welfare implications of the transition to high household debt abstract aggressive deregulation of the mortgage market in the early 1980s triggered innovations that greatly reduced indebted households required home equity and a borrowing surge followed this paper uses a calibrated general equilibrium model of lending from the wealthy to the middle class to evaluate the welfare effects of this reform quantitatively we find that the indirect effects of endogenous interest rate and other relative price changes dominate the direct effect of relaxing the constraint the borrowing household s welfare falls even though the reform directly relaxes a constraint on its trade the saving household s welfare rises substantially

political influence motives and the choice between tariffs and quotas abstract tariffs and quotas are not symmetric under a variety of circumstances this paper pursues the implications of one such circumstance domestic market power for the political choice of protectionist instrument in the context of a political support maximization model tariffs dominate quotas in the political model in the absence of revenue seeking motives in the presence of revenue seeking ambiguity arises but limits can be placed on the range of tariff or quota levels also some welfare implications emerge

on the efficiency of law a public choice perspective economists have not yet developed a comprehensive theoretical framework incorporating transaction cost economics within a public choice perspective for predicting when there will be an efficiency problem with the law transaction cost reasoning and the rent seeking insight have not been applied systematically in a dynamic institutional context to evaluate when the law will be used to increase or not minimize problems of bounded rationality and opportunism this paper takes a first step at identifying and remedying this deficiency the paper first provides a critical review of relevant theoretical contributions made by becker 1983 1985 posner 1977 priest 1977 rubin 1977 1982 williamson 1975 1985 and others we then show how analysis of the efficiency of law can be synthesized into a broader whole by incorporating transaction cost economics more fully into existing understanding of rentseeking in the political realm thus within the public choice paradigm this paper develops a deeper transaction cost analysis of the efficiency of law building on prior research by the authors crew and rowley 1988a 1988b twight 1983 1988 the paper identifies variables that position legal rules on a spectrum that ranges from those that are predominantly transaction cost

media scrutiny and the quality of public officials i investigate whether attempts by the media to determine a candidate s fitness for office lowers the average quality of public officials what i call the media scrutiny paradox media scrutiny imperfectly signals heterogeneous candidates type but imposes privacy costs and reputational costs on politicians the quality of office holders falls if the selection effect is adverse and outweighs the screening effect a low quality information signal which could result if the media focus on irrelevant aspects of behavior makes the screening effect small and the media paradox more likely to hold individuals of good character might invest more in their reputation and have more at stake from being falsely identified as a rapscallion the actual malice standard established in new york times v sullivan likely increased relatively the cost of candidacy for good people and lowered the quality of officials

blame game politics in a coalition government abstract delays in the adoption of reforms is an important question in political economics this paper explores this issue in the context of a representative democracy where the government is a coalition and citizens observe neither the decision making process nor politicians preferences for a reform we show that a coalition member who favors a reform may nonetheless choose to veto its adoption thus delaying it until after the next election and let his coalition partners share the blame for the non adoption we refer to this strategy as blame game politics we then identify three reasons for a politician to play the blame game one is to make an issue salient in the next election a second reason is to avoid a split in his electorate which is accomplished by hiding his stance on an issue a third reason is to enhance bargaining power during the formation of the next government

why democracies produce efficient results by applying the standard tools of microeconomic analysis i argue that democratic markets work as well as economic markets in particular i show that previous work has greatly exaggerated the existence of principal agent and informational problems in electoral markets and has drawn incorrect conclusions

monetary aggregates and liquidity in a neo wicksellian framework woodford 2003 describes a popular class of neo wicksellian models in which monetary policy is characterized by an interest rate rule and the money market and financial institutions are typically not even modeled critics contend that these models are incomplete and unsuitable for monetary policy evaluation our banks and bonds model starts with a standard neo wicksellian model and then adds banks and a role for bonds in the liquidity management of households and banks the banks and bonds model gives a more complete description of the economy but the neo wicksellian model has the virtue of simplicity our purpose here is to see if the neo wicksellian model gives a reasonably accurate account of macroeconomic behavior in the more complete banks and bonds model we do this by comparing the models second moments variance decompositions and impulse response functions we also study the role of monetary aggregates in predicting inflation in the two models

transparency and economic policy we provide a two period model of political competition in which voters imperfectly observe the electoral promises made to other voters imperfect observability generates an incentive for candidates to offer excessive transfers even if voters are homogeneous and taxation is distortionary government spending is larger than in a world of perfect observability transfers are partly financed through government debt and the size of the debt is higher in less transparent political systems the model provides an explanation of fiscal churning it also predicts that groups whose transfers are less visible to others receive higher transfers and that imperfect transparency of transfers may lead to underprovision of public goods from the policy perspective the main novelty of our analysis is a separate evaluation of the transparency of spending and the transparency of revenues we show that the transparency of the political system does not unambiguously improve efficiency transparency of spending is beneficial but transparency of revenues can be counterproductive because it endogenously leads to increased wasteful spending

