Public Economics Economie Publique Lectures Notes 8-14

Public Economics Economie Publique Lectures notes 8-14

Doc¸. Dr. Sezgin Polat

Universit´e Galatasaray University

Fall, 2018 Outline

Figure

I Sale price (lower) I Repeated interactions (most likely a one- shot game) I Monitoring cost (higher - low quality insurance) I Uncertain investment project (lower sunk cost)

J.Hindriks and G.D. Myles, Chapter 9 Intermediate Public Economics. MIT Press Market for Lemons 1

Akerloff (1970) ”The Market for Lemons: Quality Uncertainty and the Market Mechanism” Example:[Varian, 2014], ch. 37 I Consider a market with 100 people who want to sell their used cars and 100 people who want to buy a used car. Everyone knows that 50 of the cars are “plums (good quality)” and 50 are “lemons (bad quality).” The current owner of each car knows its quality, but the prospective purchasers don’t know whether any given car is a plum or a lemon. I The owner of a lemon is willing to part with it for $1000 and the owner of a plum is willing to part with it for $2000. I The buyers of the car are willing to pay $2400 for a plum and $1200 for a lemon. I The lemons will sell at some price between $1000 and $1200 and the plums will sell at some price between $2000 and $2400. I But what happens to the market if the buyers can’t observe the quality of the car? Market for Lemons 2

I The probability of a car being plum is q = 1/2. I Expected (average) value of a car will be Ec = qpl + (1 − q)ph = (1/2)1200 + (1/2)2400 = 1800 I At a price of $1800 only lemons would be offered for sale. I No market for good quality cars. Lemons will dominate the market. I Gresham’s Law ”La mauvaise monnaie chasse la bonne” ”Bad money drives out good” I failure. The problem is that there is an externality between the sellers of good cars and bad cars; when an individual decides to try to sell a bad car, he affects the purchasers’ perceptions of the quality of the average car on the market. I Market Failure due to information asymmetry. (Sellers know the quality of their car while buyers do not know the quality of car on the market.) Market for Lemons 3

I No Market Failure Condition (perceptions of buyers) s I Ec ≥ ph = qpl + (1 − q)ph 2000 = q1200 + (1 − q)2400 −→ q ≤ 1/3 History - Information and Quality

I The Chicago Board of Trade – in the mid-19th century adopted classifications and policies to create more homogeneous kinds of grain so as to facilitate the buying and selling process (Cronon (1991)) I ˙Istanbul’un ias¸e is¸lerini yur¨ utmek¨ uzere¨ kurulan ve bas¸ına mustakil¨ bir nazır tayin edilen Zahire Nezareti, 25 Ekim 1793 tarihli talimnamesine gore¨ s¸u gorevleri¨ ustlenmis¸ti.¨ I Fırınların çıkardıkları ekmeklerin fiyat ve kalitesini denetlemek. I Kapanın (Unkapanı - Halle aux blés) ve diger˘ tuccarın¨ zahire is¸lerini denetlemek ve onların zahire getirmelerine yardımcı olmak I Guran,¨ T. (1986). ˙Istanbul’un ˙Ias¸esinde Devletin Rolu¨ (1793-1839). ˙Iktisat Fakultesi¨ Mecmuası, 44(1-4). Incompleteness of Contracts

Emile Durkheim, The Division of Labor[1902] Tout n’est pas contractuel dans le contrat...Le contrat n’est possible que graceˆ a` une réglementation du contrat qui est d’origine sociale ’Not everything in the contract is contractual.... the contract is not sufficient in itself but is possible only thanks to a regulation of the contact, which is social in origin.’ I Verifiability: Third-party enforcement of contracts requires information that is available to both parties and can be verified by third-parties such as courts of law. I Time: A contract is generally executed over a period of time as when a contract specifies that Party A does X now and Party B does Y later. A complete contract must specify what the parties must do in every possible future situation or ‘state of the world’. e.g inflation - increase in prices I Measurability: Many of the services or goods involved in the exchange process are inherently difficult to measure or to describe precisely enough to be written into a contract. e.g. waiter and customer satisfaction I Authority: For some transactions there is no judicial apparatus - no courts or other relevant third parties - capable of enforcing contracts. Many international transactions are of this type (tahkim) I Motivation: Even where the nature of the goods or services to be exchanged would permit a more complete contract, traders may favor a less complete contract for motivational reasons. Incompleteness of Contracts

Repeated interactions between asymmetrical parties provide opportunities for mutually beneficial exchanges to occur even when contracts are incomplete or even entirely absent. I Power by one of the parties to the exchange. (pareto-improvement is possible) I Social norms, Trust and Fairness (pareto-improvement is possible) Transactions between lenders and borrowers, or employers and employees,are members of a large class of exchanges with incomplete contracts known as principal-agent relationships. In models of principal-agentrelationships we have two roles. I Principal: The principal benefits from the actions or the attributes of the agent. For example, an employer or bank lender are principals: they benefit from the actions or attributes of the agent. The employer (principal) makes more profit if the worker (agent) exerts more effort for a given wage. I Agent: The agent obtains a benefit from the principal while undertaking a costly action. For example, employees and borrowers are agents. The agents obtain a benefit from the principal while incurring a cost. The employee (agent) obtains a wage from the employer (principal) and exerts effort (which is costly). It is often the case that parties to an exchange know different things - they have different information - and can do different things - they have different strategy sets. I Strategic asymmetry: The employer’s first-mover advantage is a strategic asymmetry. I Information asymmetry: The employee knowing something the employer does not, is an example of information asymmetry. One player has information the other does know. Adverse Selection

I Adverse Selection: In the model(market for Lemons) we examined the low-quality items crowded out the high-quality items because of the high cost of acquiring information. I Example: Insurance I Suppose that an insurance company wants to offer insurance for bicycle theft. I In some areas there is a high probability that a bicycle will be stolen, and in other areas thefts are quite rare. Suppose that the insurance company decides to offer the insurance based on the average theft rate. I the insurance claims will mostly be made by the consumers who live in the high-risk areas. Rates based on the average probability of theft will be a misleading indication of the actual experience of claims ﬁled with the insurance company. I The insurance company will not get an unbiased selection of customers; rather they will get an adverse selection. In fact the term “adverse selection” was ﬁrst used in the insurance industry to describe just this sort of problem. Moral Hazard

