what s wrong with forced wage compression the fair wage hypothesis redux abstract in this note we examine a modified version of akerlof and yellen s q j econ 105 1990 255 fair wage hypothesis where individuals care about the wages of workers above as well as below them in the wage distribution we find that this modified fair wage model is consistent with existing evidence about the reaction of workers and firms to forced wage compression from below

market efficiency and insider trading new evidence that corporate insiders earn profits from stock trading does not surprise most financial economists but that outsiders can earn abnormal returns by using pub licly available insider trading data constitutes a serious exception to stock market efficiency the authors show that this anomaly conti nues to exist despite the publication of studies attesting to its exi stence they suggest that the anomalous profits to outsiders are a ma nifestation of the size and earnings price ratio effects controlling for these factors reduces outsider profits by half the additional a ssumption of a 2 percent transactions cost makes outsider profits zer o or negative insider profits after an assumed 2 percent transactio ns cost are a moderate 3 percent per annum for annual holding period s copyright 1988 by the university of chicago

inefficient credit booms this paper studies the welfare properties of competitive equilibria in an economy with financial frictions hit by aggregate shocks in particular it shows that competitive financial contracts can result in excessive borrowing ex ante and excessive volatility ex post even though from a first best perspective the equilibrium always displays under borrowing from a second best point of view excessive borrowing can arise the inefficiency is due to the combination of limited commitment in financial contracts and the fact that asset prices are determined in a spot market this generates a pecuniary externality that is not internalized in private contracts the model provides a framework to evaluate preventive policies which can be used during a credit boom to reduce the expected costs of a financial crisis copyright 2008 wiley blackwell

benefits conditional on work and the nordic model abstract welfare benefits in the nordic countries are often tied to employment we argue that this is one of the factors behind the success of the nordic model where a comprehensive welfare state is associated with high employment in a general equilibrium setting the underlining mechanism works through wage moderation and job creation the benefits make it more important to hold a job thus lower wages will be accepted and more jobs created moreover we show that the incentive to acquire higher education improves further boosting employment in the long run these positive effects help in counteracting the negative impact of taxation through numerical simulations we show how this mechanism can contribute to explain the better labor market performance and more equitable income distribution of nordic countries compared to continental european ones

utilitarian aggregation of beliefs and tastes harsanyi s utilitarianism is extended here to savage s framework we formulate a pareto condition that implies that both society s utility function and its probability measure are linear combinations of those of the individuals an indiscriminate pareto condition has been shown to contradict linear aggregation of beliefs and tastes we argue that such a condition is not compelling society should not necessarily endorse a unanimous choice when it is based on contradictory beliefs our pareto condition is restricted to choices that involve identical beliefs only

a liquidity based model of security design we consider the problem of the design and sale of a security backed by specified assets given access to higher return investments the issuer has an incentive to raise capital by securitizing part of these assets at the time the security is issued the issuer s or underwriter s private information regarding the payoff of the security may cause illiquidity in the form of a downward sloping demand curve for the security the severity of this illiquidity depends upon the sensitivity of the value of the issued security to the issuer s private information thus the security design problem involves a tradeoff between the retention cost of holding cash flows not included in the security design and the liquidity cost of including the cash flows and making the security design more sensitive to the issuer s private information we characterize the optimal security design in several cases we also demonstrate circumstances under which standard debt is optimal and show that the riskiness of the debt is increasing in the issuer s retention costs for assets

no betting pareto dominance we argue that the notion of pareto dominance is not as compelling in the presence of uncertainty as it is under certainty in particular voluntary trade based on differences in tastes is commonly accepted as desirable because tastes cannot be wrong by contrast voluntary trade based on incompatible beliefs may indicate that at least one agent entertains mistaken beliefs we propose and characterize a weaker no betting notion of pareto domination which requires on top of unanimity of preference the existence of shared beliefs that can rationalize such preference for each agent

