crossing network versus dealer market unique equilibrium in the allocation of order flow the allocation of order flow to alternative trading systems can be understood as a game with strategic substitutes between buyers on the same side of the market as well as one of positive network externalities we consider the allocation of order flow between a crossing network and a dealer market we show that small differences in traders preferences generate a unique switching equilibrium in which patient traders use the crossing network while impatient traders submit orders directly to the dealer market our model explains why assets with large turnovers and low price volatility are likely to be traded on crossing networks while less liquid assets are traded on dealer markets

does one soros make a difference a theory of currency crises with large and small traders do large investors increase the vulnerability of a country to speculative attacks in the foreign exchange markets to address this issue we build a model of currency crises where a single large investor and a continuum of small investors independently decide whether to attack a currency based on their private information about fundamentals even abstracting from signaling the presence of the large investor does make all other traders more aggressive in their selling relative to the case in which there is no large investors small investors attach the currency when fundamentals are stronger yet the difference can be small or null depending on the relative precision of private information of the small and large investors adding signaling makes the influence of the large trader on small traders behaviour much stronger

speculative attacks and the information role of the interest rate this paper models currency attacks as carried out by speculators who condition their actions on private signals about the state and on the market clearing interest rate besides affecting speculators payoffs this interest rate also provides an endogenous public signal for a plausible type of investment strategies the dual role of the interest rate allows the model to explain abrupt and intense speculative attacks solely via economic fundamentals without resorting to sunspot variables this result underlies a novel policy implication an official intervention in the foreign exchange market may reinforce a currency peg by influencing the precision of public information jel d82 d84 f31

self fulfilling currency crises the role of interest rates abstract we develop a stylized currency crises model with heterogeneous information among investors andendogenous determination of interest rates in a noisy rational expectations equilibrium our modelcaptures three key features of interest rates the opportunity cost of attacking the currency respondsto the investors behavior the domestic interest rate may influence the central bank s preferences fora fixed exchange rate and the domestic interest rate serves as a public signal which aggregatesprivate information about fundamentals we explore the payoff and informational channels throughwhich interest rates determine devaluation outcomes and examine the implications for equilibriumselection by global games methods our main conclusion is that multiplicity is not an artifact ofcommon knowledge in particular we show that multiplicity emerges robustly either when adevaluation is triggered by the cost of high domestic interest rates as in obstfeld 1996 or when adevaluation is triggered by the central bank s loss of foreign reserves as in obstfeld 1986 providedthat the domestic asset supply is sufficiently elastic in the interest rate and shocks to the domesticbond supply are sufficiently small christian helliwigdepartment of economicsuniversity of california los angelesbox 951477los angeles ca 90095 1477arijit mukherjiuniversity of minnesotaaleh tsyvinskidepartment of economicsharvard universitylittauer centercambridge ma 02138 3001

guarantees transparency and the interdependency between sovereign and bank default risk bank debt guarantees have traditionally been viewed as costless measures to prevent bank runs however as recent experiences in some european countries have demonstrated guarantees may link the coordination problems of bank and sovereign creditors and induce a functional interdependence between the likelihoods of a government default and bank illiquidity employing a global game approach we model this link showing the existence and uniqueness of the joint equilibrium and derive its comparative statics properties in equilibrium the guarantee reduces the probability of a bank run while it increases the probability of a sovereign default the latter erodes the guarantee s credibility and thus its effectiveness ex ante by setting the guarantee optimally the government balances these two effects in order to minimize expected costs of crises our results show that the optimal guarantee has clear cut welfare gains which are enhanced through policies that promote greater balance sheet transparency

computing multi period information constrained optima this paper presents a detailed theoretical derivation and justification for methods used to compute solutions to a multi period including infinite period continuum agent unobservedeffort economy actual solutions are displayed illustrating cross sectional variability in consumption and labour effort in the population at a point in time and variability for a typical individual over time the optimal tradeoff between insurance and incentives is explored and the issue of excess variability is addressed by consideration of the analogue full information economy and various restricted contracting regimes

