optimal incentive schemes with many agents the grossman hart principal agent model of moral hazard is extended to the multiple agent case to explore the use of relative performance in optimal incentive contracting under the assumption that the principal chooses incentive schemes to implement agent actions as nash equilibria necessary and sufficient conditions are derived for the optimality of independent contracts of rank order tournaments and for attainability of the first best in this context the relation of the principal s welfare to the correlation between the underlying randomness in outputs of different agents is also investigated finally some problems with the nash equilibrium implementation assumption are discussed in this paper we extend the grossman hart analysis of the principal agent problem to a multiple agent setting in this version of the problem a risk neutral principal is assumed to observe the output or a performance index for each risk averse agent the output of any agent depends on a privately observable action chosen by the agent and an exogenous random variable the realization of which is not observed either by the principal or by the agent before choosing its action we especially focus attention on the role of relative performance evaluation in optimal incentive contracts and the way this depends on properties of the underlying production technology and the joint distribution of the random variables affecting the outputs of different agents in section 2 of the paper we consider the principal s problem of finding an optimal incentive scheme and an action tuple for agents subject to the constraint that the latter be implemented as a nash equilibrium between agents by the chosen incentive scheme where agents must attain at least their reservation utilities a characterization of optimal incentive schemes is derived analogous to the grossman hart characterization for the single agent problem this characterization is then utilized to find sufficient and generically necessary conditions for a optimal contracts for any agent to be independent of the performance of other agents and b optimality of rank order tournaments where payments depend solely on ordinal comparisons of output across agents we then describe a necessary and sufficient condition for the principal to extract maximum advantage from relative performance clauses i e achieve the first best level of expected utility in the multiagent situation an implication of this result is that under fairly weak conditions perfect correlation in the underlying production uncertainties for different agents enables the principal to attain the first best if and only if sufficiently heavy penalties can be inflicted on agents we then enquire what happens in intermediate cases of non perfect correlation it turns out that while in general the principal s welfare is a continuous function of the correlation coefficient it is not always nondecreasing in the latter because the correlation coefficient is not a general measure of association between two random variables but rather a measure of linear association between them

does monetary unification lead to excessive debt accumulation abstract if discretionary monetary policy gives rise to an inflation bias monetary unification boosts the accumulation of public debt the additional debt accumulation harms welfare if governments are sufficiently myopic in the presence of myopic governments debt ceilings play a useful role in avoiding excessive debt accumulation in a monetary union and allowing a conservative independent central bank to focus on price stability with supply shocks monetary unification results in excessive variability of public debt a debt target that constrains stabilization policy helps to prevent this

interregional redistribution and budget institutions under asymmetric information empirical evidence from the u s and the european union suggests that regions which contribute to interregional redistribution face weaker borrowing constraints than regions which benefit from interregional redistribution this paper presents an argument in favor of such differentiated budget institutions it develops a two period model of a federation consisting of two types of regions the federal government redistributes from one type of regions contributors to the other type recipients it is shown that a fiscal constitution with lax budget rules for contributors and strict budget rules for recipients solves the self selection problem the federal government faces in the presence of asymmetric information regarding exogenous characteristics of the regions

rules and discretion with noncoordinated monetary and fiscal policies the time inconsistency of optimal monetary policy is due to the effects of tax distortions thus the issue of how to improve upon the time consistent suboptimal monetary policy is related to that of the coordination of monetary and fiscal policy we present a model with three players the central bark the fiscal authority and wage setters in which distortionary taxes are explicitly modelled we show that binding commitments to monetary rules are not necessarily welfare improving if monetary and fiscal policy are not coordinated we also examine the effects of different degrees of independence of the central bank

