tripartite income employment contracts and coalition incentive compatibility tripartite contracts between workers a firm and an insurance broker pareto dominate the usual bilateral arrangements if coalitions are not feasible they do this by allowing the broker to run surpluses over a reservation expected utility in some states and deficits in others we show that these contracts are manipulable by coalitions this motivates our main contribution the definition and characterization of coalition incentive compatible tripartite contracts we then ask whether broker intermediation can still be useful the answer is that not every coalition incentive compatibility requirement annuls the critical budget breaking property specifically if firm broker coalitions are feasible there is no three party contract that is coalition incentive compatible and pareto superior to bilateral firm worker contracts except in the extreme case where the workers demand for leisure is income inelastic but if only a firm worker coalition can form the addition of a broker to a bilateral arrangement does reduce the welfare losses caused by the existence of asymmetric information

involuntary unemployment and implicit contracts this paper provides an explanation of involuntary umemployment arising as a consequence of asymmetric information between firms and workers involuntary unemployment is defined as a situation where ex post gains to trade exist a model of labor contracts is developed where the allocations are not ex post optimal it is shown that inferiority of leisure is a necessary and sufficient condition for the existence of involuntary unemployment

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

underemployment and normal leisure abstract a combined worksharing layoff wage severance pay contract is shown to imply inter alia that normal leisure and underemployment do coexist provided the elasticity of substitution between employment and hours is sufficiently low as defined rigorously in the text

wage employment contracts this paper studies the efficient agreements about the dependence of workers earnings on employment when the employment level is controlled by firms the firms superior information about profitability conditions is responsible for this form of contract governance under plausible assumptions such agreements will cause employment to diverge from efficiency as a byproduct of their attempt to mitigate risk it is shown that if leisure is a normal good and firms are risk neutral employment is always above the efficient level such a one period implicit contracting model cannot therefore be used to explain unemployment as a rational byproduct of risk sharing between workers and a risk neutral firm under conditions of asymmetric information

environment market share and market power in this paper we develop a process model relating market share to firm profits in particular we specify average price and average cost equations as a function of previous year market share position changes in market share environmental conditions and interactions of environmental conditions with the lagged market position and market share change variables we estimate these equations using pims data after controlling for unobservable factors our results suggest that firms with high market shares derive no extra market power benefits except if they operate in environments with little buyer power instead environmental factors and changes in market share most strongly influence price and cost an analysis of the market share associated with maximal firm profits indicates that for the majority of firms in our sample steadily increasing market share does not always associate with increasing profits giving credence to the proposition that more market share is not always better

implicit contracts moral hazard and unemployment this paper considers a firm whose marginal revenue product of labor is a random variable we derive the form of an optimal long term contract between workers and the firm under the assumption that labor s marginal product is observed by the firm but not by the workers we show that the existence of asymmetric information causes unemployment to be greater than in a situation where information about labor s marginal product is public or where employment is determined in spot markets in particular unemployment can occur when the marginal product of labor exceeds the reservation wage

a hardware approach to value function iteration abstract this paper proposes a novel approach for the computation of dynamic stochastic equilibrium models we design an fpga specialized in the computation of a bellman equation via value function iteration vfi our hardware approach exhibits significant speed gains vis a vis gpu based data parallelization techniques the speed gains arise from two layers of parallelism accessible to hardware developers instruction level and pipeline parallelism at the logical resources level by and large the paper documents significant computational speed gains from hardware specialization so far unexplored by the macroeconomic literature

cyclical dynamics in idiosyncratic labor market risk is individual labor income more risky in recessions this is a difficult question to answer because existing panel data sets are so short to address this problem we develop a generalized method of moments estimator that conditions on the macroeconomic history that each member of the panel has experienced variation in the cross sectional variance between households with differing macroeconomic histories allows us to incorporate business cycle information dating back to 1930 even though our data do not begin until 1968 we implement this estimator using household level labor earnings data from the panel study of income dynamics we estimate that idiosyncratic risk is i highly persistent with an annual autocorrelation coefficient of 0 95 and ii strongly countercyclical with a conditional standard deviation that increases by 75 percent from 0 12 to 0 21 as the macroeconomy moves from peak to trough

household balance sheet channels of monetary policy a back of the envelope calculation for the euro area abstract this paper formulates a back of the envelope approach to study the effects of monetary policy on household consumption expenditures we analyze several transmission mechanisms operating through direct partial equilibrium channels intertemporal substitution and net interest rate exposure and indirect general equilibrium channels net nominal exposure as well as wealth collateral and labor income channels the strength of these forces varies across households depending on their marginal propensities to consume their balance sheet composition the sensitivity of their own earnings to fluctuations in aggregate labor income and the responsiveness of aggregate earnings asset prices and inflation to monetary policy shocks we quantify all these channels in the euro area by combining micro data from the hfcs and the eu lfs with structural vars estimated on aggregate time series we find that the indirect labor income channel and the housing wealth effect are strong drivers of the aggregate consumption response to monetary policy and explain the cross country heterogeneity in these responses

