guarding the guardians good government requires some restraints on the powerful but how can those be impose if there is no one above them this paper studies the equilibrium allocation of power and resources established by self interested incumbents under the threat of rebellions from inside and outside the group in power commitment to uphold individuals rights can only be achieved if power is not as concentrated as incumbents would like it to be ex post power sharing endogenously enables incumbents to commit to otherwise time inconsistent laws by ensuring more people receive rents under the status quo and thus want to defend it

a model of the origins of basic property rights this paper studies the origins of one of the most basic of property rights namely the right of an individual or an organization to the fruits of its labour my objective is to address the questions of why when and how this property right can emerge and be made secure i develop a model of the strategic interaction between two players in the state of nature which is an environment characterized by the absence of any laws and institutions including property rights and the state my analysis explores in particular the roles of the players fightin g and productive skills on the emergence and security or otherwise of this property right

war peace and the size of countries this paper studies the relationship between international con ict and the size distribution of countries in a model in which both peaceful bargaining and non peaceful confrontations are possible we show how the size distribution of countries depends on the likelihood bene ts and costs of con ict and war we also study the role of international law and show how better de ned international property rights may lead to country breakup and more numerous local con icts

competition cooperation and innovation organizational arrangements for regimes of rapid technological progress abstract discussions of the link between firm size and innovation are outmoded because the boundaries of the firm have become fuzzy in recent decades strategic alliances constellations of bilateral agreements among firms are increasingly necessary to support innovative activities such alliances can facilitate complex coordination beyond what the price system can accomplish while avoiding the dysfunctional properties sometimes associated with hierarchy antitrust law and competition policy need to recognize that these new organizational forms are often the functional antithesis of cartels though they may have certain structural similarities a more complete understanding of bilateral contracts and agreements ought to reveal when and how cooperation can support rather than impede innovation and competition

natural resources curse or blessing are natural resources a curse or a blessing the empirical evidence suggests that either outcome is possible this paper surveys a variety of hypotheses and supporting evidence for why some countries benefit and others lose from the presence of natural resources these include that a resource bonanza induces appreciation of the real exchange rate deindustrialization and bad growth prospects and that these adverse effects are more severe in volatile countries with bad institutions and lack of rule of law corruption presidential democracies and underdeveloped financial systems another hypothesis is that a resource boom reinforces rent grabbing and civil conflict especially if institutions are bad induces corruption especially in nondemocratic countries and keeps in place bad policies finally resource rich developing economies seem unable to successfully convert their depleting exhaustible resources into other productive assets the survey also offers some welfare based fiscal rules for harnessing resource windfalls in developed and developing economies

adapting prices or quantities in the presence of adjustment costs it is often hypothesized that costs of adjusting both price and quantities may have important implications for the macroeconomic adjustment process not least to nominal shocks we analyse this in an explicit intertemporal general equilibrium model considering the empirically relevant case of fixed costs of adjusting prices and fixed and variable costs of adjusting quantities we find that the presence of both price and quantity adjustment costs changes the response to shocks significantly it is an implication that small shocks do not support the menu cost case but rather both fixed prices and quantities rationing a numerical analysis based on available evidence on adjustment costs is used to illustrate the likelihood that the various adjustment patterns actually arise

a theory of sticky rents search and bargaining with incomplete information abstract this paper offers the first theoretical explanation of housing rent stickiness and differential stickiness by housing structure type key features of rental markets worldwide previous theoretical work on the subject is sparse and explains why some landlords charge below market rents not stickiness apart from its interest for understanding housing markets and overall inflation rent stickiness is intriguing because it shows that stickiness can emerge in markets where the typical menu cost logic does not apply and where market participants typically engage in repeated bargaining over contracts our model involves search and bargaining with incomplete information in a two period game and generates stickiness in a novel manner the key decision is the landlord s choice of whether to renegotiate or not crucially landlords do not know tenant perceptions of unit quality the key force generating stickiness is that offering the identical contract preempts tenant search thus limiting tenants outside options and resolves uncertainty early risk aversion reinforces this mechanism and yields differential stickiness by landlord type renegotiation risk for large landlords disappears because the different outcomes rent increase rent decrease and vacancy average out landlords who manage only one unit loathe vacancy and are highly motivated to avoid renegotiation

business cycles theory evidence and policy implications this paper looks at recent advances in the study of aggregate fluctuations the emphasis is on three prominent areas of research the stochastic growth model economies which exhibit macroeconomic complementarities and models that emphasize heterogeneity each section of the paper outlines the theory examines relevant empirical evidence and then discusses some policy implications of the analysis

infrequent housing adjustment limited participation and monetary policy this paper asks why monetary contractions have strong effects on the housing market the paper presents a model with staggered housing adjustment in which monetary policy has real effects in the absence of any rigidity in producer pricing or wages limited participation in financial markets leads to a rise in the real mortgage rate following an increase in the nominal short rate since households must take on a mortgage to consume housing the rise in the real interest rate reduces the share of residential investment in output

