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on Regulation |
| By: | Heidhues, Paul; Köster, Mats; Köszegi, Botond |
| Abstract: | We develop a theory of digital ecosystems built on the premise that a multi-market firm can steer users it has in one market toward its products in other markets. Due to this "cross-market leverage, " a leader in an "access-point'' market (where users begin their online journeys) derives a high value from offering services in connected markets (where users continue their journeys), and can thus make profitable takeovers. Indeed, because the firm has the outside option of acquiring, and steering users toward, its target's competitor, it can take over the target at a discount. In contrast, other firms have no or smaller incentives for takeovers, explaining why ecosystems grow out of market leaders at access points. Conversely, cross-market leverage also implies that once an ecosystem has grown, it has an increased value of controlling access points, so it may go to great lengths to dominate these markets. Our theory suggests that ecosystems have mixed implications for consumer welfare. Under plausible assumptions, a to-be ecosystem takes over market leaders, and this consolidation of good services across markets benefits consumers in the short run. But an ecosystem's takeovers and dominance of access points lower incentives for entry and innovation, and lower the efficiency of access-point markets with superior alternatives. Hence, the long-run welfare implications of ecosystems are often negative. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19524 |
| By: | Langehennig, Stefani (University of Denver); Roney, Dani |
| Abstract: | State legislatures have become the primary venue for artificial intelligence (AI) poli- cymaking in the United States, but existing measures of state AI activity count bills without distinguishing what those bills actually do. This research note introduces a new measure of the policy orientation of state AI legislation. Drawing on a corpus of approximately 1.45 million state bills, we identify 3, 124 high-confidence AI bills using a validated two-tier keyword system benchmarked against the National Conference of State Legislatures’ AI legislation database. We then classify each bill as regulatory, promotional, or procedural using a large language model with human validation. Regu- latory bills dominate the agenda (61.7%), but one in four AI bills is purely procedural: task forces, studies, and reports that create no substantive policy. The measure sep- arates legislative activity from governance commitment and provides a resource for research on technology federalism, policy diffusion, and symbolic politics. |
| Date: | 2026–07–18 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:394mj_v1 |
| By: | Reaser, Robert; Kay, Owen; Taylor, Reid |
| Abstract: | Artificial-intelligence-driven data centers are reversing two decades of flat U.S. electricity demand and have generated questions about how this growth will impact electricity prices. We quantify this effect using an hourly, unit-level least-cost dispatch model covering wholesale electricity markets in the continental United States. We find that existing data centers have already increased wholesale prices by 2 to 6% on average nationwide, with substantially larger effects in regions hosting major data center corridors. Extending the model through 2028, we show that if proposed construction proceeds under high-utilization scenarios, wholesale prices could rise dramatically (50%), while more moderate build-out yields smaller (20%) but still meaningful effects. Impacts vary due to utilization and build-out assumptions. Finally, we use the model to address several policy discussions including optimal data center siting decisions and renewable build-out uncertainty. |
| Keywords: | Resource/Energy Economics and Policy |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ags:aaea26:404751 |
| By: | Bombardini, Matilde; Trebbi, Francesco; Zhang, Miao Ben |
| Abstract: | This article discusses recent methodological innovations in the area of cost and benefit assessment of government regulation, in both a prospective and retrospective sense. Much of the extant progress is presented on the front of private costs of compliance. Private benefits, social costs, and social benefits remain much less systematically organized and more arduous to quantitatively assess, mostly due to the difficulty of standardizing partial and general equilibrium counterfactuals. We offer a discussion of potential future methodological improvements in cost-benefit analysis. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19478 |
| By: | Bobtcheff, Catherine; De Donder, Philippe; Salanié, François |
| Abstract: | We set up a static model of electricity provision in which delivery to consumers is only imperfectly reliable. Blackouts can be either rolling or systemic; in both cases a price cap has to be imposed on the wholesale market. We characterize optimal allocations and we show that for any given value of the price cap on the wholesale market, one can decentralize these allocations thanks to two types of regulatory instruments: a retail tax, and capacity subsidies. Some properties follow. If demand is affected by multiplicative shocks only, capacity subsidies are exactly financed by the revenues from the retail tax. If moreover the distribution of systemic blackouts is exogenous, a price cap is sufficient, provided it is set at the value of lost load. In all other cases, all instruments are needed, and capacity subsidies need to be differentiated, based on the correlation between available capacity and its social value. |
