Philippe De Donder

The political economy of targeting

One of the most widely used method of targeting is to reduce welfare benefits as income rises. Although the need for such targeting is clear enough, it also entails two important difficulties. Firstly, the prospect for the recipients of losing part of their benefits if they were to earn more can be a deterrent to work harder. Secondly, by reducing the number of recipients, targeting reduces the political support for taxation and redistribution. The purpose of this paper is to study the voting equilibrium of the degree of targeting and the level of taxation in an economy where labour supply is variable. The analysis reveals that targeting may be fatal for redistribution even though it rejects strictly less than the richest half of the population, and that it is not possible for a coalition of the extremes to form and reject the middle income group from the welfare system. Moreover, because targeting affects labour supply, we find that Pareto improvements are possible when targeting is either “too low” or “too high”. We also find that voting simultaneously over taxation and targeting is favourable to the poor in the sense that they can converge to their most-preferred policy by successively forming a majority coalition with the rich to increase targeting and with the middle to increase taxation.

The Politics of Redistributive Social Insurance

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Designing a Linear Pension Scheme with Forced Savings and Wage Heterogeneity

This paper studies the optimal linear pension scheme when society consists of rational and myopic individuals. Myopic individuals have, ex ante, a strong preference for the present even though, ex post, they would regret not to have saved enough. While rational and myopic persons share the same ex post intertemporal preferences, only the rational agents make their savings and labor supply decisions according to these preferences. Individuals are also distinguished by their productivity. The social objective is “paternalistic”: the utilitarian welfare function depends on ex post utilities. We examine how the presence of myopic individuals affects both the size of the pension system and the degree of redistribution it operates, with and without liquidity constraints. The relationship between proportion of myopic individuals and characteristics of the pension system turns out to be much more complex than one would have conjectured. Neither the impact on the level of pensions nor the effect on their redistributive degree is unambiguous. Nevertheless, we show that under some plausible assumptions adding myopic individuals increases the level of pension benefits and leads to a shift from a flat or even targeted scheme to a partially contributory one. However, we also provide an example where the degree of redistribution is not a monotonic function of the proportion of myopic individuals.

The Politics of Progressive Income Taxation with Incentive Effects

This paper studies majority voting over quadratic taxation and investigates under which conditions marginal progressivity emerges as a voting outcome. In our model with endogenous income, there is no majority (Condorcet) winning tax schedule. We then investigate less demanding political equilibrium concepts in order to see under which conditions the set of equilibria is composed only of progressive tax functions. We follow three strategies: (i) reduction of the policy space to the tax functions that are ideal for some voter; (ii) elimination of weakly dominated strategies and the use of mixed strategies in a standard Downsian two-party competition game; (iii) assumption that political parties interact repeatedly and care about the size of their majority. Although each approach captures a different aspect of political behavior, they point to the same (simulation-based) conclusion that progressivity is more likely to emerge for most distributions of abilities and that it is actually the only possible voting outcome if the distribution is sufficiently concentrated at the middle.

Voting Under the Threat of Secession: Accommodation vs. Repression

We build a simple model of secession crises where a majority of voters may wish to accommodate a minority in order to prevent a secession attempt. We first show the existence of a majority voting equilibrium, where the median voter is decisive and most prefers a government’s type that is biased in favor of the minority. We propose a measure of the secession risk at equilibrium, which depends upon the comparison of the willingness to secede by the minority and to accommodate by the majority. We show that focusing only on the willingness to secede, as previous literature has done, is misleading when studying the impact on the risk of secession of the size of the minority region, the probability that a secession attempt by the minority is successful, and the cultural heterogeneity in the country.