the arms trade the arms trade winners and losers the arms trade is highly controversial and raises difficult policy issues the controversies tend to concentrate on the moral military and political dimensions of arms exports decisions quite a lot of light can be shed on this murky market by asking basic economic questions and using standard economic models we begin with a structured economic description of the evolution of the international arms market in terms of the factors that influence demand and supply and thus prices and quantities then we review the policy issues faced by eu members in particular whether a common control regime is needed to harmonize their regulation of arms exports to address these policy issues we present some models of the market that we have developed and examine their implications for the interesting interactions that characterize the trade paul levine and ron smith

private interest government beyond market and state market liberalism and state interventionism are both challenged as modes of democratic government by this book it suggests that the development of private interest governments might be a more viable policy alternative for the future it also questions whether the state could devolve certain public policy responsibilities to interest associations in specific economic sectors the book focuses specifically on interest associations in a disaggregated rather than global approach to economics and politics ten western industrialized countries are covered subjects ranging from advertising with self regulation private accountancy regulation and the british voluntary sector to four comparative papers on the corporatist arrangements in the governance of the dairy industry

the creation of effective property rights traditionally general equilibrium models have taken effective property rights to be given and have been concerned only with analyzing the allocation of resources among productive uses and the distribution of the resulting product but this formulation of the economic problem is incomplete because it neglects that the appropriative activities by which people create the effective property rights that inform allocation and distribution are themselves an alternative use of scare resources this paper develops two canonical general equilibrium models of resource allocation and income distribution that allow for the allocation of time and effort to the creation of effective property rights to valuable resources in one model the valuable resources are initially in common pool in the other models the analysis reveals how the amount of time and effort that agents allocate to the creation of effective property rights on the technology of production and on the scale of the economy the paper also analyses the security of initial claims to valuable resources and speculates about why initial claims are perfectly secure

endogenous insecurity and economic development abstract we explore the implications of endogenous credit market imperfections for the endogenous relationship between investment insecurity and the process of economic development in the initial stages of development the fraction of agents engaged in nonproductive diversionary activities e g rent seeking grows as the opportunities to gain from diversionary activities expand in later stages however diversion falls as capital market imperfections are overcome and productive activities become more secure and more profitable we detail the forces that determine whether the insecurity generated by an economy s early development will choke off the growth process we also compare the cost effectiveness of alternative policies designed to prevent diversion

steady state equilibrium with state dependent pricing abstract state dependent pricing models are now an operational framework for quantitative business cycle analysis the analysis in ball and romer 1991 sticky prices as coordination failure american economic review 81 3 539 552 however suggests that such models may be rife with multiple equilibria for in their static model price adjustment is always characterized by complementarity a necessary condition for multiplicity we study existence and uniqueness of steady state equilibrium in a discrete time state dependent pricing model we find only weak complementarity and no evidence of multiplicity however nonexistence of symmetric steady state equilibrium with pure strategies arises in the region of the parameter space between flexible and sticky prices

anarchy efficiency and redistribution this paper develops a contractarian theory of the state and the existence of redistribution the existence of rules of redistribution is explained without any recourse to the risk aversion of agents no veil of ignorance is needed this avoids obligational problems inherent in most other contractarian theories of justice hence this paper departs from the standard legitimization of redistribution as fundamental insurance and interprets it as stemming from a principle of reciprocity in trade since this paper deals with an anarchic society the implementation of redistributional rules is constrained by the assumption of self enforcement we show that this assumption changes the interpretation of the state the state is characterized by a particular design of equilibrium strategies not by the existence of enforcement agencies

do the new keynesian microfoundations rationalise stabilisation policy systematic monetary policy is analysed in a two period extension of standard static new keynesian models it is shown that countercyclical policies increase the band of inaction of the price setters and that this feedback effect on price rigidity may make such policies self justifying that is the policies themselves cause the fluctuations that they are stabilising moreover countercyclical policies may in general reduce welfare in fact socially optimal policies may very well involve a commitment to enhance shocks

on the origins of property rights conflict and production in the state of nature i analyse the emergence of property rights in a model of conflict and production in the absence of institutions of enforcement the population of agents evolves dynamically through conflicts for possession of factor goods among pairs of randomly matched agents conflicts are incomplete information wars of attrition with an agent s type consisting of his or her independently drawn valuation of the prize and cost of competing for it i prove equilibrium existence and show that in the steady state of the game the population sorts into two stable groups resource haves and have nots in accordance with a known function of their primitive types

a contractarian theory of property rights and crime as was noted long ago war like distributional squabbles which divert resources from socially productive uses will persist in a world without government in this paper we show that all agents can gain ex ante from the institution of a social contract which establishes property rights and levies a tax in order to finance a criminal justice system where punishment is threatened for violations of property rights these ex ante gains hold even for individuals who may be harshly punished ex post the optimal social contract i e the optimal level of enforcement of property rights is also characterized

the irony of state strength comparative responses to the oil shocks in the 1970s like two gigantic waves the oil shocks crested over the advanced industrial world during the 1970s the relatively stable postwar petroleum regime managed by the large oil firms and protected by american diplomatic and military strength collapsed in seven years crude oil prices adjusted for inflation increased more than 500 percent a multitude of national security economic and political challenges confronted the advanced industrial states but unlike war where the threat is observable and lines of conflict quickly become apparent the oil shocks cast up problems that were more insidious problems of energy security economic adjustment and industrial competitiveness these international dilemmas could be defined in various ways and a host of policy responses could be brought to bear upon them