financial market innovation and security design an introduction abstract the article describes in the context of theory and practice this special issue of the journal of economic theory on financial market innovation and security design the main focus is on security design in incomplete financial markets possibly with asymmetrically informed traders we first survey the general equilibrium literature which emphasizes the spanning role of securities we then provide a unified framework encompassing the literature that employs a cara guassian setting to study the impact of financial innovation on risk sharing and information aggregation journal of economic literature classification numbers g10 d52

effects of financial innovations on market volatility when beliefs are heterogeneous abstract consider a model with two logarithmic utility maximizer agents that observe aggregate consumption but disagree about its expected rate of change markets are incomplete we first show that volatility of the interest rate in an economy with additional information is higher in a complete markets economy with no additional information there are two differences in volatility with the previous the first one due to the increase in volatility of the wealth share of the individuals is always positive the second difference is the change in covariance between the components of the interest rate volatility and can be positive or negative

optimal innovation of futures contracts this article presents a simple model of the innovation of new futures contracts by transaction volume maximizing futures exchanges in incomplete markets under uncertainty with mean variance preferences and proportional transactions costs we characterize the set of nash equilibria for a number of exchanges simultaneously or sequentially choosing contracts the optimal monopolistic contract design is shown to be pareto optimal an example shows the failure of pareto optimality for aparticularnash equilibrium likewise in a monopolistic multiperiod setting an example shows the failure of pareto optimality given an incentive for the exchange to induce turnover

scoring on the stock exchange the effect of football matches on stock market returns an event study we analyse the effect of results of football matches on the stock market performance of football teams we analyse 1274 matches of eight teams in the national and european competition during 2000 2004 we find that the stock market response is significant and positive for victories and negative for defeats the response is significantly stronger in the case of defeat the response is stronger for matches in the european competition than for those in the national competition unexpected results have a stronger impact for european matches than expected ones but this is not the case in the national competition

belief disagreements and collateral constraints belief disagreements have been suggested as a major contributing factor to the recent subprime mortgage crisis this paper theoretically evaluates this hypothesis i assume that optimists have limited wealth and take on leverage so as to take positions in line with their beliefs to have a significant effect on asset prices they need to borrow from traders with pessimistic beliefs using loans collateralized by the asset itself since pessimists do not value the collateral as much as optimists do they are reluctant to lend which provides an endogenous constraint on optimists ability to borrow and to influence asset prices i demonstrate that the tightness of this constraint depends on the nature of belief disagreements optimism concerning the probability of downside states has no or little effect on asset prices because these types of optimism are disciplined by this constraint instead optimism concerning the relative probability of upside states could have significant effects on asset prices this asymmetric disciplining effect is robust to allowing for short selling because pessimists that borrow the asset face a similar endogenous constraint these results emphasize that what investors disagree about matters for asset prices to a greater extent than the level of disagreements when richer contracts are available relatively complex contracts that resemble some of the recent financial innovations in the mortgage market endogenously emerge to facilitate betting

privacy and time consistent optimal labor income taxation abstract incomplete information is a commitment device for time consistency problems in the context of time consistent optimal labor income taxation privacy can lead to a pareto superior outcome and increases the effectiveness of public education as a second best policy

against the wind bargaining recentralisation and wage inequality in norway 1987 91 in the late 1980s norway s labour market experienced similar supply and demand shifts for skills to other countries but unlike other oecd nations norway s wage setting system became more centralised the pay distribution in norway became more compressed at the bottom from 1987 to 1991 while low wage workers in other countries lost ground relatively using norwegian microdata for 1987 and 1991 i found that changing labour market prices helped cause this wage compression further the less educated had declining relative overall employment but increasing relative public sector employment both possible labour market responses to the wage compression

