the role of risk preferences in pay to bid auctions we analyze a new auction format in which bidders pay a fee each time they increase the auction price bidding fees are the primary source of revenue for the seller but produce the same expected revenue as standard auctions assuming risk neutral bidders if risk loving preferences are incorporated in the model expected revenue increases our model predicts a particular distribution of ending prices which we test against observed auction data the degree of fit depends on how unobserved parameters are chosen in particular a slight preference for risk has the biggest impact in explaining auction behavior suggesting that pay to bid auctions are a mild form of gambling this paper was accepted by peter wakker decision analysis

wage bargaining central bank independence and the real effects of money the effects of financial capital mobility on monetary policy autonomy are relatively well understood but the importance of particular monetary regimes in distinct national institutional settings is not this article is a theoretical and empirical exploration of the effects of monetary policy regimes on unemployment in different national wage bargaining settings based on a rational expectations two stage game of the interaction between the wage behavior of labor unions and the monetary policies of governments i argue that monetary policies have real employment effects in all but the most decentralized bargaining systems specifically in intermediately centralized bargaining systems a credible government commitment to a nonaccommodating monetary policy rule will deter militant wage behavior with salutary effects on unemployment in highly centralized systems by contrast restrictive monetary policies will clash with unions pursuit of wage distributive goals and produce inferior employment performance only in highly fragmented bargaining systems is money neutral in the sense that employment performance is unaffected by monetary regimes the model has clear consequences for the optimal design of central banks and collective bargaining arrangements and suggests new ways to study institutional change hereunder the causal effect of increasingly globalized capital markets the argument is supported by pooled time series data for fifteen oecd countries over a twenty one year period

political uncertainty and macroeconomic performance abstract it is often claimed that politically induced economic flucturations are harmful for the society in this paper we show that this conjecture is not necessarily correct and such fluctuations can actually improve society s macroeconomic performance

saving and after tax rates of return in recent years a number of economists have found or taken for granted a substantial positive interest elasticity of private saving and several have concluded that the current taxation of property income has played a major role in depressing saving and investment and therefore economic welfare thus probably the most quoted of these studies by michael boskin 1978 finds that a variety of functional forms estimation methods and definitions of the real after tax rate of return invariably lead to the conclusion of a substantial positive interest elasticity of private saving p 3 as a consequence he states current tax treatment of income from capital significantly retards capital accumulation rough estimates of the lost welfare exceed 50 billion per year the most recent of these studies by lawrence summers 1981 uses the boskin empirical results to check corresponding findings based on assumed values of the relevant parameters in a life cycle model of aggregate saving behavior summers raises the ante in his estimate of the welfare gain associated with the elimination of capital income taxation claiming it would exceed 150 billion annually and noting that this conclusion rests on a high positive interest elasticity of saving p 533 summers notes that his larger interest rate effect reflects his additional allowance for wealth changes since these findings on interest elasticity are inconsistent with earlier studies 2 and have received widespread attention by political activists it is important to determine how much confidence can be placed in the underlying analysis this paper will demonstrate that there is little scientific justification for the recent literature purporting to show a strong positive interest elasticity of saving so that government tax policies predicated on such saving behavior rest on a dubious foundation the evidence to be presented will indicate that at the present stage of knowledge we have no sound basis for alleging either a strong positive or negative after tax rate of return effect on saving the only prior published examination of these recent potentially important findings of a strong positive interest elasticity of private saving has been a brief reference to the boskin results in a paper by howrey and hymans 1978 which was largely devoted to an analysis of what the authors call personal cash or loanable funds rather than private saving these authors report that the significance of boskin s results is sensitive to estimation period inclusion of lagged unemployment and use of alternative interest rate variables they do not report the results of the alternative estimations however nor do they present consistent instrumental variable estimations despite the fact that the latter provide boskin with what he considers to be his best results in this paper in striking contrast to the boskin analysis we show that using the best available proxies for the relevant interest rate variables real expected after tax rates of return estimated both on an ex ante and on an ex post basis the estimated interest elasticity of household and private saving is generally found to be either statistically insignificant or significantly negative and only rarely significantly positive with the result depending on the specific interest rate series period and consumption function used nor is this finding altered when the single equation estimation of this saving or consumption function is replaced by an instrumental variable consistent estimation as a result there does not seem to be much basis to boskin s or summers strong criticism of the earlier literature which generally concluded that there was received for publication may 14 1982 revision accepted for publication november 23 1982 university of pennsylvania see boskin 1978 gylfason 1981 and summers 1981 2 see the consumption function in either the wharton model the wharton mark iv quarterly econometric model philadelphia 1977 and updates or the mps model the quarterly econometric model board of governors of the federal reserve system 1978 and updates