recovering measures of advertising carryover from aggregate data the role of the firm s decision behavior data interval bias the biased estimation of advertising carryover in aggregate data can be viewed as a misinterpretation of the aggregate advertising sales relationship due to missing micro advertising data this paper argues that if the researcher does not explicitly model the firm s advertising decisions he will incorrectly interpolate the missing data and thereby allow the firm s decision behavior to influence inferences about advertising carryover drawing upon a general model of advertising decision behavior the expected aggregate form of the koyck relationship is developed and compared to existing bias correction methodologies although it is difficult to find any parsimonious procedure which is robust with respect to all types of decision behavior allowing lagged advertising to enter the classical koyck equation emerges as a simple method of obtaining a reasonable estimate of advertising carryover in aggregate data

modeling asymmetric competition the effects of the marketing actions of one brand can be distributed among its competitors market shares in a complex manner this paper presents and illustrates methods for modeling brand competition and brand strategies in markets where competitive effects can be differentially and asymmetrically distributed we discuss the empirical specification parameter estimation and competitive strategy implications of the models proposed price and advertising competition among eleven brands of an australian household product is used to illustrate the application of these procedures

are micro and macro labor supply elasticities consistent a review of evidence on the intensive and extensive margins we evaluate whether state of the art macro models featuring indivisible labor are consistent with modern quasi experimental micro evidence by synthesizing evidence on both the intensive and extensive margins we find that micro estimates are consistent with macro estimates of the steady state hicksian elasticities relevant for cross country comparisons on both the extensive and intensive margins however micro estimates of intertemporal substitution frisch elasticities are an order of magnitude smaller than the values needed to explain business cycle fluctuations in aggregate hours by preferences the key puzzle to be resolved is why micro and macro estimates of the frisch extensive margin elasticity are so different

the welfare cost of business cycles revisited finite lives and cyclical variation in idiosyncratic risk abstract this paper investigates the welfare costs of business cycles in a heterogeneous agent overlapping generations economy which is distinguished by idiosyncratic labor market risk aggregate variation arises both in terms of aggregate productivity shocks and countercyclical variation in the volatility of idiosyncratic shocks based on both aggregate data and microeconomic data from the panel study on income dynamics we find the welfare benefits of eliminating aggregate variation to be large an order of magnitude larger than those originally documented by lucas 1987 the key difference is countercyclical variation in idiosycratic risk which both amplifies the welfare cost of aggregate productivity shocks and imposes a cost of its own the magnitude of these effects increases non linearly in risk aversion our results therefore are consistent with the increasingly popular notion that distributional effects are an important aspect of understanding the welfare cost of business cycles

the method of endogenous gridpoints with occasionally binding constraints among endogenous variables we show how the method of endogenous gridpoints can be extended to solve models with occasionally binding constraints among endogenous variables very efficiently we present the method for a consumer problem with occasionally binding collateral constraints and non separable utility in durable and non durable consumption this problem allows for a joint analysis of durable and non durable consumption in models with uninsurable income risk which is important to understand patterns of consumption saving and collateralized debt we illustrate the algorithm and its efficiency by calibrating the model to us data

the persistence of marketing effects on sales are marketing efforts able to affect long term trends in sales or other performance measures answering this question is essential for the creation of marketing strategies that deliver a sustainable competitive advantage this paper introduces persistence modeling to derive long term marketing effectiveness from time series observations on sales and marketing expenditures first we use unit root tests to determine whether sales are stable or evolving trending over time if they are evolving we examine how strong this evolution is univariate persistence and to what extent it can be related to marketing activity multivariate persistence an empirical example on sales and media spending for a chain of home improvement stores reveals that some but not all advertising has strong trend setting effects on sales we argue that traditional modeling approaches would not pick up these effects and therefore seriously underestimate the long term effectiveness of advertising the paper concludes with an agenda for future empirical research on long run marketing effectiveness

a further look at the propagation of monetary policy shocks in hank we provide quantitative guidance on whether and to what extent different elements of heterogeneous agent new keynesian hank models amplify or dampen the response of aggregate consumption to a monetary policy shock we emphasize four findings first the introduction of capital adjustment costs does not affect the aggregate response but does change the transmission mechanism so that a larger share of indirect effects originates from equity prices rather than from labor income second incorporating estimated unequal incidence functions for aggregate labor income fluctuations leads to either amplification or dampening depending on the data and estimation methods third distribution rules for monopoly profits that allocate a larger share to liquid assets lead to greater amplification fourth assumptions about the fiscal reaction to a monetary policy shock have a stronger effect on the aggregate consumption response than any of the other three elements

