revisiting the exchange rate disconnect puzzle abstractone of the major anomalies in international macroeconomics is the persistent finding that the exchange rate has no empirical relationship with a variety of macroeconomic fundamentals dubbed the exchange rate disconnect puzzle this article examines this issue for five australian dollar bilateral exchange rates using quarterly data for the period 1984 1 2015 4 a novel feature of this article is that it departs from the extant literature by using a different approach to testing for cointegration the results show that the exchange rates and fundamentals move together in the long run furthermore the results show that fundamentals granger cause exchange rates both in the short run and the long run

a common agency with incomplete information in the present article i demonstrate that forming a common agency by oligopolistic firms may not be to their advantage if agents have access to private information about their costs bernheim and whinston 1985 1986 pointed out that a common agency allows the firms to sustain the collusive outcome by giving them a vehicle to internalize the externality generated by their pricing or output decisions if agents have access to private information the advantage pointed out by bernheim and whinston may be more than outweighed by the possible existence of an informational disadvantage specifically if the unit costs of different potential agents are correlated the firm may be more successful in extracting the informational rents of its agent if it contracts with an independent agent and not with the same agent as its rival firm when oligopolistic firms contract with independent agents the revenues of one firm reveal implicit information about the unit costs of agents serving competing firms in the same industry however if the unit costs of different agents are correlated revenues also reflect information about the unit cost of the firm s own agent this additional information transmitted by revenues cannot be controlled by the agent s reporting behavior as a result if the firm conditions its agent s payoff upon revenues it can limit the informational rents that this agent can secure due to the existence of private information this possibility of limiting its agent s informational rents is eliminated if the firm contracts with the same agent as its rivals with a common agency the agent can manipulate the reports delivered to all the firms thus reducing the options available to each of them various patterns of agency relationship exist in markets where oligopolistic producers

public capital and long run costs in u k manufacturing a model of u k manufacturing production that incorporates the inputs of public as well as private capital is specified and estimated the model is then used to measure the contribution of public capital to productivity growth over the period 1966 to 1990 it is found that before 1980 the public and private capital contributions were of comparable magnitude after 1980 the contribution of public capital declined significantly copyright 1993 by royal economic society

duopolistic vertical restraints abstract in an industry where competition exists at the wholesale level vertical restraints are not necessarily desirable from the standpoint of the manufacturers when vertical restraints are employed it is never in the form of retail price maintenance but rather in the form of franchise fee pricing when the products produced by the manufacturers are only slightly differentiated the producers may benefit from the double marginalization that arises with linear pricing such double marginalization results in higher retail prices which relieve competitive pressures

medical expenditure risk and household portfolio choice medical expenses are an increasingly important contributor to household financial risk we examine the effect of medical expenditure risk on the willingness of medicare beneficiaries to hold risky assets using a discrete factor maximum likelihood method to address the endogeneity of insurance choices we find that having a moderately protective medigap or employer supplemental policy increases risky asset holding by 7 1 percentage points relative to those without supplemental coverage while participation in a highly protective medicare hmo increases risky asset holding by 13 0 percentage points our results highlight an important link between the availability of health insurance and financial behavior

refining for export and the convergence of petroleum product prices abstract the petroleum refining industry has changed over the past decades from one in which capacity primarily served local and regional markets to one in which trade in refined petroleum products has become more widespread we investigate the hypothesis of increasing globalization by examining the convergence of prices for refined products across different markets using data on refined products from market centers in the us and europe we test for convergence of prices using standard time series techniques the data plainly show that markets for refined petroleum products have become more interrelated as europe exported its gasoline surplus and global demand for petroleum products approached refining capacity econometric evidence supports the hypothesis that the us and european markets for oil and refined products are integrated we find evidence that a structural break during the financial crisis of 2008 changed the long run equilibrium price relationships and the short run price dynamics refined product markets are likely to experience continued globalization given trends in the united states and europe and because of key export oriented refining capacity investments made to take advantage of access to specific crude oil sources

a further look at household portfolio choice and health status abstract this paper investigates the effect of changes in health status on household financial wealth and financial portfolio choice it is shown that the impact of health events on household financial and non financial wealth is asymmetric a diagnosis of a new disease leads to a larger decrease in financial wealth than in non financial wealth moreover we find that the puzzle pertaining to the relationship between health status and portfolio choice discussed in the extant literature generally disappears after controlling for differences in the amount of financial assets held by healthy and sick people the results suggest that the effect of changes in health status on household financial portfolios is indirect a health shock significantly reduces household total financial wealth in turn leading households to restructure the composition of their financial assets

wealth and portfolio composition theory and evidence we examine a survey of 6010 u s households and estimate a model for household portfolio allocation we extend the conventional portfolio choice model in order to capture the observed incompleteness of household portfolios we show that the empirical specification of the joint discrete and continuous choice that characterizes household portfolio behavior is a switching regressions model with endogenous switching we go on to examine the impact of taxes on portfolio composition using detailed survey data to calculate precisely the marginal tax rate facing each household finally we estimate wealth elasticities of demand for a range of assets and liabilities

the determinants of household risky asset holdings australian evidence on background risk and other factors we study the portfolio allocation decisions of australian households using the relatively new household income and labour dynamics in australia hilda survey we focus on household allocations to risky financial assets our empirical analysis considers a range of hypothesised determinants of these allocations we find background risk factors posed by labor income uncertainty and health risk are important credit constraints and observed risk preferences play the expected role a positive age gradient is identified for risky asset holdings and home ownership is associated with greater risky asset holdings a unifying theme for many of our empirical findings is the important role played by financial awareness and knowledge in determining risky asset holdings many non stockholding households appear to lack the experience and financial literacy that might enable them to benefit from direct investment in stocks

