do side payments help collective decisions and strategic delegation i investigate when side payments facilitate cooperation in a context with strategic delegation on the one hand allowing side payments may be necessary when one party s participation con straint otherwise would be violated on the other with side payments each principal appoints a delegate that values the project less because this increases her bargaining power reluctant agents in turn implement too few projects i show that side payments are bad if the hetero geneity is small while the uncertainty and the typical value of the project are large with a larger number of parties there may be a stalemate without side payments but delegation becomes more strategic as well and cooperation decreases in either case jel c78 d78 f53 h77

tax limited reaction functions summary this paper models for the first time a spatial process in local tax policies in the presence of centrally imposed fiscal limitations focusing on the frequently encountered case of a tax rate cap we evaluate three empirical approaches to the analysis of spatially dependent limited tax policies i a bayesian spatial approach for censored dependent variables ii a tobit corner solution model augmented with a spatial lag iii a spatial discrete hazard model the evidence arising from an investigation of severely state constrained local vehicle taxes in italy suggests that ignoring tax limitations can lead to substantial underestimation of inter jurisdictional fiscal interaction copyright 2011 john wiley sons ltd

centralized versus decentralized provision of local public goods a political economy approach abstract this paper takes a fresh look at the trade off between centralized and decentralized provision of local public goods it argues that the sharing of the costs of local public spending in a centralized system will create a conflict of interest between citizens in different jurisdictions when spending decisions are made by a legislature of locally elected representatives this conflict of interest will play out in the legislature depending on precisely how the legislature behaves the result may be excessive public spending or allocations of public goods characterized by uncertainty and misallocation across districts the extent of the conflict of interest between districts is affected by spillovers and differences in tastes for public spending thus the relative performance of centralized and decentralized systems depends upon spillovers and differences in tastes for public spending but for different reasons than suggested in the existing literature

in or out centralization by majority vote we present a positive theory of centralization of political decisions voters choose centralization or decentralization depending on their forecast of the political organization that will favor the policies they prefer we study the induced preferences for centralization as well results of different forms of referenda

bargaining over reform abstract this paper models the delay in a macroeconomic stabilization as the outcome of a bargaining game between two parties who must reach an agreement over how the stabilization cost is to be shared the paper modifies alesina and drazen s 1991 american economic review 81 1170 1189 war of attrition model by endogenizing the distribution of the stabilization costs through a bargaining game using this bargaining framework the paper analyzes the role of crises and foreign assistance in bringing about a settlement to the distributional conflict in the bargaining game a crisis that increases the welfare loss from not stabilizing the economy will lower the probability of delay in contrast foreign aid that is used to reduce the stabilization costs will further increase the delay in reaching an agreement between the two parties

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

majority rules and incentives a club s majority rule defines the number of members that must approve a policy proposed to replace the status quo since the majority rule thus dictates the extent to which winners must compensate losers it also determines the incentives to invest in order to become a winner of anticipated projects if the required majority is large members invest too little because of a holdup problem if it is small members invest too much in order to become a member of the majority coalition to balance these opposing forces the majority rule should increase in the project s value and the club s enforcement capacity but decrease in the heterogeneity in preferences externalities can be internalized by adjusting the rule with heterogeneity in size or initial conditions votes should be appropriately weighted or double majorities required

price advertising and the deterioration of product quality arguments in favour of self enforced bans on advertising by professionals often rely on the stylized fact that advertising can communicate information about price but not about quality this being the case it is argued that allowing professionals to advertise runs the risk that firms will compete vigorously over price at the expense of the quality of their product this paper shows that even if price can communicate no information directly about quality it can do so indirectly because price will be a signal of quality because of this allowing advertising is shown to improve consumer welfare

rules transparency and political accountability rules of allocation and redistribution in the public sector are often less contingent on available information than normative theory would suggest this paper offers a political economy explanation under different rules even if the observable outcomes of policies remain the same the informational content which can be extracted by these observations is different less contingent rules allow citizens to gain more information on politicians and this improved information may be used to better select politicians this advantage may overcome the efficiency loss induced by flatter rules 2001 elsevier science b v all rights reserved

on enhanced cooperation abstract we analyze the issues relative to the formation of sub unions in a federation called enhanced cooperation agreements in the european union when centralization is not politically feasible an agreement among a subset of countries may allow such countries to exploit benefits from coordination that would otherwise be lost other countries in the federation may object to the sub union because it changes the status quo if cooperation at the federal level becomes convenient in the future the change in the status quo may adversely affect the countries which remained initially outside the sub union we show that as long as the countries can commit to coordinate on a policy which takes into account the utility of the excluded countries sub union formation may be optimal the relative advantage of a sub union towards immediate centralization increases when transfers are costly on the other hand if commitment is not possible then the excluded countries may be penalized we use the results to discuss the newly introduced rules for enhanced cooperation agreements in the european union

