Articles
Political Economy
A Political Economy Theory of Partial Decentralization (with Gerard Padró i Miquel) PDF
We revisit the classic problem of tax competition in the context of federal nations, and derive a positive theory of partial decentralization. A capital poor median voter chooses to use redistributive capital taxes to provide public goods. The expectation of high capital taxes, however, results in a small capital stock which lowers returns to redistribution. The median voter therefore wants to commit to a lower level of capital taxes. She does so by setting a partial degree of decentralization in the Constitution. The equilibrium degree of decentralization balances the positive effect of tax competition on capital taxes with the loss in redistribution that results. We show that the degree of decentralization is non-monotonic in inequality, increasing in the redistributive efficiency of public good provision, and decreasing in capital productivity. When public goods are heterogeneous in their capacity to transfer funds, all voters agree that goods with high redistributive capacity should be decentralized.
Electoral Regime and Trade Policy (with William R. Hauk, Jr.) PDF
This paper studies how trade protection varies with the electoral rules for legislative representation. In particular, we study how trade policy differs between countries with legislatures elected by a plurality election rule in single member constituencies and legislatures elected by a proportional, or party-list, rule. Our results, which are in line with the existing literature, show that countries with list-PR systems tend to have lower trade barriers than countries with majoritarian systems. Our paper expands on this literature by looking at the mechanisms through which this correlation can be explained. Our findings indicate that, contrary to existing theory, neither constituency size nor party strength are important when explaining this correlation. Country size does matter, but does not explain the whole of the correlation.
Federal Competition and Economic Growth (with Katrina Kosec) PDF
We examine how competition between governments affects economic growth. Using data on metropolitan statistical areas in the United States, and exploiting exogenous variation in the country's natural topography to instrument for the number of local governments, we find that the number of local governments significantly and positively affects the growth rate of income per employee over 1969-2006. In particular, doubling the number of county governments is associated with an 18% increase in the income growth rate, which implies an approximate $3900 difference in 2006 income. Decomposing this effect, we find that 60% stems from inter-jurisdictional competition changing the composition of the workforce, while 40% comes from making existing workers more productive.
Ricardian Equivalence for Local Government Bonds: A Utility Maximization Approach PDF
We investigate the question of Ricardian equivalence in the context of local
public finance. Earlier work has suggested that, even in the absence of altruism,
Ricardian equivalence will hold for local public finance. We show that this is
case if and only if subnational units use property taxes. However, for other
tax bases, a weaker result can be shown: the unique equilibrium has the same
economic outcomes as the ones where districts may not issue debt.
Backward Intergenerational Goods and Endogenous Fertility PDF
This paper characterizes the consequences of introducing the public provision of intergenerational goods to the elderly in a model with endogenous fertility. With exogenous fertility, it has been shown that the government can mandate the first-best outcome by simply imposing the socially optimal transfer. By contrast, with endogenous fertility, the government can no longer enforce this outcome. This is due, in part, to the effects of mandatory provision on the birth rate. However, taxes may still have a salubrious effect on social welfare as they can eliminate particularly bad equilibria.
Lobbyist Power and Polarization PDF
We consider how changes in the polarization of a legislature affect the power of lobbyists. If there is only one lobbyist, and he cares about policy along the dimension of polarization, an increase in polarization causes the cost of implementing any given proposal to fall and for the equilibrium policy to be farther from the median legislator’s ideal point. However, even if the lobbyists policy goals are orothogonal to the dimension of polarization, i.e. all legislators have the same ideal point on the lobbyists policy dimension, an increase in polarization along the general policy dimension will decrease the cost to the lobbyist of implementing any given policy in the lobbyists policy dimension, and move the equilibrium policy in this dimension farther from the legislatures ideal point. Furthermore, the policy choice in the dimension of legislature polarization will likely move away from the median voters ideal point, even though the lobbyist has no interest in the general policy dimension per se. With competing lobbyists, the effects on implementation cost and on equilibrium policy of an increase in polarization is ambiguous; however, the size of the optimal supermajority will fall as polarization increases.
