on the efficiency of law a public choice perspective economists have not yet developed a comprehensive theoretical framework incorporating transaction cost economics within a public choice perspective for predicting when there will be an efficiency problem with the law transaction cost reasoning and the rent seeking insight have not been applied systematically in a dynamic institutional context to evaluate when the law will be used to increase or not minimize problems of bounded rationality and opportunism this paper takes a first step at identifying and remedying this deficiency the paper first provides a critical review of relevant theoretical contributions made by becker 1983 1985 posner 1977 priest 1977 rubin 1977 1982 williamson 1975 1985 and others we then show how analysis of the efficiency of law can be synthesized into a broader whole by incorporating transaction cost economics more fully into existing understanding of rentseeking in the political realm thus within the public choice paradigm this paper develops a deeper transaction cost analysis of the efficiency of law building on prior research by the authors crew and rowley 1988a 1988b twight 1983 1988 the paper identifies variables that position legal rules on a spectrum that ranges from those that are predominantly transaction cost

pigou coase common law and environmental policy implications of the calculation debate the implications of the calculation debate are explored for pigouvian coasean and common law liability approaches to externality problems there is no escaping hayekian misean information problems but the institutional setting within which environmental policies are resolved affects the domain of third party calculation the calculation required is likely to be significantly less under common law arrangements than under administrative processes the primary implication for environmental policy is that increased reliance on competitive market processes and the common law in copying with externality problems may be more effective than attempts to improve current administrative approaches

lobbying by capital and labor over trade and labor market policies abstract this paper uses the common agency approach to analyze the joint determination of product and labor market distortions in a small open economy capital owners and union members lobby the government on both tariffs and minimum wages while other factors of production are not organized the paper shows that product and labor market distortions always move in the same direction and that their level is not modified by social pacts between capital and labor it also shows that labor market distortions are second best hence conditionality by foreign organizations should target distortions in product markets but not in labor markets

optimality of the friedman rule in an overlapping generations model with spatial separation recent models with spatial separation and limited communication suggest that the friedman rule may not be optimal this is important in light of the disparity between theory and practice concerning optimal monetary policy we take a close look at these models and show that intergenerational transfers are key to the suboptimality of the friedman rule the friedman rule is a necessary condition for achieving the efficient allocation in equilibrium we also show that the friedman rule is chosen whenever agents can implement mutually beneficial arrangements

information and the persistence of private order contract enforcement institutions an experimental analysis abstract we study an experimental market in which some sellers are prone to moral hazard and in which a private order contract enforcement institution exists that can mediate trade and prevent sellers from reneging on their contractual obligations using the institution to resolve the moral hazard problem is costly we demonstrate that in this market the utilization of the private order contract enforcement institution may make public and private market signals uninformative and inhibit learning we study whether this potential information externality can limit adaptation away from the private order institution when it is efficient to do so consistent with theory we find inefficient persistence when the institution is used but by contrast efficient adaptation in other situations providing information to individuals who are using the private order institution allows them to partially adapt

why does overnight liquidity cost more than intraday liquidity abstract in this paper we argue that the observed difference in the cost of intraday and overnight liquidity is part of an optimal payments system design in our environment overnight liquidity affects output while intraday liquidity affects only the distribution of resources between money holders and non money holders the low cost of intraday liquidity is explained by the friedman rule the optimal cost differential achieves the twin objective of reducing the incentive to overuse money at night and encouraging payment risk sharing during the day

regulatory fog the role of information in regulatory persistence abstract regulation is very persistent even when inefficient we propose an explanation for regulatory persistence based on regulatory fog the phenomenon by which regulation obscures information regarding the value of counterfactual policies we construct a dynamic model of regulation in which the underlying need for regulation varies stochastically and regulation undermines the social planner s ability to observe the state of the world compared to a full information benchmark regulation is highly persistent often lasting indefinitely regulatory fog is robust to a broad range of partially informative policies and can be quite detrimental to social welfare regulatory experiments modeled as costly and imperfect signals of the underlying state do not eliminate the effects of regulatory fog we characterize their effects and provide a framework for choosing amongst a set of potential regulatory experiments

is protection for sale evidence on the grossman helpman theory of endogenous protection grossman and helpman 1994 present a theory of endogenous protection by explicitly modeling government industry interactions for which mere black box models previously existed they obtain a ramsey pricing type solution to the provision of protection which emphasizes the role of inverse import penetration ratios and import elasticities on the lobbying side the model makes predictions about lobbying competition and lobbying spending according to deadweight costs from protection the model not only makes for richer theory in terms of rigor and elegance but its predictions are directly testable whether the grossman helman model stands up to real world data is investigated in this paper predictions from both the protection side and lobbying side are tested using cross sectional u s nontariff barrier data we also compare the second generation grossman helpman model with a more traditional specification our results call for serious consideration of this model in the political economy literature

limit order book as a market for liquidity we develop a dynamic model of an order driven market populated by discretionary liquidity traders these traders must trade yet can choose the type of order and are fully strategic in their decision traders differ by their impatience less patient traders demand liquidity more patient traders provide it three equilibrium patterns are obtained the pattern is determined by three parameters the degree of impatience of the patient traders which we model as the cost of execution delay in providing liquidity their proportion in the population which determines the degree of competition among the liquidity providers and the tick size which is the cost of the minimal price improvement despite its simplicity the model generates a rich set of empirical predictions on the relation between market parameters time to execution and spreads we argue that the economic intuition of this model is so basic its main results must be robust in much more general models