monetary union in west africa who might gain who might lose and why we develop a model in which governments financing needs exceed the socially optimal level because public resources are diverted to serve the narrow interests of the group in power from a social welfare perspective this results in undue pressure on the central bank to extract seigniorage monetary policy also suffers from an expansive bias owing to the authorities inability to precommit to price stability such a conjecture about the fiscal monetary policy mix appears quite relevant in africa with deep implications for the incentives of fiscally heterogeneous countries to form a currency union we calibrate the model to data for west africa and use it to assess proposed ecowas monetary unions fiscal heterogeneity indeed appears crit ical in shaping regional currency blocs that would be mutually beneficial for all their members in particular nigeria s membership in the configurations currently envisaged would not be in the interests of other ecowas countries unless it were accompanied by effective containment on nigeria s financing needs jel classification e58 e61 e62 f33 union monetaire en afrique de l ouest qui pourrait gagner qui pourrait perdre et pourquoi les auteurs developpent un modele dans lequel les besoins financiers des gouvernements depassent le niveau socialement optimal parce que des ressources pub liques sont detournees de maniere aservir les interets etroits du groupe au pouvoir dans une perspective de bien etre social cela entraine des pressions indues sur la banque centrale pour qu elle extraie du seigneuriage la politique monetaire souffre

positive self image in tournaments this paper analyzes the implications of worker overestimation of productivity for firms in which incentives take the form of tournaments each worker overestimates his productivity but is aware of the bias in his opponent s self assessment the manager of the firm on the other hand correctly assesses workers productivities and self beliefs when setting tournament prizes the paper shows that under a variety of circumstances firms make higher profits when workers have positive self image than if workers do not by contrast workers welfare declines due to their own misguided choices

a model of currency depreciation and the debt inflation spiral abstract this paper shows how a government that cannot make credible policy commitments might manage its exchange rate and fiscal stance in a world of rational expectations the dynamic game model developed here potentially can generate diverse patterns of macroeconomic behavior patterns that differ as a result of assumed differences in government objectives under some types of government the ongoing strategic interaction between the public and private sectors leads to a disinflationary outcome other governments may push the economy into a spiral of rising debt and inflation

central bank independence and public debt policy the various proposals for the institutional design of the european monetary union have drawn fresh attention to the link between monetary and public debt policies this paper explores the strategic interaction between fiscal authorities setting public debt and the central bank controlling monetary policy in the absence of political distortions an optimally designed conservative independent central bank is sufficient to establish the second best in the presence of political distortions or with coordination of monetary and fiscal policy however also a debt target is needed

macroeconomics after the crisis time to deal with the pretense of knowledge syndrome the recent financial crisis has damaged the reputation of macroeconomics largely for its inability to predict the impending financial and economic crisis to be honest this inability to predict does not concern me much it is almost tautological that severe crises are essentially unpredictable for otherwise they would not cause such a high degree of distress what does concern me about my discipline is that its current core by which i mainly mean the so called dynamic stochastic general equilibrium approach has become so mesmerized with its own internal logic that it has begun to confuse the precision it has achieved about its own world with the precision that it has about the real one this is dangerous for both methodological and policy reasons to be fair to our field an enormous amount of work at the intersection of macroeconomics and corporate finance has been chasing many of the issues that played a central role during the current crisis including liquidity evaporation collateral shortages bubbles crises panics fire sales risk shifting contagion and the like however much of this literature belongs to the periphery of macroeconomics rather than to its core i will discuss the distinction between the core and the periphery of macroeconomics as well as the futile nature of the integrationist movement that is the process of gradually bringing the insights of the periphery into the dynamic stochastic general equilibrium structure i argue that the complexity of macroeconomic interactions limits the knowledge we can ever attain and that we need to place this fact at the center of our analysis we should consider what this complexity does to the actions and reactions of the economic agent and seek analytical tools and macroeconomic policies that are robust to the enormous uncertainty to which we are confined

optimal inflation targets conservative central banks and linear inflation contracts comment inflation targeting regimes like those of new zealand canada the united kingdom and sweden are interpreted as having explicit inflation targets and implicit employment targets without employment persistence an inflation target conservative central bank eliminates the inflation bias mimics an optimal inflation contract and dominates a rogoff weight conservative central bank with employment persistence a state contingent inflation bias and a stabilization bias also arise a constant inflation target and a constant inflation contract are still equivalent a state contingent inflation target combined with a weight conservative central bank can achieve the equilibrium corresponding to an optimal rule under commitment copyright 1997 by american economic association

