Overconfidence and welfare in a differentiated duopoly

We examine whether owners\u27 decisions to delegate corporate responsibilities to overconfident managers improve welfare. We develop a dynamic model with product differentiation, where firms compete in cost-reducing research and development (R&D) and output. Before firms compete, each owner makes a strategic decision whether to hire an overconfident manager. The results reveal that when R&D technology is less productive, owners hire overconfident managers who overinvest in cost-reducing R&D. These strategic decisions improve welfare when spillovers are small and R&D productivity is low, or spillovers are large, or product differentiation is strong

A Political Reciprocity Mechanism

We consider the problem of designing legislative mechanisms that guarantee equilibrium existence, Pareto-efficiency, and inclusiveness. To address this question, we propose a finite-horizon voting procedure that embeds clauses of reciprocity. These clauses grant voters the right to oppose actions that are not in their interest, retract actions that face opposition, and punish harmful actions. We study voters\u27 strategic behavior under this voting procedure using two classical approaches. Following the blocking approach, we introduce two related solution concepts---the reciprocity set and the sophisticated reciprocity set---to predict equilibrium policies. We then show that these solution concepts (1) are always non-empty; (2) only select Pareto-efficient policies; (3) strategically protect minority interests; and (4) are compatible with classical notions of fairness and Rawlsian justice in distributive problems. Following the non-cooperative approach, we provide an implementation of each of these solution concepts in subgame perfect equilibrium, which makes them applicable in a wide range of legislative settings. We also extend them to effectivity functions, a large class of games that includes strategic form games. A comparative analysis shows that the reciprocity mechanism has other desirable features and properties that distinguish it from other well-known voting mechanisms and solution concepts

Locating an Optimal Site for a Controversial Facility

We consider a situation in which policymakers in a local community have to choose an optimal site for a controversial and essential project in a democratic setting. Policymakers have either single-dipped or multi-dipped preferences over a Euclidean space of possible locations. We provide two existence results for this issue. There exists at most two optimal sites if the size of policymakers is odd, and they have single-dipped preferences over a one-dimensional site space

Political Design Meets Policy Complexity

The rules that are employed to pass policies in legislative bodies vary widely. It is generally argued that policies that differ in complexity or importance level should be decided under different kinds of voting rules. While this question has been examined for static legislative mechanisms, an analysis of the precise relationship between the level of policy complexity and the type of voting rule is still missing for dynamic mechanisms. We address this problem from the perspective of a preference-blind political designer. Given the level of complexity of the decision that is to be made, the political designer\u27s goal is to select the supermajority rule that avoids (1) policy instability; (2) guarantees efficiency; and (3) minimizes institutional status quo bias. We provide an answer to this objective problem, deriving a closed-form relationship between voting rule and policy complexity. Our analysis rationalizes the use of different rules to adopt different types of policy only when preferences are weak. When preferences are strong, the optimal rule is unique, and it does not vary by level of policy complexity. These findings significantly differ from those obtained for static mechanisms. Our study also implies that more complex policies are more likely to be persistent, even after a change in political preferences

On the Dynamic Analysis of Cournot-Bertrand Equilibria

We consider a setting where firms in the first stage invest in cost-reducing R&D. In the market stage, one firm sets a quantity, and another sets a price. We prove that the quantity-setting firm invests more in R&D, has a lower price, and produces higher quantity than the price-setting firm. We also consider welfare implications

Supermajority Politics: Equilibrium Range, Policy Diversity, Utilitarian Welfare, and Political Compromise

The standard Bowen model of political competition with single-peaked preferences (Bowen, 1943)predicts party convergence to the median voter’s ideal policy, with the number of equilibrium policies not exceeding two. This result assumes majority rule and unidimensional policy space.We extend this model to static and dynamic political economies where the voting rule is a supermajority rule, and the policy space is totally ordered. Voters’ strategic behavior is captured by the core in static environments and by the largest consistent set in dynamic environments.In these settings, we determine the exact number of equilibria and show that it is an increasing correspondence of the supermajority’s size. This result has implications for the depth of policy diversity across structurally identical supermajoritarian political economies. We also examine equilibrium effects of supermajority rules on utilitarian welfare and political compromise under uncertainty

