efficient mechanisms for bilateral trading we consider bargaining problems between one buyer and one seller for a single object the seller s valuation and the buyer s valuation for the object are assumed to be independent random variables and each individual s valuation is unknown to the other we characterize the set of allocation mechanisms that are bayesian incentive compatible and individually rational and show the general impossibility of ex post efficient mechanisms without outside subsidies for a wide class of problems we show how to compute mechanisms that maximize expected total gains from trade and mechanisms that can maximize a broker s expected profit journal of economic literature classification number 026

tax collection with agency costs private contracting or government bureaucrats historically governments contracted with private agents known as tax farmers to collect taxes this paper develops a theoretical framework for determining when a welfare maximizing government should choose tax farmers over bureaucratic tax collectors while bureaucratic collectors have an incentive to shirk and raise collection costs above least costs profit maximizing private collectors tend to reduce tax evasion below the optimal level generally the choice of collection methods depends on a comparison of the welfare loss associated with monitoring in the bureaucratic setting and the welfare loss associated with overdetection of evasion in the private setting copyright 1992 by the london school of economics and political science

unemployment and effort at work we measure the sensitivity of work effort to local labour market conditions using self reported non work at the workplace in the american time use survey atus 2003 12 non work at work is quantitatively significant and varies positively with local unemployment but in opposite directions at the extensive and intensive margins the fraction of workers reporting positive values declines with unemployment while time spent in non work conditional on any such time rises with unemployment the results speak to issues of labour hoarding efficiency wages and the cyclicality of labour productivity we also demonstrate a relationship between the incidence of non work and unemployment benefits in state data linked to the atus there are also pronounced occupational differences in the incidence and intensity of non work

crime and poverty a search theoretic approach numerous studies document that criminal activity is positively related to unemployment and negatively related to educational attainment levels within given communities we study this phenomenon in the context of a search equilibrium model in which agents choose between formal employment and pursuing crimerelated activities theft prior to their occupational choices agents undertake costly schooling raising their productivity crime acts in essence as a tax on human capital by affecting the probability that a worker s earnings possessions are subsequently appropriated there are multiple equilibria high crime low levels of educational attainment long spells of unemployment and poverty are correlated across them

irs as loan shark tax compliance with borrowing constraints abstract this paper considers a simple dynamic model of tax compliance in which people may face binding borrowing constraints the model leads to much different conclusions and policy recommendations than static models in particular the government cannot generate full compliance by setting the expected value of cheating to be negative also it is possible for the government to set penalties in a way that will increase tax revenue over that of full compliance the government can increase welfare by playing the role of loan shark to people whose borrowing is constrained on the private market

income distribution police expenditures and crime a political economy perspective in this paper i present a structural approach to investigate empirically the relation between income distribution police expenditures and crime the approach is based on the estimation of an equilibrium model where heterogeneous individuals choose whether to engage in criminal activities and expenditures on police to apprehend criminals are determined endogenously through majority voting i discuss the identification and estimation of the parameters of the structural model using data for the united states jel d72 d78 k42

inflation and tax evasion an empirical analysis this paper contains an analysis of the effect of inflation on aggregate tax evasion in the united states over the period 1947 81 it is found that tax evasion in both absolute and relative terms is positively related to the inflation rate further the results indicate that aggregate evasion has risen in both absolute and relative terms with increases in the marginal tax rate but has fallen with increases in the detection probability the penalty rate and the wage share of income finally evasion has risen in absolute terms but has fallen in relative terms when real true income has risen

burglary and income inequality abstract in a model where risk neutral agents have differing legal incomes which may be supplemented by burglary we study the effects of income distribution on the level of burglary assuming that a detected burglar is incarcerated for a fixed term and assuming that burglars choose target houses using the signal of house quality we show how increases in income inequality may increase the level of crime in particular increases in relative differential inequality unambiguously increase burglary crime corollaries are that a more regressive income tax increases the level of crime and that richer neighborhoods may have lower crime rates

