altruism and time consistency the economics of fait accompli this paper analyzes the strategic and intertemporal interaction between two economic agents who have overlapping concerns such as altruistic concerns for each other s welfare the agents may be two individuals a social bureau and a client or two units in an organization we show how the presence of such common concerns may lead to socially inefficient outcomes in which one economic agent free rides on the other s concern we also briefly how this inefficiency and free riding in the context of interaction between individuals might be mitigated by compulsory social security systems as another example we interpret the inefficiency in terms of kornai s soft budget constraints within organizations

environmental tax policy and intergenerational distribution abstract we study the effects of environmental taxation within the context of an overlapping generations model the quality of the environment is modelled as a durable consumption good introduction of the environmental tax harms old existing generations and benefits young existing generations as well as all future generations increasing the tax in a pareto improving manner is easier the higher the pre existing tax the reverse holds if tax policy is decided by majority rule a suitably designed bond policy can be used to redistribute the efficiency gains due to the internalisation of environmental externalities across the generations

understanding overbidding in second price auctions an experimental study we present results from second price private value auction spa experiments where bidders may receive noisy signals about their opponentsvalue such signals change biddersperception about the strengthof their opponent and the relationship between biddersperception of their opponent and overbidding provides a novel channel to understand overbidding in spa we found that small and medium overbids are more likely to occur when bidders perceive their rivals to have similar values supporting a modifiedjoy of winninghypothesis but large overbids are more likely to occur when bidders believe their opponents to have much higher values consistent with thespite hypothesis second price private value auctions spas are the most easily understood auction format from a theoretical point of view 1 in standard private value auction models of fully rational bidders with standard preferences bidding one s own value is a weakly dominant strategy this theoretical prediction holds irrespective of biddersrisk atti tudes the number of rival bidders symmetry in the value distributions and so on in laboratory experiments however subjects are found to exhibit a consistent pattern of overbidding kagel et al 1987 found that the actual bids are on average 11 above the dominant strategy bids kagel and levin 1993 found that about 62 of all bids in their five bidder spa sessions exceed the bidder s value while only 8 of all bids were below it both kagel and levin 1993 and harstad 2000 further reported that experience has only a small effect in reducing overbidding in spa an important related finding is that overbidding in english auctions a mechanism that is strategically equivalent to the spa in the case of private values is known to be a short term phenomenon that subjects quickly learn not to undertake kagel and levin 1993 thus any explanation for the prevalence and persistence of overbidding in the spa must also explain its rarity in the english auction given the robustness of the findings of overbidding in spa it is surprising that economists have little understanding of why it happens kagel et al 1987 conjectured that bidding above one s own value in a spa is based on the illusion that it improves the probability of winning with little cost because the winner only pays the second highest bid 2 moreover they argue that overbidding is sustainable because bidders still on average earn positive profits and because the negative feedback from overbidding is a weak mechanism in the spa for example if a bidder overbids in a spa by 10 above her value it is quite possible that she does not win at all and thus does not experience

scale effects in multi unit auctions abstract we argue that auctions with multi unit demand can be used to experimentally conduct new and novel tests of auction theory the focus of the paper is on changes in bidding behavior as the auction is scaled up by adding more bidders and increasing both the demand per bidder and supply of the auctioned good we identify uniquely tractable environments and obtain clear cut theoretical comparative statics in these settings this leads to the construction of uniform price auctions of different scales where the prediction is that risk neutral bidders bids on the last unit they demand are independent of scale in our experiment bidders on average bid much more aggressively than predicted by theory there is also evidence of a scale effect with more aggressive bidding in the small scale treatment compared to the large scale treatment it is argued that these features are consistent with joy of winning and anticipated regret

independent private value auctions bidder behaviour in first second and third price auctions with varying numbers of bidders the symmetric equilibrium of third price auctions is characterized it makes a number of contrasting predictions relative to firms and second price auctions bids exceed private values the marginal effects on bids of an increase in private values is greater than one increasing numbers of bidders reduces bids and risk aversion requires bidding below the risk neutral nash equilibrium in the experiment bidders do not always satisfy the point predictions of the theory however the game theoretic models correctly anticipate at least directionally the important effects of the price rule changes copyright 1993 by royal economic society

carbon pricing carbon sequestration and social discounting abstract this paper studies the optimal taxation of carbon emissions in a dynastic economy when the welfare function places direct pareto weights on unborn generations the social discount rate is lower than the discount rate of the current generation i show that this welfare criterion has important consequences for the structure of the optimal regulatory system in particular i show that i the optimal carbon tax does not in general equal the social cost of carbon ii a subsidy on oil reserves is sometimes optimal and iii carbon trading programs should limit the award of carbon offset allowances

