Winners, Losers, and Efficiency: Achieving Multiple Goals in Japan's Financial System Reforms

When giving policy advice, economists often proceed as if efficiency is the only valid social goal. Although efficiency is important, we argue that single-minded pursuit of it is counterproductive. It unnecessarily erects political hurdles to the enactment of efficiency-enhancing reforms because policy proposals that ignore valid, nonefficiency concerns are more likely to meet political and bureaucratic resistance. Moreover, such resistance may be avoided. A number of design principals can be employed to craft proposals that address political goals without abandoning efficiency. We describe three classes of principles: creative design of market mechanisms, maintenance of marginal incentives, and compensation for losers.We then illustrate their practical application in the context of Japanese financial-sector deregulation. This policy area usefully illustrates the importance of considering multiple goals in policy design. While efficiency is a frequently expressed goal, Japan's continued policy paralysis indicates that the bureaucratic and political goals of major stakeholders make the straightforward deregulation of financial markets difficult to achieve. We do not purport to resolve the entrenched barriers to economic reform in Japan, but to the extent that we identify and address valid nonefficiency goals, the conclusions of the analysis are relevant.     

Trade-offs implicit in child-support guidelines

Recent U.S. federal legislation required states to establish mandatory judicial guidelines for the setting of child-support awards. An equivalence-based approach is used to compare three formulae (two in use, one proposed) to three theoretical benchmarks, to clarify unavoidable trade-offs in the choice of a guideline.

1 Generally, the formulae in use leave children worse off economically than would the benchmark formulae.

Since the economic well-being of children cannot be separated from that of their custodial parent, that which most privileges children's welfare will usually privilege the custodial parent over the absent parent, and what appears more fair between the two adults may be less favorable to the children. Another possible trade-off is between children's welfare and work incentives: The guidelines that prescribe larger awards are those with higher implied marginal tax rates. Despite their work disincentive effects, the formulae with higher marginal tax rates are more favorable to children's economic interests.     

CONSUMERS AND PRODUCT SAFETY: MARKET PROCESSES AND IMPERFECTIONS*

This paper reexamines the competitive market solution to the determination of product safety. The concept of an optimizing social level of product safety-defined at the point at which the costs of increasing safety are equated to consumers willingness to pay for it-is developed and discussed. Various potential market failures are outlined. These failures give reasons to expect that the competitive solution will not be achieved in practice and provide a rationale for certain types of governmental intervention. Various empirical studies of implicit markets for various types of risks are reviewed as a basis for evaluating market efficiency and regulatory efficiency.