a political economy theory of partial decentralization we revisit the classic problem of tax competition in the context of federal nations and derive a positive theory of partial decentralization a capital poor median voter chooses to use redistributive capital taxes to provide public goods the expectation of high capital taxes however results in a small capital stock which lowers returns to redistribution the median voter therefore wants to commit to a lower level of capital taxes she does so by setting a partial degree of decentralization in the constitution the equilibrium degree of decentralization balances the positive effect of tax competition on capital taxes with the loss in redistribution that results we show that the degree of decentralization is nonmonotonic in inequality increasing in the redistributive efficiency of public good provision and decreasing in capital productivity when public goods are heterogeneous in their capacity to transfer funds all voters agree that goods with high redistributive capacity should be decentralized

credence attributes voluntary organizations and social pressure abstract credence attributes of products are unobservable through search or experience some consumers are willing to pay a premium for their provision and in addition citizens can apply social pressure on firms to supply credence attributes firms have formed voluntary organizations to assure the provision of credence attributes and the credible provision provides product differentiation this paper provides a theory of the voluntary provision of credence attributes in the presence of demand pull from consumers and social pressure from ngos where an organization chooses a credence standard and firms compete given the standard the credence standard is lower the larger the organization and social pressure results in a higher standard

an equilibrium voting model of federal standards with externalities this paper proposes a framework for studying policy making in a federal system in the presence of spillover externalities local jurisdictions choose local policies by majority rule subject to standards that are set by majority rule at the federal level we characterize the induced preferences of voters for federal policies prove existence of local majority rule equilibrium provide an example of non existence of global majority rule equilibrium and explore the welfare properties of federal standards in the presence of spillovers

reputation in long run relationships we model a long run relationship as an infinitely repeated game played by two equally patient agents in each period the agents play an extensive form stage game of perfect information with either locally non conflicting interests or strictly conflicting interests there is incomplete information about the type of player 1 while player 2 s type is commonly known we show that a sufficiently patient player 1 can leverage player 2 s uncertainty about his type to secure his highest pay off compatible with player 2 s individual rationality in any perfect bayesian equilibrium of the repeated game copyright 2012 oxford university press

communication in federal politics universalism policy uniformity and the optimal allocation of fiscal authority the paper presents a positive model of policy formation in federal legislatures when delegates engage in the strategic exchange of policy relevant information depending on the type of policy under consideration communication between delegates generally suffers from a bias that makes truthful communication difficult and sometimes impossible this generates inefficient federal policy choices that are often endogenously characterized by overspending universalism and uniformity building on these findings i develop a theory of fiscal de centralization which revisits the work of oates in a world of incomplete information and strategic communication empirical results from a cross section of us municipalities are consistent with the predicted pattern of spending

endogenous minimum participation in international environmental agreements an experimental analysis almost all international environmental treaties require a minimum number of countries to ratify the treaty before it enters into force despite the wide spread use of this mechanism little is known about its effectiveness at facilitating cooperation we analyze an agreement formation game that includes an endogenously determined minimum participation constraint and then test the predictions using economic experiments we demonstrate theoretically that players will vote to implement an efficient coalition size as the membership requirement and this coalition will form experimental tests of the theory demonstrate that the minimum participation mechanism is highly effective at facilitating cooperation when efficiency requires the participation of all players however when efficiency requires only a subset of players to participate profitable coalitions are often deliberately blocked in light of our results it is possible that equity concerns can impede the formation of international agreements when membership requirements allow free riders

a coalition formation approach to equilibrium federations the authors develop a model in which states may choose to form coalitions to capture efficiency gains from policy coordination joining a coalition entails setting the policy variable to maximize the coalition s aggregate payoff at a nash equilibrium against nonmembers and to commit to a transfer scheme to share the gains with two states the unique equilibrium structure is complete federation with more than two states incomplete federation can be the unique equilibrium interpreting this result in terms of custom unions the trend to trading bloc formation may be equilibrium behavior even with cooperation and transfers within customs unions copyright 1997 by american economic association

widening and deepening reforming the european union the european union is the product of a unique institutional process individual states often with a history of belligerent relationships have gradually given up ever more sovereignty to produce an increasing number of common goods including the single market a joint cur rency and common policies in the process the union has integrated increasingly diverse coun tries and achieved institutional progress beyond its borders these achievements are particularly remarkable given that member states have had and still have widely different views of the desirable speed and ultimate depth of integra tion possibly the single most powerful force sustaining the process of integration has been the implicit and often explicit threat by more committed member states to form an inner core a club in the club conversely less enthusias tic members have supported extending member ship to more countries as a strategy to frustrate deeper integration

incarceration length employment and earnings this paper estimates effects of increases in incarceration length on employment and earnings prospects of individuals after their release from prison i utilize a variety of research designs including controlling for observable factors and using instrumental variables for incarceration length based on randomly assigned judges with different sentencing propensities the results show no consistent evidence of adverse labor market consequences of longer incarceration length using any of the analytical methods in either the state system in florida or the federal system in california

