adverse selection and moral hazard with risk neutral agents abstract this paper surveys some recent developments of the literature on adverse selection and moral hazard in agency problems it is concerned with the case where both aspects coexist and both agents are income risk neutral it shows that in most cases the moral hazard aspect does not entail welfare losses compared to the pure adverse selection case it moreover analyses different ways using a single contract or a family of contracts of deriving the optimal contracts from the optimal pure adverse selection solution

an r d race with knowledge accumulation i develop a model of an r d race with knowledge accumulation my model does not inherit the memorylessness property of the exponential distribution that troubles existing models of r d races hence firms knowledge stocks are no longer irrelevant to their behavior during the r d race and knowledge accumulation has strategic implications in this more general setting i obtain results that stand in marked contrast to the previous literature in particular under some conditions the firm that is behind in the race engages in catch up behavior this pattern of strategic interactions action reaction is consistent with empirical research copyright 2003 by the rand corporation

time series forecasts of international travel demand for australia abstract this paper analyses stationary and non stationary international tourism time series data by formally testing for the presence of unit roots and seasonal unit roots prior to estimation model selection and forecasting various box jenkins autoregressive integrated moving average arima models are estimated over the period 1975 1 1989 4 for tourist arrivals to australia from hong kong malaysia and singapore the mean absolute percentage error and root mean squared error rmse are used as measures of forecast accuracy as the best fitting arima model is found to have the lowest rmse this model is used to obtain post sample forecasts tourist arrivals data for 1990 1 1996 4 are compared with the forecast performance of the arima model for each origin market the fitted arima model forecasts tourist arrivals from singapore for the period 1990 1 1996 4 very well although the arima model outperforms the seasonal arima models for hong kong and malaysia the forecasts of tourist arrivals are not as accurate as in the case of singapore

long run welfare under externalities in consumption leisure and production a case for happy degrowth vs unhappy growth in this paper we contribute to the debate on the relationship between growth and well being by examining an endogenous growth model where we allow for externalities in consumption leisure and production we analyze three regimes a decentralized economy where each household makes isolated choices without considering their external effects a planned economy where a myopic planner fails to recognize both leisure and consumption externalities but recognizes production externalities and a planned economy with a fully informed planner we first compare the balanced growth paths under the three regimes and then we numerically investigate the transition to the optimal balanced growth path we provide a number of findings first in a decentralized economy growth or labor or both are greater than in the regime with a fully informed planner and hence are sub optimal from a welfare standpoint second a myopic intervention which overlooks consumption and leisure externalities leads to more growth and labor than in both the decentralized and the fully informed regime third we provide a case for happy degrowth a transition to the optimal balanced growth path that is associated with downscaling of production a reduction in private consumption and an ongoing increase in leisure and well being

individual risk in an investment based social security system this paper examines the risk aspects of an investment based defined contribution social security plan we focus on the risk after the plan is fully phased in individuals deposit a fraction of wages to a personal retirement account pra invest these funds in a 60 40 equity debt mix and in a similarly invested annuity at age 67 the value of the assets follows a random walk with mean and variance of a 60 40 equity debt portfolio over the period 1946 95 a mean log return of 5 5 percent net of administrative costs of 0 4 percent and a standard deviation of 12 5 percent we study he stochastic distributions of this process by doing 10 000 simulations of the 80 year experience of the cohort that reached age 21 in 1998 the resulting annuities are compared to the future defined benefits specified in current law the benchmark benefits with no uncertainty a 5 5 percent log return would permit the benchmark benefits to be purchased with pra deposits of 3 1 percent of payroll only one sixth of the pay as you go tax needed for the benchmark benefits saving a higher share of wages provides a cushion that protects the individual from the risk of an unacceptably low level of benefits for example pra deposits of 6 percent of wages reduces the probability that the benefits are less than the benchmark to 0 17 and the probability that they are less than 61 percent of the benchmark to 0 05 pra deposits of 9 percent of wages half of the tax rate required in a pay as you go system would substantially reduce these risks this pure investment based plan is an extreme case the investment risk can be reduced further by using a mixed system that combines pay as you go and investment based components or that makes intergenerational transfers conditional on the performance of stock and bond prices this abstract was borrowed from another version of this item

tax policy and aggregate demand management under catching up with the joneses this paper examines the role for tax policies in productivity shock driven economies with catching up with the joneses utility functions the optimal tax policy is shown to affect the economy countercyclically via procyclical taxes i e cooling down the economy with higher taxes when it is overheating in booms and stimulating the economy with lower taxes in recessions to keep consumption up thus models with catching up with the joneses utility functions call for traditional keynesian demand management policies but for rather unorthodox reasons

tax evasion on a social network abstract we relate tax evasion behavior to a substantial literature on social comparison in judgements taxpayers engage in tax evasion as a means to boost their expected consumption relative to others in their social network the unique nash equilibrium of the model relates optimal evasion to a bonacich measure of network centrality more central taxpayers evade more given that tax authorities are now investing heavily in big data tools that aim to construct social networks we investigate the value of acquiring network information we do this using networks that allow for celebrity taxpayers whose consumption is seen widely and who are systematically of higher wealth we show that there are pronounced returns to the initial acquisition of network information especially in the presence of celebrity taxpayers

status effects public goods provision and excess burden abstract most studies of the optimal provision of public goods or the excess burden from taxation assume that individual utility is independent of other individuals consumption this paper investigates public good provision and excess burden in a model that allows for interdependence in consumption in the form of status relative consumption effects in the presence of such effects consumption and labor taxes no longer are pure distortionary taxes but have a corrective tax element that addresses an externality from consumption as a result the marginal excess burden of consumption taxes is lower than in the absence of status effects and will be negative if the consumption tax rate is below the pigouvian rate correspondingly when consumption or labor tax rates are below the pigouvian rate the second best level of public goods provision is above the first best level contrary to findings from models without status effects for plausible functional forms and parameters relating to status effects the marginal excess burden from existing u s labor taxes is substantially lower than in most prior studies and is negative in some cases

