Paretian Quasi-Orders: Two Agents.

We characterize Paretian quasi-orders in the two-agent continuous case.

Distortionary Taxation and Labor Supply: Evidence from Canada.

This paper examines empirically the effects of distortionary taxation on labor supply using a general equilibrium framework. The long-term relations predicted by the model are derived and tested using Canadian data between 1966 and 1993. While the cointegrating predictions of the model without taxation are rejected, the ones of the model with labor taxation are not. Persistent labor tax rate increases appear to play an important role in the observed downward trend in hours worked.

The Inflation Bias When the Central Bank Targets, the Natural Rate of Unemployment

This paper studies the proposition that an inflation bias can arise in a setup where a central banker with asymmetric preferences targets the natural unemployment rate. Preferences are asymmetric in the sense that positive unemployment deviations from the natural rate are weighted more (or less) severely than negative deviations in the central banker's loss function. The bias is proportional to the conditional variance of unemployment. The time-series predictions of the model are evaluated using data from G7 countries. Econometric estimates support the prediction that the conditional variance of unemployment and the rate of inflation are positively related.

Environmental Risks : Should Banks Be Liable?

This paper studies the impact of banks' liability for environmental damages caused by their borrowers. Laws or court decisions that declare banks liable for environmental damages have two objectives : (1) finding someone to pay for the damages and (2) exerting a pressure on a firm's stakeholders to incite them to invest in environmental risk prevention. We study the effect that such legal decisions can have on financing relationships and especially on the incentives to reduce environmental risk in an environment where banks cannot commit to refinance the firm in all circumstances. Following an environmental accident, liable banks more readily agree to refinance the firm. We then show that bank liability effectively makes refinancing more attractive to banks, therefore improving the firm's risk-sharing possibilities. Consequently, the firm's incentives to invest in environmental risk reduction are weakened compared to the (bank) no-liability case. We also show that, when banks are liable, the firm invests at the full-commitment optimal level of risk reduction investment. If there are some externalities such that some damages cannot be accounted for, the socially efficient level of investment is greater than the privately optimal one. in that case, making banks non-liable can be socially desirable.

Maximal-Element Rationalizability

We examine the maximal-element rationalizability of choice functions with arbitrary do-mains. While rationality formulated in terms of the choice of greatest elements according to a rationalizing relation has been analyzed relatively thoroughly in the earlier litera-ture, this is not the case for maximal-element rationalizability, except when it coincides with greatest-element rationalizability because of properties imposed on the rationalizing relation. We develop necessary and sufficient conditions for maximal-element rationaliz-ability by itself, and for maximal-element rationalizability in conjunction with additional properties of a rationalizing relation such as re exivity, completeness, P-acyclicity, quasi-transitivity, consistency and transitivity.

Responsibility and Cross-Subsidization in Cost Sharing

We propose two axiomatic theories of cost sharing with the common premise that agents demand comparable -though perhaps different- commodities and are responsible for their own demand. Under partial responsibility the agents are not responsible for the asymmetries of the cost function: two agents consuming the same amount of output always pay the same price; this holds true under full responsibility only if the cost function is symmetric in all individual demands. If the cost function is additively separable, each agent pays her stand alone cost under full responsibility; this holds true under partial responsibility only if, in addition, the cost function is symmetric. By generalizing Moulin and Shenker’s (1999) Distributivity axiom to cost-sharing methods for heterogeneous goods, we identify in each of our two theories a different serial method. The subsidy-free serial method (Moulin, 1995) is essentially the only distributive method meeting Ranking and Dummy. The cross-subsidizing serial method (Sprumont, 1998) is the only distributive method satisfying Separability and Strong Ranking. Finally, we propose an alternative characterization of the latter method based on a strengthening of Distributivity.

Population Ethics and the Value of Life

Public policies often involve choices of alternatives in which the size and the composition of the population may vary. Examples are the allocation of resources to prenatal care and the design of aid packages to developing countries. In order to assess the corresponding feasible choices on normative grounds, criteria for social evaluation that are capable of performing variable-population comparisons are required. We review several important axioms for welfarist population principles and discuss the link between individual well-being and the desirability of adding a new person to a given society.

