the inherent inefficiency of simultaneously feasible financial transmission rights auctions abstract empirical evidence from the new york iso shows that the clearing prices for point to point congestion revenue rights also known as financial transmission rights ftrs resulting from centralized auctions conducted by independent system operators differ significantly and systematically from the realized congestion revenues that determine the accrued payoffs of these rights the question addressed by this paper is whether such deviations are due to price discovery errors which will eventually vanish or due to inherent inefficiencies in the auction structure we show that even with perfect foresight of average congestion rents the clearing prices for the ftrs depend on the bid quantity and therefore may not be priced correctly in the financial transmission right ftr auction in particular we prove that quantity limits on the ftr bids may cause the auction clearing prices to differ from the bid prices this phenomenon which is inherent in the theoretical properties of the optimization algorithm used to clear the auction is further illustrated through numerical simulations with test systems we conclude that price discovery alone would not remedy the discrepancy between the auction prices and the realized values of the ftrs secondary markets or frequent reconfiguration auctions are necessary in order to achieve such convergence

stochastic modeling of financial electricity contracts abstract we discuss the modeling of electricity contracts traded in many deregulated power markets these forward futures type contracts deliver either physically or financially electricity over a specified time period and is frequently referred to as swaps since they in effect represent an exchange of fixed for floating electricity price we propose to use the heath jarrow morton approach to model swap prices since the notion of a spot price is not easily defined in these markets for general stochastic dynamical models we connect the spot price the instantaneous delivery forward price and the swap price and analyze two different ways to apply the heath jarrow morton approach to swap pricing either one specifies a dynamics for the non existing instantaneous delivery forwards and derives the implied swap dynamics or one models directly on the swaps the former is shown to lead to quite complicated stochastic models for the swap price even when the forward dynamics is simple the latter has some theoretical problems due to a no arbitrage condition that has to be satisfied for swaps with overlapping delivery periods to overcome this problem a practical modeling approach is analyzed the market is supposed only to consist of non overlapping swaps and these are modelled directly a thorough empirical study is performed using data collected from nord pool our investigations demonstrate that it is possible to state reasonable models for the swap price dynamics which is analytically tractable for risk management and option pricing purposes however this is an area of further research

a two person dynamic equilibrium under ambiguity this paper describes a pure exchange continuous time economy with two heterogeneous agents and complete markets a novel feature of the economy is that agents perceive some security returns as ambiguous in the sense often attributed to frank knight the equilibrium is described completely in closed form after identifying agents as countries the model is applied to address the consumption home bias and equity home bias puzzles 2002 elsevier science b v all rights reserved jel classi cation d81 g11 g12 g15

optimal growth with many consumers abstract a method is described for constructing all pareto optimal allocations for a dynamic economy with many heterogeneous consumers under certainty in which both the technology and consumer preferences are recursive but preferences need not be additively separable over time optimal perfect foresight competitive equilibrium allocations are obtained through the study of a dynamic program for an economy with one consumption good sufficient conditions are given for the existence of a unique interior stationary distribution of consumption and wealth for a two person exchange economy sufficient conditions are given for the global asymptotic stability of the unique interior stationary point

currency risk factors in a recursive multicountry economy we study a risk sharing model featuring multiple countries with recursive prefer ences defined over bundles of consumption goods whose supply is subject to both global and local short and long run shocks first we quantify the extent of con tagion and insurance possibilities as we vary the number of countries in the econ omy second we introduce persistent heterogeneous exposure to global long run news shocks and analyze the properties of several carry trade strategies in the context of our model lustig et al 2011 hml fx and della corte et al 2013 hml na the average excess returns of these strategies can be rationalized in a recursive risk sharing scheme with long run global shocks to output growth

