optimal long term contracting with learning we introduce uncertainty into holmstrom and milgrom 1987 to study optimal long term contracting with learning in a dynamic relationship the agent s shirking not only reduces current performance but also increases the agent s information rent due to the persistent belief manipulation effect we characterize the optimal contract using the dynamic programming technique in which information rent is the unique state variable in the optimal contract the optimal effort is front loaded and stochastically decreases over time furthermore the optimal contract exhibits an option like feature in that incentives increase after good performance implications about managerial incentives and asset management compensations are discussed

wage mobility in the united states this paper examines the mobility of individuals through the wage and earnings distributions using 1979 1991 data from the national longitudinal survey of youth lifetime wages will be more equally distributed than wages from any single year if individuals change position in the wage distribution over time the results suggest that mobility is predominantly within group mobility reducing wage inequality by 12 26 over a four year horizon a detailed examination of within group mobility using year to year estimates of transition probabilities among quintiles of the distribution reveals similar general patterns across all skill groups mobility declined significantly over the years especially at the lower end of the wage and earnings distributions

cyclical ratcheting in government spending evidence from the oecd this paper studies the role of business cycles in the phenomenon of increasing government spending gdp ratios in the oecd countries an empirical framework that includes both long run and cyclical considerations in the determination of government spending is applied to panel data covering 1975 1998 the main finding is that the prolonged rise in the spending gdp ratio is partially explained by cyclical upward ratcheting due to asymmetric fiscal behavior the ratio increases during recessions and is only partially reduced in expansions the long run ratcheting effect is estimated as approximately 2 of gdp also analyzed are the cyclical changes in the composition of government spending government consumption transfers and subsidies and capital expenditure as well as a possible link between cyclical ratcheting and government weakness

does direct democracy reduce public debt evidence from swiss municipalities although some countries have managed toobtain balanced budgets or even budgetsurpluses in recent times public debts ofmany oecd countries remain at high levels since structural reforms of public spendinghave only infrequently taken place in mostcountries fiscal pressure will increaseagain in the future due to society s ageingand the accompanying increases in socialtransfer spending constitutionalrestrictions on debt levels and legal rulesof the budgetary process such as a strongrole of the minister of finance aresupposed to be helping against the debtbias inherent in political decision makingprocedures in addition to such top downbudgetary procedures this paperinvestigates the impact of referendumapproval of budget deficits by the voterson the level of public debt in a crosssection of the 134 largest swissmunicipalities in 1990

accuracy of response in labor market surveys evidence and implications this paper examines the extent of response errors in labor market survey data and explores the implications of such errors for economic analysis explicitly examined are responses to questions on industry occupation union status hours worked and wages analyses are based on two sources 1 a special supplement to the january 1977 current population survey that obtained data from workers and their employers and 2 an exact match of workers and their employers interviewed in the employment opportunity pilot project survey the dual nature of these surveys provides a basis for analyzing the effect of response error on a variety of economic analyses including the trade off between wages and risk the wage impact of unionism and the sensitivity of wage determination models to alternative responses to earnings questions

hand in the cookie jar an experimental investigation of equity based compensation and managerial fraud the use of equity based compensation is an increasingly popular means by which to align the incentives of top management with those of the shareholders however recent theoretical and empirical research indicates that the use of equity based compensation has the unintended consequence of creating the incentive to commit managerial fraud of the type being reported in the press this paper reports experimental evidence that shows that the amount of fraud committed by subjects is positively correlated with the level of equity as is the level of effort in addition the amount of fraud that is committed is negatively correlated with the probability of detection and subjects risk aversion the experimental design permits the identification of causal relations in the directions just noted

estimating income poverty in the presence of measurement error and missing data problems reliable measures of poverty are an essential statistical tool for public policies aimed at reducing poverty in this article we consider the reliability of income poverty measures based on survey data which are typically plagued by missing data and measurement error neglecting these problems can bias the estimated poverty rates we show how to derive upper and lower bounds for the population poverty rate using the sample evidence an upper bound on the probability of misclassifying people into poor and nonpoor and instrumental or monotone instrumental variable assumptions by using the european community household panel we compute bounds for the poverty rate in 10 european countries and study the sensitivity of poverty comparisons across countries to missing data and measurement error problems supplemental materials for this article may be downloaded from the jbes website

