Petra Persson is on the job market this year from Columbia. Her CV is pretty incredible – there’s pure theory, cutting edge empirical techniques, policy work, networks, behavioral and more. Her job market paper is about the impact of social insurance policy on seemingly unrelated markets like marriage, and I’ll discuss it briefly at the end of the post, but I want to focus on another paper on hers which struck me as quite interesting.
Imagine a benevolent ruler who has private information about some policy, such as the relative safety of wearing seatbelts. This ruler can either tell citizens the information, or lie, or coerce them to take such action. Naive libertarianism suggests that we should always be truthful is altruistic; consumers can then weigh the information according to their preferences and then choose the policy optimal for them.
But note something interesting. On some issues, one subset of politicians has libertarian leanings, while on others, a different subset has those leanings. For instance, a politician may favor legal assisted suicide but insist on mandatory seatbelt rules, while another politician may be against the mandatory belt and also against legal assisted suicide. Politicians can even vary in how libertarian they wish to be depending on who the policy affects. Witness that many politicians favor legalizing marijuana but very few favor legalizing it for 16 year olds. What explains this behavior?
Loginova and Persson examine this theoretically. Take a population of citizens. There are two possible states, 0 and 1. They can either think each state equally likely yet have different heterogeneous preferences from the politician (measured with a Crawford-Sobel style quadratic loss, though this isn’t a critical model) or they can have identical preferences as the politician yet have different heterogenous (prior) beliefs about the probability of each state. The politician can be altruistic to varying degrees – more altruism means he, according to his own prior, puts more and more weight on the utility of the agent. The politician gets a noisy signal about the true state. To limit the extent of opposing beliefs, the politician is restricted to having the same prior as the median citizen.
If the politician can only advise or not advise, when does he make a truthful public announcement? If he disagrees on preferences with the citizens, then the more altruistic, the more likely he is to announce truthfully, for the standard libertarian reason: the citizens know their own preferences, and the better informed they are, the better they can maximize their own welfare. If, however, he disagrees on priors with the citizens, then the more altruistic, the less likely he is to announce truthfully: altruism means I care about the citizen’s welfare, but since they have priors that are in my eyes wrong, the citizens know that even when I am altruistic I have incentive to lie so that citizens take actions that are optimal according to my prior, therefore truthful communication cannot be sustained.
Now what if the politician could (at a cost to him) force all individuals to take an individual action? With preference disagreement, an altruistic politician would never do this, both because he can send all the information to citizens with a free message and also because a mandate does not respect heterogeneity of preferences. Even if action 0 is better than action 1 for 90% of the population, an altruistic principle also cares about the other 10%. With disagreement about priors, however, an altruistic politician is more likely to impose a mandate the more altruistic he is. Even though citizens have heterogeneous priors, the principle thinks all of them are wrong, and hence is not worried about heterogeneity when imposing a mandate. Since we noted in the last paragraph that altruistic politicians who have different priors from citizens will not be able to credibly send their information, the mandate allows the politician’s private information to be used in the citizen’s actions.
Finally, what if the politician can send individual-level messages or enforce individual mandates? A politician with preference disagreement need to be fairly altruistic before his public message is credible; in fact, he needs to be able to credibly persuade the individual with the average disagreement in order for his public signal to be credible. If he is not altruistic enough, he can still credibly persuade those agents who have only a limited amount of preference disagreement with him. If mandates are possible, the politician with limited altruism will force individuals whose preferences are very different from the politician to take the politician’s desired action, but since preferences of the politician and the agents are more aligned when altruism is higher, the share of citizens who face a mandate declines as the politician’s altruism increases. Likewise, a politician with disagreement about priors can only truthfully send information when his altruism is low. If the politician is very altruistic, even though the public signal will not be believed, a politician can still credibly send information to those whose priors are similar to the politician. The politician with low levels of altruism will only mandate the action of agents with extreme beliefs, but as altruism increases, more and more citizens will face a mandate.
Very good – the use of paternalistic policies, and the extent to which they are targeted at individuals, depends qualitatively on whether the politician disagrees with the agents about their preferences or about their knowledge, and the extent to which mandates are applied on certain groups depends on how extreme their preferences or beliefs are. There is nothing inherently contradictory in an altruistic politician taking the libertarian side on one issue and the paternalistic side on another.
July 2012 working paper (No IDEAS version). Petra has many other interesting papers. In her job market paper, presented here last week, she shows that social insurance, in this case a widow’s benefit in Sweden, can have major affects in other markets. In particular, a really nice regression discontinuity shows that the benefit was leading to a huge number of extra marriages, that these were more likely to end in divorce, that intrahousehold bargaining was affected, and much more (Jeff at Cheap Talk has a longer description). Her paper Circles of Trust notes a reason for cliquish behavior in some labor markets. If I have information whose value declines with use (such as a stock tip) and I am altruistic, I may wish to tell my friends the info. But I worry that they will tell their friends, who I don’t know and hence don’t really care about. If my friend could commit not to tell his friends, I would give him the info. How can we commit ex-ante? Make our social networks a clique. I would bet that this phenomenon explains hiring in, say, small hedge funds to a great extent.
A Fine Theorem 