the inflation tax in a real business cycle model money is incorporated into a real business cycle model using a cash in advance constraint the model economy is used to analyze whether the business cycle is different in high inflation and low inflation economies and to analyze the impact of variability in the growth rate of money in addition the welfare cost of the inflation tax is measured and the steady state properties of high and low inflation economies are compared

entrepreneurial rents and the theory of the firm abstract the creation of entrepreneurial rents occurs under conditions of uncertainty yet current theories of rent appropriation such as transactions cost theories of the firm focus their efforts primarily on how quasi rents rents that have already been created are appropriated by parties to that exchange entrepreneurs face a dual challenge that of creating entrepreneurial rents and appropriating some of these rents moreover this challenge usually exists at a time when the entrepreneurial rents that might be created are not known or anticipatable indeed entrepreneurs not only concern themselves with ensuring that they are able to appropriate at least some of the rents that might be eventually created but in fact they may not create any rents or potentially lose value understanding the dual nature of the rent creation and the rent appropriation problem has a variety of implications for the study of entrepreneurial organizations and generally for theory of the firm discussions

the role of investment specific technological change in the business cycle this is a quantitative investigation of the importance of technological change speci c to new investment goods for postwar us aggregate uctuations a growth model that incorporates this form of technological change is calibrated to us data and simulated using the relative price of new equipment to identify the process driving investmentspeci c technology shocks the analysis suggests that this form of technological change is the source of about 30 of output uctuations 2000 elsevier science b v all rights reserved

two remarks on the property rights literature we first point out that the recent property rights literature is based on three assumptions 1 that contracts are always subject to renegotiation 2 that the exercise of a property right confers a private benefit and 3 that parties are risk neutral building on hart moore 1999 we provide conditions under which an optimal contract consists of nothing more than an assignment of property rights we also examine the robustness of some of the literature s standard predictions about asset ownership to the introduction of mechanisms for eliciting parties ex post willingness to pay for the assets such as options or financial markets to illustrate the issue we revisit the hart moore 1990 proposition that joint ownership is suboptimal and argue that ownership by a single party is dominated by joint ownership with put options

unforeseen contingencies and incomplete contracts we scrutinize the conceptual framework commonly used in the incomplete contract literature this literature usually assumes that contractual incompleteness is due to the transaction costs of describing or of even foreseeing the possible states of nature in advance we argue however that such transaction costs need not interfere with optimal contracting i e transaction costs need not be relevant provided that agents can probabilistically forecast their possible future payoffs even if other aspects of the state of the nature cannot be forecast in other words all that is required for optimality is that agents be able to perform dynamic programming an assumption always invoked by the incomplete contract literature the foregoing optimality result holds very generally provided that parties can commit themselves not to renegotiate moreover we point out that renegotiation may be hard to reconcile with a framework that otherwise presumes perfect rationality however even if renegotiation is allowed the result still remains valid provided that parties are risk averse

inference in nonlinear econometric models with structural change this paper extends the classical test for structural change in linear regression models see chow 1960 to a wide variety of nonlinear models estimated by a variety of different procedures wald lagrange multiplier like and likelihood ratio like test statistics are introduced the results allow for heterogeneity and temporal dependence of the observations in the process of developing the above tests the paper also provides a compact presentation of general unifying results for estimation and testing in nonlinear parametric econometric models

toward a theory of regulation for developing countries following jean jacques laffont s lead the efficient operation and expansion of infrastructures in developing countries is crucial for growth and poverty reduction however recent reforms aimed at improving the performance of these sectors have had limited success evidence suggests that in many instances this was because the traditional regulatory theory relied on by policymakers was not suitable for the institutional context in developing countries this article surveys more recent theoretical work focusing on problems with regulation in these countries at the heart of the survey is the work of jean jacques laffont who in the last decade of his life set about developing a theoretical framework for regulation in developing countries we consider the implications of his work which focused on the key institutional limitations faced in developing countries we then discuss where experience suggests that there are important omissions from this modeling bringing in extensions and alternative approaches pursued by other authors we conclude by summarizing the key ways in which regulatory policy will be different when institutions are weak overall we find that an understanding of the institutional context and its implications are crucial when designing a regulatory framework for developing countries