peer effects in the demand for housing quality abstract using detailed data on friendship networks within neighborhoods we investigate the importance of social interactions in one s own residential neighborhood in the demand for housing quality we find evidence consistent with the presence of peer effects especially for households living in urban areas our findings are in line with the prediction of a model where conformity preferences underlie economic outcomes that involve interactions with peers

optimal dynamic taxation with distinctive forms of social status attainment we examine the role of both consumption and wealth induced social comparisons in setting dynamic optimal income taxation under complete information state invariant labor income taxes are used to remedy the externality caused by consumption induced social comparisons while state contingent capital income taxes are used to remedy the externalities caused by both consumption and wealth induced ones under incomplete information distinct types of agents are subject to an identical marginal capital income tax which removes social comparisons to solve the information problem low productivity agents could be subject to a lower marginal labor tax than high productivity agents which contradicts the traditional result in the mirrlees stiglitz models this article is protected by copyright all rights reserved

modeling and forecasting tourism demand for arrivals with stochastic nonstationary seasonality and intervention abstract this paper presents the use of time series sarima and marima with interventions in forecasting tourism demand using ten arrival series for hong kong augmented dickey fuller tests indicated that all the series were seasonal nonstationary significant interventions such as relaxation of the issuance of out bound visitors visas the asian financial crisis the handover and the bird flu epidemic were all empirically identified with significant test results and expected signs the forecasts obtained using models that capture stochastic nonstationary seasonality and interventions sarima and marima with intervention analysis are compared with other eight time series models and were found to have the highest accuracy

pareto improving social security reform when financial markets are incomplete this paper studies an overlapping generations model with stochastic production and incomplete markets to assess whether the introduction of an unfunded social security system leads to a pareto improvement when returns to capital and wages are imperfectly correlated a system that endows retired households with claims to labor income enhances the sharing of aggregate risk between generations our quantitative analysis shows that abstracting from the capital crowding out effect the introduction of social security represents a pareto improving reform even when the economy is dynamically efficient however the severity of the crowding out effect in general equilibrium tends to overturn these gains

a model of the evolution of duopoly does the asymmetry between firms tend to increase or decrease this paper is an attempt to identify some of the factors that affect the evolution of market structure in a model of dynamic competition between two firms the stochastic evolution of the state of competition depends on the respective effort rates of the firms the question is whether the current leader works harder than the laggard does the gap between firms tend to increase or decrease we show that several effects are at work the state tends to evolve in the direction where joint payoffs are greater since joint payoffs are related to joint product market profits less joint effort costs there are two classes of effect the joint profit effect and various joint cost effects the latter result in part from the pattern of profits and in part from endpoint effects that give relief from efforts asymptotic expansions illuminate these influences moreover we show by numerical simulation that there is another kind of joint cost effect the pattern of joint effort costs can influence the pattern of evolution of market structure and the evolution of the pattern of market structure can influence the pattern of efforts in a mutually self reinforcing manner in particular there may be equilibria in which this last effect means that the laggard works harder than the leader even though all the other effects work in favour of the leader

are positional concerns stronger in some domains than in others for more than one hundred years economists have discussed the concept of positional goods that the utility conferred by many perhaps even most goods depends not only on the amount the individual consumes but also on the amount others consume e g thorstein veblen 1899 james duesenberry 1949 john k galbraith 1958 robert frank 1985 while economic interest in positional goods is increasing e g mark pingle and mike mitchell 2002 kenneth arrow et al 2004 ed hopkins and tatiana kornienko 2004 the literature remains largely theoretical rather than empirical if status concerns affect all items in the utility function equally leisure as well as goods the positional effect would operate like a lump sum tax reducing well being without changing the allocation of time or money arrow et al 2004 however if positional concerns are stronger for some things than for others then in order to understand how people can become better off in well being not simply in wealth we must investigate how interpersonal competition interacts with material gains frank 1997 evidence about what goods are more positional than others is essential for correct policy recommendations gregory besharov 2002 but little is actually known about the relative positional rankings of items in the typical consumer s utility function four hypotheses proposed in the literature are

conspicuous leisure optimal income taxation when both relative consumption and relative leisure matter previous studies on public policy under relative consumption concerns have ignored the role of leisure comparisons this paper considers a two type optimal nonlinear income tax model where people care both about their relative consumption and their relative leisure increased consumption positionality typically implies higher marginal income tax rates for both the high ability and the low ability type whereas leisure positionality has an offsetting role however this offsetting role is not symmetric concern about relative leisure implies a progressive income tax component i e a component that is larger for the high ability than for the low ability type moreover leisure positionality does not modify the policy rule for public good provision when the income tax is optimally chosen

how should capital be taxed this survey discusses how capital should be taxed in advanced economies we review the theoretical optimal tax literature survey empirical studies on the distribution of capital and the distortion

an empirical test of the asymmetric models on innovative activity who invests more into r d the incumbent or the challenger the theoretical discussion concerning the question whether the incumbent or the potential entrant invests more into r d has attracted considerable interest this paper reports the results of an empirical study on this question using data of about 3500 german firms over the years 1992 to 1995 the survey explicitly asks the firms for their motives to undertake innovative activity it is thus possible to take account of intended not just completed market entry it turns out that the challenger invests more into r d in order to enter a new market than the incumbent thus the patent racing model by reinganum and others seems to characterize innovative activity more accurately than the competing auction model of gilbert and newbery we use a heteroscedastic tobit as well as a tobit model with selectivity in order to deal with the econometric problems of double censoring