testing the monetary model of exchange rate determination new evidence from a century of data abstract we test the long run monetary model of exchange rate determination for a collection of 14 industrialized countries using data spanning the late nineteenth or early twentieth century to the late twentieth century interestingly we find support for a simple form of the long run monetary model in over half of the countries we consider for these countries we estimate vector error correction models to investigate the adjustment process to the long run monetary equilibrium in the spirit of meese and rogoff journal of international economics 14 1983 3 24 we also compare nominal exchange rate forecasts based on monetary fundamentals to those based on a naive random walk model

implications of consumer heterogeneity in time series estimates of us money demand the money demand function has traditionally been estimated with income and interest rates typically employing quite lengthy time series controversy however surrounds the importance of heterogeneous agents in monetary economics and throughout macroeconomics more generally in particular if proportions of agents with different traits and hence different money demands are changing over time ignoring those changes may bias estimated income and interest elasticities this concern as well as that of appropriate functional form is explored here controlling for consumer heterogeneity has surprising effects on the estimated elasticities of traditional variables

estimating shocks and impulse response functions this paper examines the issue of how to identify the shocks in a cointegrated var when the following assumptions are made the variables can be classified as endogenous or exogenous there are as many cointegrating relations as endogenous variables the cointegrating vectors are identified and they contain at least one exogenous variable it is shown that with these assumptions it is possible to identify the shocks without the use of further restrictions on the covariance matrix of the disturbances or the short run dynamics if the long run parameters are known the whole model can be estimated by ols the analysis is extended to allow the var to have both stationary and non stationary variables an illustration of the method is provided using the traditional benchmark var model involving us data on output prices interest rates and money a liquidity effect is not found using this var methodology

an analysis of portfolio selection with background risk abstract this paper investigates the impact of background risk on an investor s portfolio choice in a mean variance framework and analyzes the properties of efficient portfolios as well as the investor s hedging behaviour in the presence of background risk our model implies that the efficient portfolio with background risk can be separated into two independent components the traditional mean variance efficient portfolio and a self financing component constructed to hedge against background risk our analysis also shows that the presence of background risk shifts the efficient frontier of financial assets to the right with no changes in its shape moreover both the composition of the hedge portfolio and the location of the efficient frontier are greatly affected by a number of background risk factors including the proportion of background assets in total wealth and the correlation between background risk and financial risk

a new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the business cycle abstract this paper introduces a general procedure for decomposition of non stationary time series into a permanent and transitory component allowing both components to be stochastic the permanent component is shown to be a random walk with drift and the transitory or cyclical component is a stationary process with mean zero the decomposition methodology which depends only on past data and therefore is computable in real time is applied to the problem of measuring and dating business cycles in the portwar u s economy we find that measured expansions and contractions are of roughly equivalent duration and that our dating of cyclical episodes tends to lead the traditional nber dating and to a lesser extent the growth cycle chronology of zarnowitz and boschan 1977

optimal franchising in oligopolistic markets with uncertain demand abstract if oligopolistic firms can observe and enforce retail prices upon their retailers they may select to do so if retailers have private information about an uncertain state of the demand delegating the pricing decision to the retailer has both an advantageous effect of alleviating price competition among firms and a disadvantageous effect of transferring surplus from the firm to its agent the disadvantageous effect may be dominant if the products produced by the firms are sufficiently differentiated and or the degree of prior uncertainty about the demand is sufficiently high

efficiency in housing markets which home buyers know how to discount abstract we test for efficiency in the swedish co op market by examining the negative relationship between the sales price and the present value of future monthly payments or rents if the co op housing market is efficient the present value of co op rental payments due to underlying debt obligations of the cooperative should be fully reflected in the sales price however a one hundred kronor increase in the present value of future rents only leads to an approximately 75 kronor reduction in the sales price these inefficiencies are larger at the lower end of the housing market and in poorer less educated regions and appear to reflect both liquidity constraints and the existence of more sophisticated buyers in higher educated areas overall our findings suggest that there is some systematic failure to properly discount the future stream of rent payments relative to the up front sales price

agency theory and franchising some empirical results this article provides an empirical assessment of various agency theoretic explanations for franchising including risk sharing one sided moral hazard and two sided moral hazard the empirical models use proxies for factors such as risk moral hazard and franchisors need for capital to explain both franchisors decisions about the terms of their contracts royalty rates and up front franchise fees and the extent to which they use franchising in this article i exploit several new sources of data on franchising to construct a cross section of 548 franchisors involved in various business activities in the united states in 1986 the data are most consistent with a model based on two sided moral hazard the empirical models are also more successful at explaining the extent to which franchisors choose to franchise stores than at explaining the terms of franchise contracts finally contrary to the predictions of several theoretical models i find that royalty rates and franchise fees are not negatively related

endogenous residual claimancy by vertical hierarchies in this note we study a model of vertical hierarchies where the allocation of residual claimancy is endogenous and is determined jointly with production and contractual decisions we show that the equilibrium allocation of residual claimancy may be affected by production externalities across hierarchies in a non trivial manner specifically although revenue sharing contracts foster agents non contractible surplus enhancing effort we show that principals dealing with exclusive and privately informed agents might still prefer to retain a share of the surplus from production when dealing with inefficient high cost types this is because reducing the surplus share of those types reduces the information rent given up to efficient low cost types by means of a generalized competing contracts effect

