elasticities of substitution in real business cycle models with home production this paper constructs a simple model of home production that demonstrates the connection between the intertemporal elasticity of substitution in market consumption ies and the static elasticity of substitution between home and market consumption ses understanding this connection is important because there is a large body of empirical evidence suggesting that the ies is small but little evidence on the size of the ses we use our framework to shed light on the properties of a home production model with a low ies we find that such a model must have three fundamental properties in order to match key aspects of aggregate u s data first the steady state growth rate of technology must be the same across sectors second shocks to technology must be sufficiently positively correlated across sectors third capital must be used more intensively in the market sector than in the home sector a home production model with these three properties can be surprisingly successful at reconciling the rbc paradigm with evidence for a low ies

does the type of political regime matter for trade and labor market policies this article uses cross country data to examine the link between a country s type of political regime and its degree of openness and labor market distortion the analysis indicates that more authoritarian regimes are associated with higher trade protection and greater labor market distortions this supports the view that political authoritarianism may be counterproductive to development in important respects

political economy of public policies insights from distortions to agricultural and food markets the agricultural and food sector is an ideal case for investigating the political economy of public policies many of the policy developments in this sector since the 1950s have been sudden and transformational while others have been gradual but persistent this paper reviews and synthesizes the literature on trends and fluctuations in market distortions and the political economy explanations that have been advanced based on a rich global data set covering a half century of evidence on commodities countries and policy instruments the paper identifies hypotheses that have been explored in the literature on the extent of market distortions and the conditions under which reform may be feasible

illusory revenues import tariffs in resource rich and aid rich economies abstract where imports are financed predominantly by rents from resource extraction or aid the revenue generated by tariffs is illusory revenue earned by the tariff is offset by a reduction in the real value of aid and resource rents revenue is however moved between accounts in the government budget which in the case of aid may reduce the burden of donor conditionality we demonstrate this proposition for a simple central case and show that the result is not overturned by generalisations around this case we argue that trade policy formulation in such economies should recognize the illusory nature of tariff revenues

uncertainty competition and the adoption of new technology faced with the decision of whether or not to adopt a new technology whose economic value cannot be gauged with certainty the manager of the firm may elect to decrease the uncertainty by sequentially gathering information at a unit cost of c 0 updating his prior beliefs in a bayesian manner uncertainty regarding the actions of a competitor however cannot be reduced our model allows a manager to account for potential competition either substitute or complementary by inclusion of strategic considerations modelled in a game theoretic setting we show that the firm s best response mapping satisfies a dynamic programming recursion even when the one period reward function is unbounded providing management with a familiar tool to solve its problem best response behavior is characterized by a monotone sequence of pairs of threshold numbers which give rise to a cone shaped continuation region the continuation region is shown to shift up down with increases in the expected level of substitute complementary competition making the firm less more likely to adopt the innovation finally the existence of a nash equilibrium in cone shaped strategies is established

habit persistence and the long run labor supply standard macroeconomic models possess the undesirable feature that people stop working in the long run assuming standard parameters the neoclassical model predicts that 2 of annual productivity growth leads to a 99 decline in the labor supply after 624 years yet this contradicts the fact that labor hours per capita are relatively stable even over a long period of time this paper shows how internal and external habit persistence each work to stabilize the long run labor supply independent of key parameter choices

habit formation in consumption and its implications for monetary policy models this paper explores a monetary policy model with habit formation for consumers in which consumers utility depends in part on current consumption relative to past consumption the empirical tests developed in the paper show that one can reject the hypothesis of no habit formation with tremendous condence largely because the habit formation model captures the gradual hump shaped response of real spending to various shocks the paper then embeds the habit consumption specication in a monetary policy model and nds that the responses of both spending and inflation to monetary policy actions are signicantly improved by this modication jel d12 e52 e43

adoption and diffusion of an innovation of uncertain profitability the argument has frequently been made that the pattern of diffusion associated with most new innovations will typically have certain characteristics a diffusion curve for an innovation is usually defined as the proportion of its potential users who have already adopted as a function of time measured from the first adoption many empirical studies by both economists and other social scientists have shown that diffusion curves nearly always have two distinct characteristics i they are s shaped the proportion adopted is an increasing function of time which is initially convex but eventually becomes concave and ii they tend to be right hand skewed the inflection point occurs at a time corresponding to a proportion adopted which is less than one half so that the function is concave over the greatest amount of time in fact this skewing is occasionally severe enough to make the diffusion curve appear concave everywhere the focus of most empirical studies of innovation diffusion has centered on identification of either the major determinants of the speed of diffusion or the characteristics of firms which determine how long they delay adoption the seminal contributions are griliches 6 study of hybrid corn and mansfield s 121 study of 12 industrial innovations these studies and most of the similar ones following conclude that diffusion is faster for innovations with higher profitability and that large firms tend to be the earliest adopters some studies e g mansfield 121 herregat 71 have attempted to ascertain