divergence of opinion in complete markets a note we consider an arrow debreu model with agents who have different subjective probabilities in general asset prices will depend only on aggregate consumption and the distribution of subjective probabilities in each state of nature if all agents have identical preferences then an asset with more dispersed subjective probabilities will have a lower price than an asset with less dispersed subjective probabilities if risk aversion does not decline too rapidly it seems that this condition is likely to be met in practice so that increased dispersion of beliefs will generally be associated with reduced asset prices in a given arrow debreu equilibrium there have been several recent investigations concerning the effect of heterogeneous probability beliefs on asset prices most of these investigations have taken place in the context of capm like mean variance models see for example lintner 5 miller 7 williams 10 jarrow 4 and mayshar 6 comparatively little has been done in the analysis of differences of opinion in an arrow debreu contingent claims context rubinstein 8 breeden and litzenberger 2 and breeden 1 have presented nice analyses of asset price determination in an arrow debreu model but most of their results have assumed commonly held probability beliefs in this paper we analyze the impact of divergence of opinion on asset prices in an arrow debreu economy the results serve to generalize the findings of rubinstein and breeden litzenberger to the case of different probability beliefs among the results we establish are 1 in equilibrium asset prices depend only on aggregate consumption and the distribution of subjective probability beliefs 2 asset values are an increasing function of any one individual s probability beliefs 3 an increase in the spread of the probability beliefs of investors may increase or decrease equilibrium asset values depending on the value of a parameter of the utility function however the most likely effect is to decrease the asset values these results are especially interesting in light of the recent empirical work of cragg and malkiel 3 they studied the relationship between ex post return and various measures of risk for common stocks and found that the measure of risk that performed best in their analysis was a measure of divergence of opinion

stock splits and stock dividends why who and when this study investigates empirically why firms split their stock or distribute stock dividends and why the market reacts favorably to these distributions the findings suggest that stock splits are mainly aimed at restoring stock prices to a normal range some support can also be found for the oft mentioned signalling motive of stock splits stock dividends are altogether different from stock splits and they appear to be a decreasing phenomenon the clue to stock dividend distributions may lie in their perceived substitution for relatively low cash dividends neither stock splits nor stock dividends are recent phenomena the latter dates back to the elizabethan age among the first to declare such dividends was the east india company which while enjoying great prosperity declared in 1682 a stock dividend of one hundred percent during the eighteenth and nineteenth centuries stock dividends were quite frequently distributed by british companies in the united states an early and frequently discussed stock dividend distribution was that of the new york central railroad just prior to its union with the hudson river railroad in 1869 surprisingly stock dividends were quite popular in the u s despite their being subject to federal income tax thus for example during the seven years prior to 1922 the year in which the supreme court exempted the recipients of stock dividends from taxes the ratio of stock dividends to all dividend distributions was 14 5 percent this ratio increased to a staggering forty seven percent during the seven years succeeding the supreme court decision during 1936 to 1937 some american companies distributed stock dividends to avoid the undistributed profit tax

neglected risks financial innovation and financial fragility abstract we present a standard model of financial innovation in which intermediaries engineer securities with cash flows that investors seek but modify two assumptions first investors and possibly intermediaries neglect certain unlikely risks second investors demand securities with safe cash flows financial intermediaries cater to these preferences and beliefs by engineering securities perceived to be safe but exposed to neglected risks because the risks are neglected security issuance is excessive as investors eventually recognize these risks they fly back to the safety of traditional securities and markets become fragile even without leverage precisely because the volume of new claims is excessive

optimality of incomplete markets abstract in a static exchange economy where the traders initial endowments are risky the optimality of the financial structure is studied when markets are incomplete only financial structures with the same number of assets are compared a market structure is optimal when in a particular economy it yields an allocation of risks which cannot be pareto dominated through the implementation of any other market structure in a linear gaussian setup the optimal market structures are shown to span an eigenspace of a matrix which combines the risk exposures of the participants in the market approximately weighted by a measure of their risk aversions journal of economic literature classification numbers d60 g10

a welfare criterion for models with distorted beliefs this paper proposes a welfare criterion for economies in which agents have heterogeneously distorted beliefs instead of taking a stand on whose belief is correct our criterion asserts an allocation to be belief neutral ine cient if it is ine cient under any convex combination of agents beliefs while this criterion gives an incomplete ranking of social allocations it can identify negative sum speculation in a broad range of prominent models with distorted beliefs

