Stability, Fairness and Random Walks in the Bargaining Problem

We study the classical bargaining problem and its two canonical solutions, (Nash and Kalai-Smorodinsky), from a novel point of view: we ask for stability of the solution if both players are able distort the underlying bargaining process by reference to a third party (e.g. a court). By exploring the simplest case, where decisions of the third party are made randomly we obtain a stable solution, where players do not have any incentive to refer to such a third party. While neither the Nash nor the Kalai-Smorodinsky solution are able to ensure stability in case reference to a third party is possible, we found that the Kalai-Smorodinsky solution seems to always dominate the stable allocation which constitutes novel support in favor of the latter.Comment: to appear in Physica

Debt, Boom, Bust: A Theory of Minsky-Veblen Cycles

This paper reflects on the development leading to the recent crisis and interprets this development as a series of events within a Minsky-Veblen Cycle. To illustrate this claim we introduce conspicuous consumption concerns, as described by Veblen, into a stock flow consistent Post Keynesian model and demonstrate that, under these conditions, a decrease in income equality leads to a corresponding increase in debt-financed consumption demand. Here Minskyian dynamics come into play: increased credit demand leads to a corresponding rise in credit supply, which, eventually, gives rise to a debt-financed consumption boom. As the solvency of households decreases and interest rates move up, banks reduce lending, triggering household bankruptcies and, finally, a recession. What follows is a stable period of consolidation, where past debts are repaid, financial stability is regained and conspicuous consumption motives may gradually take over again. We illustrate this approach to the current crisis and its explanatory validity by extending our stock-flow consistent model into a dynamic simulation

Conspicuous consumption, inequality and debt: The nature of consumption-driven profit-led regimes

This paper extends the theoretical concept of wage-led and profit-led demand regimes, first introduced by Amit Bhaduri and Steven Marglin in the early 1990s, by incorporating relative consumption concerns. Specifically, it integrates the Veblenian concept of conspicuous consumption into a typical Bhaduri-Marglin model by assuming that relative consumption concerns matter primarily within the working class. If in such a framework the profit share increases and the corresponding decrease in workers' income is distributed unevenly, efforts to keep up with the Joneses may increase consumption and, hence, lead to a consumption- driven profit-led regime. The model's empirical relevance is illustrated with respect to the pre-crisis developments as observed in the U.S

How to boost the European Green Deal’s scale and ambition

The European Green Deal (EGD) is the European Union’s flagship strategy to tackle climate change. This policy paper compares the ambition and scale of the EGD with the current relevant scientific literature. The goal is to assess whether the current proposals are capable of fulfilling the EU’s commitment to limit global warming to 1.5°C in line with the Paris Agreement. Before embarking on the details of that question it is crucial to emphasize three core messages which emerge from climate science: 1. Tackling climate change requires that greenhouse gas emissions (GHG) are cut to net zero. Importantly, this net zero goal allows for positive emissions as long as they are offset by negative emissions. However, the technological and ecological uncertainties involved in large scale deployment of negative emissions technologies, means the emissions goal should be thought of as being close to an absolute zero goal. 2. There is not much time left to take action globally and in Europe. The latest estimates of global, as well as European carbon budgets, suggest that at current emission rates global warming will increase by more than 1.5°C in less than ten years. In addition, self-reinforcing feedback loops which push earth onto an irreversible warming path (hothouse earth) might set in from global temperature increases as little as 2°C. 3. The price of inaction will be high and most likely underestimated by the general public. While Europe will not suffer the worst consequences of climate change, heat waves, floods and droughts will still cause severe human suffering and economic damage. In addition, by 2070 up to 3.5 billion people could live in regions unsuitable for human habitation. This has the potential to trigger an unprecedented global migration wave. The question which emerges against this background is whether the EGD is ambitious enough to avoid the worst consequences of climate change. First, and most important, is the overall emissions reduction targets. While the EGD proposes to cut emissions by 50% to 55% percent by 2030 compared to 1990 levels, recent research suggests that in order to stay well below 2°C, a reduction of 65% by 2030 would be required, as would reaching net zero by 2040 rather than 2050. The EGD currently assumes that reducing GHG emissions by 40% by 2030 requires additional annual investments of € 260 billion. This is likely an underestimation of the volume of required investments for several reasons. First, increasing the reduction target towards 55% or even 65% will require faster and broader action. Second, increasing energy efficiency renovation of buildings alone is likely to require annual investments of € 490 billion. Third, scaling up Research and Development (R&D) investment to 3% or 4% of GDP in the EU27 requires additional annual investments of between € 75 and € 200 billion. Many of the required carbon neutral processes, especially in manufacturing, do not exist yet, and will require an increased expenditure in R&D for a successful transition. Taken together, this suggests that annual investment requirements of up to € 855 billion in the EU27 would be required for a successful transition. Setting and delivering on more ambitious GHG emission reduction targets requires the use of all possible policy tools. The EGD is a promising start in this context as it relies on a broad set of instruments from regulations, carbon markets, taxes and public investment. Given the limited time available the EGD should go a step further and upgrade the Sustainable Europe Investment Plan into a comprehensive climate master plan which determines clear targets and timelines for renewable energy capacity, building renovations, transport infrastructure, R&D targets etc. This would not only provide the private sector with clear long-term signals but also allow for timely monitoring of the EU’s progress

