Redistribution Through Markets

Econometrica ◽  
2021 ◽  
Vol 89 (4) ◽  
pp. 1665-1698 ◽  
Author(s):  
Piotr Dworczak ◽  
Scott Duke Kominers ◽  
Mohammad Akbarpour
Keyword(s):  
Private Information ◽  
Competitive Equilibrium ◽  
Pareto Frontier ◽  
Allocative Efficiency ◽  
Market Clearing ◽  
Trade Off ◽  
Price Controls ◽  
Equilibrium Allocation ◽  
Lump Sum ◽  
Indivisible Object

Policymakers frequently use price regulations as a response to inequality in the markets they control. In this paper, we examine the optimal structure of such policies from the perspective of mechanism design. We study a buyer‐seller market in which agents have private information about both their valuations for an indivisible object and their marginal utilities for money. The planner seeks a mechanism that maximizes agents' total utilities, subject to incentive and market‐clearing constraints. We uncover the constrained Pareto frontier by identifying the optimal trade‐off between allocative efficiency and redistribution. We find that competitive‐equilibrium allocation is not always optimal. Instead, when there is inequality across sides of the market, the optimal design uses a tax‐like mechanism, introducing a wedge between the buyer and seller prices, and redistributing the resulting surplus to the poorer side of the market via lump‐sum payments. When there is significant same‐side inequality that can be uncovered by market behavior, it may be optimal to impose price controls even though doing so induces rationing.

Uncertainty, Profit, and the Limits of Markets

2021 ◽  
pp. 106591292110358
Author(s):  
Roni Hirsch
Keyword(s):  
Allocative Efficiency ◽  
Market Model ◽  
Perfect Competition ◽  
Political Debate ◽  
Trade Off ◽  
Starting Point ◽  
Knowledge Uncertainty ◽  
Market Benefits ◽  
Capitalist Democracies ◽  
The Ideal

The neoclassical market model is the overwhelming basis for contemporary views of markets as fair, efficient, or both. But is it an appropriate starting point? The article draws on Frank Knight’s 1920s work on the economics of uncertainty to show that the ideal of perfect competition conceals a tacit trade-off between equality and certainty. Largely undetected, this trade-off continues to govern financialized capitalist democracies, evading normative and political debate. By explaining how markets and firms resolve the problem of uncertainty, Knight shows that all supposed market benefits, even allocative efficiency, are not costless to society. More specifically, Knight argued that modern markets are premised on a tacit agreement between a handful of “daring” entrepreneurs and the “risk-averse” public: the former agree to carry the uncertainties of business-life in return for a substantially larger share of its power and rewards. Despite the highly static assumptions of neoclassicism, therefore, and its linked assumption of perfect knowledge, uncertainty is far from absent in modern economics. It is built into firms and markets and manifests itself as a steep social and material hierarchy.

scholarly journals Persistent Distortionary Policies with Asymmetric Information

2006 ◽  
Vol 96 (1) ◽  
pp. 387-393 ◽  
Author(s):  
Matthew F Mitchell ◽  
Andrea Moro
Keyword(s):  
Asymmetric Information ◽  
Efficient Method ◽  
Pareto Frontier ◽  
Pareto Improvement ◽  
Lump Sum ◽  
Standard Textbook ◽  
Pareto Improvements

Why are distortionary policies used when seemingly Pareto improvements exist? According to a standard textbook argument, a Pareto improvement can be obtained by eliminating the distortions, compensating the losers with a lump sum transfer, and redistributing the gains that are left over. We relax the assumption that winners know the losses suffered by the losers and show that the informationally efficient method of compensating losers may involve the use of seemingly inefficient (but informationally efficient) distortionary policies. The risk of overcompensating losers may make distortions informationally efficient, as there are points on the Pareto frontier where distortions are used.

