macroeconomic equilibrium and reform in a transitional economy we build a general equilibrium macro model of a transitional economy to reflect four stylized facts among these are that central planning has left a legacy of highly concentrated industry and a residue of price controls and rationing an almost classical dichotomy obtains in the model monetary expansion leaves output and employment unchanged despite the existence of unemployment though leisure time declines however the economy displays a high degree of complementarity between the state controlled and private sectors giving rise to keynesian multiplier effects we also analyse the effects of price liberalization and privatization on the properties of the economy

optimal contract imperfect output observation and limited liability abstract we study the optimal contract when output is imperfectly observed when all parties are risk neutral and the agent has unlimited liability the optimal contract remains the same regardless of whether the output is perfectly or imperfectly observed when the agent s liability becomes limited the optimal contract changes profoundly under imperfect information we show that the high productivity agent never produces at first best and may be required to produce an effort lower than the one required from the low productivity agent and both types of agents can earn rents journal of economic literature classification number d82

wage indexation and the time consistency of government policy this paper concerns the role of wage indexation as a mechanism for enabling an economy to achieve outcomes that would not otherwise be time consistent the desirability of indexation depends on the size of real and nominal shocks and on a policymaker s incentives for short run inflation surprises policymakers incentives to utilize wage indexation are examined and it is found that weak policymakers are more likely to choose wage indexation hence in an electoral equilibrium voters may choose a policymaker who cares more about unemployment than inflation but who chooses wage indexation to commit to low inflation copyright 1995 by the editors of the scandinavian journal of economics

international taxation and the direction and volume of cross border m as we show that the parent subsidiary structure of multinational firms created by cross border mergers and acquisitions is affected by the prospect of international double taxation specifically the likelihood of parent firm location in a country following a cross border takeover is reduced by high international double taxation of foreign source income at the same time countries with high international double taxation attract smaller numbers of parent firms a unilateral elimination of worldwide taxation by the united states is simulated to increase the proportion of parent firms locating in the united states following cross border mergers and acquisitions from 53 to 58

money back warranties vs replacement warranties a simple comparaison product warranties are one of the most common time honored and visible contractual relationships entered into by consumers moreover under the uniform commercial code consumers are covered by an implied warranty of merchantability even without a written warranty in this paper we compare the outcomes of two contrasting types of consumer product warranties money back warranties and replacement warranties both these types of warranties are ubiquitous in fact a best and a r andreasen 1977 find that returning an item is the most common action taken by dissatisfied consumers c l kendall and f a russ 1975 in a study of the consumer packaged goods industry find that money back and new merchandise are the two most common responses made by firms to consumer complaints yet as our analysis shows there are significant differences in the incentives they provide firms and in their welfare properties in particular we find that the comparison depends crucially on the observability of quality and on the cost of servicing warranties although there are certainly more complicated explanations for warranties we rely on a simple model of imperfect consumer information in which to embed our comparison of the relative performance of these two forms of warranty consumers are confronted by seller moral hazard that is either they are unable to discern the quality of a product before purchase or alternatively this information is extremely costly for consumers to obtain or for firms to publicly demonstrate we abstract from issues such as differing degrees of risk aversion consumer moral hazard and screening each of which is frequently the rationale behind warranty provision our model is perhaps closest to the model presented in michael spence s 1977 article in which he analyzes the provision of warranties in an environment with biased consumer information

signaling quality with a money back guarantee the role of transaction costs direct marketing is witnessing explosive growth as consumers increasingly purchase products from their homes their ability to judge the quality of products they buy is significantly reduced in this paper we study how money back guarantees can signal product quality in such environments we interpret product quality broadly to mean both the level of attributes promised as well as the firm s consistency in delivering on those promises key aspects of our formulation are the explicit consideration of transaction costs and alternative signals of product quality transaction costs are the costs the seller or buyer faces when redeeming a money back guarantee we show that money back guarantees signal quality by exploiting the higher probability of returns for a lower quality product and the attendant higher transaction costs however if the seller s transaction costs are very large then there are less costly ways to signal namely charging a high price we compare the signaling performance of 1 price 2 price with uninformative advertising and 3 price with a money back guarantee whereas uninformative advertising does not work at all in our model under certain conditions a money back guarantee is necessary to signal and under other conditions a money back guarantee is a useful supplement to price