Revenue Decentralization, the Local Income Tax Deduction, and the Provision of Public Goods
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We consider a model where local and national governments invest in both productive and consumptive public goods using income tax revenue. Local governments will overprovide the consumptive public good if the local income tax is (fully or partially) deductible. However, without full deductibility, local governments will underprovide local productive public goods. Hence, to reduce the distortions in the local governments' decisions, a welfare-maximizing national government will underinvest in both types of public goods. We also consider an alternative fiscal structure where the national government sets one national tax rate and provides transfers to the local governments: This results in lower welfare than one where local governments raise revenue independently.
Federalism, Taxation, and Economic Growth
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We present a model of endogenous growth where government provides a productive public good enhanced by income and capital taxes. In equilibrium, a decentralized government chooses tax policy to maximize economic growth, while a centralized government does not do so. Furthermore, these conclusions hold regardless of whether governments are beholden to a median voter or are rent-maximizing Leviathans. However, a decentralized government will underprovide a hedonic public good, while a central government beholden to the median voter will optimally invest in the hedonic public good.
Multitasking, Limited Liability, and Political Agency (with Gerard Padró i Miquel)
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This paper considers a simple framework of political accountability in which the politician exerts unobserved effort in two independent dimensions. We show that it is difficult to implement vectors that devote attention to both dimensions: the citizens have to sacrifice half of total effort with respect to the case in which they hold the politician accountable for a single dimension, as the problem of the politician becomes non-convex in the two dimensions if excessive rewards are provided. Given this, we then consider why we do not observe more direct election of different ministers. We find that if there is an element of unobserved types together with the moral hazard problem, a united executive generally dominates one with divided accountability.
Federalism, Tax Base Restrictions, and the Provision of Intergenerational Public Goods PDF
We investigate the level of investment in local public goods that will be enjoyed by future generations under decentralized provision of these goods, under both head tax and land tax regimes. We then compare these outcomes to results for the centralized provision of such goods. We find that decentralizing the provision of intergenerational goods always leads to more efficient provision of intergenerational goods, regardless of the tax base available to the centralized and decentralized governments. However, choice of tax base is still important; under a head tax regime, we obtain efficient investment under very general assumptions. Under a land tax regime, we obtain efficient investment only in the limit of perfect competition and noncongestibility of the public good, while investment is inefficiently low if either of these conditions fails.
Market Design
Contract Design and Stability in Many-to-Many Matching (with Scott Duke Kominers) PDF
We develop a model of many-to-many matching with contracts which subsumes as special cases many-to-many matching markets and buyer-seller markets with heterogeneous and indivisible goods. In our setting, in contrast to results for the setting of many-to-one matching with contracts, preference substitutability is sufficient and necessary to guarantee the existence of a nonempty lattice of stable allocations. Several fundamental structural results, such as the rural hospitals theorem, extend to our setting. We also develop a theory of language for many-to-many matching markets with contracts, and show a natural tradeoff between expressiveness and stability: bundling makes a contractual language less expressive, but encourages substitutability of agents' preferences over contracts.
Promoting School Competition Through School Choice: A Market Design Approach (with
Fuhito Kojima and
Yusuke Narita) PDF
We study the effect of different school choice mechanisms on schools' incentives for quality improvement. To do so, we introduce the following criterion: A mechanism respects improvements of school quality if each school becomes weakly better off whenever that school becomes more preferred by students. We first show that no stable mechanism, or mechanism that is Pareto efficient for students (such as the Boston and top trading cycles mechanisms), respects improvements of school quality. Nevertheless, for large school districts, we demonstrate that any stable mechanism approximately respects improvements of school quality; by contrast, the Boston and top trading cycles mechanisms fail to do so. Thus a stable mechanism may provide better incentives for schools to improve themselves than the Boston and top trading cycles mechanisms.
