The B.E. Journal of Economic Analysis & Policy

Published by De Gruyter

Volume 1 Issue 1

December 2001

Issue of The B.E. Journal of Economic Analysis & Policy

Contents
Journal Overview

Frontiers of Economic Analysis & Policy

April 12, 2005

Second-Best Pollution Taxation and Environmental Quality

Thomas Gaube

Article number: 1538-0629.1363

Abstract

This paper deals with second-best pollution taxation by investigating allocations instead of the corresponding tax rates. Assuming certain restrictions on utility and that the marginal revenue from environmental taxation is positive, it is shown that environmental quality is higher in second best where only distortionary taxes are used to finance public expenditures than in the first-best optimum where lump-sum taxes are available.

Advances in Economic Analysis & Policy

September 11, 2001

Home Bias in Portfolios and Taxation of Asset Income

Roger Hall Gordon, Vitor Gaspar

Article number: 1538-0637.1001

Abstract

Intuitively, the observed "home bias" in individual portfolios plausibly explains the international capital immobility reported by Feldstein and Horioka (1980) as well as the survival of taxes on capital income. These intuitions are examined in a model where consumers prefer to consume domestically produced goods. The results show that international capital immobility is indeed present in the model: extra domestic savings generate extra investment primarily in the home country. When monetary policy focuses on exchange rate stabilization random domestic prices cause individuals to heavily invest in domestic equity as a hedge against price fluctuations. However our findings show that the specialization of equity portfolios does not necessarily facilitate the taxation of capital income. While random equity returns do facilitate taxes on equity income, as shown in Gordon and Varian (1989) and Huizinga and Nielsen (1997), random consumer prices appear to undermine taxes on capital income.

October 25, 2001

Explaining Incomplete Contracts as the Result of Contract-Reading Costs

Eric Bennett Rasmusen

Article number: 1538-0637.1000

Abstract

Much real-world contracting involves finding new clauses to add to a basic agreement, clauses which may or may not increase the welfare of both parties. The parties must decide which complications to propose, how closely to examine the other side's proposals, and whether to accept them. This suggests a reason why contracts are incomplete in the sense of lacking Pareto-improving clauses: contract-reading costs matter as much as contract-writing costs. Fine print that is cheap to write can be expensive to read carefully enough to understand the value to the reader, and especially to verify the absence of clauses artfully written to benefit the writer at the reader's expense. As a result, complicated clauses may be rejected outright even if they really do benefit both parties, and this will deter proposing such clauses in the first place.

November 3, 2001

Lobbying and Legislative Bargaining

Elhanan Helpman, Torsten Persson

Article number: 1538-0637.1008

Abstract

We examine the effects of the interaction between lobbying and legislative bargaining on policy formation. Two systems are considered: a US-style congressional system and a European-style parliamentary system. First, we show that the policies generated are not intermediate between policies that would result from pure lobbying or from pure legislative bargaining. Second, we show that in congressional systems the resulting policies are strongly skewed in favor of the agenda-setter. In parliamentary systems they are skewed in favor of the coalition, but within the coalition there are many possible outcomes (there are multiple equilibria) with the agenda-setter having no particular advantage. Third, we show that equilibrium contributions are very small, despite the fact that lobbying has a marked effect on policies.

Contributions to Economic Analysis & Policy

January 24, 2002

Why Governments Should Tax Mobile Capital in the Presence of Unemployment

Erkki Koskela, Ronnie Schöb

Article number: 1538-0645.1004

Abstract

This paper shows that a small open economy that suffers from involuntary unemployment should levy a positive source-based tax on capital income. A revenue-neutral tax reform that increases the capital tax rate and reduces the labour tax rate will induce firms to substitute labour for capital. Such a tax reform will lower the marginal cost of production, increase output, reduce unemployment, and increase domestic welfare as long as the labour tax rate exceeds the capital tax rate. The result holds even though trade unions might succeed in subsequently increasing the net-of-tax wage rate, if the elasticity of substitution between capital and labour is above a critical value (which is itself below one). Finally, and importantly, independent of the size of the elasticity of substitution, the government can promote wage moderation and reduce unemployment by increasing the personal tax credit of employed workers instead of reducing the labour tax rate.

January 24, 2002

Testing the Economic Model of Crime:The National Hockey League's Two-Referee Experiment

Steven D. Levitt

Article number: 1538-0645.1014

Abstract

During the 1998-99 season, the National Hockey League randomly varied the number of referees used across games, seemingly providing a rare opportunity to test directly the deterrence model. Combining experimental parameter estimates with an economic model, there is little evidence that the rate of offending changed substantially with the addition of a second referee. The reason, however, appears to be that the second referee had little impact on the probability of punishment. As a consequence, the experiment ultimately turns out to be of limited use for testing deterrence.