I Consider the bicycle-theft insurance market again and suppose for simplicity that all of the consumers live in areas with identical probabilities of theft, so that there is no problem of adverse selection. On the other hand, the probability of theft may be affected by the actions taken by the bicycle owners. I If a consumer can purchase bicycle insurance, then the cost inﬂicted on the individual of having his bicycle stolen is much less. If the bicycle is stolen then the person simply has to report it to the insurance company and he will get insurance money to replace it. In the extreme case, where the insurance company completely reimburses the individual for the theft of his bicycle, the individual has no incentive to take care at all. I This lack of incentive to take care is called Moral Hazard (Al´ea Moral). I Tradeoff (quid pro quo) : too little insurance means that people bear a lot of risk, too much insurance means that people will take inadequate care. I If the amount of care (action) is observable, then there is no problem. The insurance company can base its rates on the amount of care taken. I In general, the insurance companies will not want to offer the consumers “complete” insurance. They will always want the consumer to face some part of the risk. Hidden Actions/Informations

I Moral hazard refers to situations where one side of the market can’t observe the actions of the other. For this reason it is sometimes called a hidden action problem. I Adverse selection refers to situations where one side of the market can’t observe the “type” or quality of the goods on other side of the market. For this reason it is sometimes called a hidden information problem. I Equilibrium in a market involving hidden action typically involves some form of rationing—ﬁrms would like to provide more than they do, but they are unwilling to do so since it will change the incentives of their customers. I Equilibrium in a market involving hidden information will typically involve too little trade taking place because of the externality between the “good” and “bad” types. I Example: Deposit Insurance in 1990s I Free Parking lots in Yıldız park (Galatasaray University) bearing some cost reveal the hidden actions I In a system without deposit insurance (bail-out), depositors would have a strong incentive to monitor their bank’s actions. Signaling

I For the Market for Lemons case, one sensible signal in this context would be for the owner of a good used car to offer a warranty/insurance. This would be a promise to pay the purchaser some agreed upon amount if the car turned out to be a lemon. Owners of the good used cars can afford to offer such a warranty while the owners of the lemons can’t afford this. I This is a way for the owners of the good used cars to signal that they have good cars. I But there are other cases where signaling can make a market perform less well. Signaling

Michael Spence, Market Signaling (Cambridge, Mass: Harvard University Press, 1974). Example: [Varian, 2014], ch. 37 I Suppose that we have two types of workers, able and unable. The able workers have a marginal product of a2, and the unable workers have a marginal product of a1, where a2 > a1. Suppose that a fraction b of the workers are able and 1 − b of them are unable.

I If worker quality is easily observable, then firms would just offer a wage of w2 = a2 to the able workers and of w1 = a1 to the unable workers. That is, each worker would be paid his marginal product/productivity and we would have an efficient equilibrium. I But what if the firm can’t observe productivity of workers? If a firm can’t distinguish the types of workers, then the best that it can do is to offer the average wage, which is w = (1 − b)a1 + ba2. I However, suppose now that there is some signal that the workers can acquire that will distinguish the two types. For example, suppose that the workers can acquire education. Let e1 be the amount of education attained by the type 1 workers and e2 the amount attained by the type 2 workers. I Suppose that the workers have different costs of acquiring education, the total cost of education for the able workers is c2e2 and the total cost of education for the unable workers is c1e1 Signaling

I Suppose that c2 < c1. This says that the marginal cost of acquiring education is less for the able workers than the unable workers. ∗ I Let e be an education level that satisﬁes the following inequalities:

a2 − a1 a2 − a1 < e∗ < c1 c2

I Note that the choice of the education level of a worker perfectly signals his type. ∗ I a2 − a1 < c1e for will choose zero education for unable worker. ∗ I a2 − a1 > c2e for will choose education for able worker. ∗ I This pattern of wages is an equilibrium: if each able worker chooses education level e and each unable worker chooses a zero educational level, then no worker has any reason to change his or her behavior. Signaling - Equilibria

Separating equilibrium The equilibrium involves each type of worker making a choice that allows him to separate himself from the other type.

Pooling equilibrium each type of worker makes the same choice

I The separating equilibrium is especially interesting since it is inefficient from a social point of view. Each able worker finds it in his interest to pay for acquiring the signal, even though it doesn’t change his productivity at all. I It is worth thinking about the nature of this inefficiency. As before, it arises because of an externality. If both able and unable workers were paid their average product, the wage of the able workers would be depressed because of the presence of the unable workers. I Thus they would have an incentive to invest in signals that will distinguish them from the less able. I This investment offers a private benefit but no social benefit. Signaling- Contrast with the human capital model of education

Does the signaling model share any implications with the Human Capital model?

I People who attend additional years of schooling are more productive. X I People who attend additional years of schooling receive higher wages. X I The rate of return to schooling should be roughly equal to the rate of interest. ambiguous effect I People will attend school while they are young, i.e., before they enter the workforce. X How do you empirically distinguish the human capital and signaling models? I Measure whether more educated people are more productive? (Would be true for either model.) I Measure people’s productivity before and after they receive education. I Test whether higher ability people go to school? I Find people of identical ability and randomly assign some of them to go to college. Check if the college educated ones earn more? I Find people of identical ability and randomly assign them a diploma. See if the ones with the diploma earn more. Imperfect Information- Examples

Wage Labor The problem with wage labor is that it requires observation of the amount of labor input. The wage has to be based on the effort put in to production, not just the hours spent in the ﬁrm. If the owner can’t observe the amount of labor input, then it will be impossible to implement this kind of incentive scheme.

Share-cropping - Métayage(fr.)- ortakçılık - marabacılık (tr) This is something of a happy medium. The payment to the worker depends in part on observed output, but the worker and the owner share the risk of output fluctuations. This gives the worker an incentive to produce output but it doesn’t leave him bearing all the risk.

Crop lien system In the view of the merchant, cotton afforded greater security for such loans than food crops. Cotton was a cash crop that could readily be sold in a well-organized market; it was not perishable; it was easily stored .... For these reasons the merchant frequently stipulated that a certain quantity of cotton be planted .... It was the universal complaint of the farmers that the rural merchants predicated his willingness to negotiate credit on the condition that sufﬁcient cotton to serve as collateral had been planted. (Ransom and Sutch, 1977, 160) Ransom, Roger L. and Richard Sutch. 1977. One Kind of Freedom: The Economic Consequences of Emancipation Outline

I As the two theorems of Welfare Economics showed, they do this so well that Pareto-efficiency is attained. Imperfect competition arises whenever an economic agent has the ability to influence prices. I This requires that the agent must be large relative to the size of the market in which they operate. I Imperfect competition can take many forms. It can arise due to monopoly in product markets and through monopsony in labor markets. I Firms with monopoly power will push price above marginal cost in order to raise their profits. This will reduce the equilibrium level of consumption below what it would have been had the market been competitive and will transfer surplus from consumers to the owners of the firm. Market Power 2

