Roland Iwan Luttens

Responsibility sensitive egalitarianism and optimal linear income taxation

We compute optimal linear taxes on labor income with quasilinear preferences between income and labor. Agents differ in their productivity and in their taste for leisure. A responsibility sensitive egalitarian wants to compensate for the former differences but not for the latter. This intuition is captured by a social planner that wants to equalize opportunities for subjective utility along the lines of the criteria proposed by Roemer and Van de gaer, and by a social planner evaluating social states based on an advantage function representing reference preferences. Our theoretical results are illustrated with empirical data for Belgium.

Lorenz dominance and non-welfaristic redistribution

Our concern is for income inequalities that may result from non-welfaristic redistribution schemes. We show that for large classes of income functions Lorenz dominance results can be found in the comparison of two egalitarian equivalent mechanisms. Comparisons of different conditionally egalitarian mechanisms only yield poverty dominance results. In general, no egalitarian equivalent mechanism can be Lorenz dominated by a conditionally egalitarian mechanism. Our analysis stresses the need for accurate empirical estimates of the pre-tax income function and of the distributions of responsibility and compensation characteristics.

Minimal rights based solidarity

In a model where individuals with different levels of skills exert different levels of effort, we propose to use individuals’ minimal rights to divide an extra amount of income generated by a change in the skill profile. Priority is given to individuals with a positive minimal right which ensures that the way redistribution is performed depends on the total sum of income available in society. We characterize two families of minimal rights based Egalitarian mechanisms. One family guarantees each individual her claim when claims are feasible. The other family guarantees a non-negative income after redistribution for all individuals.

Fairness in bankruptcy situations: an experimental study

The pari passu principle is the most prominent principle in the law of insolvency. We report from a lab experiment designed to study whether People find this principle a fair solution to the bankruptcy problem. The experimental design generates situations where participants work and accumulate claims in firms, some of which subsequently go bankrupt. Third-party arbitrators are randomly assigned to determine how the liquidation value of the bankrupt firms should be distributed between claimants. Our main finding is that there is a striking support for the pari passu principle of awarding claimants proportionally to their pre-insolvency claims. We estimate a random utility model that allows for the arbitrators to differ in what they consider a fair solution to the bankruptcy problem and find that about 85 percent of the participants endorse the proportional rule. We also find that a non-negligible fraction of the arbitrators follow the constrained equal losses rule, while there is almost no support in our experiment for the constrained equal awards rule or other fairness rules suggested in the normative literature. Finally, we show that the estimated random utility model nicely captures the observed arbitrator behavior, in terms of both the overall distribution of awards and the relationship between awards and claims.

Collective Bargaining Under Non-Binding Contracts

We introduce collective bargaining in a static framework where the firm and its risk-neutral employees negotiate over wages in a non-binding contract setting. Our main result is the equivalence between the non-binding collective equilibrium wage-employment contract and the equilibrium contract under binding risk-neutral efficient bargaining. We also demonstrate that our non-cooperative equilibrium wages and profits coincide with the Owen values of the corresponding cooperative game with the coalitional structure that follows from unionization.

Demand Lotteries, Abandonment Options and the Decision to Start R&D and Process Innovation

We study different determinants of real-life R&D decisions within a net present value framework. Besides entry threat, Bertrand competition and multi-stage R&D with an abandonment option, our model includes demand uncertainty, modelled as a lottery. A lottery becomes more divergent when the difference between the outcomes of the lottery increases. We derive under which lottery probabilities more divergent demand lotteries positively or negatively affect the decision to start R&D. Using CIS IV data for about 2600 German firms, we find that for firms facing lotteries where the good state is more likely to prevail a 10% increase in the degree of divergence of the demand lottery increases the likelihood of undertaking R&D by 1.2 percentage points. For firms facing a demand lottery where the bad state is most likely to prevail, a 10% increase in the degree of divergence of the demand lottery decreases the likelihood of undertaking R&D by 4.6 percentage points. Having the option to abandon R&D projects significantly increases the likelihood of undertaking R&D.

Saving Private Pareto

We include initial holdings in the jungle economy of Piccione and Rubinstein (Economic Journal, 2007) and relax the assumptions on consumption sets and preferences. We show that initial holdings are irrelevant for lexicographic welfare maximization. Equilibria other than such maximizers can be jungle equilibria due to myopia. We show that farsightedness restores the equivalence between jungle equilibria and lexicographic welfare maximization. However, we also derive farsighted equilibria in which stronger agents withhold goods from weaker agents. Then, gift giving by stronger agents is needed to restore Pareto efficiency. Our results add to understanding coercion and the crucial assumptions underlying jungle economies.

Starting an R&D Project under Uncertainty

We study a two-stage R&D project with an abandonment option. Two types of uncertainty influence the decision to start R&D. Demand uncertainty is modelled as a lottery between a proportional increase and decrease in demand. Technical uncertainty is modelled as a lottery between a decrease and increase in the cost to continue R&D. We relate differences in uncertainty to differences in risk premia. We deduct testable hypotheses on the basis of which we empirically analyze the impact of uncertainty on the decision to start an R&D project. Using data for about 4000 German firms in manufacturing and services (CIS IV), our model predictions are strongly confirmed.

The Economics of First-Contract Mediation

This paper provides an economic foundation for non-binding mediation to stimulate first collective bargaining agreements, as implemented in British Columbia since 1993. We show that the outcome of first-contract mediation is Pareto efficient and proves immune to the insider-outsider problem of underhiring. We also demonstrate that equilibrium wages and profits under mediation coincide with the Owen values of the corresponding cooperative game with the coalitional structure that follows from unionization.