April 26, 2002

Road Warrior Booty: Prize Structures in Motorcycle Racing

Michael T. Maloney, Kristina Terkun

Article number: 1538-0645.1015

Abstract

This research reports the results of an analysis of prize structures among competing firms paying tournament wages. In motorcycle racing, sponsors compete in an auction for riders using tournament prizes as bids. Since racers can only ride one bike and wear one helmet, they are forced to choose among sponsors of similar products. We find that in the face of competition, sponsors are forced to lower the incentive intensity of their prize differentials as rival sponsors post larger purses. Our test offers new corroboration of the Lazear-Rosen tournament model. Other researchers have found that workers respond to bigger prize differentials by working harder. We find that firms recognize this and also recognize that in the competitive labor-market equilibrium this extra work must be compensated by offering higher expected wages through bigger purses. Our results complete the theoretical circle: workers respond to the incentive effects of tournament wages and firms anticipate this behavior when making tournament wage offers.

July 9, 2002

Optimal Environmental Regulation in the Presence of Other Taxes: The Role of Non-separable Preferences and Technology

Seung-Rae Kim

Article number: 1538-0645.1025

Abstract

Recent studies find that environmental taxes typically exacerbate pre-existing tax distortions and, therefore, the optimal pollution tax should lie below the Pigouvian level (social marginal damages). This paper analyzes a general equilibrium model with non-separable preferences and technology, relatively rare assumptions in this literature, and finds that the second-best optimal pollution tax can be above or below the first-best Pigouvian level. Surprisingly, the ordering of the two does not depend on the degree of pre-existing tax distortion. Moreover, it depends not just on the difference between the two goods' cross-price elasticities with leisure, but on that difference compared to the elasticity of demand for the polluting intermediate input. Finally, the paper shows that under plausible parameter conditions, a greater pre-existing tax distortion can increase the optimal level of environmental regulation.

July 25, 2002

Adverse Selection, Short-Term Contracting, and the Underprovision of On-the-Job Training

Benjamin E. Hermalin

Article number: 1538-0645.1005

Abstract

This article argues that the existence of adverse selection (worker heterogeneity) can explain the underprovision of general training by employers. High-ability workers value the option to entertain outside wage offers once their abilty becomes known to the market. Offering short-term contracts is, therefore, a way to screen high-ability types from low-ability types. A firm is not willing to train workers under short-term contracts. Hence, despite the positive returns to training, training may be underprovided in equilibrium. More generally, this article contributes to the literature that seeks to explain the puzzling phenomenon of short-term contracts governing long-term buyer-seller relationships.

August 22, 2002

Credits, Crises, and Capital Controls: A Microeconomic Analysis

Zvika Neeman, Gerhard Oskar Orosel

Article number: 1538-0645.1050

Abstract

We analyze the behavior of foreign banks who sequentially provide credit to finance projects in an emerging market. The foreign banks are exposed to both project-risks and the macro-economic risk of a currency crisis, and there are no bailout guarantees. Nevertheless, we show that it is often the case that banks provide too much credit too easily and that this behavior may precipitate the onset of a currency crisis. We demonstrate how the imposition of capital controls in the form of taxes and subsidies on foreign investment may improve the situation. Whereas most of the literature on currency crises focuses its analysis on debtor countries and thus on the borrowers' side, our paper illustrates that the lenders' side also deserves attention.

August 30, 2002

The Effects of Social Security Privatization on Household Saving: Evidence from Chile

Julia Lynn Coronado

Article number: 1538-0645.1033

Abstract

In recent years, a handful of countries have converted the financing of their social security systems from pay-as-you-go (PAYGO) to partial or full funding. Privatization is viewed as one way to insulate social security from the political and demographic pressures that currently threaten the financial stability of PAYGO systems. However, privatization would improve a nation's situation only if such a reform increases domestic saving. In this paper I use evidence from Chile, where social security was privatized in 1981, to assess the impact of such a reform on household saving rates. I find that the reform provided a significant stimulus for net of social security household saving; increasing household saving rates between 5 and 10 percentage points.

September 30, 2002

Complexity, Bounded Rationality and Heuristic Search

W. Bentley MacLeod

Article number: 1538-0645.1059

Abstract

This paper explores the use of heuristic search algorithms for modeling human decision making. It is shown that this algorithm is consistent with many observed behavioral regularities, and may help explain deviations from rational choice. The main insight is that the heuristic function can be viewed as formal implementation of one aspect of emotion as discussed in Descarte's Error by Antonio Damasio. Consistent with Damasio's observations, it is shown that the quality of decision making is very sensitive to the nature of the heuristic ("emotion"), and hence this may help us better understand the role of emotion in rational choice theory.