currency fluctuations in the post bretton woods era the international monetary landscape that has emerged since the felling of bretton woods is characterized by a hybrid exchange rate system that lies somewhere between the textbook polar cases of a gold standard and a pure float this system has relatively flexible exchange rates between major countries active central bank intervention in the market for the major currencies and predominantly fixed exchange rates relative to the dollar or to some basket of currencies for less developed countries and newly industrializing nations the majority of research on currency markets since the early 1970s has focused on the characteristics of flexible exchange rates under this hybrid regime my thesis is that this research has been unsuccessful the proportion of monthly or quarterly exchange rate changes that current models can explain is essentially zero even after the fact forecasts that use actual values instead of forecasted values of the explanatory variables cannot explain major currency movements over the post bretton woods era this result is quite surprising since exchange rate changes would be entirely unpredictable only in very special cases of the theoretical models discussed as the discussion below will argue it is not a general implication of market efficiency that exchange rates follow a random walk process 1

contracting with endogenous entry we analyze entry in markets where a principal contracts with a privately informed agent before learning his production cost the agent knows his probability of having a low cost his ex ante type and decides whether to pay an entry fee to contract with the principal there are two cut off equilibria that determine the possible types of an agent who actually enters the market and neither equilibrium can be discarded by standard selection criteria contrasting with standard intuition in the equilibrium with the highest cut off an increase in the entry fee reduces the marginal type of the agent who enters thus increasing entry and the expected cost of an entrant this equilibrium is selected by a criterion based on robustness to equilibrium risk even though the equilibrium with the lowest cut off is pareto dominant for the agent public policies that increase entry barriers may be welfare improving

an asymmetric error correction model of uk consumer spending this paper augments the granger and lee journal of applied econometrics 4 1989 non symmetric error equilibrium correction model to assess the possibility that in the aggregate consumers respond differently to different types of disequilibrium error this idea is illustrated using an engle granger implementation of the davidson hendry srba and yeo dhsy economic journal 80 1978 model the disequilibrium error is endogenously determined by the long run empirical model and a binary dummy variable captures two alternative states above and below equilibrium spending interaction of the dummy variable with key variables in a short run dynamic model of uk consumer spending augments the dynamics of the dhsy model income elasticities inflation elasticities and speeds of adjustment are all seen to change significantly depending on whether the disequilibrium error is positive or negative and is suggestive of asymmetric behaviour on the part of consumers moreover the asymmetrically augmented mode

have north south growth linkages changed abstract this paper provides econometric evidence suggesting that the traditional tradebased business cycle linkages between the north and the south have changed many countries in the south particularly in asia appear to have become more resilient to cyclical movements in the north and play a more significant role in sustaining global activity a number of factors may have contributed to these changes improved domestic policies and more open trade and exchange regimes closer financial linkages with the north and a substantial increase in capital flows a marked rise in intraregional trade and greater diversification of the exports of the south

portfolio choice in the presence of personal illiquid projects personal projects such as a private business or the purchase of a home influence individuals portfolio choice we conduct a theoretical analysis of this influence when financial assets are required to provide liquidity to personal projects due to this liquidity consideration individuals behave in a more risk averse fashion when there is a large penalty for discontinuing or underinvesting in the final stages of the projects in addition using data from the 1995 survey of consumer finances we find that households that are saving to invest in their own businesses or in their own homes indeed have significantly safer financial portfolios a large portion of private assets are invested in personal illiquid projects these are projects that must be partly self financed and are costly to sell according to the 1995 survey of consumer finances scf residential housing and capital invested in unincorporated businesses account for 41 2 percent and 19 1 percent respectively of household wealth in this paper we study the impact of these personal illiquid projects on individuals portfolios of financial assets personal projects influence portfolio choice in two ways first financial assets can be used to provide diversification against bad outcomes of personal projects this interaction is well recognized in the literature as it emanates from standard portfolio theory second financial assets can be used to provide liquidity to personal projects when the timing of investment in these projects is important this latter interaction is the focus of our paper we show that it helps explain why individuals particularly young investors and entrepreneurs have larger than expected holdings of safe financial assets in the financial planning literature young investors are advised to hold a larger share of risky assets in their financial portfolios in order to capture the superior expected return of these assets as investors grow older they are advised to gradually reduce their holdings of risky assets jagannathan and kocherlakota 1996 show that this advice is economically sound as long as the investor s human wealth is relatively uncorrelated with stock returns

breaking trends and the money output correlation this paper examines the impact on the money output correla tion of a univariate specification that allows time series to be characterized as stationary around a broken trend function though pretesting suggests that u s real output industrial production can be described as broken trend stationary this result has only limited impact on the money output correlation before 1985 there is a strong granger causal relationship between money and broken detrended output but not first differenced output even when different short term interest rates are used as regres sors however after 1985 this relationship weakens significantly whether or not one determines that output has a unit root

the effects of health events on the economic status of married couples this paper uses measures of exogenous health shocks to identify the different channels through which changes in health conditions affect income wealth and consumption behavior the results indicate that serious health conditions have strong effects on household wealth but that the effects for women are larger and more significant than the effects for men the source of the asymmetry arises from the fact that general living expenses increase when wives become seriously ill while for husbands health shocks do not affect these expenditures

