stopping agents from cheating abstract when a principal hires two or more agents to work in a correlated environment each agent s reward will depend on the other s performance unfortunately with just the usual optimal incentive constrained contracts being offered the agents strictly prefer to play equilibrium strategies other than those desired by the principal they cheat however the principal can use a more subtle contractual mechanism to stop them from cheating at no extra cost this mechanism uses one agent to police the other and exploits certain properties of the optimal contracts

signaling quality with a money back guarantee the role of transaction costs direct marketing is witnessing explosive growth as consumers increasingly purchase products from their homes their ability to judge the quality of products they buy is significantly reduced in this paper we study how money back guarantees can signal product quality in such environments we interpret product quality broadly to mean both the level of attributes promised as well as the firm s consistency in delivering on those promises key aspects of our formulation are the explicit consideration of transaction costs and alternative signals of product quality transaction costs are the costs the seller or buyer faces when redeeming a money back guarantee we show that money back guarantees signal quality by exploiting the higher probability of returns for a lower quality product and the attendant higher transaction costs however if the seller s transaction costs are very large then there are less costly ways to signal namely charging a high price we compare the signaling performance of 1 price 2 price with uninformative advertising and 3 price with a money back guarantee whereas uninformative advertising does not work at all in our model under certain conditions a money back guarantee is necessary to signal and under other conditions a money back guarantee is a useful supplement to price

the social ecology of the post fordist global city economic restructuring and socio spatial polarisation in the toronto urban region numerous authors have asserted that globalisation and occupational changes associated with post fordist economic restructuring have led to a growth in intraurban social disparity and even polarisat

patenting in the shadow of competitors this article empirically examines the patenting behavior of new biotechnology firms that have different litigation costs i show that firms with high litigation costs are less likely to patent in subclasses with many other awards particularly those of firms with low litigation costs this pattern is consistent with the literature on costly litigation which suggests that firms that have high litigation costs will take greater precautions to avoid litigation these results are robust to a variety of control variables and modifications that seek to test alternative explanations

the resolution of financial distress most models of financial structure embody an assumption about financial distress that causes debt to be costly to the issuing firm this approach has been criticized on the grounds that the assumed costs could be avoided by a costless financial reorganization in this article we show that despite the possibility of costless reorganization it may be rational for firms to incur significant costs in the resolution of financial distress the main assumptions that give rise to our results are the existence of asymmetric courts to impose a reorganization on the claimants of a firm article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

toward a political theory of the emergence of environmental incentive regulation this article makes some steps toward a formal political economy of environmental policy economists quasi unanimous preference for sophisticated incentive regulation is reconsidered we recast the question of instrument choice in the general mechanism design literature within an incomplete contract approach to political economy we show why constitutional constraints on the instruments of environmental policy may be desirable even though they appear inefficient from a standard economic viewpoint their justification lies in the limitations they impose on the politicians ability to distribute rents insights are provided on the emergence of incentive mechanisms in environmental regulation

industrial policy and politics abstract recognizing the uncontrollable nature of the political system in a fine tuning way we derive simple constitutional rules for industrial policies which take into account simultaneously the inefficiencies of the political system and informational asymmetries of regulators we apply this methodology to the regulation of natural monopolies we consider a two type political system with the majority rule we study how the chosen cost reimbursement rules and pricing rules which characterize regulation are affected by constitutional choices such as public ownership or privatization creation of incentives for regulators or not price discrimination or not

transfers in cash and in kind theory meets the data we review theoretical explanations for in kind transfers in light of the limited empirical evidence after reviewing the traditional paternalistic arguments we consider explanations based on imperfect information and self targeting we then discuss the large literature on in kind programs as a way of improving the efficiency of the tax system and a range of other possible explanations including the samaritan s dilemma pecuniary effects credit constraints asymmetric information amongst agents and political economy considerations our reading of the evidence suggests that paternalism and interdependent preferences are leading overall explanations for the existence of in kind transfer programs but that some of the other arguments may apply to specific cases political economy considerations must also be part of the story

do benefit cuts boost job finding swedish evidence from the 1990s in june 1995 the swedish parliament decided to cut the replacement rate in unemployment insurance from 80 percent to 75 percent a change that took effect on january 1 1996 this paper examines h

the politics of redistributive social insurance this paper analyses the political support for a social insurance that includes elements of redistribution when there exists an imperfect private insurance alternative individuals differ both in their income and risk the social insurance is compulsory and charges an income related contribution with pooling of risks the private insurance is voluntary and charges a contribution based on individual risks however due to the adverse selection problem private insurance companies provide only partial insurance adopting a non expected utility model we show that there is a general majority support for social insurance and that this support is increasing with risk aversion we also show that a mixed insurance is politically impossible regardless of the degree of redistribution of social insurance and the joint distribution of risk and income in the population lastly we analyse how the political support for social insurance is affected by any change in its redistributive component and the possibility of using genetic tests

