does monetary unification lead to excessive debt accumulation abstract if discretionary monetary policy gives rise to an inflation bias monetary unification boosts the accumulation of public debt the additional debt accumulation harms welfare if governments are sufficiently myopic in the presence of myopic governments debt ceilings play a useful role in avoiding excessive debt accumulation in a monetary union and allowing a conservative independent central bank to focus on price stability with supply shocks monetary unification results in excessive variability of public debt a debt target that constrains stabilization policy helps to prevent this

downward nominal wage rigidity and the case for temporary infl ation in the eurozone abstract since the onset of the great recession in peripheral europe nominal hourly wages have not fallen from the high levels they had reached during the boom years this in spite of widespread in

general training in labor markets common value auctions with unobservable investment abstract this paper studies the puzzle of employer financing for the general training of workers a parsimonious theory is developed based on asymmetric information between employers about the quantity of training the labor market is modeled as a common value auction with an informed and an uninformed bidder the novel feature of the game is that one of the bidders can make an unobservable investment that increases the value of the item before the auction by randomizing the amount of training provided an employer can create an endogenous adverse selection problem enabling it to compress the wage structure and capture some returns from its training investment the model generates continuous equilibrium wage and training distributions and identical employees can receive different wage offers and training levels a parametric example is used to illustrate how the shape of the wage distribution depends on the elasticity of production with respect to human capital

the strategic bequest motive although recent research suggests that intergenerational transfers play an important role in aggregate capital accumulation our understanding of bequest motives remains incomplete we develop a simple model of strategic bequests in which a testator influences the decisions of his beneficiaries by holding wealth in bequeathable forms and by conditioning the division of bequests on the beneficiaries actions the model generates falsifiable empirical predictions that are inconsistent with other theories of intergenerational transfers we present econometric and other evidence that strongly suggests that bequests are often used as compensation for services rendered by beneficiaries

a note on the empirical effectiveness of formal fiscal restraints abstract an important agrument in the current debate over european monetary integration is that a monetary union requires formal fiscal restraints limiting individual member states budgetary powers to reduce the common monetary authority s risk of having to bail out insolvent member governments this note presents empirical evidence on the effectiveness of fiscal restraints on state budgets in the united states nonparametric tests reveal that fiscal restraints significantly affect the probability of fiscal choices and performance without however preventing extreme outcomes fiscal restraints induce substitution of nonrestricted for restricted debt instruments

reputation for quality and adverse selection abstract we analyze a dynamic market with a seller who can make a one time investment that affects the returns of tradable assets the potential buyers of the assets cannot observe the seller s investment prior to the trade or verify it in any way after the trade the market faces two types of inefficiency the ex ante inefficiency i e the seller s moral hazard problem and the ex post inefficiency i e inefficient ex post allocations due to the adverse selection problem we analyze how the observability of information by future buyers through which the seller builds a reputation affects the two types of inefficiency as well as the interplay between them

crowding out of private support to the elderly evidence from a demogrant in mexico abstract to examine whether private support dampens or reinforces the impact of redistributive policies this paper estimates the effect of an exogenous increase in the income of the elderly caused by a recent demogrant in mexico on the amount of private transfers they receive my instrumental variables strategy overcomes the endogeneity of income that typically contaminates estimates and unlike related studies that use natural or policy experiments in reduced form estimations it yields evidence of a positive bias this suggests that an unobservable characteristic is positively correlated both with income and private transfer receipt and that treating income as exogenous could lead to an underestimation of the crowding out effect in contrast my preferred estimates are negative significant and not far from minus one implying an almost complete crowding out my findings suggest that private transfers could neutralize the changes in the public transfers for the elderly

cooperative investments and the value of contracting recent articles have shown that contracts can support the efficient outcome for bilateral trade even in the face of specific investments and incomplete contracting these studies typically considered selfish investments that benefit the investor e g the seller s investment reduces her production costs the authors find very different results for cooperative investments that directly benefit the investor s partner e g the seller s investment improves the buyer s value of the good most importantly if committing not to renegotiate the contract is impossible then contracting has no value i e the parties cannot do better than to abandon contracting altogether in favor of ex post negotiation

balanced budget rules distortionary taxes and aggregate instability a traditional argument against a balanced budget fiscal policy rule is that it amplifies business cycles by stimulating aggregate demand during booms via tax cuts and higher public expenditures and by reducing demand during recessions through a corresponding fiscal contraction this paper suggests an additional source of instability that may arise from this type of fiscal policy rule it shows that within the standard neoclassical growth model a balanced budget rule can make expectations of higher tax rates self fulfilling if the fiscal authority relies heavily on changes in labor income taxes to eliminate short run fiscal imbalances calibrated versions of the model show that indeterminacy occurs for income tax rates that are empirically plausible for the u s economy and other group of seven countries