information acquisition in global games of regime change abstract we study costly information acquisition in global games of regime change that is coordination games where payoffs are discontinuous in the unobserved state and in the agents average action we show that only symmetric equilibria exist and provide sufficient conditions for uniqueness we then characterize the value of information in these games and link it to the underlying parameters of the model we investigate equilibrium efficiency complementarities in information choices and the trade offs between public and private information we show that information acquisition can be inefficient and that strategic complementarities in actions do not always translate into strategic complementarities in information acquisition finally we find that public and private information can be complements these results contrast findings in linear quadratic models where payoffs depend continuously on both the unobserved state and the agents average action

promoting the role of farmer based organizations for value chain integration the tension between a program s targeting and an organization s investment strategy we use new data on 500 farmer based organizations fbos in ghana and regression analysis to reveal determinants of collective investments and the case of the millennium development authority s mida agricultural program in ghana to demonstrate that development programs offering hard incentives may be counterproductive in promoting collective action we show that when a program sets criteria for participation and offers in cash and in kind support to selected fbos it may promote rent seeking and crowd out equity capital formation this is so because fbos may have formed for the sole purpose of benefitting from incentives offered by the program and thus lack an economic justification which is an important condition for progression through the cooperative life cycle further by setting stringent participation criteria the program may end up selecting younger organizations while it is the more consolidated organizations that are able to connect to business development services bds and engage in more offensive collective action

coordination and delay in global games abstract what is the effect of offering agents an option to delay their choices in a global coordination game we address this question by considering a canonical binary action global game and allowing players to delay their irreversible decisions those that delay have access to accurate private information at the second stage but receive lower payoffs we show that as noise vanishes as long as the benefit to taking the risky action early is greater than the benefit of taking the risky action late the introduction of the option to delay reduces the incidence of coordination failure in equilibrium relative to the standard case where all agents must choose their actions at the same time we outline the welfare implications of this finding and probe the robustness of our results from a variety of angles

optimal degree of public information dissemination financial markets and macroeconomic environments are often characterised by positive external ities in these environments transparency may reduce expected welfare public announcements serve as focal points for higher order beliefs and affect agentsbehaviour more than justified by their informational contents some scholars conclude that reducing public signalsprecision or entirely withholding information may improve welfare this article shows that public information should always be provided with maximum precision but under certain conditions not to all agents restricting the degree of publicity is a better suited instrument for preventing the negative welfare effects of public announcements than restrictions on their precision are there is a general presumption that higher central bank transparency in terms of information disclosure to a wider audience improves the effectiveness of monetary policy and is beneficial to markets as it reduces information asymmetries helps to assess risk better and arrive at more informed decisions thus enhancing market efficiency while practitioners in central banks and international institutions agree on the desirability of informative announcements and promote higher transparency on the ground that any information is valuable to markets recent academic literature distin guishes private and public information and argues that public announcements may destabilise markets and reduce efficiency by their effects on higher order beliefs if markets are characterised by positive externalities morris and shin 2002 henceforth m s have shown that noisy public announcements may be detrimental to welfare from an ex ante point of view they conclude that a commitment to withholding relevant information or deliberately reducing its precision may be welfare enhancing in this article we challenge this conclusion by distinguishing two components of transparency precision ofinformationanddegreeofpublicity the degreeof publicity is the proportion of agents who receive a signal using a stylised coordination game introduced by m s we show that information should always be provided to the market

time delay complexity and support for taxation people often experience the benefits of taxation over time we design an intertemporal market experiment with negative externalities to examine how delaying the benefits of taxation affects support for taxes we find that when negative externalities occur immediately people learn to adopt pigouvian taxes which are aimed at reducing negative externalities and restoring market efficiency by contrast when negative externalities are delayed people are less receptive to taxation this effect persists over time our data reveal that the strong negative delay effect can be explained in large part by narrow bracketing and the increased perceived complexity of the environment rather than by time discounting per se we argue and demonstrate that increasing the transparency of intertemporal tradeoffs can effectively promote support for taxation

