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10.2.5 EFFICIENCY OF REDISTRIBUTION IN RELATION TO THE DONOR'S PREFERENCES

Let us now try to identify the main factors which motivate a donor to provide support and which also affect the amount and allocation of that support.

A. Economic benefit of the weakest links

Redistribution from the economically strong to the economically weak need not always come at the cost of the efficiency of the economy as a whole, It is not unusual for the marginal product of a resource (the deciding factor as regards allocation efficiency) to be higher for an agent that is economically threatened. This can give rise to a situation where redistribution increases the economic efficiency of a community (for example the economy as a whole). This can happen, for example:

• in small firms as a result of monopsonistic retail chains preferring large suppliers,

• as a result of threats due to external factors (arising outside the market environment of the economy), e.g. crop failure, panicking customers, import barriers introduced in other countries,

• in the short term in underfunded firms with high potential,

• as a result of one group of firms being at a relative disadvantage, for example because they have worse access to credit or because politically motivated or corrupt decisions made by the state or municipality have put their competitors at an advantage.

In all these cases, purely market allocation is sub-optimal because the market environment has been significantly disrupted. Here, levelling the playing field (primarily for individual agents on the market] via redistribution is a way to achieve optimal allocation in the long term.

In all other cases, redistribution is accompanied by a reduction in allocation efficiency and must be justified by the "trade-off" argument. Is it worth sacrificing part of attainable production or saveable resources in the interests of the state (armament, food self-sufficiency, regional support)?

B. Maintaining the existing structure or attaining the desired one

Allocation in favour of the weakest links may also, of course, be a result of purely economic calculation by the central authority. If resources are being allocated to maintaining the existing structure or attaining the desired structure in the economic system, it is optimal to support weak links that in this case represent "bottlenecks” to growth of society in the desired structure. The optimal redistribution, therefore, is allocation that is indirectly proportional to the marginal product, i.e. an agent that is capable of achieving a four-times higher increase in the value of one more unit of a resource than another agent gets a four-times lower allocation. This is the source of the comparative advantage stemming from for eign trade and also of the for esightedness[1] of the post-Velvet Revolution Czech privatization path, which involved no prior restructuring.

The very inclusion of a for mulation of the desired (sectoral or regional] production structure in redistribution schemes therefore always greatly reduces the efficiency of allocation or redistribution. Although it may not seem more "economical" to the public, it is more rational to derive the level of support for the regions from their needs and not to justify and quantify this redistribution on the basis of a "desirable", centrally determined (sectoral or regional] structure of the economic system as a whole.

C. Averting threats to the community

Redistribution is most frequently a manifestation of solidarity with the community and its members. To model it, we need to describe behaviour within the community. This will allow us to analyse how the behaviour of the community as a whole can be derived from individual preferences containing solidarity with the community. It is appropriate to distinguish between Gemeinschaft (community) and Gesellschaft (society):

Cl. Threats to Gemeinschaft.

In this case, coexistence is ordained by meaning (and not justified by purpose and the benefit for members[2]). Examples include families, groups of friends, familial communities and even local communities.

In Gemeinschaften, the manifestations of incorporation of the interests of the community into those of the individual (on the economic level) can include:

• an altruistically motivated membership contribution to common funds,

• support provided to needy community members with no expectation of reciprocity,

• gratuitous support and preferential treatment given to community members,[3]

• a willingness to die defending the community.

The point of redistribution can be assessed even for Gemeinschaften. The criterion (of Darwinian type, i.e. maximization of the probability of survival of the individual or the community) is survival — not only the biological survival of the individual or the community, but also, for instance, the survival of the state as a democratic society without serious social upheaval or the economic survival of a family without collapse. In models for describing the behaviour of individuals in Gemeinschaften, one can derive the dependence of the optimal allocation of resources (from the survival point of view) on the total income of the community. In some cases, it is optimal to sacrifice a member of the community (altruism can be cruel[4]).

C2. Threats to Gesellschaft

Gesellschaft is justified by purpose and the benefit for members. A Gesellschaft member views a threat to the community as a loss, although only to the extent that the loss does not exceed the benefit he derives from his membership. The most common economic Gesellschaften are firms, cartels, non-profit sports clubs and other non-profit organizations.

The manifestations of Gesellschaft mutuality [the willingness to redistribute in favour of other members or in favour of the community as a whole) include:

• support for the society to which you belong, but which you regard merely as a means of acquiring status or making money,

• contribution to common funds motivated by the potential individual financial loss associated with the potential downfall of the community,

• a guarantee vis-a-vis third-parties motivated by expected reciprocity.

