Comment on ‘Valuation of Barrier Options in a Black–Scholes Setup with Jump Risk’ Hans-Peter Bermin Hans-Peter Bermin Search for other works by this author on: Oxford Academic Google Scholar Review of Finance, Volume 3, Issue 3, 1999, Pages 343–345, https://doi.org/10.1023/A:1009865221699 Published: 01 December 1999

In many countries, equality of political rights, including the right to vote over taxes and transfers, goes along with substantial inequality of economic conditions. This observation lies at the root of one fundamental issue in political economy, one about the factors that limit the extent of redistribution in democracies. The conventional economic wisdom on this issue can roughly be summarized by two arguments. Firstly, redistributive taxation may be limited by various kinds of incentive costs of taxation [as, e.g., in James A. Mirrlees (1971), Kevin W.S. Roberts (1977), Dennis N. Epple and Thomas Romer (1991), and Thomas Piketty (1995)]. Secondly, redistribution may be dampened by the lobbying activity of high-income groups and by various imperfections inherent to the political process that determines the tax system [as, e.g., in Gary S. Becker (1983) and John E. Roemer (1995)]. While both arguments offer illuminating insights into the phenomenon of redistribution, they are also based on a very crude description of human behavior, one which ignores social motivations of action, both in the economic and the political sphere. The present paper develops an explanation that takes such motivations into account. Specifically, it shows that limits to redistribution may arise when economic inequality has an informational value for social decisions. Our approach is based upon the following observation: many goods and decisions that heavily affect an individual’s quality of life are not allocated or made through markets but through social interactions (Thomas Scitovsky, 1976). For instance, although people have strong preferences over how they are treated by others and over whom they mate with, these things are not the object of market transactions. A number of sources of satisfaction, like conversation, dinners and parties, playing with others, and being observed and admired, are nonmarket goods, for which a keen social competition between individuals often develops. As shown by Harold Cole et al. (1992), the existence of social—rather than market—competition for some goods can endogenously generate a concern for relative position in the income distribution. When information about relative income is private, individuals become interested in the observable consumption differentials between them and their social competitors. Since consumption differentials are influenced by redistributive taxation, the political attitudes of people toward redistribution will be shaped by its expected impact on social competition. In some identifiable environments, this concern for social success may be the crucial factor that limits the extent of redistribution desired by a majority of voters. Specifically, while the middle class may obtain economic benefits from a large amount of redistributive taxation, it may oppose an equalization of living standards since this would harm its social success. The fear of losing social status in favor of the poor induces the middle class to enter a political alliance with the rich which supports conservative taxation programs. In the sociological literature, scholars of voting behavior have often suggested that the need for social recognition plays a crucial role in shaping political attitudes. Seymour M. Lipset (1967) pointed out that white-collar workers tend to be socially valued similarly as those higher in the system and, although their income may be only slightly larger than that of manual workers, white collars are much more likely to * Corneo: Department of Economics, University of Osnabruck, Rolandstrasse 8, D-49069 Osnabruck, Germany, CESifo, Munich, and CEPR, London; Gruner: Department of Economics, University of Mannheim, D-68131 Mannheim, Germany, IZA, Bonn, and CEPR, London. We would like to thank Emmanuelle Auriol, Dieter Bos, Peter Funk, Mike Hout, Olivier Jeanne, Peter Jonas, Georg Noldeke, Thomas Piketty, Regis Renault, John Roemer, Jens Weidmann, and three anonymous referees for insightful comments and suggestions. We have also benefited from the comments of participants at workshops and conferences in Barcelona, Bonn, Davis, Jena, Maastricht, Magdeburg, Mannheim, Montreal, Munich, Rotterdam, Silvaplana, Tel Aviv, Tilburg, Toulouse, and Warwick, at which we presented earlier versions of this work. Financial support from the Deutsche Forschungsgemeinschaft, SFB 303 at the University of Bonn, is gratefully acknowledged.

How should a society choose between two social alternatives if participation in the decision process is voluntary and costly, and monetary transfers are not feasible? Assuming symmetric independent private values, we show that it is utilitarian‐optimal to use a linear voting rule: votes get alternative‐dependent weights, and a default obtains if the weighted sum of votes stays below some threshold. Any combination of weights and threshold can be optimal. A standard quorum rule can be optimal only when it yields the same outcome as a linear rule. A linear rule is called upper linear if the default is upset at every election result that meets the threshold exactly. We develop a perturbation method to characterize equilibria of voting rules in the case of small participation costs and show that leaving participation voluntary increases welfare for any two‐sided upper linear rule that is optimal under compulsory participation.

Value relevance, Earnings reconciliation, Accounting differences, Conservatism

We use probabilistic expectations data elicited from survey respondents in rural Malawi to investigate how risky sexual behaviour may be influenced by individuals' expectations about survival, and future HIV status, which in turn depend on the perceived impact of HIV/AIDS on survival, expectations about own and partner's current HIV status, and expectations about HIV transmission rates. Subjective expectations, in particular about mortality risk but not the risk of living with HIV, play an important role in determining the decision to have multiple sexual partners. Using our estimated parameters, we simulate the impact of various policies that would influence expectations. An information campaign on mortality risk would decrease risky sexual behaviour on average, whereas an information campaign on HIV transmission risks, which tend to be overestimated by respondents, would actually increase risky behaviour. Also, the expansion of anti-retroviral therapy (ART) treatments to all individuals infected with HIV would increase risky sexual behaviour for a quarter of the HIV-negative individuals or those who have not been tested because they are aware that ART increases life expectancy, and thus reduces the cost of becoming HIV positive.

It is shown that a Pareto optimal and continuous single-valued choice function defined on the compact convex subsets of the positive orthant of the n-dimensional Euclidean space maximizes a real-valued function if and only if it satisfies the independence of irrelevant alternatives condition if n=2, and the strong axiom of revealed preference otherwise. The results can be applied to consumer demand theory to deal with nonlinear budget sets, and to bargaining game theory to generalize the Nash bargaining solution.