Social Welfare Loss Research Articles

Social Relationships and Trust

While social relationships play an important role for individuals to cope with missing market institutions, they also limit individuals' range of trading partners. This paper aims at understanding the determinants of trust at various social distances when information asymmetries are present. Among participants from an informal housing area in Cairo we find that the increase in trust following a reduction in social distance comes from the fact that trustors are much more inclined to follow their beliefs when interacting with their friend. When interacting with an ex-ante unknown agent instead, the decision to trust is mainly driven by social preferences. Nevertheless, trustors underestimate their friend's intrinsic motivation to cooperate, leading to a loss in social welfare. We relate this to the agents' inability to signal their trustworthiness in an environment characterized by strong social norms.

Liquidity Trap in an Inflation-Targeting Framework: A Graphical Analysis

This paper presents a simple inflation-targeting model with alternative assumptions regarding the conduct of monetary policy. The central bank is assumed to either follow a Taylor rule or minimize a social welfare loss function. The model can be tractably described by means of a straightforward graphical apparatus, which, so far, has not been extended to include the treatment of the liquidity trap. The paper presents an analysis of the zero nominal interest rate bound using this apparatus and discusses the implications of preemptive monetary easing when the macroeconomic conditions suggest that the bound may restrict future monetary policy effectiveness.

Capacity choice and water management in hydroelectricity systems

This paper proposes a simple two-period model that captures the seasonal pattern of water inflows and electricity demand observed in many countries where hydropower is a major source of electricity supply. The model characterizes the effects of different inflows pattern on the optimal water management, capacity, and the associated electricity production and price. The first best capacity is a non-monotonic function of water inflows, which provides a rationale for the observed differences in reservoirs sizes across hydropower systems around the world. The monopoly solution is qualitatively similar to the first best outcome, and the privatization of hydroelectric power generation systems does not always imply a social welfare loss.

Social Relationships and Trust

While social relationships play an important role for individuals to cope with missing market institutions, they also limit individuals' range of trading partners. This paper aims at understanding the determinants of trust at various social distances when information asymmetries are present. Among participants from an informal housing area in Cairo we find that the increase in trust following a reduction in social distance comes from the fact that trustors are much more inclined to follow their beliefs when interacting with their friend. When interacting with an ex-ante unknown agent instead, the decision to trust is mainly driven by social preferences. Nevertheless, trustors underestimate their friend's intrinsic motivation to cooperate, leading to a loss in social welfare. We relate this to the agents' inability to signal their trustworthiness in an environment characterized by strong social norms.

Dynamic Optimal Portfolio of Pension Funds When Risk Preferences are Heterogeneous Among Pensioners

In many developed countries, pension funds are growing its sizes because of dwindling birthrate and aging population. Portfolio management of their reserved funds arouses public attention. Since agents who participate in pension fund, in particular public pension fund, are heterogeneous, it is not easy in general to agree on a particular portfolio strategy. When we take heterogeneity of risk preferences among members into account, portfolio management problems of pension funds are considered as syndicate problems. Objective functions of pension funds do not tend to be constant absolute or relative risk aversion but tend to be decreasing relative risk aversion. The strategic asset allocation strategy (or constant-mix strategy) that is widely used in pension's asset allocation decision is inconsistent with decreasing relative risk aversion utility function. We formulate a security market model and an optimal portfolio problem for pension fund with heterogeneous risk preferences. The optimal portfolio is characterized as a weighted average of each member's optimal portfolio. Using Japanese public pension fund as an example, it is shown that losses of social welfare by using inefficient risk sharing rules and suboptimal portfolio strategies could be significant.