unemployment growth and taxation in industrial countries unemployeement and taxes do taxes affect the rate of umemployeement to the layman the upward trend in european unemployment is related to the slowdown of economic growth we argue that the layman s view is correct the increase in european unemployment and the slowdown in economic growth are related because they stem from a common cause an excessively rapid growth in the cost of labour in europe labour costs have gone up for many reasons but one is particularly easy to identify higher taxes on labour if wages are set by strong and decentralized trade unions an increase in labour taxes is shifted onto higher real wages this has two effects first it reduces labour demand and thus creates unemployment secondly as firms substitute capital for labour the marginal product of capital falls over long periods of time this in turn diminishes the incentive to invest and to grow the data strongly support this view according to our estimates the observed rise of 14 percentage points in labour tax rates between 1965 and 1995 in the eu could account for a rise in eu unemployment of roughly 4 percentage points a reduction of the investment share of output of about 3 percentage points and a growth slowdown of about 0 4 percentage points a year francesco daveri and guido tabellini

toilet cleaning and department chairing volunteering a public service abstract who will do a job that nobody wants but that someone has to do the search for a volunteer is modelled as a war of attrition in which everyone is tempted to just wait for someone else to do it we show that the volunteer will be ceteris paribus the individual for whom the benefit cost ratio of performing the public service is largest the one most impatient to consume it or the one who stands to benefit from it the longest

aggregate savings financial intermediation and interest rate there has been considerable controversy about the role of financial factors as determinants of savings in developing countries this paper explores the importance of two such factors namely real interest rate and financial intermediation using pooled time series cross section data a model of savings is estimated for asia latin america and for the total sample particular attention is paid to the error structure in estimation the results suggest that pooling is not justified further there is no unequivocal support for the effect of either of the two factors some qualified support is found for asia but none for latin america copyright 1987 by mit press

how much should central banks talk a new argument abstract more openness in central bank decision procedures may increase inflation uncertainty for players on financial markets when it leads to less wage discipline and higher average inflation

the demand for nominal and real money balances in a large macroeconomic system cointegration has become a popular empirical technique used to estimate the existence and stability of money demand relationships a common approach has been to estimate a single equation system with real money balances ml real income and an interest rate although hafer and jansen 13 friedman and kuttner 10 and stock and watson 29 find only minimal support for this specification baba hendry and starr 6 estimate a more complicated ml relation by including specific opportunity cost variables and find stronger support for the ml relation using post wwii data there have been four reasons put forth to explain the lack of a cointegrating relation between ml real income and the interest rate stock and watson 29 conclude that a stable money demand relation exists in data from 1900 89 but not for the post war period alone their explanation is that sufficient variation exists in the longer sample to identify money demand but excessive multicollinearity among variables during the post war period prevents unique identification baba hendry and starr 6 bhs maintain that misspecification of the ml relation is the reason for poor results they augment the money demand function with inflation a measure of long term bond yield and risk and learning curve weighted yields on newly introduced ml and m2 assets bhs claim their specification is able to account for the missing money period of 1975 76 the velocity decline of 1982 83 and the ml explosion of 1985 86 while standard ml models cannot friedman and kuttner 10 offer a third reason why the simple money demand equation fails they estimate a single equation model for several periods and conclude that a money demand vector exists over the 1960 2 79 4 period for ml however when data is included

central bank inflation contracts and strategic wage setting in a multiunion economy abstract a shared feature of models used to investigate the welfare enhancing potential of a central bank inflation contract is their stochastic nature central to the benefits conferred by such a contract is the presence of supply shocks in constructing a framework where wages are set strategically by a number of nonatomistic inflation averse unions this note identifies circumstances in which an inflation contract improves macroeconomic outcomes even in the absence of supply shocks

economic insights from internet auctions this paper surveys recent studies of internet auctions four main areas of research are summarized first we survey several studies that document and attempt to explain the frequently observed sniping or last second bidding behavior in these auctions second we summarize several methods proposed to quantify the distortions caused by asymmetric information in these markets most notably due to the winner s curse third we explore research about the role of reputation mechanisms installed to help combat these distortions finally we discuss what internet auctions have to teach us about auction design

inflation adjustment and labour market structures evidence from a multi country study the impact of labour market structures on the response of inflation to macroeconomic shocks is analysed empirically results based on a 20 country panel show that if labour market coordination is high the effect on inflation of movements in unemployment import prices tax rates and productivity is dampened both on impact and dynamically in contrast monopoly power in labour supply measured by the percentage unionisation of the workforce appears to amplify the response of inflation to its reduced form determinants these findings are attributed to the behaviour of wages following movements in demand and supply side conditions

