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Anger and Regulation

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  • Rafael Di Tella
  • Juan Dubra

Abstract

We propose a model where voters experience an emotional cost when they observe a firm that has displayed insufficient concern for other people's welfare (altruism) in the process of making high profits. Even with few truly altruistic firms, an equilibrium may emerge where all firms pretend to be kind and refrain from charging "abusive" prices to their customers. Our main result is that, as competition decreases, the set of parameters for which such pooling equilibria exist beomes smaller and firms are more likely to anger consumers. Regulation can increase welfare, for example, through fines (even if there are no changes in prices). We illustrate these gains in a monopoly setting, where regulation affects welfare through 3 channels (i) a reduction in monopoly price leads to the production of units that cost less than their value to consumers (standard channel); (ii) regulation calms down existing consumers because a reduction in the profits of an "unkind" firm increases total welfare by reducing consumer anger (anger channel); and (iii) individuals who were out of the market when they were excessively angry in the unregulated market, decide to purchase once the firm is regulated, reducing the standard distortions described in the first channel (mixed channel).

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15201.

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Date of creation: Aug 2009
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Handle: RePEc:nbr:nberwo:15201

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  1. Jean-Robert Tyran & Dirk Engelmann, 2005. "To Buy or Not to Buy? An Experimental Study of Consumer Boycotts in Retail Markets," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 72(285), pages 1-16, 02.
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  5. Ernst Fehr & Klaus M. Schmidt, 1999. "A Theory Of Fairness, Competition, And Cooperation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(3), pages 817-868, August.
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  7. Falk, Armin & Fischbacher, Urs, 2001. "A Theory of Reciprocity," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3014, C.E.P.R. Discussion Papers.
  8. Botond Koszegi & Matthew Rabin, 2007. "Reference-Dependent Risk Attitudes," American Economic Review, American Economic Association, American Economic Association, vol. 97(4), pages 1047-1073, September.
  9. Di Tella, Rafael & Dubra, Juan, 2008. "Crime and punishment in the "American Dream"," Journal of Public Economics, Elsevier, Elsevier, vol. 92(7), pages 1564-1584, July.
  10. Julio J. Rotemberg, 2006. "Minimally acceptable altruism and the ultimatum game," Working Papers, Federal Reserve Bank of Boston 06-12, Federal Reserve Bank of Boston.
  11. Botond Kőszegi & Paul Heidhues, 2008. "Competition and Price Variation When Consumers Are Loss Averse," American Economic Review, American Economic Association, American Economic Association, vol. 98(4), pages 1245-68, September.
  12. Julio J. Rotemberg, 2000. "Commercial Policy with Altruistic Voters," NBER Working Papers 7984, National Bureau of Economic Research, Inc.
  13. Edward L. Glaeser & Andrei Shleifer, 2001. "The Rise of the Regulatory State," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1934, Harvard - Institute of Economic Research.
  14. Matthew Rabin., 1992. "Incorporating Fairness into Game Theory and Economics," Economics Working Papers, University of California at Berkeley 92-199, University of California at Berkeley.
  15. Axel Ockenfels & Gary E. Bolton, 2000. "ERC: A Theory of Equity, Reciprocity, and Competition," American Economic Review, American Economic Association, American Economic Association, vol. 90(1), pages 166-193, March.
  16. Cho, In-Koo & Kreps, David M, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(2), pages 179-221, May.
  17. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
  18. Rotemberg, Julio J., 2005. "Customer anger at price increases, changes in the frequency of price adjustment and monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 52(4), pages 829-852, May.
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Cited by:
  1. Rafael Di Tella & Juan Dubra, 2010. "Peronist Beliefs and Interventionist Policies," NBER Working Papers 16621, National Bureau of Economic Research, Inc.
  2. Magnus Söderberg & Makoto Tanaka, 2012. "Spatial price homogeneity as a mechanism to reduce the threat of regulatory intervention in locally monopolistic sectors," Working Papers hal-00659458, HAL.

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