A cost-benefit approach to labor market reform

Labor reforms in Latin America have been scarce compared with the pace of structural reforms aimed at liberalizing product and capital markets. Some analysts contend that without continued liberalization labor market performance will fail to improve, hindering Latin American economies’ ability to compete in international markets. ; This article assesses labor market regulations in Latin America, documents their recent history, and assesses their costs and benefits. The author argues that existing regulatory systems, while generating costs in terms of labor market performance, constitute the base (albeit imperfect) of social protection policies in Latin America. ; Compared with industrialized countries, Latin American countries have more protective labor regulations governing working conditions and job security but lower social security benefits. Evidence from the existing literature points to sizable negative effects of mandatory benefits, particularly social security contributions, on employment. Job security provisions tend to bias employment toward prime-age workers and away from younger and less skilled workers. ; Since the demand for social protection in Latin America appears to be large, the author argues that reforms that seek only labor market deregulation do not address this demand. It is tempting to conclude that the solution lies in designing and implementing less costly social protection mechanisms, but the alternatives are not exempt from costs and are not warranted to improve upon existing systems. In these circumstances, the author recommends a mix of research, policy experimentation, and policy evaluation to find solutions that maximize benefits while minimizing costs.Economic stabilization ; Labor market

Endogenous Coalition Formation in Contests

This paper analyzes coalition formation in a model of contests with linear costs. Agents first form groups and then compete by investing resources. Coalitions fight for prizes that are assumed to be subject to rivalry, so their value is non-increasing in the size of the group. This formulation encompasses as particular cases some models proposed in the rent-seeking literature. We show that the formation of groups generates positive spillovers and analyze two classes of games of coalition formation. A contest among individual agents is the only stable outcome when individual defections leave the rest of the group intact. More concentrated coalition structures, including the grand coalition, are stable when groups collapse after a defection, provided that rivalry is not too strong. Results in a sequential game of coalition formation suggest that there exists a non-monotonic relationship between the level of underlying rivalry and the level of social conflict.Contests, coalition formation, conflict, rivalry.

Bargaining and Conflict with Incomplete Information

This paper studies bargaining and conflict under incomplete information, provides an overview and a critical account of the literature on the topic and contributes with original research. We first revise models of mechanism design and sequential bargaining that take confrontation as final. Conflict and inefficiencies are to be expected in these models whenever parties have optimistic prospects on the outcome of the all-out conflict. After examining the causes and reasons for this optimism, we move to the analysis of the recent literature that considers the existence of limited confrontations that allow bargaining to resume. In the presence of private information, these limited conflicts convey information and thus become a bargaining instrument. The paper closes with a discussion on the related empirical literature, the challenges that it faces and some potential avenues for further research.Bargaining, Conflict, Incomplete information, Power, Optimism, Hicks paradox, Uneven contenders paradox.

Conflict as a Part of the Bargaining Process: Theory and Empirical Evidence

This paper explores the role of conflict as a bargaining tool. It first presents a simple bargaining model with one-sided incomplete information. Parties can choose the scope of the confrontation they may want to engage in: A limited conflict that only introduces delay, or an absolute conflict that terminates the game. The outcomes of both types of confrontation are driven by the relative strength of the parties that is only known to one of them. Therefore, the non-final conflict conveys information about the eventual outcome of the absolute one. In this framework, it is shown that confrontation has a double-edged effect: It may paradoxically open the door to agreement when the uninformed party is so optimistic that no agreement is feasible. But it can also create inefficiency when agreement is possible but the informed agent has an incentive to improve her bargaining position by fighting. The second part of the paper performs a duration analysis on a sample of colonial and imperial wars fought between 1817 and 1988. The results offer evidence illustrating the use of conflict in negotiations.Conflict, Bargaining, Incomplete information, Duration analysis.

On the Social Efficiency of Conflict

In sharp contrast with the economic literature on conflict, this paper shows that confrontation may be efficiency enhancing. Conditions are derived under which a contest over the exclusive control of a resource Pareto dominates open access. When the population size is big enough or production exhibits strong decreasing returns to scale, agents unanimously prefer to engage in conflict.

(Don't) Make My Vote Count

Proponents of proportional electoral rules often argue that majority rule depresses turnout and may lower welfare due to the 'tyranny of the majority' problem. The present paper studies the impact of electoral rules on turnout and social welfare. We analyze a model of instrumental voting where citizens have private information over their individual cost of voting and over the alternative they prefer. The electoral rule used to select the winning alternative is a combination of majority rule and proportional rule. Results show that the above arguments against majority rule do not hold in this set up. Social welfare and turnout increase with the weight that the electoral rule gives to majority rule when the electorate is expected to be split, and they are independent of the electoral rule employed when the expected size of the minority group tends to zero. However, more proportional rules can increase turnout within the minority group. This effect is stronger the smaller the minority group. We then conclude that majority rule fosters overall turnout and increases social welfare, whereas proportional rule fosters the participation of minorities

Settlement finality as a public good in large-value payment systems

Target is a real time gross settlement (RTGS) large value payment network operated by European central banks that eliminates systemic risk. Euro1 is a privately operated delayed net settlement (DNS) network that reduces substantially systemic risk but does not eliminate it. This difference makes RTGS networks more expensive to users even if both networks had the same unit operating costs. This provides an incentive for users to shift payments to the more risky network in normal times and back to Target in times of financial market disruption. The estimated extra cost to a DNS network from posting collateral sufficient to cover all exposures (and eliminate systemic risk) is from 15 to 42 cents per transaction. If full cost recovery on an RTGS system were reduced by this amount, user collateral costs — but not risks — would be equalized between networks. Full collateralization on DNS networks would equalize both user costs and risks.payments, settlement, public good

Who Benefits from Labor Market Regulations? Chile 1960-1998

Economists have examined the impact of labor market regulations on the level of employment. However, there are many reasons to suspect that the impact of regulations differs across types of workers. In this paper we take advantage of the unusual large variance in labor policy in Chile to exa mine how different labor market regulations affect the distribution of employment and the employment rates across age, gender and skill levels. To this effect, we use a sample of repeated cross-section household surveys spanning the period 1960-1998 and measures of the evolution of job security provisions and minimum wages across time. Our results suggest large distribution effects. We find that employment security provisions and minimum wages reduce the share of youth and unskilled employment as well as their employment rates. We also find large effects on the distribution of employment between women and men.

Law and Employment: Lessons from Latin America and the Caribbean

This paper summarizes the main lessons learned from Law and Employment: Lessons from Latin America and the Caribbean, a forthcoming NBER book. It places Latin American economies and economic policies in a world context. The paper quantifies the cost of regulation in Latin America and OECD Europe and discusses the origin of regulation. It shows the fragility of time series data analyses of the sort widely used to analyze the impact of regulation in OECD Europe and the benefits of using microdata data. The evidence shows that regulation reduces labor market flexibility, reduces the employment of marginal workers and generates inequality in the larger society.