the efficiency of electric power pools evidence from firing unit data 1986 the efficiency of electric power pools evidence from firing unit data applied economics vol 18 no 12 pp 1323 1334

the decline of dominant firms 1905 1929 the theory of dynamic limit pricing implies that a firm maximizes its wealth by gradually sacrificing its dominant market share we extend the theory by simulation methods to show that higher structural entry barriers generally result in both higher profits and a slower sacrifice of market share the model is applied to 42 once dominant firms in u s manufacturing to explain jointly the declines of their market shares and the profit rates earned during 1905 1929 the statistical results agree substantially with the hypothesis that these firms behaved consistently with maximizing their wealth through dynamic limit pricing

the relative importance of actual and potential competition empirical evidence from the pharmaceuticals market the relative importance of actual and potential competition empirical evidence from the pharmaceuticals market

spatial variation of the marginal utility of income and unequal treatment of equals in one of the most famous contributions to the new urban economics literature mirrlees 6 showed that a utilitarian planner able to control the distribution of income or endowments across households the consumption of land or housing and the distribution of population over space would treat households with identical tastes unequally in the sense that utility levels would vary among them at the planner s optimum similar results were obtained by dixit 2 who showed that even more inequality averse social welfare functions than the utilitarian one would result in unequal treatment he concluded that only the rawlsian maximin welfare function would produce the equal treatment outcome 2 this result has generated considerable attention see e g mills and mackinnon 5 because of its apparently paradoxical nature the purpose of this note is to present a new way of thinking about and making plausible the unequal treatment result 3 to develop the intuition recall that in monocentric city models where equals are treated equally that is where households have equal endowments a market equilibrium with free mobility is characterized by equal utilities for all assuming identical preferences as is well known in the absence of congestion or other market failures this market equilibrium is pareto efficient producing the maximum feasible common level of utility imagine now a mirrlees planner coming across such an equal utility equilibrium under what conditions would the planner not want to disturb the market equilibrium clearly a necessary condition for equal treatment to be utilitarian optimal is that the marginal utility of income be the same for all households in the market equilibrium otherwise freezing the allocation of resources in every other respect social

are judges leading economic theory sunk costs the threat of entry and the competitive process in this paper we attempt to bring theoretical form to a particular entry argument that has found favor in the courts we suggest that sunk costs may not be a major impediment to entry when a group of customers can commit to an entry enhancing strategy buyers have strong incentives to adopt such strategies because they benefit directly from the resulting lower prices the simplest example involves a large buyer that is able to guarantee an entrant a market for its product long term contracts or even informal purchase commitments backed by customer reputation may also allow the entrant to obtain a guarantee of sufficient business to make the entry profitable once entry is thought likely to occur the existing competitors may be unwilling to attempt a price increase of any magnitude thus the threat of entry can maintain competitive prices even in the presence of sunk costs in section ii we motivate the analysis by discussing the current controversy over the role entry conditions play in an antitrust merger review then we discuss the necessary assumptions for a model of how the threat of entry can deter any price increase in the presence of sunk costs we note that these conditions are different from those commonly used in the economic literature

optimal labour contracts when workers have a variety of privately observed reservation wages if a firm does not know the individual ex post outside opportunities of its contracted workforce then it can use hours wages and redundancy payments to screen them will a second best contract have underemployment inefficiency or overemployment and with a stochastic contract are those workers randomly selected for layoff worse off than their retained colleagues involuntary layoff or vice versa involuntary retention the answers depend on the nature of the workers preferences two polar cases are looked at corresponding to permanent and temporary layoff the former is characterized by overemployment and involuntary retention the latter by underemployment and involuntary layoff also examined are simple contracts where all retained workers are paid a common wage and all laid off workers receive a common redundancy payment handling asymmetric information in stochastic contracts has led to two technical innovations first a number of results are proved even though all the truth telling constraints are explicitly included second a new regularity condition is found under which the local constraints are sufficient to ensure global incentive compatibility at an optimum

randomization of commodity taxes an expenditure minimization approach using an expenditure minimization approach necessary and sufficient conditions for local random taxation are obtained in terms of the curvature of the compensated demand function so that intuition from excess burden analysis can be applied major findings include 1 random taxation is locally optimal if the compensated demand function is sufficiently convex 2 horizontally equitable taxation is locally optimal if the compensated demand function is concave and 3 local randomization is not optimal if the tax revenue requirement is sufficiently close to zero or to any local maximum we also derive an inverse elasticity characterization of the optimal random tax structure

endogenous sequential entry in a spatial model in this paper we simulate a sequential entry of firms in a differentiated industry a la hotelling firms select a product location once for all they are aware of the unique price equilibrium that will take place after entry has occurred and take into account the behaviour of subsequent entrants it is found that early entrants will systematically locate around the centre but in such a way as not to induce later competitors to locate in between them location choices are also investigated as an instrument for entry deterrence which is feasible because of a fixed cost we identify several ranges of fixed cost for which entry is innocently deterred corresponding to a natural monopoly duopoly triopoly entry deterrence is then typically used to stretch the range of fixed cost for which a given number of firms can be sustained deterrence strategies are consistently such that firms locate at more regular intervals

efficient black markets abstract this paper investigates analytically the welfare effects of black market activities that firms undertake to evade taxes the desirability of a black market is linked to the attributes of the goods supplied by black market firms the analysis identifies cases where a black market reduces increases the distortionary impact of taxation on the allocation of resources across the goods that the government is attempting to tax leading to a welfare gain loss