the curse of natural resources in fractionalized countries abstract this paper develops a model that can explain why natural resources are a blessing for some countries but a curse for others in this model natural resources cause fighting activities between rivalling groups fighting reduces productive activities and weakens property rights making productive activities even less attractive the aggregate production decrease exceeds the natural resources direct positive income effect if and only if the number of rivalling groups is sufficiently large the model thus predicts that natural resources lower incomes in fractionalized countries but increase incomes in homogenous countries empirical evidence supporting this prediction is provided

vulnerable trade the dark side of an edgeworth box abstract we examine incentives to seize and defend goods offered for trade in an edgeworth box economy appropriation possibilities generate equilibrium of coerced redistribution and voluntary trade in a reduced box potential mutual gains remain untaken because the prospect of piracy creates a price wedge wherein the effective relative price is lowered for the exporter and raised for the importer as the vulnerability of one or both goods increases the price wedge widens causing trade to diminish if vulnerability becomes sufficiently high then equilibrium with trade ceases to exist in the edgeworth box economy

heterogeneity and output fluctuations in a dynamic menu cost economy when firms face menu costs the relation between their output and money is highly non linear at the aggregate level however this needs not be so in this paper we study the dynamic behaviour of a menu cost economy where firms are heterogeneous in the shocks they perceive and the demands and adjustment costs they face in this context we i generalize the caplin and spulber 1987 steady state monetary neutrality result ii show that uniqueness of equilibria depends not only on the degree of strategic complementarities but also on the degree of dispersion of firms positions in their price cycle iii characterize the path of output outside the steady state and show that as strategic complementarities become more important expansions become longer and smoother than contractions and iv show that the potential impact of monetary shocks is an increasing function of the distance of the economy from its steady state but that an uninformed policy maker will have no effect on output on average

arming as a strategic investment in a cooperative equilibrium to develop a positive economic theory of military spending this analysis focuses on a game theoretic general equilibrium model of international conflict in which consumption peaceful investment and military spending are endogenously determined the analysis illustrates that when there is repeated interaction between nations a game of threats and punishments generally will not support a disarmament outcome and that fluctuations in military spending can be an endogenous result of fluctuations in aggregate economic activity furthermore the analysis shows how the relation between aggregate economic activity and military spending qualitatively depends on whether governments are acting opportunistically or cooperatively copyright 1990 by american economic association

menu costs and nominal price friction an experimental examination abstract this paper examines how menu costs affect monopoly behavior using experimental markets this research takes a new keynesian theory of business fluctuations and tests it in a controlled environment where people are making decisions for real salient payoffs these experiments are the first controlled test of a new keynesian explanation for sticky product prices and they offer some insights into nominal price frictions the results from this research indicate that menu costs have real economic effects in a static situation but not in a dynamic setting

perfectly secure property rights and production inefficiencies in tullock contests from the point of view of institutional economics property rights are an instrument to shape individual incentives efficiently for the case of a tullock contest with endogenously determined rent i analyze the circumstances under which perfectly secure property rights emerge in an economy where the security of property is endogenously determined i analyze different sequential structures for the determination of defensive and appropriative investments and determine the equilibrium sequence of moves if the sequential structure is endogenous it turns out that in subgames where perfectly secure property rights emerge incentives for production are still inefficient in addition it can be shown that the endogenous determination of moves leads to a sequence of events that result in open conflict even if perfectly secure property rights would have been an alternative

population technology and fragmentation the european miracle revisited abstract the effects of political fragmentation on long run development seem to have changed over the course of human history technological leaders used to be empires but the industrial revolution started in the fragmented europe this paper sets up a model to help us think about this puzzle there are two sets of mechanisms at play a standard scale effect which benefits unified regions since technology is a non rivalrous good and several competition effects both negative like wasteful armies and positive incentives to invest in new technologies we apply the model to analyze the preindustrial divergence between china and europe

industrial governance structures innovation strategies and the case of japan sectoral or cross national comparative analysis in comparative research on industrial policy strategies attention has shifted from national level variables to sectoral variables in both the description and the explanation of policy the sectoral literature however lacks analytic focus and has provided little systematic insight into the causes of cross sectoral variance in governance structures and policy strategies based on recent contributions to the economics and sociology of formal organizations this article attempts to sharpen the concept of industrial sector and to provide a rationale for why sectoral structures and strategies vary next it develops a synthetic explanatory framework that combines sectoral analysis and national domestic structuralism in order to account for industrial innovation strategies in advanced capitalist countries in the final section the fruitfulness of this approach is illustrated by developing a new account of japan s success and failure in industrial innovation an account that overcomes the contradictions among the main alternatives offered in the past the key objective of the article however is to develop a new set of theoretical hypotheses for cross national research not a rigorous empirical test of its main propositions

goods or resource contests in this paper we analyze the optimal mix between appropriative and defensive activities for goods goods contest and appropriative and defensive activities for resources resource contest we show that goods contests are qualitatively different from resource contests it turns out that for plausible cases the resource contest is dominated by the goods contest in the sense that investments are only positive in the latter