credibility of policies versus credibility of policymakers standard models of policy credibility defined as the expectation that an announced policy will be carried out emphasize the preferences of the policymaker and the role of tough policies in signaling toughness and raising credibility whether a policy is carried out however will also reflect the state of the economy we present a model in which a policymaker maintains a fixed parity in good times but devalues if the unemployment rate gets too high our main conclusion is that if there is persistence in unemployment observing a tough policy in a given period may lower rather than raise the credibility of a no devaluation pledge in subsequent periods we test this implication on ems interest rates and find support for our hypothesis

the 6lucas critique a generalisation the extraordinarily influential lucas critique of various familiar econometric practices is generalized the intention though is not to argue against the possibility of economics as science but to hasten its widespread realization to this end it is argued that a quite significant change of direction in economic practice is warranted and an outline of a sustainable potentially fruitful alternative approach is indicated c 1995 academic press ltd copyright 1995 by oxford university press

an experimental analysis of voting in the stability and growth pact in the european monetary union the stability and growth pact sgp in the european monetary union shall deter countries from running excessive deficits by the threat of punishment executed conditional on the outcome of a multistage voting procedure we examine voting behaviour in an experiment which closely resembles the sgp s design and find that the sgp enables larger countries to block punishment more often than smaller countries in addition we study an institutional modification of the sgp by excluding countries with excessive deficits from voting on other fiscal sinners our findings clearly suggest that this innovation would give the sgp sharper teeth than it actually has in reality

games of monetary and fiscal interactions in the emu abstract this paper constructs various models of the emu and ecb when member countries have different objectives voting in pursuit of national interest can yield moderate and stable inflation the metaphor of walsh type contracts implements a monetary policy rule that averages the member countries most preferred rules in a repeated relationship where a country suffering a large adverse shock can use political bargaining to subvert the ecb s commitment the optimal rule should incorporate some flexibility to forestall that finally freedom of national fiscal policies undermines the ecb s monetary commitment this may justify fiscal constraints like the stability and growth pact

the intrinsic limits of modern economic theory the emperor has no clothes assumptions of the uniqueness and stability of general equilibrium in a walrasian framework have no theoretical justification this paper argues that the key reason for this is that the walrasian model treats people as acting independently of one another especially in their demand behavior this independence plays an essential role in constructing economies with arbitrary excess demand functions thus making individual behavior dependent or similar may open the way to obtaining meaningful restrictions on aggregate excess demand functions copyright 1989 by royal economic society

economic and monetary union in europe the european council s maastricht agreement maps out a precise route to monetary union and the eventual introduction of a common currency my discussion begins with a look at the general arguments for and against monetary union i shall then discuss the proposed constitution of the european central bank and whether it is likely to be conducive to monetary stability together with some of the problems posed by the transition to the new regime finally i will turn to the issue of rules for the conduct of fiscal policy and the question of fiscal federalism

ontology and the study of social reality emergence organisation community power social relations corporations artefacts and money the conception of social reality i have previously defended and here extend positing features such as social relations positions and powers is thoroughly naturalistic and even consistent with modern interpretations of quantum field theory it also serves to ground a social science that can be scientific in the sense of natural science this is the thesis defended here central to the argument is an emphasis on a strong form of emergence and the category of organisation in process to bring out various salient features of the position defended i take the opportunity to compare aspects of it with relevant components of the contribution of john searle whose ontological conception appears at once to be both very similar yet also very different copyright the author 2012 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

how complicated does the model have to be simple macroeconomic models based on is lm have become unfashionable because of their lack of micro foundations and are in danger of being effectively forgotten by the profession yet while thinking about micro foundations is a productive enterprise complex models based on such foundations are not necessarily more accurate than simple ad hoc models three decades of attempts to base aggregate supply on rational behaviour have not displaced the phillips curve inter temporal models of consumption do not offer reliable predictions about aggregate demand meanwhile the ease of use of small models makes them superior for many practical applications so we should not allow them to be driven out of circulation copyright 2000 by oxford university press