applied fairness theory comment william baumol 1982 presented a provocative and potentially valuable piece of analysis on fairness but his contribution suffers from the flaw of defining terms in a manner similar to but with important differences from their common definitions as a result of this terminological problem it would be possible for a real world outcome to be fair or even superfair according to baumol s criteria but to be unfair according to the commonly accepted meaning of the word conversely what would commonly be accepted as fair in the real world might not be fair according to baumol s criteria my objection here is largely with baumol s terminology but its significance extends well beyond terminology because it affects the way economists think about equity issues ranging from the particular case of fairness theory to welfare economics in general the remarks that follow fall into two categories first i argue that it is unfair in the traditional meaning of the word for baumol to redefine the meaning of fair second i argue that fair outcomes can only be judged within the context of the institutional setting that produces the outcomes as a result any analysis like baumol s which examines only the outcome of a process without examining the process itself can never determine whether an outcome is fair

does political reform increase wealth or why the difference between the chicago and virginia schools is really an elasticity question this paper shows that contrary to becker work there is no innate tendency for political competition to reduce the total cost of government wealth transfers simple examples demonstrate how the effects of government policies on total wealth boil down to the elasticities of the marginal support and opposition curves disagreements between the chicago and virginia schools of political economy can be understood as a disagreement about these elasticities the broader implications for this argument in terms of the efficiency of the common law are also discussed

heterogeneity redistribution and the friedman rule we study monetary models with nondegenerate stationary distributions of money holdings we find that the friedman rule does not typically maximize ex post social welfare an increase in the rate of growth of the money supply has two effects the standard distortionary or rate of return effect makes money a less desirable asset for all moneyholders a second redistributive effect creates a transfer from one type of agent to the other an increase in the rate of growth of money away from the friedman rule can produce a rate of return effect that dominates the standard effect

toward a public choice theory of monopoly regulation its many dimensions from the perspective of market economics this new thrust was consolidated in 1976 by s peltzman who developed a formal market model in which regulations were viewed as commodities brokered via political markets in response to bids and counter bids by those who stood to gain or to lose from specific regulation outcomes the subsequent contribution by becker 1983 added insights and institutional flesh to the stigler peltzman embryo confirming regulation as an integral component of mainstream market economics an important implication of such contributions especially those from the chicago perspective is that regulation for the most part confirms resource efficiency within market process that political markets in the absence of entry barriers are just as effective as are competitive commodity markets in achieving economic efficiency defined within a comparative institutions framework nowhere is this complacency more apparent than in the conclusion drawn by becker 1983 from a detailed formal analysis of competition among pressure groups for political influence

deregulation redux does mandating access to bottleneck facilities necessarily improve welfare we demonstrate that deregulation in the form of vertical separation of network components into natural monopoly and potentially competitive markets does not truly represent a lessening of regulatory burdens that is vertical separation is not synonymous with deregulation more competitors is not equivalent to more competition we assume a public interest regulator that is constrained to set a unit price that maximizes expected welfare subject to a break even constraint we show that under both symmetric and asymmetric information cases the information demands on the regulator of the vertically integrated system are no greater than those in the case of vertical separation

political internalization of economic externalities and environmental policy abstract this paper derives the characteristics of endogenous environmental policy in a common agency model of politics and proceeds to show that competition between lobby groups is an important source of internalization of economic externalities our analysis generalizes bhagwati s principle of targeting to the case of distorted political markets moreover we show that the politically optimal structure of environmental taxes incorporates a pigouvian adjustment however since lobby groups care about the distribution of income as well as about efficiency the equilibrium structure of taxes differs considerably from the pigouvian rule

capture and ideology in the economic theory of politics the economic theory of regulation long ago put public interest theories of politics to rest these theories have correctly been viewed as normative wishings rather than explanations of real world phenomena they have been replaced by models of political behavior that are consistent with the rest of microeconomics anthony downs 1957 james buchanan and gordon tullock 1965 george stigler 1971 sam peltzman 1976 recently however debate has arisen over whether some version of a public interest theory of regulation will have to be readmitted to our thinking about actions and results in the political arena what is at issue is the empirical importance of the altruistic publicly interested goals of rational actors in determining legislative and regulatory outcomes james kau and paul rubin 1979 kalt 1981 peltzman 1982 this study assesses the nature and significance of publicly interested objectives in a particular instance of economic policymaking u s senate voting on coal strip mining regulations the existence of such objectives is of course no contradiction of the economic view of human behavior kenneth arrow 1972 gary becker 1974 and may well be rooted in genetic biological history becker 1976 jack hirshleifer 1978 generally however individuals altruistic publicly interested goals have been given little attention this reflects the judgment that such goals are so empirically unimportant as to allow the use of occam s razor in positive models or well founded apprehensions that these goals are unusually difficult to identify measure and analyze notwithstanding the latter problem we find that approaches which confine themselves to a view of political actors as narrowly egocentric maximizers explain and predict legislative outcomes poorly the tracking and dissecting of the determinants of voting on coal strip mining policy suggest that the economic theory of politics has been prematurely closed to a broader conception of political behavior

does centralization increase the size of government abstract are fiscal programs larger or smaller if they are run centrally rather than locally in a prospective federation we abstract completely from well understood economic issues and focus instead on the political effects of centralization for fiscal programs with benefits broadly spread in the population such as redistributive transfer schemes social insurance and general government consumption centralization changes the coalition of voters who favor a large program in a direction that depends on the nature of the redistributive instrument for fiscal programs with localized benefits such as provision of local public goods centralization creates opportunities for rent seeking which increases the size of government