a model of institutional formation within a rent seeking environment abstract this paper presents a game theoretic model in which some fraction of output is appropriated from entrepreneurs entrepreneurs are able to form a league to prevent this appropriation but this might not be individually rational because of either the free rider problem or coordination failure the model also shows that poorer countries are less able to form this league and so might not be able to develop institutions establishing property rights

inflation and output dynamics with state dependent pricing decisions this paper studies a state dependent pricing model in which firms face a fixed cost of changing their pricing plans a pricing plan specifies an entire sequence of time varying future prices allowing firms to choose a pricing plan rather than a single price generates inflation inertia in the response of the economy to small changes in the growth rate of money allowing firms to choose when to change their pricing plan generates a non linear response of inflation and output to small and large changes in the money growth rate the non linear solution method also reveals that the model generates an asymmetric response of output and inflation to monetary expansions and contractions

menu costs and the neutrality of money a model of endogenous price adjustment under money growth is presented firms follow s s pricing policies and price revisions are imperfectly synchronized in the aggregate price stickiness disappears and money is neutral the connection between firm price adjustment and relative price variability in the presence of monetary growth is also investigated the results contrast with those obtained in models with exogenous fixed timing of price adjustment

historical legacies a model linking africa s past to its current underdevelopment abstract recent studies have found evidence linking africa s current under development to colonial rule and the slave trade given that these events ended long ago why do they continue to matter today i develop a model exhibiting path dependence which provides one explanation for why these past events may have lasting impacts the model has multiple equilibria one equilibrium with secure property rights and a high level of production and others with insecure property rights and low levels of production i show that external extraction when severe enough causes a society initially in the high production equilibrium to move to a low production equilibrium because of the stability of low production equilibria the society remains trapped in this suboptimal equilibrium even after the period of external extraction ends the model provides one explanation why africa s past events continue to matter today

is a moral disposition rewarded this paper explores the conditions under which a moral disposition is rewarded in the sense of moral people being more prosperous than amoral people the analytical framework is a general equilibrium model in which production is more lucrative for moral people than for amoral people but in which amoral people can choose to be predators rather than producers we find that regardless of the advantage that moral people have in production a moral disposition is rewarded if and only if the ratio of amoral people to moral people is large relative to a parameter that embodies the technology of predation

innovation networks and vertical integration abstract a central debate in industrial policy today is that between proponents of large vertically integrated firms on the one hand and those of networks of small specialized producers on the other this paper argues that neither institutional structure is the panacea its supporters claim the menu of institutional alternatives is in fact quite large and both firms and networks of which there are several kinds can be successful growth promoting adaptations to the competitive environment industrial structures vary in their ability to coordinate information flows necessary for innovation and to overcome power relationships adverse to innovation the relative desirability of the various structures then depends on the nature and scope of technological change in the industry and on the effects of various product life cycle patterns the principal policy conclusion of this analysis is that the government s role ought to be facilitating rather than narrow and prescriptive allowing scope for firms to develop organizational forms that are best adapted to their particular environments

nonlinear monetary policy in europe fact or myth abstract we hold the fort for linear specification of monetary policy and economic activity in europe using data on the last two and a half decades we cannot reject the hypothesis that monetary policy is a linear process and we find mixed results regarding economic activity

anarchy and autarky endogenous predation as a barrier to trade this article presents a general equilibrium two country ricardian trade model with endogenous transactions costs that arise from individual utility maximizing allocation of labor to production and piracy in the absence of institutions for risk sharing and coordination of defense autarky obtains over most of the parameter space when both trade and predation are supported in equilibrium terms of trade effects can make security immiserizing in that case paradoxically predation creates trade

explaining investment dynamics in u s manufacturing a generalized s s approach we are grateful to olivier blanchard whitney newey james stock an editor three anonymousreferees and seminar participants at brown cepr champoussin chicago columbia econometric society meetings caracas and tokyo efcc harvard impa lse nber princeton rochester site toronto u de chile and yale for their comments financial support to caballero from the national science and sloan foundations and to engel from fondecyt grant 195 510 and the mellon foundation grant 9608 is gratefully acknowledged 2since plants entry is excluded from their sample these statistics are likely to represent lowerbounds on the degree of lumpiness in plants investment patterns 3we use the word project to emphasize the fact that the actual implementation of a projectmay cover more than a year observation realistic time to build aspects of investment are not incontradiction with the view that investment episodes are lumpy in nature 4 see chirinko 1994 for a survey of the empirical investment literature

anarchy and its breakdown anarchy defined as a system in which participants can seize and defend resources without regulation from above is not chaos but rather a spontaneous order however anarchy is fragile and may dissolve either into formless amorphy or into a more organized system such as hierarchy under anarchy each contestant balances between productive exploitation of the current resource base and fighting to acquire or defend resources anarchy is sustainable only when there are strongly diminishing returns to fighting effort the decisiveness parameter is sufficiently low and incomes exceed the viability minimum these considerations explain many features of animal and human conflict