the political economy of targeting one of the most widely used method of targeting is to reduce welfare benefits as income rises although the need for such targeting is clear enough it also entails two important difficulties firstly the prospect for the recipients of losing part of their benefits if they were to earn more can be a deterrent to work harder secondly by reducing the number of recipients targeting reduces the political support for taxation and redistribution the purpose of this paper is to study the voting equilibrium of the degree of targeting and the level of taxation in an economy where labour supply is variable the analysis reveals that targeting may be fatal for redistribution even though it rejects strictly less than the richest half of the population and that it is not possible for a coalition of the extremes to form and reject the middle income group from the welfare system moreover because targeting affects labour supply we find that pareto improvements are possible when targeting is either too low or too high we also find that voting simultaneously over taxation and targeting is favourable to the poor in the sense that they can converge to their most preferred policy by successively forming a majority coalition with the rich to increase targeting and with the middle to increase taxation

social polarisation in global cities theory and evidence this paper examines the debate over social polarisation in global cities it focuses on the claims made by sassen that the processes of economic change in such cities are leading to a growing polar

the political economy of mitigation and adaptation abstract climate policies have very uneven effects in terms of their fiscal impact while mitigation of climate change typically raises revenues adaptation is costly to the taxpayer and the more so the more distortionary the tax system moreover the benefits and costs of mitigation and adaptation vary across generations in an olg model with majority voting we show that even in the absence of international pollution spillovers and strategic considerations neither mitigation nor adaptation can be expected to be set efficiently the reason is that voters have incentives to use climate policy as an instrument for redistribution we find that these incentives depend on the underlying tax system furthermore the chosen mitigation or adaptation level may be inefficiently high in a political equilibrium with a distortionary income tax system although not simultaneously this finding suggests that a distortionary income tax system favors one policy mitigation or adaptation at the expense of the other the calibration of our model to the german economy reveals that both mitigation and adaptation are lower than their socially optimal levels

customer return policies for experience goods this paper studies the economic rationale for customer return policies by focusing on the experience goods aspect of many products return policies allow consumers to defer their purchasing decisions until after they gain some experience with goods in so doing they insure consumers against ex post loss which allows a monopoly seller to charge more than otherwise it is shown that the seller adopts the return policy when consumers are highly risk averse or retail costs are high consumers are strictly better off under the return policy but there is too little adoption of the policy in equilibrium copyright 1996 by blackwell publishing ltd

political economy of pension plans impact of institutions gender and culture abstract national pension systems are an important part of financial intermediation and worker welfare in most countries but how and why do they differ internationally controlling for important political economic and social institutions we document that international differences in pension progressivity or how pensions reflect lifetime earnings are negatively related to masculinity uncertainty avoidance individualism long term orientation employment rights average pension levels social trust and economic inequality we also find that pension progressivity is positively related to the economic and societal role of women the extent of catholicism as well as political voice and accountability these results provide important insights for both public policy and mnc managers

secrecy and safety we provide a model showing that the use of confidential settlement as a strategy for a firm facing tort litigation leads to lower average safety of products sold than would occur if the firm were committed to openness a rational risk neutral consumer s response in a market wherein a firm engages in confidential settlements may be to reduce demand a firm committed to openness incurs higher liability and r d costs though product demand is not diminished we identify conditions such that if the cost of credible auditing to verify openness is low enough a firm prefers to eschew confidentiality

the political economy of social security we consider a two period overlapping generations model in which individual voters differ by age and by productivity in such a setting a redistributive pay as you go system is politically sustainable even when the interest rate is higher than the rate of population growth the workers with medium wages not those with the lowest wages and the retirees form a majority which votes for a positive level of social security this level depends on the difference between the rates of population growth and interest as well as on the redistributiveness of the benefit rule

the option value of returns theory and empirical evidence when a firm allows the return of previously purchased merchandise it provides customers with an option that has measurable value whereas the option to return merchandise leads to an increase in gross revenue it also creates additional costs selecting an optimal return policy requires balancing both demand and cost implications in this paper we develop a structural model of a consumer s decision to purchase and return an item that nests extant choice models as a special case the model enables a firm to both measure the value to consumers of the return option and balance the costs and benefits of different return policies we apply the model to a sample of data provided by a mail order catalog company we find considerable variation in the value of returns across customers and categories when the option value is large there are large increases in demand for example the option to return women s footwear is worth an average of more than 15 per purchase to customers and increases average purchase rates by more than 50 we illustrate how the model can be used by a retailer to optimize his return policies across categories and customers

adverse selection and regulation in health insurance markets abstract in this paper we look at various ways to regulate the health insurance market and ask whether they provide an answer to the problem of adverse selection to avoid inefficiency government policy must either effectuate some cross subsidization of insurance policies within the state sector or grant private insurance firms an exclusive right to serve certain groups of the population recent reforms in the netherlands and germany and president clinton s proposals for the us could be adapted to fulfil these requirements efficiency cannot be achieved on the other hand if the regulator tries to prescribe cross subsidization within the private sector

