A seller and a buyer bargain over the terms of trade for an object. The seller receives a perfect signal that determines the value of the object to both players, whereas the buyer remains uninformed. We analyze the infinite-horizon bargaining game in which the buyer makes all the offers. When the static incentive constraints permit first-best efficiency, then under some regularity conditions the outcome of the sequential bargaining game becomes arbitrarily efficient as bargaining frictions vanish. When the static incentive constraints preclude first-best efficiency, the limiting bargaining outcome is not second-best efficient and may even perform worse than the outcome from the one-period bargaining game. With frequent buyer offers, the outcome is then characterized by recurring bursts of high probability of agreement, followed by long periods of delay in which the probability of agreement is negligible. Copyright The Econometric Society 2006.
This paper considers a market served by a monopolist who sells a durable goods that depreciates stochastically over time. We show that there exist three types of stationary equilibria: a Coase Conjecture equilibrium, a monopoly equilibrium and a reputational equilibrium. When the depreciation rate is low, the Coase Conjecture equilibrium is the unique equilibrium. For intermediate values of the depreciation rate, all three equilibrium types coexist. When the depreciation rate is high, the monopoly equilibrium is the unique equilibrium. Consequently, when selling a good of sufficiently low durability, the monopolist does not lose any of her monopoly power. Furthermore, the steady state output in the reputational equilibrium falls below the monopoly quantity. Hence in durable goods markets welfare losses due to monopoly power may be larger than in markets for perishables.
Tax enforcement not only detects tax evasion (the direct effect) but also enforces voluntary compliance (the indirect effect). This paper explores implications of the indirect effect for the optimal size of the budget allocated to the Internal Revenue Service (IRS). The conventional wisdom prescribes that the size of the budget allocated to the IRS should always fall short of the level where an additional dollar allocated would return just an additional dollar of revenue. In a model where taxpayers are subject to a small amount of incomplete information, we show that after taking into consideration the indirect effect of tax enforcement, it is possible that the optimal prescription is opposite to the conventional wisdom.
| INTRODUCTIONAs far as the collection of tax revenue is concerned, the true function of the Internal Revenue Service's (IRS) enforcement may not lie in detecting tax evasion (the direct effect) but in preventing tax evasion or enforcing voluntary compliance (the indirect effect). This view is clearly expressed by the National Taxpayer Advocate (2004, II-4):The IRS estimates that the annual net tax gap is about $255 billion. … Studies show that examinations [audits] reduce the tax gap primarily through an indirect effect on voluntary compliance rather than direct collection from the taxpayer under audit.
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