accepting market failure cultural worldviews and the opposition to corrective environmental policies abstract to explore whether and why people sometimes reject environmental policies that improve individual and collective outcomes we create an experimental market in which transactions generate a negative externality market participants endogenously determine whether to implement corrective policies we consider three policy instruments pigouvian taxes and subsidies and quantity regulation and two levels of policy efficiency full and half we then explore how individual cultural worldviews might contribute to the rejection of policies that correct the market failure our results indicate that people often oppose policies that improve their material outcomes and we find that such opposition is significantly explained by cultural worldviews interesting connections emerge between individual worldviews and specific policy instruments

dynamic global games of regime change learning multiplicity and the timing of attacks global games of regime change coordination games of incomplete information in which a status quo is abandoned once a sufficiently large fraction of agents attack it have been used to study crises phenomena such as currency attacks bank runs debt crises and political change we extend the static benchmark examined in the literature by allowing agents to take actions in many periods and to learn about the underlying fundamentals over time we first provide a simple recursive algorithm for the characterization of monotone equilibria we then show how the interaction of the knowledge that the regime survived past attacks with the arrival of information over time or with changes in fundamentals leads to interesting equilibrium properties first multiplicity may obtain under the same conditions on exogenous information that guarantee uniqueness in the static benchmark second fundamentals may predict the eventual fate of the regime but not the timing or the number of attacks finally equilibrium dynamics can alternate between phases of tranquility where no attack is possible and phases of distress where a large attack can occur even without changes in fundamentals

unique equilibrium in a model of self fulfilling currency attacks even though self fulfilling currency attacks lead to multiple equilibria when fundamentals are common knowledge we demonstrate the uniqueness of equilibrium when speculators face a small amount of noise in their signals about the fundamentals this unique equilibrium depends not only on the fundamentals but also on financial variables such as the quantity of hot money in circulation and the costs of speculative trading in contrast to multiple equilibrium models our model allows analysis of policy proposals directed at curtailing currency attacks

market microstructure information aggregation and equilibrium uniqueness in a global game abstract speculators contemplating an attack e g on a currency peg must guess the beliefs of other speculators which they can do by looking at the stock market as shown in earlier work this information gathering process may be destabilising by creating multiple equilibria this paper studies the role played by the microstructure of the asset market in the emergence of multiple equilibria driven by information aggregation to do so we study the outcome of a two stage global game wherein an asset price determined at the trading stage of the game provides an endogenous public signal about the fundamental that affects traders decision to attack in the coordination stage of the game in the trading stage placing a full demand schedule i e a continuum of limit orders is costly but traders may use riskier and cheaper market orders i e order to sell or buy a fixed quantity of assets unconditional on the execution price price execution risk reduces traders aggressiveness and hence slows down information aggregation which ultimately makes multiple equilibria in the coordination stage less likely in this sense microstructure frictions that lead to greater individual exposure to price execution risk may reduce aggregate uncertainty by pinning down a unique equilibrium outcome

the influence of ethical attitudes on the demand for environmental recreation incorporating lexicographic preferences abstract this article examines the relationships between different ethical attitudes toward environmental quality and the use values obtained from the environment in particular we consider individuals who have duty based ethical attitudes that lead to lexicographic preferences for environmental quality we show that individuals with duty based ethical attitudes have recreation demand functions that are kinked exhibiting perfectly inelastic behavior over some range of income however the kinks cannot be identified from typical cross sectional data and to the extent that observed recreation demand for these individuals differs from those with neoclassical preferences such differences could be captured empirically through a proxy variable that measures ethical attitudes a more fundamental issue is that changes in welfare for duty based individuals cannot be determined from their estimated demand function while an exogenous rise in environmental quality is likely to increase the demand for recreation by these individuals additional recreation is not the reason for an improvement in well being an empirical model to identify the effect of ethical attitudes on recreation is illustrated using survey data on stated preferences for visits to urban parks

