strategic behavior and partial cost sharing abstract the main objects here are games in which players mainly compete but nonetheless collaborate on some subsidiary activities play assumes a two stage nature in that first stage moves presume coordination of some subsequent tasks specifically we consider instances where second stage coordination amounts to partial cost sharing anticipated and sustained as a core solution examples include regional cournot oligopolies with joint transportation we define and characterize equilibria and inquire about their existence

varying the intensity of competition in a multiple prize rent seeking experiment we experimentally test a rent seeking model under five levels of competition at one extreme a subject s probability of winning a prize is equal to her share of the total expenditures at lower levels of competition a subject s probability of winning is affected more by her own expenditures than by the expenditures of others predicted expenditure levels are positively associated with higher levels of competition consistent with previous rent seeking experiments we find that subjects spend significantly more than the nash equilibrium prediction at all levels of competition however expenditure patterns generally follow the nash prediction expenditures decrease as the level of competition decreases our experimental design also includes a lottery choice experiment to control for subjects risk preference we find that subjects who are more risk averse spend significantly less in the contest and this effect is particularly strong for female subjects

do too many cooks always spoil the stew an experimental analysis of rent seeking and the role of a strategic buyer laboratory methods are used to evaluate the effects of institutional arrangements and rent defending activity on rent seeking auction outcomes in part nash equilibrium predictions are a useful behavioral guide as predicted more rents are dissipated in perfectly discriminating auctions where the high bidder wins than in lotteries where relative bids determine the chance of winning also as predicted the introduction of a rent defending buyer reduces social costs nevertheless the social costs of rent seeking consistently exceed predicted levels moreover individual bidding especially by buyers deviates markedly from nash predictions

ten little treasures of game theory and ten intuitive contradictions this paper reports laboratory data for games that are played only once these games span the standard categories static and dynamic games with complete and incomplete information for each game the treasure is a treatment in which behavior conforms nicely to predictions of the nash equilibrium or relevant refinement in each case however a change in the payoff structure produces a large inconsistency between theoretical predictions and observed behavior these contradictions are generally consistent with simple intuition based on the interaction of payoff asymmetries and noisy introspection about others decisions

distortionary taxes and the provision of public goods economists have long been concerned with finding an efficient level of public expenditure the classic statement of the problem was given by paul samuelson 1954 an optimal level of expenditure is where the sum of the marginal rates of substitution between the public good and a reference good equals the marginal rate of transformation between the public good and the reference good mrs mrt however samuelson s formula assumes that all of the revenue needed to finance public goods can be raised with lump sum taxes since this is not generally possible the formula must be modified to account for the distortionary effects of the tax system an appropriate modification is to multiply the cost side of the equation by a term that is commonly called the marginal cost of public funds mcf in the case of samuelson s formula where government is entirely financed with lump sum taxes the mcf would be exactly 1 0 in the traditional view of economists distortionary taxes cause the mcf to be greater than one thus raising the cost of providing public goods in this paper we discuss some cases where the mcf may be less than one we will illustrate this possibility using numerical examples for labor taxes

pigou meets mirrlees on the irrelevance of tax distortions for the second best pigouvian tax this paper extends the mirrlees 1971 model of optimal income redistribution with optimal corrective taxes to internalize consumption externalities using general utility structures and exploring both linear and non linear taxes it is demonstrated that the optimal second best tax on an externality generating good should not be corrected for the marginal cost of public funds since it equals one in the optimal tax system in the optimum distortions of income taxes are equal to marginal redistributional gains if the government does not have access to a non distortionary marginal source of finance the marginal cost of public funds can be either larger or smaller than one depending on subjective preferences for income redistribution the optimal second best corrective tax is then either higher or lower than the pigouvian level the findings in this paper generalize and amend prior results based on representative agent models shedding new light on the weak double dividend hypothesis and on the welfare gains of recycling revenue from environmental taxes

risk aversion in contests in a contest participants spend money or effort to increase their chances of winning a prize the authors examine primarily the following question could the timid the more risk averse have a better chance of winning in contests under limited liability the answer is always positive in the absence of limited liability there is no single answer whereas when the prize is shared as a function of effort the outcome is independent of the contestants risk aversion the authors also relate their results to self protection and examine some other implications of risk aversion copyright 1995 by royal economic society

winner take all and proportional prize contests theory and experimental results abstract this study provides a unified framework to compare three canonical types of contests winner take all contests won by the best performer winner take all lotteries where probability of success is proportional to performance and proportional prize contests in which rewards are shared in proportion to performance we derive equilibria and observe outcomes from each contest in a laboratory experiment equilibrium and observed efforts are highest in winner take all contests lotteries and proportional prize contests have the same nash equilibrium but empirically lotteries induce higher efforts and lower more unequal payoffs behavioral deviations from theoretical benchmarks in different contests are caused by the same underlying attributes such as risk aversion and the utility of winning finally we find that subjects exhibit consistent behavior across different types of contests with subjects exerting higher effort in one contest also exerting higher effort in another contest

distributional weights in cost benefit analysis should we forget about them many argue that it is socially inefficient to use distributional weights in cost benefit analysis and that doing so implies large inefficiency losses when distributional matters can be dealt with trough income taxation instead our results question this view by showing a large range of cases when distributional weights are second best optimal to use one example is when different provided goods affect tax revenues equally per dollar spent utility functions that are separable in the provided goods is sufficient for this most results hold for linear and non linear income taxes and whether they are optimal or not general policy implications are discussed

progressive taxation and the social marginal cost of public funds abstract this paper describes the calculation of the social marginal cost of public funds smcf for a progressive tax system which distorts individuals labour supply decisions a formula for the smcf indicates that the income and substitution effects of the labour supply response are weighted by the changes in individuals average and marginal tax rates respectively other well known formulas for the smcf are shown to be special cases of this formula the difference between this formula and the mayshar 1991 formula is shown to be due to different but equally valid ways of computing the change in the average tax rate the condition under which a marginal tax rate increase may lead to a reduction in revenues is derived