| Keywords: | Electricity; Renewables; Climate change |
| JEL: | D24 Q41 Q42 Q48 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19318 |
| By: | Qing Hu (Kansai University); Ryo Masuyama (Kushiro Public University of Economics and Kobe University); Tomomichi Mizuno (Kobe University) |
| Abstract: | This paper examines how bundling affects the welfare comparison between input price discrimination (IPD) and uniform input pricing (UIP) in a vertical market structure with Cournot competition. A multi-product firm bundles its products across a competitive market and a monopoly market, while an upstream supplier provides inputs only to the competitive market. When the inefficient firm is the bundling firm, IPD can increase total surplus relative to UIP if the monopoly market is sufficiently small. When the efficient firm is the bundling firm, however, IPD always reduces both consumer and total surpluses. |
| Keywords: | input price discriminationï¼› uniform input priceï¼› bundlingï¼› vertical relationship |
| JEL: | D43 L10 L13 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:koe:wpaper:2610 |
| By: | Marra, Marleen |
| Abstract: | Globally, scarce airport capacity is rationed by awarding time-specific slots free of charge to airlines, incentivising retention regardless of efficiency. I quantify the efficiency losses and welfare effects of market-based reallocation, defining slot values as equilibrium profits from a structural flight-level model. Reallocating 6% of weekly slot pairs in two airports increases consumer surplus by at least 3.2% through substitution of under-utilised slots for long-haul flights at suitable hours; fare effects are negligible. Larger operations yield cost and demand advantages and reduce outside hubs as substitutes. This reinforces concentration, but unlike in standard markets, the resulting network convenience benefits consumers at the margin. |
| Keywords: | Airline industry; Structural estimation; Airports; Auctions; Demand estimation |
| JEL: | L13 L93 D44 C57 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19442 |
| By: | Yuan, Zhe; Barwick, Panle |
| Abstract: | The Hub-and-Spoke network is a defining feature of the airline industry. This paper is among the first in the literature to introduce an empirical framework for analyzing network competition among airlines. Airlines make market entry decisions and choose flight frequencies in the first stage, followed by price competition to attract passengers in the second stage. A key feature of this model is the linkage between direct and indirect flights, which is described by a technological relationship (and estimated using data) that proxies the Hub-and-Spoke network. The paper estimates the marginal costs of serving passengers and operating flights using first-order conditions, bounds the entry costs using inequalities derived from the reveal-preference argument, and employs a state-of-the-art econometric method to conduct inference for entry cost parameters. Ignoring network externality underestimates the benefits of operating an additional flight by 13.2%, and airlines would schedule 21.53% fewer one-stop flights had they made flight operation decisions independently for each market. To evaluate the impact of a hypothetical merger, the paper proposes a novel equilibrium concept that makes it feasible to compute the industry equilibria. Counterfactual analyses indicate that a hypothetical merger between Alaska and Virgin America would increase consumer surplus as the merged airline would offer direct flights in 10% more markets while the overall post-merger price effect would likely be muted. |
| Keywords: | Network competition; Network externalities; Airline industry; Entry models; Moment inequalities |
| JEL: | C51 L13 L14 L93 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19423 |
| By: | Jeon, Doh-Shin; Rey, Patrick |
| Abstract: | We study the development of apps on competing platforms. We show that competition leads to commissions exceeding those maximizing consumer surplus (and, a fortiori, social welfare) whenever raising one commission reduces rivals' app bases. We relate this finding to economies of scope in app development and, to illustrate it, consider a setting in which some developers can port their apps at no cost: as their proportion increases, app development is progressively choked-off. Fostering platform competition or interoperability may therefore fail to produce the desired results. Within-platform app store competition, together with appropriate access conditions, may constitute a more promising avenue. |
| Keywords: | Platform competition |
| JEL: | D21 D43 L13 L22 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19456 |
| By: | Ryuichi Hashimoto (Kobe University); Tomomichi Mizuno (Kobe University) |