a taxonomy of automated trade execution systems abstract a taxonomy of automated trade execution systems in financial markets is developed over 50 automated market structures in 16 countries are analyzed these markets consist of computerized rules governing both allowable message types and the means by which such messages are translated into trades computerized market structures are classified by ordered sets of trade execution priority rules trade matching protocols and associated degree of automation of price discovery and transparency to include informational asymmetries between classes of market participants differences in systems across types of financial instruments geographical locations and over time are analyzed jel g15 d44

an empirical behavioral model of liquidity and volatility abstract we develop a behavioral model for liquidity and volatility based on empirical regularities in trading order flow in the london stock exchange this can be viewed as a very simple agent based model in which all components of the model are validated against real data our empirical studies of order flow uncover several interesting regularities in the way trading orders are placed and cancelled the resulting simple model of order flow is used to simulate price formation under a continuous double auction and the statistical properties of the resulting simulated sequence of prices are compared to those of real data the model is constructed using one stock azn and tested on 24 other stocks for low volatility small tick size stocks called group i the predictions are very good but for stocks outside group i they are not good for group i the model predicts the correct magnitude and functional form of the distribution of the volatility and the bid ask spread without adjusting any parameters based on prices this suggests that at least for group i stocks the volatility and heavy tails of prices are related to market microstructure effects and supports the hypothesis that at least on short time scales the large fluctuations of absolute returns r are well described by a power law of the form p r r r r with a value of r that varies from stock to stock

does electoral accountability affect economic policy choices evidence from gubernatorial term limits this paper analyzes the behavior of u s governors from 1950 to 1986 to investigate a reputation building model of political behavior we argue that differences in the behavior of governors who face a binding term limit and those who are able to run again provides a source of variation in discount rates that can be used to test a political agency model we find evidence that taxes spending and other policy instruments respond to a binding term limit if a democrat is in office the result is a fiscal cycle in term limit states which lowers state income when the term limit binds

the economic approach to political behavior governors bureaucrats and cost commissions cost control commissions provide two primary types of recommendations widespread benefits widespread costs and widespread benefits narrow costs both types of recommendations are not of the form predicted by the standard economic models of political behavior the paper explores why governors sanction these commissions and the types of recommendations governors will accept legislators use the maxim of concentrate benefits spread costs to maximize votes governors however face a lower return to concentrated benefit policies and a lower cost from concentrated cost policies this leads a governor to favor at the margin policies which have widespread benefit widespread cost or widespread benefit concentrated cost evidence from 5 state cost control commissions support the difference between the politicians the cost control commissions sanctioned by governors have proposed recommendations of the widespread benefit widespread cost and widespread benefit concentrated cost form governors accepted approximately two thirds of the widespread benefit concentrated cost proposals although they were more likely to accept recommendations of the widespread benefit widespread cost nature recommendations which required legislative approval saw a lower likelihood of acceptance this is consistent with the view that legislators prefer concentrated to widespread benefit recommendations qu the politician s favorite strategy is to create a commission to study a problem and make recommendations that may then be used as political cover call it government by commission victor 1988

the optimum quantity of money rule in the theory of public finance this paper examines optimal tax policy in a monetary economy in which money serves as an intermediate good that helps facilitate the conversion of scarce resources into tinal consumption goods by enabling consumers to economize on the costs of transacting it is shown that in such an environment even though distorting taxes must be levied for revenue purposes the optimal tax structure calls for abstaining from inflationary finance and adopting the optimum quantity of money rule

optimal monetary policy and economic growth abstract a question at the center of many analyses of optimal monetary policy is why do central banks never implement the friedman rule to the list of answers to this question we add neoclassical production specifically the tobin effect as one possible explanation to that end we study an overlapping generations economy with capital where limited communication and stochastic relocation create an endogenous transactions role for fiat money we assume a production function with a knowledge externality romer style that nests economies with endogenous growth ak form and those with no long run growth the diamond model the tobin effect is shown to be always operative under crra preferences a mild degree of social increasing returns is sufficient but not necessary for some positive inflation to dominate zero inflation and for the friedman rule to be sub optimal irrespective of the degree of risk aversion

lobbying and asymmetric information informational lobbying the use by interest groups of their alleged expertise or private information on matters of importance for policymakers in an attempt to persuade them to implement particular policies is often regarded as an important means of influence this paper analyzes this phenomenon in a game setting on the one hand the interest group is assumed to have private information which is relevant to the policymaker whilst on the other hand the policymaker is assumed to be fully aware of the strategic incentives of the interest group to mis report or conceal its private information

the contribution of market makers to liquidity and efficiency of options trading in electronic markets this paper examines the contribution of market makers to the liquidity and the efficiency of the options market in a unique setup of an order driven computerized trading system in which market makers and other participants operate under equitable conditions the main findings are 1 liquidity increased a 60 increase in trading volume and a 35 decrease of bid ask spreads 2 the efficiency of shekel euro options trading improved deviations from put call parity decreased significantly by 12 and skewness decreased by about 30 we also find that the net cost to the exchange is out weighted by the benefit to the trading public and that the presence of market makers encouraged trading between other participants far beyond their own trading 2005 elsevier b v all rights reserved

economists and public policy chicago political economy versus conventional views both conventional welfare economics and public choice analysis suggest that economists have an important educational role to play in the public policy process in improving the decision making process in sharp contrast information and incentive problems related to voting rules the bureaucracy and the legislature do not arise in cpe because these processes are all perfect agents of interest groups consequently the political process is efficient and there is no scope for beneficial economic analysis as it relates to the sugar program or other public policies that is the polity is efficient or it would be reordered by competing interest groups to make it so but as mitchell 1989 290 stresses the important unanswered question in cpe remains if there is no scope for improvement how and why does change occur

