efficient and durable decision rules with incomplete information we compare six concepts of efficiency for economies with incomplete information depending on the stage at which individuals welfare is evaluated and on whether incentive constraints are recognized an example is shown in which an incentive efficient decision rule may be unanimously rejected by the individuals in the economy we define durable decision rules which can resist such unanimous rejection and show that efficient durable decision rules exist

the economics of favors abstract this paper examines the favors people perform for each other using a stochastic version of the infinitely repeated prisoner s dilemma rpd it is shown that the socially efficient outcome may not be consistent with an equilibrium because some favors are too expensive to perform on the other hand it is possible for some socially inefficient favors to be performed even so favor exchange relationships must be strictly pareto improving the model is also able to address situations in which there are market alternatives to the services being exchanged and when favors are exchanged among members of large groups or hierarchies

how much damage will climate change do recent estimates two reasons to be concerned about climate change are its unjust distributional impact and its negative aggregate effect on economic growth and welfare although our knowledge of the impact of climate change is incomplete and uncertain economic valuation is difficult and controversial and the effect of other developments on the impacts of climate change is largely speculative the authors find that poorer countries and people are more vulnerable than are richer countries and people a modest global warming is likely to have a net negative effect on poor countries in hot climates but may have a net positive effect on rich countries in temperate climates if one counts dollars the world aggregate may be positive if one counts people the world aggregate is probably negative negative impacts would become more negative and positive impacts would turn negative for more substantial warming the marginal costs of carbon dioxide emissions are uncertain and sensitive to assumptions that partially reflect ethical positions but are unlikely to be larger than 50 per tonne carbon

welfare effects of distortionary fringe benefits taxation the case of employer provided cars in europe many employees receive company cars as fringe benefits induced by taxation we analyze the welfare effects of company car taxation for the netherlands by estimating to what extent car expenditure and private car travel change when employees receive a company car tax treatment of company cars generates an annual welfare loss ranging from 600 to 780 per company car mainly due to a shift toward more expensive cars from 420 to 600 but also due to increased private travel 180 for the whole of europe the annual welfare loss is about 12 billion 2011 by the economics department of the university of pennsylvania and the osaka university institute of social and economic research association

externality correcting taxes and regulation externality correcting taxes and regulation in much of the literature on externalities taxes and direct regulation have been considered as alternative policy instruments both instruments might be imperfect in practice reflecting informational deficiencies and other limitations we analyse the use of taxes and regulation in combination to control externalities arising from individual consumption behaviour we consider the cases either where taxes are imperfectly differentiated to reflect individual differences in externalities or where some consumption escapes taxation in both cases we characterize the optimal instrument mix and we show how changing the level of direct regulation alters the optimal externality tax

a diamond is forever and other fairy tales the relationship between wedding expenses and marriage duration in this study we evaluate the association between wedding spending and marriage duration using data from a survey of more than 3 000 ever married persons in the united states controlling for a number of demographic and relationship characteristics we find evidence that marriage duration is inversely associated with spending on the engagement ring and wedding ceremony jel j12 z1 d1

the non monetary nature of gifts this paper addresses the prevalence of non monetary gifts over more highly valued and e cient monetary transfers in social relationships we demonstrate that under a wide variety of circumstances ine cient non monetary gifts will be o ered by a donor in lieu of cash in order to signal the donor s quality of information about the recipient s preferences this result emerges because gift giving is ine cient relative to cash and not because of any arbitrary assumptions regarding communication in particular the donor has available the strategy of o ering cash and saying what he would have purchased nonetheless there is still an important equilibrium role for buying gifts 2001 elsevier science b v all rights reserved jel classixcation a13 d10 d64 d82 z1

economic dimensions of household gift giving the purpose of this research was to explore economic dimensions of a consumer gift giving model two dimensions of extrahousehold gift expenditures were modeled the probability of giving and the expected value of the corresponding expenditures data were from 4 139 households in the quarterly interview component of the 1984 1985 u s continuing consumer expenditure survey the results demonstrated that both the probability of giving and the value of annual expenditures for gifts given outside the consumer unit are related to total expenditures a proxy for income family size life cycle stage and education in addition the probability of gift giving is related to the number of female adults ethnicity and urbanization and the value of gift expenditures is related to region extrahousehold gift expenditures appear to be a luxury as income increases gift expenditures increase more rapidly

mass car ownership in the emerging market giants the typical urban household in china owns a tv a refrigerator a washing machine and a computer but does not yet own a car in this paper we draw on data for a panel of countries and detailed household level surveys for the largest emerging markets to document a remarkably stable relationship between gdp per capita and car ownership highlighting the importance of within country income distribution factors we find that car ownership is low up to per capita incomes of about us 5000 and then takes off very rapidly several emerging markets including india and china the most populous countries in the world are currently at the stage of development when such takeoff is expected to take place we project that the number of cars will increase by 2 3 billion between 2005 and 2050 with an increase by 1 9 billion in emerging market and developing countries we outline a number of possible policy options to deal with the implications for the countries affected and the world as a whole marcos chamon paolo mauro and yohei okawa

the role of market forces in assuring contractual performance the conditions under which transactors can use the market repeat purchase mechanism of contract enforcement are examined increased price is shown to be a means of assuring contractual performance a necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance this will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm specific assets advertising investments thereby become a positive indicator of likely performance

sacrifice and stigma reducing free riding in cults communes and other collectives this paper presents an economic analysis of religious behavior that accounts for the continuing success of groups with strange requirements and seemingly inefficient prohibitions the analysis does not presuppose any special motives for religious activity rather religion is modeled as a club good that displays positive returns to participatory crowding the analysis demonstrates that efficient religions with perfectly rational members may benefit from stigma self sacrifice and bizarre behavioral restrictions the model also addresses sacrifice in nonreligious social clubs fraternities communes political parties work groups and families

why do people volunteer an experimental analysis of preferences for time donations why do individuals volunteer their time even when recipients receive far less value than the donor s opportunity cost previous models of altruism that focus on the overall impact of a gift cannot rationalize this behavior despite its prevalence we develop a model that allows for differential warm glow depending on the form of the donation in a series of laboratory experiments that control for other aspects of volunteering such as its signaling value subjects demonstrate behavior consistent with the theoretical assumption that gifts of time produce greater utility than the same transfers in the form of money subjects perform an effort task accruing earnings at potentially different wage rates for themselves or a charity of their choice with the ability to transfer any of their personal earnings to charity at the end of the experiment subjects exhibit strong preferences for donating time even when differential wage rates make it costly to do so the results provide new insights on the nature of vo