optimal regional redistribution under asymmetric information this paper studies optimal redistribution among two different regions in a federal state regional governments supply local public goods financed with distorting local taxes they have better information on their tax bases than the federal government we model this both as an adverse selection problem on the size of local tax bases and or as moral hazard problem on local tax enforcement moral hazard alone does not affect the first best redistribution rule which is a lump sum transfer from the rich to the poor region in all other cases the optimal transfer rule involves a lump sum tax on the rich regions and a premium for fiscal effort by the poor regions with the transfer falling short of the first best level in the equilibrium with moral hazard and adverse selection tax evasion occurs only in the poor region even though the possibility of lax tax enforcement benefits the rich and harms the poor region because it reduces equilibrium redistribution this abstract was borrowed from another version of this item

cross border externalities and cooperation among representative democracies abstract this paper analyzes the provision of public goods with cross border externalities by representative democracies the level of provision of each country is decided by a policy maker elected by majority rule at the country level we compare the case in which policy makers set their policies noncooperatively with the case in which they set their policies through coasian cooperation cooperation induces policy makers to internalize cross border externalities but it also induces strategic voters to elect a policy maker who cares less about the public good to reduce their public good contribution the former effect increases public good provision while the latter reduces it we show that once voters incentives are taken into account whether cooperation is beneficial depends neither on voters preferences nor on the magnitude of spillovers nor on the size bargaining power or efficiency of each country instead it depends only on the curvature of the demand for the public good cooperation increases decreases public good provision when the demand function is more less convex than the unit elastic demand function hence the desirability of international cooperation depends mostly on the type of public good considered

a theory of economic unions abstract after decades of successful growth economic unions have recently become the focus of heightened political controversy to understand why we develop a theoretical model of the effects on trade income distribution and welfare of economic unions that differ in size and scope our model shows that political support for international unions can grow with their breadth and depth provided member countries are sufficiently similar however differences in economic size and factor endowments can trigger disagreement over the value of unions our model is consistent with some salient features of the process of european integration and statistical evidence from survey data

can high prices ensure product quality when buyers do not know the sellers cost timothy j perri i introduction when consumers are unaware of product quality before they buy producers can nonetheless be punished for providing low quality by losing repeat business klein and leffler 1981 demonstrate that under fairly general conditions a price with a positive profit margin is needed to induce producers to deliver the promised quality level if the profit margin were zero the profit would be greater from low quality than from high even if the customers were disappointed and none of them returned consequently if a firm s price equaled its cost repeat business would be a matter of indifference a higher price however increases long run profit more for firms that provide the promised quality because such firms benefit from the repeat business of satisfied customers at a sufficiently high price the profit from repeat business exceeds the profit from cheating on quality at that price firms will provide the promised quality level 1 two points are of interest in the klein leffler model first absent firm specific capital expenditures positive profit exists in a competitive market second because consumers know the price is an incentive for high quality only if it generates sufficiently high profit they must know the firm s production costs if a given price premium is to ensure high quality we address both points in this article first although it is sometimes thought that non price competition will dissipate profits in the klein leffler model the model does not by itself have that implication positive profit will indeed persist in equilibrium even with free entry unless some new feature is added second while the klein leffier model assumes producers have identical costs though they can choose different quality levels we will add the possibility firms differ in their marginal costs of high quality in ways buyers cannot observe thus we combine moral hazard and adverse selection in a product quality model we hope to accomplish two things to explain how positive profits can persist in the original klein leffler model and to show that adding adverse selection can result in profit dissipation let us explain further before setting out the model first profit dissipation by non price competition lies outside the klein leffler model in that model information is complete buyers know only one type of firm exists but do not know product quality when they purchase a good 2 thus moral hazard is possible firms may deliver quality that is less than what they promised a price p sup above average cost p sub c is necessary to induce firms to deliver the high level of quality they promise to consumers entry cannot eliminate the resulting profit since additional output will drive price below the quality assuring level of p sup this is a surprising result an industry known to earn positive profit without collusion or conventional barriers to entry and yet without expanded output or entry 3 klein and leffler suggest that non price competition will dissipate this profit they realize that non price competition cannot reduce the operating margin by driving average cost per period up closer to price but they suggest that some kind of fixed cost might absorb the profit competition to dissipate the economic profits earned by existing firms must therefore occur in nonprice dimensions the competition involves firm specific capital expenditures klein and leffler 1981 626 such thinking comes naturally to economists we hold the maxim that markets abhor a profit as dearly as physics does nature abhors a vacuum non price competition would occur if each firm could increase profit via such behavior even though the net effect of many firms doing it would dissipate profit such is the case with a cartel where each cartel member can do better if it cheats on the collusive agreement using secret price cuts or non price competition that tends to drive profit to zero

multi issue bargaining with endogenous agenda abstract the first part of this paper shows that in a noncooperative bargaining model with alternating offers and time preferences the timing of issues the agenda matters even if players become arbitrarily patient this result raises the question of which agenda should come up endogenously when agents bargain over a set of unrelated issues it is found that simultaneous bargaining over packages should be a prevailing phenomenon but we also point to the possibility of multiple equilibria involving even considerable delay journal of economic literature classification number c78

