fighting with one hand tied behind the back political budget cycles in the west german states theories of political budget cycles have been contested because scholars find that incumbents can manipulate deficits in the pre election period only if fiscal transparency is low i argue that these findings do not generally rule out the possibility of fiscal electioneering governments may increase spending on highly visible policies the composition of the budget serves as a second best strategy it increases political support without straining the budget balance an empirical analysis of the west german states reveals alternative electoral budget strategies and ultimately point to the importance of analyzing how governments choose between alternative fiscal instruments

wage bargaining central bank independence and the real effects of money the effects of financial capital mobility on monetary policy autonomy are relatively well understood but the importance of particular monetary regimes in distinct national institutional settings is not this article is a theoretical and empirical exploration of the effects of monetary policy regimes on unemployment in different national wage bargaining settings based on a rational expectations two stage game of the interaction between the wage behavior of labor unions and the monetary policies of governments i argue that monetary policies have real employment effects in all but the most decentralized bargaining systems specifically in intermediately centralized bargaining systems a credible government commitment to a nonaccommodating monetary policy rule will deter militant wage behavior with salutary effects on unemployment in highly centralized systems by contrast restrictive monetary policies will clash with unions pursuit of wage distributive goals and produce inferior employment performance only in highly fragmented bargaining systems is money neutral in the sense that employment performance is unaffected by monetary regimes the model has clear consequences for the optimal design of central banks and collective bargaining arrangements and suggests new ways to study institutional change hereunder the causal effect of increasingly globalized capital markets the argument is supported by pooled time series data for fifteen oecd countries over a twenty one year period

uncertainty risk and the financial crisis of 2008 the distinction between uncertainty and risk originally drawn by frank knight and john maynard keynes in the 1920s remains fundamentally important today in the presence of uncertainty market actors and economic policy makers substitute other methods of decision making for rational calculation specifically actors decisions are rooted in social conventions drawing from innovations in financial markets and deliberations among top american monetary authorities in the years before the 2008 crisis we show how economic actors and policy makers live in worlds of risk and uncertainty in that world social conventions deserve much greater attention than conventional ipe analyses accords them such conventions must be part of our toolkit as we seek to understand the preferences and strategies of economic and political actors

are corruption and taxation really harmful to growth firm level evidence exploiting a unique data set containing information about the estimated bribe payments of ugandan firms the authors study the relationship between bribe payments taxes and firm growth in uganda for the period 1995 97 using industry location averages to circumvent the potential problem of endogeneity and to deal with issues of measurement error they find that both the rate of taxation and the rate of bribery are negatively correlated with firm growth for the full data set a one percentage point increase in the bribery rate is associated with three percentage point reduction in firm growth an effect about three times that of taxation moreover after excluding outliers the authors find that bribery has a much greater negative impact on growth and taxation a considerably smaller one this provides some validation of firm level theories of corruption which posit that corruption retards development even more than taxation does

real sources of european currency policy sectoral interests and european monetary integration in the thirty years before economic and monetary union was achieved european currency policies varied widely among countries and over time in this article i argue that the sectoral impact of regional exchange rate arrangements in particular their expected real effects on european trade and investment exerted a powerful influence on the course of european monetary integration the principal benefit of fixing european exchange rates was facilitation of cross border trade and investment within the european union eu the principal cost of fixed rates was the loss of national governments ability to use currency policy to improve their producers competitive position empirical results indeed indicate that a stronger and more stable currency was associated with greater importance of manufactured exports to the eu s hard currency core while depreciations were associated with an increase in the net import competition faced by the country s producers this suggests a powerful impact of real factors related to trade and investment and of private interests concerned about these factors in determining national currency policies

macroeconomic policy in a two party system as a repeated game this paper considers the interaction of two parties with different objectives concerning inflation and unemployment and rational and forward looking wage setters if discretionary policies are followed an economic cycle related to the political cycle results in equilibrium this cycle is significantly different from the traditional political business cycle reputational mechanisms due to the repeated interaction of the two parties and the public or commitments to a common policy rule can improve upon the discretionary outcome by reducing or eliminating the magnitude of the economic fluctuations

veto players and the choice of monetary institutions i argue that two types of veto players matter in the choice of monetary institutions party veto players and subnational governments which are strong in federal systems but weak in unitary systems a crucial issue is whether voters can readily identify the manipulation of the economy with party players a second issue concerns the national party veto player s ability to control either fiscal or monetary policy in one party unitary governments identification and control are clear parties where such governments are common prefer flexible exchange rates and dependent central banks in multiparty coalition governments in unitary systems identification is traditionally difficult and the ability to target benefits to specific constituencies under fiscal policy makes fiscal policy autonomy more attractive for coalition governments such governments prefer central banks that are politically independent but that finance government debt under federalism parties that constitute the central government have less control over fiscal policy and they prefer flexible exchange rates subnational governments do not support a dependent central bank that gives more power to the central government

the political obstacles to greater exchange rate flexibility in china summary an undervalued currency has arguably helped china pursue an east asian style export led model of development spurring economic growth and job creation recently however the undervalued exchange rate has exposed china to a raft of growing major financial and economic vulnerabilities including an overheating of the domestic economy and renewed financial sector difficulties despite these risks chinese leaders have refused to significantly revalue the renminbi suggesting that political objectives are taking precedence over economic optimality i aim to glean insight into such political explanations by building upon present theories in political economy

fear of floating and the external effects of currency unions the introduction of the euro has considerably affected the de facto monetary policy autonomy defined as independence from monetary policy in the key currency areas in countries outside the european currency union ecu using a standard open economy framework we argue that de facto monetary policy autonomy has significantly declined for countries that dominantly trade with the ecu and slightly increased for countries that dominantly trade with the dollar zone the predictions of our model find support in the data we estimate the influence of the bundesbank s ecb s and the fed s monetary policies on various country groups the de facto monetary policy autonomy of both non euro eu members and efta countries declined with the introduction of the euro this effect was slightly stronger for the eu member countries than for efta countries as our theory predicts at the same time the de facto monetary policy autonomy of australia and new zealand vis a vis the us dollar has moderately increased

