Welfare Tradeoff Research Articles

Comparing Budget Repair Measures for a Small Open Economy with Growing Debt

In this study, we quantify the macroeconomic and welfare effects of alternative fiscal consolidation plans in the context of a small open economy. Using a computable overlapping generations model tailored to the Australian economy, we examine immediate and gradual eliminations of the existing fiscal deficit with (i) temporary income tax hikes, (ii) temporary consumption tax hikes and (iii) temporary transfer payment cuts. The simulation results indicate that all three examined fiscal measures result in favourable long-run macroeconomic and welfare outcomes, but have adverse consequences in the short run that are particularly severe under the immediate fiscal consolidation plan. Moreover, our results show that cutting transfer payments leads to the worst welfare outcome for all generations currently alive, and especially the poor. Increasing the consumption tax rate results in smaller welfare losses, but compared to raising income taxes, the current poor households pay much larger welfare costs. Overall, the welfare trade-offs between current and future generations, as well as between the rich and poor, highlight key political constraints and point to challenging policy choices for the wellbeing of future generations.

Appraising Merger Efficiencies

Mergers of business firms violate the antitrust laws when they threaten to lessen competition, which generally refers to a price increase resulting from a reduction in output. However, a that threatens competition may also enable the post-merger firm to reduce its costs or improve its product. Attitudes toward mergers are heavily driven by assumptions about efficiency gains. If mergers of competitors never produced efficiency gains but simply reduced the number of competitors, a strong presumption against them would be warranted. We tolerate most mergers because of a background, highly generalized belief that most or at least many produce cost savings or improvements in products or service. This article considers the current approach of enforcement policy to merger-induced efficiencies. Merger analysis today takes efficiencies into account in two ways. First, it makes assumptions about efficiencies in determining where the line for prima facie illegality should be drawn. Second, it recognizes an efficiencies once prima facie illegality has been established, with the burden of proof on the defendant. The rapidly growing empirical literature on post-merger performance suggests that policy today is more likely to permit an anticompetitive than to prohibit a harmless one. At the same time, however, the fault appears not to lie with the efficiencies defense. The defense has almost never successfully defended a after the government has made out a prima facie case of illegality. In that case the under deterrence problem must lie in the prima facie case itself. Welfare tradeoff models attempt to assess the welfare effects of mergers by comparing consumer harms and producer gains. One problem with the well known welfare tradeoff model developed by Oliver E. Williamson is that the efficiencies it contemplates occur at output levels that are lower than they were prior to the merger. While efficiencies at lower output levels are possible, they properly require additional proof. Of course, efficiencies might be so substantial that post-merger output is higher, and prices lower, than at premerger levels. But in that case there is nothing to trade off -- both producers and consumers would benefit from the merger. Williamson's model also assumed a market that was perfectly competitive prior to the but monopolized thereafter. Virtually no challenged mergers today fall into that territory. Most mergers occur in moderately concentrated markets where pre-merger prices are already substantially above marginal cost. In that case consumer welfare losses are much larger and efficiency gains must be spread over a much smaller output. The 2010 Horizontal Merger Guidelines also require that efficiencies be merger specific -- that is, that they could not reasonably be brought about except by the merger. Under a general welfare test that trades actual consumer losses against producer gains that approach makes sense, but under the consumer welfare test that the Merger Guidelines apply it is perplexing. First, if the efficiencies are not of sufficient magnitude to offset fully any propensity toward a price increase, then the efficiency defense will be rejected whether or not the claimed efficiencies are specific. However, if the efficiencies are in fact of sufficient magnitude to predict that the post-merger price will be no higher than the pre-merger price, then why do we care? Such a does not harm consumers, and as a result is not anticompetitive.

A Broader Look at Patent Royalties and Antitrust

It is well known in antitrust economics that competitors can rely on patent licensing with supracompetitive royalties as a surrogate for price fixing. This paper addresses a number of alternative situations in which patent royalty agreements may raise antitrust concerns, even if the royalty rate is ostensibly reasonable (implying the agreement is not transparently anticompetitive). First, a royalty may serve effectively as a vertical restraint, preventing the downstream firm from passing too much of the licensing value through to consumers, which may enhance joint profits. Second, licensing to a rival creates an by giving the licensor a stake in its rival's success, thereby diminishing inter-party competition. This is the same problem that arises when a firm buys stock in a competitor. Consequently, even if the royalty rate is reasonable, the arrangement may reduce consumer welfare overall. Indeed, it creates essentially the same welfare tradeoff as horizontal merger: it engenders some procompetitive efficiencies, but it makes the market less competitive. Additionally, offsetting (i.e. reciprocal) license payments between competitors often warrant scrutiny even if each royalty appears individually reasonable. Even under cross-licensing, offsetting payments are generally unnecessary for the parties to reach a mutually-beneficial agreement, which is the relevant antitrust question. Instead, the practical effect of offsetting royalties is to replicate a collusive agreement to restrain consumer pass-through, ensuring the firms retain more of the licensing surplus. The results shed new light on the competitive impact of patent pools, which typically create widespread royalty offset and alignment between competing members, even if patents are complementary.