rent seeking with bounded rationality an analysis of the all pay auction the winner take all nature of all pay auctions makes the outcome sensitive to decision errors which we introduce with a logit formulation the equilibrium bid distribution is a fixed point the belief distributions that determine expected payoffs equal the choice distributions determined by expected payoffs we prove existence uniqueness and symmetry properties in contrast to the nash equilibrium the comparative statics of the logit equilibrium are intuitive rent dissipation increases with the number of players and the bid cost overdissipation of rents is impossible under full rationality but is observed in laboratory experiments our model predicts this property

the marginal welfare cost of public funds theory and estimates abstract we derive a general analytic formula for the marginal welfare cost mwc of public funds without imposing restrictive assumptions on preferences or technologies the framework encompasses the various special cases previously considered and reconciles the disparities among the reported estimates of mwc unresolved differences in existing estimates are fully explained by appropriate interpretations of intended thought experiments and alternative assumptions about the elasticity of labor supply with respect to public spending further progress in measuring mwc requires empirical estimation of labor supply functions that include government spending as an explanatory variable

distributional preferences in probabilistic and share contests we analyze nash equilibria of probabilistic and share contests where players have distributional preferences if players are sufficiently similar distributional preferences create multiple equilibria for the case of only mildly heterogeneous players equilibrium effort can be lower as well as higher than effort exerted by players with selfish preferences these findings can explain the following three anomalies observed in empirical tests of probabilistic and share contests the large variance of effort levels overspreading individual spending that exceeds the nash equilibrium prediction overspending and aggregate spending that exceeds the value of the prize overdissipation if players are sufficiently heterogeneous the game has a unique equilibrium that is more egalitarian than the selfish nash equilibrium it turns out that the less talented competitor may win the larger share of the prize if his inequality aversion is sufficiently strong we analyze how the equilibria evolve if the number of players becomes larger and how sequential moves influence behavior two new insights follow from the analysis of the sequential move game first sequential moves act as a coordination device in case of multiple simultaneous equilibria and second inequality aversion of the more egalitarian player can be used as a commitment device for low effort this effect can reverse the conventional wisdom that the underdog should lead

optimal tax rules and public sector efficiency with an externality in an overlapping generations model abstract this paper examines optimal tax rules and public sector efficiency integrating them in a second best world with pollution by using an overlapping generations model the second best world is characterized by the comparative statics of green preferences the main results obtained are as follows first the marginal cost of public funds may be reduced by the externalities regardless of the choice of taxes second optimal environmental and non environmental tax rules are additively and directly affected by the dynamic efficiency of capital accumulation per unit labour decal and indirectly by it through the efficiency of the public sector environmental taxes going beyond pigovian ones may be welfare improving if the decal is improved by the environmental tax even optimal non environmental tax rules should additively and directly counter the dynamics of pollution to consider the income effects of the optimal tax system for the future third the additivity property or the principle of targeting does not hold even in the absence of incentive compatibility constraints the essential reasons for this are clarified as follows distortions that should be countered by taxes that is the income effects of the optimal tax system and the decal in this model break the equality between optimal environmental taxes and the externalities measured by governments finally growing environmental concerns may in fact increase pollution the inverse relationship between environmental and labour income taxes may not hold

utilities privatization and the poor lessons and evidence from latin america abstract the perception that privatization hurts the poor is growing and creating a backlash against the private provision of basic infrastructure services at the same time governments are finding themselves fiscally strapped searching for ways to finance the large investments needed to expand services to the poor in latin america a laboratory for privatization evidence exists which sheds light on the privatization experience this paper analyzes the channels through which the poor might either lose or gain from privatization examines the evidence accumulated on what has actually happened and then discusses the policy options available to decision makers who want to increase efficiency while at the same time dealing with the infrastructure needs of the poor that have been identified as being important for their welfare in that context the issue of whether welfare considerations should form part of the regulatory approach to privatized services is examined the paper s major aims are to shed light on the issue of who can and does benefit from privatization of utilities and to guide policy makers in the choices

an efficient and almost budget balanced cost sharing method for a convex technology c we characterize cost sharing games where the nash equilibrium demands maximize total surplus budget balance is possible if and only if c is polynomial of degree n 1 or less for general c the residual cost shares are balanced if at least one demand is null a characteristic property if the cost function is totally monotone a null demand receives cash and total payments may exceed actual cost the ratio of excess payment to efficient surplus is at most min 2logn 1 for power cost functions c a ap p 1 the ratio of budget imbalance to efficient surplus vanishes as 1np 1 for analytic cost functions the ratio converges to zero exponentially along a given sequence of users all asymptotic properties are lost if the cost function is not smooth

evolutionary equilibrium in contests with stochastic participation entry effort and overdissipation this paper examines the evolutionary stability of behaviour in contests where players participation can be stochastic we find for exogenously given participation probabilities players exert more effort under the concept of a finite population evolutionarily stable strategy fpess than under nash equilibrium ne we show that there is ex ante overdissipation under fpess for sufficiently large participation probabilities if and only if the impact function is convex with costly endogenous entry players enter the contest with a higher probability and exert more effort under fpess than under ne importantly under endogenous entry overdissipation can occur for all tullock contest success functions in particular those with concave impact functions

cooperation and distributive conflict if either property rights or institutions are weak agents who create wealth by cooperating will later have an incentive to fight over the distribution of it in this paper we investigate theoretically and experimentally the circumstances under which welfare losses from investment in distributional contests destroy welfare gains from voluntary cooperation we find that in situations where the return to cooperation is high subjects cooperate strongly and welfare exceeds the predicted non cooperation levels if returns to cooperation are low then subjects still cooperate but the resources wasted in the distributional conflict lead to lower welfare than if subjects had followed the theoretical prediction of not cooperating

separability and public finance abstract in a second best environment the optimal policy choice sometimes follows first best rules this paper presents a formal general argument which allows to unify much of the literature it lays down the information structure and separability assumptions under which the results hold in a variety of setups with extensions to preference heterogeneity and individual production sets

