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Anger and Regulation

  • Di Tella, Rafael
  • Dubra, Juan

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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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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  1. Julio J. Rotemberg, 2000. "Commercial Policy with Altruistic Voters," NBER Working Papers 7984, National Bureau of Economic Research, Inc.
  2. Ernst Fehr & Klaus M. Schmidt, . "A Theory of Fairness, Competition and Cooperation," IEW - Working Papers 004, Institute for Empirical Research in Economics - University of Zurich.
  3. Di Tella, Rafael & Dubra, Juan, 2008. "Crime and punishment in the "American Dream"," Journal of Public Economics, Elsevier, vol. 92(7), pages 1564-1584, July.
  4. Koszegi, Botond & Rabin, Matthew, 2004. "A Model of Reference-Dependent Preferences," Department of Economics, Working Paper Series qt0w82b6nm, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  5. Simeon Djankov & Rafael La Porta & Florencio Lopez-de-Silanes & Andre Shleifer, 2000. "The Regulation of Entry," Harvard Institute of Economic Research Working Papers 1904, Harvard - Institute of Economic Research.
  6. Julio J. Rotemberg, 2006. "Minimally acceptable altruism and the ultimatum game," Working Papers 06-12, Federal Reserve Bank of Boston.
  7. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 21-92, Tel Aviv.
  8. Armin Falk & Urs Fischbacher, 2001. "A Theory of Reciprocity," CESifo Working Paper Series 457, CESifo Group Munich.
  9. 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, vol. 76(4), pages 728-41, September.
  10. M. Rabin, 2001. "Incorporating Fairness into Game Theory and Economics," Levine's Working Paper Archive 511, David K. Levine.
  11. 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, vol. 72(285), pages 1-16, 02.
  12. Edward L. Glaeser & Andrei Shleifer, 2001. "The Rise of the Regulatory State," NBER Working Papers 8650, National Bureau of Economic Research, Inc.
  13. Axel Ockenfels & Gary E. Bolton, 2000. "ERC: A Theory of Equity, Reciprocity, and Competition," American Economic Review, American Economic Association, vol. 90(1), pages 166-193, March.
  14. Botond Kőszegi & Paul Heidhues, 2008. "Competition and Price Variation When Consumers Are Loss Averse," American Economic Review, American Economic Association, vol. 98(4), pages 1245-68, September.
  15. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
  16. Botond Koszegi & Matthew Rabin, 2006. "Reference-Dependent Risk Attitudes," Levine's Bibliography 122247000000001267, UCLA Department of Economics.
  17. Rotemberg, Julio J., 2005. "Customer anger at price increases, changes in the frequency of price adjustment and monetary policy," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 829-852, May.
  18. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
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