| The link between public policy on one hand, and citizens' preferences and welfare on the other, is considered in the context of the following three applications: sovereign debt, optimality of market advertising levels for differentiated products, and effectiveness of international aid.; Chapter 1 offers a political economy model of sovereign debt. We show how decisions on default or repayment of debt are shaped by individual preferences in a democratic economy. Most current models of sovereign debt consider the reputation of borrowing countries as the only driver of a borrowing country's decisions on default or repayment of foreign debt. Our example economy is, arguably, more realistic than other existing models. In our model, we add the borrowing country's domestic economy as an additional driving factor of default behavior.; Chapter 2 studies the optimality of informative advertising levels in markets of differentiated products. In order to determine the direction of public policy, the market levels of advertising are compared to the socially optimal levels. Excess market advertising calls for taxation, while under-advertising calls for subsidization policies. One of the most famous results of advertising literature is that markets generate excess advertising. We show that for most advertising technologies studied before, excess advertising need not occur, if consumers value the product highly. However, sufficiently low consumer valuations can produce excess advertising.; Chapter 3 studies the effectiveness of foreign aid. The results of prior studies are mixed, but many authors have found that recent debt relief efforts by the international community have been associated with higher economic growth and lower poverty. This literature is criticized on the grounds that the poverty measures chosen (such as the percentage of population with income of less than {dollar}l/day) do not represent individuals' welfare appropriately. We consider a different measure of welfare, namely, the mortality rate of children under age 5 (U5MR). For the group of Highly Indebted Poor Countries (HIPC), we find that aid and debt relief have, generally, had no significant effect on U5MR. |