limited liability and incentive contracting with ex ante action choices abstract this article examines a principal agent model of financial contracting in which a risk neutral entrepreneur agent makes an unobservable ex ante effort choice while employing the investment funds of a risk neutral investor principal the key innovation is that the investment contract is subject to statutory liability limits given these liability limits two settings are considered one in which the investor payoff function is also constrained to be monotonically nondecreasing in firm profit and another in which no such monotonic contract constraint is imposed in the former case a standard debt contract is shown to emerge and a first best effort choice is not achieved in the latter setting the optimum is characterized by a live or die payoff function and a first best effort level may or may not be realized

a simple model of voice we think of voice as a means of information aggregation within groups operating in a variety of settings we explore how the characteristics of groups and their leaders influence voice in relatively homogeneous groups members farthest away from the leader have the best incentives to provide information and their voice tends to moderate policy decisions in large heterogeneous groups where leaders cannot identify individual members the possibilities for informational exchange are severely limited and any communication that exists pushes policies farther to the extreme

the effect of a worldwide tax system on tax management of foreign subsidiaries under a worldwide tax system firms pay taxes on their domestic income and repatriated foreign income whereas under a territorial tax system repatriated foreign income is exempt from taxation we examine whether worldwide tax systems reduce the incentives of multinational corporations to engage in tax management in their foreign subsidiaries using two quasi natural experiments we show that multinationals lower the effective tax rates in their foreign subsidiaries after countries switch from a worldwide to a territorial tax system thus multinationals subject to a worldwide tax system face competitive disadvantages compared to competitors from countries with a territorial tax system

inflation and reputation in many macroeconomic models with rational expectations optimal policy is time inconsistent and therefore announced policy may not be credible this paper models the government s credibility explicitly using kreps and wilson s analysis time consistent optimal government policy emerges as a sequential equilibrium in a repeated game this policy is at least as good as the inconsistent optimal policy and dominates the consistent policy when reputational effects are ignored thus the analysis resolves the problem of specifying a credible optimal policy in such models the results show why attempts to disinflate may lead to recession even with perfectly flexible prices this abstract was borrowed from another version of this item

collusion under asymmetric information when applied to groups the revelation principle postulates a bayesian nash behavior between agents their binding agreements are unenforceable or the principal can prevent them at no cost we analyze instead a mechanism design problem in which the agents can communicate between themselves and collude under asymmetric information we characterize the set of implementable collusion proof contracts both when the principal offers anonymous and nonanonymous contracts after having isolated the nexi and the stakes of collusion we proceed to a normative analysis perform some comparative statics discuss our concept of collusion proofness and provide some insights about transaction costs in side contracting

macroeconomic effects of price controls the role of market structure the impetus for the current study comes from an attempt to understand the results of israel s stabilisation programme of july i985 the programme consisted of a sharp reduction in aggregate spending via an increase in net taxes and a moderate reduction in government spending a devaluation followed by a fixed exchange rate and price and wage controls the results of the programme are reported in table i in the first quarter that followed the implementation of the programme i e the third quarter of i985 aggregate spending declined exports increased imports declined the real wage rate declined and employment declined these results can be explained by a conventional competitive macroeconomic model as i will show in section ii during the next six months all the variables reversed their course this would be easy to explain with a conventional competitive model if the price controls had been removed however they were not and it is difficult to reconcile the comovement of the reported variables in their presence especially intriguing is the simultaneous increase in the real wage rate and employment this is so because in a competitive model price controls lead to excess demand in this case increased spending has no price or employment effects while a wage increase reduces employment the difficulty is further aggravated by the fact that contrary to the model s prediction almost no shortages have been observed in addition as shown in section ii partial relaxation of price controls is also incapable of explaining the data with this type of model this led me to study a macroeconomic model with oligopolistic markets i have chosen to work with a particular form of imperfect competition which proves to be useful for the purpose at hand it is however possible to think about alternatives which are also of interest clearly it is pointless to cover all these