a theory of ambiguity credibility and inflation under discretion and asymmetric information this paper develops a positive theory of credibility ambiguity and inflation under discretion and asymmetric information the monetary policymaker maximizes his own politically motivated objective function that is positively related to economic stimulation through monetary surprises and negatively related to monetary growth the relative importance he assigns to each target shifts stochastically through time his current preference trade off is known to him but not to the public when choosing the state contingent path of money growth for the present and the future the policymaker compares the benefits from current stimulation with the costs associated with higher future inflation expectations current monetary growth conveys information to the public about future money growth because there is persistence in the policymaker s objectives although expectations are rational information is imperfect because monetary control procedures are imprecise as a result the public cannot correctly distinguish persistent changes of emphasis on different policy objectives from transitory monetary control errors the public becomes aware of changes gradually by observing past monetary growth credibility is defined in terms of the speed with which the public recognizes changes in the objectives of the policymaker credibility is lower the noisier monetary control and the more stable the objectives of the policymaker looser monetary control and a higher degree of time preference on the part of the policymaker induce him to produce higher and more variable monetary growth when the policymaker is free to determine the accuracy of monetary control he does not always choose the most effective control available in spite of the fact that monetary surprises always have an expected value of zero the reason is that ambiguous control procedures enable the policymaker to generate positive surprises when he cares more than on average about economic stimulation he leaves the inevitable negative surprises for periods in which he cares more about inflation prevention this result provides an explanation for the fed s preference for ambiguity recently documented by goodfriend 1986 the policymaker is more likely to pick more ambiguous control procedures the more uncertain his objectives and the higher his time preference the paper also provides a theoretical underpinning for the well documented crosscountry positive correlation between the level and the variability of inflation

how will emu affect inflation and unemployment in europe this paper explores how european monetary union will change the wage setting behavior of national labor unions we derive the impact of national inflation aversion and labor militancy on the performance of national labor markets under different monetary arrangements a common central bank raises inflation and unemployment if it acts as conservatively as national central banks however unemployment falls in countries that previously tied their monetary policy to the bundesbank we also examine the composition of emu and the influence of national labor market legislation jel classification e24 f02 f33

monetary policy cooperation may not be counterproductive this paper qualifies rogoff s famous 1985 result that international monetary policy cooperation is counterproductive in a model similar to his it is shown that if wage setters are non atomistic and inflation averse as policymakers are cooperation leads to higher employment and possibly lower inflation

corporatism monetary policy and macroeconomic performance a simple game theoretic analysis the effects of corporatism on inflation and output are analyzed in a model of a game between a government and a union this model allows consideration of aspects of corporatism other than centralization of wage bargaining and permits monetary policy to be endogenized corporatist attitudes on the part of the union have beneficial effects on economic performance provided the game is played noncooperatively with simultaneous moves through the nature of their impact depends critically on the government s preferences if the government leads certain forms of corporatism can be inflationary cooperative play reduces inflation but has an ambiguous effect on output copyright 1995 by the editors of the scandinavian journal of economics

consumption and demand during the recent economic downturn anec dotal reports in the press indicate that some demands are recession resistant beer while others are very procyclical e g wine this naturally causes economists to attempt to infer something about engel curves just as macroe conomists think differently about growth and business cycles so it seems should microe conomists think differently about how con sumption responds to growth and business cycles using quarterly national income and product account nipa data figure 1 depicts consumption and food expenditure growth mean percentage growth rates for food con sumption was 2 3 in the period 1948 1977 and 1 85 in the period 1978 2009 while the standard deviation of growth rates fell from 0 37 in the earlier period to 0 27 in the later pe riod consistent with engel s law the growth rate of food consumption has fallen over time in either total or per capita forms unsur prisingly the quarterly growth rate of medical consumption not shown is higher than food with a mean growth of 5 97 in the earlier period and reduced growth of 3 4 and de clining in the later period interestingly stan dard deviation d of medical growth rate has fallen substantially from 0 51 to 0 18 the mean growth of overall consumption expendi tures was 3 9 d 4 15 in the earlier period and 3 1 d 2 62 in the later period finally housing expenditure growth rates not shown halved from 5 04 in the early period to 2 51 in the latter period with very stable rates of growth d 0 15 however negative growth rates occur during recessions 2001 is an ex ception indeed food expenditures fell almost 15 in the recent quarter from the previous quarter which was also negative growth sim ilar patterns of negative growth rates during re cessions occur for the other two categories of consumption in the period 1978 2009 and for total consumption as expected consumption and consumption growth behave very differ ently in recessions the question is are the negative growth rates just due to a fall in cur rent income or do they reflect uncertainty if uncertainty is key then one must funda mentally think about model future expecta tions in order to understand measure current demand as simple as these basic engel curve consid erations are one of the liveliest debates in eco nomics centers on consumption in response to income for decades there has been the steady accumulation of evidence for and against a keynesian type view that people consume out of current income the contrary view is most commonly called the permanent income hypothesis or pih due to modigliani and brumberg 1954 friedman 1957 and oth ers generally forward looking intertemporal models of consumption and savings might be called the life cycle hypothesis with pih as a special case yet economists have not been particularly successful at amassing convincing evidence that is consistent with the life cycle model of behavior in all of its ramifications and many find models of conventionally ra tional economic agents wanting e g laibson 1998 the pih is that individuals consume out of an annuity derived from expected lifetime wealth this is particularly relevant when dis cussing the effects of countercyclical fiscal pol icy john taylor 2008 recently sided with the pih against the keynesian or neo keynesian view a second major issue is whether liquid ity constraints mitigate the forward looking life cycle predictions a third issue is how un certainty affects consumption and saving pre cautionary behavior much research has focused on the demand response to changes in total expenditure or even food expenditure allocations to particu lar foods engel curve notions of this research could be stated as dqt dc 1 n where c is real total consumption expenditures c j2 i piqi where qt and pt are the th quantity and real price respectively macroeconomics fellows address rulon d pope is professor of economics at brigham young university the author would like to thank daniel sullivan for assistance fellows address was presented at the 2008 aaea annual meet ing in milwaukee wi august 2009 invited addresses are not sub jected to the journal s standard refereeing process

