why are taxes so high in egalitarian societies in an analysis of the relative income or relative consumption hypothesis it is shown that if the ratio of agent i s consumption to agent j s consumption enters into the utility function a tax on labor income may increase welfare for all agents if pretax wage inequality is low all agents will unanimously be in favor of such a tax thus there will be a tendency for taxes to be high in societies where pretax wage inequality is low copyright 1995 by the editors of the scandinavian journal of economics

redistributional aspects of tax evasion most empirical studies of income distribution use official tax data based on reported income in the presence of tax evasion or a large irregular economy such data give an incorrect picture of the actual income distribution in this paper a model of tax evasion originally due to allingham and sandmo 1972 is developed to analyze the relation between the actual and the officially reported income distribution it is shown that within the framework of this model the distribution of total income which also takes income from the hidden sector into account is generally more uneven than the distribution of officially reported disposable income it is also concluded that in the presence of tax evasion government policy aimed at reducing the degree of inequality can sometimes be counterproductive policy measures which seem egalitarian in the sense that they make the distribution of officially reported disposable income more even might very well make total income less evenly distributed

infrastructure and development a critical appraisal of the macro level literature this survey reviews the existing macro level empirical literature on the link between infrastructure and development outcomes in a critical light after providing a general framework that casts the relevant terms of the controversy on the real effect of infrastructure on growth in the context of an aggregate production function it signals what are the relevant empirical questions to be addressed this guides the systematic review of a number of empirical studies and the discussion of the main econometric challenges to the identification of the effect of infrastructure on output and productivity finally building on related research in particular in contract theory and political economy the paper spells out several promising research avenues

on the sign of the optimum marginal income tax this paper studies a central aspect of optimal income taxation as modelled in mirrlees original paper on the topic identical leisure consumption preferences qualitatively homogeneous skills in production namely whether given concave utilitarianism alone the optimal marginal income tax will be non negative a well known positive answer to this question in weak inequality form was given in the said paper which however we show requires additive separability of individual utility in the ordinal and cardinal senses our main result here is to derive the required strict positivity of the marginal tax under weak conditions slightly wider than noninferiority of consumption and leisure with preferences otherwise arbitrary

tax policy and aggregate demand management under catching up with the joneses this paper examines the role for tax policies in productivity shock driven economies with catching up with the joneses utility functions the optimal tax policy is shown to affect the economy countercyclically via procyclical taxes i e cooling down the economy with higher taxes when it is overheating in booms and stimulating the economy with lower taxes in recessions to keep consumption up thus models with catching up with the joneses utility functions call for traditional keynesian demand management policies but for rather unorthodox reasons

street crime and street culture a model shows how reputation concerns can support widespread street crime a street culture where the direct incentives for such behavior are weak there are social benefits to street reputations but those benefits are dominated when reputation concerns draw into crime those who obtain no direct gain from it the model matches facts about violent crime that a standard model cannot easily explain including low monetary returns disproportionate victimization of the young and poor and high variance in rates across small distances the model generates novel implications for policy and social science including a negative effect of social capital

on the optimal income taxation and educational decisions abstract in this paper we consider three different ways of incorporating individuals educational choices into the design of optimal income tax policy in one variant of the model case 2 where an individual chooses his education before knowing his ability and after that education makes his labour supply decisions on the basis of known ability it is shown that qualitative features of the optimal income tax schedule are not similar to those of the standard optimal income tax model the marginal tax rate is generally not zero at the endpoints of distribution but is most likely negative using numerical methods some interesting features quite different from earlier numerical results are revealed especially in the second case for example the marginal tax rate is non decreasing in income for a substantial income range in addition our calculations support neither the traditional views on the egalitarian nature of equal education nor its disadvantageous consequences in the perfect utilitarian society

altruism jealousy and the theory of optimal non linear taxation abstract this paper studies optimal non linear taxes in a world in which there is altruism and jealousy a formula for optimal marginal tax rates is derived which turns out to be a simple and intuitively appealing extension of a result due to mirrlees the paper shows that in this sort of economy all of optimal tax theory s general results either no longer hold or need not hold and it sets out appropriate modifications to standard tax rules

optimal dynamic taxation with distinctive forms of social status attainment we examine the role of both consumption and wealth induced social comparisons in setting dynamic optimal income taxation under complete information state invariant labor income taxes are used to remedy the externality caused by consumption induced social comparisons while state contingent capital income taxes are used to remedy the externalities caused by both consumption and wealth induced ones under incomplete information distinct types of agents are subject to an identical marginal capital income tax which removes social comparisons to solve the information problem low productivity agents could be subject to a lower marginal labor tax than high productivity agents which contradicts the traditional result in the mirrlees stiglitz models this article is protected by copyright all rights reserved

tax effects versus budget effects on labor supply this paper analyzes the effects on labor supply of parallel changes in taxes and public spending of various types a number of important recent developments in the labor supply behavior of households are highlighted by such a study of various types of budget effects rather than isolated tax effects this comes out in particular when considering cross substitution effects on labor supply of changes in public spending on goods and services or of the subsidization of goods and services provided by private markets moreover the income effects of tax changes are often mitigated or possibly even removed by the income effects of the accompanying expenditure changes

interpreting income distributions in a welfare state the case of sweden abstract it is shown in this paper that the distribution of purchasing power and hence probably also economic well being in a welfare state like sweden is not tightly connected with the contribution of households in the production system moreover economic inequality is drastically exaggerated when income statistics are not adjusted for differences in working time and in the time profile of income over life however it is also shown that some important inequalities are not removed even by the very ambitious tax and welfare state system in sweden and that some new inequalities are in fact introduced the paper also tries to highlight the wide wedges which in an advanced welfare state are necessarily driven between factor costs for firms and factor rewards for households all this holds in particular for annual income