Takeover Defenses and Adverse Selection (with Jordan M. Barry) PDF
Corporate takeover defenses have long been a focal point of academic attention. However, no consensus exists on such fundamental questions as why different corporations adopt varying levels of defenses and whether defenses benefit or harm target corporations' shareholders or society generally. Our Article advances the ongoing dialogue on this topic by introducing formal models that incorporate the reality that corporate insiders have superior information about the target corporation but are imperfect agents of its shareholders. These models suggest that modern defenses enable target shareholders to extract value from acquirers by empowering corporate insiders, but that takeover defenses do not benefit society as a whole. They also provide insight into several factors that may influence corporations’ decisions to adopt varying levels of takeover defenses. Our findings have implications for the longstanding debate about who is best-served by state-level control of corporate law and the desirability of increased federal involvement in corporate law. Mathematical Appendix for Takeover Defenses and Adverse SelectionPDF
Price Controls, Non-Price Quality Competition, and the Nonexistence of Competitive Equilibrium (with Charles R. Platt and Tomomi Tanaka) PDF
We investigate how price ceilings and floors affect outomces in continuous time, double auction markets with discrete goods and multiple qualities. Since competitive equilibria need not exist in markets with price contols, we investigated the nature of non-price competition and how markets might evolve in its presence. We develop a quality competition model based on matching theory. Equilibria always exist in such price-constrained markets; moreover, they naturally correspond to competitive equilibria when competitive equilibria exist. Additionally, we characterize the set of equilibria in the presence of price restrictions. In a series of experiments, we find that market outcomes closely conform to the predictions of the model. In particular, price controls induce non-price competition between agents both in theory and in the experimental environment; market behaviors result in allocations close to the predictions of the model.
Vacancies in Supply Chain Networks (with Scott Duke Kominers) PDF
We use the supply chain matching framework to study the effects of firm exit. We show that the exit of an initial supplier or end consumer has monotonic effects on the welfare of initial suppliers and end consumers, but may simultaneously have positive and negative effects on intermediaries. Furthermore, we demonstrate that there are no clear comparative statics for the effects of removing an intermediary on the welfare of other firms; most surprisingly, removing an intermediary may diminish the welfare of other firms at the same level of the supply chain.
The Economics of Debt Clearing Mechanisms (with Lars Boerner) PDF
We examine the evolution of decentralized clearinghouse mechanisms from the13th to the 18th century; in particular, we explore the clearing of non- or limited tradable debts like bills of exchange. We construct a theoretical model of these clearinghouse mechanisms, similar to the models in the theoretical matching literature, and show that specific decentralized multilateral clearing algorithms known as rescontre, skontrieren or virement des parties used by merchants were efficient in specific historical contexts. We can explain both the evolutionary self-organizing emergence of late medieval and early modern fairs, and its robustness during the 17th and 18th century.
Multilateral Matching (with Scott Duke Kominers) PDF
We introduce a matching model in which agents engage in joint ventures via multilateral
contracts. This approach allows us to consider production complementarities
previously outside the scope of matching theory. We show analogues of the first and
second welfare theorems, and, under a natural concavity condition, show that competitive
equilibria exist, correspond to stable outcomes, and yield core outcomes.
Stability and Competitive Equilibrium
in Trading Networks (with Scott Duke Kominers, Alexandru Nichifor, Michael Ostrovsky, and Alexander Westkamp) PDF
We introduce a model in which a network of agents trades via bilateral contracts. In contrast to previous results in settings without transferable utility, we find that when continuous transfers are allowed and utility is quasilinear, the full substitutability of preferences is on its own both sufficient and necessary for the guaranteed existence of stable outcomes. Furthermore, when transfers are possible and preferences are fully substitutable, the set of stable outcomes is equivalent to the set of competitive equilibria, and all stable outcomes are in the core and efficient.
Testing Substitutability (with Scott Duke Kominers and Nicole Immorlica) PDF
We provide an algorithm for testing the substitutability of a length -N preference relation over a set of contracts X in time
O(|X|2. N3). Access to the preference relation is essential for this result: We show that a substitutability-testing algorithm with access only to an agent's choice function must make an expected number of queries exponential in |X|. An analogous result obtains when the agent's preferences are quasilinear in a numeraire and the algorithm has access to the agent's underlying valuation function.
Matching in Networks with Bilateral Contracts (with Scott Duke Kominers) PDF
We introduce a model in which firms trade goods via bilateral contracts which specify a buyer, a seller, and the terms of the exchange. This setting subsumes (many-to-many) matching with contracts, as well as supply chain matching. When firms’ relationships do not exhibit a supply chain structure, stable allocations need not exist. By contrast, in the presence of supply chain structure, a natural substitutability condition characterizes the maximal domain of firm preferences for which stable allocations always exist. Furthermore, the classical lattice structure, rural hospitals theorem, and one-sided strategy-proofness results all generalize to this setting.