wages and employment in a segmented labor market this paper analyzes the impact of business cycle fluctuations on a labor market segmented into a unionized primary sector and a competitive secondary sector either permanent or temporary changes in real aggregate demand are shown to widen the intersectoral wage differential in recession and under reasonable specifications of key parameters to cause greater fluctuations of primary sector employment than secondary sector employment this pattern agrees with the stylized facts of the u s economy

monetary conservatism and fiscal coordination in a monetary union abstract in monetary unions time inconsistency provides the rationale for monetary conservativeness and against fiscal coordination however this depends on the assumption of exogenous labor markets once wage setting behavior is explicitly modeled fiscal coordination and less conservative central bankers improve the performance

gambling by auctions abstract we provide theoretical and empirical analysis of a selling mechanism used by an internet web site that combines important features of auctions and gambling this is the first analysis of such a selling mechanism which provides insights into how the two kinds of behavior might be related in real life the winner of the object is the bidder with the highest bid not submitted by any other bidder in the equilibrium of our game theoretical model each bid made with positive probability yields the same probability of winning bidders are more likely to submit higher bids and the bid distribution does not depend on the value of the object or the highest bid allowed if one controls for the number of bidders most of these key theoretical predictions are confirmed by the data

the welfare state and competitiveness in all industrial countries fiscal policy is increasingly about redistribution in this paper the authors study redistribution across different types of agents in a world characterized by the presence of labor unions and distortionary taxation they show that an increase in transfers financed by distortionary taxation has nonlinear effects on unit labor costs relative to the other countries depending on the degree of centralization of the wage setting process in the labor market the authors find considerable empirical support for the model in a sample of fourteen oecd countries copyright 1997 by american economic association

why are stabilizations delayed when a stabilization has significant distributional implications e g tax increases to eliminate a large budget deficit socioeconomic groups may attempt to shift the burden of stabilization onto other groups the process leading to stabilization becomes a war of attrition each group attempting to wait the others out and stabilization occurring only when one group concedes and bears a disproportionate share of the burden the authors solve for the expected time of stabilization in a model of rational delay and relate it to several political and economic variables they motivate this approach and its results by comparison to historical and current episodes copyright 1991 by american economic association

can higher prices stimulate product use evidence from a field experiment in zambia the controversy over how much to charge for health products in the developing world rests in part on whether higher prices can increase use either by targeting distribution to high use households a screening effect or by stimulating use psychologically through a sunk cost effect we develop a methodology for separating these two effects we implement the methodology in a field experiment in zambia using door to door marketing of a home water purification solution we find evidence of economically important screening effects by contrast we find no consistent evidence of sunk cost effects jel c93 d12 i11 m31 o12

on central bank independence and the stability of policy targets it is argued that impediments to the establishment of an independent central bank arise in the presence of unstable policy targets changing policy targets may occur with an officemotivated policymaker this differs from politico economic models where targets change depending on the partisanship of the politicians in office in the model the principal faces a tradeoff between the credibility benefits of an independent central bank and the flexibility to pursue shifts in his policy targets allowed by a regime of policy discretion an empirical section addresses the issue of the correlation between central bank independence and the stability of policy targets

efficient bargains and the mcdonald solow conjecture this article explores the mcdonald and solow 1981 conjecture that the outcome from a bargain over wages and employment can be approximately achieved by a bargain over wages and the labor capital ratio the crew size where the latter can be argued to be more representative of the real world i derive a crew size contract curve and show that this conjecture is not generally true a test to determine which model is generating real world data is suggested the wage rigidity results derived by mcdonald and solow for their contract curve do not apply to this crew size contract curve

the macroeconomics of social pacts in this paper we analyze macroeconomic interactions between trade unions the central bank and the fiscal policymaker we explicitly model unions concern for public expenditure paving the way for an analysis of the potential gains from cooperation between the fiscal policymaker and the unions i e the so called corporatist or social pacts that have characterized economic policies in a number of european countries in the last few decades we also highlight the profoundly different incentives generated by institutional arrangements such as the maastricht criteria and the stability and growth pact the former has unambiguously induced more efficient outcomes the latter is likely to backfire