renegotiation design with unverifiable information this paper considers a buyer seller relationship with observable but unverifiable investments and or random utility parameters in such situations it is known that contract renegotiation may prevent the implementation of first best outcomes in this paper we show however that efficient investments and optimal risk sharing can typically be achieved provided the initial contract is able to monitor the ex post renegotiation process specifically we focus on the following two features of renegotiation design first default options in case renegotiation breaks down second the allocation of all bargaining power to either contracting party moreover we show that these two features can be obtained in standard rubinstein bargaining games through contractual provisions such as specific performance clauses and penalties for delay or equivalently financial hostages refundable without interest

optimal domestic regulation under asymmetric information and international trade a simple general equilibrium approach we investigate the design of domestic incentive regulations in a small economy opened to trade and its implications for international specialization and for trade openness to remain welfare improving more specifically we append to an otherwise standard 2 2 heckscher ohlin model of a small open economy a continuum of intermediate sectors producing nontradable goods used in tradable sectors those goods are produced by privately informed regulated firms asymmetric information induces distortions with general equilibrium impacts the small economy becomes relatively richer in the informationally sensitive factor so that asymmetric information might reverse trade patterns free trade is pareto dominated by autarky when it exacerbates agency distortions

macroeconomic implications of conspicuous consumption a sombartian dynamic model this chapter presents a dynamic general equilibrium model in which consumers have status preference i investigate the manner in which capital accumulation is impeded by conspicuous consumption a la corneo and jeanne j public econ 66 55 71 1997a following the literature social norms are given as either bandwagon type or snob type i then show that when the economy is characterized by a bandwagon type social norm capital accumulation exhibits interesting patterns those patterns include for example an oscillating convergence path the rise of the economy feeds its decay through conspicuous consumption and that decay suppresses conspicuous consumption and engenders prosperity as predicted by sombart liebe luxus und kapitalismus reprinted 1967 deutscher taschenbuch verlag munchen 1912

game theoretic methods in general equilibrium analysis list of figures list of authors introduction j f mertens a the core and the bargaining set i general equilibrium and cooperative games basic results e allen s sorin ii core convergence in perfectly competitive economies r m anderson iii economies with atoms j f mertens iv bargaining sets r vohra b the value v the shapley value r j aumann vi value of games with a continuum of players a neyman vii the tu value the non differentiable case j f mertens addendum the shapley value of a perfectly competitive market may not exist f lefevre viii the harsanyi value s hart ix value equivalence theorems the tu and ntu cases s hart x economic applications of the shapley value r j aumann c the cooperative approach to large markets and games xi an axiomatic approach to the equivalence phenomenon p dubey a neyman xii large games and economies with effective small groups m h wooders d the non cooperative approach xiii strategic market games a survey of some results p dubey xiv from nash to walras equilibrium e allen h polemarchakis xv correlated and communication equilibria j f mertens xvi notes on correlated equilibrium and sunspot equilibrium j peck xvii implementation with plain conversation s sorin

wage dispersion and productive efficiency evidence for sweden the swedish record of enormous compression of relative wages under centralized solidarity bargaining followed by substantial decompression of wages after central bargaining broke down supplies observations well suited to empirical evaluation of arguments about the response of productive efficiency to shifts in wage distribution we obtain no results supporting fairness morale and cohesiveness theories implying that wage leveling within workplaces and industries may enhance productivity reduction of interindustry wage differentials evidently did however contribute positively to aggregate output and productivity growth most likely for the structural reasons first emphasized by swedish trade union economists almost a half century ago

optimal income tax in the presence of status effects abstract the existence of distortions from individuals competing to attain social status by using consumption signals justifies some measure of income tax as a counter acting distortion the question posed here is whether it also constitutes a reason for a more progressive income tax schedule the answer is found to be broadly negative if progressiveness is interpreted as a more convex tax schedule unless the rich are more concerned with status seeking than the poor on the other hand status seeking makes the optimal tax schedule steeper so that redistribution is increased essentially the analysis of status seeking based on a signaling approach confirms and strengthens the existing view of an optimal tax schedule and can be incorporated into the diamond american economic review 88 1998 83 95 approach

social status in economic theory social distinction or status is an important motivation of human behaviour this paper provides a selective survey of recent advances in the economic analysis of the origins and consequences of social status concerns first a selection of empirical research from a variety of scientific disciplines is discussed to underpin the further theoretical analysis i then consider the origins and determinants of tastes for status discuss the endogenous derivation of such preferences for relative standing and assess the different formalizations of these preferences subsequently the consequences of preferences for status are studied for a variety of problems and settings the last section discusses a number of implications of status concerns for normative economics and public policy

efficient local charity with self selection how is charitable giving within a city influenced by the prospect of donor and recipient migration the theoretical literature on charitable contributions in a closed economy has mainly argued that the market level of private giving will tend to be lower than optimal wherever there exists a local fiscal externality between donors and recipients interjurisdictional models of voluntary redistribution on the other hand abstract from altruism to explore the interjurisdictional fiscal externality resulting from the failure of one community to account for the migration impacts of its actions on other communities this paper integrates and extends both literatures by allowing for local altruism among the mobile residents of a system of local economies within a single community mobility thus introduces adverse selection considerations for each donor via the migration of both recipients and other donors moreover any change in the local transfer level influences both equilibrium wages and donor behavior system wide