financial complexity and trade what are the implications on trading activity if investors are not sophisticated enough to understand and evaluate trades that have a complex payoff structure can frictions generated by this type of financial complexity be so severe that they lead to a complete market freeze like that of the recent financial crisis starting from an allocation that is not pareto optimal we find that whether complexity impedes trade depends on how investors perceive risk and uncertainty for smooth convex preferences such as subjective expected utility complexity cannot halt trade even in the extreme case where each investor is so unsophisticated that he can only trade up to one arrow debreu security without being able to combine two or more in order to construct a complex trade however for non smooth preferences which allow for kinked indifference curves such as maxmin expected utility complexity can completely shut down trade

skewness preference and the measurement of abnormal returns in performing an empirical analysis of stock market returns there are certain conditions under which the quadratic characteristic line qcl will be the appropriate return generating process compared to the linear characteristic line lcl these conditions are whether the parameter associated with the squared market term the deviation from the mean is significantly different from zero and whether the return on the market portfolio is asymmetrically distributed or skewness is present examining abnormal returns surrounding stock splits we find that these conditions hold for our data set having ascertained that the conditions for qcl hold we find that the cumulative average returns cars obtained using qcl dominate the cars obtained using lcl in the event time and the car space for the dividend increase sub sample furthermore the standardized abnormal returns for the qcl model are significantly different than those obtained using the lcl model we find that neither the lcl nor the qcl paradigm re

institutional markets financial marketing and financial innovation firms and institutions are monitored and controlled through a complex set of implicit and explicit contractual relations because of these agency theoretic relations institu tional behavior in financial markets is not a simple reflection of the preference structures of individuals institutional preferences give rise to a demand for new financial instru ments and innovations even when the returns on these instruments are spanned in the sense of complete pricing the innovations can be thought of as solving moral hazard problems an agency theoretic example serves to illustrate the demand supply and financial marketing of stripped securities in short institutions matter the past two decades have witnessed an explosion of financial innovations the changes are too varied and diffuse to permit an easy taxonomy but broadly they seem to fall into two classes first there are the new securities and their markets beginning with puts and calls we have moved on to euromarkets mortgage pass throughs and cmo s strips straps and swaps putable converti bles primes and scores and s p futures and all of the other instruments that inhibit the financial zoo second there are the dynamic trading strategies that make heavy use of the new instruments basket and program trading the asset pricing theories that now characterize different types of money management and the various incarnations of portfolio insurance have changed financial decision making as dramatically as the available array of instruments has changed along with these changes has come an enormous increase in the demand for the services of financial economists we are called upon not only to value the new instruments and the new strategies but to design them as well like engineers

a risk centric model of demand recessions and speculation we provide a continuous time risk centric representation of the new keynesian model which we use to analyze the interactions between asset prices financial speculation and macro economic outcomes when output is determined by aggregate demand in principle interest rate policy is highly effective in dealing with shocks to asset valuations however in practice monetary policy faces a wide range of constraints if these constraints are severe a decline in risky asset valuations generates a demand recession this reduces earnings and generates a negative feedback loop between asset prices and aggregate demand in the recession phase average beliefs matter not only because they affect asset valuations but also because they determine the strength of the amplification mechanism in the ex ante boom phase belief disagreements or heterogeneous asset valuations matter because they induce investors to speculate this speculation exacerbates the crash by reducing high valuation investors wealth when the economy transitions to recession which depresses wealth weighted average beliefs macroprudential policy that restricts speculation in the boom can pareto improve welfare by increasing asset prices and aggregate demand in the recession

arrested development theory and evidence of supply side speculation in the housing market this paper incorporates speculation into the standard supply and demand framework used to analyze housing booms and busts speculation reverses the common intuition that elastic housing supply attenuates housing booms housing market frictions make land a more attractive speculative investment than housing as a result undeveloped land both facilitates construction and intensies

