the speed of the invisible hand abstract very little attention has been devoted to incorporating dynamic elements into empirical models of market structure and performance consequently there has been little progress in settling the issue of whether the market structure profits relationship is more than just a temporary phenomenon in this study an estimation equation is developed which allows for incomplete adjustment of past profits from expected future profits where expected profits depends on present and expected future changes in market structure the model is estimated pooling panel data across industries the findings indicate that adjustment to abnormal profits is relatively quick market share adjustments are non instantaneous and that inclusion of industry specific effects is important the results suggest that previous studies are susceptible to specification bias from omitted variables

optimal taxation with endogenously incomplete debt markets abstract empirical analyses of labor tax and public debt processes provide prima facie evidence for imperfect government insurance this paper considers a model in which the government s inability to commit to future policies or to report truthfully its spending needs renders government debt markets endogenously incomplete a method for solving for optimal fiscal policy under these constraints is developed such policy is found to be intermediate between that implied by the complete insurance ramsey model and a model with exogenously incomplete debt markets in contrast to optimal ramsey policy optimal policy in this model is consistent with a variety of stylized fiscal policy facts such as the high persistence of labor tax rates and debt levels and the positive covariance between government spending and the value of government debt sales

the choice between market failures and corruption because government intervention transfers resources from one party to another it creates room for corruption as corruption often undermines the purpose of the intervention governments will try to prevent it they may create rents for bureaucrats induce a misallocation of resources and increase the size of the bureaucracy since preventing all corruption is excessively costly second best intervention may involve a certain fraction of bureaucrats accepting bribes when corruption is harder to prevent there may be both more bureaucrats and higher public sector wages also the optimal degree of government intervention may be nonmonotonic in the level of income

the constitution of economic policy one of the most exciting intellectual moments of my career was my 1984 discovery of knut wicksell s unknown and untranslated dissertation finanztheoretische untersuchungen buried in the dusty stacks of chicago s old harper library only the immediate post dissertation leisure of an academic novice allowed for the browsing that produced my own dramatic example of learning by serendipity wicksell s new principle of justice in taxation gave me a tremendous surge of self confidence wicksell who was an established figure in the history of economic ideas challenged the orthodoxy of public finance theory along lines that were congenial with my own developing stream of critical consciousness from that moment in chicago i took on the determination to make wicksell s contribution known to a wider audience and i commenced immediately a translation effort that took some time and considerable help from elizabeth henderson before final publication this abstract was borrowed from another version of this item

optimal taxation merging micro and macro approaches efficient provision of social insurance and efficient redistributionofresourcesamongindividualsaresomeofthemostimportantandchallenging questions in macroeconomics and public finance a seminal contribution of mirrlees 1971 is the starting point for the modern approach to answering these questions a trade off between efficiency and insurance or equity is inherent to this approach and is a key determinant of the optimal policy in this paper we argue that the large body of research that follows mirrlees approach has been developing in two quite separate directions referred to in this paper as the micro and macro approaches we argue that merging the two directions

macroeconomic features of the french revolution this paper describes aspects of the french revolution from the perspective of theories about money and government budget constraints we describe how unpleasant fiscal arithmetic gripped the old regime how the estates general responded to reorganize france s fiscal affairs and how fiscal exigencies impelled the revolution into a procession of monetary experiments ending in hyper inflation

politicians as experts electoral control and fiscal restraints we propose an argument for fiscal restraints that is based on the premise that the services of politicians are credence goods politicians are experts who specialize in observing the true state of the economy budget maximizing politicians are better informed than the electorate about the level of public spending necessary to manage public affairs voters who are able to observe the size of the budget but not the necessary level of spending affect the government s spending behavior via electoral control a fiscal restraint limits the maximum spending a government can choose we identify conditions under which such a fiscal restraint improves voter welfare and discuss the role of the political opposition as a second expert in situations in which the state of the economy requires a level of spending which exceeds the fiscal restraint

managing the maturity structure of government debt abstract it is known that a government can implement the optimal complete market ramsey allocations by issuing non contingent bonds of different maturities the implied optimal maturity structure is time and state invariant i e it is not actively managed i construct a model where the ramsey allocations can be implemented with active management of the maturity structure in a numerical example that reflects the time series properties of the british government s expenditure during the 18th century its historic pattern of maturity management is replicated

interpreting econometric evidence the behaviour of consumers expenditure in the uk abstract the dynamic models of consumers expenditure proposed by davidson et al 1978 and hendry and von ungern sternberg 1979 are re appraised in the light of hall s 1978 analysis of the empirical implications of the life cycle permanent income hypothesis in particular that the series for consumption should obey a random walk apart from trend in an attempt to reconcile the conflicting findings monte carlo experiments are used to demonstrate that if the davidson et al model were actually correct the hall model would appear to give a good description of the data and would probably not be rejected all the models are re estimated with new data for the uk and these data do reject a modified random walk specification in conclusion we discuss the issue of income exogeneity and comment on questions of model selection and interpretation