Social Costs and Benefits of the Universal Service Obligation in the Postal Market

The universal service obligation (USO) is a cornerstone of regulatory policy in the postal sector. In the EU, where the sector is headed towards full liberalization, the USO is the major argument used to advocate some residual regulation. In the postal sector, like in many other network industries, universal service was historically provided by a monopolistic public or regulated operator. While the need for monopoly protection has been increasingly disputed, the very idea of universal service has remained relatively uncontested during the early stages of the liberalization process. The debate was not that much about the appropriate extent of the USO but about the most efficient (or least costly) way to make it competitively neutral, or at least as compatible as possible with competition. This in itself is a challenging question. More recently, however, the USO in itself has increasingly been questioned. The question is whether the social benefits associated with the USO are significant enough to justify its cost and in particular the impediment to competition it often implies. The spectacular development of electronic communications is likely to further fuel this debate. To ensure a sound design of the future regulatory context in the postal sector, it is important not to restrict this debate to political or ideological considerations. The underlying economic aspects are of crucial importance and have to be given thorough consideration. While there are some papers in the literature that deal with this issue, it appears fair to say that most of the contributions on USO have concentrated on the “how” (to implement) rather than on the “why” (to impose it and to what extent). This is true to some extent for all network industries but even more so for the postal sector.

Taxing Sin Goods and Subsidizing Health Care

We consider a two-period model. In the first period, individuals consume two goods: one is sinful and the other is not. The sin good brings pleasure but has a detrimental effect on second period health and individuals tend to underestimate this effect. In the second period, individuals can devote part of their saving to improve their health status and thus compensate for the damage caused by their sinful consumption. We consider two alternative specifications concerning this second period health care decision: either individuals acknowledge that they have made a mistake in the first period out of myopia or ignorance, or they persist in ignoring the detrimental effect of their sinful consumption. We study the optimal linear taxes on sin good consumption, saving and health care expenditures for a paternalistic social planner. We compare those taxes in the two specifications. We show under which circumstances the first best outcome can be decentralized and we study the second best taxes when saving is unobservable.

Uniform Pricing and Postal Market Liberalization

A widely accepted definition of the universal service obligation (USO) in posts is the provision of a universal postal service at a uniform (that is, geographically averaged) price. Historically, the reserved area has been put in place in individual countries to allow postal administrations to finance this obligation. However, as postal markets move into an increasingly liberalized environment, the question naturally arises as to whether the uniform price would necessarily be a market generated outcome in this new world. Alternatively, would demand and cost conditions make it more likely that market behavior would lead to a more complex pattern of tariffs from postal operators which would lead to differentiation by customer type and geography? This is an issue of fundamental importance to regulators and policy makers for, in general, national governments value highly the maintenance of the uniform tariff while, at the same time, wishing to promote market liberalization.

Genetic Testing with Primary Prevention and Moral Hazard

We develop a model where a genetic test reveals whether an individual has a low or high probability of developing a disease. Testing is not mandatory, but agents have to reveal their test results to the insurers, facing a discrimination risk. A costly prevention effort allows agents with a genetic predisposition to decrease their probability to develop the disease. We study the individual decisions to take the test and to undertake the prevention effort as a function of the effort cost and of its efficiency. If effort is observable by insurers, agents undertake the test only if the effort cost is neither too large nor too small. If the effort cost is not observable by insurers, moral hazard increases the value of the test if the effort cost is low. We offer several policy recommendations, from the optimal breadth of the tests to policies to do away with the discrimination risk.

Majority voting solution concepts and redistributive taxation

Strong assumptions are usually needed to guarantee the existence of a Condorcet winner in majority voting games. The theoretical literature has developed various solution concepts to accommodate the general absence of Condorcet winner, but very little is known on their economic implications. In this paper, I select three such concepts (the uncovered set, the bipartisan set and the minmax set), defined as game-theoretical solution concepts applied to a Downsian electoral competition game. These concepts are then computed by means of simulations in a simple model of purely redistributive taxation, where factor supply varies with net factor rewards. All three concepts give rather sharp predictions and are not too sensitive to small variations of the preference profiles.Abstract. Strong assumptions are usually needed to guarantee the existence of a Condorcet winner in majority voting games. The theoretical literature has developed various solution concepts to accommodate the general absence of Condorcet winner, but very little is known on their economic implications. In this paper, I select three such concepts (the uncovered set, the bipartisan set and the minmax set), defined as game-theoretical solution concepts applied to a Downsian electoral competition game. These concepts are then computed by means of simulations in a simple model of purely redistributive taxation, where factor supply varies with net factor rewards. All three concepts give rather sharp predictions and are not too sensitive to small variations of the preference profiles.