Prosocial effects of MDMA: A measure of generosity.

3,4-methylenedioxymethamphetamine (MDMA) produces "prosocial" effects that contribute to its recreational use. Few studies have examined the cognitive and behavioral mechanisms by which MDMA produces these effects. Here we examined the effect of MDMA on a specific prosocial effect, i.e. generosity, using a task in which participants make decisions about whether they or another person will receive money (Welfare Trade-Off Task; WTT). The project included one study without drug administration and one with MDMA. In Study 1, we administered the WTT to healthy adults (N = 361) and examined their performance in relation to measures of personality and socioeconomic status. In Study 2, healthy volunteers with MDMA experience (N = 32) completed the WTT after MDMA administration (0, 0.5, or 1.0 mg/kg). As expected, in both studies participants were more generous with a close friend than an acquaintance or stranger. In Study 1, WTT generosity was related to household income and trait Agreeableness. In Study 2, MDMA (1.0 mg/kg) increased generosity toward a friend but not a stranger, whereas MDMA (0.5 mg/kg) slightly increased generosity toward a stranger, especially among female participants. These data indicate that the WTT is a valuable, novel tool to assess a component of prosocial behavior, i.e. generosity to others. The findings support growing evidence that MDMA produces prosocial effects, but, as with oxytocin, these appear to depend on the social proximity of the relationships. The brain mechanisms underlying the construct of generosity, or the effects of MDMA on this measure, remain to be determined.

Mergers, Innovation, and Entry-Exit Dynamics: The Consolidation of the Hard Disk Drive Industry (19766-2014)

How far should an industry be allowed to consolidate when competition and innovation are endogenous? We extend Rust's (1987) framework to incorporate a stochastically alternating-move game of dynamic oligopoly, and estimate it using data from the hard disk drive industry, in which a dozen global players consolidated into only three in the last 20 years. We find plateau-shaped equilibrium relationships between competition and innovation, with systematic heterogeneity across time and productivity. Our counterfactual simulations suggest the optimal policy should stop mergers when five or fewer firms exist, highlighting a dynamic welfare tradeoff between ex-post pro-competitive effects and ex-ante value-destruction side effects.

Intellectual property in plant breeding: comparing different levels and forms of protection

Welfare trade-offs between intellectual property (IP) protections provided by patents and by plant variety protection (PVP) are explored. PVP breeders’ exemption weakens IP protection, but may speed the transfer of research gains across firms. A model is developed assuming firms optimise research given existing IP protection. A baseline scenario supporting each system is used to perform welfare analysis, and study how the balance is altered between systems. Survey data suggest patents are more appropriate for longer-term, higher-risk research, whereas PVP is better suited for traditional breeding. A scenario where patents and licensing co-exist dominates PVP in all commercially relevant areas.

Nudges and Welfare: Optimal Behavioural Policy with Decision Costs

The complexity of the modern world imposes significant cognitive and material costs on consumers. This paper models decision costs to better describe and understand the effects of behavioural policy, and finds that, similar to traditional economic policy, behavioural policies can create welfare distortions and equity-efficiency tradeoffs. In particular, such policies may discourage consumers from optimizing and convince them to take the default even when it makes them and society worse off, an effect I call the discouragement effect. These problems can be minimized through careful policy design, targeting specific subsets of the population to avoid affecting the incentives of others, but doing so efficiently can impose prohibitively high information requirements. This represents one of the first systematic treatments of the welfare implications and tradeoffs of behavioural policy, illustrated in the relatively novel setting of energy-saving technology adoption. Better understanding of the tradeoffs induced by behavioural policies is essential for policymaking.

The need for a quantitative assessment of animal welfare trade-offs in climate change mitigation scenarios

The need for a quantitative assessment of animal welfare trade-offs in climate change mitigation scenarios

Deciding to enter a monetary union: The role of trade and financial linkages

This paper evaluates the role of trade and financial linkages in the decision to enter a monetary union. We estimate a two-country DSGE model for the U.K. economy and the euro area with financial intermediaries as in Gertler and Karadi (2011). We use the model to compute the welfare trade-offs from joining the euro. We compare the gains from trade that would occur after the adoption of the euro against the costs of relinquishing monetary policy, both conventional and unconventional. We also study the effects of the changes in the corporate risk premium observed during the recent crisis. We find that in tranquil times, when the risk premium volatility is low, the net welfare gain of joining the monetary union is 2.4 percent of life-time consumption. During financial crises, when there is a sharp increase in the volatility of the risk premium, joining a monetary union would lead to a net welfare loss of 2.2 percent of life-time consumption. The welfare analysis underscores the importance of financial stability to sustain a monetary union over time.