toward a public choice theory of monopoly regulation its many dimensions from the perspective of market economics this new thrust was consolidated in 1976 by s peltzman who developed a formal market model in which regulations were viewed as commodities brokered via political markets in response to bids and counter bids by those who stood to gain or to lose from specific regulation outcomes the subsequent contribution by becker 1983 added insights and institutional flesh to the stigler peltzman embryo confirming regulation as an integral component of mainstream market economics an important implication of such contributions especially those from the chicago perspective is that regulation for the most part confirms resource efficiency within market process that political markets in the absence of entry barriers are just as effective as are competitive commodity markets in achieving economic efficiency defined within a comparative institutions framework nowhere is this complacency more apparent than in the conclusion drawn by becker 1983 from a detailed formal analysis of competition among pressure groups for political influence

political economy of public policies insights from distortions to agricultural and food markets the agricultural and food sector is an ideal case for investigating the political economy of public policies many of the policy developments in this sector since the 1950s have been sudden and transformational while others have been gradual but persistent this paper reviews and synthesizes the literature on trends and fluctuations in market distortions and the political economy explanations that have been advanced based on a rich global data set covering a half century of evidence on commodities countries and policy instruments the paper identifies hypotheses that have been explored in the literature on the extent of market distortions and the conditions under which reform may be feasible

a bargaining theory of inefficient redistribution policies when two policies are available to achieve the same goal why is the relatively inefficient one often observed we address this question in the context of policies used to redistribute income towards special interest groups sigs in a two stage model in the first stage the set of constraints on policy instruments is chosen in the second stage the government and sigs bargain over the level of the available transfer policies restrictions on the use of efficient policies and the use of inefficient ones reduce the surplus over which sigs and governments can bargain there is however an offsetting effect not generally recognized in models of inefficient redistribution an improvement in the government s bargaining position which allows it to capture a larger share of the surplus we show that this positive effect for the government dominates under plausible conditions inefficient policies are the equilibrium outcome under alternative first stage mechanisms for policy selection such as the election of policymakers or in some cases bargaining between sigs and the government jel classification d7 f13 c70 h23

primary and secondary reform i introduction the export led growth performance of the east asian newly industrialized countries has increased interest in liberalization among developing countries in general such reforms are felt to benefit the economy not only because they reduce the usual economic distortions but also because they tend to drive agents out of rent seeking and into productive activities however the presence of lobbyists working for vested interests such as import competing industries makes these distortions difficult to remove 1 developed countries of course face similar problems in analyzing the political and economic consequences of a reform it is essential to consider the full range of rent related activities in which individuals may engage our model focuses on two activities rent seeking and lobbying and examines the feedback effects resulting from reforms which target one or the other of these activities 2 in particular when people are driven out of rent seeking by a reform their most natural alternative may be some other rent related activity such as lobbying we refer to reforms which target lobbying as primary reforms while reforms which target rent seeking activities are called secondary reforms primary reforms target the decision making process an example is an institutional reform which lowers all else equal the marginal product of lobbying secondary reform focuses on the side effects resulting from the policy which has been put in place by lobbying an example is the replacement of quotas by their tariff equivalent tariffication in an attempt to reduce rent seeking associated with the trade regime in our model import competing firms may lobby for protection which takes the form of a combination of tariffs and quotas raising the domestic price of the imported good increases the returns to sector specific capital located in the protected industry to the extent that binding quotas are utilized rents will accrue to those who acquire the import licenses rent seeking consists of resources time spent attempting to acquire the import licenses 3 an important feature of the model is that for the individuals involved rent seeking and lobbying are highly substitutable activities the presumption is that the skills required for these activities are more closely related to one another than they are to productive activities this type of substitution between rent related activities is suggested by rodrik 1994 p 86 footnote 6 to the extent that rent seeking behavior dissipates some of the rents of trade protection the efficiency gains of reform may be larger than those measured here however the rent seeking literature generally exaggerates these gains if individuals can waste resources competing for the rents generated by say quotas they can also waste resources lobbying the government for the reimposition of quotas that have been taken away 4 our assumption about the nature of rent seeking and lobbying activities has important implications for understanding the response to reform in particular this response depends on the extent to which reform is directed at rent seeking secondary reform or lobbying primary reform feedback effects arise both because of labor market linkages and because rents are created as a side effect of lobbying for trade protection as we show below the feedback effects from primary reforms often tend to reinforce the original reform while the feedback effects associated with secondary reforms tend to retard the reform process near autarky however a primary reform can actually raise rents by increasing the volume of trade thus in this situation any primary reform should presumably be accompanied by secondary reform though the model presented here is extremely simple and is a rather specific example of reform of the trade regime the insights gained may apply to rent seeking and lobbying more generally

macroeconomic implications of deep habits in banking recent empirical evidence shows that price cost margins in the market for bank credit are countercyclical in the u s economy and that this cyclical behavior can be explained in part from the fact that switching banks is costly for customers i e from a borrower hold up effect our goal in this paper is to study the financial accelerator role of these countercyclical margins as a propagation mechanism of macroeconomic shocks to do so we apply the deep habits framework in ravn schmitt grohe and uribe 2006 to financial markets to model this hold up effect within a monopolistically competitive banking industry we are able to reproduce the pattern of price cost margins observed in the data and to show that the real effects of aggregate total factor productivity shocks are larger the stronger the friction implied by borrower hold up also output investment and employment all become more volatile than in a standard model with constant margins in credit markets an empirical contribution of our work is to provide structural estimates of the deep habits parameters for financial markets