labor supply elasticities overcoming nonclassical measurement error using more accurate hours data we measure the impact of measurement error in labor supply elasticities estimated over recalled usual work hours as is ubiquitous in the literature we employ data on hours of work in diaries collected by the american time use survey 2003 2015 along with the same respondents recalled usual work hours estimates using the latter yield elasticities that are positively biased we argue that this bias arises from the salient effects of differences in wage rates on recalled hours abstract from author

measurement error and misclassification a comparison of survey and administrative data we provide both a theoretical and empirical analysis of the relation between administrative and survey data by distinguishing between different sources of deviations between survey and administrative data we are able to reproduce several stylized facts we illustrate the implications of different error sources for estimation in simple econometric models and find potentially very substantial biases this article shows the sensitivity of some findings in the literature for the assumption that administrative data represent the truth in particular the common finding of substantial mean reversion in survey data largely goes away once we allow for a richer error structure

the use of stock based pay for sorting an empirical analysis of compensation for new ceos examining stock based compensation for newly hired ceos this article finds that the sensitivity of stock based pay to performance is higher for new economy young and volatile firms of the components of stock based pay it is option grants that generate such variation across firms it also finds that this cross firm variation in pay performance sensitivity is more pronounced for the ceo s first year in office these findings support the view that firms use stock based pay to new ceos for sorting

political and institutional determinants of fiscal policy in the european community in recent theoretical and empirical research the variation in political and institutional arrangements which may affect the process of national policy formation is examined in order to explain cross country differences with respect to fiscal policies pursued in this paper we build upon this literature and examine whether and how cross country differences in debt accumulation and public sector size of member countries of the european community during the 1980s can be explained we conclude that the growth of government debt is positively related to the frequency of government changes and negatively to sound budgetary procedures in countries with left wing governments the growth of the share of government spending in total output generally tends to be higher

racial disparities in job finding and offered wages abstractthe extent to which discrimination can explain racial wage gaps is one of the most divisive issues in the social sciences using a newly available data set this paper develops a simple empirical test that under plausible but not innocuous conditions provides a lower bound on the extent of discrimination in the labor market taken at face value our estimates imply that differential treatment accounts for at least one third of the black white wage gap we argue that the patterns in our data are most naturally rationalized through a search matching model in which employers statistically discriminate on the basis of race when hiring unemployed workers but learn about their marginal product over time

wage aspirations and unemployment persistence abstract we use panel data to examine the empirical determinants of the reservation wage in particular the influence of previous wages and consider what this implies for the evolution of the natural rate of unemployment we find that previous wages have a significant but relatively small effect on reservation wages an elasticity between 0 15 and 0 47 we also find considerable differences across genders with previous wages being more important for men and market wages being more important for women overall our results suggest that the reservation wage will adjust quite quickly to shocks

price elasticity of groundwater demand attenuation and amplification bias due to incomplete information measurement errors in both human and natural components of agricultural and environmental systems can be as much a source of estimation bias as omitted variables selfselection simultaneity and reverse causality nonetheless partly because of difficulties in obtaining data there is less literature on measurement error problems than on other endogeneity problems this article examines estimation bias in the price elasticity of groundwater consumption for irrigated agriculture on the intensive margin the price at issue is for the energy used in pumping and pressurizing water for delivery lacking the precise unit irrigation cost previous studies imputed irrigation costs we first consider groundwater irrigation costs and identify factors that can cause measurement errors in the process of imputation under incomplete information about the determinants of irrigation costs we follow this by systematically analyzing the potential bias caused by measurement errors using econometric theory along with monte carlo simulations where appropriate we then quantify actual measurement errors making use of a unique dataset in which energy and groundwater consumption data are matched for individual observations finally we compare regression results using exact irrigation costs as opposed to imputed ones we find evidence of substantial measurement errors resulting in attenuation and amplification bias in the price elasticity of irrigation water consumption on the intensive margin our results indicate that measurement errors in irrigation costs can lead to misleading policy implications related to water and energy pricing as a tool to conserve water we also show that estimating the energy price elasticity of groundwater use is not as straightforward as previously thought

partisan influence on the local tax burden in the netherlands this paper analyses the role of partisan politics in determiningthe local tax burden property taxes are the most important revenuesource which municipalities in the netherlands can decide uponthemselves using a new data set on dutch local property taxes in1996 it is concluded that municipalities with a council dominatedby left wing parties have a higher tax burden we also find thatlarger coalitions have lower levels of taxation finally taxexporting increases tax rates

