       ,    We study optimal capital taxation under limited commitment. We prove that the optimal tax rate on capital income should be positive in steady state provided that full risk-sharing is not feasible. In a limited commitment environment, a one unit increase of capital investment by an agent increases all individuals'' autarky values in the economy and generates externality costs in the economy. This externality cost provides a rationale for positive capital taxation even in the absence of government expenditure. Moreover, we show that both this externality cost of capital investment and the optimal tax rate are potentially much bigger than one might expect. =================================================================== A New Way of Lifetime Income Taxation: Lifetime Income Tax Credit Young Lee      Hanyang University, younglee@hanyang.ac.kr Young Jun Chun      Hanyang University, yjchun@hanyang.ac.kr      ,       ,       ,    We propose a tax reform to alter the current annual-income-based tax system to lifetime-income-based one, and present simulation results on the effects of the proposed tax reform on tax compliance, labor supply, inter-vivo transfer, and welfare. Our tax reform proposal consists of two elements. First, we propose to provide tax credit of the amount of taxpayers'' lifetime income tax payments (hereafter, LITC) when they compute their estate/gift taxes. Allowing lifetime income tax credit makes lifetime tax burden to be more in line with the lifetime income. Second, we propose to provide averaging of taxable income over time. Averaging lowers fluctuation of after-tax income and the average of marginal tax rates. The proposed tax reform improves the horizontal equity and enhances tax compliance. Furthermore, they lower the average marginal tax rates, generating significant efficiency gains. We examine the effects of LITC (but not of averaging) using a general equilibrium overlapping generational model. Simulation results show that tax compliance increases considerably and that the average level and the variance of income tax rates decrease, leading to a smaller excess burden, a larger consumption, and a large welfare gain. As expected, LITC changes the form of inter-vivo transfer toward less investment in human capital, but the magnitude of the impact is not large. We discuss transitional issues, impact of LITC on asset portfolio, and ways to adjust for inflation. =================================================================== Differential Mortality, Moral Hazard and Optimal Taxation Marie-Louise Leroux      CORE-UCL, marie-louise.leroux@uclouvain.be      ,       ,       ,       ,    This paper studies the normative problem of redistribution between individuals who can influence their longevity through a non monetary effort but who have different taste for effort. As benchmarks, we first present the laissez-faire and the first best. In the first best, the level of effort is always lower than in the laissez-faire since the social planner takes into account the impact of higher effort on survival and thus on the price of annuities. However, if effort is assumed to be private and non monetary (like doing sport), it is reasonable to think that the social planner has no control on it. Thus, we modify our framework and assume for the rest of the paper that effort is determined by the individual while the social planner only allocates consumptions. Under full information and moral hazard constraints, early consumption is preferred to future consumption and the high survival individual obtains higher future consumption. Under asymmetric information, the distortion is equal to the first best one for the low survival individual while the trade-off between two-period consumptions is distorted upward for the high survival individual as a way to solve the incentive problem. We finally show how to decentralize first best and second best allocations through a perfect annuity market and taxes on annuities. =================================================================== Interregional Redistribution and Regional Disparities: How Equalization Does (Not) Work Christian Lessmann      TU Dresden, christian.lessmann@tu-dresden.de Anke S. Kessler      CEPR, CIFAR, Simon Fraser University, akessler@sfu.ca      ,       ,       ,    Do inter-governmental transfers such as equalization grants reduce interregional disparities? This paper studies both theoretically and empirically the impact of interregional redistribution on interregional inequality. We set up a model with residential choice and equalization grants between regions, and show that interregional transfer payments prevent convergence promoting migration. We test our model in using cross-country data and panel data for 23 highly developed OECD countries from 1982 to 2000. The evidence supports our theoretical model suggesting a positive relationship between interregional transfers and regional disparities both across countries and over time. =================================================================== Undertable negotiation Duozhe Li      Chinese University of Hong Kong, duozheli@cuhk.edu.hk      ,       ,       ,       ,    We study a multilateral bargaining game with imperfect information. Players take turns to make offers. Each responder observes only the offer to him, and his response to the offer is also made privately. Agreement is reached if all offers are accepted. Otherwise, the game proceeds to next period, in which another player is called upon to make offers. Previous offers and responses are never revealed, thus they never become common knowledge among players. With a plausible restriction on players'' beliefs, we obtain a unique public perfect equilibrium. The uniqueness result remains valid even if we take private strategies into consideration. The bargaining procedure is robust to collusions among any subgroup of players. =================================================================== "Spatial Agglomeration with Vertical Differentiation" Wen-Jung Liang      Tamkang University, wjliang@mail.tku.edu.tw Ching-Chih Tseng      Tamkang University, 893510023@s93.tku.edu.tw Kuang-Cheng Andy Wang      Chang Guang University, andykcwang@giga.net.tw      ,       ,    This paper constructs a model using a two-dimensional framework to take account of both horizontal and vertical differentiation. To examine firms'' location configuration, the paper employs a two-stage game, in which firms first simultaneously decide optimal locations and then play Bertrand price competition with three pricing policies taking the degree of vertical differentiation as given. It is shown that the higher the degree of vertical differentiation, the weaker the centrifugal competition effect will be. The Principle of Minimum Differentiation can attain if firms engage in discriminatory pricing. However, the Principle of Maximum Differentiation will never emerge. In addition, firms locate at the market center as long as the degree of vertical differentiation is greater than zero in both cases where firms adopt uniform delivered and mill pricing schemes. =================================================================== Crowding out of private-sector work by workfare - An optimal tax analysis Tim Lohse      Leibniz University Hannover, Lohse@fiwi.uni-hannover.de      ,       ,       ,       ,    A usual objection against work obligations in return for transfer payments is that they can crowd out private-sector work. The present paper argues that this crowding out can indeed happen, but that it is second-best. A discrete version of the standard Mirrlees (1971) model is analyzed. The workfare productivity emerges to be the crucial determinant. We find two individual thresholds of workfare productivity. For any work obligation that exhibits a productivity beyond the first threshold the respective type should be on workfare. Moreover, if workfare productivity exceeds a second threshold then the type should not be regularly employed anymore. It turns out that these two thresholds are in fact the same. The crowding out occurs entirely in the sense that workfare and private-sector employment are mutually exclusive. The welfare increase is due to the fact that workfare provides an additional instrument besides the distortion of the individual labor-leisure decision. Workfare enhances redistribution and lowers the extent of distortionary taxation. =================================================================== Optimal Board Structure in the Presence of a Large Shareholder Annalisa Luporini      University of Florence, luporini@unifi.it Clara Graziano      University of Udine, clara.graziano@dse.uniud.it      ,       ,       ,    The paper analyzes the optimal structure of the board of directors in a firm with a large shareholder sitting on the board. It focuses on the choice between a one-tier and a two-tier structure. In a one-tier structure the sole board performs all tasks, while in a two-tier structure the management board is in charge of project selection and the supervisory board is in charge of monitoring. We consider the case in which the large shareholder sits on (and controls) the supervisory board but not on the management board. Thus in the dual board structure the large shareholder retains the monitoring task and the firing decision while she delegates project choice to the management board. We show that such a two-tier structure can limit the interference of the large shareholder and can restore manager''s incentive to exert effort to become informed on new investment projects without reducing the large shareholder''s incentive to monitor the manager. This results in higher expected profits. If the difference in profits is high enough, the large shareholder prefers a two-tier board even if this implies that the manager selects his own preferred project. The analysis refers to private corporations but it also applies to State participated firms where the problem can be that of limiting political interference. =================================================================== Lobbying of Multinational Corporations Alexander Mahle      Ludwig-Maximilians-University Munich, alexander.mahle@lrz.uni-muenchen.de Marco Runkel      Ludwig-Maximilians-University Munich, marco.runkel@lrz.uni-muenchen.de      ,       ,       ,    Multinational Corporations (MC) facing different national corporate income tax (CIT) rates still have the opportunity to exploit tax differentials by profit-shifting via intrafirm transactions. This gives governemnts an incentive to strategically reduce their tax rates to attract this mobile tax base. But MC might also have the possibility to influence CIT policies more directly. Based on the menu auction approch, originally developed by Bernheim and Whinston (1986) and a in this regard very influental application by Grossman and Helpman (1994), we set up a simple model of political influence of MCs on national CIT policies via an international special interest group. In such a setting, governments become more aware of the private income loss on part of the organized lobby members in the operating countries, leading to a further decrease in equilibrium tax rates. Running a comparative static analysis on tax differentials, we further find that a higher degree of lobby organization in one country results in a larger reduction in the intitially lower tax rate, therefore possibly increasing the profit-shifting into the other country. As profit shifting and lobbying can be seen as two operating channels of tax avoiding strategies from the MC perspective, we finally look at the equilibrium contributions to examine their connection. As it turns out, restricting profit-shifting opportunities might at least partially be offset by strengthened political pressure. =================================================================== Living in a jungle or together and in peace? Dario Maimone Ansaldo Patti Dr     University of Messina and University of Essex, dmaimone@unime.it Giuseppe Sobbrio Prof.     