does consumer irrationality trump consumer sovereignty scholars working on the border of economics and psychology have documented many contexts in which individual decision making is unreliable and might be improved by paternalistic interventions against this mounting body of negative evidence economists default belief in consumer sovereignty has been motivated primarily by theory rather than evidence the goal of the present study is to see whether there is direct evidence supporting economists faith in consumer sovereignty in a simple context we address this question by presenting direct evidence that consumers own purchases generate between 10 and 18 more value per dollar spent than items received as gifts

the effect of unemployment insurance sanctions on the transition rate from unemployment to employment sanctions or punitive benefits reductions are increasingly used as a tool to enforce compliance of unemployment insurance claimants with search requirements this article analyses sanctions using a unique administrative data set of individuals who started collecting unemployment insurance in the netherlands in 1992 after correction for selectivity in the imposition of sanctions we find that sanctions substantially raise individual re employment rates

pricing and congestion economic principles relevant to pricing roads u k expenditures on roads or road costs average l4 34 billion per year from the 24 6 million vehicles registered road taxes of l12 7 billion were collected 2 9 times road costs from 1978 88 the average daily traffic on each km of road rose by 34 percent with a consequent serious increase in congestion road space is a valuable and scarce resource and road users should logically pay the marginal social cost if they are to make efficient transport and location decisions the paper estimates these costs and the appropriate charges for britain and identifies the major policy issues total road charges ignoring hard to quantify accident costs should yield l13 8 billion of which congestion charges would be l12 8 billion though close to road taxes in total amount replacing current taxes by road pricing would reduce congestion improve public transport and avoid perverse consequences from road expansion copyright 1990 by oxford university press

tax incidence when individuals are time inconsistent the case of cigarette excise taxes abstract one of the most cogent criticisms of excise taxes is their regressivity with lower income groups spending a much larger share of their income on goods such as cigarettes than do higher income groups we argue that traditional quantity based measures of incidence are only appropriate under a very restrictive time consistent model of consumption of sin goods a model that is much more consistent with existing evidence on smoking decisions is a time inconsistent formulation where excise taxes on cigarettes serve a self control function that is valued by smokers who would like to quit but cannot this self control function benefits lower income groups more since they have a significantly higher price sensitivity of smoking calibrations show that as a result cigarette taxes are much less regressive than previously assumed and are even progressive for a wide variety of parameter values

marginal tax reform externalities and income distribution the paper examines welfare improving and revenue neutral directions marginal policy reforms for an economy with nonidentical individuals and an externality that has a feedback effect on the consumption of taxed goods it considers three types of policy instruments the indirect taxes the uniform poll transfer and public abatement this extends the framework set up by ahmad and stern 1984 bovenberg and de mooij 1994 and schob 1996 the theoretical model is illustrated for a specific externality namely congestion caused by peak car transport

environmental policy public finance and the labour market in a second best world abstract environmental and tax policies and the optimal provision of clean and dirty public goods are analysed within the context of a second best framework of optimal taxation households consume both clean and dirty commodities degradation of the natural environment occurs due to the consumption of dirty private and public goods but can be offset when the government engages in abatement activities increased environmental concern implies a higher dirt tax a lower tax on labour less employment more public abatement and a cleaner environment if the elasticity of substitution between private consumption commodities and leisure is large and that between clean and dirty goods is small public consumption may expand while private consumption contracts otherwise public consumption falls

can personal gasoline permit trading be effective an investigation into permit demand this study proposes a personal gasoline permit trading scheme to limit the total gasoline consumption thus reducing its environmental impact we studied the effectiveness of this scheme by analyzing the permit demand of a gasoline driven vehicle in transportation sector a general utility optimization model is formulated and a cobb douglas utility function is further assumed to analyze the response of permit demand to its price changes with the slutsky decomposition of price effects the results when defined in economic terms indicate that the permit demand of consumers in higher income groups are negatively related to permit price permit demand are also negatively related to permit price for consumers in medium income groups but with positive income effect and the direct relationship between permit demand of lower income groups and the price is defined as a giffen good effect that is for those low income groups when the permit price rises their demand for permits would also increase then us and singapore household expenditure data are used to show comparable results of a pilot personal gasoline permit trading scheme further some regulations on critical parameters such as permit allocation and permit prices in the policy design are proposed to make the scheme feasible in different income groups based on these results implications limitation and suggestions for future study are discussed

money talks an experimental investigation of cheap talk and burned money we experimentally study the strategic transmission of information in a setting where both cheap talk and money can be used for communication purposes theoretically a large number of equilibria exist side by side in which senders either use costless messages money or a combination of the two we find that senders prefer to communicate through costless messages only when the interest disalignment between sender and receiver increases cheap talk tends to break down and high sender types start burning money to enhance the credibility of their costless messages a behavioral model due to kartik 2009 assuming that sellers bear a cost of lying fits the data best

taxing and regulating vices we study the optimal taxation and regulation of sin goods goods that are enjoyable to consume but also create future negative health consequences within a setting in which individuals are time inconsistent and thus consume too much regulation makes the consumption of sin goods less pleasurable and taxation involves administrative and compliance costs in contrast to previous literature we find that regulation can be beneficial even when corrective taxes are available and individuals are homogeneous moreover despite the inefficiencies associated with the use of both instruments the consumption of the sin good might fall short of the first best the results are robust to consumers heterogeneity

on the seasoning process of new bonds some are more seasoned than others in recent years there have been a number of studies investigating the yield spread phenomena between new and seasoned bonds 1 2 3 4 8 10 13 this literature focuses upon two aspects of the equilibrium pricing of new versus seasoned bonds l analysis of the microeconomic determinants of new issue seasoned issue yield spreads such as specific differences in coupon rates call features maturity features and the like and 2 analysis of macroeconomic determinants of yield spreads such as economic growth interest rate cycles changing marginal tax rates and the like

corrective taxation versus liability as a solution to the problem of harmful externalities abstractalthough the corrective tax has long been viewed by economists as a desirable remedy for the problem of harmful externalities its actual use has been limited mainly to the domain of pollution liability in contrast has great importance in controlling harmful externalities i compare the tax and liability in theory and suggest that the conclusions help explain the observed predominance of liability over taxation except in the area of pollution the following factors are emphasized inefficiency of incentives under taxes when the state cannot practically take into account all variables that significantly affect expected harm efficiency of incentives under strict liability which requires only that actual harms be measured efficiency of incentives under the negligence rule administrative cost advantages of liability deriving from its being applied only when harm occurs and dilution of incentives under liability when suit is unlikely or injurers cannot pay fully for harm