life expectancy heterogeneity and the political support for collective annuities individuals differing in productivity and life expectancy vote over the size and type of a collective annuity its type is represented by the fraction of the contributive bismarckian component based on the worker s past earnings as opposed to the non contributive beveridgean part based on average contribution the equilibrium collective annuity is either a large mostly bismarckian program a smaller pure beveridgean one in accordance with empirical evidence or nil a larger correlation between longevity and productivity or a larger average life expectancy both make the equilibrium collective annuity program more beveridgean although at the expense of its size

two improvements on the clinton framework i t is wonderful that the clinton administration has created the possibility of major reform of health insurance and medical care while the clinton proposal has many good features this comment will suggest two improvements in its present form the clinton proposal allows states to set up a single payer system or to organize the insurance market making heavy use of large regional alliances i will suggest that states should be allowed a third alternative to organize the insurance market with small alliances an advantage of small alliances comes from the distinction between group and individual purchase of insurance as developed below the second suggested improvement involves the question of rationing which is present now and is inevitable in any system for allocating resources the question is who does it and how the clinton plan chooses to offer relatively comprehensive health insurance coverage to all a more efficient form of rationing might offer basic coverage to all making more use of individually purchased supplemental policies as part of the rationing mechanism

on the effectiveness of liability rules when agents are not identical this paper is about accidents involving two risk neutral parties both parties engage in actions that are profitable but affect the magnitude of possible bilateral accidents we analyse how the action choices can be decentralized by liability rules that assign the accident costs to the two parties if we allow for punitive damages we can implement the first best actions by a liability rule even if agents are not identical under this liability rule some individuals may be in expectation better off in the event of an accident than in the event of no accident we provide conditions under which this problem does not arise

an empirical test of the comparative and contributory negligence rules in accident law scholars in the field of law and economics have developed an extensive theoretical literature on the effects of liability rules in accident law but have done little testing of their theoretical models in this article i develop an empirically testable model of the incentives for injurers and victims to avoid accidents under both the older contributory negligence rule and the newer rule of comparative negligence the model takes account of the fact that in the automobile accident context drivers do not know in advance with whom they will be involved in an accident and whether they will be the injurer or the victim or both it also allows for uncertainty in legal decision making the model is tested using a data set of rear end automobile accidents litigated in court the results suggest first that incentives to take care to avoid accidents are stronger under the contributory negligence rule than under the newer rule of comparative negligence and second the incentives set up by the comparative negligence rule for drivers to avoid accidents are weaker than is economically efficient

the optimal two bracket linear income tax abstract we investigate two bracket piecewise linear income tax structures in a two class economy pareto efficient tax schedules of this type feature at least one marginal tax rate equal to zero and that the marginal tax rate may be increasing and declining we then investigate the optimal structure of taxation when the social welfare function utility function and distribution of abilities are characterized as in the standard optimal linear income tax problem in all cases the second marginal tax rate is less than the first rate but progressivity in the sense of a uniformly rising average tax rate generally obtains

social polarisation economic restructuring and welfare state regimes the central argument of this paper is that it is misconceived to view social polarisation of occupational structure and incomes in global cities as either inevitable or as a direct product of econo

analysis of democratic institutions structure conduct and performance t s ahe structure of a democratic political system consists of the offices that politicians may seek the constitutional powers associated with these offices and the procedures by which candidates are elected to these offices these structures together form a complex incentive system for politicians determining what kinds of political decisions and strategies will be rewarded thus the constitutional structure of a democracy may influence the conduct of its politicians and the performance of its government in this way political theory confronts a set of questions that have much in common with the classic economic questions of structure conduct and performance in industrial organization this paper develops this economic perspective on political theory as a guide to some problems and directions of current research economic and political interpretations of a classic model

majority voting in a model of means testing abstract we study a model of endogenous means testing where households differ in their income and where the in kind transfer received by each household declines with income majority voting determines the two dimensions of public policy the size of the welfare program and the means testing rate we establish the existence of a sequential majority voting equilibrium and show that the means testing rate increases with the size of the program but the fraction and the identity of the households receiving the transfers are independent of the program size furthermore the set of subsidy recipients does not depend on households preferences but depends only on income heterogeneity

dynamic inefficiencies in an employment based health insurance system theory and evidence we investigate the effects of the institutional settings of the us health care system on individuals life cycle medical expenditures health is a form of general human capital labor turnover and labor market frictions prevent an employer employee pair from capturing the entire surplus from investment in an employee s health thus the pair underinvests in health during working years thereby increasing medical expenditures during retirement we provide empirical evidence consistent with the comparative statics predictions of our model using the medical expenditure panel survey meps and the health and retirement study hrs our estimates suggest significant inefficiencies in health investment in the united states