Contract Design and Stability in Matching Markets (with Scott Duke Kominers) PDF
We develop a model of many-to-many matching with contracts which subsumes as special cases many-to-many matching markets and buyer-seller markets with heterogeneous and indivisible goods. In our setting, in contrast to results for the setting of many-to-one matching with contracts, preference substitutability is sufficient and necessary to guarantee the existence of a nonempty lattice of stable allocations. Several fundamental structural results, such as the rural hospitals theorem, extend to our setting. We apply these results to derive a novel condition on preferences, weaker than substitutability, that is sufficient for the existence of a lattice of stable allocations in the context of many-to-one matching with contracts; extensions of this condition yield rural hospitals and strategy-proofness results. We also develop a theory of language for many-to-many matching markets with contracts, and show a natural tradeoff between expressiveness and stability: bundling makes a contractual language less expressive, but encourages substitutability of agents' preferences over contracts.
Strategy-Proof and Nonbossy Quota Allocations
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We consider the problem of designing mechanisms to allocate objects to agents when each agent has a quota that must be filled exactly. Agents are assumed to have responsive (i.e. additively seperable) preferences over items. We show that the only strategy-proof, Pareto optimal, nonbossy, and neutral mechanisms are serial dictatorships. We also show that the only strategy-proof, Pareto optimal, and nonbossy mechanisms are sequential dictatorships. Since these negative results hold for responsive preferences, they hold for more general preferences as well.
Incentive Compatibility in Matching with Contracts (with Fuhito Kojima)
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Hatfield and Milgrom (2005) present a unified model of matching with contracts, which includes the standard two-sided matching and some package auction models as special cases. They show that the doctor-optimal stable mechanism is strategy-proof for doctors if hospitals’ preferences satisfy substitutes and the law of aggregate demand. We show that the doctor-optimal stable mechanism is group strategy-proof for doctors under these same conditions. That is, no group of doctors can make each of its members strictly better off by jointly misreporting their preferences. We derive as a corollary of this result that no individually rational matching is preferred by all the doctors to the doctor-optimal stable match.
Matching with Contracts: Comment (with Fuhito Kojima)
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Hatfield and Milgrom (2005) present a unified model of matching with contracts, which includes the standard two-sided matching and some package auction models as special cases. They show that there exists a stable set of contracts if contracts are substitutes for each hospital. They further claim that the substitutes condition is in a sense necessary to guarantee the existence of a stable set of contracts: that is, if contracts are not substitutes for a hospital, then there exists a preference profile of other hospitals and doctors such that no stable allocation exists. We show that the last claim does not hold in general. We further show that the claim holds in a special class of problems, the Kelso and Crawford (1982) labor matching problems with adjustable wages, and also present a weaker condition that is necessary to guarantee the existence of stable allocations.
Substitutes and Stability for Matching with Contracts (with Fuhito Kojima) PDF
We consider the matching problem with contracts of Hatfield and Milgrom (2005), and we introduce new concepts of bilateral and unilateral substitutes. We show that bilateral substitutes is the necessary and sufficient condition for the existence of a stable allocation in this framework. However, the set of stable allocations does not form a lattice under this condition, and there does not necessarily exist a doctor-optimal stable allocation. Under a slightly stronger condition, unilateral substitutes, the set of stable allocations still does not form a lattice with respect to doctors’ preferences, but there does exist a doctor-optimal stable allocation, and other key results such as incentive compatibility and the rural hospitals theorem are recovered. The existing substitutes condition is shown to be necessary and sufficient for the set of stable allocations to form a lattice with respect to doctors’ preferences.
Pairwise kidney exchange: Comment PDF
In their recent paper, Roth et al. [Pairwise kidney exchange, J. Econ. Theory 125 (2005) 151–188] consider pairwise kidney exchanges, and show within this subset of feasible exchanges that a priority mechanism is strategy-proof. We show that this result can be broadened to allow much more general mechanisms and restrictions on the feasible set of allocations, including allowing three-way exchanges, regional specifications, and others. The key requirement is that the choice mechanism be consistent, i.e., if an allocation is chosen from some set of feasible allocations, it is also chosen from any subset of that set.