On the current state of German-speaking economics: Paradigmatic orientations and political alignments of German-speaking economists

A sample of 708 full professors (Lehrstuhlinhaber_innen) of economics at German-speaking universities (Austria, Germany and Switzerland). Very low percentage of female economists (13%). Dominance of microeconomic research orientation (50.35%). Paradigmatic classification based on two approaches reveals strong dominance of a neoclassical mainstream (91.27% and 76.11%). Heterodox approaches are marginalized and situated at small universities (e.g. Bremen, Darmstadt, Oldenburg, Lüneburg and Jena). Rather strong reference to ordoliberal concepts in Germany (8.04%). Only a minority of German-speaking economists is doing research on the financial crisis (14.45%). The German Economic Association is by far the most important academic association (60% are member of the GEA). A substantial part of German-speaking economists (particularly from those active in economic policy advice) are connected to ordoliberal and German neoliberal think tanks, institutions and initiatives (e.g. Walter Eucken Institute, Kronberger Kreis, INSM or the Hamburger Appell)

Government policies and financial crises: Mitigation, postponement or prevention?

In the aftermath of the Great Recession governments have implemented several policy measures to counteract the collapse of the financial sector and the downswing of the real economy. Within a framework of Minsky-Veblen cycles, where relative consumption concerns, a debt-led growth regime and financial sector confidence constitute the main causes of economic fluctuations, we use computer simulations to assess the effectiveness of such measures. We find that the considered policy measures help to mitigate the impact of financial crises, though they do so at the cost of shortening the time between the initial financial crisis and the next. This result is due to an increase in solvency and confidence induced by the policy-measures under study, which contribute to an increase in private credit and, thereby, increases effective demand. Our results suggest that without a strengthening of financial regulation any policy intervention remains incomplete

A Comment on Fitting Pareto Tails to Complex Survey Data

Taking survey data on household wealth as our major example, this short paper discusses some of the issues applied researchers are facing when fitting (type I) Pareto distributions to complex survey data. The major contribution of this paper is twofold: First, we provide a novel take on key aspects of Pareto tail fitting and a new and easy way of implementing the latter. Second, we summarise key results on goodness of fit tests in the context of complex survey data. Taken together we think the paper provides a concise and useful presentation of the fundamentals of Pareto tail fitting with complex survey data

Rank Correction: A New Approach to Differential Nonresponse in Wealth Survey Data