strategic outsourcing revisited this paper analyzes a sequential game where firms decide about outsourcing the production of a non specific input good to an imperfectly competitive input market we apply the taxonomy of business strategies introduced by fudenberg and tirole 1984 to characterize the different equilibria and find that outsourcing generally softens competition in the final product market if firms anticipate the impact of their outsourcing decisions on input prices there may be equilibria where firms outsource so as to collude or to raise rivals costs we illustrate our analysis using a linear cournot model

net foreign assets and international adjustment the united states japan and germany abstract this paper examines external adjustment in the usa japan and germany from the perspective of net foreign asset positions it asks two questions what are in the long run the determinants of net foreign asset equilibrium what are in the short run some of the adjustment mechanisms sustaining that equilibrium an analysis of post war data produces two insights first using a cointegration approach the existence of long run net foreign asset equilibrium can be identified it is a function of demographic variables and public debt second deviations from long run equilibrium give rise to feedback through different components of domestic absorption in the three countries

optimal diversification and risk taking a theoretical and empirical analysis among the justifications for capital property income received by private households is that it is a return to risk taking however portfolio diversification provides an obvious means toward the reduction of risk moreover it is widely believed that the wealthier the household the more diversification it practices the larger tends to be the proportion of its total portfolio allocated to publicly traded stock and the larger tends to be the number of individual stock issues included in its portfolio using a simple homogeneous securities model explicit functional forms are obtained for both the optimal proportion of the portfolio allocated to stocks and the optimal number of individual stock issues in the portfolio empirical evaluation of these theoretical results using a dataset derived from the 2004 survey of consumer finances scf lends substantial support to the model applying these empirical results it is found that as household capital wealth increases expected capital income increase

social interaction and stock market participation we propose that stock market participation is influenced by social interaction in our model any given social investor finds the market more attractive when more of his peers participate we test this theory using data from the health and retirement study and find that social households those who interact with their neighbors or attend church are substantially more likely to invest in the market than non social households controlling for wealth race education and risk tolerance moreover consistent with a peer effects story the impact of sociability is stronger in states where stock market participation rates are higher

portfolio choice and mortality contingent claims the general hara case abstract we solve a portfolio choice problem that includes mortality contingent claims and labor income under general hara preferences our contribution beyond existing literature is to i focus on the covariance between shocks to human capital and financial capital to ii model the utility of a family with basic needs and iii include life insurance and pension annuity claims in one unified life cycle model our solution employs a similarity reduction mapping which reduces the two dimensional hjb equation into one dimension this allows for the implementation of a quick numerical scheme and when shocks to human capital and financial capital are perfectly correlated a closed form expression is obtained as a special case

subjective life horizon and portfolio choice abstract using data from a u s household survey we examine the empirical relation between subjective life horizon i e the self reported expectation of remaining life span and portfolio choice we find that equity portfolio shares are higher for investors with longer horizons controlling for gender specific age effects socio economic characteristics health and optimism our result is robust to accounting for the endogeneity of equity market participation or instrumenting subjective life horizon with parental survival finally we show that the effect of a shortening horizon on portfolio allocation is stronger for households without bequest motives

retirement spending and biological age abstract we solve a lifecycle model in which the consumer s chronological age does not move in lockstep with calendar time instead biological age increases at a stochastic non linear rate in time like a broken clock that might occasionally move backwards in other words biological age could actually decline our paper is inspired by the growing body of medical literature that has identified biomarkers which indicate how people age at different rates this offers better estimates of expected remaining lifetime and future mortality rates it isn t farfetched to argue that in the not too distant future personal age will be more closely associated with biological vs calendar age thus after introducing our stochastic mortality model we derive optimal consumption rates in a classic yaari 1965 framework adjusted to our proper clock time in addition to the normative implications of having access to biological age our positive objective is to partially explain the cross sectional heterogeneity in retirement spending rates at any given chronological age in sum we argue that neither biological nor chronological age alone is a sufficient statistic for making economic decisions rather both ages are required to behave rationally

the effects of competition on executive behavior economists presume that competition spurs a firm to be more efficient by forcing it to reduce its agency problems this article investigates this presumption it finds that the effects of competition on executive behavior can be decomposed into four effects each of which is of potentially ambiguous sign theory thus offers no definitive defense of this presumption this article also derives sets of conditions under which increased competition has the presumed effect of reducing agency problems in some sets important conditions are that increased competition reduce the executive s expected income and that agency goods e g shirking be normal goods for the executive the article shows that an increase in the shareholder bargaining strength can both reduce the agency problem and make it more sensitive to competition

the strategic value of partial vertical integration we investigate the strategic incentives for partial vertical integration namely partial ownership agreements between manufacturers and retailers when retailers privately know their costs and engage in price competition with differentiated goods the partial misalignment between the profit objectives within a partially integrated manufacturer retailer hierarchy implies a higher retail price than under full integration this information vertical effect translates into a competition horizontal effect the partially integrated hierarchy s commitment to a higher price induces the competitor to increase its price which strategically relaxes competition our analysis provides implications for vertical merger policy and theoretical support for the recently documented empirical evidence on partial vertical acquisitions

empirical models of the exchange rate separating the wheat from the chaff various popular exchange rate models a standard monetary model a portfolio balance model and sticky price models are estimated and evaluated using u s canadian data for the 1970s nonnested hypothesis tests demonstrate that none are correctly specified the data suggest 1 the exchange rate persistence observed is not fully explained by any of the models 2 the small durbin watson statistics indicate longer lags are required 3 the current account is a useful explanatory variable 4 the portfolio balance model fits the data well but has potentially serious problems measuring the stock of foreign assets this abstract was borrowed from another version of this item