mixed signals central bank independence coordinated wage bargaining and european monetary union plans for the european monetary union emu are based on the conventional postulate that increasing the independence of the central bank can reduce inflation without any real economic effects however the theoretical and empirical bases for this claim rest on models of the economy that make unrealistic information assumptions and omit institutional variables other than the central bank when signaling problems between the central bank and other actors in the political economy are considered we find that the character of wage bargaining conditions the impact of central bank independence by rendering the signals between the bank and the bargainers more or less effective greater central bank independence can reduce inflation without major employment effects where bargaining is coordinated but it can bring higher levels of unemployment where bargaining is less coordinated thus currency unions like the emu may require higher levels of unemployment to control inflation than their proponents envisage they will have costs as well as benefits and these will be unevenly distributed among and within the member nations depending on the changes they induce in the status of the bank and of wage coordination

the political economy of the euro crisis this article introduces the special issue on the political economy of the euro crisis which aims to improve our understanding of the causes consequences and implications of the highly unusual nature of this crisis a financial crisis among developed countries within a supranational monetary union the article provides a brief chronology of the crisis discusses its underlying causes and reviews the ways in which comparative and international political economy can help us understand the crisis the article then discusses the individual and collective contributions of the articles in the special issue and discusses possible future research paths on the political economy of the euro crisis we conclude with a brief discussion of how a political economy perspective informs our understanding of the long term prospects for the eurozone and european integration

intrinsic motivation and incentives workers act in the interests of their employ ers for a host of reasons sometimes money is the motivation but often it is because they care about what they do despite the importance of such intrinsic motivation the economic litera ture has offered little in terms of understanding relevant trade offs when alignment of inherent preferences rather than monetary interests is what motivates people 1 instead the literature has focused largely on the efficiency gains that arise from agents sharing the preferences of their employers 2 this paper offers such a theory of intrinsic motivation where firms partially solve agency problems by hiring agents with particu lar preferences unlike the previous literature i show that firms in general hire agents who do not share their interests instead agents are disproportionately motivated to carry out a sub set of what the firm cares about specifically i show that the institution hires the agent with similar preferences to himself only in the limit ing case where the agent s preferences are irrel evant namely when output can be perfectly contracted on instead the optimal response of the institution is to hire biased agents with the degree of bias increasing as contracting mea sures get worse the reason for this is rather simple that jobs within firms are specialized so for example some people make things others design them yet other sell them and so on similarly aca demics do research deans raise money admin istrators do the books social workers provide services to clients while their superiors are charged with cost control etc the principal novelty of this paper is to show how hiring practices and specifically the intrinsic moti vation of those hired changes as the ability to contract worsens in a world where tasks are specialized in doing so it paints a picture of firms responding to noncontractibility by hiring agents with very extreme interests at the cost of their ignoring other aspects of their jobs so for example if the output of a social worker cannot be measured a natural response will be to hire agents who are highly motivated to get benefits to clients at the cost of their ignoring things like cost control simple though this observation is it illustrates a cost to using intrinsic motiva tion namely the endogenous hiring of those who increasingly care only about one aspect of their job in this way the simple model outlined here lays the foundation for a view of poor contracting firms as fiefdoms where those with extreme competing interests reside a point i elaborate on elsewhere prendergast 2008 for a theory of intrinsic motivation to be use ful firms must have some control over it the central assumption here is that firms have some ability to hire employees based on these intrin sic preferences i build a model of an institution that carries out two activities say service pro vision and cost control it employs two agents to do so the tasks are somewhat specialized in that one agent primarily but not exclusively does service provision and the other primarily does cost control the institution has an objec tive that trades off these two components and has a performance measure that can reward agents the firm also chooses whom to hire potential discussant robert gibbons massachusetts institute of technology

white collar crime writ small a case study of bagels donuts and the honor system for more than a decade an mit trained economist has meticulously recorded the results of nearly 75 000 deliveries of bagels and donuts to corporate offices these bagels and donuts are left in workplaces in the morning along with a list of prices and a lockbox office workers purchase the products on the honor system later that day the uneaten goods and the lock box are collected and the relevant data for each office are recorded in a spreadsheet these data provide a unique opportunity for understanding the extent to which individuals behave honestly in this setting and the factors that influence the level of honesty an analysis of the discrepancy between the prices of the goods consumed and the actual payments deposited in the lock box yields a number of insights first the base payment rate is quite high on average payments represent almost 90 percent of the posted price in a model of pure self interest one would expect very low payment rates because there would seem to be many opportunities for individuals to take the products with almost no chance of their nonpayment being detected moderating the tendency to take the products without paying is the fact that low payment rates will increase the probability the delivery company stops serving the company paying for one s bagels and donuts viewed in this light is a public good for other office workers thus one might expect a strong negative relationship between office size and payment rates which is not present in the data rather the data appear more consistent with a model in which there are internal nonpecuniary costs associated with stealing the bagels and donuts i e people overwhelmingly pay for the products because it would be wrong not to do so the observed payment rates are systematically related to a variety of observable factors for instance payment rates fall in response to increases in the posted price this is consistent with the increase in financial costs pushing some marginal consumers to be willing to sustain the moral cost associated with not stealing the goods or paying less than full price payment rates are higher when many of the bagels and donuts go uneaten suggesting that the marginal consumer pays a lower share of the posted price than the inframarginal consumer purchasers of donuts appear to be more likely to pay less than the full price there is a sharp and persistent increase in the payment rate following the september 11 terrorist attacks

the labor market return to academic fraud abstract academic fraud by undergraduate students is pervasive but should it be taken seriously as an economic problem our research suggests so using a unique data set from the caucasus we estimate a large positive effect of academic fraud on the probability of employment econometrically we deal with endogenous selection into academic fraud and possible measurement error in the reporting of academic fraud using partial identification techniques the findings demonstrate that incentives to commit academic fraud are strong and point towards the potentially damaging consequences of academic fraud in broader settings

what determines patent value insights from the semiconductor industry abstract this paper contributes to an understanding which impacts certain patent characteristics have on the value of patent rights in an exploratory study 127 individual patents from a semiconductor company were evaluated comprehensively by technical and marketing representatives the analysis of this rare data shows that for patents used as bargaining chips novelty and inventive activity are most important difficulty of inventing around and disclosure turn out to be of limited importance due to a selection bias the influence of patent age on its value cannot be determined the results hint at a differentiated theoretical plausibility of value indicators