tourism demand modelling and forecasting a review of recent research abstract this paper reviews the published studies on tourism demand modelling and forecasting since 2000 one of the key findings of this review is that the methods used in analysing and forecasting the demand for tourism have been more diverse than those identified by other review articles in addition to the most popular time series and econometric models a number of new techniques have emerged in the literature however as far as the forecasting accuracy is concerned the study shows that there is no single model that consistently outperforms other models in all situations furthermore this study identifies some new research directions which include improving the forecasting accuracy through forecast combination integrating both qualitative and quantitative forecasting approaches tourism cycles and seasonality analysis events impact assessment and risk forecasting

a perpetual race to stay ahead this paper presents a model of dynamic competition between two firms that repeatedly engage in an innovative activity the state of competition measured by the difference between the number of innovations introduced by the firms evolves stochastically according to their effort level the structure of markov perfect equilibria is identified it is generally not true that competition is fiercest when firms are closest rather firms invest under two distinct circumstances while sufficiently ahead to outstrip their rival and secure a durable leadership while behind to regain leadership and prevent the situation from worsening to the point where their rival outstrips them industry such a market structure cannot be adequately modelled by a repeated game since history obviously affects market opportunities more precisely previous outcomes determine the range of available actions and pay offs economists have thus resorted to the study of races to gain insights into the strategic issues raised by such competition with the notable exceptions of aoki 1991 harris 1991 and budd harris and vickers 1993 most of the literature has analysed formal races displaying exogenous finishing lines or deadlines as well as final prizes and rewards and the corresponding results rely on backward induction however such assumptions do not seem to capture accurately the essential features of many markets often the rivalry only ends if at all when one of the competitors withdraws so that the deadline should be endogenized moreover benefits and losses are continuously collected additionally the emerging empirical literature on races stresses the inadequacy of standard models and the need to model r d as a race with multiple prizes in the words of cockburn and henderson 1994 our finding that the modern game theoretic literature is of only limited usefulness as an empirical guide points to the need to model r d as a race with multiple prizes the model analysed in this paper is an attempt to offer an adequate framework for this type of dynamic competition the stochastic evolution of the state of competition between two firms depends on their respective effort levels the state of competition is measured by the

choosing the joneses endogenous goals and reference standards a growing economic literature stresses the importance of relative comparisons e g for savings and consumption or happiness in this literature it is usually assumed that reference standards against which people compare themselves are exogenously given in contrast findings from social psychology suggest that people play an active role in determining their reference standards we introduce a social comparison model where people choose their reference standards to serve motives of self improvement and self enhancement the model predicts that reference standards increase in individuals abilities and that people thus tend to compare themselves to similar others the results of a questionnaire study confirm the prediction of the model

relativity mobility and optimal nonlinear income taxation in an open economy abstract recent evidence suggests that globalization has reduced the barriers to international labor mobility and induced more cross country social comparisons in an open economy with tax driven migration and consumption externalities relativity we derive an optimal tax formula that subsumes existing ones obtained under a maximin social objective and additively separable utility and sign the second best mirrleesian marginal tax rates for all skill levels we establish the thresholds of the elasticity and level of migration to determine when relativity and inequality act as complements or substitutes in shaping the optimal top tax rate under both nash and stackelberg tax competition if the migration probability of top income workers is approximately 50 numerical calculation using parameter estimates from empirical studies shows that the country with labor inflow outflow implements over 10 lower higher marginal tax rates than suggested by the autarky equilibrium of kanbur and tuomala 2013

preemption in r d races abstract fudenberg gilbert stiglitz and tirole 1983 consider a patent race in which each firm s instantaneous probability of discovering a patentable invention is an increasing function of its cumulative expenditure on rd in particular we show that for intermediate values of it is possible for the follower to spoil the race by forcing the leader to drop out

a portfolio approach to the optimal mix of funded and unfunded pensions abstractin this paper we address the optimal funding of pensions by means of portfolio choice approach considering the unfunded paygo pension system as a quasi asset with hedging and diversif

social comparisons and optimal taxation in a small open economy in this paper we analyze how international capital mobility affects the optimal labor and capital income tax policy in a small open economy when consumers care about relative consumption the main

social status and economic performance a survey abstract this survey combines ideas and results from sociology and economics recognizing that economic decisions are often shaped by social concerns and influences based on the sociological literature we define social status and describe its measurement we then describe the role of social status in economic analysis of saving and consumption wages and economic growth we review recent work on status determination in equilibrium including evolutionary models we conclude with some remarks on the need for further interaction between sociology and economics

optimal taxation when consumers have endogenous benchmark levels of consumption i examine optimal taxes in an overlapping generations economy in which each consumer s utility depends on consumption relative to a weighted average of consumption by others the benchmark level of consumption as well as on the level of the consumer s own consumption the socially optimal balanced growth path is characterized by the modi ed golden rule and by a condition on the intergenerational allocation of consumption in each period a competitive economy can be induced to attain the social optimum by a lump sum pay as you go social security system and a tax on capital income

designing social security a portfolio choice approach public social security systems may provide diversification of risks to individuals life time income capturing that a pay as you go program paygo may be considered as a quasiasset we study the optimal size of the social security program as well as the optimal split between a funded part and a paygo part by means of a theoretical portfolio choice approach a low yielding paygo system can benefit individuals if it contributes to hedge other risks to their lifetime resources moreover a funded part of the social security system can be justified by potential imperfections to the individuals free access to the stock market numerical calculations for sweden norway the us and the uk demonstrate that the optimal size of paygo part of the pension program varies considerably in response to differences in projected growth rates and the correlation between stock returns and growth our calculations suggest that a paygo program has an important role in the three former countries but not in the u k