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

the vanishing harberger triangle this paper shows that the double taxation of corporate dividends or profit repatriations implies a nucleus theory of the corporation after the firm is set up with a small stock of original capital it enters a phase of purely internal growth during which no dividends are paid and no shares are issued the phase terminates when an efficient stock of capital has been accumulated and dividends are paid during the growth phases the tax distortion is inversely related to the tax burden and it is larger than conventional formulae for the cost of internal and external equity finance suggest

signalling wage controls and monetary disinflation policy focuses on wage control and monetary disinflation policy how the crucial variable to control is the money supply and wage and price controls should be avoided because of their macroeconomic costs the two types of government as being low inflation governments and high inflation governments how wage controls have microeconomic costs

exchange rate policy wage formation and credibility abstract since the collapse of the bretton woods system some european countries have pursued discretionary exchange rate policies in order to maintain or enhance the international competitiveness of the traded goods sector these countries which typically feature centralized wage setting have also tended to experience high nominal wage increases the overall outcome may be described as a devaluation wage spiral this paper applies two models of repeated games to analyze the strategic interaction between an exchange rate setting policy maker and a wage setting trade union it is shown how a devaluation wage spiral may result from a conflict of interest over the real wage it is also shown how reputational forces may provide a way out of the devaluation wage spiral

exit option in hierarchical agency abstract we explain why organizations that limit the voice of their agents can benefit from granting them an exit option we study a hierarchy with a principal a productive supervisor and an agent communication is imperfect in that only the supervisor can communicate with the principal while the agent has no direct voice to the principal we show that the principal is better off if she grants the agent the option to walk away from the contract by doing so the principal is implicitly giving a veto power to the agent this in turn restricts the manipulation of report by the supervisor thus the exit option can be interpreted as a remedy for limits on communication our finding contrasts to the traditional result from the contract theory literature that the exit option reduces the principal s welfare while protecting the agent our result is robust to the case of collusion between the supervisor and the agent we also examine the optimal exit option i e whether exit should entail a payment to or from the agent

monopolistic competition credibility and the output costs of disinflation programs an analysis of price controls abstract brazil argentina and israel all used price controls as part of disinflation programs in 1985 1986 in each case they were intended to break an inertial component of inflation this paper focuses on the interaction between lack of credibility of government monetary policy announcements and the price setting behavior of forward looking firms we show that this interaction can lead to inertia extending well beyond the price setting period lack of credibility is then shown to lead to output losses during a disinflation program the paper analyses asset price behavior during disinflation programs with and without price controls and the influence of credibility problems finally we show that if past government policy has any information content about future government policy cheating on current announcements of tight policy buys current employment gains during the price control period at the cost of higher inflation afterwards sustaining low inflation after the price control period thus requires restrictive monetary policy during the price control period

rational expectations and policy credibility following a change in regime we examine the dynamic path of an economy after a change in regime when neither the policy to be followed nor the reactions of the public are known the model is an application of kreps and wilson s reputation model to barro and gordon s macroeconomic policy game equilibrium is defined to be the dynamically consistent solution to a game between the government and the private sector it involves mixed strategies and bayesian learning by both sides until the uncertainty about government and public behaviour is resolved the absence of complete credibility of government policy and intransigence of private sector wage demands increase the output loss of disinflation the analysis also sheds light on the strategic nature of economic policymaking and the role of information in macroeconomics

taxing foreign profits with international mergers and acquisitions a large part of border crossing investment takes the form of international mergers and acquisitions in this article we ask how optimal repatriation tax systems look like in a world where investment involves a change of ownership instead of a reallocation of real capital we find that the standard results of international taxation do not carry over to the case of international mergers and acquisitions the deduction system is no longer optimal from a national perspective and the foreign tax credit system fails to ensure global optimality the tax exemption system is optimal if ownership advantage is a public good within the multinational firm however the cross border cash flow tax system dominates the exemption system in terms of optimality properties

