Nondictatorial Arrovian Social Welfare Functions: An Integer Programming Approach

In the line opened by Kalai and Muller (1997), we explore new conditions on prefernce domains which make it possible to avoid Arrow's impossibility result. In our main theorem, we provide a complete characterization of the domains admitting nondictorial Arrovian social welfare functions with ties (i.e. including indifference in the range) by introducing a notion of strict decomposability. In the proof, we use integer programming tools, following an approach first applied to social choice theory by Sethuraman, Teo and Vohra ((2003), (2006)). In order to obtain a representation of Arrovian social welfare functions whose range can include indifference, we generalize Sethuraman et al.'s work and specify integer programs in which variables are allowed to assume values in the set {0, 1/2, 1}: indeed, we show that, there exists a one-to-one correspondence between solutions of an integer program defined on this set and the set of all Arrovian social welfare functions - without restrictions on the range.

On the characterisation and measurement of the welfare effects of income mobility from an ex-ante perspective

The paper employs a rank-dependent formulation of the social welfare function with time-separable utilities to evaluate the economic consequences of income mobility from an ex-ante perspective. The resultant class of measures can be decomposed not only in terms of structural and exchange mobility but also in terms of vertical and horizontal mobility, thereby encompassing two of the main approaches in the literature. We illustrate our measurement framework by comparing mobility in the USA and Germany using data from the Cross-National Equivalent File 1980-2005. We find that the pattern of income mobility in the USA was both less pro-poor and more horizontally inequitable than in Germany, but that the latter did not translate into higher levels of exchange mobility given higher levels of absolute inequality and the vertical stance of the growth process.

Ordering Policy Rules with an Unconditional Welfare Measure

The unconditional expectation of social welfare is often used to assess alternative macroeconomic policy rules in applied quantitative research. It is shown that it is generally possible to derive a linear - quadratic problem that approximates the exact non-linear problem where the unconditional expectation of the objective is maximised and the steady-state is distorted. Thus, the measure of pol icy performance is a linear combinat ion of second moments of economic variables which is relatively easy to compute numerically, and can be used to rank alternative policy rules. The approach is applied to a simple Calvo-type model under various monetary policy rules.

Aggregate and welfare effects of long run inflation risk under inflation and price-level targeting

This paper presents a DSGE model in which long run inflation risk matters for social welfare. Aggregate and welfare effects of long run inflation risk are assessed under two monetary regimes: inflation targeting (IT) and price-level targeting (PT). These effects differ because IT implies base-level drift in the price level, while PT makes the price level stationary around a target price path. Under IT, the welfare cost of long run inflation risk is equal to 0.35 percent of aggregate consumption. Under PT, where long run inflation risk is largely eliminated, it is lowered to only 0.01 per cent. There are welfare gains from PT because it raises average consumption for the young and lowers consumption risk substantially for the old. These results are strongly robust to changes in the PT target horizon and fairly robust to imperfect credibility, fiscal policy, and model calibration. While the distributional effects of an unexpected transition to PT are sizeable, they are short-lived and not welfare-reducing.

Electoral Uncertainty and the Deficit Bias in a New Keynesian Economy

Recent attempts to incorporate optimal fiscal policy into New Keynesian models subject to nominal inertia, have tended to assume that policy makers are benevolent and have access to a commitment technology. A separate literature, on the New Political Economy, has focused on real economies where there is strategic use of policy instruments in a world of political conflict. In this paper we combine these literatures and assume that policy is set in a New Keynesian economy by one of two policy makers facing electoral uncertainty (in terms of infrequent elections and an endogenous voting mechanism). The policy makers generally share the social welfare function, but differ in their preferences over fiscal expenditure (in its size and/or composition). Given the environment, policy shall be realistically constrained to be time-consistent. In a sticky-price economy, such heterogeneity gives rise to the possibility of one policy maker utilising (nominal) debt strategically to tie the hands of the other party, and influence the outcome of any future elections. This can give rise to a deficit bias, implying a sub-optimally high level of steady-state debt, and can also imply a sub-optimal response to shocks. The steady-state distortions and inflation bias this generates, combined with the volatility induced by the electoral cycle in a sticky-price environment, can significantly

Second-Order Approximation to the Rotemberg Model around a Distorted Steady State

Less is known about social welfare objectives when it is costly to change prices, as in Rotemberg (1982), compared with Calvo-type models. We derive a quadratic approximate welfare function around a distorted steady state for the costly price adjustment model. We highlight the similarities and differences to the Calvo setup. Both models imply inflation and output stabilization goals. It is explained why the degree of distortion in the economy influences inflation aversion in the Rotemberg framework in a way that differs from the Calvo setup.