the canadian us dollar exchange rate a test of alternative models for the seventies abstract three basic models of bilateral exchange rate determination are evaluated on the basis of the canadian experience in the 1970s we examine wealth effects and incorporate consistent expectations in the traditional models based on reduced form equations empirical results reject a simple monetary approach and the stickly price asset market model but concur with a version of the stock flow model of exchange rate determination

measuring market power for some industrial sectors in austria this paper applies an oligopoly model which parameterizes the degree of market power for two industrial sectors glass industry non electrical machinery in austria in contrast all other paper in the new empirical indsutrial organization literature we account for the non stationarity characteristics of the data series a dynamic specification procedure which assumes structural long run equilibrium relationships is therefore applied since a simultaneous system with non linear cross equation restrictions is implied by the economic model a full information maximum likelihood method is used the data reveal a higher degree of market power for the glass industry than for non electrical machinery this hierarchy is in line with the position of these industries for concentration rates and herfindahl indices

searching for a break in gnp it has been suggested that existing estimates of the long run impact of a surprise move in income may have a substantial upward bias due to the presence of a trend break in postwar u s gross national product data this article shows that the statistical evidence does not warrant abandoning the no trend break null hypothesis a key part of the argument is that conventionally computed p values overstate the likelihood of the trend break alternative hypothesis this is because they do not take into account that in practice the date is chosen based on pretest examination of the data

declining discount rates and the fisher effect inflated past discounted future uncertain and persistent real interest rates underpin one argument for using a declining term structure of social discount rates in the expected net present value enpv framework despite being controversial this approach has influenced both the inter agency working group on cost benefit analysis and the uk government s guidelines on discounting we first clarify the theoretical basis of the enpv approach then rather than following previous work which used a single series of u s treasury bond returns we treat nominal interest rates and inflation as co integrated series and estimate the empirical term structure of discount rates via the fisher effect this nests previous empirical models and is more flexible it also addresses an irregularity in previous work which used data on nominal interest rates until 1950 and real interest rates thereafter as we show the real and nominal data have very different time series properties this paper therefore provides a robustness check on previous discounting advice and updated methodological guidance at a time when governments around the world are reviewing their guidelines on social discounting the policy implications are discussed in the context of the social cost of carbon nuclear decommissioning and public health

estimating long run economic equilibria with stochastic trends an asymptotic theory is provided to analyze a menu of currently existing estimators of cointegrated systems we study in detail the single equation ecm seecm approach of hendry our theoretical results lead to prescriptions for empirical work such as specifying seecm s nonlinearly and including lagged equilibrium relationships rather than lagged differences of the dependent variable as covariates simulations support these prescriptions and point to problems of overfitting not encountered in the semiparametric approach of phillips and hansen 1990

empirical age earnings profiles the human capital earnings function in which earnings are expressed as a quadratic in potential experience is probably the most widely accepted empirical specification in economics in spite of its widespread acceptance the human capital earnings function provides a very poor approximation of the true empirical relationship between earnings and experience the standard formulation understates early career earnings growth by about 30 50 and overstates midcareer growth by 20 50 however simple alternative specifications that fit the data are available

using cost observation to regulate firms the paper emphasizes the use of accounting data in regulatory or procurement contracts when the supplier 1 has superior information about the cost of the project and 2 invests in cost reduction the main result states that under risk neutrality the supplier announces an expected cost and is given an incentive contract linear in cost overruns this optimal contract moves toward a fixed price contract as the announced cost decreases an investment choice is then introduced and the use of a rate of return regulation is studied

the exchange rate and purchasing power parity extending the theory and tests abstract this paper analyzes the exchange rate in a no arbitrage or real business cycle equilibrium model and provides empirical evidence for this model vis a vis ppp our contribution is to show based on a generalization of the equilibrium model of exchange rates that i the test equation linking the exchange rate to fundamentals should allow for international heterogeneity in time preferences and risk attitudes as well as noise that is the model should not be tested as an exact relation ii empirical work should use levels of variables rather than first differences and iii tests on the existence of long run relations should be complemented by test on the signs of the coefficients our empirical work shows that as a long run relation the generalized model outperforms ppp moreover under the generalized model quarterly deviations from the estimated long term relation have a half life of only four to five quarters

health and other asset holdings despite clear evidence of correlations between financial and medical statuses and decisions most models treat financial and health related choices separately this article bridges this gap by proposing a tractable dynamic framework for the joint determination of optimal consumption portfolio holdings health investment and health insurance we solve for the optimal rules in closed form and capitalize on this tractability to gain a better understanding of the conditions under which separation between financial and health related decisions is sensible and of the pathways through which wealth and health determine allocations welfare and other variables of interest such as expected longevity or the value of health furthermore we show that the model is consistent with the observed patterns of individual allocations and provide realistic estimates of the parameters that confirm the relevance of all the main characteristics of the model

health cost risk a potential solution to the annuity puzzle we find that health cost risk lowers optimal annuity demand at retirement if medical expenses can be sizeable early in retirement full annuitisation at retirement is no longer optimal because agents do not have enough time to build a liquid wealth buffer furthermore large deviations from optimal annuitisation levels lead to small utility differences our results suggest that health cost risk can explain a large proportion of empirically observed annuity choices finally allowing additional annuitisation after retirement results in welfare gains of at most 2 5 when facing health cost risk and negligible gains without this risk