political influence on the central bank international evidence political influence on the central bank is measured bere by looking at the probability that a central bank governor will be replaced shortly after a political change of government the governor changes about half the time witbin six months of a nonconstitutional or other radical change of government a military coup or a restoration of democracy the governor is much less likely to change within six months following a routine change in the head of government about one fourth of the time in developing countries and one tenth in industrial countries these indicators vary across countries and correlate statistically with inflation and its variability and with real growth and real interest rates differences in the vulnerability of the central bank to political instability in political instability itself and in central bank turnover in nonpolitical periods seem to be a major part of the explanation for why developing countries have on average higher and more variable inflation than industrial countries do

the economics of invention incentives patents prizes and research contracts though public intervention in the market for research is virtually universal economists have paid surprisingly little attention to the choice of the form of research incentive in a given market structure many studies concentrate on patents but any assumption of their superiority over other incentives has been founded on intuition rather than on formal analysis in this paper i analyze the choice between three of the most common alternative means of public intervention in the research market namely patents prizes and direct contracting for research services i show why and under what conditions any one of the three may be preferred by a social welfare maximizing administrator in a competitive economy using a model that for the first time pays explicit attention to differences in the informational roles of each of these alternatives in the extensive literature on the economics of patents see arnold plant 1934 fritz machlup 1958 charles taylor and z a silberston 1973 morton kamien and nancy schwartz 1975 and f m scherer 1977 for valuable surveys formal analysis weighs the benefits of patents as a solution to the market failure associated with the inappropriability of knowledge against the welfare cost due to the restriction on the use of the knowledge generated and this tradeoff is optimized by patent life adjustment in william nordhaus 1969 scant analytical attention is paid to alternative incentive mechanisms an exception is ben yu 1981 who considers the role of prior contracting for inventions but as many writers for example dan usher 1964 yoram barzel 1968 joseph stiglitz 1969 carole kitti 1973 glenn loury 1979 partha dasgupta and stiglitz 1980a have pointed out in various contexts the incentive offered by an unlimited patent to competitive researchers may be excessive due to the common pool problem discussed further in section i below if the patent administrator and researchers share the same information as implicitly assumed in previous models then the patent life limitation can be adjusted to provide the optimal patent incentive given the common pool problem but in all such models patents would not be chosen in a fully optimized fiscal system researchers and the administrator are assumed to have identical information about the shadow price of potential inventions a patent is just a means of turning this shadow price into a monetary reward but monetary compensation can instead be offered directly to researchers by the state assuming that patent revenues incur a higher deadweight loss than an equivalent amount of public funds financed by less distortionary means for example a minimally efficient tax system appropriate prizes or government contracts are socially preferable to patents with optimal lives if the patent is ever to be the optimal incentive mechanism for research it must possess advantages not captured in existing models informal discussions of patents emphasize their informational role to include the latter as a justification for decentralized invention incentives i incorporate an ex ante imbalance of information about costs and benefits of research in the model presented in section ii but this alone is not quite enough it is further necessary to specify that the terms of the award must be fixed before department of economics economic growth center box 1987 yale station yale university new haven ct 06520 i thank with the usual caveat marguerite alejandro wright cindy arfken martin baily nuong brennan steven englander robert evenson richard levin richard nelson susan rose ackerman denis wright and two referees for assistance of various kinds

speeding terrorism and teaching to the test educators worry that high stakes testing will induce teachers and their students to focus only on the test and ignore other untested aspects of knowledge some counter that although this may be true knowing something is better than knowing nothing and many students would benefit even by learning the material that is to be tested using the metaphor of deterring drivers from speeding it is shown that the optimal rules for high stakes testing depend on the costs of learning and of monitoring incentives need to be concentrated for those whose costs of action are high

one money one market the effect of common currencies on trade currency unions their dramatic effect on international trade a gravity model is used to assess the separate effects of exchange rate volatility and currency unions on international trade the panel data bilateral observations for five years during 1970 90 covering 186 countries includes 300 observations in which both countries use the same currency i find a large positive effect of a currency union on international trade and a small negative effect of exchange rate volatility even after controlling for a host of features including the endogenous nature of the exchange rate regime these effects statistically significant imply that two countries sharing the same currency trade three times as much as they would with different currencies currency unions like the european emu may thus lead to a large increase in international trade with all that that entails andrew rose

strict dollarization and economic performance an empirical investigation in this paper we analyze the macroeconomic record of strictly dollarized economies in particular we investigate whether dollarized countries have historically exhibited faster growth and lower volatility than countries with a domestic currency we analyze this issue by using a treatment regression analysis that estimates jointly the probability of being a dollarized country and outcome equations our analysis indicates that the probability of being a dollarized country depends on regional geographical political and structural variables our results also suggest that gdp per capita growth has not been statistically different in dollarized and in non dollarized countries we also find that volatility has been significantly higher in dollarized than in non dollarized economies these results are robust to the estimation technique and to the sample used

democratic institutions and exchange rate commitments since the collapse of the bretton woods system countries have been able to choose from a variety of exchange rate arrangements we argue that politicians incentives condition the choice of an exchange rate arrangement these incentives reflect the configuration of domestic political institutions particularly electoral and legislative institutions in systems where the cost of electoral defeat is high and electoral timing is exogenous politicians will be less willing to forgo their discretion over monetary policy with a fixed exchange rate in systems where the costs of electoral defeat are low and electoral timing is endogenous politicians are more likely to adopt a fixed exchange rate regime consequently differences in domestic political systems can help account for variations in the choice of exchange rate arrangements we test this argument using constrained multinomial logit and binomial logit on a sample of twenty democracies over the period 1974 95 domestic political institutions have a significant effect on exchange rate regime choice even after controlling for systemic macroeconomic and other political variables