portfolio behaviour in a flow of funds model for the household sector in india we estimate a flow of funds model for the household sector in india within the almost ideal demand system aids framework and examine the demand for money and the substitution effects between money and other financial assets the restricted long run model obtained using cointegration techniques provides stable equilibrium relationship between i 1 variables and broadly satisfies the axioms of rational choice in consumer demand theory we find that financial sector reform exerts a significant impact on the interest rate structure and household portfolio preferences specifically there is strong substitutability among risk free assets and a possible speculative effect in the stock market while the exchange rate strongly influences the demand for money these findings all have important policy implications

international spillovers productivity growth and openness in thailand an intertemporal general equilibrium analysis thailand has experienced economic growth well above world averages for about 40 years it is a challenge to understand the sources of this high growth path and in particular why growth has not slowed down with assumed decreasing returns to capital we develop an intertemporal general equilbrium model separating between agriculture and industry and with open capital market and endogenous productivity growth to analyze the underlying adjustment mechanisms foreign technology spillover embodied in trade is assumed to be the driving force of the productivity growth consistent with available econometric evidence the high growth experience is understood as a transition path with interaction between productivity growth openness and capital investment counterfactual analysis shows how protection may have had serious detrimental effect on growth rate due to productivity and investment slowdown the role of relative prices in constraining growth is investigated inspired by the acemoglu ventura hypothesis of growth slowdown due to terms of trade effect in our setting low elasticity between domestic and exports goods in supply leads to large relative price shifts for domestic goods but promotes investment and growth during transition

a critical appraisal of mckinnon s complementarity hypothesis does the real rate of return on money matter for investment in developing countries this is the post print version of the final paper published in world development the published article is available from the link below changes resulting from the publishing process such as peer review editing corrections structural formatting and other quality control mechanisms may not be reflected in this document changes may have been made to this work since it was submitted for publication copyright 2009 elsevier b v

the political economy of environmental policy with overlapping generations a two sector overlapping generations model illuminates the intergenerational effects of a tax that protects an environmental stock a traded asset capitalizes the economic returns to future tax induced environmental improvements benefiting the current asset owners the old generation absent a transfer the tax harms the young generation by decreasing their real wage future generations benefit from the tax induced improvement in environmental stock the principal intergenerational conflict arising from the tax is between generations alive at the time society imposes the policy not between generations alive at different times a pareto improving tax can be implemented under various political economy settings

buy coal a case for supply side environmental policy free riding is at the core of environmental problems if a climate coalition reduces its emissions world prices change and nonparticipants typically emit more they may also extract the dirtiest type of fossil fuel and invest too little in green technology the coalition s second best policy distorts trade and is not time consistent however suppose that the countries can trade the rights to exploit fossil fuel deposits as soon as the market clears the above mentioned problems vanish and the first best is implemented in short the coalition s best policy is to simply buy foreign deposits and conserve them

financial liberalisation stockmarkets and economic development abstract during the 1980s and 1990s many developing countries dcs have been engaged in far reaching reforms of their financial systems liberalising them and making them more market oriented this liberalisation involving inter alia financial de repression has been inspired partly by the work of the mckinnon 1973 and shaw 1973 m s school this paper suggests that in addition to financial de repression there has been a major new element in the development of dc financial systems in recent years the establishment and fast expansion of stockmarkets these markets have played a key role in the internal as well as external financial liberalisation processes in leading dcs further the paper finds that the actual behaviour of these markets in many countries has led to outcomes which undermine the effects of the higher real interest rates arising from financial de repression

the effects of financial liberalization on savings and investment in uruguay the following sections are included introductionfinancial reforms financial deepening and financial crisisstylized outcomes savings investment and growthfinancial liberalization savings and investmentfinancial resource allocation at the micro levelconclusions

financial liberalization in india and a new test of the complementarity hypothesis abstract this article reappraises the financial repression hypothesis for india in light of the partial liberalization of the financial sector in the early 1990s using for the first time state of the art multivariate cointegration and vector error correction models vecm from this more robust testing procedure we find that for the indian economy over the sample period 1951 99 money and capital are complementary suggesting that higher real interest rates will further raise the demand for money and lead to higher levels of investment furthermore testing for a structural break in the early 1990s to coincide with the liberalization of the financial sector in india suggests that these reforms have not significantly changed the complementary relationship between money and capital the policy implication is that further financial liberalization maybe required in india to enhance investment and economic growth

