buffer stocks and precautionary savings with loss aversion abstract this paper reexamines buffer stocks and precautionary savings in the presence of loss aversion we assume that agents are disappointment averse as in gul econometrica 59 1991 667 686 we show that the concavity of the marginal utility continues to determine precautionary saving but its effect is of a second order magnitude proportional to the square of the coefficient of variation compared to the first order effect proportional to the coefficient of variation induced by loss aversion we show that a stabilization fund that is rather small when agents are maximizing the conventional expected utility turns out to be rather large with loss aversion

limit order submission strategies under asymmetric information abstract this paper provides evidence that informed traders dominate the response of limit order submissions to shocks in a pure limit order market in the market we study informed traders are highly sensitive to spreads volatility momentum and depth by contrast uninformed traders are relatively insensitive to all these market conditions the dominance of the informed over limit order submissions is magnified by contrasts between them and the uninformed in the use of aggressively priced limit orders

natural resources curse or blessing are natural resources a curse or a blessing the empirical evidence suggests that either outcome is possible this paper surveys a variety of hypotheses and supporting evidence for why some countries benefit and others lose from the presence of natural resources these include that a resource bonanza induces appreciation of the real exchange rate deindustrialization and bad growth prospects and that these adverse effects are more severe in volatile countries with bad institutions and lack of rule of law corruption presidential democracies and underdeveloped financial systems another hypothesis is that a resource boom reinforces rent grabbing and civil conflict especially if institutions are bad induces corruption especially in nondemocratic countries and keeps in place bad policies finally resource rich developing economies seem unable to successfully convert their depleting exhaustible resources into other productive assets the survey also offers some welfare based fiscal rules for harnessing resource windfalls in developed and developing economies

the political economy of public income volatility with an application to the resource curse abstract in recent years many countries have witnessed a great deal of volatility in public budgets be it due to volatility in the access to foreign loans in greece or to unstable oil prices in venezuela we study the political consequences of such public income volatility as is standard in our model political incentives create inefficient policies to increase re election probabilities but we show that making public income uncertain creates specific new effects future volatility reduces the benefit of being in power making policy more efficient yet at the same time it also reduces the re election probability of an incumbent and since some of the policy inefficiencies are concentrated in the future this makes inefficient policy such as patronage public employment less costly our model highlights a new political economy connection between the volatility of the public budget and economic growth in the case where volatility comes from natural resource prices a characteristic of many developing countries we show that volatility in itself may be a source of inefficient resource extraction jointly interacting with increased patronage employment

marginal tax rates and tax favoured pension savings of the self employed evidence from sweden in recent years the study of how individuals respond to policies that aim at promoting pension savings has emerged as a vital area of economic research this paper adds to this body of literature by estimating the tax price elasticity of contributions to tax favoured pension savings accounts on a population of self employed individuals i exploit a unique total database over the swedish population that covers the years 19992005 using instrumental variables i obtain a tax price elasticity estimate of 0 51 and an income elasticity estimate of 0 13 whereas ordinary least squares ols produces estimates that conflict with consumer theory

the political economy of public savings and the role of capital mobility abstract this paper explains public saving and investment in economies where many groups compete for scarce public funds we show that there is a collective action problem if there is no strong center then this problem manifests itself in a very low savings and investment rates in the extreme current spending may be determined simply by the current tax income and access to borrowing this explains why in the face of a temporary boom governments may not save but may even borrow more to finance even higher levels of expenditure we deal also with several mitigating factors repetition insiders outsiders interaction elections

common property resources storage facilities and ownership structures a cournot model of the oil market during the last decade economists have tried hard to convince meadows and his followers that market forces do not tend to exhaust our natural resources too rapidly as compared with the requirements of an intertemporal pareto optimum it is well known now that under well defined property rights and correct price expectations a competitive extraction industry brings about a pareto optimal depletion path and it has been shown that oligopolistic and monopolistic market structures may even produce a bias towards conservation 1 it is still an unresolved issue however which extraction path will result if property rights are imperfectly defined following the pioneering work of gordon 1954 there has been a large body of literature demonstrating that in the extreme case of free entry and myopic profit maximization there are strong reasons for excessive extraction 2 but this literature hardly yields reliable conclusions for the perhaps more realistic case where firms derive their behaviour from intertemporal optimization and where there is a common ownership but limited access to the resource the basic intuition behind the common pool problem is that the individual agent chooses an extraction policy other than the one he would choose under well defined property rights since he is afraid that part of the resource he leaves underground will be extracted and sold by others 3 despite the simplicity of this intuition there does not seem to be any publication that analyses it within an intertemporal equilibrium model with rational and far sighted agents this is the motivation for the present approach the approach studies the common pool problem in the context of an oligopolistic world market for oil it posits a given number of identical firms extracting oil from holdings between some of which there is mutual seepage the firms sell the extracted oil in the same market or they store it in privately owned seepage proof tanks each firm derives its behaviour from intertemporal optimization under perfect foresight of the time paths of the model variables but cournotesque conjectures about the reactions of its competitors except for the assumption of storage facilities this specification is closely related to models previously studied by khalatbari 1977 and kemp and long 1980 essay 10 4 the two models are very similar but they yield strikingly different conclusions while kemp and long find that the extraction path chosen by the firms is pareto optimal i e that the price of the resource rises at a rate given by the market rate of interest khalatbari contends that there is over extraction kemp and long convincingly demonstrate that khalatbari s model suffers from an inconsistency in the way the individual firm expects its rivals to respond to its own actions and they argue that this inconsistency is the reason for the divergence in results thus the casual reader gets the