household debt and fiscal multipliers we study the size of government spending multipliers in a general equilibrium model with search and matching frictions in which we allow for different levels of household indebtedness the main results are a the presence of impatient households and private debt helps to generate government spending multipliers greater than 1 b as financial conditions worsen the size of the government spending multiplier falls c conversely employment vacancies and unemployment multipliers are larger in a credit crunch d the model explains the observed pattern of responses of labour market variables housing prices and private debt to a fiscal shock reasonably well

executive veto and informational strategy a structure induced equilibrium analysis this paper explores the strategic value of incomplete preference revelation for an executive with veto authority within a budgetary process the analysis indicates which forms of veto power can be augmented by the strategic manipulation of information on preferences the lesson of the analysis is that the failure to consider the strategic value of incomplete preference revelation is a methodological shortcoming of standard structure induced equilibrium analysis since without such consideration equilibrium outcomes are subject to misspecification the true power bestowed upon individual political actors by alternative institutions is misunderstood and the informational gamesmanship that is so much a part of the political process is left unexplained

why so much stability majority voting legislative institutions and gordon tullock gordon tullock nearly a half century ago raised questions about arrow s theorem a phantom has stalked the classrooms and seminars of economics and political science he followed this up by asking in light of arrow s theorem why so much stability in this paper a more nuanced understanding of the operating characteristics of majority rule in institutional settings anticipated and stimulated by tullock is spelled out a major distinction is made between preference cycles and voting cycles suggesting why arrow s phantom still stalks but that tullock s intuitions are germane as well

personal bankruptcy and credit market competition we document a link between u s credit supply and rising personal bankruptcy rates we exploit the exogenous variation in market contestability brought on by banking deregulation the relaxation of entry restrictions in the 1980s and 1990s at the state level we find deregulation explains at least 10 of the rise in bankruptcy rates we also find that deregulation leads to increased lending lower loss rates on loans and higher lending productivity our findings indicate that increased competition prompted banks to adopt sophisticated credit rating technology allowing for new credit extension to existing and previously excluded households the last quarter century saw a dramatic increase in the share of u s con sumers filing for personal bankruptcy thereby seeking a discharge of their unsecured debt in 2005 this increase led to the most comprehensive change to u s bankruptcy law since 1978 while several causes for the rise in bankruptcies have been advanced and it is the subject of ongoing research two potentially significant changes occurred during this period banking deregulation the relaxation of bank entry restrictions in the 1980s and 1990s and technological change in consumer lending banking deregulation by removing barriers to entry increases credit market competition and there fore affects the supply of credit new screening technologies change the way loans are made allowing for interest rates to better reflect underlying risk and thus facilitating lending to riskier borrowers in this paper we examine whether banking deregulation and technological change played a role in the increase in consumer bankruptcy the empirical literature has mostly focused on cross sectional differences in personal bankruptcy in particular it has revolved around legal institutions as a way to answer whether consumers file due to adverse events as part of a rational financial calculation or as a consequence of unfair or deceptive lending practices usually researchers have exploited the different asset exemptions across u s states i e the amount of personal assets protected from creditors

extending the economic theory of regulation to the form of policy the mutually beneficial connection between industries and the governments that regulate them is the subject of a large literature led by stigler 1971 what has not been studied is how firms choose their desired policies from the set including entry barriers price floors subsidies and demand stimulation we take as given that government and incumbents from the supply and demand for regulation and explore the choice of political product

compensations as signaling devices in the political economy of reforms we propose an explanation for why efficient reforms are not carried out when losers can block their implementation and compensations are feasible in our model a government tries to sequentially implement two efficient reforms by bargaining with interest groups the organization of interest groups is endogenous compensations are distortionary and different governments care differently about distortions governments use low compensations to discourage losers who just want to receive transfers from organizing this comes at the cost of reforms being blocked by interest groups with relatively high losses resulting in a bias against payment of compensations and the implementation of reforms

asymmetric information and the structure of the banking industry abstract we analyze the effects of informational asymmetries on the market structure of the banking industry in a multi period model of spatial competition in the process of lending incumbent banks gather proprietary information about their clients acquiring an advantage over potential entrants we show that these informational asymmetries are important determinants of the industry structure and of banks strategic behavior contrary to traditional models of horizontal differentiation the steady state equilibrium is characterized by a finite number of banks even in the absence of exogenous fixed costs in addition less concentrated industry structures may be associated with higher interest rates

financial frictions and policy cooperation a case with monopolistic banking and staggered loan contracts abstract do financial frictions call for cross border policy cooperation this paper investigates the implications of financial frictions in the form of staggered loan contracts supplied by monopolistic banks for monetary policy using the linear quadratic lq framework we show that policy cooperation yields long run gains in addition to gains from stabilizing inefficient fluctuations over the business cycle as usually found in models with price rigidities the ramsey optimal steady states differ between cooperation and noncooperation such gains from cooperation arise irrespective of capital account liberalization