I The assumption of price-taking behavior used to prove the two Theorems is violated, and an economy with imperfect competition will not achieve an efﬁcient equilibrium I If the inﬂuence on price can be exercised by the sellers of a product, then there is monopoly power. If it is exercised by the buyers, then there is monosony power, and if by both buyers and sellers, there is bilateral monopoly. A single seller is a monopolist and a single buyer a monopsonist. Oligopoly arises with two or more sellers who have market power, with duopoly being the special case of two sellers. Market

I Market consists of the buyers and sellers whose interaction determines the price and quantity traded. Two sellers will be considered to be in the same market if their products are close substitutes. I Markets are also deﬁned by geographic areas, since otherwise identical products will not be close substitutes if they are sold in different areas and the cost of transporting is large. Pricing of Monopoly

I Let us use p(y) to denote the market inverse demand curve and c(y) to denote the cost function. Let r(y) = p(y)y denote the revenue function of the monopolist. The monopolist’s proﬁt-maximization problem then takes the form

Maxy π = r(y) − c(y) π = p(y)y − c(y)

First order condition rule (FOC). Find the maximum value of the proﬁt function.

∂π = 0 ∂y

∂p ∂c p + y = ∂y ∂y ∂p < 0 (price falls as output increases), implies that ∂y p > c Monopoly Pricing > Marginal Cost of Production

Mark-up Pricing

p ∂p y ∂p 1 (p + y ) = p(1 + ) = p(1 + ) = MC p ∂y p ∂y (y)

(y) p = MC( ) (y) − 1 Example Monopoly 1 Example Monopoly 2 Example Monopoly 3 Competition

I Three distinct dimensions of competition. I The first dimension is contestability, which represents the freedom of rivals to enter an industry.Legal monopoly rights (patent protection, operating licenses, etc.) or other barriers to entry (economies of scale and scope, the marketing advantage of incumbents, entry-deterring strategies, etc.). I A second dimension is the degree of concentration that represents the number and distribution of rivals currently operating in the same market. The performance of a market depends on whether it is concentrated or unconcentrated. I The third dimension of the market structure is collusiveness. This is related to the degree of independence of firms’ strategies within the market or the possibility for sellers to agree to raise prices in unison. Collusion can either be explicit (e.g., a cartel agreement) or tacit (when it is in each firm’s interest to refrain from aggressive price cutting). Herfindahl Index in Manufacturing Industry - Turkey (TurkStat)

Rank Code Highest Sub-sectors 2009 2010 2011 2012 2013 2014 2015 1 3211 Madeni para basımı 0.999 0.999 1.000 1.000 1.000 0.999 1.000 2 2640 Tuketici¨ elektronigi˘ ur¨ unlerinin¨ imalatı 0.784 0.656 0.658 0.589 0.920 0.938 0.859 3 1920 Rafine edilmis¸petrol ur¨ unleri¨ imalatı 0.836 0.617 0.744 0.760 0.840 0.703 0.808 4 1910 Kok fırını ur¨ unlerinin¨ imalatı 0.658 0.875 0.874 0.429 0.297 0.496 0.752 5 2824 Motorlu veya pnomatik¨ (hava basınçlı) el aletlerinin imalatı 0.994 0.992 1.000 0.520 0.586 0.319 0.751 6 1101 Alkollu¨ içeceklerin damıtılması, arıtılması ve harmanlanması 0.536 0.619 0.789 0.481 0.644 0.610 0.629 7 3040 Askeri savas¸araçlarının imalatı 0.329 0.446 0.666 0.741 0.604 0.503 0.598 8 2311 Duz¨ cam imalatı 0.971 0.974 0.800 0.791 0.529 0.511 0.582 9 1105 Bira imalatı 0.793 0.769 0.816 0.731 0.696 0.628 0.577 10 2343 Seramik yalıtkanların (izolatorlerin)¨ imalatı 0.801 0.730 0.410 0.532 0.542 0.408 0.571

Rank Code Lowest Sub-sectors 2009 2010 2011 2012 2013 2014 2015 10 3102 Mutfak mobilyalarının imalatı 0.007 0.008 0.003 0.005 0.006 0.006 0.007 9 1623 Diger˘ bina dogramacılı˘ gı˘ ve marangozluk ur¨ unlerinin¨ imalatı 0.004 0.007 0.005 0.005 0.004 0.005 0.006 8 2363 Hazır beton imalatı 0.013 0.011 0.011 0.009 0.009 0.006 0.006 7 2223 Plastik ins¸aat malzemesi imalatı 0.009 0.005 0.008 0.007 0.008 0.007 0.006 6 2829 Bas¸ka yerde sınıﬂandırılmamıs¸diger˘ genel amac¸lı makinelerin imalatı 0.006 0.007 0.006 0.008 0.006 0.007 0.006 5 1812 Diger˘ matbaacılık 0.004 0.006 0.004 0.004 0.003 0.005 0.005 4 2370 Tas¸ve mermerin kesilmesi, s¸ekil verilmesi ve bitirilmesi 0.003 0.003 0.003 0.003 0.003 0.003 0.004 3 1413 Diger˘ dıs¸giyim es¸yaları imalatı 0.004 0.004 0.003 0.004 0.004 0.004 0.003 2 2512 Metalden kapı ve pencere imalatı 0.005 0.002 0.003 0.003 0.002 0.003 0.003 1 1071 Ekmek, taze pastane ur¨ unleri¨ ve taze kek imalatı 0.003 0.003 0.002 0.002 0.002 0.002 0.002

I Capital / Labor Intensive Firms I Innovative Firms I Scale- Economy (Decreasing Average Costs) I Small and Medium Enterprises Natural Monopoly

[Leach, 2004], chapter 14 A production process displays increasing returns to scale if output more than doubles when the use of every input is doubled. The cost curves of a firm that produces under increasing returns to scale have two important properties: I Average cost falls as output rises. I Marginal cost is everywhere below average cost. I A market in which production is characterized by increasing returns to scale is said to be a natural monopoly because only one firm can survive in such a market. Initially, a number of competing firms will “race to get big.” The larger firms will have lower average costs than their smaller competitors and will be able to charge lower prices. The smaller firms will be unable to earn profits and will be driven from the market. Ultimately, only one firm will remain in the market. I Not a contestable market (rivals can not enter into the market). Large sunk costs and investments. Natural Monopoly

o I Regulation: A regulator would require the monopolist to raise its output from q so that the welfare cost of the monopoly is reduced. Raising output from qo to ˆq will reduce the welfare cost of the monopoly by an amount equal to the area ABDE. A welfare cost equal to the area BCD would remain. I Government ownership: A government-owned firm does not need to earn profits. The government-owned firm should therefore operate at the socially optimal output q∗ and charge the price p∗. Rent Seeking

