Lorenz meets rating but misses valuation

Using an experiment with material incentives, this paper investigates the violation of Lorenz relations in the case of dominant and single?crossing Lorenz curves. Our experimental design consists of two treatments: an income distribution treatment and a lottery treatment. Both treatments were conducted in Italy and Spain. In each treatment, subjects were asked to judge ten multiple?outcome lotteries or ten n?dimensional income distributions in terms of both ratings and valuations. This 2 × 2 × 2 experimental design, allows us to investigate the response?mode (rating versus valuation) and framing (lotteries versus income distributions) effects in subjects? perceptions concerning the two types of Lorenz relations. We found the existence of a marked response?mode effect, as only the ratings of the lotteries and income distributions confirm both Lorenz relations, whereas the valuations violate them. The framing effect is significant only for the Spanish data. For this data the sign of the framing effect depends on the type of the Lorenz relation considered. For crossing Lorenz curves, a higher conformity corresponds to the lottery frame, for Lorenz dominance a higher conformity corresponds to the income distribution frame. --Income Distributions,Lotteries,Lorenz Curves,Inequality and Risk Aversion,Response?Mode Effects

Collective and Random Fining versus Tax/Subsidy - Schemes to Regulate Non-Point Pollution : An Experimental Study

In this paper we present results of an experimental study on the performance of three mechanisms which are designed to deal with non-point source pollution : collective fining, random fining, and a tax-subsidy scheme. Our results show that collective and random fining schemes do not induce the subjects to play the efficient equilibrium. Experience from participation in similar treatments further enforces the tendency to under-abate. The taxsubsidy mechanism, by contrast, induces the efficient equilibrium action to be played more frequently than the fining mechanisms, with a slight tendency to over-abate. Experience enforces this tendency. Controlling for the subjects? risk attitude, we find that for risk averse subjects the random fining mechanism outperforms the collective fine. --Non-point source pollution,environmental policy,collective fining,random fining,tax-subsidy scheme,experiments

Designing public communication and disclusure strategies for central banks and other policy bodies

[Introduction] The idea that a price system based on competitive markets is able to aggregate different pieces of information dispersed in the economy dates back to the 50\u2019s. In particular, economists have long understood that, in theory, the prices in properly designed asset markets reflect the collection of all the information possessed by traders on future events. Asymmetry of information among the traders is of course an essential ingredient for prices to have an informational role. Instead of leaving the market operating alone in aggregating private information, the release of public information might constitute an option that can facilitate the aggregation process. In addition to the information hold privately by traders, one might assume the existence of a disciplining institution that releases public information in order to enhance market efficiency. The public character of the information lies in the fact that it is known by all economic agents operating in the market and it is almost freely available. Intuitively, one might think that public information should be beneficial for market performance, if it is assumed that it simply cumulates to the information already present in the market: in this sense, more information seems to be beneficial for decision makers. If this might be true when an economic agent acts in isolation from others, it might not be the case when a certain strategic interaction among decision makers is introduced. The theoretical literature has shown that in an economic system where agents have access to private information, noisy public information might be weighted above and beyond its accuracy, driving the economic system far from fundamentals when wrong and therefore damaging social welfare. Using the words of Morris and Shin (2002) \u201cpublic and private information (might) end up being substitute rather than being cumulative". They demonstrate that public information might be considered a double edged-instrument: it conveys information on the fundamentals of a financial asset, but, at the same time, it serves as a focal point in coordinating the traders' activity in a market. As a consequence, the noisiness of public information can be enhanced in the market due to the overreaction of the traders to the disclosure of a public signal. [...

Income Distributions versus Lotteries Happiness, Response-Mode Effects, and Preference

This paper provides a comparative experimental study of risky prospects (lotteries) and income distributions. The experimental design consisted of multi?outcome lotteries and n?dimensional income distributions arranged in the shapes of ten distributions which were judged in terms of ratings and valuations, respectively. Material incentives applied. We found heavy response?mode effects, which cause inconsistent behavior between rating and valuation of lotteries and income distributions in more than 50% of all cases. This means that ethical inequality measures lack support in peoples? perceptions. In addition to classical preference reversals between generalized P?bets and $?bets we observed three additional patterns of preference reversal, two of which apply only to income distributions. Dominating Lorenz curves and Lorenz curves cutting others from below receive decidedly higher ratings (which implies risk and inequality aversion), but lower valuations. The transfer principle is largely violated. The rating of lotteries is a decreasing function of skewness, the rating of income distributions is a decreasing function of standard deviation. The valuation of lotteries is an increasing function of standard deviation and kurtosis, and the valuation of income distributions is an increasing function of standard deviation, skewness, and kurtosis. --Income Distribution,Lotteries,Income Happiness,Inequality and Risk Aversion,Ethical Inequality Measures,Preference Reversal

El liderazgo upstream vs. downstream en la determinación de la estructura vertical de mercado

En un modelo en el que dos marcas diferenciadas verticalmente pueden ser distribuidas por hasta dos minoristas potencialmente diferenciados, estudiamos la estructura distributiva del mercado en equilibrio resultante de la decisión de los minoristas o los productores. En términos de bienestar social, las estructuras de distribución de equilibrio decididas por los productores dominan débilmente a las resultantes de decisiones de los minoristas. Contrariamente a la preocupación habitual sobre el poder de mercado en el segmento upstream, nuestros resultados sugieren que la elección de la estructura de distribución por parte de minoristas con poder puede, per se, ser la causa de estructuras verticales socialmente ineficientesIn a model in which two vertically differentiated brands can be distributed by up to two potentially differentiated retailers, we study the equilibrium distribution market structure resulting from the decision of retailers or manufacturers. In terms of social welfare, equilibrium distribution structures decided by producers weakly dominate those resulting from retailers’ decisions. Contrary to usual concerns about upstream market power, our results suggest that the choice of the distribution structure by powerful retailers may be, per se, the cause of socially inefficient vertical structure