taking versus taxing an analysis of conscription in a private information economy most countries currently man their militaries through conscription i e a draft conventional wisdom suggests that by lowering the budgetary cost of the military a draft reduces distortionary taxation especially when military needs are large we find that this intuition is misguided when income taxes are set optimally voluntary enlistments lead to less distortionary taxation than a draft because the tax base left behind by a volunteer army tends to be more productive than that after a draft for reasonable parameter values drafts are more distortionary and less socially desirable when military needs are large

advertising sunk costs and barriers to entry this paper tests hypotheses about the entry deterring effects of advertising the model isolates three separate effects of advertising on entry the effect on the irrecoverable costs of entry the effect on the uncertainty underlying the entry environment and the effect on the measured rates of profit we find that advertising impedes entry since necessary advertising expenditures give rise to a sunk cost which raises the risk of entry however we also find a countervailing force due to advertising in that the entrant perceives a greater likelihood of success in markets where advertising is important our analysis shows that the overall impact of advertising on entry is positive

taxation insurance and precautionary labor we examine optimal taxation and social insurance with adverse selection in competitive insurance markets in a previous literature it has been shown that with perfect insurance markets social insurance improves welfare since it is able to redistribute without creating distortions this result has been taken as robust to the introduction of adverse selection as this would only provide additional justifications for social insurance we show however that adverse selection can weaken the case for social insurance compared to a situation with perfect markets whenever social insurance mitigates private underinsurance it also causes welfare reducing effects by decreasing precautionary labor supply and hence tax revenue in addition adverse selection may reduce the redistributive potential of social insurance we illustrate our general results using different equilibrium concepts for the insurance market notably we derive conditions under which a complete renunciation of social insurance is optimal and the government only relies on income taxation to achieve its redistributive objectives

new perspectives on public finance recent achievements and future challenges abstract the advances in the economics of the public sector during the past quarter century have been as pronounced as in any field within economics public finance has become a rigorous branch of applied microeconomics incorporating the best thinking and most advanced tools of both theoretical economics and econometrics in the remarks below i will focus on a few key areas in applied and theoretical tax and expenditure policy drawing both upon the academic work of myself and others and my experiences in the policy arena both as chairman of the council of economic advisers and as chief economist of the world bank i shall address both the questions of what we have learned in the past few decades as well as the questions where further research is needed

redistribution and administrative federalism in this paper redistribution is studied in the presence of migration externalities administrative federalism is defined as a constitution where statutory tax and transfer levels are set nationally while local administrations may refuse to pay the transfer or rebate the tax in single cases thereby introducing horizontal inequity with risk aversion this is less attractive than reducing the level of redistribution in a horizontally equal way it is shown that administrative federalism leads to higher transfers and higher utilitarian welfare than decentralized decisions that it may implement the first best solution and that horizontal inequality never occurs in equilibrium

location choice product proliferation and entry deterrence within a slightly modified version of hotelling s model we reconsider the claim that the threat of entry induces existing firms to produce a larger number of products than they would otherwise we show that entry deterrence although optimal need not be achieved through product proliferation in some cases the incumbent monopolist resorts to an entry deterring strategy based on location choice rather than product proliferation we also show that in some cases the number of products chosen by the incumbent facing the threat of entry is strictly greater than the minimum number required to deter entry

an index of inequality with applications to horizontal equity and social mobility horizontal equity and social mobility are discussed in terms of a non utilitarian social welfare function which takes account of the process by which an ex ante distribution is mapped into an ex post distribution by the tax system for example an index of inequality is proposed which decomposes into two components corresponding to vertical and horizontal equity respectively a functional form for the social welfare function is derived for the purposes of empirical work and an application to data for 5895 uk households is presented the paper contains a theoretical application of the index to a model of optimal taxation it is conventional to assess the merits of alternative public policies in terms of a trade off between equity and efficiency in practice however a change in say the tax system involves three effects first it may have incentive or disincentive effects leading to efficiency gains or losses secondly it may alter the distribution of welfare levels thirdly it may alter the ranking of individuals or households within the distribution these three effects correspond to efficiency vertical equity and we shall argue certain aspects of horizontal equity respectively and any assessment of a tax change must take into account all three the principal assumption of this paper is that government is concerned about the trade off between these three effects a strict utilitarian is concerned only with the consequences of an action and in the evaluation of a particular reform a utilitarian measure of social welfare is defined over the vector of ex post utilities no account is taken of the process by which the vector of ex ante utilities is mapped into the ex post vector and no ethical status is awarded to the ex ante distribution one does not have to adopt an entitlement theory of justice to believe that the utilitarian approach may ignore some relevant considerations such as the fairness of the redistributive process a striking example of this arises in the model used by mirrlees 11 to examine optimal income taxation in that model individuals have identical preferences defined over consumption and leisure and differ only in respect of their potential wage rates or ability levels clearly in the absence of taxation individual utility is an increasing function of ability suppose the government uses redistributive lump sum taxes to achieve the first best optimum then as mirrlees 11 12 shows the first best optimum for a utilitarian social welfare

noncooperative behavior by a cartel as an entry deterring signal recent work has investigated the effect of a potential entrant s uncertainty about postentry profits on the likelihood of his entering the market it has always been assumed that the potential entrant knows the type of postentry solution but lacks information on cost or as to whether the postentry solution will be cooperative or noncooperative we find that entry is more likely the greater is the preentry profit rate in equilibrium the threat of entry then forces the incumbent firms to act more competitively to deter entry