a simple account of the behavior of long term interest rates recent empirical research on the term structure of interest rates has shown that the long term interest rate is well described by a distributed lag on short term interest rates but does not conform to the expectations theory of the term structure it has been suggested that the long rate overreacts to the short rate this paper presents aunified taxonomy of risk premia or deviations from the expectations theory this enables the hypothesis of overreaction to be formally stated it is shown that if anything the long rate has underreacted to the short rate however the independent movement of the long rate is primarily responsible for the failure of the expectations theory

what accounts for the decline in crime in this article we analyze recent trends in aggregate property crime rates in the united states we propose a dynamic equilibrium model that guides our quantitative investigation of the major determinants of observed patterns of crime our main findings can be summarized as follows first the model is capable of reproducing the drop in crime between 1980 and 1996 second the most important factors that account for the observed decline in property crime are the higher apprehension probability the stronger economy and the aging of the population third the effect of unemployment on crime is negligible fourth the increased inequality prevented an even larger decline in crime overall our analysis can account for the behavior of the time series of property crime rates over the past quarter century

unemployment and crime rates in the post world war ii united states a theoretical and empirical analysis using annual time series data for the united states 1946 1982 two hypotheses are tested 1 the level of the unemployment rate in any given year will have a negative partial contemporaneous effect on detrendedfluctuations increases or decreases in seven index crime rates homicide rape aggravated assault robbery burglary larceny theft and motor vehicle theft in that year 2 unemployment rate fluctuationsfrom one year to the next will have a positive partial effect on detrended crime rate fluctuations in the next year these hypotheses are developed from a theoretical model that identifies the former with a criminal opportunity effect and the latter with a criminal motivation effect of aggregate unemployment on crime for burglary robbery and larceny theft empirical support is found for the expected pattern of partial effects however the relative sizes of the effects are such that the total impacts of unemployment through both partial effects are negative in addition only the negative levels effect is exhibited for homicide and motor vehicle theft while rape and aggravated assault show no consistent association with either levels orfluctuations in the unemployment rate interpretations for these findings are discussed

plea bargaining with the irs abstract the purpose of this paper is to propose a new evasion counteracting policy and to prove its welfare improving property the new fatota policy allows a target group of businesses to choose between the following two options paying a fixed amount of taxes thus exempting themselves from tax audits or paying only the amount they choose to pay and subject to possible tax audits it is shown that fatota is very similar to the plea bargaining system of the u s criminal proceedings and our results can be treated as an extension of the grossman katz analysis to the crime of tax evasion

unemployment long term employment relations and productivity growth using an effort regulation type of efficiency wage model it is demonstrated that a firm may respond to slackening labor markets by acting to increase the intensity with which workers work the magnitude of this work intensity effect depends on the structure of employment relations where long term employment relations are prevalent the effect of labor market slack on work intensity may be diminished these propositions are tested empirically by estimating the effects unemployment and long term employment have on productivity growth in two digit manufacturing industries copyright 1987 by mit press

sickness absenteeism during a period of job to job transition we examine a novel pattern of workplace sickness absenteeism for job to job movers covering the periods before and after their job transitions the movers display two opposite changes of absenteeism an upward and a downward spike before and after job change the estimates indicate a behavioural effect related to differences in financial incentives for job movers

labour supply tax evasion and the marginal cost of public funds an empirical investigation abstract in this paper we extend the concept of marginal cost of public funds itmcf to incorporate tax evasion in the labour market mcf values are also computed from various tax reforms applied to the province of quebec canada 1985 for this purpose a utility based labour supply model that allows for both regular and irregular work activities is used at the benchmark situation the mcf associated with an increase in marginal income tax rates ranges between 1 39 and 1 53 depending upon whether we consider rationing or not moreover the presence of the irregular sector accounts for between 0 02 and 0 05 of this mcf although small in magnitude the impact of the irregular sector increases rapidly with the level of marginal tax rates

