Francisco M. Gonzalez

Effective property rights, conflict and growth

This paper shows how the interaction between conflict and growth can give rise to a nonmonotone relationship between property rights and social welfare. This interaction is illustrated in a model of endogenous growth in which equilibrium diversion of resources is the cost of securing effective property rights. A symmetric equilibrium allocation associated with more secure property rights and faster growth can be Pareto dominated by one associated with poorer property rights and slower growth. Faster growth can exacerbate the problem of diversion whenever property rights are sufficiently poor. These results call for caution before a society decides to pursue economic growth independently of the institutional structure of property rights. Furthermore, if this structure is inappropriate piecemeal reform might not be in the interest of society, and a substantial reform might be necessary if it is to be welfare-improving.

An equilibrium analysis of information aggregation and fluctuations in markets with discrete decisions

This paper shows how the interaction between decentralized information gathering and discreteness of investment decisions at the individual level can generate random fluctuations in aggregate investment that involve occasionally large allocation errors. This interaction is illustrated in a model in which private information is costly to acquire and prices reveal information. The unique rational expectations equilibrium outcome of the model is shown to always be noisy and characterized by investment levels which may be high simply because uninformed investors are buying under the impression that the high price is a signal of good investment opportunities.

A Theory of Top Income Taxation and Social Insurance

The development of the welfare state in the Western economies between 1930 and 1990 coincided with a puzzling pattern in the taxation of top incomes. Effective tax rates at the top increased sharply but then gradually decreased, even as social transfers continued rising. We propose a new theory of the development of the welfare state to explain these facts. Our main insight is that social insurance and top income taxation are substitutes for averting social confl?ict. We emphasize the role of the Great Depression as a source of aggregate risk, and argue that the rise of the welfare state can be understood as a process of exploiting efficiency gains in response to gradual technological improvements in the provision of social insurance. Our detailed arguments build on the policy histories of the United States, Great Britain, and Sweden.

Intergenerational altruism with future bias

We show that standard preferences of altruistic overlapping generations exhibit future bias, which involves preference reversals associated with increasing impatience. This underlies a conflict of interest between successive generations. We explore the implications of this conflict for intergenerational redistribution when there is a sequence of utilitarian governments representing living generations and choosing policies independently over time. We argue that future bias creates incentives to legislate and sustain a pay-as-you-go pension system, which every government views as a self-enforcing commitment mechanism to increase future old-age transfers.

The Supply of Social Insurance

We propose a theory of the welfare state, in which social transfers are chosen by a governing group interacting with non-governing groups repeatedly. Social demands from the non-governing groups are credible because these groups have the ability to generate social conflict. In this context social insurance is supplied as an equilibrium response to income risks within a self-enforcing social contract. When we explore the implications of such a view of the social contract, we find four main determinants of the welfare state: the degree of aggregate income risk; the heterogeneity of group-specific income risks; the public administration’s ability to implement group-specific transfers; and the ability of the nongoverning groups to coordinate their social demands. We also analyze the link between public good provision and social insurance.