The Drawbacks of Electoral Competition

We examine the effect of the number of candidates and the impact of ideology on the efficiency of the electoral process. We show that the tendency to focus on policies that provide particularistic benefits increases with the number of candidates to the expense of policies that benefit the population at large. Thus, the efficiency of policies provided in an electoral equilibrium worsens when the number of candidates increases. We next show that partisan voters are disadvantaged in the process of redistributive politics, and that the larger the fraction of voters who vote ideologically, the less efficient the political process. This is because electoral competition focuses on swing voters, increasing the values of policies with targetable benefits.

Parental Guidance and Supervised Learning

We propose a simple theoretical model of supervised learning that is potentially useful to interpret a number of empirical phenomena. The model captures a basic tradeoff between sheltering the child from the consequences of his mistakes, and allowing him to learn from experience. We characterize the optimal parenting policy and its comparative-statics properties. We then show that key features of the optimal policy can be useful to interpret provocative findings from behavioral genetics.

Efficient Sorting in a Dynamic Adverse Selection Model: The Hot Potato

We study the possibility of achieving efficiency in a dynamic adverse selection market for durable goods. The idea is to use the number of times a car has been traded (``vintage'') as a signal of its quality. Higher-valuation consumers experiment with younger vintages. We first exhibit an impossibility result: no choice of (re)sale prices can induce consumers to follow this experimentation policy. We then show that modified leasing contracts can be constructed so as to achieve efficiency if consumers are patient.

Collective Self-Control

Behavioral economics presents a "paternalistic" rationale for a benevolent government's intervention. We consider an economy where the only "distortion" is agents' time-inconsistency. We study the desirability of various forms of collective action, ones pertaining to costly commitment and ones pertaining to the timing of consumption, when government decisions respond to voters' preferences via the political process. Three messages emerge. First, welfare is highest under either full centralization or laissez-faire. Second, introducing collective action only on consumption decisions yields no commitment. Last, individuals' relative preferences for commitment may reverse depending on whether future consumption decisions are centralized or not

The Role of Leasing under Adverse Selection

Leasing contracts specify a rental rate and an option price at which the used good can be bought at the termination of the lease. This option price cannot be controlled when the car is sold. We show that in a world with symmetric information this additional control variable is useless; equilibrium allocations and profits to lessors are unaffected by the option prices. In contrast, under adverse selection, leasing contracts affect equilibrium allocations in a way that matches observed behavior in the car market. We show that a social planner can use leasing contracts to improve welfare but they are imperfect tools; they cannot generally achieve first best while other mechanisms can. We also show that a producer with market power can benefit from leasing contracts for two reasons: better pricing of the option of keeping the used good, and market segmentation. Moreover, despite the fact that lessors could structure contracts to prevent adverse selection (by raising the option price so high that no lessee keeps the used good) we show that this is not in their interest; a keeping option will always be included in some contracts.

Provision of quality and certification intermediaries

If buyers do not observe the quality of a product and production of quality is costly, market allocations can be very inefficient. Certification intermediaries are institutions that provide information about quality to buyers. The amount of information in the market determines the incentives that producers have to provide high quality goods. In this paper, we model information revelation as a strategic variable of intermediaries. The amount of disclosed information is shown to deeply influence both the intermediary's profits and the distribution of quality produced in equilibrium. We show that a monopoly intermediary will provide noisy signals of quality and that the quality produced in equilibrium is the same as the one that would be chosen by a monopsonistic buyer who optimally designs a mechanism. Efficiency is increased by the intermediary but less quality is produced in equilibrium than under complete information

Efficient sorting in a dynamic adverse-selection model

We discuss a class of markets for durable goods where efficiency (or approximate efficiency) is obtained despite the presence of information asymmetries. In the model, the number of times a good has changed hands (the vintage of the good) is an accurate signal of its quality, each consumer self-selects into obtaining the vintage that the social planner would have assigned to her, and consumers' equilibrium trading behavior in secondary markets is not subject to adverse selection. We show that producers have the incentive to choose contracts that lead to the efficient allocation, and to supply the efficient output. We also provide a contrast between leasing contracts, resale contracts, and different kinds of rental contracts. Resale contracts do not lead to the efficient allocation. A specific kind of rental contract provides the appropriate incentives to consumers