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Anger and Regulation

Rafael Di Tella

Harvard Business School - Business, Government and the International Economy Unit; National Bureau of Economic Research (NBER)

Juan Dubra

University of Montevideo - Department of Economics

August 2009

NBER Working Paper No. w15201

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 with few truly altruistic firms, an equilibrium may emerge where all firms pretend to be kind and refrain from charging "abusive" prices to their customers. Our main result is that, as competition decreases, the set of parameters for which such pooling equilibria exist beomes smaller and firms are more likely to anger consumers. Regulation can increase welfare, for example, through fines (even if there are no changes in prices). We illustrate these gains in a monopoly setting, where regulation affects welfare through 3 channels (i) a reduction in monopoly price leads to the production of units that cost less than their value to consumers (standard channel); (ii) regulation calms down existing consumers because a reduction in the profits of an "unkind" firm increases total welfare by reducing consumer anger (anger channel); and (iii) 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 (mixed channel).

Number of Pages in PDF File: 37

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Date posted: August 11, 2009  

Suggested Citation

Di Tella, Rafael and Dubra, Juan, Anger and Regulation (August 2009). NBER Working Paper No. w15201. Available at SSRN: https://ssrn.com/abstract=1444702

Contact Information

Rafael Di Tella (Contact Author)
Harvard Business School - Business, Government and the International Economy Unit ( email )
Cambridge, MA
United States
617-495-5048 (Phone)
617-496-5985 (Fax)
HOME PAGE: http://www.people.hbs.edu/rditella/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Juan Dubra
University of Montevideo - Department of Economics ( email )
Prudencio de Pena 2440
Montevideo, CP 11600
5982 707 4461 (Phone)
HOME PAGE: http:\\www2.um.edu.uy\dubraj
Feedback to SSRN

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