Fairness, NGO Activism and the Welfare of Less Developed Countries

In a world where some consumers are not self-interested and the action of non-governmental organizations (NGOs) reveals information, the price of a good produced by a multinational enterprise and the latter's relocation and production decisions depend on labor standards. We study the effect of an increase in NGO activism on labor standards and welfare in less developed countries (LDC). An increase in NGO activism improves labor practices unless consumers like inequity. A priori, activism could either increase or decrease LDC welfare. We give parameter restrictions that determine which way it moves.

Choosing between traditional and innovative technologies: the case of scientific uncertainty

We study the choice between a traditional technology characterized by known risks and an innovative technology (a geological storages for nuclear wastes, a genetically modified organism or a new treatment in medical science) subject to scientific uncertainty. We assume that the two technologies differ in first period implementation costs, second period risk, and degree of irreversibility, and we study the effect of foreseen scientific progress on the present choice between the two. If the first-period choice is restricted to be 'all or nothing', scientific progress promotes the traditional technology; with constant absolute risk aversion, scientific progress increases the optimal level of the technology with the higher implementation cost.

no Logo

Firms have incentives to invest in wage reducing practices when they expect a high advertising equilibrium in the future product market competition. Incentives to invest in wage reducing practices like shifting the production to the third world or lobbying legislators to change labor market regulation by lowering the bargaining power of workers, can be explained by a link between the product market and labor market which operates through the effect of advertising on demand. Increased advertising implies under general conditions more production and therefore greater incentives to reduce production costs per unit. advertising, wages, global economy

Advertising and Cost Reduction

The empirical literature on internalization has found a positive relationship between advertising intensity and foreign direct investment. The model presented in this paper explains this evidence by a technological change in the communications environment and makes predictions for other cost-reducing investments. We consider a market in which a single producer launches a new product. At first potential buyers are unaware of the product and its price, and the producer decides the optimal advertising strategy. We find that both advertising spending and investment in per unit cost reduction are higher under targeting than under mass advertising when the advertising technology exhibits marginal economies of targeting.Informative advertising, Targeting, Foreign Direct Investment, Cost reduction

Parents, Television and Cultural Change

This paper develops a model of cultural transmission where television plays a central role for socialization. Parents split their free time between educating their children, which is costly, and watching TV which though entertaining might socialize the children to the wrong trait. The free to air television industry maximizes advertisement revenue. We show that TV watching is increasing in cultural coverage, cost of education, TV’s entertainment value and decreasing in the perceived cultural distance between the two traits. A monopolistic television industry captures all TV watching by both groups if the perceived cultural distance between groups is small relative to the TV’s entertainment value. Otherwise, more coverage will be given to the most profitable group where profitability increases in group size, advertisement sensitivity and perceived cultural distance. This leads to two possible steady states where one group is larger but both groups survive in the long run. Competition in the media industry might lead to cultural extinction but only if one group is very insensitive to advertisement and not radical enough not to watch TV. We briefly discuss the existing evidence for the empirical predictions of the model.television, socialization, cultural trait dynamics, media coverage

Discounting and Expropriation Risk

This paper investigates the association between discounting and risk of expropriation and provides the theoretical conditions that make a positive association consistent with rationality. Moreover, using a national representative sample and a representative sample of the 50+ in eleven European countries, we show that discounting increases with expropriation risk. The two surveys give direct measures of discount rate as well as measures derived from households consumption decisions and provide proxies for expropriation from government and expropriation from criminal offenses.

Legal Standards, Enforcement and Corruption

Stricter laws require more incisive and costlier enforcement. Since enforcement activity depends both on available tax revenue and the honesty of officials, the optimal legal standard of a benevolent government is increasing in per-capita income and decreasing in officials’ corruption. In contrast to the “tollbooth view” of regulation, the standard chosen by a self-interested government is a non-monotonic function of officials’ corruption, and can be either lower or higher than that chosen by a benevolent regulator. International evidence on environmental regulation show that standards correlate positively with percapita income, and negatively with corruption, consistently with the model’s predictions for benevolent governments.legal standards, enforcement, corruption

Optimal Regulation of Auditing

We study regulation of the auditing profession in a model where audit quality is unobservable and enforcing regulation is costly. The optimal audit standard falls short of the first-best audit quality, and is increasing in the riskiness of firms and in the amount of funding they seek. The model can encompass collusion between clients and auditors, arising from the joint provision of auditing and consulting services: deflecting collusion requires less ambitious standards. Finally, banning the provision of consulting services by auditors eliminates collusion but may not be optimal in the presence of economies of scope.auditing, regulation, enforcement, collusion

Optimal Regulation of Auditing

We study regulation of the auditing profession in a model where audit quality is unobservable and enforcing regulation is costly. The optimal audit standard falls short of the first-best audit quality, and is increasing in the riskiness of firms and in the amount of funding they seek. The model can encompass collusion between clients and auditors, arising from the joint provision of auditing and consulting services: deflecting collusion requires less ambitious standards. Finally, banning the provision of consulting services by auditors eliminates collusion but may not be optimal in the presence of economies of scope.auditing, regulation, enforcement, collusion.

Optimal Accomplice-Witnesses Regulation under Asymmetric Information

We study the problem of a Legislator designing immunity for privately informed cooperating accomplices. Our objective is to highlight the positive (vertical) externality between expected returns from crime and the information rent that must be granted by the Legislator to whistleblowers in order to break their code of silence (omertà) and elicit truthful information revelation. We identify the accomplices' incentives to release distorted information and characterize the second-best policy limiting this behavior. The central finding is that this externality leads to a second-best policy that purposefully allows whistleblowers not to disclose part of their private information. We also show that accomplices must fulfill minimal information requirements to be admitted into the program (rationing), that a bonus must be awarded to accomplices providing more reliable information and that, under some conditions, rewarding a self-reporting `boss' can increase efficiency. These results are consistent with a number of widespread legislative provisions.Accomplice-witnesses, Adverse Selection, Leniency, Organized Crime