a complete solution to a class of principal agent problems with an application to the control of a self managed firm this paper considers a class of principal agent problems which have the following features 1 there is adverse selection because the principal ignores the value of one parameter of the agent s true characteristics 2 leaving aside the information parameter the principal s welfare as well as the agent s welfare depend on two types of variables observable to both of them the first ones possibly multidimensional are called action variable s and the second one which is one dimensional has in general the meaning of a money transfer 3 the principal is a stackelberg leader of the two person game he can commit himself to decision rules which are admissible on informational grounds he optimizes within the adequate class taking into account besides the agent s reaction one constraint which has generally the meaning of an individual rationality constraint and sometimes of a feasibility constraint the optimization is limited to the class of non stochastic mechanisms 4 the problem can also receive an alternative interpretation the principal faces a continuum of agents of unknown characteristics the distribution being known however stylized principal agent problems of this type have often been considered in the economic literature in particular the reader will later be able to recognize that the standard income tax model a la mirrlees 1971 the quality or quantity choice model of the monopolist a la mussa and rosen 1978 or maskin and riley 1982 and the model of government regulation of the private monopolist of baron and myerson 1982 all belong to

strategic aspects of vertical delegation abstract this paper offers an overview of the strategic aspects of situations where either institutionally or contractually a firm delegates some of its decisions to another firm a subsidiary an internal division etc delegation may have several kinds of strategic benefits in the short term it may improve the competitive position of the firm or induce a more lenient behavior from its competitors in the long run it may be used to deter the entry of potential competitors to foreclose market access or to induce actual competitors to exit the paper analyzes the trade off between these possible benefits and the agency costs of delegation and emphasizes the key issues of credibility and commitment

health and portfolio choices a diffidence approach the effect of health status on portfolio decisions has been extensively studied from an empirical viewpoint in this paper we propose a theoretical model of individuals choice of financial assets under bivariate utility functions depending on wealth and health our approach makes an extensive use of the diffidence theorem we establish the conditions under which the share of wealth held in risky assets falls as 1 individuals health status deteriorates and 2 individuals health status becomes risky these conditions are shown to be related to the behavior of the intensities of correlation aversion and of cross prudence as wealth increases

vertical integration or separation of the sales function as implied by competitive forces abstract in the present paper we link the decisions concerning the sales strategies that are made by competing firms we demonstrate that when the demand schedules facing competing firms are moderately correlated asymmetric equilibria may arise where only one firm decides to establish its own sales force while its competitor sells its product through an independent sales agency when demand schedules are highly correlated however only symmetric equilibria can arise since firms derive greater benefits from imitating rather than contradicting their rivals choices we demonstrate that vertical separation of its sales function is more likely than vertical integration when firms produce products that are highly substitutable

monetary models of dollar yen euro nominal exchange rates dead or undead the predictions of the models were based on ex post realised values of the explanatory variables in other words the standard exchange rate models we estimated exhibited extremely poor out of sample fit 2 at the time these nihilistic results seemed quite radical since there was widespread optimism about the potential of monetary models especially sticky price monetary models to explain how flexible exchange rates function after all the main cornerstones of monetary exchange rate models were relatively noncontroversial long run purchasing power parity or some variant of ppp and a presumption that there is a strong long run connection between money growth and inflation today the meese and rogoff 1983a results no longer seem quite so crazy despite longer data sets on modern floating rates and the application of more sophisticated econometric techniques researchers have continued to find it very frustrating to firmly demonstrate any systematic relationship between exchange rates and macroeconomic fundamentals at least for the cross rates between the dollar dm euro and yen it is true that researchers have occasionally found particular sub samples where certain models seem to perform noticeably better than the random walk model but as a rule these results wilt under sustained out of sample testing surveying the evidence in their survey for the handbook of international economics frankel and rose 1995 conclude that numerous attempts to overturn the meese and rogoff 1983a results have failed

the failure of the monetary exchange rate model for the canadian u s dollar in this paper the validity of the monetary exchange rate model in the long run for the canadian u s dollar exchange rate is examined the primary test employed is the johansen 1991 and johansen and juselius 1990 cointegration technique the effects of dummy variables and lag specification on the statistical inference are considered and monte carlo simulations based on the estimated parameters are employed despite the use of the longest data set yet for the canadian case no evidence is found in favour of the monetary exchange rate model using the johansen procedures this result is confirmed by several other cointegration procedures jel classification f31 f41 la faillite du modele monetaire du taux de change pour les dollars canadien et americain ce memoire examine le modele monetaire du taux de change pour savoir s il est valide par l experience canado americaine en longue periode le test principal utilise est la technique de cointegration de johansen 1991 et johansen et juselius 1990 les effets des variables fictives et de la specification de la structure de delais sur l inference statistique sont consideres et on utilise des simulations de monte carlo fondees sur les parametres calibres malgre le fait qu on fait appel a la plus longue serie chronologique utilisee dans ce type d analyse a ce jour on ne trouve aucun support du modele monetaire du taux de change en utilisant les procedures de johansen ce resultat est confirme par l utilisation de plusieurs autres procedures de cointegration

why do so few hold stocks the authors investigate why 75 percent of u s households do not hold stocks despite the equity premium and predictions of expected utility models the question is relevant for privatization asset pricing and tax progressivity issues they show that risk aversion per se heterogeneity of beliefs habit persistence time nonseparability and quantity constraints on borrowing do not account for the phenomenon a wedge between borrowing and lending rates and minimum investment requirements are plausible but empirically weak factors more promising explanations are inertia and departures from expected utility maximization there is also qualified support for nondiversifiable income risk as a contributing factor copyright 1995 by royal economic society