structural distortions and decentralized fiscal policies in emu the combination of discretionary monetary policy labor market distortions and nominal wage rigidity yields excessive inflation as monetary policy tries to exploit nominal wage contracts to address labor market distortions an inflation target reduces inflation but creates a conflict between monetary policy and discretionary fiscal policy if fiscal policy is set at a higher frequency than nominal wages are preventing the associated excessive accumulation of public debt calls for debt ceilings if countries differ substantially in terms of structural distortions uniform debt ceilings must be complemented by country specific debt targets in order to prevent decentralized fiscal authorities from employing debt policy strategically

aggregate structural macroeconomic analysis a reconsideration and defence aggregate structural macroeconomic analysis asma is frequently criticised for being ad hoc and justified if at all only as a pragmatic expedient this paper argues instead that asma is consistent with the principles of well established bodies of social theory appeal to these principles reveals that asma is adequate and likely even necessary for the successful prosecution of macroeconomic inquiry

inflation targets and contracts with uncertain central banker preferences within a standard model of monetary delegation the authors show that the optimal linear inflation contract performs strictly better than the optimal inflation target when there is uncertainty about the central banker s preferences the optimal combination of a contract and a target performs best and eliminates the inflation bias and any variability not associated with supply shocks however variability due to shocks is enhanced by uncertain central banker preferences quadratic contracts are shown to overcome this problem partly but the advantages of delegation may still be dominated by the excess variability due to shocks hence the credibility stabilization tradeoff is restored

when does an inflation target yield the second best it is shown that an inflation target does not establish the second best if the central bank is independent and the government collects seigniorage revenues to eliminate excessive inflation and ensure that stabilization is efficient society should combine an optimal inflation target with a central bank that attaches less weight to inflation stabilization than the public does

good bad or ugly on the effects of fiscal rules with creative accounting abstract do fiscal rules lead to fiscal adjustment or do they encourage the use of creative accounting this question is studied with a model in which fiscal rules are imposed on measured fiscal variables which can differ from true variables because there is a margin for creative accounting the probability of detecting creative accounting depends on its size and the transparency of the budget the model studies the effects on fiscal policy of a budget rule separating structural from cyclical effects and examines how these effects depend on the underlying fiscal distortion and on the degree of transparency of the budget

the structure of public debt and the choice of exchange rate regime this paper explores the relationship between the denomination of public debt and the choice of exchange rate regime three types of debt nominal indexed and foreign and two regimes fixed and flexible are considered indexed debt is insulated against unexpected inflation the real domestic currency value of foreign debt is subject to valuation effects from real exchange rate shocks the fear of floating result that foreign debt makes pegging more attractive is shown to hold unambiguously only if the peg is fully credible if the peg lacks credibility a critical factor is the perceived likelihood of using the escape clause of a switch to a float which raises the costs of pegging foreign debt increases the temptation to resort to the escape clause so when a peg is not fully credible as is almost always the case in reality pegging tends to be less attractive than floating in the presence of foreign debt ce memoire explore le rapport entre la denomination de la dette publique et le choix d un regime de taux de change trois types de dettes sont considerees nominale indexee etrangere et deux types de regimes taux fixes et taux flexibles la dette indexee est immunisee contre l inflation imprevue la valeur reelle en monnaie domestique de la dette etrangere est sujette a des effets attribuables aux chocs dans les taux de change reels la peur de laisser flotter le taux de change aide a comprendre qu une dette etrangere rend le taux fixe plus attrayant mais ce resultat est sans ambiguite seulement si le taux fixe est pleinement credible si le taux fixe manque de credibilite un facteur critique est la perception de la probabilite qu on va utiliser l echappatoire du passage au taux flottant ce qui augmente les cots d un taux fixe la dette etrangere accroit la tentation d avoir recours a la clause echappatoire ce qui fait que quand un taux fixe n est pas pleinement credible comme c est a peu pres toujours le cas en realite un regime de taux de change fixe tend a tre moins attrayant qu un regime de taux de change flottants quand il y a dette etrangere