the redistributive design of social security systems countries with low intragenerational redistribution in social security systems bismarckian are associated with larger public pension expenditures a smaller fraction of private pension and lower income inequality than countries with more redistributive social security beveridgean this article introduces a bidimensional voting model to account for these features agents different in age income and in their ability to invest in the capital market vote on the degree of redistribution of the social security system and on the size of the transfer in an economy with three income groups a small beveridgean system is supported by low income agents who gain from its redistributive feature and high income individuals who seek to minimise their tax contribution and to invest in a private scheme middle income individuals instead favour a large bismarckian system

political sustainability and the design of social insurance this paper examines how the issue of political support affects the design of social insurance it distinguishes between redistributive character and size of social protection three main results emerge first it may be appropriate to adopt a system which is less redistributive than otherwise optimal in order to ensure political support for an adequate level of coverage in the second voting stage second supplementary private insurance may increase the welfare of the poor even if it is effectively bought only by the rich third the case for prohibiting supplementary private insurance may become stronger when the efficiency of private insurance markets increases

social security universal versus earnings dependent benefits i compare the welfare implications of bismarckian earnings dependent benefits and beveridgean universal benefits social security systems agents are better off with a beveridgean system than with a comparable bismarckian system in an environment with intragenerational homogeneity the latter results in a larger decrease in net wages with intragenerational skill heterogeneity most agents benefit from the more redistributive beveridgean system when agents vote for the replacement rates with intragenerational homogeneity the resulting bismarckian system is larger than the beveridgean system with intragenerational skill heterogeneity the beveridgean system is larger overall agents are worse off with the larger system

in quest of the good urban life socio spatial dynamics and residential building stock transformation in zurich this paper discusses socio spatial dynamics and the transformation of the residential building stock in the global city of zurich it deals with five questions does zurich exhibit the type of social polarisation outlined by the global city hypothesis if so how does social polarisation become visible in the context of a european city which actors in the real estate market are catering to the special tastes of the new urban middle class with whom does the new middle class compete for space in the city the paper argues that real estate developers customise the residential building stock and produce residential units for a targeted market the new urban middle class furthermore a new socio spatial phenomenon ennoblement has evolved as the new urban middle class takes residence in traditional upper class neighbourhoods by investing its own economic capital this new middle class is hoping to profit from upper class social and cultural capital

public versus private insurance system with and without transaction costs optimal segmentation policy of an informed monopolist computer mediated transactions allow insurance companies to customize their contracts while transaction costs limit this tendency toward customization to capture this phenomenon we develop a com

a theory of yardstick competition in the typical regulatory scheme a franchised monopoly has little incentive to reduce costs this article proposes a mechanism in which the price the regulatedfirm receives depends on the costs of identical firms in equilibrium each firm chooses a socially efficient level of cost reduction the mechanism generalizes to cover heterogeneous firms with observable differences medicare s prospective reimbursement of hospitals by using diagnostically related groups is a scheme very similar to the one outlined here

a theory of voluntary recalls and product liability there is now a substantial body of literature analyzing pricing policies in unregulated markets when firms and consumers have asymmetric information about the quality of a product at the time the product is marketed the existence of equilibria in which a variety of signaling mechanisms can be used to transfer a firm s information regarding its product to otherwise uninformed consumers is demonstrated in 1 11 14 more recently bagwell and riordan analyzed the learning procedure of consumers when a product of unknown quality is introduced to the market and some fraction of consumers becomes informed over time 9 in these models the firm has prior knowledge of the exact quality and consumers either correctly infer quality prior to purchase because of the incentive structure of the equilibrium signaling scheme or learn quality immediately upon purchase the extensive literature on statistical testing and quality control as well as the frequent news items on product recalls suggests that prior to observation of market performance a firm s knowledge of the properties of its product may not be exact 2 there is another body of literature which examines the effectiveness of various forms of liability schemes on the level of care and the severity of the warnings firms choose when producing and marketing their products models by marino shavell and cooter have the assumption that the market will not provide the firm with sufficient incentives to provide the socially efficient levels of care and warnings and these market incentives must be supplemented by liability rules of various kinds 10 13 4 the particular liability rule which is chosen varies with the assumptions of the model marino showed that the existence of scale effects in consumption could alter the common conclusions regarding the relative effectiveness of strict liability and regulation this paper examines the incentives a firm faces to recall a product which is discovered to be

social security policy in a changing labour market conditions in the uk labour market of the 1990s are markedly different from those which prevailed in the post war period when the modern welfare state was created the main differences include a growth in long term unemployment in female part time employment and in low paid employment and self employment in some respects social security policy has adapted to reflect these new patterns the clearest example of this is the introduction and enhancement of in work benefits such as family credit however two of the main strands of benefit policy in recent decades greater reliance on family based means testing and an increased role for private insurance do not fit so well with labour market trends in the case of the privatization of mortgage insurance the result is likely to be further redistribution away from those in insecure or low paid employment copyright 1995 by oxford university press

litigation liability and incentives for care abstract in this paper potential injurers are subject to a negligence standard and differ in cost of taking care in the event of accident the injurer s degree of care is private information in litigation that follows award of damages for pain and suffering will lead to a general increase in care and hence reduce the likehood of accident a tighter negligence standard will lead some potential injurers to take more care and others to take less adoption of a rule under which the loser at trial must pay the litigation costs of the winner will reduce the pressure for punitive damages