information manipulation coordination and regime change this article presents a model of information manipulation and political regime change there is a regime that can be overthrown but only if enough citizens participate in an uprising citizens are imperfectly informed about the regime s ability to resist an uprising and the regime can engage in propaganda that taken at face value makes the regime seem stronger than it truly is this coordination game with endogenous information manipulation has a unique equilibrium and the article gives a complete analytic characterization of the equilibrium s comparative statics holding fixed the number of signals available to citizens if the per unit signal precision is sufficiently high then the regime is harder to overthrow in contrast if the number of signals increases so that both total signal precision and the regime s costs of manipulation rise together then the regime is easier to overthrow unless there are strong economies of scale in information control

redistributive taxation in a simple perfect foresight model abstract we investigate the redistributive potential of capital taxation in an intertemporal maximizing model of capital formation first even unanticipated redistributive capital taxation is severely limited in its effectiveness since it depresses wages second under any convergent redistributive tax policy which maximizes a paretian social objective the capital income tax will converge to zero independent of the factor supply elasticities these results are independent of workers holdings of capital

linking consumption externalities with optimal accumulation of human and physical capital and intergenerational transfers abstract this paper opens a new perspective from which one can explain the presence of government intervention in education even in the absence of human capital externality it argues that consumption externalities can provide rationale for government intervention in education within the context of overlapping generations economy it has also been shown that competitive equilibrium either underaccumulates both physical and human capital or overaccumulates both thus the result rules out the possibility of competitive equilibrium deviating from the social optimum in its allocation of physical and human capital in opposite directions immediate policy issues have also been discussed

temptation and taxation we study optimal taxation when consumers have temptation and self control problems embedding the class of preferences developed by gul and pesendorfer into a standard macroeconomic setting we first prove in a two period model that the optimal policy is to subsidize savings when consumers are tempted by excessive impatience the savings subsidy improves welfare because it makes succumbing to temptation less attractive we then study an economy with a long but finite horizon which nests as a special case the phelps pollak laibson multiple selves model thereby providing guidance on how to evaluate welfare in this model we prove that when period utility is logarithmic the optimal savings subsidies increase over time for any finite horizon moreover as the horizon grows large the optimal policy prescribes a constant subsidy in contrast to the well known chamley judd result

the robustness of equilibria to incomplete information a number of papers have shown that a strict nash equilibrium action profile of a game may never be played if there is a small amount of incomplete information see for example carlsson and van damme 1993a we present a general approach to analyzing the robustness of equilibria to a small amount of incomplete information a nash equilibrium of a complete information game is said to be robust to incomplete information if every incomplete information game with payoffs almost always given by the complete information game has an equilibrium which generates behavior close to the nash equilibrium we show that many games with strict equilibria have no robust equilibrium and examine why we get such different results from existing refinements if a game has a unique correlated equilibrium it is robust a natural many player many action generalization of risk dominance is a sufficient condition for robustness

do women shy away from competition do men compete too much we examine whether men and women of the same ability differ in their selection into a competitive environment participants in a laboratory experiment solve a real task first under a noncompetitive piece rate and then a competitive tournament incentive scheme although there are no gender differences in performance men select the tournament twice as much as women when choosing their compensation scheme for the next performance while 73 percent of the men select the tournament only 35 percent of the women make this choice this gender gap in tournament entry is not explained by performance and factors such as risk and feedback aversion only playa negligible role instead the tournament entry gap is driven by men being more overconfident and by gender differences in preferences for performing in a competition the result is that women shy away from competition and men embrace it

voting under temptation abstract within the confines of linear tax and complete market we show that the efficiency force for a negative capital tax may not be strong enough to reverse the politico economic force for a positive redistributive taxation under temptation and self control preferences

expectations and contagion in self fulfilling currency attacks this paper shows how expectations driven contagion of currency crises can arise even if the currency market has a unique equilibrium when viewed in isolation the model of morris and shin 1998 is extended to allow speculators to trade in a second currency market if speculators believe that a devaluation of this other currency will make a domestic devaluation more likely they will engage in trades that link the two markets a sharp devaluation of the other currency will then be propagated to the domestic market and will increase the likelihood of ac risis there fulfilling the original expectations even though this contagion is driven solely by expectations the model places restrictions on observable variables and these restrictions are broadly consistent with existing empirical evidence

