HIER 2010 Abstracts

2­­182. N. Gregory Mankiw
Spreading the Wealth Around: Reflections Inspired by Joe the Plumber
Abstract | ­Pape­r
This essay discusses the policy debate concerning optimal taxation and the distribution of income.  It begins with a brief overview of trends in income inequality, the leading hypothesis to explain these trends, and the distribution of the tax burden.  It then considers the normative question of how the tax system should be designed.  The conventional utilitarian framework is found to be wanting, as it leads to prescriptions that conflict with many individuals' moral intuitions.  The essay then explores an alternative normative framework, dubbed the Just Deserts Theory, according to which an individual's compensation should reflect his or her social contribution.

2­­183. Alberto Alesina and Andrea Stella
The Politics of Monetary Policy
Abstract | ­Pape­r
In this paper we critically review the literature on the political economy of monetary policy, with an eye on the questions raised by the recent financial crisis.  We begin with a discussion of rules versus discretion.  We then examine the issue of Central Banks independence both in normal times, and in times of crisis.  Then we review the literature of electoral manipulation of policies.  Finally we address international institutional issues concerning the feasibility, optimality and political sustainability of currency unions in which more than one country share the same currency.  A brief review of the Euro experience concludes the paper.

2184. Tomasz Strzalecki
Depth of Reasoning and Higher order Beliefs
Abstract | ­Pape­r
As demonstrated by the email game of Rubinstein (1989), the predictions of the standard equilibrium models of game theory are sensitive to assumptions about the fine details of the higher order beliefs. This paper shows that models of bounded depth of reasoning based on level-k thinking or cognitive hierarchy make predictions that are independent of the tail assumptions on the higher order beliefs. In addition to this finding, the tools developed in this paper offer a new direction for the analysis of models of bounded depth of reasoning and their applications to various economic settings.

2185. Alberto Alesina & Francesco Passarelli
Regulation versus Taxation
Abstract | ­Pape­r
We study which policy tool and at what level would be chosen by majority voting to reduce negative externalities, such as pollution. We consider three instruments: a rule, that sets an upper limit to the polluting activity, a quota that obliges to proportional reduction, and a tax on the activity. For all instruments the majority chooses too restrictive levels when pollution is mainly due to a small fraction of the population, and when costs for reducing activities or paying taxes are convex, and vice versa. Even though a tax is in general superior to the other two instruments, the majority may strategically choose a rule in order to charge the minority a larger share of the cost for the externality reduction.

2186. Tomasz Strzalecki
Probabilistic Sophistication and Variational Preferences
Abstract | Paper
This paper shows that in the class of variational preferences the notion of probabilistic sophistication is equivalent to expected utility as long as there exists at least one event such that the independence axiom holds for bets on that event. This extends a result of Marinacci (2002) and provides a novel interpretation of his result.

2187. Tomasz Strzalecki
Temporal Resolution of Uncertainty and Recursive Models of Ambiguity Aversion
Abstract | Paper
Models of ambiguity aversion have recently found many applications in dynamic settings. This paper shows that there is a strong interdependence be- tween ambiguity aversion and the preferences for the timing of the resolution of uncertainty, as defined by the classic work of Kreps and Porteus (1978): the modeling choices that are being made in the domain of ambiguity aversion in- fluence the set of modeling choices available in the domain of timing attitudes. The main result of the paper is that the only model of ambiguity aversion that exhibits indifference to timing is the maxmin expected utility of Gilboa and Schmeidler (1989). This paper also examines the structure of the timing nonindifference implied by the other commonly used models of ambiguity aver- sion. The interdependence of ambiguity and timing that this paper identifies is of interest both conceptually and practically—especially for economists using these models in applications.

2188. Christopher T. Conlon and Julie Holland Mortimer
Effects of Product Availability: Experimental Evidence
Abstract | Paper
Product availability impacts many industries such as transportation, events, and retail, yet little empirical evidence documents the importance of stocking decisions for firm profits, vertical relationships, or consumers. We conduct several experiments, exogenously removing top-selling products from a set of vending machines and analyzing substitution patterns and profit impacts of the changed product availability using non- parametric analyses and structural demand estimation. We find substantial switching to alternate products, and evidence of misaligned incentives between upstream and downstream firms in the choice of which products to carry. We discuss the trade-offs of both empirical approaches for analyzing product availability effects generally.

2189. Julie Holland Mortimer, Chris Nosko, and Alan Sorensen
Supply Responses to Digital Distribution: Recorded Music and Live Performances
Abstract | Paper
Changes in technologies for reproducing and redistributing digital goods (e.g., mu- sic, movies, software, books) have dramatically affected profitability of these goods, and raised concerns for future development of socially valuable digital products. However, broader illegitimate distribution of digital goods may have offsetting demand implications for legitimate sales of complementary non-digital products. We examine the negative impact of file-sharing on recorded music sales and offsetting implications for live concert performances. We find that file-sharing reduces album sales but increases live performance revenues for small artists, perhaps through increased awareness. The impact on live performance revenues for large, well-known artists is negligible.

2190. Justin Ho, Katherine Ho, and Julie Holland Mortimer
Analyzing the Welfare Impacts of Full-line Forcing Contracts
Abstract | Paper
Theoretical investigations have examined both anti-competitive and efficiency-inducing rationales for vertical bundling, making empirical evidence important to understanding its welfare implications. We use an extensive dataset on full-line forcing contracts between movie distributors and video retailers to empirically measure the impact of vertical bundling on welfare. We identify and measure three primary effects of full- line forcing contracts: market coverage, leverage, and efficiency. We find that bundling increases market coverage and efficiency, but has little impact on one distributor gaining leverage over another. As a result, we estimate that full-line forcing contracts increased consumer and producer surplus in this application.