political biases in lobbying under asymmetric information this paper introduces asymmetric information in a pluralistic model of interest groups competition and analyzes its impact on policy biases lobbying groups are uninformed on a decision maker s preferences and use nonlinear contributions not only to compete for the agent s services but also to learn about his preferences in an otherwise standard common agency model of lobbying asymmetric information can be either on the decision maker s ideal point horizontal differentiation or on the strength of his own preferences for ideology vertical differentiation at equilibrium asymmetric information redistributes bargaining powers between interest groups and the decision maker in non trivial ways that may depend on the kind of informational asymmetry which is postulated asymmetric information tends to mitigate the influence of interest groups and contributions might be significantly reduced interest groups no longer contribute for a change in policy what it is worth to them as under complete information contributions incorporate a discount related to the group s ability to solve the asymmetric information problem jel d72 d82

colluding victims a public choice analysis of international alliances analysis of international alliances is often premised on predicted responses by nation states when nation states are assumed to behave as utility maximising actors large allies are exploited by small allies when output is a public good empirical analysis of defence expenditures in nato yields results consistent with the proposition that exploitation increases as alliance output approximates a pure public good but why would large countries acquiesce a public choice analysis offers a different perspective if producers of armaments are rent seeking are large allies able to capture rent by incurring a disproportionate share of defence expenditure

on the form of transfers to special interests an important question in political economy concerns the form of transfers to special interests the chicago view is that political competition leads politicians to make such transfers efficiently the virginia position is that lack of information on the part of voters leads politicians to favor inefficient sneaky methods of redistribution this paper analyzes the form of transfers in a model of political competition in which politicians have incentives to make transfers to special interests it shows that when voters have imperfect information about both the effects of policy and the predispositions of politicians inefficient methods of redistribution may be employed

money for nothing politicians rent extraction and political extortion introduction the model 1 background the economic theory of regulation 2 rent extraction the theory of political extortion demonstrations 3 observing extortion the practice of rent extraction 4 validating the model empirical tests of rent extraction 5 contracting for rent preservation the durability problem extensions 6 extraction and optimal taxation excises earmarked taxes and government user charges 7 costs and benefits of interest group organization 8 improving the model worthy yet unanswered questions notes references index

pricing and regulating affect environmental ethics effluent charges and tradeable permits are economically efficient but rarely used a new explanation for this discrepancy is offered pricing may crowd out environmental ethics in the pricing and via spillovers also in non pricing sectors pricing may therefore increase pollution providing a reason why decision makers tend to reject environmental pricing five propositions showing the conditions for counterproductive effects are advanced they are consistent with available empirical evidence regulation by setting standards and subsidies damage environmental ethics less than pricing because pollution is condoned damaging environmental ethics may prevent political action in favor of the environment

voting and paying for public goods an application of the theory of the core abstract let any coalition with a majority of all voters have the power to choose the quantities of public goods under rule i a majority coalition bears a cost of its decision that is proportional to its size under rule ii it must bear the whole cost of its decision thus rule i imposes costs on minorities although they have no power to choose the quantities of public goods while rule ii allows goods to have some attributes of semiprivate goods it is shown that a nonempty core under rule i implies a nonempty core under rule ii but not conversely necessary and sufficient conditions in terms of the properties of the von neumann morgenstern characteristic function are given

is the friedman rule optimal when money is an intermediate good in contrast to the recent literature on the optimal inflation tax we show that in models where money reduces transactions costs it is optimal to set the inflation tax to zero when seigniorage is replaced by revenue from distortionary taxes the main reasons for this result are that the variable costs of supplying real balances are negligible and the inflation tax is a unit tax we also show that the intermediate good optimal taxation rules in the public finance literature cannot be directly applied both when money is costless and when it requires resources to be produced

us non tariff barriers as privately provided public goods abstract the endogenous theory of protection is empirically investigated in a different light rather than emphasizing the determinants of the supply of protection the present study emperically investigates the micro level demand side behavior of firms predictions from bergstrom et al journal of public economics 1986 2 25 49 about the private provision of public goods provide a theoretical foundation for such a demand side econometric investigation if rational lobbies are observed to behave in a manner consistent with the theory of the private provision of public goods then it must be the case that they are able to influence trade policy the econometric specification is also consistent with the special interest models of olson the logic of collective action public goods and the theory of groups harvard university press 1965 stigler bell journal of economics and management science 1971 2 137 146 baron quarterly journal of economics 1989 1 45 72 and grossman and helpman american economic review 1994 84 833 850 hence evidence presented in this study from the demand side behavior of firms has the deeper implication that it validates the theory of endogenous protection an issue that is still controversial among trade theorists

economic organization with limited communication this paper presents formal stylized representations of communication accounting systems oral assignment portable object written message and telecommunication systems are considered the environments that allow this formalization are characterized by spatial separation private information and a need to keep track of past actions transfers and shocks in environments that have spatial separation and private information beneficial multilateral arrangements can depend critically on agents ability to communicate to one another values of contemporary shocks and to keep track of histories of past transfers or past announced shocks this paper formalizes this idea and focuses on com