Regulatory adaptations for delivering information: the case of confession

Prior to, or concurrent with, the encoding of concepts into speech, the individual faces decisions about whether, what, when, how, and with whom to communicate. Compared to the existing wealth of linguistic knowledge however, we know little of the mechanisms that govern the delivery and accrual of information. Here we focus on a fundamental issue of communication: The decision whether to deliver information. Specifically, we study spontaneous confession to a victim. Given the costs of social devaluation, offenders are hypothesized to refrain from confessing unless the expected benefits of confession (e.g. enabling the victim to remedially modify their course of action) outweigh its marginal costs—the victim’s reaction, discounted by the likelihood that information about the offense has not leaked. The logic of welfare tradeoffs indicates that the victim’s reaction will be less severe and, therefore, less costly to the offender, with decreases in the cost of the offense to the victim and, counter-intuitively, with increases in the benefit of the offense to the offender. Data from naturalistic offenses and experimental studies supported these predictions. Offenders are more willing to confess when the benefit of the offense to them is high, the cost to the victim is low, and the probability of information leakage is high. This suggests a conflict of interests between senders and receivers: Often, offenders are more willing to confess when confessions are less beneficial to the victims. An evolutionary–computational framework is a fruitful approach to understand the factors that regulate communication.

Positive animal welfare states and reference standards for welfare assessment

Developments in affective neuroscience and behavioural science during the last 10–15 years have together made it increasingly apparent that sentient animals are potentially much more sensitive to their environmental and social circumstances than was previously thought to be the case. It therefore seems likely that both the range and magnitude of welfare trade-offs that occur when animals are managed for human purposes have been underestimated even when minimalistic but arguably well-intentioned attempts have been made to maintain high levels of welfare. In light of these neuroscience-supported behaviour-based insights, the present review considers the extent to which the use of currently available reference standards might draw attention to these previously neglected areas of concern. It is concluded that the natural living orientation cannot provide an all-embracing or definitive welfare benchmark because of its primary focus on behavioural freedom. However assessments of this type, supported by neuroscience insights into behavioural motivation, may now carry greater weight when used to identify management practices that should be avoided, discontinued or substantially modified. Using currently accepted baseline standards as welfare reference points may result in small changes being accorded greater significance than would be the case if they were compared with higher standards, and this could slow the progress towards better levels of welfare. On the other hand, using “what animals want” as a reference standard has the appeal of focusing on the specific resources or conditions the animals would choose themselves and can potentially improve their welfare more quickly than the approach of making small increments above baseline standards. It is concluded that the cautious use of these approaches in different combinations could lead to recommendations that would more effectively promote positive welfare states in hitherto neglected areas of concern.

Economies as an Antitrust Defense Revisited: The Welfare Trade-offs and Safe Harbors

This paper incorporates a Cournot model of oligopoly pricing into Williamson’s (1968a) model to assess the welfare effect of a merger that yields economies and market power simultaneously. The results show: (i) in most cases, economies from mergers can offset price increases due to market power such that there are positive net allocative effects, and (ii) the safe harbors in the merger guidelines may fail to screen out mergers correctly. The reliability, however, can be improved by considering cost savings and price elasticities in addition to the current use of increases in HHI and post-merger HHIs.

Pension Design with a Large Informal Labor Market: Evidence from Chile

This paper investigates empirically the fiscal and welfare trade-offs involved in designing a pension system when workers can avoid participation by working informally. A dynamic behavioral model captures a household's labor supply, formal/informal sector choice and saving decisions under the rules of Chile's canonical privatized pension system. The parameters governing household preferences and earnings opportunities in the formal and the informal sector are jointly estimated using a longitudinal survey linked with administrative data from the pension system's regulatory agency. The parameter estimates imply that formal jobs rationing is limited and that mandatory pension contributions play an sizeable role in encouraging informality. Our policy experiments show that Chile could achieve a reduction of 23% of minimum pension costs, while guarantying the same level of income in retirement, by increasing the rate at which the benefits taper off.