| Abstract: | This study analyzes the conditions under which failing firm acquisitions arise endogenously and examines their welfare effects. We consider a vertical market structure in which an upstream firm supplies a common input to multiple independent downstream markets. We show that acquiring a failing downstream firm preserves input demand in the market, and when the demand in that market is relatively elastic, it results in a lower input price. This input price effect gives rival firms an incentive to acquire a failing firm even in the absence of efficiency gains or direct synergies. We further demonstrate that failing firm acquisitions can increase both consumer surplus and total surplus by maintaining the supply of final goods and reducing input prices. These findings remain robust when the upstream market is oligopolistic and suggest that competition authorities should account for upstream market effects when evaluating the failing firm defense. |
| Keywords: | horizontal mergerï¼› failing firm defenseï¼› vertical relationshipï¼› input prices upstream market power |
| JEL: | D43 L10 L13 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:koe:wpaper:2612 |
| By: | Hinchberger, Andrew; Jacobsen, Mark; Knittel, Christopher; Sallee, James; van Benthem, Arthur |
| Abstract: | The marginal cost of electricity fluctuates hour-by-hour, yet retail customers typically face flat prices. Using data from all seven US wholesale markets and a new method to evaluate alternative rates set in advance that accounts for equilibrium price effects, we estimate efficiency gains from time-varying price schedules that better align price with cost. We have three main results. First, time-of-use rates and critical-peak pricing, the two most common time-varying rate plans, each correct about 10% of mispricing. Second, complex rate structures based on historical prices often backfire. Third, real-time pricing with price ceilings can capture most potential efficiency gains. |
| JEL: | L94 L97 Q41 Q48 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19475 |
| By: | Dongwei Zhao; Stefanos Delikaraogloub; Vladimir Dvorkin Alberto J. Lamadrid L.; Audun Botterud |
| Abstract: | Coordination of day-ahead and real-time electricity markets is imperative for cost-effective electricity supply and also to provide efficient incentives for the energy transition. Although stochastic market designs feature the least-cost coordination, they are incompatible with current deterministic markets. This paper proposes a new approach for compatible coordination in two-settlement markets based on benchmark bidding curves for variable renewable energy. These curves are optimized based on a bilevel optimization problem, anticipating per-scenario responses of deterministic market-clearing problems and ultimately minimizing the expected cost across day-ahead and real-time markets. Although the general bilevel model is challenging to solve, we theoretically prove that a single-segment bidding curve with a zero bidding price is sufficient to achieve system optimality if the marginal cost of variable renewable energy is zero, thus addressing the computational challenge. In practice, variable renewable energy producers can be allowed to bid multi-segment curves with non-zero prices. We test the bilevel framework for both single- and multiple-segment bidding curves under the assumption of fixed bidding prices. We leverage duality theory and McCormick envelopes to derive the linear programming approximation of the bilevel problem, which scales to practical systems such as a 1576-bus NYISO system. We benchmark the proposed coordination and find absolute dominance over the baseline solution, which assumes that renewables agnostically bid their expected forecasts. We also demonstrate that our proposed scheme provides a good approximation of the least-cost, yet unattainable in practice, stochastic market outcome. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.18732 |
| By: | Hamid Firooz; Sylvain Leduc; Zheng Liu |
| Abstract: | We study how AI affects market competition based on a general equilibrium framework with heterogeneous firms facing idiosyncratic productivity and variable markups. Firms choose the AI technology subject to fixed costs, where AI production requires data and energy inputs. Our model predicts a non-monotonic relation of AI diffusion with industry concentration. As AI usage rises from an initially low level, large incumbent users gain market share. When AI usage is sufficiently diffused, entry of new and smaller adopters erodes the market share of incumbents, reducing industry concentration. The non-monotonic relations are robust when firms can complement AI with their own data. Our calibrated model predicts that industry concentration is likely to fall if AI adoption increases relative to the current level. In comparison, the relation of AI with the average markup depends on whether increased AI usage is driven by demand or supply factors. Our model also predicts that a modest subsidy of about 3 percent for AI adopter revenues maximizes social welfare, reflecting a tradeoff between aggregate productivity and the average markup associated with AI usage. |
| Keywords: | artificial intelligence; data; heterogeneous firms; industry concentration; markup; productivity; welfare |
| JEL: | E24 L11 O33 |