economists and the welfare state abstract this paper constrasts the views of the welfare state of economists in the 1940s and 1950s with those of the current generation it is argued that economists as a profession in particular in the scandinavian countries have changed from being strong spokesmen for the welfare state to becoming much more critical the reasons for this are sought both in the expansion of the public sector in recent decades and in the development of economic theory in the areas of public finance insurance and incentives and public choice an attempt is made to evaluate the importance of the empirical and theoretical developments for the changing views of the welfare state

relativity mobility and optimal nonlinear income taxation in an open economy abstract recent evidence suggests that globalization has reduced the barriers to international labor mobility and induced more cross country social comparisons in an open economy with tax driven migration and consumption externalities relativity we derive an optimal tax formula that subsumes existing ones obtained under a maximin social objective and additively separable utility and sign the second best mirrleesian marginal tax rates for all skill levels we establish the thresholds of the elasticity and level of migration to determine when relativity and inequality act as complements or substitutes in shaping the optimal top tax rate under both nash and stackelberg tax competition if the migration probability of top income workers is approximately 50 numerical calculation using parameter estimates from empirical studies shows that the country with labor inflow outflow implements over 10 lower higher marginal tax rates than suggested by the autarky equilibrium of kanbur and tuomala 2013

the equal absolute sacrifice principle revisited abstract we summarize the literature on equal absolute sacrifice income taxes and make some extensions we adapt the utilitarian equal sacrifice criterion to a wide class of rank dependent social welfare functions and find that liabilities depend on both income and position in the distribution we investigate whether such taxes need be progressive using a combination of analytics and simulation and in the process uncover tax functions not previously recognized as equating sacrifices finally out of horizontal equity considerations a new concept of the equal treatment of equals by an income tax emerges with implications for future work whose significance is discussed

pecuniary emulation inequality and growth abstract we study a two class growth model in which agents care about both consumption and the social perception of their wealth rank the latter determines the social status enjoyed by agents social perceptions are based upon noisy signals of wealth and in equilibrium there is incomplete separation of classes the steady growth rate of the economy increases with the full information status differential between classes and contrary to the growth model without status it is affected by the initial level of wealth inequality both too much equality and too much inequality are detrimental to economic growth

robust comparative statics in large dynamic economies we consider infinite horizon economies populated by a continuum of agents subject to idiosyncratic shocks this framework contains models of saving and capital accumulation with incomplete markets in the spirit of works by bewley aiyagari and huggett models of entry exit and industry dynamics in the spirit of hopenhayn s work and dynamic models of occupational choice and search models as special cases robust and easy to apply comparative statics results are established with respect to exogenous parameters as well as various kinds of changes in the markov processes governing the law of motion of the idiosyncratic shocks

social comparisons and optimal taxation in a small open economy in this paper we analyze how international capital mobility affects the optimal labor and capital income tax policy in a small open economy when consumers care about relative consumption the main

social comparisons in oligopsony abstract a large body of evidence suggests that social comparisons matter for workers valuation of the wage they receive the consequences of social comparisons in imperfectly competitive labor markets are less well understood we analyze an oligopsonistic model of the labor market where workers derive dis utility from comparing their own wage with wages paid at other firms as social comparisons become more prevalent all workers are paid higher wages the wage distribution becomes more equal and employment shifts to high productivity firms moreover the total wage bill and output increase while aggregate profits decline overall welfare rises our theoretical results have implications for estimating the elasticity of the labor supply curve facing a firm

relational incentive contracts standard incentive theory models provide a rich framework for studying informational problems but assume that contracts can be perfectly enforced this paper studies the design of self enforced relational contracts i show that optimal contracts often can take a simple stationary form but that self enforcement restricts promised compensation and affects incentive provision with hidden information it may be optimal for an agent to supply the same inefficient effort regardless of cost conditions with moral hazard optimal contracts involve just two levels of compensation this is true even if performance measures are subjective in which case optimal contracts terminate following poor performance jel c73 d82 l14

a note on progression penalty schemes and tax evasion abstract this note deals with the question of whether shifting the tax base towards more progression will stimulate or discourage tax evasion when the tax base is shifted so that either the expected tax revenues of government or the expected utility of taxpayer will remain unchanged the answer turns out to depend sensitively on the nature of penalty schemes if caught in tax evasion if the penalty rate is charged on the undeclared income tax evasion will increase while if the penalty rate is charged on the evaded tax tax evasion will decrease when the tax base is shifted towards progression

distributional implications of joint tax evasion both buyers and sellers of goods and services may benefit from letting their economic transactions go unrecorded for tax purposes the supplier reduces his tax burden by underreporting income and sales whereas the consumer may gain from buying a non taxed lower priced product the distributional implications of such joint tax evasion depend on the amounts evaded on where the evaders on both sides of the market are found in the income distribution and on how the financial gain is split our empirical investigations show that the tax evasion controlled estimate of income inequality in norway exhibits more income dispersion than official estimates

non welfarist optimal taxation and behavioral public economics research in behavioral economics has uncovered the widespread phenomenon of people making decisions against their own good intentions in these situations the government might want to intervene indeed individuals might want the government to intervene to induce behavior that is closer to what individuals wish they were doing the analysis of such corrective interventions through taxes and subsidies might be called behavioral public economics however such analysis where the government has an objective function that is different from that of individuals is not new in public economics in these cases the government is said to be non welfarist in its objectives and there is a long tradition of nonwelfarist welfare economics especially the analysis of optimal taxation and subsidy policy where the outcomes of individual behavior are evaluated using a preference function different from the one that generated the outcomes the object of this paper is to first of all present a unified view of the non welfarist optimal taxation literature and secondly to present behavioral public economics as a natural special case of this general framework