interest rate management in ldc s the mckinnon argument that higher time deposit rates raise output and lower inflation in the short run and increase medium term growth by raising the savings rate are shown to depend crucially on the assumption that portfolio shifts into td s come out of an asset providing less intermediation than the banking system we show that if instead the shift is out of an asset providing more intermediation e g loans on a curbmarket raising td rates is contractionary in the short run may have negative impacts on growth and can lead to more rather than less inflation in the short run

a theory of exit in duopoly we develop a duopoly model in which exit occurs because of the existence of fixed costs or opportunity costs each firm enters the market knowing its own cost but not that of its opponent as times goes on each firm becomes increasingly pessimistic about the cost of its remaining rival the time of exit is the only strategic variable so that our model is a war of attrition in contrast to the classic war of attrition however we assume that with positive probability each firm s costs may be low enough that staying in forever is a dominant strategy thus our model unlike the classic one has a unique equilibrium

saving pension contributions and the real interest rate a test of the hypothesis that estimates of the interest elasticity of personal and private saving may be biased downward by a failure to control for behavior related to defined benefit pension programs fails to reject existence of a positive interest elasticity of private saving correcting for pension funding bias the estimated interest elasticity of private saving is 0 04 well below michael j boskin s 1978 estimate of 0 4 obtained with a different data set and different estimation procedures the estimated interest elasticity of personal saving is 0 28 copyright 1989 by mit press

less fighting than expected experiments with wars of attrition and all pay auctions while all pay auctions are well researched experimentally we do not have much laboratory evidence on wars of attrition this paper tries to fill this gap technically there are only a few differences between wars of attrition and all pay auctions behaviorally however we find striking differences as many studies our experiment finds overbidding in all pay auctions in contrast in wars of attrition we observe systematic underbidding

trade union density and inflation performance evidence from oecd panel data this paper examines the impact of union membership rates on inflation in oecd countries a positive effect of union density is estimated even after controlling for fixed effects and time dummies additional institutional characteristics for example union coordination employment protection laws and central bank independence do not affect inflation directly in a panel setting but do influence the size of the unionization coefficient via interaction terms the results are robust to controlling for potential common causes such as oil price shocks and the political stance of the government and to using gmm iv techniques to handle possible endogeneity biases

has monetary policy become more efficient a cross country analysis over the past twenty years macroeconomic performance has improved in industrialized and developing countries alike in a broad cross section of countries inflation volatility has fallen markedly while output variability has either fallen or risen only slightly this increased stability can be attributed to either 1 more efficient policymaking by the monetary authority 2 a reduction in the variability of the aggregate supply shocks or 3 changes in the structure of the economy in this paper we develop a method for measuring changes in performance and allocate the source of performance changes to these two factors our technique involves estimating movements toward an inflation and output variability efficiency frontier and shifts in the frontier itself we study the change from the 1980s to the 1990s in the macroeconomic performance of 24 countries and find that for most of the analyzed countries more efficient policy has been the driving force behind improved macroeconomic performance

bargaining structure and economic performance in the open economy abstract it seems nowadays accepted that both centralized wage bargaining and negotiation at the firm level perform better than sectoral wage bargaining this is because sectoral unions have enough market power to raise wages but do not internalize all the effects of their actions however the ranking may be different in an open economy facing a less than infinitely elastic foreign demand because raising wages improves the country s terms of trade as in the optimal tariff argument as a result welfare is higher in the centralized setting while sectoral bargaining is better than full decentralization when imported goods represent a large share of total consumption

the sunk cost fallacy in penny auctions this article theoretically and empirically analyses behaviour in penny auctions a relatively new auction mechanism as in the us dollars or war of attrition players in penny auctions commit higher non refundable costs as the auction continues and only win if all other players stop bidding i first show that in any equilibria that does not end immediately players bid probabilistically such that the expected profit from every bid is zero then using two large data sets covering 166 000 auctions i calculate that average profit margins actually exceed 50 to explain this deviation i incorporate a sunk cost fallacy into the theoretical model to generate a set of predictions about hazard rates and player behaviour which i confirm empirically while players do slowly learn to correct this bias and there are few obvious barriers to competition activity in the market is rising and concentration remains relatively high

relative prices in monetary union and floating we analyse a small open economy with a tradable and a sheltered sector if the unions that operate in each sector coordinate their wage demands sectorwise the choice of monetary regime floating cum inflation target vs emu may affect the relative wages and prices of the economy we show that emu results in lower prices for tradable goods and lower real wages in the traded sector while opposite results hold for sheltered sector prices and wages thus if large unions behave strategically the choice of monetary regime has far reaching structural implications