political credit cycles the case of the euro zone we study the mechanisms through which the adoption of the euro delayed rather than advanced economic reforms in the euro zone periphery and led to the deterioration of important institutions in these countries we show that the abandonment of the reform process and the institutional deterioration in turn not only reduced their growth prospects but also fed back into financial conditions prolonging the credit boom and delaying the response to the bubble when the speculative nature of the cycle was already evident we analyze empirically the interrelation between the financial boom and the reform process in greece spain ireland and portugal and by way of contrast in germany a country that did experience a reform process after the creation of the euro

the dynamics of sovereign default risk and political turnover abstract this paper develops a stochastic dynamic politico economic model of sovereign debt to analyze the interaction of sovereign default risk and political turnover two parties differ in their preferred size of unproductive public spending which is financed by taxes and external debt electoral outcomes are characterized by the economic benefits from the incumbent s policies and stochastic idiosyncratic ideological aspects quantitative findings suggest that endogenous political turnover increases the discrepancies between the optimal borrowing and default policies of the two parties prior to a debt crisis the incumbent government accumulates external debt to foster the probability of remaining in power the dynamic interaction of electoral outcomes external debt and sovereign default supports arguments for imposing institutional constraints on incumbent governments

government debt threshold contracts politicians tend to push the amount of public debt beyond socially desirable levels in order to increase their reelection chances we develop a model that provides a new explanation for this behavior office holders undertake debt financed public projects but postpone the timing of part of the output to the next term this makes it difficult to replace them as a consequence the office holders reelection chances rise as does public debt as a potential remedy for this inefficiency we allow candidates for public office to offer government debt threshold contracts such a contract contains an upper limit for government debt and the sanction that an office holder violating this limit cannot stand for reelection we show that such competitively offered contracts contain low debt levels that limit debt financing and improve the citizens welfare when negative macroeconomic events occur government debt threshold contracts may be violated and the economy is stabilized jel d7 d82 h4

the surprising power of age dependent taxes this paper provides a new empirically driven application of the dynamic mirrleesian framework by studying a feasible and potentially powerful tax reform age dependent labour income taxation i show analytically how age dependence improves policy on both the intratemporal and intertemporal margins i use detailed numerical simulations calibrated with data from the u s panel study of income dynamics to generate robust policy implications age dependence 1 lowers marginal taxes on average and especially on high income young workers and 2 lowers average taxes on all young workers relative to older workers when private saving and borrowing are restricted finally i calculate and characterize the welfare gains from age dependence despite its simplicity age dependence generates a welfare gain equal to between 0 6 and 1 5 of aggregate annual consumption and it captures more than 60 of the gain from reform to the dynamic optimal policy the gains are due to substantial increases in both efficiency and equity when age dependence is restricted to be pareto improving the welfare gain is nearly as large

fiscal rules and discretion in a world economy governments are present biased toward spending fiscal rules are deficit limits that trade off commitment to not overspend and flexibility to react to shocks we compare coordinated rules chosen jointly by a group of countries to uncoordinated rules if governments present bias is small coordinated rules are tighter than uncoordinated rules individual countries do not internalize the redistributive effect of interest rates however if the bias is large coordinated rules are slacker countries do not internalize the disciplining effect of interest rates surplus limits enhance welfare and increased savings by some countries or outside economies can hurt the rest

simple solutions to the initial conditions problem in dynamic nonlinear panel data models with unobserved heterogeneity i study a simple widely applicable approach to handling the initial conditions problem in dynamic nonlinear unobserved effects models rather than attempting to obtain the joint distribution of all outcomes of the endogenous variables i propose finding the distribution conditional on the initial value and the observed history of strictly exogenous explanatory variables the approach is flexible and results in simple estimation strategies for at least three leading dynamic nonlinear models probit tobit and poisson regression i treat the general problem of estimating average partial effects and show that simple estimators exist for important special cases copyright 2005 john wiley sons ltd

optimal fiscal policy in a business cycle model this paper develops the quantitative implications of optimal fiscal policy in a business cycle model in a stationary equilibrium the ex ante tax rate on capital income is approximately zero there is an equivalence class of ex post capital income tax rates and bond policies that support a given allocation within this class the optimal ex post capital tax rates can range from close to independently and identically distributed to close to a random walk the tax rate on labor income fluctuates very little and inherits the persistence properties of the exogenous shocks thus there is no presumption that optimal labor tax rates follow a random walk most of the welfare gains realized by switching from a tax system like that of the united states to the ramsey system come from an initial period of high taxation on capital income

future rent seeking and current public savings abstract the conventional wisdom is that politicians rent seeking motives increase public debt and deficits this is because myopic politicians face political risk and prefer to extract political rents as early as possible in this paper we study the determination of government debt and deficits in a dynamic political economy model we show that this conventional wisdom relies on economic volatility being low relative to political uncertainty if economic volatility is high relative to political uncertainty then a rent seeking government actually over saves and over taxes along the equilibrium path relative to a benevolent government this result emerges because of the option value of rent seeking a rent seeking government over values future funds because of the possibility of using them for future rents instead of cutting taxes in the event of a future boom when marginal utility of private consumption is low this over saving bias is temporary since in the long run the rent seeking government over borrows relative to the benevolent government as it eventually squanders the funds it has accumulated we find that both the under saving and over saving bias of the government can be solved by a rule of capping deficits