a politics of institutional choice post communist presidencies this work uses incomplete contracting theory to account for variation in the specific and residual powers of post communist presidencies it uses evidence from 24 post communist countries to test theories of institutional choice that link presidential powers to economic reform institutional legacies party systems and social cleavages it argues that two factors can account for variation in presidential powers the bargaining power of the electoral favorite and the degree of uncertainty over the electoral outcome it tests this model in greater detail against four cases russia 1991 estonia 1992 russia 1993 belarus 1994 three insights flow from these cases first political institutions can be analyzed as the by products of power seeking politicians making choices under varying degrees of uncertainty second despite the great uncertainty of the transition actors understand their interests and strategies third high uncertainty compels political actors to hedge their bets when designing politi

the reference point approach to the theory of the firm an introduction there is a small but growing literature on the reference point approach to incomplete contracts as formulated by hart and moore the reference point approach has begun to be applied to the theory of the firm in 3 recent papers this introduction reviews the main theoretical aspects of each of these papers it then discusses the relationship between the reference point approach to the firm the transaction cost approach and the property rights approach here it is argued that the reference point approach is a step back towards ex post inefficiencies away from reliance on ex ante inefficiencies

renegotiation design with unverifiable information this paper considers a buyer seller relationship with observable but unverifiable investments and or random utility parameters in such situations it is known that contract renegotiation may prevent the implementation of first best outcomes in this paper we show however that efficient investments and optimal risk sharing can typically be achieved provided the initial contract is able to monitor the ex post renegotiation process specifically we focus on the following two features of renegotiation design first default options in case renegotiation breaks down second the allocation of all bargaining power to either contracting party moreover we show that these two features can be obtained in standard rubinstein bargaining games through contractual provisions such as specific performance clauses and penalties for delay or equivalently financial hostages refundable without interest

sticky price models of the business cycle can the contract multiplier solve the persistence problem we construct a quantitative equilibrium model with firms setting prices in a staggered fashion and use it to ask whether monetary shocks can generate business cycle fluctuations these fluctuations include persistent movements in output along with the other defining features of business cycles like volatile investment and smooth consumption we assume that prices are exogenously sticky for a short time persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices much when they can do so we find that for a wide range of parameter values the amount of endogenous stickiness is small thus we find that in a standard quantitative model staggered price setting alone does not generate business cycle fluctuations

on sustained growth under uncertainty we analyze a stochastic one sector model of economic growth and investigate the conditions under which long run growth occurs almost surely in contrast to the deterministic version of the model the utility function plays a crucial role in determining the long run behavior of output the central purpose of theories of economic growth is to understand the factors behind long run growth of economies and to explain differences in growth performances of economies in terms of fundamental endowments and choices a wide class of endogenous growth models has been specified in the last decade and they have explored a large array of possible explanatory variables for the differences in observed growth rates between countries with some notable exceptions most of these models are deterministic and therefore ignore the fundamental uncertainties which affect productivity and cause diversity between growth of nations the exceptions which include real business cycle models that examine the consequence of productivity shocks in endogenous growth frameworks use specific utility and production functions drawn from the log linear family see among others king et al 1988 king and rebelo 1988 de hek 1999 jones et al 1999 a general analysis of the phenomenon of sustained growth in economies subject to technological shocks is not yet available and the kind of conditions needed to guarantee sustained stochastic growth are not well understood in this article we address this issue in the simple framework of a stochastic one sector convex growth model when the technology is globally productive in the sense that marginal productivity of investment is bounded above one output and consumption flows can grow indefinitely i e long run growth is feasible whether such growth actually occurs depends on the intertemporal preference structure 2 in the deterministic version of this model this problem was first discussed by gale and sutherland 1968 who extended the classical optimal growth analysis to the case of such a productive technology more recently jones and manuelli 1990 have rigorously characterized the possibility of sustained long run growth in a variant of the one sector deterministic growth model see also rebelo 1991 3 the main result is that long run growth

