Distortions In Allocation Research Articles

Prices and Allocations in a Trading Market with Multi-Dimensional Signals

There is a continuum of agents, each of whom trades a divisible asset via demand function competition. Individual valuations are determined by multiple idiosyncratic and common shocks, regarding which the agent observes multi-dimensional signals. The only assumptions are that the signals are normally and symmetrically distributed. We introduce two measures to quantify the distance between an outcome of the demand function competition game and the first-best outcome: the allocative distortion and the price distortion. We say that an equilibrium is “price-quantity efficient” if no outcome of the demand function competition game generates lower allocative and price distortions. We give three results about this economy. First, an equilibrium exists. Second, we give “lax” sufficient conditions (that is, an agent learns about different payoff shocks from different signals) so that every Nash equilibrium is price-quantity efficient. Third, every price-quantity efficient outcome can be implemented by setting an appropriate capital gains tax; because this tax reduces agents’ incentives to speculate on the asset’s price, it decreases the allocative distortion but increases the price distortion.

Selling through referrals

AbstractWe endogenize intermediaries' choice to operate as agents or merchants in a market where there are frictions due to asymmetric information about consumption values. A seller has an object for sale and can reach buyers only through intermediaries. Intermediaries can either mediate the transaction by buying and reselling—the merchant mode—or refer buyers to the seller for a fee—the referral mode. When the seller has a strong bargaining position and can condition the asking price to the intermediaries' business model choice, all intermediaries specialize in agency. The seller's and intermediaries' joint profits equal the seller's profits when he has access to all buyers. When the seller does not have such bargaining power, the level of the referral fee and the degree of competition among intermediaries determine the business mode adoption. A hybrid agency–merchant mode may be adopted in equilibrium. Banning the referral mode can decrease welfare because the merchant mode is associated with additional allocative distortions due to asymmetric information.

Entry and Exit, Multiproduct Firms, and Allocative Distortions

Most studies quantifying the gains from reversing allocative distortions are static in nature. We propose a model of firm dynamics featuring entry, exit, and multiproduct firms to understand the contribution of these dynamic factors in shaping the welfare and long-run productivity gains from removing distortions. We find that while the entry and exit of firms and their product-portfolio choices exert countervailing forces over long-run total factor productivity (TFP), they reinforce each other in shaping the welfare gains from reversing misallocation. Welfare gains, which account for transition dynamics, become more than twice as high as the long-run changes in TFP. (JEL D21, D24, D61, L11, O41)

The impact of incentive policies on foreign direct investment misallocation

Certain institutional barriers of China can hinder investments. This paper examines the impact of fiscal incentives and implicit incentive policies on the degree of resource distortions in FDI allocation by using the provincial data of manufactures from 1994 to 2013. This paper reviews the empirical literature, specifically addressing various types of incentives for Foreign Direct Investment (FDI) and how FDI can lead to resource reallocation effects. The analysis shows that fiscal incentive policies to inward FDI tend to decrease the resource misallocation, whereas implicit incentives increase the resource misallocation.

Multitasking Academics

ABSTRACT I start from the apparent observation that academics have inherently multifaceted jobs requiring their attention across a range of (typically three) activities (research, teaching, service)—that is, professors multitask. What seems less apparent, I then argue, is that effective organizational designs where multitasking is prevalent require weak incentives. To elaborate, my first point is that if department chairs/deans want their professors to undertake all three activities, and the three activities compete for their professors' attention, then multitasking theory posits, perhaps counterintuitively, that department chairs/deans should resist providing strong incentives to any one of the three activities. My own experiences and observations as a faculty member spanning 20 years, however, suggest that this theory is not always heeded, if not explicitly then certainly implicitly, causing distortions in faculty's allocation of effort and attention to all three activities. However, this point overlooks that synergies can exist across the three activities that make an earnest engagement with all three rather naturally attractive and mutually beneficial. I provide examples of such synergies as I see or have experienced them. Hence, my second point is that, subject to spillover effects across research, teaching, and service, focusing sensibly on one's portfolio of activities, and thoughtfully navigating their alleged tensions, one may well do better on all three as compared to when one uncritically accepts that these activities are in conflict or work against each other. Overall, then, the takeaway is that weak but balanced incentives may be especially conducive for engaged professors to have their greatest potential impact as a teacher, a researcher, and a citizen of academe. So, I was pleased when the guest editor asked me to write this article, hoping to make a compelling case for this because multitasking, when handled judiciously, makes for a richer, not poorer, profession and a richer experience for those who profess it—the professors.