reforming our pension system is it a demographic financial or political problem we argue that economic and demographic factors play a relatively small role in the old age crisis political factors are far more important a benevolent social planner can address the problems raised by population ageing and declining productivity growth however in reality social security systems are established and reformed through the political process majority voting and lobbying consequently the outcome is likely not to be socially optimal majority voting typically results in overspending on social security but also in rapidly phasing it out in case of unexpected shocks then the entrenched interests of retirees that oppose drastic cuts in benefits can be socially desirable

inequality social insurance and redistribution is the political support for welfare policy higher or lower in less egalitarian societies we answer the question using a model of welfare policy as publicly financed insurance that pays benefits in a redistributive manner when voters have both redistributive and insurance motives for supporting welfare spending the effect of inequality depends on how benefits are targeted greater inequality increases support for welfare expenditures when benefits are targeted to the employed but decreases support when benefits are targeted to those without earnings with endogenous targeting support for benefits to those without earnings declines as inequality increases whereas support for aggregate spending is a v shaped function of inequality statistical analysis of welfare expenditures in advanced industrial societies provides support for key empirical implications of the model

subgame perfect implementation this paper examines the use of stage mechanisms in implementation problems and provides a partial characterization of the set of subgam e perfect implementable choice rules it is shown that in many economic environments virtually an y choice rule can be implemented to illustrate the power of this approach the paper discusses a number of models in which it is possible to implement the first best although it wouldn t have been possible to do so without using stage mechanisms the diversity of these models suggests that subgame perfect implementation may find wide application copyright 1988 by the econometric society

the politics of progressive income taxation with incentive effects this paper studies majority voting over quadratic taxation and investigates under which conditions marginal progressivity emerges as a voting outcome in our model with endogenous income there is no majority condorcet winning tax schedule we then investigate less demanding political equilibrium concepts in order to see under which conditions the set of equilibria is composed only of progressive tax functions we follow three strategies i reduction of the policy space to the tax functions that are ideal for some voter ii elimination of weakly dominated strategies and the use of mixed strategies in a standard downsian two party competition game iii assumption that political parties interact repeatedly and care about the size of their majority although each approach captures a different aspect of political behavior they point to the same simulation based conclusion that progressivity is more likely to emerge for most distributions of abilities and that it is actually the only possible voting outcome if the distribution is sufficiently concentrated at the middle

optimal sharing of foodborne illness prevention between consumers and industry the effect of regulation and liability consumers and the food industry can both prevent foodborne illness two questions are explored what is the socially optimal level of preventative effort by each and can tort and regulatory instruments induce such behavior analysis is complicated by two aspects of food safety technology one party s effort can affect the marginal effectiveness of the other party s effort and damage functions can be nonconvex previous analysis of accidents under torts and regulation fails to consider these generalizations indeed results concerning the ability of tort and regulatory instruments to induce first best and second best behavior often contradict previous results in the literature

efficient liability rules for an economy with non identical individuals abstract this paper is about accident situations involving two risk neutral parties both parties engage in activities that are profitable but affect the magnitude of possible bilateral accidents we analyse how the activity choices can be decentralized by liability rules that assign the costs to the two parties to an accident we show that rules which share damages are superior to rules where one party bears the entire accident costs

earmarking and the political support of fat taxes a fat and a healthy good provide immediate gratification and cause health costs or benefits in the long run which are misperceived additionally the fat good healthy good increases decreases health care costs by increasing decreasing the probability of suffering from a chronic disease in the future individuals differ in income and in their degree of misperceptions concerning the health effects of the consumption of fat and of healthy goods the level of the fat tax is determined through majority voting individuals vote according to their misperceived utility function consequently excessive fat consumption is not due to a self control problem but due to information deficiencies or cognitive inability to process information a fraction of the fat tax proceeds is earmarked to reduce health insurance premiums while the remaining fraction finances a subsidy on the healthy good this earmarking rule is determined at a constitutional stage to maximize utilitarian or rawlsian welfare anticipating the induced political equilibrium we show that the fat tax in the political equilibrium is always lower than the utilitarian fat tax this is no longer necessarily true with a rawlsian objective the determination of the optimal earmarking rule is quite complex even in the utilitarian case it is not just used to boost political support for the fat tax instead it may involve a tradeoff between the fat tax and the healthy good subsidy

litigation and settlement under two sided incomplete information this paper deals with a simple game of litigation and settlement with incomplete information parties are assumed to have the choice between settling their dispute out of court or resorting to costly litigation the set of sequential equilibria is characterized and conditions are given under which an efficient equilibrium does exist efficient equilibria however will be ruled out by various tests of refinement a comparative statics analysis is carried out with respect to the quality of private information which parties are assumed to receive before any moves have to be made