fear of novelty a model of scientific discovery with strategic uncertainty this paper analyzes the production of fundamental research as a coordination game played by scholars in the model scholars decide to adopt a new idea only if they believe that a critical mass of peers is following a similar research strategy if researchers observe only a noisy idiosyncratic signal of the true scientifi c potential of a new idea we show that the game presents a single threshold equilibrium in this environment fundamental research proceeds with large structural breaks followed by long periods of time in which new ideas are unsuccessful the likelihood of a new idea emerging depends on various parameters including the rewards of working in the old paradigm the critical mass of researchers required to create a new school of thought and scholars ability to properly assess the scientifi c value of new ideas

living in an imaginary world that looks real abstract in the paper we show using standard approaches general equilibrium modeling and the assumption of complete rationality that the macroeconomic environment is endogenous and is indeterminate specifically it is argued without resorting to sunspot type arguments that microeconomic fundamentals do not suffice to characterize the economy at the macro level in particular we show how perceptions of rational agents of the workings of the economy a shape the environment b affect the environment sufficiently to ensure that rational economic agents find the observed environment consistent with their beliefs even though it is not as a by product we illustrate that endogenous macro uncertainty can arise as an outcome if rational economic agents whose expectations are anchored on endogenous variables expect them to arise finally we show that systematic errors can persist indefinitely under rationality

informational channels of financial contagion two main classes of channels are studied as informational sources of financial contagion one is a fundamental channel that is based on real and financial links between economies and the second is a social learning channel that arises when agents base their decisions on noisy observations about the actions of others in foreign markets using global games i present a two country model of financial contagion in which both channels can operate and i test its predictions experimentally the experimental results show that subjects do not extract information optimally which leads to two systematic biases that affect these channels directly base rate neglect leads subjects to underweight their prior and thus weakens the fundamental channel an overreaction bias strengthens the social learning channel since subjects rely on information about the behavior of others even when this information is irrelevant these results have significant welfare effects rooted in the specific way in which these biases alter behavior

the role of budgetary information in the preference for externality correcting subsidies over taxes a lab experiment on public support the potential of taxes to correct environmental externalities has long been recognized among economists yet this welfare enhancing policy commonly faces strong opposition by citizens conversely externality correcting subsidies frequently enjoy high public support we conduct a lab experiment to explore public support for pigouvian taxes and subsidies in an experimental market with a negative externality participants vote on the introduction of pigouvian taxes and subsidies under full or reduced information concerning how the tax revenues will be spent and the subsidy paid for theoretically the two instruments should produce identical outcomes however we find substantially greater support for subsidies than for taxes this can partially be explained by the participants expectation that the subsidy will increase their own payoffs more than a tax but not because it is expected to be more effective in changing behavior furthermore we find that with greater uncertainty the preference for subsidies is even stronger a result which is consistent with loss aversion

speculative attacks with multiple sources of public information we propose a speculative attack model in which agents receive multiple public signals it is characterised by its focus on an informational structure which sets free from the strict separation between public information and private information diverse pieces of public information can be taken into account differently by players and are likely to lead to different appreciations ex post this process defines players private value the main result is to show that equilibrium uniqueness depends on two conditions i signals are sufficiently dispersed ii private beliefs about the relative precision of these signals sufficiently differ we derive some implications for information dissemination policy transparency in this context is multi dimensional it concerns the publicity of announcements the number of signals disclosed as well as their precision especially it seems that the central bank has better not publishing its forecast errors in order to maintain stability an illustration to our analysis is the recent debate concerning the optimal monetary policy committee structure of central banks

the revealed preference theory of changing tastes we analyse preferences over finite decision problems in order to model decision makers with changing tastes we provide conditions on these preferences that identify the strotz model of consistent planning building on an example given by peleg and yaari 1973 we show that for problems with infinitely many choices strotz s representation of preferences may not be well defined for that case we propose a well defined approximation which is empirically indistinguishable from the strotz preference that is being approximated