Credit Distortion, Firm Nature and Investment Efficiency

Credit is the foremost external source of funds for enterprises. The allocation rationality of credit fund directly affects corporate financing constraints and further manipulates business investment actions. Based on government intervention, the credit market in China presents certain degree of allocation distortion, which means that state-owned companies have quantity and cost advantages over non state-owned companies in respect of the acquisition of credit resources. Taking listed A share in 2008-2015 as the samples, the thesis firstly introduces the interprovincial variables of credit allocation distortion to quantify external credit allocation distortion degree faced by companies and study investment inefficiency problems in state-owned companies and non state-owned companies. As proved by the empirical results: 1) comparing with state-owned companies, non state-owned companies encounter more grievous problems in underinvestment and overinvestment; 2) the aggravation of regional credit allocation distortion degree will significantly intensify overinvestment of state-owned companies and underinvestment of non state-owned companies in local regions. It fully indicates that the imbalance of credit resource allocation will encumber corporate investment efficiency.

Labor Efficiency Loss in Chinese Manufacturing and Its Decomposition: Theory and Evidence

In the existing literature, methods for calculating TFP loss caused by labor allocation distortion in the manufacturing industry of China do not eliminate the disturbances of external factors, thereby making the TFP loss significantly overestimated. On the basis of the benchmark model of Hsieh and Klenow(2009), this paper redefines the TFP loss resulting from labor allocation distortion. After eliminating the disturbances of external factors, it concludes that the TFP loss of China's manufacturing industry caused by labor allocation distortion is gradually decreasing from 9.00% in 1998 to 7.39% in 2007. Moreover, since the existing literature lacks related theory of TFP loss decomposition under the model of heterogeneity enterprises, this paper divides enterprises into groups by their characteristics, and establishes the theory of TFP loss decomposition. TFP loss decomposition is helpful to analyze the composition of TFP loss, and provides a reference for relevant policy formulation.The theory of TFP loss decomposition is applicable to databases like not only the manufacturing industry but also agriculture and services industry. Finally, this paper studies the composition of TFP loss resulting from labor allocation distortion from 1998 to 2007 in manufacturing after grouping enterprises by ownership as an example. It comes to the following results:firstly, the TFP loss caused by labor allocation distortion in every industry is the increasing function of the industry's share of labor force, the elasticity of product substitution and the labor-output logarithm ratio variance; secondly, the inexistence of labor allocation distortion between groups in an industry needs to satisfy the condition that the average value of enterprises' labor allocation distortion for every groups within the industry is equal; thirdly, after dividing enterprises into groups by ownership, it obtains that the TFP loss in China's manufacturing industry from 1998 to 2007 caused by labor allocation distortion is mainly composed by in-group loss, and it has changed from the state-owned enterprises and collective enterprises as the main reason to other enterprises as the main reason.

Taxation in Matching Markets

We analyze the effects of taxation in two-sided matching markets, i.e. markets in which all agents have heterogeneous preferences over potential partners. In matching markets, taxes can generate inefficiency on the allocative margin by changing who is matched to whom, even if the number of workers at each firm is unaffected. While the allocative inefficiency of taxation need not be monotonic in the level of the tax when transfers flow in both directions, we show that it is weakly increasing in the tax rate for markets in which workers refuse to match without a positive wage. We introduce a renormalization that allows for an equivalence between markets with taxation and markets without taxation but with adjusted match values. We use our equivalence to show additional properties of matching markets with taxation and to adapt existing econometric methods to such markets. We then estimate the preferences in the college-coach US football matching market and show through simulations of tax reforms that the true deadweight loss can differ dramatically from that measured without accounting for the preference heterogeneity of the matching market. In addition to highlighting the potential for allocative distortions from taxation, our model provides a continuous link between canonical models of matching with and without transfers.

Temptation and taxation with elastic labor

In this paper we study the corrective role of income taxation in a model with the Gul and Pesendorfer type of temptation and self-control preferences embedded with labor/leisure choice. “Excessive” impatience created by the presence of temptation in preferences causes a bias in favour of present consumption and a two-dimensional problem: under-saving and over-supply-of-labor. In such an environment, the two-dimensional problem requires two-dimensional tax policy tools. In particular, we first show that subsidizing savings alone improves welfare because it mitigates the under-saving problem i.e. inter-temporal allocation distortion. However, the optimal subsidy rate is not as high as in Krusell et al. (2010) because the savings subsidy amplifies the over-supply-of-labor problem, i.e. intra-temporal allocation distortion. Next, we find that labor income tax policy alone improves welfare because it mitigates the intra-temporal allocation distortion; however, its welfare gains are constrained by its adverse effects on savings. Finally, we demonstrate that a combination of capital and labor income taxation appears to be a more effective policy.