pareto efficient taxation and expenditures pre and re distribution abstract this paper shows that there is a presumption that pareto efficient taxation entails a positive tax on capital when tax and expenditure policies can affect the market distribution of income in ways that cannot be directly offset those effects need to be taken into account reducing the burden imposed on distortionary redistribution the paper extends the 1976 atkinson stiglitz results to a dynamic overlapping generations model correcting a misreading of the result on the desirability of a zero capital tax that result required separability of consumption from labor and that the only unobservable differences among individuals were in fixed labor productivities in a general equilibrium model one needs to take into account the effects of policy changes on binding self selection constraints in a simple model with time separability but with non separability between consumption and leisure capital taxation depends on the complementarity substitutability of leisure during work with retirement consumption the final section constructs a simple two class model capitalists who maximize dynastic welfare and workers who save for retirement whose productivity can be enhanced by publicly provided education it derives a simple expression for the optimal capital tax which is positive so long as the social welfare function is sufficiently equalitarian and the productivity of educational expenditures is sufficiently high

contestability queues and governmental entry deterrence this paper demonstrates that a perverse kind of entry deterrence can result when government subsidized production is combined with non price rationing in the form of queuing even though queuing leads to a total cost to the consumer not including the tax cost that is higher than the cost of an unsubsidized private supplier and even though the government s money price is rigid the market is not contestable the key to the result is that the waiting cost portion of the consumer s acquisition cost declines immediately upon entry and losses would be forced upon the entrant privatization would negate the entry deterrence thus leading to entry increased output at lower full prices lower average production costs decreased waiting costs increased profits and increased consumer surplus

scale economies and capacity utilization the importance of relative fuel prices abstract several authors have directed attention to the importance of capacity utilization as an explanation for technical scale economies in the production of electricity we analyse 1981 us firing unit data for electric generating companies to determine the relationship between capacity utilization and scale economies we show that capacity utilization rates are functions of relative fuel prices and the mix of technology available to the company this suggests that the results of capacity utilization studies will be dependent on the relative fuel prices in the year s from which the data come even if the capital stock is exactly the same as a result ex ante companies do not have much flexibility in choosing an expected utilization rate associated with scale

capacity outpl t and sequential entry comment two behavioral assumptions that are often made in the industrial organization literature are that an established firm or group may deter entry either through limit pricing the sylos postulate or by holding excess capacity the excess capacity hypothesis in an interesting recent article in this review 1981 daniel spulber examines these behavioral assumptions to see whether they are consistent with rational behavior by an established firm spulber s analysis is based on a two firm two period game model in which the established firm is given a first in advantage by introducing this dynamic element into the model spulber is able to explicitly address the issue of the optimality of entry deterring behavior spulber finds that the use of limit pricing and or excess capacity to deter entry is rational only under a very limited set of circumstances in particular when the second period outcome is determined by a cournot nash equilibrium he derives the following results 1 the first period output of the established firm is always less than or equal to the first period output produced by a firm not anticipating entry the established firm essentially accommodates entry and limit pricing does not occur 2 the established firm never holds more capital than the amount that would minimize its production costs given its output choices in periods one and two this comment takes issue with spulber s conclusions about the cournot nash case it will be shown that the two results cited above may be reversed when the production technology is characterized by variable proportions this reversal hinges on the particular type of nash equilibrium employed in the analysis of the two period model spulber implicitly uses a nash equilibrium that is not subgame perfect 2 it is shown below that when one requires the nash equilibrium to be subgame perfect both limit pricing and excess capital investment outcomes are possible for the variable proportions technology case the subgame perfection property thus seems to capture an important strategic element in decision making for the established firm in some cases this type of strategic behavior leads to entry barriers that would not exist under innocent profit maximization by the established firm strategic entry barriers are discussed by steven salop 1979 spulber s notation and assumptions about demand and costs are adopted below

equity equality and welfare this paper argues that horizontal equity he and vertical equity ve are two of the basic commands of social justice and can be seen as hierarchical the information content of the ve command is sufficient also to implement he a general vector specification of inequity is proposed for a tariff treatment system which does not satisfy he and ve in the case of the income tax the distinction between the he and ve commands and the nr no reranking criterion which has coexisted in the income tax literature with these for the last 15 years is drawn a complication not recognised by he and ve is the effect of pursuing the common interest efficiency goal of the tariff the paper concludes with a call for further work on the meaning and implementation of concepts of justice in direct taxation and on the common interest dimension

empirical measurement of horizontal inequity abstract horizontal inequity is the unequal treatment of equals a crucial problem arising when measuring its extent is how should differential treatment which has some equity justification be distinguished from that which does not the literature to date has suggested that genuine equals can be identified and thence the problem solved by adjusting incomes prior to calculations using equivalence scales the paper argues that there are some good reasons for considering an alternative approach labelled partial symmetry in this the emphasis is on measuring horizontal inequity within each group of households with the same equity relevant characteristics rather than on adjusting incomes and then using the same measure for all households in the population the approaches are compared theoritically with reference to summary indices based on the generalised entropy family and to the conditions required to make partial orderings of different redistributions exploratory empirical work suggests there has been a substantial reduction in the horizontal inequity of u k direct taxes between 1976 and 1981 whichever approach is used the sources of the inequity observed are analysed in detail

incentives and discrimination optimal incentive mechanisms may require that agents are rewarded differentially even when they are completely identical and are induced to act the same we demonstrate this point by means of a simple incentive model where agents decisions about effort exertion is mapped into a probability that the project will succeed we give necessary and sufficient conditions for optimal incentive mechanisms to be discriminatory we also show that full discrimination across all agents is required if and only if the technology has increasing return to scale in the non symmetric framework we show that negligible differences in agents attributes may result in major differences in rewards in the unique optimal mechanism this abstract was borrowed from another version of this item

public finance of private goods the case of college education this paper describes a contract theory of public finance of college education that explains why everyone pays for the college education of a lucky minority the contract provides gambles that families desire optimizing the contract determines the taxes paid by all members of society fees paid by those whose children go to college the fraction of children who are admitted to college and the quality of college education changes in wealth lead to changes in taxes and admissions but fees and quality are invariant the practice of using a cutoff level of precollege achievement to determine admission to college is justified by the theory