forecasting hourly electricity prices using armax garch models an application to miso hubs abstract the recent deregulation of the electricity industry and reliance on competitive wholesale markets has generated significant volatility in wholesale electricity prices given the importance of short term price forecasts in this new environment this paper estimates and evaluates the forecasting performance of four armax garch models for five miso pricing hubs cinergy first energy illinois michigan and minnesota using hourly data from june 1 2006 to october 6 2007 our empirical results reveal three important patterns a electricity price volatility is regional and the optimum volatility model depends in part on the hub location the forecast horizon and regulated versus unregulated status of the market b the aparch model performs well in hubs in deregulated states and c volatility dynamics in regulated states are better captured by a simple garch model and thus are less complex

alternative regulatory methods and firm efficiency stochastic frontier evidence from the u s electricity industry the use of incentive regulation and other alternative regulatory programs in u s electricity markets has grown during the past two decades within a stochastic frontier framework i investigate the effect of individual programs on the technical efficiency of a large set of coal and natural gas generation units i find that those programs tied directly to generator performance and those that modify traditional fuel cost pass through programs to provide a greater incentive to reduce fuel costs are associated with greater efficiency levels other programs have no statistical association with efficiency levels

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

international risk cycles abstract recent work in international finance suggests that exchange rate puzzles can be accounted for if 1 aggregate uncertainty is time varying and 2 countries have heterogeneous exposures to a world aggregate shock we embed these features in a standard two country real business cycle framework and calibrate the model to equity risk premia in low and high interest rates countries unlike traditional real business cycle models our model generates volatile exchange rates a large currency forward premium excess comovement of asset prices relative to quantities and an imperfect correlation between relative consumption growth and exchange rates our model implies however that high interest rate countries have smoother quantities equity returns and interest rates than low interest rate countries contrary to the data

breakthroughs deadlines and self reported progress contracting for multistage projects we study the optimal incentive schemes for multistage projects staged financing pervasive in both venture capital and research grants arises as a feature of the optimal contract the nature of progress plays an important role when progress is tangible incentives are provided through a series of deadlines and a reward scheme that decreases over time early progress in one stage gives the agent more time and funding to complete the next one when progress is intangible unverifiable progress reports are used despite the fact that the information in the report has no social value the optimal contract involves a soft deadline wherein the principal guarantees funding up to a certain date if the agent reports progress at that date then the principal gives him a relatively short deadline to complete the project if not then a probationary phase begins in which the project is terminated at a constant rate until progress is reported we explore the implications for welfare and optimal project design

cointegration analysis of spot electricity prices insights on transmission efficiency in the western us abstract the us energy policy act of 1992 promoted the development of spot markets for electric power by requiring utilities to open their transmission systems to wholesale power sales in this paper we specify and estimate a vector error correction model using peak and off peak electricity spot prices during 1994 1996 covering 11 regional markets in the western united states and test these prices for evidence of market integration the results show evidence of an efficient and stable wholesale power market

speculation in the oil market the run up in oil prices since 2004 coincided with growing investment in commodity markets and increased price co movement among different commodities we assess whether speculation in the oil market played a role in driving this salient empirical pattern we identify oil shocks from a large dataset using a dynamic factor model this method is motivated by the fact that a small scale vector autoregression is not informationally sufficient to identify the shocks the main results are as follows i while global demand shocks account for the largest share of oil price fluctuations speculative shocks are the second most important driver ii the increase in oil prices over the last decade is mainly driven by the strength of global demand however speculation played a significant role in the oil price increase between 2004 and 2008 and its subsequent collapse iii the co movement between oil prices and the prices of other commodities is mainly explained by global demand shocks our results support the view that the recent oil price increase is mainly driven by the strength of global demand but that the financialization process of commodity markets also played a role

structure of pareto optima when agents have stochastic recursive preferences abstract a recursive method is given for constructing all pareto optimal allocations for a dynamic economy under markov certainty in which consumer preferences are recursive journal of economic literature classification numbers c60 d50

