A theory of rational political extremism
Albert Breton, Silvana Dalmazzone
The paper focuses on two broad questions. The first is concerned with who becomes an extremist and with the mechanisms that are conducive to the radicalization of potential candidates. These are persons whose individual makeup in terms of a potential for autonomy – or in terms of a competence to deal with change, confusion, difficult situations, or other like circumstances – renders them susceptible to the adverse effects of information control. The paper also examines a number of mechanisms through which extreme beliefs are reinforced in persons and diffused or disseminated in groups. The second question with which the paper is concerned is that of explaining why groups of political extremists which appear to have the same broad orientation and to be moved by the desire to achieve virtually the same goals, engage in dissimilar activities –some practice indiscriminate terrorism, others engage in violent attacks towards specifically identified targets, others restrict themselves to the cultivation of hatred and resentment. The paper offers an explanation based on an analysis of signalling and destabilization motives underlying extremist behaviour.
VAT compliance: an economic psychological approach
Caroline Adams, Henk Elffers, Paul Webley
This study aimed to uncover the factors that influence value added tax (VAT) compliance. Small businesses from the catering and flooring/furnishing trades in the United Kingdom were sent a questionnaire designed to elicit their views on VAT and related issues. Responses were obtained from 359 businesses. Results showed that VAT compliance in small businesses shares a number of similarities with private income tax compliance with Social norms, equity, economic factors and personality all important in predicting compliance.
Dynamic labour demand with lumpy and kinked adjustment costs
Paola Rota
We analyze the dynamics of firms employment decisions which underlie lumpy and kinked adjustment costs. We consider a dynamic structural model in which, in each period, firms face a choice of whether to vary the labour input or to postpone the adjustment to the future. By exploiting the first order condition for optimality, we derive a semi-reduced form in which firms' intertemporal employment are defined by a standard static marginal productivity condition augmented by a forward-looking term. In this way we obtain a marginal productivity equilibrium relation which takes into account the future alternatives of adjustment or non-adjustment that firms face as the result of the presence of fixed and linear adjustment costs. Our procedure takes explicitly into account the censoring generated by the discrete choice firms face in the presence of non-strictly convex adjustment costs. We first estimate the conditional probability of varying the labour input and, in a second stage, we condition on firms which adjust, and exploit orthogonality conditions for the estimation of the structural parameters.
Racial bias in police stops and searches: an economic analysis
Vani K. Borooah
The purpose of this paper is to analyse the nature of racial bias to police stops and searches by providing an economic explanation of why, in spite of the fact that such bias is socially sub-optimal, it is so virulent in England and Wales. The paper draws a distinction between what the police, from the perspective of social welfare, should do and what they actually do. The cleavage between the normative and the positive aspects of police behaviour arises because the police are concerned with their own, organisational, interests and these may be different from those of society. Using Home Office data, the paper offers empirical estimates of the extent to which racial bias in police stops, in 10 Police Areas in England, was socially sub-optimal.
The proportionality of electoral systems: electoral welfare and electoral inequality
Vani K. Borooah
This paper argues that measuring the degree of proportionality in an electoral system is equivalent to measuring the degree of electoral inequality, defined in terms of inter-party differences in the seats-to-votes ratio. It proposes an index of the degree of electoral inequality which is based on Atkinson's (1970) index, applied originally to measuring income inequality. This index satisfies all the criteria proposed in the literature for evaluating measures of electoral proportionality. In addition, such an Atkinson-type index of electoral inequality can also be given a welfarist interpretation by directly relating its value to the level of electoral welfare. Under such an interpretation, the disproportionality in an electoral system may be interpreted as being the result of the system imputing voting shares to the different political parties which are different from their actual voting shares. The larger this difference, the greater the degree of disproportionality in the system. The use of this index is illustrated by an application to the outcomes of Irish General Elections from 1923 till 1997.
Can we represent firm's employment decisions by (S,s) rules?
Paola Rota
In this paper we analyze the conditions under which an (S,s) rule may be derived and compare these with alternative rules. We consider the case of labour demand in the presence of fixed, possibly asymmetric, adjustment costs. The (S,s) rule implies a specific ordering of chices: downward adjustment, non-adjustemnt and upward adjustment (or upward adjustment, non-adjustment and downward adjustmeent) with the decision of inaction lying crucially in the middle. We find that we may model frim's decisions as an (S,s) rule only if it is possible to characterize unobserved heterogeneity as a perfect negative relation between the error terms specific to the choice of adjusting up (relative to non adjusting) and of adjusting down (relative to non adjusting). Assuming that the choice-specific error terms are normally distribued, the particular ordering of choices implied by the (S,s) rule may be estimated by an ordered probit. We test the (S,s) rule nesting the ordered probit within a multinational model with correlated error terms.We find that our data do not support the ordering of choices consistent with the (S,s) rule.