debt inflation and central bank independence abstract increasing the independence of a central bank from political influence although ex ante socially beneficial and initially successful in reducing inflation would ultimately fail to lower inflation permanently the smaller anticipated policy distortions implemented by a more independent central bank would induce the fiscal authority to decrease current distortions by increasing the deficit over time inflation would increase to accommodate a higher public debt by contrast imposing a strict inflation target would lower inflation permanently and insulate the primary deficit from political distortions

fiscal activism under inflation targeting and non atomistic wage setting this paper presents a game between a fiscal authority an independent central bank and non atomistic wage setters the effects of fiscal activism and inflation targeting on labour market outcomes are analysed the results suggest that inflation targeting provides incentive for wage restraint moreover real wages are increasing in the degree of fiscal activism as wage setters exploit the response of a fiscal authority seeking to promote employment numerical results suggest that the benefits of targeting inflation are larger when the government pursues an activist policy and therefore that there is some substitutability between fiscal and monetary rules

on the economics of state lotteries s tate lotteries can be evaluated from either of two perspectives familiar to economists as a consumer commodity or as a source of public revenue l as a commodity the lottery is notable for its broad market penetration and rapid growth sixty percent of the adults in lottery states play at least once in a year the annual growth in real per capita sales in lottery states has averaged 12 percent rising in 1989 dollars from 22 in 1975 to 108 in 1989 as a source of public revenue lotteries account for a rather modest fraction of revenue in states that run them 3 3 percent in 1986 but they are nonetheless one of the most visible state government activities lottery sales exceed those of all other products sold directly by state governments to the public and are larger than all but three major activities of state government education public welfare and highways clotfelter and cook 1989 table 2 5 moreover lotteries are a qualitatively new activity for state governments in that they are a business operated in effect for profit state liquor stores are perhaps the closest analog but they were created to encourage temperate drinking practices and do not engage in the sales promotion and marketing activities that are characteristic of the lotteries lotteries enjoy an honored place in american history as a device for raising funds for public purposes funding for such institutions as the jamestown settlement harvard college and the continental army as well as hundreds of bridges fire houses and schools came from lotteries but after the

prospect theory in a dynamic game theory and evidence from online pay per bid auctions abundant evidence exists that expected utility theory does not adequately describe decision making under risk although prospect theory is a popular alternative it is rarely applied in strategic situations in which risk arises through individual interactions this study fills this research gap by incorporating prospect theory preferences into a dynamic game theoretic model using a large field data set from multiple online pay per bid auction sites the authors empirically show that their proposed model with prospect theory preferences makes a better out of sample prediction than a corresponding expected utility model prospect theory also provides a unified explanation for two behavioral anomalies average auctioneer revenues above current retail prices and the sunk cost fallacy the empirical results indicate that bidders are loss averse and overweight small probabilities such that the expected revenue of the auction exceeds the current retail price by 25 46 the authors illustrate and empirically confirm a managerial implication for how an auctioneer can increase revenue by changing the details of the auction design

the political economy of inflation labour market distortions and central bank independence using the citizen candidate model we study the government s choice of institutions for the labour market and the central bank and derive the implications for inflation and employment we derive conditions for the existence of equilibria in which the labour market is distorted and the central bank is dependent or independent under a range of conditions affecting central bank dependence the post election cycle in inflation and employment and inflation bias our results imply that average inflation and inflation variability are lower under an independent central bank whereas employment variability can be lower or higher consistent with evidence for oecd countries many democratic societies delegate key tasks to non elected and independent institutions a prominent example being independent central banks the belief in the advantage of central bank independence is nursed by the cross country evi

all pay auctions with a buy price option all pay auctions this paper studies all pay auctions in which there is a buy price option for bidders to guarantee purchases at a seller specified price we analyze symmetric increasing bidding equilibria in the first and second price all pay auctions with the buy price option while the optimal buy price in the second price is higher than are those in the first price all pay auction both formats maintain the same expected profit with an endogenous entry process all pay auctions with the buy price can attract more consumers and ultimately reach a higher expected profit than does the uniform posted price selling mechanism jel d44 l11 l81

partially independent central banks politically responsive governments and inflation theories of central bank independence have more exact implications regarding inflation in different political economic environments than generally understood or empirically examined they imply that inflation in any given country time will be a weighted average of what it would be if the central bank completely controlled monetary policy and what it would be if the government completely controlled it with the degree of central bank independence weighting the former an equation embodying this theoretical expectation is estimated by constrained least squares from a time series cross section of inflation rates in developed democracies since the bretton woods era the results confirm that the antiinflationary benefit of central bank independence is not constant but rather depends on every variable in the broader politicaleconomic environment to which wholly autonomous central banks and governments would respond differently conversely the inflationary impacts of all such political economic variables depend on the degree of central bank independence