elections and the strategic use of budget deficits we present a model in which a conservative incumbent with preferences for low public spending can strategically run a budget deficit to prevent the left wing opposition candidate from choosing high public spending if elected and possibly also to ensure his own reelection we find that the incumbent never manipulates the opposition candidate s public spending if he can ensure his own reelection and that a conservative incumbent who runs a budget deficit to ensure his reelection may somewhat paradoxically choose high public spending before the election

sustainable plans and mutual default this paper presents a simple general equilibrium model of optimal taxation in which both private agents and the government can default on their debt as a benchmark we consider ramsey equilibria in which the government can precommit to its policies at the beginning of time but in which private agents can default we then consider sustainable equilibria in which both government and private agent decision rules are required to be sequentially rational we adapt abreu s 1988 optimal trigger strategies to completely characterize the entire set of sustainable equilibria in particular we show that when there is sufficiently little discounting and government consumption fluctuates enough the ramsey allocations and policies in which the government never defaults can be supported by a sustainable equilibrium by way of an example we show that the larger the variance of government consumption the easier it is to support good outcomes we also show for moderate discount factors that in the best sustainable equilibrium tax rates are more volatile and debt is smaller than in the ramsey equilibrium

optimal maturity of government debt without state contingent bonds abstract this paper shows that state contingent debt can be synthetically constructed using non contingent debt of different maturities a main policy implication of this principle is that the ramsey allocation with complete markets can be sustained with non contingent debt only by properly managing its maturity structure the numerical experiments however suggest that this policy implication ought to be taken with care we find that the debt positions that sustain the ramsey allocation are very high on the order of a few hundred times total gdp for a very simple four state economy and increasing in the number of states in addition they are very sensitive to small variations in the parameters of the model

optimal taxation without state contingent debt in an economy studied by lucas and stokey tax rates inherit the serial correlation structure of government expenditures belying barro s earlier result that taxes should be a random walk for any stochastic process of government expenditures to recover a version of barro s random walk tax smoothing outcome we modify lucas and stokey s economy to permit only risk free debt having only risk free debt confronts the ramsey planner with additional constraints on equilibrium allocations beyond one imposed by lucas and stokey s assumption of complete markets the ramsey outcome blends features of barro s model with lucas and stokey s in our model the contemporaneous effects of exogenous government expenditures on the government deficit and taxes resemble those in lucas and stokey s model but incomplete markets put a near unit root component into government debt and taxes an outcome like barro s however we show that without ad hoc limits on the government s asset holdings outcomes can diverge in importa

fiscal policy over the real business cycle a positive theory this paper presents a political economy theory of the behavior of fiscal policy over the business cycle the theory predicts that in both booms and recessions fiscal policies are set so that the marginal cost of public funds obeys a submartingale in the short run fiscal policy can be pro cyclical with government debt spiking up upon entering a boom however in the long run fiscal policy is counter cyclical with debt increasing in recessions and decreasing in booms government spending increases in booms and decreases during recessions while tax rates decrease during booms and increase in recessions data on tax rates from the g7 countries supports the submartingale prediction and the correlations between fiscal policy variables and national income implied by the theory are consistent with much of the existing evidence from the u s and other countries

resource windfalls and public debt a political economy perspective abstract can natural resource windfalls increase public debt in democracies adopting a political economy perspective we show that the answer is in the affirmative resource windfalls increase both the government s income and wealth the former mitigates the need to borrow whereas the latter encourages further borrowing as it improves its terms implying an ambiguous pure effect of resource windfalls on debt re election considerations shorten political time horizons and give rise to political myopia we show that higher political myopia induced by more stringent institutional re election restrictions magnifies the wealth effect turning positive the effect of resource windfalls on debt we test the model s predictions using a panel of u s states over the period 1963 2007 our identification strategy rests on constitutionally entrenched differences in gubernatorial term limits that provide plausibly exogenous variation in re election prospects and geographically based cross state differences in natural endowments our baseline estimates indicate that a resource windfall of 1 induces an increase of approximately 20 in the public debt of states with more stringent re election restrictions

emergence of entrepreneurs following exogenous technological change this paper explains how after an exogenous technological change occurs entrepreneurs displace incumbents who were ex ante capable of exploiting any innovations that resulted from the change the model initially considers classical economic assumptions in the context of process innovations and then its robustness to uncertainty bounded rationality firm asymmetry and product innovations are discussed the model is preliminarily tested against industry trends using both results from an analysis of the information technology sector and from the literature the paper does not suffer from the inconsistency of explaining how capable incumbents are displaced by resorting to characterizations of incumbents as incapable due to some inefficiency the paper models incumbents as efficient yet rationally choosing in some instances to be displaced copyright 1999 john wiley sons ltd

profit entry and changes in concentration abstract the simultaneity between profit entry and changes in concentration is examined the sample includes 481 observations on 4 digit industries over the years 1972 1977 and 1977 1982 results show that profits respond positively to entry barriers and initial concentration net entry responds positively to initial profits and responds negatively to entry barriers concentration moves toward its steady state level but the rate of adjustment is very slow the competitive process left on its own does not seem to move quickly toward equilibrium

cournot competition and green innovation an inverted u relationship we examine the relationship between competition and innovation in an industry where production is polluting and r d aims to reduce emissions green innovation we present an n firm oligopoly where firms compete in quantities and decide their investment in green r d when environmental taxation is exogenous aggregate r d investment always increases with the number of firms in the industry next we analyse the case where the emission tax is set endogenously by a regulator committed or time consistent with the aim to maximise social welfare we show that an inverted u relationship exists between aggregate r d and industry size under reasonable conditions and is driven by the presence of r d spillovers