the significance of the market portfolio the market portfolio is in one sense the least important portfolio to provide to investors in an j agent one period stochastic endowment economy where preferences are quadratic a social welfare minded contract designer would never create a contract that would allow trading the market portfolio even the complete set of contracts all j 1 of them which achieve a first best solution never span the market portfolio these conclusions rely on the assumption that the contract designer has perfect information about agents utilities we also show that as the contract designer s information about agents utilities becomes more imperfect the optimal contracts approach contracts that weight individual endowments in proportion to elements of eigenvectors of the variance matrix of endowments then if there is a strong enough market component to endowments a portfolio approximating the market portfolio may be the most important portfolio

welfare effects of financial innovation in incomplete markets economies with several consumption goods abstract we show that in almost every incomplete markets economy with more than one consumption good and with sufficiently many uninsured states of nature at any general equilibrium of this economy it is possible to arbitrarily perturb the equilibrium utilities merely by introducing the appropriate asset making for example all agents worse off this result demonstrates that the examples given by hart on the optimality of equilibrium when the market structure is incomplete j econ theory11 1975 418 443 and others are actually general phenomena and is in sharp contrast to the intuition that innovation since it expands financial opportunities should benefit all agents journal of economic literature classification numbers d52 d60 g10

the welfare state in transition reforming the swedish model acknowledgments introduction richard b freeman robert topel birgitta swedenborg 1 generating equality and eliminating poverty the swedish way anders bjorklund richard b freeman 2 public employment taxes and the welfare state in sweden sherwin rosen 3 tax policy in sweden erik norrman charles e mclure jr 4 wage policy and restructuring the swedish labor market since 1960 per anders edin robert topel 5 the effects of sweden s welfare state on labor supply incentives thomas aronsson james r walker 6 an evaluation of the swedish active labor market policy new and received wisdom anders forslund alan b krueger 7 taxes and subsidies in swedish unemployment lars ljungqvist thomas j sargent 8 the social costs of regulation and lack of competition in sweden a summary stefan folster sam peltzman 9 industrial policy employer size and economic performance in sweden steven j davis magnus henrekson 10 a heckscher ohlin view of sweden competing in the global marketplace edward e leamer per lundborg contributors author index subject index

speculation and risk sharing with new financial assets while the traditional view of nancial innovation emphasizes the risk sharing role of new nancial assets belief disagreements about these assets naturally lead to speculation which represents a powerful economic force in the opposite direction this paper investigates the eect of nancial innovation on portfolio risks in an economy when both the risk sharing and the speculation forces are present financial assets provide hedging services but they are also subject to speculation because traders do not necessarily agree about their payos i de ne the average variance of traders net worths as a measure of portfolio risks for this economy and i decompose it into two components the uninsurable variance de ned as the average variance that would obtain if there were no belief disagreements and the speculative variance de ned as the residual variance that results from speculative trades based on belief disagreements financial innovation always decreases the uninsurable variance because new assets increase the possibilities for risk sharing my main result shows that nancial innovation also always increases the speculative variance this is true even if traders completely agree about the payos of new assets the intuition behind this result is the hedge more bet more eect traders use new assets to hedge their bets on existing assets which in turn enables them to place larger bets and take on greater risks my second set of results concern endogenous nancial innovation when belief disagreements are su ciently large a pro t seeking market maker introduces assets that maximize the average variance among all possible choices completely disregarding the risk sharing motive for nancial innovation my third set of results concern a calibration of the model in the context of the gdp indexed assets proposed by athanasoulis and shiller 2001 when traders have reasonable amounts of belief disagreements these assets would have the unintended consequence of increasing their consumption risks

