war debt moral hazard and the financing of the confederacy this paper develops a formal model of war spending and external borrowing and quantifies this model for the case of the american confederacy our proximate objective is to determine why the confederacy undertook little external borrowing we find that the moral hazard associated with war debt seems to have had little effect on the amount of external borrowing that the confederacy undertook rather because the confederacy began the war with large mobilizable resources relative to its expected postwar resource endowment it required little external borrowing to accomplish the optimal amount of consumption smoothing but our results also suggest that unimportance of the moral hazard associated with war debt is not a generic property of war finance copyright 1996 by ohio state university press

can interest bearing money circulate a small denomination arkansan experiment 1861 63 legal restrictions theory suggests that dominance of non interest bearing currency is possible only because legal impediments prevent financial institutions from offering interest bearing alternatives a viable interest bearing medium must be issued in denominations low enough for day to day use however and without historical examples of small denomination interest bearing issues we cannot properly test whether interest bearing currency will circulate as legal restrictions theory predicts civil war arkansas offers a rare instance where large quantities of small denomination interest bearing money were actually issued mostly below 5 the results of this arkansan experiment show that small denomination interest bearing issues can indeed function as the primary medium of exchange

turning points in the u s civil war views from the grayback market this paper introduces a new high frequency time series of confederate money prices taken from the newspapers of richmond and leading cities in the eastern confederacy the new grayback series is tested for turning points the empirical analysis suggests that turning points in the confederate grayback market were different from those identified in the union greenback market by willard et al 1996 it appears that war did not always have symmetric effects on northern and southern money prices jel codes n20 n40

adverse selection in health insurance markets evidence from state small group health insurance reforms abstract the past decade witnessed major changes in state laws governing the sale of health insurance to small employers states took measures to restrict insurers ability to distinguish between high and low risk customers because of concern about the low rate of coverage among workers in small firms the high prices in the small group market and the absence of federal health reform using both individual level and employer level data i test predictions about the effect of reforms on the employer provided health insurance market i estimate these effects for small firms and their workers using large firms and their workers in the same states as well as large and small firms and their workers in non reform states as comparison groups i find the reforms decreased the rate of employer coverage on average for workers in small firms by less than two percentage points within small firms low expenditure individuals experienced a larger decline in the rate of coverage through their employer while the coverage rate of high expenditure individuals rose slightly in some specifications there is also evidence that comprehensive reforms increased premiums slightly for small employers and that most of this increase was passed on to workers through higher employee contributions

preemption in r d races abstract fudenberg gilbert stiglitz and tirole 1983 consider a patent race in which each firm s instantaneous probability of discovering a patentable invention is an increasing function of its cumulative expenditure on rd in particular we show that for intermediate values of it is possible for the follower to spoil the race by forcing the leader to drop out