Consider two situations: I A firm is engaged in research intended to develop a new product. If the research is successful, the product will be unique, and the firm will have a monopoly position, and extract some rent from this, until rival products are introduced. I A firm has introduced a new product to the home market. A similar product is manufactured overseas. The firm hires lawyers to lobby the government to prevent imports of the overseas product. If it is successful, it will enjoy a monopoly position from which it will earn rents. Definitions: I Profit-seeking is the expenditure of resources to create a profitable position that is ultimately beneficial to society. Profit-seeking, as exemplified by the example of research, is what drives progress in the economy and is the motivating force behind competition. I Rent-seeking is the expenditure of resources to create a profitable opportunity that is ultimately damaging to society. Rent-seeking, as exemplified by the use of lawyers, hinders the economy and limits competition. Rent seeking was first discussed systematically by Tullock (1967c). The term ”rent seeking” was first used to describe the activity in question by Krueger (1974). Governments and Rent Seeking

There are two channels through which the government is connected with rentseeking. I Lobbying: In United States, there are 100,000 professional lobbyists. These lobbyists attempt to change government policy in favor of the interests that employ them. If the lobbyists are successful, rents are created. I Bureaucrats and politicians Bureaucrats and politicians in government are able to create rents through their policy choices. These rents can be “sold” to the parties that beneﬁt. Selling rents generates income for the seller and gives an incentive for careers to be made in politics and bureaucracy. Examples: I Public Procurement Markets I Public Investment Projects (Real Estate Prices) I Protective Trade Policies (e.g. Infant Industry policies) Outline

The government could provide public goods through unanimous (supported by everyone) consent of its citizens. Lindahl pricing is a system where individuals report their willingness-to-pay for each quantity of the public good, and the government aggregates preferences to form a measure of the social beneﬁt.

I First, the government announces tax prices for the public good, that is, the share of the cost that each individual must bear. I Each person announces how much of the public good he or she wants at those tax prices. I If the individual announcements differ, the government raises the tax price for the person who wants more of the good, and lowers it for the person who wants less. I When a tax price is arrived at where both individuals want the same amount of the public good, the government has reached Lindahl equilibrium. I The government produces the public good at that level, and ﬁnances it by charging each person their tax price. Lindahl Pricing 2

Example:

3 1 PBanu = 3 − q, and PAhmet = 1 − q 100 100 4 PPublic = 4 − q which gives the optimal public good level 100 if the price of public good is p = 1 then q = 75 Lindahl Pricing 3

I Lindahl pricing corresponds to the concept of beneﬁt taxation, which occurs when individuals are being taxed for a public good according to their valuation of the beneﬁt they receive. I With Lindahl pricing, the government does not need to know the utility functions of individual voters: it gets the voters to reveal their preferences by stating their willingness to pay for different levels of the public good. Problems with Lindahl Pricing

I Preference revelation problem: Individuals may behave strategically, and pretend their willingness to pay is low in order to get others to bear a larger cost of the public good. I Preference knowledge problem: It is hard for people to properly value goods they do not shop for on a regular basis. I Preference aggregation problem: Aggregating millions of voters’ preferences is difﬁcult in reality. Outline

Voting is the most commonly employed method of resolving a diversity of views or eliciting expressions of preference. There are two major properties to look for in a good method. I First is the success or failure of the method in achieving a clear-cut decision. I Second is the issue of whether voting always produces an outcome that is efﬁcient.

I Stability: Unstable preferences and cycling I Impossibility of Aggregation Individual Preferences: Social choice takes a given set of individual preferences and tries to aggregate them into a social preference. The central result of the theory of social choice, Arrow’s Impossibility Theorem, says that there is no way to devise a collective decision-making process that satisﬁes a few commonsense requirements and works in all circumstances. If there are only two options, majority voting works just ﬁne, but with more than two we can get into trouble. Condorcet Paradox

Now suppose that we use majority rule to select one of these options. We see that two out of three voters prefer a to b, while two out of three prefer b to c, and two out of three prefer c to a. At the collective level there is a cycle in preference and no decision is possible. We say that such collective preferences are intransitive, meaning that the preference for a over b and for b over c does not imply a is preferred to c. As the example shows, intransitivity of group preferences can arise even when individual preferences are transitive. This generation of social intransitivity from individual transitivity is called the Condorcet paradox. Condorcet was the ﬁrst person, as far as we know, to discover the problem of cycling, the possibility when using the simple majority rule Arrow’s Impossibility Theorem

The general problem addressed by K.Arrow in 1951 was to seek avoid the Condorcet paradox. Arrow’s approach was to start from a set of requirements that a collective ranking must satisfy. I Condition I (Independence of irrelevant alternatives) Adding new options should not affect the initial ranking of the old options, so the collective ranking over the old options should be unchanged. I Condition N (Nondictatorship) The collective preference should not be determined by the preferences of one individual. I Condition P (Pareto criterion) If everybody agrees on the ranking of all the possible options, so should the group; the collective ranking should coincide with the common individual ranking. I Condition U (Unrestricted domain) The collective choice method should accommodate any possible individual ranking of options. I Condition T (Transitivity) If the group prefers A to B and B to C, then the group cannot prefer C to A.

Kenneth Arrow’s Impossibility Theorem When choosing among more than two options, there exists no collective decision-making process that satisﬁes the conditions I, N, P, U, T. Majority Rule

I A widely held view is that democracy should treat all the voters in the same way. This symmetry requirement is called Anonymity. I Collective decision-making process should treat all possible options alike. No apparent bias in favor of one option should be introduced. This symmetric treatment of the various options is called Neutrality. I Decisiveness (the social decision rule must pick a winner) I Positive Responsiveness (increasing the vote for the winning option should not lead to the declaration of another option the winner. Example: An alternative option which is rejected by a majority becomes a winner)

Kenneth May’s theorem When choosing among only two options, there is only one collective decision-making process that satisﬁes the requirements of Anonymity, Neutrality, Decisiveness, and Positive Responsiveness. This process is majority rule. Condorcet Method

I For example, one simple binary agenda for choosing among the three options (a, b, c) in the Condorcet paradox is as follows. First, there is a vote on a against b. Then, the winner of this ﬁrst vote is opposed to c. The winner of this second vote is the chosen option. The most famous pairwise voting method is the Condorcet method. I The option that defeats all others in pairwise majority voting is called a Condorcet winner, after Condorcet suggested that such an option should be declared the winner. I The problem is that the existence of a Condorcet winner requires very special conﬁgurations of individual preferences. For instance, with the preferences given in the Condorcet paradox, there is no Condorcet winner. Condorcet Winner A common mechanism used to aggregate individual votes into a social decision is majority voting, in which individual policy options are put to a vote, and the option that receives the majority of votes is chosen.

