Markets versus governments Export

@article{citeulike:2987319, abstract = {We provide a simple framework for comparing market allocations with government-regulated allocations. Governments can collect information about individuals' types and enforce transfers across individuals. Markets (without significant government intervention) have to rely on transactions that are ex post beneficial for individuals. Consequently, governments achieve better risk sharing and consumption smoothing than markets. However, politicians in charge of collective decisions can use the centralized information and the enforcement power of government for their own benefits. This leads to political economy distortions and rents for politicians, making government-operated allocation mechanisms potentially worse than markets. We provide conditions under which it is ex ante beneficial for the society to tolerate the political economy distortions in exchange for the improvement in risk sharing. For example, more effective controls on politicians or higher discount factors of politicians make governments more attractive relative to markets. Moreover, when markets cannot engage in self-enforcing risk-sharing arrangements and income effects are limited, greater risk aversion and greater uncertainty make governments more attractive relative to markets. Nevertheless, we also show theoretically and numerically that the effect of risk aversion on the desirability of markets may be non-monotonic. In particular, when markets can support self-enforcing risk-sharing arrangements, a high degree of risk aversion improves the extent of risk sharing in markets and makes governments less necessary. The same pattern may also arise because of "income effects" on labor supply. Consequently, the welfare gains of governments relative to markets may have an inverse U-shape as a function of the degree of risk aversion of individuals.}, author = {Acemoglu, Daron and Golosov, Mikhail and Tsyvinski, Aleh}, booktitle = {Carnegie-Rochester Conference Series on Public Policy: Advances in Dynamic Public Finance April 20-21, 2007}, citeulike-article-id = {2987319}, citeulike-linkout-0 = {http://dx.doi.org/10.1016/j.jmoneco.2007.12.003}, citeulike-linkout-1 = {http://www.sciencedirect.com/science/article/B6VBW-4RDS1W4-3/1/cd448cecd4217806db14f5d9f2722d23}, doi = {10.1016/j.jmoneco.2007.12.003}, journal = {Journal of Monetary Economics}, keywords = {incentive, institution, mechanism\_design, political\_economy}, month = {January}, number = {1}, pages = {159--189}, posted-at = {2008-07-11 09:47:14}, priority = {4}, title = {Markets versus governments}, url = {http://dx.doi.org/10.1016/j.jmoneco.2007.12.003}, volume = {55}, year = {2008} }

TY - JOUR ID - citeulike:2987319 L3 - citeulike-article-id:2987319 N2 - We provide a simple framework for comparing market allocations with government-regulated allocations. Governments can collect information about individuals' types and enforce transfers across individuals. Markets (without significant government intervention) have to rely on transactions that are ex post beneficial for individuals. Consequently, governments achieve better risk sharing and consumption smoothing than markets. However, politicians in charge of collective decisions can use the centralized information and the enforcement power of government for their own benefits. This leads to political economy distortions and rents for politicians, making government-operated allocation mechanisms potentially worse than markets. We provide conditions under which it is ex ante beneficial for the society to tolerate the political economy distortions in exchange for the improvement in risk sharing. For example, more effective controls on politicians or higher discount factors of politicians make governments more attractive relative to markets. Moreover, when markets cannot engage in self-enforcing risk-sharing arrangements and income effects are limited, greater risk aversion and greater uncertainty make governments more attractive relative to markets. Nevertheless, we also show theoretically and numerically that the effect of risk aversion on the desirability of markets may be non-monotonic. In particular, when markets can support self-enforcing risk-sharing arrangements, a high degree of risk aversion improves the extent of risk sharing in markets and makes governments less necessary. The same pattern may also arise because of "income effects" on labor supply. Consequently, the welfare gains of governments relative to markets may have an inverse U-shape as a function of the degree of risk aversion of individuals. IS - 1 JF - Journal of Monetary Economics EP - 189 TI - Markets versus governments VL - 55 T2 - Carnegie-Rochester Conference Series on Public Policy: Advances in Dynamic Public Finance April 20-21, 2007 SP - 159 KW - incentive KW - institution KW - mechanism_design KW - political_economy AU - Acemoglu, Daron AU - Golosov, Mikhail AU - Tsyvinski, Aleh PY - 2008/01// UR - http://dx.doi.org/10.1016/j.jmoneco.2007.12.003 ER -