suppressing asset price inflation the confederate experience 1861 1865 i introduction the absorption of treasury notes by the funding process is progressing favorably and will counteract the tendency to a further depreciation of our currency arising from the heavy issues since the 1st of january last richmond dispatch 15 april 1863 during the civil war commodity prices rose in the confederacy while the gold value of confederate currency and bonds declined the rate of asset price inflation lagged behind commodity price inflation however and there was a greater than 2 1 divergence at the time of two confederate financial reforms aimed at encouraging exchanges of currency into bonds these exchanges raised the demand for bonds and boosted bond prices while supporting the gold value of the currency as the supply of money was reduced but the period between the announcement and implementation of these reforms saw upward surges in commodity prices with no matching depreciation in the value of the currency against gold this suggests that the reforms may have channeled inflationary pressures into commodity markets and that an examination of both asset and commodity markets is needed to assess the effectiveness of confederate monetary policy just as bernanke and gertler 1999 criticize the bank of japan for focusing on asset price inflatio n at the expense of the general price level in the 1989 97 period so too may confederate monetary policy have been directed too much toward stabilizing asset markets with less favorable consequences for the prices of other goods and services the bursts of commodity price inflation after the reforms were announced suggest that individuals exchanged money for goods as well as for bonds in the run up to the deadline a real balance effect seems to have operated whereby decreased demand for the old money created excess cash balances that were translated at least in part into an excess demand for goods even after the financial reforms reduced the total money supply the initial surges in commodity price inflation were never fully reversed there was in fact a boost to wealth holdings when the reforms took effect insofar as the stocks of money being retired were exchanged for bonds at par even though these bonds were then trading at a premium in this way consumption expenditures may well have been fueled by the gains on the bonds when the exchange occurred despite uncertainty as to the relative weights that should be attached to bond holdings and money balances as components of private sector net financial assets as discussed for example by pa tinkin 1965 289 90 the changes in the level and market value of bond holdings surely cannot be ignored in the confederate case this is especially so given the existence of a ready market for the bonds received with no restrictions on reselling from the outset confederate currency and bond markets were linked by the fact that note holders enjoyed an imbedded call option on confederate government bonds noninterest bearing confederate treasury notes were issued with the proviso that holders could at their pleasure exchange these notes for 8 government bonds at par this call option would naturally become increasingly valuable if the bonds rose above par and implied that noteholders would be able to participate fully in any bond market rally even while keeping their funds in the form of highly liquid currency the 8 bonds issued under the 1861 100 million loan authorized by the act of 19 august 1861 with a minimum denomination of 100 generally traded at or below par during 1862 however with no deadline for the exercise of the option there was no incentive for holders of confederate treasury notes to actually convert their money into bonds at that time in an attempt to induce and ultimately force early conversion of money into bonds the government instituted three funding acts that limited the time period over which treasury notes could be exchanged for the higher yielding 8 bonds

use of interest bearing currency in the civil war the experience below the mason dixon line this paper examines the case of interest bearing notes in the confederate states of america which were not legal tender but which were said to circulate like other known episodes the confederate experiment does not support the legal restrictions theory of the demand for money there is no evidence that these instruments circulated readily and some evidence that their limited circulation fell short of that of competing noninterest bearing notes characteristics inconsistent with legal restrictions theory the episode displays other characteristics inconsistent with or not encompassed by the major competing explanations of why interest bearing notes do not circulate

dropout behavior in r d races with learning we examine a game theoretic model of a two firm r d race in which expenditures on r d and the concomitant increase in experience learning enable thefirms to increase their probability of discovering an invention the learning process is stochastic it generates a unique subgame perfect equilibrium for identicalfirms with the characteristic that the leader never drops out but the follower drops out if the leader gains a significant lead the leader can find it optimal to drop out if the firms value the invention differently or have different r d efficiencies thus our analysis generates results between vigorous competition and natural monopoly central to schumpeter s 1934 vision of entrepreneurship are the extraordinary profits associated with innovation the lure of these profits fuels the fires of creative destruction as innovators replace declining firms this article analyzes the competition for the profits obtained by bringing an innovation to fruition and receiving the associated patent we restrict attention to the subclass of innovations known as inventions innovations that are the product of a firm s research and development in particular we are concerned with the conditions that cause a firm after having invested in r d to drop out of the competitive race situations in which the leading firm drops out are of even greater interest competition in r d is often modelled as a race in which the winner receives a patent and reaps most or all of the benefits of the invention as exemplified by kamien and schwartz 1972 the early theoretical literature tended to be based on decision theoretic models the firm seeks an optimal rate of expenditure on r d determined in part by the expected value of the invention the extent of the first mover advantage the economies or diseconomies of scale in r d and the perceived intensity of rivalry it is not anticipated that the firm s decisions will affect the r d efforts of the perhaps unknown rivals kamien and schwartz 1982 p 124 show that the firm does no research if rivalry is sufficiently intense because their model is static however it is never the case that a firm enters the race and then drops out

explaining the demand for free bank notes abstract this paper explains why the risky notes of banks established during the free banking era 1837 1863 were demanded even when relatively safe specie gold and silver coin was an alternative free bank notes were demanded because they were priced to reflect the expected value of their backing the empirical evidence supports this explanation specifically in new york wisconsin and indiana the expected value of backing was sufficient for free bank notes to circulate at par which they did in minnesota the backing for notes was very poor they exchanged well below par being treated as small denomination securities