sect subsidy and sacrifice an economist s view of ultra orthodox jews israeli ultra orthodox men study full time in yeshiva until age 40 on average why do fathers with families in poverty choose yeshiva over work draft deferments subsidize yeshiva attendance yet attendance typically continues long after exemption fertility rates are high tfr 7 6 and rising a social interaction approach explains these anomalies yeshiva attendance signals commitment to the community which provides mutual insurance to members prohibitions strengthen communities by effectively taxing real wages inducing high fertility historically the incursion of markets into traditional communities produces ultra orthodoxy subsidies induce dramatic reductions in labor supply and unparalleled increases in fertility illustrating extreme responses social groups may have to interventions

quasi hyperbolic discounting and retirement abstract some people have self control problems regularly this paper adds endogenous retirement to laibson s quasi hyperbolic discounting savings model quarterly journal of economics 112 1997 443 477 earlier selves think that the deciding self tends to retire too early and may save less to induce later retirement still earlier selves may think the pre retirement self does this too much saving more to induce early retirement the consumption pattern may be different from that with exponential discounting other observational non equivalence includes the impact of changing mandatory retirement rules or work incentives on savings and a possibly negative marginal propensity to consume out of increased future earnings naive agents are briefly considered

altruism reciprocity and health a social experiment in restaurant choice abstract we used an experimental game to determine whether people imitate restaurant choice reciprocate food gifts and thus spread health choices we randomly paired 138 subjects and recorded their decision to give or keep restaurant vouchers and their choice of restaurant the majority 83 3 chose an unhealthy restaurant if their randomly assigned partner chose an unhealthy restaurant similarly 77 8 chose a healthy restaurant if their partner did p 0 005 the altruistic were more likely to choose a healthy restaurant p 0 017 in sum restaurant choice is influenced by reciprocity a cycle of projection gifting and reciprocation may explain the social dynamics of food choice we propose policies that capitalize on people s tendency towards altruism and imitation

discounting and distributional considerations in the context of global warming the economics of global warming is reviewed with special emphasis on how the cost depends on the discount rate and on how costs in poor and rich regions are aggregated into a global cost estimate both of these factors depend on the assumptions made concerning the underlying utility and welfare functions it is common to aggregate welfare gains and losses across generations and countries as if the utility of money were constant but it is not if we assume that a e co2 equivalent dlubling implies costs equal to 1 5 of the income in both high and low income countries a pure rate of time preference equal to zero and a utility function which is logarithmic in income then the marginal cost of co2 emissions is estimated at 260 590 usd ton c for a time horizon in the range 300 1000 years an estimate which is large enough to justify significant reductions of co2 emissions on purely economic grounds the estimate is approximately 50 100 times larger than the estimate made by nordhaus in his dice model and the difference is almost completely due to the choice of discount rate and the weight given to the costs in the developing world as well as a more accurate model of the carbon cycle finally the sensitivity of the marginal cost estimate with respect to several parameters is analyzed

the social cost of carbon and its policy implications the shadow price or social cost of carbon is an important indicator of the global incremental damage done by emitting greenhouse gases today cost benefit analysis would set the optimal amount of greenhouse gas emission reduction at the point where this social cost just equals the incremental cost of controlling emissions the higher the value for the social cost of carbon the more control is warranted this comparison assumes that cost benefit analysis is the correct way of determining climate change policy and many believe this is not the case because of the very long term irreversible and potentially catastrophic nature of global warming but in the short run at least a comparison of cost and benefits is required and in any event all decisions imply costs and benefits but what is the right figure for the social cost of carbon this paper reviews the uk government s assessment of the cost and concludes that it has been set far too high because of a misreading of the integrated assessment models used to balance costs and benefits moreover adoption of the uk government s shadow price would have formidable implications for energy policy in the uk and for policies on afforestation copyright 2003 oxford university press

optimal taxation of car ownership car use and public transport insights derived from a discrete choice numerical optimization model in this paper we study the taxation of car ownership car use and public transport in the presence of externalities within the framework of a discrete continuous choice model we first derive optimal taxes in a simplified setting emphasizing the specific role of fixed car ownership taxes and the relevance of public transport demand by non car owners for the optimal tax structure a numerical optimisation model is then constructed to study welfareoptimal public transport fares and two part tariffs on ownership and use of gasoline and diesel cars in belgium results are as follows first we find that the current differences in tax treatment between diesel and gasoline car ownership and use cannot be justified on the basis of external cost and budgetary considerations efficient pricing requires substantial increases in the relative user tax on diesel cars as compared to gasoline cars optimal fixed taxes are substantially below current levels and only marginally differ between car fuel types second if for political or technical reasons variable car taxes cannot be optimally adjusted large differences in fixed car taxes do result the same holds if the government uses kilometre taxes as the main variable tax instrument third the results of a series of marginal tax reform exercises suggest that a shift form gasoline towards diesel taxation is welfare improving both for fixed and variable taxes somewhat surprisingly a shift from fixed towards variable taxes is not necessarily welfare improving it is for diesel but not for gasoline cars

optimal gasoline tax in developing oil producing countries the case of mexico this paper uses the methodology of parry and small 2005 to estimate the optimal gasoline tax for a less developed oil producing country the relevance of the estimation relies on the differences between less developed countries ldcs and industrial countries we argue that lawless roads general subsidies on gasoline poor mass transportation systems older vehicle fleets and unregulated city growth make the tax rates in ldcs differ substantially from the rates in the developed world we find that the optimal gasoline tax is 1 90 per gallon at 2011 prices and show that the estimate differences are in line with the factors hypothesized in contrast to the existing literature on industrial countries we show that the relative gasoline tax incidence may be progressive in mexico and more generally in ldcs

tax policy and present biased preferences paternalism under international capital mobility this paper deals with tax policy responses to quasi hyperbolic discounting earlier research on optimal paternalism typically abstracts from capital mobility if capital is mobile between countries it may no longer be possible for national governments to control domestic savings via capital taxation as in a closed economy in this paper we take a broad perspective on public policy responses to self control problems by showing how these responses vary i between closed and open economies ii between small open and large open economies and iii depending on whether or not both source based and residence based capital taxes can be used