OPTIMAL MONETARY POLICY UNDER PARAMETER UNCERTAINTY IN A SIMPLE MICROFOUNDED MODEL

This paper examines optimal monetary policy under uncertainty about fundamental parameters of a dynamic stochastic general-equilibrium model. In contrast to previous studies, a microfoundation of the model leads this uncertainty to generate uncertainty not only about the transmission of monetary policy but also about the transmission of shocks and about a social welfare loss function. In the presence of such uncertainty, this paper finds conditions under which optimal discretionary policy responds to shocks more aggressively than in the absence of the uncertainty. These conditions depend crucially on the persistence of shocks and the magnitude of policy multipliers. To obtain the conditions, taking proper account of uncertainty about the transmission of shocks and about the welfare loss function is of crucial importance.

Questioning the need for full amortization in PPP contracts for transport Infrastructure

PPP contracts most often have durations of between 20 and 35 years, but in some cases even longer. The main reason for this is the wish of the Public side to minimize its financial contribution, by including in the contract many years of revenue generation by the project to help cover the investment contribution of the private partner. Implicit however is the need to fully amortize the initial investment, which in many countries is even included in the relevant legislation. PPP contracts are normally framed around the delivery of a range of services during the lifetime of the contract, those services requiring the initial construction or recovery of an expensive infrastructure. The specification of the financial clauses of the contract requires the estimation of demand for those services over the period of the contract and this is usually taken as the major incidence of uncertainty in the contract. Indeed, experience shows that demand forecasts often fail substantially, in many cases by more than 20%, mostly by excess, as State side project promoters (and the bidding private partners) tend to be excessively optimistic about the development of such demand. But when we consider the nature of these contracts we should recognize the existence of at least two other very important types of uncertainty: first, the socially desirable scope and specification of the services to be offered as technology and social preferences evolve; and second, the policy guidelines relative to the total quantity and the social distribution of those services, as that quantity may be causing congestion in other parts of the system, or it may become important to (positively or negatively) discriminate some user segments. In both cases, it is almost impossible to foresee at the time of writing the initial contract if, when and in what direction such types of socially beneficial changes in the provision of the services would intervene, but this rigidness may bear a great loss of social welfare in relation to a more adjustable framework. This criticism affects not only PPPs but all kinds of concession contracts with long duration, so it is not the “partnership” element that must be questioned but rather the duration of the contract. An alternative way is relatively straightforward: abandon the assumption that these contracts must provide full amortization of the infrastructure, which allows adoption of contracts with a shorter life, and the use of multiple such contracts over the lifecycle of the infrastructure. The first generation contract would still have to face the full cost of the construction, but the private partner would receive the unamortized part at the end of that contract, to be paid by the State, directly from the public budget if no more private participation is wanted, or indirectly through the acquisition fee for the contract to be paid by the partner to the second life segment. But, crucially, the State recovers the right to re-specify the terms of the service to be provided without the need for any indemnity, and also the uncertainty associated with the evolution of demand in that period will be much smaller, as this will be my then a mature system in operation. This may seem to increase the transaction costs for the State as more contracts (although of a similar type, especially from the second onwards) may have to be negotiated and signed. But if we take into consideration the difficulties of the frequently needed renegotiations of long duration contracts and the conditions of asymmetry of information in which the State normally finds itself in such cases, we will conclude that, besides avoiding the loss of welfare due to the poor fit of the contract after 20 years or so, this solution after all may also reduce the transaction costs associated with negotiations over the duration of the traditional contracts.

A comparison of Hausman's and Breslaw–Smith's methods in estimating consumer welfare loss because of fuel taxes

AbstractIn this paper, we investigate the welfare effect of US gasoline consumption caused by fuel taxes. Using two different economics approaches – the Hausman method and the Breslaw and Smith method – in measuring consumer welfare loss, we calculate compensating variation (CV) and the corresponding dead weight loss (DWL) assuming there are changes in motor gasoline tax. Our analysis shows that tax revenue, CV and DWL increases as motor gasoline tax increases, but the social welfare loss measured in DWL increases far more rapidly than the other two.