efficiency of financial transmission rights markets in centrally coordinated periodic auctions electricity market design in the united states is increasingly dominated by locational marginal pricing lmp of energy and transmission lmp markets are typically coupled with periodic auctions of financial transmission rights ftrs to hedge transmission price risks while lmp designs offer considerable advantages forward price discovery in these markets requires participants to form efficient expectations on spot congestion price differences in this paper we examine trends in the efficiency of one of the early lmp markets the new york independent system operator nyiso analyzing a panel data set of over 9000 contracts over a six year period beginning september 2000 we show that nyiso ftr markets were inefficient in their early years but that market participants learned to predict forward prices and thus efficiency improved for ftrs not solely within the new york city long island sub region ftrs within this sub region which has a number of special characteristics remain relatively inefficient

markov perfect risk sharing moral hazard and limited commitment abstract we define characterize and compute markov perfect risk sharing contracts in a dynamic stochastic economy with endogenous asset accumulation and simultaneous limited commitment and moral hazard frictions we prove that markov perfect insurance contracts preserve standard properties of optimal insurance with private information and are not more restrictive than a long term contract with one sided commitment markov perfect contracts imply a determinate asset time path and a non degenerate long run stationary wealth distribution quantitatively we show that markov perfect risk sharing contracts provide sizably more consumption smoothing relative to self insurance and that the welfare gains from resolving the commitment friction are larger than the gains from resolving the moral hazard friction at low asset levels while the opposite holds for high asset levels

limits to arbitrage in electricity markets a case study of miso abstract we study the case of financial traders in the midwest electricity market where they are expected to arbitrage price differences that result in inefficiencies using exogenous variation in financial trading from the financial crisis and a period of high transaction costs we show speculators had only a weak effect moreover while arbitrage was restricted by transaction costs imposed by regulation some financial players bet in exactly the opposite direction of the pricing gap sustaining large losses while doing so we show this is consistent with price manipulation intended to increase the value of a related instrument that bets on local price differences ftrs

optimal fiscal policy with recursive preferences i study the implications of recursive utility a popular preference specification in macro finance for the design of optimal fiscal policy standard ramsey tax smoothing prescriptions are substantially altered the planner over insures by taxing less in bad times and more in good times mitigating the effects of shocks at the intertemporal margin there is a novel incentive for introducing distortions that can lead to an ex ante capital subsidy overall optimal policy calls for a much stronger use of debt returns as a fiscal absorber leading to the conclusion that actual fiscal policy is even worse than we thought

iso net surplus collection and allocation in wholesale power markets under lmp this study uses five bus and 30 bus test cases to explore iso net surplus congestion rent collections and allocations in wholesale power markets with grid congestion managed by locational marginal prices lmps price sensitivity of demand and generator learning capabilities are taken as experimental treatment factors a key finding is that conditions resulting in greater generator capacity withholding hence higher and more volatile lmps also result in greater iso net surplus collections that can be substantial in size a key conclusion is that iso net surplus collections should be used pro actively to mitigate the conditions encouraging generator capacity withholding and hence high and volatile lmps rather than to provide ex post support for lmp payment offsets and lmp volatility risk hedging as is currently the norm

endogenous groups and dynamic selection in mechanism design abstract we create a dynamic theory of endogenous risk sharing groups with good internal information and their coexistence with relative performance individualistic regimes which are informationally more opaque inequality and organizational form are determined simultaneously numerical techniques and succinct reformulations of mechanism design problems with suitable choice of promised utilities allow the computation of a stochastic steady state and its transitions regions of low inequality and moderate to high wealth utility promises produce the relative performance regime while regions of high inequality and low wealth produce the risk sharing group regime if there is a cost to prevent coalitions risk sharing groups emerge at high wealth levels also transitions from the relative performance regime to the group regime tend to occur when rewards to observed outputs exacerbate inequality while transitions from the group regime to the relative performance regime tend to come with a decrease in utility promises some regions of inequality and wealth deliver long term persistence of organization form and inequality while other regions deliver high levels of volatility

repeated insurance relationships in a costly state verification model with an application to deposit insurance abstract we consider the problem of an insurer who enters into a repeated relationship with a set of risk averse agents in the presence of ex post verification costs the insurer wishes to minimize the expected cost of providing these agents a certain expected utility level we characterize the optimal contract between the insurer and the insured agents we then apply the analysis to the provision of deposit insurance our results suggest in a deposit insurance context that it may be optimal to utilize the discount window early on and to make deposit insurance payments only later or not at all