Optimally Targeting Interventions in Networks during a Pandemic: Theory and Evidence from the Networks of Nursing Homes in the United States

This study develops an economic model for a social planner who prioritizes health over shortterm wealth accumulation during a pandemic. Agents are connected through a weighted undirected network of contacts, and the planner’s objective is to determine the policy that contains the spread of infection below a tolerable incidence level, and that maximizes the present discounted value of real income, in that order of priority. The optimal unique policy depends both on the configuration of the contact network and the tolerable infection incidence. Comparative statics analyses are conducted: (i) they reveal the tradeoff between the economic cost of the pandemic and the infection incidence allowed; and (ii) they suggest a correlation between different measures of network centrality and individual lockdown probability with the correlation increasing with the tolerable infection incidence level. Using unique data on the networks of nursing and long-term homes in the U.S., we calibrate our model at the state level and estimate the tolerable COVID-19 infection incidence level. We find that laissez-faire (more tolerance to the virus spread) pandemic policy is associated with an increased number of deaths in nursing homes and higher state GDP growth. In terms of the death count, laissez-faire is more harmful to nursing homes than more peripheral in the networks, those located in deprived counties, and those who work for a profit. We also find that U.S. states with a Republican governor have a higher level of tolerable incidence, but policies tend to converge with high death count

Stable Allocations of Vaccines in a Political Economy

We develop a theory that addresses the problem of the existence of stable vaccine allocations in a political economy. These are allocation policies that a political leader can enforce without losing their popularity. Our analysis distinguishes between contexts where vaccination has positive externalities and contexts where it does not. We show that a stable allocation may not exist if vaccine supply is sufficiently low relative to the number of individuals eligible to receive a dose. We then fully characterize the minimum number of vaccine doses that guarantees the existence of a stable vaccine allocation, regardless of society\u27s preference heterogeneity level. The minimum dose number depends only on a society\u27s influence structure or voting rule. When individuals have unequal voting rights, stable allocations favor those with greater voting power. We generalize our main characterization result to economies where spatial proximity between individuals varies and preferences are unselfish due to positive vaccine externalities. Applying the theory, we find that a political leader can enforce stable vaccine allocation policies that are minority-inclusive only when the supply of vaccines is sufficiently high

An Index of Unfairness

The Shapley distance is introduced as a measure of the extent to which output sharing among the stakeholders of an organization can be considered unfair. In fact, it measures the distance between an arbitrary pay profile and the Shapley pay profile under a given technology, the latter profile defining the fair distribution. Therefore, this chapter contributes to the literature that studies economic inequality using game theory. In particular, we provide an axiomatic characterization to a notion of unfairness, namely the Shapley distance, and show that it can be used to determine the outcome of an underlying bargaining process. We also present applications highlighting how favoritism in income distribution, egalitarianism, and taxation violate the different ideals of justice that define the Shapley value and how unfairness can be further unbundled to determine its origins. The analysis has implications that can be tested using real-world data sets

Laissez-Faire, Social Networks, and Race in a Pandemic

We study the effects of race, network centrality, and policies that tolerate some level of virus spread (laissez-faire) on COVID-19 deaths in nursing homes in the United States. Our analysis uses unique data on nursing home networks and calibration-based estimates of states\u27 preferences for health relative to short-term economic gains. Our findings suggest that laissez-faire policies increase deaths. Nursing homes with a larger share of Black residents experience more deaths, but they are less vulnerable to laissez-faire policies, especially when not central in social networks. Our findings highlight significant interactions between COVID-19 policies, race, and network structure among US seniors