lessons for an aging society the political sustainability of social security systems what is the future of social systems in oecd countries in our view the answer belongs to the realm of politics we evaluate how political constraints shape the social security system in six countries france germany italy spain the uk and the us under population aging two main aspects of the aging process are relevant to the analysis first the increase in the dependency ratio the ratio of retirees of workers reduces the average profitability of the unfunded social security system thereby inducing the agents to reduce the size of the system by substituting their claims towards future pensions with more private savings second an aging electorate leads to larger systems since it increases the relevance of pension spending on the policy makers agenda the overall assessment from our simulations is that the political aspect dominates in all countries albeit with some differences spain the fastest aging country faces the largest increase in the social security contribution rate when labor market considerations are introduced the political effect still dominates but it is less sizeable country specific characteristics not accounted for in our simulations such as the degree of redistribution in the pension system and the existence of family ties in the society may also matter our simulations deliver a strong policy implication an increase in the effective retirement age always decreases the size of the system chosen by the voters while often increasing its generosity finally delegation of pension policy to the ec may reduce political accountability and hence help to reform the systems

social insurance majority voting and labor mobility abstract this paper presents a political economy approach to payroll tax competition between two countries choosing their respective systems of social insurance in a context of labor mobility it considers a class of social insurance systems which includes two interesting polar cases one where benefits are linked to contributions bismarck and one where benefits are flat beveridge the type of social insurance is chosen behind the veil of ignorance at a first constitutional stage in the second stage the generosity of social insurance as measured by the payroll tax rate is chosen by the majority given that some have the possibility to move the main results are as follows first the type of mobility namely poor vs rich has a significant impact on the second stage tax competition migration equilibrium second more bismarckian systems are not necessarily more tax competition proof third the process will result in social insurance systems with a stronger than optimal link between earnings and benefits put differently at the constitutional stage the countries will tend to adopt systems which are too bismarckian

social security and family support this paper shows how the role of the market the state and the family in providing financial support at old age has evolved over time with changes in factors such as the reliability and the effectiveness of family support the rate of interest the cost of public funds and earning inequality we model a society in which agents with different productivity are asked to vote over the existence of a beveridgian pension system we show that when children assistance is certain and large agents may rely exclusively on family to finance old age consumption and prefer to vote for a zero tax rate only if income inequalities are very large a majority will be in favor of a pension system however when the size and the likelihood of family generosity decreases a pension system is more likely to emerge in that case agents supplement children assistance with pension benefits a pension system is also more likely to emerge when the cost of public fund is small and the return from private savings is high

social insurance with representative democracy in a representative democracy model we determine the preferred social insurance system we show that it corresponds to that which implies the lowest contribution rate when the risk aversion is high

what difference do polarisation measures make an application to china in recent years there has been much discussion of the difference between inequality and polarisation the vast literature on inequality is held to miss out key features of distributional change which are better described as changes in polarisation axioms have been proposed which capture some of these differences and measures of polarisation as distinct from inequality have been suggested the theoretical distinctions proposed in this literature are indeed interesting but do the newly proposed measures of polarisation give different results in comparing societies over time we address these questions for china where dramatic increases in inequality and polarisation have been much discussed in the literature we find that contrary to theoretical expectation the new measures of polarisation do not generate very different results from the standard measures of inequality the paper ends by considering a different approach to polarisation which might better conform to the policy concerns expressed in t

guaranteed employment or guaranteed income abstract the paper critically reviews the arguments for and against both employment guarantees and income guarantees when viewed as rights based policy instruments for poverty reduction in a developing economy decentralized implementation of the right to work poses serious challenges in poor places evidence on india s national rural employment guarantee act does not suggest that the potential for either providing work when needed or reducing current poverty is realized despite pro poor targeting instead work is often rationed by local leaders and the poverty impact is small when all the costs are considered the option of income support using cash transfers also has both pros and cons widely used methods for finely targeting cash transfers tend to miss many poor people and can discourage those reached from earning extra income yet it cannot be presumed that switching to a universal basic income will reduce poverty more than workfare or finely targeted transfers that is an empirical question and the answer will undoubtedly vary across settings belying the generalizations often heard from advocates nonetheless more incentive neutral universal and or state contingent transfer schemes merit consideration in settings in which existing public spending is skewed against poor people and or there is scope for raising taxes on the rich

a problem with the negative income tax abstract the goal of a negative income tax is to increase the work incentives of welfare recipients this note points out that it may not do so and empirical simulations show that this is a real world possibility

ex ante investment ex post remedy and product liability low quality products may cause consumer harm a firm can reduce the probability of low quality through ex ante investment before sales and can take remedy actions such as product recalls if it learns after sales that product quality is low an increase in the firm s product liability increases its incentive for ex post remedy more ex post remedy however may reduce the firm s ex ante quality investment on the other hand higher product liability increases consumer demand for the product resulting in high output and hence greater return to ex ante investment the trade off between these two effects the substitution effect and the output effect can lead to an inverted u shaped relationship between ex ante investment and product liability we find that the firm always prefers full liability whereas consumers might be better off with less than full liability full product liability tends to be socially optimal when the potential consumer loss from low quality is sufficiently high otherwise partial liability can be socially optimal