seniority and maturity of debt contracts abstract this paper provides a model of how borrowers with private information about their credit prospects choose seniority and maturity of debt increased short term debt leads lenders to liquidate too often it also increases the sensitivity of financing costs to new information although better than average borrowers desire information sensitivity the model implies that short term debt will be senior to long term debt and that long term debt will allow the issue of additional future senior debt the model also has implications on the structure of leveraged buyouts and on how various types of lenders respond to potential defaults

managerial compensation contract and bank bailout policy abstract under the incomplete contract framework we consider an optimal regulatory policy for motivating bank equity owners and bank managers to restructure the bad loans of their banks in the presence of managerial compensation contracts with stock options the regulatory policy studied in this paper is mainly concerned with the design of repayment schedules in the scheme of injection of cash funds into insolvent banks by the regulator we show that the regulator cannot necessarily attain the social optimal allocation by injecting cash funds into insolvent banks through the purchase of subordinated bonds with the risk free interest rate however even in that case we also suggest that if the regulator injects cash funds into active restructuring banks through the purchase of subordinated bonds or preferred stocks with less stringent repayment conditions and nationalizes passive restructuring banks the regulator can attain the social optimal allocation by performing such a non linear injection scheme under certain conditions

cooperative investments and the value of contracting recent articles have shown that contracts can support the efficient outcome for bilateral trade even in the face of specific investments and incomplete contracting these studies typically considered selfish investments that benefit the investor e g the seller s investment reduces her production costs the authors find very different results for cooperative investments that directly benefit the investor s partner e g the seller s investment improves the buyer s value of the good most importantly if committing not to renegotiate the contract is impossible then contracting has no value i e the parties cannot do better than to abandon contracting altogether in favor of ex post negotiation

renegotiation and information revelation over time the case of optimal labor contracts the paper analyzes the issue of commitment in grossman and hart s model of optimal labor contracts under asymmetric information about firm profitability we extend their framework by allowing employment to vary over time at equidistant intervals when both parties can precommit ex ante not to renegotiate the contract this replicates the grossman hart outcome each subperiod when precommitment is not possible information revealed through the contract can create pareto improving renegotiation opportunities and the issue of optimal information revelation arises the paper analyzes the impact of ex post pareto improving renegotiations on the optimal contract

transaction costs and contractual incompleteness the case of electricite de france abstract this paper explores the incompleteness of inter firm contracts through the lens of recent developments in transaction cost economics we built a non truncated contract database representing all the relationships of electricite de france edf with its coal carriers over the period 1977 1997 we tested and corroborated most propositions derived from transaction cost theory relating contractual incompleteness to transaction characteristics even when we considered the complete set of the theory s propositions by endogeneizing the asset specificity at stake in transactions to our knowledge this kind of test has never been conducted before

information processing and bounded rationality a survey this paper surveys recent attempts to formulate a plausible and tractable model of bounded rationality the author focuses in particular on models that view bounded rationality as stemming from limited information processing he discusses partitional models such as computability automata perceptions and optimal networks nonpartitional models and axiomatic approaches

the effects of technology shocks on hours and output a robustness analysis we analyze the effects of neutral and investment specific technology shocks on hours and output long cycles in hours are removed in a variety of ways hours robustly fall in response to neutral shocks and robustly increase in response to investment specific shocks the percentage of the variance of hours output explained by neutral shocks is small large the opposite is true for investment specific shocks news shocks are uncorrelated with the estimated technology shocks copyright 2009 john wiley sons ltd

