Pareto Improvement In Welfare Research Articles

Overconfidence and ethical contracts

Introducing heterogeneous beliefs into a contracting framework allows for considering ethical behavior. Optimal contracts with heterogeneous beliefs need to balance the standard effects of risk aversion and incentives for effort with the desire for exploitation. We study the situation where the principal additionally takes an explicit ethical stance: The agent must not be worse off from accepting the contract than the agent’s outside option according to the principal’s beliefs. In this framework, heterogeneous beliefs still matter, and we fully characterize the optimal contract with an overconfident agent. The agent is strictly better off with an ethical principal. The ethical principal may be better off with an overconfident agent, leading to Pareto improvements in welfare.

Climate change, strict Pareto improvements in welfare and multilateral financial transfers

Climate change, strict Pareto improvements in welfare and multilateral financial transfers

Facilitating the Search for Partners on Matching Platforms

Two-sided matching platforms can control and optimize over many aspects of the search for partners. To understand how matching platforms should be designed, we introduce a dynamic two-sided search model with strategic agents who must bear a cost to discover their value for each potential partner and can do so nonsimultaneously. We characterize evolutionarily stable stationary equilibria and find that, in many settings, the platform can mitigate wasted search effort by imposing suitable restrictions on agents. In unbalanced markets, the platform should force the short side of the market to initiate contact with potential partners, by disallowing the long side from doing so. This allows the agents on the long side to exercise more choice in equilibrium. When agents are vertically differentiated, the platform can significantly improve welfare even in the limit of vanishing screening costs by forcing the shorter side of the market to propose and by hiding information about the quality of potential partners. Furthermore, a Pareto improvement in welfare is possible in this limit. This paper was accepted by Baris Ata, stochastic models and simulation.

Climate Change, Strict Pareto Improvements in Welfare and Multilateral Financial Transfers

Climate Change, Strict Pareto Improvements in Welfare and Multilateral Financial Transfers

An Equilibrium Framework for the Analysis of a Degrowth Society With Asymmetric Agents, Sharing and Basic Income

This paper presents a novel equilibrium framework, allowing for asymmetries in the initial wealth allocations, labour supplies as well as in the preferences of optimizing agents. The framework is applied to study a degrowth society where a subset of agents voluntarily limit their material consumption, thereby complying with voluntary simplicity (VS). At micro-level, the utility-maximization problems of asymmetric agents are formulated and solved for optimal labour supplies. New macro-level equilibrium solutions, accounting for wealth inequality, are presented based on different labour supply models. The equilibrium welfare is measured using a Bernoully-Nash aggregate. An increase in the share of the VS-type agents implies a degrowth transition to a lower level of average consumption. Analysis of the equilibrium framework shows that degrowth, whereby average market-based consumption falls, improves the equilibrium welfare, assuming the VS-type agents have sufficient resources, enabling a reduction in labour supplies. Sharing, collaborative consumption and basic income support welfare-increasing degrowth. Any growing economy can eventually reach the size at which degrowth would improve the welfare. Simulations suggest that degrowth can also yield a Pareto-improvement in welfare.

Climate Change, Strict Pareto Improvements in Welfare and Multilateral Income Transfers

Recent climate change negotiations have emphasised the need for developing countries to take the lead by undertaking economy-wide absolute emission reduction targets but also the obligation of developed countries to provide financial resources to assist them in their mitigation efforts. This paper explores the role of such financial resources in achieving strict welfare gains (Pareto improvements) when emission targets deviate from the global welfare optimum, and there are impediments to international trade. Using a general equilibrium model of international trade with global emission externalities, it is shown that strict Pareto improvements in welfare may arise from multilateral financial transfers when either trade or carbon taxes are constrained away from their Pareto optimal levels. The purpose of financial transfers is then to account for the impact on emissions of trade distortions and inappropriate carbon pricing. Importantly, such transfers exist if and only if a generalized normality condition is violated. Numerical examples illustrate the financial transfer mechanism.

Facilitating the Search for Partners on Matching Platforms: Restricting Agents' Actions

Two-sided matching platforms can control and optimize over many aspects of the search for partners. To understand how matching platforms should be designed, we introduce a dynamic two-sided search model with strategic agents who must bear a cost to discover their value for each potential partner, and can do so non-simultaneously. We characterize equilibria and find that, in many settings, the platform can mitigate wasted search effort by imposing suitable restrictions on agents. In unbalanced markets, the platform should force the short side of the market to initiate contact with potential partners, by disallowing the long side from doing so. This allows the agents on the long side to exercise more choice in equilibrium. When agents are vertically differentiated, the platform can significantly improve welfare even in the limit of vanishing screening costs by forcing the shorter side of the market to propose and by hiding information about the quality of potential partners. Furthermore, a Pareto improvement in welfare is possible in this limit.

