statehood democracy and preindustrial development this paper proposes a growth model linking state history to economic development it considers three state systems non statehood authoritarian statehood and democratic statehood these differ in the way a public good is provided which in turn determines growth rates under certain assumptions democratic states grow faster than authoritarian ones which in turn grow faster than non states all societies start with non statehood and transition into authoritarian statehood at some point but the timing is random when later given the opportunity only those societies that transitioned relatively recently to authoritarian statehood transition to democracy when they do they begin to grow faster eventually overtaking older and still authoritarian states this generates an inversely u shaped cross sectional relationship between development and state history consistent with modern cross country data

public regulation of agricultural biotechnology field tests economic implications of alternative approaches federal oversight of agricultural biotechnology field testing is based on public concerns that unknown consequences could arise from such tests and that firms may not adequately consider the public consequences of their research and development activities in this paper four general types of ex ante and ex post approaches to manage public risks from field testing are explored the analysis shows that the approaches are least effective at facilitating the research process yet controlling public risks when the research firm is small in size and potential damages exceed the value of the firm

some evidence on lump sum versus convex costs of changing prices 2 two models in which price stickiness results from price adjustment costs are tested one an s s pricing model assumes lump sum adjustment costs and predicts firms will make relatively large infrequent price changes the other assumes convex adjustment costs and predicts frequent partial price adjustments survey data of firms price behavior reveal patterns consistent with the s s model however many of the patterns are also consistent with partial adjustment rules although the high percentage of firms which fix prices for a quarter or more casts doubt on the plausibility of the partialadjustment hypothesis i introduction in new keynesian economics price stickiness arises not because of wage rigidity so much as because either the gains to individual firms from changing prices are negligible or the costs of doing so deter full and immediate price changes as a result nominal shocks which affect demand for the firm s product as well as real shocks give rise to changes in output the nature and the timing of the effects of demand changes such as those initiated by monetary policy thus depend on how individual firms respond to the signals they receive sticky price models based on costs of price adjustment take at least two different forms one assumes a lump sum cost to changing prices which leads to predictions that firms generally keep prices fixed and make infrequent relatively large price changes the other assumes convex adjustment costs and leads to the prediction that firms make relatively small and frequent partial adjustments toward a target level evidence drawn from a series of surveys conducted by the national federation of independent business will be used to test the predictions from these two types of models while the data do not allow a definitive test between the two models the available evidence supports the model with lump sum costs of changing prices with the important proviso that there be substantial heterogeneity in the relative costs to firms of making price changes so that the frequency and size of changes vary considerably across firms ii s s rules with lump sum costs of price changes how frequently should a firm change its price when a change takes place how large should it be sheshinski and weiss 1977 and barro 1972 provided the first answers to these questions in their models an individual firm incurs a lump sum cost when changing its nominal price and the firm s profits depend on its real price where real price is defined as the firm s nominal price divided by an index of the prices of all other firms in the economy sheshinski and weiss assume that the firm tries to maximize the present value of its real profits their solution amounts to what is known in the optimal inventory literature as an s s rule in which s s units are ordered when stocks run down to s as applied to a pricing rule when prices rise elsewhere in the economy the firm s real price falls to a lower bound s at which point the firm raises its nominal price so that its real price jumps to s they prove that a more rapid general inflation rate calls for a lower s and higher s furthermore subject to a monotonicity condition a higher general inflation rate calls for a shorter time between price changes after showing a number of numerical examples sheshinski and weiss report that numerical experiments with a quadratic profit function give high intervals between price changes 1 2 years even with very low adjustment costs 1977 300 when the profit function is flat in the neighborhood of the profit maximizing real price there is little benefit from changing price a similar argument appears in the menu cost explanation for real effects of nominal disturbances in the absence of private incentives for individual price changes there may be real aggregate effects of nominal disturbances for example see mankiw 1985 akerlof and yellen 1985 kuran 1986 blanchard and kiyotaki 1987