the dynamic efficiency cost of not taxing housing traditional welfare cost estimates of tax subsidies for owner occupied housing are less than 0 5 of gnp in the united states and canada this paper argues that these static measures understate the true cost of the tax subsidy increasing the capital income tax makes untaxed housing more valuable delivering a windfall bonus to existing homeowners at the expense of future generations this intergenerational transfer has real efficiency effects in the presence of pre existing tax distortions when housing is in fixed supply the dynamic efficiency cost of preferential tax treatment for housing is as much as 2 2 of gnp or 120 billion dollars in 1990

depreciation of housing capital maintenance and house price inflation estimates from a repeat sales model abstract the rate at which physical capital depreciates is fundamental to investment in the economy nevertheless although housing capital accounts for one third of the total capital stock the rate at which housing capital depreciates has only rarely been directly estimated in part because prior studies do not control for maintenance for that same reason widely publicized measures of house price appreciation overstate the capital gain from homeownership using data from the american housing survey we examine these issues over the 1983 to 2001 period results indicate that gross of maintenance housing depreciates at roughly 2 5 percent per year while net of maintenance housing depreciates at approximately 2 percent per year moreover although the typical home appreciated at an annual real rate of roughly 0 75 percent after allowing for depreciation and maintenance the average homeowner experienced little capital gain

patents imitation and licensing in an asymmetric dynamic r d race abstract rd some may have an advantage in early stages of the r d process while others may have advantages in other stages of the process this paper uses a two firm asymmetric ability multistage r d race model to analyze the effect of patents imitations and licensing arrangements on the speed of innovation firm value and consumers surplus by using numerical analyses to study the mpe of the r d race the paper demonstrates the circumstances under which a weak patent protection regime that facilitates free imitation of any intermediate technology may yield a higher consumers surplus and total surplus than a regime that awards a patent for the final innovation the advantage of imitation may hold even when we allow for voluntary licensing of intermediate technologies

risk preferences in multi period consumption models the equity premium puzzle and habit formation utility abstract the relationship between the relative risk aversion measure for the utility function for consumption and that for the value function for wealth is a derived relationship whose properties depend on how consumption and wealth are defined and measured this fact together with information concerning estimates for these two relative risk aversion measures is used to give another perspective on the equity premium puzzle and to explain why it is that the habit formation utility function is effective in eliminating that puzzle a time separable utility function that can serve as an alternative to the assumption of habit formation is also presented

the missing piece in policy analysis social security reform this lecture discusses the economic losses that result from an unfunded social security retirement system and the potential gain from shifting to a funded system the social security payroll tax distorts labor supply and the form in which compensation is paid although each individual s benefits are linked to that individual s previous payroll tax payments the low equilibrium rate of return inherent in an unfunded system implies a net payroll tax that causes distortions the resulting deadweight loss is 1 of each year s gdp in perpetuity an amount equal to 20 of payroll tax revenue and a 50 increase in deadweight loss of the personal income tax also there is the loss of investment income resulting from forcing employees to accept the low implicit return of an unfunded program rather than the much higher return paid on private saving or in a funded social security program the present value of the annual losses from using an unfunded system exceeds the benefit to those who received windfall transfers when the program began and when it expanded shifting to a funded program cannot reverse the crowding out of capital that has already occurred recognizing the existing unfunded obligation only makes that piece of the national debt explicit but shifting to a funded program limits crowding out of capital formation to the amount that already occurred future increases in annual saving that result from economic growth are able to earn the higher rate of return on real capital the present value of these gains is equivalent to a perpetuity of more than 2 of gdp a year the combi nation of improved labor market incentives and higher real return on saving has a net present value gain of more than 15 trillion an amount equivalent to three percent of each future year s gdp forever this abstract was borrowed from another version of this item

should we refinance unfunded social security within a continuous time overlapping generations model featuring endogenous intensive margin of the labour supply and retirement decision we analyse the issue of passing the burden of payroll revenues onto consumption or capital we find that large long run welfare gains occur when pension benefits are refinanced by consumption taxes however the transition to the new steady state is very painful for a large fraction of existing cohorts on the other hand the capital base is too small to sustain pension benefits but could be made larger if capital taxes are raised yet that would entail significant welfare losses

social comparisons of wage increases and job satisfaction abstractwe combine status quo and social comparison considerations and investigate whether relative wage increases in the sense of differences between individual wage increases and wage increases of comparable employees are related to managers job satisfaction using a panel data set of managers in the german chemical industry we indeed find first evidence the relation between relative wage increases and job satisfaction is relevant for managers with lower absolute wage levels in particular

a management orientated approach to combination forecasting of tourism demand abstract volatility exponential smoothing regression and naive 2 models are considered singly and in combination in terms of forecasting demand for international tourism these models generate accurate predictions of tourism flows but their prime utility is when combined with other models usually models are combined by means of purely statistical criteria we show that goal programming gp offers an alternative flexible approach to model combination gp offers planners a practical solution to tourism forecasting problems since the method is more adaptable than conventional minimisation of prediction error by permitting practitioners to prioritise a series of management related goals forecasters can focus on longer and short term goals minimising forecast under and over estimation and or concentrate on prediction errors in tourism flows at various times of the year

conspicuous consumption and political regimes evidence from east and west germany abstract this paper investigates the influence of political regimes on the relative importance of conspicuous consumption we use the division of germany into the communist gdr and the democratic frg and its reunification in 1990 as a natural experiment relying on household data that are representative for germany our empirical results strongly indicate that conspicuous consumption is relatively more important in east germany significantly although we find some convergence a considerable gap in conspicuous consumption expenditures remains even 18 years after the german reunification