the effectiveness of monetary policy anchors firm level evidence analyses of monetary policy posit that exchange rate pegs inflation targets and central bank independence can help anchor private sector inflation expec tations yet there are few direct tests of this argument we offer cross national micro level evidence on the effectiveness of monetary anchors in controlling private sector inflation concerns using firm level data from eighty one countries approximately 10 000 firms we find evidence that international anchors exchange rate commit ments correlate significantly with a substantial reduction in private sector concerns about inflation while domestic anchors inflation targeting and central bank inde pendence do not our conjecture is that private sector inflation expectations are more responsive to exchange rate anchors because they are more transparent more con straining and more costly than domestic anchoring arrangements the literature on monetary policy highlights the role of monetary institutions in stabilizing private sector inflation expectations central bank independence cbi inflation targeting it and fixed exchange rates pegs are widely viewed as insti tutions that have the capacity to mitigate private sector concerns that policymak ers will exploit them after they have locked in their price wage and investment decisions while other empirical research explores the institutional correlates of inflation and its variability yielding mixed results we use firm level data in our study to directly assess the impact of monetary anchors on private sector inflation concerns we find evidence that pegs mitigate firm owners concerns with infla tion but that domestic anchors such as it and cbi are uncorrelated with our micro indicators of inflation expectations considerable research has investigated the use of it cbi and pegs as institu tions that establish monetary policy credibility whereas these anchors are expected

multiple wage bargaining systems in the single european currency area little attention in the emu literature has been paid to the interaction between central bank monetary rules and systems of collective wage bargaining analytically and empirically coordinated wage bargaining systems respond with real wage restraint to non accommodating monetary policy since wage determination is dominated by collective bargaining in all the emu member states and wage coordination within the member states has grown since 1980 this is a topic of potential importance in particular the replacement of the bundesbank directly targeting german inflation by an ecb targeting european inflation has removed a major institutional support of wage restraint in germany the consequences of this for emu are worked out under two scenarios that inflation expectations will be generated by ecb monetary policy and that they will reflect german inflation outcomes possible institutional developments are discussed including government union bargains the bundesbank has also played a major role in maintaining fiscal rectitude by targeting excess fiscal deficits in germany again its replacement by the ecb targeting if at all european rather than german fiscal policy loosens fiscal constraints for underlying structural reasons therefore it is possible that germany and other emu countries will move to a period of fiscal activism with wage restraint and low inflation purchased through social contract negotiations

transparency democratic accountability and the economic consequences of monetary institutions debates about the appropriate mix between autonomy and accountability of bureaucrats are relevant to numerous areas of government action i examine whether there is evidence of a tradeoff between transparency democratic accountability and the gains from monetary delegation i begin by presenting a simple theoretical model which suggests that central banks that are transparent in the sense of publishing their macroeconomic forecasts will find it easier to acquire a reputation despite making central banks more subject to outside scrutiny then monetary transparency can lead to improved economic outcomes i also consider arguments about the effect of accountability provisions involving parliamentary oversight and control over central bankers the paper then uses a new data set to examine these issues empirically focusing on a natural experiment involving disinflation costs under different central banking institutions during the 1990s results suggest that countries with more transparent central banks face lower costs of disinflation while accountability provisions have no clear effect on disinflation costs my results also concord with earlier findings that the effect of monetary institutions is conditional on other features of the political environment

leaning right and learning from the left diffusion of corporate tax policy across borders there is an increased focus in comparative politics and international relations on how choices of governments are dependent on choices made by other governments the authors argue that although the relationship between policy choices across countries is often labeled as either diffusion or competition in many cases the theoretical mechanisms underpinning these labels are unclear in this article the authors build a model of social learning with a specific application to the diffusion of corporate tax reductions the model yields predictions that are differentiable from existing models of tax competition specifically the authors argue that social learning is most likely in the wake of tax policy cuts by left governments they test the model using an existing data set of corporate tax rate changes and an author created data set of changes in tax legislation covering 20 organisation for economic co operation and development countries the authors empirical findings show that social learning is an important determinant of corporate tax policy making

variation in central bank independence across countries some provisional empirical evidence in this paper seven hypotheses to explain variation in central bank independence across countries are tested the predictions based upon the theory that delegation of authority by politicians to the central bank is used as a commitment device are not supported central bank independence is not higher the larger the employment motivated inflationary bias the higher political instability or the larger the government debt central bank independence is positively related to historical inflation experience and negatively with political instability we do only find limited support for the view that countries with a universal banking system and countries whose central banks do not regulate financial institutions have more independent central banks

selection on observed and unobserved variables assessing the effectiveness of catholic schools in this paper we measure the effect of catholic high school attendance on educational attainment and test scores because we do not have a good instrumental variable for catholic school attendance we develop new estimation methods based on the idea that the amount of selection on the observed explanatory variables in a model provides a guide to the amount of selection on the unobservables we also propose an informal way to assess selectivity bias based on measuring the ratio of selection on unobservables to selection on observables that would be required if one is to attribute the entire effect of catholic school attendance to selection bias we use our methods to estimate the effect of attending a catholic high school on a variety of outcomes our main conclusion is that catholic high schools substantially increase the probability of graduating from high school and more tentatively attending college we find little evidence of an effect on test scores

the political economy of monetary institutions in recent decades countries have experimented with a variety of monetary institutions including alternative exchange rate arrangements and different levels of central bank independence political economists have analyzed the choice of these institutions emphasizing their role in resolving both the time inconsistency problem and dilemmas created by an open economy this first generation work however suffers from a central limitation it studies exchange rate regimes and central bank institutions in isolation from one another without investigating how one monetary institution affects the costs and benefits of the other by contrast the contributors to this volume analyze the choice of exchange rate regime and central bank independence together and in so doing present a second generation of research on the determinants of monetary institutions the articles incorporate both economic and political factors in explaining the choice of monetary institutions investigating how political institutions democratic processes political party competition and interest group pressures affect the balance between economic and distributional policy objectives

technology policy for a world of skew distributed outcomes abstract this paper draws implications for technology policy from evidence on the size distribution of returns from eight sets of data on inventions and innovations attributable to private sector firms and universities the distributions are all highly skew the top 10 of sample members captured from 48 to 93 percent of total sample returns it follows that programs seeking to advance technology should not be judged negatively if they lead to numerous economic failures rather emphasis should be placed on the relatively few big successes to achieve noteworthy success with appreciable confidence a sizeable array of projects must often be supported the outcome distributions are sufficiently skewed that even with large numbers of projects it is not possible to diversify away substantial residual variability through portfolio strategies

