Building Blocks in the Economics of Mandates
(Publicado em Portuguese Economic Journal 5(2): 69-87, 2006)
John T. Addison
University of South Carolina (USA); GEMF/Universidade de Coimbra (Portugal) and IZA (Germany)
C. R. Barrett
University of Birmingham (UK)
W. S. Siebert
University of Birmingham (UK) and IZA (Germany)
The paper constructs an asymmetric information model to investigate the efficiency and equity cases for government mandated benefits. A mandate can improve workers' insurance, and may also redistribute in favour of more "deserving" workers. The risk is that it may also reduce output. The more diverse are free market contracts – separating the various worker types – the more likely it is that such output effects will on balance serve to reduce welfare. It is shown that adverse effects can be reduced by restricting mandates to larger firms. An alternative to a mandate is direct government provision. We demonstrate that direct government provision has the advantage over mandates of preserving separations.
JEL Classification: D82, J33.
Keywords: asymmetric information, labour mandates, compensation packages.