the solution to the tullock rent seeking game when r 2 mixed strategy equilibria and mean dissipation rates in tullock s rent seeking model the probability a player wins the game depends on expenditures raised to the power r we show that a symmetric mixed strategy nash equilibrium exists when r 2 and that overdissipation of rents does not arise in any nash equilibrium we derive a tight lower bound on the level of rent dissipation that arises in a symmetric equilibrium when the strategy space is discrete and show that full rent dissipation occurs when the strategy space is continuous our results are shown to be consistent with recent experimental evidence on the dissipation of rents

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

erratum to varying the intensity of competition in a multiple prize rent seeking experiment in anderson and freeborn 2009 we inadvertently made a coding error in estimating the effects of risk preferences on subjects rent seeking expenditures in models 2 through 5 of table 5 we include individual specific effects gender and risk preference as measured by the midpoint of the coefficient of relative risk aversion hereafter mid crra and state that we control for individual subject heterogeneity using fixed effects econometrically we cannot include both fixed effects and gender mid crra however a coding error allowed us to generate the results we report when we correctly account for individual heterogeneity using a random effects model the coefficients on gender and mid crra are not significant however when we follow millner and pratt 1991 by grouping individuals into risk preference categories and performing difference of means tests there is a significant decrease in overspending relative to the nash prediction as we move along the risk preference spectrum specifically the four categories are risk loving mid crra 0 68 we are guided by holt and laury 2002 in separating subjects into the categories of somewhat risk averse and very risk averse for risk loving individuals the average deviation from the nash prediction calculated as observed effort minus nash prediction across all six scenarios is 262 22 for risk neutral the average deviation is 256 97 for somewhat risk averse the average deviation is 245 35 and for very risk averse subjects the average deviation from the nash prediction is 190 76 table 1 displays

optimal insurance design with random initial wealth abstract an optimal insurance policy is designed when the policyholder faces both insurable and uninsurable risks under a realistic behavioral assumption it may display a disappearing deductible if the uninsurable loss becomes riskier according to any degree of stochastic dominance as the insurable loss increases

optimal insurance in incomplete markets this paper examines the theory of optimal insurance purchasing in the presence of uninsurable background risk existing theorems concerning the optimal level of insurance and the optimal form of an insurance contract are shown to hold only under restricted market and risk assumptions in particular conditions sufficient for the optimality of full coverage or sufficient for the optimality of deductible policies depend on the correlation between insurable and uninsurable risks these results may provide a partial explanation why existing theory is often contradicted by observable behavior

contests as selection mechanisms the impact of risk aversion abstract we investigate how individual risk preferences affect the likelihood of selecting the more able contestant within a two player tullock contest our theoretical model yields two main predictions first an increase in the risk aversion of a player worsens her odds unless she already has a sufficiently large advantage second if the prize money is sufficiently large a less able but less risk averse contestant can achieve an equal or even higher probability of winning than a more able but more risk averse opponent in a laboratory experiment we confirm both the non monotonic impact and the compensating effect of risk aversion on winning probabilities our results suggest a novel explanation for the gender gap and the optimality of limited monetary incentives in selection contests

on the emergence of a classic work a short history of the impact of gordon tullock s welfare costs of tariffs monopolies and theft gordon tullock s welfare costs of tariffs monopolies and theft is by now widely regarded to be a classic work in public choice however like many classic papers it was not always so highly regarded it was rejected at several journals before finding its way to print and arguably took two or three decades to be fully appreciated this paper discusses developments in the public choice and rent seeking literatures that helped bring tullock s paper to its status as a classic work in political economy

on expected utility for financial insurance portfolios with stochastic dependencies abstract the effect of background risks as human capital market risks and catastrophic events has been considered in the literature in different contexts in this note we consider financial insurance portfolios with insurable risks and one background risk uninsurable financial asset such that the random losses and the background risk depend on environmental parameters we study how dependencies between the risks influence the expected utility of the portfolio s wealth distribution under risk aversion when the environmental parameters are random stochastic bounds for the expected wealth are given from modeling the dependence between the parameters by different notions similar results are given for multivariate portfolios with n groups and multivariate risk aversion besides an expected utility comparison result for the minimum and the total portfolio s wealth

a multi winner nested rent seeking contest this paper considers a symmetric imperfectly discriminating rent seeking contest in which there may be several winners we first demonstrate a serious flaw in previous work and then go on to suggest an alternative method for analyzing the contest in contrast to the previous work we show that the value of the rent is fully dissipated in equilibrium as the number of players becomes large