the timing and incidence of exploratory drilling on offshore wildcat tracts this paper is an empirical study of learning and strategic delay in exploratory drilling the specific context is drilling on federal land off the coast of texas and louisiana between 1954 and 1990 the us federal government held a number of sales in which it sold the oil and gas rights to thousands of parcels of its offshore land these parcels known as tracts each cover an area of five thousand acres on average the typical sale involves more than a hundred tracts most sales are wildcat sales which consist of tracts located in areas where there has not been prior exploratory drilling and on site drilling is not permitted prior to the sale firms have access only to seismic information and as a consequence face considerable uncertainty the rights to the tracts are sold individually using a first price sealed bid auction and ownership of tracts in an area is typically distributed among several firms tracts within an area often share common geological features and a subset may be located over a common pool in either case the ex post value of nearby leases will be correlated and as result there is an information externality associated with exploratory drilling 20 refs 1more fig 5 tabs less

non atomistic wage setters and monetary policy in a new keynesian framework this paper extends an otherwise standard new keynesian nk model to allow for the presence of large wage setters building on monetary models from an earlier generation i contribute to the nk literature by adding some new insight it is shown that once the presence of large wage setters is taken into account the degree of wage setting centralization and the aggressiveness of the central bank in stabilizing inflation jointly affect steady state employment because of this interaction the benefits associated with inflation stabilization increase in the centralization of the wage bargaining process

bargaining power strike durations and wage outcomes an analysis of strikes in the 1880s strike outcomes in the 1880s had a winner take all character successful strikes ended with a discrete wage gain failed strikes ended with a return to work at the prestrike wage we present a theoretical interpretation of these outcomes based on a war of attrition model we fit an empirical model specifying the capitulation times of the two parties and the size of the wage gain in the event of a strike success the results show a systematic relation between the determinants of strike success and the determinants of the wage gain for a successful strike

sunk capital unions and the hold up problem theory and evidence from cross country sectoral data abstract in this paper we study the hold up problem by considering the effect of union bargaining power on the level of investment per worker across sectors characterised by different levels of sunk capital investment we develop a search and matching model with heterogeneous sectors and ex post collective wage bargaining and test the predictions of the model using a difference in difference approach on manufacturing sector data in a set of oecd countries during the period 1980 2000 we find that union power reduces investment per worker particularly in sunk capital intensive industries we refine our empirical analysis showing that the underlying hold up problem is exacerbated when strikes are not regulated after a collective contract is signed and there is no arbitration while the presence of social pacts may sustain cooperative equilibria that alleviate the hold up problem our results are robust to a series of controls and possible endogeneity of union power

war and conflict in economics theories applications and recent trends we review the main economic models of war and conflict these models vary in details but their implications are qualitatively consistent highlighting key commonalities across a variety of conflict settings recent empirical literature employing both laboratory and field data in many cases confirms the basic implications of conflict theory however this literature also presents important challenges to the way economists traditionally model conflict we finish our review by suggesting ways to address these challenges

the case for a populist central banker abstract we present a general equilibrium optimizing model in which we study the joint effects of centralization of wage setting and central bank conservatism on economic performance several striking conclusions emerge in relatively centralized labor markets employment and output are decreasing and inflation is intially increasing and then decreasing in the degree of central bank conservatism a radical populist central banker who cares not at all about inflation alternatively who is not conservative maximizes social welfare economic performance is not u shaped in the degree of centralization of the labor market in contrast to conventional wisdom

the nonneutrality of monetary policy with large price or wage setters monetary rules matter for the equilibrium rate of employment when the number of price wage setters is small even when assuming rational expectations complete information central bank precommitment and absence of nominal rigidities if the central bank is nonaccommodating sufficiently large unions bargaining independently have an incentive to moderate sectoral money wages and thereby expected real wages the result is an increase in the real money supply and hence higher demand and employment this does not hold with accommodating monetary policy since unions wage decisions cannot then affect the real money supply a similar argument holds for large monopolistically competitive price setters

strategic bargaining models and interpretation of strike data attrition screening and signalling models of strategic bargaining are characterized in terms of their predictions about the incidence mean duration and settlement rates of strikes and the terms of wage settlements these predictions are compared with the general features observed in empirical studies of strikes in canada and the united states conclusions are drawn about the types of models capable of generating these features and about the conformity of the models to the evidence methods are described for computing the numerical examples used to illustrate the models

replacing the u s income tax with a progressive consumption tax a sequenced general equilibrium approach abstract this paper examines the welfare consequences of changing the current u s income tax system to a progressive consumption tax we compute a sequence of single period equilibria in which savings decisions depend on the expected future return to capital in the presence of existing income taxes the u s economy is assumed to lie on a balanced growth path with the change to a consumption tax individuals save more and initially consume less as the capital stock grows consumption eventually overtakes that of the original path and the economy approaches the new balanced growth path with higher consumption and a greater capital stock both the transition and the balanced growth paths enter our welfare evaluations we find the discounted present value of the stream of net gains is approximately 650 billion in 1973 dollars just over 1 percent of the discounted present value of national income larger gains occur if further reform of capital income taxation accompanies the change we examine the sensitivity of the results both to the design of the consumption tax and to the values of elasticity and other parameters the paper also contains estimates of the time required to adjust from one growth path to the other