Altruism, Intergenerational Transfers of Time and Bequests

This paper uses a standard two-period overlapping generation model to examine the behavior of an economy where both intergenerational transfers of time and bequests are available. While bequests have been examined extensively, time transfers have received little or no attention in the literature. Assuming a log-linear utility function and a Cobb-Douglas production function, we derive an explicit solution for the dynamics and show that altruistic intergenerational time transfers can take place in presence of a binding non-negativity constraint on bequests. We also show that with either type of transfers capital is an increasing function of the intergenerational degree of altruism. However, while with time transfers the labor supply of the young increases with the degree of altruism, with bequests it may decrease

The Backing of Government Debt and the Price Level

This paper studies the interdependence between fiscal and monetary policies, and their joint role in the determination of the price level. The government is characterized by a long-run fiscal policy rule whereby a given fraction of the outstanding debt, say d, is backed by the present discounted value of current and future primary surpluses. The remaining debt is backed by seigniorage revenue. The parameter d characterizes the interdependence between fiscal and monetary authorities. It is shown that in a standard monetary economy, this policy rule implies that the price level depends not only on the money stock, but also on the proportion of debt that is backed with money. Empirical estimates of d are obtained for OECD countries using data on nominal consumption, monetary base, and debt. Results indicate that debt plays only a minor role in the determination of the price level in these economies. Estimates of d correlate well with institutional measures of central bank independence.

Deprivation and Social Exclusion

Social exclusion manifests itself in the lack of an individual’s access to functionings as compared to other members of society. Thus, the concept is closely related to deprivation. We view deprivation as having two basic determinants: the lack of identification with other members of society and the aggregate alienation experienced by an agent with respect to those with fewer functioning failures. We use an axiomatic approach to characterize classes of deprivation and exclusion measures and apply some of them to EU data for the period from 1994 to 2000.

Environmental Risk: Should Banks Be Liable?

This paper studies the impact of banks' liability for environmental damages caused by their borrowers. Laws or court decisions that declare banks liable for environmental damages have two objectives : (1) finding someone to pay for the damages and (2) exerting a pressure on a firm's stakeholders to incite them to invest in environmental risk prevention. We study the effect that such legal decisions can have on financing relationships and especially on the incentives to reduce environmental risk in an environment where banks cannot commit to refinance the firm in all circumstances. Following an environmental accident, liable banks more readily agree to refinance the firm. We then show that bank liability effectively makes refinancing more attractive to banks, therefore improving the firm's risk-sharing possibilities. Consequently, the firm's incentives to invest in environmental risk reduction are weakened compared to the (bank) no-liability case. We also show that, when banks are liable, the firm invests at the full-commitment optimal level of risk reduction investment. If there are some externalities such that some damages cannot be accounted for, the socially efficient level of investment is greater than the privately optimal one. in that case, making banks non-liable can be socially desirable.

A Theory of Random Consumer Demand

This paper presents a new theory of random consumer demand. The primitive is a collection of probability distributions, rather than a binary preference. Various assumptions constrain these distributions, including analogues of common assumptions about preferences such as transitivity, monotonicity and convexity. Two results establish a complete representation of theoretically consistent random demand. The purpose of this theory of random consumer demand is application to empirical consumer demand problems. To this end, the theory has several desirable properties. It is intrinsically stochastic, so the econometrician can apply it directly without adding extrinsic randomness in the form of residuals. Random demand is parsimoniously represented by a single function on the consumption set. Finally, we have a practical method for statistical inference based on the theory, described in McCausland (2004), a companion paper.

Interpersonal Comparisons of Well-Being

This paper, which is to be published as a chapter in the Oxford Handbook of Political Economy, provides an introduction to social-choice theory with interpersonal comparisons of well-being. We argue that the most promising route of escape from the negative conclusion of Arrow’s theorem is to use a richer informational environment than ordinal measurability and the absence of interpersonal comparability of well-being. We discuss welfarist social evaluation (which requires that the levels of individual well-being in two alternatives are the only determinants of their social ranking) and present characterizations of some important social-evaluation orderings.

Aumann-Shapley Pricing : A Reconsideration of the Discrete Case

We reconsider the following cost-sharing problem: agent i = 1,...,n demands a quantity xi of good i; the corresponding total cost C(x1,...,xn) must be shared among the n agents. The Aumann-Shapley prices (p1,...,pn) are given by the Shapley value of the game where each unit of each good is regarded as a distinct player. The Aumann-Shapley cost-sharing method assigns the cost share pixi to agent i. When goods come in indivisible units, we show that this method is characterized by the two standard axioms of Additivity and Dummy, and the property of No Merging or Splitting: agents never find it profitable to split or merge their demands.

The Possibility of Ordering Infinite Utility Streams

This paper revisits Diamond’s classical impossibility result regarding the ordering of infinite utility streams. We show that if no representability condition is imposed, there do exist strongly Paretian and finitely anonymous orderings of intertemporal utility streams with attractive additional properties. We extend a possibility theorem due to Svensson to a characterization theorem and we provide characterizations of all strongly Paretian and finitely anonymous rankings satisfying the strict transfer principle. In addition, infinite horizon extensions of leximin and of utilitarianism are characterized by adding an equity preference axiom and finite translation-scale measurability, respectively, to strong Pareto and finite anonymity.