the labor supply response to mismeasured but predictable wage changes most panel data studies of intertemporal labor supply assume classical measurement error recent validation studies refute this assumption in this study i address nonclassical measurement error explicitly i use data on males from the panel study of income dynamics validation study to purge measurement error from the panel study of income dynamics i find a large amount of predictable wage variation in the data even after allowing for measurement error however there is almost no labor supply response to these predictable wage changes therefore failure to control for nonclassical measurement error cannot explain the low estimated labor supply elasticities in other papers

government spending and budget deficits in the industrial economies fiscal policy nouriel roubini and jeffrey sachs this paper examines the evolution of the size of government and of budget deficits in oecd economies we highlight the rapid increase in government spending in the 1970s the sharp rise in budget deficits and public debt after 1973 and the reversal in these trends in the 1980s the increase in the size of government was associated in part with the slowdown in growth after 1973 but also reflected gradual adjustment of the ratio of spending to output towards a long run target which depends on political and institutional characteristics of the economy the political orientation of the government the degree of wage indexation and the degree of stability of the political system such factors also explain the size of budget deficits when faced with an adverse shock subsequent deficit reduction requires a measure of political consensus we note that such consensus is hard to achieve in multi party coalitions in consequence countries with such a political structure tended in consequence countries with such a political structure tended toin consequence countries with such a political structure tended to experience much more rapid increases in their debt gnp ratios

underwater options and the dynamics of executive pay to performance sensitivities we empirically analyze the dynamics of executives pay to performance sensitivities option pay to performance sensitivities become weaker as options fall underwater often leading to pressures to reprice options or restore pay to performance sensitivity in other ways building a detailed data set on executives portfolios of stock and options we find that the responsiveness of pay to performance sensitivities created by all executive holdings of stock and options to changes in stock price is large the elasticity of pay to performance sensitivities with respect to stock price decreases is about 0 7 and is larger for high option executives and for executives with high percentages of options already underwater the dominant mechanism through which companies offset declines in option pay to performance sensitivities is larger option grants following stock price declines on average these larger grants restore approximately 40 of the stock price induced pay to performance sensitivity declines option repricings are inconsequential in this regard despite the attention they have attracted in looking at positive returns we find the reverse higher returns both directly increase pay to performance sensitivities and lead to larger option grants which raise pay to performance sensitivities further thus option grants to executives tend to be largest following large stock price increases or large stock price decreases

determinants of income mobility and household poverty dynamics in south africa this article analyses household income mobility among africans in south africa s most populous province kwazulu natal between 1993 and 1998 compared to industrialised and most developing countries mobility has been quite high as might have been expected after the transition in south africa this finding is robust when measurement error is controlled for when disaggregating the sources of mobility it is found that demographic changes and employment changes account for most of the mobility observed which is related to rapidly shifting household boundaries and a very volatile labour market in an environment of high unemployment using a multivariate analysis it can be seen that transitory incomes play a large role four types of poverty traps are found associated with large initial household size poor initial education poor initial asset endowment and poor initial employment access that dominate the otherwise observed regression towards the mean

the effect of nonfarm income on investment in bulgarian family farming this article documents a relationship between nonfarm income primarily earnings and pensions and agricultural investment in bulgaria specifically expenditures on working capital variable inputs such as feed seed and herbicides and investment in livestock among those with positive spending on farm inputs the estimated elasticity of these expenditures with respect to nonfarm income is 0 14 nonfarm income also has an effect on the number of households that purchase farm animals with an estimated elasticity of 0 35 the use of nonfarm income for farm investment is consistent with the presence of credit constraints as is the fact that less than one percent of farmers report outstanding debts for agricultural purposes yet many farm households take out large unsecured loans for other purposes primarily to cover consumption expenditures implying that credit is available but that farmers prefer not to use borrowed funds to finance agricultural investment this would suggest that increases in the availability of agricultural credit may have little effect on farm outcomes whereas increases in nondebt financed sources of liquidity such as subsidies or transfers may better stimulate investment

political fractionalization and delay in fiscal stabilizations a duration analysis this article employs a duration analysis approach to empirically investigate whether political fractionalization leads to delayed fiscal stabilizations using a broad sample of both developed and developing countries for the period 1975 2011 we consistently find strong evidence that political fractionalization is significantly associated with longer delays in stabilizing high deficits in particular political fractionalization has a greater impact on delays in periods of macroeconomic distress we also show that while the fractionalization of government parties delays fiscal stabilization the fractionalization of opposition parties tends to facilitate fiscal stabilization