small firms in economic theory this is the fourth of a series of critical survey articles the aim of the series is to report on recent developments to provide an assessment of alternative approaches and to suggest lines of future inquiry it is intended that the articles will be accessible not only to other academic researchers but also to students and others more practically involved in the economy future survey articles will include warren samuels on institutional economics and philip arestis on post keynesian

estimating distributed lags in short panels with an application to the specification of depreciation patterns and capital stock constructs this paper considers the problem of estimating distributed lags in short panels though the n time series contained in a panel may allow for relatively precise estimates of identified lag coefficients identification requires restrictions on the contribution of the unobserved pre sample x s to the current values of y and the shortness of panels focuses attention on this matter we investigate two such restrictions the first constrains the relationship between the presample and insample x s while the second constrains the lag distribution itself an example which investigates empirically how to construct capital stocks for the analysis of rates of return closes the paper

advertising quality and sales this paper investigates claims that firm specific effects in advertising sales models can be attributed to a positive correlation between advertising and product quality using a standard koyck transformation on an unbalanced panel dataset of uk firms the implied long lasting effects of advertising disappear when firm specific effects are taken into account this conclusion is robust to various econometric approaches however when the firm specific effects are retrieved they are found to correlate strongly with mean advertising there is no discernible link between the firm specific effects and whether a firm perceives quality to be an important form of competition in its market the results give no support to the idea that advertising affects sales through associated product quality they are consistent with the persistence of advertising within firms over time

budget deficits and redistributive politics this paper proposes a new view of the forces in the political process that cause governments to accumulate debt the analysis builds on a model of redistributive politics that contrary to median voter models does not restrict the set of policies that politicians can propose i show that deficits occur even in an environment where voters and periods are homogeneous this is an environment where previous political theories of debt would predict budget balance in the model deficits are a way for candidates to better target promises to voters and are therefore used as tools of redistributive politics the main contribution of the analysis is to show that the same forces that push candidates to redistribute resources across voters to pursue political advantage are forces that generate budget deficits most countries have sizeable national debts indeed thinking of governments as debtors seems so customary that it feels awkward to talk about a national credit this suggests that there are systematic forces pushing governments to regularly borrow to cover the excess of spending over receipts at the same time a significant amount of government spending consists of transfers to special interest groups that are hard to justify on efficiency or equity grounds this paper presents a political economic model that suggests that these two phenomena are connected debt is at least in part caused by the fact that in order to get elected candidates need to appeal to groups of voters with promises of transfers debt allows candidates a finer control over the promises they make to these groups

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

politicians taxes and debt the standard analysis of the efficient management of income taxes and debt assumes a benevolent government and ignores potential distortions arising from rent seeking politicians this paper departs from this framework by assuming that a rent seeking politician chooses policies if the politician chooses extractive policies citizens throw him out of power we analyse the efficient sustainable equilibrium unlike in the standard economy temporary economic shocks generate volatile and persistent changes in taxes along the equilibrium path this serves to optimally limit rent seeking by the politician and to optimally generate support for the politician from the citizens taxes resembling those of the benevolent government are very costly since the government over saves and resources are wasted on rents political distortions thus cause the complete debt market to behave as if it were incomplete however in contrast to an incomplete market economy in the long run taxes do not converge to zero and under some conditions they resemble taxes under a benevolent government

the role of small firms in the industrial development and transformation of czechoslovakia this article presents an analysis of the role of small firms in the formation and reform of the czechoslovak manufacturing sector it attempts to give an understanding of the industrial structure formed under the past regime within the framework of the mass production paradigm as manufacturing productivity gradually declined over the past 25 years and small firms have been virtually eliminated systemic preference has been given to the development of large monopolies consequently a monolithic coalition structure of enterprise managers state bureaucrats and political nomenklatura has arisen and continues to present itself as a serious hindrance to economic transformation while small firms have the potential to play a critical role in the democratic marketization of czechoslovakia current government preoccupation with the rapid privatization of the state sector risks damaging the development of a balanced distribution of firm size and in turn the revitalization of the society

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

innovation and the evolution of market structure this paper examines the association between innovation and the evolution of market structure a dynamic model of market concentration is applied to seventy three u k industries 1970 79 and the results are found to be consistent with the hypothesis that innovation is deconcentrating the results reported here and those contained in earlier work combine to suggest that innovation and changes in market concentration interact in a relatively rapid mutually reinforcing but rather weak spiral of increased innovation and decreasing concentration copyright 1990 by blackwell publishing ltd

the dynamics of market structure abstract in this paper changes in market concentration are modelled in terms of long run steady state levels and the adjustment towards them both the speed of adjustment and the long run levels of concentration are allowed to vary across industries non linear three stage least squares estimates for allowing for the endogeneity of profits and advertising for 184 u s industries 1963 1967 suggest that both the speed of adjustment and the levels of concentration in the long run are largely determined by minimum efficient scale

