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textabstractWe analyze the redistributional (dis)advantages of a minimum wage over income taxation in competitive labor markets, without imposing assumptions on the (in)efficiency of labor rationing. Compared to a distributionally equivalent tax change, a minimum-wage increase raises involuntary unemployment, but also raises skill formation as some individuals avoid unemployment. A minimum wage is an appropriate instrument for redistribution if and only if the public revenue gains from additional skill formation outweigh both the public revenue losses from additional unemployment and the utility losses of inefficient labor rationing. We show that this critically depends on how labor rationing is distributed among workers. A necessary condition for the desirability of a minimum-wage increase is that the public revenue gains from higher skill formation outweigh the revenue losses from higher unemployment. We write this condition in terms of measurable sufficient statistics. Our empirical analysis suggests that a minimum-wage increase is undesirable in nearly all OECD countries. A reduction in the minimum wage, along with tax adjustments that keep net incomes constant, would yield a Pareto improvement.

Econometric analyses of European datasets suggest that income aspirations increase with current income. This finding is consistent with the adaptation hypothesis – the notion that individual aspirations adjust to reflect personal circumstances and living conditions. We add to these existing studies in two ways: we investigate the relationship between aspirations and living conditions within a developing country rather than a developed country context, thereby extending the analysis to individuals with considerably poorer living conditions; and we expand the analysis to look not only at income but also at educational and health aspirations. Like earlier studies we find that income aspirations increase with both the individual’s own actual income and the incomes of those around them. We also find a positive relationship between actual and aspired to education. However, with respect to health, we find that people aspire to more rather than less health when surrounded by others who are ill.

The paper contrasts early theories of the utility function (starting with Bentham and elaborated by Jevons) with the modern theory (laid down by Fisher and Samuelson). The former include in the utility function not only the sensation of current events but also the memory of past events and the anticipation of future events. The alternative hypotheses are tested by introducing both past and expected future income into the estimated subjective well-being function, using an appropriate data set for China. The tests favour the early theories. Implications are drawn.

This paper examines the redistributional function of queues. A system in which subsidies and queues are used to allocate goods may appear attractive to policy makers who are concerned about equity since the resource used in queuing (time) is generally allocated more equally than, say, human or physical capital. Thus a subsidy-queue mechanism performs a role similar to that performed by a tax-benefit system. Both mechanisms, however, bring with them efficiency losses, which the paper compares. It is shown that the subsidy-queue mechanism may appear superior if the trade-off between efficiency and equity is viewed in terms of consumption and the distribution of consumption. On the other hand, if the equity-efficiency trade-off is properly formulated in terms of utility and the distribution of utility the tax-based redistributional mechanism is superior.

We investigate the unexplored link between the risk of poverty and happiness in the context of a developing country. Using unique longitudinal data, we estimate workers’ vulnerability to income poverty and find a strong negative relationship between vulnerability and life satisfaction, over and above the positive income effect commonly documented in the literature. The result is robust and cannot be reduced to the effect of two-sided uncertainty. A matched behavioral experiment shows that respondents are significantly loss averse. We conclude that downside risk is an important determinant of happiness and of economic decisions under uncertainty. Policies that mitigate downward risk may thus have direct impacts on both well-being and efficiency.

The correct prediction of how alternative states of the world affect our lives is a cornerstone of economics. We study how accurate people are in predicting their future well-being after facing major life events. Based on individual panel data, we compare people's life satisfaction forecasts reported in the first interview after a major life event with their actual evaluations five years later on. This is done after the individuals experience widowhood, unemployment, disability, marriage, separation or divorce. We find systematic prediction errors that seem at least partly driven by unforeseen adaptation after the first four of these events.

Standard models of advertising-financed media assume consumers patronise a single-media platform, precluding effective competition for advertisers. Such competition ensues if consumers multi-home. The principle of incremental pricing implies that multi-homing consumers are less valuable to platforms. Then entry of new platforms decreases advertisement prices, while a merger increases them, and advertisement-financed platforms may suffer if a public broadcaster carries advertisements. Platforms may bias content against multi-homing consumers, especially if consumers highly value overlapping content and/or second impressions have low value.

We study if adaptive learning by a Central Bank (CB) in the Kydland and Prescott environment can steer the economy to the Pareto-optimal outcome. Our CB evaluates its potential strategies regarding the announced and the actual inflation rate through expectations of the performance of these strategies, formed thanks to its mental model of the economy. This model is forward looking and adaptive at the same time. As a starting point, we follow Arifovic et al. (2010) , and initially assume that there are two types of agents: Believers who set their inflation forecast equal to the announced inflation, and Non-believers who form static optimal forecast coupled with a forecast error correction mechanism. Our results show that the economy can reach near Ramsey outcomes most of the time. In the absence of Believers, the economies almost always converge to the Ramsey outcome. In their experiments with human subjects, Arifovic and Sargent (2003) showed that experimental economies reach and stay close to the Ramsey outcome most of the time, giving support to the ‘just do it’ policy recommendation. In light of the experimental findings, our model is of particular interest as it is the only agent-based or adaptive learning model that consistently selects the Ramsey outcome in this context.