post 1500 population flows and the long run determinants of economic growth and inequality we construct a matrix showing the share of the year 2000 population in every country that is descended from people in different source countries in the year 1500 using this matrix we analyze how post 1500 migration has influenced the level of gdp per capita and within country income inequality in the world today indicators of early development such as early state history and the timing of transition to agriculture have much better predictive power for current gdp when one looks at the ancestors of the people who currently live in a country than when one considers the history on that country s territory without adjusting for migration measures of the ethnic or linguistic heterogeneity of a country s current population do not predict income inequality as well as measures of the ethnic or linguistic heterogeneity of the current population s ancestors an even better predictor of current inequality in a country is the variance of early development history of the country s inhabitants with ethnic groups originating in regions having longer histories of agriculture and organized states tending to be at the upper end of a country s income distribution however high within country variance of early development also predicts higher income per capita holding constant the average level of early development

early starts reversals and catch up in the process of economic development early states like china and india have been experiencing more rapid economic growth in recent decades we show that more rapid growth by early starters has been the norm in economic history and that the reversal of fortune associated with the european overseas expansion was both exceptional and temporary not only was the post 1500 reversal in the process of being reversed after 1960 but also the advantage conferred by early development in the latter period was considerably greater than the growth rate disadvantage that it conferred during 1500 1960 implying a rapid undoing of the first reversal

why did the elites extend the suffrage democracy and the scope of government with an application to britain s age of reform a new rationale is presented for why an elite may want to expand the franchise even in the absence of threats to the established order expanding the franchise can turn politicians away from particularistic politics based on ad personam redistribution within the elite and foster competition based on programs with diffuse benefits if these programs are valuable a majority of the elite votes in favor of an extension of the franchise despite the absence of a threat from the disenfranchised we argue that the evolution of public spending and of political competition in nineteenth century britain is consistent with our model i introduction at the beginning of the nineteenth century in most countries narrow elites had a disproportionate influence on public affairs even in england where parliament was an influential institution suffrage was mostly the privilege of the wealthy and some members of parliament were elected in boroughs with as few as 100 voters while cities such as manchester did not have any representative a century later most western countries had universal male suffrage with female suffrage to arrive shortly thereafter what brought about this democratic revolution in many cases the elites were forced out of power after violent revolutions however there are important examples such as england where democratization took the form of gradual extensions of the suffrage and these were accompanied by little overt violence it is the peculiar pride of england that the record of social and political reform is to be found on the statute book not in the annals of revolution cheyney 1931 p vii such peaceful democratizations are difficult to rationalize within the benchmark political economic models in those models extending the franchise dilutes the elite s power to influence policy and results

are prices too sticky nominal price rigidity has a negative externality rigidity in one firm s price increases the variability of aggregate real spending which harms all firms this paper investigates whether this externality is large which would imply that stabilization policy can be highly beneficial even if the costs of making prices flexible are small there are three conclusions first both the private cost of price rigidity and the externality are second order in the size of fluctuations second the externality can nonetheless be arbitrarily large third in a simple model the externality is small for plausible parameter values

long run cultural divergence evidence from the neolithic revolution this paper investigates the long run influence of the neolithic revolution on contemporary cultural norms as reflected in the dimension of collectivism individualism we present a theory of agricultural origins of cultural divergence where we claim that the advent of farming in a core region was characterized by collectivist values and eventually triggered the out migration of individualistic farmers towards more and more peripheral areas this migration pattern caused the initial cultural divergence which remained persistent over generations using detailed data on the date of adoption of neolithic agriculture among western regions and countries the empirical findings show that the regions which adopted agriculture early also value obedience more and feel less in control of their lives the findings add to the literature by suggesting the possibility of extremely long lasting norms and beliefs influencing today s socioeconomic outcomes

the origins of state capacity property rights taxation and politics economists generally assume that the state has sufficient institutional capacity to support markets and levy taxes this paper develops a framework where policy choices in market regulation and taxation are constrained by past investments in legal and fiscal capacity it studies the economic and political determinants of such investments demonstrating that legal and fiscal capacity are typically complements the results show that among other things common interest public goods such as fighting external wars as well as political stability and inclusive political institutions are conducive to building state capacity some correlations in cross country data are consistent with the theory

environmental policy based on strict liability implications of uncertainty and bankruptcy a firm level model is developed to analyze the impacts of bankruptcy and uncertain firm wealth on incentives for safety under a strict liability rule future damages and wealth are uncertain and a firm s income earning activities that possibly create damages are incorporated into the model this analysis shows that firms do not always undertake more of a risky activity than is socially desirable for the extremely hazardous industry case larger firms always undertake less of a risky activity than smaller firms for the cyclical industry case larger firms do not always conduct less of a risky activity than smaller firms