| Date: | 2026–08–10 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:103630 |
| By: | Zhang, Yuan; Anderson, Andrew; McKenzie, Andrew; Park, Eunchun; Pates, Nicholas |
| Abstract: | ecent and pending rail mergers renew questions about the trade-off between operational efficiency and market power. We examined the 2023 Canadian Pacific (CP)–Kansas City Southern (KCS) merger and its effects on grain basis using elevator-level cash bids from 2016-2024, comparing CPKC elevators with other carriers in a difference-in-differences framework. Corn basis improved at elevators in grain surplus regions but declined at elevators in grain deficit regions. Soybean basis showed little persistent response. Wheat basis strengthened, with all sample elevators in production regions. Our results suggest this consolidation improved transportation efficiency with net welfare gains for grain producers and users. |
| Keywords: | Industrial Organization, Marketing |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ags:asea26:404833 |
| By: | Peter Boswijk (University of Amsterdam); Cees Diks (University of Amsterdam); Simon Trimborn (University of Amsterdam); Matteo Valle (University of Amsterdam) |
| Abstract: | The aim of this paper is to determine from market expectations how firms are affected by risks arising from environmental regulation. We use a text-based measure of environmental regulatory stringency derived from U.S. EPA legal documents and industry-level relevance scores to capture time-varying regulatory stringency exposure. We find that environmental regulatory stringency carries a positive and statistically significant return compensation, especially for firms with high cash holdings. For firms with low cash holdings, the effect is highly volatile, showing investors are uncertain about a firm's future when faced with stricter regulation. Firms’ environmental profiles further matter, as high-emission firms' returns are negatively affected when regulatory stringency increases. Because regulatory text is released infrequently, challenging real-time risk analysis, we utilise our studies insights to derive a high-frequency, market-expectation capturing Environmental Regulatory Risk Index (ERRI). We show that ERRI captures shifts in investors’ expectations of environmental regulatory stringency and how ERRI reacts during environmental policy and political developments. |
| Date: | 2026–07–15 |
| URL: | https://d.repec.org/n?u=RePEc:tin:wpaper:20260044 |
| By: | Lundgren, Magnus; Tallberg, Jonas |
| Abstract: | Artificial intelligence (AI) is rapidly transforming economies, societies, and polities, raising fundamental questions about how it should be regulated. Policymakers face choices over whether to prioritize innovation or safety, rely on public oversight or private self-regulation, and govern nationally or internationally. Yet little is known about how citizens evaluate these competing priorities. Here we report a conjoint survey experiment conducted in seven countries with diverse political and economic profiles. We find that citizens strongly support regulating AI and generally prioritize safety over innovation, public governance over private self-regulation, and international over national approaches. The preference for safety is strongest among those who perceive AI as risky, unpredictable, and personally consequential. These findings reveal a systematic misalignment between dominant regulatory approaches and citizen preferences. |
| Date: | 2026–07–16 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:b5re6_v1 |
| By: | Qu, Chunzi (Dept. of Business and Management Science, Norwegian School of Economics); Bjørndal, Mette (Dept. of Business and Management Science, Norwegian School of Economics) |
| Abstract: | District heating (DH) is important for Nordic decarbonization and power-heat coordination, but its development differs markedly across the region, with Norway showing much lower DH penetration than Denmark, Sweden, and Finland. The analysis combines institutional comparison, a review of empirical pricing and modeling studies, and two stylized numerical case studies, to identify transferable lessons and suitable analytical tools for Norwegian policy reform aimed at supporting DH expansion. The results show that the main weakness of Norway’s current electricity-indexed maximum-price rule lies not merely in the level of the cap, but in the instability of the benchmark and its weak alignment with the underlying cost structure and system value of DH. Greater electricity-price volatility can further amplify the mismatch between the electricity-linked cap and DH cost recovery, increasing downside revenue risk for DH companies. The representative-customer comparison shows that the current Norwegian regime exposes customers more directly to the market-linked price variation, while also making the tariff relatively more favorable for low-utilization customers, thereby increasing cost-recovery risks for DH companies. The Norwegian policy-counterfactual analysis shows that if Norway wishes to retain a maximum-price rule while revising its cap-setting method, using the cost of alternative heating technologies as a hard cap may be insufficient to ensure cost recovery under the Oslo calibration, whereas a Danish cost-recovery benchmark provides a more robust basis for long-run DH viability. Finally, the modeling review highlights the need for integrated, multi-model evaluation strategies to support evidence-based DH regulatory reform in Norway and other highly electrified energy systems. |