On the FDI-attracting property of privatizatio

In this paper, we provide an explanation of why privatization may attract foreign investors willing to enter a regional market. Privatization turns the formerly-public firm into a less aggressive competitor since profit-maximizing output is lower than the welfaremaximizing one. The drawback is that social welfare generally decreases. We also investigate tax/subsidy competition for FDI and put forward its potentially positive role. On the one hand, it may reduce the negative impact on welfare of an FDI-attracting privatization. On the other hand, it may prevent a welfare-reducing investment by the foreign firm. This sheds light on the substitute/complementary relationship between the two policies and the two objectives of governments.

Handling the endogeneity of income to health using a field experiment in Taiwan

This paper uses an exogenous increase in income for a specific sub-group in Taiwan to explore the extent to which higher income leads to higher levels of health and wellbeing. In 1995, the Taiwanese government implemented the Senior Farmer Welfare Benefit Interim Regulation (SFWBIR) which was a pure cash injection, approximately US$110 (£70) per month in 1996, to senior farmers. A Difference-in-differences (DiD) approach is used on survey data from the Taiwanese Health and Living Status of Elderly in 1989 and 1996 to evaluate the short term effect of the SFWBIR on self-assessed health, depression, and life satisfaction. Senior manufacturing workers are employed as a comparison group for the senior farmers in the natural experiment because their demographic backgrounds are similar. This paper provides evidence that the increase in income from the SFWBIR significantly improved the mental health of senior farmers by reducing the scale of depression (CES-D) by 1.718, however, it had no significant short term impact on self-assessed health or life satisfaction.

(Don’t) Make My Vote Count

Proponents of proportional electoral rules often argue that majority rule depresses turnout and may lower welfare due to the 'tyranny of the majority' problem. The present paper studies the impact of electoral rules on turnout and social welfare. We analyze a model of instrumental voting where citizens have private information over their individual cost of voting and over the alternative they prefer. The electoral rule used to select the winning alternative is a combination of majority rule and proportional rule. Results show that the above arguments against majority rule do not hold in this set up. Social welfare and turnout increase with the weight that the electoral rule gives to majority rule when the electorate is expected to be split, and they are independent of the electoral rule employed when the expected size of the minority group tends to zero. However, more proportional rules can increase turnout within the minority group. This effect is stronger the smaller the minority group. We then conclude that majority rule fosters overall turnout and increases social welfare, whereas proportional rule fosters the participation of minorities.

Monetary Policy Delegation and Equilibrium Coordination

This paper revisits the argument that the stabilisation bias that arises under discretionary monetary policy can be reduced if policy is delegated to a policymaker with redesigned objectives. We study four delegation schemes: price level targeting, interest rate smoothing, speed limits and straight conservatism. These can all increase social welfare in models with a unique discretionary equilibrium. We investigate how these schemes perform in a model with capital accumulation where uniqueness does not necessarily apply. We discuss how multiplicity arises and demonstrate that no delegation scheme is able to eliminate all potential bad equilibria. Price level targeting has two interesting features. It can create a new equilibrium that is welfare dominated, but it can also alter equilibrium stability properties and make coordination on the best equilibrium more likely.

Indexed versus nominal government debt under inflation and price-level targeting

This paper presents a DSGE model in which long run inflation risk matters for social welfare. Optimal indexation of long-term government debt is studied under two monetary policy regimes: inflation targeting (IT) and price-level targeting (PT). Under IT, full indexation is optimal because long run inflation risk is substantial due to base-level drift, making indexed bonds a much better store of value than nominal bonds. Under PT, where long run inflation risk is largely eliminated, optimal indexation is substantially lower because nominal bonds become a better store of value relative to indexed bonds. These results are robust to the PT target horizon, imperfect credibility of PT and model calibration, but the assumption that indexation is lagged is crucial. From a policy perspective, a key finding is that accounting for optimal indexation has important welfare implications for comparisons of IT and PT.