a quantized approach to rational inattention abstract in this paper i propose a model of rational inattention where the choice variable is a deterministic function of the exogenous variables and still only a finite amount of information is being used this holds provided the choice variable is discrete rather than continuous that is the mapping from the realization of the exogenous variables to the endogenous ones is piece wise constant thus limited information is now a source of lumpiness in behavior rather than a source of noise the approach is applied to a simple static model of price setting where individual price setters face aggregate monetary shocks and idiosyncratic productivity shocks the effect of aggregate money shocks on output and prices is studied it is shown that as the variance of idiosyncratic shocks become large the aggregate log price level converges to a linear function of the aggregate money shock with a coefficient which is strictly between 0 and 1 consequently unanticipated aggregate money shocks have real effects on output in contrast to the sticky price model of caplin and spulber 1987 but these effects are smaller than in standard rational inattention models or in the lucas 1972 misperception model

guns butter and anarchy a state in the international system implicit in realism must allocate its limited resources between satisfying its intrinsically valued ends and the means of military power i formalize this guns versus butter problem in a simple infinite horizon model in which two states must continually decide how to allocate their resources and whether to attack the other state the analysis establishes sufficient conditions to ensure the existence of an equilibrium in which neither state attacks shows that there is a strictly pareto dominant pair of peaceful equilibrium payoffs characterizes the unique peaceful markov perfect equilibrium that yields them and describes the comparative statics of the equilibrium allocations more broadly the analysis also suggests that the notion of anarchy has little if any substantive significance distinctively related to international politics and that the problem of absolute and relative gains is superfluous

dynamic s s economies in this paper the authors provide a framework to study the aggregate dynamic behavior of an economy where individual units follow s s policies and are subject to aggregate and idiosyncratic shocks they characterize structural and stochastic heterogeneities that ensure convergence of the economy s aggregate to that of its stochastic frictionless counterpart determine the speed at which convergence takes place and describe the transitional dynamics of this economy they study the evolution of the economy s aggregate and the evolution of the difference between this aggregate and that of the difference between this aggregate and that of an economy without microeconomic friction where the latter pertains to a situation where individual units adjust with no delay to all shocks copyright 1991 by the econometric society

rent seeking incentives in share contests abstract this article investigates share contests in our framework we allow contestants to have more general preferences than have been used in the literature previous approaches have the unfortunate characteristic that contestants marginal rates of substitution between the rent share allocated by the contest and their effort is constant regardless of the size of the rent share this results in a conventional wisdom larger rents command more effort by providing a more general framework we show the reverse may also be true and we derive the conditions under which this is the case our approach then allows us to rationalize within a standard contest framework observations that rents might be more hotly contested when they become scarcer as has evidently been the case with the recent global contraction of public funds available for public policy

slavery and other property rights the institution of slavery is found mostly at intermediate stages of agricultural development and less often among hunter gatherers and advanced agrarian societies we explain this pattern in a growth model with land and labor as inputs in production and an endogenously determined property rights institution the economy endogenously transits from an egalitarian state with equal property rights to a despotic slave society where the elite own both people and land thereafter it endogenously transits into a free labor society where the elite own the land but people are free

a tale of two rigidities sticky prices in a sticky information environment macroeconomic models with microeconomic foundations allow for comparisons with macro and micro empirical evidence this paper proposes a model wherein firms i acquire information infrequently generating sticky information mankiw and reis 2002 and ii face menu costs producing state dependent sticky prices i estimate parameters via indirect inference and show that under considerable real rigidity sticky prices in a sticky information environment are consistent with micro and macro evidence sticky prices not only help match micro data on price changes size and durations between adjustments they also improve the model s fit with the macro data as embodied in an empirical phillips curve

decoupling nominal and real rigidities we revisit ball and romer s 1990 canonical model of price setting with menu costs that exhibits multiple equilibria we show that changes to firms markups move nominal and real rigidities in opposite directions using game theoretic tools to derive a unique equilibrium we find that accounting for agents endogenous adjustment of price expectations further weakens the link between real and nominal rigidities

the social efficiency of private decisions to enforce property rights costs must be incurred if an owner is to enforce private property rights effectively we show that in a perfectly competitive economy private decisions to enforce rights may result in either more or less enforcement than is socially efficient cases of multiple stable equilibria occur and an equilibrium may be locally but not globally efficient resources may not be employed in their socially most valuable uses and enforcement may be accompanied by inefficient investment in resource productivity

strategic r d policy under vertically differentiated oligopoly in this paper strategic rd and the high tech firm s government always gains in the r d policy game in contrast to the standard prison

monopolistic competition and the effects of aggregate demand how important is monopolistic competition to an understanding of the effects of aggregate demand on output we ask the question at three levels can monopolistic competition by itself explain why aggregate demand movements affect output can it together with other imperfections generate effects of aggregate demand in a way that perfect competition cannot if so can it give an accurate account of the response of the economy to aggregate demand movements the answers are no yes and yes

some evolutionary foundations for price level rigidity this paper shows that price rigidity evolves in an economy populated by imperfectly rational agents who experiment with alternative rules of thumb in the model firms must set their prices in face of aggregate demand shocks their payoff depends on the level of aggregate demand as well as on their own price and their neighbor s price the latter assumption captures local interactions despite the fact that the rational expectations equilibrium ree is characterized by a simple pricing rule that firms can easily adopt the economy does not converge to the ree for all parameter values when the volatility of monetary innovations is low and interactions among firms are high the aggregate price level exhibits rigidity in that it does not fully react to contemporaneous aggregate demand shocks we discuss the role of the nature of experimentation and of path dependence driven by interactions in explaining these results