reputation and imperfect information abstract a common observation in the informal literature of economics and elsewhere is that is multistage games players may seek early in the game to acquire a reputation for being tough or benevolent or something else but this phenomenon is not observed in some formal game theoretic analyses of finite games such as selten s finitely repeated chain store game or in the finitely repeated prisoners dilemma we reexamine selten s model adding to it a small amount of imperfect or incomplete information about players payoffs and we find that this addition is sufficient to give rise to the reputation effect that one intuitively expects

the impact of u s tax reform on foreign direct investment in the united states abstract this study empirically examines how taxes shape foreign direct investment and finds that increased taxes spur inward foreign investment this finding conforms with theories that recognize that foreign investor response is critically shaped by the tax provisions faced by the foreign investor in his home country and by the effects of tax reform on pre tax asset returns we demonstrate that average tax rates may better proxy tax effects than do effective tax rates our findings are more robust than previous results since we utilize the entire 1980s tax history consider a fuller set of industry distinctions and estimate the tax responsiveness in the context of exchange rate fluctuations

the effect of moving to a territorial tax system on profit repatriation evidence from japan abstract in an increasingly globalized world the design of international tax systems in terms of the taxation of foreign corporate income has attracted much attention from policy makers and economists alike in the past japan s worldwide tax system taxed foreign source income upon repatriation however to stimulate dividend repatriations from japanese owned foreign affiliates the japanese government introduced a foreign dividend exemption system in 2009 that exempted dividends remitted by japanese owned foreign affiliates to their parent firms from home country taxation this paper examines the effect of this dividend exemption system on profit repatriation by japanese multinationals we find that the response of japanese owned affiliates to the dividend exemption was heterogeneous more particularly foreign affiliates with a large stock of retained earnings were generally more responsive to the reform and significantly increased dividend payments to their parent firms in response to the enactment of the dividend exemption system dividend payments by these affiliates also became more sensitive to withholding tax rates on dividends levied by host countries under the new exemption system

firm specific assets and the link between exchange rates and foreign direct investment foreign direct investment fdi theory and empirical studies have generated mixed support for a link between exchange rates and fdi this paper argues that exchange rate movements may affect acquisition fdi because acquisitions involve firm specific assets which can generate returns in currencies other than that used for purchase using data on japanese acquisitions in the united states across three digit sic industries from 1975 to 1992 maximum likelihood estimates from discrete dependent variable models support the hypothesis that real dollar depreciations make japanese acquisitions more likely in u s industries particularly those which more likely have firm specific assets copyright 1997 by american economic association

international taxation and multinational firm location decisions using a large international firm level data set we examine the separate effects of host and additional parent country taxation on the location decisions of multinational firms both types of taxation are estimated to have a negative impact on the location of new foreign subsidiaries the impact of parent country taxation is estimated to be sizeable consistent with its international discriminatory nature our results show that international double taxation by the parent country despite the general possibility of deferral of taxation until income repatriation is instrumental in shaping the structure of multinational enterprise

relocation of headquarters and international taxation about 6 of multinationals relocated their headquarters to another country in the 1997 2007 period this paper presents empirical evidence on the role of taxes in these relocation decisions it considers a sample of 140 multinationals that relocated their headquarters over the past decade and compares them to a control group of 1943 multinationals that did not relocate it is found that the additional tax due in the home country upon repatriation of foreign profits has a positive effect on the probability of relocation the empirical results suggest that an increase in the repatriation tax by 10 percentage points would raise the share of relocating multinationals by 2 2 percentage points equivalent to an increase in the number of relocations by more than one third furthermore the presence of controlled foreign corporation legislation also has a positive effect on the number of relocations

pharmaceutical price controls and entry strategies abstract this paper finds that the use of price controls has a statistically and quantitatively important effect on the extent and timing of the launch of new drugs firms headquartered in countries that regulate price reach fewer markets than those in countries without price controls companies avoid price controlled markets and are less likely to introduce products in additional markets after entering a price controlled country launches into low price european countries are further delayed following legalization of parallel imports the results suggest that price regulation in one country affects entry into other countries and may affect the strategies of domestic firms

currency prices terms of trade and interest rates a general equilibrium asset pricing cash in advance approach currency prices terms of trade and interest rates a general equilibrium asset pricing cash in advance approach