what drives the historical formation and persistent development of territorial states the importance of the length of state history for understanding variations in income levels and growth rates across countries has received a lot of attention in the recent literature on long run comparative development the literature however is silent about its origins this paper explores the determinants of statehood by considering the potential roles of an early transition to fully fledged agricultural production the adoption of state of the art military innovations and the opportunity for economic interaction with the regional economic leader the results demonstrate that only the association between economic interaction and the rise and development of the state is statistically robust

why are prices sticky preliminary results from an interview study this paper reports preliminary results from a large research project on business pricing which is currently underway the idea is to use interviews with actual price setters to assess the validity of a dozen theories of price stickiness the rather unorthodox for economists methodology is defended the research design is described briefly and a few results based on the first 72 interviews out of a projected 200 are presented this sample suggests that the median firm changes its price annually and that price adjustments typically lag 3 4 months behind shocks to demand or cost this abstract was borrowed from another version of this item

stochastic inflation and the optimal policy of price adjustment this paper analyzes the optimal policy of price adjustment for a monopolistic firm in the presence of stochastic inflation it shows that an increase in the expected rate of inflation or in the cost of price adjustment leads to an increase in the initial real price and a decrease in the terminal real price in each period with a fixed nominal price it also shows that the effects of increased riskiness of inflation are ambiguous

incentives to diffuse advanced abatement technology under environmental liability law polluting firms with advanced abatement technology at their disposal have incentives or disincentives to share this technology with other polluting firms the direction and extent of those incentives depends on the liability rule applicable and the way technical change impacts marginal abatement costs we establish that incentives for diffusion are socially optimal under strict liability and socially suboptimal under negligence if technical change lowers marginal abatement costs for all levels of abatement negligence may however induce better diffusion incentives than strict liability if technical change decreases increases marginal abatement costs for low high levels of abatement

property transfers and environmental pollution incentive effects of alternative policies this paper considers how trans ferring some or all future responsibility for cleanup of a contaminated site affects the cur rent owner s incentives to reduce contamina tion given that he anticipates selling his prop erty in the future the results depend on the probabilities that the parties will be judgment proof the distribution of surplus and whether there is joint and several liability contrary to popular belief we show that transferring liabil ity can actually increase the seller s incentive to invest in pollution abatement furthermore abatement incentives are at least as great and generally greater with joint and several liability than without it jel q2

endogenous institutions and political extremism abstract the election of extreme political leaders is often associated with changes in political institutions this paper studies these phenomena through a model in which the median voter elects a leader anticipating that he will impose institutional constraints such as constitutional amendments judicial appointments or the implicit threat of a coup that influence the behavior of future political challengers it is typically optimal for the median voter to elect an extreme incumbent when democracy is less fully consolidated when the costs of imposing institutional constraints are intermediate and when the distribution of potential challengers is asymmetric the median voter typically elects a more right wing incumbent when the distribution of potential challengers shifts to the left implications of the model for the consolidation of democracy and institutional constraints are discussed as are several related mechanisms through which politicians ability to affect institutions may lead voters to optimally elect extremists

regulatory schemes and self protective environmental risk control a comparison of insurance liability and deposit refund systems abstract there has been an increasing interest in considering non traditional regulatory instruments for control of environmental risks traditional regulation has relied on liability in various forms after risky events have actually occurred there is concern that traditional instruments do not provide adequate signals to firms regarding social costs of risks this paper considers two important alternatives to traditional liability instruments insurance and deposit refund systems the purpose of the paper is to determine whether there is any theoretical superiority of these non traditional instruments in controlling environmental risk and safety a relatively simple model designed to capture the essential features of liability insurance and deposit refund instruments is developed and used to compare the resulting control levels under pure risk and pure uncertainty the paper shows how risk aversion limited liability afforded through bankruptcy and differences between social and private discount rates can affect the ranking of control levels under each of the three primary instruments the paper shows that under reasonable assumptions deposit refund systems such as input or discharge deposits or performance bonds will result in higher levels of controls than the other instruments results also suggest that it may be necessary to tailor regulatory instruments to specific firm situations such as requiring deposits from small firms in competitive industries