housing taxation and capital accumulation this paper studies the impact of the preferential tax treatment of housing capital in a dynamic general equilibrium life cycle economy populated by heterogeneous individuals the model includes the main housing tax provisions currently in place in the u s and a minimum downpayment requirement upon purchasing non divisible houses the tax code makes the return on housing capital larger than that on business capital which distorts the lifetime profile and composition of individuals savings the wedge between the two rates of return emanates from the failure to tax imputed rents and is amplified by the presence of mortgage interest deductibility simulations show that individuals at all income levels would rather live in a world where imputed rents are taxed or one where mortgage interest payments are not deductible furthermore distributional effects are much smaller than conventionally believed

euroization what factors drive its persistence household data evidence for croatia slovenia and slovakia the question asked in this article is why people continue to use foreign currencies even after their economies have stabilized survey data for croatia slovenia and slovakia are employed to provide an answer the results confirm the role of network effects and of remittances furthermore the extent of currency substitution is found to be positively associated with the level of income and education an important aspect of euroization seems to be age older people are more likely to hold foreign currencies in contrast neither expectations about inflation rates nor about exchange rates do seem to affect the degree of euroization in a systematic and predictable way trust in the banking system is found to affect the choice between foreign currency cash and foreign currency deposits overall the results support the view that the persistence in the use of foreign currencies is driven to a large extent by factors that are related to the past

relative income effects on subjective well being in the cross section abstract recent work suggests that a person s subjective well being swb depends to a large degree on relative income focusing on the underlying identification this paper makes four contributions to this literature it describes the aggregation problem with past studies implements an estimation strategy to overcome this problem finds micro level evidence in support of the hypothesis that relative income does matter in individual assessments of swb and uses cross section estimates to replicate the aggregate time series the evidence further indicates that relative income effects may be smaller at low income levels the results are obtained from ordered probit techniques and the general social survey gss

is more always better a survey on positional concerns abstract we use survey data to provide some empirical information about concerns regarding relative standing respondents chose between a world where they have more of a good than others and one where everyone s endowment of the good is higher but the respondent has less than others questions asked about education attractiveness and intelligence for one s child and oneself income vacation time approval and disapproval from a supervisor and papers to write half of the respondents preferred to have 50 less real income but high relative income concerns about position were strongest for attractiveness and supervisor s praise and weakest for vacation time

asymmetric and non atmospheric consumption externalities and efficient consumption taxation abstract we analyze the effects of a generalized class of negative consumption externalities asymmetric and non atmospheric on the structure of efficient commodity tax programs households are not only concerned about consumption reference levels that is they gain utility from keeping up with the joneses but they also exhibit altruism two sets of efficient tax regimes are compared based on a welfarist and a non welfarist optimality criterion respectively altruism turns out not to be at odds with the consumption externalities rather altruism implicates a bound on efficient utility allocations a non welfarist government tolerates less inequality than a welfarist one in the welfarist non welfarist case first best personalized commodity tax rates respond highly sensitively barely to whether or not a consumption externality is asymmetric or non atmospheric if personalized commodity tax rates are not available second best case the tax rate on a non positional good is typically different from zero for corrective reasons for plausible functional forms and parameter values numerical simulations suggest that second best tax rates are rather insensitive with respect to both the optimality criterion and the nature of the consumption externality

prospects for social security reform preface part i what is the social security problem 1 an overview of the issues 2 measuring solvency in the social security system 3 criteria for evaluating social security reform 4 new opportunities for the social security system part ii assessing the economic impact of social security 5 social security money s worth 6 simulating benefit levels under alternative social security reforms 7 stochastic simulation of economic growth effects 8 thinking about social security s trust fund 9 government guarantees for old age income 10 means testing social security 11 social security and employer induced retirement part iii political and practical considerations regarding social security reform 12 compliance in social security systems around the world 13 employer responses to social security reform 14 an actuarial perspective on how social security reform could influence employer sponsored pensions 15 an organized labor perspective on social security reform 16 women as widows under a reformed social security system 17 investment and administrative constraints on individual social security accounts 18 americans views of social security and social security reforms contributors index

job satisfaction and co worker wages status or signal we use matched employer employee panel data to show that individual job satisfaction is higher when other workers in the same establishment are better paid this runs counter to substantial existing evidence of income comparisons in subjective well being we argue that the difference hinges on the nature of the reference group we here use co workers their earnings not only induce jealousy but also provide a signal about the worker s own future earnings in our data this positive future earnings signal outweighs any negative status effect this phenomenon is stronger for men and in the private sector but weaker for those nearer retirement

when information dominates comparison abstract we propose a micro econometric evaluation of the relation between life satisfaction and income distribution using a balanced panel survey of the russian population russian longitudinal monitoring survey rlms running from 1994 to 2000 covering 4685 individuals we show that in the context of the very volatile russian environment hirschman s q j econ 87 1973 544 tunnel effect conjecture seems to be confirmed variables reflecting income distribution do not influence satisfaction through social comparisons individuals rather seem to use their informational content in order to form their expectations the reference group s income thereby exerts a positive influence on individual satisfaction which contrasts with other studies on the subject inequality indices do not affect individual welfare

clean evidence on peer effects we study subjects who were asked to fill letters into envelopes with a remuneration independent of output in the pair treatment two subjects worked at the same time in the same room and peer effects were possible in the single treatment subjects worked alone and peer effects were ruled out we find evidence of peer effects in the pair treatment because the standard deviations of output are smaller within pairs than between pairs moreover average output is higher in the pair treatment thus peer effects raise productivity finally low productivity workers are the most sensitive to the behavior of peers

