Public Economics

As Easy as ABC? Multidimensional Screening in Public Finance’ (With Floris Zoutman) pdf available here

We characterize the second-best allocation in a Mirrleesian optimal tax model with multidimensional heterogeneity and multiple continuous choice variables. Using a first-order approach, 4 properties of the optimal allocation are derived. First, the optimal tax schedule can be described by a generalized version of Diamond's (1998) and Saez' (2001) ABC-formula. Second, a no-distortion at the top/bottom result holds. Third, the famous Atkinson-Stiglitz theorem that commodity tax rates should be uniform does not generalize to multidimensional heterogeneity. Fourth, the optimal wedges found contain as many interdependencies as the dimension of the type space. All these findings can be explained intuitively by interpreting the tax system as the tool used by the planner to elicit information from the agents. The interdependencies in the optimal tax schedule are similar to the ones found in the stochastic dynamic models of the New Dynamic Public Finance. This suggests that the complexity in NDPF tax systems might be related to multidimensional heterogeneity in the type space.

 

When a Price is Enough: Implementation in Optimal Tax Design’ (With Floris Zoutman) pdf available here

This paper studies the design of tax systems that implement a planner's second-best allocation in a market economy. An example shows that the widely used Mirrleesian (1976) tax system cannot implement all incentive-compatible allocations. Hammond's (1979) "principle of taxation" proves that any incentive-compatible allocation can be implemented through at least one tax system. However, this tax system is often undesirable since it severely restricts the choice space of agents in the economy. In this paper we derive necessary and sufficientcient conditions to verify whether a given tax system can implement a given incentive-compatible allocation. We show that when an incentive-compatible allocation is on the Pareto frontier, and/or surjective onto the choice space, a tax system that equates the marginal tax rates to the optimal wedges can implement the second best, without restricting the choice space of the agents. It follows that the Mirrleesian tax system can successfully implement the second best in the identified classes. Since the secondbest allocation of welfarist planners is always on the Pareto frontier, our results (ex post) validate most tax systems proposed in the literature. Outside of the identified classes, the planner may need to restrict the choice space of agents to implement its second best in the market. This sheds new light on rules, quotas and prohibitions used in real-world tax and benefit systems.

 

Balancing the Bids, Solutions for Unit Price Auctions pdf available here

Many organizations use procurement tenders to buy large amounts of goods and services. Especially in the public sector the use of these reverse auctions has grown rapidly over the past decades. For the (reverse) unit price auction experience as well as theory has shown that they can attract skewed/unbalanced bids, i.e. bids where the price structure is distorted to take advantage of estimation errors. This paper offers two possible strategies that can make bid skewing less profitable, without resorting to ex-post rejection of bids or altering the nature of the unit-price procedure. I show that by allowing for some secrecy or post tender competition, bid-skewing is discouraged. This reduces the incentive to skew all-together and thus more closely aligns bidders and bid-takers interests in creating a contract profitable for both.


Flip a coin or vote: Choosing Group Decision Rules’ (With Timo Hoffmann) pdf available here

Before a group can take a decision, its members must agree on a mechanism to aggregate individual preferences. In this paper we present the results of an experiment on the influence of private payoff information and the role of the available alternatives on individuals’ mechanism choices in such group choice situations. While efficient mechanisms are desirable, our experiment shows that participation constraints can prevent their implementation. In the context of social choice mechanisms for the provision of an indivisible public good, we find strong indications that individual preferences for choice rules are sensitive to individual expected payoffs. Our results highlight the importance of considering participation constraints when designing choice institutions.


Fairness Views and Political Preferences - A Representative Online Experiment ’ (With Daniel Müller)

We elicit distributional fairness ideals of impartial spectators using an incentivized eco- nomic experiment in a representative sample of the German population. Our dataset allows us to relate our experimental data on fairness ideals to a large range of socio-demographic characteristics, political preferences and revealed charitable behavior. We document several empirical facts: i) egalitarians are the predominant type, even though egalitarian allocations are Pareto-dominated by maxi-min allocations; ii) females are more egalitarian than men; iii) men are relatively more efficiency-minded; iv) maxi-max preferences are empirically irrelevant; v) left-leaning voters are more likely to be egalitarians whereas right-leaning voters are more likely to be efficiency-minded; and vi) young and highly-educated participants hold different fairness ideals than the rest of the population. Moreover, we show that the experimentally elicited fairness types predict preferences for redistribution and social spending. We also find that egalitarians are more likely to donate to charity than efficiency-minded people, even after controlling for a range of covariates. Hence, our paper also contributes to the emerging litera- ture examining how experimental measures relate to real world behavior, and test the external validity of laboratory experiments on fairness preferences.


Career Concerns in Committees: An Experimental Analysis.’’ (with Bauke Visser)

Career concerned management teams may take decisions to in ate labor markets’ assessments of their abilities. Theory predicts that rational markets take such attempts into account when forming their beliefs. We set up a laboratory experiment to study whether management teams attempt to fool markets and whether markets can undo such fooling. Managers indeed use investment decisions to manipulate market inferences. Markets are not misled by these attempts. Managers also inform markets about their confdence in the decisions taken. Contrary to theory, there is useful information about manager’s abilities in such statements. Markets extract this information efficiently and update their assessments of managers accordingly.


Other research

Designing the debate

This paper presents a model of legal systems as a set of optimal choices that follow from an initial choice of judgment function. Several prominent differences between civil and common law traditions, like the use of binding precedent, the activity level of the judge, and the relative levels of conflict intensity in the two traditions, are shown to be logical consequences of the different judgment functions chosen in these systems. This analysis highlights the co-evolution of material and procedural law. Furthermore, it is shown that both judgment fucntions, and thus the different forms of the legal systems, can be optimal solutions to a social maximization problem, and the solutions found are implementable. The winner-takes-all decision function that is characteristic of the Common law systems maximizes the power of incentives in the procedure and minimizes the amount of judicial interventions, thus maximizing individual freedom and responsibility for the outcomes. While the principle-based decision function of the Civil law system minimizes the amount of injustice in any individual case by allowing the judge to moderate the outcomes. The choices made in different countries can be attributed to differences in perception of justice and the differences between societal values that separate the Anglo-American and the Continental European nations more generally, while both are locally efficient and neither one is the one-size-fits-all optimum.


Bid Skewing in the EU, A Comparative Analysis. ’ (thesis written to obtain the LL.M. degree) pdf available here

I compare the US Federal Acquisition Regulation with the two big procurement directives in the EU. The FAR allows the bid-takers more freedom in rejecting skewed bids and therefore better protects bid-takers against this kind of gaming. I conclude that the EU should develop their own approach to deal with skewed bids, since difference in procedural law make simply copying the rules of the FAR impossible. Material legal provisions in the FAR could serve as a basis for future EU rules on skewed bids.