Kangoh Lee

Risk Aversion and Self-Insurance-cum-Protection

Self-insurance and self-protection have been discussed separately in the literature. However, as observed in practice, many actions individuals take to modify a potential loss serve both as self-insurance and as self-protection. Given this practical importance of self-insurance-cum-protection activities, this paper examines the effect of increased risk aversion on such activities. The analysis shows that the effect depends in part on the shape of the loss function and that of the probability function.

Educational vouchers, welfare effects, and voting

Abstract We analyze the welfare effects and voting equilibrium with vouchers for private schools. The analysis shows that vouchers, like tuition tax credits [ Martinello and West (1988) ; Frey (1983) ], may improve the welfare of all families, including families whose children remain in public schools, if public educational quality is unchanged and publicly-financed educational expenditures decrease. Thus, voters will approve a voucher only if it reduces taxes. When public educational quality is endogenous, a voucher may increase quality by reducing the tax cost of quality and will be approved if it reduce taxes at the pre-voucher public education level and increases quality.

Tax evasion and self-insurance

Abstract This paper examines the effect of an increase in the tax rates on tax evasion in a model where taxpayers self-insure against possible penalties. The analysis shows that the effect depends on the marginal productivity of self-insurance. If the marginal productivity is not too small, an increase in the tax rates leads to greater tax evasion and less tax compliance. This result stands in contrast with the theoretical result in the literature but accords well with empirical findings.

Uncertain income and redistribution in a federal system

Abstract This paper considers income redistribution in a federal system where regions experience random shocks. Federal redistribution serves as insurance against jurisdiction-specific shocks, but provides a uniform assistance to the poor and cannot suit individual jurisdictions demands for redistribution. Consequently, whether the federal government should redistribute depends on the advantage of pooling the risk and the disadvantage of compromising different preferences for redistribution. With mobile individuals, federal redistribution loses its advantage, because migration ensures the equalization of factor incomes between regions, and because even local redistribution serves as insurance. However, local redistribution creates fiscal externalities and distorts the allocation of labor.

Optimal retail lease contracts: the principal-agent approach

Abstract This paper considers retail lease contracts that are common in practice in a principal-agent framework. The key question concerns whether the optimal linear lease contract should have both the fixed rent and the percentage rent linear in sales. The analysis shows that an optimal linear risk-sharing contract is a form of the pure percentage rent if the tenant is risk averse and the landlord is risk neutral. However, an optimal linear contract that provides incentives for effort and shares risk may include the percentage rent and the fixed rent as well.

Transaction costs and equilibrium pricing of congested public goods with imperfect information

Abstract This paper examines the role of transaction costs in pricing a congested public facility which can be used with variable intensity when there exists information asymmetry between consumers and firms. If a per visit price (toll) requires a large transaction cost of toll gates, a lump-sum price (season ticket price) may be used in equilibrium. However, under the lump-sum price together with imperfect information, high demanders (in terms of visits to the facility) have an incentive to patronize facilities designed for low demanders to exploit a price difference. Thus, an adverse selection problem may arise, and equilibrium is in general inefficient, depending on the magnitude of the transaction cost.

Subsidies as sorting devices

Abstract The divergence between tax payments and the cost of providing public services that arise from financing local public services provides an incentive for higher-income communities to deter the entry of lower-income households into their community. Here we demonstrate that higher-income households, to insure that low-income households do not enter their community or reduce the number that do enter, subsidize goods consumed by higher-income households more than by lower-income households. This strategy will make the rich community less attractive to the poor, deterring their entry to the community.

An Analysis of Welfare Effects of Legislative Term Limits

This paper analyzes the welfare effects of term limits forstate legislators. Legislators tend to pursue their ownobjectives and deviate from the interests of voters as theystay longer in office. However, such long-term incumbentsbecome more productive in transferring wealth to theirconstituents due to seniority they gain, and voters re-electthe incumbent. Term limits reduce the maximum seniority of adistricts legislator and of other districts legislators aswell, affecting the relative seniority of the legislator.Thus, the legislator gains relative seniority sometimes andloses other times under term limits. As a consequence, votersof a district may or may not benefit from term limits. Thewelfare effects of term limits depend crucially on the shapeof the voters utility function.

Voluntary Provision of Public Goods and Administrative Costs

This article considers voluntary provision of public goods in the presence of administrative costs. Government collects taxes and provides grants to a charity. Using government grants and private donations, the charity provides a public good. Administrative costs are paid twice for the government and for the charity in the case of taxes, and less of a one dollar tax goes toward the public good than from a one dollar donation. Donations are thus more efficient in terms of administrative costs than taxes. Donors then wish to donate more than in the standard model without administrative costs, and donors decrease their donations less than one dollar in response to a one-dollar increase in taxes. This partial crowding out caused by administrative costs helps explain the coexistence of the public provision and private provision of public goods in a number of contexts.