who bears the cost of agricultural support in oecd countries this paper provides quantitative estimates of the impact of removing agricultural support in both oecd and developing countries in partial and general equilibrium frameworks the results show that agricultural support in oecd countries is highly distortionary and tariffs have a larger distortionary impact than subsidies removal of agricultural support would likely raise the international prices of food resulting in an increase in the cost of food for many net food importing countries although the size of the increase is generally small the results also show that most of the benefits from removing agricultural support accrue to the countries that liberalise

resolving differences over the optimal quantity of money optimal steady state monetary policy in models of infinitely lived agents calls for a deflation of the fiat money stock at a rate that equates the rates of return of fiat money and capital this prescription for the optimal quantity of money holds whether the demand for money springs from placing money in the utility function friedman 1969 a cash in advance constraint grandmont and younes 1973 or spatial separation townsend 1980 in contrast monetary models of overlapping generations have counseled the golden rule optimality of a fixed stock of fiat money 1 this model has often been criticized for its lack of a transactions role for money that would distinguish itself from other assets 2 the seeming difference in this model s implications concerning the optimal quantity of money thus raises an obvious question 3 does the overlapping generations model obtain different welfare implications because it assumes a finite lifespan or because it lacks a special transactions role for money recent work has reexamined the optimal quantity of money in overlappinggenerations models featuring transactions roles for money abel 1987 who takes the broadest and clearest look finds that the golden rule optimal monetary policy

applied fairness theory and rationing policy in the past few years several economists notably duncan foley hal varian e a pazner and david schmeidler have produced a novel analytical theory of fairness in the distribution of resources in contradistinction to the efficiency of their allocation this work is primarily philosophical in orientation being concerned primarily with the logical underpinnings of an analysis of fair division rather than with its application here i offer a nontechnical introduction to the subject providing a few new results about the construction but this is only a preliminary to an attempt to show how fairness theory can be used to study policy employing the issue of rationing of commodities as an illustration persons who design public policy are typically at least as concerned with issues of equity as with allocative efficiency the economist s influence is therefore impeded by his inability to deal with issues of fairness in applied problems fairness theory perhaps for the first time provides an analytic instrument for the purpose inevitably it must of course rest upon value judgments as well as observable relationships but what is remarkable about fairness theory is that both the behavioral relationships and the value judgments on which it is based are essentially those used in the standard welfare analysis of resource allocation in both the basic data are consumer preferences and production relationships and in both the basic value judgment is that the desires of the affected individuals rather than those of some superior arbitrator must count our illustrative policy issue the rationing of commodities has reemerged with the fuel problem here i will examine the choice between two points rationing arrangements under which consumers are each issued a fixed number of ration points redeemable at a fixed points price pg per gallon of gasoline or at another coupon price p h per gallon of heating oil etc the consumer is thereby subjected to a second budget constraint expressed in ration points rather than money economists have suggested that the efficiency of such a rationing system can be improved if it is accompanied by a white market in which consumers with unwanted ration coupons can sell them to others at a market clearing money price i will show that while there is a valid efficiency argument favoring the white market arrangement over one in which the sale of ration coupons is prohibited fairness analysis yields a presumption that goes the other way this may provide some justification for the apparently widespread suspicion of the fairness of white markets among noneconomists

money banking and capital formation we consider a monetary growth model in which banks arise to provide liquidity in addition there is a government that issues not only money but interest bearing bonds these bonds compete with capital in private portfolios when the government fixes a constant growth rate for the money stock we show that there can exist multiple nontrivial monetary steady states one of these steady states is a saddle while the other can be a sink moreover paths approaching a steady state can display damped endogenous fluctuations and development trap phenomena are common across different steady states low capital stocks are associated with high nominal interest rates the latter signal the comparative inefficiency of the financial system also increases in the steady state inflation rate can easily reduce the steady state capital stock journal of economic literatureclassification numbers e13 e44 e50 g20 o16

competition among trading venues information and trading on electronic communications networks this paper explores the competition between two trading venues electronic communication networks ecns and nasdaq market makers ecns oier the advantages of anonymity and speed of execution which attract informed traders thus trades are more likely to occur on ecns when information asymmetry is greater and when trading volume and stock return volatility are high ecn trades have greater permanent price impacts and more private information is revealed through ecn trades than though market maker trades however ecn trades have higher ex ante trading costs because market makers can preference or internalize the less informed trades and oier them better executions technological innovations that enable high speed low cost electronic trading systems are dramatically changing the structure of nancial markets exchanges and markets around the world are merging or forming alliances to improve liquidity and reduce costs in the face of increased competition from each other and from these computerized trading systems trading volume on electronic communications networks ecns has grown rapidly over the past several years ecns are now involved in more than a third of nasdaq trading volume and are attempting to increase their market share in nyse listed

monetary policy banking crises and the friedman rule banking crises are frequent events gerard caprio and daniela klingebiel 1997 catalog over 80 banking crises during the last 25 years interestingly some banking crises are associated with no output losses whatsoever while others involve massive recessions finally it is known that the probability of a banking crisis rises as the rate of inflation rises see asli demirguc kunt and enrica detragiache 1997 john boyd et al 2001a b while received wisdom exists about the conduct of monetary policy while a crisis is underway there is no formal treatment of how the conduct of monetary policy during normal times affects the potential for banking crises to occur to fill that gap i consider economies where spatial separation and limited communication create a transactions role for money and random shocks to agents liquidity preferences create a role for banks in addition banks confront randomness in withdrawal demand when withdrawal demand is sufficiently high banks exhaust their cash reserves there are good reasons to associate this with a banking panic the output lost during a banking panic depends on how great withdrawal demand is some banking crises generate no output losses while others generate large reductions in resource availability in addition the conduct of monetary policy during normal times affects the probability of a banking crisis the higher the nominal interest rate the inflation rate the higher is the probability of a panic driving the nominal interest rate to zero following the friedman rule eliminates bank panics this constitutes a new rationale for the friedman rule nonetheless conventional methods of implementing the friedman rule never produce an optimal resource allocation in particular low nominal interest rates induce banks to hold large cash reserves thereby forgoing socially more productive investments in effect the friedman rule induces banks to become narrow banks voluntarily the banking system is very safe but it undertakes a suboptimal level of investment less conventional methods for implementing the friedman rule such as allowing unrestricted access to the discount window at a zero nominal interest rate lead either to the nonexistence of equilibrium or to massive indeterminacies none of the equilibria will be consistent with full optimality