cross sectional patterns of mortgage debt during the housing boom evidence and implications the reallocation of mortgage debt to low income or marginally qualified borrowers plays a central role in many explanations of the early 2000s housing boom we show that such a reallocation never occurred as the distribution of mortgage debt with respect to income changed little even as the aggregate stock of debt grew rapidly moreover because mortgage debt varies positively with income in the cross section equal percentage increases in debt among high and low income borrowers meant that wealthy borrowers accounted for most new debt in dollar terms previous research stressing the importance of low income borrowing was based on the inflow of new mortgage originations alone so it could not detect offsetting outflows in mortgage terminations that left the allocation of debt stable over time and while defaults on subprime mortgages played an important part in the financial crisis the data show that subprime lending did not cause a reallocation of debt toward the poor rather subprime lending prevented a reallocation of debt toward the wealthy

excess capacity and entry some empirical evidence recent articles by spence i977 dixit i979 and schmalensee i98i have elaborated on wenders i97i1 proposition that excess capacity can act as a barrier to entry the intent of all of these treatments is to suggest that firms may rationally invest in excess capacity with the expectation that excess capacity will be seen by potential entrants either as a signal of aggressive intent or as a credible threat 2 when excess capacity does not lead to creation of a credible threat it may still act as a barrier to entry by shifting the risk return perceptions of potential entrants enough to divert the potential entrants investments into other industries 3 alternatively investment in excess capacity by incumbent firms may reduce the prospects of an active market for the used equipment of a defunct entrant and thereby help to convert fixed costs into sunk costs consequently raising entry barriers 4 this paper represents an exploratory effort to investigate empirically the prevalence and efficiency of excess capacity in deterring entry first a simple and traditional model of entry is presented this is followed by the description of the data used to explore the excess capacity investment concept a combined results and comments section follows the description of the data

cost raising strategies advantage rivals by raising their costs in this paper we show that strategies designed to raise rivals costs have a number of advantages over predatory pricing they are credible do not necessarily require the victim to exit and do not necessarily require the existence of classical market power the paper sets up a general model proves a number of general results and then applies the model to specific strategies involving overbuying inputs and vertical integration

random pricing by monopolists this paper considers the conditions under which a monopolist might wish to randomize its pricing when consumer demands depend on previous decisions by consumers the magnitude of monopoly profits becomes effectively dependent on the welfare consequences of the monopoly s pricing policy in these circumstances differing attitudes towards price gambles between a firm and its customers can imply that randomized pricing is more profitable on average than the best deterministic pricing policy sufficient conditions for profitable randomizations optimal randomizations and incentive issues are discussed copyright 1994 by blackwell publishing ltd

limit price entry prevention when complete information is lacking abstract this paper extends an earlier paper by the author in which there were two economic agents an established firm and a potential entrant operating under complete information each agent being assumed to know the profit functions of both firms the present paper extends some of the results of the earlier work to a model in which it is not known with certainty to either agent what the profit functions would be after the entrant would come into the market

innis lecture equity and equality is horizontal equity he the most widely accepted principle of equity or does it stand in opposition to the advancement of human welfare this paper argues that the case for the he principle is not as straightforward as is usually thought and that it requires advanced notions of justice and well being the most likely ethical basis for he appears to combine a rawlsian maximin principle and a view of well being that allows for relative local comparison effects the paper also explores some of the dimensions of equality and well being along which the he principle can be applied and presents a number of examples showing how he considerations can provide an important input into policy analysis le principe d d equite horizontale he constitue t il le principe ethique le plus largement admis ou est il un frein a l avancement du bien etre cet article explique pourquoi les assises ethiques du principe d eh ne sont pas aussi claires qu il est parfois suggere et demontre que ce principe fait plutot appel a des notions avancees de justice et de bien etre les assises morales les plus susceptibles d appuyer le principe d eh semblent combiner un argument de type maximin rawlsien et une perspective du bien etre qui tient compte des effets locaux relatifs de comparaison le papier explore egalement certaines des dimensions de l egalite et du auxquelles le principe d eh peut etre applique et presente un certain nombre d exemples montrant en quoi de considerations de type eh peuvent influencer l analyse de politiques

the optimal size of a tax collection agency the condition that characterizes the optimal size of a tax collection agency is derived and then given a simple interpretation in terms of excess burden the paper clarifies an earlier finding of sandmo which suggests that the optimal degree of enforcement is higher than a simple cost benefit calculation would indicate the appropriate condition is that at the margin the resource cost of increasing enforcement should equal the saving of excess burden due to the decline in exposure to risk the increased revenue gained from stricter enforcement does not enter the expression because it merely represents a transfer among the economy s identical agents

the welfare cost of perceived policy uncertainty evidence from social security policy uncertainty reduces individual welfare when individuals have limited opportunities to mitigate or insure against the resulting consumption fluctuations we field an original survey to measure the degree of perceived policy uncertainty in social security benefits and to estimate the impact of this uncertainty on individual welfare our central estimates show that on average individuals are willing to forgo 6 percent of the benefits they are supposed to get under current law to remove the policy uncertainty associated with their future social security benefits this translates to a risk premium from policy uncertainty equal to 10 percent of expected benefits

optimal linear income tax with random revenue abstract this paper introduces the concept of risk attitudes a government may take toward random revenue in the design of a linear income tax it shows that the familiar trade off formula between equity and efficiency can be derived either by assuming a risk neutral government attitude toward random revenue or by assuming no randomness of revenue we provide numerical analysis to demonstrate that optimum tax schedules for a non risk neutral government can significantly deviate from those for a risk neutral government