street crime and street culture a model shows how reputation concerns can support widespread street crime a street culture where the direct incentives for such behavior are weak there are social benefits to street reputations but those benefits are dominated when reputation concerns draw into crime those who obtain no direct gain from it the model matches facts about violent crime that a standard model cannot easily explain including low monetary returns disproportionate victimization of the young and poor and high variance in rates across small distances the model generates novel implications for policy and social science including a negative effect of social capital

oligopoly equilibria in nonrenewable resource markets abstract most nash cournot oligopoly models of nonrenewable resources apply open loop equilibrium concepts and are based on physical resource depletion this paper studies feedback equilibria and economic depletion assuming affine quadratic functional forms the existence uniqueness and explicit solutions for the equilibria are derived for duopoly and n player oligopoly with multiple resource stocks for the cases of nonquadratic criteria we develop a numeric solution scheme for the nash feedback equilibrium this scheme is an application of a discrete time discrete state controlled markov chain approximation method originally developed for solving deterministic and stochastic dynamic optimization problems in our nash cournot equilibrium the degree of concentration in supply declines over time whereas the previous models with physical depletion and open loop equilibrium concepts predict that a nash cournot resource market will develop in the direction of monopoly supply

symmetric pass through of tariffs and exchange rates under imperfect competition an empirical test abstract this paper examines the effect of tariffs and exchange rates on u s prices of japanese cars trucks and motorcycles in particular we test whether the long run pass through of tariffs and exchange rates are identical the symmetry hypothesis we find that this hypothesis is easily accepted in our sample we also find that the pass through relation varies across products ranging from about 0 6 for trucks to unity for motorcycles these coefficients have very different implications for trade policy we explain the results based on demand cost and institutional conditions in each industry

strong time consistency in the cartel versus fringe model due to developments on the oil market in the 1970s the theory of exhaustible resources was extended with the cartel versus fringe model to characterize markets with one big coherent cartel and a large number of small suppliers called the fringe because cartel and fringe are leader and follower the von stackelberg solution concept is appropriate for the supply side of this market the solution for the cartel versus fringe model presented in the previous literature proved to be time inconsistent for a large plausible range of values for extraction costs and initial reserves this paper provides a strongly time consistent solution for the cartel versus fringe model

oil depletion and development in cameroon a critical appraisal of the permanent income hypothesis this paper focuses on medium term policy options in the economic context of natural resource depletion in particular a novel approach for analyzing the impact of the permanent income hypothesis pih with a dynamic recursive computable general equilibrium cge model is employed the model is benchmarked in an oil producing country with declining production namely cameroon the results show that the pih renders public finances less vulnerable during the post oil transition however adopting the pih is not associated with substantial improvements in growth and household welfare in cameroon therefore the pih cannot be the only basis for better management of oil revenues in the country

a closed form solution for a model of precautionary saving this paper analyses life cycle consumption plans and distinguishes between temporal risk aversion and intertemporal substitution the results assume that felicity functions are quadratic and that income follows a linear model with normally distributed errors stochastic dynamic programming then yields closed loop linear decision rules certainty equivalence no longer holds but instead households play a min max strategy against nature one finds a rationale for precautionary saving and a larger sensitivity of changes in consumption to income innovations

countervailing power revisited abstract the paper uses the nash bargaining concept to study the predictions of the theory of countervailing power within two theoretical models a cournot model and a model of perfect competition within the cournot model a decrease in the number of retailers unambiguously leads to an increase in equilibrium consumer prices in the model of perfect competition the reverse is true one may thus conclude that countervailing power can have positive effects for the consumers only if competiton at the retail level is very fierce

the employment effects of low wage subsidies abstract low wage subsidies are often proposed as a solution to the unemployment problem among the low skilled but the empirical evidence on their effects is still scarce this paper examines the employment effects of a finnish payroll tax subsidy scheme which is targeted at the employers of older full time low wage workers the system s clear eligibility criteria open up an opportunity for a reliable estimation of the causal impacts of the subsidy scheme our results indicate that the subsidy system had no effect on the employment rate or wages of the eligible groups but it increased slightly working hours among those already at work