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

the asymmetric effect of endowments on vertical intra industrial trade este articulo trata de analizar los determinantes del comercio intra industrial vertical en espana con una muestra de paises extensa se contrasta empiricamente la hipotesis de la ventaja comparativa con esta finalidad hemos construido series de capital fisico humano y tecnologico en media cuando se utiliza la estimacion mco las diferencias en dotaciones suponen una limitacion al comercio intra industrial vertical usando la tecnica de regresion por cuantiles se observa que este efecto negativo disminuye en terminos absolutos a medida que los flujos de comercio intra industrial vertical se incrementan y en algunos casos llegan a ser positivos en los cuantiles altos de la distribucion este resultado ofrece evidencia a favor de una version reducida de la hipotesis de la ventaja comparativa

optimal risk sharing with background risk this paper examines qualitative properties of efficient insurance contracts in the presence of background risk in order to get results for all strictly risk averse expected utility maximizers the concept of stochastic increasingness is used different assumptions on the stochastic dependence between the insurable and uninsurable risk lead to different qualitative properties of the efficient contracts the new results obtained under hypotheses of dependent risks are compared to classical results in the absence of background risk or to the case of independent risks the theory is further generalized to nonexpected utility maximizers

strategic entry deterrence and terrorism theory and experimental evidence using a two stage rent seeking framework we present a simple model of strategic entry terrorism deterrence and test the model using laboratory experiments our contest success function highlights the potential for strategic spillovers the theory illustrates that relative to a cooperative outcome negative externalities lead to over spending on deterrence and positive externalities lead to under spending on deterrence our experimental results are broadly consistent subjects in the negative externality treatment had higher expenditures in contrast to theoretical predictions participation decisions while primarily driven by the probability of winning a contest were influenced by a subject s ability to participate in multiple contests

risk aversion and bargaining some preliminary results game theoretic models of bargaining can be thought of as falling into two broad classes a uiomatic and strategic i in all of these models the preferences of the bargainers are represented by their von neumann morgenstern utility functions a series of recent experiments has shown that these models lack descriptive power in a number of important respects in particular very clear focal point effects have been observed of a kind that will be described in somewhat more detail below that cannot be accounted for within the framework of these classical game theoretic models at the same time the success of these classical models in the theoretical economics literature rests on the intuitively appealing qualitative predictions that they make in a variety of circumstances some of these qualitative predictions may prove to have descriptive power even though other aspects of the same model do not since these models are stated in terms of the von neumann morgenstern utilities of the bargainers their qualitative predictions are inevitably involved with the bargainers risk postures

gordon tullock and experimental economics gordon tullock s research has substantially influenced the development of economic science in general and experimental economics in particular we present the first comprehensive survey of this significant achievement we show how tullock s research in bioeconomics influenced later developments in neuroeconomics and how his pioneering work on rent seeking generated a literature of laboratory tests of his hypothesis we also describe tullock s own experiments and draw attention to his early insights on trust games

economic integration inter and intra industry trade the case of sweden and the ec when trade is heavily restricted a small country may show a false comparative disadvantage in differentiated products at an early stage in the life cycle because firms are confined to a small domestic market an analysis of changes in the pattern of trade between sweden and the ec after the establishment of free trade in manufactures shows that the swedish net export position improved in industries with high rates of growth in demand and turnover of technology the results provide some support for the hypothesis that an initial swedish disadvantage in product cycle goods caused by the limitations of the domestic market was reduced by the free trade agreement i background the decision to create the ec internal market and the recent eea agreement according to which the efta countries are given an opportunity to participate in the european integration process raises questions regarding the integration effects on trade and specialization this process implies the elimination of a number of nontariff barriers such as border controls discrimination against imports in public procurement and technical barriers to trade as well as general deregulation and promotion of competition swedish participation in the internal market will change the volume and structure of swedish trade with the ec it is not clear however precisely what these effects would be would further integration with the common market result in more inter industry trade and specialization according to

intra industry trade in agrofood sectors the case of the eec meat market examination of intra industry trade iit and of its determinants has so far been confined to industrial commodity markets taking the case of red meat the possibility of trade overlap in a typical agroffod commodity is observed further based on previous theoretical analyses and empirical indications it tests formally a general and a restricted set of country and industry or demand and supply hypotheses which being particular to the eec meat market may account for cross country variations in iit in 1988 results suggest that taste overlap as approached by countries cultural and economic convergence as well as the imperfectly competitive structure of the market as supported by product differentiation significantly explain iit despite some methodological shortcomings there seems to be ample scope for the application of similar models in other agrofood sectors in what remains a relatively under researched area

multiplicative background risk although there has been much attention in recent years on the effects of additive background risks the same is not true for its multiplicative counterpart we consider random wealth of the multiplicative form xy where x and y are statistically independent random variables we assume that x is endogenous to the economic agent but that y is an exogenous and nontradable background risk that represents a type of market incompleteness our main focus is on how the presence of the multiplicative background risk y affects risk taking behavior for decisions on the choice of x we extend the results of gollier and pratt 1996 to characterize conditions on preferences that lead to more cautious behavior