opportunity and social mobility the fact that the children of rich parents have better economic prospects than the children of poor parents unequal opportunity is generally thought to be one of the weak points of modem capitalist societies the ability of the descendants of poor families to eventually become rich and the descendants of rich families to eventually become poor social mobility is commonly considered to be one of the strong points of these societies here i argue that both of these characteristics are in fact necessary implications of an efficient societal arrangement when incentives to work hard must be provided i argue this point using a generational version of the model of phelan and townsend 1991 an infinitely repeated general equilibrium economy with incentive constraints in my model each household s stochastic output is a function of its level of effort since effort is assumed to be costly and privately observed households can shirk higher than minimal effort levels must be induced by making a household s present or future consumption dependent on the household s observed output history a large literature considers models similar to this including green 1987 atkeson and lucas 1992 phelan 1994 1995 wang 1995 hopenhayn and nicolini 1997 khan and ravikumar 2002 the main difference between the economies in that literature and here is that here instead of a household consisting of a single infinitely lived individual a household consists of a sequence of altruistically linked individuals a familial dynasty each of whom lives for one period this difference affects the appropriate societal ranking of allocations when households consist of a single infinitely lived individual allocations can be ranked according to their implied distributions of ex ante lifetime utilities if one allocation delivers a distribution of ex ante utilities dominated by another allocation then the first allocation is inefficient however if a household consists of a sequence of altruistically linked individuals then the appropriate ranking of allocations is no longer obvious how those in the first generation rank allocations will in general differ from how their descendants rank allocations this paper addresses this conflict between generations by ranking allocations according to a rawlsian veil of ignorance criterion rawls 1971 that is here society seeks to maximize the expected dynastic utility utility including altruism toward descendants of an individual who does not know into which generation he will be born and the identity or output levels of his ancestors 1 i argue that this corresponds to a societal ranking which does

money and capital in economic development a test of the mckinnon hypothesis for nepal note in an important book mckinnon 1973 offered the hypothesis that in developing countries the demand for money broadly defined is complementary to the demand for physical capital the hypothesis is derived from an outside money model in which economic units are constrained to self finance and there are considerable indivisibilities in investment a much quoted empirical study by fry 1978 and published in this journal contrasted the transmission mechanism in mckinnon s model with that of shaw s 1973 debt intermediation model using pooled data from ten asian countries fry tested the demand for money functions implicit in each model and found that the evidence favored shaw s approach fry conceded that his sample included countries in which financial development had proceeded to such an advanced stage that modern financial assets other than broad money might be used as repositories of funds being accumulated for the purpose of eventual real investment he concluded that it would be necessary to look much farther down the development ladder to some of the world s least developed countries in a search for complementarity p 474 subsequently molho 1986 has stressed the intertemporal nature of complementarity to argue that the mckinnon and shaw approaches need not be considered mutually exclusive this occurs because most projects are financed in part with own funds and in part from borrowed funds thus there is contemporaneous substitutability between deposits and physical capital but intertemporal complementarity with current deposits intended to finance future investment while this may be a realistic adaption of the mckinnon model as fry 1988 points out it requires the model to be interpreted as an inside money model in which there are borrowing constraints and indivisibilities that prevent some investors from borrowing all they wish to borrow for lumpy investments and this is not consistent with mckinnon s own statement of his model in this note therefore we report the results of a test of the complementarity hypothesis on data for nepal

auctions with anticipated regret theory and experiment this paper demonstrates theoretically and experimentally that in first price auctions overbidding with respect to the risk neutral nash equilibrium might be driven from anticipated loser regret felt when bidders lose at an affordable price different information structures are created to elicit regret bidders know they will learn the winning bid if they lose loser regret condition or the second highest bid if they win winner regret condition or they will receive no feedback regarding the other bids bidders in loser regret condition anticipated regret and significantly overbid however bidders in the winner regret condition did not anticipate regret jel d44

a review of the stern review on the economics of climate change the stern review calls for immediate decisive action to stabilize greenhouse gases because the benefits of strong early action on climate change outweighs the costs the economic analysis supporting this conclusion consists mostly of two basic strands the first strand is a formal aggregative model that relies for its conclusions primari ly upon imposing a very low discount rate concerning this discount rate aspect i am skeptical of the review s formal analysis but this essay points out that we are actual ly a lot less sure about what interest rate should be used for discounting climate change than is commonly acknowledged the review s second basic strand is a more intuitive argument that it might be very important to avoid possibly large uncertain ties that are difficult to quantify concerning this uncertainty aspect i argue that it might be recast into sound analytical reasoning that might justify some of the review s conclusions the basic issue here is that spending money to slow global warming should perhaps not be conceptualized primarily as being about consump tion smoothing as much as being about how much insurance to buy to offset the small change of a ruinous catastrophe that is difficult to compensate by ordinary savings

obviously strategy proof mechanisms what makes some strategy proof mechanisms easier to understand than others to address this question i propose a new solution concept a mechanism is obviously strategy proof osp if it has an equilibrium in obviously dominant strategies this has a behavioral interpretation a strategy is obviously dominant if and only if a cognitively limited agent can recognize it as weakly dominant it also has a classical interpretation a choice rule is osp implementable if and only if it can be carried out by a social planner under a particular regime of partial commitment i fully characterize the set of osp mechanisms in a canonical setting with one dimensional types and transfers a laboratory experiment tests and corroborates the theory