, [Gruber, 2004], Public ﬁnance and public policy Median Voter Theorems 1

Median Voter Theorems When the policy space is one-dimensional, sufﬁcient (but not necessary) conditions for the existence of a Condorcet winner are given by the Median Voter Theorems. One version of these theorems refers to single-peaked preferences, while the other version refers to single-crossing preferences. The two conditions of single-peaked and single-crossing preferences are logically independent, but both conditions give the same conclusion that the median position is a Condorcet winner. Reference: [Hindriks and Myles, 2013] Median Voter Theorems 2

Median Voter Theorem I: Single-peaked version Suppose that there is an odd number of voters and that the policy space is one-dimensional (so that the options can be put in a transitive order). If the voters have single-peaked preferences, then the median of the distribution of voters’ preferred options is a Condorcet winner. Median Voter Theorems 3

Median Voter Theorem II: Single-crossing version Suppose that there is an odd number of voters and that the policy space is one-dimensional (so that the options can be put in a transitive order). If the preferences of the set of voters satisfy the single-crossing property, then the preferred option of the median voter is a Condorcet winner. Vote-Maximizing Politicians

The public good in question is education; the key question is what fraction of the budget (0% to 50%) should be spent on education? Voters are uniformly distributed on this continuum. Two politicians, Banu and Ahmet, are running for ofﬁce and competing to maximize their votes. Assumptions of the Median Voter Model

The median voter model is a powerful tool, but relies on a number of assumptions worth mentioning: I Single-dimensional voting: Voters only care about one issue. I Only two candidates: With a 3rd candidate, there is no stable equilibrium. I No ideology or influence: Assumes politicians only care about votes, not ideological positions. I No selective voting: All citizens actually vote. No lower voter turnout. I No money as a tool of influence. No vote buying. I Perfect information along three dimensions: voter knowledge of the issues, politician knowledge of the issues, and politician knowledge of voter preferences Potential Inefficiency of the Median Voter Outcome

Inefficient outcomes I For example, imagine that there are 1,001 voters in a town, who are considering building a monument that costs $40,040 ($40/person). I Assume all 1,001 voters have single-peaked preferences, so the median voter will determine the outcome. I If 500 citizens value the monument at $100 each, and the other 501 value it at $0, then the social marginal benefit is $50,000, far greater than the cost. However, the monument does not get built. Lobbying I Lobbying is the expending of resources by certain individuals or groups in an attempt to influence a politician. I The problem with lobbying arises when an issue benefits a small group and imposes small costs on a larger (perhaps even a majority) group. I The key point to remember is that large groups of people with small individual interest on an issue suffer from a free rider problem in trying to organize politically. I Small groups with large interest overcome the free-rider problem. Agenda Manipulation

In a situation in which there is no Condorcet winner, the door is opened to agenda manipulation. This is because changing the agenda, meaning the order in which the votes over pairs of alternatives are taken, can change the voting outcome. Thus the agenda-setter may have substantial power to inﬂuence the voting outcome. To determine the degree of the agenda-setter’s power, we must ﬁnd the set of outcomes that can be achieved through agenda manipulation. Alternatives to Majority Rule

I Even if one considers the principle of majority rule to be attractive, the failure to select the Condorcet winner when one exists may be regarded as a serious weakness of majority rule as a voting procedure. This is especially relevant because many of the most popular alternatives to majority rule also do not always choose the Condorcet winner when one does exist, although they always pick a winner even when a Condorcet winner does not exist. I This is the case for all the scoring rule methods, such as Plurality voting and Borda voting. I Each scoring rule method selects as a winner the option with the highest aggregate score. The difference is in the score voters can give to each option. Under Under plurality voting, voters give 1 point to their ﬁrst choice and 0 points to all other options. Thus only information on each voter’s most preferred option is used. Under Borda voting, voters give the highest possible score to their ﬁrst choice, and then progressively lower scores to worse choices. Alternatives to Majority Rule

I Borda Voting: there is no Condorcet winner but a the Borda winner with 15 points (while b gets 14 points and c gets 13 points) I Adding an alternative such as d. Now d will be the Borda winner with 22 points. I This reversal of the ranking shows that the Borda rule violates the independence of irrelevant alternatives and should be unacceptable in a voting procedure.

I Plurality Voting : The example illustrates the problem that the plurality rule fails to select the Condorcet winner, which in this case is a (a beats both b and c with majority votes). Public Choice Theory

I The analysis in most of this course assumes a benign government intent on maximizing social welfare. I Public choice theory questions this assumption by noting that governments often do not behave in an ideal manner, so that traditional assumption of a benevolent social-welfare maximizing government may be inappropriate. I Government failure is the inability or unwillingness of the government to act primarily in the interest of its citizens. Reasons include: I Size maximizing bureaucracy : Niskanen (1971) developed a model of the budget maximizing bureaucrat. In this model, the bureaucrat runs an agency that has a monopoly on the government provision of some good or service. I Leviathan theory: Leviathan theory sees individual bureaucrats and the larger government as one monopolist that simply tries to maximize the size of the public sector. I Corruption: corruption is where government ofﬁcials abuse their power in order to maximize their own personal wealth or that of their associates. Condorcet’s jury theorem

Condorcet’s jury theorem If each member of a jury has an equal and independent chance better than random, but worse than perfect, of making a correct judgement on whether a defendant is guilty (or on some other factual proposition), the majority of jurors is more likely to be correct than each individual juror, and the probability of a correct majority judgement approaches 1 as the jury size increases Thus, under certain conditions, majority rule is good at tracking the truth

Marquis de Condorcet (1785) Essai sur l’application de l’analyse a` la probabilité des décisions rendues a` la pluralité des voix. 01 Compulsory voting

Voter Turnout Database - Parliamentary

Yes No

Source:The International Institute for Democracy and Electoral Assistance Voter Turnout

Voter Turnout Database - Parliamentary

0 25 50 75 100

Source:The International Institute for Democracy and Electoral Assistance Source:The International Institute for Democracy and Electoral Assistance Median Voter - Empirical Results- [Lupu and Pontusson, 2011]

I Data from 15 to 18 advanced democracies. Luxembourg Income Study (LIS). I It is the structure of inequality, not the level of inequality, that matters for redistribution. I Middle-income voters will be inclined to ally with low-income voters and support redistributive policies when the distance between the middle and the poor is small relative to the distance between the middle and the rich. I Major ﬁnding is that both redistribution and non-elderly social spending increase as the dispersion of earnings in the upper half of the distribution increases relative to the dispersion of earnings in the lower half of the distribution. Median Voter - Empirical Results [Lupu and Pontusson, 2011] Median Voter - Empirical Results [Lupu and Pontusson, 2011] Outline