healthy bodies and thick wallets the dual relation between health and economic status there is abundant evidence of a quantitatively large association between many measures of economic status including income and wealth and a variety of health outcomes such as mortality or morbidity however considerable and often heated debate remains especially across disciplines about the direction of causation and about why the association arises although medical scientists are often convinced that the dominant if not exclusive pathway is that variation in socioeconomic status produces health disparities they are increasingly debating among themselves about why low economic status might lead to poor health at least for modern industrial countries 1 the old standby arguments the less well to do have access to less or lower quality medical care or a stronger pattern of deleterious personal behaviors have been rejected as insufficient instead a series of intriguing competing theories have arisen that emphasize long term impacts of early childhood or even inter uterine environmental factors the cumulative effects of prolonged exposures to individual stressful events or reactions to macro societal factors such as rising levels of income inequality a common link is that each theory attempts to document the physiological processes through which low economic status leads to poorer health while these scientific questions are extremely important this research has taken place with little input from economists economists are now making contributions about the alternative pathway the impact poor health may have on economic resources poor health may restrict a family s capacity to earn income or to accumulate assets by limiting work or by raising medical expenses at a minimum this work should provide a caution against exaggerating the magnitude of causation from economic status to health outcomes but the potential contribution runs deeper as people age the evolving variation in individual health outcomes may offer additional statistical information to estimate parameters of household savings and consumption behavior that so far have proven to be somewhat elusive thus incorporating health uncertainty and risk into economic models should eventually enrich our understanding of basic tenets of household behavior the first section of this paper documents the size of the association between health and one prominent economic status measure household wealth section two deals with how health influences economic status by sketching out reasons why health may alter household savings and eventually wealth and then providing estimates of the empirical magnitude of these effects section three shifts attention to the alternative pathway the links between economic status and health and summarizes 2major controversies and evidence surrounding these issues

ricardian equivalence and the public and private saving nexus in india abstractthis study tests the ricardian equivalence theorem ret and examines the responsiveness of private saving to public saving in india most estimators do not provide support for the empirical validity of ret and long run cointegration between public and private saving the increases in household saving hhs seem to have been engendered by the provision of saving incentives institution of saving schemes self driven motivation to save and the precautionary accumulations induced by uncovered uncertainties in incomes rather than by ricardian behaviour of households the self imposed aversion to debt and debt bequest borrowing and liquidity constraints and the intertemporal smoothing of consumption have been the added catalysts that contributed to the increases in hhs the households with binding borrowing constraints inadequate or no insurance and uncovered uncertainties in incomes seem to have been saving more to pay for higher inflation tax the fiscal consolidation and generation of public s

entry and product variety with competing supply chains we study a model where an endogenous number of competing manufacturers located around a circle contract with exclusive retailers who are privately informed about their costs the number of brands in the market determined by the manufacturers zero profit condition depends on the presence of asymmetric information and on the types of contracts between manufacturers and retailers with two part tariffs wholesale prices fully reflect retailers costs with linear contracts wholesale prices are constant and independent of retailers costs the number of brands is lower resp higher with asymmetric information than with complete information when contracts are linear resp with two part tariffs moreover although the number of brands is always higher with linear contracts than with two part tariffs joint profits of manufacturers and retailers are higher with linear prices we also discuss manufacturers incentives to choose different contract forms and analyze the effects of endogenous entry on welfare

product market competition and boundaries of the firm this paper studies the effects of product market competition on firm boundaries in a duopoly setting each retailer is associated with a manufacturer who must decide how to allocate property rights over a retail asset delegating property rights over the retail asset to an indepedent retailer disintegration transfers incentives from the manufacturer to the retailer and has the benefit of increasing product quality and profits owing to the retailer s superior efficiency however it also forces the manufacturer to forfeit part of the profits competition increases the net benefit from delegation and leads to more efficient vertically disintegrated structures cet article etudie la concurrence sur le marche des produits et ses effets sur les limites de l entreprise dans un modele de duopole chaque producteur associea un distributeur choisit soit une structure verticale integree dans laquelle le distributeur est son employe soit une structure desintegree dans laquelle le distributeur est independant plus efficace en termes d incitations au distributeur la structure desintegree genere des profits joints plus importants elle oblige cependant le producteur a partager les profits avec le distributeur la concurrence augmente le benefice et reduit le cout de la desintegration favorisant ainsi des structures verticales desintegrees et efficaces

services sector and economic growth in india this study examines the long run equilibrium and short run dynamic relationship between services sector and gross domestic product gdp and between services and nonservices sectors in india the model is estimated using the optimal single equation and the maximum likelihood system estimators all the estimators consistently suggest the cointegrating relationship between services sector and gdp as well as between services and nonservices sectors the estimates of long run elasticity parameters are statistically significant and dimensionally consistent across the estimators the conventional cumulative sum cusum and the new cusum and moving sum mosum tests suggest the stability of the equilibrium residuals and reinforce the cointegrating relationship between the model series the error correction model provides some support for unidirectional granger causality from services sector to gdp the impulse response and variance decomposition analyses instead suggest the bidirectional causality between servic