on the political economy of income redistribution and crime this article analyzes a general equilibrium model in which agents choose to specialize in either legitimate or criminal activities expenditures on police to apprehend criminals as well as income redistribution are determined endogenously through majority voting we investigate how crime redistribution and police expenditures depend on characteristics of the underlying distribution of income earning abilities and on the apprehension technology our model accounts for the positive correlation between inequality and crime the positive correlation between expenditures on police and redistribution and the lack of correlation between crime and redistribution observed in u s data

incentive and incarceration effects in a general equilibrium model of crime an intertemporal general equilibrium model of criminal behavior is used to analyze the effect on crime of changing policy parameters the policy parameters are the length of the prison term the severity of punishment and the amount of police resources the number of crimes in society can be decomposed into an incentive part an incarceration part and a crime competition part the magnitudes of these three components are studied by means of empirical data from england and the us

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

efficient allocation with continuous quantities abstract the inefficiency of allocation mechanisms in the presence of bilateral asymmetric information is reconsidered in an environment with continuous quantities the result of myerson and satterthwaite is proved in this environment under the condition that zero trade is efficient if the highest cost seller or the lowest value buyer appears in addition if this condition fails there may exist mechanisms implementing efficient allocations the problem of hidden endowments is considered where any agent may be either a buyer or seller depending on the realization of the privately observed information in this environment it is often possible to arrange efficient trades ex ante asymmetries rather than interim asymmetries tend to prevent efficient allocations

complexity and renegotiation a foundation for incomplete contracts the paper considers a hold up model where only one of n future trading opportunities will prove to be efficient and where ex post renegotiation of the ex ante contract cannot be prevented as the environment becomes more complex n the outcome under any message contingent long term contract converges to that of the incomplete contracting model where trade is contractible ex post but not ex ante when trades are costly to describe both ex ante and ex post the incomplete contracting result is extended to a broader class of environments

salaries and piece rates compensation can take many forms remuneration can come as pecuniary payments as fringes such as health and pension benefits or as a nonpecuniary reward such as plush office furniture that costs the firm less than it benefits the worker a significant literature has examined the trade offs between pecuniary and nonpecuniary compensation the modern work having been pioneered by rosen 1974 more recently another body of literature has examined the selection of method of total compensation ignoring the distinction between pecuniary and nonpecuniary payment this work has focused on risk and incentive factors it has resulted in comparisons of compensation based on absolute output levels to that based on relative performance it has also led to explorations of the relation of compensation to experience over the work life 2 little attention has been paid to what may be among the most important and obvious distinction in methods of compensation namely the choice between a fixed salary for some period of time that is paying on the basis of input and some workers receive compensation that is specified in advance and not directly contingent on performance instead it depends on an input measure such as hours worked for others compensation is directly related to output this essay is an attempt to predict a firm s choice of compensation method piece rates are defined more rigorously among the more important factors discussed are worker heterogeneity incentives sorting considerations monitoring costs and asymmetric information one result is that salary workers tend to be of lower quality and more homogeneous than are their piece rate counterparts numerous additional results are provided helpful comments by victoria lazear and yoram weiss are gratefully acknowledged support was provided by the department of labor and the national science foundation 1 see lazear and rosen 1981 stiglitz 1981 holmstrom 1982 green and stokey 1983 2 see lazear 1979 1981 and harris and holmstrom in press

randomization in coalition contracts this article analyzes a much debated clause in the coalition contract between spd and fdp in rheinland pfalz two parties write a contract based on which decisions under incomplete information have to be made at a later point in time it is shown that a complex complete contract can achieve the first best outcome however a simple incomplete contract can implement the first best outcome only if use of seemingly inefficient randomization is made