optimal prizes in dynamic elimination contests theory and experimental evidence abstract this paper investigates the implications of different prize structures on effort provision in dynamic two stage elimination contests theoretical results show that for risk neutral participants a structure with a single prize for the winner of the contest maximizes total effort while a structure with two appropriately chosen prizes a runner up prize and a final prize ensures incentive maintenance across stages in contrast a structure with two prizes may dominate a winner takes all contest in both dimensions if participants are risk averse evidence from laboratory experiments is largely consistent with these predictions suggesting that contest design should account for risk attitudes of participants

dissipation of contestable rents by small numbers of contenders the theory of rent seeking with its origins in the observations of gordon tullock 1967 or to use jagdish bhagwati s 1982 proposed term the theory of directly unproductive profit seeking activities is concerned with the potentially adverse effects on resource allocation of incentives to cap ture and defend artificially contrived rents and transfers the scope for so cial loss proposed by the theory derives from the relation between the value of a contestable prize and the value of the resources attracted into the con test to determine the beneficiary of the prize underlying this social loss is a specification of how rational behavior by optimizing agents links the value of the prize sought to the resources expended it has been traditional to assume competitive behavior in describing the activities of lobbying and influence seeking then if some further condi tions are satisfied l the total value of the resources expended precisely equals the value of the prize sought so dissipation is complete 2 conse quently the social cost associated with contestability of a rent can be in ferred from the value of the rent itself and the detailed and hard to come by information on individual outlays made in the course of the contest be comes unnecessary by basing their analyses on competitive dissipation contributors to the rent seeking literature see the review by robert tollison 1982 have been able to presume that the observed value of a contested rent is an exact measure of the associated social cost of monopoly power or regu lation similarly in the trade theoretic literature where the rights contested are to quota premia or revenues from trade taxes krueger 1974 bhagwati

two stage team rent seeking experimental analysis this paper presents a two stage team rent seeking model with a contest prize that is not excludable among winning team members when early effort is a perfect substitute for late effort early actors can free ride on their late moving teammates however when early and late efforts are complements all team members exert positive effort levels asymmetries in early effort reduce effort choices for all late movers the theory is tested with laboratory experimental methods although subjects overinvest relative to the nash equilibrium in all treatments chosen effort levels provide limited support for the model early movers exerted higher effort in the complement treatment and second stage effort choices were broadly consistent with best response functions surprisingly in both single shot and repeated play environments early movers in the substitute treatment did not free ride choosing effort levels similar to those of late movers

the role of comparative costs for determining inter and intra industry trade with developing countries abstract the paper studies intra industry trade of sweden with developing countries it uses a neoclassical two factor multi sector model where it is assumed that goods are differentiated with respect to country of origin in this model the share of intra industry trade between countries with different relative factor prices will be low in sectors with extreme factor requirements i e with very high or very low capital intensity this hypothesis is tested on the share of intra industry trade in sweden s trade with developing countries for a cross section of industries and largely confirmed by the statistical results

the interdependence of individual portfolio decisions and the demand for insurance we analyze the individual s demand for insurance as a special case of general portfolio hedging activity the demand for insurance contracts is determined simultaneously with the demands for other assets in the portfolio we demonstrate that when the payoffs of the policy are correlated with the payoffs to the individual s other assets the demand for insurance contracts is generally not a separable portfolio decision we argue that this separability condition is not generally met because of significant interdependence of claims across different insurance policies furthermore our generalizations can reverse the standard prediction that wealthier individuals will demand less insurance

incorporating policymaker costs and political competition into rent seeking games 1 introductionrent seeking in politics involves agents who lobby policymakers for potential benefits in a seminal contribution tullock 1980 modeled rent seeking as a lottery game a major weakness of tullock s game was that it lacked verisimilitude to actual rent seeking because it omitted politics the absence of politics meant that the game essentially assumed that there are no costs to the policymakers of supplying rents but as tollison 1997 and others have pointed out these costs are not zero and the politics surrounding the policy decision influence the pattern of lobbying and the rent seeking outcome in this paper we address two aspects of those politics the costs to policymakers of supplying rents and the variable intensity of political competition among a given number of rent seekers including these aspects increases the similarity of the game to actual rent seeking situations and makes clearer the incentives to rent seekers costs to supplying rents arise due to various constraints legislators must build coalitions acquire parliamentary rights maintain a positive image and service constituent interests policymakers in agencies must follow procedural rules submit to congressional oversight and budgeting pass omb reviews and so forth lower policymaker costs should increase the effectiveness of lobbying and this should attract greater lobbying efforts among rent seekers 1 increasing policymaker costs makes lobbying less effective indeed because of these costs policymakers often turn away lobbies empty handed in short policymakers have constraints that affect the policies they design and this affects lobbying expenditures dougan and snyder 1993 this paper introduces policymaker costs in monetary units such that they are comparable to the value of the rent and rent seeking expenditures political competition among rent seekers also influences the rent seeking outcome competition traditionally has been modeled by varying the number of rent seeking agents actual or potential or their relative lobbying expenditures e g posner 1975 rogerson 1982 sun and ng 1999 competition can vary however even among a given number of rent seekers and for a given profile of expenditures for example two agents may lobby a policymaker for the same unique and exclusive political good then one agent directly opposes the other and only one agent can win the good alternatively the same two agents may lobby a policymaker for two separate political goods in that case the agents oppose each other only indirectly this situation is frequent in politics as rent seeking agents compete for space on the political agenda for policymakers time and for portions of a particular government budget in this situation success by one agent does not necessarily result in failure by the other but it does lower the probability that the other agent will succeed competition is more intense in the first example even though the examples involve the same number of firms industrial organization economists have shown that a single parameter can determine incumbent firms competition in price and quantity regardless of the number of firms present 2 this paper introduces rent seeking competition analogously allowing a parameter to alter the competitiveness of the rent seeking game among a fixed number of firms we incorporate monetized policymaker costs and the political competition parameter into the success probabilities of the standard rent seeking game the resulting model is a game in which the agents simultaneous maximization of expected net returns or profits determines a nash equilibrium in their expenditures incorporating politics into the standard game makes the game more accurate because equilibrium and comparative statics depend in part on the politics of the rent seeking contest more specifically increasing political competition decreases rent seeking expenditures unless the value of the rent is sufficiently large relative to policymaker costs and dissipation rates are lower than in previous research because of policymaker costs