central bank reform liberalization and inflation in transition economies an international perspective this paper develops extensive new data on the legal independence of new central banks in 26 former socialist economies fse this data is constructed using the codification system for measuring legal independence developed in cukierman webb and neyapti 1992 and in chapter 19 of cukierman 1992 this makes it comparable with earlier data on central bank independence cbi in the industrial democracies and in non fse developing countries and permits experimentation with alternative indices of cbi like those reviewed in eijffinger and van keulen 1995 the new indices of independence indicate that central bank cb reform in the fse during the nineties has been quite ambitious in spite of the large price shocks induced by the transformation from plan to market reformers in those countries chose to create central banks with levels of legal independence that are substantially higher on average than those of developed economies during the eighties based on data from 1989 through 1998 the evidence in the paper suggests that cbi is unrelated to inflation during the early stages of liberalization but for sufficiently high and sustained levels of liberalization and controlling for variables like price decontrols and wars legal cbi and inflation are significantly and negatively related these findings are consistent with the view that legal cbi no matter how high cannot contain the powerful inflationary impact of wide scale liberalization of formerly controlled prices but once the process of liberalization has gathered sufficient momentum legal independence becomes effective in slowing inflation down and the cumulative liberalization index developed by de melo et al 1996 becomes relatively less important the paper also presents evidence on factors that affect the level of cbi and examines the relation between inflation and cbi within a broader sample composed of the transition and of the developed economies

honesty on the streets a field study on newspaper purchasing many publishers use an honor system for selling newspapers in the street we conducted a field experiment to study honesty in this market finding that a moral reminder increases the level of honesty in payments whereas the same message has no effect on whether one is honest reminding customers of the legal norm has no effect we argue that these results are consistent with a preference for honesty based on an internalized social norm auxiliary evidence suggests that the moral message remains effective when it is posted for longer periods and even when it is removed again authors abstract

institutionalized incentives for ingenuity patent value and the german employees inventions act in 2001 the eu15 countries invested a total of 175 5 billion in research and development activities approximately two thirds of this amount were r d expenditures made by business enterprises the remainder shared by publicly financed research institutions and academia almost 70 percent of these investments are expenditures for r d personnel yet it is surprising how little attention is given to the transformational process behind these numbers clearly the development of ideas and new concepts is financed by the funds just summarized but the actual work is done by inventors either in corporate labs in publicly financed research institutions or in academic research and their motivation and incentives should matter greatly for europe s chances of becoming more successful in global technology markets

eight questions about corruption this paper will discuss eight frequently asked questions about public corruption 1 what is corruption 2 which countries are the most corrupt 3 what are the common characteristics of countries with high corruption 4 what is the magnitude of corruption 5 do higher wages for bureaucrats reduce corruption 6 can competition reduce corruption 7 why have there been so few recent successful attempts to fight corruption 8 does corruption adversely affect growth

corruption perceptions vs corruption reality abstract this paper examines the accuracy of corruption perceptions by comparing indonesian villagers reported perceptions about corruption in a road building project in their village with a more objective measure of missing expenditures in the project i find that villagers reported perceptions do contain real information and that villagers are sophisticated enough to distinguish between corruption in a particular road project and general corruption in the village the magnitude of the reported information however is small in part because officials hide corruption where it is hardest for villagers to detect i also find that there are biases in reported perceptions the findings illustrate the limitations of relying solely on corruption perceptions whether in designing anti corruption policies or in conducting empirical research on corruption

central bank independence and macroeconomic performance some comparative evidence this note uses information on a sample of sixteen oecd countries to assess the relationship between central bank independence and macroeconomic performance as previous work suggests politically controlled central banks are more likely to pursue policies that lead to high and variable inflation however the authors find little evidence that political control of central bank policy has any impact on measures of the level or variability of growth unemployment or the ex ante real interest rate copyright 1993 by ohio state university press

why do people keep their promises an experimental test of two explanations numerous psychological and economic experiments have shown that the exchange of promises greatly enhances cooperative behavior in experimental games this paper seeks to test two theories to explain this effect the first posits that individuals have a preference for keeping their word the second assumes that people dislike letting down others payoff expectations according to the latter account promises affect behavior only indirectly because they lead to changes in the payoff expectations attributed to others i conduct an experiment designed to distinguish between and test these alternative explanations the results demonstrate that the effects of promises cannot be accounted for by changes in payoff expectations this suggests that people have a preference for promise keeping per se

the advantage of tying one s hands ems discipline and central bank credibility abstract it is often argued that the ems is an effective disciplinary device for inflation prone countries in europe since it forces the respective policy makers to pursue more restrictive monetary policies than they would otherwise it is not clear however why these countries should submit themselves to such discipline this paper argues that to answer this question appropriately one must consider that ems membership brings potentially large credibility gains policy makers in inflation prone countries the reason is that not only it attaches an extra penalty to inflation in terms of real appreciation but makes the public aware that the policy maker is faced with such penalty and thus helps to overcome the inefficiency stemming from the public s mistrust of the authorities

political parties and the business cycle in the united states 1948 1984 this paper tests the existence and the extent of a politically induced business cycle in the u s in the post world war ii period the cycle described in this paper is different from the traditional political business cycle of nordhaus it is based on a systematic difference between the monetary policies of the two parties in a model with labor contracts from an explicit optimization problem we derive a system of equations for output and money growth then we successfully test the non linear restriction imposed by the theory on the parameters of the system of equations we cannot reject the hypothesis that money growth has been systematically different under the two types of administration and that this difference contributes to explain output fluctuations

partisan and electoral motivations and the choice of monetary institutions under fully mobile capital central bank independence and pegged exchange rates have each been viewed as solutions to the inflationary bias resulting from the time inconsistency of discretionary monetary policy while it is obvious that a benevolent social planner would opt for such an institutional solution it is less obvious that a real world incumbent facing short term partisan or electoral pressures would do so in this article i model the choice of monetary institutions from the standpoint of a survival maximizing incumbent it turns out that a wide range of survival maximizing incumbents do best by forfeiting control over monetary policy while political pressures do not in general discourage monetary commitments they can influence the choice between fixed exchange rates and central bank independence i highlight the importance of viewing fiscal policy and monetary policy as substitutes and identify the conditions under which survival maximizing incumbents will view fixed exchange rates and central bank independence as substitutes in so doing i provide a framework for integrating other contributions to this volume