government strength power dispersion in governments and budget deficits in oecd countries a voting power approach we test for the influenceof government strength and dispersion ofpower among the parties of coalitiongovernments on the size of annual debtaccumulation through budget deficits inoecd countries from 1970 to 1999 government strength and power dispersion incoalition governments are measured by thebanzhaf index of voting power respectivelythe standard deviation of banzhaf indicesof coalition parties we believe that theseare better suited proxies than most of whathas been applied so far governmentstrength turns out to be insignificant however coalitions with equally strongpartners run significantly higher deficitsthan coalitions with one dominating party

technical change wage inequality and taxes this paper considers the normative implications of technical change for tax policy design a task to talent assignment model of the labor market is embedded into an optimal tax problem technical change modifies equilibrium wage growth across talents and the substitutability of talents across tasks the overall optimal policy response is to reduce marginal income taxes on low to middle incomes while raising those on middle to high incomes the reform favors those in the middle of the income distribution reducing their average taxes while lowering transfers to those at the bottom jel d31 h21 h23 h24 j31 o33

evidence on the validity of cross sectional and longitudinal labor market data this article investigates error properties of survey reports of labor market variables we use the panel study of income dynamics psid validation study a two wave panel survey of workers employed by a large firm that shared its detailed payroll records individuals reports of annual earnings are fairly accurate errors are negatively related to true earnings reducing bias due to measurement error when earnings are used as an independent variable biases are moderately larger for changes in earnings earnings per hour are less reliably reported than annual earnings biases in estimating earnings functions are relatively small but those in labor supply functions may be important

the impact of within party and between party ideological dispersion on fiscal outcomes evidence from swiss cantonal parliaments the impact of the fragmentation of executive and legislative bodies on the level and composition of government expenditure is a feature of politics that has attracted considerable attention from economists however previous authors have abstracted from two important concepts ideology and intra party politics in this paper we account for these two phenomena explicitly and make two main contributions first we show that both intra and inter party ideological dispersion matter in explaining the level of sub national public spending therefore it is improper to consider parties as monolithic entities we also show that ideological dispersion matters especially for current expenditures and not so much for investment expenditures to do so we construct a panel database 2003 2010 comprising data from a survey that quantifies the policy preferences of party members who were candidates in swiss elections

inflation dynamics when inflation is near zero this paper discusses the likely evolution of u s inflation in the near and medium term on the basis of 1 past u s experience with very low levels of inflation 2 the most recent japanese experience with deflation and 3 recent u s micro evidence on downward nominal wage rigidity our findings question the view that stable long run inflation expectations and downward nominal wage rigidity will provide sufficient support to prices such that deflation can be avoided we show that an inflation model fitted on japanese data over the past 20 years which accounts for both short and long run inflation expectations matches the recent u s inflation experience quite well while the model indicates that u s inflation might be subject to a lower bound it does not rule out a prolonged period of mild deflation going forward in addition our micro evidence on wages suggests no obvious downward rigidity in the firm s wage costs downward rigidity in individual wages notwithstanding as a consequence downward nominal wage rigidity may provide little offset to deflationary pressures in the current u s situation despite some circumstantial evidence that this channel might have been at work in the past

fragmented government effects on fiscal policy new evidence most industrialized countries entered the 1980s with their public finances in disarray at the time persistent deficits pushed up public debt to gdpratios despite such similarities deficit spending varies substantially between countries and within countries over time recent theoretical and empirical research has considered how differences in political arrangements affecting national policy formation might explain variation in fiscal policies pursued using a panel of 22 oecd countries over the 1971 1996 period this paper extends previous literature on the effects of fragmented government on fiscal policy outcomes in various directions first we focus on data relating to central government instead of general government as all theories refer to central government second not only do we analyze the effect of size fragmentation of government we also examine government s position vis a vis parliament and government s political fragmentation we find evidence that more fragmented government defined in terms of the number of political parties in a coalition or the number of spending ministers have higher deficits there is also some evidence that governments that dispose of excess seats in parliament have lower deficits right wing governments appear to have been fiscally more responsible in the seventies political fragmentation does not affect government s budget deficit

why are stabilizations delayed when a stabilization has significant distributional implications e g tax increases to eliminate a large budget deficit socioeconomic groups may attempt to shift the burden of stabilization onto other groups the process leading to stabilization becomes a war of attrition each group attempting to wait the others out and stabilization occurring only when one group concedes and bears a disproportionate share of the burden the authors solve for the expected time of stabilization in a model of rational delay and relate it to several political and economic variables they motivate this approach and its results by comparison to historical and current episodes copyright 1991 by american economic association