on the theory of rational insurance purchasing a note the authors consider the optimal amount of insurance purchased by an individual who behaves according to the hurwicz criterion of choice under uncertainty their results are compared with earlier results obtained in alternative frameworks expected utility maximization and savage s regret criterion it is shown that a positive amount deductible is often suboptimal

intraindustry specialization in production and trade in newly industrializing countries a conceptual framework and some empirical evidence from east asia abstract this paper argues that as newly industrializing countries continue on a path of industrialization led growth and development their pattern of manufacturing production and trade specialization tends to resemble that of the industrial countries consequently the importance of intraindustry specialization in production and trade in certain manufactures increases in newly industrializing countries this hypothesis is tested in the analysis of intraindustry trade in manufactures of east asian newly industrializing countries as expected the economic development and industrial growth of these countries is accompanied by growth in intraindustry trade in manufactures a substantial proportion of this trade is with industrial countries

who buys and who sells options the role of options in an economy with background risk abstract in this paper we derive an equilibrium in which some investors buy call put options on the market portfolio while others sell them since investors are assumed to have similar risk averse preferences the demand for these contracts is not explained by differences in the shape of utility functions rather it is the degree to which agents face other non hedgeable background risks that determines their risk taking behavior in the model we show that investors with low or no background risk have a concave sharing rule i e they sell options on the market portfolio whereas investors with high background risk have a convex sharing rule and buy these options journal of economic literature classification numbers d52 d81 g11 g13

comorbidities and the willingness to pay for health improvements we show that the willingness to pay for health improvements increases with the severity and probability of occurrence of comorbidities this result which is obtained under mild restrictions on the shape of the utility function has important implications for cost benefit studies applied to health care in particular it implies that the discrimination of the elderly believed to be implicit in cost benefit analysis is less of a problem than commonly thought

simultaneous decision making in competitive and cooperative environments we experimentally investigate simultaneous decision making in two contrasting environments a competitive environment a contest and a cooperative environment a voluntary contribution mechanism we find that the cooperative nature of the voluntary contribution mechanism spills over to the contest decreasing sub optimal overbidding in the contest however contributions to the public good are not affected by simultaneous participation in the contest there is a significant negative correlation between decisions made in competitive and cooperative environments i e more cooperative subjects tend to be less competitive and vice versa this correlation can be rationalized by heterogeneous social preferences towards inequality but not by bounded rationality theory

complementarity and substituability in multiple risk insurance markets we study imperfect competition between insurers in a multiple risk environment in the absence of asymmetric information equilibria are efficient and we determine the degrees of specialization under which the specialized insurers are able or unable to capture the surplus we show in contrast that under adverse selection specialization systematically prevents second best efficiency concluding on the role of our notions of strategic complementarity substituability on the tradeoff between efficiency and fairness of the allocation we give indications on the desirable structure of the insurance industry

preserving preference rankings under background risk abstract for any random vector of wealth payoffs x 1 x 2 let the random variable z be mutually independent of x 1 and x 2 with e z 0 the basic question we address in this paper is the following when can we say that x 1 z is preferred by an expected utility maximizer to x 2 z whenever x 1 is preferred to x 2 in other words when can we guarantee that the addition of an arbitrary independent background noise z will not affect the preference ranking between other risks

