Volume 21, Issue 1

Legal assignment of liabilities for losses arising out of interactions involving negative externalities usually depend on which of the interacting parties are negligent and which are not. It has been established in the literature that, if negligence is defined as failure to take some cost-justified precaution then there is no liability rule which can always lead to an efficient outcome. The objective of this paper is to try and understand if it is still possible to make pairwise comparisons between rules on the basis of efficiency and to use such a method to explain/evaluate choices from a given set of rules . We focus on a set of five of the most widely analyzed rules (no liability, strict liability, negligence, negligence with the defense of contributory negligence and strict liability with the defense of contributory negligence), and use a binary relation according to which a rule in the set is considered to be at least as efficient as another if and only if the set of applications for which it is inefficient is a subset of the set of applications for which the other one is inefficient. We show that, with respect to the above mentioned relation, pairwise comparisons between rules in this set fail. The paper, thus, demonstrates that an efficiency based explanation for any choice from these five rules is not consistent with the notion of negligence defined as failure to take some cost-justified precaution.

This paper develops an axiomatic context-dependent model of social image concerns. Allowing for context-dependence based on choice sets, it examines how context-dependence impacts social image concerns, in particular how a decision maker exhibits various social emotions stemming from their intrinsic reference point, which may not be captured by conforming to social norms. To elicit the intrinsic reference point, this paper provides weaker versions of Strategic Rationality and Independence , in addition to the basic axioms, to characterize the model of the Reference-Dependent Image-Conscious utilitarian. This paper also examines how social emotions stemming from the intrinsic reference point are related to preference reversals as violations of the Weak Axiom of Revealed Preference (WARP). Finally, this paper considers the relationship between social image concerns and intrinsic reciprocity. The findings demonstrate that social image plays a large role and the model developed illustrates a condition in which cooperation is sustained in prisoner’s dilemma games.

We study the rent-seeking behavior of political parties in a proportional representation system. In our model, the final policy choice of the parliament is a weighted average of parties’ policy positions, weights being their vote shares. An extreme party chooses a higher rent level than a moderate party in exchange for greater policy influence, except in some cases of unlikely distributions of parties. Moreover, political rents are not eliminated even with free entry, unless the entry cost is arbitrarily small.

We develop a model of a prediction market with ambiguity and derive testable implications of the presence of Knightian uncertainty. Our model can also explain two commonly observed empirical regularities in betting markets: the tendency for longshots to win less often than odds would indicate and the tendency for favorites to win more often. Using historical data from Intrade, we further present empirical evidence that is consistent with the predicted presence of Knightian uncertainty. Our evidence also suggests that, even with information acquisition, the Knightian uncertainty of the world may be not “learnable” to the traders in prediction markets.

In theoretical demand and supply analyses, functions with constant price elasticity are still frequently used although price elasticity is known to change in response to price. We relax the assumption of constant price elasticity to linear price elasticity which allows us to model demand and supply that decreases or increases with price. Quantity functions with linear price elasticity have been used in economics before but only to a limited extent since they have not been sufficiently theoretically studied. This paper overcomes this gap by identifying and studying all possible functional forms with linear price elasticity as well as their inverses, actually plotted as demand and supply curves. We find that quantity (demanded or supplied) as a function of price with linear price elasticity is a product of an exponential and a power function of price, while the price as a function of quantity involves the Lambert W function . Hence, the class of functions with linear price elasticity is heterogeneous: it contains reversible and irreversible functional forms as well as convex and non-convex functional forms. The class’ heterogeneity provides several modelling and research opportunities.

We develop a theoretical model in which a country hosts foreign investment in the presence of a drug dealer, acting as a leader, and a drug seller, acting as a follower. A policy addressed to eradicate the drug trafficking encourages the kidnapping activity, and increase the security cost of firms. When the drug is not consumed in the host country the best policy is not to fight against drug trafficking. When the drug is consumed in the host country the optimal policy depends on the social marginal disutility of drug consumption respect to ransom paid by firms. In this case, when social marginal disutility is sufficiently larger than ransom, the government combats drug trafficking, otherwise, there is no policy at all.

We assume that the set of agents is decomposed into several classes containing individuals related each other in some way, for example groups of neighbors. We propose a new definition of fairness by requiring efficiency and envy-freeness only within each group. We identify conditions under which absence of envy among “neighbors” is enough to ensure fairness in the entire society. We also show that equal-income Walrasian equilibria are the only fair allocations according to our notion, deriving as corollaries the equivalence theorems of Zhou (1992) and Cato (2010). The analysis is conducted in atomless economies as well as in mixed markets.

Capital outflows after financial integration can lead to simultaneous increases in the national savings rate and asset prices of an economy with substantial financing costs. Under autarky, firms invest in risky capital while facing a borrowing constraint that creates a need for precautionary savings. Financial integration provides firms with access to foreign risk-free assets and results in two effects: a substitution effect, whereby firms divert some investments to foreign assets and cause capital outflows; and a wealth effect, whereby they grow richer in equilibrium and thus demand more domestic capital. Savings gluts and asset price booms occur when the wealth effect dominates.

In this paper, we consider a model of social coordination and network formation, where players of two groups play a 2 × 2 coordination game when they are connected. Players in one group actively decide on whom they play with and on the action in the game, while players in the other group decide on the action in the game only and passively accept all the connections from the active group. The players in the active group can connect to a limited number of opponents in the other group. We find that the selection of long-run outcomes is determined by the population size of each group, not the overall population size of them. If either group’s population size is small in comparison to the number of maximally allowed links, all players will choose the risk-dominant equilibrium, while when both groups are sufficiently large with respect to the number of maximally allowed links, the players of the two groups will coordinate on the payoff-dominant action.

The board of committees governing university endowments often chooses between hiring professionals to run funds and trusting denoting entities with the funds. As usual, sophisticated fund managers can construct a well-diversified investment portfolio; however, their interests may not be aligned with the university. On the other hand, donors have the advantage of assuming full liabilities for losses, but they only have access to risky projects due to their limitations in terms of accessing the available investment universe. This paper develops a theoretical framework in an attempt to explain the distinct endowment management strategy adopted by universities, and particularly their choice of endowment operator identity. Our model can provide supports to the governance activities practiced by university endowments both in developed and developing countries. Furthermore, we show theoretically that current capital control regulations imposed by the developing country's government reduce donations and encourage universities to establish donor-advised endowment funds, in which donors surrender ownership of anything they put in the fund, but retain control over how their money is invested.

We present a simple principal-agent model with an employer and two types of employees/workers, low and high skilled. Low-skilled workers are envious of their high-skilled peers, and incur a disutility cost whenever the latter receive a positive surplus from their labor contract. We show that: i ) if the envy cost is relatively low (high), high-skilled workers obtain a payoff higher (lower) than that they receive when they are not envied; ii ) if the envy cost can be manipulated (increased or reduced), high-skilled workers can take actions of envy-provocation or envy-reduction to further increase their payoff.

The possibility to compare information partitions is investigated for economies with asymmetric information. First, we focus on two potentially suitable instruments, the Boylan distance and the entropy, and show that the former does not fit the purpose. Then, we use the entropy associated with the information partition of each trader to construct a partially endogenous rule which regulates the information sharing process among traders. Finally, we apply this rule to some examples and analyze its impact on two cooperative solutions: the core and the coalition structure value.

Arrow (1950) famously showed the impossibility of aggregating individual preference orders into a social preference order (together with basic desiderata). This paper shows that it is possible to aggregate individual choice functions, that satisfy almost any condition weaker than WARP, into a social choice function that satisfy the same condition (and also Arrow’s desiderata).