Three Essays on the Formation and Impact of Economic Policy

Introduction In my thesis I argue that economic policy is all about economics and politics. Consequently, analysing and understanding economic policy ideally has at least two parts. The economics part, which is centered around the expected impact of a specific policy on the real economy both in terms of efficiency and equity. The insights of this part point into which direction the fine-tuning of economic policies should go. However, fine-tuning of economic policies will be most likely subject to political constraints. That is why, in the politics part, a much better understanding can be gained by taking into account how the incentives of politicians and special interest groups as well as the role played by different institutional features affect the formation of economic policies. The first part and chapter of my thesis concentrates on the efficiency-related impact of economic policies: how does corporate income taxation in general, and corporate income tax progressivity in specific, affect the creation of new firms? Reduced progressivity and flat-rate taxes are in vogue. By 2009, 22 countries are operating flat-rate income tax systems, as do 7 US states and 14 Swiss cantons (for corporate income only). Tax reform proposals in the spirit of the "flat tax" model typically aim to reduce three parameters: the average tax burden, the progressivity of the tax schedule, and the complexity of the tax code. In joint work, Marius Brülhart and I explore the implications of changes in these three parameters on entrepreneurial activity, measured by counts of firm births in a panel of Swiss municipalities. Our results show that lower average tax rates and reduced complexity of the tax code promote firm births. Controlling for these effects, reduced progressivity inhibits firm births. Our reading of these results is that tax progressivity has an insurance effect that facilitates entrepreneurial risk taking. The positive effects of lower tax levels and reduced complexity are estimated to be significantly stronger than the negative effect of reduced progressivity. To the extent that firm births reflect desirable entrepreneurial dynamism, it is not the flattening of tax schedules that is key to successful tax reforms, but the lowering of average tax burdens and the simplification of tax codes. Flatness per se is of secondary importance and even appears to be detrimental to firm births. The second part of my thesis, which corresponds to the second and third chapter, concentrates on how economic policies are formed. By the nature of the analysis, these two chapters draw on a broader literature than the first chapter. Both economists and political scientists have done extensive research on how economic policies are formed. Thereby, researchers in both disciplines have recognised the importance of special interest groups trying to influence policy-making through various channels. In general, economists base their analysis on a formal and microeconomically founded approach, while abstracting from institutional details. In contrast, political scientists' frameworks are generally richer in terms of institutional features but lack the theoretical rigour of economists' approaches. I start from the economist's point of view. However, I try to borrow as much as possible from the findings of political science to gain a better understanding of how economic policies are formed in reality. In the second chapter, I take a theoretical approach and focus on the institutional policy framework to explore how interactions between different political institutions affect the outcome of trade policy in presence of special interest groups' lobbying. Standard political economy theory treats the government as a single institutional actor which sets tariffs by trading off social welfare against contributions from special interest groups seeking industry-specific protection from imports. However, these models lack important (institutional) features of reality. That is why, in my model, I split up the government into a legislative and executive branch which can both be lobbied by special interest groups. Furthermore, the legislative has the option to delegate its trade policy authority to the executive. I allow the executive to compensate the legislative in exchange for delegation. Despite ample anecdotal evidence, bargaining over delegation of trade policy authority has not yet been formally modelled in the literature. I show that delegation has an impact on policy formation in that it leads to lower equilibrium tariffs compared to a standard model without delegation. I also show that delegation will only take place if the lobby is not strong enough to prevent it. Furthermore, the option to delegate increases the bargaining power of the legislative at the expense of the lobbies. Therefore, the findings of this model can shed a light on why the U.S. Congress often practices delegation to the executive. In the final chapter of my thesis, my coauthor, Antonio Fidalgo, and I take a narrower approach and focus on the individual politician level of policy-making to explore how connections to private firms and networks within parliament affect individual politicians' decision-making. Theories in the spirit of the model of the second chapter show how campaign contributions from lobbies to politicians can influence economic policies. There exists an abundant empirical literature that analyses ties between firms and politicians based on campaign contributions. However, the evidence on the impact of campaign contributions is mixed, at best. In our paper, we analyse an alternative channel of influence in the shape of personal connections between politicians and firms through board membership. We identify a direct effect of board membership on individual politicians' voting behaviour and an indirect leverage effect when politicians with board connections influence non-connected peers. We assess the importance of these two effects using a vote in the Swiss parliament on a government bailout of the national airline, Swissair, in 2001, which serves as a natural experiment. We find that both the direct effect of connections to firms and the indirect leverage effect had a strong and positive impact on the probability that a politician supported the government bailout.