noncooperative regulation of a nonlocalized externality with a nonlocalized pollution externality different groups bear the costs and benefits of abatement in the case of acid rain these groups are respectively consumers in the midwest and pollutees in the northeast these groups have conflicting interests that are represented respectively by a public utilities commission and an environmental regulator we analyze a model in which the environmental protection agency acting as a von stackelberg leader regulates pollution and the public utility commission regulates the price for a monopolist that has private information about the effectiveness of its abatement alternatives we characterize a noncooperative equilibrium and compare it with a cooperative equilibrium a nonlocalized pollution externality poses special regulatory problems when the benefits and the costs of abatement are borne by distinct groups whose interests are represented by different regulatory agencies a relevant example is acid rain which is believed to be caused in part by coal fired electricity generating plants these emit sulfur dioxide and nitrogen oxide which upon contact with moisture in the atmosphere form acid that falls with rain measures to reduce these emissions are of concern to the residents of the states in which the coal fired generating plants are located because abatement costs increase the prices they pay for electricity a number of plans have been proposed for distributing those costs more broadly but the costs of reducing the emissions of generating plants located in ohio will likely be borne in large part by ohio consumers and utilities while the benefits from abatement will largely be realized by the residents of the northeast and canada the control of a nonlocalized externality such as acid rain raises the issue of the relationship between the environmental regulator the environmental protection agency epa and the public utility commission the former is responsible for achieving an acceptable balance between the damage from pollution and the cost of abatement the latter is responsible for pricing electricity on the basis of the costs of production and pollution control one possibility is that cooperation between the two regulators leads to the joint regulation of emissions and prices cooperation would internalize the conflicting interests and mandates of the regulators but the distributive consequences of the regulatory alternatives inhibit cooperation the public utility commission for example has an interest in avoiding abate

persistence seasonality and trend in the uk egg production this paper discusses the time series properties of uk egg production in order to provide an empirical analysis of the possible long run impact of the shock on the industry following the recent incidence of salmonella poisoning our analysis shows that although the short run properties of the uk egg production are consistent with the presence of persistent shocks a shock duration is unlikely to have large long run efefcts this result is remarkably robust to the choice of the persistence measure obtained

assessing the accuracy of the aggregate law of motion in models with heterogeneous agents this paper shows that the r2 and the standard error have fatal flaws and are inadequate accuracy tests using data from a krusell smith economy i show that approximations for the law of motion of aggregate capital for which the true standard deviation of aggregate capital is up to 14 119 higher than the implied value and which are thus clearly inaccurate can have an r2 as high as 0 9999 0 99 key in generating a more powerful test is that predictions of the aggregate law of motion are not updated with the aggregated simulated individual data

household heterogeneity and the transmission of foreign shocks abstract we study the role of heterogeneity in the transmission of foreign shocks we build a heterogeneous agent new keynesian small open model economy hanksome that experiences a current account reversal households portfolio composition and the extent of foreign currency borrowing are key determinants of the magnitude of the contraction in consumption associated with a sudden stop in capital inflows the contraction is more severe when households are leveraged and owe debt in foreign currency in this setting the revaluation of foreign debt causes a larger contraction in aggregate consumption when debt and leverage are concentrated among poorer households closing the output gap via an exchange rate devaluation may therefore be detrimental to household welfare due to the heterogeneous impact of the foreign debt revaluation our hanksome framework can rationalize the observed fear of floating in emerging market economies even in the absence of contractionary devaluations

an alternative approach to simulating var models abstract this paper proposes a simple approach to the problem of handling contemporaneous correlation of the error terms when simulating var models the approach is illustrated with an example using an estimated var model of the new zealand economy

employment with asymmetric information in an economy without informational and other distortions entrepreneurs and workers can write labor contracts that support a pareto optimal allocation of resources this paper is an attempt to characterize contracts when enterpreneurs are better informed about the state of nature than are their workers asymmetric information generally results in a suboptimal allocation of both risk and worker effort in particular if consumption and leisure are perfect substitutes employment will be less than fully pareto optimal in all but the most favorable states of nature

income and wealth heterogeneity in the macroeconomy how do movements in the distribution of income and wealth affect the macroeconomy we analyze this question using a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity our main finding is that in the stationary stochastic equilibrium the behavior of the macroeconomic aggregates can be almost perfectly described using only the mean of the wealth distribution this result is robust to substantial changes in both parameter values and model specification our benchmark model whose only difference from the representative agent framework is the existence of uninsurable idiosyncratic risk displays far less cross sectional dispersion and skewness in wealth than u s data however an extension that relies on a small amount of heterogeneity in thrift does succeed in replicating the key features of the wealth data furthermore this extension features aggregate time series that depart significantly from permanent income behavior