inequality segregation and redistribution abstract mainstream economic theory predicts that countries with large inequalities in pre tax income distribution will be more redistributive than countries which are more equal in this respect empirical studies however offer no strong support for this theoretical prediction in fact a number of studies indicate that the opposite may be true namely that countries which are more equal in terms of pre tax income distribution are more redistributive than less egalitarian societies the present paper offers an explanation to this puzzle in a model of endogenous choice of location and endogenous aversion against inequality we argue that large pre tax differences in income may lead to a residential segregation of rich and poor such segregation may reduce the social attachment between groups in society and reduce the willingness of the rich to make transfers to the poor conversely societies with small pre tax differences in income may be characterized by larger transfers and a less segregated population structure

optimal top marginal tax rates under income splitting for couples abstract this paper provides formulas for optimal top marginal tax rates when couples are taxed according to income splitting between spouses consumption is taxed and the skill distribution is unbounded optimal top marginal income tax rates are computed for germany using a dataset that includes the tax returns of all german top taxpayers we find that the optimal top marginal tax rate converges to about 2 3 and convergence obtains at income levels that are substantially higher than those currently subject to the actual top tax rate

the life cycle of regulatory agencies dynamic capture and transaction costs the dynamics of regulation is analysed in a model where regulatory capture comes from the repeated interaction between an interest group and a regulatory agency regulatory institutions offer a framework for this dynamic process they put constraints on the interest group s influence the dynamics of regulation and its long run outcome depend on the political principal s the regulator s and the regulated firm s time preferences and their information some foundations for the transaction costs of side contracting used in the standard literature on collusion are provided those transaction costs are linked to the precise nature of regulatory institutions

the folk theorem with imperfect public information the authors study repeated games in which players observe a public outcome that imperfectly signals the actions played they provide conditions guaranteeing that any feasible individually rational payoff vector of the stage game can arise as a perfect equilibrium of the repeated game with sufficiently little discounting the central condition requires that there exist action profiles with the property that for any two players no two deviations one by either player give rise to the same probability distribution over public outcomes the results apply to principal agent partnership oligopoly and mechanism design models and to one shot games with transferable utilities copyright 1994 by the econometric society

the efficient side of progressive income taxation abstract this paper examines allocative properties of progressive income taxation when individuals care about their relative income it shows that introducing a progressive income tax can yield a pareto improvement if pre tax income is evenly distributed implementing undistorted choices of working hours requires a progressive tax schedule and the optimal degree of progressivity decreases with pre tax income inequality

collusion delegation and supervision with soft information this paper derives an equivalence principle between organizational forms of supervisory and productive activities we consider an organization with an agent privately informed on his productivity and a risk averse supervisor getting signals on the agent s type in a centralized organization the principal can communicate and contract with both the supervisor and the agent however these two agents can collude against the principal in a decentralized organization the principal only communicates and contracts with the supervisor who in turn sub contracts with the agent we show that the two organizations achieve the same outcome we discuss this equivalence and provide various comparative statics results to assess the e ciency of supervisory structures

self control and the rise and fall of factory discipline abstract we propose a dynamic general equilibrium model that accounts for the historical pattern of the rise and fall of factory discipline in the course of economic development firms have two alternative means to increase work effort discipline and control vs monetary incentives a key ingredient of our model lies in the fact that workers suffer from present bias we show that this lack of self control makes discipline relatively cheap when workers outside option is low even in the absence of moral hazard then as one economy develops it endogenously goes through three stages where firms successively use low powered monetary incentives factory discipline and then high powered monetary incentives when moral hazard is introduced multiple development paths may emerge

lifetime versus annual tax and transfer progressivity sweden 1968 2009 in this paper we analyze the evolution of tax and transfer progressivity in sweden over both annual and lifetime horizons using a rich micro panel covering the period 1968 2009 we calculate tax rates over a cohort s entire working life cycle our main finding is that taxes are considerably less progressive over the lifetime than in any single year social insurance transfers to transitory low income earners account for most of this result we offer a number of robustness checks of the measurement of lifetime incomes and progressivity but none of them changes our overall findings

the agency cost of internal collusion and schumpeterian growth this paper analyzes the link between the internal organization of rms and the whole process of macroeconomic growth we present a schumpeterian growth model in which monopolies face dynamic agency costs due to the formation of vertical collusions between agents of the organization these agency costs aect incentives to invest and the rate of innovation however when collusion is a self enforcing implicit relationship a higher growth rate shortens the time horizon of colluding agents and makes thus collusion more dicult to enforce we analyze this two ways mechanisms between the growth process and agency problems within the rm and show how the transaction costs of side contracting within the rm and the growth rate of the economy are simultaneously derived

income tax evasion an intersectoral analysis abstract this paper develops an intersectoral model of income tax evasion with general equilibrium effects key elements of the model are imperfectly substitutable outputs from the compliant and evading sectors and workers with heterogeneous evasion costs the model allows for biased public expenditures a wide range of behavioural responses and both legitimate and criminal activities evading tax as well as tax avoidance activities qualitative and quantitative assessments are undertaken for the effects of tax rate changes on evasion activity relative output prices and real tax revenues this approach offers useful findings for taxation policy and is amenable to further analytical extensions

interdependent behavior and the effect of taxes abstract the paper studies the effect of taxes on labor supply in a model with interdependent behavior i e individuals preferences depend on other people s behavior it is found that not taking the interdependency into account can lead to a serious bias in the predicted effects of a tax change it is also shown that interdependent behavior can give rise to spikes in the hours distribution such spikes often have been attributed to quantity constraints