seigniorage and political instability the importance of seigniorage relative to other sources of government revenue differs markedly across countries this paper tries to explain this regularity by studying a political model of tax reform the model implies that countries with a more unstable and polarized political system will have more inefficient tax structures and thus will rely more heavily on seigniorage this prediction of the model is tested on cross sectional data for seventy countries the authors find that after controlling for other variables political instability is positively associated with seigniorage copyright 1992 by american economic association

loss of monetary discretion in a simple dynamic policy game abstract we analyze a simple policy game featuring monetary credibility problems and argue that loss of monetary discretion is not advantageous two elements form the basis of our analysis firstly we endogenize the source of credibility problems and secondly we consider a dynamic framework where credibility problems are not time invariant by doing this we are able to demonstrate that credibility problems are temporary and in steady state the government has removed these through sound policies a binding policy rule will only serve as an obstacle towards this steady state

a positive theory of fiscal deficits and government debt this paper considers an economy in which policymakers with different preferences alternate in office as a result of elections government debt is used strategically by each policymaker to influence the choices of his successors if different policymakers disagree about the desired composition of government spending between two public goods the economy exhibits a deficits bias that is debt accumulation is higher than it would be with a social planner the equilibrium level of debt is larger the larger is the degree of polarization between alternating governments and the less likely it is that the current government will be re elected

symbiosis of monetary and fiscal policies in a monetary union we consider the interaction between the monetary policy in a monetary union and the separate fiscal policies of the member countries we use a barro gordon type model extended to many countries and fiscal policies each country s fiscal policies inflict externalities on other countries and the common monetary policy has its time consistency problem but if the two types of policymakers agree about the ideal levels of output and inflation then this ideal is attained despite disagreements about the weights of the objectives despite ex post monetary accommodation to fiscal profligacy without fiscal coordination without monetary commitment and for any order of moves

fiscal policy labor market structure and macroeconomic performance recent work on monetary policy design has investigated the interactions between labor market institutions and monetary policies and their implications for macroeconomic performance this paper argues that this link is not independent of the fiscal policymaking structure

the economics of organization the transaction cost approach the transaction cost approach to the study of economic organization regards the transaction as the basic unit of analysis and holds that an understanding of transaction cost economizing is central to the study of organizations applications of this approach require that transactions be dimensionalized and that alternative governance structures be described economizing is accomplished by assigning transactions to governance structures in a discriminating way the approach applies both to the determination of efficient boundaries as between firms and markets and to the organization of internal transactions including the design of employment relations the approach is compared and contrasted with selected parts of the organization theory literature

the macroeconomic policy mix in a monetary union with flexible inflation targeting abstract policy mix problems may arise in a monetary union with centralized monetary policy and decentralized fiscal policy a consequence of this may be an inappropriate stabilization of shocks this paper addresses how policy coordination problems between fiscal authorities depend on the type of shocks and the objectives of the monetary authority it is shown that non coordinated fiscal policies tend to be too counter cyclical in the case of aggregate shocks and that this bias can be reduced by lowering the weight to output stability in monetary policy oppositely for country specific shocks non coordinated fiscal policies tend to be too pro cyclical and this bias can be reduced by increasing the weight to output stability in monetary policy considering the assignment of policy tasks within the set of binding policy rules for fiscal and monetary policies it is found that flexible inflation targeting dominates strict inflation targeting

beyond microfoundations post walrasian macroeconomics about the authors preface 1 overview david colander part i the post walrasian macroeconomic vision 2 taking markets seriously groundwork for a post walrasian macroeconomics robert clower and peter howitt 3 towards a not too rational macroeconomics axel leijonhufvud 4 the macrofoundations of micro david colander part ii the underpinnings of post walrasian macroeconomics 5 the evolution of macroeconomics the origins of post walrasian economics perry mehrling 6 chaos theory and post walrasian macroeconomics j barkley rosser jr 7 marshallian general equilibrium analysis david colander part iii modelling a post walrasian economy 8 heterogeneity aggregation and a meaningful macroeconomics robert j martel 9 walras complexity and post walrasian macroeconomics david m reaume 10 team coordination problems and macroeconomic models john bryant 11 competitive market disequilibrium a post walrasian analysis of investment john bryant part iv new structuralist macroeconomics vs post walrasian macroeconomics 12 endogenizing the natural rate of unemployment phelps s structural slumps and the post walrasian framework hans van ees and harry garretsen 13 post walrasian macroeconomic policy david colander and hans van ees part v appendix literature survey an annotated bibliography on the macro foundation of post walrasian economics hans van ees and harry garretsen name index subject index