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

public information private information and the multiplicity of equilibria in coordination games abstract i study coordination games with incomplete public and private information and relate equilibrium convergence to convergence of higher order beliefs as the players signals become more and more precise the equilibrium manifold converges to the correspondence of common knowledge equilibria whenever the variance of the public signal converges to 0 at a rate faster than one half the rate of convergence of the variance of private signals the same condition also determines the convergence of common p belief to common knowledge which leads to a simple intuition for its origin and an immediate generalization of the former results about equilibrium convergence journal of economic literature classification numbers c72 d82

uncertainty and currency crises evidence from survey data this paper studies empirically how uncertainty aects speculation in the foreign ex change markets we use the dispersion of survey forecasts of key macroeconomic variables to measure uncertainty about fundamentals we nd that uncertainty has a non monotone eect on exchange rate pressures namely uncertainty heightens speculative pressures when expected fundamentals are good and eases them when they are bad we prove that this prediction arises from a broad class of currency crisis theories ranging from rst generation to global game models we also show that the proposed empirical strategy remains valid in the presence of forecasters with strategic objectives and use a novel set of instrumental variables to address potential endogeneity bias

strategic interactions of fiscal policies in europe a global var perspective abstract the paper analyses the strategic interactions of fiscal policies in the european union context by modelling the interdependencies arising between public and private sectors saving investment balances in a global vector autoregressive framework we use two empirical specifications to reflect some important differences in the sequencing of the policy decision making process in this setting we draw policy implications with respect to fiscal policy coordination and fiscal policy discretion we highlight the importance of several factors such as global capital flows uncertainty with respect to policy actions and nature of the shocks as key elements defining the dimension of the prevailing policy tradeoffs

investment in the shadow of conflict globalization capital control and state repression in conflict prone societies the fear of expropriation that accompanies a regime change reduces capital investment these reductions in investments in turn harm the economy amplifying the likelihood of regime change this article studies the implications of these feedback channels on the interactions between globalization capital control state repression and regime change i show that processes that facilitate capital movements e g globalization economic modernization and technologies that reduce transportation costs amplify the likelihood of regime change in conflict prone societies and strengthen the elite s demand for a strong coercive state in particular to limit their collective action problem and manage the political risk of regime change capitalists support a state that imposes capital control we identify two conflicting forces the boix effect and the marx effect which determine when capital control and state repression become complements nazi germany or substitutes latin american military regimes in right wing regimes

the electronic mail game strategic behavior under almost common knowledge the paper addresses a paradoxical game theoretic example which is closely related to the coordinated attack problem two players have to play one of two possible coordination games only one of them receives information about the coordination game to be played it is shown that the situation with almost common knowledge is very different from when the coordination game played is common knowledge

signaling in a global game coordination and policy traps this paper introduces signaling in a global game so as to examine the informational role of policy in coordination environments such as currency crises and bank runs while exogenous asymmetric information has been shown to select a unique equilibrium we show that the endogenous information generated by policy interventions leads to multiple equilibria the policy maker is thus trapped into a position in which self fulfilling expectations dictate not only the coordination outcome but also the optimal policy this result does not rely on the freedom to choose out of equilibrium beliefs nor on the policy being a public signal it may obtain even if the policy is observed with idiosyncratic noise

collective action with uncertain payoffs coordination public signals and punishment dilemmas how can one analyze collective action in protests or revolutions when individuals are uncertain about the relative payoffs of the status quo and revolution we model a calculus of protest of individuals who must either submit to the status quo or support revolt based only on personal information about their payoffs in deciding whether to revolt the citizen must infer both the benefit of successful revolution and the likely actions of other citizens we characterize conditions under which payoff uncertainty overturns conventional wisdom a when a citizen is too willing to revolt he reduces the incentives of others to revolt b less accurate information about the value of revolution can make revolt more likely c public signals from other citizens can reduce the likelihood of revolt d harsher punishment can increase the incidence of punishment and e the incidence of protest can be positively correlated with that of repression