a theory of disappointment aversion an axiomatic model of preferences over lotteries is developed it is shown that this model is consistent with the allais paradox includes expected utility theory as a special case and is only one parameter beta richer than the expected utility model allais paradox type behavior is identified with positive values of beta preferences with positive beta are said to be disappointment averse it is shown that risk aversion implies disappointment aversion and that the arrow pratt measures of risk aversion can be generalized in a straight forward manner to the current framework copyright 1991 by the econometric society

how to eat a cake of unknown size a reconsideration abstract the paper revisits the issue of the optimal depletion of an exhaustible resource stock of uncertain size by recasting it in terms of the hazard function in addition to re establishing some of the existing results it obtains a complete qualitative characterization of the optimal depletion program for a fairly large array of continuous probability distributions that are likely to describe the initial stock distribution it turns out that an important feature of the optimal program is the eventual monotonicity of the optimal extraction cum consumption rate so characteristic of the certainty scenario additional results regarding the duration of the optimal planning horizon and comparison with the situation of perfect certainty provide further insight into the nature of the optimal depletion program for the iso elastic utility function

on the optimal order of natural resource use when the capacity of the inexhaustible substitute is limited consider a general equilibrium framework where the marginal cost of extraction from several deposits of an exhaustible resource is constant in terms of an inexhaustible perfect substitute and differs between deposits the instantaneous rate of production form the inexhaustible resource is subject to a capacity constraint

natural resources decentralization and risk sharing can resource booms unify nations previous studies imply that a positive regional fiscal shock such as a resource boom strengthens the desire for separation in this paper we present a new and opposite perspective we construct a model of endogenous fiscal decentralization that builds on two key notions a trade off between risk sharing and heterogeneity and a positive association between resource booms and risk the model shows that a resource windfall causes the nation to centralize as a mechanism to either share risk and or prevent local capture depending on the relative bargaining power of the central and regional governments we provide cross country empirical evidence for the main hypotheses finding that resource booms i decrease the level of fiscal decentralization with no u shaped patterns ii cause the former due to risk sharing incentives primarily when regional governments are relatively strong and iii have no effect on political decentralization

breaking the law when others do a model of law enforcement with neighborhood externalities abstract a standard assumption in the economics of law enforcement is that the probability of a violator being punished depends only on the resources devoted to enforcement however it is often true that the productivity of enforcement resources decreases with the number of violators in this paper an individual who violates the law provides a positive externality for other offenders because the probability of being punished decreases with the number of individuals violating the law this externality explains the existence of correlation between individuals decisions to break a law the model evaluates the implications when determining the socially optimal enforcement expenditure focusing specifically on the case of neighborhood crime in particular using a parametrized functional form i show that neighborhood externalities will enhance or impede enforcement depending on the crime rate

exports and property prices in france are they connected france has seen a marked deterioration in its export performance in the last 10 years or so previous empirical research pointed out that weak export performance was due to i vigorous domestic demand ii lower markups due to head to head competition with germany iii low non price competitiveness of french export goods iv offshoring of entire production processes especially in the automobile sector and v difficulties of french manufacturing firms to reach critical size for exporting this paper adds an additional explanation to this list we argue that resource reallocation from the exporting to the construction sector triggered by fast rising property prices hindered france to meet world export demand vis a vis its products our econometric analysis shows that the resource reallocation argument helps explain french export performance between the early 2000s and 2007 unexplained by traditional models this result is confirmed for a set of oecd countries that experienced a marked decline in their export performance and sustained real estate boom after 2000

resource revenue management and wealth neutrality in norway abstract an important idea behind the norwegian oil fund mechanism and the fiscal spending rule is to protect the non oil economy from the adverse effects of excessive spending of resource revenues over the government budget a critical assumption in this respect is that public sector saving is not being offset by private sector dis saving which is at stake with the hypothesis of ricardian equivalence based on a framework of co integrating saving rates this model provides an empirical test of the ricardian equivalence hypothesis on norwegian time series data although the model rejects the strong form presence of ricardian equivalence results indicate that the norwegian approach does not fully succeed in separating spending of resource revenues from the accrual of the same revenues

oil exporters dilemma how much to save and how much to invest summary policymakers in oil exporting countries confront the question of how to allocate oil revenues among consumption saving and investment in the face of high income volatility we study this allocation problem in a precautionary saving and investment model under uncertainty consistent with data in the 2000s precautionary saving is sizable and the marginal propensity to consume out of permanent shocks is below one in stark contrast to the predictions of the perfect foresight model the optimal investment rate is high if productivity in the tradable sector is high enough