The choice of transport infrastructure projects to include in the National Transport Infrastructure Plans in Sweden is often said to be motivated by the weighing of cost against social benefits. Examining the projects that are included in the Plans, it is clear, however, that not all projects have positive net present values, and are therefore more costly to build than the benefits they create. This paper studies alternative models that might explain the choice of projects. Two political economy models, the district demand and the swing voter with lobbying, are tested, and a model that accounts for the spatial distribution of the projects, as well as the possibility that priorities are based on welfare concerns, is estimated. No support is found for the political economy models. What explains investment volume is the existence of CBA results for a project, which may indicate that welfare benefits have an impact, as do the spatial spillovers from a project’s benefits and lobbying, especially by the municipalities concerned.

Is the Pareto optimality of matching mechanisms robust to the introduction of boundedly rational behavior? To address this question I define a restrictive and a permissive notion of Pareto optimality and consider the large set of hierarchical exchange mechanisms which contains serial dictatorship as well as Gale’s top trading cycles. Fix a housing problem with boundedly rational agents and a hierarchical exchange mechanism. Consider the set of matchings that arise with all possible assignments of agents to initial endowments in the given mechanism. I show that this set is nested between the sets of Pareto optima according to the restrictive and the permissive notion. These containment relations are generally strict, even when deviations from rationality are minimal. In a similar vein, minimal deviations from rationality suffice for the set of outcomes of Gale’s top trading cycles with all possible initial endowments to differ from the set of outcomes of serial dictatorship with all possible orders of agents as dictators. © 2016 The Author(s)

Charities often circulate widespread donation appeals, but who is most likely to donate and how do appeals impact the well-being of individual donors and non-donors, as well as the entire group exposed to the campaign? Here, we investigate three factors that may influence donations (recent winnings, the presence of another person, and matched earnings) in addition to the changes in affect reported by individuals who donate in response to a charitable opportunity and those who do not. Critically, we also investigate the change in affect reported by the entire sample to measure the net impact of the donation opportunity. Results reveal that people winning more money donate a smaller percentage to charity, and the presence of another person does not influence giving. In addition, large donors experience hedonic boosts from giving, and the substantial fraction of large donors translates to a net positive influence on well-being for the entire sample.

In this paper we consider one-to-many matching problems where the preferences of the agents involved are represented by monetary reward functions. We characterize Pareto optimal matchings by means of contractual exchange stability and matchings of maximum total reward by means of compensational exchange stability. To conclude, we show that in going from an initial matching to a matching of maximum total reward, one can always provide a compensation schedule that will be ex-post stable in the sense that there will be no subset of agents who can all by deviation obtain a higher reward. The proof of this result uses the fact that the core of an associated compensation matching game with constraints is nonempty.

© 2015 Elsevier B.V. The transfer paradox describes a situation in which a transfer of endowments between two agents results in a welfare decrease for the recipient and a welfare increase for the donor. It is known that in a two-agent regular exchange economy with an arbitrary number of goods, the transfer paradox occurs only if the price equilibrium is unstable. In this paper, we show that in the space of welfare weights, the set of stable equilibria and the set of no-transfer paradox equilibria coincide. As a corollary we also obtain that for two agents and an arbitrary number of goods, the index of an equilibrium in price space coincides with its index in welfare space. publisher: Elsevier articletitle: The transfer paradox in welfare space journaltitle: Journal of Mathematical Economics articlelink: http://dx.doi.org/10.1016/j.jmateco.2015.10.006 content_type: article copyright: Copyright © 2015 Elsevier B.V. All rights reserved. ispartof: Journal of Mathematical Economics vol:62 pages:1-4 status: published

This paper models a purely informational mechanism behind the incumbency advantage. In a two-period electoral campaign with two policy issues, an incumbent and a possibly more competent challenger compete for election by voters who are heterogeneously informed about the state of the world. Due to the asymmetries in government responsibility between candidates, the incumbent’s statement may convey information on the relevance of the issues to voters. In equilibrium, the incumbent sometimes strategically releases his statement early and thus signals the importance of his signature issue to the voters. We find that, since the incumbent’s positioning on the issue reveals private information which the challenger can use in later statements, the incumbent’s incentives to distort the campaign are decreasing in his quality, as previously documented by the empirical literature. The distortions arising in equilibrium are decreasing in the incumbent’s true competence; however, the distortions may be increasing in the incumbent’s expected competence on his signature issue.