endogenous acquisition of information and the equity home bias this paper investigates the extent to which differences in information costs can explain the equity home bias puzzle in a model where information costs are higher for the foreign asset than for the home asset i show that if cost functions are convex and the assets have identical return characteristics the expected size of the home bias in terms of differences in expected demands is positive and increasing in expected excess returns and risk but decreasing in risk aversion however a calibration to us data suggests that information costs can explain only a small fraction of the observed home bias

exchange rate attack as a coordination game theory and experimental evidence this paper compares theoretical predictions for a coordination game used to explain the onset of a currency crisis with observations from laboratory experiments theories that assume full rationality suggest that public information may destabilize an economy by creating self fulfilling belief equilibria while private information leads to a unique equilibrium in experiments differences in behaviour for these two kinds of information are small public information increases efficiency and coordination among players and there is no evidence for destabilizing effects owing to self fulfilling beliefs copyright 2002 oxford university press

self control and the theory of consumption to study the behavior of agents who are susceptible to temptation in infinite horizon consumption problems under uncertainty we define and characterize dynamic self control dsc preferences dsc preferences are recursive and separable in economies with dsc agents equilibria exist but may be inefficient in such equilibria steady state consumption is independent of initial endowments and increases in self control increasing the preference for commitment while keeping self control constant increases the equity premium removing nonbinding constraints changes equilibrium allocations and prices debt contracts can be sustained even if the only feasible punishment for default is the termination of the contract

rational and self fulfilling balance of payments crises speculative attacks on a pegged exchange rate must sometimes occur ifasset price paths are to be free of abnormal profit opportunities suchattacks are fully rational as they reflect the market s response to aregime breakdown that is inevitable the authors shows that under someexpectations about policy balance of payments crises can also be purely self fulfilling events in such cases even a permanently viableregime may collapse and the economy will possess multiple equilibriacorresponding to different subjective assessments of the probability ofa crisis the behavior of the domestic interest rate will naturally reflect the possibility of a speculative attack copyright 1986 by american economic association

optimal bank transparency increasing transparency is recurrently offered as a centerpiece of bank regulation we study a competitive banking sector whose illiquid assets are funded by short term debt that must be refinanced we show that welfare is a nonmonotonic function of the level of transparency increasing transparency fosters efficient liquidation but has an adverse effect on rollover risk given the level of risk banks may compensate this adverse effect by taking more risk these offsetting effects render an intermediate level of transparency optimal moreover the existence of negative social externalities of bank failures calls for making banks more opaque rather than more transparent

the health of farmer based organisations in ghana organisational diagnostics and governance implications abstractin this paper we use primary data on 500 ghanaian fbos collected through semi structured interviews and risky dictator games rdg to test the validity of the cooperative life cycle theory and formulate a measure of cooperative health we first define cooperative health as the alignment of heterogeneity in risk preferences and the effectuation of collective investments we then use cluster and correlation analysis to categorize fbos on the basis of their health and correlate these typologies with various performance indicators our findings reveal that organizational health is generally low as there are only a few organizations that manage to provide member farmers with both risk sharing and cost saving opportunities further healthier fbos experience stronger growth in membership while health is lower in fbos that have been established for the purpose of benefitting from external incentives

coordination failures and the lender of last resort was bagehot right after all the classical doctrine of the lender of last resort lolr elaborated by bagehot 1873 asserts that the central bank should lend to illiquid but solvent banks under certain conditions several authors have argued that this view is now obsolete in modern interbank markets a solvent bank cannot be illiquid this paper provides a possible theoretical foundation for rescuing bagehot s view our theory does not rely on the multiplicity of equilibria that arises in classical models of bank runs we built a model of banks liquidity crises that possesses a unique bayesian equilibrium in this equilibrium there is a positive probability that a solvent bank cannot find liquidity assistance in the market we derive policy implications about banking regulation solvency and liquidity ratios and interventions of the lender of last resort furthermore we find that public bailout and private bail in involvement are complementary in implementing the incentive efficient solution and that bagehot s lender of last resort facility must work together with institutions providing prompt corrective action and orderly failure resolution finally we derive similar implications for an international lender of last resort ilolr jel g21 g28

