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We consider binary private contributions to public good projects that succeed when the number of contributors exceeds a threshold. We show that for standard distributions of contribution costs, valuable threshold public good projects are more likely to succeed when they require more contributors. Raising the success threshold reduces free-riding incentives, and this strategic effect dominates the direct effect. Common intuition that easier projects are more likely to succeed only holds for cost distributions with right tails fatter than Cauchy. Our results suggest government grants can reduce the likelihood that valuable threshold public good projects succeed. (JEL D71, H41, H81)

We analyze a dynamic extension of a parsimonious model of lawmaking in which preferences evolve over time and today’s policy becomes tomorrow’s status quo. Unlike in existing models of pivotal politics, policy makers’ voting behavior depends on the institutional environment and on their expectations about future economic and political shocks. Relative to sincere voting, the equilibrium behavior exhibits a strategic polarization effect, which increases with the degree of consensus required by the institution, the volatility of the policy environment, and the expected ideological polarization of the future policy makers. The equilibrium behavior also exhibits a strategic policy bias, which works against any exogenous policy bias embedded in the voting rule. Our analysis implies that the existing literature underestimates the inertial effect of checks and balances and overestimates the impact of institutional biases such as fiscally conservative budget procedures. Loeper gratefully acknowledges support from the Ministerio Economía y Competitividad (Spain), Grants No. RYC-2015-18326, No. ECO 2013-42710-P, No. MDM 2014-0431, and Comunidad de Madrid, MadEco-CM (S2015/HUM-3444)

We study a model that characterizes the conditions under which past misbehavior becomes the subject of present scandal, with consequences for both the implicated politician and the parties that work with him. In the model, both authentic and fake scandals arise endogenously within a political framework involving two parties that trade off benefits of continued collaboration with a suspect politician against the possibility of reputational fallout. Rising polarization between the two parties, we show, increases the likelihood of scandal while decreasing its informational value. Scandals that are triggered by only the opposing party, we also find, are reputationally damaging to both parties and, in some instances, reputationally enhancing to the politician. The model also reveals that jurisdictions with lots of scandals are not necessarily beset by more misbehavior. Under well‐defined conditions, in fact, scandals can be a sign of political piety.

Why do rational politicians choose inefficient policy instruments? Environmental regulation, for example, often takes the form of technology standards and quotas even when cost-effective Pigou taxes are available. To shed light on this puzzle, we present a stochastic game with multiple legislative veto players and show that inefficient policy instruments are politically easier to repeal than efficient instruments. Anticipating this, heterogeneous legislators agree more readily on an inefficient policy instrument. We describe when inefficient instruments are likely to be chosen, and predict that they are used more frequently in (moderately) polarized political environments and in volatile economic environments. We show conditions under which players strictly benefit from the availability of the inefficient instrument. Harstad’s part of the research received funding from the European Research Council (ERC) under the European Union’s Horizon 2020 Research and Innovation Program (Grant 683031). Antoine Loeper gratefully acknowledges the support of the Fundación Ramón Areces, of the Ministerio de Economía y Competitividad (Spain), grants RYC-2015-18326, ECO 2016-75992-P, and MDM 2014-0431, and of the Comunidad de Madrid, grant MadEco-CM (S2015/HUM-3444).

Cheap-talk lies are at risk of being detected. We investigate the implications of this fact in a communication game in which players have no common interests and messages are cheap, but deceit is detectable with positive probability. In particular, when the sender makes a claim that is not true, with positive probability the receiver learns that the claim is a lie. We show that partially informative equilibria exist because lie detection generates an endogenous cost from lying consisting of being confused with lower types in equilibrium. In any informative equilibrium, the moderate and the highest types tell the truth, while the lowest types lie claiming to be the highest types. We show that more information may be revealed if the sender is given an opportunity to prepare a lie in advance and thereby decrease its detectability. We analyze an extension in which the sender may make multiple attempts at convincing the receiver, and show that if lie detectability is high, the receiver may benefit from committing to listening to the sender only once. And finally, we analyze a two-sender version of the model, and show that senders will exaggerate their claims only if the state disadvantages them sufficiently.