University of Messina, sobbriog@unime.it      ,       ,       ,    The existing literature on conflicts extensively argues that countries may find a peaceful settlement, in which they renounce fighting. In this paper we try to formalize a model, in which countries focus on a different and more attractive solution for their disputes. More specifically, we analyze the possibility that they merge, creating a new entity, instead of simply renouncing fighting. We stress the welfare implications of this choice, as well as the fact that the merging process is not necessarely unchangeable, but it can collpase depending on the parameters of the model. Beyond the literature on conflicts, this paper can also be linked to the one on countries secession/unification. =================================================================== Capital tax competition revisited Miltos Makris      University of Leicester, mm288@le.ac.uk      ,       ,       ,       ,    We re-visit the view that non-cooperative capital taxes and hence provision of local public goods may be inefficiently too low when capital is mobile across tax jurisdictions. We emphasise that taxes affect also capital stocks and tax revenues in other jurisdictions across time. These intertemporal externalities may lead, ceteris paribus, to too high regional capital taxes, and even dominate the contemporaneous effects of tax competition that have been the focus of the received literature. These neglected intertemporal externalities arise from the effects of taxes on the private income from interregionally immobile production factors, and thereby on the aggregate net supply of capital over time, for any given net interest rates. =================================================================== Ability tracking, location choices and the peer group effect Francisco Martinez Mora      University of Leicester, fmm14@le.ac.uk Gianni De Fraja      University of Leicester, defraja@le.ac.uk      ,       ,       ,    Ability grouping is one of the most controversial education policy proposals. One of the main critics these policies receive is that poor students are disproportionately represented in low tracks and thus that tracking policies are regressive. In this paper, we extend the analysis of ability tracking policies in compulsory education to a setting where households may apply to different schools. We provide a theoretical analysis of the impact different types of tracking policies have on the level of income segregation across public schools. Ability tracking alters the incentives of househods: an equilibrium with a "sufficient" amount of tracking will be characterised by a greater level of ability sorting and lower income segregation. We also study their impact on the distribution of educational benefits across students with different ability and income. We show that these policies may be equity enhancing in the sense that they promote income desegregation across schools. The reason is that poor schools are able to attract more high and medium ability students. High and medium ability students benefit from these policy reforms. Low track students are usually, but not always, made worse-off, which would require providing them with additional educational resources. Finally, if information externalities are important for university attendance, we show that ability tracking may indeed promote greater university attendance by students from low income households. =================================================================== Nominal Tales of (for) Real Economies: Taste for Inflation, Trade Money, Collaterals and Reserve Requirement Ana Paula Martins      UNiversidade Católica Portuguesa, apm@fcee.ucp.pt      ,       ,       ,       ,    This research explores the real effects of the monetization of a stylized one-sector capital growth model driven by rational representative agents. The capital state equation encompasses a finance constraint, a conversion mechanism, and official reserves an inventory state equation is additionally introduced. Generalizations assuming taste for nominal growth at the utility level were staged and nominal MIU was also tested, as felicity functions combining real as nominal consumption as arguments. The analysis relies on a discrete methodology. Contrast with a high-powered money supply multiplier mechanism is also briefly outlined. Time interval between transactions, the money rotation period, is endogenised. =================================================================== Manipulations in Elections with Uncertain Beliefs Andrew McLennan      University of Queensland, mclennan@socsci.umn.edu      ,       ,       ,       ,    A decision scheme as defined by Gibbard (1977) is a function mapping profiles of strict preferences over a set of social alternatives to lotteries over the social alternatives. Motivated by conditions typically prevailing in elections with many voters, we say that a decision scheme is _weakly strategy-proof_ if it is never possible for a voter to increase expected utility (for some vNM utility function consistent with her true preferences) by misrepresenting her preferences when her belief about the preferences of other voters is generated by a model in which the other voters are i.i.d. draws from a distribution over possible preferences. We show that if there are at least three alternatives, a decision scheme is necessarily a random dictatorship if it is weakly strategy-proof, never assigns positive probability to Pareto dominated alternatives, and is anonymous in the sense of being unaffected by permutations of the components of the profile. This result is established in two settings: a) a model with a fixed set of voters b) the Poisson voting model of Myerson. =================================================================== Cooperation, punishment and networks Miguel A Melendez-Jimenez      Universidad de Malaga, melendez@uma.es Enrique Fatas      Universidad de Valencia and LINEEX, Enrique.Fatas@uv.es Hector Solaz      Universidad de Valencia and LINEEX, hector.solaz@uv.es      ,       ,    In this paper we design an experiment to study how the network structure of a group affects the individual behavior in a team-work environment. Groups of agents repeatedly play a standard linear public good game in the lab and a network determines which members of the group each agent is able to observe. We consider four stylized networks: the complete network, the star, the line and the circle. For each network, we analyze two scenarios: without and with punishment opportunities (à la Fehr and Gächter, 2000), being the punishment opportunities also determined by the network. We compare the contribution and efficiency levels across networks, and study, for each case, the effects of allowing for punishment opportunities. =================================================================== Asymmetric Strategies in Symmetric Tullock Contests Flavio M Menezes      University of Queensland, f.menezes@uq.edu.au John Quiggin      University of Queensland, j.quiggin@uq.edu.au      ,       ,       ,    In this paper we show that, for an appropriately chosen strategy space, the equilibrium outcome of a Tullock contest with a symmetric success function is characterized by a single player winning with probability one. This equilibrium outcome fits the stylized fact that there are many uncontested elections and undefended court actions. =================================================================== INTERGENERATIONAL EQUITY AND THE DISCOUNT RATE FOR COST-BENEFIT ANALYSIS Jean-Francois Mertens      CORE Louvain la Neuve, Jean-Francois.Mertens@uclouvain.be      ,       ,       ,       ,    Intergenerations equity and the discount rate for cost-benefit analysis concerns a major problem facing society how to trade off current consumption for the well being of future generations. This paper proposes a new approach. =================================================================== otten Parents and Disciplined Children: A Politico-Economic Theory of Public Expenditure and Debt Zheng Michael      Fudan University, zsong@fudan.edu.cn      ,       ,       ,       ,    This paper proposes a dynamic politico-economic theory of debt, government finance and expenditure. Agents have preferences over a private and a government-provided public good, financed through labor taxation. Subsequent generations of voters choose taxation, government expenditure and debt accumulation through repeated elections. Debt introduces a conflict of interest between young and old voters: the young want more fiscal discipline as they are concerned with the ability of future governments to provide public goods. We characterize the Markov Perfect Equilibrium of the dynamic voting game. If taxes do not distort labor supply, the economy progressively depletes its resources through debt accumulation, leaving future generations "enslaved". However, if tax distortions are sufficiently large, the economy converges to a stationary debt level which is bounded away from the endogenous debt limit. We extend the analysis to redistributive policies and political shocks. Consistent with the empirical evidence, our theory predicts government debt to be mean reverting and debt growth to be larger under right-wing than under left-wing governments. =================================================================== Progressive taxation, wealth distribution, and macroeconomic stability Kazuo Mino      Osaka University, mino@econ.osaka-u.ac.jp Yasuhiro Nakamoto      Osaka University, ege006ny@mail2.econ.osaka-u.ac.jp      ,       ,       ,    Using a standard neoclassical growth model with two types of agents, we examine how the presence of heterogenous agents affects the stabilization role of progressive income taxation. We first show that if the marginal tax payment of each agent increases with her relative income, the steady state satisfies local saddlepoint stability so that the equilibrium is determinate. However, unlike the representative agent models with progressive taxation, our model with heterogeneous agents may have the possibility of equilibrium indeterminacy. The indeterminacy conditions depend not only on the property of tax functions but also on production and preference structures. =================================================================== Optimal taxation of saving and inheritance James Mirrlees      Cambridge University, jam28@cam.ac.uk      ,       ,       ,       ,    TBA =================================================================== Optimal auction with a general distribution: virtual valuation without densities Paulo K. Monteiro      EPGE, Fundação Getulio Vargas, Brazil, pklm@fgv.br Benar Fux Svaiter      IMPA, benar@impa.br      ,       ,       ,    We characterize the optimal auction in an independent private values framework for a completely general distribution of valuations. To do this we introduce a new concept: the generalized convex hull. The `derivative'' of the generalized convex hull with respect to the distribution of types is the generalized virtual valuation. =================================================================== Spatial Equilibria in a Social Interaction Model Pascal Mossay      University of Reading, p.mossay@reading.ac.uk      ,       ,       ,       ,    Social interactions are at the essence of societies and explain the gathering of individuals in villages, agglomerations, or cities. We study the emergence of multiple agglomerations as resulting from the interplay between spatial interaction externalities and competition in the land market. As opposed to Beckmann''s original framework (1976), agents get dispersed across several cities distributed along a circle. Spatial equilibrium configurations involve a high degree of spatial symmetry, in terms of city size and location, and can be Pareto-ranked. =================================================================== Economic Integration and the Taxation of Multinationals: Separate Accounting vs. Formula Apportionment Olaf Muenster      University of Passau, Germany, olaf.muenster@uni-passau.de      ,       ,       ,       ,    Multinational Enterprises (MNE) are a distinctive characteristic of the globalized economy. Though not all, many multinational firms are big corporations, able to excise substantial market power. Since they are spread over a range of different countries they can circumvent national policies and regulations by shifting activities between their subsidiaries. This footloose character of multinational firms s the fear, that fiscal autonomy of countries can be undermined by shifting profits from high- to low-tax jurisdictions, using transfer pricing. The present paper analyzes the effects of economic integration on the use of transfer pricing under the two different taxation schemes of separate accounting (in which profits are taxed in the region where the subsidiary is located) and formula apportionment (in which all profits of a multinational firm will be lumped together and taxed with an average tax rate that is made of several apportionment factors, reflecting the economic activity of the MNE in various regions). It uses a model of oligopolistic competition in a market with spatial product differentiation. In lowering the traveling costs of consumers, necessary to reach the seller (i.e. modeling a closer integration of the economy), we find that in a more integrated economy the transfer price reacts more sensitive to relative tax rate variations in a formula apportionment setting than in the separate accounting scenario. =================================================================== Pricing and investment of cross-border transport infrastructure Se-il Mun      Kyoto University, mun@econ.kyoto-u.ac.jp      ,       ,       ,       ,    This paper deals with issues related to the provision of cross-border transport infrastructure between two neighboring countries. We develop a simple two-country model of international trade where the transportation cost between two countries depends on capacity and price (e.g., road toll, rail fare) of infrastructure. The government of each country chooses capacity and price of infrastructure within its territory so as to maximize the welfare of its citizen. We first evaluate two regimes, with and without pricing, in terms of the efficiency in provision of the infrastructure, welfare of the two countries, and global welfare of two-country economy as a whole. We further examine the alternative system of providing cross-border transport infrastructure, such as provision by a single private firm with regulation. =================================================================== Externalities, Fundamental Nonconvexities, and Implications for Decentralization Sushama M Murty      University of Warwick, s.murty@warwick.ac.uk      ,       ,       ,       ,    In this paper we distinguish between producible and nonproducible public goods and proposes a general equilibrium model with externalities that distinguishes between and encompasses both the Starrett and Boyd and Conley type external effects. We show that while nonconvexities remain fundamental whenever the Starrett type external effects are present, these are not caused by the type discussed in Boyd and Conley. On the basis of their disposability (costly or costless) properties, the paper also distinguishes between by-product and joint-product producible public goods and shows that there is market failure in the case of both beneficial and detrimental by-product externalities. Finally, we find that the notion of a “public competitive equilibrium” for public goods found in Foley [1967, 1970] provides a partially decentralized mechanism, based on price signals and a unanimity criterion, for economies with externalities and nonconvexities, for which both welfare theorems are true. =================================================================== Nonlinear consumption taxation in models of lifetime risk Gareth D Myles      University of Exeter and Institute for Fiscal Studies, gdmyles@ex.ac.uk Richard Blundell      Univerity College, London and Institute for Fiscal Studies, blundell.richard@googlemail.com Nigar Hashimzade      University of Exeter, n.hashimzade@ex.ac.uk      ,       ,    We employ a model of lifetime risk in which income follows a multiplicative random process to investigate the efficiency properties of a nonlinear consumption tax. Linear consumption taxes are often proposed on efficiency grounds since they do not distort intertemporal choices, but a nonlinear tax can deliver greater equity. This suggests investigating whether nonlinear consumption taxes can combine the efficiency benefit with increased equity. The model of lifetime risk provides income and consumption patterns that match empirical observations without the need to invoke capital market imperfections. This is important since a central observation of the paper is that a nonlinear consumption tax imposes an implicit tax upon interest income whenever the consumption profile is rising (or falling) over time. The paper argues that the distortions introduced by the implicit tax align with those implied by optimal age-related income taxation (and a number of other exceptions to the Atkinson-Stiglitz theorem). A nonlinear consumption tax is therefore a method of implementing a tax structure that is more complex than than can be achieved by a standard nonlinear income tax. =================================================================== The optimal coalition structure for patent pool games with externality Sunha Myong      Seoul National University, shmyong@gmail.com      ,       ,       ,       ,    We consider a situation in which several firms form a patent pool to reduce marginal cost together in the Cournot market. Once the patent which represents the technological progress has been achieved there would be a cooperation among patent holders for sharing positive externality. We derive the Nash equilibrium production level in the partition function game, and obtain the optimal size of patent pool to maximize each member`s allocation under the pessimistic expectation. Finally, we apply Myerson value(1977) to share the coalition surplus, and then examine the core stability. =================================================================== Economic Policy Evaluation and Distributive Justice Nadeem Naqvi      American University in Bulgaria, nnaqvi@aubg.bg      ,       ,       ,       ,    This paper is an attempt at dusting down the existing theory of economic policy (1) to ascertain what presumptions underlie it, (2) to conduct a thorough examination of the both (i) descriptive and (ii) normative assumptions, and of some (iii) informational-invariance restrictions upon which the existing theory of public policy evaluation rests, (3) to isolate the extreme narrowness of the existing approach that jettisons available and credible information material to policy evaluation, and (4) to provide an alternative approach to public policy evaluation. This alternative policy evaluation method proposed here is both (a) based on sound theoretical foundations – axiomatically derivable, and (b) provides an operationally implementable calculation procedure for comparison of public policies on the basis of a greater extent of realization of Collective Human Wellbeing that is sensitive to distributional considerations. =================================================================== With Exhaustible Resources, Can A Developing Country Escape From The Poverty Trap? TU-ANH NGUYEN      University Paris 1, CNRS, nguyen.heraclex@gmail.com CUONG LE VAN      University Paris 1, CNRS, PSE, levan@univ-paris1.fr KATHELINE SCHUBERT      University Paris 1, CNRS, PSE, schubert@univ-paris1.fr      ,       ,    This paper studies the optimal growth of a developing non-renewable natural resource producer, which extracts the resource from its soil, and produces a single consumption good with man-made capital. It sells the extracted resource abroad and use the revenues to buy an imported good, which is a perfect substitute of the domestic consumption good. The domestic technology is convex-concave, so that the economy may be locked into a poverty trap. We show that the extent to which the country will optimally escape from the poverty trap and the exhaustible resource will be a blessing depends on the characteristics of its technology and of the revenues from the resource function, on its impatience, on the level of its initial stock of capital, and on the abundance of the natural resource. We also show that any optimal path may be decentralized in a competitive equilibrium by using a tax/subsidy scheme for firms. =================================================================== Transitional dynamics in a growth model with renewable and nonrenewable resources Manh-Hung Nguyen      Thema, Cergy Pontoise University, mnguyen@u-cergy.fr Phu Nguyen Van      Thema, Cergy-Pontoise University, Phu.Nguyen-Van@u-cergy.fr      ,       ,       ,    We provide a growth model with renewable and non-renewable resources where technological change is endogenized. We present a rigorous analysis of the existence and the characteristics of the optimal balanced growth path. Not only analyze the steady-state solution, we also characterize the transitional dynamics of the model and show that, under condition for the positiveness of consumption and knowledge accumulation, the balanced growth path has a saddle point of stability. Moreover, we prove the existence of optimal solution of the social planner problem which is often assumed for the simplicity in the many papers in the literature. Finally, we use the data from OECD countries to perform an empirical test based on the transitional equations of the model. =================================================================== Investment subsidies in vintage capital models with energy-saving technology Phu Nguyen Van      Thema, Cergy-Pontoise University, Phu.Nguyen-Van@u-cergy.fr Raouf Boucekkine      CORE, UCL, boucekkine@core.ucl.ac.be Theophile Azomahou      Universite Louis Pasteur, Strasbourg, azomahou@cournot.u-strasbg.fr      ,       ,    We develop a general equilibrium vintage capital model with embodied energy-saving technological progress to study the impacts of investment subsidies on the economy. Energy and capital are assumed to be complementary in the production process. New machines are more productive and less energy consuming than other machines. Technological progress is exogenous while the scrapping mechanism is endogenous and optimal at a finite date. Moreover, the energy sector is explicitly considered, either a a natural monopoly or a competitive firm. We show that the market structure of the energy sector does matter as to the efficiency of investment subsidies. =================================================================== Toward an Efficiency Rationale for the Public