Roland Kirstein

Government Incentives when Pollution Permits are Durable Goods

This paper analyzes the incentive effects of pollution taxesversus pollution permits for a budget oriented Government.Pollution permits are analyzed as durable goods, and apollution tax is seen as being equivalent to leasing outpollution permits. First, a general model is developed, andthen four stylized types of Government are discussed (abenevolent dictator, a pure Leviathan, a green and a business-friendly Government). We show that all types of Governmentprefer a pollution tax system, but this regime is notnecessarily the best in social welfare terms. The intuition isthat a tax or leasing system makes it easier for theGovernment to credibly commit to the budget maximizing levelof pollution permits which is good for Government revenues,but not necessarily for social welfare.

Judicial detection skill and contractual compliance

Mutually beneficial agreements might fail if the parties fear contractual opportunism. Litigation is supposed to be a remedy, but gives scope for another kind of opportunistic behavior which we call litigational opportunism: Even knowing that the opponent has fulfilled his obligations, a party might bring suit. We introduce a new concept, called judicial detection skill, and show that positive judicial detection skill is a prerequisite if the court system is to deter opportunistic suits and simultaneously induce bilateral contractual compliance. The traditional literature on litigation either assumes judges with zero detection skill, or simply neglects that opportunistic suits might be successful. We prove that those models are unable to provide an answer to the question of how to prevent both types of opportunism simultaneously.

Risk-Neutrality and Strategic Insurance

The paper shows that Legal Cost Insurance (LCI) is a device to enhance potential litigants? bargaining position rather than to re-allocate risk. Being insured decreases the cost an insured party has to bear if settlement negotiations fail and the case goes to trial. This shifts the threat points, which has an impact on the bargaining result. In negative expected value suits, LCI can make the threat to sue credible and motivate potential defendants to make positive settlement offers. Hence, even risk-neutral agents may find it beneficial to insure.

Doping, the Inspection Game, and Bayesian Enforcement:

“Bayesian enforcement” assumes that doping tests are imperfect. Moreover, the enforcer is interested in fostering compliant behavior and making correct decisions. Three types of perfect Bayesian equilibria exist, which differ in their punishment styles: “tyrannic,” “draconian,” and “lenient.” The equilibrium probability of compliant behavior is highest in the lenient equilibrium; therefore, the legal framework of the enforcement should aim at unselecting the draconian and tyrannic equilibria. Total deterrence is impossible as long as the signal is imperfect. An increase in punishment would not increase the probability of compliant behavior.

Inefficient Intra-Firm Incentives Can Stabilize Cartels in Cournot Oligopolies

The need for intra-firm incentive schemes allows remodeling the Cournot duopoly in wages (rather than in output levels). In both versions of the Cournot model, a cartel agreement is unstable. The new formulation, however, allows us to demonstrate that a collective wage agreement on minimum wages can stabilize the cartel solution. Beyond its relevance for strategic management, this result has a policy implication: competition authorities should observe collective wage agreements for their potential collusive effect on product markets. Moreover, the model may provide a new explanation why firms in reality pay lower than efficient variable wages and higher fixed wages than predicted by contract theory.

Eigennutz als Triebfeder des Wohlstands: Die "invisible hand" - im Hörsaal-Experiment sichtbar gemacht

Zusammenfassung Die empirische Prüfung theoretischer Forschungsergebnisse wirft in der Ökonomie - wie bei jeder Sozialwissenschaft - Probleme auf. Anders als in den Naturwissenschaften können volkswirtschaftliche Problemstellungen kaum in Labors nachgebildet werden. Seit einigen Jahren nutzen Ökonomen allerdings die Erfahrungen der Psychologie mit stilisierten Experimenten, um zumindest ihre grundlegenden Verhaltenshypothesen testen zu können. Dieser Beitrag stellt ein einfaches Hörsaal-Experiment vor, das Adam Smiths Hypothese von der “unsichtbaren Hand” im Marktgeschehen empirisch überprüft. Das Experiment zeigt zudem, wie Wettbewerb als Entdeckungsverfahren funktioniert, und es besitzt hohen didaktischen Wert: Die Studenten erhalten Einblick in empirische Forschung und erleben hautnah das Funktionieren des Marktes. Summary In economics, like in any social science, empirical tests of theoretical results face the problem that the economy cannot be reproduced in laboratories. Drawing on the experience of psychology, experimental economics nowadays uses stylised experiments to test at least the basic assumptions of the economic theory of human behavior. The article describes a simple classroom experiment that serves as an empirical test of Adam Smith’s invisible-hand hypothesis. It demonstrates that competition works as a discovery procedure. The experiment is of high didactical value, since the students gain insights into empirical research and experience how markets work.

The Violent and the Weak: When Dictators Care About Social Contracts

This paper explores the conditions under which compliance with a social contract establishes an equilibrium in a society. It is assumed that society consists of two groups, one of which has a comparative advantage in using violence, whereas the other one has a comparative advantage in producing a private good. Violence can be used to produce security as well as to exploit the weaker group. Yet, exploitation is limited: it reduces the incentives of the exploited group to produce the private good and increases the chances of a revolution. A social contract consists of the exchange of security against a share of the private good, produced at a high level of effort. The model not only allows the derivation of conditions for either compliance or exploitation to occur, but also sheds light on the transition from one form of government to the other. Hence, it contributes to Positive Constitutional Economics, i.e., the research program that is interested in explaining the emergence and the change of constitutions.

Sharing and Anti-Sharing in Teams

Compared to budget-balanced Sharing contracts, Anti-Sharing may improve the efficiency of teams. The Anti-Sharer collects a fixed payment from all team members; he receives the actual output and pays out its value to them. If a team members becomes Anti-Sharer, he will be unproductive in equilibrium. Hence, internal Anti-Sharing fails to yield the first-best outcome. Anti-Sharing is more likely to yield a higher team profit than Sharing, the larger the team, the curvature of the production function, or the marginal effort cost. Sharing is more likely to be better, the greater the marginal product, the cross-partials of the production function, or the curvature of the effort cost.

Optimal Delegation in Nash Bargaining

When appointing a representative in negotiations, the principal can o er his agent a offer contract that promises a percentage of the bargaining result, and a bonus payment result (or penalty) if bargaining fails. Conventional wisdom of contract theory seems to suggest that the share should be as great as possible to provide proper incentives for a risk-neutral agent, while the bonus should be small or even negative. Drawing on the symmetric Nash bargaining solution, this paper argues that the optimal share is rather small, whereas the optimal bonus is rather large.

Risk-Neutral Monopolists are Variance-Averse

If the production of a risk-neutral monopolist is in uenced by a random variable, then the expected pro t is decreasing in the variance of the production process.