simpler is better predicting consumer vehicle purchases in the short run abstract when agencies such as the us environmental protection agency epa establish future greenhouse gas emissions standards for new vehicles forecasting future vehicle purchases due to changes in fuel economy and prices provides insight into regulatory impacts we compare predictions from a nested logit model independently developed for us epa to a simple model where past market share predicts future market share using data from model years 2008 2010 and 2016 the simple model outperforms the nested logit model for all goodness of prediction measures for both prediction years including changes in vehicle price and fuel economy increases bias in forecasted market shares this bias suggests price increases are correlated with unobserved increases in vehicle quality changes in preferences or brand specific changes in market size but not cost pass through for 2010 past shares predict better than a nested logit model despite a major shock the economic disruption caused by the great recession observed share changes during this turbulent period may offer upper bounds for policy changes in other contexts the largest observed change in market share across the two horizons is 6 6 for manufacturers in 2016 and 3 4 for an individual vehicle in 2010

technology debt and the exploitation of growth options abstract this paper analyzes the effect of the firm s technology on the agency costs of debt it is shown that for an important class of technologies agency costs are not a uniformly rising function of leverage for these technologies relatively high leverage can be consistent with a small tax subsidy the effect of technology on the exploitation of real options by a levered firm is examined the analysis provides a framework for a direct test of the agency cost of debt hypothesis using cost data

strategic entry deterrence in analyzing deterrence of large scale entry two classes of entry barriers may be distinguished an innocent entry barrier is unintentionally erected as a side effect of innocent profit maximization in contrast a strategic entry barrier is purposely erected to reduce the possibility of entry two types of innocent barriers may also be distinguished a postentry absolute advantage has the property that if entry did occur the established firm would be at a profit advantage over the entrant examples are superior technology or product design patents and lower input prices a preentry asymmetry advantage arises from the fundamental preentry asymmetry between established firm and potential entrant before the entrant makes his entry decision the established firm has already committed resources this prior existence gives first move advantages the preentry asymmetry is independent of symmetry or asymmetry in the rules the equilibrium concept of the postentry game that might ensue even if the postentry game will be played according to nash cournot or entrant as leader rules the preentry leadership

would hotelling kill the electric car in this paper we show that the potential for endogenous technological change in alternative energy sources may alter the behaviour of resource owning firms when technological progress in an alternative energy source can occur through learning by doing resource owners face competing incentives to extract rents from the resource and to prevent expansion of the new technology we show that in such a context it is not necessarily the case that scarcity driven higher traditional energy prices over time will induce alternative energy supply as resources are exhausted rather we show that as we increase the learning potential in the substitute technology lower equilibrium energy prices prevail and there may be increased resource extraction and greenhouse gas emissions we show that the effectiveness and the incidence of emissions reduction policies may be altered by increased potential for technological change our results suggest that treating finite resource rents as endogenous consequences of both technological progress and policy changes will be important for the accurate assessment of climate change policy

randomness in tax enforcement abstract when there is tax evasion increased randomness about how much taxable income an auditor would assess generally leads to higher reported income and more revenue when reducing randomness is costly optimality requires some randomness in assessed taxable income even if reducing randomness is costless taxpayers may prefer some randomness when the increased revenue can be rebated so that the government s revenue stays fixed

action characteristics as predictors of competitive responses a central question in competitive dynamics is whether a competitive response can be predicted this study links various characteristics of actions with the total number and the time lag of competitors responses the hypothesized relationships were tested with a sample of competitive moves among u s airlines the results suggested that responses are influenced by the characteristics of the actions that evoked them specifically the total number of competitors affected by an action and the importance to these competitors of the markets under attack by the action increase the number of competitive responses strategic as opposed to tactical actions or actions which require substantial implementation efforts reduce the number and delay the timing of rivals counteractions finally contrary to prediction competitors who have a high stake in the markets under attack by a competitive move react slowly

sequential entry and deterrence with competitive spatial price discrimination abstract this paper analyzes sequential entry with perfect foresight in a competitive spatial price discrimination model with both an exogenous and an endogenous number of firms the spne locations do not coincide with the social cost minimizing locations

risk aversion supply response and the optimality of random prices a diagrammatic analysis this paper analyzes the effect of commodity price stabilization on producers and consumers both in the short run and in the long run when producers have adjusted their production decisions to take account of the change in the price distribution we derive conditions under which a both producers and consumers may be better off and b both producers and consumers may be worse off moreover we show that the long run effects may differ not only quantitatively but also qualitatively from the short run effects the anomalous results may occur even with reasonable assumptions concerning production functions and utility functions of producers and consumers

delegation as commitment the case of income tax audits in this article we study the value of delegating authority over income tax audit policy arising from the incompleteness of contracts consider a utilitarian government whose ability to commit is limited to aggregate dimensions of its audit policy as publicly verifiable information about detailed allocations of audit budgets is not available we show that the welfare level associated with the full commitment solution can be attained by delegating authority over audit policy to a manager the latter is offered a simple incentive scheme based only on the aggregate variables which are publicly observable in contrast if the government retains authority direct commitment to these same variables does not allow the full commitment welfare level to be achieved thus despite sharing a common informational basis delegation may perform better than centralized arrangements in the presence of incomplete contracts

labor market integration investment in risky human capital and fiscal competition this paper presents a general equilibrium model where human capital investment increases specialization and exposes skilled workers to region specific earnings risk interjurisdictional mobility of skilled labor mitigates these risks state contingent migration of skilled labor also improves efficiency with perfect capital markets labor market integration raises welfare and reduces ex post earnings inequality if instead human capital investment can only be financed through local taxes labor market integration leads to interjurisdictional fiscal competition shifting the burden of taxation to low skilled immobile workers decentralized public provision of human capital investment creates earnings inequalities and is inefficient