economists and public policy chicago political economy versus conventional views both conventional welfare economics and public choice analysis suggest that economists have an important educational role to play in the public policy process in improving the decision making process in sharp contrast information and incentive problems related to voting rules the bureaucracy and the legislature do not arise in cpe because these processes are all perfect agents of interest groups consequently the political process is efficient and there is no scope for beneficial economic analysis as it relates to the sugar program or other public policies that is the polity is efficient or it would be reordered by competing interest groups to make it so but as mitchell 1989 290 stresses the important unanswered question in cpe remains if there is no scope for improvement how and why does change occur

on the form of transfers to special interests an important question in political economy concerns the form of transfers to special interests the chicago view is that political competition leads politicians to make such transfers efficiently the virginia position is that lack of information on the part of voters leads politicians to favor inefficient sneaky methods of redistribution this paper analyzes the form of transfers in a model of political competition in which politicians have incentives to make transfers to special interests it shows that when voters have imperfect information about both the effects of policy and the predispositions of politicians inefficient methods of redistribution may be employed

equilibrium political budget cycles political business cycle theories generally rely on nominal rigidities and voter myopia this paper offers an equilibrium theory that preserves some basic insights from earlier models though with significant refinements the political budget cycle emphasized here is in fiscal policy rather than output and inflation it arises via a multidimensional signal process one can consider the welfare implications of proposals to mitigate the cycle and the effects of altering the electoral structure copyright 1990 by american economic association

causes of u s farm commodity programs this paper i s an attempt to explain variations by commodity in producer protection afforded by farm price support programs since the1930s particularly emphasized are theideas that these programs are essentially income redistributional measures and that given political forces the programs are attempts to redistribute efficiently variables associated with the cost to producers of generating political pressure and the social cost deadweight losses of redistribution are both found to be empirically important copyright 1987 by university of chicago press

credit market competition and capital regulation market discipline for financial institutions can be imposed not only from the liability side as has often been stressed in the literature on the use of subordinated debt but also from the asset side this will be particularly true if good lending opportunities are in short supply so that banks have to compete for projects in such a setting borrowers may demand that banks commit to monitoring by requiring that they use some of their own capital in lending thus creating an asset market based incentive for banks to hold capital borrowers can also provide banks with incentives to monitor by allowing them to reap some of the benefits from the loans which accrue only if the loans are in fact paid off since borrowers do not fully internalize the cost of raising capital to the banks the level of capital demanded by market participants may be above the one chosen by a regulator even when capital is a relatively costly source of funds this implies that capital requirements may not be binding as recent evidence seems to indicate

house prices borrowing constraints and monetary policy in the business cycle i develop a general equilibrium model with sticky prices credit constraints nominal loans and asset prices changes in asset prices modify agents borrowing capacity through collateral value changes in nominal prices affect real repayments through debt deflation monetary policy shocks move asset and nominal prices in the same direction and are amplified and propagated over time the financial accelerator is not constant across shocks nominal debt stabilises supply shocks making the economy less volatile when the central bank controls the interest rate i discuss the role of equity debt indexation and household and firm leverage in the propagation mechanism finally i find that monetary policy should not target asset prices as a means of reducing output and inflation volatility

leaning against boom bust cycles in credit and housing prices this paper studies the potential gains of monetary and macro prudential policies that lean against house price and credit cycles we rely on a model that features borrowers and savers and allows for over borrowing induced by news shock driven cycles we find that policy that responds to changes in financial variables is socially optimal considering the use of a single policy instrument both types of agents are better off when the interest rate optimally responds to credit growth when we allow for the implementation of both interest rate and ltv policies heterogeneity in the welfare implications is key in determining the optimal use of policy instruments the optimal policy for the borrowers is characterized by a ltv ratio that responds countercyclically to credit growth which most effectively stabilizes credit relative to gdp in contrast the optimal policy for the savers features a constant ltv ratio coupled with an interest rate response to credit growth news shock driven cycles account for most of the gains from a policy response to changes in financial variables

how do us credit supply shocks propagate internationally a gvar approach abstract we study how us credit supply shocks are transmitted to other economies we use the recently developed gvar approach to model financial variables jointly with macroeconomic variables in 33 countries for the period 1983 2009 we experiment with inter country links based on bilateral trade portfolio investment foreign direct investment and banking exposures capturing both bilateral trade and financial exposures in a gvar fits the data better than using trade weights only we use sign restrictions on the short run impulse responses in the us model to identify the credit supply shocks we find that negative credit supply shocks have strong negative effects on us and foreign gdp credit and equity markets in several countries respond clearly to the shocks exchange rate responses are consistent with a flight to quality to the us dollar the credit supply shocks explain about a fifth of one year ahead output forecast error variance in the us and about a tenth in the euro area and the uk but considerably less elsewhere

endogenous export subsidies as a revenue seeking activity some implications for the evolution of protection explaining the antiexport bias of trade policy requires a model in which there is some asymmetry between protection of the import competing and export sectors one asymmetry is that export subsidies require government expenditure while import tariffs raise revenue for the government a model is developed where lobbying for export subsidies is treated as a revenue seeking activity in contrast with the import competing sector it is found that there is no presumption that vicious circles exist in the export sector where a vicious circle refers to the tendency for exogenous political shocks to be amplified by an endogenous lobbying response