Environmental Macroeconomics: A Neglected Theme in Environmental Economics

Environmental issues are usually considered as drivers of allocative distortions within markets. The corrections of such distortions, for example, by recourse to the internalization of externalities, are firmly rooted within the market framework. Therefore the traditional view is that environmental issues fall fairly and squarely within the domain of microeconomics. This paper argues that such a view is flawed. The primary reason is that externalities are never fully internalized. Within any market, there always exist residual externalities, which do accumulate over time. Therefore, the same way as the aggregate of market transactions lead to the definition of national product in macroeconomics, the aggregate of residual externalities lend credence to the recognition of nature as capital and its depreciation. In accordance with this recognition, this paper illustrates the reformulation of long run stabilization frameworks in macroeconomics. The analysis of such reformulated frameworks illustrates different configurations for policy variables as illustrated with reference to South Korea.

Effects of Externality-Corrective Taxation on the Extent of the Market and Network Size of Division of Labor

Applying the inframarginal analysis of specialization and the effects of external costs in production and their control through taxation, this paper shows that, on top of the allocational inefficiency on the input and/or output mix caused and alleviated, there is the organizational inefficiency on the level of division of labor and extent of the market. External costs may lead to either too high or too low a level of division of labor or a mixture of efficient and inefficient structures. Low-cost taxes directly on the variables causing external costs may remove the inefficiency but may not be feasible, as, e.g., home production may be difficult to observe. Sales taxes/subsidies are completely useless as the general-equilibrium adjustments yields zero effects. A tax cum income transfer scheme may be effective in alleviating the allocational and organizational inefficiencies within certain ranges of parametric values. With the other range of parameter values, the optimum tax rate is 0 since a positive Pigovian tax generates organization distortion that outweighs corrective effect of allocative distortion.

Competition and screening with motivated health professionals

Two hospitals compete for the exclusive services of health professionals, who are privately informed about their ability and motivation. Hospitals differ in their ownership structure and in the mission they pursue. The non-profit hospital sacrifices some profits to follow its mission but becomes attractive for motivated workers. In equilibrium, when both hospitals are active, the sorting of workers to hospitals is efficient and ability-neutral. Allocative distortions are decreasing in the degree of competition and disappear when hospitals are similar. The non-profit hospital tends to provide a higher amount of care and offer lower salaries than the for-profit one.

Fiscal policy as a temptation control device: Savings subsidy and social security

In an environment where individuals suffer from temptation and self-control problems, there are induced preferences for commitment devices. We show that the savings subsidy and social security programs can be properly designed to mitigate the adverse effect of succumbing to temptation and release severity of self-control. Moreover, we disentangle the mechanics behind the two fiscal programs and find that the driving forces are quite different. Welfare gains associated with a social security program result mainly from releasing self-control costs. Conversely, welfare gains associated with a savings subsidy program are mainly driven by mitigating inter-temporal allocation distortions. Interestingly, the direction and size of welfare effects vary substantially when general equilibrium channels are in play. Our results have implications for designing an effective temptation control device using fiscal policy.

Creating a Winner's Curse Via Jump Bids

We show that jump bids can be used by a bidder to create a winner's curse and preserve an informational advantage that would otherwise disappear in the course of an open ascending auction. The effect of the winner's curse is to create allocative distortions and reduce the seller's expected revenue. Two novel features of equilibrium jump bids are also derived. First, the jump bid may partially reveal the value of the signal that the jump bid intends to hide. Second, the probability of calling a price might decrease with the type of the bidder who places the jump bid.

Creating a winner’s curse via jump bids

We show that jump bids can be used by a bidder to create a winner’s curse and preserve an informational advantage that would otherwise disappear in the course of an open ascending auction. The effect of the winner’s curse is to create allocative distortions and reduce the seller’s expected revenue. Two novel features of equilibrium jump bids are derived. First, the jump bid may fail to hide completely the value of the common value component. Second, a bidder with a higher type might jump bid less frequently than a bidder with a lower type.