This study complements existing literature on the relationship between HIV/AIDS and human capital by introducing previously unexplored indicators and more robust empirical strategies. The overarching purpose is to assess whether previous findings on the relationship withstand empirical scrutiny when alternative indicators and methodologies are employed. Four main HIV/AIDS measurements are regressed on intelligence for a maximum of 195 cross-sectional averages over the past decade. The empirical evidence is based on OLS, IWLS and 2SLS. The following findings are established. First, human capital decreases HIV prevalence, with a higher magnitude on ‘Women's share of population aged 15 and above living with HIV’. This implies improving average human capital levels across communities may be more beneficial to girls above the age of 15 living with HIV. The relatively similar negative magnitudes across other dependent variables implies that increasing human capital decreases deaths from HIV/AIDS by almost the same rate at which it reduces infections to the disease. Moreover, the HIV infection rate in children between the ages of 0 and 14 does not significantly change with improvements in human capital. More policy implications are discussed.

Default contribution rates for 401(k) pension plans powerfully influence workers’ choices. Potential causes include opt-out costs, procrastination, inattention, and psychological anchoring. We examine the welfare implications of defaults under each of these theories. We show how the optimal default, the magnitude of the welfare effects, and the degree of normative ambiguity depend on the behavioral model, the scope of the choice domain deemed welfare-relevant, the use of penalties for passive choice, and other 401(k) plan features. Depending on which theory and welfare perspective one adopts, virtually any default contribution rate may be optimal. Still, our analysis provides reasonably robust justifications for setting the default either at the highest contribution rate matched by the employer or – contrary to common wisdom – at zero. We also identify the types of empirical evidence needed to determine which case is applicable.

We assess the quantitative importance of reclassification risk in the US health insurance market. Reclassification risk arises because the health conditions of individuals evolve over time, while a typical health insurance contract only lasts for one year. Thus, a change in the health status can lead to a significant change in the health insurance premium. We measure welfare gains from introducing explicit insurance against this risk in the form of guaranteed renewable health insurance contracts. We find that in the current institutional environment individuals are well-sheltered against reclassification risk and they only moderately gain from having access to these contracts. More specifically, we show that employer-sponsored health insurance and public means-tested transfers play an important role in providing implicit insurance against reclassification risk. If these institutions are removed, the average welfare gains from having access to guaranteed renewable contracts exceed 4% of the annual consumption., JEL Classification Codes: D52, D58, D91, G22, I11, The authors acknowledge financial support from the Research and Development Administration Office at the University of Macau., http://www.grips.ac.jp/list/jp/facultyinfo/porapakkarm-ponpoje/

We completely characterize the set of second-best optimal "menus" of student-loan contracts in a simple economy with risky labour-market outcomes, adverse selection, moral hazard and risk aversion. The model combines structured student loans and an elementary optimal income-tax problem à la Mirrlees. This combination can be called a graduate tax. There are two categories of second-best optima: the equal treatment and the separating allocations. The equal treatment case is obtained when the social weights of student types are close to their population frequencies; the expected utilities of different types are then equalized, conditional on the event of success on the labor market. But individuals are ex ante unequal because of differing probabilities of success, and ex post unequal, because the income tax trades off incentives and insurance (redistribution). In separating optima, the talented types bear more risk than the less-talented ones; they arise only if the social weight of the talented types is sufficiently high. The second-best optimal graduate tax provides incomplete insurance because of moral hazard; it typically involves cross-subsidies; generically, it cannot be decomposed as the sum of an optimal income tax depending only on earnings, and a loan repayment, depending only on education. Therefore, optimal loan repayments must be income-contingent.

Purpose – How do economic prosperity, health expenditure, savings, price-stability, demographic change, democracy, corruption control, press freedom, government effectiveness, human development, foreign aid, physical security, trade openness and financial liberalization play-out in the fight against health-worker crisis when existing emigration levels matter? Despite the acute concern of health-worker crisis in Africa owing to emigration, lack of relevant data has made the subject matter empirically void over the last decades. The paper aims to discuss these issues. Design/methodology/approach – A quantile regression approach is used to assess the determinants of health-worker emigration throughout the conditional distributions of health-worker emigration. This provides an assessment of the determinants when existing emigrations levels matter. Findings – Findings provide a broad range of tools for the fight against health-worker brain-drain. As a policy implication, blanket emigration-control policies are unlikely to succeed equally across countries with different levels of emigration. Thus to be effective, immigration policies should be contingent on the prevailing levels of the crisis and tailored differently across countries with the best and worst records on fighting health-worker emigration. Originality/value – This paper has examined the theoretical postulations of a World Health Organization report on determinants of health-worker migration.