trade wars and trade talks when governments meet in the international arena their actions reflect the political situations at home previous studies of trade relations have focused on governments that are immune from political pressures and that act as benevolent servants of the public interest here we introduce domestic politics into the analysis of international economic relations we study the interactions between national leaders who are concerned both with providing a high standard of living to the general electorate and collecting campaign contributions from special interest groups our analysis sheds light on the determinants of the structure of protection in non cooperative and cooperative policy equilibria

bank regulation and macroeconomic fluctuations over the last two decades macroeconomic cycles were frequently associated with boom bust cycles in bank lending and asset prices often followed by financial instability in this paper we argue that i the new pattern of macroeconomic cycles is partly the result of banking sector liberalization since the early mid 1970s which has increased the procyclicality of the financial system ii the regulation of bank capital in the form of capital adequacy requirements is itself inherently procyclical and may therefore amplify business cycle fluctuations iii the new basel 11 accord may considerably accentuate the procyclicality of the regulatory system

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

targeting transfers through restrictions on recipients our objective is to design transfer programs that maximize some social welfare function following the optimal income tax formulation we assume that a random process endows individuals with characteristics that influence welfare such as ability to earn income medical condition or unmonitorable income the goal is to maximize the utility of a randomly chosen individual other individualistic social welfare functions would lead to equivalent results if the random characteristics were observable a first best outcome could be achieved by making them the basis for lump sum transfers in practice however we can observe only indicators of these characteristics such as earnings medical expenditures or consumption patterns the challenge for policy is to design an efficient second best transfer program based on indicators in this paper we argue that 1 an optimal transfer program in general must sacrifice productive efficiency to target efficiency this is done by imposing restrictions on the choices made by intended beneficiaries 2 a program that incorporates restrictions such as means tested in kind transfers commodity specific taxes and subsidies and even ordeals i e the imposition of deadweight costs to qualify for a transfer will perform better than programs that rely solely on income taxes and cash transfers

institutionalizing majority rule a social choice theory with policy implications recent results in the theory of pure majority rule demonstrate the genericity of majority rule cycles as established by richard mckelvey 1979 l cohen 1979 and n schofield 1978 majority rule nearly always breaks down and when it does the breakdown is complete the theorems given below may be summed up in the following three assertions 1 for any policy or alternative there exists a set of alternatives that command a majority of votes against it 2 this situation is not an abberation but rather is the general case and 3 it is almost always possible in multidimensional choice settings to find a sequence of votes that begins at any point and ends at any other point majority rule may wander anywhere yet when these theoretical assertions are applied to legislatures based upon majority rule they contain no obvious policy content or predictions the key insight which we elaborate in this paper is that majority rule is not self implementing there is no majority rule machine into which we feed preferences and out of which come outcomes rather there is a complex series of institutional arrangements underpinning the operation of majority rule legislatures arrangements from which theorists have mistakenly abstracted in fact majority rule theorists have not focused at all on institutional details instead they have restricted themselves to the majority rule dominance relation operating under the implicit assumption that what may be proved true about this relation is true of all legislative institutions based upon it in this paper we show that this assumption is misleading and that the the results based upon it must be reinterpreted in order to be useful for understanding real world committees and legislatures

stability and centrality of legislative choice in the spatial context majority rule spatial voting games lacking a core still always present a near core outcome more commonly known as the copeland winner this is the alternative that defeats or ties the greatest number of alternatives in the space previous research has not tested the copeland winner as a solution concept for spatial voting games without a core lacking a way to calculate where the copeland winner was with an infinite number of alternatives we provide a straightforward algorithm to find the copeland winner and show that it corresponds well to experimental outcomes in an important set of experimental legislative voting games we also provide an intuitive motivation for why legislative outcomes in the spatial context may be expected to lie close to the copeland winner finally we show a connection between the copeland winner and the shapley value and provide a simple but powerful algorithm to calculate the copeland scores of all points in the space in terms of the modified power values of each of the voters and their locations in the space

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

institutional ecological economics abstract new institutional economics and its forerunners have we argue made important contributions to the evolving agenda of ecological economics the conceptualisation of environmental problems as instances of interdependence and the acknowledgement of positive transaction costs are key insights into the nature of environmental problems we also discuss how plurality of behavioural motivations and limited cognitive capacity have important implications for environmental decision making and its analysis we show how evolutionary and collective action theories offer complementary takes on the choice and change of environmental governance institutions and how the concept of social capital can enrich analyses of environmental governance we conclude that an emerging institutional ecological economics has the greatest relative advantage in analysing the design implementation and effectiveness of environmental governance solutions

optimal monetary policy and imperfect financial markets a case for negative nominal interest rates this article studies optimal monetary policy in a model with credit frictions and money demand we show that augmenting a standard new keynesian model with money demand and financial frictions generates a mechanism that in equilibrium gives rise to optimal negative nominal interest rates in addition we find that the tighter credit markets are the lower the optimal nominal policy interest rate and the more likely it is to be negative quantitatively when credit constraints are binding a standard calibration of the model generates an optimal nominal policy interest rate that is roughly 4 annually jel e31 e41 e43 e44 e52 e58

the power to tax analytical foundations of a fiscal constitution preface 1 taxation in constitutional perspective 2 natural government a model of leviathan 3 constraints on base and rate structure 4 the taxation of commodities 5 taxation through time income taxes capital taxes and public debt 6 money creation and taxation 7 the disposition of public revenues 8 the domain of politics 9 open economy federalism and taxing authority 10 toward authentic tax reform prospects and prescriptions epilogue notes selected bibliography index