strategic delay in bargaining with two sided uncertainty the role of strategic delay is analyzed in an infinite horizon alternating offer model of bargaining a buyer and seller are engaged in the trade of a single object both bargainers have private information about their own preferences and are impatient in that delaying agreement is costly an equilibrium is constructed in which the bargainers signal the strength of their bargaining positions by delaying prior to making an offer a bargainer expecting large gains from trade is more impatient than one expecting small gains and hence makes concessions earlier on trade occurs whever gains from trade exist but due to the private information only after costly delay panmunjom korea upi the american general and the north korean general glared at each other across the table and the only sound was the wind howling across the barren hills outside their hut maj gen james b knapp negotiator for the united nations command unc was waiting for maj gen ri choonsun of the democratic people s republic of north korea to propose a recess they sat there arms folded for 42 hours not a word finally gen ri got up walked out and drove away evening bulletin philadelphia 11 april 1969

why are stabilizations delayed when a stabilization has significant distributional implications e g tax increases to eliminate a large budget deficit socioeconomic groups may attempt to shift the burden of stabilization onto other groups the process leading to stabilization becomes a war of attrition each group attempting to wait the others out and stabilization occurring only when one group concedes and bears a disproportionate share of the burden the authors solve for the expected time of stabilization in a model of rational delay and relate it to several political and economic variables they motivate this approach and its results by comparison to historical and current episodes copyright 1991 by american economic association

decentralization duplication and delay we argue that although decentralization has advantages in finding low cost solutions these advantages are accompanied by coordination problems which lead to delay or duplication of effort or both consequently decentralization is desirable when there is little urgency or a great deal of private information but it is strictly undesirable in urgent problems when private information is less important we also examine the effect of large numbers and find that coordination problems disappear in the limit if distributions are common knowledge

exclusion and reintegration in a social dilemma using a social dilemma game we study the cooperative behavior of individuals who reintegrate their group after being excluded by their peers we manipulate the length of exclusion and whether this length is imposed exogenously or results from a vote we show that people are willing to exclude the least cooperators and they punish more and more severely chronic defections in return a longer exclusion has a higher disciplining effect on cooperation after reintegration but only when the length of exclusion is not chosen by group members its relative disciplining effect is smaller when the length of exclusion results from a vote in this environment a quicker reintegration also limits retaliation the difference in the impact of long vs short exclusion on retaliation is larger when the length of exclusion is chosen by group members than when it is exogenous post reintegration cooperation and forgiveness depend not only on the length of exclusion but also on the perceived intentions of others when they punish

intergovernmental political competition in american federalism many policies in the united states are jointly determined by federal and state actions in the game theoretic model offered here politicians in both the state and national governments seek credit for providing goods desired by the public and avoid blame for the taxes necessary to provide the goods in line with peterson s 1995 theory of functional federalism the level of government that is better able to supply particular goods and services tends to take the lead in their provision even to the extent of fully crowding out much less efficient governments however under a broad set of circumstances both state and national politicians seek credit via public spending and their joint provision leads to a relative oversupply of public goods and services and thus to overtaxation under joint provision states vary in their responses to changing federal spending patterns based both on the causes of the national changes and on state characteristics

team production benefits from a permanent fear of exclusion one acclaimed role of managers is to monitor workers in team production processes and discipline them through the threat of terminating them from the team alchian and demsetz 1972 we extend a standard weakest link experiment with a manager that can decide to replace some of her team members at a cost the amount of contractual commitment termination possibilities and the precision of the manager s monitoring information serve as treatment variables our results show that the fear of exclusion has a profound effect on team performance even if workers are imperfectly monitored the most flexible contract induces the highest output while the one with no firing possibilities leads to the lowest production however once the fear is eliminated for some workers because permanent workers cannot be fired after a probation phase effort levels steadily decrease

the breakup of nations a political economy analysis this paper develops a model of the breakup or unification of nations in each nation the decision to separate is taken by majority voting a basic trade off between the efficiency gains of unification and the costs in terms of loss of control on political decisions is highlighted the model emphasizes political conflicts over redistribution policies the main results of the paper are i when income distributions vary across regions and the efficiency gains from unification are small separation occurs in equilibrium and ii when all factors of production are perfectly mobile all incentives for separation disappear i introduction following the demise of communism the entire map of europe from the atlantic coast to the urals is being redrawn and issues of separation unification and the redrawing of borders are yet again at the forefront of european concerns many of the issues raised by this process are primarily of a political cultural or linguistic nature however there are also economic considerations that bear on this problem the objective of this paper is to analyze some important economic and political determinants of the process of unification and separation of democratic nations the starting point of our analysis is to suppose that from an economic efficiency point of view separation of nations is never desirable a unified nation is always more efficient since free trade among regions is guaranteed duplication costs in defense and law enforcement are avoided and local public goods provision such as transportation and communication networks or common standards can be coordinated furthermore any benefits of decentralization that might be obtained in a world with several nations may also be achieved within a unified nation by replicating the administrative structure of the world with several