We study unanimity bargaining among agents along a general river structure that is expressed by a geography matrix and who have access to limited local resources, cost functions that depend upon river inflow and own extraction, and quasi-linear preferences over water and money. Bargaining determines the water allocation and monetary transfers. We translate the legal principles of Absolute Territorial Sovereignty (ATS) and Unlimited Territorial Integrity (UTI) from International Water Law into our model. ATS and a strict interpretation of UTI result in disagreement outcomes that are feasible. And a second interpretation of UTI is translated into individual aspiration levels that are infeasible. For disagreement outcomes, we apply the asymmetric Nash bargaining solution. Common intuition that upstream and midstream countries always prefer the ATS principle to the strict UTI principle (while the opposite preference holds for the downstream country) is reversed for such countries with sufficient bargaining power. For individual aspiration levels, the agents have to compromise in order to agree and we apply the asymmetric Nash rationing solution. The participation constraints in the Nash rationing solution matter. In all cases the optimization problem is separable into two subproblems: the efficient water allocation that maximizes utilitarian welfare; and the determination of monetary transfers.

The well-being of a person is reflected in the language used. Building on 1,400 letters written by three famous music composers, I obtain well-being indices that span their lifetime. The validity of this methodology is shown by linking the indices with biographical information and through estimation of the determinants of well-being. I find, consistent with the literature, that work-related engagements and accomplishments are positively related with well-being, while poor health or death of a relative is detrimental. I then exploit the data and provide quantitative evidence on the existence of a causal impact of negative emotions on outstanding creativity, an association hypothesized across several disciplines since the Antiquity; however, not yet convincingly established for the case of extraordinary achievers.

Social information 'nudges' concerning how others perform typically boost individual performances in experiments with one group reference point. However, in many natural settings, sometimes due to policy, there are several such group reference points. We address the complications that such multiple group social information might introduce through an experiment. The boost to average performance is significant and comparable to the one group case. Between-group inequality does not change. Individual inequality falls, however, because the boost is largest among the pre-‘nudge’ very poor performers. Finally, the boost to average performance is highest when individuals freely choose their group affiliations.

Empirical models of retrospective voting primarily employ standard monetary and financial indicators to proxy for voters’ utility and to explain voters’ behavior. We show that subjective well-being explains variation in voting intention that goes beyond what is captured by these monetary and financial indicators. For example, individuals who are satisfied with their life are 1.6% more likely to support the incumbent; by contrast, a 10% increase in family income leads to a 0.18% increase in an individual’s support of the incumbent. We use difference-in-differences analysis to identify how voter intention is affected by a negative shock to well-being: the death of a spouse. Individuals who experience the death of a spouse are around 10% less likely than those in the control group to support the incumbent. The results hold even if elected officials’ policies (health care, social welfare) cannot reasonably be blamed for the death.

The evolution over time of subjective well-being (SWB) in transition countries exhibit some peculiarities: greater variations which are more strongly correlated with the trends of GDP relative to other countries. What is the possible role of social trust in predicting such variations? We compare the capacity of the trends of GDP and of social trust to predict the trends of SWB. We find that the strength of the relationship between social trust and SWB over the medium-term is comparable to that of GDP. Our conclusion is that in the medium-term, even in countries considered as an extreme case of relevance of material concerns for well-being, social trust is a powerful predictor of the evolution over time of SWB. However, in the short run the relationship between social trust and SWB does not hold and GDP stands out as the only significant correlate of SWB.

This paper outlines the standard neoclassical model (SNM) of the impact of immigration on the incomes of the resident (pre-immigration) population. We augment the SNM to allow for foreign ownership of and government equity in the capital stock. Using the expanded model, four back-of-the-envelope (BOTE) calculations are made. The calculations reveal that the size of the Berry-Soligo welfare triangle is small and is dominated by the effects of foreign ownership of capital and government equity in capital. In our preferred scenario, the BOTE calculation indicates that the 1991-92 Australian immigrant intake reduced residents' income. We believe the results of the BOTE calculations justify a more comprehensive study incorporating a range of other influential factors determining the impact of immigration on residents' income. We suggest a list of such factors and report on work done in these specific areas. Essential to a comprehensive study are the integration of results from studies in specific areas, and the devotion of resources to the tasks of further data collection and model development.

International audience; We consider the link between poverty and subjective wellbeing and focus in particular on potential adaptation to poverty. We use panel data on almost 54,000 individuals living in Germany from 1985 to 2012 to show, first, that life satisfaction falls with both the incidence and intensity of contemporaneous poverty. We then reveal that there is little evidence of adaptation within a poverty spell: poverty starts bad and stays bad in terms of subjective well-being. We cannot identify any cause of poverty entry that explains the overall lack of poverty adaptation.