cross border tax effects on affiliate investment evidence from european multinationals recent studies suggest that multinational firm activities at home and abroad are positively correlated which may be due to the use of common inputs like marketing patents etc then a cost shock at one location may lead to reduced activity in all other locations within the firm in this paper we theoretically and empirically analyze national corporate tax policy in such a setting our main hypothesis is that corporate taxation at the parent location not only reduces the parent s capital stock but also lowers capital stocks at affiliates abroad using micro data on european multinational firms we confirm the hypothesis showing that a 10 percentage point increase in corporate tax rates is associated with a 5 6 decrease in the affiliate s capital stock from a welfare point of view this cross border tax effect on the capital stock gives rise to a negative fiscal externality of corporate taxation which is empirically shown to compensate a substantial fraction of the well known positive externality due to profit shifting

the 1971 1974 controls program and the price level an econometric post mortem abstract this paper provides new empirical evidence on the effects of the nixon wage price controls on the price level the major new wrinkle is that the controls are created as a quantitative rather than just a qualitative phenomenon through the use of a specially constructed series indicating the fraction of the economy that was controlled according to the estimates by february 1974 controls had lowered the non food non energy price level by 3 4 percent after that point and especially after controls ended in april 1974 a period of rapid catch up inflation eroded the gains that had been achieved leaving the price level from zero to 2 percent below what it would have been in the absence of controls the dismantling of controls can thus account for most the burst of double digit inflation in non food and non energy prices during 1974

taxing away m a capital gains taxation and acquisition activity abstract capital gains taxation distorts the market for corporate control by imposing a cost on selling shareholders in acquisitions this lock in effect increases premiums required for deal completion preventing some m as from taking place at all we estimate the effect of capital gains taxation on the quantity of realized m a deals and compute the deadweight loss related to taxing these transactions we find that a one percentage point increase in the capital gains tax rate reduces acquisition activity by around 1 annually for the united states this implies unrealized synergy gains of 9 3 billion each year due to capital gains taxes

equilibrium political budget cycles political business cycle theories generally rely on nominal rigidities and voter myopia this paper offers an equilibrium theory that preserves some basic insights from earlier models though with significant refinements the political budget cycle emphasized here is in fiscal policy rather than output and inflation it arises via a multidimensional signal process one can consider the welfare implications of proposals to mitigate the cycle and the effects of altering the electoral structure copyright 1990 by american economic association

macroeconomic effects of imf sponsored programs in latin america output costs program recidivism and the vicious cycle of failed stabilizations we investigate the effects of imf stabilization programs and the reasons behind the unusually high imf activity and relatively low program completion rates in latin america we base our tests on a panel and distinguish between imf program approvals and completion we find that latin america has higher output costs of imf programs especially when completed no improvement in the current account and a much higher likelihood of program failure and recidivism than other regions the common finding that entering into an imf supported program incurs real short run costs on the economy is entirely driven by the experiences in latin america

price controls in liberia abstractin 2009 the liberian government removed a wide reaching set of price controls compared with goods never subject to price ceilings goods whose prices were liberalized showed increased pri

monopolistic competition relative prices and output adjustment in the open economy abstract this paper explains price and output dynamics in an open economy characterized by a monopolistic competitive market structure in which pricing decisions incur costs this leads producers to pre set the price path for several periods the paper derives an optimal pricing rule including the optimal pre setting horizon it does so for a rational expectation equilibrium characterized by staggered unsynchronized price setting for which the degree of staggering is endogenously determined

disinflation and fiscal reform a neoclassical perspective abstract many latin american countries engaged in disinflation programs based on both exchange rate management and fiscal reforms in most of the cases part of the fiscal reform was not implemented and the program had to be abandoned the aftermath of these programs is not encouraging in this paper we show that if the reform process is uncertain and inflation has welfare costs the optimal exchange rate policy indeed implies the initiation of a disinflation program at the announcement of the fiscal reform even if it implies the possibility of a balance of payments crisis finally we show that it is optimal to engage in a sequence of stabilization programs until one of them is successful