household portfolio choice and retirement this study examines household portfolio choice through the retirement transition i show that couples significantly decrease their stock allocations after retirement whereas singles allocations remain relatively unchanged reallocations are concentrated among couples in which the wife is more risk averse than her husband husbands and wives respective retirement events are followed by opposite signed changes in stock allocations these findings are consistent with a model of collective household decision making in which spouses have heterogeneous risk preferences and suggest that dynamics in the distribution of intrahousehold bargaining power generate time varying household risk aversion

health status and portfolio choice causality or heterogeneity abstract this paper explores the role of unobserved individual characteristics in the health assets and health portfolio correlations we apply various econometrics models to a unique longitudinal dataset with rich information that allows for the exploitation of four different health indices our findings show strong cross sectional correlations between health and both financial and non financial assets but these correlations seem to be mainly driven by heterogeneity as the correlations largely disappear in the fixed effects model adverse health shocks however are found to motivate a safer portfolio choice even after individual fixed effects are controlled for a result consistent with the prediction made by the background risk theory our findings suggest that health shocks shift investment from risky assets toward other financial assets but keep the total financial assets unchanged

vertical restraints with incomplete information when a firm contracts with a privately informed retailer vertical restraints may be insufficient to eliminate distortions arising from having to induce truthful reporting with franchise fee contracts which are equivalent to any other quantity forcing contract two distortions arise the first is the need to transfer surplus to the retailer and the second is a reduction in the marginal return to production with rpm contracts the first best outcome of vertical integration is obtainable if the retailer observes private information only about the state of demand if the retailer observes also private information about retailing costs both distortions persist in an earlier paper rey and tirole 1986 r t compare various forms of vertical restraints in a stochastic environment where retailers have superior private information than the firm about the uncertain state of the world they demonstrate that with asymmetric information vertical restraints may be insufficient in order to reproduce the first best outcome of vertical integration in r t contingencies are not feasible in the contracts since there are multiple retailers who can arbitrage in particular the wholesale price and the franchise fee under franchise fee contracting ff or the retail price imposed upon the retailer under retail price maintenance rpm cannot be selected contingent upon any future communication with the retailers in contrast in the present paper we assume that the firm is served by a single retailer which then facilitates consideration of contingent contracts the reason we make this different assumption is in order to investigate whether more sophisticated contracts can resolve the agency problem we still obtain similar negative results to the ones obtained by r t specifically vertical integration cannot generally be reproduced by appropriate contracting if retailers can observe private information about demand or retailing costs there is another characteristic of the class of contracts considered in r t that we modify in the present analysis while in r t the agent agrees to serve the firm as long as its ex ante expected payoff is nonnegative in the present paper we require that the ex post profits of the agent are nonnegative irrespective of how unfavorable is the realization of the state of nature this

regulating a monopolist with unknown costs we consider the problem of how to regulate a monopolistic firm whose costs are unknown to the regulator the regulator s objective is to maximize a linear social welfare function of the consumers surplus and the firm s profit in the optimal regulatory policy prices and subsidies are designed as functions of the firm s cost report so that expected social welfare is maximized subject to the constraints that the firm has nonnegative profit and has no incentive to misrepresent its costs we explicitly derive the optimal policy and analyze its properties in their classic papers dupuit 2 and hotelling 5 considered pricing policies for a bridge that had a fixed cost of construction and zero marginal cost they demonstrated that the pricing policy that maximizes consumer well being is to set price equal to marginal cost and to provide a subsidy to the supplier equal to the fixed cost so that a firm would be willing to provide the bridge this first best solution is based on a number of informational assumptions first the demand function is assumed to be known to both the regulator and to the firm while the assumption of complete information may be too strong the assumption that information about demand is as available to the regulator as it is to the firm does not seem unnatural a second informational assumption is that the regulator has complete information about the cost of the firm or at least has the same information about cost as does the firm this assumption is unlikely to be met in reality since the firm would be expected to have better information about costs than would the regulator as weitzman has stated an essential feature of the regulatory environment i am trying to describe is uncertainty about the exact specification of each firm s cost function in most cases even the managers and engineers most closely associated with production will be unable to precisely specify beforehand the cheapest way to generate various hypothetical output levels because they are yet removed from the production process the regulators are likely to be vaguer still about a firm s cost function 12 p 684 as this observation suggests it is natural to expect that a firm would have better information regarding its costs than would a regulator the purpose of this paper is to develop an optimal regulatory policy for the case in which the regulator does not know the costs of the firm one strategy that a regulator could use in the absence of full information about costs is to give the firm the title to the total social surplus and to delegate the pricing decision to the firm in pursuing its own interests which would then be to maximize the total social surplus the firm would adopt the same marginal cost pricing strategy that the regulator would have imposed if the regulator had

product market competition and organizational slack under profit target contracts in a framework a la martin 1993 we introduce a common component in the managers private information in order to address three related questions what is the impact of contracts that reward managers on the basis of realized profits on firms productive and allocative efficiency relative to cost target contracts how do these contracts shape the relationship between competition and organizational slack can we then explain the existing evidence of an inverted u shaped relationship between competition and cost reducing activities as documented in aghion et al aghion p bloom n blundell r griffith r howitt p competition and innovation an inverted u relationship the quarterly journal of economics 120 pp 701 728 2005 we show that profit target contracts introduce a horizontal contractual externality between the competing firms that mitigates organizational slack and improves upon productive efficiency relative to cost plus mechanisms moreover when executive compensations are conditioned on profits an inverted u shaped relationship between product market competition and managerial effort obtains finally we also show that when contractual instruments are endogenous i e when shareholders can choose between profit and cost target rules the equilibrium with profit target contracts always exists and is the only one that survives to standard refinements