costly state verification with varying risk preferences and liability abstract in the scenario of loan contracts with costly state verification we examine how the properties of the set of states different risk preferences of debtors and varying liability of lenders affect the structure of optimal repayments in particular we show that with risk averse debtors a general set of states a constant observation cost and both unlimited and limited lender liability the debtor is strictly better off revealing the true state of nature when his realized revenue is low which implies that optimal debtor consumption has a downward jump around the single switch from observed to unobserved states if the debtor can destroy revenue or if the debtor is risk neutral this non monotonicity of consumption disappears moreover given the loan size there is more monitoring under debtor risk aversion than risk neutrality we present simulations showing that a contract with unlimited lender liability and debtor risk aversion has a higher expected observation cost but a lower variance of consumption than a contract with limited lender liability finally we discuss the problems of commitment to verification and contract renegotiation in this framework

the adverse effect of unemployment insurance on workers on the job effort and labor market outcomes i investigate the effect of unemployment insurance on worker on the job effort and its macroeconomic impacts the results show that a moderate increase in unemployment benefits decreases the average wage and employment duration and aggregate output and increases average layoff rate

government policies and graft in an economy with endogenous labor supply abstract this paper is an extension of marcouiller and young s am econ rev 85 1995 630 paper which shows that in a two good economy with constant labor supply the government can always increase graft by squeezing the formal sector out of existence in this paper we find that if individuals choose the amount of labor they supply the government can increase graft by eliminating formal production in relatively rare cases

reasonable doubt and the optimal magnitude of fines should the penalty fit the crime models of the enforcement compliance relationship have assumed that both the probability and magnitude of fines are independent choice variables of policy makers these models indicate that it may be optimal to monitor with lowfrequency but to inflict uniformly maximal penalties for all infractions detected this article shows that if the judicial system is built on the reasonable doubt test then the penalty and the probability of conviction are not independent in particular as the penalty increases the probability of conviction falls as a result uniformly maximal penalties may actually encourage crime rather than deter it this article shows that optimal fines should rise with the severity of the infraction that is the penalty should fit the crime models of the enforcement compliance relationship generally treat both the probability and magnitude of fines as independent choice variables of the government this approach has led becker 1968 and others to conclude that it is optimal to set uniformly maximal penalties for all crimes and to set the probability of conviction at the minimum level necessary to enforce compliance with the law while this normative prescription is natural and intuitive there still remains a larger positive question of why in most nations of the world penalties are not uniformly high but rather rise with the severity of the crime one possible resolution of the positive and normative questions may lie in the fact that penalties and probabilities of conviction are not generally independent convictions are typically determined by judges or jurors who are instructed to convict only if the evidence convinces them beyond a reasonable doubt that the accused is guilty psychologists however have found that a juror s willingness to convict may be influenced by more than just the evidence jurors are very sensitive to the potential penalties that defendants may pay

inquiry on the transmission of u s aggregate shocks to mexico a svar approach abstract we analyze the business cycle co movement between mexico and the us we identify two shocks affecting us aggregate supply three affecting its demand and two types of monetary policy surprises with different financial implications us shocks explain about 75 of expected output fluctuations in mexico at a three year horizon with us demand shocks driving half of these variations alone in turn mexican output responses to a monetary policy surprise in the us depend on the reaction of investors sentiment to said surprise finally for the sample period studied financial market interconnections are as important as goods demand linkages for the international transmission of us shocks

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

limited contract enforcement and strategic renegotiation this paper presents a strategic theory of contract renegotiation in this theory suboptimal contracts are put in place initially to protect one party against undesirable a ctions by another party and are renegotiated once the danger is past the authors develop a model to establish the cases in which simple contracts cannot achieve desirable outcomes so that only a complicated contract or renegotiation will serve unlike most previous accounts of contract renegotiation this theory does not rely on exogenous uncertainty to motivate renegotiation copyright 1988 by american economic association

