Experience Rating: Insurance Versus Efficiency

When unemployment insurance is publicly provided, firms' layoff decisions can be distorted. Unemployment insurance reduces the cost of laying off workers, thereby encouraging layoffs and leading to more unemployment. To dampen this increase in unemployment, it has been suggested that unemployment insurance should be financed with an experience rated tax. This paper examines the possibility that, despite that increasing the level of experience rating can reduce the level of unemployment, it can also reduce the wealth of unemployed workers. The reason for this is that, under high levels of experience rating, firms may reduce their severance payments by more than the publicly provided unemployment insurance benefit. We build a model where competitive firms offer long-term contracts to risk-adverse workers. Asymmetric information about workers' productivity leads to over-unemployment and incomplete private insurance against unemployment. This paper shows that an experience rated unemployment insurance program cannot increase the wealth of unemployed workers without increasing unemployment.Unemployment Insurance; Experience Rating; Layoffs

Competition in Law Enforcement and Capital Allocation

This paper studies interjurisdictional competition in the fight against crime and its impact on occupational choice and the allocation of capital. In a world where capital is mobile, jurisdictions are inhabited by individuals who choose to become workers or criminals. Because the return of the two occupations depends on capital, and because investment in capital in a jurisdiction depends on its crime rate, there is a bi-directional relationship between capital investment and crime which may lead to capital concentration. By investing in costly law enforcement, a jurisdiction makes the choice to become criminal less attractive, which reduces the number of criminals and makes its territory more secure. This increased security increases the attractiveness of the jurisdiction for investors and this can eventually translate into more capital being invested. We characterize the Nash equilibria — some entailing a symmetric outcome, others an asymmetric one — and study their efficiency.Crime; Occupational Choice; Capital Location; Law Enforcement

Plea Bargaining with Budgetary Constraints

In this paper, we construct a simple model that illustrates a perverse effect associated with plea bargaining in which an increase in sanctions can lead to reduced deterrence. This finding is derived from the interaction of binding budgetary constraints and plea bargaining. In an environment with these institutional features, higher sanctions are not always optimal when resources are limited, even if such sanctions are costless. Such potential phenomena may be useful in explaining the fact that many states have introduced limitations on plea bargaining. Career-concerned prosecutors are necessary for such a result to be present.Plea Bargaining; Budget Constraint; Crime; Prosecutor

Competition in Law Enforcement and Capital Allocation

This paper studies interjurisdictional competition in the fight against crime and its impact on occupational choice and the allocation of capital. In a world where capital is mobile, jurisdictions are inhabited by individuals who choose to become workers or criminals. Because the return of the two occupations depends on capital, and because investment in capital in a jurisdiction depends on its crime rate, there is a bi-directional relationship between capital investment and crime which may lead to capital concentration. By investing in costly law enforcement, a jurisdiction makes the choice to become criminal less attractive, which reduces the number of criminals and makes its territory more secure. This increased security increases the attractiveness of the jurisdiction for investors and this can eventually translate into more capital being invested. We characterize the Nash equilibria - some entailing a symmetric outcome, others an asymmetric one - and study their efficiency.Crime, Occupational Choice, Capital Location, Law Enforcement

The Layoff Rat Race

We investigate how discretionary investments in general and specific human capital are affected by the possibility of layoffs. After investments are made, firms may have to lay off workers, and will do so in inverse order of the profit that each worker generates. Greater skill investments, especially in specific human capital contribute more to a firm's bottom line, so that workers who make those investments will be laid off last. We show that, as long as workers' bargaining positions are not too weak, to reduce layoff probabilities, workers invest in specific human capital. Indeed, workers over-invest in skill acquisition from a social perspective whenever their bargaining power is strong enough, even though they only receive a share of any investment. More generally, we characterize how equilibrium skill investments are affected by the distribution of worker abilities within firms, the probability that a firm downsizes, and the distribution of employment opportunities in the economy.Human Capital; Layoffs; Unemployment; Specific Skills; Bargaining

Damage Averaging and the Formation of Class Action Suits

Within a class action suit, similarly injured individuals can collectively obtain compensation through the justice system. Damage averaging occurs when the compensation awarded by the court to individual members is partly or completely determined by the average damage of the class. The key role of damage averaging in influencing the identity of the individual that will initiate the class action suit is illustrated in a waiting game. If there is complete averaging, the individual with the lowest damage will initiate the class action suit, while if there is less damage averaging, other individuals may do so. Grâce au recours collectif, des individus ayant subi des dommages d'ampleur différente mais de même nature peuvent obtenir compensation en cour. Il est possible que le montant accordé à un individu par la cour ne soit pas strictement une compensation pour les dommages qu'il a subis, mais qu'il réflète aussi, en partie, la moyenne des dommages subis par tous les participants au recours collectif. Envisageant la formation d'un recours collectif comme un jeu d'attente, nous montrons que l'usage de la moyenne des dommages par la cour est un déterminant important de l'identité de celui qui initiera le recours collectif. Si seule la moyenne des dommages est utilisée par la cour dans l'établissement des compensations, alors l'individu ayant subi les plus petits dommages initiera le recours collectif. Si la cour utilise également les dommages individuels dans l'établissement des compensations, alors d'autres individus pourraient vouloir l'initier.Class action suit, damage averaging

What You Don't See Can't Hurt You: An Economic Analysis of Morality Laws

This paper provides an efficiency explanation for regulation of sex, drugs and gambling (the so-called ``morality laws''). The argument is motivated by the observation that the design an enforcement of these laws often promotes discretion by the people engaging in such activities. We propose that morality laws can be best explained by considering the proscribed activities to impose a negative externality on others when the activity is observed. In such a case, efficiency requires discretion by the individual who engages in such activities. When discretion is difficult to regulate directly, the activities can instead be proscribed thereby giving individuals incentive to hide their actions from others. We find conditions for the first-best levels of consumption and hiding to be implementable. In addition, since some level of activity is efficient, this paper provides another environment in which the optimal sanctions are not maximal.Crime; Externality; Laws; Morality; Enforcement

Deterrence in Rank-Order Tournaments

In a tournament, competitors may engage in undesirable activities, or 'cheating', in order to gain an advantage. Examples of such activities include the taking of steroids, plagiarism, and 'creative accounting'. This paper considers the problem of deterrence of these activities and finds that there exist special considerations that are not present in a traditional model of law enforcement. For example, an agent's returns to cheating depend on the cheating decisions of others, and so there may exist multiple equilibria. The problem of multiple equilibria can be reduced when the first-place prize is awarded to the person that performed best without cheating. Moreover, we show that re-awarding prizes reduces the amount of monitoring required to ensure compliance. We also demonstrate that monitoring costs can be further reduced by monitoring the winner of the tournament more than the loser, and by manipulating prizes, including through the introduction of prizes for non-winners.Enforcement; Cheating; Tournament

Rational Truth-Avoidance and Self-Esteem

We assume that people have beliefs about their abilities, that these generate self-esteem, and that self-esteem is valued intrinsically. Individuals face two choices; one of which strictly dominates the other in a pecuniary sense, but necessarily involves gathering information concerning one's (unobserved) ability. We lay out the circumstances under which an individual may find it rational to reject the dominant choice; an act which, in social psychology is described as avoiding the situation, but which we label truth-avoidance. We find that the incentive to avoid the truth is increasing in income and decreasing in self-esteem, the perceived accuracy of one's self-assessment, and the role which luck plays in generating opportunities.self-esteem, confidence, signal-extraction, truth-avoidance.