prices product qualities and asymmetric information the competitive case recent developments in the economics of information emphasize the informational content of prices we examine the degree to which prices convey information on product quality to uninformed agents under perfect competition we show that a rational expectations equilibrium may not exist when an equilibrium does exist the information on quality conveyed by prices depends on the shape of the average cost curves and the relative numbers of informed and uniformed agents

no win no fee some economics of contingent legal fees mark up in different types of case is to be issued after consultation with professional bodies american style share contracts whereby the lawyer is paid a proportion of the award if the case is won and nothing if it is lost will continue to be unenforceable at law and prohibited by the professional bodies the introduction of contingency fees in england and wales has been discussed in a number of official and semi official reports without any consensus emerging 3 we use a formal model of the litigation process to analyse the implications of contingent fees under both english and united states cost shifting rules in the model potential defendants can take care to avoid accidents which impose losses on potential plaintiffs if an accident occurs the defendant is sued by the plaintiff and makes a settlement offer if the plaintiff rejects the offer the case proceeds to trial plaintiffs who win at trial are awarded damages and under english rules costs against the defendant lawyer client contracts can be evaluated by the extent to which they a compensate plaintiffs after an accident by making it easy to sue and obtain redress b induce settlements rather than costly trials and c provide

from regulated cartel to regulated competition in the dutch health care system abstract health care reform is quite a hot issue in the netherlands today since the early seventies government has been trying to contain health care costs by direct control over prices and productive capacities as the results of this policy were disappointing several proposals were formulated for a structural reform based on a market oriented approach in 1988 the dutch government decided to radically reform the financial structure and organization of the health care system two major issues are the introduction of a national health insurance basic insurance and regulated competition among insurers and among providers compared with the last 15 years this can be considered a 180 degree change over of health care policy because of the revolutionary character of the proposals one can really speak of a perestrojka in the dutch health care system in this paper the recent developments in the dutch health care system will be reviewed first we will deal with the necessity of change in the dutch health care system then the main lines of the government proposals for a new structure of the health care system will be summarized finally the consequences of these proposals for the various parties involved will be discussed

public provision of private goods government may provide a good that can if legally permitted be supplemented by private purchases policy is determined by majority rule under standard assumptions on preferences a majority voting equilibrium exists a regime of positive government provision with no restriction on private supplements is shown to be majority preferred to a regime of either only market provision or only government provision combined public and private expenditure on the good is higher under this dual provision regime than under either of the alternatives under some preference configurations the median income voter is pivotal under others a voter with income below the median is pivotal

warranties as signals under consumer moral hazard this article examines the use of prices and warranties as signals of product quality to consumers who choose how to maintain their purchases the seller s incentives are strongly affected by the interaction of quality and maintenance in determining product reliability two different assumptions about this interaction are made a separating equilibrium in which high quality is signalled with a low warranty and low price is shown to be possible in both cases

means testing versus basic income the lack of political support for a universal allowance this paper studies the political economy of a basic income bi versus a means tested welfare scheme we show in a very simple setting that if society votes on the type of system its generosity as well as the severity of means testing if any a bi system could only emerge in the political equilibrium under very strong and empirically implausible conditions instead the political process leads to a means tested system the necessity to draw political support does affect the design of the system but it only implies that means testing becomes less severe so that benefits are extended also to themiddle classes however a fully universal system is rejected by a majority

endogenous cases and the evolution of the common law i develop a dynamic model of judge made law in which the ideal legal rule is unknown but can be learned in contrast to existing articles the flow of cases heard by the court is affected by the court s prior decisions the model highlights the significance of this feedback in explaining when and why the court will write broader or narrower opinions and the long run properties of common law in equilibrium the law settles endogenously because the incentives to make legally controversial choices disappear as the law evolves settled law exhibits residual uncertainty and ambiguity and potentially implements inefficient outcomes

voluntary product safety certification this paper describes the incentives for firms to seek voluntary product safety certifications we consider a firm that makes the decision of whether or not to seek certification prior to selling the product we show that even when the firm and the consumers have the same beliefs about the product s safety there are incentives for the firm to seek safety certification the main analysis investigates the role of consumer moral hazard and shows that it can lead to greater incentives for voluntary certification when inherent product safety and effort are substitutes but smaller incentives when they are complements the analysis of consumer moral hazard provides a nuanced perspective on the so called risk compensation or the peltzman effect phenomenon which postulates higher levels of accidents for safer products in our paper products that are successfully certified can end up with a higher incidence of accidents we also uncover an interesting nonmonotonic relationship between effectiveness of consumer