Public Sector Budget Imperfect Information Classification économique du Budget Adverse Selection (Antisélection) Recettes du Budget Moral Hazard (Aléa Moral) Signaling Social Welfare and Notions Market Power Market Equilibrium Natural Monopoly Efficiency Rent Seeking Equity and Social Justice Social Choice - Provision of Public Good Public Sector Growth Public Good Contribution Problem - Lindahl Pricing Theories of Public Sector Growth Social Choice - Aggregating Preferences Public Good Majority Rule Typology of goods Median Voter Theorem Private Provision Empirical Findings Public Provision Education Cooperation Education and externalities Strategic Interaction - Game Theory Educational Outcomes: International Comparison Prisoner’s Dilemma Quality Common Pool Resources (Common Goods) Intergenerational Mobility Tragedy of the Commons Higher Education Governing the Commons Inequality Externality Income Groups and Types The Coase Theorem Poverty Pigouvian Taxation International Comparison Examples of Coase Theorem Club Goods and Local Public Goods Market Imperfections Fiscal Decentralization Education and externalities I Education has externalities. It has social returns which refer to benefits that are received by other individuals. I Social benefits associated with encouraging innovation and scientific advances I Knowledge spillovers - more educated individuals raise the productivity and earnings through exchange of ideas, imitation, and learning-by-doing. I Intergenerational effects - more educated and healthy generations I Health and longevity I Lower criminal activity I Civic participation e.g voting, social involvement I Tax and transfer effects I Screening device - signalling

International Comparison

Returns to Education - Effect of one year schooling on wages

Labor market outcomes - Turkey Wage Ratio - All Wage Earners Wage Ratio - Female Wage Earners Unemployment Rate by Education Level - All Unemployment Rate by Education Level - Female Education Quality Pisa Turkiye Raporu http://pisa.meb.gov.tr/wp-content/uploads/2014/11/PISA2015_UlusalRapor.pdf

Intergenerational Mobility Great Gatsby Curve

Table: Intergenerational Educational Mobility and Average Income Positioning

Average Positioning and Std. Dev. (Income Deciles) Average probabilities Education level Education level No schooling P. 5 years P. 8 years Secondary Tertiary No schooling P. 5 years P. 8 years Secondary Tertiary Father’s Education Less than primary 22.5 38.7 49.1 56.2 75.9 0.17 0.51 0.09 0.15 0.08 (21.4) (25.8) (25.9) (24.8) (19.3)

Secondary - 47.7 42.5 59.7 76.8 0.01 0.12 0.09 0.37 0.41 - (28.3) (19.6) (24.5) (20.6)

Tertiary - 41.9 51.7 65.7 80.4 0.00 0.04 0.03 0.26 0.66 - (7.8) (24.3) (26.1) (18.5)

Source: Author’s calculations based on 2007 Adult Education Survey(AES), include adults aged 25 years or above. (1) Average score or positioning according to deciles of income (100 highest, 1 lowest) . (2) Education level conditional on father education. The numbers add to one across the rows for each father education level. Higher Education Figure: State and Vakif Universities across years Table: University Types and Enrollment 2004-2012

2004 2005 2006 2007 2008 2009 2010 2011 2012 Total Enrolled Students (Public) 1,191,757 1,284,591 1,337,791 1,371,017 1,468,194 1,605,313 1,738,649 1,959,580 2,184,530

Distance and Open Universities * 695,591 799,053 845,411 877,972 1,142,536 1,557,217 1,713,923 1,947,972 2,241,991 Private (Vakif) Universities ** 83,742 99,197 109,903 124,130 147,829 160,560 174,581 205,484 250,085 Population aged 18-24 8,110,302 8,056,109 7,995,408 7,907,623 7,823,736 7,779,649 7,753,673 7,679,509 7,691,051 Enrollment Rate (Open Edu. Excl.) 15.7 17.2 18.1 18.9 20.7 22.7 24.7 28.2 31.7

* Statistics of Measuring, Selection and Placement Center ** Calculated using Statistics of Higher Education Council. Latest accesed on june 2015, https://istatistik.yok.gov.tr/ Source: TurkStat Regional Statistics

Outline

Herbert Simon (1938) (backward-looking deﬁnition of income) ”Personal income may be deﬁned as the algebraic sum of (1) the market value of rights exercised in consumption (2) the change in the value of the store of property rights between the beginning and end of the period in question.”

Hicks(1939) (income with uncertainty) ”income is the maximum value which a man can consume during a week and still expect to be as well-as at the end of the week ...” Measuring Income

The first approach to equivalence scales is based on the concept of minimum needs. A bundle of goods and services that is seen as representing the minimum needs for the household is identified. The exact bundle will differ among households of varying size but typically involves only very basic commodities. Measuring Inequality - Gini Index Gini-coefficient of inequality: This is the most commonly used measure of inequality. The coefficient varies between 0, which reflects complete equality and 1, which indicates complete inequality (one person has all the income or consumption, all others have none). Graphically, the Gini coefficient can be easily represented by the area between the Lorenz curve and the line of equality.

Income groups and income components according to income levels Farklı Gelir Turlerinin¨ Yuzdelik¨ Gelir Gruplarındaki Oranı

Es¸deger˘ hanehalkı kullanılabilir gelire gore¨ sıralı yuzde¨ 20’lik gruplar ve gelir turlerine¨ gore¨ yıllık gelirin dagılımı˘ (Dikey %) (Turkiye)¨

Sosyal Yardimlar Kapsayaci mi ?

Es¸deger˘ hanehalkı kullanılabilir gelire gore¨ sıralı yuzde¨ 20’lik gruplar ve gelir turlerine¨ gore¨ yıllık gelirin dagılımı˘ (Yatay %) (Turkiye)¨

Poverty; analysis and measurement Goreli Yoksulluk Cizgisi(Relative poverty lines): These are defined in relation to the overall distribution of income or consumption in a country; for example, the poverty line could be set at 50 percent of the country’s mean income or consumption. Mutlak Yoksulluk Cizgisi (Absolute poverty lines): These are anchored in some absolute standard of what households should be able to count on in order to meet their basic needs. For monetary measures, these absolute poverty lines are often based on estimates of the cost of basic food needs (i.e., the cost a nutritional basket considered minimal for the healthy survival of a typical family), to which a provision is added for non-food needs. For developing countries, considering the fact that large shares of the population survive with the bare minimum or less, it is often more relevant to rely on an absolute rather than a relative poverty line. Different methods have been used in the literature to define absolute poverty lines (see Deaton 1997, Ravallion and Bidani 1994, and Ravallion 1994). I The food-energy intake method defines the poverty line by finding the consumption expenditures or income level at which a person’s typical food energy intake is just sufficient to meet a predetermined food energy requirement. If applied to different regions within the same country, the underlying food consumption pattern of the population group just consuming the necessary nutrient amounts will vary. This method can thus yield differentials in poverty lines in excess of the cost-of-living differential facing the poor. I The Cost of Basic Needs method values an explicit bundle of foods typically consumed by the poor at local prices first. To this, a specific allowance for nonfood goods, consistent with spending by the poor, is added. However defined, poverty lines will always have a high arbitrary element; for example, the calorie threshold underlying both methods might be assumed to vary with age. When estimating monetary measures of poverty, one may have a choice between using income or consumption as the indicator of well-being. Most analysts argue that provided the information on consumption obtained from a household survey is detailed enough, consumption will be a better indicator for poverty measurement than income for the following reasons:

I TU¨˙IK, bugune¨ kadar harcamaya dayalı farklı yontemlerin¨ kullanıldıgı˘ yoksulluk hesaplamaları yapmıs¸tır. Bunlardan ”goreli¨ yoksulluk”, bireylerin ortalama refah duzeyinin¨ belli bir oranının altında olması durumu olarak tanımlanmakta olup, bu tanıma gore,¨ toplumun genel duzeyine¨ gore¨ belli bir sınırın altında gelir veya harcamaya sahip olan birey veya hanehalkı goreli¨ anlamda yoksul sayılmaktadır. I Refah olç¨ us¨ u¨ olarak amaca gore¨ harcama veya gelir duzeyi¨ seçilebilir. I Hanehalkı butçe¨ aras¸tırmasında es¸deger˘ kis¸i bas¸ına tuketim¨ harcaması medyan degerinin˘ %50’si goreli¨ yoksulluk sınırı olarak tanımlanarak goreli¨ yoksulluk oranı hesaplanmaktadır. I TUIK hesaplamalarında harcama yerine es¸deger˘ fert bas¸ına dus¸en¨ (es¸deger˘ hanehalkı kullanılabilir) gelirleri kullanılarak, es¸deger˘ hanehalkı kullanılabilir gelir medyan degerine˘ gore¨ belirlenen çes¸itli goreli¨ yoksulluk sınırları (%40, %50, % 60 veya % 70) hesaplanmıs¸tır.

International comparison of various inequality measures

Outline

I Club good is a good that is either nonrivalrous or partly rivalrous but for which exclusion by the providers is possible. I A local public good can only benefit those within a given geographical area. It may be nonrivalrous within that area or it may be partially rivalrous. I A good that has some degree of nonrivalry but for which excludability is possible is called a club good. The name is intended to reflect the fact that there are benefits to groups of consumers forming a club to coordinate provision and that the group size may be less than the total population. Examples: Consumer Clubs (Tenis Club), International Bodies (NATO, IMF) I Public goods provided in a particular geographical location need not be available except for those in the close proximity. The geographical restriction on availability can also be accompanied by congestion within the region. I Congestion provides a motive for exclusion and for the forming of a club to supply the good. Club Goods and Local Public Goods

I Adding a new member allows the cost of providing a given quantity of public good to be shared among more members but reduces the benefit obtained by each existing member. Marginal costs decline, but marginal benefits decline too. I With a club good that suffers from congestion there is a second efficiency condition involved concerning the correct level of membership. I The club good can potentially suffer from congestion. We have to decide how much of the good to supply and how many member to admit. Club Goods

Unlike a pure public good, there is no barrier to ﬁnancing provision of the club good, provided that enough potential members are willing to pay for membership. The most natural assumption to make on the method of charging is that the cost of the club is divided equally among the members. I Fixed Utilization: Each club member will have a utility function like U(x, G, n) where x is the private good, G is the public good and n is the number of members I There is a level efﬁcient level of membership if there is a congestion effect

I Variable Utilization: In determining its provision, a club will wish to optimize the number of visits in addition to the size of facility and the membership. Each club member will have a utility function like U(x, G, n, v) where x is the private good, G is the public good, n is the number of members and v is the number of visits to the club. I Marginal loss of utility through congestion = reduction in cost through increased membership + increased cost of servicing additional visits I Marginal beneﬁt of additional visit = marginal maintenance cost + marginal congestion cost Local Public Goods and Tiebout Model

I Now assume that there are a number of alternative communities where a consumer can choose to live and that these differ in their provision of local public goods. In contrast to the pure public good case, a consumer’s choice of which location to live in provides a very clear signal of preferences. I The chosen location is will be the one which offers the provision of local public goods closest to the consumer’s ideal. Hence, through community or region choice, individual preferences are revealed. I If there are enough different types of community and enough consumers with each kind of preferences, then all consumers will allocate themselves to a community/region that is optimal for them and each community will be optimally sized. The provision of some public goods requires sufficient scale or size. I Consumers reveal their preferences by voting with their feet, and this ensures the construction of optimal communities. I With the preference revelation and aggregation problems solved, Lindahl pricing works in the Tiebout model. I Evidence: The housing price reflects the cost (including local property taxes) and benefits (including local public goods) of living in a town having a relatively high level of public goods. Fiscal Decentralization Arguments for Multi-level Government

There are three arguments to suggest a lower level decision is preferable. I First, determination at the local level can take account of more precise information available on local preferences. In this context, local ballots and knowledge of local circumstances may help in reaching a more efficient decision. I Second, if a decision were to be made at the national level, political pressures may prevent there from being any differentiation of provision among communities, whereas it might be efficient to have different levels of local public good provision in different areas. I Finally, the Tiebout hypothesis that if consumers have heterogeneous preferences, then efficiency requires numerous communities to form and offer different levels of public good provision. This will not be possible if decisions are taken at a national level. If these arguments for determining and providing public goods at a local level are accepted, then it follows almost inevitably that financing should be determined at the same level. To do otherwise, and to set a tax policy that was uniform across the economy, would result in transfers among regions. Such transfers may not be efficient, equitable, or politically acceptable. The Costs of Uniformity 1

I Uniform provision of public goods and services by all jurisdictions will only meet the needs of the entire population when preferences are homogeneous. I When they are not homogeneous, any form of uniform provision must be a compromise between competing levels of demand. As such, it must involve some loss in welfare relative to differentiated provision. I The public good is ﬁnanced by a uniform income tax. Denote the two groups by A and B, and assume that members of group B have a relatively stronger preference for the public good than those of group A, taking into account the higher tax rate that this implies. I The preferred choices of public good provision are denoted as GA and GB (with GA < GB). Now consider the choice of a uniform level of provision, and let this level be G0. I This analysis shows how uniformity can be costly in terms of forgone welfare. The Costs of Uniformity 2