partially independent central banks politically responsive governments and inflation theories of central bank independence have more exact implications regarding inflation in different political economic environments than generally understood or empirically examined they imply that inflation in any given country time will be a weighted average of what it would be if the central bank completely controlled monetary policy and what it would be if the government completely controlled it with the degree of central bank independence weighting the former an equation embodying this theoretical expectation is estimated by constrained least squares from a time series cross section of inflation rates in developed democracies since the bretton woods era the results confirm that the antiinflationary benefit of central bank independence is not constant but rather depends on every variable in the broader politicaleconomic environment to which wholly autonomous central banks and governments would respond differently conversely the inflationary impacts of all such political economic variables depend on the degree of central bank independence

checks and balances private information and the credibility of monetary commitments the authors develop and test several new hypotheses about the anti inflationary effect of central bank independence and exchange rate pegs in the context of different institutions and different degrees of citizen information about government policies theory provides strong reason to believe that while central bank independence will prove more effective as a commitment mechanism in countries where multiple players in government have veto power checks and balances the number of veto players will have no effect on the credibility of exchange rate pegs conversely the authors argue that central bank independence does not solve the problems of commitment that arise when citizens are imperfectly informed about the contribution of government policy to inflation exchange rate pegs however mitigate these problems the authors present extensive evidence from cross country tests using newly developed data that provide strong support for their propositions

the disadvantage of tying their hands on the political economy of policy commitments incumbents are more likely to be re elected if they have a comparative advantage in the eyes of voters on some central issue this paper argues that incumbents have an incentive to avoid reforms that reduce the government s role in deciding these issues in order to increase their chances of re election this point is illustrated in the context of the choice of an exchange rate regime in an economy characterized by an inflation bias a flexible exchange rate allows the government to use monetary policy as a stabilization tool while fixed exchange rates remove the inflation bias of the economy on the one hand it is shown that a more inflation averse government may refrain from choosing fixed exchange rates in order to capitalize on the inflationary reputation of its opponent this incentive is contrasted with the opposite incentive to tie the hands of the future government should be incumbent be defeated on the other hand it is shown that electoral considerations may reinforce the incentive of the more inflationary government to tie its own hands with fixed exchange rates

public inflation aversion and the political economy of macroeconomic policymaking do the macroeconomic priorities of citizens differ across countries if so what accounts for this variation and what are its consequences for explanations of the choice of monetary institutions macroeconomic policy and international monetary cooperation this article uses survey data from twenty advanced economies to examine individual preferences about macroeconomic priorities the analysis establishes three key findings first the results suggest that economic context defined by inflation and unemployment performance has a substantial impact on the public s economic objectives in a way that is broadly consistent with the specification of utility loss functions in the theoretical political economy literature second the results suggest that there is significant cross country variation in inflation aversion controlling for economic context third some of this variation is accounted for by national level factors affecting the aggregate costs of inflation and unemployment these results have significant implications for optimal monetary policymaking the explanation of variation in economic outcomes and for accounts of the choice of institutional frameworks for policymaking i thank the bank of england the center for basic research in the social sciences and the institution for social and policy studies for research support and jim alt andrew bailey bill bernhard lawrence broz john freeman jeff frieden jim granato shigeo hirano david lake jeff lax simon price rose razaghian ron rogowski david stasavage gabriel sterne mike tomz jim vreeland the editor and two anonymous reviewers for helpful comments all views expressed are those of the author and do not represent those of the bank of england

federalism and central bank independence the politics of german monetary policy 1957 92 two channels of political control allow elected politicians to influence monetary policy first political threats to the status structure or very existence of the central bank may force central bankers to comply with politically motivated demands on monetary policy second politicians may use their powers of appointment to ensure that central bank appointees share their electoral and party political goals this paper derives the monetary policy outcomes obtained as a function of the degree of central bank independence zero partial or full and central bankers types partisans or technocrats based on a case study of the 1957 and 1992 institutional changes to the german central banking system and a regression analysis covering the period in between i argue that the formal independence of the system is protected by its embeddedness in the institutions of german federalism and by the federalist components of its decentralized organizational structure the behavioral independence of the german central bank fluctuates over time with the party control of federalist veto points the bundesbank is staffed with nonpartisan technocrats who are partially insulated from political pressures

political parties and monetary commitments we argue that political parties will choose monetary institutions in order to help them win elections and retain office increased levels of economic openness in the industrial democracies have complicated the pursuit of office by altering the policy preferences of constituents and decreasing the ability of cabinet ministers to deliver promised economic outcomes we contend that monetary commitments can help political parties manage diverse constituent interests restore policy effectiveness and ultimately maintain their position in office therefore we expect that fixed exchange rates and central bank independence can improve cabinet durability especially under conditions of economic openness in the first section we discuss how fixed exchange rates and central bank independence can insulate cabinets from the political shocks of increased economic openness to determine the political value of these commitments we then test the effect of exchange rate commitments and central bank independence on cabinet durability in the second section in the third section we use the results of our statistical models to generate expected cabinet durability for the countries in our sample under alternative institutional configurations by comparing the expected durabilities we show that most monetary reforms have helped or at least not hurt expected cabinet durability

on the credibility of alternative exchange rate regimes abstract most anti inflation plans have used a nominal exchange rate anchor even though many other variables can serve this role the conventional wisdom is that an exchange rate anchor imposes more macroeconomic discipline than other anchors though theory does not yet provide any clear reason why this is so we explain the link between an exchange rate anchor and discipline with a model that assumes that the public can monitor the nominal exchange rate more easily that it can the other variables in our model a barro gordon game of incomplete information with imperfect monitoring we show that serious stabilizers prefer more visible anchors such as the nominal exchange rate we also show that in some circumstances serious stabilizers will choose to fix the exchange rate even when fixed exchange rates have some costs such as diminished capabilities to respond to external shocks

escaping the ties that bind exchange rate choice under central bank independence central bank independence has been seen as an effective way to achieve low inflation however by increasing the likelihood that the government will adopt a fixed exchange rate rather than maintain domestic control over monetary policy an independent central bank may be a victim of its own success because monetary policy set by an independent central bank may result in what the government considers to be adverse distributive consequences governments may look for ways to mitigate the central bank s control over monetary policy turning to a fixed exchange rate as one possible solution the author examines the implications of this argument through an analysis of the british german and french governments preferences on joining the european monetary system in 1978