two tier public provision comparing public systems abstract the paper considers a two tier institution in which government provides public services but individuals can opt out of public provision but not taxes funding for the public service is chosen endogenously by majority vote and we first provide necessary and sufficient conditions for a majority vote equilibrium in line with existing results the equilibrium tax rate usually falls below the one found in a one tier system opting out of public consumption is prohibited as the public system loses the political support of the rich who exit we prove that when the two tier system majority dominates a purely private system a majority in society always welcomes a transition from a one tier public system to a two tier system it is the only system that is stable in an evolutionary sense otherwise a majority consisting of the middle class may be in favor of staying in a one tier system prohibiting exit because of a slippery slope argument

the architecture of federations constitutions bargaining and moral hazard abstract the paper studies a federal system where a a region provides non contractible inputs into the social benefits from a public policy project with spillovers to other regions and b where political bargaining between different levels of government may ensure efficient decision making ex post allowing intergovernmental grants to be designed optimally we ask whether project authority should rest with the region or with the central government centralization is shown to dominate when governments are benevolent with regionally biased governments both centralization and decentralization yield inefficiencies and the second best institution depends on parameter values if political bargaining is prohibited when bargaining is feasible however the first best can often be achieved under decentralization but not under centralization at the root of this dichotomy is the alignment of decision making over essential inputs and project size under decentralized governance and their misalignment under centralization

the benefit of crises for economic reforms when expenditures consistently outrun revenue the resulting inflation may have the effect of convincing the public and government that taxes must be raised to finance public investment in the advanced industrial countries income taxation and big spurts in taxation generally have become possible only under the impact of major emergency and crisis mostly in wartime in a number of developing countries in

reforming an asymmetric union on the virtues of dual tier capital taxation the tax competition for mobile capital in particular the reluctance of small countries to agree on measures of tax coordination has ongoing political and economic fallouts within europe we analyse the effects of introducing a two tier structure of capital taxation where the asymmetric member states of a union choose a common federal tax rate in the first stage and then non cooperatively set local tax rates in the second stage we show that this mechanism effectively reduces competition for mobile capital between the members of the union moreover it distributes the gains across the heterogeneous states in a way that yields a strict pareto improvement over a one tier system of purely local tax choices we also discuss the effects of diverging capital endowments within the union and capital flows to third countries

incomplete social contracts there is a long normative social contract tradition that attempts to characterize ex post income inequalities that are agreeable to all behind a veil of ignorance this paper takes a similar normative approach to characterize social decision making procedures it is shown that quite generally some form of majority voting is preferred to unanimity behind a veil of ignorance whenever society faces deadweight costs in making compensating transfers deviations from unanimity or ex post pareto optimality are ex ante efficient to the extent that they economize on costly compensating transfers put another way the optimal decision rule trades off the benefits of minority protection and those from greater flexibility jel h11 g33 g34 d63 p16 p48

experimentation in federal systems will decentralization lead to a laboratory in policy experimentation or is centralization necessary to prevent free riding in the innovation process we present a model where experiments have two dimensions all prefer quality but preferences

flexible integration mandatory and minimum participation rules should a subset of the eu members be allowed to form inner clubs and enhance cooperation or should integration proceed at the same speed for all while flexible cooperation allows members to participate if and only if they benefit it also generates a free rider problem if potential members choose to opt out the analysis shows that flexible cooperation is better only if the heterogeneity is large and the externality small but rigid cooperation will be the political equilibrium too often flexibility and rigidity can be combined by i mandatory participation rules where participation is voluntary unless a super majority requires everyone to participate and ii minimum participation rules where inner clubs must be sufficiently large the combination of mandatory and minimum participation rules may implement the best possible mechanism

coordination in heterogeneous federal systems abstract we compare centralized and decentralized policy making in a federation in which policy heterogeneity is inherently costly and preferences vary across jurisdictions all jurisdictions agree that some harmonization is desirable but no one agrees on the direction of harmonization this type of collective choice problem arises when members of a federal system have to coordinate nonbudgetary policies such as laws regulations standards or diplomatic policies contrary to the common wisdom decentralization becomes optimal when coordination becomes very important when coordination costs are symmetric decentralization dominates centralization irrespective of the magnitude of externalities and the heterogeneity of preferences in the case of discontinuous network effects standardization never pareto dominates decentralization

political centralization and government accountability boffa acknowledges financial support from the free university of bolzano ww82 piolatto from the spanish ministry of science and innovation eco 2012 37131 and the government of catalonia 2014 sgr 420 ponzetto from the spanish ministry of science and innovation jci 2010 08414 and eco 2011 25624 the spanish ministry of economy and competitiveness ryc 2013 13838 the government of catalonia 2009 sgr 1157 and 2014 sgr 830 the barcelona gse and the bbva foundation through its first grant for researchers innovators and cultural creators

bargaining and international environmental agreements this article surveys game theoretic papers focused on the negotiation process that leads to an international environmental agreement most of the papers considered apply bargaining theory although other approaches have been considered as well among other issues the papers considered analyze the burden sharing rule that will result from a negotiation over a global public good the role of information asymmetries the impact of unilateral commitments delegation and ratification whether or not countries are going to form groups during the negotiation process and the influence of the expectation of a future bargaining process on investment decisions the basic bargaining model is optimistic as it predicts that countries will reach an efficient agreement immediately however all the developments of this model surveyed afterwards are rather pessimistic and even the basic model has perverse incentives for pre negotiation signals