does history matter for the relationship between r d innovation and productivity this paper analyzes the relationship between r d expenditures innovation and productivity growth taking into account the possibility of persistence in firms behaviour we study this relationship for a sample of spanish manufacturing firms between 1990 and 2005 estimating a model with four equations participation in technological activities r d intensity the generation of innovations and the impact of these technological outputs on total factor productivity growth our results reflect the existence of true state dependence both in the decision of r d investment and in the production of innovations the omission of this persistence leads to an overestimation of the current impact of innovations on productivity growth however the presence of persistence in technological inputs and outputs entails current r d activities having long run effects on a firm s productivity

incumbent performance and electoral control in the pure theory of electoral competition citizens compare the platforms of the candidates and vote for the one whose platform is preferred candidate strategies are identified with promises about future performance in office models of this sort have been developed in both static mckelvey 1975 and dynamic kramer 1977 i settings and all appear to have the property that if the set of alternatives is large enough in some sense equilibrium platforms rarely exist but these models have another feature that is quite as disturbing as their instability in the static setting discussed by mckelvey little attention is paid to the possibility that once in office the politician s preferences may diverge from those of his constituents and that he may therefore choose policies at variance from his platform instead it is simply assumed that promises will be kept whether or not such behavior is congruent with the interest of the officeholder it is sometimes argued that an enforcement mechanism may exist to discipline politicians for failing to keep promises but without a specification of the mechanism it is not obvious that it would be in the interests of the

why do we have nominal government debt abstract we study the choice between nominal and indexed debt in a stochastic macroeconomic model with discretionary monetary and fiscal policy with distortionary taxes nominal debt provides valuable insurance against the budgetary effects of economic fluctuations we show that a welfare maximizing government always issues some nominal debt even though nominal debt increases inflation along the time consistent path of the economy the result is fairly robust with respect to changes in assumptions about policy constraints and about the macroeconomic setting

participation inertia in r d tax incentive and subsidy programs we examine how persistent firms participation is in rd the use of tax credits in contrast is unrelated to a firm s productivity our results suggest that r d tax incentives and r d subsidies are not substitutes and that any unintended misallocation of support is likely to persist

concentration product variety and entry for merger evidence from new product introductions in the u s food industry competing theories in industrial organization predict that more concentrated industries will lead to a smaller and more efficient variety of products or alternately a larger and less efficient array of products this paper presents an empirical study of these competing implications that estimates the impact of market concentration on new product introductions in a panel of nine food processing industries over 1983 to 2004 controlling for industry level unobservables using fixed effects and endogeneity of industry market structure we find that industry concentration promotes the introduction of new products preliminary evidence also suggests that new product introductions spur subsequent food industry mergers both conclusions are consistent with the entry for merger theory of product variety wherein small firms introduce new products in anticipation of profitable future mergers with concentrated firms

why a stubborn conservative would run a deficit policy with time inconsistent preferences a conservative government in favor of a low level of public consumption knows that it will be replaced by a government in favor of a larger level of public consumption we show that the resulting level of public consumption is in between the levels the two governments would choose if each were in power both in the present and in the future in particular we show that if the conservative government is more stubborn in a particular sense than the succeeding government the conservative government will borrow more than it would had it remained in power in the future

a dynamic theory of public spending taxation and debt this paper presents a dynamic political economy theory of public spending taxation and debt policy choices are made by a legislature consisting of representatives elected by geographically defined districts the legislature can raise revenues via a distortionary income tax and by borrowing these revenues can be used tofinance a national public good and district specific transfers interpreted as pork barrel spending the value of the public good is stochastic reflecting shocks such as wars or natural disasters in equilibrium policy making cycles between two distinct regimes business as usual in which legislators bargain over the allocation of pork and responsible policy making in which policies maximize the collective good transitions between the two regimes are brought about by shocks in the value of the public good in the long run equilibrium tax rates are too high and too volatile public good provision is too low and debt levels are too high in some environments a balanced budget requirement can improve citizen welfare

the development and use of machine tools in historical perspective abstract improvements and diffusion of machine tools have had a major impact on productivity in manufacturing industry since the industrial revolution the impact has been both direct and indirect the direct impact consists of rising labor productivity through the use of faster more accurate more mechanized machines and of the higher capital productivity through higher operating rates greater reliability and higher utilization rates the indirect impact arises as the use of new or improved machine tools has necessitated or facilitated organizational changes affecting both labor capital raw materials and energy the magnitude of these impacts has varied over the years with the areas of application as new production methods have made possible entirely new products or lowered the cost of existing products sufficiently to create new markets the first part of the paper contains a review of the historical development of machine tool technology since the industrial revolution paying particular attention to the role of interaction between producers and users of machine tools the second part focuses on the way in which recent development differs from that in earlier periods in particular it is found that the major changes in machine tool technology from the so called american system of manufactures in the early 19th century to the development of detroit automation in the 1950s have tended to improve mass production methods by contrast the development of numerical control beginning in 1948 has opened up the possibility of extending industrial production methods and automation to areas previously characterized more by handicraft methods even though this technology is not yet fully utilized it is clear that the economics of industrial production has been revolutionized by the cost reduction of small scale production relative to large scale and the degree of flexibility offered by the technology the third section of the paper deals with the present development trends particularly discussing the increasing importance of flexibility and the shifting emphasis from development of individual pieces of machinery to integration and control of entire manufacturing processes i a through the use of industrial robots the reasons for the need for greater flexibility in manufacturing are also identified