exchange rate regimes and independent central banks a correlated choice of imperfectly credible institutions theory and empirical evidence show that low inflation is a precondition for economic growth independent central banks and fixed exchange rates are institutional mechanisms that help keep inflation low by lending monetary policy credibility to governments however the two institutions are commonly analyzed as substitutes that tie the hands of inflation prone governments thus the literature has difficulties describing why governments would adopt both institutions and the interaction between them this paper presents a model that allows policymakers the simultaneous choice of monetary institutions and shows that imperfectly credible institutions will overlap when exchange rates are fixed but adjustable and central bank independence is not fully ascertainable governments choose both institutions more generally the paper generates hypotheses about the conditions that make fixed exchange rates and independent central banks complements or substitutes thus contributing to an explanation of the diversity of global monetary institutions in the post bretton woods period

does central bank independence really matter new evidence for developing countries using a new indicator abstract this paper provides a new indicator for central bank independence cbi based on the turnover rate of central bank governors for 82 developing countries over the period 1980 1989 using this new indicator it is concluded that this proxy for cbi is related to inflation only if the high inflation countries are included in the sample the view that both cbi and inflation are caused by effective opposition towards inflation is not supported using both the extreme bound analysis and sala i martin s method we do not find evidence that cbi is robustly related to economic growth

international and domestic constraints on political business cycles in oecd economies the effect of increased capital mobility on the national control of macroeconomic policy continues to be a topic of debate empirical contributions to this debate share the assumption that domestic macroeconomic policy is driven by either partisan or countercyclical motivations and that the effects of international financial flows have roughly similar effects in all countries this article reevaluates the integration hypothesis in a framework in which manipulations of the macroeconomy derive from opportunistic motivations the article emphasizes the ways in which prior institutional choices effect the way these motivations are translated into actions evidence from individual country and pooled time series tests suggests that opportunistic cycles are less likely to occur when 1 a government maintains a fixed exchange rate in the presence of highly mobile capital or 2 when the central bank enjoys above average independence

globalization pressures and the state the worldwide spread of central bank independence the authors examine the impact of globalization on state structures in the specific instance of the central bank following the world system world society and neoinstitutional perspectives in sociology they assume that states are in cultural political and economic competition with each other thereby seeking to maintain their position and status frequently by adopting organizational forms or practices that make them isomorphic with their environment the authors predict that countries boost the independence of their central bank from the political power as their exposure to foreign trade investment and multilateral lending increases they also model the cross national dynamic process of diffusion of central bank independence by examining the impact of cohesive and role equivalent trade relationships between countries they find support for their hypotheses with information on 71 countries between 1990 and 2000

checks and balances and the supply of central bank independence abstract the paper analyzes the institutional conditions under which policymakers can credibly commit to an independent central bank and thereby mitigate the well known time consistency problem in monetary policy it is shown theoretically that granting independence via a statute is only credible for legislative systems with at least two heterogeneous decision making bodies which both have veto rights for example bicameral systems this thesis is supported by empirical evidence the legal independence of central banks is significantly higher in those oecd countries whose legislative processes are characterized by extensive checks and balances furthermore the negative relation between legal independence and inflation is larger in countries with checks and balances than in countries without checks and balances

exchange rate proclamations and inflation fighting credibility if governments choose economic policies that often run counter to their public commitments are those commitments meaningless we argue that govern ment proclamations can be critical in signaling economic policy intentions we focus on the realm of exchange rate policy in which countries frequently implement an exchange rate regime that differs from the officially declared regime we argue that the official exchange rate regime is one of the most important signals of a government s economic policy preferences when a government makes a de jure public commit ment to a fixed exchange rate it sends a signal to domestic and international markets of its strict monetary policy priorities in contrast a government that proclaims a floating exchange rate signals a desire to retain discretion over monetary policy even if it has implemented a de facto fixed rate we use data on 110 developed and devel oping countries from 1974 to 2004 to test two hypotheses first that governments that adopt de facto fixed exchange rates will experience less inflation when they back up their actions with official declarations and second that governments that abide by their commitments as demonstrated by a history of following through on their public declarations of a fixed exchange rate regime will establish greater inflation fighting credibility within developing countries democratic institutions enhance this credibility results from fixed effects econometric models provide strong support for our hypotheses

a penny for your quotes patent citations and the value of innovations the use ofpatents in economic research has been seriously hindered by the fact that patents vary enormously in their importance or value and hence simple patent counts cannot be informative about innovative output the purpose of this article is to put forward patent counts weighted by citations as indicators of the value of innovations thereby overcoming the limitations of simple counts the empirical analysis of a particular innovation computed tomography scanners indeed shows a close association between citation based patent indices and independent measures of the social value of innovations in that field moreover the weighting scheme appears to be nonlinear increasing in the number of citations implying that the informational content of citations rises at the margin as in previous studies simple patent counts are found to be highly correlated with contemporaneous rd however here the association is within afield over time rather than cross sectional

the effects of compensation plans for employee inventions on r d productivity new evidence from japanese panel data abstract this article reports the first results on how monetary compensation plans for employee inventions affect r d productivity based on the notable panel data of japanese firms the study finds that the introduction of revenue based compensation plans that are linked to patent performance lead to an increase in the number of high cited patents while this never leads to an increase in the number of patent applications furthermore this is strongly effective in smaller firms these results indicate that the monetary incentives based on patent performance are effective on enhancing the motivation of employee inventors

two economists musings on the stability of locus of control empirical studies of the role of non cognitive skills in driving economic behavior often rely heavily on the assumption that these skills are stable over the relevant time frame we analyze the change in a specific non cognitive skill i e locus of control in order to directly assess the validity of this assumption we find that short and medium run changes in locus of control are rather modest on average are concentrated among the young or very old do not appear to be related to the demographic labor market and health events that individuals experience and are unlikely to be economically meaningful still there is no evidence that locus of control is truly time invariant implying that the use of lagged measures results in an errors in variables problem that could downward bias the estimated wage return to locus of control by as much as 50 percent those researchers wishing to analyze the economic consequences of non cognitive skills should consider i restricting their analysis to the working age population for whom there is little evidence of systematic change in skill levels and ii accounting for error in the skill measures they employ