external shocks politics and private investment some theory and empirical evidence abstract the manner in which the political system responds to external economic shocks in developing countries is a key determinant of the private investment response we look at a simple model of political economic equilibrium to make this intuition more precise and developed the idea of a political transmission mechanism even in the confines of this simple model we find that ambiguities abound domestic politics can magnify or dampen the effect of the external shock in our empirical work we find that a high level of urbanization magnifies the investment reduction in response to an external shock this is consistent with the supposition that high levels of urbanization are conductive to distributive politics with pernicious economic effects we also find that the provision of political rights is conductive to superior private investment behavior

competing networks and proprietary standards the case of quadraphonic sound quadraphonic audio systems failed to replace stereo in the 1970s despite backing from all the major manufacturers and recording houses network externalities played a significant role in this episode and the author uses the installed base model of j farrell and g saloner 1986 to explain quad s failure the author finds that the introduction of competing incompatible quadraphonic systems hindered the development of a viable user base and he argues that the systems sponsors introduced their products in a technologically premature state in order to prevent one another from preemptively establishing the quad standard as a result self fulfilling consumer and retailer expectations doomed quadraphonic sound copyright 1990 by blackwell publishing ltd

political regimes and economic growth arguments that relate regimes to growth focus on property rights pressures for immediate consumption and the autonomy of dictators while everyone seems to agree that secure property rights foster growth it is controversial whether democracies or dictatorships better secure these rights the main mechanism by which democracy is thought to hinder growth is pressure for immediate consumption which reduces investment only states that are institutionally insulated from such pressures can resist them and democratic states are not the main argument against dictatorships is that authoritarian rulers have no interest in maximizing total output these views are summarized in turn

the institutional framework and economic development the compound growth rates of per capita output and farrell type efficiency measures for 115 market economies over the period 1960 80 were compared with measures of political civil and economic liberty it was found that the institutional framework has significant and large effects on the efficiency and growth rate of economies politically open societies which subscribe to the rule of law to private property and to the market allocation of resources grow at three times the rate and are two and one half times as efficient as societies in which these freedoms are abridged

uncertain search a model of search among technologies of uncertain values in the standard search problem there is an infinite pool of items whose distribution of values is known a decision maker draws an item from the pool observes its value and decides whether to keep it or to draw another item he can keep only one item and he seeks the item with the largest value in the standard uncertainty resolution problem there is only one item and the value of that item remains uncertain even after it is drawn the decision maker sequentially collects observations on the value of the item and decides whether to keep the item discard the item or take another observation uncertain search marries the sequential drawing from a pool of items from the search literature with the unknown value of a drawn item from the uncertainty resolution literature presented in the context of technology adoption it considers drawing from a pool of new technologies whose values remain unknown even after being drawn the decision maker sequentially purchases information in order to bayesianly update

habits peers and happiness an evolutionary perspective the principal motivating factor in our lives is the pursuit of happiness in most cultures when seeking this end individuals place a high priority on income and spend much of their waking time procuring this intermediate goal the connection between income and happiness is by no means trivial however two critical factors come into play first beyond subsistence level the positive effect of a permanent change in income tends to be short lived we rapidly become accustomed to a more expensive lifestyle a common name for this feature is habit formation second the satisfaction derived from a given level of income is sharply dependent on how it compares to the income of peers see for example andrew b abel 1990 becker 1996 and william a brock and steven n durlauf 2001 for a demonstration of the influence of habits and peer comparisons over behavior and see shane frederick and george loewenstein 1999 for a review of the underlying psychology habits and peer comparisons mean that an individual is not concerned mainly with her absolute level of income but rather with the difference between her income and a benchmark that changes over time in recent years economists have become increasingly interested in this fact this interest has been both applied i e the study of habits and peer influences over behavior and the analysis of happiness surveys and theoretical i e a search for biological foundations but unlike other more developed areas of economics these two approaches remain fairly separate from each other in particular the existing theoretical work is motivated only by the most basic empirical observations and the existing applied work for the most part has not been influenced by theoretical results in this essay we seek to reduce the distance between these two literature strands in particuhabits peers and happiness an evolutionary perspective