the compensation regime in liability law incentives to curb environmental harm ex ante and ex post this paper analyzes private incentives for precautions against environmental harm before accidents occur and for clean up after the fact we consider the compensatory regimes used in various jurisdictions which differ in terms of the basis for compensation the level of harm clean up costs or some combination of the two and the resulting levels of compensation we establish that socially optimal decisions are usually not induced by liability law in any of the compensatory regimes however the different types and levels of compensation have distinct effects allowing the policy maker to identify the most appropriate regime for specific circumstances

dynamic stability and reform of political institutions abstract this paper examines endogenous institutional change in a class of dynamic political games the political aggregation rules used at date t 1 are instrumental choices under rules at date t effectively rules are players who can strategically delegate future policy making authority to different rules a political rule is stable if it selects itself a reform occurs when an alternative rule is selected the stability of a political rule is shown to depend on whether its choices are dynamically consistent for instance simple majority rules can be shown to be dynamically consistent in many common environments where wealth weighted voting rules are not the result extends to political rules that incorporate private activities such as extra legal protests threats or private investment the approach is one way of understanding various explanations of institutional change proposed in the literature a parametric model of public goods provision gives an illustration

a theory of constitutional standards and civil liberty why would potentially intolerant majorities in a democracy protect the rights of unpopular groups this paper models the formation of legal standards that determine the extent of civil liberty in a society it is shown that tolerant legal standards emerge over time despite all individuals having intolerant preferences each period citizens choose activities that have social consequences a majority vote determines which of these activities are legally protected because of errors in interpreting the symbolic content of these activities voters from the majority will not impose excessively intolerant standards otherwise they may end up severely punishing members of their own group by mistake extending this framework to a dynamic model we examine markovian equilibria of the game when government improves with time in its ability to correctly interpret citizens activities these improvements allow an unchanging majority to impose increasingly intolerant standards over time it is shown that societies with high political turnover due to population changes are apt to choose tolerant legal standards societies with low turnover are more apt to choose more intolerant and unstable ones each group seeks to prevent auditing capabilities of government from improving too much over time in order to prevent future majorities from successfully enforcing more intolerant standards

a near rational model of the business cycle with wage and price inertia this paper presents a model in which insignificantly suboptimal behavior causes aggregate demand shocks to have significant real effects the individual loss to agents with inertial price wage behavior is second order in terms of the parameter describing the shock while the effect on real economic variables is first order thus significant changes in business activity can be generated by anticipated money supply changes provided that some agents are willing to engage in nonmaximizing behavior which results in small losses

on the infrequent adjustment of price by firms i introduction recent research by blinder 1991 indicates that as many as 75 percent of all firms change price no more than twice a year according to the wall street journal these findings seem to have caused considerable surprise 1 there is however nothing unusual about these results infrequent price adjustment by firms can be readily explained by the existence of very small price adjustment or menu costs and the fact that deviations from optimal price adjustment policies often result in negligible reductions in a firm s average rate of profit this paper brings together in a dynamic setting two ingredients in the literature that have previously been linked only in a static framework the small menu cost argument of mankiw 1985 and the near rational argument of akerlof and yellen 1985 numerical examples are used to answer the familiar objection that price adjustment costs are too small to be important the main conclusions of the paper remain valid for a wide variety of plausible parameter values and do not depend on extreme assumptions concerning the flatness of the firm s profit function the basic insight that under imperfect competition first order deviations from optimal behavior imply second order losses was first made by bowley 1924 25 this idea was further developed by akerlof and yellen 1985 since the firm s profit function is flat at its maximum point failure to adjust price in response to small exogenous shocks implies very small losses even if price adjustment is costless if there are some costs associated with changing price a policy of rigid prices in the face of small nominal shocks may be optimal this would seem to provide a micro explanation for sticky prices these ideas are usually expounded in the framework of a static two period model 2 further the conclusions reached are only valid for small deviations from optimal behavior the present paper extends the argument to a dynamic framework of continual inflation and its conclusions are shown to remain valid for large deviations from optimal pricing policies 3 the paper makes two main points first very small price adjustment costs often lead to surprising long intervals between price changes even when the length of this interval is chosen optimally second the loss of profits suffered by the firm when the interval between price changes is much greater than the optimal value is often negligible large deviations from optimal policies typically imply very small losses this is a much stronger claim than the familiar argument that small deviations from optimality imply second order losses and it does not follow from the envelope theorem if a firm adopts a simple rule of say changing price twice a year regardless of the inflation rate it may earn a level of profit practically indistinguishable from that it would earn if it behaved optimally at least for inflation rates experienced in the western democracies since world war ii the standard objection to the menu cost explanation of infrequent price adjustment is that these costs are much too small to explain observed pricing behavior the examples presented below show that this objection can be discounted seemingly trivial price adjustment costs as small as one millionth of the firm s annual revenue can explain price adjustment frequencies as low as once or twice a year at inflation rates of 20 percent per annum and above part of the explanation concerns the flatness of the firm s profit function over a wide range of plausible values of demand and cost parameters profit functions are sufficiently flat to explain observed frequencies of price adjustment even when the interval between price changes is optimal but there is more too it than this large deviations from optimal price adjustment policies imply surprisingly small losses even for profit functions that would never be described as flat in particular the loss in profit caused by large deviations in the interval between price changes from its optimal value are normally very small