behavior in group contests a review of experimental research group contests are ubiquitous some examples include warfare between countries competition between political parties team incentives within firms group sports and rent seeking in order to succeed members of the same group have incentives to cooperate with each other by expending individual efforts however since effort is costly each member also has an incentive to abstain from expending any effort and instead free ride on the efforts of other members contest theory shows that the intensity of competition between groups and the amount of free riding within groups depend on the group size sharing rule group impact function contest success function and heterogeneity of players we review experimental studies testing these theoretical predictions almost all studies of behavior in group contests find significant over expenditure of effort relative to the theory we discuss potential explanations for such over expenditure including the utility of winning bounded rationality relative payoff maximization parochial altruism and social identity despite over expenditure most studies find support for the comparative statics predictions of the theory with the exception of the group size paradox finally studies show that there are effective mechanisms that can promote within group cooperation and conflict resolution mechanisms that can de escalate and potentially eliminate between group conflict

overbidding and heterogeneous behavior in contest experiments a comment on the endowment effect we revisit the meta analysis of sheremeta on overbidding in contest experiments and focus on the effect of endowment on overbidding sheremeta assumes and finds evidence of an increasing linear relationship between endowment and overbidding quantal response equilibrium qre predicts an increasing concave relationship while baik and colleagues find an inverted u shaped relationship in their analysis of a single experiment we use the same data as in sheremeta but employ a different econometric model which leads to support for both qre and the inverted u shaped relationship following baik and colleagues we posit that the inverted u relationship may be interpreted in terms of a wealth effect

fair allocation of disputed properties we model problems of allocating disputed properties as generalized exchange economies in which agents have preferences and claims over multiple goods and the social endowment of each good may not be sufficient to satisfy all individual claims in this context we investigate procedural and end state principles of fairness their implications and relations to do so we explore procedural allocation rules represented by a composition of a rights assignment mechanism to assign each profile of claims individual property rights over the endowment and walrasian or other individually rational exchange rule using variants of fairness based on no envy as end state principles we provide axiomatic characterizations of the three focal egalitarian mechanisms known in the literature on rationing problems as constrained equal awards constrained equal losses and proportional mechanisms our results are connected to focal contributions in political philosophy and also provide rationale for market based environ mental policy instruments such as cap and trade schemes and personal carbon trading and moral foundation for the three proposals to allocate ghg emission rights known as the equal per capita sharing the polluter pays principle and the equal burden sharing the victims pay principle

uniform externalities two axioms for fair allocation abstract positive resp negative preference externalities say that an agent always prefers his actual welfare to his virtual welfare should other agents share his preferences resp prefers his virtual to his actual welfare negative group externalities say that an agent never prefers his actual welfare to his virtual welfare should he be the sole user of the resources these two axioms unify several familiar fairness properties and yield some new ideas as well in the division of unproduced commodities and the cooperative production of a private or a public good we also discuss their compatibility with no envy and resource monotonicity

surplus sharing with a two stage mechanism in this article we consider environments where agents jointly produce a private output good by contributing privately owned resources an efficient outcome may not be realized due to strategic behavior and conflicting interests of the agents we construct a two stage mechanism building on a varian mechanism the modified mechanism ensures an equilibrium for a large class of preferences and guarantees the feasibility of outcomes

public ownership of the external world and private ownership of self liberal political philosophy represented classically by john locke and today by libertarians defends great inequality of economic outcome on the basis that people own themselves and are entitled to establish private property in the external world by virtue of that self ownership contemporary nonlibertarian political philosophers such as john rawls and ronald dworkin achieve their relatively egalitarian conclusion by effectively denying self ownership as a premise an alternative challenge to liberalism which does not take the radical starting point of denying self ownership is to declare that while certain rights to benefit by virtue of superior skill should be protected a degree of self ownership productive assets in the external world be viewed as publicly owned and not privately appropriable what allocation mechanisms on a space of possible economies satisfy axioms that are necessary to guarantee both private ownership of self and public or joint ownership of the external world we propose a

competitive blind spots and the cyclicality of investment experimental evidence we report laboratory experiments investigating the cyclicality of profit enhancing investment in a competitive environment in our setting optimal investment is counter cyclical when investment costs fall following market downturns however we do not observe counter cyclical investment instead we see much less strategic behavior than our rational investment model anticipates our participants exhibit what porter 1980 terms a competitive blind spot and heuristic investment models where individuals invest a fixed percentage of their liquidity or a fixed percentage of anticipated market demand better fit our data than does optimal investment we also report a control treatment without cost changes and a treatment with asymmetric investment liquidity both of these extensions support our main result

redistribution and the marginal cost of public funds abstract discussions of the marginal cost of public funds with distortionary taxation are often cast in the framework of a one consumer economy while the main justification of distortionary taxes is that they are needed for redistribution this paper analyzes the issue in a model with heterogeneous consumers and a linear income tax focusing on the tradeoff between labour market distortions and the redistribution from high wage to low wage workers in an optimal tax system the mcf will be the same for all sources of funds and under certain assumptions less than one without optimality the mcf will in general differ between different sources of finance

a sectoral approach balancing global efficiency and equity this paper explores the idea that a properly designed sectoral approach could be the answer to two sets of constraints that hinder international agreements on climate change namely a genuine concern from developing countries for economic growth and competitiveness issues from industrialized countries our sectoral approach builds on three premises i cap and trade systems are established in industrialized countries and intensity targets in developing countries ii sectors subject to international trade abide by the rules of the countries in which they trade and iii a fraction of the revenues from permits in industrialized countries go towards carbon mitigation in developing countries we design an economic model that features interactions in three carbon intensive sectors two of which are internationally traded and two countries an industrialized country and a developing country two scenarios are constructed an enhanced sectoral approach which refers to our proposal and a global cap which implements a uniform co2 price we compare the two scenarios in terms of total welfare and equity it is shown that for a minor global welfare loss the enhanced sectoral approach ranks high in terms of equity for emerging countries this approach also eliminates competitiveness and leakage issues