I Imagine a polity(political entity) of nine persons divided into three local communities with three persons each. I Individuals A1, A2, and A3 belong to local community A, and they consume only the amount Public Good supplied to their community. The same is true for the three individuals belonging to B community (region) and the three belonging to C community (region). I Direct democracy (Majority Rule) ? I Representative democracy (Median Voter) ? The Tiebout Hypothesis

I Each community can be treated as an independent provider of local public goods. If the consumers in the economy have heterogeneous tastes, then there will be clear advantages to jurisdictions having different levels of provision. I Each can design what it offers (its tax rates, level of provision, and type of provision) to appeal to particular groups within society. By choosing the jurisdiction in which to live (i.e., by voting with their feet), the consumers reveal their tastes for public goods. I Starting from a uniform level of services that is too little for some consumers and too much for others, a move away from this uniform level by some jurisdictions must benefit some of the consumers. This way even restricted decentralization can be increasing in efficiency. I The Tiebout hypothesis shows the benefits achievable by decentralization. Distributive Arguments

I The regions that constitute any economy are endowed with different stocks of resources. Some may be rich in natural resources, such as oil and coal, and others may have a well-educated workforce with high levels of human capital. Such differences in endowments will be reflected in disparities in living standards among regions. I The ability to differentiate public good provision among the regions then allows more accurate targeting of resources to where they are required. This is an equity argument for not having uniform provision. I Redistribution between regions is called an equalization formula. I Such transfers are based on equalization formulas that measure the fiscal need and fiscal capacity of each jurisdiction, locality or province. Fiscal equalization then involves higher grants to those jurisdictions with the greatest fiscal need and the least fiscal capacity. I In practice, equalization grants play a major role in countries like Australia, Denmark, Canada, Germany, Sweden, and Switzerland and involve substantial transfers from wealthy to poor jurisdictions. Accountability and Decentralization 1

I Voters face a formidable agency problem because they are inevitably poorly informed about politicians’ behavior and type. Moreover the electoral sanction (pass or fail) is such a crude instrument that it can hardly induce the politicians to do what the public wants. I Brennan and Buchanan (1980) view is that decentralization is an effective mechanism to control governments’ expansive tendencies. The basic argument is that competition among different decentralized governments can exercise a disciplinary force and break the monopoly power of a large central government. Accountability and Decentralization 2

I Suppose that the circumstances under which politicians make decisions can be good (state a) or bad (state b). Governments decide to adopt policy A, which is better for their constituents in the good state a, or policy B, which is better in the bad state b. I Governments need not pursue the public interest and can rather advance their own interests by choosing policy A in state b and policy B in state a to get some private gains (e.g., a rent r > 0). Suppose that politicians place a value V on being reelected and that this value satisfies V > r. I The payoff matrix is shown in figure below, the first number in each cell is the government payoff, and the second number is voters welfare. Risk Sharing

I First, risk sharing is more effective, the broader the basis on which risks are pooled. This is a consequence of Borch’s theorem on mutual insurance. I Second, it is more advantageous for any region to engage in mutual insurance with other regions when risks are negatively correlated across regions. I Third, there must be a degree of symmetry across regions. The reason is that with an asymmetric regional distribution of risks, some regions will systematically and persistently subsidize others. The distributional considerations will then dominate insurance aspects. I Fourth, risk sharing arrangements require reciprocal behavior: a region with a favorable shock accepts to help out other regions if it can reasonably expect that those regions will in turn help it out in bad circumstances. Fiscall Decentralization

The degree of decentralization of government activity can be measured in several different ways. Oates (1972) distinguishes three measures of ﬁscal decentralization: 1. Share of total public revenue collected by the central government. (Regions can get back substantial portions of the revenue collected at the central level.) 2. Share of the central government in all public expenditures, including income redistribution payments. (Redistribution of income is mostly the role of central governments) 3. Share of the central government in current government consumption expenditures. Decentralization in OECD Countries 1 Decentralization in OECD Countries 2 Decentralization in OECD Countries 3 Decentralization in OECD Countries 4 Spending is more decentralized than revenues: The risks of ﬁscal imbalances. ReferencesI

Alesina, A. and Giuliano, P. (2011). Preferences for redistribution. In Handbook of social economics, volume 1, pages 93–131. Elsevier.

Brander, J. A. and Taylor, M. S. (1998). The simple economics of easter island: A ricardo-malthus model of renewable resource use. American economic review, pages 119–138.

Coase, R. H. (1960). The problem of social cost. In Classic Papers in Natural Resource Economics, pages 87–137. Springer.

Cusack, T. R. (1997). Partisan politics and public ﬁnance: Changes in public spending in the industrialized democracies, 1955–1989. Public choice, 91(3-4):375–395.

Fehr, E. and Gachter,¨ S. (1999). Cooperation and punishment in public goods experiments. Institute for Empirical Research in Economics working paper, (10).

Gruber, J. (2004). Public ﬁnance and public policy. Macmillan.

Hardin, G. (1968). The tragedy of the commons. Science, 162(3859):1243–1248.

Herrmann, B., Thoni,¨ C., and Gachter,¨ S. (2008). Antisocial punishment across societies. Science, 319(5868):1362–1367.

Hindriks, J. and Myles, G. D. (2013). Intermediate public economics. MIT press.

Kristov, L., Lindert, P., and McClelland, R. (1992). Pressure groups and redistribution. Journal of public economics, 48(2):135–163.

Kuznets, S. (1955). Economic growth and income inequality. The American economic review, pages 1–28. ReferencesII

Leach, J. (2004). A course in public economics. Cambridge University Press.

Lupu, N. and Pontusson, J. (2011). The structure of inequality and the politics of redistribution. American Political Science Review, 105(2):316–336.

Lute, R. D. and Raiffa, H. (1957). Games and decisions. New York, page 245ff.

Meltzer, A. H. and Richard, S. F. (1981). A rational theory of the size of government. Journal of political Economy, 89(5):914–927.

Miceli, T. J. (2017). The economic approach to law. Stanford University Press.

Nash, J. (1951). Non-cooperative games. Annals of mathematics, pages 286–295.

Ostrom, E. (1990). Governing the commons: The Evolution of Institutions for Collective Action. Cambridge University Press.

Ostrom, V. and Ostrom, E. (1991). Public goods and public choices: The emergence of public economies and industry structures. The meaning of American federalism, pages 163–197.

Peltzman, S. (1980). The growth of government. The Journal of Law and Economics, 23(2):209–287.

Piketty, T. (2014). Capital in the 21st Century. Harvard University Press Cambridge, MA.

Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. WW Norton & Company.

Wydick, B. (2007). Games in economic development. Cambridge University Press. ReferencesI