earnings dynamics and measurement error in matched survey and administrative data this article analyzes earnings dynamics and measurement error using a matched longitudinal sample of individuals survey and administrative earnings in line with previous literature the reported

give everyone a prize employee stock options in private venture backed firms this study examines employee stock options in private entrepreneurial companies i focus on private u s venture backed firms because they are renowned for the intensity and organizational depth of their stock option grants contrary to simple stereotype however i show that 27 of u s venture backed firms do not grant stock options to all employees i seek to explain this by theorizing that the economic and legal settings in which venture backed companies exist lead to both costs and benefits from the use of stock options to attract compensate incent monitor and retain certain employees and that sometimes the costs exceed the benefits i test the theory by determining whether variation in the organizational depth to which venture backed firms grant employee stock options can be explained by proxies for these economic and legal costs such proxies include the fraction of employees who are in technical positions the degree of flatness in the firm s organizational structure its proximity to other venture backed companies the number of patents it has been granted and the fraction of equity held by venture investors the results support the theory and thereby imply that venture backed firms grant employee stock options in an economically sophisticated manner

are stock options grants to ceos of stagnant firms fair and justified prior research has examined several ethical questions related to executive compensation the issues that have received most attention are whether executives pay is fair and justified by performance since more recent studies show that stock options grants constitute the single largest component in executive compensation we examine the relations of these grants to economic determinants and corporate governance for firms in the stagnant stage of their lifecycle we find that on average stock options grants comprise a significant portion of annual ceo compensation 26 4 for stagnant firms we also find that economic corporate governance factors explain less or more of the cross sectional variation in stock options grants for stagnant firms than for growth firms furthermore we document lower pay performance sensitivity i e weaker incentive alignment and no improvement in future firm performance from past stock options grants to ceos of stagnant firms in particular our study provides empirical evidence on some inefficiencies associated with stock options grants to ceos of low potential stagnant firms a long standing concern of business ethics researchers moriarty 2005 nichols and subramaniam 2001 perel 2003 our results also provide support for the corporate governance reforms discussed in matsumura and shin 2005 especially those proposed provisions that curtail the power of ceos in the governance of firms

theory and evidence of municipal borrowing in chile although chilean municipalities are not permitted to borrow they do so through arrears and leasing contracts a formal model of municipal indebtedness is estimated based on a sample of 345 municipalities with yearly data from 2004 to 2007 variables that are positively and significantly related to borrowing through arrears are mayors closely tied to the ruling central government coalition politically diverse municipal councils years close to elections and deeper municipal involvement in education while leasing contracts appear to be insensitive to political factors they are positively and significantly related to municipal staff managerial skills and municipal revenues per capita

political determinants of budget deficits coalition effects versus minority effects this paper reexamines some recent empirical evidence on the hypothesis that institutional arrangements in the political process affect budget deficits the results of roubini and sachs 1989b are replicated and sensitivity analysis indicate that their results are robust however the main conclusion of roubini and sachs that coalition governments are less capable of budgetary discipline needs to be modified a reformulation of their variable representing political cohesion reveals that it captures the effects of minority governments rather than majority coalition governments the data support the hypothesis that it is harder to negotiate in parliament than within a government

are wages habit forming evidence from micro data although utility functions play a central role in economics the axiom that utility depends only on the absolute levels of its arguments is rarely tested this paper uses panel data on 2000 british employees who remain with the same employer and who are not promoted from one wave to the next it is shown that one important measure of well being overall job satisfaction is strongly positively correlated with the change in the worker s pay between waves but is unrelated to the current level of pay empirical tests suggest that a reference dependent satisfaction function where individual well being depends on current pay relative to past pay is more consistent with these regression results than are productivity or agency explanations of increasing wage profiles some evidence is presented of greater job satisfaction effects of pay rises for lower paid less well educated and younger workers these results provide some micro evidence consistent with the theory widespread in social science of habituation individuals may become used to any given level of consumption or income as such they tie in with the finding that a country s well being as measured by the average happiness of its citizens is only weakly correlated with its per capita gnp