motivations to remit evidence from botswana in this article a theory of motivations to send remittances is described and tested with data from botswana altruism is one of the motivations tested and found to be an insufficient explanation for remittances among migrants in botswana a refinement of the model stipulates a modified altruism or enlightened self interest in this model the relationship between the migrant and family is tempered by an implicit understanding of mutual benefit the household strategy may be to encourage some members to migrate as a means of spreading risk and sharing gains the household strategy is similar to an insurance policy where migration is to places where market potential is high the risks incurred might be high the example is given of migration during a drought in botswana migrant remittances were greater in households with more cattle or households with more to lose drought alone was not statistically related to remittances increases in remittances were related to increased levels of education it is suggested that repayment was the motive for parents investment in migrants education migrants gains are identified as the potential for an inheritance the security of channeling investments through a trusted family member and security in having a home to return to it is pointed out that the altruism and family remittances from urban migration were strategies that bridged the simple dynamic of either urban development or rural development impacting on family welfare it is suggested that household models of economy adopt some measure to express the relationship of household wealth to remittances from urban migrants

renegotiation and optimality in agency contracts we analyse renegotiation in a hidden action principal agent model contract renegotiation offers are made by the agent a refinement is imposed on the principal s beliefs if precisely one action is optimal with respect to both the principal s and the agent s contracts the principal believes that that action has been taken with the refinement imposed perfect bayesian equilibrium allocations are identical to the second best in the classical principal agent model without renegotiation when renegotiation is led by the agent and when equilibria satisfy the refinement equilibrium allocations are ex ante efficient incentive contracting is a common mechanism for promoting ex ante investments and for avoiding ex post opportunistic behaviour in a long term or continuing economic relationship the classical principal agent model holmstrom 1979 grossman and hart 1983 is a natural framework for this class of problem in such a model a risk averse agent performs an action on behalf of a risk neutral principal the agent s action is unobservable and affects the principal s revenue in a random fashion the derivation and characterization of efficient compensation schemes have been the major focus in the principal agent literature generally the incentives to motivate a costly action from the agent take the form of profit sharing the agent s reward is made contingent on his random performance outcomes

fairness and the unselfish demand for redistribution by taxpayers and welfare recipients we illustrate how the desire to live in a fair society that rewards individual effort and hard work triggers an unselfish though rational demand for redistribution this leads the well off to prefer higher taxes and the poor to reject extreme progressivity we then provide evidence of these behaviors using a nationally representative survey from italy our empirical analysis confirms that a stronger aversion to unfair distributive outcomes is associated with a higher support for redistribution by individuals with high income and to a lower demand for redistribution by those with low income

good bad or ugly on the effects of fiscal rules with creative accounting abstract do fiscal rules lead to fiscal adjustment or do they encourage the use of creative accounting this question is studied with a model in which fiscal rules are imposed on measured fiscal variables which can differ from true variables because there is a margin for creative accounting the probability of detecting creative accounting depends on its size and the transparency of the budget the model studies the effects on fiscal policy of a budget rule separating structural from cyclical effects and examines how these effects depend on the underlying fiscal distortion and on the degree of transparency of the budget

do private transfers displace the benefits of public transfers evidence from south africa abstract this paper investigates whether government transfer programs displace or crowd out private support focusing on a large increase in state old age pensions in south africa using data spanning the period of the expansion we find that each rand of public pension income to the elderly leads to a 0 25 0 30 rand reduction in private transfers from children living away from home however despite the large increase in income there were no significant changes in migration labor supply or household composition we also show that evaluations of the distributional effects of the pension are overstated when crowding out is ignored

the dynamics of pretrial negotiation it is shown that many cases proceed to court despite ample opportunity for interaction and much of the settlement takes place on the courthouse steps the deadline effect when fixed costs of bargaining are introduced a u shaped pattern of settlement appears with a greater chance of settlement at the beginning and at the end of negotiations than in the middle these characteristics persist even as the time between offers approaches zero the theoretical predictions are consistent with the stylized facts a large proportion of the lawsuits that are settled out of court are settled very close to the trial date or in the first several days of the trial 3 although the deadline effect appears in many other settings as well it has little theoretical support 4

procurement and renegotiation parties bound by an incomplete contract have an incentive to renegotiate after acquiring new information the issue of the parties investment in the relationship before renegotiation is analyzed in a simple two period procurement model the firm invests in the first period it then learns its production cost and the sponsor learns its value for the project williamson s underinvestment presumption is shown to hold under very general assumptions about bargaining and about the ex post asymmetry of information as long as the firm s investment is not observable by the sponsor the introduction of a cancellation fee may well lead to even less investment contrary to what is sometimes argued the role of ex ante price fixing as an alternative way to reintroduce some form of commitment and the problem of cost overruns are discussed last it is shown that if investment is observable by the sponsor andthus may become a joint decision variable the two parties may choose to under or overinvest

when do experts cheat and whom do they target a credence good is a product or service whose usefulness or necessity is better known to the seller than to the buyer this information asymmetry often persists even after the credence good is consumed i propose two new theories of expert cheating suggesting that identifiable heterogeneities among customers can cause expert sellers to defraud their customers according to these theories cheating arises as a substitute for price discrimination and experts cheat selectively for instance experts target high valuation and high cost customers finally selective cheating may damage the communication of useful information from customers to experts and result in inferior services