independent fiscal agencies abstract there has been a considerable literature regarding the incentives of policymakers as a prime reason for persistent fiscal deficits and a variety of fiscal rules have been proposed as a remedy however the often inadequate flexibility of rules and the success of policy delegation in the monetary realm have motivated a small but growing number of studies that suggest delegating some aspects of fiscal policy to what will here be called independent fiscal agencies this paper surveys the related literature with a focus on three aspects the motivation for the establishment of such agencies their potential design and the experience with these types of institutions

fiscal activism under inflation targeting and non atomistic wage setting this paper presents a game between a fiscal authority an independent central bank and non atomistic wage setters the effects of fiscal activism and inflation targeting on labour market outcomes are analysed the results suggest that inflation targeting provides incentive for wage restraint moreover real wages are increasing in the degree of fiscal activism as wage setters exploit the response of a fiscal authority seeking to promote employment numerical results suggest that the benefits of targeting inflation are larger when the government pursues an activist policy and therefore that there is some substitutability between fiscal and monetary rules

the microfoundations project in general equilibrium theory the author 1 argues that the long lived microfoundations project based on general equilibrium models has come to an end and 2 shows that non walrasian models intended to provide microfoundations for macroeconomics are inadequate the arguments are derived from the sonnenschein mantel debreu smd demonstration of the arbitrariness of aggregate excess demands in general equilibrium models of the walrasian arrow debreu mckenzie type the issues raised have significance for the proper method of modeling macroeconomic phenomena for instance the smd results have led a growing number of general equilibrium theorists to make assumptions concerning macroeconomic structure in order to analyze other regularities at the macro level these points validate the position that systematic macroeconomic phenomena are intrinsically macroeconomic copyright 1994 by oxford university press

positive self image and incentives in organizations this paper investigates the implications of individuals mistaken beliefs of their abilities on incentives in organizations using the principal agent model of moral hazard the paper shows that if effort is observable then an agent s mistaken beliefs about own ability are always favorable to the principal however if effort is unobservable then an agent s mistaken beliefs about own ability can be either favorable or unfavorable to the principal the paper provides conditions under which an agent s over estimation about own ability is favorable to the principal when effort is unobservable finally the paper shows that workers mistaken beliefs about their coworkers abilities make interdependent incentive schemes more attractive to firms than individualistic incentive schemes

money debt and deficits in a dynamic game this paper analyzes a dynamic linear quadratic game between the fiscal and monetary authorities the equilibrium outcome of the game determines the time path of money creation fiscal deficits and public debt the game is solved for different equilibrium concepts the equilibria are then compared and interpreted with reference to alternative institutional arrangements the main results are i coordination increases the speed of adjustment towards the steady state and takes the steady state value of public debt closer to the desired target ii precommitments take the non cooperative equilibrium closer to the coordinated outcome iii increasing the weight that each policymaker assigns to his own private objectives slows down the adjustment process places more burden on the opponent but has ambiguous effects on the steady state value of public debt

looking at the bright side the motivational value of confidence abstract the motivational value of confidence postulates that individual effort provision is increasing in beliefs on one s own ability this relation is supposed to also hold for overconfident individuals who have exaggerated ability beliefs we present the first empirical evidence on the existence of a motivational value of absolute confidence that many microeconomic models with overconfident agents build on moreover we document that negative debiasing information on individual ability diminishes effort provision a result that is of obvious relevance for many contexts such as labor relations or learning at school we also offer a strategy for identifying significant absolute overconfidence at the individual level