Optimal Universal and Categorical Benefits with Classification Errors and Imperfect Enforcement

We determine he optimal combination of a universal benefit, B, and categorical benefit, C, for an economy in which individuals differ in both their ability to work - modelled as an exogenous zero quantity constraint on labour supply - and, conditional on being able to work, their productivity at work. C is targeted at those unable to work, and is conditioned in two dimensions: ex-ante an individual must be unable to work and be awarded the benefit, whilst ex-post a recipient must not subsequently work. However, the ex-ante conditionality may be imperfectly enforced due to Type I (false rejection) and Type II (false award) classification errors, whilst, in addition, the ex-post conditionality may be imperfectly enforced. If there are no classification errors - and thus no enforcement issues - it is always optimal to set C>0, whilst B=0 only if the benefit budget is sufficiently small. However, when classification errors occur, B=0 only if there are no Type I errors and the benefit budget is sufficiently small, while the conditions under which C>0 depend on the enforcement of the ex-post conditionality. We consider two discrete alternatives. Under No Enforcement C>0 only if the test administering C has some discriminatory power. In addition, social welfare is decreasing in the propensity to make each type error. However, under Full Enforcement C>0 for all levels of discriminatory power. Furthermore, whilst social welfare is decreasing in the propensity to make Type I errors, there are certain conditions under which it is increasing in the propensity to make Type II errors. This implies that there may be conditions under which it would be welfare enhancing to lower the chosen eligibility threshold - support the suggestion by Goodin (1985) to "err on the side of kindness".

Integer Programming on Domains Containing Inseparable Ordered Paris

Using the integer programming approach introduced by Sethuraman, Teo, and Vohra (2003), we extend the analysis of the preference domains containing an inseparable ordered pair, initiated by Kalai and Ritz (1978). We show that these domains admit not only Arrovian social welfare functions \without ties," but also Arrovian social welfare functions \with ties," since they satisfy the strictly decomposability condition introduced by Busetto, Codognato, and Tonin (2012). Moreover, we go further in the comparison between Kalai and Ritz (1978)'s inseparability and Arrow (1963)'s single-peak restrictions, showing that the former condition is more \respectable," in the sense of Muller and Satterthwaite (1985).

The Optimal Degree of Monetary-Discretion in a New Keynesian Model with Private Information

This paper considers the optimal degree of discretion in monetary policy when the central bank conducts policy based on its private information about the state of the economy and is unable to commit. Society seeks to maximize social welfare by imposing restrictions on the central bank's actions over time, and the central bank takes these restrictions and the New Keynesian Phillips curve as constraints. By solving a dynamic mechanism design problem we find that it is optimal to grant "constrained discretion" to the central bank by imposing both upper and lower bounds on permissible inflation, and that these bounds must be set in a history-dependent way. The optimal degree of discretion varies over time with the severity of the time-inconsistency problem, and, although no discretion is optimal when the time-inconsistency problem is very severe, our numerical experiment suggests that no-discretion is a transient phenomenon, and that some discretion is granted eventually.

Work Hours, Social Value of Leisure and Globalisation

We examine how openness interacts with the coordination of consumption-leisure decisions in determining the equilibrium working hours and wage rate when there are leisure externalities (e.g., due to social interactions). The latter are modelled by allowing a worker’s marginal utility of leisure to be increasing in the leisure time taken by other workers. Coordination takes the form of internalising the leisure externality and other relevant constraints (e.g., labour demand). The extent of openness is measured by the degree of capital mobility. We find that: coordination lowers equilibrium work hours and raises the wage rate; there is a U-shaped (inverse-U-shaped) relationship between work hours (wages) and the degree of coordination; coordination is welfare improving; and, the gap between the coordinated and uncoordinated work hours (and the corresponding wage rates) is affected by the extent and nature of openness.