In this paper, we discuss a novel aspect of affirmative action policy. We examine its redistributive role, asking whether in an egalitarian society, supplementing the tax-transfer system with an affirmative action policy would enhance social welfare. We demonstrate that affirmative action could be a desirable policy tool even if racial discrimination does not exist in the labor market. JEL Classification: H2, D6 [...]

When individuals choose from whatever alternatives available to them the one that maximizes their utility then it is always desirable that the government provide them with as many alternatives as possible. Individuals, however, do not always choose what is best for them and their mistakes may be exacerbated by the availability of options. We analyze self-selection models, when individuals know more about themselves than it is possible for governments to know, and show that it may be socially optimal to limit and sometimes to eliminate individual choice. As an example, we apply Luce’s (1959) model of random choice to a [...]

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This paper examines the interaction between the market for annuities and retirement and consumption decisions in the presence of lifetime uncertainty. We focus on two aspects of the demand for annuities: the timing of annuitization and the information available to the issuers of annuities with regard to purchasers ’ survival probabilities. The First-Best is attained by continuous annuitization of savings, with a guaranteed lump-sum payment to beneficiaries upon death. Annuitization of savings at retirement, and a-fortioti no annuitization, are inferior and lead to distortions in retirement and consumption decisions. Applying a ‘Stochastic Dominance ’ approach, we show how these decisions [...]

Abstract

This paper extends the standard model of optimum commodity taxation (Ramsey, F., 1927. A Contribution to the Theory of Taxation. Economic Journal 37, 47–61; Diamond, P., Mirrlees, J., 1971. Optimal Taxation and Public Production, II: "Tax Rules". American Economic Review 61, 261–278) to a competitive economy in which markets are inefficient due to asymmetric information. Insurance markets are prime examples: consumers impose varying costs on suppliers but firms cannot associate costs with individual customers and consequently all are charged equal prices. In such a competitive pooling equilibrium, the price of each good is equal to the average of individual marginal costs weighted by equilibrium quantities. We derive modified Ramsey–Boiteux Conditions for optimum taxes in such an economy and show that, in addition to the standard formula, they include first-order effects which reflect the deviations of prices from marginal costs and the response of equilibrium quantities to the taxes

An effective policy scheme to overcome the suboptimal low provision levels of global public goods is developed in this paper. By suggesting a decentralized approach to raise environmental public good provision levels we take account of the lack of a coercive global authority that is able to enforce efficient international environmental regulations. In our model individual regions voluntarily commence international negotiations on public good provision, which are accompanied by side-payments. These side-payments are financed by means of regional externality-correcting taxes. Side-payments and national tax rates are designed in a mutually dependent way. The decentralized scheme we recommend for approaching Pareto efficient Nash equilibria is based on the ideas of Coasean negotiations and Pigouvian taxes. As it is implementable for a wide class of Nash solutions, it is applicable to various international externality problems.

Individuals can insure themselves perfectly against uncertainty about the length of life by purchasing deferred annuities early in life. In the absence of other uninsurable uncertainties (e.g. income), there will be no residual purchases or sales of annuities later in life, thereby avoiding any adverse-selection. In contrast, the presence of such uncertainties creates an active residual annuity market based on the arrival of new information. We characterize the equilibrium in the residual annuity market and propose a new financial instrument, refundable annuities with a guaranteed refund price, which enables individuals who hold a portfolio of such annuities to better adjust [...]

In 2004, there was a further enlargement of the European Union. Among the new member countries are eight Central and Eastern European countries. Especially the accession countries located directly at the border to the EU generate significant environmental spillovers harming the Union. These spillovers are mitigated but not deleted by the enlargement regulations. In this paper we will therefore analyze an instrument which may further diminish the spillover problems: transfers, which are conditional on a tightening of environmental policy in the accession countries. The environmental policy considered is the policy of environmental taxation.

In the presence of an 'Atmosphere Externality' and competitive behavior by households, a uniform commodity tax on the externality-generating good, attains the first best. If income redistribution is desirable, then personalized taxes are required for the second best optimum.

In this paper we study the cost of adding additional capacity to transport oil from Saudi Arabia and Kuwait to the Red Sea. If this capacity is obtained by adding power to the existing pipelines, the cost would increase by approximately 14 cents per barrel, but would require large capital expenditures. If this capacity is obtained by using Drag Reduction Agents, the cost would increase by 25 to 65 cents per barrel with minor capital expenditures. Since Arabian oil is inframarginal, these increased costs should have no impact on the supply of oil.

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This paper analyses the optimum pricing policies of a multiproduct monopoly in the presence of inflation and fixed costs of nominal price changes. We examine the conditions which lead to staggered or synchronized pricing policies when the timing of price changes is endogenous. Two aspects of the decision problem are emphasized: the interactions in the joint profit function between the prices of the various goods and the interactions in the costs of price adjustment. We show that with positive interactions in the profit function and costs of price adjustments that are independent across products, staggering is unlikely. Depending on initial conditions, a firm may follow a staggered steady state or a synchronized steady state path. But the former is locally unstable while the latter is attained from a broad set of initial conditions. For a small rate of interest the staggered policy is optimal iff the interaction in profits is negative.