the impact of experience on risk taking overconfidence and herding of fund managers complementary survey evidence abstract empirical research has shown that inexperienced fund managers yield significantly higher returns than their more experienced colleagues if the portfolios of inexperienced are not more risky this result would contradict the hypothesis of market efficiency therefore it is an important question whether inexperienced fund managers tend to taker higher risks higher risk taking may be explained by a higher degree of overconfidence less herding behavior or a lower degree of risk aversion since the results concerning the relationship between experience and risk taking in previous studies are rather contradictory we provide complementary survey evidence of 117 german fund managers which can improve our understanding in this field in line with the results of previous studies we find that herding is decreasing with experience while the evidence concerning risk taking and overconfidence is mixed nevertheless our results provide some support for the hypothesis that inexperienced managers do indeed take higher risks

transactions technology and the time consistency of optimal policy abstract in a perfect foresight continuous time model of the macro economy turnovsky and brock 1980 have demonstrated that the government s choice of an optimal policy will be time inconsistent only if it is bound by a k rule regarding the growth of nominal monetary balances this result is shown to be invalid when bonds bear a liquidity yield under such circumstances it is shown that all optimal policies are time inconsistent the conclusion is that the liquidity properties of the government s financing instruments play an important role in determining the consistency properties of its optimal policies

political shocks and public debt the case for a conservative central bank revisited abstract we explore the dynamics of public debt and optimal institutions in the presence of political shocks arising from electoral uncertainty under commitment optimal stabilization is established by combining an inflation target with a debt target the inflation target should be contingent on the political shocks while the debt target forces the government to fully absorb the political shocks in the period in which it occurs in the absence of such inflation and debt targets but with monetary commitment a conservative central bank enhances stabilization an even more conservative central bank is optimal if monetary policy cannot commit

monetary and fiscal policies interaction in monetary unions in this paper the literature on the interaction between monetary and fiscal policies in a monetary union is surveyed by adopting the concept of symbiosis as a starting point the paper highlights the importance of uncertainty policy makers preferences and targets then the role of commitment to policy rules and coordination is addressed the analysis also focuses on the importance of the data considered for the generation of the policy mix as a final step the paper discusses the main results in the literature on public debt management in a monetary union all the reported theoretical results are then adopted to retrieve policy and institutional implications for the european monetary union

overconfidence and excess entry an experimental approach psychological studies show that most people are overconfident about their own relative abilities and unreasonably optimistic about their futures e g shelly e taylor and j d brown 1988 neil d weinstein 1980 when assessing their position in a distribution of peers on almost any positive trait like driving ability ola svenson 1981 income prospects or longevity a vast majority of people say they are above the average although of course only half can be if the trait is symmetrically distributed this paper explores whether optimistic biases could plausibly and predictably influence economic behavior in one particular setting entry into competitive games or markets many empirical studies show that most new businesses fail within a few years for example using plant level data from the u s census of manufacturers spanning 1963 1982 timothy dunne et al 1988 estimated that 61 5 percent of all entrants exited within five years and 79 6 percent exited within 10 years most of these exits are failures see also dunne et al 1989a 1989b d shapiro and r s khemani 1987

central bank independence and monetary control ing from details these conclusions imply that inflation is lower the higher is cbi and that given independence countries that pre announce monetary policy have even lower rates of inflation furthermore there is no evidence that cbi retards growth or investment as a matter of fact for ldcs the evidence points in the opposite direction low independence is associated with lower growth and investment some economists feel that excessive independence may interfere with the potential stabilisatory function of monetary policy since fluctuations in the growth rate of the economy are found to be unrelated to cbi this does not appear to be the case iii commitment via central bank independence and

fiscal policy coordination and emu a dynamic game approach abstract this paper examines the case for fiscal policy coordination in a european economic and monetary union emu a two bloc model with two market structures is examined emu producing a single homogeneous good in both blocs emu1 and a two good emu emu2 where each bloc produces a single home good the european central bank sets monetary policy so as to achieve credibly low inflation rates we find that for emu2 as relative prices can change countries have an incentive to improve their terms of trade leading to an inefficient noncooperative outcome which can be avoided by cooperation