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

vertical and horizontal intra industry trade a cross industry analysis for the united kingdom a large theoretical literature has emerged directed at explaining the presence of intra industry trade iit one of the distinctions which comes out of these models is that between horizontal iit where goods are differentiated by attributes and vertical iit where goods are differentiated by quality in this paper horizontal and vertical iit in u k trade are disentangled using a unit value dispersion criterion and a range of industry characteristics the paper not only points up the relative importance of vertical and horizontal iit in the united kingdom it also demonstrates how a failure to separate them out can impact on the interpretation of empirical results copyright 1995 by royal economic society

collective rent dissipation the theory of rent seeking was initiated by tullock 1967 1980 followed by krueger 1974 and posner 1975 and more recently extended in various directions by allard 1988 appelbaum and katz 1986a b c gradstein and nitzan 1989 hillman and katz 1984 1987 hillman and samet 1987 hillman and riley 1989 katz et al 1990 long and vousden 1987 ursprung 1990 and varian 1989 the purpose of this paper is to extend this theory by introducing the possibility of collective group rent seeking with voluntary individual decisions regarding their extent of participation in the collective rent seeking efforts

strategic risk taking when there is a public good to be provided privately abstract we describe a situation where a risk averse individual has a preference for risk taking in the literature we find this strategic risk behaviour in an altruistic framework where the individual actually benefits from his noninsurance only in the loss outcome in our model all agents are perfectly selfish when a public good is to be provided privately after the insurance decision the player facing greater uncertainty can expect an income transfer from the other individuals through the commitments to the public good this ex ante income transfer is not conditional on the loss

background risk and self protection abstract the presence of background risk increases self protection effort or caution as long as an agent is prudent in addition the result extends to monetary self protection investment if wealth and consumption are complements

the number of rent seekers and aggregate rent seeking expenditures an unpleasant result i examine a rent seeking contest in which the winner gets a minimum rent but also gets an additional rent which is an increasing function of his lobbying expenditure i give real world examples of such rent seeking competitions contrary to the standard result in the rent seeking literature i obtain the perverse result that aggregate rent seeking expenditures may be inversely related to the number of rent seekers however i note that even if this result holds the cost of administering rent seeking competitions may imply that society is better off with fewer contenders than with an infinitely large number of contenders although the optimal number may not be the smallest number

trade barriers multinational involvement and intra industry trade panel data evidence from india the article analyses the effects of trade barriers and multinationals on the intensity of intra industry trade iit in a panel of indian manufacturing industries from 1988 to 1999 we find that the intensity of iit increases with the reduction of trade barriers this is expected as greater competition from imports leads individual plants in the domestic industry to specialize in the manufacturing of unique varieties the analysis suggests that horizontal market seeking multinational activities in the domestic industries exert a negative influence on iit this is consistent with the view that horizontal multinationals displace exports to the host country at the same time our results indicate that iit will be stimulated to the extent that the entry of multinationals induces intra industry specialization we also analyse the role of product differentiation and plant level scale economies in determining iit

classroom games rent seeking and the inefficiency of non market allocations economics is often taught at a level of abstraction that can hinder some students from gaining basic intuition however lecture and textbook presentations can be complemented with classroom exercises in which students make decisions and interact the approach can increase interest in and decrease skepticism about economic theory this feature offers short descriptions of classroom exercises for a variety of economics courses with something of an emphasis on the more popular undergraduate courses suggestions for future columns and comments on past ones should be sent to charles holt c o journal of economic perspectives department of economics university of virginia charlottesville virginia 22903 3288

a note on insurance coverage in incomplete markets in this paper full insurance coverage on average is defined as the coinsurance rate that eliminates all insurable risk when the uninsurable risk is evaluated at its mean the regressibility assumption is used to derive the conditions on the correlation between background and insurable risks and the actuarial unfairness of insurance under which full over or underinsurance on average is optimal these conditions are compared to those for the case of default risk together they explain intuitively the different results under the cases of background risk and default risk obtained in the literature

intra industry trade with multinational firms recent developments including the analysis of firm level adjustment to falling trade costs have contributed to a revival of interest in intra industry trade iit most empirical work still relies on the standard grubel lloyd measure this however refers only to international trade disregarding income flows stimulated by repatriated profits of multinational firms given the overwhelming importance of the latter this is a major shortcoming this paper provides a guide to measurement and estimation of the determinants of bilateral iit shares from the perspective of new trade theory with multinational firms we develop an analytically solvable general equilibrium model to investigate the impact of investment costs multinational activities and income flows from repatriated profits we also discuss and quantify the bias of the grubel lloyd index associated with repatriated profit flows of multinationals using bias corrected versions of the grubel lloyd index as the dependent variable we demonstrate that the determinants motivated by our theoretical analysis offer important insights into variations in iit shares

best of three contest experiments strategic versus psychological momentum abstract we conduct an experimental analysis of a best of three tullock contest intermediate prizes lead to higher efforts while increasing the role of luck as opposed to effort leads to lower efforts both intermediate prizes and luck reduce the probability of the contest ending in two rounds the patterns of players efforts and the probability that a contest ends in two rounds are consistent with strategic momentum i e a momentum generated due to strategic incentives inherent in the contest we do not find evidence for psychological momentum i e a momentum which emerges when winning affects players confidence similar to the previous studies of contests we find significantly higher efforts than predicted and strong heterogeneity in effort between the subjects