A Value at Risk approach to background risk
Elisa Luciano, Robert Kast
This paper addresses the problem of the effects of the introduction of an uninsurable, background risk on the demand for insurance (proportional and with deductible). We study both the case of background risk uncorrelated with the insurable one and the opposite case. In order to perform our study, we exploit the new risk measure known as value at risk and introduce insurance on worst-case scenarios. By so doing, we are able to get results which do not depend on the risk attitudes of the insured, such as risk aversion and prudence. The results we obtain depend on the parameters of both risks and on the magnitude of loading charged by the insurance company. We demonstrate that, if loadings are not too high, the demand for insurance increases with positively correlated backgrounds risk; it falls, possibly to zero, with negatively correlated background risk.
Value-at-Risk as a decision criterion
Robert Kast, Elisa Luciano, Lorenzo Peccati
Value at Risk (Var) is fruithfully used for monitoring risk and indentifying its main sources, in view of an accurate resource allocation. Also, it is increasingly adopted for synthetic, powerful reporting, as well as for performance evaluation. However, a recurrent and much more ambitious aim, creeping in the Var literature, is the following: use VaR not only for assessing portfolio risk, but also for managing it. This paper addresses the question from the methodological point of view: we discuss both choice criteria which use VaR only and ranking which use VaR and other indicators of the return distribution function, such as moments and certainty equivalents. In particular, we discuss the relationship between the ranking produced by VaR and some dominance criteria; furthermore, we construct a mean-VaR efficient frontier, analogous to the mean-variance one, without the assuption of normality of returns. We compare mean variance and mean-VaR efficiency for the stable case.
Global warming treaty negotiation and compliance: implications for collective action
Joseph R. Bial, Gary D. Libecap
Concerns about the accumulation of greenhouse gases (GHG) in the atmosphere and possible effects on global temperatures have led to a series of international initiatives for collective action. The Kyoto Protocol on Global Warming of December 1997calls for 38developed countries to reduce emissions by approximately 95 percent of 1990 levels by 2008-2012. Developing countries are not required to take explicit action. Although there is a large literature on the scientific issues involved and the use of various regulatory insturments, the international collective action problem has not been examined. This paper examines the problems of cooperation when the objective is uncertain, the parties are heterogeneous with respect to the benefits and costs of taking action, and adherence to the agreement by sovereign states is voluntary. Analysis of bargaining to address more local common-property resource problems is instructive, but those lessons have not been incorporated in the global warming literature. We outline a framework for analyzing bargaining among sovereign states to address global common-property resource problems and apply it to two other international efforts, the Law of the Sea Treaty of 1982 (LOS) and the Montreal Protocol to Control Substances that Damage the Ozone Layer of 1987. The negotiation and compliance issues encountered in those treaties are observed in recent efforts to address global temperature change.
Regulatory remedies to the common pool: the limits to oil field unitization
Gary D. Libecap, James L. Smith
This paper presents a theoretical framework for why unitization agreements may not be pareto improving and hence, why parties might then write incomplete agreements or continue to engage in competitive extraction, despite its costs. The analysis also explains why coercive unitization as a policy measure has been so strongly resisted politically. The analysis does not rely on high transactions costs or information asymmetries to explain its results. Rather it relies on the presence of both oil and gas in the reservoir with the parties holding amounts of each. Under reasonable conditions the parties may not be able to complete the trades of one substance for another which is necessary for unitization to occur. The paper adds to the energy and regulation literatures.
Employement inequality, employment regulation and social welfare
Vani K. Borooah
This paper develops a model which explains the unequal employment outcomes of two groups - defined as their, respective, likelihoods of successfully filling job vacancies - in terms of disparity in their access to job networks. This disparity arises because a proportion of vacancies are filled using informal methods so that, as a first step, information about vacancies only becomes available through word-of-mouth; as a second step, appointments are based on recommandations of existing emplyees. If society is fragmented, then members of one group will have little or no contact with members of the other group. Therefore, the power to inform and to recommend becomes excessively concentrated in the group that dominates the workforce. In such a situation, the role of fair-employment regulation is to ensure fair access to jobs for all. While this generates equity gains, it could, by raising the costs of hiring and firing, also be accompanied by efficiency losses. Whether social welfare increases or decreases as a resul of regulation depends on tthe relative magnitudes of these gains and losses.