Insurance design in the presence of safety nets

Safety net assistance and insurance exist to manage risk and improve welfare. This shared goal may lead to crowding out. In a new approach, this paper analyzes the interaction of assistance with two dimensions of insurance design: level of coverage and types of risks covered. In a society of risk averse vulnerable individuals and risk neutral assistance providers, Pareto improvements in welfare are achieved through incompleteness in the types of risks covered. The results imply that safety nets promote demand for and the emergence of incomplete insurance. These results have a wide application to insurance markets where safety nets are available, including health care, disaster aid and social welfare.

Debt and welfare in economies with land

In a stochastic economy of overlapping generations subject to uninsurable risks, debt can implement Pareto improvements in welfare. This is the case even in the presence of long-lived assets and no short sales.

Orderly Marketing in Agriculture Revisited

This paper presents a model of economic behavior that explicates the phenomenon known as “orderly marketing,” which was a main objective of the Marketing Orders agricultural program introduced early in the New Deal. Recent analyses of marketing orders start with an implicit assumption that there is no market failure—thus, that price regulation can cause only deviations from the first-best market solution. However, historical evidence suggests that disorderly marketing might refer to a kind of market imperfection. In the model presented here, a monopsonist processor sets a price to be paid, and an aggregate quantity to be purchased. In some states of the world, some farmers are excluded from the market. In other words, nonprice rationing can occur, and changes in consumer expenditure for the final product are absorbed by the processor rather than passed along to the farmer. The classified price and pooling provisions of federal orders can lead to a Pareto improvement in welfare.

THE PRICING OF JOB CHARACTERISTICS WHEN MARKETS DO NOT CLEAR: THEORY AND POLICY IMPLICATIONS*

This article examines nonsequential search when jobs vary with respect to nonpecuniary characteristics. In the presence of frictions in the labor market, the equilibrium job distribution need not show evidence of compensating wage differentials. The model also generates several pervasive features of labor markets: unemployment and vacancies, apparent discrimination, and market segmentation. When workers are homogeneous, restrictions on the range of job offers decrease welfare and cannot reduce unemployment. However, when workers have heterogeneous preferences, such restrictions may lower unemployment, and can even lead to a Pareto improvement in welfare. We consider the impact of policies banning discrimination and regulating working conditions.

Optimal Financial Crises

ABSTRACTEmpirical evidence suggests that banking panics are related to the business cycle and are not simply the result of “sunspots.” Panics occur when depositors perceive that the returns on bank assets are going to be unusually low. We develop a simple model of this. In this setting, bank runs can be first‐best efficient: they allow efficient risk sharing between early and late withdrawing depositors and they allow banks to hold efficient portfolios. However, if costly runs or markets for risky assets are introduced, central bank intervention of the right kind can lead to a Pareto improvement in welfare.

Nash–Walras equilibria

At a Nash–Walras equilibrium, individuals exchange commodities competitively, and, simultaneously, they interact strategically. Under standard assumptions, Nash–Walras equilibria exist; equilibrium profiles of actions are, typically, determinate but pareto suboptimal, though not constrained pareto suboptimal: a transfer of revenue need not suffice for a pareto improvement in welfare.

Productivity- and Pareto-Improving Changes in Taxes and Tariffs

that only has tariffs and domestic commodity taxes as policy instruments. The concept of a productivity improvement in tariffs and taxes is introduced and conditions for its existence are established. We prove that a Pareto-improving change in tariffs and domestic taxes exists if a productivity-improving change in tariffs exists and if the Weymark condition on the matrix of household demands holds. Conditions are established for particular tariff reforms, such as proportional reductions and reductions of extreme rates, to yield Pareto improvements in welfare.

On the multilateral transfer problem: Existence of Pareto improving international transfers

This paper investigates the question of whether it is possible to create a strict Pareto improvement in welfare by a multilateral transfer of income between nations. We show that a strict Pareto improving multilateral transfer exist if and only if a generalized normality condition is violated. For a violation of this condition it is necessary that tariff distortions exist. Conditions for the non-existence of a Pareto improving transfer are also established. For example, a Pareto improving transfer does not exist if all commodities are normal and are net substitutes from a world point of view.