the dynamics of political compromise we characterize efficient self enforcing divisions of political or economic surplus between two parties that interact repeatedly the party in power can decide the allocation and the parties political strength changes according to a markov process we find that the share of the party currently in power depends not only on its current strength but also on whether it had previously been even stronger since it last came to power we find that the constitutional supermajority requirements that attempt to constrain the use of power can counterproductively create less compromise

power fluctuations and political economy we study constrained pareto e cient allocations in a dynamic production economy where the group that holds political power decides the allocation of resources for high discount factors the economy converges to a rst best allocation where labor supply decisions are not distorted for low discount factors distortions do not disappear and uctuate over time most importantly the set of sustainable rst best allocations is larger when there is less persistence in the identity of the party in power because this encourages political compromise this result contradicts the common presumption that there will be fewer distortions when there is a stable ruling group

intergenerational policies public debt and economic growth a politico economic analysis abstract this study presents a two period overlapping generations model with endogenous growth in each period the government representing young and old generations provides a public good financed by labor income taxation and public debt issuance and the government s policies are determined by probabilistic voting increased political power of the old lowers economic growth a debt ceiling rule is considered to resolve the negative growth effect but it creates a trade off between generations in terms of welfare

a theory of misgovernance this paper tries to explain why government bureaucracies are often associated with red tape corruption and lack of incentives the paper identifies two specific ingredients that together can provide an explanation the fact that governments often act precisely in situations where markets fail and the presence of agency problems within the government we show that these problems are exacerbated at low levels of development and in bureaucracies dealing with poor people we also argue that we need to posit the existence of a welfare oriented constituency within the government in order to explain red tape and corruption

the political economy of fiscal policy we describe a theory of the collective choice of fiscal policy in dynamic economies that are subject to aggregate shocks the theory incorporates realistically complex policy spaces rational forward looking agents and a rich political decision process we argue that it provides a tractable framework to study a variety of important questions in macroeconomics and public finance jel e62 h63 d79

currents and sub currents in innovation flows explaining innovativeness using new product announcements the creation of new knowledge is a haphazard process not every sector in an economy is equally involved the effect of industry structure on innovativeness has been a focus of attention for a long time by both academics and policymakers in a much quoted article using unique data new product announcements acs and audretsch acs z j audretsch d b 1988 innovation in large and small firms an empirical analysis american economic review 78 4 678 690 identified several characteristics of industry structure and their effects on innovativeness by analyzing a new and more consciously compiled database we re examine their original claims our results largely support their findings industry concentration and degree of unionization for instance hamper innovation skilled labor promotes it our findings diverge in one significant respect from theirs we suggest that the large firms do not contribute more to an industry s innovativeness than small firms at the industry level we find strong support for the schumpeter mark i perspective of creative destruction by small firms rather than creative accumulation by large firms in addition we show that less dedicated innovators prove more susceptible to firm external industry factors than more committed innovators an unfavorable competitive environment decreases the likelihood that less successful innovators will announce new products c 2008 elsevier b v all rights reserved

state capacity and military conflict powerful centralized states controlling a large share of national income only begin to appear in europe after 1500 we build a model that explains their emergence in response to the increasing importance of money for military success when fiscal resources are not crucial for winning wars the threat of external conflict stifles state building as finance becomes critical internally cohesive states invest in state capacity while divided states rationally drop out of the competition causing divergence we emphasize the role of the military revolution a sequence of technological innovations that transformed armed conflict using data from 374 battles we investigate empirically both the importance of money for military success and patterns of state building in early modern europe the evidence is consistent with the predictions of our model

fiscal rules and discretion under persistent shocks this paper studies the optimal level of discretion in policymaking we consider a fiscal policy model where the government has time inconsistent preferences with a present bias toward public spending the government chooses a fiscal rule to trade off its desire to commit to not overspend against its desire to have flexibility to react to privately observed shocks to the value of spending we analyze the optimal fiscal rule when the shocks are persistent unlike under independent and identically distributed shocks we show that the ex ante optimal rule is not sequentially optimal as it provides dynamic incentives the ex ante optimal rule exhibits history dependence with high shocks leading to an erosion of future fiscal discipline compared to low shocks which lead to the reinstatement of discipline the implied policy distortions oscillate over time given a sequence of high shocks and can force the government to accumulate maximal debt and become immiserated in the long run

the political economy of dynamic elections accountability commitment and responsiveness we survey the literature on dynamic elections in the traditional settings of spatial preferences and rent seeking under perfect and imperfect monitoring of politicians we define stationary electoral equilibrium which encompasses notions used by barro 1973 ferejohn 1986 banks and sundaram 1998 and others we show that repeated elections mitigate the commitment problems of politicians and voters and that a responsive democracy result holds under general conditions term limits however attenuate the responsiveness finding we also touch on related applied work and we point to areas for fruitful future research including the connection between dynamic models of politics and economics

