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Anger and Regulation

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  • Di Tella, Rafael
  • Dubra, Juan

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 when there exist few truly altruistic firms, an equilibrium may emerge where all firms pretend to be kind, refraining from charging "abusive" prices to their customers (or "exploiting" workers). Our main result is that as competition decreases, the set of parameters for which such pooling equilibria exist is smaller and firms are more liekly to anger voters by displaying low levels of altruism. As a consequence, when firms have been shown to be unkind, the welfare of consumers will go up when these firms are punished (for example through fines), even when this does not imply a change in prices. Indeed, regulation affects welfare through three channels: First, there is the standard channel whereby a reduction in monopoly price lads to the production of units that cost less than their value to consumers. Second, regulation calms down existing consumers: a reduction in the profits of a firm viewed as excessively selfish increases total welfare by reducing consumer anger. Finally, there is a third (mixed) channel arising because 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.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14442.

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Date of creation: 02 Oct 2008
Date of revision: 29 Mar 2009
Handle: RePEc:pra:mprapa:14442

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Keywords: Anger; regulation; public relations; commercial legitimacy; altruism; populism;

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  1. 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.
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  3. Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 121(4), pages 1133-1165, November.
  4. Julio J. Rotemberg, 2003. "Commercial Policy with Altruistic Voters," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 111(1), pages 174-201, February.
  5. Simeon Djankov & Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer, . "The Regulation of Entry," Working Paper 19462, Harvard University OpenScholar.
  6. 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.
  7. 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.
  8. Jean-Robert Tyran & Dirk Engelmann, 2002. "To Buy or Not to Buy? An Experimental Study of Consumer Boycotts in Retail Markets," University of St. Gallen Department of Economics working paper series 2002, Department of Economics, University of St. Gallen 2002-13, Department of Economics, University of St. Gallen.
  9. Edward L. Glaeser & Andrei Shleifer, 2003. "The Rise of the Regulatory State," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 401-425, June.
  10. Falk, Armin & Fischbacher, Urs, 2006. "A theory of reciprocity," Games and Economic Behavior, Elsevier, Elsevier, vol. 54(2), pages 293-315, February.
  11. Fehr, Ernst & Schmidt, Klaus M., . "A theory of fairness, competition, and cooperation," Chapters in Economics, University of Munich, Department of Economics, University of Munich, Department of Economics.
  12. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, American Economic Association, vol. 84(4), pages 833-50, September.
  13. M. Rabin, 2001. "Incorporating Fairness into Game Theory and Economics," Levine's Working Paper Archive 511, David K. Levine.
  14. Rafael Di Tella & Juan Dubra, 2006. "Crime and Punishment in the "American Dream"," NBER Working Papers 12641, National Bureau of Economic Research, Inc.
  15. 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.
  16. Botond Koszegi & Matthew Rabin, 2006. "Reference-Dependent Risk Attitudes," Levine's Bibliography 122247000000001267, UCLA Department of Economics.
  17. 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.
  18. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, American Economic Association, vol. 76(4), pages 728-41, September.
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Cited by:
  1. 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.
  2. Rafael Di Tella & Juan Dubra, 2010. "Peronist Beliefs and Interventionist Policies," NBER Working Papers 16621, National Bureau of Economic Research, Inc.

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