History : Sunk Cost, or Widespread Externality?

In an intertemporal Arrow-Debreu economy with a continuum of agents, suppose that the auctioneer sets prices while the government institutes optimal lump-sum transfers period by period. An earlier paper showed how subgame imperfections arise because agents understand how their current decisions such as those determining investment will influence future lump-sum transfers. This observation undermines the second efficiency theorem of welfare economics and makes “history” a widespread externality. A two-period model is used to investigate the constrained efficiency properties of different kinds of equilibrium. Possibilities for remedial policy are also discussed.

Social Choice and Just Institutions: New Perspectives

It has become accepted that social choice is impossible in absence of interpersonal comparisons of well-being. This view is challenged here. Arrow obtained an impossibility theorem only by making unreasonable demands on social choice functions. With reasonable requirements, one can get very attractive possibilities and derive social preferences on the basis of non-comparable individual preferences. This new approach makes it possible to design optimal second-best institutions inspired by principles of fairness, while traditionally the analysis of optimal second-best institutions was thought to require interpersonal comparisons of well-being. In particular, this new approach turns out to be especially suitable for the application of recent philosophical theories of justice formulated in terms of fairness, such as equality of resources.social welfare, social choice, fairness, egalitarian-equivalence

The Missing Element of Environmental Cost-Benefit Analysis: Compensation for the Loss of Regulatory Benefits

Despite its critics, cost-benefit analysis remains a fixture of the environmental regulation calculus. Most criticisms of cost-benefit analysis focus on the impossibility of monetizing environmental and health amenities protected by regulations. Less attention has been paid to the regressive wealth-transfer effects of regulations foregone based on cost-benefit analysis. This regressive effect occurs as long as downwind communities that suffer health and harms from environmental contamination are generally less wealthy than the owners of pollution sources that avoid regulatory-compliance costs. The availability of compensation to pollution-victims has the potential to ameliorate this regressive effect. This Article recommends that the availability of compensation to those suffering environmental harms should be an essential part of cost-benefit analysis, and the lack of compensation mechanisms should justify imposing regulatory burdens that might otherwise be rejected under cost-benefit analysis

Global Competition for Mobile Resources: Implications for Equity, Efficiency, and Political Economy

International integration of markets for labor and capital has far-reaching policy implications in economies where governments pursue extensive programs of redistribution through tax and transfer policies. The large fiscal impacts that result from movement of high- and low-income populations, as well as of capital, affect the benefits, costs, and political payoffs of redistributive policies, creating incentives for fiscal competition that may limit the extent of redistribution over time. Migration and capital flows are dynamic adjustment mechanisms, analysis of which can shed light on the consequences of structural changes such as globalization of factor markets and EU enlargement.Fiscal Competition

Distortionary taxation for efficient redistribution

This article uses a simple model to review the economic theory of efficient redistributive taxation. The model economy is a Lucas-tree economy, in which income comes from a stock of productive capital. Agents, who own the capital stock, are heterogenous with respect to their preference for early versus late consumption. A competitive capital market, in equilibrium, supports a unique Pareto-efficient allocation of consumption among the agents, i.e., the First Welfare Theorem holds. The equilibrium allocation represents one efficient division of the total gains from trade that are available in the economy. All other efficient divisions of the gains from trade, represented by a continuum of other Pareto-efficient allocations, are inconsistent with competitive capital market equilibrium. If agents' preference types are public information, nondistortionary wealth transfers are sufficient to implement any Pareto optimum as a market equilibrium, i.e., the classic Second Welfare Theorem holds. If agents' preferences are private information, however, the classic Second Welfare Theorem fails. A class of distortionary tax systems is characterized under which a modified Second Welfare Theorem holds: Every constrained-Pareto-optimal allocation can be supported as an equilibrium subject to distortionary taxes.Taxation

Endogenous Human Capital Accumulation, Comparative Advantage and Direct vs. Indirect Redistribution

Recently, several papers have re-examined the so-called production efficiency theorem and the Atkinson and Stiglitz theorem on commodity taxes in the optimal taxation literature. Naito (1999) showed that indirect redistribution through production distortion or consumption distortion can Pareto-improve welfare and that the two theorems do not necessarily hold when different factors are imperfect substitutes and factor prices are endogenous. On the other hand, Saez (2001) argued that in the long run where human capital accumulation is endogenous, the two theorems are still valid. This paper develops reasonable alternative models where individuals accumulate human capital based on their comparative advantage. The present paper shows that the production efficiency theorem is not necessarily valid and that indirect redistribution from the able to the less able such as tariffs and production subsidies can increase efficiency even when skill accumulation is endogenous.

Access Profit-Sharing Regulation with Information Transmission and Acquisition

The paper analyses how information acquisition and transmission issues affect the determination of the optimal access pro.t-sharing plan in regulated network industries. It considers a regulated upstream monopoly with cost uncertainty and a downstream unregulated duopoly. It will be shown that, under an access price cap regulatory mechanism, the transfer of a sufficiently high share of access profits to consumers induces an integrated upstream monopolist to transmit to his downstream rival the information privately acquired on the upstream cost and this, in turn, may negatively affect welfare. On account of these effects the optimal access profit-sharing plan will depend on the variance and shape of cost distribution, on information acquisition costs as well as on the regulator’s redistributive concerns.Access price cap regulation, profit-sharing, information transmission and acquisition

The efficiency of financial markets with high inflation

In a two period general equilibrium model with incomplete asset markets, it is shown that the contraction of nominal financial markets that occurs during high inflations can result from the variability of the future rate of inflation and from large bankruptcy costs. If the probability that inflation in the future will be high is sufficiently large, then, for a generic set of endowments, an increase in the variability of future prices reduces the utility possibilities set. In economies with only nominal assets more variable future prices lead to a Pareto fall in social welfare