the role of potential competition in industrial organization potential competition has been recognized as a mechanism to control the exploitation of market power at least since the work of j b clark 1902 but it was not until 50 years later that economists most notably joe bain and paolo sylos labini refocused attention on the idea with inputs from the theories of imperfect competition optimal control and dynamic games their work evolved into ever more sophisticated models of the reactions of existing competitors to the threat of new competition although the most appropriate models of competitive interaction are those which begin with a specific industry a number of theories have been proposed which attempt to develop more general conclusions my purpose in this paper is to develop an understanding of the strengths and limitations of these alternative theories by examining the available theoretical empirical and institutional knowledge rather than attempt the sisyphean task of recounting every model which relates conditions of entry and market performance i have partitioned the analysis into four major schools of thought according to their most central propositions these are the traditional model of limit pricing dynamic limit pricing the theory of contestable markets and the market efficiency model traditional limit pricing models rest on the assumption that firms respond to entry but are able to earn persistent profits when the structural characteristics of markets make entry difficult dynamic limit pricing is similar but emphasizes that markets can only be temporarily protected from entry contestability theory in its pure form asserts that potential competition is as effective as actual competition in controlling market performance the efficient markets hypothesis broadly interpreted states that markets are workably competitive and that the market structure reflects differential efficiency not strategic behavior while one can construct many other hypotheses about potential competition these classifications

socially optimal procurement with tight budgets and rationing abstract we investigate the behaviour of a social planner that secures the supply of a good e g an environmental benefit through contracting with private agents while the social planner seeks to maximise net social benefits she is also controlled with a fixed budget private agents are profit maximising and hold private information concerning their variable costs of production they also have known fixed costs of contracting we find that budget constraints and fixed costs change the optimal contract design in more than one way the social planner minimises costs rations high cost contracts to reduce fixed costs and information rents and distorts contracts for all agent types including low cost agents we find that rationing improves social welfare also even though social costs including tax distortion are explicitly taken into consideration they do not affect the design of optimal contracts when budgets are tight in those cases the budget constraint dominates the solution

minimum wage legislation as a second best policy mass unemployment is a striking phenomenon of the present economic situation of european market economies although the profession of economists has been criticized for not providing satisfactory cures it has produced a number of different explanations either complementary or contradictory for the occurrence of mass unemployment in this paper we examine the argument that unemployment is the consequence of minimum wage legislation which is socially desirable the observation of current wage legislations suggests that the above argument is broadly at least partly accepted by policy makers curiously enough a defence of this argument meeting the rigorous requirements of modern theory seems to be missing symmetrically attacks against minimum wage legislation often rely upon reasonings of dubious relevance i e the obvious remark that unemployment is a waste with first best efficiency criteria the present paper proposes a second best analysis where second best stems from informational asymmetries which prevent the implementation of lump sum transfers needed for a first best redistribution policy the question under scrutiny can be reformulated in a more precise way as follows does a second best optimal redistribution policy lead to minimum wage legislation and unemployment our elements of answer are gathered in 3 sections in section 2 the principles of the analysis of the desirability of quantity controls and existing results are recalled in section 3 the analysis of section 2 is specified to a simple prototype model for the study of linear income taxation in section 4

taxation and labour supply with risky activities consider the following three phenomena a in recent years dramatic shifts in the types of contract between london cabbies and the taxi owners have been observed b if one tries to hire a housepainter in the uk one is often quoted two rates one for official work during regular hours and for unofficial weekend and evening work c in two unrelated discussions with economics professors about the textbook model of taxation and labour supply each revealed to me that marginal hours released from his regular employment were spent not in the form of leisure but in participating in stock market speculation

strategic behaviour of incumbent firms in the uk abstract the main purpose of this paper is to examine the incidence of strategic behaviour in the uk by means of a questionnaire study performed across three broad manufacturing industries food electrical engineering and chemicals of the strategies which have received substantial theoretical attention r d and advertising appear widely used patenting pricing and excess capacity much less so vertical instruments such as purchasing policy also stand out as important but possibly only a minority of firms in our sample actively pursue strategic instruments

tax rate uncertainty factor supplies and welfare uncertainty about prospective changes in tax rates may increase factor supplies and hence the tax base permitting a reduction in tax rates that could result in a net increase in welfare under empirically relevant assumptions about attitudes towards risk we find that when an individual exclusively saves or works the tax base rises in response to greater tax rate uncertainty so that welfare could indeed increase however when an individual both saves and works the supply of the randomly taxed factor declines with increased uncertainty implying that tax revenue and welfare decrease when the nonrandom tax rate is sufficiently low

income tax deductions for losses as insurance the federal income tax allows deductions for some categories of personal losses notably for casualty losses such as destruction of one s home or car and medical expenses above a threshold the latter even with lower marginal rates and further restrictions brought about by the 1986 tax reform involves more than a 3 billion annual revenue loss office of management and budget 1990 1 deductions like these act as partial insurance individuals receive a tax benefit equal to their marginal rate multiplied by the magnitude of their loss however this form of insurance is unnecessary when private insurance is available moreover as will be emphasized here these deductions have a perverse effect because they are allowed only for the uninsured portion of losses this induces individuals to be less protected against risk in the aggregate than if the implicit insurance provided by the tax system were unavailable if the tax rate is sufficiently high individuals would forgo insurance coverage altogether 2 it will be demonstrated that a tax system with no deductions for personal losses pareto dominates the current system these conclusions are demonstrated in section i using a simple model in which risk averse individuals may purchase actuarially fair insurance against loss and individual behavior does not affect the risk of loss no moral hazard section ii considers the applicability of the results when one allows for moral hazard administrative costs and other imperfections it also discusses the applicability of traditional notions of tax equity