dropout behavior in r d races with learning we examine a game theoretic model of a two firm r d race in which expenditures on r d and the concomitant increase in experience learning enable thefirms to increase their probability of discovering an invention the learning process is stochastic it generates a unique subgame perfect equilibrium for identicalfirms with the characteristic that the leader never drops out but the follower drops out if the leader gains a significant lead the leader can find it optimal to drop out if the firms value the invention differently or have different r d efficiencies thus our analysis generates results between vigorous competition and natural monopoly central to schumpeter s 1934 vision of entrepreneurship are the extraordinary profits associated with innovation the lure of these profits fuels the fires of creative destruction as innovators replace declining firms this article analyzes the competition for the profits obtained by bringing an innovation to fruition and receiving the associated patent we restrict attention to the subclass of innovations known as inventions innovations that are the product of a firm s research and development in particular we are concerned with the conditions that cause a firm after having invested in r d to drop out of the competitive race situations in which the leading firm drops out are of even greater interest competition in r d is often modelled as a race in which the winner receives a patent and reaps most or all of the benefits of the invention as exemplified by kamien and schwartz 1972 the early theoretical literature tended to be based on decision theoretic models the firm seeks an optimal rate of expenditure on r d determined in part by the expected value of the invention the extent of the first mover advantage the economies or diseconomies of scale in r d and the perceived intensity of rivalry it is not anticipated that the firm s decisions will affect the r d efforts of the perhaps unknown rivals kamien and schwartz 1982 p 124 show that the firm does no research if rivalry is sufficiently intense because their model is static however it is never the case that a firm enters the race and then drops out

hedonic recall bias why you should not ask people how much they earn abstract the empirical literature which explores the effect of wage on job satisfaction typically uses data drawn from social surveys in these surveys the amount of wage is reported by the respondents themselves thus the explanatory variable of the econometric models may differ from the true wage people earn our paper shows that the use of survey data can lead to considerable over estimation of the importance of wage as a determinant of wage satisfaction in particular responses seem to be affected by a recall bias people who are satisfied with their wage are more likely to over report their wage in questionnaires the more satisfied they are the more they over report and vice versa unsatisfied people we name this behavioral disposition hedonic recall bias

jealousy and equilibrium overconsumption the idea that the happiness of an individual depends upon the consumption of others is widely viewed as an important feature of our shared social existence recent research in finance has used this idea through consumption externalities to explore asset pricing anomalies consumption externalities potentially break the link between pareto optimality and competitive equilibria and open the door for beneficial government intervention e g lars ljungqvist and harald uhlig 2000 in this paper we delineate two effects that a consumption externality may have an increase in aggregate consumption may a raise the marginal utility of individual consumption relative to leisure and or b lower an individual s utility level we refer to a as keeping up with the joneses henceforth kuj following jordi gali 1994 and we refer to b as jealousy jealousy is a distinct concept from kuj under kuj an individual derives greater utility from additional own consumption relative to leisure when others consume more at the same time higher per capita consumption holding fixed individual consumption can trigger either jealousy so that individual utility falls or admiration so that individual utility rises in section i of this paper we show that jealousy implies that the laissez faire equilibrium consumption level is greater than the optimal level whether preferences exhibit kuj is not necessary for this main result intuitively in the presence of jealousy consumption is similar to pollution overpollution exists because individuals do not take into account the cost of polluting on others not because an increase in economywide pollution makes the return to individual polluting higher similarly overconsumption exists because individuals do not take into account the negative effect of own consumption on jealous others things go in the opposite direction when individuals are admiring in section ii we consider a functional form that encompasses several existing models we show that jealousy determines the optimal tax to correct overconsumption and that kuj is mainly important for asset pricing

measuring future grandparents preferences for equality and relative standing individuals aversion to risk and inequality and their concern for relative standing are measured through experimental choices between hypothetical societies it is found that on average individuals are both fairly inequality averse and have a strong concern for relative income the results are used to illustrate welfare consequences based on a utilitarian swf and a modified crra utility function it is shown that the social marginal utility of income may then become negative even at income levels that are far from extreme

the optimal mix between funded and unfunded pension systems when people care about relative consumption the paper studies the optimal portfolio mix between funded and unfunded pension systems when people care about relative consumption in pay as you go systems with fixed contribution rates pensions are tied to wages this lowers the uncertainty of individuals future relative position thereby increasing the attractiveness of unfunded systems the paper shows analytically that the optimal share of funding decreases with the importance of relative standing a calibrated version of the model suggests that the concern for relative standing has also a quantitatively important impact on the optimal share of funding for reasonable assumptions it is typically around 20

dynamic status effects savings and income inequality this paper advances the hypothesis that the intensity of status preferences depends negatively on the average wealth of society endogenous dynamic status effect in accordance with empirical evidence our theory replicates the contradictory historical facts of an increasing saving rate along with declining returns to capital over time by affecting the dynamics of the saving rate the dynamic status effect raises inequality thereby providing a behavioural mechanism for the observed diverse dynamics of income inequality across countries in countries in which the dynamic status effect is strong weak inequality rises declines over time in response to a positive productivity shock

a stochastic competitive r d race where winner takes all the paper considers a race among multiple firms that compete over the development of a product the first firm to complete the development gains a reward whereas the other firms gain nothing each firm decides how much to invest in developing the product and the time it completes the development is a random variable that depends on the investment level the paper provides a method for explicitly computing a unique nash equilibrium parametrically in the interest rate for a given interest rate the nash equilibrium is determined in time that is linear in the number of firms the structure of the solution yields insights about the behavior of the participants furthermore an explicit expression for a unique globally optimal solution is obtained and compared to the unique nash equilibrium