political economy and the social marginal cost of public funds the case of the meltzer richard economy i introduction the marginal cost of public funds mcf is defined as the full cost to the private sector of raising an additional dollar of tax revenue including deadweight loss or excess burden of taxation imposed on taxpayers much of the theoretical literature on the mcf is cast in the framework of a one consumer economy however the main reason why we have distortionary taxes in the first place is precisely because of the need for redistribution or the existence of consumers with heterogeneity in view of this inconsistency several papers including dahlby 1998 and sandmo 1998 have recently started addressing the so called social marginal cost of public funds smcf in models with heterogenous consumers 1 these papers highlight how the redistributive concern may alter the calculation of the smcf 2 in previous studies on the mcf or smcf the existing of status quo tax system has been assumed to be either arbitrary or optimal 3 it is arguable however that the existing tax system is neither arbitrary nor optimal but rather represents a political equilibrium the approach adopted by hettich and winer 1999 and persson and tabellini 2000 corroborates this argument in surveying the political economy of public finance the authors of these two books explicitly portrayed public policy as the equilibrium outcome of some specified political process in this note we study the smcf issue on the basis of the plausible premise that the existing tax system itself represents a political equilibrium the calculation of the smcf is basically a normative exercise the premise that the existing tax system is a policy outcome in political equilibrium will enable us to exploit the positive property of political equilibrium in this normative exercise as an illustration of our approach we revisit the political economy of redistributive taxation as set out in meltzer and richard 1981 hereafter m r the m r model holds a prominent position in the redistribution literature and has been elaborated and extended in many directions persson and tabellini 2000 part ii 4 section ii overviews the m r model sections iii and iv derive and discuss the smcf in the m r economy an interesting feature of our finding is that the degree of income inequality as measured by the ratio of mean to median income can play an important role in estimating the smcf and judging whether the level of redistribution is excessive or inadequate ii the m r model a economy consideran economy in which there are n 1 u sup i u c sup i l sup i i 1 n this utility function is assumed to be smooth and possess the usual properties the income tax system consists of two parameters a marginal tax rate t and a lump sum grant a the tax system pays the lump sum grant or demogrant a to each individual and finances the payment by imposing the marginal tax rate t on all earned income 5 the budget constraint facing individual i is 2 c sup i 1 t w sup i l sup i a i 1 n where l sup i denotes the labor supply with l sup i l sup i 1 from equations 1 and 2 we can derive the indirect utility function 3 v sup i v 1 t w sup i a u 1 t w sup i l sup i a 1 l sup i i 1 n it is assumed that the government budget is balanced denoting per capita pretax income by y we then have 4 ty a where y summation y sup i n with y sup i w sup i l sup i b political economy the preferences of individuals qua voters over income tax policy are represented by the indirect utility function 3

the evolution of preferences for conflict we consider preference evolution in a class of conflict models with finite populations we show that whereas aggregate conflict effort is always the same in evolutionary equilibrium larger populations have greater individual subjective costs of conflict effort

a marginal cost of funds approach to multi period public project evaluation implications for the social discount rate abstract although the use of marginal cost of funds mcf has been widely appreciated in public finance literature discussions of mcf have been confined to a static setting this paper develops a multi period project evaluation rule that is based on mcf unlike previous approaches the parameters required for implementing the mcf rule are independent of projects under consideration a lesson from this paper is that the government discount rate policies that are largely based on the concepts of social discount rate and shadow price of capital should be rewritten with the use of parameters representing mcf

overbidding and overspreading in rent seeking experiments cost structure and prize allocation rules we study experimentally the effects of cost structure and prize allocation rules on the performance of rent seeking contests most previous studies use a lottery prize rule and linear cost and find both overbidding relative to the nash equilibrium prediction and significant variation of efforts which we term overspreading we investigate the effects of allocating the prize by a lottery versus sharing it proportionally and of convex versus linear costs of effort while holding fixed the nash equilibrium prediction for effort we find the share rule results in average effort closer to the nash prediction and lower variation of effort combining the share rule with a convex cost function further enhances these results we can explain a significant amount of non equilibrium behavior by features of the experimental design these results contribute towards design guidelines for contests based on behavioral principles that take into account implementation features of a contest

on the marginal welfare cost of taxation this paper develops a rigorous partial equilibrium analysis of the determinants of margin al welfare cost mwc of taxes on labor earnings it shows that four key parameters interact to determine the magnitude of mwc using aggregate data and plausible ranges of values for the parameters mwc can vary from under 10 percent to more than 300 percent of marginal tax revenue intermediate parameter values sugge st mwc is in the 25 50 percent range however the more extreme estimates cannot be ruled out on the basis of available evidence suggesting that mwc cannot yet be copyright 1987 by american economic association

when do distortionary taxes reduce the optimal supply of public goods abstract it is often argued that the optimal level of public good provision is below the first best level as long as the government s expenditures have to be financed by distortionary taxes i examine this hypothesis and show that it is correct in a representative consumer economy if i the public good is normal and ii private commodities are normal and gross substitutes otherwise counterexamples can be constructed these results hold also with heterogeneous households provided that equity considerations are ignored in general however distributional objectives may lead to a higher level of public expenditures in second best than in first best

optimal public good provision with limited lump sum taxation it is often argued that the use of distortionary taxation lowers the optimal provision of public goods below its optimal level in a first best economy which contains no restrictions on lump sum taxation however this issue is usually investigated using commodity tax models that contain no lump sum taxes this paper examines a many consumer economy in which the only tax instruments are commodity taxes and a poll tax subsidies are negative taxes the optimal level of public good provision in this economy typically exceeds the first best level at least for distributionally neutral public goods copyright 1991 by american economic association

the marginal cost of public funds hours of work versus labor force participation this paper extends the theory and measurement of the marginal cost of public funds mcf to account for labor force participation responses our work is motivated by the emerging consensus in the empirical literature that extensive participation responses are more important than intensive hours of work responses in the modelling of extensive responses we argue that it is crucial to account for the presence of non convexities created by fixed work costs in a non convex framework tax and transfer reforms give rise to discrete participation responses generating first order effects on government revenue these revenue effects make the marginal cost of funds higher and we show numerically that the implications for mcf tend to be substantial

