Dagobert L. Brito

Consumer Rationality and Credit Cards

Borrowing on credit cards at high interest rates might appear irrational. However, even low transactions costs can make credit cards attractive relative to bank loans. Credit cards also provide liquidity services by allowing consumers to avoid some of the opportunity costs of holding money. The effect of alternative interest rates on the demand for card debits can explain why credit card interest rates only partially reflect changes in the cost of funds. Credit card interest rates that are inflexible relative to the cost of funds are not inconsistent with a competitive equilibrium that yields zero profits for the marginal entrant.

Externalities and compulsary vaccinations

Abstract This paper challenges the conventional wisdom that, because of the free rider problem, a case can be made for compulsary vaccination against infectious disease. For a very general class of models, requiring that all individuals be vaccinated is strictly dominated by free choice. The market allocation is not optimum and in the full information optimum some individuals would be compelled to be vaccinated. This allocation can be achieved by taxes and subsidies; however, the government can exploit the revelation properties of vaccination and achieve an even better allocation than the full information optimum.

Can arms races lead to the outbreak of war

The possible relationships of an arms race to the outbreak of war are treated in the framework of a dynamic model of a missile war that could be used by defense planners to simulate the outbreak of war between two nuclear nations. It is shown that, depending on the initial and final configuration of weapons on both sides, an arms race could lead not only to war but to peace. Conversely, a disarming race could lead not only to peace but to war. The analytic framework is also applied to a qualitative arms race to show that such a race can promote crisis instability. These results are applied both to questions of disarmament and arms control and to the U.S.-Soviet postwar arms race. A conclusion of this analysis is that the quantitative U.S.-Soviet arms race of the 1960s and 1970s not only reduced the chances of war outbreak but also provided insurance against qualitative improvements in weapons.

Conflict, War, and Redistribution

This article analyzes the circumstances under which conflict leads to the outbreak of war using a formal model which incorporates both the redistribution of resources as an alternative to war and imperfect information. Countries act as rational agents concerned with both consumption and the public bad of a war. In the first period both countries can either consume or build arms, whereas in the second period there can be either the threat or the use of force to reallocate resources. If both countries are fully informed, then there will be no war but rather a voluntary redistribution of resources. In a situation of asymmetric information, however, in which one country is fully informed and the other is not, a war can occur if the uninformed country uses a separating equilibrium strategy, precommitting itself to a positive probability of war in order to prevent bluffing by the informed country.

Formal Models of Arms Races

The purpose of this paper is to present some formal models that have been or might be utilized as analytic approaches in the study of arms races. Formal models can be either descriptive or normative, and both types of models are presented here. Section 1 outlines two descriptive models of an arms race, models without an explicit objective, which are intended to describe and to explain arms race phenomena. Section 2 presents two normative models of an arms race, each of which includes an explicit goal and implied goal-directed behavior. Section 3 develops a model which integrates strategic concepts with the treatment of an arms race, and the implications of this model for arms control and disarmament are developed. The last section, Section 4, presents conclusions. Before beginning it is useful to define terms and notation. An “arms race” here refers to the process of interaction between two countries in their acquisition of stocks of a single homogeneous weapon. Only two countries, labelled A and B, are considered, Thus questions of proliferation, alliance formation, multicountry stability, etc. are not treated here. These are important questions, but they are not addressed for two reasons. First, from a theoretical standpoint, a theory for three, four, . . . countries is intrinsically more complex than that for two countries and hence should follow the development of the simpler theory. Second, from an empirical standpoint, much of the observed interaction in arms races is that between two. countries or alliances. In nuclear weapons there is the U.S.-U.S.S.R. interaction (or, more broadly, NATO vs. Warsaw Pact) with only marginal impacts of other nuclear powers such as France and China. In conventional weapons there

Arms races and proliferation

Previous analyses of arms races and proliferation are integrated and extended, building from a treatment of the behavioral foundations of weapons acquisitions to a general theory of arms races, with implications for the role of negotiations, the balance of power, the timing of crises, and nuclear proliferation. Recent developments in economic theory are also applied here to the problems of the arms race, nuclear proliferation, and the outbreak of war, yielding a deeper treatment of these phenomena by directly or indirectly treating asymmetric information in bargaining, repeated games that involve threats, and principal-agent problems in decisions on technology and weapons accumulation.

DYNAMIC OPTIMAL INCOME TAXATION WITH GOVERNMENT COMMITMENT

The optimal income taxation problem has been extensively studied in one-period models. This paper analyzes optimal income taxation when consumers work for many periods. We also analyze what information, if any, that the government learns about abilities in one period can be used in later periods to attain more redistribution than in a one-period world. When the government must commit itself to future tax schedules, intertemporal nonstationarity of tax schedules could relax the self-selection constraints and lead to Pareto improvements. The effect of nonstationarity is analogous to that of randomization in one-period models. The use of information is limited since only a single lifetime self-selection constraint for each type of consumer exists. These results hold when individuals and the government have the same discount rates. The planner can make additional use of the information when individual and social rates of time discounting differ. In this case, the limiting tax schedule is a nondistorting one if the government has a lower discount rate than individuals.

A predator-prey model of guerrilla warfare

Guerrilla warfare has emerged as one of the principal forms of modern warfare. Mutual deterrence, as achieved by the arms race and arms control, has made nuclear warfare not impossible but at least improb able, the major potential initiator of a nuclear war probably being miscalculation, accident, or escalation rather than premeditation or preemption.1 Traditional large-scale warfare, as in the case of both World Wars, is also improbable in view of potential superpower involvement and fear of escalation. What remains are three pos sibilities. First, there are wars confined to a particular region, and without direct superpower involvement, such as the Arab-Israeli wars, the India-Pakistan wars, the Iran-Iraq war, or the Falklands War. Second, there are civil wars such as those in Nigeria and Chad. Third, there are guerrilla wars, such as those in Malaysia, Vietnam, the Sudan, Nicaragua, El Salvador, and Afghanistan. The purpose of this paper is to analyze guerrilla warfare by means of a dynamic model.2 The model suggests specific paths for the evolution of such wars and how such wars might be fought or combatted.

Narco‐traffic and guerrilla warfare: A new symbiosis

This paper considers the role of drug lords in narco‐trafficking. The model is of a three‐person game with a two‐stage structure. The first stage is the war between the guerrillas and the government, while the second stage is the relationship between the participants in the guerrilla war and the drug lords, where the drug lords act as Stackelberg leaders with the government and the guerrillas acting as Stackelberg followers. The dynamics of the model imply that the drug lords can achieve their own preferred outcome by appropriate transfers to one side or the other in the guerrilla war.

Privatization and the distribution of income in the commons

Abstract The explicit treatment of heterogeneity among the users of the commons leads to results that differ from those that are now generally accepted in the literature. The owner of the fixed factor is not able to expropriate the rents of privatization. Rather, the resulting distribution of income to the free factor after privatization depends on the technology and the institutional arrangements. This result extends to more than two goods if the decline in the price of the good produced in the commons is sufficient to offset the decline in the marginal product of labor in the rest of the economy.