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

the political economy of benefits and costs a neoclassical approach to distributive politics this essay offers a rational political explanation for the notorious inefficiency of pork barrel projects with an optimization model of legislative behavior and legislative institutions the model emphasizes the economically arbitrary from a welfare point of view importance of the geographic incidence of benefits and costs owing to the geographic basis for political representation we explore the implications of a legislator s objective function and derive conditions under which a representative legislature will select an omnibus of projects each of which exceeds the efficient scale

cycle avoiding trajectories strategic agendas and the duality of memory and foresight an informal exposition this paper considers the notion of cycle avoiding trajectories in majority voting tournaments and shows that they underlie and guide several apparently disparate voting processes the set of alternatives that are maximal with respect to such trajectories constitutes a new solution set of considerable significance it may be dubbed the banks set in recognition of the important paper by banks 1985 that first made use of this set the purpose of this paper is to informally demonstrate that the banks set is a solution set of broad relevance for understanding group decision making in both cooperative and non cooperative settings and under both sincere and sophisticated voting in addition we show how sincere and sophisticated voting processes can be viewed as mirror images of one another embodying respectively dmemory and foresight we also show how to develop the idea of a sophisticated agenda one in which the choice of what alternatives to propose is itself a matter of strategic calculation

redistribution tax under non benevolent governments i analyze redistribution policies of majority governments in one kind of representative voting system i employ these assumptions members gain special benefits in the majority parties act strategically by using redistribution transfers the member s utility function is given in a quasi linear function the government s objective functions are the weighted summation of utilities and i classify governments according to the weight the four main results are a stable majority dose not support myopic government the stable redistribution policy of benevolent government is expressed by a scope of transfers the stable transfer of non benevolent governments depends on private utilities of the majority and opportunity costs of the minority and the altruistic government is not displayed by any other majority because it offers the total welfare of the majority to the minority as a subsidy

banking competition housing prices and macroeconomic stability we develop a macroeconomic model with an imperfectly competitive bank loans market and collateral constraints that tie investors credit capacity to the value of their real estate holdings lending margins are optimally set by banks and have a significant effect on aggregate variables over the long run stronger banking competition increases output by triggering a reallocation of available collateral towards investors in the short run output credit and housing prices are more responsive on impact to shocks in an environment of highly competitive banks also stronger banking competition implies higher lower persistency of credit and output after a monetary credit crunch shock

environmental preservation and majority decisions in this paper we bring together the quasi option value literature with a majority rule community decision making scheme it is shown that the quasi option value is positive for a majority of voters if there exists a median voter who is dictatorial however the quasi option value can be negative for a majority or all community members given the standard assumptions of the literature for which the quasi option value for a single decision maker would always be positive but in some cases this leads to majority decisions in favor of the irreversible development of natural resources when future information is taken into account

shrouded costs of government the political economy of state and local public pensions abstract why do public sector workers receive so much of their compensation in the form of pensions and other benefits this paper presents a political economy model in which politicians compete for taxpayers and government employees votes by promising compensation packages but some voters cannot evaluate every aspect of promised compensation if pension packages are shrouded so that public sector workers better understand their value than ordinary taxpayers then compensation will be highly back loaded in equilibrium the welfare of public sector workers could be improved holding total public sector costs constant if they received higher wages and lower pensions centralizing pension determination has two offsetting effects on generosity more state level media attention helps taxpayers better understand pension costs and that reduces pension generosity but a larger share of public sector workers will vote within the jurisdiction which increases pension generosity a short discussion of pensions in two decentralized states california and pennsylvania and two centralized states massachusetts and ohio suggests that centralization appears to have modestly reduced pensions but as the model suggests this is unlikely to be universal

making sense of institutions as a factor shaping economic performance abstract there has recently been a resurgence of interest in how institutions affect economic performance a review of this literature reveals that the concept of an institution means different things to different scholars both within economics and across the social sciences we discuss what factors unify the different definitions of institutions and develop a concept of institutions useful for the analysis of economic performance and economic growth in particular specifically we develop the notion of institutions as standard social technologies economic growth results from the co evolution of physical and social technologies

altruism the samaritan s dilemma and government transfer policy this paper shows that altruism provides an efficiency rationale for public provision of insurance to the poor the framework is one in which there are rich altruists and risk averse poor who face some possibility of loss the government represents the rich and makes transfers on their behalf with unconditional transfers the poor may forgo insurance and rely on private charity to bail them out in the event of loss this reliance on private charity has adverse efficiency effects these may be avoided if the government makes in kind transfers of insurance copyright 1995 by american economic association

