Corruption and Power in Democracies

According to Acton: “Power corrupts and absolute power corrupts absolutely”. We study the implications of Acton’s dictum in models where citizens vote (for three parties) and governments then form in a series of elections. In each election, parties have fixed tastes for graft, which affect negotiations to form a government if parliament hangs; but incumbency changes tastes across elections. We argue that combinations of Acton’s dictum with various assumptions about citizen sophistication and inter-party commitments generate tight and testable predictions which cover plausible dynamics of government formation in an otherwise stationary environment.Corruption, government dynamics

Bargaining in standing committees with an endogenous default

Committee voting has mostly been investigated from the perspective of the standard Baron–Ferejohn model of bargaining over the division of a pie, in which bargaining ends as soon as the committee reaches an agreement. In standing committees, however, existing agreements can be amended. This article studies an extension of the Baron–Ferejohn framework to a model with an evolving default that reflects this important feature of policymaking in standing committees: In each of an infinite number of periods, the ongoing default can be amended to a new policy (which is, in turn, the default for the next period). The model provides a number of quite different predictions. (i) From a positive perspective, the key distinction turns on whether the quota is less than unanimity. In that case, patient enough players waste substantial shares of the pie each period and the size principle fails in some pure strategy Markov perfect equilibria. In contrast, the unique Markov perfect equilibrium payoffs in a unanimity committee coincide with those in the corresponding Baron–Ferejohn framework. (ii) If players have heterogeneous discount factors then a large class of subgame perfect equilibria (including all Markov perfect equilibria) are inefficient

Bargaining over an endogenous agenda

We present a model of bargaining in which a committee searches over the policy space, successively amending the default by voting over proposals. Bargaining ends when proposers are unable or unwilling to amend the existing default, which is then implemented. We characterize the policies which can be implemented from any initial default in a pure strategy stationary Markov perfect equilibrium for an interesting class of environments including multi-dimensional and infinite policy spaces. Minimumwinning coalitions may not form, and the set of equilibrium policies may be unaffected by a change in the set of proposers. The set of stable policies (which are implemented, once reached as default) forms a weakly stable set; and conversely, any weakly stable set is supported by some equilibrium. If the policy space is well ordered then the committee implements the ideal policy of the last proposer in a subset of a weakly stable set. However, this result does not generalize to other cases, allowing us to explore the effects of protocol manipulation. Variations in the quota and in the number of proposers may have surprising effects on the set of stable decisions. We also show that equilibria of our model are contemporaneous perfect e-equilibria of a related model of repeated implementation with an evolving default; and that stable decisions in semi-Markovian equilibria form the largest consistent set

Bargaining in standing committees

Committee voting has mostly been investigated from the perspective of the standard Baron-Ferejohn model of bargaining over the division of a pie, in which bargaining ends as soon as the committee reaches an agreement. In standing committees, however, existing agreements can be amended. This paper studies an extension of the Baron-Ferejohn framework to a model with an evolving default that reflects this important feature of policymaking in standing committees: In each of an infinite number of periods, the ongoing default can be amended to a new policy (which in turn determines the default for the next period). The model provides a number of quite different predictions. In particular: (i) Substantial shares of the pie are wasted each period and the size principle fails in some pure strategy Markov perfect equilibria of non-unanimity games with patient enough players; and (ii) All Markov perfect equilibria are Pareto inefficient when discount factors are heterogenous. However, there is a unique equilibrium outcome in unanimity standing committee games, which coincides with the unique equilibrium outcome of the corresponding Baron-Ferejohn framework

Protecting buyers from fine print

Buyers typically do not read the …ne print in contracts, providing an incentive for a monopolist to draft terms which are unfavorable to buyers. We model this problem, proving that trade must then be inefficient. We show that regulation which mandates efficient terms raises welfare. More interestingly, regulations which prohibit the least efficient terms may reduce welfare by inducing the monopolist not to other favorable terms. We extend these results to markets in which some buyers are naive, showing that prohibiting the least efficient terms may also harm the naive buyers

The Prohibition of the Proposed Springer-Prosiebensat.1-Merger: How Much Economics in German Merger Control?

We review the Bundeskartellamt (Federal Cartel Office Germany) decision on the proposed merger between Springer and ProSiebenSat.1 from an economic point of view. In doing so, it is not our goal to analyse whether the controversial decision by the Bundeskar-tellamt has been correct or flawed from a legal point of view. Instead, we analyse whether the economic reasoning in the decision document reflects state-of-the-art economic theory on conglomerate mergers. Regarding such types of mergers, anticompetitive effects either do not occur regularly or are more often than not overcompensated by efficiency gains, so that a standard welfare perspective demands reluctance concerning antitrust interventions. This is particularly true if two-sided markets, like media markets, are involved. However, anticompe-titive conglomerate mergers are not impossible, in particular in neighbouring markets where there is some relationship between the products of the merging companies. In line with the more-economic approach in European merger control, a particular thorough line of argumen-tation, backed with particularly convincing economic evidence, is necessary to justify a pro-hibition of a conglomerate merger from an economic point of view. Against this background, we do not find the reasoning of the Bundeskartellamt entirely convincing and sufficiently strong to justify a prohibition of the proposed combination from an economic perspective. The reasons are that (i) the Bundeskartellamt fails to continuously consider consumer and customer welfare as the relevant standards, (ii) positive efficiency and welfare effects of cross-media strategies are neglected, (iii) in contrast, the competition agency sometimes ap-pears to view profitability of post-merger strategy options to be per se anticompetitive (effi-ciency offence), (iv) the incontestability of the relevant markets is not sufficiently substanti-ated, (v) inconsistencies occur regarding the symmetry of the TV advertising market duopoly versus the unique role of the BILD-Zeitung and (vi) the employment of modern economic instruments appears to be underdeveloped. Thus, we conclude that the Bundeskartellamt has not embraced the European more-economic approach in the analysed decision. However, one can discuss whether economic effects are overcompensated in this case by concerns about a reduction in diversity of opinion and threats to free speech. Similar to the Bundeskartellamt, we do not consider these concerns in our analysis

The Impact of Interest Rates on Price and Supply.

The author considers the effect of an increase in the current and future interest rate on the stationary price and su pply policy of a stock-holding firm, and provides necessary and suffi cient conditions for either price or supply to be raised in response.

Transactions/List Pricing

Suppose that a representative downstream firm must buy relationship-specific capital before an upstream monopolist is privately informed of its unit costs. We show that the upstream firm will write a contract before the downstream firm invests, specifying a maximum (list) price which may be discounted when costs are low. This model therefore rationalizes transactions/list pricing: a prevalent mode of inter-firm trading. We use our results to explain Stigler and Kindahl's findings on medium-term price dynamics