how should heavy duty trucks be taxed abstract this paper develops and implements an analytical framework for estimating optimal taxes on the fuel use and mileage of heavy duty trucks in the united states accounting for external costs from congestion accidents pavement damage noise energy security and local and global pollution the analysis allows for endogenous fuel economy increased auto travel in response to reduced truck congestion and distinguishes driving by truck type and region we estimate the optimal second best diesel fuel tax at 1 12 per gallon and implementing it increases welfare by 1 34 billion per annum optimizing over both fuel and mileage taxes and differentiating mileage taxes by vehicle type and region yields progressively higher welfare gains the most efficient tax structure involves a diesel fuel tax of 69 cents per gallon and charges on trucks that vary between 7 and 33 cents per mile implementing this tax structure yields estimated welfare gains of 2 06 billion

gifts as economic signals and social symbols gift giving has often puzzled economists especially because efficient gifts like cash or giving exactly what a person asks for seem crass or inappropriate it is shown in a formal game theoretic model that gifts serve as signals of a person s intentions about future investment in a relationship and inefficient gifts can be better signals other explanations for the inefficiency of gift giving are advanced and some stylized facts about gift giving practices are described many of which are consistent with the signaling view of gifts

does britain or the united states have the right gasoline tax this paper develops an analytical framework to assess the second best optimal level of gasoline taxation taking into account unpriced pollution congestion and accident externalities as well as interactions with the broader fiscal system we provide calculations of the optimal taxes for the us and the uk under a variety of parameter scenarios under our central parameter values the second best optimal gasoline tax is 1 01 gal for the us and 1 34 gal for the uk current tax rates are much lower than this in the us and higher in the uk the calculations are moderately sensitive to alternative parameter assumptions the congestion externality is the largest component in both nations revenue raising needs also play a significant role as do accident externalities and local air pollution potential welfare gains from reducing the current uk tax rate are estimated at nearly one fourth the production cost of all gasoline used in the uk even larger gains could be achieved by switching to a tax on vehicle miles with equal revenue yield for the us the welfare gains from optimizing the gasoline tax are smaller but those from switching to an optimal tax on vehicle miles are very large

market uncertainty and the least cost offering method of public utility debt a note the choice of offering method competitive bidding or negotiated offering for the issuance of new securities by public utilities is subject to approval by its regulators the securities and exchange commission sec regulates security issuance by utility holding companies as stipulated by the public utility holding company act of 1935 rule 50 requires that unless a waiver is granted sales of all securities of a holding company or subsidiary company be accomplished through competitive bidding procedures the federal energy regulatory commission ferc requires competitive bidding on all new securities issued by electric utilities each state regulatory agency can formulate its own policy concerning security issuance most states that have the legal authority to require competitive bidding do require it a fair conclusion of the prevailing regulatory environment is that regulators believe that competitive bidding will lead to lower overall interest cost three recent studies have investigated this question based on a pooled sample of industrial and public utility debt offerings for the period january 1974 to april 1978 sorensen 5 found that competitive bidding leads to a significantly lower overall interest cost compared with negotiated offerings in contrast parker and cooperman 3 using a sample of public utility debt offerings issued between 1970 and 1974 found that competitive bidding did not necessarily result in lower cost fabozzi and west 1 resolve these two seemingly conflicting findings using a sample of public utility debt offerings for the period 1974 through 1976 they demonstrate that the appropriate comparison is not between negotiation and competitive bidding per se but rather between negotiation and the intensity of bidding competition 1 p 324 in addition they show that the general level of uncertainty must be considered in investigating the least cost offering method in doing so they develop a measure to proxy for market uncertainty the purpose of this note is to provide additional empirical evidence on the importance of market uncertainty in the method of offering controversy using a sample from a more recent time period that includes a more volatile interest rate environment than in previous studies to investigate this issue we employ a new measure of market uncertainty as well as the measure developed by fabozzi and west

effective tax rates in macroeconomics cross country estimates of tax rates on factor incomes and consumption abstract this paper proposes a method for computing tax rates using national accounts and revenue statistics using this method we construct time series of tax rates for large industrial countries the method identifies the revenue raised by different taxes at the general government level and defines aggregate measures of the corresponding tax bases this method yields estimates of effective tax rates on factor incomes and consumption consistent with the tax distortions faced by a representative agent in a general equilibrium framework these tax rates compare favorably with existing estimates of marginal tax rates and highlight important international differences in tax policy

comparing the efficiency of alternative policies for reducing traffic congestion abstract this paper compares the efficiency of a single lane toll a uniform congestion tax across freeway lanes a gasoline tax and a transit fare subsidy at reducing congestion there are three conditions for an efficient outcome relating to travel across modes across peak and off peak periods and sorting out drivers with high and low time costs across faster and slower freeway lanes each policy involves some inefficiency indeed the single lane toll gasoline tax and transit subsidy forego at least two thirds of the efficiency gains under an ideal congestion tax that varies across lanes however the uniform congestion tax achieves over 90 of these gains

when should drivers be encouraged to carpool in hov lanes policies to encourage carpooling in high occupancy vehicle hov lanes have been adopted in the united states to lower congestion and reduce air pollution we analytically model highway congestion and other vehicle related externalities encouraging carpooling decreases total costs when congestion relief in mainline lanes outweighs increased hov lane congestion importantly entry of new drivers via induced demand can negate the benefits of increased carpooling using 10 years of traffic data from los angeles we estimate time and route specific marginal external costs because costs vary substantially across routes hours and days current policies to promote carpooling will often increase social costs jel r41 r48 q53

religion terrorism and public goods testing the club model abstract can rational models once theological explanations are discredited explain why certain radical religious rebels are so successful in perpetrating suicide attacks the fundamental barrier to success turns out not to be recruiting suicide attackers there is a rational basis for volunteering rather the barrier is the danger of other operatives defecting a club model portraying voluntary religious organizations as efficient providers of local public goods explains how they weed out potential defectors by requiring sacrifices as signals of commitment they are thereby able to succeed in risky terrorist attacks the model has testable implications for tactic choice and damage achieved by clubs and other rebel organizations data spanning a half century on both terrorists and civil war insurgents much from middle east sources and israel palestine reveal that a missions organized by radical religious clubs that provide benign local public goods are both more lethal and are more likely to be suicide attacks than missions organized by other terrorist groups with similar aims and theologies and b suicide attacks are chosen when targets are hard i e difficult to destroy our results suggest benign tactics to counter radical religious terrorism and insurgency

