Events at CERGE-EI

Prof. Alessandro Pavan

Northwestern University, Evanston, Illinois, USA

Authors: Miltos Makris and Alessandro Pavan

Abstract: We study the impact of learning-by-doing on the design of dynamic incentives, and in particular its interplay with uncertainty and preferences for insurance. In passing, we also clarify various results in the literature and underline the relative importance of various channels in shaping dynamic incentives. We show that distortions under learning-by-doing may be upward (i.e. over-production sustained by subsidies). Furthermore, learning-by-doing introduces an intertemporal substitutability in marginal distortions, which, if sufficiently strong, may lead to marginal distortions that are decreasing over time (even in the presence of an insurance motive). Finally, we emphasize that learning-by-doing can have a negative impact on expected information rents, which can be more acute for lower current skills thus leading to progressivity, i.e. marginal distortions that are increasing in the (productivity) type.

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