power pooling an exercise in industrial coordination interconnected public utilities can achieve cost savings more reliable service lower capacity requirements and optimum siting by closely coordinating generation and transmission transactions within a common pool they can also achieve seasonal diversity and economy of energy in their exchanges despite the advantages the costs of pooling arrangements inefficient allocations of benefits and government regulations have been serious disincentives the relative tightness of agreements in 17 power pools demonstrates that tightly coordinated pools generally experience the most benefits 20 references dck

achieving demand side synergy from strategic diversification how combining mundane assets can leverage consumer utilities we explore the overlooked issue of how certain strategic level interindustry diversification options might increase consumer utility discussions of inter industry diversification typically focus on producer synergies obtainable from economies of scope or from skill transfer across business units discussions of intra industry product diversification generally the province of marketing typically focus on synergies obtainable from product bundling which lowers producer costs or provides convenience for consumers we take a different tack by linking interindustry diversification and consumer utility we first separately examine two possible consumer benefits of interindustry diversification 1 facilitating consumers accomplishment of two tasks simultaneously or 2 attracting diverse consumer groups to a common platform when intergroup externalities exist we then assess a simple empirical context that shows potential for simultaneous consumer utilities and two sided market utility together we analyze this context and concurrently develop a mathematical model showing how these demand side synergies can create unique business value we next introduce asymmetric preferences among consumer subgroups and we refine our arguments by comparing their conclusions with the empirical data we learn that combinations of otherwise mundane i e commonplace assets can create consumer value superior assets are not necessary moreover common ownership is necessary for the pricing flexibility required to deliver and capture maximum value through interindustry diversification especially when consumer groups preferences may change the negotiations and settling up required for cooperation through alliances will without common ownership increase costs and reduce responsiveness we discuss the sustainability of demand side advantages and the implications of these ideas for future research and practice

strategic deterrence of sequential entry into an industry industrial entry deterrence is typically studied in a setting where an established firm or firms confront and attempt to deter a single potential competitor during the evolution of most industries however a sequence of firms enters or attempts to enter at distinct points in time consideration of issues arising from sequential entry fundamentally alters the qualitative nature of the deterrence decision undertaken by incumbent firms within a sequential setting counterintuitive behavior may be observed specifically numerous government policies designed to decrease industrial concentration penalties for anticompetitive practices subsidization of entry consent decrees restructuring industries may have the opposite effect

student loans do college students borrow too much or not enough total student loan debt rose to over 800 billion in june 2010 overtaking total credit card debt outstanding for the first time by the time this article sees print the continually updated student loan debt clock will show an accumulated total of roughly 1 trillion borrowing to finance educational expenditures has been increasing more than quadrupling in real dollars since the early 1990s the sheer magnitude of these figures has led to increased public commentary on the level of student borrowing the authors move the discussion of student loans away from anecdote by establishing a framework for considering the use of student loans in the optimal financing of collegiate investments from a financial perspective enrolling in college is equivalent to signing up for a lottery with large expected gains indeed the figures presented here suggest that college is on average a better investment today than it was a generation ago but it is also a lottery with significant probabilities of both larger positive and smaller or even negative returns the authors look to available albeit limited evidence to assess which types of students are likely to be borrowing too much or too little

labour supply under uncertainty with piecewise linear tax regimes the analysis of labour supply under uncertainty has been developing rapidly in recent years papers by block and heineke 1973 stiglitz 1976 cowell 1981a b eaton and rosen 1980a b stern 1980 and tressler and menezes 1980 have all presented analyses of the problem almost without exception the focus of the analysis has been the effects of greater risk in the wage rate or in non labour income on the labour supply decision of the individual not surprisingly therefore the well known comparative static results of rothschild and stiglitz 1971 and diamond and stiglitz 1974 on how increases in risk influence the optimal choice of a control variable have been found to be useful in this literature some of the above mentioned papers have also considered the problem of labour supply under uncertainty when there are taxes in operation thus stiglitz 1976 cowell 1981a b and eaton and rosen 1980a b all analyse the role of taxation however none of these papers has examined labour supply under uncertainty with tax regimes of the type we observe in practicewhich are typically piecewise linear 1 moreover in all the studies i am aware of the tax regime itself is held to be constant thus the role of tax risk as opposed to wage risk remains unanalysed the object of this paper therefore is to advance the literature on labour supply under uncertainty in these two directions first we ask the more common question about the impact of greater risk on labour supply but this time in the context of piecewise linear tax regimes it will be seen that the answers now have to be modified in interesting ways in particular it will be shown that the problem belongs to a general class of problems in decision making under uncertainty analysed in kanbur 1980 1982 where the pay off function has a kink or non differentiability at a critical value of the random variable in such a setting the rothschild stiglitz 1971 and diamond stiglitz 1974 results are no longer directly applicable we have to use their generalized counterparts developed in kanbur 1981 second we ask a question that has not been asked in the literature up to now what is the impact of greater uncertainty about the tax regime on labour supply decisions it will be seen that the piecewise linear regime allows us to parametrize such tax regime risk in a convenient and manageable way the plan of this paper is as follows section i introduces the model and in the context of the model gives a precise statement of the questions that this paper asks section ii begins the analysis by considering the effects of greater risk in the wage rate and in non labour income sections iii and iv then consider the question of tax regime risk section v concludes the paper

redistribution when avoidance behavior is heterogeneous abstract the optimal income taxation framework is extended to account for heterogeneity in avoidance behavior the optimal tax formulae are shown to be simply and intuitively modified to reflect the value of taxable income as an indicator of the need for transfers at a given skill level this effect is in addition to any effect implied by just considering additional margins of response to taxes alternative sources of heterogeneity and their likely consequences are discussed when the choice of administration is added to the model it is demonstrated that the optimal tax system may include some seemingly wasteful avoidance schemes even if they could be eliminated without any cost when an avoidance scheme is more heavily used by the needy it may provide additional redistribution without affecting standard incentive constraints

