CER-ETH Research Seminar, Spring Term 2011

Everyone who is interested is cordially invited!

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Speakers

Robert Gary-Bobo

We propose a model of strikes in a relational (or self-enforcing) contracts framework. The employer has private information about fi…rm pro…tability, proposes a wage and a bonus, and can outsource part of the production in each period. The union can either go on strike or reduce the workers' effort (i.e., decide a slowdown or work-to-rule) as a response to a low wage or a low bonus. We construct perfect public equilibria in which strikes (or slowdown) appear randomly on the equilibrium path, during …nite-duration spells triggered by the occurrence of a low-pro…tability state. Equilibria exhibit money-burning (i.e., conflict) and wage-compression as in the recent literature on relational contracts; they are …first-best inefficient. We discuss some empirical implications of the model and applications to the public sector. An important advantage of our theory is that it allows for equilibrium regime changes, induced by changes in the environment: strikes may disappear and be replaced by other forms of conflict that are less easily observable. This has consequences for the empirical work on strikes.

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Uwe Sunde

This paper studies the endogenous emergence of political regimes, in particular democracy, oligarchy and mass dictatorship, in societies in which productive resources are distributed unequally and institutions do not ensure political commitments. The political regime is shown to depend on resource inequality as well as on the production structure in the economy, which is affected by economic development. The main results imply that for any level of development there exists a distribution of resources such that democracy is the political outcome. This distribution is even independent of the particular development level if the income share generated by the poor is sufficiently large. On the other hand, there are distributions of resources for which democracy is infeasible in equilibrium irrespective of the level of development. The model also delivers results on the stability of democracy. Variations in inequality across several dimensions due to unbalanced technological change, immigration or changes in the demographic structure affect the scope for democracy or may even lead to its breakdown. The results are consistent with the different political regimes that emerged in Germany after its unification in 1871.

Carl Christian von Weizsäcker

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Bertrand Villeneuve

Natural and industrial risks present many similarities, since they are both strongly determined by the number of people and businesses and the value of their assets located in exposed areas. The difference between natural and industrial disasters is not essentially in the nature of the physical phenomena but in the legal liability rules that apply in civil cases. Implicitly, the government is the residual claimant for disasters compensation, whereas the firm is liable for industrial disasters it causes. We analyze how location choices, risk levels and insurance price are simultaneously determined at the equilibrium in a given regulation context and under a given hazard. The equilibrium depends so on the given regulation of insurance and land use; comparative statics of equilibria with respect to different regulations enable to make recommendations for natural and industrial risks management. Indeed, our model provides a new (to our knowledge) theoretical framework to assess simultaneously insurance and land use policies and characterize their necessary coordination.

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Thomas Aronsson

This paper concerns optimal nonlinear taxation in an OLG model with two ability-types, where people care about their own consumption relative to (i) other people’s current consumption, (ii) own past consumption, and (iii) other people’s past consumption. We show that intertemporal consumption comparisons affect the marginal income tax structure in the same qualitative way as comparisons based on other people’s current consumption. Based on available empirical estimates, comparisons with other people’s current and previous consumption tend to substantially increase the optimal marginal labor income tax rates, while they may either increase or decrease the optimal marginal capital income tax rates.

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Wolfgang Bucholz

Expected Utility Theory (EUT) is not only used to describe decisions at the individual level but also to find ethically acceptable outcomes at the social level. The most prominent example for this application of EUT is the famous construction of a "veil of ignorance" behind which an impartial observer makes ethical choices. In this presentation we will examine to what degree EUT is capable to take ethical objectives, as e.g. equality of distribution or different versions of the "principle of need", into account. In particular, we deal with intergenerational ethics which, in the context of the debate on climate change, is an issue of current interest.