the tax evasion social multiplier evidence from italy we estimate social externalities of tax evasion in a model where congestion of the auditing resources of local tax authorities generates a social multiplier identification is based on a contrast of the variance of tax evasion at different levels of aggregation we use a unique data set that contains audits of about 80 000 small businesses and professionals in italy and also provides an exact measure of reference groups in our model we find a social multiplier of about 3 which means that the equilibrium response to a shock that induces an exogenous variation in mean concealed income is about 3 times the initial average response this is a short run effect that persists to the extent that auditing resources are not adjusted to internalize the congestion externality

mergers with differentiated products the case of the ready to eat cereal industry traditional merger analysis is difficult to implement when evaluating mergers in industries with differentiated products i discuss an alternative which consists of demand estimation and the use of a model of postmerger conduct to simulate the competitive effects of a merger i estimate a brand level demand system for ready to eat cereal using supermarket scanner data and use the estimates to 1 recover marginal costs 2 simulate postmerger price equilibria and 3 compute welfare effects under a variety of assumptions the methodology is applied to five mergers two of which occurred and for which i compare predicted to actual outcomes

crime and social interactions the high variance of crime rates across time and space is one of the oldest puzzles in the social sciences this variance appears too high to be explained by changes in the exogenous costs and benefits of crime we present a model where social interactions create enough covariance across individuals to explain the high cross city variance of crime rates this model provides an index of social interactions which suggests that the amount of social interactions is highest in petty crimes moderate in more serious crimes and almost negligible in murder and rape

a theory of oil igopoly cournot equilibrium in exhaustible resource markets with fixed supplies the emergence of an effective and powerful cartel in the international petroleum market has stimulated considerable effort among economists to develop models of pricing and supply behavior for this industry 2 this modeling task poses two basic difficulties first as in the standard oligopoly problem one must characterize the behavior of several sellers in a market aware of each other and of their effect on market price second there is here the added difficulty of treating the explicitly intertemporal nature of suppliers decision wherein a limited stock must be optimally allocated over time this paper studies the implications of the simplest non trivial postulates about these two aspects of the problem it is assumed that suppliers are non cooperative cournot nash players each of whom is imagined to select an optimal supply strategy taking as given the strategies of the others moreover it is hypothesized that the feasible strategies are limited to open loop paths chosen at the initial date to maximize the present value of profits in light of the paths of supply which the others have chosen 3 these basic postulates together with a few technical assumptions concerning the structure of resource demand permit one to demonstrate the existence of at least one non cooperative equilibrium concerning thisequilibrium we show that 1 the average and marginal return on resource stocks is inversely related to the size of a player s initial endowment 2 aggregate production decreases over time until all stocks are exhausted while firms with smaller stocks exhaust their supplies no later than firms with larger stocks do 3 the present value of price net of extraction cost declines over time 4 industry production maximizes a weighted average of intertemporal consumer s surplus and producers profits

saving and liquidity constraints this paper is concerned with the theory of saving when consumers are not permitted to borrow and with the ability of such a theory to account for some of the stylized facts of saving behavior the models presented in the paper seem to account for important aspects of reality that are not explained by traditional life cycle models copyright 1991 by the econometric society

the optimal production of an exhaustible resource when price is exogenous and stochastic this paper examines the optimal production of a resource such as oil when its price is determined exogenously e g by a cartel such as opec and is subject to stochastic fluctuations away from an expected growth path we first examine the dependence of production on extraction cost and show that the conventional exponential decline curve is indeed optimal if marginal cost is constant with respect to the rate of extraction but is a hyperbolic function of the reserve level we next show that uncertainty about future price affects the optimal production rate in two ways first if marginal cost is a convex concave function of the rate of production stochastic fluctuations in price raise lower average cost over time so that there is an incentive to speed up slow down production second the option value of the reserve i e the ability to withhold production indefinitely and never incur the cost of extraction provides an incentive to slow down the rate of production

combining micro and macro data in microeconometric models or panel samples to improve accuracy of estimation in this paper we show how to do this efficiently we show that the gains from use of marginal information can be substantial we also discuss how to test the compatibility of sample and marginal information

measuring market power in the ready to eat cereal industry the ready to eat cereal industry is characterized by high concentration high price cost margins large advertising to sales ratios and numerous introductions of new products previous researchers have concluded that the ready to eat cereal industry is a classic example of an industry with nearly collusive pricing behavior and intense nonprice competition this paper empirically examines this conclusion in particular i estimate price cost margins but more importantly i am able empirically to separate these margins into three sources i that which is due to product differentiation ii that which is due to multi product firm pricing and iii that due to potential price collusion the results suggest that given the demand for different brands of cereal the first two effects explain most of the observed price cost margins i conclude that prices in the industry are consistent with noncollusive pricing behavior despite the high price cost margins leading firms are able to maintain a portfolio of differentiated products and influence the perceived product quality it is these two factors that lead to high price cost margins