latin america s social policy challenge education social insurance redistribution abstract long regarded as a region beset by macroeconomic instability high inflation and excessive poverty and inequality latin america has undergone a major transformation over the last 20 years the region has seen improved macroeconomic management and substantial and sustained reductions in poverty and inequality in this paper we argue that social policy including human capital and education social insurance and redistribution need special attention if achievements of the last two decades are to be sustained and amplified starting in the mid 1990s many governments in the region introduced a variety of programs including noncontributory pensions and health insurance and cash transfers targeted to the poor social spending in latin america increased sharply these policies have been widely praised and we believe they have resulted in substantial improvements in the lives of the poor in the region however a more nuanced view shows some worrisome trends moving forward we believe it is nec

old age government transfers and the crowding out of private gifts the70 and aboveprogram for the rural elderly in mexico old age public transfers and remittances

the effect of noncontributory pensions on saving in mexico this paper examines the effects of non contributory pension programs at the federal and state levels on mexican households saving patterns using micro data from the mexican income and expenditure survey the federal program by itself appears to reduce the saving rate of households whose oldest member is either 18 to 54 or 65 to 69 state programs by themselves have no significant effects on household saving rates in the smallest localities but in larger localities they may reduce the saving of households with members in their sixties the combination of both types of programs generally does not have statistically significant effects on households aggregate saving probably because each program seems to affect different population strata no significant effects are found for households whose oldest member is age eligible 70 and older within specific investment categories evidence is found of increases in human capital and in durable and financial goods for some age groups finally the paper provides evidence on household level labor supply responses

information control in the hold up problem we study the use of information control to mitigate hold up risks we identify a distinction between asymmetric information that creates an ex ante investment incentive and asymmetric information that causes ex post inefficiency which then allows ex post inefficiency to be eliminated without compromising the ex ante investment incentive we characterize the properties of the optimal information structure and the payoffs and welfare achievable with information control in the presence of hold up risks

unobservable investment and the hold up problem we study a two person bargaining problem in which the buyer may invest and increase his valuation of the object before bargaining we show that if all offers are made by the seller and the time between offers is small then the buyer invests efficiently and the seller extracts all of the surplus hence bargaining with frequently repeated offers remedies the hold up problem even when the agent who makes the relation specific investment has no bargaining power and contracting is not possible we consider alternative formulations with uncertain gains from trade or two sided investment

investment and screening under asymmetric endogenous information this article provides an analysis of screening contracts in a complete but imperfect information environment as opposed to the usual incomplete information bayesian environment an agent faces a hold up situation while making a cost reducing specific investment that is not observed by the principal to prevent the hold up the agent randomizes his investment strategy and the principal offers a screening contract the informational rents provided by the equilibrium contract finance the investment for a large class of cost functions the randomization is such that the marginal surplus follows a power distribution

dynamic market for lemons with endogenous quality choice by the seller we analyze a dynamic market for lemons in which the quality of the good is endogenously determined by the seller potential buyers sequentially submit offers to one seller the seller can make an investment that determines the quality of the item at the beginning of the game which is unobservable to buyers at the interim stage of the game the information and payoff structures are the same as in the market for lemons our main result is that the possibility of trade does not create any efficiency gain if i the common discounting is low and ii the static incentive constraints preclude the mutually agreeable ex ante contract under which the trade happens with probability one our result does not depend on whether the offers by buyers are private or public

information and bargaining in the hold up problem this article incorporates an information structure with partial information into the canonical hold up problem the optimal information structure balances the tradeoff between ex ante efficiency the information rent effect and ex post efficiency the bargaining disagreement effect with one shot bargaining it occurs at an intermediate level of information asymmetry when there is repeated bargaining it is attained with perfect asymmetry asymmetric information the parameter that is frequently ignored in the literature turns out to be an important welfare instrument for the hold up problem our results therefore provide a basis for institutional design regarding the optimal control of information flow

motives for private income transfers private income transfers are becoming increasingly recognized as a key aspect of the u s economy the majority of private income transfers occur inter vivos i e between living persons but very little is known about this type of transfer behavior this paper tests alternative hypotheses concerning motivation for inter vivos transfers two motives are considered altruism and exchange evidence presented here casts doubt on the altruistic model of transfer behavior observed patterns for inter vivos transfers are more consistent with exchange related motives this finding has important implications for the effects of public transfer programs on the distribution of economic well being

unobserved investment endogenous quality and trade a seller can make investments that affect a tradable asset s future returns the potential buyer of the asset cannot observe the seller s investment prior to trade nor does he receive any signal of it nor can he verify it in anyway after trade despite this severe moral hazard problem this paper shows the seller will invest with positive probability in equilibrium and that trade will occur with positive probability the outcome of the game is sensitive to the distribution of bargaining power between the parties with a holdup problem existing if the buyer has the bargaining power a consequence of the holdup problem is surplus reducing distortions in investment level perhaps counterintuitively in many situations this distortion involves an increase in the expected amount invested vis a vis the situation without holdup