relative wage movements and the distribution of consumption we analyze how relative wage movements among birth cohorts and education groups affected the distribution of household consumption and economic welfare our empirical work draws on the best available cross sectional data sets to construct synthetic panel data on u s consumption labor supply and wages during the 1980s we find that low frequency movements in the cohort education structure of pretax hourly wages among men drove large changes in the distribution of household consumption the results constitute a spectacular failure of between group consumption insurance a failure not explained by existing theories of informationally constrained optimal consumption behavior a welfare analysis indicates that the cost of between group consumption variability is larger than the cost of aggregate consumption variability by two orders of magnitude

robust control of forward looking models abstract this paper shows how to formulate and compute robust ramsey aka stackelberg plans for linear models with forward looking private agents the leader and the followers share a common approximating model and both have preferences for robust decision rules because both doubt the model since their preferences differ the leader s and followers decision rules are fragile to different misspecifications of the approximating model we define a stackelberg equilibrium with robust decision makers in which the leader and follower have different worst case models despite sharing a common approximating model to compute a stackelberg equilibrium we formulate a bellman equation that is associated with an artificial single agent robust control problem the artificial bellman equation contains a description of implementability constraints that include euler equations that describe the worst case analysis of the followers as an example the paper analyzes a model of a monopoly facing a competitive fringe

first order risk aversion heterogeneity and asset market outcomes we examine a wide range of two date economies populated by heterogeneous agents with the most common forms of nonexpected utility preferences used in finance and macroeconomics we demonstrate that the risk premium and the risk free rate in these models are sensitive to ignoring heterogeneity this follows because of endogenous withdrawal by nonexpected utility agents from the market for the risky asset this finding is important precisely because these alternative preferences have frequently been proposed as possible resolutions to various asset pricing puzzles and they have all been examined exclusively in a representative agent framework the well documented shortcomings of asset pricing models based in part on the expected utility eu hypothesis has motivated a large and rapidly grow ing set of pricing models that incorporate nonexpected utility preferences the pricing implications of these models in the existing literature have been based exclusively on the assumption of a single representative agent ra who prices assets using the aggregate endowment as the consumption process while ag gregation is well understood in the standard eu setting see constantinides 1982 it can be more complicated when some or all agents do not have eu we provide a simple and intuitive examination of the asset pricing implications of heterogeneity for the most commonly used alternatives to eu our primary finding is that the risk premium and the risk free rate are sensitive to ignoring heterogeneity in all of the simple two date non eu models that we examine we compare the prices in a model with two agent types to the prices in a model with a single representative agent who has a wealth weighted average of the utility parameters in the two agent economy the economies are otherwise identical for example they have the same endowment process market structure etc it is common for the single agent model to overstate the equity premium often by as much as 100 or more of the value in the two agent model and to understate the level of the risk free rate often by as much as 20 of the value in the two agent model

the present state of institutional economics after articulating the institutionalist paradigm and its principal facets the article examines the present status converging interests and possible future of institutional economics emphasis is on related schools of thought and especially european and other developments along evolutionary and holistic lines of analysis and on a new generation of u s and especially european authors among more specific themes are the importance of power technology social change social control organizations and institutions in governing economic performance the work of european authors is expected to become increasingly important owing to their concern with subject matter and policy issues rather than sectarian questions c 1995 academic press ltd copyright 1995 by oxford university press

informal urban property markets and poverty alleviation a conceptual framework in the context of increasing urbanisation growth of informal settlements and the urbanisation of poverty this article suggests a conceptual framework to link urban informal property markets and p

exploring utopia limited with a companion for economic development the central importance of commercial law private enterprise and public infrastructure are undeniable yet trying to transplant such in situations when they are foreign can add political turmoil to economic stagnation drawing on the elgar companion to development studies 2006 this dilemma is explored with implications for the appropriate definition of institutions the meaning of property rights and the mechanisms of conflict resolution