the political economy of public employment programs abstract what are the welfare implications of a political equilibrium where the choice of active labor market programs almps have to please the employed majority this issue is examined in an equilibrium model featuring matching frictions and worker firm wage bargaining it turns out that the welfare consequences depend on the nature of almps and the political weight attributed to firm interests if firm values carry little political weight and programs contribute to wage pressure the employed will opt for excessive program activity

financial innovation and asset price volatility we compare asset prices in an overlapping generations model for incomplete and complete markets individuals within a generational cohort have heterogeneous beliefs about future states of the economy and thus would like to make bets against each other in the incomplete markets economy agents cannot make such bets asset price volatility is very small the situation changes dramatically when markets are completed through financial innovations as the set of available securities now allows agents with different beliefs to place bets against each other wealth shifts across agents and generations such changes in the wealth distribution lead to substantial asset price volatility

differential interpretation of public signals and trade in speculative markets most models of trade in speculative markets assume that agents interpret public information identically we provide empirical evidence on the relation between the volume of trade and stock returns around public announcements and we argue that the evidence is inconsistent with this assumption we then develop a model of trade around public announcements that incorporates differential interpretations and is consistent with the observed volume return relation then we test the standard model of belief revision underlying most models of trade using stock brokerage research analysts earnings forecasts the hypthesis of identical interpretations seems inconsistent with the forecast revisions in these data

financial innovation the last twenty years and the next the word revolution is entirely appropriate for describing the changes in financial institu tions and instruments that have occurred in the past twenty years the major impulses to successful financial innovations have come from regulations and taxes the outlook for the future is for a slowing down of the rate of financial innovation but much growth and improvement are still in prospect

world income components measuring and exploiting risk sharing opportunities a method is constructedfor decomposing the variance of changes in incomes in the world into components to indicate the most important risk sharing opportunities among people of the world a constant absolute risk premium carp model an intertemporal general equilibrium model of the world is presented to permit optimal contract design for a contract designer maximizing a social welfare function the optimal contracts maximize the equilibrium world real interest rate securities are defined in terms of eigenvectors of a transformed variance matrix the method is applied using penn world table data on the g 7 countries 1950

reciprocity as a foundation of financial economics this paper argues that the subsistence of the fundamental theorem of contemporary financial mathematics is the ethical concept reciprocity the argument is based on identifying an equivalence between the contemporary and ostensibly value neutral fundamental theory of asset pricing with theories of mathematical probability that emerged in the seventeenth century in the context of the ethical assessment of commercial contracts in a framework of aristotelian ethics this observation the main claim of the paper is justified on the basis of results from the ultimatum game and is analysed within a framework of pragmatic philosophy the analysis leads to the explanatory hypothesis that markets are centres of communicative action with reciprocity as a rule of discourse the purpose of the paper is to reorientate financial economics to emphasise the objectives of cooperation and social cohesion and to this end we offer specific policy advice