A distribution-sensitive measure of unemployment
Vani K. Borooah
The measurement of unemployment, like that of poverty, involves two distinct steps: indentification and aggregation. In this process, the issue of identifying the unemployed has received considerable attention but, once they have been identified, the aggregation problem has been addressed by arriving at a unemployment rate through simply counting heads. This, in particular, leads to differences in the unemploymentt experiences of individuals, that underly the unemployment rate, being ignnored. This paper proposes a methodology, based on the measurement of income inequality, for adjusting unemployment rates to make them "distribution-sensitive". Consequently, different levels of social loss will, depending on the distribution of unemployment experiences, be associated with the same value of the conventionally defined unemployment rate. A numerical example illustrates the methodology.
Measuring US core inflation
Fabio C. Bagliano, Claudio Morana
In this paper the long-run trend in CPI inflation (core inflation) for the USA over the 1960-1998 period is estimated using a common trends model. The estimates obtained are compared with the median inflation measure proposed by Bryan and Cecchetti (1994). The results show that the latter measure of core inflation is not completely successful in separating the permanent from the transitory component of observed inflation. The core inflation rate derived from a common trends model can then provide useful additional information in evaluating the trend behaviour of inflation for monetary policy purposes.
Federalism, subsidarity, regionalism and decentralisation principles and practices in the european integration
Christine Fletcher
This paper details the fundamental differences, and also the level of compatibility, between key principles adopted by States to organise sovereignty within the constitutional framework of European integration. The two most significant principles integrated into relationship between governments and people in that framework are federalism and subsidiarity. Subsidiarity is built into various legal instrumentalities to guard against the exploitation of local communities by more powerful governments. Both subsidiarity and federalism are suppose to constrain central power. Broadly, the difference between them is that whereas federalism is a constitutional system of government, subsidiarity is a set of legal patterns for making powerful coalitions of bureaucracies and governments more accountable to local communities. Two other strategic methods that determine the sharing of economic resources and political authority within the European community are regionalism and decentralisation. But, as this paper illustrates, these strategies often cut across local jurisdictions - unlike subsidiarily or federalism, neither regionalism nor decentralisation contain any particular political blueprint for power sharing. Both regionalism and decentralisation are shaped by political or economic objectives rather than by constitutional rules. It is against this background that I address some of the misconceptions that portray federalism as simply a substitute for other forms of political resource sharing, particularly decentralisation. Because of its emphasis on regional self-determination, the terminology of federalism has been fused, misleadingly, with decentralisation and to a lesser extent, with regionalism. Federalism contains constitutional obligations to preserve the self-determination of sub-national governments. The same is not true of decentralisation.
Preserving competition: economic analysis, legal standards and Microsoft
Ronald A. Cass, Keith N. Hylton
Increasingly, government authorities charged with enforcement of antitrust (competition) laws appear inclined to accept the arguments of academic economists who are more skeptical of commercial markets and less skeptical of government markets than economists associated with the AChicago School.@ In the United States, the on-going case against Microsoft Corporation illustrates the influence of economists who see government as a relatively benign market policeman, able to nip and tuck around the edges to obtain just the right degree of competition in each market. Professor Steven Salop, a prominent member of the Anip-and-tuck@ school of antitrust analysis, in a recent article with Dr. Craig Romaine uses the Microsoft litigation to advance arguments central to this school=s credo. They argue that a wide variety of business behavior should be seen as potentially anticompetitive because those activities can raise the costs of business rivals and that antitrust law should be tailored more to assure limitations on potentially anticompetitive behavior than to avoid interference with businesses actually engaged in competition. We show that the Salop-Romaine arguments are misguided. They would dramatically expand the reach of antitrust law and would provide enormous discretion to decision makers who, following their arguments, could characterize an extraordinary array of ordinary business activities as violating antitrust strictures. Salop-Romaine=s fears about unregulated Anetwork markets@ are shown to rest on flawed analysis, even if such markets have the basic characteristics Salop and Romaine address. The vices they target generally will be subject to substantial mitigation through commercial markets, while the vices their approach would engender require correction through political markets that cannot be predicted to achieve favorable results. Indeed, their approach likely would exacerbate problems currently encountered in political markets. Fortunately, current law does not embody the standards contended for by Salop-Romaine and sympathetic economists.
Is there an Austrian approach to transition?