the global stability of efficient intertemporal allocations this paper describes a continuous time model of an economy with finitely many infinitely lived consumers and a finite number of capital goods two objectives are achieved first recursive nonadditive utility functionals are formulated and analyzed second these preference functionals are applied to analyze the nature of efficient allocations in a dynamic economy two classes of global turnpike propositions are proven which provide the basis for a model of the long run distribution of wealth these propositions also provide new perspective regarding existing stability literature based on additive utilities copyright 1987 by the econometric society

risk sharing between and within families this paper uses the panel study of income dynamics to test whether risk sharing is complete between or within american families the tests accommodate a wide variety in the configuration and availability of family data the test results reject inter as well as intra family full risk sharing even assuming that leisure is endogenous or that leisure and consumption are nonseparable

a further inquiry into ftr properties abstract william hogan introduced financial transmission rights as a tool to hedge the locational risk inherent in locational marginal prices ftrs are claimed to serve four main purposes 1 provide a hedge for nodal price differences 2 provide revenue sufficiency for contracts for differences 3 distribute the merchandizing surplus an rto accrues in market operations and 4 provide a price signal for transmission and generation developers this paper examines the hedging and redistributional properties of ftrs it argues that ftr allocation has important distributional impacts and related implications for retail rates this observation adds an additional explanation for rate increases in light of decreased production costs due to restructuring this paper also shows that rto practices have important implications for the hedging characteristics of ftrs it further shows via counterexample that even in theory ftrs may not serve as a perfect hedge against congestion charges the paper concludes with a series of recommendations for ftr allocation and the functions that ftrs should serve

pareto weights as wedges in two country models abstract in models with recursive preferences endogenous variation in pareto weights would be interpreted as wedges from the perspective of a frictionless model with additive preferences we describe the behavior of the relative pareto weight in a two country world and explore its interaction with consumption and the real exchange rate

institutions and economic growth an historical introduction abstract in this essay the interdependence of political and economic institutions is examined against premises in neoclassical theories of economies which maintain that population and savings are the principal determinants of economic growth that institutions matter in the development of economies is the difference in assumptions i examine i look at the institutional frameworks that preceded adoption of the united states constitution and the northwest ordinance in early america i then trace the precedents of these american institutions to the evolution of common law in england where interests unconcerned with the crown coalesced to form competing political units i then contrast england s institutional development with the comparatively centralized enforcement mechanisms of spain to examine the hypothesis that institutional differences produce economic consequences

efficiency and equality in a simple model of efficient unemployment insurance abstract this paper describes the efficient allocation of consumption and work effort in an economy in which workers face idiosyncratic employment risk and considerations of moral hazard prevent full insurance we impose a lower bound on the expected discounted utility that can be assigned to any agent from any date onward and show with this feature added that the efficient unemployment insurance scheme induces an invariant cross sectional distribution of individual entitlements to utility the paper thus provides a simple prototype model suited to the study of the normative question what is the trade off between equality and efficiency in resource allocation journal of economic literature classification numbers d31 d63 d82 j65

international robust disagreement the literature on disagreement documents that exogenous heterogenous beliefs can explain several key features of both domestic and international asset prices among others anderson ghysels and juergens 2005 and beber breedon and buraschi 2010 we show that concerns about model misspecification paired with consumption home bias can generate persistent endogenous disagreement across countries even when i they share the same approximating model ii endowments are i i d and markets are complete and frictionless when agents fear model misspecification hansen and sargent 2007 they slant probabilities toward worst case outcomes and base their economic choices on their distorted subjective probabilities in our two country two good economy consumption home bias generates endogenous disagreement in about the worst case scenario since each country fears a low supply of its most preferred good disagreement on the worst case scenario generates different distorted expectations about the growth rates of the local endowments even in the case in which all goods share the same objective probability distribution according to recent findings in the literature on risk sharing with heterogenous consumers and recursive preferences anderson 2005 colacito and croce 2011 borovicka 2011 our economy features permanent disagreement with a well defined ergodic distribution of beliefs