the political economy of administered protection trade restrictions are hardly ever voted directly by congress though the threat of direct congressional action is frequently present pressure for protection is usually applied through the major instruments for the administrative regulation of imports the antidumping and countervailing duty procedures and the escape clause mechanism in this paper we will examine these instruments for the administrative regulation of imports the form of the paper is not novel a theory of how these mechanisms work is developed then operational implications of this theory are deduced and tested over the record of countervailing duty antidumping and escape clause cases decided from 1975 through 1979 this is the period over which the trade act of 1974 was in force because the nature of these mechanisms is relatively unfamiliar a relatively large amount of institutional information is provided

market behavior in a clearing house one of the most fundamental market mechanisms is the clearing house where orders are accumulated over time and the market is cleared periodically the issue addressed in this study is the statistical behavior of the market under this neutral mechanism in the framework of a tractable stochastic model which captures the underlying uncertainties and indivisibilities in the demand and supply schedules applying renewal theory we derive closed form results for the behavior of prices and quantities and pursue the implications of the possibility of no trade and the multiplicity of market clearing prices

price discovery in auction markets a look inside the black box opening mechanisms play a crucial role in information aggregation following the overnight nontrading period this article examines the process of price discovery at the new yorkstockexchange single price opening auction we develop a theoretical model to explain the determinants of the opening price and test the model using order level data we show that the presence of designated dealers facilitates price discovery relative to a fully automated call auction market this is consistent with specialists extracting information from observing the evolution of the limit order book in addition the specialist s opening trade reflects noninformational factors such as price stabilization requirements

ownership versus competition efficiency in public enterprise certainly the introduction of product market competition into potentially competitive or at least contestable markets can improve performance to take just one example morrison and whinston 1986 1986 estimate that even in the imperfectly contestable u s airline industry the annual u s welfare gains from deregulation have been around 6 billion

contestable markets an uprising in the theory of industry structure presents a transcript of the presidential address delivered at the 94th meeting of the american economic association on december 29 1981 discussion of developments in the theory of industry structure welfare attributes of contestable markets behavior characteristics of oligopoly equilibrium intertemporal vulnerability to inefficient entry ebsco

auctions as algorithms abstract computerized auction systems are introduced as a new form of market institution characterized by communications technologies for passing messages between traders and a set of programmed rules that restrict the message space and process messages into transactions prices and quantities the stationary distributions of price quotations and transactions prices given order arrival rates conditioned on information available through the limit order book are derived for an automated continuous auction system with price and time priority rules the key to the analysis is the application of the theory of queues with preemptive priorities to the problem of two interactive queues the model then is used to characterize the structure of the electronic order book in terms of the distributions of the number of buy and sell orders in the system and the waiting time to trade execution the theoretical development is applied to a comparison of automated continuous and periodic single price auctions with respect to price volatility the magnitude of the bid ask spread and volume traded per unit of time

the economics of special interest politics the case of the tariff this paper investigates the interaction of politicians and special interest lobbies the goal is to model the equilibrium levels of redistributive policies such as taxes subsidies tariffs and regulatory decisions the model is applied throughout to the setting of tariffs by contributing to political campaigns special interest lobbies generate economic returns higher tariffs generate revenue for import competing industries through higher product prices higher milk support prices raise dairy farm income and so forth the lobby invests to maximize these net economic returns in evaluating their chances of election politicians weigh the favorable effects of special interest money against the unfavorable association with the lobby and the social cost of the redistributive policy section i explores the lobby s problem it describes a formalization of mancur olson s discussion of the voluntary provision of public goods and optimal contributions by lobbies to political campaigns section ii describes determination of the equilibrium tariff positions of each politician in a political campaign

x efficiency rent seeking and social costs comment in 1966 harvey leibenstein published his seminal paper on x efficiency in which he argued that imperfectly competitive market structures are likely to give rise to an intra firm non allocative or x inefficiency measured as the elevation of costs due to monopoly power he also argued that these inefficiencies not captured by the harberger triangle harberger 1959 are likely to be larger than the allocative losses reported by harberger one year later in 1967 gordon tullock tullock 1967 published a paper on the welfare costs of monopoly power and theft in it he cited leibenstein s 1966 paper as part of his own discussion as to why the harberger estimates of the welfare losses from monopoly power are likely to be underestimated tullock did not explicitly criticize the notion of x inefficiency what he did was to state his preference for analyzing these non harberger type effects of monopoly power in terms of the traditional framework of maximizing behavior other writers working within a rent seeking framework however have been explicit in their rejection that either x inefficiency can exist or that it has any impact on social welfare crain and zardkoohi 1980 more recently two papers both published in this journal have been more inclined to assume that x inefficiency can exist and is potentially important the first of these is by crew and rowley 1988 the second and the focus of our paper is by formby keeler and thistle 1988 hereafter fkt fkt present two models of x inefficient production first pure pecuniary x inefficiency and second real x inefficiency these refer to x inefficiency in the form of payments to resource owners in excess of their opportunity costs and x inefficiency in the form of slacking off labor respectively further in their model of real x inefficiency fkt distinguish between zero and positive non pecuniary benefits accruing to the owners of slack resources fkt then compare their models of x inefficiency to rent seeking behavior in order to comment on the relative social costs of each