Essays in equilibrium asset pricing

This thesis consists of four essays in equilibrium asset pricing. The main topic is investors' heterogeneity: I investigates the equilibrium implications for the financial markets when investors have different attitudes toward risk. The first chapter studies why expected risk and remuneration on the aggregate market are negatively related, even if intuition and standard theory suggest a positive relation. I show that the negative trade-off can obtain in equilibrium if investors' beliefs about economic fundamentals are procyclically biased and the market Sharpe ratio is countercyclical. I verify that such conditions hold in the real markets and I find empirical support for the risk-return dynamics predicted by the model. The second chapter consists of two essays. The first essay studies how het¬erogeneity in risk preferences interacts with other sources of heterogeneity and how this affects asset prices in equilibrium. Using perceived macroeconomic un¬certainty as source of heterogeneity, the model helps to explain some patterns of financial returns, even if heterogeneity is small as suggested by survey data. The second essay determines conditions such that equilibrium prices have analytical solutions when investors have heterogeneous risk attitudes and macroeconomic fundamentals feature latent uncertainty. This approach provides additional in-sights to the previous literature where models require numerical solutions. The third chapter studies why equity claims (i.e. assets paying a single future dividend) feature premia and risk decreasing with the horizon, even if standard models imply the opposite shape. I show that labor relations helps to explain the puzzle. When workers have bargaining power to exploit partial income insurance within the firm, wages are smoother and dividends are riskier than in a standard economy. Distributional risk among workers and shareholders provides a rationale to the equity short-term risk, which leads to downward sloping term structures of premia and risk for equity claim. Résumé Cette thèse se compose de quatre essais dans l'évaluation des actifs d'équilibre. Le sujet principal est l'hétérogénéité des investisseurs: J'étudie les implications d'équilibre pour les marchés financiers où les investisseurs ont des attitudes différentes face au risque. Le première chapitre étudie pourquoi attendus risque et la rémunération sur le marché global sont liées négativement, même si l'intuition et la théorie standard suggèrent une relation positive. Je montre que le compromis négatif peut obtenir en équilibre si les croyances des investisseurs sur les fondamentaux économiques sont procyclique biaisées et le ratio de Sharpe du marché est anticyclique. Je vérifier que ces conditions sont réalisées dans les marchés réels et je trouve un appui empirique à la dynamique risque-rendement prédites par le modèle. Le deuxième chapitre se compose de deux essais. Le première essai étudie com¬ment hétérogénéité dans les préférences de risque inter agit avec d'autres sources d'hétérogénéité et comment cela affecte les prix des actifs en équilibre. Utili¬sation de l'incertitude macroéconomique perù comme source d'hétérogénéité, le modèle permet d'expliquer certaines tendances de rendements financiers, même si l'hétérogénéité est faible comme suggéré par les données d'enquête. Le deuxième essai détermine des conditions telles que les prix d'équilibre disposer de solutions analytiques lorsque les investisseurs ont des attitudes des risques hétérogènes et les fondamentaux macroéconomiques disposent d'incertitude latente. Cette approche fournit un éclairage supplémentaire à la littérature antérieure où les modèles nécessitent des solutions numériques. Le troisième chapitre étudie pourquoi les equity-claims (actifs que paient un seul dividende futur) ont les primes et le risque décroissante avec l'horizon, mme si les modèles standards impliquent la forme opposée. Je montre que les relations de travail contribue à expliquer l'énigme. Lorsque les travailleurs ont le pouvoir de négociation d'exploiter assurance revenu partiel dans l'entreprise, les salaires sont plus lisses et les dividendes sont plus risqués que dans une économie standard. Risque de répartition entre les travailleurs et les actionnaires fournit une justification à le risque à court terme, ce qui conduit à des term-structures en pente descendante des primes et des risques pour les equity-claims.