financial deregulation and segmented capital markets the case of korea abstract this paper deals with the relation between the official and the unregulated or curb segments of the capital market in korea the paper focuses on the behavior of officially controlled interest rates paid on time deposits and on freely determined curb market interest rates the effects of financial deregulation on interest rates investment and growth are investigated it is argued that under some plausible circumstances financial deregulation can generate significant crowding out in the curb market reducing the total degree of financial intermediation the empirical results provide some support to the crowding out hypothesis and indicate that changes in the officially controlled time deposit rate have been positively related to changes in the freely determined curb market interest rate an aggregate investment function is also estimated for korea it is found that an increase decrease in the curb rate discourages encourages investment on the other hand increases in the real volume of credit intermediate in the official segment have a positive effect on real aggregate investment

does financial liberalization really improve private investment in developing countries assuming that liquidity constraints exist in most developing countries the majority of analysts believe that increasing real interest rates will raise the volume of lending and hence private investment the author focusing on the demand for capital goods argues that the positive effect on the domestic credit market may be offset by the negative effect of a portfolio shift from capital goods and public bonds into monetary assets the author also demonstrates that a policy of financial liberalization could increase the public sector s demand for domestic credit thus limiting the funds available to the private sector this crowding out does not result from a change in the government s behavior but from a shift in the portfolio of private agents higher demand for bank deposits reduces the private sector s willingness to hold government bonds so the public sector must finance a given budget deficit with more domestic credit simulations for argentina for 1961 1982 suggest that the low response of private investors to changes in interest rate policy in those 20 years was attributable not to the low values of interest elasticities but to the interaction of the mechanisms allowed for in the model which tends to neutralize the impact of such policies the author concludes that the effect of changes in interest rate policy on the demand for capital goods is weak in argentina and might affect the quality of private investment more than its quantity

optimal abatement of carbon emission flows we study optimal carbon capture and storage ccs from point sources taking into account damages incurred from the accumulation of carbon in the atmosphere and exhaustibility of fossil fuel reserves high carbon concentrations call for full ccs meaning zero net emissions we identify conditions under which partial or no ccs is optimal in the absence of ccs the co2 stock might be inverted u shaped with ccs more complicated behavior may arise it can be optimal to have full capture initially yielding a decreasing stock then partial capture while keeping the co2 stock constant and a final phase without capture but with an inverted u shaped co2 stock we also introduce the option of adaptation and provide a unified theory regarding the optimal use of ccs and adaptation

foreign aid and economic growth the role of flexible labor supply this paper examines the link between foreign aid economic growth and welfare in a small open economy external transfers impinge on the recipient s macroeconomic performance by affecting resource allocation decisions and relative prices the endogeneity of the labor leisure choice plays a crucial role in the propagation of foreign aid shocks the efficacy of foreign aid also depends on externalities associated with the public good that it helps finance the impact of tied and untied aid on the recipient government s intertemporal fiscal balance is examined finally the transitional adjustment to a foreign aid shock is shown to be sensitive to the elasticity of substitution in production and the relative importance of the labor leisure choice in utility

a review of the stern review on the economics of climate change how much and how fast should we react to the threat of global warming the stern review argues that the damages from climate change are large and that nations should undertake sharp and immediate reductions in greenhouse gas emissions an examination of the review s radical revision of the economics of climate change finds however that it depends decisively on the assumption of a near zero time discount rate combined with a specific utility function the review s unambiguous conclusions about the need for extreme immediate action will not survive the substitution of assumptions that are consistent with today s marketplace real interest rates and savings rates

monetization financial liberalization and economic development barter sector in 1954 55 the monetized sector contributed 69 to the net national product of india the share of the monetized sector increased to 78 6 of the net national product by 1974 75 during this period the explicit objective of monetary policy in india was to help accelerate the pace of economic development in an environment of reasonable price stability there are several versions of the financial liberalization hypothesis but the one put forward by ronald mckinnon is chosen here because of its succinctness and easy amenability to empirical verification 2 mckinnon s theory in essence deals with the effect of financial liberalization on the accumulation of capital through a policy of high real interest rates this formulation has been made operational by estimating the response of real demand for money balances and private investment to alternative rates of return under the implicit assumption that these are the only two alternative forms of assets held by the private sector 3 all this is predicated on the assumption that the effective limitation on the rate of real capital formation is the supply of real savings and not the inadequate willingness to invest most underdeveloped countries have a significant barter sector a reduction in the share of the barter sector can help to further accelerate the accumulation of capital in a barter system a good share of the factors of production is tied up in distribution away from production to achieve the double coincidence required in such a system with the