occupational mobility and the distribution of occupational success among young men interpretation of the distribution of occupational success depends crucially on an understanding of the process of mobility if the holders of low paying jobs this year are just as likely as anyone else to hold good jobs next year then the lower tail of the earnings distribution is not a matter of great social concern further if the distribution of success is primarily determined by a random process the prospects for a significant reduction in the inequality of earnings are unfavorable on the other hand high mobility in the short run may conceal systematic stratification of the labor force it may be that the same individuals spend most of their time in the worst jobs if so luck and random events may play a small role in the distribution of well being inequality may be a major issue and the elimination of stratification may hold out the promise of an important reduction in inequality simple tabulation of distributions of success and of mobility among categories of success cannot answer the basic question of the role of stratification in this paper we develop a model and statistical method for studying mobility and relating it to characteristics upon which stratification may be based our study rests on annual interviews conducted from 1966 through 1969 with about 3 000 white males born between 1942 and 1952 1 we find that mobility is closely related to personal characteristics especially intelligence and education men with high iqs and extensive education are more likely to move to high paying jobs and are more likely to remain in them nevertheless random events dominate the distribution of occupational success in the short run our results strongly support the finding of christopher jencks and his collaborators that redistribution of the determinants of earnings would do almost nothing to reduce the observed inequality of annual earnings

housing the market versus the welfare state model revisited most housing policy analyses conclude that housing is a commodity that cannot be efficiently and equitably allocated via the market process major contentions in this respect are that market allocation will result in suboptimal housing investment and that the market process leads to the creation of slums furthermore the proponents of the welfare housing model argue that welfare state interventions have raised the average level of housing consumption above the level that would have been achieved under a more market oriented allocative model however both theory and evidence fail to support these beliefs

relativity inequality and optimal nonlinear income taxation how does concern for consumption relative to others relativity affect the structure of optimal nonlinear income taxation our article provides three sets of answers to this general question first it supports the conclusion in the literature that relativity leads to higher marginal tax rates in doing so it both generalizes some of the conditions under which this result is obtained in the literature and fleshes out the detailed structure for optimal marginal tax rates for specific functional forms for distribution utility function and social welfare function second the article goes beyond the literature and examines the impact of relativity on the progression of optimal marginal tax rates by and large we find support for greater progressivity defined as the steepness of the rise of the marginal tax rate schedule as relativity concern increases third none of the papers in the literature to our knowledge examines the interplay of relativity and inequality in determining the optimal structure of income taxes our special analytical cases and more general numerical calculations support the conclusion that higher inequality dampens the positive impact of greater relativity on the level and the progression of marginal tax rates more work is needed to further explore this interaction between relativity and inequality that our analysis has uncovered

nosy preferences benevolence and efficiency author affiliation chetan dave cdave nyu edustefan dodds sdodds uwinnipeg ca acknowledgment we would like to thank ingela alger sheryl ball nathan berg tarek coury rachel croson frances woolley participants at the 2008 canadian economics association meetings seminar participants at queen s university and two anonymous referees for valuable comments all errors are those of the authors 1 introductionthe pareto principle declares that if everyone in a society prefers some social state of the world x to another state y then the aggregated social ranking should reflect this as well minimal liberalism requires that no individual s preference relation between social states say z and w be violated in the social choice provided that the position of other individuals is unaffected across states z and w both of these principles can be appealing to economists as they evaluate the normative features of various policies however the liberal paradox of sen 1970 demonstrates that the pareto principle and minimal liberalism are potentially at odds with one another the paradox shows that if individuals possess nosy preferences that is they hold opinions about what others should do even though their own material well being is unaffected by others actions then it is in general impossible to arrive at a unique social choice that jointly satisfies these two axioms 1 as an elegant proof by contradiction the paradox adds to the list of social choice impossibilities 2sen s paradox highlights the tension between freedom of choice and efficiency with nosiness as the key ingredient in this article we re examine this tension by using recent insights from behavioral economics the idea that individuals may have concern for others namely altruism is well established in the behavioral economics literature becker 1974 however the concept of nosy preferences and what they imply for collective choice environments has not been extensively studied from a behavioral perspective here we provide such a study to do so we recast nosiness as a new form of social preference in a strategic setting this insight stems from the analysis of segal and sobel 2007 who consider a model where players in a game possess preferences over both outcomes and strategies employed by all players we embed our version of nosiness into a more general model of social preferences individuals in the model derive utility from three sources intrinsic payoffs from the outcomes of strategic choice nosy payoffs based on specific actions taken by other individuals to generate such outcomes and unconditionally altruistic or benevolent payoffs positively related to the extended utilities of other individuals this framework allows us to analyze strategic environments in which there exist interdependent preferences over utilities and actions or just one of these features we apply this particular model of preferences to two environments the first was suggested by aldrich 1977 who sought to provide a game theoretic interpretation of sen s paradox for this environment we are interested in the efficiency of equilibria and to what extent inefficiency depends on particular forms of social preferences we thus offer a new behavioral interpretation of sen s paradox following the behavioral theme we show that when individuals exhibit loss aversion over their own actions the paradox may be robust to schemes that attempt to generate efficiency by restricting action sets ex ante the second environment we consider is that of relative consumption concerns we show that applying our particular model of interdependent preferences to this environment allows us to find cases where individuals will voluntarily restrict consumption to mitigate the negative externality arising from nosy concerns about what others consume

reign in hell or serve in heaven a cross country journey into the relative vs absolute perceptions of wellbeing abstract questionnaires exploring the relativist vs absolutist perception of wellbeing are administered to 3883 students in eight different countries four low income countries bolivia brazil kenya and laos 1924 respondents and four high income countries italy sweden switzerland and the uk 1959 respondents our data reveal that wellbeing is perceived mainly in relative terms with the strength of relativism being higher for respondents in high income countries however when the satisfaction of some basic needs is at stake the absolutist concern becomes powerful personal characteristics such as gender and background of studies have a significant role in determining respondents perception of wellbeing finally additional insights emerge from our study interpersonal comparisons take place by looking both upward and downward along the income scale not only income ranking but also the magnitude of reference incomes plays a role and the perception of wellbeing is more elastic to absolute rather than relative income