Enrico Colombatto
The paper discusses the meaning of the term "transition" and its implications for policy-making. Two extreme orthodox views are outlined. In particular, it is shown that both the institutional and the public-choice approaches address a set of important but misleading questions borrowed from the neoclassical tradition. It is suggested that an Austrian view would enhance a better understanding of what has been happening in Central and Eastern Europe in the past decade. Within this framework, the analysis should be based on three criteria: acquisition of knowledge, individual responsibility, free entry. The article leads to two main conclusions. First, future transition analysis should keep at bay all temptations in social engineering. Instead, more attention should be devoted to the way a number of subjectivistic features drive institution-al change. In addition, Western observers should focus on the features of the new opportunity sets made available to individuals, as well as on their freedom to choose. On this latter point, much remains to be done.
Dall'impresa dei neoclassici allimprenditore di Kirzner
Enrico Colombatto
Lo schema analitico neoclassico, per quanto elegante per gli aspetti formali ed efficace in chiave didattica, è tuttavia insoddisfacente sotto altri profili. L'articolo discute gli elementi essenziali della visione neoclassica dell'impresa, ponendone in evidenza i limiti positivi e normativi. In particolare, la trattazione si sofferma sul ruolo dell'incertezza e del rischio, sulle caratteristiche e le debolezze della concezione di equilibrio concorrenziale, sul ruolo dell'imprenditore. La seconda parte del lavoro ha invece per oggetto la visione Austriaca dell'impresa, dell'imprenditore e della "scoperta imprenditoriale", da von Mises a Kirzner. I paragrafi conclusivi propongono quindi alcune considerazioni circa i filoni di ricerca che la visione Austriaca suggerisce e i dubbi che l'impostazione Kirzneriana solleva.
Network competition and integration
Carlo Cambini
The telecommunications industry is now facing a new tendency toward vertical integration. Because of the several mergers and acquisition that are emerging worldwide, market structure of the telecommunications industry, and so the behaviour of telecommunications operators, is rapidly going to change. This paper analyses competition between vertically integrated telecommunications networks in a deregulated environment. Two local operators compete in linear tariff in the subscriber market; in addition, they are integrated downstream in the long distance sector where they face competition of other firms which need access to the local networks as an “essential” facility. A combination between a two-way and a one-way access problem is here analysed. The paper focuses on (anti)competitive behaviour of local operators in setting one-way interconnection charge to their networks for independent long distance operators. It is shown that, in a mature phase of the industry, presence of competition both in the local and in the long distance sectors leads to lower local and long distance tariffs and lower one-way access charges. Optimal solutions in case of separation between local and long distance sectors are also analysed and a comparison between the two cases is carried out. Finally, it is considered the asymmetric case in which only one of the two networks is vertically integrated and the strategic behaviour of the firms is pointed out.
Ambiguity and partisan business cycles
Anna Maffioletti, Michele Santoni
We introduce ambiguity (Knightian uncertainty) into a down-stripped version of Alesina's (1987) partisan model of the business cycle. We show that, if the private sector's subjective expectations of future events are ambiguous, there is the possibility of a political business cycle, even when the parties running for the election have similar preferences for inflation and unemployment. In particular, if inflation is perceived as a loss, the larger is the fraction of the population that is ambiguity prone (adverse), the larger is the post-election boom (slump), with unemployment then returning back to its natural level. We also show that, for given parties' preferences, ambiguity preference (aversion) implies smaller (larger) fluctuations in the level of unemployment around its natural level, when the right-wing party wins the elections. Finally, we design an experiment that measures the attitude towards ambiguity of a small sample of Italian trade-union delegates. If the probability of the election outcome is uniformly distributed over the unit interval, it turns out that the ambiguity-neutral behaviour is prevalent among the wage-setters on average.
Vertical competition in unitary states: the case of Italy
Albert Breton, Angela Fraschini
In the paper we argue and seek to demonstrate that in unitary states – namely states in which all powers are owned by the central government – vertical competition can generate efficient divisions of powers and decentralization equilibrium outcomes that are stable. Equilibrium outcomes that, in other words, do not unravel through arbitrary repossessions of powers by the central authorities whenever competition is deemed by these authorities to produce results that are judged to be unfavorable. Stability is a product of what we call institutional commitment devices. Through these a democratic government, though it does not possess the formal capacity to bind a successor government to any of its own decisions, can effectively obligate these successor governments to respect some of the decisions it has made. We argue that a number of such institutional commitment devices exist in Italy and that they make possible vertical competition between central and regional governments in regard to the division of powers and, in addition, that they serve to guarantee that decentralization equilibrium outcomes in the Italian Republic are stable.