price stickiness in ss models new interpretations of old results abstract what is the relation between infrequent price adjustment and the dynamic response of the aggregate price level to monetary shocks the answer to this question ranges from a one to one link calvo g 1983 prices in a utility maximizing framework journal of monetary economics 12 383 398 to no connection whatsoever caplin a spulber d 1987 menu costs and the neutrality of money quarterly journal of economics 102 703 726 the purpose of this paper is to provide a unified framework to understand the mechanisms behind this wide range of results in doing so we propose new interpretations of key results in this area which in turn suggest the kind of ss model that is likely to generate substantial price rigidity among these new interpretations we revisit caplin and spulber s monetary neutrality result we show that when price stickiness is measured in terms of the impulse response function this result is not a consequence of aggregation as is often assumed but is due instead to the absence of price stickiness at the microeconomic level we also show that the selection effect according to which units that adjust their prices are those that benefit the most is neither necessary nor sufficient to account for the higher aggregate flexibility of ss type models compared to calvo models instead the key concept is the contribution of the extensive margin of adjustment to the aggregate price response the aggregate price level is more flexible than suggested by the microeconomic frequency of adjustment if and only if this term is positive

state dependent or time dependent pricing does it matter for recent u s inflation in the 1988 2004 micro data collected by the u s bureau of labor statistics for the cpi price changes are frequent every 4 7 months depending on the treatment of sale prices and large in absolute value on the order of 10 the size and timing of price changes varies considerably for a given item but the size and probability of a price change are unrelated to the time since the last price change movements in aggregate inflation reflect movements in the size of price changes rather than the fraction of items changing price due to offsetting movements in the fraction of price increases and decreases neither leading time dependent models taylor or calvo nor 1 st generation state dependent models match all of these facts some 2 nd generation state dependent models however appear broadly consistent with the empirical patterns

bargaining and conflict with up front investments how power asymmetries matter abstract we examine settings such as litigation labor relations or arming and war in which players first make non contractible up front investments to improve their bargaining position and gain advantage for possible future conflict bargaining is efficient ex post but we show that a player may prefer conflict ex ante if there are sufficient asymmetries in strength there are two sources of this finding first up front investments are more dissimilar between players under conflict and they are lower than under bargaining when one player is much stronger than the other second the probability of the stronger player winning in conflict is higher than the share received under nash bargaining we thus provide a rationale for conflict to occur under complete information that does not depend on long term commitment problems greater balance in institutional support for different sides is more likely to maintain peace and settlements

social composition social conflict and economic development this article investigates how the existence of non cooperative social groups that appropriate resources either peacefully or through contest affects economic growth when property rights are unenforceable for symmetric groups it shows that economic growth is generated only in peaceful societies for the case of asymmetric groups rebel equilibria are investigated in which a large majority behaves peacefully although challenged by an aggressive minority the article explains how conflict intensity and the rate of economic growth depend on social fractionalisation general productivity of the economy power of social elites and the ease at which resources are appropriated

industrial policy and the creation of new industries evidence from brazil s bioethanol industry industrial policy programs are frequently used by governments to stimulate economic activity in particular sectors of the economy this study explores how an industrial policy program can affect the creation and evolution of an industry and ultimately the long term performance of firms we examine the history of the brazilian bioethanol industry focusing on the industrial policy program implemented by the brazilian government in the 1970s to develop the industry we put together a novel data set containing detailed information about the history of bioethanol producers our findings show that plants founded during the industrial policy program tend to be in the long run more productive than those founded before the program was in place based on additional analyses and complementary fieldwork we infer that the wave of acquisitions that occurred after the end of the industrial policy program had an important effect on the performance of the plants founded when the program was in place industrial policy especially in conjunction with a competitive post industrial policy business landscape can succeed in nurturing competitive firms

is firm pricing state or time dependent evidence from u s manufacturing abstract if pricing is state dependent firms are more likely to adjust whenever aggregate and idiosyncratic shocks reinforce each other and trigger desired price changes in the same direction using measures of technology shocks derived from production function estimates for four digit u s manufacturing industries i find that sectoral inflation rates are more sensitive to negative as opposed to positive technology disturbances in periods of higher economy wide inflation commodity price increases and expansionary monetary policy shocks i argue using a state dependent sticky price model that matches salient features of the u s microprice data that these results suggest that pricing is state dependent in u s manufacturing

two aggregate games demonstration using a production appropriation model we expand the scope of the two aggregate method by applying it to a situation where many heterogeneous players are free to contribute to both aggregates such situations naturally arise in various resource allocation problems hence our method is useful in many applications a production appropriation model is employed to illustrate how the problem of establishing the nash equilibrium can be reduced from solving n 2 best response functions in n unknowns to solving two consistency conditions in two unknowns we then conduct a comparative static exercise that the conventional approach could not handle easily if at all to demonstrate the power of our method this article is protected by copyright all rights reserved