public goods tax policies and unemployment in ldcs 1 introduction traditionally an analytically convenient and widely used assumption in the international trade and development economics literature has been that of lump sum distribution of direct e g income or indirect e g consumption tariff tax revenue when various policy implications of such instruments e g terms of trade or welfare effects were to be examined this analytical shortcut however hardly ever constitutes a real world practice either in rich developed or in poorer developing economies on the other hand another extensive branch of economics the public finance literature has adopted a more realistic approach regarding the economic activity of a government a government is viewed among other things as a provider of public collective consumption goods and or of public inputs that enhance the productive capacity of the private sector being so it can use revenues from nondistortionary e g lump sum taxes or distortionary e g consumption taxes to finance the provision of such goods and services within this public finance context a long standing proposition states that when nondistortionary taxes are used to finance the provision of a public good the first best efficiency rule requires that the sum of the marginal rates of substitution i e the social marginal benefit equal the marginal rate of transformation i e the social marginal cost e g see samuelson 1954 when distortionary taxes are used to finance the provision of the public good pigou 1947 argued that the social marginal cost exceeds the private marginal cost because of the induced indirect cost from raising tax revenue through distortionary taxation stiglitz and dasgupta 1971 atkinson and stem 1974 and wildasin 1984 among others demonstrate that in certain cases e g when the taxed and the public goods are complements in consumption pigou s argument fails to hold and the social cost may fall short of the private marginal cost because of its more realistic appeal this public finance approach to the use of tax revenue has been subsequently adopted by the relevant international trade and development economics literature recently the efficiency rule for public good provision has been examined in the context of a small open economy by among others feehan 1988 when tariff revenue finances the provision of the public good in an economy producing two traded goods and a nontraded public consumption good michael and hatzipanayotou 1995 examine the same issue and derive the formulae for the optimal tax rates on traded or nontraded goods in an economy producing many traded and nontraded goods and where consumption tax revenue finances the provision of the public good michael and hatzipanayotou 1997 demonstrate the failure of the first best efficiency rule when lump sum taxes are used to finance the provision of a public good in a small open economy in the presence of trade restrictions i e a tariff or a ver two features in the above reviewed studies of the international trade development economics and public finance literature motivate the present paper first all these studies derive the efficiency rule for public good provision in the context of a small open or closed economy with full employment unemployment however to a lesser or to a larger extent remains a structural feature of many developed or developing economies from an analytical standpoint the existence of such a distortion may alter both the optimal tax formulae and the efficiency rule for public good provision second the above reviewed literature considers the case where a government uses a single policy instrument e g lump sum taxes income taxes tariffs to finance the provision of the public good more than often however governments may have at their disposal several tax instruments that they can simultaneously use in order to raise revenue for financing the provision of public consumption goods

endogenous private safety investment and the willingness to pay for mortality risk reductions when individuals cannot undertake safety improving expenditures the effect of an increase in the initial risk on the willingness to pay wtp for mortality risk reduction is positive because of the dead anyway effect when they can undertake safety improving expenditures the effect of an increase in the initial risk is governed by two effects the dead anyway effect which is positive and the high payment effect which is negative we treat the two types of risk reducing expenditures endogenous and exogenous as inputs in a safety improving technology function and find conditions that guarantee that the high payment effect dominates

optimal provision of public goods a synthesis the standard approach to the optimal provision of public goods highlights the importance of distortionary taxation and distributional concerns a new approach neutralizes distributional concerns by adjusting the income tax schedule we demonstrate that both approaches are derived from the same basic formula we also take the new approach further by deriving an intuitive formula for the optimal level of public goods without imposing strong assumptions on preferences this formula shows that distortionary taxation has a role to play as in the standard approach however the main determinants of optimal provision are different and the modified samuelson rule is likely to lead to underprovision

entry into winner take all and proportional prize contests an experimental study this experiment compares the performance of two contest designs a standard winner take all tournament with a single fixed prize and a novel proportional payment design in which that same prize is divided among contestants by their share of total achievement we find that proportional prizes elicit more entry and more total achievement than the winner take all tournament the proportional prize contest performs better by limiting the degree to which heterogeneity among contestants discourages weaker entrants without altering the performance of stronger entrants these findings could inform the design of contests for technological and other improvements which are widely used by governments and philanthropic donors to elicit more effort on targeted economic and technological development activities

a theory of anticipated utility abstract a new theory of cardinal utility with an associated set of axioms is presented it is a generalization of the von neumann morgenstern expected utility theory which permits the analysis of phenomena associated with the distortion of subjective probability

financing education using optimal redistributive taxation abstract in this article the joint use of an income tax and public provision of education as instruments to achieve the government s distributional objectives is considered individuals differ in innate labour productivity and in aptitude to acquire skills through education actual labour productivity depends on both innate skill and the amount of education received using a generalized version of the mirrlees tax problem that incorporates these features qualitative properties of an optimal tax schedule are investigated

reward patterns of fair solutions abstract the solutions proposed in the literature on fair allocations are sensitive to the preference profiles of the agents as a consequence each of them displays a specific distribution pattern which may be interpreted as rewarding certain kinds of preferences at the expense of others in the basic models with private goods and decreasing returns the equal income competitive equilibrium tends to favor the eccentric preferences whereas most egalitarian equivalent solutions tend to reward the agents who like particular resources the identification of the rewarding pattern of each mechanism sheds light on its ethical content and may help select the adequate solution in concrete applications in this analysis a preference monotonicity property turns out to be satisfied by many solutions

social accounting and the public sector this article contributes to the theory of social accounting as such it tries to extend earlier literature on the welfare equivalence of the comprehensive net national product in two main directions both of which refer to the public sector one is by considering welfare measurement problems associated with public good provision and redistributive policy respectively when the public revenues are raised by distortionary taxes the other is by addressing the consequences of a federation like decision structure where independent tax and expenditure decisions are made both by the central government and by lower level governments