growth and risk sharing with private information abstract we examine the impact of incomplete risk sharing on growth and welfare the source of market incompleteness in our economy is private information a household s idiosyncratic productivity shock is not observable by others risk sharing between households occurs through long term contracts with intermediaries we find that incomplete risk sharing tends to reduce the rate of growth relative to the complete risk sharing benchmark numerical examples indicate that the welfare cost and the growth effect of private information are small

payments systems design in deterministic and private information environments abstract the first setup we study is a deterministic model with spatial separation where we consider alternative payments systems institutions and their implications for allocation and welfare a payments system with period by period settlement in outside money improves on decentralized exchange an efficient allocation is supported by a payments system where settlement is not imposed in the second model there is random matching and unobserved productivity shocks and preference shocks we explore how risk should be shared optimally in this economy and interpret the results in terms of how actual payments systems should operate journal of economic literature classification numbers e4 e5

a neoinstitutionalist interpretation of the changes in the russian oil model this paper deals with the current change of the institutional and organizational framework of the russian oil industry regarding this evolution the main characteristic is the increasing involvement of national oil companies in the upstream activities the point is to explain this reorganization by relying on the new institutional economics framework these theoretical works highlight that institutional environment and governance structures complement each other we argue that the current reorganization in an attempt to increase the coherence of the institutional arrangement governing the transaction between the russian state and the private oil companies

the case for institutional economics this paper begins with a personal comment which admittedly is unprofessional but there is no escape i declare myself to be an institutional economist though with occasional backward glances and some residue of earlier mainstream indoctrination the conversion from mainstream to institutional economics was not sudden like st paul s conversion to christianity or george bush s conversion to voodoo economics it occurred slowly over several decades it was the result of two influences

theories of institutions and economic reform in africa abstract the paper presents and critically examines the theories of institutions that can be used as a guide to economic reform in africa three approaches to institutions are initially discussed the model of structural adjustment new institutional economics and the old institutionalist tradition five institutions related to the development of markets in africa are examined from the three perspectives the institutions include property rights including their role in agriculture money and financial institutions prices and markets firms and industrial organization and markets and states the main conclusion of the paper is that structural adjustment due to its neoclassical roots is basically ainstitutional and therefore ill equipped to promote the development of markets in africa while new institutionalism provides interesting insights it is also limited by its neoclassical economic foundations thus if african governments desire to promote market reform they would be best advised to consult the old institutionalist literature particularly the very interesting recent work of proponents of this tradition

valuation of physical transmission rights an analysis of electricity cross border capacities between germany and the netherlands abstract the purpose of this paper is to discuss market coherent valuation of physical transmission rights for cross border capacities between germany and the netherlands aiming at a fair valuation of these contracts the most important stylized facts of electricity prices such as mean reversion spikes and correlations of regional prices have to be considered we present different approaches to the valuation of physical transmission rights and perform a quantitative analysis of the results on the one hand various challenges of modeling regional price spreads are analyzed on the other hand we indicate a structural undervaluation of physical transmission rights in all model constellations i e market prices are below theoretical prices of ptr s flexibility we discuss several reasons for this undervaluation and finally state that regulatory modifications have to be made to avoid missing incentives for the extension of cross border capacities

short term forecasting of electricity prices for miso hubs evidence from arima egarch models this study estimates three time series models arima arima egarch and arima egarch m for hourly real time electricity prices for each of the five hubs of the midwest independent system operator miso and examines the in and out of sample forecasting performance of the respective models the results from the arima models reveal the presence of autoregressive conditional heteroskedasticity recognizing the possibility of asymmetric time varying volatility the egarch specification for the variance equation demonstrates the presence of an inverse leverage effect in electricity prices for each hub with respect to forecasts no one model clearly dominates the others in terms of in sample forecasting performance based on four forecast evaluation statistics however the arima egarch m model outperforms the other models michigan hub is the exception in terms of the out of sample forecasting performance

