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Über dieses Buch

This state-of-the art collection of papers analyses various aspects of the theory of externalities and public goods. The contributions employ new analytical techniques like the aggregative game approach, and discuss the philosophical underpinnings of the theory. Furthermore, they highlight a range of topical empirical applications including climate policy and counterterrorism. This contributed volume was written in memory of Richard C. Cornes, a pioneer in the theory of externalities and public goods.



The Theory of Externalities and Public Goods: The Lifework of Richard Cornes

Several months ago, after Richard had passed away, we felt that there was a need for activities honoring Richard and his lifework. In the beginning, we thought hard about the right way to recognize this exceptional researcher, colleague and friend. One appropriate option was to bring together some of those colleagues that he was most associated with and to ask them to contribute a research paper to a book honoring him. The idea was immediately supported by Roger Hartley and Todd Sandler who offered helpful advice, e.g. on whom we may ask to contribute. Of special importance to us was that Alison, Richard’s wife, was also delighted with the book project.
Wolfgang Buchholz, Dirk Rübbelke

Efficiency in Contests Between Groups

We study collective contests in which contestants lobby as groups. Our main observation is that group lobbying effort is efficiently produced in equilibrium, apparently contradicting conventional interpretations of results in the literature. This observation also leads to a substantial simplification of the analysis of equilibria through the application of a decomposition theorem, which shows that, under standard conditions a collective contest can be analyzed by reducing it to a conventional Tullock contest between groups in which each group has a group-specific cost function derived from the individual members’ cost functions. The theorem also allows us to transfer results from standard contest theory to collective contests. For example, it can be used to establish conditions for the existence and uniqueness of equilibria in collective contests. Similarly, we can apply well-known results in comparative statics to study how group composition affects the lobbying effectiveness of groups and to investigate rent dissipation.
Roger Hartley

Multiple-Aggregate Games

Consider an environment in which individuals are organised into groups, they contribute to the collective action of their group, and are influenced by the collective actions of other groups; there are externalities between groups that are transmitted through the aggregation of groups’ actions. The theory of ‘aggregative games’ has been successfully applied to study games in which players’ payoffs depend only on their own strategy and a single aggregation of all players’ strategies, but the setting just described features multiple aggregations of actions—one for each group—in which the nature of the intra-group strategic interaction may be very different to the inter-group strategic interaction. The aim of this contribution is to establish a framework within which to consider such ‘multiple aggregate games’; present a method to analyse the existence and properties of Nash equilibria; and to discuss some applications of the theory to demonstrate how useful the technique is for analysing strategic interactions involving individuals in groups.
Alex Dickson

Strategic Coalition Formation in Global Public Good Provision

In this paper we consider a two-stage game where at stage 1 the members of two groups of countries decide whether they should form a coalition and then at stage 2 determine their contribution to a global public good cooperatively within their respective group. After describing the Nash equilibria of public good provision at stage 2, which result either after unilateral or bilateral coalition building at stage 1, we provide some characterization of the subgame-perfect equilibria of the entire game. Especially, we show that in many situations the coalition formation game at stage 1 will be of the chicken type, but that other game structures may emerge as well. Since partial cooperation by a smaller group of countries may undermine the willingness of a larger group to form a coalition some paradoxical effects can also be observed.
Wolfgang Buchholz, Michael Eichenseer

Evolution of Consistent Conjectures in Semi-aggregative Representation of Games, with Applications to Public Good Games and Contests

In a semi-aggregative representation of a game, the payoff of a player depends on a player’s own strategy and on a personalized aggregate of all players’ strategies. Suppose that each player has a conjecture about the reaction of the personalized aggregate to a change in the player’s own strategy. The players play an equilibrium given their conjectures, and evolution selects conjectures that lead to a higher payoff in such an equilibrium. Considering one player role, I show that for any conjectures of the other players, only conjectures that are consistent can be evolutionarily stable, where consistency means that the conjecture is, to a first approximation, correct at equilibrium. I illustrate this result in public good games and contests.
Alex Possajennikov

Mixed-Strategy Kant-Nash Equilibrium and Private Contributions to a Public Good

This paper models situations where contributors to a public good belong to two distinct behavioral types: Kantian and Nashian. In particular, we study how the expected level of aggregate contribution to public good may change across mixed strategy equilibria when the proportion of Kantian in the population changes. The model provides a simple theoretical account of the observed phenomenon that the extent of private provision of public goods varies considerably across time and across countries that have similar levels of per capita income.
Ngo Van Long

Social Creation of Pro-social Preferences for Collective Action

Pro-social preferences are thought to play a significant role in solving society’s collective action problems of providing public goods and reducing public bads. Societies can benefit by deliberately instilling and sustaining such preferences in their members. We construct a theoretical model to examine an intergenerational education process for this. We consider both a one-time action of this kind and a constitution that establishes a steady state, and compare the two.
Avinash Dixit, Simon Levin

Community Size and Public Goods in Hume’s Treatise of Human Nature

This paper examines David Hume’s concept of justice as a social convention and its relation to public goods. It points out that it is one of two distinct types of public good discussed in A Treatise on Human Nature. These goods are indeed treated separately in modern economic theory. We examine the assertion that the “justice” type of public good, which is provided by discrete actions performed by individuals over time, is less likely to be sustainable by individual action in a large community, formalising ideas clearly outlined by Hume himself. We find, consistent with Hume’s own ideas, that in a large community agents might be more likely to provide “justice”, but that this outcome may depend critically on the assumption of complete information.
Simon Vicary