volatility transmission in emerging european foreign exchange markets abstract this paper studies the dynamics of volatility transmission between central european ce currencies and the eur usd foreign exchange using model free estimates of daily exchange rate volatility based on intraday data we formulate a flexible yet parsimonious parametric model in which the daily realized volatility of a given exchange rate depends both on its own lags as well as on the lagged realized volatilities of the other exchange rates we find evidence of statistically significant intra regional volatility spillovers among the ce foreign exchange markets with the exception of the czech and prior to the recent turbulent economic events polish currencies we find no significant spillovers running from the eur usd to the ce foreign exchange markets to measure the overall magnitude and evolution of volatility transmission over time we construct a dynamic version of the diebold yilmaz volatility spillover index and show that volatility spillovers tend to increase in periods characterized by market uncertainty

social welfare in a common property oligopoly output in a markov nash cournot equilibrium to a noncooperative differential game in which in oligopolists extract a common property nonrenewable resource is bounded by the output of in firm and in i firm static oligopolies we discuss the welfare effects of the number of firms and of the divergence between private and social discount rates we compare extraction under the markov and open loop equilibria and then offer an explanation for the possibility that the resource is exhausted instantaneously in a continuous time game this explanation does not depend on the fact that the period of commitment is infinitesimal this essay models the extraction by an oligopolistic industry of a common property nonrenewable resource we characterize the markov perfect equilibrium mpe in a game amongst firms and then provide general conditions under which the resource is exhausted instantaneously if there is unrestricted access to a resource agents perceive its shadow value to be 0 and extract too rapidly when access is restricted to a finite number of agents in none of whom possess exclusive property rights an additional complication may arise if firms behave as oligopolists in the product market they have an incentive to extract the resource too slowly in order to increase the price thus where m firms exploit a resource in the absence of property rights there are conflicting tendencies the absence of property rights encourages excessive exploitation whereas the finite number of firms encourages insufficiently rapid exploitation there are a number of situations where the lack of property rights and the presence of market power coexist examples include i national fisheries which are large enough to affect fish populations and output prices ii common exploitation of aquifers or rivers where individual use affects the price of an agricultural output or of another input iii production by oligopolistic firms which degrades the environment we consider the case of nonrenewable resources such as oil this implies a simple equation of motion for the stock of the resource and emphasizes the role of the number of firms and the stock size such models are often appropriate even if the resource is not literally nonrenewable for example tropical forests or groundwater aquifers are potentially renewable given enough time as indeed oil deposits may be however the rate of replenishment may be insignificant given

aggressive oil extraction and precautionary saving coping with volatility the effects of stochastic oil demand on optimal oil extraction paths and tax spending and government debt policies are analyzed when the oil demand schedule is linear and preferences quadratic without prudence optimal oil extraction is governed by the hotelling rule and optimal budgetary policies by the tax and consumption smoothing principle volatile oil demand brings forward oil extraction and induces a bigger government surplus with prudence the government depletes oil reserves even more aggressively and engages in additional precautionary saving financed by postponing spending and bringing taxes forward especially if it has substantial monopoly power on the oil market gives high priority to the public spending target is very prudent and future oil demand has high variance uncertain economic prospects induce even higher precautionary saving and if non oil revenue shocks and oil revenue shocks are positively correlated even more aggressive oil extraction in contrast prudent governments deliberately underestimate oil reserves which induce less aggressive oil depletion and less government saving but less so if uncertainty about reserves and oil demand are positively correlated

avoidance screening and optimum enforcement a standard assumption in the economic literature on crime and punishment is that fines are costless transfers given this assumption several economists have argued that it is optimal to set the fine for engaging in a proscribed activity as high as possible the argument is a simple one raising the probability of a fine is costly since it requires devoting more resources to monitoring and apprehending individuals in contrast raising the magnitude of a fine is costless therefore the least costly way to achieve a given expected fine is to set the fine as high as possible presumably equal to the offender s wealth and adjust its probability so that the desired expected fine is obtained

marginal deterrence in enforcement of law we characterize optimal enforcement in a setting in which individuals can select among various levels of some activity all of which are monitored at the same rate but may be prosecuted and punished at varying rates for less harmful acts marginal expected penalties ought to fall short of marginal harms caused indeed some range of very minor acts should be legalized for more harmful acts whether marginal expected penalties should fall short of or exceed marginal harms depends on the balance between monitoring and prosecution punishment costs we also explore how the optimal enforcement policy varies with changes in these costs