do the effects of r d tax credits vary across industries a meta regression analysis this paper presents a survey of the micro econometric literature on the effects of r d tax credits on firms innovation activities we focus on one specific aspect that has not received sufficient attention in previous research the sectoral dimension our meta regression analysis mra sets up a new database collecting a large number of firm level studies on the effects of r d tax credits and investigates the factors that may explain differences in the estimated effects that are reported in the literature the main result of the mra analysis is indeed that sectors matter specifically the additionality effect of r d tax credits is on average stronger for smes firms in the service sectors and firms in low tech sectors in countries with an incremental scheme the paper proposes a simple framework to investigate why the innovation and economic effects of r d tax credits vary across sectors and points out new directions and hypotheses for future research

poverty and social exclusion two sides of the same coin or dynamically interrelated processes there is growing interest in the analysis and measurement of social exclusion to complement the static and dynamic literature on income poverty on theoretical grounds social exclusion and income poverty are seen as different processes but with closely interrelated dynamics however our empirical understanding of the way these two processes dynamically interact at the individual level is still very limited to shed some light on the issue we use a dynamic bivariate probit model controlling for unobserved heterogeneity and wooldridge 2005 type initial conditions both the first and second order markov dynamics are examined we estimate the model using the italian sample of the european community household panel echp waves 1 8 and find a sizable extent of state dependence in both poverty and social exclusion moreover there are dynamic cross effects implying that poverty and social exclusion are mutually reinforcing social policies aimed at eradicating poverty and avoiding individuals social

who participates in r d subsidy programs the case of spanish manufacturing firms abstract empirical evidence on the effectiveness of r d subsidies to firms has produced mixed results so far one possible explanation is that firms and project selection rules may be quite heterogeneous both across agencies and across industries leading to different outcomes in terms of the induced additional private effort here we focus on the participation stage using a sample of spanish firms we test for differences across agencies and industries our results suggest that firms in the same industry face different hurdles to participate in different agencies programs that participation patterns may reflect a combination of agency goals and that patterns differ across high tech and low tech industries

a new methodology linking concentration dynamics to current and steady state profits examining korean industrial policy during take off abstract we model the dynamics of industrial structure and market power using korean manufacturing data during the take off period 1978 82 structure conduct performance scp methodologies have been criticized for using accounting data and because a few superior firms may have greater shares and greater profits both are argued to present possible spurious correlations between concentration and profits this paper follows earlier work which shows that market structure responds to observed accounting profits as if these were accurate indices of real profits and not as if leading firms are perceived to have unmatchable advantages the methodological contribution of this model is a new latent variable for steady state profits derived from the speed of structural adjustment long run profits are identified by the hypothesis that structural adjustment will be more rapid when industries are farther from steady state levels we analyze the long run profits latent variable finding strong support for this hypothesis the speed of adjustment is greater for positive and negative deviations from steady state structure we show that the profits and structural adjustment relationship is non monotone the scp criticisms above are based on spurious correlations which are monotone in profits and structure positing spurious correlations which are at the same time monotone in structure and non monotone in structural adjustment seems less plausible than accepting the scp results which are consistent with both our analysis also is new in that it is the first direct econometric analysis of korean industrial policy during its take off years we note that in korea unlike elsewhere industrial policy was hypothesized to lead to concentration and market power in the popular press and by professional economists ours is the first direct econometric analysis of this hypothesis and we find it supported

quantitative asset pricing implications of endogenous solvency constraints we study the asset pricing implications of an economy where solvency constraints are endogenously determined to deter agents from defaulting while allowing as much risk sharing as possible we solve analytically for efficient allocations and for the corresponding asset prices portfolio holdings and solvency constraints for a simple example then we calibrate a more general model to u s aggregate as well as idiosyncratic income processes we find equity premia risk premia for long term bonds and sharpe ratios of magnitudes similar to the u s data for low risk aversion and a low time discount factor article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

optimal taxation with private government information the ramsey model of fiscal policy implies that taxes should be smooth in the sense of having small variances in contrast empirical labour tax processes are smooth in the sense of being random walks they provide prima facie evidence for incomplete government insurance this paper considers whether private government information might lie behind such incomplete insurance it shows that optimal incentive compatible policies exhibit limited use of state contingent debt and greater persistence in taxes and debt and it argues that they are better approximations to empirical fiscal policies than those implied by the ramsey model the paper also establishes that optimal incentive compatible allocations converge to allocations such that the government s incentive compatibility constraint no longer binds generally these limiting allocations are ones in which the government is maximally indebted their credibility and the interaction of incentive compatibility and credibility is briefly discussed

estimating the benefits of targeted r d subsidies we study the expected welfare effects of targeted r d subsi dies using project level data from finland we model the application and r d investment decisions of firms and the subsidy granting decision of the public agency in charge of the program our model and institutional environment allow us to identify different benefits and costs of the r d subsidy program we find that expected effects of subsidies are very het erogeneous and estimated application costs low on average the social rate of return on targeted subsidies is 30 to 50 but spillover effects of subsidies are smaller than effects on firm profits

sovereign debt as intertemporal barter author s kletzer kenneth m wright brian d abstract borrowing and lending between sovereign parties is modeled as intertemporal barter that smoothes the consumption of a risk averse party subject to endowment shocks the surplus anticipated in the relationship offers sufficient incentive for cooperation by all parties including any other competitive agents who are potential lenders to the sovereign the sole punishments consist of renegotiation proof changes in the path of future payments we show that intertemporal trade can be sustained in the absence of any exogenous enforcement of lending relationships whatsoever that is borrowing and lending are possible under anarchy and are supported by punishments that consist of cheating any cheater long term implicit relationships may be fulfilled as the continual renegotiation of simple incomplete short term loans the analysis suggests that the crucial role of the explicit loan contract is the identification of the relationship and the parties involved