the wage price spiral this paper rehabilitates the old wage price spiral it shows that after an increase in aggregate demand the process of adjustment of nominal prices and nominal wages results from attempts by workers to maintain or increase their real wage and by firms to maintain or increase their markups of prices over wages under continuous price and wage setting the process of adjustment would be instantaneous under staggering of price and wage decisions the adjustment takes time the more inflexible real wages and markups are to shifts in demand the higher is the degree of price level inertia and the longer lasting are the effects of aggregate demand on output

limited liability contracts between principal and agent abstract the optimal strategy of the principal is examined in an environment where there are ex post limitations on the maximum penalty that can be imposed on a riskneutral agent contrary to the case in which such limitations are not imposed it is in the principal s interest to deliberately forego the opportunity to induce socially efficient behavior and to instead design a contract that induces the agent to realize an efficient outcome only in the most productive state of nature and perhaps in certain very unproductive states the properties of the contract are examined in detail

u s worldwide taxation and domestic mergers and acquisitions a discussion abstract harris and o brien 2018 investigate whether u s tax policy distorts u s multinationals mncs investment they find that mncs facing higher repatriation tax costs engage in fewer domestic acquisitions the study re examines the results in two prior studies that found no effect hanlon et al 2015 and a positive effect martin et al 2015 by introducing a new proxy for repatriation tax costs a binary variable for whether the mnc uses the double irish structure we critique the theory underlying the prediction as well as the proxy we conclude that caution should be exercised in taking the results at face value

optimal accommodation by strong policymakers under incomplete information abstract this paper examines the optimal behavior of a policymaker who is able to precommit labelled strong when the public entertains the possibility that he is either strong or weak unable to precommit the main result is that in the presence of doubts about their type it is optimal even for strong policymakers to partially accommodate inflationary expectations this contrasts with vickers 1986 who finds that when strength is conceived in terms of the relative concern for employment the strong policymaker inflates less under incomplete than under full information the paper also provides a theory of endogenous announcements

sticky goods prices flexible asset prices monopolistic competition and monetary policy a monetary general equilibrium asset pricing model with sticky goods prices is developed goods prices are set by monopolistically competitive firms that maximize stock market value equilibria with underutilization of resources excess capacity in some states result in contrast to previous monetary asset pricing models the degree of competition affects capacity utilization monetary policy can affect output and resource utilization in addition to real asset prices depending upon the amount of information available to the monetary authority

limited liability and incentive contracting with multiple projects i examine a principal agent model with multiple projects where a risk neutral manager is protected by limited liability the analysis has several interesting implications i incentive problems are shown to be a natural source of economies of scope as combining multiple projects under the management of a single manager relaxes the limited liability constraint ii as a result managers may be overloaded with work and exert inefficiently high effort and iii the analysis has implications for the optimal allocation of projects to different managers copyright 2001 by the rand corporation

the firm as a communication network this paper analyzes how organizations can minimize costs of processing and communicating information communication is costly because it takes time for an agent to absorb new information sent by others agents can reduce this time by specializing in the processing of particular types of information when these returns to specialization outweigh costs of communication it is efficient for several agents to collaborate within a firm it is shown that efficient networks involve centralization that individuals delegate tasks to subordinates only if they are overloaded and that the number of transits to the top tends to be equalized across individual information items

exchange rates and traded goods prices abstract this paper presents a partial equilibrium model of the determination of domestic and export prices by a monopolistic competitive firm the model stresses the role of exchange rate uncertainty and expectations the most important result of the analysis is that the stochastic properties of deviations from the law of one price are crucially affected by the currency of denomination of export prices using data on domestic and dollar export prices of japanese goods i find that deviations from the law of one price are due to exchange rate surprises but also to price staggering and ex ante price discrimination

altered states taxes and the location of foreign direct investment in america this paper compares the distribution between u s states of investment from countries that grant foreign tax credits with investment from all other countries the ability to apply foreign tax credits against home country tax liabilities reduces an investor s incentive to avoid high tax foreign locations state corporate tax rate differences of 1 percent are associated with differences of 9 11 percent between the investment shares of foreign tax credit investors and the investment shares of all others suggesting that state taxes significantly influence the pattern of foreign direct investment in the united states copyright 1996 by american economic association

