Jim Leitzel

Damage Measures and Incomplete Contracts

I present a model of two-party contracts that allows for incomplete specification of future states and actions. I examine various damage measures under the assumption that courts protect only reasonable reliance expenditures so that parties make efficient reliance choices. The expectations damage measure is preferred to the alternative damage measures no matter what the contractual terms are.

Income Distribution and Price Controls: Targeting a Social Safety Net During Economic Transition

During the ongoing post-communist economic transitions, the relative well-being of many people is changing rapidly, and governments are not well positioned to accurately measure individual living standards. Under such circumstances, continued price controls over basic consumer goods within the state sector, and the associated queuing, can form a serviceable device for targeting poor people for subsidies. With a fixed-price state sector and free-price parallel markets, rich people might choose to avoid queues and shop in the free markets, while poor people would prefer to pay low nominal prices and queue in the state sector. The targeting of subsidies through queues, therefore, can be accomplished even if the government has no information on individual income or living standards. When the alternative to price controls is a poorly targeted explicit social safety net, the resource cost of queues might be more than compensated for by an improvement in the targeting of subsidies.

The Political Economy of Rule Evasion and Policy Reform

1. Rules and their Circumvention 2. Evasion 3. Zero Tolerance 4. Avoidance, Futility, and Reform 5. Preventive and Punitive Controls 6. Corruption 7. Evasion and the Demise of the Soviet Union 8. Gun Control

Goods Diversion and Repressed Inflation: Notes on the Political Economy of Price Liberalization

Most analyses of parallel markets in centrally-planned systems focus on queue-rationing as the mechanism whereby state-sector goods become available for second economy resale. This article takes into account employee diversion of goods as a second channel through which merchandise can move to private markets. Diversion of goods tends to temper the adverse distributional consequences of price liberalization. As repressed inflation increases, more goods are diverted out of the state sector, and the likelihood that an individual will be made worse off by a transition of free prices is diminished.

Collusion and rent-seeking*

ConclusionsThis paper has explored the possibilities for profitable collusion in rent-seeking games. Anticipated collusion is only profitable for coalitions that approach the size of the grand coalition, while unanticipated collusion is always profitable. By reducing the rent-seeking expenditures of the colluding firms, collusion bestows an external benefit on non-colluding firms. Economies of scale in rent-seeking increase the profitability of collusion, while diseconomies of scale reduce the attractiveness of collusion. When 1 of 3 firms enjoys an incumbency advantage, the total gains from collusion fall as the incumbency advantage rises. Furthermore, 2-firm collusion is more profitable to the colluding coalition when the incumbent colludes with a non-incumbent than when the two non-incumbents collude, whether or not the collusion is anticipated. In all circumstances, unanticipated collusion is more profitable to the colluding coalition than perfectly anticipated collusion. Colluding firms may therefore have an incentive to conceal their collusive activity, even when collusion is legal.

Contracting in strategic situations

Abstract Cooperative games are distinguished from noncooperative games by the ability to form binding pre-play agreements. The notion of a binding agreement, however, is ambiguous, for two reasons. First, contracts can be enforced by various provisions for the payment of damages in the event of breach. Second, contracts generally are incomplete, not specifying unique actions for each possible state of the world. This paper examines the interaction between incompletely specified and enforced pre-play contracts, and the outcomes that are achieved, in 2-player strategic situations. Comparisons are made among various damage measures for breach of contract.

The new institutional economics and a model of contract

Abstract This paper presents a model of contract that incorporates many of the features identified in the New Institutional Economies. Concepts such as ‘transaction costs’, ‘bounded rationality’, ‘opportunism’, and ‘asset specificity’ have natural interpretations in the framework of the model. The model makes explicit provision for damage measures for breach of contract, permitting a reexamination of some New Institutional ideas when court ordering is possible. It is demonstrated that an explicit provision for the legal background has a profound effect on New Institutional reasoning, and should be taken into consideration in developing policy towards non-standard contracting.

From Harm to Robustness: A Principled Approach to Vice Regulation

John Stuart Mills harm principle maintains that adult behavior cannot justifiably be subject to social coercion unless the behavior involves harm or a significant risk of harm to non-consenting others. The absence of harms to others, however, is one of the distinguishing features of many manifestations of vices such as the consumption of alcohol, nicotine, recreational drugs, prostitution, pornography, and gambling. It is therefore with respect to vice policy that the harm principle tends to be most constraining, and some current vice controls, including prohibitions on prostitution and drug possession, violate Mills precept. In the vice arena, we seem to be willing to accept social interference with what Mill termed self-regarding behavior. Does consistency then imply that any popular social intervention into private affairs is justifiable, that the government has just as much right to outlaw skateboarding, or shag carpets, or spicy foods, as it does to outlaw drugs? In this paper I argue that advances in neuroscience and behavioral economics offer strong evidence that vices and other potentially addictive goods or activities frequently involve less-than-rational choices, and hence are exempt from the full force of the harm principle. As an alternative guide to vice policy, and following some direction from Mill, I propose the robustness principle: public policy towards addictive or vicious activities engaged in by adults should be robust with respect to departures from full rationality. That is, policies should work pretty well if everyone is completely rational, and policies should work pretty well even if many people are occasionally (or frequently) irrational in their vice-related choices. The harm and robustness principles cohere in many ways, but the robustness principle offers more scope for policies that try to direct people for their own good, without opening the door to tyrannical inroads upon self-regarding behavior.

Breaking the rules and making the rules: Evasion, avoidance, and policy reform

Rule evasion and avoidance can have a significant impact on policy outcomes, and therefore on the design, implementation, and enforcement of policies. The purposes of this paper is to assess the causes and consequences of evasion and avoidance in general settings, including their implications for policy reform. Evasion of rules often serves a socially useful role, and can promote efficient policies. Small-scale evasion typically provokes one of three responses: it is either effectively ignored, enforcement is increased, or the rule is revised. Large-scale evasion, alternatively, tends to meet with major policy shifts. Avoidance and evasion frequently temper the anticipated impacts of policy reforms, but are unlikely to render reform futile. Indeed, ongoing processes of reform might be required to maintain effective policies.

Vice Policy in Russia: Alcohol, Tobacco, Gambling

In the past dozen years the regulatory systems surrounding the traditional vices of alcohol, tobacco, and gambling have been extensively overhauled in Russia, generally in the direction of tighter control. This paper surveys these reforms and assesses their impact. In the case of alcohol and tobacco, the reforms generally have been quite salutary, even as opportunities to engage legally in these vices remain plentiful; Russia’s extensive geographical ban on casino gambling might rein in compulsive wagering, but at the cost of putting legal casino gambling out of reach for most Russians. Informal markets continue to limit the effectiveness of formal vice market regulations, but do not preclude the maintenance of robust regimes that can protect (arguably) rational vice participation, while still raising meaningful barriers to less-than-fully considered vice decision-making.