Heuristic Switching Model and Exploration-Exploitation Algorithm to Describe Long-Run Expectations in LtFEs: a Compariso

We elicit individual expectations in a series of Learning-to-Forecast Experiments (LtFEs) with different feedback mechanisms between expectations and market price: positive and negative feedback markets. We implement the EEA proposed by Colasante et al. (J Evol Econ 2018b. https://doi.org/10.1007/S00191-018-0585-1). We compare the performance of two learning algorithms in replicating individual short and long-run expectations: the Exploration-Exploitation Algorithm (EEA) and the Heuristic Switching Model (HSM). Moreover, we modify the existing version of the HSM in order to incorporate the long run predictions. Although the two algorithms provide a fairly good description of prices in the short run, the EEA outperforms the HSM in replicating the main characteristics of individual expectation in the long-run, both in terms of coordination of individual expectations and convergence of expectations to the fundamental value

El Papel de las agencias de rating en la desestabilización de los mercados financieros en el laboratorio

Tras la reciente etapa de agitación en los mercados financieros, tanto los académicos como las instituciones reguladoras han iniciado un debate sobre el papel de las agencias de rating en la inestabilidad financiera. Parece ser que sus recomendaciones optimistas han sido seguidas por la gran mayoría de los inversores, a pesar de que con posterioridad se han revelado erróneas. Como ejemplo, en el caso de Islandia, las agencias de rating no fueron capaces de predecir su inminente colapso en 2008. Como consecuencia de ello, en los últimos meses se ha agudizado el debate sobre agencias de rating y su contribución en las turbulencias en los mercados financieros. Así, un gran número de comisiones gubernamentales y grupos de investigación a nivel mundial han propuesto diferentes reformas del sistema financiero. Entre ellas está aumentar el número de agencias de rating, dado que uno de los factores que pueden favorecer un comportamiento colusivo entre ellas es su reducido número. Como ejemplo Standard and Poor’s, Moody’s y Fitch controlan el 90 % del mercado.Following the recent period of unease on the financial markets, both academics and regulatory institutions have begun a debate on the role played by rating agencies in financial instability. It seems that their optimistic recommendations have been followed by the vast majority of investors, even though they later proved to be mistaken. As an example, the rating agencies were unable to predict Island’s imminent collapse in 2008. Consequently, in the last few months the debate on rating agencies and their contribution to the turbulences of the financial markets has become more pronounced. Thus, a large number of governmental commissions and research groups around the world have proposed different reforms to the financial system. One of these changes would be to increase the number of rating agencies, since one of the factors that can favour collusive behaviour among them is the fact that they are very few in number. Standard and Poor’s, Moody’s and Fitch, for example, control 90% of the market

Alternative approaches for the reformulation of economics

In the last decades most of advanced and developing economies have undertaken adeep structural transformation. This profound structural change, caused by the tran-sition from a manufacturing economy to a service-based one, is among the causes ofthe current crisis (see Delli Gatti et al.2012). The dereculation of the banking sys-tem with the consequent redirection of banking activity from the credit sector to thefinancial one,1and the liberalization of financial markets, the globalization and thedelocalisation of production with the resulting labor market flexibility are just some ofthe many transformations affecting the socio-economic system in the recent decades

Environmental policy instruments: technology adoption incentives with imperfect compliance

We study the incentives to adopt advanced abatement technologies in the presence of imperfect compliance. Interestingly, incentives under emission taxes and pollution abatement subsidies are the same that in the perfect compliance scenario. However, under emission standards imperfect compliance can increase firms’ incentives to invest, whereas under an emission permit mechanism investment incentives decrease only if widespread non-compliance induces a reduction in the permit price. Our results are valid for fairly general characteristics of the monitoring and enforcement strategies commonly found in both, theoretical and empirical applications

¿Por qué los mercados grandes no regulan?

El objetivo de este trabajo es estudiar, utilizando un modelo teórico, el impacto que el tamaño del mercado tiene sobre la regulación de las emisiones consecuencia de la actividad productiva de las empresas. En nuestro modelo asumimos dos países con mercados del mismo tamaño. En cada país opera una sola empresa que produce tanto para el mercado doméstico como el mercado extranjero. Los gobiernos deciden controlar las emisiones resultantes de la actividad productiva de las empresas gravándolas con un impuesto y dar así incentivos a las empresas a invertir en actividades de I+D con el fin de reducir sus emisiones. En un contexto en el que tanto las empresas como los gobiernos actúan de forma estratégica demostramos que un aumento en el tamaño del mercado reduce los incentivos de los gobiernos a aplicar impuestos a la contaminación.This paper aims to analyse, through the application of a theoretical model, the impact that the size of markets has on the regulations over the resulting emissions of the production activity of companies. In our model we acknowledge two countries with similar size markets. In each country there is just one operating company, producing both for the domestic and the foreign market. The governments decide to control the abovementioned emissions by introducing a tax, while, at the same time, incentives are given to those companies in order for them to invest in R&D and thus reduce their emissions. In a context where both the companies and the governments assume strategic roles we prove that an increase in the size of the market reduces the incentives governments grant regarding the introduction of taxes against pollution