Inflation Targeting versus Monetary Targeting - The Case of Sri Lanka

High and volatile inflation could result in significant negative outcomes leading to loss of social welfare, which underscores the necessity of having in place an effective monetary policy regime. Increasingly larger numbers of countries have shifted to an inflation targeting regime, following the success of those that adopted inflation targeting in the early 1990s. Analysing Sri Lanka's monetary policy regime suggests that, monetary targeting, although appropriate for effectively controlling inflation, seems to lack the institutional features that have enabled inflation targeting regimes to achieve low and stable inflation in the long-run. This makes inflation targeting an attractive alternative to countries presently in a monetary targeting regime, experiencing high or volatile inflation. (JEL E42) DOI: 10.4038/ss.v38i1.1221 <em>Staff Studies </em>Volume 38 Numbers 1& 2 2008 p.45-74

Competition Policy and Market Leaders

We study the potential loss in social welfare and changes in incentives to invest in R&D that result when the market leading firm is deprived of its position. We show that under plausible assumptions like free entry or repeated market interactions there is a social value of market leadership and its mechanical removal by means of competition policy is likely to me harmful for society.

Innovation Policy and the Economy: Introduction to Volume 9

Innovation Policy and the Economy: Introduction to Volume 9

Welfare Balance of Different Interest Groups During Rural-urban Land Conversion

Abstract Rural-urban land conversion is currently a common social economic phenomenon during the process of economic development and rural urbanization in China. Rural-urban land conversion is positively effective as far as social and economic benefits are concerned (Yang, 2002), but its negative effect is also evident, resulting in such problems as low efficiency of rural land configuration and loss of social welfare. Consequently, farmers should also have an equal chance to enjoy the social welfare enhanced by land conversion. Based on the theories of welfare economy, this paper puts forward policy suggestions by discussing the welfare changes of various interest groups, builds the model of welfare distribution, and analyzes the conditions of maximizing social welfare. The absolute and opposite value of social welfare is closely related with the speed of rural-urban land conversion, and governments should give farmers and collectives fair compensation to make up for the utility loss caused by land expro...

The excess burden of tax evasion—An experimental detection–concealment contest

Tax evasion may cause social welfare losses due to the incentives of taxpayers to invest in the concealment and of tax authorities to invest in the detection of tax evasion. Reducing the investment of both parties at the same time would then lead to a Pareto improvement. Given that concealment and detection costs are hardly measurable in reality, we show in a controlled laboratory experiment that the welfare losses from a concealment–detection contest depend positively on the prevailing tax rate, but not on the penalty which is imposed in case of detected tax evasion. Hence, policy makers who are concerned about socially inefficient concealment and enforcement costs should focus on tax rates rather than penalty rates.

TO PREY OR NOT TO PREY? WELFARE AND INDIVIDUAL LOSSES IN A CONFLICT MODEL1

AbstractWe analyse a generalised form of the Hirshleifer‐Skaperdas predation model. In such a model agents have a choice between productive work and appropriation. We suggest that such a model can usefully be thought of as a continuous form of the Prisoners' Dilemma. We present closed form solutions for the interior equilibria and comparative statics for all Cournot equilibria and analyse the social welfare losses arising from predation. We show that predation is minimised under two quite different regimes, one in which claiming is very ineffective and another in which one of the players becomes marginalised. The worst outcomes seem to arise when claiming is effective, but inequality in power is significant but not extreme. This, arguably, is the situation in a number of transition societies.

The optimal negligence standard in health care under supply-side cost sharing

This paper elaborates on the optimal negligence standard in a world where physicians choose their level of care subject to erroneous court judgements and to the degree of supply-side cost sharing. Uncertain liability in malpractice lawsuits leads physicians to provide excessive and insufficient care, which results in a loss of social welfare. The standard that maximizes welfare depends on the cost share: Under traditional, close to full cost reimbursement it is lower than the first-best level of care, while under substantial supply-side cost sharing it increases and may even exceed the first best.

