New Economics Papers
on Collective Decision-Making
Issue of 2006‒06‒17
ten papers chosen by

  1. Unique Equilibrium in a Model of Rule of Law By Randolph Luca Bruno
  2. Rational Discounting for Regulatory Analysis By W. Kip Viscusi
  3. The Economic Effects of Direct Democracy - A Cross-Country Assessment By Stefan Voigt; Lorenz Blume
  4. Does Democracy Foster Trust? By Helmut Rainer; Thomas Siedler
  5. Explaining Corporativism and Corruption By Luis G. González-Morales
  6. The Topology of Conflict and Co-operation By Sam Perlo-Freeman
  7. Contests with Investment By Johannes Münster
  8. Multi-battle contests By Kai A. Konrad; Dan Kovenock
  9. Equilibrium and Efficiency in the Tug-of-War By Kai A. Konrad; Dan Kovenock
  10. Collective penalities and inducement of self-reporting. By Katrin Millock; David Zilberman

  1. By: Randolph Luca Bruno
    Abstract: This paper presents a model of Rule of Law in which a continuum of agents plays against the State for the appropriation of the economic assets of a stylised economy. The model shows how each agent can either challenge the State or acquiesce, with the latter having the choice of either protecting property rights or abandoning the economy to anarchy. Players' payoffs are affected by strategic complementarities, not only between State and agents but also among agents themselves. As a consequence of this, a Coordination Failure is generated. The solution of the game is given by two Pareto-ranked Nash equilibria emerging from the context. Introducing idiosyncratic information and sequential play generates a unique equilibrium, according to the global game approach. On the one hand, this model predicts that high uncertainty and sunk costs in law enforcement have a negative effect, pushing the economy towards a Pareto-dominated equilibrium. On the other hand, the high value given to the economy's assets (embedded social norms) has a positive influence, leading to a Pareto-dominant equilibrium.
    Keywords: Rule of Law, Coordination Failure, Global Games
    Date: 2006–06–12
  2. By: W. Kip Viscusi
    Abstract: This article examines the economic basis for what is termed “rational discounting,” which entails full recognition of policy effects over time and exponential discounting at a riskless rate of return. Policies often cannot be ranked unambiguously in terms of their present or future orientation. Both failure to discount and preferential intergenerational discounting generate inconsistencies and economic anomalies. Office of Management and Budget discounting guidelines now stipulate more reasonable discount rates than earlier guidelines, but err in permitting open-ended preferential rates for intergenerational effects. The article presents a methodology for monetizing the value of statistical life for people of different ages and at different points in time. Review of regulatory analyses indicates increased consistency of discounting practices. However, examination of two policies with intergenerational effects, stratospheric ozone regulation and nuclear waste storage at Yucca Mountain, reveal failures to adopt a rational discounting approach. The influence of behavioral anomalies such as hyperbolic discounting may make full recognition of intertemporal effects in benefit-cost analysis more consequential than the use of preferential discount rates.
    JEL: Q50 D90 H10 L50
    Date: 2006–06
  3. By: Stefan Voigt (Department of Economics, University of Kassel); Lorenz Blume (Department of Economics, University of Kassel)
    Abstract: This is the first study that assesses the economic effects of direct democratic institutions on a cross country basis. Most of the results of the former intra-country studies could be confirmed. On the basis of some 30 countries, a higher degree of direct democracy leads to lower total government expenditure (albeit insignificantly) but also to higher central government revenue. Central government budget deficits are lower in countries using direct democratic institutions. As former intra-country studies, we also find that government effectiveness is higher under strong direct-democratic institutions and corruption lower. Both labor and total factor productivity are significantly higher in countries with direct democratic institutions. The low number of observations as well as the very general nature of the variable used to proxy for direct democracy clearly call for a more fine-grained analysis of the issues.
    JEL: H1 H3 H5 H8
    Date: 2006–05
  4. By: Helmut Rainer (University of St. Andrews); Thomas Siedler (University of Essex, DIW Berlin and IZA Bonn)
    Abstract: The level of trust inherent in a society is important for a wide range of microeconomic and macroeconomic outcomes. This paper investigates how individuals’ attitudes toward social and institutional trust are shaped by the political regime in which they live. The German reunification is a unique natural experiment that allows us to conduct such a study. Using data from the German General Social Survey (ALLBUS) and from the German Socio- Economic Panel Study (SOEP), we obtain two sets of results. On one side, we find that, shortly after reunification, East Germans displayed a significantly less trusting attitude than West Germans. This suggests a negative effect of communism in East Germany versus democracy in West Germany on social and institutional trust. However, the experience of democracy by East Germans since reunification did not serve to increase levels of social trust significantly. In fact, we cannot reject the hypothesis that East Germans, after more than a decade of democracy, have the same levels of social distrust as shortly after the collapse of communism. In trying to understand the underlying causes, we show that the persistence of social distrust in the East can be explained by negative economic outcomes that many East Germans experienced in the post-reunification period. Our main conclusion is that democracy can foster trust in post-communist societies only when citizens’ economic outcomes are right.
    Keywords: social trust, institutional trust, political regimes
    JEL: P51 Z13
    Date: 2006–05
  5. By: Luis G. González-Morales
    Abstract: A simple contract-theoretic model is used to show that, in a democratic system, positive political rents and efficient provision of public goods can characterize an equilibrium in the political contest. Moreover, this equilibrium is stable under the assumption that a fraction of the political rents can be shared with a subgroup of voters through corporativist arrangements. These features correspond fairly well to the presidential and corporativist political system of post-revolutionary Mexico.