This paper develops a new approach for dealing with the under-reporting of wealth in household survey data (differential nonresponse). The current practice among researchers relying on household wealth survey data is one out of three approaches. First, simply ignore the problem. Second, fit a Pareto distribution to the tail of the survey data and use that distribution. Third, add rich list data to the sample and fit a Pareto distribution to the combined data Vermeulen (2018). We propose a fourth approach - the rank correction approach - which improves over the first two and does not require information drawn from publicly available rich lists. We show by means of Monte Carlo simulations that this rank correction approach substantially reduces nonresponse bias in the Pareto tail estimates. Applying the procedure to wealth survey data (HFCS, SCF, WAS) yields substantial increases in aggregate wealth and top wealth shares, which are closely in line with wealth summary statistics from other sources such as the World Inequality Database. As such the rank correction approach can serve as a complement and robustness check to Vermeulen (2018) rich list approach and as an attractive alternative to the second approach in situations where rich list data is not available or of poor quality

Was Pareto right? Is the distribution of wealth thick-tailed?

We fit log-normal, exponential, Pareto type I and Pareto type II distributions to US wealth data from 1989 to 2019 and examine the goodness of fit. Unlike earlier literature this paper uses high quality data, covering the entire US population, yielding powerful and unbiased tests. Beyond the 91st percentile the type II distribution consistently provides the best fit to the data and supports the hypothesis of a thick-tailed wealth (and by extension income) distribution. In addition, our results highlight the changing shape of the tail with decreasing concentration up to the 98th percentile and increasing concentration beyond. Our results suggest that practitioners modelling the distribution of wealth in situations where only limited data is available, a type I Pareto distribution might still serve as a valuable bias correction tool but should only be fitted to the top 1% of the population

A European wealth tax for a fair and green recovery

The European Union faces the twin crises of Covid-19 and climate change. Confronting both crises leads to an unprecedented demand on public resources which in turn leads to the question of how to raise the required funds a) without jeopardising a weak economy recovering from the pandemic and b) without undermining broad political support for climate action. This policy study investigates the potential of a European net wealth tax to raise substantial revenues while supporting the economy and the consensus on climate action. To achieve this, household survey data from the European Central Bank (covering 22 EU countries) are analysed. To address the problem of under-reporting of wealth at the top of the distribution in survey data, a Pareto distribution is fitted to the right tail of the data and used to create an amended data set which also represents these missing rich, whose wealth goes unreported. The Pareto-amended data show that household wealth is highly concentrated among the wealthiest households: the richest 1% hold 32% of total net wealth in the EU22 while the poorest half of all households only hold about 4.5% of total net wealth. These data are then used to estimate revenues for four different tax models. The results show that annual revenues between €192 billion (1.6% of GDP) and €1,281 billion (10.8% of GDP) across the EU22 are possible. Non-progressive (flat tax) designs yield revenues at the low end of this range while strongly progressive designs are responsible for the high revenue estimates at the upper end of this range. Conversely, the models’ ability to actively reduce the current concentration of wealth in Europe varies with the degree of progressivity of the tax design. In sum, a net wealth tax exhibits high revenue potential, which is a direct result of the observed high levels of inequality and is far larger than that for other proposals currently being discussed at the European level. A combination of clever design choices, more resources and better infrastructure for the EU’s tax authorities would make a European net wealth tax feasible. With respect to the tax design, high exemption thresholds between €1 million and €2 million, paired with progressive tax rates and a broad tax base, imply that only the richest 1% to 3% of all households are taxed and thus the problem of illiquid tax subjects is avoided, while keeping the revenue potential high. Boosting tax authorities’ resources to enforce the tax and to build appropriate infrastructure, such as real estate valuation databases and company registers, will ensure high levels of compliance and enforcement. Best practice examples such as Switzerland (valuation) and Norway (third party reporting) exist and can be used as a point of reference for successful implementation. To strengthen compliance an implementation at the European level is desirable. The results of this policy study show that overall, a European net wealth tax has the potential to make a substantial contribution to the EU’s efforts to organise a decisive response to the twin crises of Covid-19 and climate change. A net wealth tax is not only attractive because its revenue potential ranks amongst the highest of the potential alternatives that are currently being discussed at the European level, but also because of its ability to reduce historically high levels of wealth inequality in Europe