OPTIMAL POLICY IN COLLATERAL CONSTRAINED ECONOMIES

2017 ◽  
Vol 23 (2) ◽  
pp. 798-836 ◽  
Author(s):  
Nina Biljanovska
Keyword(s):  
Optimal Policy ◽  
Competitive Equilibrium ◽  
Policy Instruments ◽  
Policy Recommendations ◽  
Tax Rates ◽  
Second Best ◽  
Collateral Constraints ◽  
Income Transfers ◽  
Lump Sum ◽  
Distortionary Taxes

This paper examines optimal policy in a macroeconomic model with collateral constraints. Binding collateral constraints yield inefficient competitive equilibrium allocations because they distort the optimal utilization of real resources. I identify the set of policy instruments that can be used by a Ramsey planner to achieve the first-best and the second-best (i.e., constrained planner's) allocations. A system of distortionary taxes on capital and labor income, along with direct lump-sum transfers among borrowers and lenders replicates the first-best outcome. The tax rates correct for the marginal distortions, whereas the direct lump-sum transfers perform income redistributions among the agents. In absence of direct lump-sum transfers, the distortionary taxes have an additional role, i.e., to perform implicit income transfers, and only second-best outcomes are attainable. I also derive the optimal policy in response to real and financial shocks, and show how the policy recommendations differ depending on the set of policy instruments available.

The Over-Regulated City: A Perspective on Regulatory Procedures in the City of New York

1981 ◽  
Vol 9 (2) ◽  
pp. 197-219 ◽  
Author(s):  
Harold M. Hochman
Keyword(s):  
New York ◽  
Land Use ◽  
Direct Effects ◽  
Market Clearing ◽  
Pilot Studies ◽  
Local Regulation ◽  
Price Controls ◽  
Private Interests ◽  
The City

This article summarizes the pilot studies of local regulation in the City of New York of a team of City University of New York students and faculty. It deals with three categories of regulation: permits and licenses, qualitative restrictions on buildings and land use, and price controls. Direct effects on revenue and revenue potential seem small, but the burdens of compliance and enforcement appear to be significant. While no striking evidence that regulation is responsible for the economic fortunes of New York is unearthed, it seems clear, in many cases, that regulation serves no significant purpose, and has stifled incentive and inhibited market-clearing at “correct” prices. Further study, directed in particular to why private interests seem more successful in promoting their demands for regulation in New York than elsewhere, seems warranted.

scholarly journals Polynomial Batch Codes for Efficient IT-PIR

2016 ◽  
Vol 2016 (4) ◽  
pp. 202-218 ◽  
Author(s):  
Ryan Henry
Keyword(s):  
Private Information ◽  
Research Literature ◽  
Private Information Retrieval ◽  
New Techniques ◽  
Computation Cost ◽  
Trade Off ◽  
Server Side ◽  
Efficient Information ◽  
The Cost ◽  
Database Servers

Abstract Private information retrieval (PIR) is a way for clients to query a remote database without the database holder learning the clients’ query terms or the responses they generate. Compelling applications for PIR are abound in the cryptographic and privacy research literature, yet existing PIR techniques are notoriously inefficient. Consequently, no such PIRbased application to date has seen real-world at-scale deployment. This paper proposes new “batch coding” techniques to help address PIR’s efficiency problem. The new techniques exploit the connection between ramp secret sharing schemes and efficient information-theoretically secure PIR (IT-PIR) protocols. This connection was previously observed by Henry, Huang, and Goldberg (NDSS 2013), who used ramp schemes to construct efficient “batch queries” with which clients can fetch several database records for the same cost as fetching a single record using a standard, non-batch query. The new techniques in this paper generalize and extend those of Henry et al. to construct “batch codes” with which clients can fetch several records for only a fraction the cost of fetching a single record using a standard non-batch query over an unencoded database. The batch codes are highly tuneable, providing a means to trade off (i) lower server-side computation cost, (ii) lower server-side storage cost, and/or (iii) lower uni- or bi-directional communication cost, in exchange for a comparatively modest decrease in resilience to Byzantine database servers.