Two players choose whether to cooperate on a project. Each of them is endowed with some evidence, and if both possess a sufficient amount, then cooperation is profitable. In order to facilitate cooperation, the players reveal evidence to one another. However, some players are concerned about privacy, and so revelation of evidence that does not result in cooperation is costly. We show that in equilibrium evidence can be exchanged both incrementally and all at once, and identify conditions under which the different rates of evidence exchange are optimal. (JEL C71, D83)

This paper analyzes an ongoing bargaining situation in which i) preferences evolve overtime, ii) the interests of individuals are not perfectly aligned, and iii) the previous agreement becomes the next status quo and determines the payoffs until a new agreement is reached. We show that the endogeneity of the status quo exacerbates the players’ conflict of interest and decreases the responsiveness of the bargaining outcome to the environment. Players with arbitrarily similar preferences can behave as if their interests were highly discordant. When players become very patient, the endogeneity of the status quo can bring the negotiations to a complete gridlock. Under mild regularity conditions, fixing the status quo throughout the game via an automatic sunset provision improves welfare. The detrimental effect of the endogeneity of the status quo can also be mitigated by concentrating decision rights, for instance, by lowering the supermajority requirement.

Inclusive voting rules are rules that require the approval of a greater set of policy makers than a simple majority. Using a dynamic voting model with stochastic shocks, we identify a novel distortive effect of inclusive voting rules. Under inclusive voting rules, the identity of the pivotal player depends on the policy that is currently in place. As a result, policy makers distort their voting behavior in favor of alternatives that make them more likely to be pivotal in future votes. This effect leads them to vote in a more polarized way, and makes the policy less responsive to the environment. These distortions increase as the voting rule becomes more inclusive, and as the environment becomes more volatile. Because of these distortions, biasing the voting rule in favor of some policies can perversely bias the equilibrium outcome against them.

Two players choose whether to coordinate on a project. Each of them is endowed with some information, and if both possess a sufficient amount then coordination is profitable. In order to facilitate coordination the players reveal information to one another. However, some players are concerned about privacy, and so revelation of information that does not result in coordination is costly.We show that gradual information revelation can arise in equilibrium, may be necessary for coordination, and, under some conditions, is optimal. We also show that when all players have privacy concerns, long and gradual information revelation may allow players to preserve their privacy completely.

Why do investors excessively tilt their portfolio towards domestic assets? Recent studies suggest asymmetric information plays a significant role in the home equity bias puzzle. A key assumption in theoretical models is that agents invest in assets and process information on their own. However, most international investments are executed by managers in financial institutions. These institutions allocate significant resources to processing information, making the asymmetric information assumption less appealing. In this paper, we explain home bias at the fund level by showing how information asymmetry at the individual level has relevant implications at the portfolio management level. Agents delegate their investment decisions to portfolio managers of different and uncertain ability. Investors are better informed about the performance of domestic markets; and therefore, are more able to evaluate the ability of managers operating in these markets. This, in turn, makes investing in domestic markets less risky and attracts more managers. Additionally, highly skilled managers benefit more from higher transparency, and this is why they are more likely to choose to operate in the domestic market. Therefore, a small information asymmetry of individual investors generates home bias due to highly skilled managers in the domestic market (higher than in the foreign market) and diversification (a higher number of managers in the domestic market). We simulate the model and find that on average 69.2% of investment is in the domestic market.

Despite the expectations of economists that the euro changeover would have no effect on prices, European consumers perceived the opposite. To shed some light on this puzzle, we develop a model of imperfect information in which cheaper goods experience higher price growth after the changeover. Retailers, aware of consumers' difficulties in adopting the new currency, use currency changeovers to increase profits by increasing prices. The lower the price transparency after the changeover, the higher the euro-related inflation. Using data on inflation (Eurostat) and price levels (Economist Intelligence Unit), we show that although the euro changeover did not significantly increase inflation, it nevertheless had a distortionary effect on prices. After the changeover, cheaper goods had higher inflation, and this effect was stronger in countries in which people found dealing with the new currency problematic.

Despite the expectations of economists that the euro changeover would have no effect on prices, we show that European consumers perceive the contrary. The data indicate that consumers based their perceptions about inflation on goods that are cheaper and more frequently purchased. We use this insight to develop and estimate a model of imperfect information that explains why these goods were subject to higher price growth after the changeover. The data indicate that some retailers, aware of the consumers' difficulties in adopting the new currency, used the changeover to increase profits by increasing prices. We also propose an explanation on why, contrary to common belief, this effect was smaller in more concentrated retail markets.