Munich Personal RePEc Archive

Anger and Regulation

Di Tella, Rafael and Dubra, Juan (2008): Anger and Regulation.

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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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