ambivalent investment and the hold up problem in this paper we add to the foundations of incomplete contracting literature we study the hold up problem with ambivalent investment where investment benefits the investing party if ex post the right decision is undertaken but harms the investing party if the wrong decision is made in this context we show that the power of contracts to provide investment incentives depends on three factors the commitment value of contracts the amount of quasirents that the investing party can expect in the case of out of contract renegotiation and the degree of ambivalence of investment first contracts provide first best investment incentives when parties can commit to a contract regardless of the type of investment second with sufficiently ambivalent investment if parties cannot commit not to renegotiate a contract and if the investing party s bargaining power is intermediate contracts cannot improve investment incentives above those provided by no contract in contrast a simple buyer or seller option contract is optimal when the investing party s bargaining power is extreme jel d23 k12 l22

investment adjustment costs an empirical assessment we evaluate empirical evidence for costs that penalize changes in investment using us industry data in aggregate models such investment adjustment costs have been introduced to help account for a variety of business cycle and asset market phenomena so far no attempt has been made to estimate these costs directly at a disaggregated level we consider an industry model with investment adjustment costs and estimate its parameters using generalized methods of moments the ndings indicate small costs associated with changing the ow of investment at the industry level the weighted average of the industry elasticities with respect to the shadow price of capital which depends inversely on the adjustment cost parameter is more than seven times larger than the largest estimate based on aggregate data we examine potential sources which may account for the large industry aggregate dierence overall our results suggest

efficient investments in the implementation problem abstract this paper identifies a condition for an efficient social choice rule to be fully implementable when we take into account investment efficiency to do so we extend the standard implementation problem to include endogenous ex ante and ex post investments in our problem the social planner aims to achieve efficiency in every equilibrium of a dynamic game in which agents strategically make investments before and after playing the mechanism our main theorem shows that a novel condition commitment proofness is sufficient and necessary for an efficient social choice rule to be implementable in subgame perfect equilibria the availability of ex post investments is crucial in our model there is no social choice rule that is efficient and implementable in subgame perfect equilibria without ex post investments we also show that our positive result continues to hold in the incomplete information setting

technology shocks capital utilization and sticky prices abstract we quantitatively evaluate a business cycle environment featuring endogenous capital utilization and nominal price rigidity that illustrates a negative relationship between labor hours and technology tfp shocks and a positive relationship between hours and investment mei shocks sticky prices induce firms to suppress changes in output due to tfp shocks through changes in the utilization rate of the existing capital stock and labor demand mei shocks have an indirect impact on output via their link with capital utilization and are shown to be the dominant driver of post 1979 us business cycles

complexity and renegotiation a foundation for incomplete contracts the paper considers a hold up model where only one of n future trading opportunities will prove to be efficient and where ex post renegotiation of the ex ante contract cannot be prevented as the environment becomes more complex n the outcome under any message contingent long term contract converges to that of the incomplete contracting model where trade is contractible ex post but not ex ante when trades are costly to describe both ex ante and ex post the incomplete contracting result is extended to a broader class of environments

investment shocks and business cycles abstract the origins of business cycles are still controversial among macroeconomists this paper contributes to this debate by studying the driving forces of fluctuations in an estimated new neoclassical synthesis model of the u s economy in this model most of the variability of output and hours at business cycle frequencies is due to shocks to the marginal efficiency of investment imperfect competition and to a lesser extent technological frictions are the key to their transmission although labor supply shocks explain a large fraction of the fluctuations in hours at very low frequencies they are irrelevant over the business cycle this finding is important because the microfoundations of these disturbances are widely regarded as unappealing

the time varying volatility of macroeconomic fluctuations we investigate the sources of the important shifts in the volatility of us mac roeconomic variables in the postwar period to this end we propose the esti mation of dsge models allowing for time variation in the volatility of the structural innovations we apply our estimation strategy to a large scale model of the business cycle and find that shocks specific to the equilibrium condition of investment account for most of the sharp decline in volatility of the last two decades jel c51 e32