monopoly price dispersion under demand uncertainty when a monopolist sets its price before its demand is known then it may set more than one price and limit the availability of its output at lower prices this article adds demand uncertainty and price rigidities to the standard model of monopoly pricing when there are two states of demand and the ex post monopoly price is greater when demand is high then the monopolist s optimal ex ante pricing strategy is to set two prices and limit purchases at the lower price

caveat innovator strategic and structural characteristics of new product introductions abstract the assumptions underlying models of strategic behavior by incumbents are evaluated using a case study of a ground coffee product introduction the assumption underlying earlier strategic models that the entrant does not know the incumbent s payoffs after strategic have been tested does not appear to apply instead strategic behavior is observed to hinge on ex ante uncertainty about the structure of the payoff matrix and the incremental decision making which this uncertainty spawns in this environment strategies which create noise can slow learning and delay entry

optimal observability in a linear income tax abstract we study the optimal observability of the tax base within the standard linear income tax problem where observability is determined by the government s investment into the accurate measurement of the tax base we characterize the optimal level of observability and derive a new expression for the optimal progressivity which in addition to the standard equity efficiency trade off accounts for the limited accuracy of an income tax system

the great recession and credit trends across income groups abstract in this paper we document trends in credit use across income groups in the period surrounding the great recession we investigate trends in access to different credit markets including mortgages home equity automobiles and student loans we disentangle growth rates of new market entrants from the aggregates and analyze overall as well as within county growth rate differentials across income strata our findings may provide insight into the financial well being of different income groups in the context of the great recession

equity and policy effectiveness with imperfect targeting abstract we propose a general approach that jointly integrates horizontal and vertical equity criteria in the assessment of poverty alleviation programs with the strength of each criterion being captured through its own inequity aversion parameter this contrasts with the assessment of poverty alleviation programs done with simple under coverage and leakage ratios or with other methods that do not take into account the heterogeneity of the poor and that do not address directly the social benefits of achieving normative criteria our methodology is illustrated using tunisian data and two alternative poverty alleviation policies we find inter alia that the social ranking of commodity and socio demographic targeting in tunisia depends on the policymaker s comparative preference for vertical and horizontal equity

constrained efficient fine cum tax rate structures the case of constant relative risk aversion this paper explores the possibility that fines and tax rates impose different welfare costs on different types of taxpayer so that the government may want to apply different fine tax rate treatments to different types of taxpayer under the assumption that taxpayers exhibit constant relative risk aversion we characterize the constrained pareto efficient fine tax rate structure showing that i the co existence of compliers the above ground economy and evaders the underground economy is typical at the pareto optimum and ii pareto efficiency requires compliers to face tax rates no higher and fines no lower than those faced by evaders

utilitarianism and horizontal equity the case for random taxation this paper establishes that far from being able to derive the principle of horizontal equity from utilitarianism the principle is actually in consistent with utilitarianism in a variety of circumstances we derive conditions under which a it is optimal to impose random tax schedules ex post randomization and b it is optimal to randomize the tax schedules imposed on a set of otherwise identical individuals ex ante randomization the implications for optimal tax theory are discussed more generally it is shown that there are a number of potentially important economic situations with which the principle of horizontal equity may be inconsistent not only with utilitarianism but even with pareto optimality this abstract was borrowed from another version of this item

fixed costs sunk costs entry barriers and sustainability of monopoly this paper shows that i fixed costs of sufficient magnitude assure the existence of a vector of sustainable prices for the products of a natural monopolist prices making him invulnerable against entry ii nevertheless fixed costs do not constitute barriers to entry that is they need not have undesirable welfare consequences iii indeed in market forms that we call perfectly contestable large fixed costs are completely compatible with many desirable attributes of competitive equilibrium iv sunk costs do however constitute barriers to entry and v finally the profit and welfare consequences of entry barriers are described formally in this paper it is shown that i fixed costs of sufficient magnitude assure the existence of a vector of sustainable prices a set of product prices that make a natural monopolist invulnerable against successful entry ii nevertheless costs that are truly fixed do not constitute barriers to entry that is they do not have the welfare consequences normally attributed to barriers to entry iii indeed there are markets of a form which we call perfectly contestable markets and whose properties may be approximated in practice in which large fixed costs are completely compatible with many if not most of the desirable attributes of competitive equilibrium iv sunk costs do however constitute barriers to entry and v finally the resource allocation problems that stem from fixed costs are formally identical with those that accompany public goods both their sources and their character are the same thus the rationale for public supply of public goods may be no different from that pertaining to nationalization of natural monopolies

equivalence scales horizontal equity and optimal taxation under utilitarianism abstract this paper analyzes the question of how differences in family size should be treated by the income tax system in order to achieve horizontal equity family size is incorporated into the demand system by the procedure of demographic scaling horizontal equity is defined as equal treatment of equals it is shown that when lump sum taxes are not available and the government has to rely on income taxation then the only way to entail equal utilities for household of different size is to equate the labor supplies and the per standard adult consumptions of these households

the persistence of monopoly an investigation of the effectiveness of the united kingdom monopolies commission a sample of twenty eight markets investigated by the uk monopolies and mergers commission is taken and market share changes are analysed for subsequent erosion of dominance the evidence points to a modest erosion for leading firms but only rarely to a loss of leadership although there is no significant difference between the rates of decline for leading firms in the mmc sample and a control group the achievement of some erosion of dominance in markets where entry barriers were reduced may represent some limited success for competition policy