inefficiency of credible strategies in oligopolistic resource markets with uncertainty abstract the implications of different information patterns for firms in oligopolistic resource markets are considered the traditional open loop nash equilibrium with static information sets is one of many possible nash equilibria and is not suitable for stochastic environments when shocks to resource growth are serially uncorrelated there are no gains from conditioning the harvest on past stock levels and the feedback or credible nash equilibrium is the appropriate nash equilibrium concept this credible equilibrium assumes that firms have knowledge of current stocks of reserves which typically leads to more rapid extraction of the resource and possibly extinction since the open loop nash equilibrium is efficient when demand is iso elastic and extraction costs are zero it is clear that an increase in information can be detrimental to firms in the industry

optimal monetary policy when agents are learning abstract we derive optimal monetary policy in a sticky price model when private agents follow adaptive learning we show that this slight departure from rationality has important implications for policy design the central bank faces a new intertemporal trade off not present under rational expectations it is optimal to forego stabilizing the economy in the present in order to facilitate private sector learning and thus ease the future intratemporal inflation output gap trade offs the policy recommendation is robust the welfare loss entailed by optimal policy under learning if the private sector actually has rational expectations is much smaller than if the central bank mistakenly assumes rational expectations when in fact agents are learning

accidental bequests a curse for the rich and a boon for the poor when accidental bequests signal otherwise unobservable individual characteristics such as productivity and longevity the population should be partitioned into two groups those who do not receive an inheritance and those who do the first tagged group receives a mirrlees second best tax schedule the second group when its type is fully revealed faces a first best tax schedule receiving an inheritance makes high ability types worse off and low ability types better off high ability individuals face a bequest tax of more than 100 percent while low ability types face a bequest tax that can be smaller as well as larger than 100 percent and it might even be negative

harnessing windfall revenues optimal policies for resource rich developing economies a windfall of natural resource revenue or foreign aid faces government with choices of how to manage public debt investment and the distribution of funds for consumption particularly if the windfall is both anticipated and temporary we show that the permanent income hypothesis prescription of an ever lasting increase in consumption financed by borrowing ahead of the windfall and then accumulating a sovereign wealth fund swf is not optimal for capital scarce developing economies such countries should accumulate public and private capital to accelerate their development and only if the windfall is large relative to initial foreign debt is it optimal to build a swf the optimal time profile of consumption is biased towards the near future as compared to the permanent income hypothesis outcomes depend on instruments available to government we study cases where the government can make lump sum transfers to consumers where such transfers are impossible so optimal policy involves cutting distortionary taxation in order to raise investment and wages and where ricardian consumers can borrow against future revenues in which case the policy response to possible over consumption is a high level of investment in infrastructure

competition and collusion in the american automobile industry the 1955 price war movements in total quantity and in quality adjusted price suggest a supply side shock in the american automobile market in 1955 this paper tests the hypothesis that the shock was a transitory change in industry conduct a price war the key ingredients of the test are alternative equilibrium models of oligopoly under product differentiation in nonnested cox tests of hypotheses a collusive solution is sustained in 1954 and in 1956 while a competitive solution holds in 1955 the result does not appear to be an artifact since it is robust in tests against alternative specifications copyright 1987 by blackwell publishing ltd

precautionary savings and the permanent income hypothesis this paper derives the explicit solution of a dynamic stochastic optimal consumption problem for infinitely lived agents whose preferences exhibit in the presence of non diversifiable labour income uncertainty a constant elasticity of intertemporal substitution and constant absolute risk aversion the constancy of the elasticity of intertemporal substitution which implies that marginal utility at zero consumption is infinite guarantees that the non negativity constraint on consumption is never binding along the optimal path the assumption of constant absolute risk aversion allows an explicit computation of human wealth and provides a simple representation of the precautionary savings motive

on the economic determinants of oil production theoretical analysis and empirical evidence for small exporting countries abstract in this paper decisions regarding production in oil exporting countries are studied by means of theoretical analysis and empirical investigation in particular we aim at describing the relationship between oil production levels and changes in the world oil demand and prices intertemporal production decisions by a representative oil producer are modeled by means of a partial equilibrium model in this theoretical model oil producers are subject to exogenous shocks in world oil consumption and prices oil companies can change output levels only by incurring a fixed cost results from the simulation of this model show a strong relationship between oil production and changes in world oil consumption on the contrary the effects of changes in real oil prices on oil production decisions seem to be much lower results from the simulation of the theoretical model are then empirically investigated using time series econometric techniques the empirical evidence supports the hypothesis that oil producing countries are characterized by different responses to changes in world oil demand and in real oil prices for many countries production rapidly adjusts to changes in consumption whereas responses of oil production to innovations in real oil prices are found to be not statistically significant in addition when non linearities in the relationship between world oil demand prices and output levels are allowed for evidence of asymmetric effects of shocks to exogenous variables on output levels is found for some countries