popular support for progressive taxation and the relative income hypothesis abstract we show that a marginal rate progressive tax always defeats a marginal rate regressive tax under pairwise majority voting so long as the latter collects at least as much revenue as the former one irrespective of whether the voters care at all about their relative incomes or not

tax arbitrage and labor supply we examine how tax avoidance in the form of trade in well functioning asset markets affects the basic labor supply model we show that tax arbitrage has dramatic implications for positive normative and econometric analysis of how taxes affect work incentives

social norms savings behavior and growth we argue that many goods and decisions are not allocated or made through markets we interpret an agent s status as a ranking device that determines how well he or she fares in the nonmarket sector the existence of a nonmarket sector can endogenously generate a concern for relative position in for example the income distribution so that higher income implies higher status moreover it can naturally yield multiple equilibria it is thus possible to explain differences in growth rates across countries without recourse to differences in underlying preferences technologies or endowments different social organizations lead to different reduced form preferences which lead to different growth rates

relative deprivation and economic welfare abstract it is shown that the theory of relative deprivation can be decomposed into two concepts deprivation and its relativity deprivation is interpreted as forgone utility due to lack of commodities thus minimizing deprivation and maximizing utility come to much the same thing the relativity of the concept stems from the existence of reference groups in the society the core of the paper deals with the effect of reference groups on the deprivation felt in the society

profit sharing and relative consumption mandatory profit sharing can represent a pareto improvement if labour supply is excessive due to relative consumption effects profit sharing reduces wages if the rise in profit income keeps total income constant there will only be a pareto improving substitution effect

review 1 obesity unhappiness and the challenge of affluence theory and evidence is affluence a good thing the book the challenge of affluence by avner offer 2006 argues that economic prosperity weakens self control and undermines human well being consistent with a pessimistic view we show that psychological distress has been rising through time in modern great britain taking over eating as an example our data reveal that half the british population view themselves as overweight and that happiness and mental health are worse among fatter people in britain and germany comparisons also matter we discuss problems of inference and argue that longitudinal data are needed we suggest a theory of obesity imitation where utility depends on relative weight copyright 2007 the author s journal compilation royal economic society 2007

relative consumption and tax evasion abstract relative consumption effects or status concerns that feature jealousy in the sense of dupor and liu 2003 boost consumption expenditure if consumption is financed by labour income such status considerations increase labour supply and hence the tax base a higher taxable income in turn can make tax evasion more attractive we show for various specifications of preferences that the tax base effect generally dominates consequently relative consumption effects tend to reduce tax evasion this is true irrespective of whether tax parameters are exogenous guarantee a balanced budget or are set optimally

contracting productivity growth in this paper we analyze the interactions between growth and the contracting environment in the production sector allowing incompleteness in contracting implies that viable production relationships for firms and workers and therefore the profitability of industries depend on the rates of innovation and growth the speed at which new innovations arrive in turn depends on the profitability of production for the usual reasons examined in the endogenous growth literature we show that these interactions can have important implications which are consistent with observed phenomena in both the micro and macro environment in particular we demonstrate that a technological shock increasing productivity of research can through this interaction lead to a productivity slowdown and a shift in labor market contracts away from firms providing implicit guarantees of lifetime employment and towards shorter term contractor type arrangements we show the consistency of an increase in the proportion of the labor force under short term employment increased relative returns of workers in high productivity sectors and increased income inequality with a productivity slowdown of finite duration

social interactions and habit formation in a model of female labour supply this paper investigates the influence of habit formation and preference interdependence on labour supply behaviour of married females a novelty of the paper is that we incorporate direct survey information on reference groups of individuals in a neoclassical labour supply model for that purpose we first estimate a latent variables model relating the direct information to the true but unobserved reference groups one of the most interesting features of the model is that the presence of young children becomes an insignificant factor in the hours equation while it remains a significant factor in the participation decision in addition the labour supply curve is much flatter in a model with habit formation and preference interdependence than in a model without it both habit formation and preference interdependence contribute significantly to the explanation of female labour supply 1998 elsevier science s a all rights reserved

a shared sense of responsibility money versus effort contributions in the voluntary provision of public goods a frequently cited argument against the use of market based instruments to provide public goods is that they diminish our sense of responsibility to be good citizens in this paper we report on the results of a laboratory experiment designed to explore the idea that this distrust stems from the ability of some members of society to contribute to the public good with money instead of time or effort even when the level of total contributions is held constant in our experiments subjects complete lab tasks as a contribution to a public good carbon emission reductions we look at how the number of lab tasks completed by subjects changes when their peers take advantage of an offer to buy out i e contribute money in lieu of effort we find that on average subjects reduce the number of completed tasks when their peers buy out however the aggregate result masks significant heterogeneity across individual responses those who choose not to buy out despite its expected profitability have no response to the treatment while those for whom it would not be profitable to buy out register large reductions in effort contributions the magnitude of these responses is increasing in the share of the group that accepts the buyout offer suggesting that it is the act of peers buying out rather than the simple introduction of monetary incentives that is the source of the effect

income tax evasion labour supply and the equity efficiency tradeoff abstract this paper is an attempt to incorporate tax evasion into the analysis of optimum income taxation a model of variable labour supply with tax evasion is used to derive supply functions for labour in regular and irregular markets given taxpayer behaviour the government chooses tax rates penalties and the probability of detection to maximize a utilitarian social welfare function the results consist in the derivation of a formula for the optimum marginal tax rate and a characterization of the factors determining the choice between the penalty rate and the probability of detection as instruments for the control of tax evasion