Pension Design with a Large Informal Labor Market: Evidence from Chile

This paper investigates empirically the fiscal and welfare trade-offs involved in designing a pension system when workers can avoid participation by working informally. A dynamic behavioral model captures a household's labor supply, formal/informal sector choice and saving decisions under the rules of Chile's canonical privatized pension system. The parameters governing household preferences and earnings opportunities in the formal and the informal sector are jointly estimated using a longitudinal survey linked with administrative data from the pension system's regulatory agency. The parameter estimates imply that formal jobs rationing is limited and that mandatory pension contributions play an sizeable role in encouraging informality. Our policy experiments show that Chile could achieve a reduction of 23% of minimum pension costs, while guarantying the same level of income in retirement, by increasing the rate at which the benefits taper off.

Guns–butter tradeoff in contemporary China

This study offers an investigation of the relationship between defense and social spending in the People's Republic of China. In particular, three consecutive questions are answered here. Does a warfare–welfare tradeoff exist in China's budgetary allocation? Is it positive or negative? What is the causal direction involved? By applying a vector autoregression analysis for the period of 1952–2006, this study finds a unidirectional crowd-out effect going from defense to social spending.

Personality, self-control, and welfare-tradeoff ratios in revenge and forgiveness

We address how trait self-control and trait concern for others relate to the concepts of monitored and intrinsic Welfare Tradeoff Ratios (WTRs), respectively, and how recent work on personality, revenge, and forgiveness are informed by the adaptationist perspective proposed in the target article. We also discuss how the proposed adaptationist perspective provides clues to some previously puzzling findings on revenge.

Towards an ecosystem approach for understanding public values concerning marine biodiversity loss

Recent European legislation requires the adoption of an ecosystem-based approach for managing marine systems in which societal values and good science contribute to attainment of 'good environmental status' for Europe's seas by 2020. At present, there is a lack of studies that consider public values for marine biodiversity changes taking into account the cultural diversity within Europe. We used a contingent valuation survey to explore respondents' marginal willing- ness to pay (WTP) and motivations to prevent 3 levels of species loss (10, 25 and 50%) as compared to current levels for fish and all marine species. The survey was undertaken in 2 sites: the Azores islands (NE Atlantic) and the Gulf of Gdansk (Baltic Sea). Results, based on 747 interviews, showed that motivations underlying WTP for marine species conservation encompassed primarily bequest values and direct use values. Respondents from different locations differed in their atti- tudes and values towards marine biodiversity conservation. Scope tests revealed significant differ- ences in WTP for different levels of species loss; however the magnitudes of the scope sensitivity were constrained by a lack of awareness about the consequences of biodiversity changes and the welfare tradeoffs involved. This result highlights the need for the scientific community to better communicate knowledge about the link between biodiversity changes and human wellbeing and to embrace a fuller dialogue between policymakers and the public. A successful ecosystem based approach must accommodate the diversity of preferences and hence may need to be adapted to reflect regional diversity within Europe.

Preferential Trade and Welfare with Differentiated Products

AbstractWe consider analytically and numerically the welfare tradeoffs inherent in a preferential trade area (PTA) with products differentiated by region of origin. For a small open economy in such a setting, welfare gains are associated with higher trade volumes within the PTA. However, welfare losses are induced by declining tariff revenues on trade with non‐member countries. We show that both effects are concave, while one is a non‐monotonic and the other a potentially non‐monotonic function of pre‐PTA partner trade shares. Therefore, the relationship between initial partner import shares and direct static welfare impacts of a PTA are theoretically ambiguous. This finding contrasts with conventional results in the homogeneous‐goods case, whereby the smaller is the pre‐agreement trade volume with a potential partner the more beneficial is a PTA.

Merger to Monopsony: An Efficiencies Defense

In a classic article, Oliver Williamson introduced the efficiency defense to antitrust merger analysis. In this article, I extend his analysis to mergers among buyers that may create monopsony power. When such mergers are accompanied by merger-specific efficiencies, there is necessarily a welfare tradeoff. Evaluating the impact of the merger on social welfare requires a comparison of the cost savings that can be realized only without the merger and the allocative inefficiency due to the exercise of monopsony power.

Does strengthening Collective Action Clauses (CACs) help?

Does improving creditor coordination by strengthening CACs lead to efficiency gains in the functioning of sovereign bond markets? We address this question in a model featuring both debtor moral hazard and creditor coordination under incomplete information. Conditional on default, we characterize the interim efficient CAC threshold and show that strengthening CACs away from unanimity results in interim welfare gains. However, once the impact of strengthening CACs on debtor's incentives is taken into account, we demonstrate the robust possibility of a conflict between ex ante and interim efficiency. We calibrate our model to quantify such a welfare trade-off and discuss the policy implications of our results.