do you not like pigou or do you not understand him tax aversion and revenue recycling in the lab tax aversion reduces the likelihood that price rationing can be a politically viable tool for environmental protection we examine the case of the classic pigouvian tax to control a negative externality and consider how recycling the revenues labeling of the tax and information about its purpose affects the support for taxation we test the support for taxation within a single price market experiment in which purchases by some buyers impose external costs on others observing behavior consistent with tax aversion we also find that recycling the revenues to more narrowly targeted groups seems to increase support for taxation in the absence of narrow revenue recycling labeling a pigouvian instrument as a tax may significantly lower the likelihood of voter support

optimal defaults and active decisions defaults often have a large influence on consumer decisions we identify an overlooked but practical alternative to defaults requiring individuals to make an explicit choice for themselves we study such active decisions in the context of 401 k saving we find that compelling new hires to make active decisions about 401 k enrollment raises the initial fraction that enroll by 28 percentage points relative to a standard opt in enrollment procedure producing a savings distribution three months after hire that would take 30 months to achieve under standard enrollment we also present a model of 401 k enrollment and derive conditions under which the optimal enrollment regime is automatic enrollment i e default enrollment standard enrollment i e default non enrollment or active decisions i e no default and compulsory choice active decisions are optimal when consumers have a strong propensity to procrastinate and savings preferences are highly heterogeneous financial illiteracy however favors default enrollment over active decision enrollment

optimal taxation of capital income in general equilibrium with infinite lives this paper analyzes the optimal tax on capital income in general equilibrium models of the second best agents have infinite lives and utility functions which are extensions from the koopmans form the population is heterogeneous the important property of the models is the equality between the social and the private discount rates in the long run i find that the optimal tax rate is zero in the long run for a special case of additively separable utility functions i then determine the tax rates along the dynamic path and conditions that are sufficient for the local stability of the steady state

political economy of mechanisms we study the optimal mirrlees taxation problem in a dynamic economy in contrast to the standard approach where the taxation mechanism is operated by a benevolent planner with full commitment power we focus on economies in which policy decisions are made by self interested politicians who cannot commit to policies the society controls politicians using elections we show that the provision of incentives to politicians can be partly separated from redistribution across agents and that political economy constraints can be modeled as introducing additional aggregate distortions in the dynamic mirrlees problem we provide conditions under which the political economy distortions persist or disappear in the long run if the politicians are as patient as the agents the best sustainable mechanism leads to an asymptotic allocation where the aggregate distortions arising from political economy disappear in contrast when politicians are less patient than the citizens positive aggregate labor and capital taxes remain even asymptotically we conclude by providing a brief comparison of centralized

coordination risk and the price of debt abstract creditors of a distressed borrower face a coordination problem even if the fundamentals are sound fear of premature foreclosure by others may lead to pre emptive action undermining the project recognition of this problem lies behind corporate bankruptcy provisions across the world and it has been identified as a culprit in international financial crises but has received scant attention from the literature on debt pricing without common knowledge of fundamentals the incidence of failure is uniquely determined provided that private information is precise enough this affords a way to price the coordination failure comparative statics on the unique equilibrium provides several insights on the role of information and the incidence of inefficient liquidation

credit rating and debt crises we develop an equilibrium theory of credit rating in the presence of rollover risk by influencing rational creditors ratings affect sovereigns probability of default which in turn affects ratings our analysis reveals a pro cyclical impact of credit rating in equilibrium the presence of a rating agency increases default risk when it is high and decreases default risk when it is low

crises and prices information aggregation multiplicity and volatility crises are volatile times when endogenous sources of information are closely monitored we study the role of information in crises by introducing a financial market in a coordination game with imperfect information the asset price aggregates dispersed private information acting as a public noisy signal in contrast to the case with exogenous information our main result is that uniqueness may not obtain as a perturbation from perfect information multiplicity is ensured with small noise in addition we show that a multiplicity may emerge in the financial price itself b less noise may contribute toward nonfundamental volatility even when the equilibrium is unique and c similar results obtain for a model where individuals observe one another s actions highlighting the importance of endogenous information more generally