voluntary income redistribution with migration abstract this paper examines theoretically the welfare magnet problem brought about by income redistribution in a small area where disparities across jurisdictions in transfer policies may induce both recipient and resource migration we show that the level of redistribution determined by majority rule may either rise or decline as household mobility increases and that this level will be either higher or lower than the efficient level to an extent that depends on local market conditions the social value of migrants and the mobility of both the rich and the poor in particular an economy may benefit from the immigration of transfer recipients we also derive the form of an efficient community specific subsidy to transfers which in some cases will be negative

education matching and the allocative value of romance societies are characterized by customs governing the allocation of non market goods such as marital partnerships we explore how such customs affect the educational investment decisions of young singles and the subsequent joint labour supply decisions of partnered couples we consider two separate matching paradigms for agents with heterogeneous abilities one where partners marry for money and the other where partners marry for romantic reasons orthogonal to productivity or debt these generate different investment incentives and therefore have a real impact on the market economy while marrying for money generates greater investment efficiency romantic matching generates greater allocative efficiency since more high ability individuals participate in the labour market the analysis offers the possibility of explaining cross country differences in educational investments and labour force participation based on matching regimes

keeping one step ahead of the joneses status the distribution of wealth and long run growth assuming that the utility of each agent depends on its relative wealth position in the society this chapter constructs an endogenous growth model it is shown that even if the subjective discount rates differ across agents there exists a unique balanced growth equilibrium in which each agent owns a positive share of the world wealth it is also shown that if the agents are identical then an increase in savings incentives always raises the long run growth rate but if they are heterogeneous then an increase in savings incentives may lower the long run growth rate

optimal incentives for teams much of the existing theory of incentives describes a static relationship that lasts for just one transaction this static assumption is not only unrealistic but the resulting predictions appear to be at odds with many work organizations the current paper introduces possible long term interaction among agents and studies how the design of explicit incentives and work organizations can exploit and interact with the implicit incentives generated by the repeated interaction of the agents the optimal incentive scheme is shown to display observed features of the increasingly popular teams such as the use of low powered group incentives

income distribution and tax structure empirical test of the meltzer richard hypothesis abstract the meltzer richard hypothesis that more unequal income distribution will create a majority for more redistribution has generated much research but little empirical support the empirical literature has concentrated on cross country studies and the size of the public sector and the results broadly do not indicate more redistribution with more inequality this analysis suggests that the hypothesis should be investigated in a more homogenous setting with comparable institutions and with an explicit decision about redistribution here tax structure new data on poll tax and property tax in decentralized government in norway are exploited we show how the multi dimensional decision can be analyzed as majority rule assuming intermediate preferences in the econometric analysis instruments are used to account for endogeneity of income level and income distribution the estimated model supports the understanding that more unequal income distribution implies a shift in the tax burden from poll tax to property taxes and thereby gives more redistribution

conspicuous consumption snobbism and conformism abstract we develop a model in which consumers purchase a conspicuous good in order to signal high income and thereby achieve greater social status in equilibrium the signalling value of conspicuous consumption depends in an identifiable way on the number of consumers and consumer behaviour is characterized by either snobbism or conformism the market demand curve for the conspicuous good may exhibit a positive slope if consumers are conformist we derive some unconventional policy implications concerning the taxation of luxuries and the voluntary provision of public goods

risk assessment and profit sharing in business networks abstract nowadays network is the preferred governance form to conduct economic transactions network solution allows to reach flexibility maintaining cost and quality level since network concept refers to a great variety of organizational hybrids it is possible to choose the one that fits better market requirements the new trends in inter organization relationships push towards network solutions companies are interested in relationships with partners and customers to overcome resource dependence to enter too risky market or simply differentiate their business portfolio the proposed research focuses on the network concept aiming at highlighting threats and opportunities to investigate the double nature of the risk concept network structures offer flexibility and higher profit as a consequence and business risk sharing opportunity these two aspects profit and risk are strictly related and have to be considered together to depict a complete scenario this implies that risk assessment and management in network environment cannot neglect profit sharing or in other words that profit sharing mechanisms should use risk as driver in this context our research proposes a methodology to measure risk taking into account network peculiarities risk estimation is a basic step to evaluate the opportunity cost of capital needed to compute the network net present value npv that is assumed as base in the profit sharing process the profit sharing process has been tackled using the shapley value approach that is inspired to the fairness principle while the opportunity cost of capital is assessed using the capital asset pricing model capm

redistributive taxation with heterogeneous relative consumption concerns this paper studies the impact of redistributive income taxation in a society where only some individuals are motivated by relative consumption concerns introducing this heterogeneity raises theoretical challenges since i earned income becomes an imperfect indicator of underlying ability and ii relative concerns may be inadmissable in the social objective a new behavioural model is developed in which only relatively concerned individuals choose work effort strategically linear tax transfer systems schemes are then characterized and simulated for a series of welfarist and non welfarist social objectives and for different degrees of preference heterogeneity a key result is that a government which understands the extent of relative consumption concerns but places no social weight on individuals with such preferences nevertheless sets a significantly more progressive tax system than a government which ignores relative consumption motivations altogether ce memoire examine l impact d une imposition redistributrice sur le revenu dans une societe ou certaines personnes sont motivees par des questions de niveaux de consommation relative cette sorte d heterogeneite souleve certains defis theoriques puisque i les gains sont un indicateur imparfait des habiletes sous jacentes et ii ces malaises quant a la consommation relative peuvent etre inadmissibles au plan de l objectif social on developpe un nouveau modele de comportement dans lequel seulement les personnes preoccupees par leur position relative definissent leur effort de travail strategiquement on definit des systemes d imposition et de transferts lineaires et on les soumet a des simulations pour une serie d objectifs sociaux a saveur welfariste et non welfariste et pour differents degres d heterogeneite de preferences un resultat crucial est qu un gouvernement qui comprend l importance des sensibilites aux resultats relatifs mais qui ne donne aucune valence sociale aux personnes qui ont de telles preferences neanmoins met en place une fiscalite plus progressive de maniere significative qu un gouvernement qui ignore completement ces motivations fondees sur la consommation relative