behind the market stage where real societies exist part i the role of public and private order institutions this two part article is an attempt to clarify the social conditions upon which the viability and efficiency of the market system rest it strives to show that the embeddedness thesis that is an explanation based upon the existence of long run personal ties involving the use of reputation mechanisms among transactors cannot fully elucidate the question as to how the problem of trust is solved in market societies as explained in part i there are difficulties of both theoretical and empirical historical kinds and these explain why the market order needs to be sustained by private and public order institutions in part ii the role of generalised morality in backing or supplementing such institutions is discussed in the light of game theory and particular emphasis is put on the ability of moral norms to sustain honest behaviour by generating the right kind of preferences and establishing trust the vexed problem of the dynamics of norm emergence and erosion is then addressed with a view to showing

survival and long run dynamics with heterogeneous beliefs under recursive preferences i analytically characterize the long run behavior of an economy with two types of agents who differ in their beliefs and are endowed with homothetic recursive preferences agents with more incorrec

a simple test of consumption insurance are consumers effectively insured against idiosyncratic shocks to income or wealth either by formal institutions such as charities private insurance and government programs or by informal mechanisms such as gifts and loans from relatives friends and neighbors under full insurance consumption growth should be cross sectionally independent of idiosyncratic variables that are exogenous to consumers this proposition is tested by cross sectional regressions of consumption growth on a variety of exogenous variables full insurance is rejected for long illness and involuntary job loss but not for spells of unemployment loss of work due to strike and an involuntary move

the dynamics of risk sensitive allocations abstract this paper describes pareto optimal allocations when agents have risk sensitive preferences as formulated by hansen and sargent ieee trans automat control 40 5 1995 968 971 necessary and sufficient conditions are given for the existence and stability of steady states at which pareto weights are time invariant when all agents are risk sensitive with the same power reward function there is a unique interior steady state which is stable when the power is positive and unstable when the power is negative when there is at least one agent with time additive preferences eventually all risk sensitive agents have zero pareto weights

the ubiquity of habits and rules under what circumstances is it necessary or convenient for an agent to rely on habits or rules this paper focuses on the types of decision situations giving rise to their use even optimization requires the deployment of rules and for this reason mainstream economics cannot legitimately ignore these questions the argument is that habits and rules are ubiquitous in human activity in a new taxonomy seven types of decision situations are considered classified according to the type of information problem involved neither neoclassical nor behavioral economics can provide a complete account of the bases of habits or rules in these cases copyright 1997 by oxford university press

an assessment of the danish german cross border auctions abstract this paper presents an analysis of the auction prices at the cross border auction between west denmark and germany and between east denmark and germany the kontek cable monthly and annual transmission capacities appear to be more highly valued than daily transmission capacity on average the two cross border auctions show different trends the auctions between west denmark and germany exhibit a higher level of prices in the southbound direction and between east denmark and germany higher prices in the northbound direction we find a relatively strong correspondence in the pricing of products over different time frames daily monthly and annual auctions between west denmark and germany and a weak correspondence for the products between east denmark and germany in the daily auctions market players can decide whether to use their capacity after the clearing of the day ahead market while in the monthly and annual auctions they must decide whether to use their capacity prior to clearing if they choose not to use their capacity the use it or lose it principle applies the capacity is then subsequently released to the daily market since the daily cross border auctions are free of commitment they should be valued as options likewise in the monthly and annual auctions market players can choose not to nominate their capacity but as this must occur before the clearing of the day ahead market they will not know the directions of the power flows a priori if they nominate the capacity they must use it if the direction turns out to be wrong it is then possible to purchase capacity in the opposite direction in the daily auctions if market players can accurately predict the outcome of the spot markets day ahead the value of monthly and annual capacity should more closely reflect the value of an option thus one would expect the value of the monthly and annual capacity to be between the value of an option and an obligation although this suggests that the average price of daily capacity should be greater than monthly and annual capacity our data do not support this hypothesis the daily monthly and annual capacity auctions do not reflect the value of the underlying asset as specified by the appropriate valuation of the energy price differentials between west denmark and germany and east denmark and germany therefore market players are exposed to substantial variation in fees for congestion management on the cross border we study whether arbitrage improves over time and discern no obvious trend since the explicit auction procedure has not been cost efficient a better approach appears to be the new market coupling arrangement introduced on the kontek cable and on the border between west denmark and germany with the result that market players will pay a congestion management fee i e area price difference equal to the energy price differential resulting from the market coupling mechanism