The paper argues that household budgets are the best starting point for investigating a number of big questions related to the evolution of the living standards during the last two-three centuries. If one knows where to look, historical family budgets are more abundant than might be suspected. And statistical techniques have been developed to handle the associated problems of small, incomplete, and unrepresentative samples. We introduce the Historical Household Budgets (HHB) Project, aimed at gathering data and sources, but also at creating an informational infrastructure that provides i) reliable storage and easy access to historical family budget data, along with ii) tools to configure the data as it is entered so as to harmonise it with present-day surveys.

We propose a notion of r-rationality, a relative version of satisficing behavior based on the idea that, for any set of available alternatives, individuals choose one of their r-best according to a single preference. We fully characterize the choice functions satisfying the condition for any r, and provide an algorithm to compute the maximal degree of r-rationality associated with any given choice function. The notion is extended to individuals whose r may vary with the set of available alternatives. We provide experimental evidence that the predictive power of our theory, measured by Selten's index, improves upon that of alternative ones.

We develop a framework for assessing the welfare implications of the new European Union's (EU) Macroeconomic Imbalance Procedure (MIP) implemented in 2012, with a special focus on the current account (CA) constraint, real effective exchange rate (REER) constraint and nominal unit labour cost (ULC) constraint. For this purpose, we apply a New Keynesian 2-region, 2-sector DSGE model, using the second order Taylor approximation of the households' utility around the steady state as a measure of welfare. The compliance with the CA criterion is ensured by modifying the policymakers' loss function in line with Woodford's (2003) treatment of the zero lower bound of nominal interest rates. The introduction of MIP threshold on CA balance results in a welfare loss equivalent to steady-state decrease in consumption of 0.0274% after the euro adoption or 0.0152% before that. If we consider the 4% threshold on current plus capital account (rather than current account alone), this cost decreases to equivalent to 0.0117% steady-state consumption under the euro and approximately a half of that without the euro. The welfare cost for the converging economies is higher due to persistent, but equilibrium-consistent CA deficits, as well as REER appreciation. MIP can also be seen as a factor augmenting the cost of euro adoption. This working paper is an updated version of the working paper Excessive Imbalance Procedure in the EU: a Welfare Evaluation.

Applications of willingness to pay (WTP) have shown the difficultly to discriminate between various options. This reflects the problem of embedding in both its specific sense, of options being nested within one another, and its more-general sense, whereby respondents cannot discriminate between close substitutes or between more-disparate rivals for the same budget. Furthermore, high proportions of reversals between WTP-value and simple preference based rankings of options are often highlighted. Although an incremental WTP approach was devised to encourage more differentiated answers and a higher degree of consistency among respondents, a theoretical basis for this approach has not been elucidated, and there is little evidence to show that this approach might indeed achieve greater consistency between explicit and implicit rankings inferred from WTP values. We address both these issues. Following our theoretical exposition, standard and incremental approaches were compared with explicit ranking in a study assessing preferences for different French emergency care services. 280 persons, representative of the French adult population, were interviewed. Half received the incremental version, the other half the standard version. Results suggest that the incremental approach provides a ranking of options fully in line with explicit ranking. The standard approach was reasonably consistent with explicit ranking but proved unable to differentiate between the five most preferred providers, as predicted by theory. Our findings suggest that the incremental approach provides results which can be used in priority-setting contexts.

In a large economy, a first-best provison rule for a public good is robustly implementable with budget balance because no one individual alone can affect the aggregate outcome. First-best outcomes can, however, be blocked by coalitions of agents acting in concert. With a requirement of immunity against robustly blocking coalitions, we find that, for a pubic good that come as a single indivisible unit, a monotonic social choice function cannot condition on preference intensities but only on the population shares of people favoring one outcome over another. Any such social choice function can be implemented by a simple voting mechanism. With more public-good provision levels, more complicated mechanisms are required, but they still involve the counting of votes rather than an assessment of benefits. Monotonicity and immunity against robust blocking thus provide a foundation for the use of voting mechanisms.

We study random assignment economies with expected-utility agents, each of them eventually obtaining a single object. Inspired on Hylland and Zeckhauser's (1979) Pseudomarket mechanism (PM) and on a serial dictatorship, we introduce the Sequential Pseudomarket (SP) where groups of agents are called turn by turn and participate in a pseudomarket for the remaining objects. To measure efficiency, we focus on the set of ex-ante Pareto-optimal (PO) random assignments and on the ex-ante weak core (CO). We find: 1) PM ⊂ PO but the converse is not always true (there is no Second Theorem of Welfare Economics), 2) PO ⊂ SP but the converse is not always true, 3) SP ⊂ CO

A major obstacle for introducing carbon pricing are its distributional implications: climate policy is believed to be regressive. We illuminate the role of carbon-intensive subsistence consumption for the prospect of making carbon pricing progressive. The distributional impacts of a carbon tax reform depend on the revenue recycling options: we prove that lump-sum transfers proportional to income and linear income tax cuts make the reform regressive and that this is due only to subsistence consumption. By contrast, returning the revenue as uniform lump-sum transfers renders the carbon tax reform progressive.