asymmetric discouragement in asymmetric contests we provide new experimental evidence which suggests an asymmetric discouragement effect in lottery contests with heterogeneous abilities compared to a symmetric contest subjects invest less effort when facing a stronger opponent but they invest the same when facing a weaker opponent our results can be explained by a simple model of disappointment aversion

second best insurance contract design in an incomplete market the optimal form of insurance contracts for multiple risks is examined a well known result in the literature is that under fairly general conditions an insurance policy with a deductible for aggregate losses is optimal real world markets however are typically incomplete in that they require separate contracts for separate loss exposures for instance insurable damage to one s home is not generally allowed to affect the insurance indemnity for unrelated insurable damage to one s automobile we show that separate deductibles are second best optima in this setting we compare the indemnity provided in this second best setting with first best solutions the effect of second best contracts on the individual s total insurance demand is also examined

utility risk and demand for incomplete insurance lab experiments with guatemalan cooperatives we play a series of incentivized laboratory games with risk exposed cooperative based coffee farmers in guatemala to understand the demand for index based rainfall insurance we show that insurance demand goes up as increasingly severe risk makes insurance payouts more partial payouts are smaller than losses but demand is ad versely effected by more complex risk structures in which payouts are probabilistic it is possible that a shock occurs with no payout we use numerical techniques to esti mate a flexible utility function for each player and consequently can put exact dollar values on the magnitude of the behavioral response triggered by probabilistic insur ance exploiting the group structure of the cooperative we investigate the possibility of using group loss adjustment to smooth idiosyncratic risk our results suggest that consumers value probabilistic insurance using a prospect style utility function that is concave both in probabilities and in income and that group insurance mechanisms are unlikely to solve the issues of low demand that have bedeviled index insurance markets

are people risk vulnerable we report on a within subject experiment with substantial monetary incentives designed to test whether or not people are risk vulnerable in the experiment subjects face the standard portfolio choice problem in which the investor has to allocate part of his wealth between one safe asset and one risky asset we elicit risk vulnerability by observing each subject s portfolio choice in two different contexts that differ only by the presence or absence of an actuarially neutral background risk our main result is that most of the subjects are risk vulnerable 81 chose a less risky portfolio when exposed to background risk more precisely 47 invested a strictly smaller amount in the risky asset whereas 34 were indifferent furthermore contrasting the predictions provided by competing decision theoretic models we conclude that expected utility theory best fits our experimental data this paper was accepted by uri gneezy behavioral economics

the design of an optimal insurance policy almost every phase of economic behavior is affected by uncertainty the economic system has adapted to uncertainty by developing methods that facilitate the reallocation of risk among individuals and firms the most apparent and familiar form for shifting risks is the ordinary insurance policy previous insurance decision analyses can be divided into those in which the insurance policy was exogenously specified see john gould jan mossin and vernon smith and those in which it was not see karl borch 1960 and kenneth arrow 1971 1973 in this paper the pioneering work of borch and arrow the derivation of the optimal insurance contract form from the model is synthesized and extended

reexamining efficient rent seeking in laboratory markets given millner and pratt s 1989 finding of behavior inconsistent with theory we reexamine efficient rent seeking in experimental markets we show that a when r 3 no nash equilibrium exists and therefore behavior has no theoretical benchmark to judge consistency and b when r 1 with a new experimental design utilizing an explicit expected payoff matrix rent seeking behavior is consistent with both nash equilibrium and dissipation hypotheses

preservation of more risk averse under expectations abstract the preservation of risk aversion properties of utility functions under expectation operations is of interest in the study of derived utility functions in sequential decision problems and in problems with multiple contemporaneous sources of uncertainty the purpose of this note is to present sufficient conditions for the pratt relation more risk averse to be preserved under expectations

controlling preferences for lotteries on units of experimental exchange in an experimental setting when outcomes are stochastically related to actions predictions of equilibrium behavior depend not only on the participants preference orderings of outcomes but also on their orderings of lotteries on outcomes as well we introduce and test a reward structure that can be utilized in any experimental setting to allow the experimenter to decree beforehand the subjects preferences for lotteries on experimental outcomes we show analytically that the proposed reward structure can induce subjects to behave as if they have the decreed preference function defined on experimental outcomes empirical tests using two different choice settings provide evidence to support this ability to control preferences

an experimental test for risk aversion abstract this paper evaluates an experimental method to measure attitudes to risk in individual subjects the method is applied to study the degree of risk aversion of 46 subjects the results lead us to reject a working hypothesis of risk neutrality for such experimental subjects