the uruguay round and welfare in some distorted agricultural economies abstract the uruguay round s induced changes in world agricultural prices will affect the welfare of developing countries the standard terms of trade effect calculation can mislead since the distortion effect operates alongside the terms of trade effect this study of the uruguay round s impact on nine agricultural economies reveals distortion effects which are many times larger than terms of trade effects in three of nine cases the distortion effect reverses the impact of the terms of trade effect in two other cases the distortion effect raises trivial terms of trade effect up to around 1 of national income

the impact of sanitary and phytosanitary measures on market entry and trade flows in an attempt to disentangle the impact of sanitary and phytosanitary sps measures on trade patterns we estimate a heckman selection model on the hs4 disaggregated level of trade we find that aggregated sps measures constitute barriers to agricultural and food trade consistently to all exporters but conditional on market entry trade flows are positively affected by sps measures additionally we find that sps measures related to conformity assessment hamper market entry and trade flows while sps measures related to product characteristics pose an entry barrier but increase bilateral trade flows conditional on meeting the standard

policy persistence and rent extraction the existing literature has shown that special interest groups can have both growth enhancing and growth retarding effects on an economy in either case it is always assumed that the nature of the special interest groups remains constant over time the hypothesis of this paper is that a dynamic relationship exists between politicians and lobbyists i e that opportunities for rent extraction for special interest groups can evolve over time in the short run politicians may support projects proposed to them by lobbies because they yield clear economic benefits however continued governmental support may imply a cost to society and yield rents to the lobbies a theoretical framework in which established and new lobbies overlap is developed to model a government s incentives to behave in a manner consistent with the hypothesis in this framework voters can still rationally reelect politicians even if the latter support lobbies for an inefficiently long period of time because if they did not then the quality of the pool of new projects would deteriorate

lobbying under political uncertainty abstract this paper considers a model of lobbying described as a common agency game it departs from the current literature by assuming that the special interest groups are not a priori organized or unorganized and that the type of the politician is not common knowledge we characterize equilibria when the choice set of the politician consists of two policies we discuss the conditions leading to efficiency and the characteristics of the groups explaining their relative success in the process of influence we also offer some results for the general case including disjoint necessary and sufficient conditions for the equilibria to be efficient

endogenous lobby formation and endogenous protection a long run model of trade policy determination this paper provides a theory of lobby formation within a framework in which trade policy is determined through political contributions under certain conditions free trade turns out to be an equilibrium outcome either when the government has a high affinity for political contributions or when it cares a great deal about social welfare moreover greater inequality in asset distribution results in a greater number of lobbies and in most cases more protection for each of these lobbies furthermore industries with higher levels of capital stock fewer capitalists more inelastic demand and smaller geographical dispersion are the ones that get organized

regulating vertically integrated utilities when transfers are costly but revenues are beneficial this paper considers regulating a vertically integratedutility under asymmetric information about efficiency gainsdue to integration the benchmark case benevolentregulation implies a divestiture of a technically efficientintegration unless the cost savings due to integrating aresubstantial this highlights how private information causes adeviation from the standard perfect information framework this result is at odds with the worldwide experience withpublic utilities that remained integrated almost throughoutthe 20th century despite that integration offered meager or nosavings as now becomes evident of course this divergencebetween normative analysis and facts is no surprise for publicchoice indeed a rather mild kind of a leviathan motive regulators dislike transfers to the utility and by symmetry like revenues coupled with the secrecy only integrationoffers due to private information explains why a regulator hasan interest to keep even economically inefficiently integratedfirms integrated this is in line with crew and rowley 1988 that public regulation serves to milk rather than to imposeefficiency

a theory of competition among pressure groups for political influence this paper presents a theory of competition among pressure groups for political influence political equilibrium depends on the efficiency of each group in producing pressure the effect of additional pressure on their influence the number of persons in different groups and the deadweight cost of taxes and subsidies an increase in deadweight costs discourages pressure by subsidized groups and encourages pressure by taxpayers this analysis unifies the view that governments correct market failures with the view that they favor the politically powerful both are produced by the competition for political favors

optimality of the friedman rule in economies with distorting taxes abstract we find conditions for the friedman rule to be optimal in three standard monetary models our main contribution is to shed light on two issues in the literature first the conventional view maintains that when money is a final good its services should be taxed moreover if money demand is interest inelastic its services should be taxed heavily we show that this view is incorrect second there is an ongoing controversy about whether the optimality of the friedman rule is connected to the intermediate goods result from public finance we resolve this controversy by showing a deep connection between these results

information transmission and inefficient lobbying abstract in a seminal paper grossman and helpman 1994 introduced a framework to understand how lobbying influences the choice of import export tariffs in this paper we extend their analysis and assume that lobbies have private information to analyze the effects of information transmission in a grossman and helpman lobby game information transmission leads to two agency costs one refers to the cost of signaling and the other to the cost of screening the lobby s competitiveness the signaling cost reduces distortions resulting from the screening cost on the other hand distortions from the screening cost enhance the signaling cost the two combined effects generate more distortions in the political game than each effect separately tariff protection and lobbies rents are lower than those found in grossman and helpman s truthful equilibrium therefore information transmission may improve welfare through the reduction of rent seeking activities