Provision of Private Goods Peter Noman      UNC Chapel Hill, normanp@email.unc.edu Hanming Fang      Duke, hanming.fang@duke.edu      ,       ,       ,    This paper shows that public provision of private goods may be justified on pure efficiency grounds in an environment where individuals consume both public and private goods. The government''s involvement in the provision of private goods provides it with information about individuals'' private good purchases that facilitates more efficient revenue extraction for the provision of public goods. We show that public provision of the private good improves economic efficiency under a condition that is always fulfilled under stochastic independence and satisfied for an open set of joint distributions. Our model is an example where there is an efficiency loss from separating revenue and expenditure problems, and is therefore of more general interest for the study of optimal taxation. =================================================================== Equalization transfers, fiscal decentralization, and economic growth Hikaru Ogawa      School of Economics, Nagoya University, ogawa@soec.nagoya-u.ac.jp Sayaka Yakita      Graduate School of Economics, Nagoya University, saya_saya0730@hotmail.com      ,       ,       ,    This paper analyses the fiscal decentralization and equalization transfers in a two-region model of endogenous growth. In our model, two levels of government with different objectives are considered, the local governments maximize the utility of the residents of the region, and the central government makes the equalization transfers to close the gaps in fiscal capacity among the regions and pays attention to the economic growth rate. Our first result demonstrates that the preferred tax rate chosen by the local government is positively affected by the magnitude of fiscal decentralization. The second result shows that the fiscal equalization policies of the central government have no influence on the speed of interregional growth-convergence. Furthermore, the normative implication is obtained from our final results that there exists an optimal degree of fiscal decentralization to reach the central governments goal of growth maximization, but the magnitude of fiscal decentralization chosen by the central government is excessive to entail the highest regional welfare. =================================================================== Rethinking the informal labour from an evolutionary point of view Bilge Ozturk      Galatasaray University, bozturk@gsu.edu.tr Renginar Dayangac      Galatasaray University, renginnar@gmail.com      ,       ,       ,    The model presents the dynamics and the equilibrium of an overlapping generation economy when there is informal employment, a pension system and altruistic agents. The model inspires from stylised facts on developping and Euro-Mediteranean countries where family plays a central role in risk insurance. The rational is emphasised by lower costs compared to private and public insurance systems. Given an initial distribution of the informally employed individuals, the model captures the effects of social security decisions and anticipated bequests on the choice of the agents about accessing formal or informal labor market segments. The impact of fiscal policies on this distribution is analysed when opportunist politicians are considered. The opportunist behaviour would amplify the relative size of the informal employment. =================================================================== A theory of free-rider anonymity Amrish Patel      University of Kent, ap291@kent.ac.uk      ,       ,       ,       ,    Fundraising organisations typically report the contributor identity and donation amount for only those who make positive contributions rather than for all solicited individuals. This leads to uncertainty over who has been asked to contribute. In this paper, we use a public goods game where individuals care about their relative contribution, to compare behaviour under the two different reporting mechanisms. We find reporting all contributions is more successful in raising funds than reporting only nonzero contributions. If only nonzero contributions are publicised, individuals have a greater incentive to free-ride as they can claim they were not asked to contribute, thereby avoiding the shame and reputation costs from non-contribution. As more individuals free-ride, others face less competitive pressure to achieve a given relative contribution level, thus non-free-riders also reduce contributions. =================================================================== Economic Geography with Multiple Manufacturing sectors: A synthesis of the FC and the FE Model Shin-Kun Peng      Institute of Economics, Academia Sinica, speng@econ.sinica.edu.tw Ching-mu Chen      National Taiwan University, d94228003@ntu.edu.tw      ,       ,       ,    This paper synthesizes a modified model to incorporate both footloose capital and footloose entrepreneur manufacturing industries in the economy. It shows that the footloose capital and the footloose entrepreneur manufacturing industries will interact each other and yield more fruitful and realistic spatial distributions, and also it yields two different kinds of pitchfork bifurcation in the footloose entrepreneur manufacturing sector, ‘subcritical'' and ‘supercritical'', and the determination of the bifurcation is depending on an interesting exogenous parameters. More importantly, it features the emergence of partial agglomerations of both industries, and yields five types of equilibrium configuration which is depending on the form of bifurcation, the break point, and the sustain point of various trade freeness on both sectors. It is also shown that the alternative configuration is determined by the exogenous parameters associated with the consumer expenditure share as well as the elasticities of substitution within these two manufacturing sectors, and accordingly the emergence of the different bifurcation represents the different evolutionary trajectories of equilibrium configurations. This finding of the bifurcation switching is absent in the conventional literature of new economy geography, in which only one mobile production factor is incorporated in the one or two IRS manufacturing industry. =================================================================== Manipulating an ordering Ashley Piggins      National University of Ireland, Galway, ashley.piggins@nuigalway.ie      ,       ,       ,       ,    It is well known that many social decision procedures are manipulable through strategic behavior. Typically, the decision procedures considered in the literature are social choice correspondences. In this paper we investigate the problem of constructing a social welfare function that is non-manipulable. In this context, individuals attempt to manipulate a social ordering as opposed to a social choice. Using techniques from an ordinal version of fuzzy set theory, we introduce a class of ordinally fuzzy binary relations of which exact binary relations are a special case. Operating within this family enables us to prove an impossibility theorem. This theorem states that all non-manipulable social welfare functions are dictatorial, provided that they are not constant. This theorem generalizes the one in Perote-Peña and Piggins [Perote-Peña, J., Piggins, A., 2007. Strategy-proof fuzzy aggregation rules. J. Math. Econ. vol 43, p564-p580]. =================================================================== A Committee and a Puzzle of Costs and Benefits Athanassios Pitsoulis      Brandenburg University of Technology, pitsouli@tu-cottbus.de      ,       ,       ,       ,    We explore a common knowledge puzzle applied to a deliberative assembly where factions have heterogeneous preferences and private information regarding the true state of the world. It is shown that the members do not need to communicate directly but can infer the true state of the world from a vote on whether everybody shall disclose their private information. Commitment to disclosure serves as a signal regarding knowledge and makes direct communication unnecessary. =================================================================== Piracy, Entry Deterrence and Intellectual Property Rights (IPR) Protection Sougata Poddar      National University of Singapore and Hanyang University , ecssp@nus.edu.sg      ,       ,       ,       ,    In this paper, we address the issue of piracy or illegal copying or counterfeiting of the original product and Intellectual Property Right (IPR) protections. The original product developer makes costly investment to deter piracy in given a regime of IPR protection. In this environment, we first characterize completely the entry deterrence and entry accommodation equilibrium in the presence of a commercial pirate. We find that it is profitable for the original producer to accommodate the pirate when there is weak IPR protection, while deterring is profitable when the IPR protection is strong. However, we find there is a non-monotonic relationship between the optimal level of deterrence (chosen by the original producer) and the degree of IPR protection in the economy. The relationship between the rate of piracy and IPR protection is found to be monotonically decreasing whereas the relationship between the rate of piracy and the quality of the pirated product turns out to be non-monotonic. In our welfare analysis, we find that the total welfare of the society decreases as the degree of IPR protection increases. =================================================================== Longevity, health spending and the variance of lifetime welfare Gregory Ponthiere      FNRS, CREPP, University of Liege, G.Ponthiere@ulg.ac.be Marie-Louise Leroux      CORE, Catholic University of Louvain, Marie-Louise.Leroux@uclouvain.be      ,       ,       ,    This paper studies the normative problem of redistribution between agents who can influence their probability of survival through private health expenditures, but who differ on their attitude towards the degree of risk involved in the lotteries of life to be chosen. For that purpose, we develop a simple two-period model where agents''s preferences over lotteries of life can be represented by a mean and variance utility function allowing, unlike the expected utility form, a sensitivity of decision-makers to what Allais (1953) calls the ‘dispersion of psychological values''. In the present context of risky length of life, the mean and variance utility function has the virtue to allow some degree of risk-aversion with respect to the length of life. It is shown that if agents tend to ignore the impact of their health expenditures on the return of their savings, the decentralization of the first-best optimum requires not only intergroup lump sum transfers, but, also, group-specific taxes on private health expenditures. Under asymmetric information on individual sensitivities to the variance in welfare, we find that, in addition to existing taxes on health expenditures, a tax on annuity for the high-type individual is a way to make the problem incentive compatible. =================================================================== Strategic quality competition and the Porter hypothesis Nicolás Porteiro      Universidad Pablo de Olavide, nporteiro@upo.es Paula González      Universidad Pablo de Olavide, pgonzalez@upo.es Francisco J. André      Universidad Pablo de Olavide, andre@upo.es      ,       ,    Conventional economic thinking suggests that introducing more stringent environmental regulations always implies some private costs, since it displaces firms