the consequences of de regulation on employment duration and efficiency an experimental study i introduction when little is known about the future market conditions offering an employment contract that regulates working conditions for many periods can be dangerous if market wages drastically decline one may hire labor more cheaply furthermore an employee may turn out less reliable than expected such risks are by no means farfetched rather they relate to crucial aspects of long term employment 1 so why is long term employment still predominant and short term employment for example in the form of rented labor rare albeit increasing see alewell et al 2007 an explanation might be the increasing institutional flexibility regarding wage adjustments institutional downward flexibility is usually not legally codified but often a consequence of court rulings and thereby based on social norms 2 see for instance bewley 1995 in our paper we want to investigate whether more flexibility in wage adjustment from none to full flexibility increases the duration of accepted employment contracts our first hypothesis hypothesis a which we wish to test experimentally is that contract duration depends on contract flexibility one obvious argument for long term employment is that offering a short term contract reveals distrust in the newly hired worker and encourages shirking but what is wrong with long term employment resulting from both partners employer and employee repeatedly and mutually opting for rematching another reason for long term employment could be that in the long run it allows the interacting parties more easily to overcome efficiency losses due to opportunistic behavior in our experimental scenario regulations prevent efficient employment contracts when workers react opportunistically but do long term employees care more for efficiency and therefore invest more than optimal efforts deregulation 3 has been the major policy recommendation for nearly all developed market economies for the most part the effects of de regulation are predicted by rational choice analyses of labor markets an interesting exception that takes into account the empirical evidence from behavioral labor economics fehr gotte and zehnder 2009 is the analysis of agell 1999 in whose tradition we want to provide a behaviorally informed discussion of de regulation rather than doing this by field data our empirical approach is an experimental one our earlier experimental findings berninghaus bleich and giath 2008 question the idea that labor market efficiency is higher in deregulated markets to determine more systematically whether the usual intuition that wage rigidities undermine efficiency is correct or whether our earlier results are more reliable we analyze more thoroughly the interdependency of wage flexibility and employment duration our second hypothesis claims that long term contracts are substituted by renewable contracts when contracts become more inflexible hypothesis b unlike in our previous study where we varied only the flexibility of fixed wages in this study piece rates may also be adapted periodically in the experiment of brown falk and fehr 2004 where work contracts last for only one period long term relationships between employers and employees can only be established if the employer offers a new contract to the same employee in each period we too allow for voluntary renewal of contracts at the end of each period but also the possibility of offering contracts which extend for more than one period our study is more systematic than previous ones because we do not just compare less with more labor flexibility but distinguish five flexibility treatments which can be at least partially ordered from less to more flexibility for any kind of monotonicity hypothesis this can be viewed as a real stress test note that already the one off interaction of our basic labor market scenario allows for reciprocity 4 since employees choose effort after accepting a more or less favorable employment contract

hroot hamburg registration and organization online tool abstract hroot hamburg registration and organization online tool is a web based software designed for managing participants of economic experiments this package provides important features to assure a randomized invitation process based on a filtered pre specified subject pool and a complete documentation of the selection procedure for potential participants of an experiment

federal mandates by popular demand this paper proposes a new framework for studying federal mandates regarding public policies in areas such as environmental quality public health highway safety and the provision of local public goods voters have single peaked preferences along a single policy dimension there are two levels of government federal and local the federal level can constrain local policy by mandating a minimum or maximum policy localities are free to adopt any policy satisfying the constraint imposed by the federal mandate we show that voters choose federal mandates that are too strict which leads to excessively severe mandates we show that similar results can obtain when federal provision of the public provided good is more efficient than local provision

climate policy negotiations with incomplete information we analyse bargaining over international climate agreements in a setting with incomplete information about abatement costs incomplete information is known as one of the key reasons why negotiations may fail more generally and why efficiency gains cannot be exploited we ask whether unilateral commitment to high abatement reduces or increases the likelihood for an efficient negotiation outcome we find that such commitment behaviour reduces the gains from global cooperation and that in turn this reduces the probability of reaching efficient international environmental agreements

decentralization externalities and efficiency in the competitive model externalities lead to inefficiencies and inefficiencies increase with the size of externalities however as argued by coase these problems may be mitigated in a decentralized system through voluntary coordination we show how coordination is limited by the combination of two factors respect for individual autonomy and the existence of private information together they imply that efficient outcomes can only be achieved through coordination when external effects are relatively large moreover there are instances in which coordination cannot yield any improvement at all despite common knowledge that social gains from agreement exist this occurs when external effects are relatively small and this may help to explain why coordination is so seldom observed in practice when improvements are possible we describe how simple subsidies can be used to implement second best solutions and explain why standard solutions such as pigovian taxes cannot be used possible extensions to issues arising in the structure of research joint ventures assumptions in the endogenous growth literature and the location of environmental hazards are also described

externalities vs internalities a model of political integration abstract decentralized government leads to inter regional externalities whereas an integrated jurisdiction solves the externality problem centralized government entails other costs in particular a neglect for minority interests the paper models formally the trade off between these two forces in determining the optimum as well as the equilibrium design of jurisdictions both the relative size of regions and the distribution of tastes are shown to be important parameters of the problem