environmental liability and privatization in central and eastern europe toward an optimal policy it has been estimated that the costs of remediating contaminated sites in central and eastern europe cee will be very high these contingent environmental liabilities have emerged precisely at the time cee countries are attempting to privatize their capital stocks creating major challenges for privatization agencies it is also generally agreed that an inadequate handling of these liabilities in the past has reduced sales of state owned enterprises in central and eastern europe this paper uses an analytical model to identify optimal policies for minimizing the damage to privatization processes from environmental liabilities policy simulations are conducted which evaluate the effects of the use of liability indemnifications and environmental audits on privatization sales prices and government revenues net of environmental costs the major finding of the paper is that goals to mitigate the effects of environmental liability on privatizations and maximize government net revenues from privatization sales require equivalent environmental liability policies both goals require optimal provision of information and indemnifications to investors and moreover it is found that the two policies are complementary rather than substitutes

environmental research joint ventures under emission taxes the effect of environmentalpolicy depends crucially on the strategicbehavior of firms firms can undertakepollution abatement innovation cooperativelythrough environmental r d joint ventures rjvs environmental rjvs have not onlyenvironmental but also economic impacts threetypes of environmental rjv are discussed inthis paper r d cartelization in which firmschoose r d efforts to maximize the jointprofit rjv competition in which firms sharethe r d fruits to maximize their own profits and rjv cartelization in which firms share r dfruits and maximize the joint profit an r dcartelization minimizes output quantities maximizes the total emission and minimizes thesocial surplus an rjv cartelization with asufficiently high spillover coefficientmaximizes r d efforts minimizes the totalemission and maximizes the social surplus

monopolistic competition and the effects of aggregate demand how important is monopolistic competition to an understanding of the effects of aggregate demand on output we ask the question at three levels can monopolistic competition by itself explain why aggregate demand movements affect output can it together with other imperfections generate effects of aggregate demand in a way that perfect competition cannot if so can it give an accurate account of the response of the economy to aggregate demand movements the answers are no yes and yes

strict liability as a deterrent in toxic waste management empirical evidence from accident and spill data abstract this paper examines whether strict liability imposed on polluters has reduced uncontrolled releases of toxics into the environment we fit regressions relating spills of selected chemicals to the type of liability in force in a state and to state manufacturing activity for some chemicals spills are more numerous in states imposing strict liability this could be due to unobserved state characteristics with small firms being responsible for a disproportionate number of spills regardless of the liability structure alternatively separate regressions for the two liability regimes suggest that only under strict liability are small firms responsible for a disproportionate number of spills

on dynamic compromise abstract most legislatures require the consent of only a simple majority to pass a proposal so why don t legislative outcomes favor only a bare majority we show that compromise can be achieved if legislators are neither too impatient nor too patient and initial allocations are not too unequal the compromise is only sustainable if starting from the unequal allocations there is a possibility of spiraling towards a complete absence of compromise we find that the range of discount factors for which the equilibrium exists increases as the number of legislators increases in this sense compromise is easier in larger legislatures

the making of policy institutionalized or not this paper develops a framework for analyzing different policymaking styles their causes and their consequences in latin america finding that lower institutionalization and greater use of alternative political technologies apts are more likely the lower the cost of using these technologies the higher the potential damage they can cause the lower the wealth of the economy and the more asymmetric the distribution of de jure political power moreover strategic complementarity exists in the use of alternative political technologies for instance bribes by the rich and protests by the poor are likely to be countervailing forces and will both occur in polities with weaker political institutions