from their first-best and forces them into a more compromised position. Porter (1990) challenged this view, claiming that environmental regulations can encourage companies to innovate and generate long-term gains that can partly or fully offset the costs of complying with them. This claim is now widely known as the Porter Hypothesis. Almost all of the theoretical contributions to the Porter Hypothesis have tended to focus exclusively on the supply side of the market. By contrast, in this paper, we report an additional reason why a Porter-type result may emerge, that stems from consumer preferences (the demand-side of the market). We use a duopoly model of vertical product differentiation in which two firms simultaneously choose to produce either an environmentally friendly or standard variant of a good, before engaging in price competition. In this simple setting, we show that a Nash equilibrium of the game featuring the low quality good can be Pareto dominated by a different strategy profile, in which both firms opt in favour of the "green" product. Our analysis demonstrates that, in such a case, both firms stand to profit from the introduction of a rule penalizing any firm refusing to produce the environmentally friendly product. We also find that consumers themselves may benefit from such regulations. =================================================================== Emissions Trading and Profit Neutral Grandfathering John Quah      Oxford University, john.quah@economics.ox.ac.uk Cameron Hepburn      Oxford University, cameron.hepburn@economics.ox.ac.uk Robert Ritz      Oxford University, robert.ritz@economics.ox.ac.uk      ,       ,    This paper examines the amount of grandfathering needed for an emissions trading scheme (ETS) to have a neutral impact on firm profits. We provide a simple formula to calculate profit-neutral grandfathering in a Cournot model with firms of different sizes and a general demand function. Using this formula, we obtain estimates of profit-neutral grandfathering for the electricity, cement, newsprint and steel industries. Under the current EU ETS, firms obtain close to full grandfathering we show that while this may still leave some firms worse off, others have probably benefitted substantially. We find no evidence that any industry as a whole could be worse off with full grandfathering. We also show that the common presumption that a higher rate of cost pass-through lowers profit-neutral grandfathering is unreliable. =================================================================== Strategic Consolidation under Formula Apportionment Nadine Riedel      University of Munich, nadine.riedel@lrz.uni-muenchen.de Thiess Büttner      ifo Institute, buettner@ifo.de Marco Runkel      University of Munich, marco.runkel@lrz.uni-muenchen.de      ,       ,    We provide empirical evidence that multi-jurisdictional enterprises (MJE) strategically exclude affiliates from the basis of consolidation under a formula apportionment (FA) regime. Our testing ground is the German local business tax that is raised at the municipality level and applies FA regulations. Using unique data for the whole population of German firms and exploiting an exogeneous variation in the German business tax law, we show that MJEs tend to exclude affiliates from the basis of consolidation if their intra-group tax rate distribution implies large gains from profit shifting activities under non-consolidation. Our analysis therefore suggests that the advantages of FA will be limited if the consolidation base is subject to manipulations. =================================================================== The Private Provision of Public Inputs Julio R. Robledo      University of Nottingham, julio.robledo@nottingham.ac.uk      ,       ,       ,       ,    We extend the private provision game to public inputs like knowledge, information and innovation, which are non-rival in its effects and are not final consumption goods but intermediate factors. The literature on public inputs is reviewed and the individual payoff maximizing input choice is compared to the socially optimal level. We present the private provision game for linear and for best-shot contribution technology, since the latter approach may be better suited to model public inputs. The results from the model are then contrasted with the traditional view of intellectual property protection as an incentive mechanism for innovation effort. =================================================================== Good and Bad Consistency in Regulatory Decisions Christian Roessler      University of Queensland, c.roessler@uq.edu.au Flavio M Menezes      University of Queensland, f.menezes@uq.edu.au      ,       ,       ,    We consider three scenarios that may lead to similar (“consistent”) policies by regulators who face similar decision problems. (1) Information updating when the decisions are taken sequentially. (2) Public sector career incentives that reward conflict avoidance. (3) Private sector career incentives that reward soft regulation. While (1) is in the public interest, (2) and (3) are undesirable. We propose a strategy to disentangle good and bad consistency in data on regulatory decisions, exploiting the fact that (2) and (3) imply less randomness in decision differences than (1). =================================================================== Regularity and stability of equilibria in an overlapping generations model with exogenous growth Anna Rubinchik      Univ of CO at Boulder, anna.rubinchik@colorado.edu Jean-Francois Mertens      CORE, Universit\''e Catholique de Louvain, jfm@core.ucl.ac.be      ,       ,       ,    In an exogenous-growth Arrow-Debreu economy with overlapping generations (OG) we analyse local stability of the ``golden-rule'''' equilibrium with respect to perturbations of consumption endowments, thought of as the ``monetised'''' value of a government policy to individuals. We demonstrate that the equilibrium allocation expressed in terms of efficient labour units is Frech\''{e}t differentiable in $L_\infty$ with derivatives given by kernels. We conjecture that the result can also be extended to any balanced growth equilibrium in this economy. =================================================================== Altruism, liquidity constraint and education investment Takashi Sato      Shimonoseki City University, sato@shimonoseki-cu.ac.jp Toshihiro Ihori      Tokyo University, ihori@e.u-tokyo.ac.jp Kimiyoshi Kamada      Chukyo University, kkamada@mecl.chukyo-u.ac.jp      ,       ,    In Japan and other East Asian societies, the education expenditure (especially the private tutoring expenditure) has increased dramatically. The purpose of this paper is to provide a rationale behind the fact that some families very actively invest in education. Introducing altruism and liquidity constraints into a simple parent-child model, we show that the investment in education can be higher or lower than the parent''s first best, depending on the income level of the family. Our model also has an implication for the rotten-kid theorem (Becker, 1974). There exist families in which the parental welfare in the equilibrium is higher than that in the parent''s second best if the liquidity constraint is binding. =================================================================== Decentralization, Growth and Wasteful Governments Christiane Schuppert      University of Dortmund, christiane.schuppert@uni-dortmund.de      ,       ,       ,       ,    While the empirical literature on the relation between fiscal federalism and growth is ambiguous, a newly emerging theoretical literature mainly argues that decentralization positively affects a country''s growth rate. Yet, these theoretical contributions focus on saving effects of decentralization and fail to incorporate human capital as the most important engine of growth. Accounting for this shortcoming, we show that decentralization is harmful for growth: Since wasteful governments try to prevent mobility-increasing education, the level of human capital available locally and, consequently, the growth rate of the economy decline. =================================================================== Market imperfections and endogenous fluctuations: a general approach Thomas Seegmuller      Paris School of Economics and CNRS, seegmu@univ-paris1.fr Teresa Lloyd-Braga      FCEE-UCP and CEPR, tlb@fcee.ucp.pt Leonor Modesto      UCP-FCEE and IZA, lrm@fcee.ucp.pt      ,       ,    We provide a methodology to study the role of distortions and market failures on endogenous fluctuations. We extend the well-known Woodford (1986) model to account for market distortions, introducing general specifications for three crucial functions: real rental cost of capital, real wage and workers offer curve. The elasticities of these three functions have a key role on local dynamics and, using them, we are able to identify the several parameters'' configurations under which local indeterminacy and bifurcations occur. Most of the specific market imperfections considered in the related literature become particular cases of our general framework, and by comparing them we show that several types of market distortions are equivalent in terms of the local dynamics, sharing therefore the same indeterminacy mechanisms. We further provide examples of distortions leading to new configurations. We also found that indeterminacy is possible with arbitrarily small levels of distortions in real wage and/or in workers offer curve, but it requires extremely high values for the elasticity of substitution between inputs and for the elasticity of the labor supply curve. =================================================================== The impossibility of a just Pigouvian Christian Seidl      Dept. of Economics, University of Kiel, seidl@economics.uni-kiel.de Casilda Lasso de la Vega      Dept of Economics, Univesity of Bilbao, casilda.lassodelavega@ehu.es      ,       ,       ,    An income inequality measure satisfies the Pigou-Dalton transfer principle if progressive transfers decrease income inequality. When transfers cause transaction costs, one can trace out the maximum leakage such that the transfer pays at the margin. An income inequality measure is leaky-bucket consistent if the transaction costs of a transfer are neither negative nor do they exceed the amount of the transfer. We show that the Pigou-Dalton transfer principle and leaky-bucket consistency are not reconcilable. Experimental research has shown that subjects'' behavior exhibit compensating justice, that is compensating income changes which maintain the degree of income inequality should point in the same direction should provide less income compensation for richer than for poorer income recipients. We also show that the Pigou-Dalton transfer principle and compensating justice are not reconcilable. Moreover, we show that only constant income inequality measures satisfy compensating justice. =================================================================== Optimal Capital Income Taxation and Distributions Service Sheikh T Selim      Cardiff University, selimst@cardiff.ac.uk Akos Valentinyi      University of Southampton, av2@soton.ac.uk      ,       ,       ,    We show that in a multisector economy with perfectly competitive markets, in a steady state the optimal capital income tax rate is in general different from zero. If distributions service is a market good, the difference between buyer price of consumption and buyer price of investment is determined by the unit cost difference of distributing these and the market price for distributions service. We argue that if the buyer price