signaling in a global game coordination and policy traps this paper introduces signaling in a global game so as to examine the informational role of policy in coordination environments such as currency crises and bank runs while exogenous asymmetric information has been shown to select a unique equilibrium we show that the endogenous information generated by policy interventions leads to multiple equilibria the policy maker is thus trapped into a position in which self fulfilling expectations dictate not only the coordination outcome but also the optimal policy this result does not rely on the freedom to choose out of equilibrium beliefs nor on the policy being a public signal it may obtain even if the policy is observed with idiosyncratic noise

are windfalls a curse abstract a puzzling feature of temporary terms of trade booms is that some countries have responded to such windfalls by running current account deficits furthermore those countries that ran current account deficits failed to attain greater post boom growth rates indicating the deficits were consumed or invested in low quality projects the point we make is that the structure of the fiscal process is critical in determining outcomes if fiscal control is unitary then the consumption smoothing effect is operative and representative agent models of the current account have predictive power however if control is divided among several fiscal claimants a voracity effect appears which counteracts the consumption smoothing effect leading to a deterioration of the current account in response to a positive temporary shock we model the interaction among fiscal claimants as a dynamic game and show that in equilibrium aggregate appropriation increases more than the windfall itself this results in a deterioration of the current account we also show that all the windfall is dissipated with the country experiencing no increase in welfare 1998 elsevier science b v

countervailing power and consumer prices this paper considers the importance of countervailing power manifested as the effects of increased retail concentration on consumer prices and welfare within a market setting where imperfectly competitive retailers negotiate intermediate prices with a monopoly supplier only when retailer services are regarded as very close substitutes do final prices fall following a reduction in the number of retailers even in these circumstances the social benefits of countervailing power may not be realised as the supplier may seek to protect its profits by using a refusal to supply restraint to engage in exclusive trading

disadvantageous oil tariffs and dynamic consistency a large importer who places relatively greater weight on future than current oil consumption will import less oil in the future than if it were able to commit itself in advance to future tariffs and may find itself worse off than if it were unable to impose tariffs at all futures markets and storage modify these adverse effects and may avoid the problem of dynamic inconsistency copyright 1990 by american economic association

has the euro affected the choice of invoicing currency we present a new approach to study empirically the effect of the introduction of the euro on the pattern of currency invoicing our approach uses a compositional multinomial logit model in which currency choice is explained by both currency specific and country specific determinants we use unique quarterly panel data on the invoicing of norwegian imports from oecd countries for the 1996 2006 period we find that eurozone countries have substantially increased their share of home currency invoicing after the introduction of the euro whereas the home currency share of non eurozone countries fell slightly in addition the euro as a vehicle currency has overtaken the role of the us dollar in norwegian imports the substantial rise in producer currency invoicing by eurozone countries is primarily caused by a drop in inflation volatility and can only to a small extent be explained by an unobserved euro effect

social influence and economic incentives complements or substitutes the case of fighting crimes abstract when policy makers can both use economic incentives and nudge social influence to alter individual behavior an open question is are these instruments substitutes or complements within a crime framework we show that they can be either we distinguish this result from the social multiplier effect in the literature

buying power and strategic interactions this paper shows that buying power at the retail level can lead to a rise in wholesale price as a result retailers without buying power may increase their retail price nevertheless total surplus is non decreasing in the degree of buying power possessed by the dominant retailer jel classification l13 pouvoir d achat et interactions strategiques ce memoire montre que le pouvoir d achat au niveau du commerce de detail peut mener a un accroissement dans les prix de gros en consequence les detaillants qui n ont pas de pouvoir d achat peuvent accroitre leurs prix au detail neanmoins le surplus total ne decroit pas a mesure que le degre de pouvoir d achat du detaillant s accroit

precautionary saving and the timing of taxes this paper analyzes the effects of government debt and income taxes on consumption and saving in a world of infinitely lived households having uncertain and heterogeneous incomes the special structure of the model allows exact aggregation across households despite incomplete markets the effects of government debt are shown to be substantial roughly comparable to those resulting from finite horizons and crucially dependent on the length of time until the debt is repaid also anticipated changes in taxes are shown to cause anticipated changes in consumption finally an index of fiscal stance is derived

crime punishment and the market for offenses crime is a subject of intense emotions conflicting ideologies however economists have generally explained it as a reflection of individual choice and equilibrating market forces two major themes of the literature are outlined the evolution of a market model to explain the diversity of crime across time and space and the debate about the usefulness of positive versus negative incentives systematic analyses generally indicate that crime is affected on the margin by both positive and negative incentives there are serious limitations to the effectiveness of incapacitation and rehabilitation and optimal enforcement strategies involve trade offs between narrow efficiency and equity considerations