economic and political foundations of tax structure this paper derives the essential elements of tax systems as the outcome of rational behavior in a model w here government maximizes expected support and where opposition to ta xation depends on the loss in full income the analysis treats the le vel of expenditures as endogenous and integrates the influence of adm inistration costs with that of political and economic factors tax st ructure is shown to be a system of related components in equilibrium a final section compares results to two alternative approaches opti mal taxation and the leviathan model copyright 1988 by american economic association

risk preferences in the psid individual imputations and family covariation unobserved heterogeneity greatly complicates empirical analysis in economics unobserved heterogeneity in preferences is particularly troublesome because there are so few theoretical restrictions on the distribution of preference parameters in the population therefore despite potential pitfalls we have developed direct survey measures of preference parameters based on hypothetical choices and appropriate econometric techniques for dealing with the inevitable measurement error in any such measures our work on survey measures of preference parameters focuses on risk tolerance robert b barsky f thomas juster kimball and shapiro 1997 bjks hereafter and kimball claudia r sahm and shapiro 2008 kss hereafter time preference and the elasticity of intertemporal substitution bjks and labor supply elasticities kimball and shapiro 2008

the intertemporal elasticity of substitution in consumption in the united states and the united kingdom as robert e hall 1988 notes the magnitude of the intertemporal elasticity of substitution in consumption is one of the central questions of macroeconomics do higher expected real interest rates lead to deferred consumption the authors extend hall s methodology and model and compare results for the united sta tes and the united kingdom in both cases they directly estimate the mo ving average process that temporal aggregation might induce in the random disturbances and take account of consumers who do not follow the lif e cycle permanent income model of consumption copyright 1992 by mit press

has monetary policy become more effective we investigate the implications of changes in the structure of the u s economy for monetary policy effectiveness estimating a vector autoregression over the pre and post 1980 periods we provide evidence of a reduced effect of monetary policy shocks in the latter period we estimate a structural model that replicates well the economy s response in both periods and perform counterfactual experiments to determine the source of the change in the monetary transmission mechanism and in the economy s volatility we find that by responding more strongly to inflation expectations monetary policy has stabilized the economy more effectively in the post 1980 period

the political economy of growth a critical survey of the recent literature this article reviews the recent literature on the political economy of growth focusing on the research that has developed at the intersection of the endogenous growth literature and the new political economy it explores the relationship among four key variables economic growth and capital accumulation political instability political freedom and democratic institutions and income inequality

trade policy issues and empirical analysis interest in u s trade policy has been stimulated in recent years by the massive american trade deficit by the belief that intervention by foreign governments in international markets has given other countries a competitive edge over the united states and by concern about the increase in protectionism among industrial countries in turn major analytical developments in international economics have revolutionized trade theory broadening its scope both by introducing in a more formal manner such concepts as imperfect competition increasing returns product differentiation and learning effects and by including the study of political and economic factors that shape trade policy decisions this collection of papers the result of a conference held by the nber applies these new trade theories to existing world cases and also presents complementary empirical studies that are grounded in more traditional trade theories the volume is divided into four parts the papers in part 1 consider the problem of imperfect competition empirically assessing the economic effect of various trade policies introduced in industries in which the new trade theory seems to apply those in part 2 isolate the effects of protection from the influences of the many economic changes that accompany actual periods of protection and also examine how the effects from exogenous changes in economic conditions vary with the form of protection part 3 provides new empirical evidence on the effect of foreign production by a country s firms on the home country s exports finally in part 4 two key bilateral issues are analyzed recent u s japanese trade tensions and the incident involving the threat of the imposition of countervailing duties by the united states on canadian softwood lumber

explaining asset prices with external habits and wage rigidities in a dsge model in this paper i investigate the scope of a model with exogenous habit formation or catching up with the joneses see abel 1990 to generate the observed equity premium as well as other key macroeconomic facts along the way i derive restrictions for four out of eight parameters for a rather general preference specification of habit formation by imposing consistency with long run growth the leisure share the aggregate frisch elasticity of labor supply the observed risk free rate and the observed sharpe ratio i show that a dsge model with exogenous and lagged habits in both leisure and consumption but not necessarily with additional persistence is well capable of matching the observed asset market facts as well as macro facts provided one allows for moderate real wage stickiness and provided one allows for sufficient curvature on preferences as dictated by the asset market observations without wage stickiness delivery on both the asset pricing implications as well as the macroeconomic implications seems to be much harder