recent developments in the theory of rules versus discretion policymaker this perspective on rules versus discretion was changed by kydland and prescott 1977 who looked at rules as a form of commitment a commitment amounts to a binding contract which specifies in advance the actions that someone will take possibly contingent on some exogenous variables that everyone can observe in contrast under discretion a person promises only to take those future actions that will best further his objectives later on such promises are easy to keep thus discretion is the special case of a rule or contract in which none of today s provisions restrict a person s future actions in the area of private business dealings it is natural to think about optimal forms of contracts which would not usually be pure discretion similarly for public policy the perspective becomes the optimal form of rules or prior restrictions even the smart benevolent policymaker is likely to desire and use

price and advertising signals of product quality we present a signaling model based on ideas of phillip nelson in which both the introductory price and the level of directly uninformative advertising or other dissipative marketing expenditures are choice variables and may be used as signals for the initially unobservable quality of a newly introduced experience good repeat purchases play a crucial role in our model a second focus of the paper is on illustrating an approach to refining the set of equilibria in signalling games with multiple potential signals

the role of saving and investment in exchange rate determination under alternative monetary mechanisms abstract we argue that the demand for national currencies depends on existing payment arrangements for imports and exports therefore exchange rate movements depend on these arrangement as a result the relationship between exchange rate movements and various macroeconomic aggregates like saving and investment depend on what we call the monetary mechanism these points are explicitly demonstrated by studying two extreme monetary mechanisms one in which all payments are done with the seller s currency and one in which all payments are done with the buyer s currency

reputation in a model of monetary policy with incomplete information abstract previous models of rules versus discretion are extended to include uncertainty about the policymaker s type when people observe low inflation they raise the possibility that the policymaker is committed to low inflation type 1 this enhancement of reputation gives the uncommitted policymaker type 2 an incentive to masquerade as the committed type in the equilibrium the policymaker of type 1 delivers surprisingly low inflation with corresponding costs to the economy over an extended interval the type 2 person mimics this outcome for awhile but shifts eventually to high inflation this high inflation is surprising initially but subsequently becomes anticipated

product warranties and double moral hazard this article explores a model of warranties in which moral hazard problems play a key role the goal is to understand the important characteristics of warranties including their provision of incomplete insurance and the relationship between product quality and coverage we analyze a model in which buyers and sellers take actions that affect a product s performance since these actions are not cooperatively determined an incentives problem arises we characterize the optimal warranty contract and undertake comparative statics to determine the predicted correlation of warranty coverage and product quality

the politics and economics of offshore outsourcing abstract this paper reviews the political uproar over offshore outsourcing connected with the release of the economic report of the president erp in february 2004 examines the differing ways in which economists and non economists talk about offshore outsourcing and assesses the empirical evidence on the importance of offshore outsourcing in accounting for the weak labor market from 2001 to 2004 even with important gaps in the data the empirical literature is able to conclude that offshore outsourcing is unlikely to have accounted for a meaningful part of the job losses in the recent downturn or contributed much to the slow labor market rebound the empirical evidence to date while still tentative actually suggests that increased employment in the overseas affiliates of us multinationals is associated with more employment in the us parent rather than less

the welfare costs of price controls for cars and color televisions in poland contrasting estimates of rent seeking from recent experience the welfare costs of price controls can vary enormously depending on the method of allocating the goods in shortage and the possible rent seeking costs that may result with full rent dissipation the welfare loss from price controls on polish color televisions in 1989 was about ten times the standard estimates of distortion costs which ignore rent seeking and was more than 100 percent of the value of domestic producers sales the methods of allocating cars however did not result in rent seeking costs the domestic price controls were an unintended implicit subsidy to imports subsidies for cars were estimated at 43 percent and for color televisions at 22 percent

excess capacity monopolistic competition and international transmission of monetary disturbances analyzes the excess capacity monopolistic competition and international transmission of monetary policy disturbances in the united states sheds light on the international impact of monetary policy emphasis on the spillover effects of monetary disturbances similarity of framework used with open economy macroeconomics