optimal health insurance for multiple goods and time periods we examine the efficiency based arguments for second best optimal health insurance with multiple treatment goods and multiple time periods correlated shocks across health care goods and over time interact with complementarity and substitutability to affect optimal cost sharing health care goods that are substitutes or have positively correlated demand shocks should have lower optimal patient cost sharing positive serial correlations of demand shocks and uncompensated losses that are positively correlated with covered health services also reduce optimal cost sharing our results rationalize covering pharmaceuticals and outpatient spending more fully than is implied by static one good or one period models

rent seeking in groups abstract rent seeking contests between groups involve conflicts of interests at the levels of individuals groups and the society as a whole we conduct a series of economic experiments to study the behavior of groups and individuals competing against each other in rent seeking contests we find substantial over contribution to rent seeking relative to the equilibrium predictions of standard models regardless whether individuals compete against other individuals groups compete against other groups or individuals compete against groups

innovation and trade performance in the united kingdom a popular explanation for the u k s poor trade performance in the postwar period is that insufficient attention was paid to the quality of goods offered to consumers the authors explore the role of both price and quality factors in determining the net trade balances of a number of u k manufacturing and service industries particular attention is paid to the role of innovation used empirically as a proxy for product improvement the findings show considerable support for the view that an advanced industrial country like britain needs to continually upgrade its products to avoid erosion of its domestic and international market shares

rational insurance purchasing consideration of contract nonperformance much of the analysis of rational insurance purchasing and hedging strategies has been undertaken on the basis of the expected utility hypothesis this decision framework has been used to reformulate the bernoulli principle that a risk averter rationally would fully insure at a fair premium other applications include the analysis of insurance at unfair premiums mossin 1968 and smith 1968 the effects of state dependent utility on the rational insurance purchase cook and graham 1977 the effects of risky background wealth doherty and schlesinger 1983 and mayers and smith 1983 and the design of the optimal insurance policy raviv 1979 such analyses have been conducted on the assumption that insurance policies are free of insolvency default risk this assumption stands in sharp contrast to the actuarial literature in which the insolvency risk or probability of ruin is a central focus of attention

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

optimal hedging in a futures market with background noise and basis risk abstract this paper examines hedging behavior in an incomplete market in which there exists an unhedgeable and uninsurable independent background risk in the case of a basis risk that satisfies the regressibility property the background risk might be partly endogenous background risk generally has an ambiguous effect on the optimal hedge ratio however if preferences exhibit standard risk aversion and the background risk is fully exogenous the qualitative effect of the added background risk is determinate and depends on the direction of any bias in the futures market in all cases the speculative component of the hedge ratio is reduced in the presence of background risk when the background risk is a basis risk and futures prices exhibit normal backwardation this qualitative effect need not hold and it depends in part on the direction of regressability for spot and futures prices

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

some stronger measures of risk aversion in the small and the large with applications the arrow pratt measures of risk aversion for von neumann morgenstern utility functions have become workhorses for analyzing problems in the microeconomics of uncertainty they have been used to characterize the qualitative properties of demand in insurance and asset markets to examine the properties of risk taking in taxation models and to study the interaction between risk and life cycle savings problems to name just a few applications equally importantly they have generated the linear risk tolerance class of utility functions which has provided canonical examples in such diverse areas as portfolio theory and the theory of teams despite these successes there have been a number of areas for which the results have been weaker than hoped it is natural to use the risk aversion measures to compare the behavior of individuals in risky choice situations for example consider the individual portfolio choice problem in a two asset world with a riskless asset and a risky asset if individual a has a uniformly higher arrow pratt coefficient of risk aversion than individual b then b will always choose a portfolio combination with more wealth invested in the risky asset but suppose that both assets are risky now there is no obvious sense in which the more risk averse individual can be said to hold a less risky portfolio but it seems strange that such a simple alteration should destroy the analytics which support the basic intuition similarly consider the basic insurance problem if one individual a is more risk averse than another b in the arrow pratt sense it follows that a will pay a larger premium to insure against a random loss than will b typically though an individual evaluates partial rather than total insurance that is only some gambles can be insured against and others must be retained in this case even when the gambles which are retained are independent from those which are insured it is no longer true that the individual whose arrow pratt measure of risk aversion is higher will pay a larger insurance premium the situation is no better when we consider comparative statics exercises for a single individual decreasing absolute risk aversion in the sense of arrow and

sensitivity of modeling results to technological and regional details the case of italy s carbon mitigation policy model differences in technological and geographical scales are common but their contributions to uncertainties have not been systematically quantified in the climate policy literature this paper carries out a systematic assessment on the sensitivity of computable general equilibrium models to technological and geographical scales in evaluating the economic impacts of carbon mitigation policies in particular we examine the impacts of sub national details and technological details of power generation on the estimate of carbon price and economic cost taking italy as an example we find that the estimation for carbon price and the economic cost of a de carbonization pathway by means of a model with technological and regional details can be lower than a model without such details by up to 40 additionally the effect of representing regional details appears to be far more important than the effect of representing the details of electricity technology in both the estimated carbon prices and the estimated economic impacts our results for italy highlight the importance of modeling uncertainties of these two key assumptions which should be appropriately acknowledged when applying cge models for policy impact assessment our conclusions can be generalized to different countries and policy scenarios not in terms of absolute numbers but in terms of economic explanations in particular intra national trade and the sub national sectoral technological specialization are important variables for understanding the economic dynamics behind these outcomes