back propagation learning in improving the accuracy of neural network based tourism demand forecasting abstract traditional tourism demand forecasting techniques concentrate predominantly on multivariate regression models and univariate time series models these single mathematical function based forecasting techniques although they have achieved a certain degree of success in tourism forecasting are unable to represent the relationship of demand for tourism as accurate as a multiprocessing node based feed forward neural network previous research has demonstrated that using a feed forward neural network can accomplish a higher forecasting accuracy than the regression and time series techniques for a set of linearly separable tourism demand data this research extends the applicability of neural networks in tourism demand forecasting by incorporating the back propagation learning process into a non linearly separable tourism demand data empirical results indicate that utilizing a back propagation neural network outperforms regression models time series models and feed forward neural networks in terms of forecasting accuracy

predicting tourism demand using fuzzy time series and hybrid grey theory abstract forecasting tourism demand in a capacity constrained service industry has been a major theme in this field this study presents two models that can be used to predict tourism demand both two models are based on artificial intelligent ai neural network theory was first applied to tourism demand forecasting in 2000 and empirically tested using the raw data from hong kong this work provides empirical evidence using grey theory and fuzzy time series which do not need large sample and long past time series these ai models are estimated for tourist arrivals to taiwan from hong kong united states and germany during the period of 1989 2000 gm 1 1 model achieves an accurate forecast when the sample data show a stable increase trend nevertheless the markov modification model can efficiently improved the gm 1 1 model when the sample data show significant fluctuations

relative pay and labor supply we examine the impact of relative wages on labor supply in a laboratory experiment we test the hypothesis that ceteris paribus making a given wage high low relative to other wage levels will lead to an increase decrease in labor supply we find that labor supply does respond significantly to relative pay and in the expected direction however when a strong enough reason for the relative low pay is given this difference disappears

caste comparisons in india evidence from subjective well being data this paper evaluates how caste influences economic comparisons in india using happiness data from an original panel survey we find that both within caste comparisons and between caste comparisons reduce well being between caste comparisons reduce well being three times more than within caste comparisons in absolute terms an increase in rival caste expenditures affects well being as much as primary expenditure these findings highlight the strong influence that comparisons between rival castes have on well being yet this comparison scheme turns out to be asymmetrical only low caste individuals are affected by the economic successes of their rivals whereas only higher caste individuals compete with their fellows

comparing with the average reference points and market reactions to above average earnings surprises abstract we examine whether the average earnings surprises announced yesterday affect investors responses to earnings news announced today we find that in the short window surrounding an earnings announcement the market rewards today s earnings news that is above yesterday s average earnings surprises with a premium consistent with yesterday s average becoming a reference point for investors to classify today s earnings news as a gain or a loss the price premium for an above average earnings surprise is larger when more earnings announcements are made on the same day and when investors face greater uncertainty in assessing firms performance we interpret this evidence as suggesting that investors rely more on the average as a reference point when they are more likely to be subject to cognitive constraints in processing information we also find that firms announcing above average earnings surprises exhibit a greater abnormal trading volume consistent with the notion that beating reference points prompts investors to trade

social comparison and performance experimental evidence on the fair wage effort hypothesis we investigate the impact of wage comparisons for worker productivity we present three studies which all use three person gift exchange experiments consistent with akerlof and yellen s 1990 fair wage effort hypothesis we find that disadvantageous wage discrimination leads to lower efforts while advantageous wage discrimination does not increase efforts on average two studies allow us to measure wage comparison effects at the individual level we observe strongly heterogeneous wage comparison effects we also find that reactions to wage discrimination can be attributed to the underlying intentions of discrimination rather than to payoff consequences

income redistribution going awry the reversal power of the concern for relative deprivation abstract we demonstrate that a rank preserving transfer from a richer individual to a poorer individual can exacerbate income inequality when inequality is measured by the gini coefficient this happens when individuals preferences depend negatively not only on work time effort but also on low relative income it is rigorously shown that the set of preference profiles that gives rise to this perverse effect of a transfer on inequality is a non empty open subset of all preference profiles a robust example illustrates this result

relative consumption of housing marginal saving subsidies and income taxes as a second best policy this paper analyzes whether marginal taxation of labor and capital income are useful second best instruments for internalizing the externalities caused by conspicuous housing consumption when the

who compares to whom the anatomy of income comparisons in europe this article provides unprecedented direct evidence from large scale survey data on both the intensity how much and direction to whom of income comparisons income comparisons are considered to be at least somewhat important by three quarters of europeans they are associated with both lower levels of subjective well being and a greater demand for income redistribution the rich compare less and are happier than average when they do which latter is consistent with relative income theory with respect to the direction of comparisons colleagues are the most frequently cited reference group those who compare to colleagues are happier than those who compare to other benchmarks

dynamic competition in technological investments an empirical examination of the lcd panel industry abstract when are technological laggards more likely to try to catch up with leaders we offer empirical evidence on firm level data of plant investments in the tft lcd panel industry where technological competition has been intense and dynamic we find that the followers level of technology has a non monotonic effect on technology improving investments with intermediate followers the most apt to invest in catch ups this result is a puzzle given the existing theory on technology race we also find that followers catch up investments increase with the capacity of the leader that employs the state of the art technology these results are robust to variations in specification and alternative accounts of effects we discuss our findings and contributions in light of the technology race literature

the gains from pension reform we classify social security pension systems in three dimensions actuarial versus non actuarial funded versus unfunded and defined benefit versus defined contribution systems recent pension reforms are discussed in terms of these dimensions shifting to a more actuarial system reduces labor market distortions although limiting the scope for redistribution shifting to a funded system may increase saving redistribute income to future generations and distort contermporary labor supply a partial shift to a funded system helps individuals diversify their pension assets a shift from a defined benefit to a defined contribution system means that income risk will be shifted from workers to pensioners