patents imitation and licensing in an asymmetric dynamic r d race abstract rd some may have an advantage in early stages of the r d process while others may have advantages in other stages of the process this paper uses a two firm asymmetric ability multistage r d race model to analyze the effect of patents imitations and licensing arrangements on the speed of innovation firm value and consumers surplus by using numerical analyses to study the mpe of the r d race the paper demonstrates the circumstances under which a weak patent protection regime that facilitates free imitation of any intermediate technology may yield a higher consumers surplus and total surplus than a regime that awards a patent for the final innovation the advantage of imitation may hold even when we allow for voluntary licensing of intermediate technologies

turning points in the civil war views from the greenback market in early 1862 the united states government began issuing greenbacks a legal tender currency that was not convertible into gold the government promised to redeem the greenbacks in gold eventually but speculators understood that the probability of redemption depended on union army military fortunes and political developments that affected the total cost of the war to serve the speculative interest in gold a market emerged for the purpose of trading greenbacks for gold dollars because the market price of a greenback reflected the public s perceptions of future war costs the movement of these prices provides unique insights into how people at the time perceived various events we use daily quotations of the gold price of greenbacks to identify a set of dates during the civil war that market participants regarded as turning points in some cases these dates coincide with events familiar from conventional historical accounts of the war in other instances however market participants reacted strongly to events that historians have not viewed as very significant this abstract was borrowed from another version of this item

the emancipation proclamation confederate expectations and the price of southern bank notes we examine the behavior of a semimonthly series of the confederate dollar price of bank notes these notes traded at par with confederate dollars from october of 1861 until november 5 1862 we use a model of the demand for two currencies to argue that this departure from par results from altered southern expectations after the 1862 congressional elections assured the enactment of the emancipation proclamation previously southerners believed a win or a negotiated settlement would allow a return to the union intact when these expectations changed bank notes appreciated against confederate dollars in addition our empirical work shows that notes appreciated following northern victories

dynamic r d competition the authors study a simple two stage stochastic patent race involving two firms they examine the behavior of the participants as they gain the lead or fall behind in the race the authors find that the leader engages in rd 2 a policy of issuing patents for intermediate research results and 3 the effects of research joint ventures whereby the firms coordinate their initial research efforts and share their results copyright 1987 by royal economic society

the tradeoff between performance and quitting in high power tournaments tournaments may be characterized by the performance they induce as well as by the rate of quitting and dropouts of participants although most of the attention in the literature is on the performance induced by high power incentives there are many daily situations in which dropouts and quitting are a major concern using a field experiment in schools and a model of dynamic tournament we examine the effect of different levels of rewards on the rate of quitting our experiment indicates that there is a possible tradeoff between performance and quitting strong incentives tournaments induced participants to exert more effort and exhibit a better performance but at the same time it induces a higher rate of quitting we present a multi stage tournament model that gives rise to a similar characterization jel c93 c73 d8 j30

an empirical test of the asymmetric models on innovative activity who invests more into r d the incumbent or the challenger the theoretical discussion concerning the question whether the incumbent or the potential entrant invests more into r d has attracted considerable interest this paper reports the results of an empirical study on this question using data of about 3500 german firms over the years 1992 to 1995 the survey explicitly asks the firms for their motives to undertake innovative activity it is thus possible to take account of intended not just completed market entry it turns out that the challenger invests more into r d in order to enter a new market than the incumbent thus the patent racing model by reinganum and others seems to characterize innovative activity more accurately than the competing auction model of gilbert and newbery we use a heteroscedastic tobit as well as a tobit model with selectivity in order to deal with the econometric problems of double censoring