  6. By: Sam Perlo-Freeman (School of Economics, University of the West of England)
    Abstract: The class of simultaneous 2x2 pure-strategy ordinal games (which include well-known games such as Prisoner’s Dilemma, Chicken and Stag Hunt) have received considerable attention, including complete classification schemes by amongst others Rapoport & Guyer (1978) and Robinson & Goforth (2005). This paper focuses on a particularly pertinent subset of these games, described as the ‘Co-operate-Defect’ (C-D) games, which are characterised by each player having a dominant preference for a particular strategy by the other player. These games are therefore relevant in a number of contexts, including arms race games and collective action problems. The C-D games may be efficiently classified by assigning each player one of six distinct types, a classification that cannot be naturally extended to the full class of 2x2 games. The six types and the resulting game forms are analysed, and the subclass of CD games are identified within a topological structure for the 2x2 games devised by Robinson & Goforth (2005).
    Keywords: Conflict; co-operation; game theory; co-operate-defect games
    JEL: C25 D12
    Date: 2006–06
  7. By: Johannes Münster (Free University Berlin and Social Science Research Center Berlin (WZB), Reichpietschufer 50, 10785 Berlin, Germany, Telephone: +49 30 25491 410, Fax: +49 30 25491 400, E-mail:
    Abstract: Perfectly discriminating contests (or all pay auction) are widely used as a model of situations where individuals devote resources to win some prize. In reality such contests are often preceded by investments of the contestants into their ability to fight in the contest. This paper studies a two stage game where in the first stage, players can invest to lower their bid cost in a perfectly discriminating contest, which is played in the second stage. Different assumptions on the timing of investment are studied. With simultaneous investments, equilibria in which players play a pure strategy in the investment stage are asymmetric, exhibit incomplete rent dissipation, and expected effort is reduced relative to the game without investment. There also are symmetric mixed strategy equilibria with complete rent dissipation. With sequential investment, the first mover always invests enough to deter the second mover from investing, and enjoys a first mover advantage. I also look at unobservable investments and endogenous timing of investments.
    Keywords: contests, all pay auctions, investment
    JEL: D44 D72
    Date: 2006–05
  8. By: Kai A. Konrad (Kai A. Konrad, WZB, Reichpietschufer 50, D-10785 Berlin, Germany, e-mail:; Dan Kovenock (Dan Kovenock, Krannert School of Management, Purdue University, West Lafayette, IN 47907, USA, fax: +1-765-494-9658, e-mail:
    Abstract: We study equilibrium in a multistage race in which players compete in a sequence of simultaneous move component contests. Players may win a prize for winning each component contest, as well as a prize for winning the overall race. Each component contest is an all-pay auction with complete information. We characterize the unique equilibrium analytically and demonstrate that it exhibits endogenous uncertainty. Even a large lead by one player does not fully discourage the other player, and each feasible state is reached with positive probability in equilibrium (pervasiveness). Total effort may exceed the value of the prize by a factor that is proportional to the maximum number of stages. Important applications are to war, sports, and R&D contests and the results have empirical counterparts there.
    Keywords: all-pay auction, contest, race, conflict, multi-stage, R&D, endogenous uncertainty, preemption, discouragement
    JEL: D72 D74
    Date: 2006–03
  9. By: Kai A. Konrad (Kai A. Konrad, WZB, Reichpietschufer 50, D-10785 Berlin, Germany, e-mail:; Dan Kovenock (Dan Kovenock, Krannert School of Management, Purdue University, West Lafayette, IN 47907, USA, fax: +1-765-494-9658, e-mail:
    Abstract: We characterize the unique Markov perfect equilibrium of a tug-of-war without exogenous noise, in which players have the opportunity to engage in a sequence of battles in an attempt to win the war. Each battle is an all-pay auction in which the player expending the greater resources wins. In equilibrium, contest effort concentrates on at most two adjacent states of the game, the "tipping states", which are determined by the contestants’ relative strengths, their distances to final victory, and the discount factor. In these states battle outcomes are stochastic due to endogenous randomization. Both relative strength and closeness to victory increase the probability of winning the battle at hand. Patience reduces the role of distance in determining outcomes. Applications range from politics, economics and sports, to biology, where the equilibrium behavior finds empirical support: many species have developed mechanisms such as hierarchies or other organizational structures by which the allocation of prizes are governed by possibly repeated conflict. Our results contribute to an explanation why. Compared to a single stage conflict, such structures can reduce the overall resources that are dissipated among the group of players.
    Keywords: winner-take-all, all-pay auction, tipping, multi-stage contest, dynamic game, preemption, conflict, dominance
    JEL: D72 D74
    Date: 2006–05
  10. By: Katrin Millock (Centre d'Economie de la Sorbonne); David Zilberman (Department of Agricultural and Resource Economics, University of California, Berkeley)
    Abstract: Random accidents can be contained by collective penalties. These penalties are not likely to be enforced but rather induce self-reporting that enhances welfare due to early containment. Self-reporting under collective penalties increases overall welfare, but may increase expected environmental cost. Even when regulation is constrained by an upper limit on the acceptable collective penalty, the threat of collective penalties can induce an incentive-compatible mutual insurance scheme under which a side-payment is made to the agent that self-reports an accident. This self-reporting mechanism is welfare-improving, but first-best outcomes can only be obtained when the collective penalty is unconstrained, or when an honor system applies. In cases when there is a new externality that requires fast response (avian flu),collective penalties can compliment or substitute for monitoring.
    Keywords: Ambient tax, collective penalties, enforcement, self-reporting.
    JEL: H23 K42 Q28
    Date: 2006–05

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