good jobs bad jobs and redistribution we analyse the question of optimal taxation in a dual economy when the policy maker is concerned about the distribution of labour income income inequality is caused by the presence of sunk capital investments which creates a good jobs sector due to the capture of quasi rents by trade unions with strong unions and high planner preference for income equality the optimal policy is a combination of investment subsidies and progressive income taxation if unions are weaker the policy maker may instead choose to tax investment

experimental comparison of multi stage and one stage contests this article experimentally studies a two stage elimination contest and compares its performance with a one stage contest contrary to the theory the two stage contest generates higher revenue than the equivalent one stage contest there is significant over dissipation in both stages of the two stage contest and experience diminishes over dissipation in the first stage but not in the second stage our experiment provides evidence that winning is a component in a subject s utility a simple behavioral model that accounts for a non monetary utility of winning can explain significant over dissipation in both contests it can also explain why the two stage contest generates higher revenue than the equivalent one stage contest

joint ownership of a convex technology comparison of three solutions a given set of agents jointly own and operate a decreasing returns to scale technology with a single input and a single output they all contribute some input and receive some of the output what first best allocation is equitable we discuss three allocation mechanisms the equal benefits solution gives every agent the same benefit computed at the supporting price the equal returns solution equalizes returns output shares input contributions across agents the constant returns equivalent solution gives every agent his indirect utility level at some common price of output relative to input a lower and an upper bound on individual welfares play a key role in these axiomatic characterisation results

chaotic dynamics in contests under a myopic best reply dynamic efforts in repeated contests may exhibit chaotic behavior this may help explain for example why experimental data often show nonconvergence to one shot equilibrium efforts jel c61 c72 d72 d74 d83

individual rationality and voting in cooperative production abstract suppose that a group of individuals owns collectively a technology which produces a consumption good from an input a sharing rule associates input contributions with a vector of consumption we consider sharing rules that are a convex combination of the proportional the equal share and the equal benefit rules we characterize the subset of sharing rules that satisfy pareto efficiency and individual rationality we also study the outcome of majority voting on this subselection of sharing rules

workaholics and dropouts in organizations this paper reports the results of experiments designed to test the theory of the optimal composition of prizes in contests in the aggregate the behavior of subjects is consistent with that predicted by the theory but we find that such aggregate results mask an unexpected compositional effect on the individual level whereas theory predicts that subject efforts are continuous and increasing functions of ability the actual efforts of our laboratory subjects bifurcate lowability workers drop out and exert little or no effort and high ability workers try too hard this bifurcation which is masked by aggregation can be explained by assuming loss aversion on the part of the subjects jel c92 d44 d72 d82 j31

a note on optimal income taxation public goods provision and robust mechanism design abstract this paper extends the model of optimal income taxation due to mirrlees mirrlees j 1971 an exploration in the theory of optimum income taxation review of economic studies 38 175 208 and includes private information on public goods preferences a mechanism design approach is used to establish the following result if policies are required to be robustly implementable in the sense of bergemann and morris bergemann d morris s 2005 robust mechanism design econometrica 73 1771 1813 then the optimality conditions in the extended model with uncertainty about tax and expenditure policies are the same as in the standard model of optimal income taxation the paper provides a foundation for a widely used assumption in public finance namely that individuals optimize their behavior subject to a predetermined and commonly known tax system

a generalized approach to multigeneration project evaluation 1 introductionit is well known that the choice of discount rate plays a significant role in the ranking of projects with varying time paths of costs and benefits for public projects the choice of the appropriate social discount rate sdr is not clear cut even in the context of short lived projects in which costs and benefits occur within a single generation in particular when capital taxes produce a wedge between gross and net rates of return should one discount at the economy s rate of return the before tax rate or the individual s rate of return the after tax rate in the single generation context the literature falls in two camps 1 one camp argues that the appropriate sdr is a weighted average of the gross and net rates of return with weights typically determined by the fractions of resources drawn from consumption and private investment respectively 2 a second camp argues that future benefits should be discounted at the net rate of return but that the initial investment should be multiplied by a scale factor so that the direct costs of the project can be expressed in terms of consumption units 3both approaches suffer from severe implementation problems for the first approach there is no general formula for the weights needed to calculate the sdr as a weighted average of two market rates of return dreze 1974 indeed the appropriate sdr to use is project specific stiglitz 1982 without a systematic methodology to derive project specific sdrs the weighted average approach is hard to implement for the second approach which equalizes the sdr to the net rate of return the scale factor the opportunity cost of public investment must be quantified the opportunity cost of public investment depends on whether resources come from private investment or consumption and on the calculation of the present value of the future consumption yielded by a unit of capital discounted at the net rate of return that is the shadow price of capital as lind 1997 points out however there is no general agreement on a specific procedure for calculating the shadow price of capital indeed the concept of the opportunity cost of public investment suffers the same project dependence problem as the first view of the sdr diamond 1968 multigeneration projects such as nuclear waste disposal natural resource conservation or even social security reform further complicate discount rate choice specifically intergenerational equity in addition to intertemporal efficiency plays a role in determining the appropriate social discount rate for multigeneration public project evaluation 4 as in the single generation context there are two competing views on the appropriate discount rate when evaluating multigeneration projects the descriptive and the prescriptive approaches 5the descriptive approach to discounting is a market based approach it does not rely on an explicit social welfare function swf or the pure time preference rate embedded in the swf however the descriptive approach works under the assumption that intergenerational compensation through changes in the tax debt policy is available 6 it is argued that under appropriate intergenerational compensation the market rates of return are still relevant for calculating the sdr for multigeneration project evaluation and in general the sdr should be a weighted average of the gross and net rates of return this descriptive view of setting the sdr equal to the market return appears to underlie the office of management and budget s omb adoption of 7 as the appropriate discount rate for federal programs 7the intent of the prescriptive approach is to use the social discount rate as an expression of ethical judgment on how consumption of future generations should be compared to consumption of current generations