strategic trade policy through the tax system if conventional instruments of strategic trade policy are unavailable the system of foreign profit taxation and transfer price guidelines may serve as surrogate policy instruments in this paper i consider a model where firms from two countries compete with each other on a market in a third country both firms have affiliates in the third country where part of the production takes place i analyse optimal policy choices of the firms residence countries aiming at strategically manipulating the competitiveness of their firms i show that first countries prefer the tax exemption system over the tax credit system if there is no intra firm trade second if the headquarters provide inputs for production in the affiliate countries prefer the tax exemption system if the transfer price for these inputs is close to the headquarters variable cost and if the residence country s tax rate is high however if transfer prices are high and the residence country s tax rate is low i show that the tax credit system is an optimal tax policy choice for both countries from a policy perspective the view that the tax exemption system is generally the best policy response if domestic firms competitiveness is a policy goal has to be qualified

redistributive income taxation under outsourcing and foreign direct investment this paper deals with optimal income taxation under international outsourcing and fdi we show how the joint effect of outsourcing and fdi on the optimal marginal income tax rates depends on whethe

thieves thugs and neighborhood poverty abstract this paper develops a model of crime analyzing how such behavior is associated with individual and neighborhood poverty the model shows that even under relatively minimal assumptions a connection between individual poverty and both property and violent crimes will arise and moreover neighborhood effects can develop but will differ substantially in nature across crime types a key implication is that greater economic segregation in a city should have no effect or a negative effect on property crime but a positive effect on violent crime using iv methods i show this implication to be consistent with the empirical evidence

uncertain lifetime and intertemporal choice risk aversion as a rationale for time discounting this article makes explicit the links between preferences over lotteries on length of life and intertemporal choice it shows that the approach used by traditional life cycle models to account for uncertain survival corresponds to a strong assumption of risk neutrality with respect to length of life relaxing such an assumption leads us to develop a more general formulation of lifetime utility in which time discounting is directly related to preferences over length of life exponential and hyperbolic discounting are found to result in a first approximation from constant and hyperbolic risk aversion with respect to length of life

why do increased arrest rates appear to reduce crime deterrence incapacitation or measurement error this paper attempts to discriminate between deterrence incapacitation and measurement error as explanations for the negative empirical relationship between arrest rates and crime measurement error cannot explain the observed patterns in the data incapacitation suggests that an increase in the arrest rate for one crime will reduces all crime rates deterrence predicts that an increase in the arrest rate for one crime will lead to a rise in other crimes as criminals substitute away from the first crime empirically deterrence appears to be the more important factor particularly for property crimes jel k42

precautionary saving in the small and in the large the theory of precautionary saving is shown to be isomorphic to the arrow pratt theory of risk aversion making possible the application of a large body of knowledge about risk aversion to precautionary saving and more generally to the theory of optimal choice under risk in particular a measure of the strength of the precautionary saving motive analogous to the arrow pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving and to give a new interpretation of the dreze modigliani substitution effect copyright 1990 by the econometric society

social norms and the enforcement of laws we examine the interplay between social norms and the enforcement of laws agents choose a behavior e g tax evasion production of low quality products corruption harassing behavior substance abuse etc and then are randomly matched with another agent there are complementarities in behaviors so that an agent s payoff decreases with the mismatch between her behavior and her partner s and with overall negative externalities created by the behavior of others a law is an upper bound cap on behavior a law breaker when detected pays a fine and has her behavior forced down to the level of the law equilibrium law breaking depends on social norms because detection relies at least in part on whistle blowing law abiding agents have an incentive to whistle blow on a law breaking partner because this reduces the mismatch with their partners behaviors as well as the negative externalities when laws are in conflict with norms and many agents are breaking the law each agent anticipates little whistle blowing and is more likely to also break the law tighter laws banning more behaviors greater fines and better public enforcement all have counteracting effects reducing behavior among law abiding individuals but increasing it among law breakers we show that laws that are in strong conflict with prevailing social norms may backfire whereas gradual tightening of laws can be more effective in influencing social norms and behavior

the elephant in the ground managing oil and sovereign wealth many oil exporters accumulate large sovereign wealth funds though their portfolio allocation does not take into account below ground assets like oil similarly the above ground portfolio does not affect the decision to extract oil this paper shows that subsoil oil wealth should change a country s above ground asset allocation in two ways first the holding of all risky assets is leveraged because there is additional wealth outside the fund second more less is invested in financial assets that are negatively positively correlated with oil to hedge against the riskiness of subsoil exposure furthermore if marginal oil rents move pro cyclically with the value of the financial assets in the fund then oil will be extracted slower than predicted by the standard hotelling rule this leaves a buffer of oil to be extracted when both oil prices and asset returns are high finally any unhedged residual volatility must be managed through additional precautionary saving