relative concerns for consumption at the top an intertemporal analysis for the uk abstract this paper investigates whether the consumption of rich households provides a reference point in the intertemporal consumption choices of non rich households using uk household data on food consumption we estimate the euler equation implied by a life cycle model incorporating relative concerns for the consumption of rich households according to both our ols and gmm estimates for the population of non rich households as a whole there is no evidence of such relative concerns we also examine an alternative model of relative concerns in which households overconsume when exposed to higher reference group consumption and find correlational evidence that this may be the case for food consumed away from home finally we investigate the presence of heterogeneous relative concerns across county and household characteristics in both models finding evidence of relative concerns for consumption at the top in counties with relatively low income inequality this mechanism seems to operate for food consumed away from home

dynamic r d competition the authors study a simple two stage stochastic patent race involving two firms they examine the behavior of the participants as they gain the lead or fall behind in the race the authors find that the leader engages in rd 2 a policy of issuing patents for intermediate research results and 3 the effects of research joint ventures whereby the firms coordinate their initial research efforts and share their results copyright 1987 by royal economic society

genuine saving and positional externalities much evidence suggests that people are concerned with their relative consumption yet positional externalities have so far been ignored in savings based indicators of sustainable development this

a portfolio approach to the optimal funding of pensions abstract fully funded pension systems are advocated for their higher rate of return but this return is typically risky using a simple mean variance model we find that mixed funded unfunded systems are desirable in this setting because they enable risk diversification

the tradeoff between performance and quitting in high power tournaments tournaments may be characterized by the performance they induce as well as by the rate of quitting and dropouts of participants although most of the attention in the literature is on the performance induced by high power incentives there are many daily situations in which dropouts and quitting are a major concern using a field experiment in schools and a model of dynamic tournament we examine the effect of different levels of rewards on the rate of quitting our experiment indicates that there is a possible tradeoff between performance and quitting strong incentives tournaments induced participants to exert more effort and exhibit a better performance but at the same time it induces a higher rate of quitting we present a multi stage tournament model that gives rise to a similar characterization jel c93 c73 d8 j30

reign in hell or serve in heaven a cross country journey into the relative vs absolute perceptions of wellbeing abstract questionnaires exploring the relativist vs absolutist perception of wellbeing are administered to 3883 students in eight different countries four low income countries bolivia brazil kenya and laos 1924 respondents and four high income countries italy sweden switzerland and the uk 1959 respondents our data reveal that wellbeing is perceived mainly in relative terms with the strength of relativism being higher for respondents in high income countries however when the satisfaction of some basic needs is at stake the absolutist concern becomes powerful personal characteristics such as gender and background of studies have a significant role in determining respondents perception of wellbeing finally additional insights emerge from our study interpersonal comparisons take place by looking both upward and downward along the income scale not only income ranking but also the magnitude of reference incomes plays a role and the perception of wellbeing is more elastic to absolute rather than relative income

emulation inequality and work hours was thorsten veblen right we investigate the manner in which a desire to emulate the rich influences individuals allocation of time between labour and leisure greater inequality inducing longer work hours as a result data on work hours in ten countries over the period 1963 98 show that greater inequality is indeed associated longer work hours these veblen effects are large and the estimates are robust using country fixed effects and other specifications because consumption inequality is a public bad a social welfare optimum cannot be implemented by a flat tax on consumption but may be accomplished by more complicated progressive consumption taxes at the close of the nineteenth century thorsten veblen proposed what he termed pecuniary emulation as the foundation of a theory of consumption spending he maintained is driven by relative status considerations that is by the desire to be a particular type of person as much as bythedesire to enjoytheconsumer goodsper se the joneses with whom one had to keep up were not the neighbours but the rich theirleveloflivingbecamethenever attainableobjectiveinaconsumptionarmsrace among the less well to do in the theory of the leisure class he wrote the motive is emulation the stimulus of an invidious comparison especially in any community in which class distinctions are quite vague all canons and reputability and decency and all standards of consumption are traced back by insensible gradations to the usages and thoughts of the highest social and pecuniary class the wealthy leisure class 1934 p 81 while valued by some economists as capturing common sense aspects of consumption as a form of status seeking veblen s view of social preferences was soon eclipsed by the simpler and more tractable neoclassical theory of the consumer relegated to the underworld of economics veblen s ideas have nonetheless resonated over the ensuing years in the writing of duesenberry 1949 leibenstein 1950 and galbraith 1958 at the middle of the past century and schor 1998

self selection and pareto efficient taxation abstract this paper analyses the set of pareto efficient tax structures the formulation of the problem as one of self selection not only shows more clearly the similarity between this problem and a number of other problems such as the optimal pricing of a monopolist which have recently been the subject of extensive research but also allows the derivation of a number of new results we establish i under fairly weak conditions randomization of tax structures is desirable ii if different individuals are not perfect substitutes for one another in production then the general equilibrium effects until now largely ignored in the literature of changes in the tax structure may be dominant in determining the optimal tax structure in particular if the relative wage of high ability and low ability individuals depends on the relative supplies of labor the optimal tax structure entails a negative marginal tax rate on the high ability individuals and a positive marginal tax rate on the low ability individuals the marnitude of which depends on the elasticity of substitution iii if individuals differ in their preferences pareto efficient taxation may entail negative marginal tax rates for high incomes while iv if wage income is stochastic the marginal tax rate at the upper end may be 100 our analysis thus makes clear that the main qualitative properties of the optimal tax structure to which earlier studies called attention are not robust to these attempts to make the theory more realistic