On higher hurdles for incumbents

The election mechanism has difficulties in selecting the most able candidates and deselecting less able ones. In a simple model we explore how the power of elections as a selection device can be improved by requiring higher vote thresholds than 50% for incumbents.Third JEL Category: H4Elections, political contracts, vote-share thresholds, incumbents, selection, effort.

Campaigns, Political Mobility, and Communication

We present a model of elections in which interest group donations allow candidates to shift policy positions. We show that if donations were prohibited, then a unique equilibrium regarding the platform choices of candidates would exist. Our game with financing of political campaigns exhibits two equilibria, depending on whether a majority of interest groups runs to support the leftist or rightist candidate. The equilibria generate a variety of new features of campaign games and may help identify the objective functions of candidates empirically.elections, campaign contributions, interest groups

The Global Refunding System and Climate Change

We propose a global refunding scheme as a new international approach to addressing climate change. A global refunding system allows each country to set its carbon emission tax, while aggregate tax revenues are partially refunded to member countries in proportion to the relative emissions reduction they achieve within a period. Nationally determined environmental policies and global refunding create increasing incentives to reduce emissions and may achieve e±ciency and equity objectives of global climate policy.

Banking with Contingent Contracts, Macroeconomic Risks, and Banking Crises

We examine banking competition when deposit or loan contracts contingent on macroeconomic shocks become feasible. We show that the risk allocation is efficient, provided that banks are not bailed out. In this case, banks may shift part of the risk to depositors. The private sector insures the banking sector and banking crises are avoided. In contrast, when banks are bailed out, depositors receive non-contingent contracts with high interest rates, while entrepreneurs obtain loan contracts that demand high repayment in good times and low repayment in bad times. As a result, the present generation overinvests, and banks create large macroeconomic risks for future generations, even if the underlying risk is small or zero.Financial intermediation, macroeconomic risks, state contingent contracts, banking regulation

When Inefficiency Begets Efficiency

Collective consumption decisions taken by the members of a household may prove inefficient. The impact of such inefficient household decisions on market performance is investigated. At one extreme, market efficiency can occur even when household decisions are inefficient, namely when household inefficiencies are merely due to inefficient net trades with the market. At the other extreme, market efficiency is bound to fail, if household inefficiencies are solely caused by an inefficient distribution of a household's aggregate consumption to its individual members. This leads us to consider competitive forces as a disciplinary device for households. When households compete for both resources and members then household stability requires efficient or not too inefficient internal distribution.Allocative efficiency, General equilibrium, Household behavior

Hierarchical Trade and Endogenous Price Distortions

We study the allocation of commodities through a two-stage hierarchy of competitive markets. Groups or countries trade at global prices while individuals within a group trade at local prices. We identify the free trade and the autarky equilibrium as polar cases. We show that no other two-stage market equilibria exist if the commodity space is two-dimensional. An example demonstrates that other, so-called intermediate equilibria exist for three-dimensional commodity spaces. The example also exhibits endogenous price distortions in third countries when some countries follow distortionary trade policies. We give two existence proofs for intermediate equilibria in higher dimensions. Each proof provides an explicit construction of special classes of intermediate equilibria.

Competition of Politicians for Incentive Contracts and Elections

When politicians have lower discount factors than voters, democratic elections cannot sufficiently motivate politicians to undertake long-term socially beneficial projects. When politicians can offer incentive contracts which become effective upon reelection, the hierarchy of contracts and elections can alleviate such inefficient decision-making in politics. This mechanism still works if the public cannot commit itself to a reelection scheme or if the public is unsure about the politicians’ time preferences. In the non-commitment case, incentive contracts may need to include a golden parachute clause.Keywords: Incentive contracts, politicians, long-term policies, elections and contracts, golden parachute clauseIncentive contracts, politicians, long-term policies, elections and contracts, golden parachute clause

Campaigns, Political Mobility, and Communication

We present a model of elections in which interest group donations allow candidates to shift policy positions. We show that if donations were prohibited, then a unique equilibrium regarding the position choices of candidates would exist. With unrestricted financing of political campaigns two equilibria emerge, depending on whether a majority of interest groups runs to support the leftist or rightist candidate. The equilibria generate a variety of new features of campaign games and may help identify the objective functions of candidates empirically.elections, campaign contributions, interest groups

Competitive Markets, Collective Decisions and Group Formation

We consider a general equilibrium model where groups operating in a competitive market environment can have several members and make efficient collective consumption decisions. Individuals have the option to leave the group and make it on their own or join another group. We study the effect of these outside options on group formation, group stability, equilibrium existence, and equilibrium efficiency.household behavior, household formation, collective decision making, general equilibrium

A Human Relations Paradox

We present a variant of a general equilibrium model with group formation to study how changes of non-consumptive benefits from group formation impact on the well-being of group members. We identify a human relations paradox: Positive externalities increase, but none of the group members gains in equilibrium. Moreover, a member who experiences an increase of positive emotional benefits in a group may become worse off in equilibrium.Group formation, competitive markets, human relation, exit