the approach of institutional economics this paper assesses the old institutional economics it emphasizes the importance of key old institutionalist themes concerning the necessity of habits and rules and the role of institutions a problem in the alternative theoretical program of the new institutionalism is the untenability of its assumption of an original institution free market or state of nature even optimizing behavior requires the prior existence of habits and rules although it still lacks a complete and systematic theory the evolutionary approach of the old institutionalists tackles the problem of the interactive relationship of actor to structure without analytical reduction to one or the other

the dynamics of efficient intertemporal allocations with many agents recursive preferences and production abstract the local dynamics of efficient allocations are studied for heterogeneous agent economies with production where preferences are recursive but not time separable in the case of a one sector neoclassical technology it is shown that optimal trajectories locally converge to a unique steady state provided that every agent s utility satisfies normality and increasing marginal impatience conditions in the two sector case with the above restrictions on preferences it is shown that oscillations can result only if the consumption goods sector is sufficiently capital intensive

three types of ambiguity for each of three types of ambiguity we compute a robust ramsey plan and an associated worst case probability model ex post ambiguity of type i implies endogenously distorted homogeneous beliefs while ambiguities of types ii and iii imply distorted heterogeneous beliefs martingales characterize alternative probability specications and clarify distinctions among the three types of ambiguity we use recursive formulations of ramsey problems to impose local predictability of commitment multipliers directly to reduce the dimension of the state in a recursive formulation we transform the commitment multiplier to accommodate the heterogeneous beliefs that arise with ambiguity of types ii and iii our formulations facilitate comparisons of the consequences of these alternative types of ambiguity

robust permanent income and pricing i suppose there exists an extremely powerful and if i may so speak malignant being whose whole endeavours are directed toward deceiving me rene descartes meditations ii 1

institutions in economics the old and the new institutionalism 1 definitions and issues 2 formalism and anti formalism 3 individualism and holism 4 rationality and rule following 5 evolution and design 6 efficiency and reform 7 conflicts and complementarities

why and how to regulate power exchanges in the eu market integration context abstract the european union eu market integration is leading to increasingly monopolistic electricity market infrastructures which has opened a debate on the regulation of these so called power exchanges in this paper we start by stating that there are two types of power exchanges in europe i e merchant and cost of service regulated power exchanges we then discuss how regulation can be used to better align their incentives with the main power exchange tasks we conclude that adopting the cost of service regulated model for all power exchanges in europe could be counterproductive in the current context but that regulation can help ensure that the benefits of the eu market integration materialize promising regulatory actions include tempering the reinforced market power of power exchanges and quality of service regulation for the ongoing cooperation among power exchanges to organize trade across borders

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

adapting to the financial landscape evidence from small firms in nairobi abstract small enterprises face a financial landscape that limits their access to bank loans and trade credit they adapt by relying on a range of other mechanisms to relieve the financing constraint employing an institutional framework the paper explores the use of credit from suppliers customers and other sources a unique finding is that very small firms use purchase orders as a signaling device to obtain irregular access to trade credit the use of pre payments installments and overdrafts is also investigated the results indicate that small firms may be less credit constrained than is suggested by a narrow definition of credit evidence is drawn from a survey of 115 micro and small manufacturing enterprises in nairobi

north s institutionalism and the prospect of combining theoretical approaches the distinction between new and old institutional economics may be unhelpful in depicting those theorists who defy clear categorisation one such writer is douglass north who is associated with the new institutionalism but who deviates from the neoclassical principles which supposedly form the foundations of this school the paper analyses his work to show how he combines both mainstream and alternative ideas in attempting to reconcile individual agency with social structure north suggests that institutions provide the constraints under which decisions are made but that individuals and organisations can alter those constraints while his work is an attempt to advance interdisciplinary research it fails to provide a fully integrated theoretical approach