spatial competition in the banking system localization cross subsidies and the regulation of deposit rates abstract the paper analyses a spatial competition model of the banking sector banks offer two kind of services deposits and credit and can either borrow or lend on the money market we investigate the consequences of the regulation of rates paid on deposits the main conclusions are as follows regulation first increases network size beyond social optimum in the long run it results in lower equilibrium credit rates because of increased competition secondly regulation generates tied sales contracts by which banks propose bundles of credit and deposit services tied sales in turn motivate the introduction of cross subsidies between the two activities the rent levied upon regulated deposits financing lower rates in the credit market finally it is shown that in a regulated environment the effectiveness of monetary policy is reduced in the sense that fluctuations of money market rates are less than fully transmitted in credit rates

price support acreage controls and efficient redistribution this study is concerned with the combination of target price and acreage controls as the two major mechanisms of farm policy acreage controls are shown to enhance the efficiency of redistribution under a target price program more specifically this study demonstrates that if the traditional cobb douglas production function is assumed acreage controls do not enhance the efficiency of target price programs in the process of redistributing income to the farm sector the study proves that if the elasticity of substitution between land and all other inputs is less than one then the income redistributional costs are likely to be reduced moreover by using an empirical estimate of the elasticity of substitution and farm data for the time period 1984 88 this study demonstrates that acreage control programs have drastically reduced the deadweight losses associated with income redistribution flowing from target price programs these results lend strong support to the public choice notion that politicians favo

executive veto and spending limitation positive political economy with implications for institutional choice the consequences of institutional change in the budgetary process are not generally determinate independent of the preferences of political actors nonetheless this study shows for a general class of preference configurations that the legislative branch cannot be made better off by a spending limitation unless the executive is empowered with a line item veto in the absence of executive item veto authority there is no incentive for the legislature to constrain spending

executive veto legislative override and structure induced equilibrium in this study the structure induced equilibrium approach for modeling democratic institutions is extended to allow for the added structural features of executive veto and legislative override a multidimensional model is presented for a budgetary process involving three actors a legislature an appropriations committee and an executive in order to focus attention on the role of the veto and override possibilities simplifying assumptions are made with regard to other aspects of the agenda formation process in particular the committee has monopoly agenda power a closed amendment control rule is operative and perfect foresight expectations are held by the committee and the executive given these assumptions utility maximization by the several actors generates a budget outcome characterized as a structure induced equilibrium the general model is illustrated geometrically with a two dimensional example permitting budget outcomes to be analyzed for various combinations of veto rules and override provisions the analysis demonstrates that budget outcomes are sensitive to alternative specifications of veto rules and override provisions in the illustration executive veto power is shown to vary directly with both the permissiveness of the veto rule and the stringency of the override provision similar relationships however are not found to exist for total budget expenditures

rent seeking and growth the case of growth through human capital accumulation this paper follows the work of h uzawa 1965 and r e lucas 1988 by presenting an endogenous growth model with human capital accumulation as the engine of growth agents make time allocation decisions in an economy where quantitative restrictions are employed in the trade regime agents may allocate time to obtain valuable import licences the effect of this activity on the growth rate is found to be dependent upon whether agents specialize in the rent seeking activity when agents do not specialize the rent seeking activity reduces growth by reducing the incentive to accumulate productive human capital

exogenous tariff changes with an endogenous lobbying response as pointed out by krueger 1993a 1993b changes in policy which are exogenous to the lobbying process may lead to a vicious circle of protectionism a sector which receives protection will tend to grow thereby increasing the constituency for greater protection and reducing the constituency which opposes protection the possibility of such a vicious circle is examined in the context of a trade model where capital which is immobile in the short run may lobby for a sector specific import tariff if costs associated with overcoming the free rider problem do not rise too quickly exogenous policy changes will be reinforced by the endogenous lobbying response as capital flows into the protected sector in the long run the implications of lobbying by third parties versus lobbying by the specific factors themselves are also examined

a foundation for strategic agenda voting abstract we offer complete characterizations of the equilibrium outcomes of two prominent agenda voting institutions that are widely used in the democratic world the amendment also known as the anglo american procedure and the successive or equivalently the euro latin procedure our axiomatic approach provides a proper understanding of these voting institutions and allows comparisons between them and with other voting procedures

a theory of competition among pressure groups for political influence this paper presents a theory of competition among pressure groups for political influence political equilibrium depends on the efficiency of each group in producing pressure the effect of additional pressure on their influence the number of persons in different groups and the deadweight cost of taxes and subsidies an increase in deadweight costs discourages pressure by subsidized groups and encourages pressure by taxpayers this analysis unifies the view that governments correct market failures with the view that they favor the politically powerful both are produced by the competition for political favors

political foundations of the resource curse in this paper we argue that the political incentives that resource endowments generate are the key to understanding whether or not they are a curse we show 1 politicians tend to over extract natural resources relative to the efficient extraction path because they discount the future too much and 2 resource booms improve the efficiency of the extraction path however 3 resource booms by raising the value of being in power and by providing politicians with more resources which they can use to influence the outcome of elections increase resource misallocation in the rest of the economy 4 the overall impact of resource booms on the economy depends critically on institutions since these determine the extent to which political incentives map into policy outcomes countries with institutions that promote accountability and state competence will tend to benefit from resource booms since these institutions ameliorate the perverse political incentives that such booms create countries without such institutions however may suffer from a resource curse