in search of welfare improving gifts gift giving is thought to decrease welfare recipients are sometimes stuck with gifts they would not have purchased because the giver does not perfectly know the recipient s preferences and in kind gifts cannot be costlessly refunded such gifts are welfare reducing compared to giving cash if in addition recipients possess full information as to which stores carry their desired goods and the ability to reach these stores costlessly we replace these two latter assumptions with the more realistic assumptions of uncertainty about the location of goods and search costs in contrast to existing economic models gifts in our model enhance expected welfare moreover gift giving cannot be replaced by a profit maximizing trader nor the introduction of nearby specialty stores carrying gift goods we use our model to explain a number of stylized facts about gift giving the organization of retail trade and in kind government transfers 2008 elsevier b v all rights reserved

to rebate or not to rebate fuel economy standards versus feebates we compare the welfare effects in equilibrium of two environmental regulations that aim at increasing the new cars fleet s average fuel efficiency the fuel economy standards and the feebate policies maintaining the same environmental benefit and tax revenue we simulate the implementation of each policy in france and the united states standard type policies have larger negative welfare effects up to 3 2 times those from the feebate effects on manufacturers are heterogeneous some are better of under the standard regulation the addition of a market to trade levels of fuel efficiency dominates the simple standard regulation but not always the feebate we also consider the attribute based standard technological improvements and the equivalence with fuel taxes as extensions

forced gifts the burden of being a friend abstract in many developing countries gift expenses escalate with income growth and account for a substantial share of household expenditure we develop a theoretical model to demonstrate how unequal income growth may trigger gift competition and drive up the financial burden associated with gift exchange we use unique census type panel data from rural china to test our model predictions and demonstrate that 1 the value of gifts responds to the average gift in the community 2 the escalation of gift giving may have adverse welfare implications especially for the poor and 3 escalating gift expenses crowd out expenditures on other consumption items

do workplace smoking bans reduce smoking in recent years workplace smoking policies have become increasingly prevalent and restrictive using data from two large scale national surveys we investigate whether these policies reduce smoking our estimates suggest that workplace bans reduce smoking prevalence by 5 percentage points and daily consumption among smokers by 10 percent although workers with better health habits are more likely to work at firms with smoking bans estimates from systems of equations indicate that these results are not subject to an omitted variables bias the rapid increase in bans can explain all of the recent drop in smoking among workers relative to nonworkers

household allocations and endogenous information the case of split migrants in kenya abstract one of the main elements separating different models of intrahousehold allocations is the household information set this paper tests for the endogeneity of the household information set in a context where household members cannot observe each other easily spousal information in the context of split urban migration in kenya based on unique data it finds that split migrant couples in the nairobi slums invest considerable resources into information acquisition substituting visits monitoring by siblings and budget submissions before remitting comparisons of pre marital search characteristics between current split and joint migrants are consistent with the hypothesis that those anticipating split migration change their marital search behavior to mitigate the consequences of pending imperfect information

optimal sin taxes abstract we investigate sin taxes on unhealthy items such as fatty foods that people may by their own reckoning consume too much of we employ a standard optimal taxation framework but replace the standard assumption that all consumers have 100 self control with an assumption that some consumers may have some degree of self control problems we show that imposing taxes on unhealthy items and returning the proceeds to consumers can generally improve total social surplus because such taxes counteract over consumption by consumers with self control problems while at the same time they naturally redistribute income to consumers with no self control problems who consume less such taxes can even create pareto improvements finally we demonstrate with some simple numerical examples that even if the population exhibits relatively few self control problems optimal taxes can still be large

the theory of reform and indian indirect taxes abstract given a set of value judgements an initial state and a model of the economy one can ask whether some feasible tax change would increase welfare we do this by defining the marginal cost in terms of welfare of raising an extra rupee from the i th good the inverse optimum problem is the calculation of non negative welfare weights on households which imply that the initial state is optimum if no such welfare weights exist then a pareto improvement is possible we illustrate the concepts and results using data from the indian economy for 1979 1980 directions of tax reform for a number of specific social welfare functions and for pareto improvements are presented

household adjustment to gasoline price change an analysis using 9 years of us survey data this paper examines the dynamics and composition of household adjustment to changes in the real price of gasoline using a panel of us households by decomposing the demand for gasoline into the demand for vehicle miles traveled and the demand for household composite miles per gallon we are able to add rich detail to the description of how households respond to gasoline price changes while obtaining total price elasticity estimates well within the range found in the literature we find that consumers initially respond to a price rise with a much larger decrease in consumption than would be indicated by the total elasticity in addition households respond to price changes by adjusting vehicle miles traveled more than composite miles per gallon in the year after a price change

the magic of the personal touch field experimental evidence on money appreciation as gifts this paper makes use of two field experiments to explore individual effort responses to gifts we extend the literature by looking at nonfinancial gifts and gifts that combine financial and nonfinancial elements with or without adding a personal touch we find that non pecuniary gifts that signal worker appreciation induce reciprocity most importantly we find that there are interaction effects between money and appreciation while money and appreciation are individually effective they only work well together when they are combined with a personal touch this points to the importance of interpersonal elements in gift giving and has important implications for how to effectively elicit worker effort

biofuel subsidies versus the gas tax the carrot or the stick abstract this paper provides an analytical framework to examine the relative efficiencies of a revenue neutral biofuel subsidy and a gas tax in the presence of pre existing distortions and growing substitutability between fuels both policies are set to achieve a targeted reduction in gasoline use at the state level the model is then calibrated for a small open economy such as illinois which is one of the largest producers of biofuels such as ethanol in the u s the main result of the paper shows that raising the biofuel subsidy use reduces overall welfare by more than a higher gas tax both aimed to achieve a targeted reduction in pure gasoline the relative efficiency of the higher gas tax is primarily due to it exacerbating the pre existing distortion in the biofuel market by less than the subsidy moreover for current parameter estimates welfare improving policy combinations for achieving a targeted amount of energy security are higher gas taxes combined with lower biofuel subsidies and a lower tax on income however the preference for a gasoline labor tax swap shrinks as the elasticity of substitution between the two fuels rises

product quality market signaling and the development of east west trade countertrade a contractual form in which there is a two way flow of goods occupies a position of significance in east west trade in this paper it is shown that countertrade can solve problems which arise when the quality of eastern european products is unknown using the market signaling literature a theory is formulated in order to make predictions concerning the use of countertrade countertrade will be particularly useful when quality information is important but cannot be obtained directly and when a country has a poor quality reputation these predictions are supported by empirical tests