Saniregio 2015 fornisce un'analisi della spesa sanitaria corrente delle singole Regioni italiane. Introduciamo un meccanismo di calcolo del fabbisogno standard basato sulla stima di una funzione di spesa, un modello empirico derivato dalla funzione di costo dei servizi sanitari, che vede come variabile dipendente la spesa storica corrente di ogni Regione e tra i principali driver del fabbisogno variabili di contesto socio-economico, con un ruolo fondamentale giocato dalla numerosità e dalla composizione per età della popolazione residente. Tra le principali novità metodologiche di Saniregio 2015, oltre alla popolazione, tra i principali driver dei fabbisogni standard, sono state inserite due variabili che misurano la quota di spesa riconducibile all'adeguatezza dei servizi erogati e all'efficienza con cui questi ultimi sono stati prodotti.

Violence and coercion are key to understanding economic and social interactions in any society. This premise was used by North et al. (2009) to distinguish three `patterns of social organization' that societies have used to solve the problem of violence. We model one of these, the `limited access order', that is still dominant today. This order is characterized by an elite coalition that uses coercion to extract economic rents, while restricting violence and containing bandits. Since violence is key, we choose to apply insights from the economic literature on conflict and appropriation. Our model puts structure on the main elements of the limited access order. It allows us to assess some of its characteristics, by identifying conditions under which a sizeable elite emerges that is capable of limiting the activities of bandits and thereby provides order and stability. Our results show large variations in elite size, appropriation, production levels, and welfare across limited access societies due to only minor variations in exogenous model parameters, such as productivity, the cost of conflict, and the decisiveness of conflict. A striking result is that, within the limited access order, unproductive societies are faced with a high tax rate and a large elite, while productive societies are faced with a low tax rate and a small elite. The difference in additional productivity between these societies is offset by increased appropriation by bandits in absence of a strong elite, resulting in welfare being maximized for moderate levels of productivity.

Using newly comprehensive data and tools from the Global Consumption and Income Project or CGIP, covering most of the world and five decades, we present a portrait of the changing global distribution of consumption and income and discuss its implications for our understanding of inequality, poverty, inclusivity of growth and development, world economic welfare, and the emergence of a global ‘middle class’. We show how regional distributions of income and consumption have evolved very differently over time. We also undertake sensitivity analysis to quantify the impact of various choices made in database construction and analysis. We find that levels of consumption and income have increased across the distribution, that the global distribution has become more relatively equal due to falling inter-country relative inequality, and that by some measures global poverty has declined greatly but by others it has hardly declined at all, even over the fifty years. The global middle class has grown markedly in certain countries but only slightly worldwide. Most of the marked changes have occurred after 1990. China’s rapid economic growth is by far the most important factor underlying almost all of them, notwithstanding sharply increasing inequalities within the country. Most improvements outside of China are associated with rapid developing country growth after 2000, and are of unknown durability. Country-experiences vary widely; there is for instance some evidence of ‘inequality convergence’ with previously more equal countries becoming less equal over time and the obverse. We provide support for previous findings (e.g. the replacement of the global ‘twin peaks’ by a unimodal distribution) but also arrive at some conclusions that overthrow old ‘stylized facts’ (e.g. that the Sub-Saharan African countries, and not Latin American ones, have the highest levels of inequality in the world, when measured using standardized surveys). The GCIP provides a resource for ongoing analysis, and forecasting, of developments in the world distribution.

In this paper, we consider a cooperative game in which two types of players co-exist: solidary and non solidary players. Solidary players are able to support by consent at least one of their weaker partners without disadvantaging non-solidary players. We present a value of the game which takes ito account the types of players and satisfies some appropriate axioms: Efficiency, Additivity, Symmetry among players who have the same type, Conditional null player, and a new axiom, the Unaffected Allocation of nonsolidary players - (UA) - which is defined as follows: when players have the possibility to decide freely to be solidary, this should affect neither the allocations of non-solidary players, nor the outcome of the game.