voluntary public health insurance we look at the consequences of allowing public health insurance puhi to be voluntary when its coverage can be supplemented in the market puhi redistributes with respect to risk and income and the market is affected by adverse selection we argue that making puhi voluntary does not lead to its collapse since individuals always participate in it additionally in some cases a voluntary puhi scheme increases market efficiency because participation in it sends a signal to private insurers of an individual s health risk type the welfare consequences depend on the status quo if in the status quo no political support exists for a compulsory puhi making it voluntary constitutes a pareto improvement and in some cases all individuals are strictly better off if instead the status quo implements compulsory puhi making it voluntary then results in less redistribution

collective choice and voluntary provision of public goods some public goods are provided entirely with private contributions others with a mixture of public and private funding and still others are entirely publicly funded in order to study this variation a model of dual provision is developed that endogenizes public and private funding households vote over an income tax that finances public supply of the good and on whether to permit private contributions while permitting private contributions may lead to a reduction in total provision a majority always favors permitting private contributions results are developed for small and large economies and the relevance of nonexcludability and noncongestion are investigated

product safety liability r d and signaling the authors develop a monopoly model of product design and safety signaling incorporating a parametric liability specification the firm first engages in rd injuries lead to losses which are allocated by the liability system the authors vary the liability system s allocation of losses and trace out the implications for r d investment and the price safety relationship copyright 1995 by american economic association

earnings inequality and welfare spending a disaggregated analysis the welfare state is generally viewed as either providing redistribution from rich to poor or as providing publicly financed insurance both views are incomplete welfare policies provide both insurance and redistribution in varying amounts depending on the design of the policy the authors explore the political consequences of the mix of redistribution and insurance in the context of studying the impact of income inequality on expenditures in different categories of welfare spending in advanced industrial societies from 1980 to 1995 they find that spending on pensions health care family benefits poverty alleviation and housing subsidies is largely uncorrelated with income inequality but that spending on income replacement programs such as unemployment insurance sickness pay occupational illness and disability are significantly higher in countries with more egalitarian income distributions they show that this pattern is exactly what a theory of political support for redistributive social insurance programs would predict

financially constrained lawyers an economic theory of legal disputes abstract financial constraints reduce the lawyer s ability to file lawsuits and bring cases to trial as a result access to justice for victims pretrial bargaining and potential injurers precaution might be affected we study civil litigation using a model that allows for asymmetric information financially constrained lawyers third party lawyer lending and a continuum of plaintiff s types we contribute to the economic analysis of law by generalizing seminal models of litigation bebchuk 1984 bebchuk 1988 katz 1990 offering the first formal definition of access to justice and presenting comprehensive social welfare analysis of relevant public policy we provide complete equilibrium characterization and identify necessary conditions for the existence of the mixed and pure strategy pbe access to justice is denied to some victims under the mixed strategy equilibrium we then study the social welfare effects of policies aimed at relaxing lawyers financial constraints and identify a necessary and sufficient condition for a welfare enhancing effect

social insurance competition between bismarck and beveridge social insurance schemes differ according to the relationship between contributions and benefits bismarckian systems provide earnings related benefits while beveridgean systems offer flat payments the conventional wisdom is that with factor mobility poor people have incentives to move towards beveridgean countries consequently beveridgean regimes would not be sustainable under economic integration this paper studies the validity of such a conjecture within a simple model it is shown that mobility does have a significant impact on social protection however the equilibrium patterns that can emerge are more complex and diversified than the initial conjecture suggests in some cases the equilibrium may even imply that all the poor move to the bismarckian country

organizing the health insurance market this paper presents a new approach to organizing universal health insurance first the government divides the entire population into many large groups then the government creates a federal health insurance system healthfed modeled on the federal reserve system to fill the role now played by the benefits office of a large firm the healthfed would create a short menu of alternatives solicit bids for insuring the entire group and price alternatives there would be redistribution between groups and pricing of alterna tives to reflect optimal social insurance principles there would be no connection between health insurance and employment it may seem odd that this presidential address is my first publication in health economics at the time when i might have been working on an alternative address i was chair of an expert panel for the advisory council on social security looking at issues in both retirement income and medical care 2 in the process of this work i have come up with a new approach to organizing universal health insurance that is the subject of this paper before starting on health insurance i will say a few words about a wider context offering what i will say as an example in that setting 3 a great deal of attention has been focused on the exciting issue of reorganizing economies dropping central planning commonly economists from those countries em brace capitalism or more specifically laissez faire competition with an enthusi asm which exceeds that ofwestern economists although not necessarily western businessmen yet laissez faire capitalism has received little serious support in the west for a very long time we all know the fundamental welfare theorem which shows many ways that capitalism can be imperfect we have also seen a growth in discussion and analysis of the many ways governments can mess up resource allocation the real question is the design of arrangements that try to integrate the things that each type of institution does better this is hard for two reasons one is that it is in the realm of second best with many constraints the more the constraints the harder the analysis the second is that we do not have good positive theories of government behavior good examples yes good theories no thus the analysis is more intuitive less theory driven than in our picture of private markets but also in our private market analyses we have been greatly complicating our picture recognizing all sorts of information imperfec tions that affect the way that private markets work so i will present to you a proposal for universal health insurance meant to combine something that