Parts, places, and perspectives : a theory of spatial relations based an mereotopology and convexity

This thesis suggests to carry on the philosophical work begun in Casati's and Varzi's seminal book Parts and Places, by extending their general reflections on the basic formal structure of spatial representation beyond mereotopology and absolute location to the question of perspectives and perspective-dependent spatial relations. We show how, on the basis of a conceptual analysis of such notions as perspective and direction, a mereotopological theory with convexity can express perspectival spatial relations in a strictly qualitative framework. We start by introducing a particular mereotopological theory, AKGEMT, and argue that it constitutes an adequate core for a theory of spatial relations. Two features of AKGEMT are of particular importance: AKGEMT is an extensional mereotopology, implying that sameness of proper parts is a sufficient and necessary condition for identity, and it allows for (lower- dimensional) boundary elements in its domain of quantification. We then discuss an extension of AKGEMT, AKGEMTS, which results from the addition of a binary segment operator whose interpretation is that of a straight line segment between mereotopological points. Based on existing axiom systems in standard point-set topology, we propose an axiomatic characterisation of the segment operator and show that it is strong enough to sustain complex properties of a convexity predicate and a convex hull operator. We compare our segment-based characterisation of the convex hull to Cohn et al.'s axioms for the convex hull operator, arguing that our notion of convexity is significantly stronger. The discussion of AKGEMTS defines the background theory of spatial representation on which the developments in the second part of this thesis are built. The second part deals with perspectival spatial relations in two-dimensional space, i.e., such relations as those expressed by 'in front of, 'behind', 'to the left/right of, etc., and develops a qualitative formalism for perspectival relations within the framework of AKGEMTS. Two main claims are defended in part 2: That perspectival relations in two-dimensional space are four- place relations of the kind R(x, y, z, w), to be read as x is i?-related to y as z looks at w; and that these four-place structures can be satisfactorily expressed within the qualitative theory AKGEMTS. To defend these two claims, we start by arguing for a unified account of perspectival relations, thus rejecting the traditional distinction between 'relative' and 'intrinsic' perspectival relations. We present a formal theory of perspectival relations in the framework of AKGEMTS, deploying the idea that perspectival relations in two-dimensional space are four-place relations, having a locational and a perspectival part and show how this four-place structure leads to a unified framework of perspectival relations. Finally, we present a philosophical motivation to the idea that perspectival relations are four-place, cashing out the thesis that perspectives are vectorial properties and argue that vectorial properties are relations between spatial entities. Using Fine's notion of "qua objects" for an analysis of points of view, we show at last how our four-place approach to perspectival relations compares to more traditional understandings.

Three essays in incomplete contracts

General Introduction These three chapters, while fairly independent from each other, study economic situations in incomplete contract settings. They are the product of both the academic freedom my advisors granted me, and in this sense reflect my personal interests, and of their interested feedback. The content of each chapter can be summarized as follows: Chapter 1: Inefficient durable-goods monopolies In this chapter we study the efficiency of an infinite-horizon durable-goods monopoly model with a fmite number of buyers. We find that, while all pure-strategy Markov Perfect Equilibria (MPE) are efficient, there also exist previously unstudied inefficient MPE where high valuation buyers randomize their purchase decision while trying to benefit from low prices which are offered once a critical mass has purchased. Real time delay, an unusual monopoly distortion, is the result of this attrition behavior. We conclude that neither technological constraints nor concern for reputation are necessary to explain inefficiency in monopolized durable-goods markets. Chapter 2: Downstream mergers and producer's capacity choice: why bake a larger pie when getting a smaller slice? In this chapter we study the effect of downstream horizontal mergers on the upstream producer's capacity choice. Contrary to conventional wisdom, we find anon-monotonic relationship: horizontal mergers induce a higher upstream capacity if the cost of capacity is low, and a lower upstream capacity if this cost is high. We explain this result by decomposing the total effect into two competing effects: a change in hold-up and a change in bargaining erosion. Chapter 3: Contract bargaining with multiple agents In this chapter we study a bargaining game between a principal and N agents when the utility of each agent depends on all agents' trades with the principal. We show, using the Potential, that equilibria payoffs coincide with the Shapley value of the underlying coalitional game with an appropriately defined characteristic function, which under common assumptions coincides with the principal's equilibrium profit in the offer game. Since the problem accounts for differences in information and agents' conjectures, the outcome can be either efficient (e.g. public contracting) or inefficient (e.g. passive beliefs).