economic implications of 3d printing market structure models in light of additive manufacturing revisited abstract additive manufacturing am colloquially known as 3d printing is currently being promoted as the spark of a new industrial revolution the technology allows one to make customized products without incurring any cost penalties in manufacturing as neither tools nor molds are required moreover am enables the production of complex and integrated functional designs in a one step process thereby also potentially reducing the need for assembly work in this article we discuss the impact of am technology at both firm and industry level our intention is to discern how market structures will be affected from an operations management perspective based on an analysis of established economic models we first identify the economic and technological characteristics of am and distill four key principles relevant to manufacturers at firm level we then critically assess the effects of am at industry level by analyzing the validity of earlier assumptions in the models when these four principles apply in so doing we derive a set of seven propositions which provide impetus for future research in particular we propose that in a monopoly the adoption of am allows a firm to increase profits by capturing consumer surplus when flexibly producing customized products meanwhile in competitive markets competition is spurred as am may lower barriers to market entry and offers the ability to serve multiple markets at once this should ultimately result in lower prices for consumers

lack of commitment and the level of debt the tendency of countries to accumulate public debt has been rationalized in models of political disagreement and lack of commitment we analyze in a benchmark model how the evolution of public debt is affected by lack of commitment per se while commitment introduces indeterminacy in the level of debt lack of commitment creates incentives for debt to converge to specific levels one of the levels that debt often converges to implies no debt accumulation at all in a simple example we prove analytically that debt converges to zero and we analyze numerically more complex models we also show in an imperfect credibility setting that a small deviation from full commitment is enough to obtain these results

sustainable plans and debt abstract this paper presents a simple general equilibrium model of optimal fiscal policy similar to that of lucas and stokey j monet econ 12 1983 55 93 except that we let the government default on its debt we consider sustainable equilibria in which both government and private agent decision rules are required to be sequentially rational we concentrate on trigger mechanisms which specify reversion to the markov equilibrium after deviations by the government and show that such mechanisms cannot support equilibria with positive debt we go on to show by way of examples that there can be more complicated trigger mechanisms which support positive debt journal of economic literature classification numbers e61 e62

political economy of mechanisms we study the optimal mirrlees taxation problem in a dynamic economy in contrast to the standard approach where the taxation mechanism is operated by a benevolent planner with full commitment power we focus on economies in which policy decisions are made by self interested politicians who cannot commit to policies the society controls politicians using elections we show that the provision of incentives to politicians can be partly separated from redistribution across agents and that political economy constraints can be modeled as introducing additional aggregate distortions in the dynamic mirrlees problem we provide conditions under which the political economy distortions persist or disappear in the long run if the politicians are as patient as the agents the best sustainable mechanism leads to an asymptotic allocation where the aggregate distortions arising from political economy disappear in contrast when politicians are less patient than the citizens positive aggregate labor and capital taxes remain even asymptotically we conclude by providing a brief comparison of centralized

political economy of ramsey taxation abstract we study the dynamic taxation of capital and labor in the ramsey model under the assumption that taxes and public good provision are decided by a self interested politician who cannot commit to policies we show that as long as the politician is as patient as the citizens the chamley judd result of zero long run taxes holds in contrast if the politician is less patient than the citizens the best subgame perfect equilibrium from the viewpoint of the citizens involves long run capital taxation

debt constrained asset markets we develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature if an agent defaults on a contract he can be excluded from future contingent claims markets trading and can have his assets seized he cannot be excluded from spot markets trading however and he has some private endowments that cannot be seized all information is publicly held and common knowledge and there is a complete set of contingent claims markets since there is complete information an agent cannot enter into a contract in which he would have an incentive to default in some state in general there is only partial insurance variations in consumption may be imperfectly correlated across agents interest rates may be lower than they would be without constraints and equilibria may be pareto ranked

self enforcing wage contracts we examine long term wage contracts between a risk neutral firm and a risk averse worker when both can costlessly renege and buy or sell labour at a random spot market wage a self enforcing contract is one in which neither party ever has an incentive to renege in the optimum self enforcing contract wages are sticky they are less variable than spot market wages and positively serially correlated they are updated by a simple rule around each spot wage is a time invariant interval and the contract wage changes each period by the smallest amount necessary to bring it into the current interval

spending biased legislators discipline through disagreement this paper studies politicians who have a present bias for spending they want to increase current spending and procrastinate spending cuts we argue that legislators bias is more severe in economies with low institutional quality we show that disagreement in legislatures leads to policy persistence and that this attenuates the temptation to overspend depending on the environment legislators decisions to be fiscally responsible may either complement or substitute other legislator s decisions in economies with weak institutions politicians actions are strategic complements thus institutional changes that induce fiscal responsibility are desirable they generate a positive responsibility multiplier and reduce inefficient spending however in economies with better institutions the same institutional change would induce some legislators to free ride on others responsibility and may lead to more inefficient spending