The Misallocation of Finance

We ask whether financial assets are well-allocated in the cross-section of firms. Extending the framework of Hsieh and Klenow (2009) to the liabilities side of the balance sheet, we estimate the real losses that accrue from the cross-sectional misallocation of financial liabilities across firms. Using U.S. and Chinese data on manufacturing firms, we find significant misallocation of debt and equity. Although financial liabilities appear well-allocated in the United States, they are not in China. If China's debt and equity markets were as developed as those in the United States, China would realize gains of 40-55% in real firm value. We also back out the cost of debt and equity for each firm with our model, taking into account allocation distortions. We find that larger firms and firms located in more developed cities face markedly lower costs.

Régulation ou supervision : quels nouveaux risques ?

Les règles comptables et prudentielles régissant l’intermédiation financière se sont considérablement sophistiquées lors des vingt dernières années en se rapprochant des meilleures pratiques internes des institutions financières. Cette évolution a engendré une plus grande procyclicité et ouvert des options d’arbitrage réglementaire qui ont grandement contribué à la crise de 2008. Les réponses réglementaires qui se dessinent présentent deux risques. D’une part, les évolutions asymétriques de la réglementation bancaire et de celle du shadow banking risquent de conduire à une migration massive du financement de l’économie vers le shadow banking , encore très instable par nature. D’autre part, un retour en arrière vers des règles prudentielles simplifiées à l’excès telles que le ratio de levier peut créer des distorsions importantes dans le financement de l’économie. Un investissement important dans le capital humain de la supervision et une plus grande discrétion des superviseurs dans l’interprétation des règles paraissent mieux à même de pallier les insuffisances mises à jour par la crise. Classification JEL : G01, G21, G28.

Dynamic revenue maximization: A continuous time approach

We characterize the revenue-maximizing mechanism for time separable allocation problems in continuous time. The willingness-to-pay of each agent is private information and changes over time.We derive the dynamic revenue-maximizing mechanism, analyze its qualitative structure and frequently derive its closed form solution. In the leading example of repeat sales of a good or service, we establish that commonly observed contract features such as flat rates, free consumption units and two-part tariffs emerge as part of the optimal contract. We investigate in detail the environments in which the type of each agent follows an arithmetic or geometric Brownian motion or a mean-reverting process. We analyze the allocative distortions and show that depending on the nature of the private information the distortion might increase or decrease over time.

The Window Tax: A Case Study in Excess Burden

The window tax provides a dramatic and transparent historical example of the potential distorting effects of taxation. Imposed in England in 1696, the tax—a kind of predecessor of the modern property tax—was levied on dwellings with the tax liability based on the number of windows. The tax led to efforts to reduce tax bills through such measures as the boarding up of windows and the construction of houses with very few windows. In spite of the pernicious health and aesthetic effects and despite widespread protests, the tax persisted for over a century and a half: it was finally repealed in 1851. Our purpose in this paper is threefold. First, we provide a brief history of the tax with a discussion of its rationale, its role in the British fiscal system, and its economic and political ramifications. Second, we have assembled a dataset from microfilms of local tax records during this period that indicate the numbers of windows in individual dwellings. Drawing on these data, we are able to test some basic hypotheses concerning the effect of the tax on the number of windows and to calculate an admittedly rough measure of the excess burden associated with the window tax. Third, we have in mind a pedagogical objective. The concept of excess burden (or “deadweight loss”) is for economists part of the meat and potatoes of tax analysis. But to the laity the notion is actually rather arcane; public-finance economists often have some difficulty, for example, in explaining to taxpayers the welfare costs of tax-induced distortions in resource allocation. The window tax is a textbook example of how a tax can have serious adverse side effects on social welfare. In addition to its objectionable consequences for tax equity, the window tax resulted in obvious and costly misallocations of resources.

Changing energy intensity in China: a decomposition analysis

This study proposed a decomposition method based on the normalized quadratic shadow unit cost function to explore the determinants of the change in energy intensity in China from 1985 to 2010. The decomposition analysis indicates that (1) the improvement in technical efficiency dramatically reduced the energy intensity, whereas technological change played only a minor role, which could be attributed to a rebound effect; (2) the aggregated allocation effect was small because the change in the allocative distortion between capital and energy significantly enhanced energy intensity but was partly offset by the effect stemming from the change in the allocative distortion between capital and energy; and (3) the substitution of energy for labor increased energy intensity, but the aggregated substitution effect significantly reduced energy intensity because the substitution of capital for energy reduced energy intensity to a great extent. These findings were obtained at the national level and varied at the regio...