a simple model of product quality with elastic demand abstract in various models starting with klein and leffler 1981 sellers produce high quality for the sake of future profits these models have assumed that a consumer demands one or zero units but a simple model with elastic demand and entry costs can illustrate the same point with fewer problems of existence or determinacy of equilibrium

international cooperation for sale abstract this paper shows that strong asymmetry among countries warrants a change in the rules of the game of global public goods provision with the consequence that cooperation by some countries is bought by others and aggregate welfare is increased perhaps substantially side payments on their own have virtually no effect on the outcomes that can be sustained by self enforcing cooperative agreements but when the rules of the game are changed by strong asymmetry when some countries are effectively committed to being non signatories to an agreement eschewing money transfers side payments become the vehicle for increasing participation in a cooperative agreement

on the timing of climate agreements a central issue in climate policy is the question whether long term targets for greenhouse gas emissions should be adopted this paper analyzes strategic effects related to the timing of such commitments using a two country model we identify a redistributive effect that undermines long term cooperation when countries are asymmetric and side payments are unavailable the effect enables countries to shift rents strategically via their r d efforts under delayed cooperation in contrast a complementarity effect stabilizes long term cooperation because early commitments in abatement induce countries to invest more in low carbon technologies and create additional knowledge spillovers contrasting both effects we endogenize the timing of climate agreements

accountability and decentralisation in government an incomplete contracts model this paper approaches the question of the appropriate level of decentralisation of power in government as a problem in the allocation of control rights under incomplete contracts the model of the paper compares allocations of power to local central and regional government as alternative means of motivating governments to act in the interests of citizens centralisation allows benefits from policy coordination but has costs in terms of diminished accountability which can be precisely defined as the reduced probability that the welfare of a given region can determine the re election of the government the model is extended to allow for conflicts of interest within regions and externalities between central and local governments in a federation it is also applied to determining levels of fiscal transfer between localities and to circumstances where governments may act as leviathans appropriating resources for their own use

trade disputes and settlement we develop a model of trade agreements with renegotiation and imperfectly verifiable information in equilibrium trade disputes can occur and can be resolved in a variety of ways governments may settle early or trigger a court ruling and in the latter case they may implement the ruling or reach a post ruling settlement the model yields predictions on how the dispute outcome depends on the contracting environment and how it correlates with the optimal contract form we find support for a key prediction of our model using data on the outcomes of actual trade disputes in the general agreement on tariffs and trade world trade organization

efficiency equilibrium and exclusion when the poor chase the rich using a simple adverse selection model we characterize equilibrium when the rich chase the poor if communities are established by competitive entrepreneurs the equilibrium exists is unique and is efficient it involves either complete separation or complete pooling different income groups may rank these qualitative outcomes differently we show how restrictions imposed by a central government may alter the nature of equilibrium such restrictions may be explained as the choice of a low income majority altering the equilibrium to the pooling outcome which they prefer

resistance redistribution and investor friendliness abstract poor communities sometimes resist private investment and destroy economic surplus even if the government has the willingness and ability to redistribute we interpret such acts of resistance as demands for redistribution destruction contains credible information about how the affected group values surplus and such information is used by the government in implementing the optimal redistribution policy the extent of destruction is increasing in the extent of political marginalization of the affected group resistance not only destroys economic surplus it also mutes the investor s incentives to create surplus the government uses a tax subsidy on the investor to maximize weighted social surplus and we show that the possibility of destruction may force the government to be too soft in its negotiations with the investor we discuss several policy instruments that have the potential to improve welfare these include compensation floor for the affected group legal or financial protection for the investor and licensing fees for the investor

centralized fiscal spending by supranational unions we study fiscal spending by supranational unions where participation is voluntary and countries bargain over contributions to and the allocation of a central budget since decisions are made by unanimity bargaining power over the allocation becomes a function of contributions which generically causes inefficiency in the presence of income asymmetry between member nations this link between the budget allocation and contributions explains patterns of inefficient spending in the eu e g why resources are diverted to low productivity projects in high income countries the option of veto creates a trade off between efficiency on the contributions margin and efficiency on the allocation margin

harmonization and side payments in political cooperation for two districts or countries that try to internalize externalities i analyze a bargaining game under private information i derive conditions for when it is efficient with uniform policies across regions with and without side payments and when it is efficient to prohibit side payments in the negotiations while policy differentiation and side payments allow the policy to better reflect local conditions they create conflicts between the regions and thus delay the results also describe when political centralization outperforms decentralized cooperation and they provide a theoretical foundation for the controversial uniformity assumption traditionally used by the fiscal federalism literature

on the number and size of nations this paper studies the equilibrium determination of the number of countries in different political regimes and in different economic environments with more or less economic integration we focus on the trade off between the benefits of large jurisdictions and the costs of heterogeneity of large and diverse populations our model implies that i democratization leads to secessions ii in equilibrium one generally observes an inefficiently large number of countries iii the equilibrium number of countries is increasing in the amount of economic integration