a pigovian rule for the optimum provision of public goods abstract the integrated treatment of optimal taxation and public expenditure presented here is based on the dual relationship between the prices of private goods and the quantities of public goods the conditions for optimum public good provision can be expressed as a modification of the samuelson conditions with extra terms representing a the distortionary effect of taxes on the willingness to pay for the public good and b distributional effects the former captures pigou s notion of the indirect damage caused by the need to finance public expenditure out of distortionary taxes and we call this the pigou term in certain cases a very simple benefit cost ratio for public projects emerges that is equivalent to measuring benefits as if they were taxed

equality of resources implies equality of welfare if one is an egalitarian should one try to equalize resources available to agents or to equalize their welfares with a suitably general conception of what resources are these two conceptions cannot be distinguished an allocation mechanism is defined on a space of economies and is required to satisfy various axioms that are necessary conditions for equalizing resources among a population the unique mechanism satisfying these axioms on a large domain of economies is the one that allocates commodities so as to equalize utilities of the agents methodologically the theorem is a generalization of bargaining theory because the mechanisms are defined on commodity space

risk averse rent seekers and the social cost of monopoly power there is now quite general recognition that the social cost of monopoly power encompasses the resources expended by individuals seeking to become the beneficiaries of monopoly rents however since the activity of rent seeking is generally not observable direct estimates of resources expended in quests to acquire monopoly power are usually impossible to come by 1 as a consequence the indirect approach of taking the observed value of monopoly rents as indicative of the unobserved value of the resources expended in rent seeking is quite generally adopted in approaches to evaluation of the social cost of such activity

characterizations of bargaining solutions in production economies with unequal skills in production economies with unequal skills this paper characterizes bargaining solutions by using axioms on allocation rules rather than axioms on classical bargaining solutions we introduce a new axiom consistency w r t technological innovations so that the non welfaristic characterizations of bargaining solutions in the production economies are provided by the characterizations we can classify the three bargaining solutions the nash the kalai smorodinsky and the egalitarian solutions from the viewpoint of responsibility and compensation discussed by dworkin

tax revenue and the marginal cost of public funds in sweden abstract we assess the welfare cost of raising a marginal unit of tax revenue in a balanced budget general equilibrium framework the calculated social cost of an increment of public funds is sensitive to both the specific type of tax increase and the type of public spending used on the margin best guess assumptions on labor supply elasticities yield marginal costs of public funds for different fiscal mixes of between 0 67 and 4 51 at prevailing tax rates in sweden alternative labor supply assumptions well within the range of current estimates substantially affect the results and can imply infinite marginal welfare costs marginal welfare costs are also sensitive to assumptions about both the income and substitution effects of labor supply

an experimental investigation of efficient rent seeking the debate about the measurement of the amount of rent dissipated in rent seeking activities is unable to be answered by observations from the naturally occurring environment current theoretical investigations have indicated that a number of factors will affect the amount of rent that can be assumed to be dissipated by rent seeking the theory of efficient rent seeking predicts that the number of rent seekers their risk posture their ability to enter and exit the rent seeking process and the manner in which the probability of receiving a rent is determined will affect the amount of rent that is dissipated

wine prices and quality ratings a meta regression analysis this article examines the empirical support for the hypothesized hedonic theoretical relation between the price of wine and its quality the examination considers over 180 hedonic wine price models developed over 20 years covering many countries the research identifies that the relation between the price of wine and its sensory quality rating is a moderate partial correlation of 0 30 this correlation exists despite the lack of information held by consumers about a wine s quality and the inconsistency of expert tasters when evaluating wines the results identify a moderate price quality correlation which suggests the existence of strategic buying opportunities for better informed consumers strategic price setting possibilities may also exist for wine producers given the incomplete quality information held by consumers the results from the meta regression analysis point to the absence of any publication bias and attribute the observed asymmetry in estimates to study heterogeneity the analysis suggests the observed heterogeneity is explained by the importance of a wine s reputation the use of the 100 point quality rating scale the analysis of a single wine variety style and the employed functional form the most important implication from the analysis is the relative importance of a wine s reputation over its sensory quality inferring that producers need to sustain the sensory quality of a wine over time to extract appropriate returns the reputation of the wine producer is found not to influence the strength of the price quality relationship this finding does not contradict the importance of wine producer reputation in directly influencing prices

risk aversion heterogeneity and contests we introduce a novel method of modellingcontests that avoids the complexitiesencountered by the best response function approach we analyse contests in which i there are many risk averse players ii attitudes to risk may differ acrossindividuals and iii the technology thattransforms rent seeking effort intoprobability of winning may also differacross individuals we establish that ifevery player has a constant degree ofabsolute risk aversion a uniqueequilibrium exists we also establishcomparative static results and examine howthe level of rent dissipation is affectedby the heterogeneity of attitudes towardsrisk and the precise nature of the technology

egalitarian equivalent cost sharing of a public good in an economy with one public and one private good egalitarian equivalent cost sharing consists of finding the highest public good level x such that consuming x for free yields a feasible utility distribution the corresponding feasible allocation typically unique called egalitarian equivalent is in the core of the economy conversely any cost sharing method satisfying pareto optimality cost monotonicity nobody suffers a utility loss if the production technology improves upon ceteris paribus and individual rationality no single agent coalition objects or no private transfers no agent receives a positive amount of private good must select an egalitarian equivalent allocation in every economy copyright 1987 by the econometric society

information feedback and contest structure in rent seeking games we investigate the effects of information feedback in rent seeking games with two different contest structures in the share contest a contestant receives a share of the rent equal to her share of rent seeking expenditures while in the lottery contest a contestant wins the entire rent with probability equal to her share of rent seeking expenditures in share contests average expenditures converge to equilibrium levels when subjects only get feedback about own earnings and additional feedback about rivals choices and earnings raises average expenditures in lottery contests information feedback has an opposite and even stronger effect when subjects only get feedback on own earnings we observe high levels of rent dissipation usually exceeding the value of the rent and additional feedback about rivals choices and earnings has a significant moderating influence on expenditures in a follow up treatment we make information feedback endogenous by allowing contestants in a lottery contest to make public or private expenditures subjects make the vast majority of expenditures privately and overall excess expenditures are similar to the lottery contest with own feedback

