Band 2, Heft 1

Because of difficulties measuring pollution, many prior papers suggest a subsidy to some observable method of reducing pollution. We take three such papers as examples, and we extend each of them to show how welfare under the suggested subsidy can be increased by the addition of an output tax. While the suggested subsidy reduces damage per unit of output, it also decreases the firm's cost of production and the equilibrium break-even price. It might therefore increase output – unless combined with an output tax. While this general point has appeared in prior literature, it has been overlooked in specific applications. We illustrate the applicability of a tax-subsidy combination in three very different models of different environmental problems. Using one example, we show that a properly-constructed subsidy-tax combination is equivalent to a Pigovian tax. Another example is a computational model, extended here to show that the policy combination can yield a welfare gain that is more than three times the gain from using the subsidy alone. The third example is a theoretical model, used to show that the subsidy alone increases production and thus could increase total pollution. An additional output tax offsets this increase in production.

This paper studies a simple two-stage model of conflict in which two players allocate resources between arms and domestic production in the first stage and subsequently engage in peace negotiations trying to avoid war. War is costly and war damages depend on arms buildup. Peace also comes with costs (e.g., disarmament, monitoring and enforcement). We show that when the cost of peace is in the medium range and resources are more effective in causing damages to one's enemy when invested in arms than in being productive in domestic production, the game has two kinds of equilibria: those involving peace and those involving war. The two players will build more arms in any peace equilibrium than in the (unique) war equilibrium. When the cost of peace is unknown to the players while making investment choices, arms levels in equilibrium are positively correlated with the probability of peace.

A tool used by special interests to influence policies in their favor but rarely treated in the economic literature is examined. Through contributions to the pool of available information, a bias in public perceptions of policy consequences may be created and policymaking accordingly affected. The results in terms of equilibrium protection levels add to but do not overthrow those of traditional analyses involving contributions to campaign funds.The analysis also shows that as long as some influence over perceived policy consequences can be generated by special interest groups, the political power they can wield by means of campaign contributions is much stronger (and more likely to be extensively used) than that predicted by analyses focused exclusively on campaign contributions. Restrictions on one means of special interest influence can therefore yield significant reductions in both protection and the use of resources for political influence purposes.

Price markups over marginal cost are often higher on aftermarket parts and services for durable goods than they are on the goods themselves. A popular explanation is that the aftermarket good is used as a “metering” device. This paper explores what happens in the metering model as foremarket competition increases, and examines the implications of adding an optional enhancement to the model along with the aftermarket input. It finds that as foremarket competition increases, markups in the aftermarket drop to zero before markups in the foremarket. It also finds that an optional enhancement may expropriate the metering role of an aftermarket input.

We study auctions where bidders have independent private values but attach a disutility to the surplus of rivals, and derive symmetric equilibria for first-price, second-price, English, and Dutch auctions. We find that equilibrium bidding is more aggressive than standard predictions. Indeed, in second-price auctions it is optimal to bid above one's valuation; that is, bidding "frenzies" can arise in equilibrium. Further, revenue equivalence between second-price and first-price auctions breaks down, with second-price outperforming first-price. We also find that strategic equivalence between second-price and English auctions no longer holds, although they remain revenue equivalent. We conclude that spiteful bidding rationalizes anomalies observed in laboratory experiments across the four auction forms better than the leading alternatives.

Although courts justify the constitutional law of libel with consequential reasoning, the true consequences of liability for harmful speech have never been fully explored. We construct an analytical framework for studying libel law, emphasizing both the positive and negative externalities generated by the publication of information. Our model highlights two distinct decisions that a publisher faces, the verification decision and the publication decision. We first demonstrate that a single damage measure for publication of false libelous information, such as the “damages equal harm” measure, cannot simultaneously induce socially optimal decisions regarding verification and publication. We then argue that the damage measure should depend on the efficacy of the verification process. Interestingly, when verification is reasonably effective, the damage award should be set equal to the social benefit from truthful publication. Our analysis provides a theoretical foundation for important elements of current libel law. It also suggests practicable avenues for reform.

This paper studies under which conditions a cross-sectional regression yields unbiased estimates of the parameters of an individual dynamic model with fixed effects and individual-specific responses to macro shocks. We show that the OLS estimation of a relationship involving non stationary variables on a cross-section yields estimates which converge to the true value when calendar time tends to infinity. We then consider the particular case of an AI demand model, and we show, using French quarterly aggregate time-series, that budget shares, relative prices and the log of real total expenditure are I(1) and form a cointegrated system. We compare these macro estimates to estimates obtained from three Family Expenditure Surveys and find large differences.

When parents save money for their children's college education, a portion of their savings is later taken away in the form of reduced eligibility for college financial aid. We estimate the long-run impact of this implicit asset tax by estimating family preferences over life-cycle consumption, savings and college choices and then simulating family choices over these variables under various hypothetical financial aid systems with different asset treatments. Our simulations suggest that the implicit taxes in the current college financial aid system may in the long run reduce economy-wide asset holdings in the U.S. by $186 billion versus aid systems with no implicit asset taxes. This figure is less than 1% of total U.S. wealth during the years of our data. It, however, reflects a 10.2% reduction is asset holdings for affected families.