| Keywords: | District heating; Price regulation; Tariff design; Power-heat coordination; Energy system modeling; Nordic countries |
| JEL: | Q20 Q30 Q40 |
| Date: | 2026–08–18 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:nhhfms:2026_009 |
| By: | Gambato, Jacopo; Peitz, Martin |
| Abstract: | We analyze consumers' voluntary information disclosure in a platform setting. For given consumer participation, the platform and sellers tend to prefer limited disclosure of consumer valuations, in contrast to consumers. With endogenous consumer participation, seller and platform incentives may be misaligned, and sellers may be better off when consumers can disclose their valuations. A regulator acting in the best interest of consumers and/or sellers may want to intervene and force the platform to employ a disclosure technology that enables consumers to voluntarily disclose information from a richer message space. |
| Keywords: | E-commerce |
| JEL: | L12 L15 D21 D42 M37 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19359 |
| By: | Kim, Kyungmin; Kos, Nenad |
| Abstract: | The model considers a monopolist who optimally chooses the design and price of a product on the Hotelling line. We characterize the set of prices and consumer surplus that can arise in the model across all distributions of tastes. In a stark departure from the monopoly model without product design, the seller never offers a price below a certain threshold. Moreover, the maximal consumer surplus is strictly smaller than in the absence of product design. It is attained by a distribution that renders the seller indifferent over a set of design/price combinations. Notably, the distribution does not exhibit unit elasticity given any fixed design. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19630 |
| By: | Zoltán Hermann (HUN-REN Centre for Economic and Regional Studies; Corvinus University of Budapest); Júlia Varga (HUN-REN Centre for Economic and Regional Studies) |
| Abstract: | This paper examines the impact of occupational regulation, a labour market institution affecting many workers, on labour market fluidity in Europe. Using data from 10 European countries, we estimate the effect of occupational regulation on occupational mobility (transition to another occupation) and job loss (transition from employment to unemployment). By leveraging the variation in regulation across countries within an occupation, we identify the regulation effect using a two-way fixed effects approach. We also compare the effects of more and less stringent forms of regulation. The results show that occupational regulation substantially decreases occupational mobility, while its effect on job loss is ambiguous. More stringent regulation (occupational licensing) has a more substantial effect than weaker requirements. |
| Keywords: | occupational regulation, occupation licensing, occupation mobility, labour market fluidity, labour market flexibility |
| JEL: | C01 J08 J44 J62 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:has:discpr:2418 |
| By: | Ben-Moshe, Dan; Genesove, David |
| Abstract: | Regulation is a major driver of housing supply, yet often difficult to observe directly. This paper estimates frontier cost, the non-land cost of producing housing absent regulation, and regulatory tax, which quantifies regulation in money terms. Working within an urban environment of multi-floor, multi-family housing and using only apartment prices and building heights, we show that the frontier is identified from the support of supply and demand shocks without recourse to instrumental variables. In an application to new Israeli residential construction, and accounting for random housing quality, the estimated mean regulatory tax is 48% of housing prices, with significant variation across locations. Higher regulation is associated with proximity to city center, higher density, and higher prices. We construct a lower bound for the regulatory tax that allows quality to differ systematically over location and time, by assuming (weak) complementarity between quality and demand. The bound is most useful after prices have increased, so that at the end of our sample period, with prices at their highest, we bound the regulatory tax between 40% (using a 2km radius) and 53%. |
| Keywords: | Housing; Regulation; Stochastic frontier analysis; Real estate |
| JEL: | R52 C01 D24 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19500 |
| By: | Lagrotta, Luiz Carlos Nacif |