This paper provides a new rationale for macroprudential regulation and studies its optimal design, implementation, and distributional consequences. In a partial equilibrium model where bank risk taking is subject to moral hazard, we show that although private contracting can solve the bank's agency (i.e., risk shifting) problem, the market outcome is constrainedinefficient: The combination of moral hazard and competition for deposits that are not supplied elastically leads to a pecuniary externality as raising deposits ultimately increases the deposit rate and exacerbates risk shifting of all other banks. As a result, banks are too large, have too much leverage, and take excessive risk. This generic inefficiency provides a strong rationale for regulation even in the absence of classical frictions such as social cost of bank failure or incorrectly priced deposit insurance. The pecuniary externality can be internalized by standard regulatory tools such as capital requirements or by issuing a specific number of banking licenses. Related to the idea of financial restraint, optimal regulation creates rent opportunities to reward prudent banks. This also leads to redistribution from depositors to banks and firms with access to the capital market such that optimal regulation is not a Pareto improvement.

We propose a formal re-definition of the concept market failure based on the idea of the imperfect state. In the Neo-classical taxonomy, a decentralized regime of exchange is a market failure if its laissez faire equilibrium solution is welfare-dominated by a technically feasible alternative. If the state is perfect, that is, benevolent and its transactions cost of intervention is zero, every market failure can be remedied/corrected with a welfare gain. If the state is imperfect, that is, either non-benevolent or with non-zero transactions cost, the state intervention to correct the market failure can be welfare-reducing. Extending the logic behind Williamson’s remediableness criterion and Stiglitz’ constrained Paretoness, we introduce a new taxonomy of failures: the concept “proto-failure” now denotes any failure which laissez faire interaction cannot remedy without a welfare gain. The label “market failure” now denotes a proto-failure which the relevant state can correct with a welfare gain. A proto-failure that the relevant state cannot correct with a welfare gain we call “RC efficient.” We use the net welfare metric which explicitly accounts for transactions cost of intervention as efficiency criterion. The new taxonomy is equivalent to the old if the state is perfect, that is, all proto failures are market failures. When the state is imperfect, the set of market failures is smaller than the set of proto-failures. A proto-failure is a necessary--but not a sufficient--condition for a welfare-improving government intervention. This paper follows the Williamson counsel to “push the logic of positive transactions cost to completion.”

We apply recent money illusion tests on data on individual life satisfaction from the Eurobarometer for the period 1980–2003. The null hypothesis of no money illusion cannot be rejected. Different nominal rigidities across European countries and EMU countries, specifically, cannot be explained by different degrees of money illusion.

We integrate individual power in groups into general equilibrium models with endogenous group formation. We distinguish between formal power (the say in group decisions) and real power (utility gain from being in groups). Their values will be determined as part of the equilibrium. We find that higher formal power does not necessarily translate into higher equilibrium utility or higher real power. One reason is that induced price changes may offset the group member’s increased influence. A second reason is that the group may dissolve when a group member gains too much influence, because other members can exercise the option to leave. We also show that maximal real power can be compatible with Pareto efficiency. We further identify circumstances when changes of formal power in one group do not impact on other groups. Finally, we establish existence of competitive equilibria, including equilibria where some individual enjoys real power.

In this article, we look at the combination of several market-based climate and energy policies and compare them with first best solution, i.e., a perfectly designed emission tax or emission cap level. It is shown that in the case an emission control policy is imperfect designed or implemented, its per-formance can be improved by an energy (output) tax/subsidy scheme, where the subsidy is given only to renewable generators or for energy efficiency improvements. This combination can bring the production levels and energy price to the optimum level. The emission level is also decreased by this combination, but not to the optimum level. Thus it may be considered as a second-best policy set. However, other targets on renewables share or energy efficiency level are improved instead, although they are bounded by an optimum level. The policy combination needs to be applied glob-ally to have its best effect and heterogeneous implementation (i.e. different levels of tax/subsidy for various regions) makes welfare loss, but still adding a global emission control policy to a set of ex-isting different local output tax/subsidy policies may be beneficial.

This paper looks at the distributional effect of an environmental tax on meat in Sweden, if such a tax was to be introduced. Welfare effects are measured as Compensation Variation (CV) for multiple price changes where Hicksian cross price elasticities, household expenditures and price changes are used in the calculations. Results show that taxes on meat are neutral over households when expenditures on meat are used as welfare indicators, and regressive if income is used. This can be explained as households use similar shares of total expenditures on meat. The households with the smallest income levels need to be compensated with 950 SEK per person and year to feel that utility is not lowered if taxes on meat are introduced, and the households with the highest income levels need to be compensated with 1176 SEK per person and year. This corresponds to 0.78% and 0.80% of total expenditures for the groups respectively. Compared to income levels this is 1.04% for the households with the smallest income levels and 0.52% for the households with the largest income.