north south negotiations on emission reductions a bargaining approach this article models north south negotiations on emission reductions where the north provides side payments in exchange for the south s adoption of a more stringent emission standard we find that depending on where firms compete strong asymmetry among regions the two regions different valuations of side payments and climate change damage can produce self enforcing cooperative agreements moreover the south s optimal standard choice can be one of two polar cases i e either the cleanest or the dirtiest irrespective of the continuum of standards available the results above can also hold true when both parties bargain over the south s emission tax

endogenous games and mechanisms side payments among players we characterize the outcomes of games when players may make binding offers of strategy contingent side payments before the game is played this does not always lead to efficient outcomes despite complete information and costless contracting the characterizations are illustrated in a series of examples including voluntary contribution public good games cournot and bertrand oligopoly principal agent problems and commons games among others

does incarceration length affect labor market outcomes abstractthis paper studies how longer incarceration spells affect offenders labor market outcomes by using a reform that increased incarceration lengths by approximately 1 month i use detailed register data for offenders who predominantly serve incarceration spells of 1 2 months i analyze the sample for several years prior to and after incarceration and show that the reform led to an exogenous increase in incarceration lengths i find that the longer incarceration spells result in lower unemployment rates and higher earnings possibly because marginal increases in short incarceration spells improve conditions and incentives for rehabilitation while the costs of jail related to these outcomes are unaffected i show that the estimates are robust to different econometric specifications and further provide evidence that my results are not driven by changes in macroeconomic conditions

do we punish high income criminals too heavily many critics believe that since high income criminals can afford to purchase better legal services they are less severely punished than poor criminals who commit equivalent crimes others are concerned that the penalties imposed on criminals are too small this paper shows that ignoring the effect conviction has on later earnings dramatically underestimates the total monetary penalty paid by those convicted and that the penalty structure is extremely progressive where evidence on the probability of conviction is available it shows that the highest income criminals face the highest expected penalties

distributive politics and the costs of centralization this paper studies the choice between centralization and decentralization of fiscal policy in a political economy setting with centralization regional delegates vote over agendas comprising sets of region specific projects the outcome is inefficient because the choice of projects is insufficiently sensitive to within region benefits the number of projects funded may be non monotonic in the strength of project externalities the efficiency gains from decentralization and the performance of constitutional rules such as majority voting which may be used to choose between decentralization and centralization are then discussed in this framework weaker externalities and more heterogeneity between regions need not increase the efficiency gain from decentralization

negotiating free trade we develop a dynamic bargaining model in which a leading country endogenously decides whether to sequentially negotiate free trade agreements with subsets of countries or engage in simultaneous multilateral bargaining with all countries at once we show how the structure of coalition externalities shapes the choice between sequential and multilateral bargaining and we identify circumstances in which the grand coalition is the equilibrium outcome leading to worldwide free trade a model of international trade is then used to illustrate equilibrium outcomes and how they depend on the structure of trade and protection global free trade is not achieved when the political economy motive for protection is sufficiently large furthermore the model generates both building bloc and stumbling bloc effects of preferential trade agreements in particular we describe an equilibrium in which global free trade is attained only when preferential trade agreements are permitted to form a building bloc effect and an equilibrium in which global free trade is attained only when preferential trade agreements are forbidden a stumbling bloc effect the analysis identifies conditions under which each of these outcomes emerges

interregional redistribution and mobility in federations a positive approach the paper studies the effects and the determinants of interregional redistribution in a model of residential and political choice we find that paradoxical consequences of inter jurisdictional transfers arise if people are mobile while self sufficient regions are nec essarily identical with respect to policies and average incomes in our model interregional redistribution always leads to the divergence of regional policies and per capita incomes thus interregional redistribution prevents interregional equality at the same time however transfers may allow for more interpersonal equality among the inhabitants of each region the voting population may therefore in a decision over the fiscal constitution deliberately implement such a transfer scheme to foster regional divergence empirical evidence from panel data from oecd countries and candian provinces is consistent with the theory

minimum participation rules in international environmental agreements empirical evidence from a survey among delegates in international climate negotiations recent contributions to the theoretical and experimental literature suggest that minimum participation rules mprs are able to reduce free riding incentives and may facilitate cooperation or at least coordination at the extensive margin of international environmental agreements based on a dataset from a world wide survey among delegates in international climate negotiations this paper assesses preferences for different mprs for a future climate treaty among key players the empirical findings provide evidence that small countries with low bargaining power rather opt for large minimum membership requirements while industrialized countries push forward the idea of a small carbon club of the largest emitters only in contrast delegates from countries in transition try to keep emission thresholds rather low which would allow a future agreement to come into force without their signature

strategic delay in bargaining this paper analyses a bargaining model with incomplete information in which the time between offers is an endogenous strategic variable we find equilibria involving a delay to agreement that is due to the use of strategic time delay by bargainers to signal their relative strength under some specifications of the parameters delay is present in the unique sequential equilibrium whose beliefs satisfy one intuitive restriction this delay does not vanish as the minimal time between offers becomes small