| Abstract: | Brazilian courts increasingly invoke administrative deference when reviewing technical, scientific, regulatory, distributive, and organizational decisions. Some judgments expressly associate this form of judicial restraint with the so-called Chevron doctrine, even though Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. addressed a narrower question: whether courts should accept a permissible agency interpretation of an ambiguous statute. The United States Supreme Court’s decision in Loper Bright Enterprises v. Raimondo, which overruled Chevron, makes the conceptual ambiguity of the Brazilian approach particularly visible. This Article argues that Brazilian law has not imported a single doctrine of administrative deference. Instead, courts have placed several distinct forms of judicial restraint under the same label: interpretive, epistemic, regulatory, distributive, temporal-organizational, and institutional-procedural deference. These categories do not share the same legal foundation and should not be subject to the same standard of review. Deference cannot create administrative discretion, enlarge statutory authority, or convert technical complexity into immunity from judicial scrutiny. It operates only after the legal system has conferred a genuine margin of choice upon the administration. The Article proposes a density-sensitive model of deference. The intensity of judicial review should vary according to the statutory delegation, the nature of the disputed issue, the quality of the administrative procedure, the evidentiary basis of the decision, the completeness of its stated reasons, the severity of the rights restriction, and the comparative capacities of the institutions involved. Legal certainty, reasonableness, and proportionality are not exceptions to deference but conditions for its legitimacy. Law and Economics contributes by identifying information asymmetries, externalities, error costs, systemic effects, and institutional incentives, but efficiency cannot displace legality, equality, or fundamental rights. |
| Date: | 2026–08–10 |
| URL: | https://d.repec.org/n?u=RePEc:osf:lawarc:dq3rk_v1 |
| By: | Igor Cialenco; Michael Ludkovski; Gael Dimitri Tekam Fongouo |
| Abstract: | We introduce a pro-rata rationing mechanism for resolving supply-demand imbalances in groundwater markets, extending the price-formation model of Cialenco and Ludkovski (2025). We show that under the pro-rata distribution, every price is a Nash equilibrium, thereby pro-rata approach provides a rationing device whenever supply and demand fail to match. By the very nature of the pro-rata mechanism, the resolution of supply-demand imbalances is unique, and the proportional rationing approach is fair. First, we consider markets with exogenous restrictions on the amounts each agent may buy and/or sell, deriving closed-form first-best consumption and characterizing how one-sided caps monotonically shift the Pareto price, while two-sided caps have an ambiguous effect. These results give the market-maker (or regulator) a tool for studying the impact of trading restrictions on price formation. Second, we study a leader-follower setting in which a regulator (the leader) sets the trading price by optimizing first its own objective, such as balancing social welfare against a target traded volume or a fairness objective such as Gini-type disparity measure across farmers' profitability, while farmers (the `followers') respond via pro-rata trading. We further compare the proposed pro-rata approach to a family of asymmetric rationing schemes (seniority-based, excess-based, uniform, and mixed pro-rata rules) that trade off proportional fairness against protections for small or senior water-rights holders. Throughout, we illustrate the theoretical results with a numerical case study calibrated to a stylized four-farmer groundwater market. |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2608.00917 |
| By: | Quy Lam (University of California, Merced); Ketki Sheth (Department of Economics, University of Tennessee) |
| Abstract: | Deterrence theory assumes that harsher penalties reduce misconduct by raising its cost. Yet enforcement often depends on individuals who witness or respond to wrongdoing, and their behavior may also be shaped by the severity of punishment. Using a high-powered online experiment framed in a workplace setting, we test whether increasing penalties reduces willingness to report. We find that harsher penalties suppress reporting: employees are 1 percentage point less likely to report for every 10 percentage point increase in the penalty. This effect is mediated by perceived fairness: reporting declines only when penalties are seen as excessive. Despite the decrease in reporting, higher penalties still deter misconduct overall, as their direct deterrent effect outweighs the indirect increase in law-breaking caused by lower reporting rates. We also find that individuals support harsher penalties before a violation occurs, when deterrence is relevant, but prefer more lenient consequences after the offense has happened. This helps explain how policies can arise and persist in equilibrium, even when people are unwilling to enforce them in practice. These findings advance understanding of how social norms and perceptions of fairness shape the decisions of those who observe misconduct, and highlight the need to design sanctions that align with public willingness to act on violations. More severe penalties can discourage reporting, weaken enforcement, and ultimately undermine the effectiveness of deterrence mechanisms. |
| Keywords: | Reporting; Whistle-blowing; Deterrence; Penalty Severity; Perceived Fairness; Misconduct; Enforcement; Online Experiment |
| JEL: | C91 D63 D91 K42 M54 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:ten:wpaper:2026-02 |