Through utilization review (UR), managed care organizations (MCOs) monitor and alter physician treatment decisions. We show that the value of UR depends on physician incentives. Not surprisingly, when physicians have incentives to significantly overtreat patients, UR can improve social welfare by eliminating unnecessary utilization. More surprisingly, UR can also improve welfare when physicians have incentives to significantly undertreat patients. In this case, UR filters out the least valuable cases, encouraging physicians to recommend more treatments. We also show that the effectiveness of UR depends on MCO precommitment to a treatment approval threshold. Ex ante optimal precommitment can make it appear that the MCO is inappropriately withholding care ex post.

Using panel data for a cross-section of countries, several previous studies estimate the effect of advertising bans on cigarette consumption. These studies suffer from three problems: (1) structural change in cigarette demand functions; (2) endogeneity of advertising bans; and (3) non-stationarity of cigarette consumption data. Using annual data for 20 OECD countries, this study tests for unit roots. Growth rates of cigarette consumption (log differences) are stationary, but levels data are not. I estimate single-equation panel models for 1970-1995 and test formally for structural change. The tests and recursive coefficient estimates confirm a regime change beginning in 1985. Results for different time periods are reported for the effects of price, income, health warnings, country fixed-effects, and moderate and strong advertising bans. The study also considers the possibility of endogenous advertising bans. A public-choice model is estimated as a two-equation model of advertising legislation and cigarette demand. The adoption of advertising bans is modeled as a Poisson count regression, and fitted values for the number of banned media are used as instruments in the demand equation. The results in the paper fail to demonstrate that advertising bans reduce aggregate cigarette consumption. Empirical results in previous studies are not robust to use of stationary data; refinements in model specification; different time periods; and endogeneity of advertising bans. Due to a decline in smoking prevalence, especially among males, there was a change in the political climate in favor of stronger restrictions on cigarette advertising. Overall, advertising bans have had no effect on cigarette consumption, regardless of the time period considered or the severity of the bans.

Publishers of computer software and music claimed losses of over $17.6 billion to piracy in 2002. Theoretically, however, piracy may raise legitimate demand through positive demand-side externalities, sampling, and sharing. Accordingly, the actual impact of piracy on the legitimate demand is an empirical issue. Addressing this issue in the context of recorded music, we develop and test hypotheses from theoretical models of piracy on international data for music CDs over the period 1994-98. Empirically, we find that the demand for music CDs decreased with piracy, suggesting that "theft" outweighed the "positive" effects of piracy. However, the impact of piracy on CD sales was considerably less than estimated by industry. We estimated that, in 1998, actual losses amounted to about 6.6% of sales, or 42% of industry estimates. But, we found evidence that publishers would have raised prices in the absence of piracy, suggesting that the actual revenue loss would have been higher.

We examine market structure and optimal commodity taxation in a world in which firms produce differentiated products and can exert some degree of market power. Building on Kay and Keen (1983), we model two forms of product technologies, two forms of market entry structures, and two forms of pricing. This yields eight models providing a richer analysis of the role of taxes as regulatory tools than could be provided in Kay and Keen's analysis. In the presence of price discrimination, tax policy loses much of its effectiveness at serving as a substitute for direct regulation. Moreover, in cases where taxes can influence market structure, subsides rather than taxes may be required to achieve optimum market structure. Our results should remove the presumption that has developed over the past twenty years that the ad valorem tax rate should be positive to discourage excess entry in imperfectly competitive markets.

Individuals in a committee or election can increase their voting power by forming coalitions. This behavior is shown here to yield a prisoner's dilemma, in which a subset of voters can increase their power, while reducing average voting power for the electorate as a whole. This is an unusual form of the prisoner's dilemma in that cooperation is the selfish act that hurts the larger group. Under a simple model, the privately optimal coalition size is approximately 1.4 times the square root of the number of voters. When voters' preferences are allowed to differ, coalitions form only if voters are approximately politically balanced. We propose a dynamic view of coalitions, in which groups of voters choose of their own free will to form and disband coalitions, in a continuing struggle to maintain their voting power. This is potentially an endogenous mechanism for political instability, even in a world where individuals' (probabilistic) preferences are fixed and known.

This paper investigates the role of ethnicity, religion, gender, and networks in domestic agricultural trade in Africa. Using a theoretical model of self-disciplining markets, we begin by demonstrating that statistical discrimination and networks can generate similar patterns of ethnic concentration. The model also predicts that traders who start with an ethnic or network advantage grow faster. We then test these ideas using original survey data collected in Benin, Malawi, and Madagascar. We find no evidence that members of a particular sex or ethnic group are more easily trusted by suppliers and trust clients more easily. In contrast, network effects have a strong and systematic effect on trust and information sharing. We also find some evidence that religion matters, but the effect is not due to discrimination or better networks. Ethnicity also has little effect on start-up networks and working capital but women accumulate working capital slower than men, including in Benin where women represent 80% of surveyed traders. Agricultural trade appears fairly open to all, irrespective of gender, ethnicity, or religion.

This paper provides one of the first assessments of the hypothesis that two countries are more likely to form a preferential trade agreement (PTA) if they are already major trading partners. The paper also tests a number of predictions from the political economy literature about which countries are expected to form regional agreements. The results show that countries are more likely to be preferential trading partners if they have significant bilateral trade, are similar in size, and are both democracies. Finally, the paper measures the effect of preferential agreements on trade volumes while, unlike previous studies, treating PTA formation as endogenous.