does unmeasured ability explain inter industry wage differentials this paper provides empirical assessments of the two leading explanations of measured inter industry wage differentials 1 true wage differentials exist across industries and 2 the measured differentials simply reflect unmeasured differences in workers productive abilities first we summarize the existing evidence on the unmeasured ability explanation second we construct a simple model which shows that if matching is important then endogenous job change decisions can create important self selection biases even in first differenced estimates of industry wage differentials third we analyze a sample that approximates the experiment of exogenous job loss we find that i the wage change experienced by a typical industry switcher closely resembles the difference in the relevant industry differentials estimated in a cross section and ii pre displacement industry affiliation plays an important role in post displacement wage determination

crime punishment and background risks abstract we show that if the punishment for a property crime effectively eliminates an individual s initial wealth as with a very long prison sentence then such criminal activities become less desirable for a risk averse and prudent individual if his initial wealth distribution undergoes a second order stochastic dominant improvement similar results obtain under additional restrictions if the punishment reduces an individual s initial wealth by some factor less than 1 in a general equilibrium model where the endogenous victimization risk is part of individuals background risks we also show that the availability of insurance for the victimization risk lowers economy wide crime rates

myopic deterrence policies and the instability of equilibria we develop a general equilibrium model of crime in which honest workers face an effective tax rate on earnings consisting of an exogenous income tax used to pay for policing and an endogenous crime tax given by the proportion of their disposable income that is stolen when there are two stable equilibria the low crime equilibrium is welfare dominant and furthermore welfare is a decreasing function of the income tax rate however as the income tax rate is reduced the degree of stability of the low crime equilibrium diminishes until for sufficiently low tax rates the low crime equilibrium is unstable with respect to any small positive perturbation in the crime rate thus myopic maximization of social welfare exposes the economy to random shocks in the crime rate that can destroy the preferred low crime equilibrium we argue that this dilemma between economizing on resources used for deterrence and ensuring the stability of the most desirable equilibrium is a fundamental trade off in the design of many institutions intended to control antisocial behavior including rent seeking corruption and theft

hidden protectionism evidence from non tariff barriers to trade in the united states abstract can the enforcement of product standards be protectionism in disguise this paper estimates the costs of non compliance with u s product standards using a new database on u s import refusals from 2002 to 2014 we find that import refusals decrease exports to the united states this trade reducing effect is driven by developing countries and by refusals without any product sample analysis in particular during the subprime crisis and its aftermath we also provide evidence that given product standards were enforced more strictly during the crisis while the quality of imported products did not deteriorate these results are consistent with the existence of counter cyclical hidden protectionism due to non tariff barriers to trade in the united states

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

making do with less working harder during recessions why did productivity rise during recent recessions one possibility is that average worker quality increased a second is that each incumbent worker produced more the second effect is termed making do with less using data from 2006 to 2010 on individual worker productivity from a large firm these effects can be measured and separated for this firm most of the gain in productivity during the recession was a result of increased effort additionally the increase in effort is correlated with the increase in the local unemployment rate presumably reflecting the costs of losing a job

the establishment level behavior of vacancies and hiring this paper is the first to study vacancies hires and vacancy yields at the establishment level in the job openings and labor turnover survey a large sample of u s employers to interpret the data we develop a simple model that identifies the flow of new vacancies and the job filling rate for vacant positions the job filling rate moves counter to aggregate employment but rises steeply with employer growth rates in the cross section it falls with employer size rises with worker turnover rates and varies by a factor of four across major industry groups we also develop evidence that the employer level hiring technology exhibits constant returns and that at the employer level and that employers rely heavily on other instruments in addition to vacancies as they vary hires we also develop evidence that effective recruiting intensity per vacancy varies over time accounting for about 41 of movements in aggregate hires in the 2007 to 2009 period our evidence and analysis provide useful inputs for assessing developing and calibrating theoretical models of search matching and hiring in the labor market