Transnational private authority and the participation of workers' organizations in the regulatory space surrounding the employment relationship

Most corporate codes of conduct and multi-stakeholder sustainability standards guarantee workers' rights to freedom of association and collective bargaining, but many authors are sceptical about the concrete impact of codes and standards of this kind. In this paper we use Hancher and Moran's (1998) concept of 'regulatory space' to assess the potential of private transnational regulation to support the growth of trade union membership and collective bargaining relationships, drawing on some preliminary case study results from a project on the impact of the International Finance Corporation's (IFC) social conditionality on worker organization and social dialogue. One of the major effects of neoliberal economic and industrial policy has been the routine exclusion of workers' organizations from regulatory processes on the grounds that they introduce inappropriate 'political' motives into what ought to be technical decision-making processes. This, rather than any direct attack on their capacity to take action, is what seems best to explain the global decline in union influence (Cradden 2004; Howell 2007; Howe 2012). The evidence we present in the paper suggests that private labour regulation may under certain conditions contribute to a reversal of this tendency, re-establishing the legitimacy of workers' organizations within regulatory processes and by extension the legitimacy of their use of economic and social power. We argue that guarantees of freedom of association and bargaining rights within private regulation schemes are effective to the extent that they can be used by workers' organizations in support of a claim for access to the regulatory space within which the terms and conditions of the employment relationship are determined. Our case study evidence shows that certain trade unions in East Africa have indeed been able to use IFC and other private regulation schemes as levers to win recognition from employers and to establish collective bargaining relationships. Although they did not attempt to use formal procedures to make a claim for the enforcement of freedom of association rights on behalf of their members, the unions did use enterprises' adherence to private regulation schemes as a normative point of reference in argument and political exchange about worker representation. For these unions, the regulation was a useful addition to the range of arguments that they could deploy as means to justify their demand for recognition by employers. By contrast, the private regulation that helps workers' organizations to win access to regulatory processes does little to ensure that they are able to participate meaningfully, whether in terms of technical capacity or of their ability to mobilize social power as a counterweight to the economic power of employers. To the extent that our East African unions were able to make an impact on terms and conditions of employment via their participation in regulatory space it was solely on the basis of their own capacities and resources and the application of national labour law.

Transnational private authority, regulatory space and workers' collective competences: Bringing local contexts and worker agency back in

The impact of transnational private regulation on labour standards remains in dispute. While studies have provided some limited evidence of positive effects on 'outcome standards' such as wages or occupational health and safety, the literature gives little reason to believe that there has been any significant effect on 'process rights' relating primarily to collective workers' voice and social dialogue. This paper probes this assumption by bringing local contexts and worker agency more fully into the picture. It outlines an analytical framework that emphasizes workers' potential to act collectively for change in the regulatory space surrounding the employment relationship. It argues that while transnational private regulation on labour standards may marginally improve workers access to regulatory spaces and their capacity to require the inclusion of enterprises in them, it does little to increase union leverage. The findings are based on empirical research work conducted in Sub-Saharan Africa.

Interdependency management in universities: a case study

There remains uncertainty in scientific discussions regarding the governance of universities in new public management regimes in terms of who actually 'rules' in the university. Apparently, a strengthened management leadership is confronted with continuing elements of academic self-regulation and professional autonomy in knowledge production and diffusion. Organisational and academic rationales coexist in today's management of universities. This article endeavours to clarify some of the ambiguities pertaining to the coexistence of two authorities by demonstrating the working of 'interdependency management' that is taking place within universities. For this purpose, the authors have scrutinised research, teaching and recruitment policies in one Swiss university that is subject to such ambiguities. The study confirms existing research in that a command-and-control system is not applied. Policymaking in universities is instead based on a mix of negotiations in faculties that are taking place in the 'shadow of hierarchy', negotiated bargaining between faculties and leaders and occasional unilateral decisions of leaders. This mitigates latent conflicts between management and the academic community: strategic orientations of the university are generally accepted by the academic community while the academic community has influence on policy formulation and maintains defining powers over policy substance.