seigniorage legal tender and the demand notes of 1861 i introduction shortly after the onset of hostilities at fort sumter the lincoln administration asked congress to authorize the first large scale issue of federal paper currency officially labeled as united states notes they were popularly known as the demand notes of 1861 the administration s action is unremarkable the extraordinary revenue requirements of long and costly wars are often met in part by issuing paper money more surprising and not widely recognized is that this initial issue of paper money carried provisions that largely prevented it from yielding sustainable revenue seigniorage these provisions were largely omitted for the successor currency to the 1861 notes also known as united states notes but popularly as greenbacks as a result its seigniorage potential was greater although seigniorage was limited by other provisions in modern software jargon the greenbacks might be viewed as 1861 notes version 2 0 a version better suited to sustain a flow of seigniorage however the government was unable to replace the latter with the former very quickly resulting in an extended period during which two paper currencies with different properties circulated side by side both with each other and with gold coin this somewhat untidy situation provides an interesting and heretofore underexploited experiment for economists these alternative monies circulated widely with market determined exchange rates for a substantial period during which the amounts of both paper currencies in circulation greatly increased before the 1861 notes were removed from circulation we have collected daily data on these exchange rates and report them as differing gold premiums for the competing paper monies below these data are exploited to calculate the seigniorage cost of the various provisions of the 1861 notes and to provide evidence on alternative theories of expectations formation during this period our paper has three sections the first presents a more extensive discussion than has been previously available of the 1861 notes in the second a simple analytical framework is used to demonstrate and where possible estimate the seigniorage costs of the provisions attached to these notes the third section analyzes the market relationship between gold and the simultaneously circulating 1861 notes and greenbacks prior to the all but complete retirement of the former in 1863 the paper concludes with a summary ii the demand notes of 1861 the major focus of this paper is on the demand notes of 1861 the first large scale federal experiment with paper money 1 we concentrate on these notes for two reasons first little has been written about them mitchell 1902 in his pioneering work on civil war finance devotes only 7 pages to them while devoting 17 pages to fractional currency and minor coins during the war in addition most of his discussion concerns the period prior to suspension more recently calomiris 1988a 1988b 1992 makes reference to the 1861 notes but only as a part of his discussion of greenbacks second the paradox of issuing largely seigniorage free paper money to help finance a war has not been well recognized and hence largely unexplained this conflict between means and ends is interesting in its own right and illuminates some of what is puzzling in the sequence of monetary events over the first half of the civil war as a part of our discussion of the 1861 notes we challenge or extend the existing literature in three ways first we demonstrate that the conclusion of studenski and krooss 1963 141 144 that these notes were only used by the government to pay salaries and hence in their words were a pseudomoney is mistaken examination of the financial press of the day suggests that these notes were not only popular but also circulated widely as money a convincing claim can be made that they were indeed a national currency

a model of the evolution of duopoly does the asymmetry between firms tend to increase or decrease this paper is an attempt to identify some of the factors that affect the evolution of market structure in a model of dynamic competition between two firms the stochastic evolution of the state of competition depends on the respective effort rates of the firms the question is whether the current leader works harder than the laggard does the gap between firms tend to increase or decrease we show that several effects are at work the state tends to evolve in the direction where joint payoffs are greater since joint payoffs are related to joint product market profits less joint effort costs there are two classes of effect the joint profit effect and various joint cost effects the latter result in part from the pattern of profits and in part from endpoint effects that give relief from efforts asymptotic expansions illuminate these influences moreover we show by numerical simulation that there is another kind of joint cost effect the pattern of joint effort costs can influence the pattern of evolution of market structure and the evolution of the pattern of market structure can influence the pattern of efforts in a mutually self reinforcing manner in particular there may be equilibria in which this last effect means that the laggard works harder than the leader even though all the other effects work in favour of the leader

inflation is always and everywhere a monetary phenomenon richmond vs houston in 1864 on april 1 1864 the confederate currency reform act reduced the money supply in the eastern confederacy by one third the delayed implementation of the reform west of the mississippi provides a counterfactual view of what may have happened in the east had the reform not been enacted this episode is a natural experiment illustrating the relative importance for prices of war news vs the quantity of money in circulation our analysis of the major eastern and western gold markets richmond and houston strongly suggests that money matters more than war news in the post reform period this abstract was borrowed from another version of this item