median voter preferences central bank independence and conservatism this paper studies how the independence and theconservatism of a central bank relate to the structureand stability of the median voter preferences this isdone by means of a model of endogenous delegationwhere an opportunistic policy maker chooses themonetary regime independence and conservatism tomaximise the welfare of the median voter the resultsshow that a high degree of inflation aversion ofmonetary policy is not necessarily associated with ahigh degree of central bank independence a high andstable degree of inflation aversion of society i e of the median voter may lead to establish a dependentcentral bank which is highly inflation averse this suggests that the negativecorrelation between inflation and central bankindependence indices detected by several empiricalstudies may reflect a link between inflation and somedeep features of social preferences

the generalized war of attrition abstract we model a war of attrition with n k firms competing for n prizes in a natural oligopoly context the k 1 lowest value firms drop out instantaneously even though each firm s value is private information to itself in a standard setting context in which every competitor suffers losses until a standard is chosen even after giving up on its own preferred alternative each firm s exit time is independent both of k and of other players actions our results explain how long it takes to form a winning coalition in politics solving the model is facilitated by the revenue equivalence theorem jel d43 d44 l13 o30

wage setting under different monetary regimes in an economy with large wage setters like industry unions the monetary regime affects the trade off between consumer real wages and employment and profits faced by the wage setters this paper shows that an exchange rate target including participation in a monetary union is likely to involve lower wages in the traded sector and higher wages in the non traded sector than does a price target an exchange rate target also involves higher prices on non traded goods relative to on traded goods overall welfare is likely to be higher under a price target

the interaction of monetary policy and wages this paper focuses on the interaction of monetary policy and wage formation in economies with strong labor unions government and unions are viewed as endogenous utility maximizers and the macroeconomic consequences of their strategic interaction are explored with the aid of some elements of simple game theory specifically it is shown a how labor unions adjust wages to prices so as to maximize their utility following changes in monetary policy b how the effectiveness of monetary policy is circumscribed without necessarily being nullified by the utility maximizing reactions of unions and c how the interplay of government and unions can create a persistent tendency towards inflation and unemployment simultaneously

wage rigidity collective bargaining and the minimum wage evidence from french agreement data using several unique data sets on wage agreements at both industry and firm levels in france we document stylized facts on wage stickiness and the impact of wage setting institutions on wage rigidity first the average duration of wages is a little less than one year and around 10 percent of wages are modified each month by a wage agreement data patterns are consistent with predictions of a mixture of calvo and taylor models the frequency of wage change agreements is rather staggered over the year but the frequency of effective wage changes is seasonal the national minimum wage has a significant impact on the probability of a wage agreement and on the seasonality of wage changes negotiated wage increases are correlated with inflation the national minimum wage increases and the firm profitability

central bank independence centralization of wage bargaining inflation and unemployment theory and some evidence abstract this paper proposes a conceptual framework to investigate the effects of central bank independence of the degree of centralization of wage bargaining and of the interaction between those institutional variables on real wages unemployment and inflation in a framework in which unions are averse to inflation this aversion moderates union s wage demands as they attempt to induce the central bank to inflate at a lower rate an increase in the degree of centralization of wage bargaining a decrease in the number of unions triggers two opposite effects on real wages unemployment and inflation it reduces the substitutability between the labor of different unions and therefore the degree of effective competition between them this reduced competition effect raises real wages unemployment and inflation but the decrease in the number of unions also strengthens the moderating effect of inflationary fears on the real wage demands of each union this strategic effect lowers real wages unemployment and inflation for sufficiently inflation averse unions the interaction between those two effects produces a calmfors driffill type relation between real wages and centralization the paper analyzes the effects of central bank independence on the position and the shape of this relation as well as on inflation and unemployment the paper features two mechanisms one of which is novel through which monetary institutions have real effects the model implies that if there is a single union social welfare is maximized when the central bank attaches a zero weight to inflation but when the number of unions is larger than one this result is no longer true in general empirical evaluation of some of the theoretical implications using data from 19 developed economies is for the most part supportive of those implications

an analysis of the war of attrition and the all pay auction we study the war of attrition and the all pay auction when players signals are affiliated and symmetrically distributed we a find sufficient conditions for the existence of symmetric monotonic equilibrium bidding strategies and b examine the performance of these auction forms in terms of the expected revenue accruing to the seller under our conditions the war of attrition raises greater expected revenue than all other known sealed bid auction forms journal of economic literature classification numbers d44 d82 1997 academic press