Supporting Attainable Solutions: Symmetry and Complexity in One-Period Exchange Mechanisms

2016 ◽  
Author(s):  
Martin Shubik ◽  
Eric Smith
Keyword(s):  
Degrees Of Freedom ◽  
Competitive Equilibrium ◽  
Process Analysis ◽  
Allocative Efficiency ◽  
Market Mechanism ◽  
Rational Action ◽  
Strategic Choices ◽  
Production And Consumption ◽  
The Social

In this chapter we compare economies at the least-structured level of dynamics: market systems characterized by one-shot clearing and hence a single timescale for strategic choices. We choose that timescale to coincide with the social “day” that is the natural cycle of production and consumption. We compare different clearing mechanisms according to a number of structural properties that can be used as a measure of complexity. We use a measure of allocative efficiency to illustrate distortions from competitive equilibrium for each mechanism. Much of the importance of process analysis can be illustrated with a single dilemma: the meaning and determination of the value of the numéraire for exchange. This is explored here. Six market models are presented to illustrate the constraints on rational action from asymmetry of the market mechanism or from strategically ambiguous degrees of freedom. The models have sufficiently many shared features that they roughly represent successive stages in the elaboration of a few common ideas. These are laid out in the chapter.

MONEY TAXES, MARKET SEGMENTATION, AND SUNSPOT EQUILIBRIA

2001 ◽  
Vol 5 (3) ◽  
pp. 327-352
Author(s):  
Todd Keister
Keyword(s):  
Market Segmentation ◽  
Competitive Equilibrium ◽  
Price Level ◽  
Asset Market ◽  
Fiat Money ◽  
Lump Sum ◽  
General Price Level ◽  
Redistribution Policy ◽  
Sunspot Equilibria ◽  
The Government

This paper investigates how volatile the general price level can be in an equilibrium where all uncertainty is extrinsic. The government operates a lump-sum redistribution policy using fiat money. An approach to modeling asset market segmentation is introduced in which this tax policy determines how volatile the price level can be, which in turn determines the volatility of consumption. The paper characterizes (i) the set of general price levels consistent with the existence of competitive equilibrium and (ii) the resulting set of equilibrium allocations. The results demonstrate how redistribution policies that are fixed in nominal terms can have a destabilizing effect on an economy, and show how to evaluate the amount of volatility that a particular policy may induce.

scholarly journals Efficiency, Welfare, and Political Competition *

2015 ◽  
Vol 131 (1) ◽  
pp. 461-518 ◽  
Author(s):  
Felix J. Bierbrauer ◽  
Pierre C. Boyer
Keyword(s):  
Private Information ◽  
Political Competition ◽  
Income Taxation ◽  
Symmetric Equilibrium ◽  
Public Goods Provision ◽  
Trade Off ◽  
Private Goods ◽  
Incentive Compatible ◽  
Equity And Efficiency ◽  
Pareto Efficient

Abstract We study political competition in an environment in which voters have private information about their preferences. Our framework covers models of income taxation, public-goods provision, or publicly provided private goods. Politicians are vote-share maximizers. They can propose any policy that is resource-feasible and incentive-compatible. They can also offer special favors to subsets of the electorate. We prove two main results. First, the unique symmetric equilibrium is such that policies are surplus-maximizing and hence first-best Pareto-efficient. Second, there is a surplus-maximizing policy that wins a majority against any welfare-maximizing policy. Thus, in our model, policies that trade off equity and efficiency considerations are politically infeasible.

A Theory of Arbitrage Capital

2013 ◽  
Vol 2 (1) ◽  
pp. 62-97 ◽  
Author(s):  
Viral V. Acharya ◽  
Hyun Song Shin ◽  
Tanju Yorulmazer
Keyword(s):  
Asset Prices ◽  
Learning By Doing ◽  
Liquid Form ◽  
Trade Off ◽  
Fire Sales ◽  
Equilibrium Allocation ◽  
Limited Arbitrage

We present a model of equilibrium allocation of capital for arbitrage. If asset prices may fall low enough, it is profitable to carry liquid capital to acquire assets in such states. Set against this, keeping capital in liquid form entails costs in terms of foregone profitable investments. This trade-off generates occasional fire sales and limited arbitrage capital as robust phenomena. With learning-by-doing effects, arbitrage capital moves in to acquire assets only if fire sales are steep. However, once arbitrage capital finds it profitable to acquire assets, it requires similar returns elsewhere, inducing contagious fire-sale prices even for unrelated assets. (JEL G21, G28, G38, E58, D62)

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