modeling gift choice the effect of uncertainty on price sensitivity abstractgift giving generates high revenues for retailers it is also marked with significant welfare or deadweight loss in that givers tend to pay more than the receivers valuation previous research has attributed this discrepancy to givers inaccurate predictions of the receivers preferences this research demonstrates that reduced price sensitivity is another important source of the deadweight loss givers use gift prices to signal the importance of their relationship with the receiver in order to demonstrate this mechanism the authors develop a new bayesian gift choice model that captures both preference predictions as well as the signaling value of price the model is estimated on two choice based conjoint studies for gift giving that allow for the manipulation of the giver s uncertainty about the receiver s preferences both studies show the strong signaling value of price especially when givers are uncertain about receivers preferences decomposition of the deadweight loss shows that the s

the effects of excise taxes and regulations on cigarette smoking abstract we estimate a generalized linear model to examine adult and teenage cigarette demand our analysis focuses on the extent to which exice taxes and regulations restricting smoking in public places affect cigarette consumption the adult results indicate that the price elasticity of demand is unstable over time ranging from 0 06 in 1970 to 0 23 in 1985 these estimates are lower than most found in previous studies the teenage price elasticity does not differ statistically from the estimates for adults additionally regulations restricting smoking in public places have a significant effect on both adult and teenage cigarette demand

analysing gasoline demand elasticities a survey this paper is a survey of studies on gasoline demand although there are very many dxerent studies in this eld which sometimes appear to arrive at contradictory results we find that with proper stratification of studies by model and data type much of the contict turns to consensus in this survey we classtfy studies by data type and by ten d erent categories of model and with the exception of estimates on seasonal data which tend to be unstable and of certain inappropriate model formulations we find a fair degree of agreement concerning average short run and even long run income and price elasticities

economists views about parameters values and policies survey results in labor and public economics specialists in labor economics and public economics at 40 leading research universities provided opinions of policy proposals quantitative best estimates and 95 percent confidence intervals for economic parameters and answers to values questions regarding income redistribution efficiency versus equity and individual versus social responsibility their positions on policy are more closely related to their values than to their estimates of relevant economic parameters average best estimates of the economic parameters agree well with the relevant literature but individual best estimates are usually widely dispersed the individual 95 percent confidence intervals are much narrower than the substantial cross respondent variation in estimates would warrant

underpricing of newly issued bonds evidence from the swiss capital market the pricing of newly issued bonds on the swiss capital market is investigated over the years 1980 1982 the results reveal a slight underpricing of new bonds at the issue date that is roughly equal to the difference in transactions costs between the markets for new and seasoned bonds underpricing is no longer observed when the new bonds start to be traded on the stock exchange that is after about two days tests of several hypotheses show that unexpected changes in interest rates over the offering period explain part of the underpricing the capital acquisition process of firms has been the subject of intensive research in finance 1 the pricing of newly issued securities is one of the central topics in this area several studies for the bond market find systematic and partly persistent underpricing and therefore higher returns for new bonds relative to seasoned bonds the term seasoning process is generally used to describe this phenomenon 2 typically yields to maturity or holding period returns of either individual new bonds or portfolios of new bonds are compared to portfolios of existing bonds so far only data from the united states have been evaluated this study extends previous research by investigating observations from the swiss capital market due to different institutional characteristics various hypotheses can be tested in a more revealing way in order to allow a reliable identification of the seasoning process individual new and seasoned bonds are selected so that they are identical in as many relevant characteristics as possible holding periods are defined over shorter time spans than commonly used in the literature leading to a more exact estimate of the persistence of systematic differences in returns the paper is organized as follows the methodology underlying the empirical work is developed in section i section ii discusses the institutional setting and the data base the empirical importance of the seasoning process is documented in section iii various explanations and their respective test results are presented in sections iv and v some conclusions complete the paper study center gerzensee foundation of swiss national bank and bank pictet co geneva respectively the comments by j williams as well as by participants at the 13th annual meeting of the european finance association dublin 1986 are gratefully acknowledged the unusually detailed suggestions by two referees resulted in a significant improvement of the paper

the pricing of convertible debt offerings abstract we present the first empirical evidence on the pricing of convertible debt offerings using a sample of 91 convertible debt offerings from the period 1988 1992 we show a significant mean initial excess return of 1 11 our underpricing result is invariant to zero nonzero coupons maturity issue size or bond ratings further analysis reveals that various types of risk inherent in the new convertible issues are useful in explaining the cross sectional variation in the initial excess returns we offer an explanation for our results based on the arguments of the differential information model

optimal taxes and the structure of preferences if optimal tax theory is to be the basis for calculating tax rates a close understanding is required of the relationship between the structure of preferences and the configuration of optimal tax rates otherwise hypotheses chosen by the econometrician for practical convenience may completely determine the results independently of measurement this paper explores the relationship between various types of separability particularly weak and implicit separability and optimal tax rates in the various models discussed in the literature the use of distance functions and the antonelli matrix provides a significant unification of previously disparate results in the final analysis optimal tax theory should be the basis for actual calculation of tax rates although recently there have been great advances in theoretical results and in our understanding of their meaning we are still some way from a working knowledge of whether uniform commodity taxes are in practice optimal or if not which commodities should be discriminated against present theoretical formulae do not yield clear cut results except in special cases and it has recently become clear that optimal rates depend crucially on the detailed structure of consumer preferences for example atkinson and stiglitz 3 show that with an optimal nonlinear income tax discriminatory commodity taxes are only necessary to the extent that individual commodities are not weakly separable from leisure more recently deaton 6 has shown that a similar result holds for what is perhaps the most interesting of the standard models that where there are many consumers and only a linear income tax and proportional commodity taxes are allowed in this case separability between goods and leisure together with linear engel curves for goods removes the need for differential commodity taxation in consequence nothing can be learned about commodity taxes from consumer demand studies in which commodity demands are explained conditionally on total expenditure and commodity prices and which assume linear engel curves all such studies require separability from leisure as a maintained hypothesis and so are consistent with uniform commodity taxation these results suggest that the prospects for meaningful empirical calculations of tax rates are bleak econometricians estimating commodity demand and labor supply equations make generous use of separability assumptions to enable estimation at all in consequence it is likely that empirically calculated tax rates based on econometric estimates of parameters will be determined in structure not by the measurements actually made but by arbitrary untested and even unconscious hypotheses chosen by the econometrician for practical convenience to remedy this situation and as a prelude to fruitful empirical work it is necessary to have a more explicit understanding of how preference structure affects optimal tax rates such is the object of this paper three different