an endogenous policy model of hierarchical government endogenous policy models usually neglect that government policies are frequently the result of decisions taken at different tiers by different agents each enjoying some degree of autonomy in this paper policies are the outcome of the choices made by two agents within a hierarchy a legislator decides on the budget to be successively spent by a bureaucrat both agents are lobbied by one or two interest groups the combination of sequential decisionmaking and lobbying implies that the interaction between the agent at one tier and the interest group s depends on the exchange between the same interest group s and the agent at the other tier our results concerning multi tier lobbying and legislatorial oversight substantially qualify the conventional wisdom related to one tier lobbying in particular the reaction of the legislator to lobbying at the bureaucratic tier may make lobbying wasteful even when there is no competition from other lobbies moreover the legislator benefits from lobbying only when there is competition between interest groups at the upper tier it is also shown that competition for influence at the bureaucratic tier may work as a perfect substitute for legislatorial oversight extensions of the model indicate its usefulness for the analysis of decisionmaking in other multilevel governance structures like federations or firms

the liquidity trap the real balance effect and the friedman rule this paper studies the behavior of the economy and the efficacy of monetary policy under zero nominal interest rates using a model with population growth that nests as a special case a more conventional specification in which there is a single infinitely lived representative agent the paper shows that with a growing population monetary policy has distributional effects that give rise to a real balance effect thereby eliminating the liquidity trap these same distributional effects however can also work to make many agents much worse off under zero nominal interest rates than they are when the nominal interest rate is positive

sub optimality of the friedman rule in townsend s turnpike and stochastic relocation models of money do finite lives and initial dates matter abstract the friedman rule a widely studied prescription for monetary policy is optimal in townsend s turnpike model of money it is not so in the overlapping generations version of his stochastic relocation model of money we investigate these monetary models in the light of this disparity to this end we create a modified version of the turnpike model that generates the same stationary monetary equilibria as does the two period overlapping generations model with random relocation we exploit this equivalence to explain the aforementioned disparity we also discuss the importance of whether or not the economy has an initial date

lump sum taxation and the superneutrality and optimum quantity of money in life cycle growth models abstract the question of superneutrality and the optimum quantity of money is addressed in a model where money services enter the utility function and where individuals have finite lives it is demonstrated that the existing result in the literature regarding a positive relationship between money creation and the steady state capital intensity and welfare is not due to monetary policy per se on the contrary this is shown to arise because of the intergenerational wealth effects embedded in the manner in which money is created assuming that preferences are separable between consumption goods and real balances and that the consumption goods are normal it is proved that i money is superneutral and ii any other money supply rule is pareto inferior to the chicago rule provided that the government also embarks on a policy of wealth redistribution across generations through the imposition of appropriate lump sum taxes and transfers

asset trading mechanisms and expansionary policy abstract previous authors have argued that the otimal monetary policy is contractionary if buyers value consumption substantially more than sellers there is some randomness and informational constraints make asset trading useful we show that there is an incentive compatible expansionary policy that dominates all incentive compatible contractionary policies

conflict and cooperation the structure of equilibrium payoffs in common agency abstract this paper is a contribution to the theory of common agency initiated by b d bernheim and m d whinston 1986 quart j econ 101 1 31 by common agency we mean the following an agent decides upon an action which affects its well being as well as the well being of n other individuals the principals each of whom offers a menu of payments contingent on the action chosen under complete information bernheim and whinston prove the existence of an interesting subset of nash equilibria they call truthful provide arguments in defense of this refinement and characterize the set of equilibrium payoffs this paper provides a set of theoretical results to identify the structure of equilibrium payoffs with special attention to the payoff of the agent by focusing on complete information we are in a position to evaluate the effects of competition per se on the magnitude of the rent obtained by the agent we illustrate this user guide on a wide and diverse family of applications including auctions competition for an input economic influence and private production of public goods journal of economic literature classification numbers c72 d72

economic policy and special interest politics a great deal of research has been done on the boundary between economics and political science in the last five to ten years this research in political economics spans many subfields such as macroeconomics trade public finance regulation rational choice politics and game theory a common denominator has been to study structural models of the political process agents behave rationally within well specified economic and political institutions where the policymaking process is formulated as an extensive form game methodologically much progress has been made relative to traditional approaches which were often based on inconsistent or irrational political and economic behaviour relying on non derived influence functions political support functions or vote functions yet the modem work has largely developed separately in each subfield without much contact with other subfields and each of the resulting literatures tends to focus on a distinct but partial aspect of the political process in this lecture i shall argue that even though the progress to date has been substantial we can gain a better understanding of policymaking in democracies by combining the insights from different strands of thinking on some economic policy issues the conflicting views both among citizens and politicians basically reduce to a single left to right dimension examples may include the politics of inflation vs unemployment capital taxation or the size of government we can think about policy issues within this domain of general interest politics as being resolved via traditional downsian electoral competition at least to a first approximation but the economic policy process also allows narrow interest groups ample opportunities to concentrate benefits to their own group at the expense of the population as a whole the resulting policy conflict is generically multi dimensional resolving it by voting alone would thus result in condorcet cycles we therefore need to go beyond the simplest electoral models to understand policy determination within this domain of special interest politics this lecture deals with special interest politics to make my point about fruitful analytical arbitrage i will stick to the same underlying policy example throughout this will be a simple model of a society where the government uses