economic globalization and the welfare state in affluent democracies 1975 1998 prior scholarship is sharply divided on how or if globalization influences welfare states globalization s effects may be positive causing expansion negative triggering crisis and reduction curvilinear contributing to convergence or insignificant we bring new evidence to bear on this crucial debate with a pooled time series analysis of two measures of the welfare state and 16 indicators of economic globalization for 17 affluent democracies from 1975 to 1998 the analysis suggests that 1 state of the art welfare state models warrant revision in the globalization era 2 most indicators of economic globalization do not have significant effects 3 the few significant globalization effects are in different directions and often inconsistent with extant theories 4 the globalization effects are far smaller than the effects of domestic political and economic factors and 5 these effects are not systematically different for liberal vs nonliberal welfare state regimes european vs non european countries or with four alternative dependent variables increased globalization and a modest convergence of the welfare state have occurred but globalization does not unambiguously cause welfare state expansion crisis and reduction or convergence bisherige befunde der sozialwissenschaftlichen forschung zum kausalen verhaltnis von globalisierung und wohlfahrtsstaat sind nicht eindeutig danach kann globalisierung positive effekte haben und zu einem ausbau an wohlfahrtsstaatlichkeit fuhren eine krise des wohlfahrtsstaates oder leistungsreduktionen herbeifuhren kurvilineare wirkungen aufweisen und zu konvergenz beitragen als auch vollkommen insignifikant sein unsere gepoolte zeitreihenanalyse von wohlfahrtsstaatlichkeit und globalisierung in 17 reichen demokratien 1975 1998 hat folgende befunde zu tage gefordert 1 im zeitalter der globalisierung erscheinen bestehende wohlfahrtsstaatsmodelle revisionsbedurftig 2 die mehrzahl der okonomischen globalisierungsindikatoren weist keine signifikanten effekte auf 3 die wenigen signifikanten effekte zeigen in unterschiedliche richtungen und stimmen haufig nicht mit bestehenden theoretischen annahmen uberein 4 die globalisierungseffekte sind deutlich kleiner als die effekte binnenpolitischer variablen und okonomischer faktoren 5 diese effekte unterscheiden sich in liberalen und nicht liberalen wohlfahrtsregimen bzw europaischen und nicht europaischen landern nicht systematisch von einander im analysezeitraum konnen wir sowohl einen anstieg der verschiedenen globalisierungsindikatoren sowie eine moderate konvergenz der verschiedenen wohlfahrtsstaaten konstatieren jedoch kann der prozess der globalisierung nicht eindeutig als kausale ursache fur die unterschiedlichen entwicklungsrichtungen in den verschiedenen wohlfahrtsstaaten identifiziert werden

financial innovation and portfolio risks i illustrate the effect of financial innovation on portfolio risks by using an example with risk sharing needs and belief disagreements i consider two types of innovation product innovation formalized as an expansion of new financial assets and process innovation formalized as a reduction in transaction costs when belief disagreements are large both types of innovation increase portfolio risks moreover endogenous financial innovation is directed towards speculative assets that increase portfolio risks

the swedish experiment the deterioration of the economic performance in sweden from about 1970 was to some extent the result of a number of exogenous shocks and unnecessary policy mistakes it was however also related to basic changes in the economic and social system in sweden in the late 1960s and early 1970 when government spending taxes and regulations started to expand dramatically it is also argued in the paper that problematic political economic and social mechanisms had become embedded in the long term dynamics of the system itself these various experiences are the background for recent reforms and retreats of the swedish experiment

arbitrage equilibrium with skewed asset returns the quadratic form of the covariance co skewness model by kraus and litzenberger and arbitrage pricing theory are used for an empirical investigation of market equilibrium with skewed seecurity returns empirical tests similar to the ones in black jensen scholes and gibbons are discussed the empirical estimates give some support to the kraus litzenberger hypothesis on skewness preference however there is some evidence that the tested arbitrage equilibrium is not a complete description of security pricing

catering to investors through security design headline rate and complexity this study investigates how banks design financial products to cater to yield seeking investors we focus on a large market of investment products targeted exclusively at households retail structured products these products typically offer a high return under their best case scenario the headline rate that is nested in a complex payoff formula using a text analysis of the payoff formulas of the 55 000 products issued in europe from 2002 to 2010 we measure product headline rates complexity and risk over this period product headline rates depart from the prevailing interest rates as the latter decrease complexity increases and risky products become more common in the cross section the headline rate of a product is positively correlated with its level of complexity and risk higher headline rate more complex and riskier products appear more profitable to the banks distributing them our results suggest that financial complexity is a by product of banks catering to yield seeking investors

can a financial transaction tax prevent stock price booms we present a stock market model that quantitatively replicates the joint behavior of stock prices trading volume and investor expectations stock prices in the model occasionally display belief driven boom and bust cycles that delink asset prices from fundamentals and redistribute considerable amounts of wealth from less to more experienced investors although gains from trade arise only from subjective belief differences introducing financial transactions taxes ftts remains undesirable while ftts reduce the size and length of boom bust cycles they increase the likelihood of such cycles thereby overall return volatility and wealth redistribution contingent ftts which are levied only above a certain price threshold give rise to problems of equilibrium multiplicity and non existence