optimal environmental taxation in the presence of other taxes general equilibrium analyses this paper examines the optimal setting of environmental taxes in economies where other distortionary taxes are present we employ analytical and numerical models to explore the degree to which in a second best economy optimal environmental tax rates differ from the rates implied by the pigovian principle according to which the optimal tax rate equals the marginal environmental damages both models indicate contrary to what several analysts have suggested that the optimal tax rate on emissions of a given pollutant is generally less than the rate supported by the pigovian principle moreover the optimal rate is lower the larger are the distortions posed by ordinary taxes numerical results indicate that previous studies may have seriously overstated the size of the optimal carbon tax by disregarding pre existing taxes this abstract was borrowed from another version of this item

revisiting multinational firms tolerance for joint ventures a trust based approach in spite of the increasing popularity of international joint ventures managers express a high level of dissatisfaction with them this paper argues that overemphasis on the outcome has resulted in a neglect of the social processes underlying the outcome the paper elaborates upon the rationale for a cooperative approach towards interorganizational collaborative relationships based on trust and discusses it in the context of joint ventures this is then applied towards understanding multinational ownership preferences and tolerance for joint ventures it is argued that trust centered logic is largely consistent with approaches that emphasize the issue of ownership and deepens and enriches the insights provided by the latter a shift in focus from ownership to relational dynamics is encouraged

time is not money in an ultimatum bargaining experiment we study how subjects bargain over the returns to their investments of money and time the most notable finding is that a third of the subjects demand no compensation for their time investments whereas almost all subjects demand compensation for equally costly monetary investments

biofuel economics in a setting of multiple objectives unintended consequences this paper examines biofuels from an economic perspective and evaluates the merits of promoting biofuel production in the context of the policies multiple objectives life cycle implications pecuniary externalities and other unintended consequences the policy goals most often cited are to reduce fossil fuel use and to lower greenhouse gas emissions but the presence of multiple objectives and various indirect effects complicates normative evaluation to address some of these complicating factors we look at a several combinations of policy alternatives that achieve the same set of incremental gains along the two primary targeted policy dimensions making it possible to compare the costs and cost effectiveness of each combination of policies for example when this approach is applied to u s produced biofuels they are found to be 14 31 times as costly as alternatives like raising the gas tax or promoting energy efficiency improvements the analysis also finds the scale of the potential contributions of biofuels to be extremely small in both the u s and eu mandated u s corn ethanol production for 2025 reduces u s petroleum input use by 1 75 and would have negligible net effects on co2 emissions and although eu imports of brazilian ethanol may look better given the high costs of other alternatives this option is equivalent at most to a 1 20 reduction in eu gasoline consumption

ramsey meets laibson in the neoclassical growth model the neoclassical growth model is modified to include a variable rate of time preference with no commitment ability and log utility the equilibrium features a constant effective rate of time preference and is observationally equivalent to the standard model the extended framework yields testable linkages between the extent of commitment ability and the rates of saving and growth the model also has welfare implications including the optimal design of institutions that facilitate household commitments steady state results are obtained for general concave utility functions and some properties of the transitional dynamics are characterized for isoelastic utility

directed giving evidence from an inter household transfer experiment abstract we investigate the determinants of giving in a lab in the field experiment with large stakes study participants in urban mozambique play dictator games where their counterpart is the closest person to them outside their household when given the option dictators do a large fraction of giving in kind in the form of goods rather than cash in addition they share more in total when they have the option of giving in kind compared to giving that can only be in cash qualitative post experiment responses suggest that this effect is driven by a desire to control how recipients use gifted resources standard economic determinants such as the rate of return to giving and the size of the endowment also affect giving but the effects of even large changes in these determinants are significantly smaller than the effect of the in kind option our results support theories of giving where the utility of givers depends on the composition not just the level of gift recipient expenditures and givers thus seek control over transferred resources

the optimal degree of cooperation in the repeated prisoners dilemma with side payments abstract in the infinitely repeated prisoners dilemma with side payments we characterize the pareto frontier of the set of subgame perfect equilibrium payoffs for all possible combinations of discount factors play paths implementing pareto dominant equilibrium payoffs are uniquely determined in all but the first period full cooperation does not necessarily implement these payoffs even when it maximizes total stage game payoffs rather when the difference in players discount factors is sufficiently large pareto dominant equilibrium payoffs are implemented by partial cooperation supported by repeated payments from the impatient to the patient player when both players are sufficiently patient such payoffs while implemented via full cooperation are supported by repeated payments from the impatient to the patient player we characterize conditions under which public randomization has no impact on the pareto dominant equilibrium payoffs and conditions under which such payoffs are robust to renegotiation

environmental tax interactions when pollution affects health or productivity abstract recent studies indicate that interactions with the tax distorted labor market increase the cost of pollution regulation however these studies make restrictive assumptions regarding preferences and ignore key links between pollution human health and labor productivity together these assumptions imply that pollution does not affect labor supply this paper develops an analytical general equilibrium model that considers several potential benefits from reduced pollution including improved health or productivity it shows that these benefits affect labor supply and thus create a benefit side tax interaction effect that can be of the same magnitude as the familiar cost side interaction when reduced pollution boosts labor productivity the effect substantially magnifies such benefits in contrast when pollution affects consumer health the effect tends to diminish the benefits of reduced pollution the paper considers only environmental regulation but these concepts apply equally to other policies affecting productivity or health such as research subsidies or occupational safety regulations

broad and narrow bracketing in gift certificate spending abstract we survey 1050 consumers who have just redeemed one or more open loop gift certificates to learn whether they view gift certificate income cash gifts and non gift income as substitutes we find that the majority 83 of recipients spend the certificates in the same way as cash the other respondents 17 bought an item they would not have bought otherwise but adjustments in their shopping pattern do not seem to result from constraints in redeeming the certificates 80 of all respondents in this group says they have used the certificate to buy an item they really love to have while inconsistent with standard microeconomic demand theory this behavior can be explained by narrow bracketing in spending gift certificates these consumers consider a limited choice set of nice personal items our data show that females are more likely to narrow bracket gift certificate income and that positive reciprocity towards the giver induces narrow bracketing in case the giver is a household member who suggests to buy a particular item using the certificate previous studies have found that both giving in kind gifts waldfogel 1993 as giving gift cards offenberg 2007 entail a welfare loss of 10 30 when compared to giving cash we find that the welfare effects of open loop gift certificates among users are limited the consumption of broad bracketing consumers is unaffected and narrow bracketing consumers seem to value the possibility to separate gift certificate income from other income sources