a theory of price control price or rent control is but one of many forms of legislative action which interfere with private contracting in the market place to delimit the scope of my analysis i shall use the term price control to refer only to any set of regulations which satisfies the following three conditions first the control must fix the price or income terms of private contracts this categorically excludes any laws which regulate the distribution of income among the contracting parties on a share or percentage basis 2 second the control must involve no appropriation of proceeds to or from the government taxation and subsidization are thus excluded finally the fixing of price must not be associated with direct government sales purchases or manipulation of resources so as to maintain the regulated price 3 by this stipulation price support is also excluded even on such terms legal regulations to control price are still many and varied to evaluate our understanding of the class of phenomena which we seek to explain it is essential that we discover implications refutable by facts by this criterion the available body of economic theory pertaining to price control is deficient indeed the massive literature on the subject offers few such implications 4 an alternative approach to analyzing the observable effects of price control is presented here

repatriation taxes and outbound m as repatriation taxes reduce the competitiveness of multinational firms from tax credit countries when bidding for targets in low tax countries this comparative disadvantage with respect to bidders from exemption countries violates ownership neutrality which results in production inefficiencies due to second best ownership structures this paper empirically estimates the magnitude of these effects the abolishment of repatriation taxes in japan and in the u k in 2009 has increased the number of acquisitions abroad by japanese and british firms by 16 1 and 1 6 respectively a similar policy switch in the u s is simulated to increase the number of u s cross border acquisition by 11 0 the yearly gain in efficiency is estimated to be 108 9 million dollar due to the japanese reform and 3 9 million dollar due to the u k reform simulating such a reform for the u s results in a yearly efficiency gain of 537 0 million dollar

public sector pricing and the real exchange rate we examine the effects of consumption subsidies public enterprise pricing and price controls on the real exchange rate under plausible assumptions we show that permanent reform in these areas leads to a permanent real exchange rate appreciation an empirical application to the 1990 fujimori plan in peru is discussed redistribution purposes sometimes even to buy votes by populist leaders since economic reform usually requires the shutting down of loans from the central bank to parastatals reducing consumption subsidies and increasing public enterprise prices price reform plays an important role in imf and world bank programmes edwards 1989a for example found that public enterprise price increases and reductions in consumption subsidies were involved in 79 and 44 per cent respectively of imf programmes between 1983 and 1985 trade reforms in contrast were present in just 35 per cent of cases to date the real exchange rate effects of public sector price policies have

moral hazard and capital structure dynamics we base a contracting theory for a start up firm on an agency model with observable but nonverifiable effort and renegotiable contracts two essential restrictions on simple contracts are imposed the entrepreneur must be given limited liability and the investor s earnings must not decrease in the realized profi to f thefirm all message game contracts with pure strategy equilibria and no third parties are considered within this class of contracts equilibria and regardless of who has the renegotiating bargaining power debt and convertible debt maximize the entrepreneur s incentives to exert effort these contracts are optimal if the entrepreneur has the bargaining power in renegotiation if the investor has the bargaining power the same is true unless debt induces excessive effort in the latter case a non debt simple contract achieves efficiency the non contractibility of effort does not lower welfare thus when the non contractibility of effort matters our results mirror typical capital structure dynamics an early use of debt claims followed by a switch to equity like claims

price controls and rent seeking behavior in developing countries abstract when the price of a good is controlled a nonprice allocation rule must necessarily be substituted for allocation by price examples are first come first served allocation which gives rise to rationing by waiting and allocation by an explicit system of ration coupons with rationing by waiting consumers are induced to pursue activities that economize on waiting costs such as buying a larger quantity per purchase although such responses are individually rational they are socially self defeating in the sense that they lower equilibrium consumer welfare rationing by coupons can avoid some but typically not all of these losses these ideas are developed with examples of model economies and their practical relevance is illustrated with evidence from developing countries

reciprocal supervision collusion and organizational design we study the design of supervisory functions in an organization with one principal and two agents each agent can perform supervision activities regarding the other agent we characterize the way the principal must structure incentive payments to avoid any collusive activity between agents in particular it is shown that better mutual information between agents may hurt the principal the other main result is the possibility that it may be better to give up one supervisory function or to have a third party be the supervisor if possible finally we show that such a dual supervisory structure raises the possibility that letting collusion happen may be the best policy