difference is due to the market price of distributions service, it can induce inefficient levels of production and allocation of factors, which in turns violates production efficiency. We show that in a steady state of the Ramsey equilibrium, the optimal policy that involves a capital income tax/subsidy and different rates of labour income taxes can undo the relative price difference and can restore production efficiency. =================================================================== Witness Intimidation Rajiv Sethi      Barnard College, Columbia University, rs328@columbia.edu Brendan O'Flaherty      Columbia University, bo2@columbia.edu      ,       ,       ,    Witness intimidation is a fundamental threat to the rule of law. It also involves significant strategic complexity and two-sided uncertainty: a criminal cannot know whether his threat will effectively deter a witness from testifying, and a witness cannot know whether the threat will in fact be carried out. We model this interaction and explore the manner in which equilibrium rates of intimidation, testimony, and conviction respond to changes in prosecutorial effectiveness, police-community relations, and witness protection programs. An increase in prosecutorial effectiveness raises the incentives for criminals to threaten witnesses but also makes these threats less credible. Sometimes the rise in threats will be large enough to drive down the rate of conviction, with the paradoxical outcome that better prosecutors may convict fewer criminals. Direct attempts to reduce witness tampering may also prove counterproductive. When the harm faced by a witness itself depends on whether or not the criminal is convicted, communities can be trapped in equilibria with collective silence: no witness testifies because none expects others to testify. =================================================================== Altruisitc Redistribution and Strategic Deficit Jens Peter Siebel      University of Applied Sciences Kaiserslautern, jenspeter.siebel@fh-kl.de      ,       ,       ,       ,    Most strategic deficit models neglect the role of redistribution. Few models regard redistribution, but only in a purely egoistic way. In the two period model here, both egoistic and altruistic motifs for redistribution are considered. Voters differ with regard to their pre-tax earnings. Each voter''s earnings are a mixture of fair (or deserved) and unfair (or undeserved) components. Each voter likes to have high earnings for himself, but dislikes an unfair income distribution among society as a whole. In both periods they vote on the tax and redistribution policy and additionally on the budget balance in the first period. The first period voting outcome is analyzed under different scenarios, i. e. intertemporal changes of median voter income as well as of the variance of unfair earnings are regarded. Numerical examples show that the sign of the budget balance depends both on strategic / egoistic and altruistic motifs. =================================================================== Methods for allocating the costs of quay construction Sung Soukkyung      Seoul National University, ssky6261@snu.ac.kr      ,       ,       ,       ,    A port has been considered as a major social overhead capital. Since all people benefit from the port, it has been deemed as a public good. As a consequence, most countries, including Korea, levied port charges which are too low to collect investment costs. However, nowadays, since the port industry is classified as part of the service industry, it is not justified any more for the government to subsidize the port facilities. This paper will discuss why it is difficult to collect the quay construction costs when the current construction cost allocation method is applied and suggest the application of serial cost sharing rule(Moulin and Shenker, 1992). Furthermore, his paper applies the serial cost sharing rule to the Gwangyang Container Port''s construction cost as an example showing a fair allocation of the construction cost =================================================================== Taxing deficits to restrain government spending and foster capital accumulation Nikolai Stähler      Deutsche Bundesbank, nikolai.staehler@bundesbank.de      ,       ,       ,       ,    In a dynamic model of fiscal policy, social polarization provokes a deficit bias. Policy advisors have recently proposed that governments running a deficit should be forced to generate additional tax revenue. We show that this deficit taxation reduces the deficit bias as it internalizes the externality different lobby groups impose on others. The mechanism described here is not due to the political risk of being elected out of office because the private sector dislikes taxation. Lower government spending and the resulting reduced deficit bias augment capital accumulation. =================================================================== Optimal Provision of a Discrete Public Good: linear equilibria in the private-information subscription game Barbieri Stefano      Department of Economics - Tulane University, sbarbier@tulane.edu David Malueg      Department of Economics - University of California, Riverside, david.malueg@ucr.edu      ,       ,       ,    We analyze a symmetric Bayesian game in which two players individually contribute to fund a discrete public good contributions are refunded if they do not meet a threshold set by the seller of the good. We provide a general characterization of symmetric equilibrium strategies that are continuous and nonconstant over the set of values for which the good has a positive chance of provision. Piecewise-linear strategies are our special focus. We characterize the distributions of players'' private values that can support a continuous piecewise-linear symmetric equilibrium, and we calculate such equilibria for these distributions. Allowing the seller to charge a nonrefundable entry fee before players make their private contributions, we show these piecewise-linear equilibria can maximize the seller''s expected utility over all incentive compatible selling mechanisms. =================================================================== R&D Spillovers, Concentration and Market Performance Anna Stepanova      University of Kent, A.Stepanova@kent.ac.uk      ,       ,       ,       ,    In a setup of a two-stage R&D game of process innovation, we investigate the effect of exogenously changing R&D spillovers and market concentration on the equilibrium effective cost reduction, total output, profits and social welfare. Interpreting spillover as an inverse measure of distance between firms, we find that tight proximity among firms slows down the innovative as well as the productive activity of the firms. We also show that neither profit-maximizing nor welfare-maximizing spillover level can take an extreme value of 0 or 1. Both per-firm equilibrium profit and equilibrium social welfare are inverse U-shaped in the spillover rate. An intermediate location achieves the objective of maximizing per-firm equilibrium profit, while closer proximity between firms is more desirable for welfare-maximizing purposes. =================================================================== Standard Breach Remedies, Quality Thresholds, and Cooperative Investments Alexander Stremitzer      University of Bonn, astremit@uni-bonn.de      ,       ,       ,       ,    When investments are non-verifiable, inducing cooperative investments with simple contracts may not be as difficult as previously thought. Indeed, modeling "expectation damages" close to legal practice, we show that the default remedy of contract law induces the first best. Hence, there is no need for privately stipulated remedies. Yet, in order to lower informational requirements of courts, parties may opt for a "specific performance" regime which grants the breached-against buyer an option to choose "restitution" if the tender''s value falls below some (exogenously given) quality threshold. =================================================================== Opportunistic Termination Alexander Stremitzer      University of Bonn, astremit@uni-bonn.de      ,       ,       ,       ,    If a seller delivers a good non-conforming to the contract, Article 2 of the UCC as well as European warranty law allows consumers to choose between some money transfer and termination. Termination rights are, however, widely criticized, mainly for fear that the buyer resorts to "opportunistic termination", i.e. takes non-conformity as a pretext to get rid of a contract he no longer wants. We show that the possibility of opportunistic termination might actually have positive effects. Under some circumstances, it will lead to redistribution in favour of the buyer without any loss of efficiency. Moreover, by curbing the monopoly power of the seller, a regime involving termination increases welfare by enabling a more efficient output level in a setting with multiple buyers. =================================================================== Delay in Strategic Information Aggregation Wing Suen      University of Hong Kong, wsuen@econ.hku.hk      ,       ,       ,       ,    We study a model of collective decision making in which agents vote on the decision repeatedly until they agree, with the agents receiving no exogenous new information between two voting rounds but incurring a delay cost. Although preference conflict between the agents makes information aggregation impossible in a single round of voting, in the equilibrium of the repeated voting game agents are increasingly more willing to vote their private information after each disagreement. Information is effciently aggregated within a finite number of rounds. As delay becomes less costly, agents are less willing to vote their private information, and e±cient information aggregation takes longer. Even as the delay cost converges to zero, agents are strictly better off in the repeated voting game than in any single round game for moderate degrees of initial conflict. =================================================================== Mechanism design with collusive supervision: a three-tier agency model with a continuum of types Yutaka Suzuki      Faculty of Economics, Hosei University, yutaka@hosei.ac.jp      ,       ,       ,       ,    We apply the “Monotone Comparative Statics” method à la Topkis (1978), Edlin and Shannon (1998), and Milgrom and Segal (2002)''s generalized envelope theorem to the three-tier agency model with hidden information and collusion à la Tirole (1986, 1992), thereby provide a framework that can address the issues treated in the existing literature, e.g., Kofman and Lawarree (1993)''s auditing application, in a much simpler fashion. In addition to such a technical contribution, the paper derives some clear and robust implication applicable to corporate governance reform. =================================================================== Information and Market Price Manipulation in the Unique Equilibrium of a Sequential Trade Model Shino Takayama      University of Queensland, s.takayama@economics.uq.edu.au      ,       ,       ,       ,    This paper studies how stock price manipulation affects the price formation process and process of information transmission into a market. Manipulation by an informed trader has been a difficult issue in the literature of market microstructure. This paper presents a model of dynamic informed trading which has a unique equilibrium. This paper considers markets where a risky asset is traded between competitive market makers, informed traders and liquidity traders. In the beginning of the whole