October 11, 2002

Patent Theory versus Patent Law

Alexander Tabarrok

Article number: 1538-0645.1039

Abstract

According to the economic theory of patents, patents are needed so that pioneer firm have time to recoup their sunk costs of research and development. The key element in the economic theory is that pioneer firms have large, hard to recoup, sunk costs. Yet patents are not awarded on the basis of a firm's sunk costs. Patent law, in fact, ignores costs. The disconnect between patent law and patent theory suggests either that modifying patent law so that it better fits with patent theory would reduce the costs and inefficiencies associated with current patent practice or that the standard economic theory of patents is wrong.

October 22, 2002

An Assessment of the Proposals of the President's Commission to Strengthen Social Security

Peter Diamond, Peter R. Orszag

Article number: 1538-0645.1072

Abstract

The President's Commission to Strengthen Social Security proposed three plans for reforming Social Security. All of them would create individual accounts financed by diverting funds from the Social Security Trust Fund. One of the three Commission proposals (Model 1) would not restore long-term balance to Social Security. This paper focuses on the other two proposals - Models 2 and 3 - which would restore long-term balance. Models 2 and 3 contain a number of elements and are quite complicated. To understand the plans, we describe their proposed changes to Social Security benefits (which we refer to as "traditional benefits"), the individual accounts that the plans would establish, the combined effect on retirement income from the changes in traditional Social Security benefits and the individual accounts, and the impact on Social Security financing and the rest of the budget.

December 2, 2002

Collusive Bidding in the FCC Spectrum Auctions

Peter Cramton, Jesse A Schwartz

Article number: 1538-0645.1078

Abstract

This paper describes the bid signaling that occurred in many of the FCC spectrum auctions. Bidders in these auctions bid on numerous spectrum licenses simultaneously, with bidding remaining open on all licenses until no bidder is willing to raise the bid on any license. Simultaneous open bidding allows bidders to send messages to their rivals, telling them on which licenses to bid and which to avoid. This “code bidding” occurs when one bidder tags the last few digits of its bid with the market number of a related license. We examine how extensively bidders signaled each other with retaliating bids and code bids in the DEF-block PCS spectrum auction. We find that only a small fraction of the bidders commonly used retaliating bids and code bids. These bidders won more than 40% of the spectrum for sale and paid significantly less for their overall winnings.

Topics in Economic Analysis & Policy

November 11, 2001

Pension systems in integrated capital markets

Alessandra Casarico

Article number: 1538-0653.1017

Abstract

The paper studies the effects on factor prices and welfare of the integration in a perfect world capital market of countries that differ in the degree of funding of their pension systems. It focuses on two large economies running respectively a pay-as-you-go and a fully funded pension system and it first analyzes the open economy implications of the different pension designs under the assumption that the pay-as-you-go system is balanced and in steady state equilibrium. It then elaborates on the institutional structure of the pay-as-you-go system to analyze how its degree of maturity, its expenditure profile and the presence of debt financing affect factor prices and welfare in open economy. Finally, it focuses on pension reform issues. The paper shows that, under perfect capital mobility, the differences in the degree of funding of the pension systems cause divergent welfare effects across generations and across countries. It shows that the design features of the pay-as-you-go scheme play a role in the world equilibrium and it identifies which of them can amplify or reduce the open economy linkages operating through the pension schemes.

January 9, 2002

Trade Tax Reform in a Small Open Economy with Distributional Objectives and Distortionary Taxation

Jeremy Edwards

Article number: 1538-0653.1022

Abstract

The paper shows that, if two conditions are satisfied, both radial contraction and concertina trade tax reforms continue to be desirable in a small open economy that differs from the one usually considered by having distributional objectives and using distortionary taxes to raise revenue. The first condition is that some optimisation in the choice of commodity taxes takes place - at a minimum, taxes on nontraded goods must be optimally chosen while taxes on traded goods keep the consumer prices of such goods constant. The second is that pure profits are absent from every household's budget constraint. These conditions mean that some care is required in arguing the case for simple trade tax reforms in small open economies.

About this journal

Objective
The B.E. Journal of Economic Analysis & Policy (BEJEAP) welcomes submissions that employ microeconomics to analyze issues in organizational economics, consumer behavior, and public policy. Articles submitted to BEJEAP can come in two formats: research papers and letters. Authors should bring to their analysis whatever microeconomic theoretical, experimental or econometric tools are helpful. We publish both empirical work and applied theory (though not more abstract forms of applied theory), and our aim is to disseminate papers that have practical implications for public policy, organizational or individual decision making.

Topics

Design of organizations and institutions
Industrial organization
Health economics
Public finance
Labour Economics
Economics of education, family, development, law, or the environment
Effects of domestic and international policy

Article formats
Research Papers, Letters

> Information on submission process