contract renegotiation and coasian dynamics consider a long term relationship between a seller and a buyer whose valuation for a per period service or a durable good is private as trade progresses the valuation will be partially revealed and it may be impossible for the parties to commit ex ante not to take advantage of this we analyse this situation first by supposing that the parties can sign a sequence of short term contracts and secondly by supposing that they can sign a long term contract but cannot commit not to renegotiate it later we find a close relationship in the second case between the optimal long term contract and the non commitment outcome in the standard coasian durable good model our results also have implications for hidden information principal agent models

subgame perfect implementation this paper examines the use of stage mechanisms in implementation problems and provides a partial characterization of the set of subgam e perfect implementable choice rules it is shown that in many economic environments virtually an y choice rule can be implemented to illustrate the power of this approach the paper discusses a number of models in which it is possible to implement the first best although it wouldn t have been possible to do so without using stage mechanisms the diversity of these models suggests that subgame perfect implementation may find wide application copyright 1988 by the econometric society

the comparative advantages of firms markets and contracts a unified theory the most efficient labour market mechanism depends on the advantages of specialization workers costs of switching between entrepreneurs and the frequency with which needs change multilateral mechanisms are more efficient when specialization is more advantageous when it is cheap for workers to switch between entrepreneurs and when individual entrepreneurs cannot occupy a worker on a full time basis given a bilateral mechanism employment a firm is more efficient than contracts when in process adjustments arise more frequently there exist three regions in which firms markets and sequences of bilateral contracts are weakly more efficient than all other mechanisms in a big class

endogenous money or sticky prices abstract what explains the correlations between nominal and real variables in the postwar us data are these correlations indicative of significant nominal rigidity or do they simply reflect the particular way that monetary policymakers react to developments in the real economy to answer these questions this paper uses maximum likelihood to estimate a model of endogenous money this model allows but does not require nominal prices to be sticky the results show that nominal price rigidity over and above endogenous money plays a role in accounting for key features of the data

informational lobbying and political contributions abstract interest groups can potentially influence political decision makers by offering contributions and by providing relevant information that sways the decision in the group s favor what mix of these two instruments should an interest group choose and how does the use of one instrument affect the effectiveness of the other in this paper we identify an information externality that raises the cost of offering contributions and show that this indirect search cost reduces the group s incentive to gather information when contributions are allowed furthermore we analyze how competition among lobby groups as providers of information and contributions affect the choice and effectiveness of the instruments we show that the information externality rewards the group that can abstain from information search and focus its influence on contributions

measuring presidential power despite an increased need to measure presidential power and the increased use of such measurements in empirical studies there has been little examination of the relative merits of alternative methods of measuring presidential power this study reviews the measures currently in use and identifies the measure developed by shugart and carey 1992 as the most useful the study also suggests improvements to the shugart and carey method to improve its applicability to semipresidential regimes scoring of austria finland france and the six central and east european states with popularly elected presidents demonstrates the usefulness of these revisions for establishing clearer boundaries for this regime type which is a necessary step toward empirical testing of the relationship between semipresidentialism and democratic consolidation

unified government bill approval and the legislative weight of the president this article proposes a new approach to measuring the legislative weight of the president and congress based on the approval of each actor s legislative agenda the authors focus on presidential systems where presidents possess both formal authority to introduce their own bills and a variety of prerogatives to influence the passage of legislation the authors argue that the legislative weight of the president varies over time in response to contextual political variables after devising a general model to measure changes in the legislative weight of the president vis a vis congress the authors empirically test their propositions using data from argentina the results indicate that the policy and productivity weights of the president actually increase in the absence of unified government

incentives for procrastinators we examine how principals should design incentives to induce time inconsistent procrastinating agents to complete tasks efficiently delay is costly to the principal but the agent faces stochastic costs of completing the task and efficiency requires waiting when costs are high if the principal knows the task cost distribution she can always achieve first best efficiency if the agent has private information the principal can induce first best efficiency for time consistent agents but often cannot for procrastinators we show that second best optimal incentives for procrastinators typically involve an increasing punishment for delay as time passes