voting on the budget deficit this paper analyzes a model in which a group of rational individuals votes over the composition and time profile of public spending all voters agree that a balanced budget is ex ante optimal however if there is disagreement between current and future majorities a balanced budget is not a political equilibrium under majority rule under certain conditions a majority of the voters favors a budget deficit and the equilibrium deficit is larger the greater is the polarization among voters copyright 1990 by american economic association

big banks and macroeconomic outcomes theory and cross country evidence of granularity does the mere presence of big banks affect macroeconomic outcomes we develop a theory of granularity for the banking sector by modeling heterogeneous banks charging variable markups using data for a large set of countries we show that the banking sector is indeed granular as the right tail of the bank size distribution follows a power law we demonstrate empirically that the presence of big banks measured by a high degree of market concentration is associated with a positive and significant relationship between bank level credit growth and aggregate growth of credit or gdp

is free trade passe abstract if there were an economist s creed it would surely contain the affirmations i understand the principle of comparative advantage and i advocate free trade yet the case for free trade is currently more in doubt than at any time since the 1817 publication of ricardo s principles of political economy and this is due to changes that have recently taken place in the theory of international trade while new developments in international trade theory may not yet be familiar to the profession at large they have been substantial and radical in the last ten years the traditional constant returns perfect competition models of international trade have been supplemented and to some extent supplanted by a new breed of models that emphasizes increasing returns and imperfect competition these new models call into doubt the extent to which actual trade can be explained by comparative advantage they also open the possibility that government intervention in trade via import restrictions export subsidies

a theory of informational autocracy abstract we develop an informational theory of autocracy dictators survive not by means of force or ideology but because they convince the public rightly or wrongly that they are competent citizens do not observe the leader s type but infer it from signals in their living standards state propaganda and messages sent by an informed elite via independent media if citizens conclude that the leader is incompetent they overthrow him the dictator can invest in making convincing state propaganda censoring independent media co opting the elite or equipping police to repress attempted uprisings but he must finance such spending at the expense of the public s consumption we show that informational autocracies prevail over old style overtly violent dictatorships when the informed elite is sufficiently large but are replaced by democracies when elites are too numerous to be bribed or censored the theory provides insight into various soft authoritarian regimes around the world and suggests a logic of modernization behind recent global political trends

banking competition collateral constraints and optimal monetary policy we analyze optimal monetary policy in a model with two distinct financial frictions monopolistically competitive banks that charge endogenous lending spreads and collateral constraints we show that welfare maximization is equivalent to stabilization of four goals inflation output gap the consumption gap between borrowers and savers and a housing gap that measures the distortion in the distribution of the collateralizable asset between both groups collateral constraints create a trade off between stabilization goals following both productivity and financial shocks and relative to strict inflation targeting the optimal policy implies sharper movements in the policy rate aimed primarily at reducing fluctuations in asset prices and hence in borrowers net worth the policy trade offs become amplified as banking competition increases due to the fall in lending spreads and the resulting increase in borrowers leverage

tariffs subsidies and welfare with endogenous policy abstract it is a well established proposition of trade theory that in the absence of directly trade related distortions or policy goals subsidies are superior to tariffs for achieving any economic or non economic objective this paper shows that once the endogeneity of the distortion or non economic objective is allowed for the welfare ranking of various policies can be reversed the particular model analyzed is one where the level of non economic objectives that have to be fulfilled itself depends on the policy tools considered to fulfill them with this arises from the public good nature of tariffs compared to subsidies

toward a presumption of efficiency in politics in the preceding pages i have returned time and again to the idea that in the next quarter century the profession will devote more of its resources to an understanding of politics and of political organizations with a presumption that the behaviors and institutions we observe in the real world represent efficient responses to exogenously given constraints and to competitive forces that does not mean of course that normative preoccupations critical evaluations and reformist drives will not continue to motivate a good number of scholars that is to be expected and praised however i believe that in relative terms more attention will come to be given to understanding and less to re designing and reforming in this context the economic approach to politics will flourish and as an important carrier of these research results public choice will continue to play an indispensable role we can already see the future and it is promising

the determinants of bank interest rate margins an international study abstract this paper studies the determinants of bank net interest margins nims in six selected european countries and the us during the period 1988 1995 for a sample of 614 banks we apply the ho and saunders model ho t saunders a 1981 the determinants of bank interest margins theory and empirical evidence journal of financial and quantitative analyses 16 581 600 to a multicountry setting and decompose bank margins into a regulatory component a market structure component and a risk premium component the regulatory components in the form of interest rate restrictions on deposits reserve requirements and capital to asset ratios have a significant impact on banks nims the empirical results suggest an important policy trade off between assuring bank solvency high capital to asset ratios and lowering the cost of financial services to consumers low nims the more segmented or restricted the banking system both geographically and by activity the larger appears to be the monopoly power of existing banks and the higher their spreads macro interest rate volatility was found to have a significant impact on bank nims this suggests that macro policies consistent with reduced interest rate volatility could have a positive effect in reducing bank margins