rising earnings inequality in sweden the role of composition and prices the rise in cross sectional earnings inequality in sweden between 1990 and 2002 is decomposed into changes in market prices of observable characteristics changes in the composition of the labor force across demographic groups and industries and changes in unobservables the swedish experience is then compared with that in the united states in both countries the rise in earnings inequality is a consequence of rising upper tail dispersion contrary to the u s experience where the rise is largely driven by changing market prices of observables and increased residual dispersion shifts in the swedish labor force composition have contributed positively to the rise in the p90 p50 gap the rise in the swedish p99 p90 gap however is entirely accounted for by changes in prices and residual dispersion

public sector employment and the skill premium sweden versus the united states 1970 2012 swedish census data and tax records reveal an astonishing decline in the aggregate skill premium of 30 percent between 1970 and 1990 with only a modest recovery in the next couple of decades in contrast the us skill premium rose by around 24 percent over those four decades a theory that equalizes wages with marginal products can rationalize these disparate outcomes when we replace commonly used measures of total labor supplies by private sector employment the dramatic decline in the skill premium in sweden is the result of an expanding public sector that has disproportionately hired unskilled labor

the role of liquidity in futures market innovations i characterize the optimal design of a new futures market an innovation by an exchange in the presence of market frictions futures markets am characterized by both the contract and the level of trader participation both can be determined by an exchange a game in which exchanges simultaneously design markets is c onsidered and a particular equilibrium not necessarily unique is constructed a game in which exchanges sequentially design markets and incur design costs is also considered and the generically unique equilibrium is constructed the nature of equilibrium with multiple exchanges is discussed in these simultaneous and sequential settings illustrating the role played by liquidity considerations both in market design and in the nature of competition between exchanges

collateral motivated financial innovation collateral frictions have a profound effect on our economic landscape ranging from the design of financial securities laws and institutions to various rules and regulations we analyze a model with disagreement where securities and collateral requirements are endogenous it shows that the security that isolates the variable with disagreement is optimal in the sense that alternative securities cannot generate any trading in an economy with n states investors may introduce more than n securities and markets are still incomplete the model has several novel predictions on the behavior of basis the spread between the prices of an asset and its replicating portfolio

should day care be subsidized in the presence of distortionary taxes on labor can subsidies on childcare flnanced by a further increase in taxes raise welfare by encouraging women with small children to work we approach this question in two difierent ways first we consider a set of stylized models where we prove analytically that under some conditions the ramsey optimal policy consists in making childcare expenses tax deductible then we construct a calibrated stochastic dynamic life cycle model of household decision making designed to capture some facts about labor supply in germany we flnd that the welfare gains associated with subsidizing childcare are considerable and that the maximum gains are realized when childcare is subsidized to an even greater extent than what tax deductibility implies

personal experiences and expectations about aggregate outcomes using novel survey data we document that individuals extrapolate from recent personal experiences when forming expectations about aggregate economic outcomes recent locally experienced house price movements affect expectations about future u s house price changes and higher experienced house price volatility causes respondents to report a wider distribution over expected u s house price movements when we exploit within individual variation in employment status we find that individuals who personally experience unemployment become more pessimistic about future nationwide unemployment the extent of extrapolation is unrelated to how informative personal experiences are is inconsistent with risk adjustment and is more pronounced for less sophisticated individuals

selecting a portfolio with skewness recent evidence from us european and latin american equity markets abstract polynomial goal programming in which investor preferences for skewness can be incorporated is utilized to determine the optimal portfolio from latin american us and european capital markets the empirical findings suggest that the incorporation of skewness into an investor s portfolio decision causes a major change in the resultant optimal portfolio the empirical evidence indicates that investors do trade expected return of the portfolio for skewness

comment on the intended and unintended consequences of financial market regulations a general equilibrium analysis by adrian buss bernard dumas raman uppal and grigory vilkov