keynesian real business cycles in a neoclassical framework abstract simple old fashioned keynesian models of cyclical fluctuations provide a legitimate alternative to neoclassical real business cycle models not only can these models mimic many of the characteristics of actual business cycles the ad hoc behavioral rules on which they are based are vastly simpler and easier to calculate than the often insoluble maximization problems faced by representative agents in neoclassical models in addition these simple rules often imply a negligible loss of utility compared to that achieved when decision rules are derived as solutions to an intertemporal optimization problem as a result even though keynesian models are apparently based on suboptimal behavior by individual agents one cannot assume that these models are dominated by neoclassical alternatives

price adjustment costs and the output inflation trade off when prices are costly to adjust there is a trade off between the rate of inflation and the firm s average level of output this trade off is the result of fully optimizing behaviour by the firm sufficient conditions are developed for inflation to have no effect on output however these conditions are unlikely to be met in practice this suggests that the superneutrality of money hypothesis is incompatible with the type of demand and cost curves normally encountered in economic theory if the discount rate is positive moderate rates of inflation will always lead to higher levels of output

market power in the eco industry polluters incentives under environmental liability law this paper analyzes the output and abatement choices of perfectly competitive downstream polluters who are subject to environmental liability law and procure abatement from an imperfectly competitive eco industry under strict liability polluting firms choose suboptimal abatement but socially optimal output given abatement under negligence with firm specific abatement standards polluting firms choose suboptimal output but socially optimal abatement given output under negligence with industry wide abatement standards the output and abatement choices of most firms are socially suboptimal second best considerations are offered for each case under strict liability negligence these apply to the level of liability the behavioral standard

liability transfers an economic assessment of buyer and lender liability abstract this paper examines the conditions under which it is efficient to transfer liability for contamination of a given piece of property from the seller to the buyer at the time of sale and then for debt financed sales for which there is a foreclosure subsequently to the lender who has financed the purchase we identify two key potential sources of inefficiency which depend on the relative probabilities that the parties will be judgment proof at the time liability is imposed the results suggest that the efficiency effects of liability transfers will depend on the relative magnitudes of these two sources of inefficiency

institutional constraints and the inefficiency in public investments abstract this paper studies limits on executive authority by identifying a dynamic channel through which they interact with policy making the model features two agents one of which becomes the incumbent in each of the two periods and unilaterally decides on investment in a common interest public good targeted pork spending and the future executive constraint while a weak constraint permits an incumbent to enact his desired policies in case of re election the same applies to his opponent in the opposite scenario however this trade off changes with the level of the public good because the agents shared investment interest dominates their conflict over pork spending to a lesser extent as the efficiency gains from investing get exhausted in equilibrium more efficient states of the public good are associated with tighter executive constraints despite the fact that agents share the same preferences over public good consumption equilibrium public good provision is inefficient moreover this inefficiency worsens as the incumbent s re election chances deteriorate these findings shed light on why incumbents facing similar electoral environments make different institutional choices

search price setting and inflation a model of monopolistic competition in an inflationary environment is developed which embodies optimal sequential search price dynamics and entry on the part of consumers and firms respectively equilibrium price strategies are s s these bounds increase continuously with consumer search costs and so does price dispersion indeed the whole equilibrium varies smoothly from the competitive bertrand to the monopolistic diamond 1971 end of the spectrum the latter s paradoxical result is explained as a limiting case where frictions on firms side of the market price adjustment costs but not on buyers search costs tend to zero a positive relationship between smooth and perfectly anticipated inflation and price dispersion or uncertainty is established