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 measurement of intra industry trade countries or more specifically newly industrialising countries increased in importance as exporters of manufactures over this period some 6o of the overall expansion of trade in manufactures comprised trade within western europe and north america a phenomenon which appears to have increased in importance as a consequence of the growth of trade between manufacturing nations is intra industry trade i e the simultaneous import and export of commodities classified in the same industry or product group although there are considerable difficulties associated with the computation of a meaningful summary statistic of the importance of intra industry trade relative to total trade a substantial amount of evidence now exists to suggest that intra industry trade has increased in importance to the point where it may account for in excess of 6o of total trade in most developed market economies 2 intra industry trade is important for at least two reasons first accurate measurement of pure intra industry trade can give some indication of the importance of determinants of international exchange other than relative factor proportions recent work has for example emphasised the role of preference diversity and decreasing costs despite attempts to generalise the heckscherohlin model neither of these factors can be comfortably accommodated consequently the heckscher ohlin postulate that countries specialise in and export commodities which use their abundant factor intensively is of little value in explaining intra industry exchange secondly there is a possibility that adjustment to trade expansion may be easier when the expansion takes the form of an increase in intra as opposed to inter industry exchange 3 in order to explore either of these issues empirically or to test any of the models of intraindustry exchange which have emerged in recent years 4 intra industry trade has to be measured as accurately as possible the principal complication with measurement is the unknown influence of categorical aggregation this paper discusses alternative approaches to assessing the influence of categorical aggre

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

categorical aggregation and international trade a comment the central issue of the literature on intra industry trade iit is the extent to which iit is a substantive phenomenon or a statistical artefact due to aggregation greenaway and milner hereafter gm have recently proposed an adjusted index of iit to shed new light on categorical aggregation and they contrast this index with the widely adopted procedure of disaggregating the standard iit index the contrast is a false one gm s disaggregated treatment of the standard index is not the method adopted by the cited earlier studies while gm s adjusted index is the one which these writers did in fact use the usual definition of iit is xj m2 i xj amj where xj and mj are exports and imports of thejth industry for comparability this is conventionally stated as a percentage of total trade

insurance markets with loss prevention activity profits market structure and consumer welfare this article considers the joint production of insurance protection and loss prevention by insurers we first examine the loss distribution of consumers that is potentially the most profitable for insurers unlike in the preponderance of the insurance literature which assumes cost based pricing of insurance policies we allow the insurer to charge whatever price the market will bear we then examine the expected profit maximizing strategy of assumes cost based pricing of insurance policies we allow the insurer to charge whatever price the market will bear we then examine the expected profit maximizing strategy of the insurer in several different market settings whether the insurance protection and loss prevention services can be perfectly bundled plays a key roll in the insurer s pricing decision we consider consumer welfare under various market settings and demonstrate that a consumer may be better off when the insurance market is monopolistic rather than competitive finally we consider whether monopoly power in the loss prevention market leads to monopoly power in an otherwise perfectly contestable insurance market we also show conditions under which a loss prevention monopolist would increase expected profit by integrating into the insurance market

single and double elimination all pay tournaments abstract tournaments consisting of iterative matches are a common mechanism for determining how to allocate a prize for this reason it is important to understand the behavioral as well as the theoretical properties of different tournament structures given that laboratory experiments have consistently found high levels of overbidding in contests one might suspect that double elimination tournaments would generate substantially more total investment than single elimination tournaments despite the two types of tournaments generating theoretically equivalent expected aggregate investment this paper reports a set of laboratory experiments designed to test this comparison the results indicate that aggregate investment is similar between the two tournaments despite behavioral differences in bidding strategies

rent seeking with multiple winners this paper examines the impact of the number of winners allowed by regulators on rentseeking expenditures it is demonstrated in a widely used model that an increase in the number of winners will decrease total rent seeking expenditures this result is generally obtained regardless of whether the firms are risk averse or risk lovers when regulators award coveted market franchises there will be smaller welfare losses if more winners are allowed

a cross section analysis of intra industry trade in the u k abstract in this paper the inter industry patterns of intra industry trade in the united kingdom are explored a cross section econometric model is explained and estimated for the year 1977 two samples of 37 and 68 observations are tested using a variety of proxies for features of market structure including market concentration product differentiation and cost conditions the results suggest that a significant proportion of the inter industry variation in intra industry trade can be explained by the model