nep-hpe New Economics Papers
on History and Philosophy of Economics
Issue of 2017‒08‒13
four papers chosen by
Erik Thomson
University of Manitoba

  1. Entry in Beauty-Contest Games By Sanchez Villalba, Miguel; Martinez Gorricho, Silvia
  2. Human Needs and the Measurement of Welfare By Fellner, Wolfgang; Goehmann, Benedikt
  3. On moral hazard and persistent private information By Vasama, Suvi
  4. Sympathy for the Diligent and the Demand for Workfare By Andres Drenik; Ricardo Perez-Truglia

  1. By: Sanchez Villalba, Miguel; Martinez Gorricho, Silvia
    Abstract: We study how voluntary participation in Beauty Contest Games (BCGs) affects the actions and payoffs of type-heterogenous players. In a BCG, players have two goals --one personal, the other social-- and so BCGs appropriately model relevant economic situations like participating in a social network, partaking in the coding of an open-source software, or the choice of research topics by academics, among others. Key in these and other cases is the concept of "social norm" that will emerge in the associated "community", and so people's entry choices will depend crucially on their expectations regarding not only how many but who (which types) will join in. We find that in equilibrium there is entry as long as the BCG is "attractive" and that there might be multiple equilibria, each indexed by its associated social norm. We also find that, when finite, there is an odd number of equilibria and that --if ordered based on the value of the associated social norm-- odd/even equilibria are stable/unstable. Further, for low attractiveness, equilibrium social norms are univocally associated with the extrema of the distribution of types in the economy, so that stable/unstable equilibria are linked to maxima/interior minima. We find that "universal" communities in which everybody joins the BCG (as implicitly assumed by the literature) only occur when the BCG is sufficiently attractive and the economy's average type is not extreme. In non-universal communities, social norms are affected by the attractiveness of the BCG and the functional form of the distribution of types in the economy (especifically, its skewness around extrema). Attractiveness affects both the size and the composition of the community. Thus, an increase in attractiveness could lead both to the entry of new members and to the exit of some others.
    Keywords: Beauty contest game, endogenous entry, social norms
    JEL: C7 L17 Z1
    Date: 2017
  2. By: Fellner, Wolfgang; Goehmann, Benedikt
    Abstract: Adam Smith considered consumption the sole end and purpose of all production. Concerning the measurement of welfare, this requires a sound understanding of the connection between consumption and welfare. The consumerist conceptualization of this connection implies that the amount of consumption equals welfare and the level of production can be an indicator for welfare. The limits and problems of production measures are widely accepted. Yet, indicators like GDP remain the focus of mainstream economic theory and policy. We trace the origin of this lock-in back to the economic model of behaviour and the concept of agency in mainstream economics. The suggested alternative stems from literature about human needs in heterodox economics and psychology. This literature incorporates the relevance of social aspects and cultural change for welfare. It turns out that consumerism can be a threat to well-being and welfare rather than a requirement for it.
    Keywords: economic psychology, capabilities approach; self-determination theory; consumerism; structure vs. agency
    Date: 2017–08
  3. By: Vasama, Suvi
    Abstract: I examine a simple model of dynamic moral hazard in which the agent has persistent private information. I show that despite the complexity of the framework, the problem has a simple solution that can be found using standard methods. The incentives at the optimal contract can be captured using two state variables: the agent's continuation value and his information rent. The optimal contract uses a combination of nonnegative payments and inefficient liquidation threat to provide the agent incentives. In the beginning, the inefficient liquidation threat is severe, but the expected length of the relationship long, such that the agent's information rent is high. Over time, the information rent decays and continuation value increases as function of the past outcomes. Depending on the past performance, these two processes meet and liquidation at a fixed threshold becomes optimal. In particular, early weak performance leads to a permanent distortion that cannot be undone by performing well in the future.
    JEL: D82 D86
    Date: 2017–08–04
  4. By: Andres Drenik; Ricardo Perez-Truglia
    Abstract: We study the role of fairness concerns in the demand for redistribution through workfare. In the first part of the paper, we present new evidence from a survey experiment. We show that individuals are more generous towards poor people whom they perceive to be diligent workers relative to poor people whom they perceive to be non-diligent, a social preference that we label “sympathy for the diligent.” This preference is much stronger than preferences regarding other characteristics of the poor, such as race, nationality, and disability. More important, we show that subjects with higher sympathy for the diligent have a stronger preference for workfare programs. In the second part of the paper, we incorporate our empirical findings into a model of income redistribution. We consider the case of a benevolent government with fairness concerns that prioritizes the well-being of individuals who exert the most effort. We characterize the optimal conditions under which the government introduces work requirements. Even if wasteful, work requirements can be optimal, because they allow for a better distinction between individuals who exert great effort and individuals who do not. However, if the government lacks commitment power, the availability of screening through work requirements leads to a lower equilibrium effort and, possibly, a Pareto-dominated allocation.
    JEL: D64 H2 H5
    Date: 2017–08

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