game, nature chooses the liquidation value of the risky asset to be high or low, and tells the informed trader who trades dynamically. Trade takes place in periods 1 to T. In each period there is a random determination of whether the informed trader or a liquidity trader trades. The market makers post bid and ask prices for the next period, after which the trader buys or sells one unit. Back and Baruch (2004) study the equivalence of the two standard models in the market microstructure: the continuous auction model, developed by Kyle (1985) and the sequential trade model, proposed by Glosten and Milgrom (1985). This paper studies the dynamic version of the G-M model and proves that the value functions are strictly monotone and strictly convex the bid price is strictly convex and strictly increasing and the ask price is strictly concave and strictly increasing in the market makers'' prior. Those results provide theoretical support for properties of numerical simulation in Back and Baruch. =================================================================== Fiscal Federalism and Soft Budget Constraint: Public Expenditures and the Financing of Redistribution Emmanuelle Taugourdeau      CNRS, CES-ENS Cachan, taugour@univ-paris1.fr Marie-Laure Breuillé      INRA, breuille@ensead.inra.fr Thierry Madies      University of Fribourg, thierry.madies@unifr.ch      ,       ,    The purpose of this paper is to analyse the impact of two widely-used equalization transfer schemes on the degree of "softness" of regional budget constraints when regions compete among each other to attract mobile capital and finance two kinds of public goods A public good which enters the utility function of citizens and a productivity-enhancing public input. Lack of commitment implies that regional choices are chosen prior to federal transfers. We show that public input provision always reduces the opportunity cost of the federal government''s ex post transfers and hence reduces the ability of the federal government to commit itself not to bail out regions, in comparison with a situation where only public goods are provided to citizens. Secondly, a net equalization scheme can be considered as commitment device with respect to a gross equalization scheme as the federal government is always incited to reduce its bail out to regions which cut their tax rate and increase their public expenditure in order to attract capital. Interesting are the consequences on the pattern of public spending: The consumption public good is efficiently provided while the public good is over-provided under a gross equalization scheme. Under a net equalization scheme the consumption public good provision turns to be under- provided while the public input is efficiently provided. =================================================================== Idiosyncratic Productivity Risk and Progressive Optimal Income Taxation Alain Trannoy      Université de Cergy-Pontoise, trannoy@u-cergy.fr Patrick Pintus      Univ. de la Mediterranee GREQAM-IDEP, pintus@univmed.fr      ,       ,       ,    We introduce productivity risk in Diamond''s (1998) formulation of Mirrlees''s (1971) optimal taxation model with quasi-linear utility. Under multiplicative shocks to productivity, we show that the optimal marginal tax rate can be approximated, with any arbitrarily high level of accuracy, by the solution of a Cauchy-Euler differential equation. This solution takes the simple form of a weighted sum of power functions. We give sufficient conditions such that the approximated marginal tax rate is either an increasing or a U-shaped function of income. In particular, increasing marginal tax rates obtain if the distribution of the productivity shocks has a large enough kurtosis and if one imposes that marginal tax rates should be positive (respectively negative) for large (respectively small) incomes. Finally, we show that with income risk, marginal tax rates generally do not vanish either under a Utilitarian criterion or at the top and bottom of the income distribution. =================================================================== The Importance of Non-Cognitive Skills: Observations from Asian Educational Systems Jen-Ruey Tsaur      University of Kentucky, jen-ruey.tsaur@uky.edu Robert R. Reed      University of Alabama, rreed@cba.ua.edu      ,       ,       ,    The traditional view of human capital ties schooling to cognitive skills. However, recent studies have emphasized the role of education for developing non-cognitive skills. As a result, educational systems should be structured recognizing the value of both skills. While the existing literature has focused on production of human capital at the secondary level, the orientation of tertiary education should also be examined. As a glaring example, several Asian countries have pursued educational reforms that encourage the acquisition of non-cognitive skills. In light of these observations, this paper studies the optimal design of university-level educational systems. In particular, we consider two different admission policies. Under the first criterion, an entrance examination regime (EER), admissions are exclusively determined by a person''s cognitive skills. Alternatively, under a generalized admission regime (GAR), the criterion for admission depends on an individual''s overall abilities a combination of both types of skills. We begin with an economy where productivity only depends on cognitive skills. In contrast, in the second economy, both skills help enhance productivity. As admissions policies affect individuals'' incentives, the structure of educational systems leads to different investment decisions. In the first economy, an EER may be associated with higher social welfare. However, if productivity also depends on non-cognitive skills, the GAR weakly dominates an EER. =================================================================== Two good things at the same time: equality amid prosperity Manachaya Uruyos      Chulalongkorn University, manachaya.u@chula.ac.th Kittithad Wangveerathananon      Chulalongkorn University, kittithad.w@student.chula.ac.th      ,       ,       ,    Kuznets''s ''''inverted U-curve hypothesis'''' concludes that inequality must increase before decreasing however, empirical works on testing Kuznets'' hypothesis have gathered controversial results. This paper employs the three-period overlapping generations model with heterogeneity to analyze the interaction between the distribution of human capital, technological progress, and economic growth. The study illustrates the important role of the distribution of human capital in the evolution of economies. The study suggests that the economy may find it beneficial to subsidize the human capital investment of a low human capital dynasty by imposing lump-sum tax on the high human capital dynasty. This policy would encourage the low dynasty to accumulate human capital since the earlier stage, which raise the rate of production technology improvement, and ultimately generate enough externalities to pull the society as a whole to a state of equality and prosperity at a shorter length of time. The paper also finds the welfare effect of those fiscal policies. Under a specific set of parameters, the benefit from the subsidy would outweigh the costs of lump-sum taxation if the subsidy rate was below a critical value. Contrast to what Kuznets suggested at any stages, the economy does not have to face the trade-off between equality and prosperity. =================================================================== On some types of contractual stability in a pure exchange economy Vasil'ev Valery      Sobolev Institute of Mathematics, Russian Academy of Sciences, Siberian Branch, vasilev@math.nsc.ru      ,       ,       ,       ,    This paper contains a game-theoretical analysis of the so-called totally contractual allocations, similar to that introduced by V.Makarov (1980). The main attention is paid to the case when no restrictions to the breaking procedure of recontracting process is posed besides the feasibility of the final contractual system (hence, no minimality condition, applied in the previous papers). At the same time, any such a final system supposed to be a coalitional improvement (not just at least one of the minimal final system, like it appears to be in the other author''s papers). Surprisingly, it is found that quite often the cores corresponding to the various types of recontracting process are the same. To clarify this phenomenon, we prove one of the main results of the paper, stating that under rather mild assumptions weak totally contractual core (consisting of stable outcomes of recontracting process with no minimality condition) is equal to the set of Walrasian equilibrium allocations. To demonstrate the main assumptions in this core equivalence result are relevant, two examples of pure exchange economies having unblocked allocations with no supporting equilibrium prices are given. The most interesting is the last example with no equilibrium allocations and nonempty weak totally contractual core, exhibiting that a weak totally contractual allocation may be chosen as a compromise solution in case the classical market mechanism doesn''t work. =================================================================== Knowledge Spillovers and the Formation of Spatial Networks Ping Wang      Washington University in St. Louis, pingwang@wustl.edu Fan-Chin Kung      City University of Hong Kong, fkung@artsci.wustl.edu      ,       ,       ,    This paper proposes a new approach to city formation the network formation approach. The main driving force of population agglomeration is uncompensated knowledge spillovers. Because knowledge can be transmitted only when both parties are linked in the network sense, the network formation approach is a natural framework to define and examine the underlying spatial configuration of the equilibrium. While it is beneficial to be connected to take advantage of knowledge transmission from other locations, maintaining a link is costly. Depending on its roles, a location may become a core, serving as a knowledge aggregation and transmission node for other connected peripheral locations. We find that a spatial equilibrium may feature monocentric, multicentric, urban-rural, or multiple urban areas. We examine under which conditions a particular spatial configuration may emerge and perform comparative statics with respect to changes in knowledge spillover, link maintenance, urban land rent, rent gradient, and urban unemployment parameters. =================================================================== Subgame Perfect Implementation of the Nash Rationing Solution Quan Wen      Vanderbilt University, U.S.A., quan.wen@vanderbilt.edu Marco Marco Mariotti      Queen Mary, University of London, U.K., m.mariotti@qmul.ac.uk      ,       ,       ,    We study a bargaining mechanism that implements the Nash rationing solution of Mariotti and Villar (International Journal of Game Theory, 2005). The bargaining mechanism is an n-person non-cooperative game of perfect information. In each period, one player makes a proposal from a set of feasible alternatives. Even with only two players, there are generally multiple subgame perfect equilibrium outcomes. We show that as the probability of exogenous breakdown does to zero, the limit of any convergent sequence of subgame perfect equilibrium outcomes is a Nash rationing solutions of the underlining rationing problem. However, not every Nash rationing solution can be a limit of subgame perfect equilibrium outcomes. =================================================================== Fertility in the absence of self-control Bertrand Wigniolle      Paris School of Economics and University of Paris I , wignioll@univ-paris1.fr      ,       ,       ,       ,    This paper studies the quantity-quality trade-off model of fertility, under the assumption of hyperbolic discounting. It shows that the lack of self-control may play a different role in a developed economy and in a developing one. In the first case characterized by a positive investment in quality, the lack of self control tends to reduce fertility. In the second case, it is possible that the lack of self-control leads both to no investment in quality and to a higher fertility rate. It is also proved that if parents cannot commit on their investment in quality, a small change of parameters may lead to a jump in fertility. =================================================================== Political Economy of Higher Education Finance Martin Wimbersky      University of Munich, martin.wimbersky@lrz.uni-muenchen.de Rainald Borck Prof. Dr.     