unforeseen contingency and renegotiation with asymmetric information this article considers a buyer seller contracting model in which the seller possesses private information about all relevant aspects of the state of nature including how much each action is worth to the buyer i argue that given asymmetric information the buyer may not entirely dismiss an unforeseen contingency claim by the seller then if the buyer lacks the foresight awareness to expect the unexpected the model admits an equilibrium in which a seemingly complete contract is written and then renegotiated along its outcome path to generate inefficiency ex post

investments in physical capital relationship specificity and the property rights approach abstract we reconsider the property rights approach to the theory of the firm based on incomplete contracts we explore the implications of different degrees of relationship specificity when there are two parties a and b who can make investments in physical capital instead of human capital if relationship specificity is exogenously given it turns out that joint asset ownership can be optimal only if the degree of relationship specificity is sufficiently small if relationship specificity can be freely chosen and if party a s investments are more productive then the parties deliberately choose a strictly positive level of relationship specificity and they always agree on sole ownership by party a

a theory of debt and equity diversity of securities and manager shareholder congruence this paper shows how the optimal financial structure of a firm complements incentive schemes to discipline managers and how the securities return streams determine the claim holders incentives to intervene in management the theory rationalizes 1 the multipucity of securities 2 the observed correlation between return streams and control rights of securities and 3 the partial congruence between managerial and equity holder preferences over policy choices and monetary rewards as well as the low level of interference of equity in management the theory also offers new prospects for a reappraisal of the earlier corporate finance literature

the dynamic effects of neutral and investment specific technology shocks the neoclassical growth model is used to identify the short run effects of neutral technology shocks which affect the production of all goods homogeneously and investment specific shocks which affect only investment goods the real equipment price crucial for identifying the investment shocks experiences an abrupt increase in its average rate of decline in 1982 so the analysis is based on a split sample on the basis of the preferred specification the two technology shocks account for 73 percent of hours and 44 percent of output s business cycle variation before 1982 and 38 percent and 80 percent afterward the shocks also account for more than 40 percent of hours and 58 percent of output s forecast errors over a three to eight year horizon in both samples the majority of these effects are driven by the investment shocks

real business cycles in this paper we demonstrate how certain very ordinary economic principles lead maximizing individuals to choose consumption production plans that display many of the characteristics commonly associated with business cycles our explanation is entirely consistent with i rational expectations ii complete current information iii stable preferences iv no technological change v no long lived commodities vi no frictions or adjustment costs vii no government viii no money and ix no serial dependence in the stochastic elements of the environment we also provide a completely worked out example of the type of artificial economy we have in mind the time series properties of the example exhibit some major features of observed business cycles although this type of model may not be capable of explaining all of the regularities in actual business cycles we believe that it provides a useful well defined benchmark for assessing the relative importance of factors e g monetary disturbances

contracting with diversely naive agents in standard contract theoretic models the underlying assumption is that agent types differ in their preference or cost parameters and the principal s objective is to design contracts in order to screen this type we study a contract theoretic model in which the heterogeneity among agent types is of a cognitive nature in our model the agent has dynamically inconsistent preferences agent types differ only in their degree of sophistication that is their ability to forecast the change in their future tastes we fully characterize the menu of contracts which the principal offers in order to screen the agent s sophistication the menu does not exclude any type it provides a perfect commitment device for relatively sophisticated types and exploitative contracts which involve speculation with relatively naive types more naive types are more heavily exploited and generate a greater profit for the principal our results allow us to interpret real life contractual arrangements in a variety of industries

lying for strategic advantage rational and boundedly rational misrepresentation of intentions starting from hendricks and mcafee s 2000 example of the allies decision to feint at calais and attack at normandy on d day this paper models misrepresentation of intentions to competitors or enemies allowing for the possibility of bounded strategic rationality and rational players responses to it yields a sensible account of lying via costless noiseless messages in many cases the model has generically unique pure strategy sequential equilibria in which rational players exploit boundedly rational players but are not themselves fooled in others the model has generically essentially unique mixed strategy sequential equilibria in which rational players strategies protect all players from exploitation