the weak government thesis some new evidence this paper presents new evidence on the hypothesis that coalition governments will find it more difficult to keep their budgets in line after an adverse economic shock than do one party majoritarian governments the estimates are based on a broad sample of oecd countries for the period 1979 1995 using various specifications as suggested in the literature we do not find evidence that the type of government affects cross country variation in fiscal policy however the number of political parties in government affects central government debt growth

the political determinants of fiscal policies in the states of india an empirical investigation abstract using data from the 14 major states of india we investigate whether state governments fiscal policy choices are tempered by political considerations our principal findings are twofold first we show that certain fiscal policies experience electoral cycles state governments raise less commodity tax revenue spend less on the current account and incur larger capital account developmental expenditures in election years than in all other years second we show that coalition state governments raise less own non tax revenues and spend less on the current account than state governments that are more cohesive in composition in sum the dispersion of political power affects government size

consumption volatility liquidity constraints and household welfare we evaluate the impact of increased income uncertainty and financial liberalisation in the us on consumption volatility and household welfare we estimate euler equations and measure the volatility of unpredictable changes in consumption as the squared residuals we directly control for liquidity constraints using survey of consumer finances data on access to credit and document that despite the increase in household debt between 1983 and 2007 there was no decline in the proportion of liquidity constrained households consumption volatility increased significantly over this period especially for liquidity constrained households indicating substantial welfare losses

are ceos really paid like bureaucrats a common view is that there is little correlation between firm performance and ceo pay using a new fifteen year panel data set of ceos in the largest publicly traded u s companies we document a strong relationship between firm performance and ceo compensation this relationship is generated almost entirely by changes in the value of ceo holdings of stock and stock options in addition we show that both the level of ceo compensation and the sensitivity of compensation to firm performance have risen dramatically since 1980 largely because of increases in stock option grants

intertemporal substitution in labor supply evidence from micro data the sensitivity of the supply of labor to intertemporal variation in the wage is an important issue in macroeconomics the analysis of social security and pensions and the study of life cycle patterns of work this paper explores two approaches to the measurement of intertemporal substitution that have appeared in the literature the first approach is to use consumption to control for wealth and unobserved expectations about future wages in the labor supply equation the second approach is to estimate a first difference equation for hours in which labor supply from the previous period serves as a control for wealth and wage expectations the results indicate that intertemporal substitution elasticity for married men is positive but small

inter industry wage differentials revisited wage volatility and the option value of mobility analysis of data from the psid reveals that idiosyncratic wage volatility varies inversely with inter industry wage differentials and is positively correlated with both returns to industry tenure and rates of inter industry mobility an incomplete markets life cycle model in which inter industry mobility decisions and wage differentials are endogenously determined in equilibrium is then developed and shown to be capable of rationalizing these features of the data in the model the ability of worker to switch industries generates option value that is large enough to offset the standard risk premium that workers demand for exposure to excess wage volatility

are earnings inequality and mobility overstated the impact of non classical measurement error abstract measures of inequality and mobility based on self reported earnings reflect attributes of both the joint distribution of earnings across time and the joint distribution of measurement error and earnings while classical measurement error would increase measures of inequality and mobility there is substantial evidence that measurement error in earnings is not classical in this paper we present the analytical links between nonclassical measurement error and some summary measures of inequality and mobility the empirical importance of nonclassical measurement error is explored using the survey of income and program participation sipp matched to tax records we find that the effects of nonclassical measurement error are large however these nonclassical effects are largely offsetting when estimating mobility as measured by the intertemporal correlation in earnings as a result sipp estimates of the correlation are similar to estimates based on tax records though sipp estimates of inequality

the macroeconomic implications of rising wage inequality in the united states in recent decades american workers have faced a rising college premium a narrowing gender gap and increasing wage volatility this paper explores the quantitative and welfare implications of these changes the framework is an incomplete markets life cycle model in which individuals choose education intrafamily time allocation and savings given the observed history of the u s wage structure the model replicates key trends in cross sectional inequality in hours worked earnings and consumption recent cohorts enjoy welfare gains on average as higher relative wages for college graduates and for women translate into higher educational attainment and a more even division of labor within the household

human capital capital structure and employee pay an empirical analysis abstract we test the predictions of titman 1984 and berk stanton and zechner 2010 by examining the effect of leverage on labor costs leverage has a significantly positive impact on cash equity based and total compensation of chief executive officers ceos compensation of new ceos hired from outside the firm is positively related to prior year firm leverage in addition leverage has a positive and significant impact on average employee pay the incremental total labor expenses associated with an increase in leverage are large enough to offset the incremental tax benefits of debt the empirical evidence supports the theoretical prediction that labor costs limit the use of debt