why did the west extend the franchise democracy inequality and growth in historical perspective during the nineteenth century most western societies extended voting rights a decision that led to unprecedented redistributive programs we argue that these political reforms can be viewed as strategic decisions by the political elite to prevent widespread social unrest and revolution political transition rather than redistribution under existing political institutions occurs because current transfers do not ensure future transfers while the extension of the franchise changes future political equilibria and acts as a commitment to redistribution our theory also offers a novel explanation for the kuznets curve in many western economies during this period with the fall in inequality following redistribution due to democratization i introduction the nineteenth century was a period of fundamental political reform and unprecedented changes in taxation and redistribution britain for example was transformed from an oligarchy run by an elite to a democracy the franchise was extended in 1832 and then again in 1867 and 1884 transferring voting rights to portions of the society with no previous political representation the decades after the political reforms witnessed radical social reforms increased taxation and the extension of education to the masses moreover as noted by kuznets inequality which was previously increasing started to decline during this period the gini coefficient for income inequality in england and wales had risen from 0 400 in 1823 to 0 627 in 1871 but fell to 0 443 in 1901 two key factors in the reduction in inequality were the increase in the proportion of skilled workers williamson 1985 and the redistribution of income toward the poorer segments of the society for example taxes rose from 8 12 percent of national product in 1867 to 18 8 percent by 1927 and the progressivity of the tax system increased substantially see lindert 1989

risk and incentives in the financing of hazardous waste cleanup abstract this paper evaluates alternative approaches to financing hazardous waste cleanup recognizing that future cleanup costs are not known with certainty and that the choice of a financing approach implies a specific allocation of risk both retroactive and prospective use of different forms of strict liability are considered in the prospective case the standard principal agent paradigm is extended to capture the risk sharing and incentive effects relating to the choice of waste generating inputs the results indicate when a fund used for cleanup should or should not be subrogated

accidents waiting to happen liability policy and toxic pollution releases proponents of environmental policies based on liability assert that strict liability imposed on polluters induces firms to handle hazardous wastes properly we examine unintended pollution releases relating them to the liability imposed on polluters by state mini superfund laws we find that strict liability reduces the frequency and severity of pollution releases but that its effects vary with firm size smaller firms are associated with more pollution releases in states with strict liability suggesting that in these states smaller firms may have specialized in riskier production processes their number however has not necessarily grown in response to the state s liability policy

inflation and efficiency in search markets this paper examines how inflation affects efficiency and output in monopolistically competitive search markets it formalizes the conventional wisdom linking higher inflation price dispersion and increased resources devoted to search it also brings to light the induced exit of arms which reduces rent dissipation but the most important effect of inflation is how it alters the distribution of real transactions prices whether this reduces or promotes efficiency and output is shown to depend critically on preferences and market structure and especially on whether search costs are large or small relative to consumer surplus

limits to environmental bonds abstract bonds have recently been promoted as an alternative tool to control environmental damages particularly in those instances when the innovative activities of a firm have uncertain future impacts under this mechanism a firm would post a bond ex ante forfeiting all or a portion of the bond if its activities harmed environmental resources while the benefits of bonds have been developed there has been little systematic effort to explore their limitations in contrast the labor literature has extensively studied the limits of bonds as a mechanism to prevent worker shirking using insights from this parallel problem this paper explores the limits to environmental bonds focusing on the problems of moral hazard liquidity constraints and legal restrictions each limit offers a challenge to the success of environmental bonds we explore the use of bonds in surface mining and agricultural nonpoint pollution as motivating examples we also consider how other incentive schemes suggested by the labor literature might prove useful in the context of environmental management we consider the labor mechanisms of efficiency wages increasing wage profiles trust funds and rank order tournaments

on inflation and output with costly price changes a simple unifying result we analyze the effect of inflation on the average output of monopolistic firms facing a small fixed cost of changing nominal prices using taylor expansions we derive a general closed form solution for the slope of the long run phillips curve this very simple unifying formula allows us to evaluate and clarify the role of three key factors the asymmetry of the profit function the convexity of the demand function and the discount rate these partial equilibrium effects remain important components of any general equilibrium model with s s pricing this abstract was borrowed from another version of this item

small menu costs and large business cycles a macroeconomic model of monopoly i introduction the conflict between modern neoclassical and traditional keynesian theories of the business cycle centers upon the pricing mechanism in neoclassical models prices are fully flexible they represent the continuous optimization of economic agents and the continuous intersection of supply and demand in keynesian models prices are often assumed to be sticky they do not necessarily equilibrate all markets at all times one of the reasons for the resurgence of the equilibrium approach to macroeconomics has been the absence of a theoretical underpinning for this keynesian price stickiness this note shows that sticky prices can be both privately efficient and socially inefficient the business cycle results from the suboptimal adjustment of prices in response to a demand shock to the extent that policy can stabilize aggregate demand it can mitigate the social loss due to this suboptimal adjustment in some keynesian models prices are simply exogenously fixed 2 in others agents must set their prices in advance of the transaction date the act of altering a posted price is certainly costly these costs include such items as printing new catalogs and informing salesmen of the new price yet these menu costs are small and therefore generally perceived as providing only a weak foundation for these fixed price models however this inference is flawed small menu costs can cause large welfare losses the claim that price adjustment costs are small does not rebut the claim that they are central to understanding economic fluctuations