Grid Economics: A Selective Discussion of Two Research Problems

The last 5 years have seen considerable discussion of various types of Grids—compute Grids, storage Grids, and data Grids. Using the checklist given in Foster (http://www-fp.mcs.anl.gov/∼foster/Articles/WhatIsTheGrid.pdf, 2002) to define a Grid, two important problems that arise in the context of resource sharing in Grid computing environments are discussed. First, the well documented problem in compute Grid environments that arises from the inability of consumers to accurately estimate their resource requirements is presented. This results in incorrect scheduling of requests for Grid resources and social welfare loss. To address this problem, two research proposals are briefly described. The first approach argues for the design of decision support tools to help users with resource estimation while the second approach studies the design of resource allocation mechanisms that can work with stochastic specifications of resource requirements. This is in contrast to the traditional point estimates of resource required by extant mechanisms. Next, resource provisioning and pricing problems that arise in data storage and retrieval Grids are described. These Grids differ fundamentally from compute Grids but share some economic characteristics with P2P file sharing networks. Drawing on this connection, pricing mechanisms and resource provisioning research is briefly discussed.

Debugging Software Patents: Increasing Innovation and Reducing Uncertainty in the Judicial Design of Optimal Software Patent Law

Software patents not only do no promote innovation, they instead reduce it. The U.S. Executive branch has recommended against recognizing software patents, and the Supreme Court has never rejected a test (its physical-transformation test) that would invalidate pure business method and software patents. In this paper, I review the genesis of the patentability of software patents, analyze the social welfare implications of recognizing software as patentable subject matter and examine recommendations for reform. Others have suggested, among other things, enhancing software patent claim disclosure requirements to address social welfare losses. I conclude that altering disclosure requirements would dramatically increase litigation while reducing the value of most software patents. Instead, the only way to optimally reform software patent law without destroying settled expectations of current software patent holders, is for the Supreme Court to reinstate and apply prospectively its physical-transformation test.

Inflation Conservatism and Monetary-Fiscal Policy Interactions

This paper investigates the stabilization bias that arises in a model of monetary and fiscal policy stabilization of the economy, when assuming that the monetary authority put higher weight on inflation stabilization than society. We demonstrate that inflation-conservatism unambiguously leads to social welfare losses if the fiscal authority acts strategically. Although the precise form of monetary-fiscal interactions depends on the choice of fiscal instrument and on the level of steady state debt, the assessment of gains is robust to these assumptions. We also study how the outcome of stabilization depends on the leadership structure. We develop an algorithm that computes leadership equilibria in much wider spectrum of problems with strategic agents in LQ RE models.

Endogenous Persistence and the Performance of Inertial Targeting Rules

We investigate the optimality of monetary policy targeting rules in a macroeconomic model based on explicit micro-foundations for intrinsic persistence in inflation and real output. For the corresponding social welfare loss function to be minimized by the central bank, inertia arises endogenously in both the inflation and output gap stabilization objectives. In this framework, inflation targeting closely approximates the optimal precommitment policy for empirically relevant parameter values. Alternative policy rules, such as nominal income growth targeting, "speed-limit" targeting, or price level targeting, do not perform as well. Previous research has demonstrated lower social welfare losses with these alternative targeting rules; such findings are shown to be primarily a consequence of assuming the central bank minimizes a simple social loss function that is not consistent with the micro-foundations of a model with intrinsic persistence.

Endogenous Persistence and the Performance of Inertial Targeting Rules

We investigate the optimality of monetary policy targeting rules in a macroeconomic model based on explicit micro-foundations for intrinsic persistence in inflation and real output. For the corresponding social welfare loss function to be minimized by the central bank, inertia arises endogenously in both the inflation and output gap stabilization objectives. In this framework, inflation targeting closely approximates the optimal precommitment policy for empirically relevant parameter values. Alternative policy rules, such as nominal income growth targeting, “speed-limit” targeting, or price level targeting, do not perform as well. Previous research has demonstrated lower social welfare losses with these alternative targeting rules; such findings are shown to be primarily a consequence of assuming the central bank minimizes a simple social loss function that is not consistent with the micro-foundations of a model with intrinsic persistence.