The creation of industry-specific public goods: new insights into the technology policy debate
Dominique Foray, Morris Teubal
In this paper we are dealing with technology policy problems which are raised by the provision of industry-specific public goods (ISPGs). ISPGs raise very difficult issues because they can neither be provided by the government (they are industry specific) nor by the firms (they are public goods). The issue is to determine some kinds of mechanisms to facilitate collective actions among rival firms. We thus develop a framework in which policy is viewed as providing tools allowing firms to create private institutions which can solve those problems posed by collective action. The “self-organized investment board” model (Romer, 1993) is presented and discussed in the first part of the paper and an evolutionary policy perspective is proposed and developed in the second part of the paper.
Gini's nuclear family
Rolf Aaberge
The purpose of this paper is to justify the use of the Gini coefficient and two close relatives for summarizing the basic information of inequality in distributions of income. To this end we employ a specific transformation of the Lorenz curve, the scaled conditional mean curve, rather than the Lorenz curve as the basic formal representation of inequality in distributions of income. The scaled conditional mean curve is shown to possess several attractive properties as an alternative interpretation of the information content of the Lorenz curve and furthermore proves to yield essential information of polarization in the population.
Ambiguity aversion in the insurance frame: does information matter?
Carmela di Mauro, Anna Maffioletti
In a laboratory experiment we test the hypothesis that consumers' valuation of insurance is sensitive to the amount of information available about the probability of loss. In order to test this hypothesis we simulate a market in which we elicit individuals' willingness to pay to insure against a loss characterised either by known or else vague probabilities of loss. Subjects in the experiment are split in two groups: the first group receives vague information about the probability of loss, while the second receives detailed information. We find that in general more information has a weak impact on valuation, and that it marginally increases the price individuals are willing to pay to insure.
Three crucial issues in post-communist privatization
Jan Winiecki
The paper presents issues regarded by the author as crucial for the success of privatization - and of transition in general. Two of the three issues are strongly interrelated. The first concerns the internal composition of the emerging private sector in post-communist economies. The larger is the share of privatization 'from below' (expansion of the generic private sector) vis-a-vis privatization 'from above' (transformation of state-owned enterprises), the more dynamic the economy in transition becomes. The success of privatization 'from below' depends, however, not only on the rules of unfettered entrepreneurship, or even on the larger set of transition rules, but also on the still wider framework of liberty, law and order, and resultant general trust. This is the second crucial issue and a strongly interrelated one, because without this wider framework the generic private sector, the mainstay of the capitalist market economy will not take roots. The third issue points to certain differences between privatizations in the East and in the West and draws conclusions about future challenges for transition economies.
Historical output and trade distortions as determinants of export performance in post-communist transition
Jan Winiecki
It has rarely been appreciated to what extent system-specific distortions determined the path of transition. This paper deals with historical determinants of export performance of post-communist economic system. It explains how distorted structure of incentives under central, inward-oriented development strategy, and the emergence of two separate markets (undemanding COMECON market and demanding world market) interacted in generating peculiar dual export structure of communist economies. Next, implications of the foregoing for the prospects of successful reorientation of exports to the demanding market are considered in detail.
Early retirement and economic incentives
Erik Hernaes, Marte Sollie, Steinar Strøm
In Norway early retirement programs have gradually reduced the retirement age from 67 to 62 for a majority of the labor force. Based on micro data for 1990 and 1992, we estimate a competing risk models with three states: full retirement, partial retirement/part-time work, and full-time work, and we use the estimated model in simulations to study how financial incentives can be strengthened to extend working life. Financial incentives, educational background and industry affiliation are found to influence retirement behavior. For low and medium incomes, the tax system shifts the incentives heavily towards early retirement, in particular partial retirement combined with part-time work.
Poverty and development in XVI century Spain and England: the first policy of human capital
Cosimo Perrotta
In XVI century western Europe had to face a new phenomenon: the huge increase of the unemployed poor and of beggars. This was particularly keen in Spain and in England; where the conflict between the feudal classes and the new commercial classes was more acute. But the policies applied in these countries, and the results they produced were very different. In Spain there was a clash between two opposite views. One saw the phenomenon in the medieval way of a religious and moral problem; the other saw it in a modern way: as a social problem. But both views did not bound the social problem of the poor to the economic problems of development. They never saw the poor as human capital. Thus the modern approach did not succeed, and the medieval approach prevailed. On the contrary, the concern for employment and development prevailed in England since the beginning. The policy implemented in England led to a rapid increase of manufactories and fostered powerfully economic development. While the approach that prevailed in Spain was among the causes - certainly not the least one - of Spanish economic decline.