stock based pay in new economy firms abstract ittner lambert and larcker j accounting economics 2003 this issue present compelling evidence that new economy firms rely more on stock based compensation than do old economy firms based on 1998 and 1999 data from a proprietary sample of companies i complement the ill results by analyzing data over a longer time period 1992 2001 and more importantly document the effect of the 2000 market crash on stock based pay in new economy firms finally i offer evidence supporting the conjecture that differences in pay practices between new and old economy firms reflect accounting considerations perceived costs and competitive inertia

consumption and labor supply with partial insurance an analytical framework we develop a model with partial insurance against idiosyncratic wage shocks to quantify risk sharing closed form solutions are obtained for equilibrium allocations and for moments of the joint distribution of consumption hours and wages we prove identification and demonstrate how labor supply data are informative about risk sharing the model estimated with us data over the period 1967 2006 implies that i 39 percent of permanent wage shocks pass through to consumption ii the share of wage risk insured increased until the early 1980s and iii preference heterogeneity is important in accounting for observed dispersion in consumption and hours jel e21 e23 e31 e52

uncertainty avoidance and the timing of employee stock option exercise we examine the impact of the cultural norm of uncertainty avoidance on employee stock option eso exercise behavior using proprietary data from a multinational firm we find that employees from countries with higher levels of uncertainty avoidance exercise their stock options earlier these findings lend support to a maintained assumption in the eso literature that employee attitudes toward uncertainty influence stock option exercise behaviors our findings further help to explain prior findings of cross cultural differences in firms compensation practices by indicating that employee responses to option based pay and firms consequent financial reporting costs vary as functions of employee uncertainty avoidance

the political economy of deficit spending in nine industrialized parliamentary democracies the role of fiscal institutions this article analyzes the influence of four sets of factors on deficit spending in 9 industrialized parliamentary democracies during 1958 1990 this article analyzes the influence of these factors and introduces and tests the importance of an additional potential influence on the size of a country s fiscal deficit the strength of fiscal bureaucracy it is argued that the stronger a country s fiscal bureaucracy the lower its deficit ceteris paribus empirically the authors find that the state of a nation s economy heavily affects its deficit little systematic relationship is found between the ideology of the ruling political party and a nation s deficit or between the political strength of the ruling party and deficits in contrast to the findings of roubini and sachs finally it is found that the strength of a country s fiscal bureaucracy is an important influence on the deficit in these 9 industrialized parliamentary democracies

estimates of year to year volatility in earnings and in household incomes from administrative survey and matched data abstract we document trends in the volatility in earnings and household incomes between 1985 and 2005 in three different data sources administrative earnings records the survey of income and program participation sipp matched to administrative earnings records and sipp survey data in all data sources we find a substantial amount of year to year volatility in workers earnings and household incomes in the data sources that contain administrative earnings we find that volatility has been roughly constant and has even declined slightly since the mid 1980s these findings differ from what is found using survey data and what has been reported in previous studies

labor market search and schooling investment we generalize a search matching and bargaining model to allow individuals to acquire productivity enhancing schooling prior to labor market entry in general search frictions and weakness in bargaining position contribute to underinvestment in schooling from an efficiency perspective using estimates of a general equilibrium version of the model in which firm vacancy creation decisions are included we find that minimum wages and schooling subsidies improve aggregate welfare but have very different welfare impacts across the ability distribution in particular policies that maximize the average welfare of workers have strongly negative effects on the welfare of the least able

managerial expertise private information and pay performance sensitivity this paper characterizes optimal pay performance sensitivities of compensation contracts for managers who have private information about their skills and those skills affect their outside employment opportunities the model presumes that the rate at which a manager s opportunity wage increases in his expertise depends on the nature of that expertise i e whether it is general or firm specific the analysis demonstrates that when managerial expertise is largely firm specific general the optimal pay performance sensitivity is lower higher than its optimal value in a benchmark setting of symmetric information furthermore when managerial skills are largely firm specific general the optimal pay performance sensitivity decreases increases as managerial skills become a more important determinant of firm performance unlike the standard agency theoretic prediction of a negative trade off between risk and pay performance sensitivity this paper identifies plausible circumstances under which risk and incentives are positively associated in addition to providing an explanation for why empirical tests of risk incentive relationships have produced mixed results the analysis generates insights that can be useful in guiding future empirical research