For this type of community we can assume that for each member there is a relatively constant amount representing the individual's perceived value of membership. In contrast to Gemeinschaft, where the individual regards joint consumption as part of his own consumption, in Gesellschaft every reduction in individual consumption is perceived as a loss and is compared with the value of membership. If the perceived loss is greater than the value of membership, the individual leaves and regards his departure as a gain rather than a loss. The individual's departure can often reduce the value of membership for other individuals and can set off a chain of events leading very rapidly to the collapse of the community.

Gesellschaften always have an administrator of common resources (a common budget). We refer to him as the decision-taker, although he is not necessarily an authoritative "ruler" of the community who can ignore others when making his decisions. The models for describing individuals' behaviour in economic Gesellschaften deal, for example, with the situation where the decision-taker (the administrator of the common budget) can, by providing his support, save only some parts of the community and condemn the rest to extinction ( for example by not supporting them). Here again, the optimal allocation of shared resources also depends fundamentally on the decision-taker's criterion function (preferences). Sometimes it is optimal to divide up a subsidy equally, but other times it is optimal to prefer the most sensitively reacting member and, once that member's survival has been 100% guaranteed, to redirect the support to the next (second most sensitively reacting) individual. The optimal allocation also sometimes depends fundamentally on the relations between the parameters determining the agents' threat zone boundaries.

In the previous research phase[5] several common budget models were derived for a two-member community (for example a partnership). The common budget is split into three parts — two parts for satisfying the individual needs of the two members of the community and the remainder for providing for the running of the community as a whole. We assumed that there is a community leader who draws up the common budget and decides on the allocation of resources. This decision-taker perceives three threats:

• the threat of insufficient resources to satisfy his individual needs,

• the threat of insufficient resources to satisfy his partner's needs,

• the threat of insufficient resources for the community as a whole.

If we assume very simplistically that the individual threats are independent, the decision-taker's optimum, i.e. the point of maximum probability of (economic) survival, lies within the set of feasible situations. It turns out that the larger part of any additional income will go to the community member who convinces the other one that he faces the greater threat. In other words, modesty can worsen one's economic position in the community, the more so the lower the total resources for the community. We can also interpret this as the model of a family that has degenerated into Gesellschaft (in order to increase the prosperity of its members).

We distinguish three criteria: egoistic, altruistic and symmetric. A comparison of the individual models reveals that

• the optimal allocation always lies within the set of feasible situations,[6]

• the funds earmarked for the community (family) as a whole are largest when there is a dominant altruist and smallest in the symmetric situation,

• the greatest inequality in the degree of satisfaction of individual needs occurs in the dominant altruist case.

If we abandon the decision-taker's criterion and look at all three cases from the perspective an independent observer (weighing the risk of collapse of an altruist close to boundary of biological survival) a family with a dominant (but self-threatening) altruist would (paradoxically?) be an extremely endangered community.

The rules of redistribution, in the sense of achieving the purpose of redistribution (which can be mere survival) are not trivial. Optimal redistribution depends not only on decision-taker's criterion regarding shared resources, but also on the amount of those resources. There is a discontinuity (unusual in standard microeconomics) where a marginal change (for example in the donor's income) leads to a fundamental change in the optimal allocation (redistribution) strategy. We will demonstrate this in section 10.3.2.

  • [1] We choose the term "for esightedness" despite the currently prevailing criticism of the Czech privatization path. Poor results are no guarantee that any other path would not have been significantly more disadvantageous or unviable.
  • [2] Even in Gemeinschaften, a special purpose can prevail—a group of friends can turn into a criminal gang and a family can turn into an economic unit earning in order to consume conspicuously or conversely into an environment for caring for a disabled child. Here, however, purpose is derived from meaning. Hence, the nature of the community is unchanged, as the original meaning is unaltered.
  • [3] As we argued above, mutuality is no guarantee of morality. Giving preferential treatment to a creditor is a criminal offence that in mature democracies is viewed as being equally repellent as fraud and theft.
  • [4] See Hlaváček, J., Hlaváček, M.: Cruel Altruism. Prague Economic Papers 14, 4(2005): 363–71.
  • [5] Culminating in Hlaváček, J., et al.: Mikroekonomie sounáležitosti se společenstvím. Praha: Karolinum, 1999.
  • [6] This is unusual: in standard microeconomics, based on decision-making problems in the form of maxi-mization of profit or other utility subject to a given set of constraints, the optimum (in the deterministic case) lies on the boundary of the set of feasible solutions. See Chapter 1.
 
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