contest efforts in light of behavioural considerations this study shows that distortion of probabilities is a possible reason for rent under dissipation incontests with relatively small number of participants such distortion may also result however inover dissipation of the contested rent focusing on contests with homogeneous contestants and thecommonly studied contest success function our main results clarify under what circumstances i rents are more under dissipated relative to the standard situation where probabilities are notdistorted ii rents are under dissipated yet less intensely relative to the standard situation whereprobabilities are not distorted iii rents are over dissipated and iv the contest does not possess asymmetric interior equilibrium in pure strategies

risk aversion in rent seeking and rent augmenting games the effects of risk aversion are examined for two types of expenditures in rent seeking contests a rent seeking expenditures which improve the probability that the rent is obtained and b rent augmenting expenditures which increase the size of the rent to be awarded risk aversion is shown to reduce expenditures of type b unambiguously while having an indeterminate effect on those of type a these two contrasting results are shown to derive from the very different effects rent seeking and rent augmenting expenditures have on the riskiness of a player s position

on the marginal cost of public funds and the optimal provision of public goods abstract this paper argues that in models with heterogeneous agents the concept of the marginal cost of public funds mcpf will only be useful if it is compared with an analogous concept for the benefit side the mcpf does not assume a unique value and is not particularly illuminating in and out of itself also gone is the benchmark status of mcpf 1 turning to the provision of public goods using a mechanism design approach the paper constructs a two stage proof for kaplow s kaplow l 1996 the optimal supply of public goods and the distortionary cost of taxation national tax journal 49 513 533 proposition concerning the irrelevance of labor supply and distributional concerns in public good provision this highlights the two fundamental ingredients for his result first the provision of public goods per se when it satisfies the samuelson s rule is only potentially pareto improving second the actual pareto improvement will materialize when or if one reforms the income tax structure if the reform is not forthcoming the decision on public goods provision must rely on redistributional concerns finally the paper generalizes broadway and keen s boadway r keen m 1993 public goods self selection and optimal income taxation international economic review 34 463 478 result to a model with many types of agents many private goods and without making any assumptions regarding which self selection constraints are or are not binding

risk aversion and rent seeking an extension and some experimental evidence theoretical investigations indicate that the risk attitudes of individuals will effect the amount of rent that can be assumed to be dissipated by rent seeking activities following this line of investigation we extend hillman and katz s work to a small numbers case and demonstrate that the degree to which a monopoly rent is dissipated is dependent upon the structure of the risk attitudes of two risk averse individuals

welfare bounds in the cooperative production problem a general model of lower bound individual rationality and upper bound axioms for fair allocation is proposed the unanimity welfare function associates to each individual utility function the highest equal utility feasibile when all agents share this utility if this function is a feasible lower bound resp upper bound then it is the highest lower bound of all resp the lower upper bound applying this to cooperative production of private goods we characterize when the unanimity welfare is a lower upper bound function and when the stand alone welfare is an upper or lower bound our approach unifies several familiar fairness properties

a proposal to unify some concepts in the theory of fairness so far the theory of distributive justice has tried to single out a unique criterion of justice in our opinion we live in a world in which different people hold conflicting ideas about justice we propose a procedure for representing these individual opinions by means of what we call aspiration functions and we present in this paper three different ways of aggregating such opposing opinions into a socially acceptable judgement furthermore we show that many well known concepts are special cases of our approach we study under a restriction on the form of the aspiration functions the conditions that are necessary and sufficient for a social choice correspondence to be generated from any of our concepts

income redistribution and public goods provision under tax competition abstract a standard result in existing literature is that public goods are under provided under tax competition see zodrow and mieszkowski 1986 this paper shows that introducing redistribution concerns changes the result capital mobility reduces income redistribution by increasing the efficiency costs of capital taxation if public goods have positive distributional effects providing more public goods counteracts the negative effects of capital mobility moreover under the condition that labor income and capital income are positively correlated less income redistribution through capital taxation can be compensated by stronger taxation of labor income as a result a higher level of public goods is desirable if capital mobility increases

theory and misbehavior of first price auctions recent experimental evidence appears to reject simple nash equilibrium models of bidding behavior in first price auctions the author presents a methodological critique of this evidence existing tests have concentrated on deviations of subjects from predictions in the message space of the action bid deviations the author suggests that it is more natural to evaluate subject behavior in expected payoff space he concludes that the evidence against the simple models is not significant enough to warrant their rejection copyright 1989 by american economic association

the dynamics of inequalities and unequal exchange of labor in intertemporal linear economies abstract introducing a concept of fairness of economic allocations namely exploitation as the unequal exchange of labor henceforth ue exploitation by generalizing roemer s 1981 1982a seminal models this paper aims to answer the following two questions in the context of an intertemporal economy with linear technology how is income and wealth inequality related or unrelated to the existence and persistence of ue exploitation what are the mechanisms driving the persistent existence of ue exploitation in growing economies agents are ue exploited resp exploiters if the amount of labor that they contribute to the economy is bigger resp smaller than the amount of labor received by them via their income it is proved first that ue exploitation is monotonically correlated to functional income inequality second it is shown that unless agents discount the future asset inequalities are necessary but not sufficient for the persistence of ue exploitation and capital accumulation leading to the disappearance of ue exploitation cannot be ruled out in equilibrium third it is shown that regardless of whether agents discount the future labor saving technical progress may yield sustained growth with persistent ue exploitation by keeping labor abundant relative to capital which restrains wages from rising unlike in models with differentiable production functions this mechanism does not rely on changes in the marginal productivity of inputs and it is entirely driven by the interaction between innovation and labor markets

progressive taxation redistribution and labor supply the analysis of the effect of progression on labor supply is extended to a model with many consumers the condition for progression to increase labor supply given constant aggregate tax revenue is derived and shown to depend on the income effects resulting from redistribution it is then shown that the optimal linear income tax schedule involves a degree of progression which on the margin does reduce labor supply