incentives for research agents and performance vested equity based compensation abstract this paper studies the agency problem between a firm and its research employees in a dynamic optimal contracting setting we implement the optimal contract by a risky security which can be created using the equity of the firm and a sequence of performance based holding requirements this result provides a rationale for using performance vested equity based compensation in r d intensive start up firms

political fragmentation party ideology and public expenditures in this paper we propose an original model of competition for effective political power between majority and opposition coalitions the model indicates that the electoral margin of the majority and the fragmentation of both coalitions are key variables that determine their effective political power we estimate the model in the case of the french departements our econometric results support the model and show that the per capita social expenditures in the french departements depend on the effective political power of the majority

equilibrium search and tax credit reform an empirical equilibrium job search model with wage posting is developed to analyze the labor market impact of uk tax reforms the model allows for a rich characterization of the labor market with hours responses accurate representations of the tax and transfer system and both worker and firm heterogeneity the model is estimated with pre reform longitudinal survey data using a semi parametric estimation technique and the impact of actual tax reform policies is simulated the model predicts that the british working families tax credit and contemporaneous reforms increased employment with equilibrium effects found to play a relatively minor role

coalition governments versus minority governments bargaining power cohesion and budgeting outcomes recent empirical work investigating the role of minoritygovernments in the selection of fiscal policies has shown thatthe majority status does not affect the budget size thispaper presents an analytical framework which accounts for thisresult it combines a government formation game and a budgetgame involving cabinet and parliament a general indifferenceresult applies an exogenous shock to the bargaininigenvironment which absorbes the cohesion of the governmentincreases the demand for expenditures at the same time theconditions for the formation of a minority government arefulfilled if the formateur is strong a minority governmentcan be a device for cutting expenditures

political and monetary institutions and public financial policies in the industrial countries institutions and policies vittorio grilli donato masciandaro and guido tabellini why do countries as similar as the industrialized oecd countries go through such different experience in terms of public deficits and debts or in terms of inflation the answer cannot come from macroeconomic policy responses to different disturbances nor from the principles of optimal taxation but rather from politics this article focuses on the role that particular institutions exert in providing constraints and incentives which shape the actions of policymakers the electoral process and political traditions affect the ability of governments to deal with deficits and mounting debts what seems to matter most it is found is the effect of the durability of governments governments with short horizons act myopically and never quite tackle the hard choices such governments typically exist in countries with an electoral system favouring many small political parties central bank independence promotes low inflation with no apparent costs in terms of real economic performance irrespective of the political institutions in fact there is no link between monetary and fiscal discipline these findings carry powerful implications for countries facing high indebtedness or stubborn inflation but also for the construction of the european economic and monetary union

does the confucius institute impact international travel to china a panel data analysis this article examines the impact of confucius institutes on inbound travel to china we estimate a panel gravity model of inbound tourism flows to china between 2004 and 2010 we use a poisson pseudo maximum likelihood estimator to control for heteroscedasticity endemic in gravity models santos silva and tenreyro 2006 we find that the presence of confucius institute s in the source country increases overall tourism in general and business and worker tourists in particular

the effect of risk on the ceo market this article presents a market equilibrium model of ceo assignment pay and incentives under risk aversion and moral hazard each of the three outcomes can be summarized by a single closed form equation in the presence of moral hazard assignment is distorted from positive assortative matching on firm size as firms with higher risk or disutility choose less talented ceos such firms also pay higher salaries in the cross section but economywide increases in risk or the disutility of being a ceo do not affect pay the strength of incentives depends only on the disutility of effort and is independent of risk and risk aversion if the ceo can affect firm risk incentives rise and are increasing in risk and risk aversion we calibrate the losses from various forms of poor corporate governance such as failures in monitoring and inefficiencies in ceo assignment jel g34 j33 this article presents a market equilibrium model of ceo assignment pay and incentives risk averse managers of different talents are hired in a competitive market by heterogeneous firms which vary in their size risk and level of effort required the level of pay drives the assignment of talent to firms the strength of incentives induces the efficient effort level and is determined by an optimal contracting approach our main contribution is to incorporate risk into a ceo market equilibrium in a tractable manner a large empirical literature has shown that risk is a firstorder determinant of compensation contracts demsetz and lehn 1985 garen 1994 core and guay 1999 oyer and schaefer 2004 peters 2009 peters and wagner 2009 but most theories assume risk neutrality this assumption is