We study values for transferable utility games enriched by a communication graph (CO-games) where the graph does not necessarily affect the productivity but can influence the way the players distribute the worth generated by the grand coalition. Thus, we can envisage values that are efficient instead of values that are component efficient. For CO-games with connected graphs, efficiency and component efficiency coincide. In particular, the Myerson value (Myerson in Math Oper Res 2:22–229, 1977) is efficient for such games. Moreover, fairness is characteristic of the Myerson value. We identify the value that is efficient for all CO-games, coincides with the Myerson value for CO-games with connected graphs, and satisfies fairness.

We propose a structural model to estimate inequality of opportunity (IOp) among workers and to distinguish two different sources of inequality: (i) inequality in the labour attachment and (ii) inequality in the remuneration of each working hour. Considering working hours as a measure of effort, our model can also be conceived as an attempt of disentangling the direct from the indirect contribution of circumstances to IOp. We estimate a system of seemingly unrelated regression equations and we use an original identification strategy based on a local market condition variable acting as exclusion restriction. By using data from the 2011 wave of the EU-SILC data base, we find in general a strong positive direct effect and a negative indirect effect of circumstances on overall IOp. Moreover, we are able to identify three cluster of countries: a first cluster includes continental countries (Italy, Spain, France) and Sweden, which show a low degree of IOp. A second cluster shows ``moderate'' levels of IOp and includes Finland and United Kingdom. A third cluster of countries shows the highest levels of IOp and includes all eastern countries.

This paper shows that developing countries possess an inherent shock-absorbing mechanism that stems from their peculiar institutional characteristics and can lessen the gravity of detrimental welfare consequence of exogenous terms-of-trade disturbances in terms of a two-sector, full-employment general equilibrium model with endogenous labour market distortion. The supply of foreign capital in the economy is a positive function of the return to capital and a decreasing function of the degree of prevailing restrictions in the economy in the process of free inflow of foreign capital. The analysis leads to a couple of important policies that should be adhered to preserve this in-built system. Finally, it offers three important statistically testable hypotheses, empirical validation of which might have an important bearing on formulation of developmental policies in these countries.

I examine the circumstances under which a sophisticated time-inconsistent decisionmaker (i) will not or (ii) need not severely miscoordinate her behavior across time, in the sense of following a course of action which fails to be Pareto-optimal for the sequence of temporal selves of the individual (Laibson [1994] and O'Donoghue and Rabin [1999] provide prominent instances of such miscoordination). Studying the standard solution concept for this case - Strotz-Pollak equilibrium - in general decision problems with perfect information, I establish two results: first, for finite-horizon problems without indifference, essential consistency (Hammond [1976]) is sufficient for choice to be Pareto-optimal. Second, if the decision problem satisfies a certain history-independence property, whenever an equilibrium outcome fails to be Pareto-optimal, it is Pareto-dominated by another equilibrium outcome, leading to an existence result for a Pareto-optimal solution.

This paper describes the results of a web-based multi-period insurance purchasing experiment focusing on how individuals make insurance choices for low-probability, high-consequence events. Participants were told the probability and resulting losses of a hurricane occurring and were informed that these were stable from period to period. We contrast the model of informed expected utility [E(U)] maximization with alternative behavioral models of choice as explanations for what we observe. The majority of individuals (63 percent) behaved in ways that were consistent with expected utility theory, although we do not know whether these individuals were utilizing other decision rules. A sizeable number of uninsured individuals decided to purchase insurance after learning that they had suffered a loss and revealing that they were unhappy about having been uninsured. In this sense, the study shows that a loss coupled with emotions is likely to play an important role in convincing an uninsured person to buy coverage. In contrast, insured individuals who did not suffer a loss rarely dropped coverage. The paper concludes by raising questions regarding the welfare implications of this behavior.

We study centipede games played by an infinite sequence of players. Following the literature on time-inconsistent preferences, we distinguish two types of decision makers, naive and sophisticated, and the corresponding solution concepts, nave -equilibrium and sophisticated -equilibrium. We show the existence of both naive and sophisticated -equilibria for each positive . Under the assumption that the payoff functions are upper semicontinuous, we furthermore show that there exist both naive and sophisticated 0-equilibria in pure strategies. We also compare the probability to stop of a naive versus a sophisticated decision maker and show that a sophisticated decision maker stops earlier.

Brent Moulton and Nicole Mayerhauser (2015) point out that, for more than 50 years, economists have featured the concept of human capital in their models of labor, growth, productivity, and distribution of income. The authors recommend the addition to the System of National Accounts (SNA) of supplemental person-level accounts: i.e., a System of Person Accounts (SPA). They see this as the best way of recognizing the processes of human capital creation as well as related issues of how income is distributed among individuals and families. The authors argue that this change would support three different perspectives from which economic activity can be viewed: (1) a current period outcomes perspective, (2) a risky possibilities perspective, and (3) a resources perspective. Moreover, these gains could be realized without changing the SNA in any substantial respects.