A New General Equilibrium Welfare Measure, with Application to Labor Income Taxes

In this paper we extend the Hicksian compensating variation welfare measure in two directions. First, we adjust the size of the compensating variation in order to account for the fact that the compensating transfers will result in changes in output, as well as in prices, because labor and, in dynamic models, capital will adjust in response to these transfers. Second, we extend the measure to a dynamic setting with possibly time non-separable preferences. We find that these considerations become more significant for the welfare cost of higher labor income taxes as one moves from static to dynamic models, to models with time non-separable preferences, and finally to models with uncertainty.

Examining the Impact of Electoral Competition and Endogenous Lobby Formation on Equilibrium Policy Platforms

This paper formulates a mathematical model that combines the dynamics of interest group formation with electoral politics, involving office-seeking and corrupt political candidates and voting population with well-defined policy as well as ideological preferences. The analysis provides several interesting insights into the factors affecting lobby membership, free-riding incentives of citizen-voters and aggregate monetary donations garnered by lobby groups. Besides this, the paper also explores the impact of the formation of distinct lobby groups, the presence of swing voters and the corrupt practices or financial embezzlement on the equilibrium policy choice of electoral contenders. The findings reveal that more honest spending of campaign donations by electoral contenders reduces both the size of the lobby (or membership) as well as aggregate campaign contributions in equilibrium. In contrast, a rise in the fixed cost of organization is found to augment lobby membership along with the total amount of campaign contributions. In addition, a reduction in the level of electoral uncertainty as well as a rise in the ideological or swing voter density is found to increase the effectiveness of campaign contributions in raising an electoral candidate’s perceived popularity and, therefore, a smaller lobby group with lower aggregate donations is deemed as sufficient in influencing electoral outcomes. Moreover, the results indicate that a lower utility difference derived by the citizen-voters when comparing the two electoral candidate’s policy choices translates into smaller dispersion of the voters’ ideological bias, and consequently results in an increase in the size of lobby groups and their corresponding aggregate donations. As regards the choice of equilibrium policy, evidence of full policy convergence is not found in the case when citizen-voters of the two groups have separable preferences. In addition, policy equilibrium for a more realistic case in which the two policy platforms exhibit strategic interaction by reacting to each other has also been estimated with the help of simulations. Finally, this paper helps in categorically deciphering the influence of the median voter effect (or the centripetal force) and the distinct centrifugal forces in the form of lobbying effect, swing voter effect and the financial embezzlement effect on the equilibrium policy choice by employing different parametric specifications of the model.

Everything in Moderation: Foundations and Applications of the Satiation Model

Models in which current utility depends solely on current consumption (a.k.a. time-separable preferences) are widely acknowledged to be unrealistic, especially when attempting to describe preferences over consumption rates. Alternatively, one may stipulate that instant utility also depends on a state, for example, some stock of past consumption. Escaping the gravitational pull of time separability, however, is difficult because (1) the behavioral axioms that characterize the state and the instant utility are not known, (2) how to elicit the preference parameters—most notably the initial level of the state and the decay rate—is not known, and (3) managerial applications where state-dependent preferences produce interesting insights and solutions are scarce. This paper makes advances on these three fronts by proposing a novel set of axioms that characterize the satiation model, a proof of concept on how to elicit all preference parameters using consumption rates, and a mixed-integer linear formulation to solve the optimal design of experiential services under satiation. Our preferences introduce a de-satiation motive, absent in separable preferences, and we explore how to optimally manage this motive. This paper was accepted by David Simchi-Levi, decision analysis.

The Complexity of Election Problems with Group-Separable Preferences

We analyze the complexity of several NP-hard election-related problems under the assumptions that the voters have group-separable preferences. We show that under this assumption our problems typically remain NP-hard, but we provide more efficient algorithms if additionally the clone decomposition tree is of moderate height.

Monopolistic competition with generalized additively separable preferences

We study monopolistic competition equilibria with free entry and social planner solutions under symmetric generalized additively separable preferences, which encompass known cases such as additive, homothetic, translog and other preferences. This setting can jointly produce competition and selection effects of entry, incomplete pass-through of cost changes and pricing to market. We discuss the inefficiencies of the market equilibrium under Gorman-Pollak preferences and show its optimality under implicit constant elasticity of substitution preferences. We propose a new specification of generalized translated power preferences, and discuss applications to trade and macroeconomics.

Instrumental Rationality Without Separability

This paper argues that instrumental rationality is more permissive than expected utility theory. The most compelling instrumentalist argument in favour of separability, its core requirement, is that agents with non-separable preferences end up badly off by their own lights in some dynamic choice problems. I argue that once we focus on the question of whether agents’ attitudes to uncertain prospects help define their ends in their own right, or instead only assign instrumental value in virtue of the outcomes they may lead to, we see that the argument must fail. Either attitudes to prospects assign non-instrumental value in their own right, in which case we cannot establish the irrationality of the dynamic choice behaviour of agents with non-separable preferences. Or they don’t, in which case agents with non-separable preferences can avoid the problematic choice behaviour without adopting separable preferences.

Time, Habits, and Consumer Durables

This chapter reviews the most important sources of non-separability. In models with habit formation the marginal utility provided by today’s consumption depends on past consumption (internal habits) or on the level of aggregate consumption (external habits). The analysis of durable goods is similar in most respects to models with habits. Durable goods put a wedge between expenditure (which takes places in one period) and consumption (over multiple subsequent periods). Non-separability between consumption and leisure posits that the utility from consuming a good might depend on the amount of leisure time one has available. Another important deviation from the model with separable preferences is home production. Models incorporating home production assume that consumers allocate their time among three activities: work, leisure, and home production. Finally, collective models of behavior assume that household members have different preferences with regard to individual consumption, individual leisure time, and public (shared) goods.