social capital conflict and welfare abstract this paper analyzes the role of external conflict as a force that can create social capital hostile inter group interactions can help to resolve intra group social dilemmas but these potential gains must be weighed against the insecurity of hostile relations with an out group our central result is that the presence of an outside threat can induce higher levels of social capital either because a protective aspect of social capital comes into play and or as a reallocation of investments from private to social capital given that social capital is potentially subject to free riding the threat by promoting a greater level of social capital can be welfare improving when the threat is severe social capital and welfare are more likely to fall this effect of an external threat on social capital is stronger in poor economies these results can shed light on the sometimes contradicting empirical evidence on the relationship between conflict and social capital

scarcity without leviathan the violent effects of cocaine supply shortages in the mexican drug war abstract this paper asks whether scarcity increases violence in markets that lack a centralized authority we construct a model in which by raising prices scarcity fosters violence guided by our

monetary non neutrality in a multisector menu cost model empirical evidence suggests that as much as one third of the u s business cycle is due to nominal shocks we calibrate a multisector menu cost model using new evidence on the cross sectional distribution of the frequency and size of price changes in the u s economy we augment the model to incorporate intermediate inputs we show that the introduction of heterogeneity in the frequency of price change triples the degree of monetary non neutrality generated by the model we furthermore show that the introduction of intermediate inputs raises the degree of monetary non neutrality by another factor of three without adversely affecting the model s ability to match the large average size of price changes a single sector model with a frequency of price change equal to the median rather than the mean generates monetary non neutrality similar to that in our multisector model our multisector model with intermediate inputs generates variation in real output in response to calibrated aggregate nominal shocks that can account for roughly 23 of the u s business cycle

optimum pricing policy under stochastic inflation we describe aggregate inflation as a stochastic process in which the rate of change of the price level can be positive or zero where the times spent in each state are of random duration this class of processes includes two state markov chains and renewal processes as special cases it is shown that the optimal pricing policy of a monopolistic firm with non convex costs of price adjustment is s s in its real price i e its nominal price relative to the price level a basic certainty equivalence result is proved i e the firm behaves as if it faces a certain and fixed rate of inflation higher than the actual expected rate the difference between the two rates being a risk premium which depends on the real interest rate and the parameters of the stochastic process one can thus apply previous results from the case of certainty sheshinski and weiss review of economic studies 1977 to obtain comparative static results in particular one finds that an increase in the variance of expected inflation leads firms to choose a pricing policy with larger amplitude in real price the paper also addresses the question of consistency in firms expectations when the price level is determined by the firms actions in this paper we consider pricing policies of individual firms in an inflationary environment each firm expects the general price level to increase and must determine the rate of increase of its own price it is assumed that the firm incurs an adjustment cost when it changes its nominal price consequently firms choose to change prices occasionally rather than continuously

state structure and economic adjustment of the east asian newly industrializing countries an analysis of the economic adjustment policies of hong kong singapore south korea and taiwan during the 1970s and 1980s shows that these east asian newly industrializing countries nics which faced common problems in sustaining their recent industrial growth responded to the challenge with industrial adjustment strategies that differed in their degree of intensity of state involvement and emphasis on national control to explain this divergence in adjustment strategies the article explores the variations in the national political structures of the four nics and focuses particularly on three aspects of state structure the organization of the economic bureaucracy the institutional links between the state and private sector and the larger state society relations the article demonstrates the usefulness of moving beyond the generalizations of the developmental state view by carefully disaggregating these aspects of state structure and by exploring the ordering logic that gives coherence to them

conflict war and redistribution this article analyzes the circumstances under which conflict leads to the outbreak of war using a formal model which incorporates both the redistribution of resources as an alternative to war and imperfect information countries act as rational agents concerned with both consumption and the public bad of a war in the first period both countries can either consume or build arms whereas in the second period there can be either the threat or the use of force to reallocate resources if both countries are fully informed then there will be no war but rather a voluntary redistribution of resources in a situation of asymmetric information however in which one country is fully informed and the other is not a war can occur if the uninformed country uses a separating equilibrium strategy precommitting itself to a positive probability of war in order to prevent bluffing by the informed country

small menu costs and large business cycles a macroeconomic model of monopoly i introduction the conflict between modern neoclassical and traditional keynesian theories of the business cycle centers upon the pricing mechanism in neoclassical models prices are fully flexible they represent the continuous optimization of economic agents and the continuous intersection of supply and demand in keynesian models prices are often assumed to be sticky they do not necessarily equilibrate all markets at all times one of the reasons for the resurgence of the equilibrium approach to macroeconomics has been the absence of a theoretical underpinning for this keynesian price stickiness this note shows that sticky prices can be both privately efficient and socially inefficient the business cycle results from the suboptimal adjustment of prices in response to a demand shock to the extent that policy can stabilize aggregate demand it can mitigate the social loss due to this suboptimal adjustment in some keynesian models prices are simply exogenously fixed 2 in others agents must set their prices in advance of the transaction date the act of altering a posted price is certainly costly these costs include such items as printing new catalogs and informing salesmen of the new price yet these menu costs are small and therefore generally perceived as providing only a weak foundation for these fixed price models however this inference is flawed small menu costs can cause large welfare losses the claim that price adjustment costs are small does not rebut the claim that they are central to understanding economic fluctuations