Decentralized Leadership

This paper studies the efficiency of decentralized leadership in federal settings in which selfish regional governments provide regional and federal public goods and the benevolent central government implements interregional earmarked and income transfers. In the simpler model without residential mobility, unlimited decentralized leadership is efficient only if the center implements redistributive interregional income and earmarked transfers to equate consumption of private and regional public goods across regions. Such policies perfectly align the incentives of the selfish regional governments. In the extended model with imperfect residential mobility, due to regional attachment, decentralized leadership is efficient if the center adopts the redistributive interregional income and earmarked policies and there is a common labor market in the federation.
Emilson Caputo Delfino Silva

Debt Neutrality Without Altruism: Voluntary Contributions to Public Goods as ‘Operative Linkages’

In this paper an overlapping-generations model in which generations make voluntary contributions to a public good is considered. It is described how the supply and the cost sharing of financing the public good develop in a conflict between young and old generations. It is shown that, due the strategic effects of present savings on future private and public consumption levels, generations are ‘operatively linked’. As a consequence, an intergenerational income redistribution via public debt is neutral with respect to the intertemporal resource allocation. This result has two implications: First, it suggests that the Warr Neutrality Theorem in the static standard model of voluntary public good provision can be extended to a dynamic context. Second, it shows that the Ricardian Equivalence Theorem can hold even in the absence of altruism.
Christian Haslbeck, Wolfgang Peters

Counterterrorism: A Public Goods Approach

This chapter employs the concepts of public goods and externalities to investigate myriad aspects of proactive and defensive counterterrorism policies. Such policies include degrading terrorist groups’ assets, hardening potential targets, securing border transit points, gathering intelligence, eliminating safe havens, and infiltrating terrorist groups. Counterterrorism actions possess opposing or re-enforcing externalities that create an amazing variety of strategic substitutes and complements. As such, the implications for leadership and/or unilateral action may be quite varied for alternative counterterrorism measures. By drawing on the private provision of public good model, joint products, and aggregator technology, this article serves to underscore the wide-ranging applicability of many theoretic constructs developed by Cornes and his co-authors.
Todd Sandler

Linguistic Assimilation and Ethno-religious Conflict

I examine the consequences, of integrating large minorities into productivity-relevant majority ethno-linguistic conventions, for income distribution and ethnic conflict. I develop a two-community model where such assimilation generates social gains by: (a) facilitating economic interaction, and (b) dampening ethno-religious or racial conflict over symbolic and normative contents of the public sphere, measured by the proportion of total output allocated to such conflict. However, integration shifts the distribution of both material and symbolic goods against the minority. It also expands income inequality within the minority community. Total resource wastage due to conflict may go up in absolute terms. My analysis explains why attempts to integrate large minorities into majority ethno-linguistic conventions may meet with strong resistance, even if there are potential gains from such integration. Results suggest that minorities may be more open to assimilation in productivity-relevant majority cultural (especially linguistic) conventions when assimilatory policies are bundled with measures to secularize or de-racialize the public sphere, in the sense of closing a larger part of it to ethno-religious or racial contestation.
Indraneel Dasgupta

International Carbon Trade and National Taxes: Distributional Impacts of Double Regulation

This paper focuses on carbon emissions control in a group of countries to explore the distributional incidence of mixed policies consisting of a joint emissions trading scheme (ETS) and of national emissions taxes overlapping with the ETS. Such policies impact on national welfares through both the overlapping taxes and the distribution of national emissions caps. First, we consider the polar case of an emissions tax-only policy and show that the equilibrium allocation is unaffected by the introduction of an ETS with an arbitrarily given distribution of emissions caps. Next, we analyze the distributional consequences of mixed policies. We characterize those mixed policies, including the polar cases of ETS-only and tax-only policies, which bring about the same distribution of national welfares. We also suggest two measures of the net distributional incidence of mixed policies which allow to identify winners and losers of mixed policies relative to the tax-only policy.
Thomas Eichner, Rüdiger Pethig

Thinking Local but Acting Global? The Interplay Between Local and Global Internalization of Externalities

The paper analyzes the implications of local and global pollution when two types of abatement activities can be undertaken. One type reduces solely local pollution (e.g., use of particulate matter filters) while the other mitigates global pollution as well (e.g., application of fuel saving technologies). In the framework of a 2-country endogenous growth model, the implications of different assumptions about the degree to which global externalities are internalised are analysed. Subsequently, we derive policy rules adapted to the different scenarios.
Karen Pittel, Dirk Rübbelke

Showdown in Schönau: A Contest Case Study

This chapter analyzes a referendum campaign as a case study of a contest. The referendum, held in 1996 in the small German town of Schönau, led to the replacement of the conventional electricity supplier by a firm founded by the local environmentalists. We discuss both qualitative aspects (activities, arguments and strategies of the environmentalists, the electricity firm and its local allies) and quantitative aspects (lobbying effectiveness, stakes, effort and success probability). We identify voter groups more inclined to vote one way or the other and factors that contributed to the environmentalists’ victory. Finally, we discuss modeling implications.
Bouwe R. Dijkstra, Patrick R. Graichen
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