toward an optimal u s ethanol fuel subsidy abstract enhanced environmental quality fuel security and economic development along with reduced prices of ethanol gasoline blends are often used as justifications for the u s federal excise tax exemption on ethanol fuels however the possible effect of increased overall consumption of fuel in response to lower total price mitigating the environmental and fuel security benefits are generally not considered taking this price response into account the optimal u s ethanol subsidy is derived estimated values of the optimal subsidy reveal that the subsidy s environmental and security benefits are questionable however positive environmental and security benefits from the ethanol tax exemption subsidy may be obtained if the subsidy is combined with an increase in the excise tax on gasoline

biological basics and the economics of the family many economic models of the family are based on a generic person one person two household or parent child family rather than their anatomically correct counterparts sons and daughters fathers and mothers and grandfathers and grandmothers these economic models can offer powerful insights into family behavior but also can leave certain patterns unexplained and neglect potentially important crosscurrents melding biological insights with family economics can cast new light on existing knowledge and open up novel paths for research for example study after study has found that putting family income in the hands of mothers rather than fathers tends to increase the consumption of children as noted in this journal in lundberg and pollak 1996 yet the way such results are usually described might strike a noneconomist as exceedingly circumspect economists point out that these findings reject the common preference model of household decision making in favor of one with independent decisionmaking spouses but usually make little mention of motherhood or fatherhood per se or consider the dramatic expansion of south african government pension programs in the early 1990s which put lots of extra money in the hands of grandparents many of whom lived with their grandchildren in a compelling and oft cited study duflo 2003 found evidence of pension spillovers to grandchildren but the most intriguing patterns were demographic pensions to maternal grandmothers redounded to the benefit of granddaughters economic analysis uncovers the income effects but turns out to be of little help for explaining why these particular gender effects predominated

comparing alternative policies to reduce traffic accidents abstract this paper derives and implements formulas for the welfare effects of uniform mileage taxes gasoline taxes per mile insurance premiums and mileage taxes differentiated across vehicle and driver groups for reducing the external costs of passenger vehicle accidents the average external accident cost is estimated at 2 2 6 6 cents per mile accidents costs differ substantially across driver groups but only moderately across vehicles groups annual welfare gains from a mileage tax equal to marginal external costs for each driver vehicle group are 9 4 billion in the benchmark case the uniform mileage tax and per mile insurance reform can achieve 76 and 65 of this welfare gain respectively while the gasoline tax can achieve only 28 of the welfare gain unlike other policies the gasoline tax induces costly improvements in average fleet fuel economy that have little effect on reducing external costs

theft gift giving and trustworthiness honesty is its own reward in rural paraguay in developing countries lacking legal enforcement villagers may use implicit contracts to minimize crime i construct a dynamic limited commitment model in which a thief cannot commit to forego stealing but is induced to steal less by the promise of future gifts combining survey data on production theft gifts and trust with experiments measuring trustworthiness i provide supporting evidence farmers living near more relatives or with plots that are difficult to steal from give fewer gifts and trust more and those living near more relatives also experience less theft giving increases when trust is lower and the threat of theft is greater

automobile externalities and policies this paper discusses the nature and magnitude of externalities associated with automobile use including local and global pollution oil dependence traffic congestion and traffic accidents it then discusses current federal policies affecting these externalities including fuel taxes fuel economy and emissions standards and alternative fuel policies summarizing insofar as possible the welfare effects of those policies finally we discuss emerging pricing policies including congestion tolls and insurance reform and summarize the appropriate combination of policies to address automobile externalities

revenue recycling and the welfare effects of road pricing the authors explore the interaction between taxes on work related traffic congestion and preexisting distortionary taxes in the labor market a congestion tax raises the overall costs of commuting to work and discourages labor force participation at the margin when revenues are returned in lump sum transfers the resulting efficiency loss in the labor market can be larger that the pigouvian efficiency gains from internalizing the congestion externality by contrast if congestion tax revenues are used to reduce labor taxes the net impact on the labor supply is positive and the efficiency gain in the labor market can raise the overall welfare gains of the congestion tax by as much as 100 percent recycling congestion tax revenues in public transit subsidies produces a positive but smaller impact on the labor supply in short the authors results indicate that the presence of preexisting tax distortions and the form of revenue recycling can crucially affect the size and possibly even the sign of the welfare effect of road pricing schemes the efficiency gains from recycling congestion tax revenues in other tax reductions can amount to several times the pigouvian welfare gains from congestion reduction

the determinants of trust in supplier automaker relationships in the us japan and korea we examine the determinants of trust in 453 supplier automaker relationships in the us japan and korea we define trust and derive a model of its determinants drawing upon 1 an embeddedness relationship based perspective 2 a process based perspective and 3 an economic hostage based perspective our findings indicate strong support for the process based perspective in all countries embeddedness was only important in japan and the economic hostage based variable stock ownership was not important in any country

revenue raising vs other approaches to environmental protection the critical significance of pre existing tax distortions using analytical and numerical general equilibrium models we show that preexisting factor taxes produce a tax interaction effect that increases the costs of pollution taxes and quotas under policies that raise revenue and recycle it through cuts in marginal factor tax rates this effect is partially offset by a revenue recycling effect grandfathered pollution quotas such as those used under the 1990 clean air act amendments to regulate electric utilities so2 emissions do not benefit from this offset preexisting taxes raise this regulation s cost by over 70 more than half of this additional cost could be avoided by auctioning quotas and exploiting the revenue recycling effect

purchasing behavior in embedded markets this article explores the concept of market embeddedness and its impact on purchasing behavior in a consumer market embeddedness exists when consumers derive utility from two sources simultaneously from attributes of the product and from social capital found in preexisting ties between buyers and sellers this framework is applied to the home party method of direct sales we find that the degree of social capital present as measured by the strength of the buyer seller tie and buyer indebtedness to the seller significantly affects the likelihood of purchase we cannot tell the precise moment when friendship is formed as in filling a vessel drop by drop there is at last a drop which makes it run over so in a series of kindnesses there is at last one which makes the heart run over boswell 1777 1835