genuine saving and positional externalities much evidence suggests that people are concerned with their relative consumption yet positional externalities have so far been ignored in savings based indicators of sustainable development this

conspicuous leisure optimal income taxation when both relative consumption and relative leisure matter previous studies on public policy under relative consumption concerns have ignored the role of leisure comparisons this paper considers a two type optimal nonlinear income tax model where people care both about their relative consumption and their relative leisure increased consumption positionality typically implies higher marginal income tax rates for both the high ability and the low ability type whereas leisure positionality has an offsetting role however this offsetting role is not symmetric concern about relative leisure implies a progressive income tax component i e a component that is larger for the high ability than for the low ability type moreover leisure positionality does not modify the policy rule for public good provision when the income tax is optimally chosen

why do people care about social status abstract this paper shows that complementary interaction can induce people to care about social status because it serves as a signal of non observable abilities there is a unique separating equilibrium in which everyone cares about social status in this equilibrium a person s social status perfectly reveals his abilities and everyone matches with a person of like ability the analysis shows that people s instrumental concern for social status has important welfare and policy implications indeed peoples efforts to keep up with the joneses may be welfare enhancing

dual factor price equalization elements of a theory abstract the article hypothesizes that despite wide differences in wages and incomes between the developed and the developing countries world wide factor price equalization is taking place once the factors of production are correctly identified in particular the developed country s counterparts to the informal sector workers in a developing country are its low skilled service sector workers and unemployed factor price equalization is largely taking place by the creation of dual economies in the developed countries rather than by their eradication in the developing countries while institutional forces are slowing down this equilibrating process strong economic and political forces such as so called thatcherism and reaganomics are threatening these same institutions some preliminary evidence is given in favor of the theory

nash equilibrium and welfare optimality if is a set of social alternatives a social choice rule scr assigns a subset of a to each potential profile of individuals preferences over a where the subset is interpreted as the set of welfare optima a game form or mechanism implements the social choice rule if for any potential profile of preferences 1 any welfare optimum can arise as a nash equilibrium of the game form implying in particular that a nash equilibrium exists and 2 all nash equilibria are welfare optimal the main result of this paper establishes that any scr that satisfies two properties monotonicity and no veto power can be implemented by a game form if there are three or more individuals the proof is constructive

altruism in the family and selfishness in the market place adam smith argued in a famous passage that people are selfish in their market transactions it is not from the benevolence of the butcher the brewer or the baker that we expect our dinner but from their regard to their own interest we address ourselves not to their humanity but to their self love and never talk to them of our own necessities but of their advantages 1937 p 14 in an earlier study he said with irony we are not ready to suspect any person of being defective in selfishness 1853 p 446 selfishness in market transactions has been assumed in practically all subsequent discussions of the economic system objections were dismissed with vague allusions to human nature or with an assertion that altruism loses out to selfishness in the struggle to survive in the market sector yet altruism is generally recognized to be important within a family again adam smith said

emulation inequality and work hours was thorsten veblen right we investigate the manner in which a desire to emulate the rich influences individuals allocation of time between labour and leisure greater inequality inducing longer work hours as a result data on work hours in ten countries over the period 1963 98 show that greater inequality is indeed associated longer work hours these veblen effects are large and the estimates are robust using country fixed effects and other specifications because consumption inequality is a public bad a social welfare optimum cannot be implemented by a flat tax on consumption but may be accomplished by more complicated progressive consumption taxes at the close of the nineteenth century thorsten veblen proposed what he termed pecuniary emulation as the foundation of a theory of consumption spending he maintained is driven by relative status considerations that is by the desire to be a particular type of person as much as bythedesire to enjoytheconsumer goodsper se the joneses with whom one had to keep up were not the neighbours but the rich theirleveloflivingbecamethenever attainableobjectiveinaconsumptionarmsrace among the less well to do in the theory of the leisure class he wrote the motive is emulation the stimulus of an invidious comparison especially in any community in which class distinctions are quite vague all canons and reputability and decency and all standards of consumption are traced back by insensible gradations to the usages and thoughts of the highest social and pecuniary class the wealthy leisure class 1934 p 81 while valued by some economists as capturing common sense aspects of consumption as a form of status seeking veblen s view of social preferences was soon eclipsed by the simpler and more tractable neoclassical theory of the consumer relegated to the underworld of economics veblen s ideas have nonetheless resonated over the ensuing years in the writing of duesenberry 1949 leibenstein 1950 and galbraith 1958 at the middle of the past century and schor 1998

public policies pressure groups and dead weight costs abstract this paper presents a model of competition among special interest groups for political influence each active group exerts pressure to affect its taxes and subsidies where activities of different groups are related by the equality between total tax collections and total tax subsidies the dead weight costs and benefits of taxes and subsidies play a major role in our model an increase in the dead weight cost of taxation encourages pressure by taxpayers while an increase in the dead weight costs of subsidies discourages pressure by recipients various applications of the analysis are discussed