swords or plowshares a theory of the security of claims to property this paper develops a general equilibrium model of the allocation of resources among appropriative and productive activities the model emphasizes the distinction between offensive weapons which are the instruments of predation and fortifications which provide defense against predation the analysis of this model shows how the equilibrium security of claims to property is determined the analysis focuses on the possibility of a nonaggressive equilibrium in which no resources are allocated to offensive weapons and claims to property are fully secure we also analyze the complex relation between economic welfare and the security of claims to property we find for example that a relatively poor agent could be better off in an equilibrium with less secure claims to property

restricted coasean bargaining we investigate the efficiency of coasean bargaining when restrictions are placed on the set of feasible bargaining outcomes when property rights are costly to defend appropriate we find bargaining restrictions may be pareto superior to unconstrainedvoluntary exchange under cost uncertainty over the harmful activity we show an efficient configuration of restrictions must balance the potential reduction in appropriation costs with the possibility of allocatively inefficient bargaining restrictions for an all pay auction we find conditions where precluding bargaining is always ex ante preferable to unrestricted bargaining for cases where the restrictions are contested we show conditions for the continuing existence of welfare improvements

time or state dependent price setting rules evidence from micro data we use two rich micro datasets on portuguese firms to analyse the ability of time and state dependent price setting rules to explain durations of price spells or the probability of price changes using a duration model with time varying regressors we find some evidence of state dependent price setting behaviour which suggests that time dependent models are unable to fully describe the features of the data specifically we find statistically significant impacts on the probability of a price change of inflation the level of economic activity and the magnitude of the last price change besides being statistically significant in some cases these effects are also economically important finally it is found that negative and positive values of the covariates have different impacts on the expected duration of prices

why are rich countries more politically cohesive we document empirically that rich countries are more politically cohesive than poorer countries in order to explain this regularity we provide a model where political cohesion is linked to the emergence of a fully functioning market economy without market exchange the welfare of inherently selfish individuals will be mutually independent whoever has greater bargaining power will be willing to make decisions that enhance the productivity of their supporters at the expense of other groups in society if the gains from specialization are sufficiently large however a market economy will emerge from being essentially non cohesive under self sufficiency the political decision making process becomes cohesive in the market economy because the welfare of individuals will be mutually interdependent as a result of the exchange of goods

the elementary economics of social dilemmas a social dilemma is in essence a prisoners dilemma in a continuous strategy space i discuss a number of social dilemmas that have caught my attention offer an elementary diagrammatic synthesis of them and discuss some of the economic insights that the diagrams capture including incentives for pre commitment finally i model pre commitment via delegation and link results to the literature on the evolution of preferences l economie elementaire des dilemmes sociaux un dilemme social est essentiellement un dilemme du prisonnier dans un espace continu de strategie l auteur discute d un certain nombre de dilemmes sociaux qui ont retenu son attention il en propose une synthese graphique elementaire et discute certaines des suggestions economiques qui decoulent de ces diagrammes comme par exemple les incitations a se pre engager finalement l auteur construit un modele de pre engagement par delegation et relie ses resultats a la litterature sur l evolution des references

endogenous timing in general rent seeking and conflict models we examine simultaneous versus sequential choice of effort in a two player contest the timing of moves determined in a preplay stage prior to the contest subgame as well as the value of the prize is allowed to be endogenous contrary to endogenous timing models with an exogenously fixed prize the present paper finds the following 1 players may decide to choose their effort simultaneously in the subgame perfect equilibrium spe of the extended game 2 the spe does not need to be unique in particular there is no unique spe with sequential moves if the direct costs of effort are zero 3 symmetry among players does not rule out incentives for precommitment to effort locally away from the cournot nash level 4 finally there may be no correlation between win probability and strategic incentives in our framework a finding most central in the analysis of fixed prize contests

the korean system of innovation and the semiconductor industry a governance perspective1 this paper explores in detail the political institutional processes and governance aspects of the korean system of innovation it shows i how the specific form of corporate governance chaebol evolved out of korea s national political institutional arrangements such as the state firm relationship based on reciprocal subsidy and ii how the dramatic emergence of korean semiconductor firms in world memory chip markets resulted from the subtle and changing interactions of state world market conditions and chaebol governance copyright 1998 by oxford university press

optimal price dynamics and speculation with a storable good this paper analyzes as a dynamic game the optimal price and storage strategies of respectively a the seller of a storable good who must keep pace with inflation but incurs a cost to changing his price b his customers who speculate on the timing of price adjustments to buy and store just before a unique markov perfect equilibrium is shown to exist and is fully characterized rt generally involves a phase of mixed strategies during which the seller tries to deter speculation by injecting uncertainty into its price dynamics while speculators store in increasing numbers with possibly a final run on the good the stochastic price policies of a large number of such firms are shown to aggregate back to a price index growing at the rate of general inflation in response to which they arose the model thus establishes that a a constant rate of aggregate inflation can at the same time generate and cover up significant uncertainty and social costs at the microeconomic level b speculation can be destabilizing and socially wasteful even in the absence of shocks and imperfect information most importantly they provide a theoretical foundation for the frequently encountered claim that inflation causes price uncertainty