monetary union without fiscal coordination may discipline policymakers abstract with benevolent policymakers and fiscal leadership monetary unification reduces inflation taxes and public spending these disciplining effects of a monetary union which become stronger if the number of participants in the union increases are likely to raise welfare two types of arrangements are considered for the union s common central bank ccb making the ccb more conservative and imposing an inflation target on the ccb in contrast to the results of svensson 1997 svensson l e o 1997 optimal inflation targets conservative central banks and linear inflation contracts american economic review 87 98 114 an optimally designed conservative ccb may outperform inflation targeting finally we find that fiscal coordination offsets the disciplining effects of monetary unification hence subsidiarity in fiscal policymaking may enhance welfare

voting on the budget deficit this paper analyzes a model in which a group of rational individuals votes over the composition and time profile of public spending all voters agree that a balanced budget is ex ante optimal however if there is disagreement between current and future majorities a balanced budget is not a political equilibrium under majority rule under certain conditions a majority of the voters favors a budget deficit and the equilibrium deficit is larger the greater is the polarization among voters copyright 1990 by american economic association

the theory of moral hazard and unobservable behaviour part i principal agent models are studied in which outcomes conditional on the agent s action are uncertain and the agent s behaviour therefore unobservable for a model with bounded agent s utility conditions are given under which the first best equilibrium can be approximated arbitrarily closely by contracts relating payment to observable outcomes for general models it is shown that the solution may not always be obtained by using the agent s first order conditions as constraint general conditions of lagrangean type are given for problems in which contracts are finite dimensional 1 the moral hazard situation

rationalizability learning and equilibrium in games with strategic complementarities we study a rich class of noncooperative games that includes models of oligopoly competition macroeconomic coordination failures arms races bank runs technology adoption and diffusion r d competition pretrial bargaining coordination in teams and many others for all these games the sets of pure strategy nash equilibria correlated equilibria and rationalizable strategies have identical bounds also for a class of models of dynamic adaptive choice behavior that encompasses both best response dynamics and bayesian learning the players choices lie eventually within the same bounds these bounds are shown to vary monotonically with certain exogenous parameters we study the class of noncooperative supermodular games introduced by topkis 1979 and further analyzed by vives 1985 1989 who also pointed out the importance of these games in industrial economics supermodular games are games in which each player s strategy set is partially ordered the marginal returns to increasing one s strategy rise with increases in the competitors strategies so that the game exhibits strategic complementarity 2 and if a player s strategies are multidimensional marginal returns to any one com ponent of the player s strategy rise with increases in the other components this class turns out to encompass many of the most important economic applications of noncooperative game theory in macroeconomics diamond s 1982 search model and bryant s 1983 1984 rational expectations models can be represented as supermodular games in each of these models more activity by some members of the economy raises the returns to increased levels of activity by others in oligopoly theory some models of bertrand oligopoly with differentiated products qualify as supermodu lar games in these games when a firm s competitors raise their prices the marginal profitability of the firm s own price increase rises a similar structure is present in games of new technology adoption such as those of dybvig and spatt 1983 farrell and saloner 1986 and katz and shapiro 1986 when more users hook into a communication system or more manufacturers adopt an interface standard the marginal return to others of doing the same often rises similarly in some specifications of the bank runs model introduced by diamond and dybvig 1983 when more depositors withdraw their funds from a bank it is more worthwhile for other depositors to do the same in the warrant exercise

an analysis of the principal agent problem most analyses of the principal agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent s utility being at a stationary point an important paper of mirrlees has shown that this approach is generally invalid we present an alternative procedure if the agent s preferences over income lotteries are independent of action we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem we use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem

self confidence and personal motivation the maintenance and enhancement of self esteem has always been identified as a fundamental human impulse philosophers writers educators and of course psychologists have all emphasized the crucial role played by self image in motivation affect and social interactions the aim of this chapter is to bring these concerns into the realm of economic analysis and show that this has important implications for how agents process information and make decisions conversely the tools of economic modelling can help shed light on a number of apparently irrational behaviours documented by psychologists