University of Munich, Rainald.Borck@lrz.uni-muenchen.de      ,       ,       ,    The paper analyses voting on higher education finance. Individuals differ by their endowments and can choose whether or not to study. We compare several financing schemes: a traditional tax-subsidy scheme, graduate taxes (where students are subsidised but only successful students pay taxes to finance these subsidies) and income contingent loans (where all students receive loans but only those with high incomes have to fully repay them). We study how the support for one over the other system is determined by individuals'' risk aversion and the distribution of endowments. =================================================================== A strategic model of club formation existence and characterization of equilibrium Myrna Wooders      Vanderbilt University , myrna.wooders@vanderbilt.edu Marta Faias      New University of Lisbon, mcm@fct.unl.pt      ,       ,       ,    We introduce a new model of a club economy as a two stage game. Players derive utility from consumption of private good, consumption of public good, and the profile of crowding characteristics those characteristics of a player that directly affect other players of members of the same club. In the first stage of the game, players choose amounts to consume of an endowment of private good. The crowding characteristics acquired by a player are determined by his choice of consumption level, as is the amount of private good remaining to private consumption in the second stage and to contribute to the production of the club good in the second stage of the game. In the second stage of the game, given the profile of crowding characteristics of the total player set, club memberships are endogenously determined as outcomes of subgame perfect equilibrium. We establish existence of equilibrium in mixed strategies and we establish existence of equilibrium in pure strategies for the economy with incomplete information. Finally, we provide some examples illustrating that characterization results from models of club economies with price-taking equilibrium do not necessarily hold. =================================================================== Shapley Value, Noncooperative Games, and Externality Licun Xue      McGill University, licun.xue@mcgill.ca      ,       ,       ,       ,    We study a simple bargaining game that implements the Shapley value in coalitional games with transferable utilities. The same bargaining game is then applied to partition functions games. We examine the equilibrium payoff allocation which can serve as a "noncooperative extension" of Shapley value to partition function games. We compare our results with recent contributions in the literature: Macho-Stadler, Pérez-Castrillo, and Wettstein (2006), de Clippel and Serrano (2006), and Hafalir (2006). =================================================================== Optimal environmental policy in developing economies Akira Yakita      Graduate School of Systems and Information Engineering, University of Tsukuba, yakita@sk.tsukuba.ac.jp Koichi Saito      Graduate School of Systems and Information Enginieering, University of Tsukuba, ksaito@sk.tsukuba.ac.jp      ,       ,       ,    We investigate the optimal policy in a green-Solow-type model in which the government can allocate the tax revenue between productive capital formation and pollution abatement. It is shown that it is optimal to appropriate the tax revenue exclusively to productive capital accumulation in the transition to the long-term optimum, starting with poor productive capital and pristine environment, and that the tax revenue will be allocated to pollution abatement as well as capital formation at the long-term optimum. The Environmental Kuznets Curve, although inverse-V shaped in the present model, may reflect the optimal development and environmental policy. =================================================================== Global Stability of Unique Nash Equilibrium in Cournot Oligopoly and Public Good Game Takeshi Yamazaki      Niigata University, tyamazak@econ.niigata-u.ac.jp Koji Okuguchi      Gifu Shotoku Gakuen University, okuguchi351013@yahoo.co.jp      ,       ,       ,    In this paper we will prove that if a submodular aggregative game satisfies the generalized Fisher-Hahn condition, then the unique Nash equilibrium in the game is globally stable under two alternative continuous adjustment processes with non-negativity constraints. The general result is applied to Cournot oligopoly without product differentiation and to the pure public good model. The first application gives the complete proof to the global stability result of Hahn (1962) and Okuguchi (1964), whose proofs contain a defect pointed out by Al-Nowaihi and Levine (1985), taking into account the non-negativity of firms''outputs during the adjustment periods. We next analyze the global stability of Nash equilibrium in a model of a pure public good, another example of aggregative games. =================================================================== On the budget-constrained IRS: equilibrium and welfare C.C. Yang      Academia Sinica , ccyang@econ.sinica.edu.tw Meng-Yu Liang      Academia Sinica, myliang@econ.sinica.edu.tw      ,       ,       ,    This paper extends Graetz, Reinganum and Wilde''s (1986) seminal work on tax compliance to the real- world scenario where the IRS (Internal Revenue Service) faces a budget constraint imposed upon her by the Congress. The paper consists of two parts. First, we characterize the equilibria resulting from the interaction between taxpayers and the budget-constrained IRS. Second, we examine the welfare implication of varying the size of the budget allocated to the IRS. It is shown that, to mitigate or eliminate the so-called "congestion effect," the IRS should be sufficiently budgeted and, in particular, we provide a case for the policy prescription that the size of the budget allocated to the IRS should be expanded as long as an additonal dollar allocated could return more than an additional dollar of revenue. =================================================================== Endogenous Occupational Choice and Economic Development Masaya Yasuoka      Graduate School of Economics, Kobe University, yasuoka@econ.kobe-u.ac.jp Yusuke Kinai      Graduate School of Economics, Osaka University, ykinai@js8.so-net.ne.jp      ,       ,       ,    This paper constructs the three-period overlapping generations model in which the determination of occupational choice (unskilled labor or skilled labor) is endogenous. In this model, work in childhood and education investment is strategic complements and as a result, multiple equilibria may arise: one is the low income equilibrium in which there is child labor, the other is the high income equilibrium that there is no child labor. Which equilibrium is determined is affected by coordination policy. Friction of labor market prevents households from receiving education even if they receive education in no friction of labor market. =================================================================== Revolving Doors: a Channel of Influence Peddling Seung Han Yoo      Cornell University, sy239@cornell.edu      ,       ,       ,       ,    A significant number of high-level government officials are employed as executives, consultants, lobbyists or members of advisory boards after retirement. The majority of these officials previously worked in departments involved in government regulations or procurement. This situation leads to problems of influence peddling. This paper attempts to develop a framework for a theoretical analysis of these issues and to examine implications of related economic policy. The main results of this paper are the following: (1) unlike the arguments in the canonical statistical discrimination models, in a one-stage game, discrimination is not always a coordination problem, and (2) in an infinitely repeated game, government officials and an employer can collude so that each official''s expected payoff strictly increases, and post-government employment restrictions may not be an effective policy. =================================================================== Injustice of Exploitation Naoki Yoshihara      Institute of Economic Research, Hitotsubashi University, yosihara@ier.hit-u.ac.jp Roberto Veneziani      Department of Economics, Queen Mary, University of London, r.veneziani@qmul.ac.uk      ,       ,       ,    The normative relevance of the concept of exploitation is analysed in the context of subsistence economies with a general convex technology. The complete class and exploitation structures of the economy are analysed according to different definitions of exploitation and Roemer''s (1982, 1988) results are generalised. Two main new axioms, called Labour Exploitation in Subsistence Economies and Feasibility of Non-Exploitation, are presented and a chracterisation result is derived. =================================================================== Reverse brain drain Yibo Zhang      Washington University in St Louis, USA, yzhang@artsci.wustl.edu      ,       ,       ,       ,    Brain drain phenomenon has been extensively studied yet the recent "reverse brain drain" phenomenon, that is, a lot of people from developing countries who have studied in developed countries go back to their home country sooner or later for good, has yet to be studied. We study this phenomenon in a two period lifecycle economy where home country agents choose not only education location (home or abroad) but also work location (home or abroad) possibly multiple times in their lifetime. Agents work and earn labor income after they are done with their studies in the first period and become entrepreneurs and earn returns to entrepreneurial skills in the second period. The key feature of the model is that it captures all the factors that are crucial in agents'' location choice decision including work-place premium, education-location premium, market opportunity gap (between home country and foreign country) as well as adaptability of skills. In addition, we allow for difference in agents'' preference for education location as well as in their preference for work location. Their preference for work location when old could also be different from their preference for work location when young. We solve the model analytically and discuss when Reverse Brain Drain could occur. We then do comparative statics analysis followed by some semi calibration based on the data from Taiwan (1950-2004) and Mainland China (1985-2006). ===================================================================