the moral hazard of budget breaking it has recently been suggested in the agency literature that moral hazard in teams can be dealt with by introducing a third party who breaks the budget balancing constraint and that this facilitates the design of contracts that can sustain the pareto optimum as a perfect nash equilibrium this note offers an explanation for why the use of budget breaking schemes is not so widespread as that of active monitoring despite the fact that such schemes would save the resources expended on supervision the note demonstrates that allowing the budget to be broken introduces the potential for moral hazard on the part of the third party which could render the proposed equilibrium incredible

central bank policies and income and wealth inequality a survey this paper reviews recent research on the relationship between central bank policies and inequality a new paradigm which integrates sticky prices incomplete markets and heterogeneity among households is emerging which allows for the joint study of how inequality shapes macroeconomic aggregates and how macroeconomic shocks and policies affect inequality the new paradigm features multiple distributional channels of monetary policy most empirical studies however analyze each potential channel of redistribution in isolation our review suggests that empirical research on the effects of conventional monetary policy on income and wealth inequality yields mixed findings although there seems to be a consensus that higher inflation at least above some threshold increases inequality in contrast to common wisdom conclusions concerning the impact of unconventional monetary policies on inequality are also not clear cut to better understand policy effects on inequality future research should focus on the estimation of general equilibrium models with heterogeneous agents

precautionary savings illiquid assets and the aggregate consequences of shocks to household income risk households face large income uncertainty that varies substantially over the business cycle we examine the macroeconomic consequences of these variations in a model with incomplete markets liquid and illiquid assets and a nominal rigidity heightened uncertainty depresses aggregate demand as households respond by hoarding liquid paper assets for precautionary motives thereby reducing both illiquid physical investment and consumption demand we document the empirical response of portfolio liquidity and aggregate activity to surprise changes in idiosyncratic income uncertainty and find both to be quantitatively in line with our model the welfare consequences of uncertainty shocks and of the policy response thereto depend crucially on a household s asset position

optimal incentive contracts with multiple agents abstract a setting in which a single principal contracts with two agents who possess perfect private information about their own productivity is considered with correlated productivities each agent s private information also provides a signal about the other agent s productivity in contrast to the setting in which there is only one agent it is shown that such private information may be of no value to the agents it is only if the agents are risk averse that their private information may allow them to command rents moreover when the agents are constrained only to reveal their private information truthfully as a nash equilibrium the pareto optimal incentive scheme may induce the agents to adopt strategies other than truth telling this leads to the consideration of truth telling equilibria that are not pareto dominated in the subgame played by the agents among all such equilibria the one preferred by the principal restricts one agent to tell the truth as a dominant strategy and the other as a nash response to truth

reference effects of price and promotion on brand choice behavior when consumers are exposed to pricing and promotional activity by frequently purchased packaged goods they may develop expectations that are used as points of reference in evaluating future activi

persistence in foreign exchange rates abstract this study examines the long run behavior of seven daily nominal exchange rates using univariate and multivariate persistence measures our results indicate that for some currencies the long run behavior deviates from that of a pure random walk in certain periods the multivariate estimates reflect the effect of both the ems exchange rate mechanism and increased post louvre accord coordinated intervention a large portion of the effect of a shock in one currency on another currency s long run value can be attributed to contemporaneous effects on the other currencies

a note on overemployment underemployment in labor contracts under asymmetric information abstract models of labor contracts under asymmetric information may predict either overemployment or underemployment this paper shows that this result depends crucially on whether or not leisure is a normal good if firms are risk neutral

consumption dynamics under time varying unemployment risk abstract in response to an adverse labor market shock a calibrated heterogeneous agent model predicts that aggregate spending on durable goods falls mainly due to the ex ante increase in income uncertainty caused by higher unemployment risk in contrast aggregate spending on nondurable goods falls mainly due to the ex post income losses associated with realized unemployment spells when households hold little liquid assets the nondurable spending response is amplified whereas the durable spending response is dampened these differences stem from micro level adjustment frictions involved in purchases of durable goods the model is corroborated with evidence from micro survey data

macroeconomic fluctuations with hank sam an analytical approach new keynesian models with unemployment and incomplete markets are rapidly becoming a new workhorse model in macroeconomics such models typically require heavy computational methods which may obscure intuition and overlook equilibria we present a tractable version which can be characterized analytically our results highlight that ndue the interaction between incomplete markets sticky prices and endogenous unemployment risk nproductivity shocks may have radically di erent e ects than in traditional nk models that the taylor principle may fail and that pessimistic beliefs may be self fulolling and move the economy into temporary episodes of low demand and high unemployment as well as into a long lasting iunemployment trapi at the zero lower bound the presence of endogenous unemployment risk can create inaation and overturn paradoxical properties of the model we further study onancial asset prices and show that non negligible risk premia emerge