Roland Bénabou

Social Mobility and the Demand for Redistribution: the POUM Hypothesis

Even relatively poor people oppose high rates of redistribution because of the anticipation that they or their children may move up the income ladder. This hypothesis commonly advanced as an explanation of why most democracies do not engage in large-scale expropriation and highly progressive redistribution. But is it compatible with everyone -- especially the poor -- holding rational expectations that not everyone can simultaneously expect to end up richer than average? This paper establishes the formal basis for the POUM hypothesis. There is a range of incomes below the mean where agents oppose lasting redistributions if (and, in a sense, only if) tomorrows expected income is increasing and concave in todays income. The laissez-faire coalition is larger, the more concave the transition function and the longer the policy horizon. We illustrate the general analysis with an example (calibrated to the U.S.) where, in every period, 3/4 of families are poorer than average, yet a 2/3 majority has expected future incomes above the mean, and therefore desires low tax rates for all future generations. We also analyze empirical mobility matrices from the PSID and find that the POUM effect is indeed a significant feature of the data.

Equity and Efficiency in Human Capital Investment: The Local Connection

A general model of community formation and human capital accumulation with social spillovers and decentralized school funding is used to analyse the causes of economic segregation and its consequences for equity and efficiency. Significant polarization arises from minor differences in endowments, preferences or access to capital markets. This makes income inequality more persistent across generations, but the same need not be true for wealth. Equilibrium stratification tends to be excessive, resulting in low aggregate surplus. Whether state equalization of school resources can remedy these problems hinges on how purchased, social and family inputs interact in education and in mobility decisions.

Individual and Corporate Social Responsibility

Society’s demands for individual and corporate social responsibility as an alternative response to market and distributive failures are becoming increasingly prominent. We first draw on recent developments in the “psychology and economics” of prosocial behavior to shed light on this trend, which reflects a complex interplay of genuine altruism, social or self image concerns, and material incentives. We then link individual concerns to corporate social responsibility, contrasting three possible understandings of the term: the adoption of a more long-term perspective by firms, the delegated exercise of prosocial behavior on behalf of stakeholders, and insider-initiated corporate philanthropy. For both individuals and firms we discuss the benefits, costs and limits of socially responsible behavior as a means to further societal goals.

Using Privileged Information to Manipulate Markets: Insiders, Gurus, and Credibility

Access to private information is shown to generate both the incentives and the ability to manipulate asset markets through strategically distorted announcements. The fact that privileged information is noisy interferes with the publics attempts to learn whether such announcements are honest; it allows opportunistic individuals to manipulate prices repeatedly, without ever being fully found out. This leads us to extend Sobels [1985] model of strategic communication to the case of noisy private signals. Our results show that when truthfulness is not easily verifiable, restrictions on trading by insiders may be needed to preserve the integrity of information embodied in prices.

Willpower and Personal Rules

We develop a theory of internal commitments or “personal rules” based on self‐reputation over one’s willpower, which transforms lapses into precedents that undermine future self‐restraint. The foundation for this mechanism is the imperfect recall of past motives and feelings, leading people to draw inferences from their past actions. The degree of self‐control an individual can achieve is shown to rise with his self‐confidence and decrease with prior external constraints. On the negative side, individuals may adopt excessively rigid rules that result in compulsive behaviors such as miserliness, workaholism, or anorexia. We also study the cognitive basis of self‐regulation, showing how it is constrained by the extent to which self‐monitoring is subject to opportunistic distortions of memory or attribution, and how rules for information processing can themselves be maintained.

Inflation and Efficiency in Search Markets

This paper examines how inflation affects efficiency and output in monopolistically competitive search markets. It formalizes the conventional wisdom linking higher inflation, price dispersion, and increased resources devoted to search. It also brings to light the induced exit of Arms, which reduces rent dissipation. But the most important effect of inflation is how it alters the distribution of real transactions prices. Whether this reduces or promotes efficiency and output is shown to depend critically on preferences and market structure, and especially on whether search costs are large or small relative to consumer surplus.

Human capital, inequality, and growth: A local perspective

Abstract A recent body of work has demonstrated the crucial role played by local human capital externalities and local school funding in generating socio-economic segregation, persistent poverty, and low aggregate income or productivity growth. We present a simple model which captures the main insights from this literature, and prove three general propositions. First, minor differences in education technologies, preferences, wealth, or minor imperfections in capital markets, can lead to a high degree of stratification. Second, stratification makes inequality in education and income more persistent across generations; the same is true for total wealth, provided the rich succeed in capturing the rents created by their secession. Finally, this polarization or urban areas can be very inefficient, especially in the long run.

Self Control in Peer Groups

People with a self-control problem often seek relief through social interactions rather than binding commitments. Thus, in self-help groups like Alcoholics Anonymous, Narcotics Anonymous etc, members are said to achieve better personal outcomes by mainly sharing their experiences. In other settings, however, peer influences can severely aggravate individual tendencies towards immediate gratification, as is often the case with interactions among schoolmates or neighborhood youths. Bringing together the issues of self-control and peer effects, we study how observing the behaviour of others affects individuals’ ability to resist their own impulses towards short-run gratification. We show how these purely informational spillovers can give rise to multiple equilibria, where agents’ choices of self-restraint or self-indulgence are mutually reinforcing. More generally, we identify conditions on agents’ initial self-confidence, confidence in others, and degree of correlation that uniquely lead to either a ‘good news’ equilibrium where social interactions improve self-discipline, a ‘bad news equilibrium’ where they damage it, or to both. We also conduct a welfare analysis to determine when group membership is preferable to, or worse than, isolation. Individuals will generally find groups useful for self-control only if they have at least a minimal level of confidence in their own and their peers’ ability to resist temptation. At the same time, having a partner who is ‘too perfect’ is no better than being alone, and therefore often less desirable than being matched to someone more like oneself. Our Paper thus provides a psychologically grounded theory of endogenous peer effects, as well as of the importance of group morale.

Dynamic inconsistency and self-control: a planner-doer interpretation

We show that Gul and Pesendorfer’s [Econometrica 69 (2001) 1403] representation result for preferences with temptation and self-control can be reexpressed in terms of a costly intrapersonal conflict between a Planner and Doer, as in Thaler and Shefrin [J. Political Econ. 89 (1981) 392] and psychologists’ standard view of self-control problems.

Bonus Culture: Competitive Pay, Screening, and Multitasking

To analyze the impact of labor market competition on the structure of compensation, we embed multitasking and screening within a Hotelling framework. Competition for talent leads to an escalation of performance pay, shifting effort away from long-term investments, risk management, and cooperation. Efficiency losses can exceed those from a single principal, who dulls incentives to extract rents. As competition intensifies, monopsonistic underincentivization of low-skill agents first decreases and then gives way to growing overincentivization of high-skill ones. Aggregate welfare is thus hill-shaped, while inequality tends to rise monotonically. Bonus caps can help restore balance in incentives but may generate other distortions.