Nick Vikander (University of Edinburgh)

Advertising, Commitment, and Social Image

This paper explores optimal pricing and informative advertising when consumers value social image. A monopolist advertises and sells a good to consumers who are either conformists or snobs, who respectively experience positive or negative consumption externalities. Unlike with traditional network goods, these externalities depend not on actual quantity sold, but on the perceived value of quantity sold, as averaged across all consumers.

I show that social image concerns generate a commitment problem for the firm that drives up the price to conformists and drives down the price to snobs. The firm can reduce the severity of this problem by increasing its advertising, but a drop in advertising costs can sometimes make the commitment problem more severe. I show that the equilibrium price is non-monotonic in advertising costs, equilibrium advertising intensity may appear excessive or insufficient, and that making targeted advertising possible can reduce profits.

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Olivier Herlem (Erasmus University Rotterdam)

Vote Selling and the Abolition of Earmarking: Evidence from the US House of Representatives

Earmarks are discretionary budget items that allow members of Congress to allocate public funds to their district. Over the years, earmarks became a symbol of wasteful spending and corruption in the US Congress, so much that they were discontinued in 2010. While most studies on vote selling focus on specific bills, this paper exploits the discontinuation of earmarks as an exogenous change in earmarking and estimates its effects on the complete voting behavior of US Representatives. Though earmarks always represented a tiny share of the federal budget, they had a considerable impact on the legislative process: the results show that the loss of earmarks caused Representatives to deviate from their party line significantly more than before. Furthermore, the results reveal that the loss of earmarks hurt the politicians in the elections and induced them to run more expensive campaigns, …financed by special interests. These findings suggest that earmarks were a potent bargaining instrument to buy votes around the party leaderships’ positions because they helped politicians win elections. Accordingly, their discontinuation weakened party voting discipline and heightened electoral pressure, which favored an increase in the influence of special interests.