Volume 12, Issue 1

The gap between the richest Americans and the rest of the nation has changed dramatically over the past three decades – becoming one of the most challenging political and economic trends for the nation. For decades prior to that, the distribution of wealth and income had been relatively stable, so much that a central problem posed in the economics literature was to explain this stability. But beginning in the early 1980s, inequality began to grow rapidly and has recently been attracting substantial attention from policymakers and researchers reflecting a widespread concern that reflecting a widespread concern that growing labor incomes of senior executives, finance professionals, and successful entrepreneurs is entailing large economic costs to society. The dominant paradigm in the media and Washington is that inequality is purely a matter of divergence in earned (labor) income inequality which can be ameliorated by making earned income taxes more progressive and shifting spending to help the poorer. However, this is not the story: wealth inequality, as it turns out, is much worse. This warrants emphasis for a variety of reasons: (1) a growing body of research that suggests that in the head-on comparison it is wealth inequality, rather than income inequality or poverty that has a negative, statistically significant effect on economic growth.1 Bagchi and Svejnar (2013). (2) Historically societies have failed when wealth has become overly concentrated; and (3) the wedge between earned and unearned income tax rates reduces progressivity as capital income rises. We offer a number of solutions which should generate debate amongst economists as they test conventional wisdom.

On February 26, 2015, the Federal Communications Commission (FCC) proposed sweeping new regulation for broadband providers. While regulation is typically driven by a combination of economic and political considerations, this article argues that the FCC’s initiative is long on politics and short on economics. For example, the FCC is not able to identify a non-transitory abuse of market power by broadband providers to justify its actions. There is no evidence of excessive returns being earned by broadband providers and the violations of net neutrality that the Commission can point to, including throttling and blocking of data, are conspicuously few in number. What is more, the FCC has yet to establish that the regulatory oversight it proposes would not stifle more investment than it stimulates. Broadband is an example of a two-sided market in which edge (content) providers represent one side of the market and consumers represent the other side of the market. Just as newspapers impose positive prices on both advertisers and subscribers, it is (quite generally) efficient in two-sided markets for both sides of the market to contribute to the total price. Two-sided markets are characterized by a seesaw principle in which a lower price on one side of the market tends to give rise to a higher price on the other side of the market. Hence, a ban on paid prioritization of traffic delivery over broadband networks essentially requires consumers to pay the full freight. The FCC is therefore in the unenviable position of having to justify a policy to regulate broadband that is distinguished by being both economically inefficient and socially inequitable. While the courts are disposed to give deference to expert federal agencies under the Chevron Doctrine, the lack of economic foundation to justify broadband regulation promises to make this tough sledding for the FCC. The strategy on the part of the broadband providers will be to run out the clock with litigation in the hope that the political winds shift in their favor post 2016.

Climate change risk will likely force the de-carbonization of our electricity sector and thus involve massive investments in long-lived assets using many new and emerging technologies. Since technological progress (independent or dependent on deployment) will likely lower the future cost of those technologies, investing early and rapidly forecloses saving money by installing those technologies at a lower cost later. There are thus benefits to waiting until the costs of renewables fall further. However, there are also costs to waiting. First, given the longevity of greenhouse gases in the atmosphere, cumulative emissions matter and lowering greenhouse gas emissions earlier is beneficial. Second, there is significant uncertainty not only over the rate of change of the cost of low carbon technologies, but also over the cost of greenhouse gas emissions. The costs of waiting are complex in that the distributions themselves are unknown (and quite possibly have “fat” tails). There may also be complex timing issues such as points of no return in terms of global greenhouse gas concentrations, beyond which the costs of adapting to climate change effects become essentially infinite. Hurrying can therefore be considered an insurance policy against the unknown but perhaps increasing risk of catastrophic damage.

Abstract: Concepts from behavioral economics can be used to make predictions concerning how climate change will impact the economy. Six new predictions from behavioral economics are compared to their rational expectations counterparts.

The security offering literature shows that firms offering their shares for sale to the public generally manage their earnings upwards around the offering to raise investor demand for the firm’s shares and increase their sale price. In addition, the literature demonstrates that earnings management around the offering increases the information asymmetry between the issuers and outside investors, thereby increasing the issue flotation costs. Markedly increased flotation costs imply, inter alia, a reduced demand for, and pricing of, the new shares offered – the opposite result of that sought by the issuing management. To date, mechanisms to prevent issuing firms from managing earnings opportunistically are non-existent. I address this current gap in the literature by proposing a disclosure-based framework for issuing firms aimed at reducing the extent of information asymmetry between them, outside investors and underwriters. Specifically, I present a mechanism where firms add a voluntary “honest disclosure” section in their issue prospectuses, in which they provide information that reduces uncertainty about their financial reports. I demonstrate that such voluntary disclosures by firms create a reality that encourages truthful reporting around the offering and results in a more effective capital market. The proposed framework does not require a change in current institutional mechanisms. Furthermore, as an integral part of the prospectus, the SEC will scrutinize the disclosure. Last but not least, the new section should not add significant cost to the issuer.