inflation output and labour productivity when prices are changed infrequently when prices are changed infrequently the effect of inflation on output depends on the form of profit and demand functions this paper provides a general taxonomy at small inflation rates output falls rises stays the same if the demand function is concave convex linear in terms of the log of real price this holds when the frequency of price changes is fixed in case of a catalogue firm as well as when it is chosen optimally in case of a menu cost firm with fixed and variable price adjustments costs with some specifications inflation increases output but reduces labor productivity copyright 1990 by the london school of economics and political science

indivisible toxic torts the economics of joint and several liability cost effective or efficient pollution control has traditionally devoted most of its attention to analyzing the effects of legislative or regulatory policy instruments such as emission taxes or marketable emission permits recent contributions have expanded this focus to include the effects of monitoring and enforcement policies 2 with a few noteworthy exceptions 3 however the role of the court system in general and liability law in particular have not received analytical attention among environmental economists in proportion to their importance in resource allocation

income and democracy existing studies establish a strong cross country correlation between income and democracy but do not control for factors that simultaneously affect both variables we show that controlling for such factors by including country fixed effects removes the statistical association between income per capita and vari ous measures of democracy we present instrumental variables estimates that also show no causal effect of income on democracy the cross country corre lation between income and democracy reflects a positive correlation between changes in income and democracy over the past 500 years this pattern is con sistent with the idea that societies embarked on divergent political economic development paths at certain critical junctures jel d7 e 1

liability for past environmental contamination and privatization this paper examines the role ofliability for past environmental contaminationin the privatization processes of central andeastern europe in particular it establishes alink between a risk averse investor s amount ofinformation regarding the extent of pastenvironmental contamination and its cleanupcosts and the investor s willingness to payfor a particular enterprise i e bid as theinvestor obtains a more precise estimate of theuncertain cleanup costs the investor facesless risk therefore the investor s riskpremium falls and the investor s bid rises this link generates four hypotheses regarding aprivatization agency s responses to theinvestor s knowledge of clean up costs

privatization and contaminated site remediation in central and eastern europe do environmental liability policies matter abstract this paper examines the effects on site remediation decisions after state owned firms have been privatized of providing environmental information to potential investors and undertaking site remediation planning prior to privatization the literature suggests that to minimize distortions created by uncertain environmental problems governments should invest in environmental information for potential investors inventory problems and develop plans for remediation one of the believed benefits is a higher probability of site remediation because with uncertainty resolved potential conflicts after privatization are less likely few countries in central europe which has experienced both environmental problems and privatization on enormous scales have adopted this advice using firm level data empirical analysis is presented which suggests providing only information to investors is insufficient to spur remediation inventorying site contamination and planning remediation prior to privatization is a much more effective measure combining provision of information with remediation planning is found to be the most powerful policy package for encouraging remediation

optimal price dynamics and speculation with a storable good this paper analyzes as a dynamic game the optimal price and storage strategies of respectively a the seller of a storable good who must keep pace with inflation but incurs a cost to changing his price b his customers who speculate on the timing of price adjustments to buy and store just before a unique markov perfect equilibrium is shown to exist and is fully characterized rt generally involves a phase of mixed strategies during which the seller tries to deter speculation by injecting uncertainty into its price dynamics while speculators store in increasing numbers with possibly a final run on the good the stochastic price policies of a large number of such firms are shown to aggregate back to a price index growing at the rate of general inflation in response to which they arose the model thus establishes that a a constant rate of aggregate inflation can at the same time generate and cover up significant uncertainty and social costs at the microeconomic level b speculation can be destabilizing and socially wasteful even in the absence of shocks and imperfect information most importantly they provide a theoretical foundation for the frequently encountered claim that inflation causes price uncertainty