mobile capital domestic institutions and electorally induced monetary and fiscal policy the literature on global integration and national policy autonomy often ignores a central result from open economy macroeconomics capital mobility constrains monetary policy when the exchange rate is fixed and fiscal policy when the exchange rate is flexible similarly examinations of the electoral determinants of monetary and fiscal policy typically ignore international pressures altogether we develop a formal model to analyze the interaction between fiscal and monetary policymakers under various exchange rate regimes and the degrees of central bank independence we test the model using data from oecd countries we find evidence that preelectoral monetary expansions occur only when the exchange rate is flexible and central bank independence is low preelectoral fiscal expansions occur when the exchange rate is fixed we then explore the implications of our model for arguments that emphasize the partisan sources of macroeconomic policy and for the conduct of fiscal policy after economic and monetary union in europe

a political explanation of variations in central bank independence although central banks possess a similar function across the industrial democracies their institutional structures their levels of independence differ greatly my explanation of this variation emphasizes the informational asymmetries of monetary policymaking government ministers have informational advantages in the policy process potentially creating conflicts with backbench legislators and in a multiparty government coalition partners an independent central bank can help alleviate these conflicts politicians will choose an independent bank 1 if government ministers party legislators and coalition partners have different monetary policy incentives and 2 if government ministers fear that party legislators and coalition partners will withdraw their support over a policy dispute i statistically test the argument against the cross national variation of central bank institutions i also use the theoretical framework to examine episodes of institutional choice and reform in germany britain and italy

the effectiveness of reward systems on innovative output an empirical analysis this study investigated the relationship of patent output to the reward systems for individual r d scientists in high technology firms a survey of technical managers in 57 connecticut firms collected information on firm size r d expenditure and the frequency of use of eighteen different reward systems using a regression model patent output was found to be dependent on firm size r d expenditure and on monetary and non monetary reward systems informal award programs and variable bonuses based on the issue of patents when a subset of small firms was investigated separately non monetary rewards were shown to be ineffective however variable bonuses remained important to patent output and large sum reward payments 50 000 also demonstrated a significant effect

political and monetary institutions and public financial policies in the industrial countries institutions and policies vittorio grilli donato masciandaro and guido tabellini why do countries as similar as the industrialized oecd countries go through such different experience in terms of public deficits and debts or in terms of inflation the answer cannot come from macroeconomic policy responses to different disturbances nor from the principles of optimal taxation but rather from politics this article focuses on the role that particular institutions exert in providing constraints and incentives which shape the actions of policymakers the electoral process and political traditions affect the ability of governments to deal with deficits and mounting debts what seems to matter most it is found is the effect of the durability of governments governments with short horizons act myopically and never quite tackle the hard choices such governments typically exist in countries with an electoral system favouring many small political parties central bank independence promotes low inflation with no apparent costs in terms of real economic performance irrespective of the political institutions in fact there is no link between monetary and fiscal discipline these findings carry powerful implications for countries facing high indebtedness or stubborn inflation but also for the construction of the european economic and monetary union

a partisanship theory of fiscal and monetary regimes this paper indicates that income redistribution motivated by the distributive ideals of liberal political p arties create unanticipated disincentives for productive effort thi s suggests that newly elected liberal parties are likely to engage in monetary surprises in order to compensate for the adverse effects of these disincentives on real income estimated reaction from function s support these predictions a measure of income redistribution the change in the ratio of the social expenditures of government to gnp has a positive significant effect on money growth in addition when the presidency changes from conservative to liberal there is a posit ive and significant increase on money growth copyright 1987 by ohio state university press

strategic communication with lying costs i study a model of strategic communication between an uninformed receiver and an informed but upwardly biased sender the sender bears a cost of lying or more broadly of misrepresenting his private information the main results show that inflated language naturally arises in this environment where the sender almost always claims to be of a higher type than he would with complete information regardless of the intensity of lying cost there is incomplete separation with some pooling on the highest messages the degree of language inflation and how much information is revealed depend upon the intensity of lying cost the analysis delivers a framework to span a class of cheap talk and verifiable disclosure games unifying the polar predictions they make under large conflicts of interest i use the model to discuss how the degree of manipulability of information can affect the trade off between delegation and communication copyright 2009 wiley blackwell

invested interests the politics of national economic policies in a world of global finance capital moves more rapidly across national borders now than it has in at least fifty years and perhaps in history this article examines the effects of capital mobility on different groups in national societies and on the politics of economic policymaking it begins by emphasizing that while financial markets are highly integrated within the developed world many investments are still quite specific with respect to firm sector or location it then argues that contemporary levels of international capital mobility have a differential impact on socioeconomic groups over the long run increased capital mobility tends to favor owners of capital over other groups in the shorter run owners and workers in specific sectors in capital exporting countries bear much of the burden of adjusting to increased capital mobility these patterns can be expected to lead to political divisions about whether or not to encourage or increase international capital market integration the article then demonstrates that capital mobility also affects the politics of other economic policies most centrally it shifts debate toward the exchange rate as an intermediate or ultimate policy instrument in this context it tends to pit groups that favor exchange rate stability against groups that are more concerned about national monetary policy autonomy and therefore less concerned about exchange rate stability similarly it tends to drive a wedge between groups that favor an appreciated exchange rate and groups that favor a depreciated one these divisions have important implications for such economic policies as european monetary and currency union the dollar yen exchange rate and international macroeconomic policy coordination

competing commitments technocracy and democracy in the design of monetary institutions in this article i refine and expand the agenda for research on monetary institutions first i evaluate the analyses and research designs presented in this special issue of international organization out of this evaluation several ideas about how to produce a third generation of research on this topic emerge specific ideas include how to create a better synthesis with certain branches of economics such as information economics broaden the welfare criteria on which institutional choices are made deepen the analyses of coalitional and other political processes on which the choice of institutions are based and strengthen the tests that are offered in support of these choices in the second part of this article i explore questions of how popular sovereignty over economic policy and institutional choice are achieved i show that the institutional regimes proposed in the special issue are in a sense democratic as long as the public s perceived consensus about economic policies and macroeconomic outcomes is real however if as new work suggests there is genuine dissensus about policy and macroeconomic objectives it is no longer clear that the regimes proposed in the special issue are democratic in the conclusion i briefly discuss a possible crisis of imagination in institutional design