countervailing incentives in agency problems abstract we analyze countervailing incentives in agency problem countervailing incentives exist when the agent has an incentive to understate his private information for some of its realizations and to overstate it for others when countervailing incentives arise pooling generally characterizes the equilibrium contract furthermore performance is distorted both above and below efficient levels in addition the agent s rents generally increase with the realization of his private information over some ranges and decrease over other ranges we demonstate that the creation of countervailing incentives can enhance aggregate welfare

the market for street crime an economic analysis of victim offender interaction abstract this paper views the economic explanation of crime rates from a new perspective by explicitly deriving an economic model of the behavior of potential victims and considering the interaction of the behavior of potential victims with the behavior of offenders crime is produced through offenders supplying time in search of victims and victims demanding to expose themselves to the environment a model is set up in which the crime rate the probability of being a victim per unit of exposure time and the probability of finding a victim per unit of offenders search time are simultaneously determined the model leads us to distinguish the real crime rate the probability of being a victim per unit of exposure time from the nominal crime rate the number of crimes per capita the nominal crime rate can be inversely related to the real crime rate

the race between deterrence and displacement theory and evidence from bank robberies security measures that deter crime may unwittingly displace it to neighboring areas but evidence of displacement is scarce we exploit precise information on the timing and locations of all italia

crime punishment and the market for offenses crime is a subject of intense emotions conflicting ideologies however economists have generally explained it as a reflection of individual choice and equilibrating market forces two major themes of the literature are outlined the evolution of a market model to explain the diversity of crime across time and space and the debate about the usefulness of positive versus negative incentives systematic analyses generally indicate that crime is affected on the margin by both positive and negative incentives there are serious limitations to the effectiveness of incapacitation and rehabilitation and optimal enforcement strategies involve trade offs between narrow efficiency and equity considerations

a general equilibrium model of crime commission and prevention abstract the model developed in this paper features a general equilibrium specification of the relationships among criminals victims of crime and a law enforcement agency these relationships are employed to endogenously derive an explicit intuitively appealing technology of crime commission and prevention the solution to the present model is therefore obtained with a set of more elementary assumptions than the previous literature where arbitrary curvature assumptions are invoked

the optimal use of fines and imprisonment abstract this paper examines the use of fines and imprisonment to deter individuals from engaging in harmful activities these sanctions are analyzed separately as well as together first for identical risk neutral individuals and then for two groups of risk neutral individuals who differ by wealth when fines are used alone and individuals are identical the optimal fine and probability of apprehension are such that there is some underdeterrence if individuals differ by wealth then the optimal fine for the high wealth group exceeds the fine for the low wealth group when imprisonment is used alone and individuals are identical the optimal imprisonment term and probability may be such that there is either underdeterrence or overdeterrence if individuals differ by wealth the optimal imprisonment term for the high wealth group may be longer or shorter than the term for the low wealth group when fines and imprisonment are used together it is desirable to use the fine to its maximum feasible extent before possibly supplementing it with an imprisonment term the effects of risk aversion of these results are also discussed

dynamic deterrence theory economic theories of deterrence have primarily been built on static models a common and serious shortcoming of the existing dynamic deterrence models is the assumption of a twoperiod structure that ignores recidivism the aims of this paper are to formulate and solve a general dynamic deterrence model that incorporates recidivistic behaviour to explore its implications and to derive some testable predictions the analysis shows how the value and the intensity of engaging in illegal activity change over time highlights the weaknesses of twoperiod deterrence models and compares the deterrent effectiveness of increasing the likelihood of punishment versus the severity of punishment finally the recidivistic model provides a structural foundation for the widely used stochastic process models of crime in operations research and criminology

tax evasion and the allocation of capital abstract the efficiency cost of capital misallocations between the corporate sector and the noncorporate sector is typically measured using statutory tax differences corporate source income tax compliance is high because of third party reporting however while noncorporate rental income tax compliance is low differential evasion thus exacerbates statutory differences and enlarges the efficiency cost to measure this effect we build a numerical general equilibrium model where households simultaneously choose portfolios of risky assets and fractions of income to report