bureaucratic minimal squawk behavior theory and evidence from regulatory agencies this paper develops a model in which a desire to avoid criticism prompts otherwise public spirited bureaucrats to behave inefficiently decisions are taken to keep interest groups quiet and to keep mistakes out of the public eye the policy implications of this minimal squawk behavior are at odds with the view that agencies should be structured to minimize the threat of capture an empirical test using data from us state public utility commissions rejects the capture hypothesis and is consistent with the squawk hypothesis longer puc terms of office are associated with a higher incidence of rate reviews and lower household electricity bills jel d73 l51 l97 l98

limit cycles in intertemporal adjustment models theory and applications this paper starts from well behaved i e concave one state variable optimal control models the crucial feature is that indigenous growth is present the replacement of the control by an adjustment process and presumably penalizing these adjustments may convert stable and only stable fixed point equilibria into limit cycles indeed given positive growth and proper externalities such that discounting exceeds growth one can generate stable limit cycles with ease e g for a separable framework examples from such diverse fields as renewable resources optimal saving and public choice highlight the economic applicability

the inexorable and mysterious tradeoff between inflation and unemployment this paper discusses the short run tradeoff between inflation and unemployment although this tradeoff remains a necessary building block of business cycle theory economists have yet to provide a completely satisfactory explanation for it according to the consensus view among central bankers and monetary economists a contractionary monetary shock raises unemployment at least temporarily and leads to a delayed and gradual fall in inflation standard dynamic models of price adjustment however cannot explain this pattern of responses reconciling the consensus view about the effects of monetary policy with models of price adjustment remains an outstanding puzzle for business cycle theorists several years ago i gave myself a peculiar assignment i decided to try to summarise all of economics in ten simply stated principles the purpose of this task was to introduce students to the economic way of thinking in the first chapter of my textbook principles of economics i figured if god could boil all of moral philosophy down to ten commandments i should be able to do much the same with economic science most of the ten principles i chose were microeconomic and hard to argue with they involved the importance of tradeoffs marginal analysis the benefits of trade market efficiency market failure and so on i allocated the last three principles to macroeconomics the first of these was a country s standard of living depends on its ability to produce goods and services which i viewed as the foundation of all growth theory the second was prices rise when the government prints too much money which i took to be the essence of classical monetary theory the last of my ten principles is the subject of today s lecture society faces a short run tradeoff between inflation and unemployment perhaps not surprisingly this statement turned out to be controversial when my publisher sent out the manuscript for review a few readers objected

unemployment growth and taxation in industrial countries unemployeement and taxes do taxes affect the rate of umemployeement to the layman the upward trend in european unemployment is related to the slowdown of economic growth we argue that the layman s view is correct the increase in european unemployment and the slowdown in economic growth are related because they stem from a common cause an excessively rapid growth in the cost of labour in europe labour costs have gone up for many reasons but one is particularly easy to identify higher taxes on labour if wages are set by strong and decentralized trade unions an increase in labour taxes is shifted onto higher real wages this has two effects first it reduces labour demand and thus creates unemployment secondly as firms substitute capital for labour the marginal product of capital falls over long periods of time this in turn diminishes the incentive to invest and to grow the data strongly support this view according to our estimates the observed rise of 14 percentage points in labour tax rates between 1965 and 1995 in the eu could account for a rise in eu unemployment of roughly 4 percentage points a reduction of the investment share of output of about 3 percentage points and a growth slowdown of about 0 4 percentage points a year francesco daveri and guido tabellini

quality of service efficiency and scale in network industries an analysis of european electricity distribution quality of service qos is of major economic significance in natural monopoly infrastructure industries in this article we present an efficiency analysis of electricity distribution networks from seven european countries we apply the stochastic frontier analysis method to multi output translog input distance function models to estimate cost efficiency and scale economies we show that introducing the quality dimension into the analysis affects estimated efficiency significantly especially that smaller utilities efficiency seems to decrease our results emphasize that qos should be an integrated part of efficiency and economic analysis of regulated natural monopolies

commitment and fairness in a dynamic regulatory relationship this paper considers a multiperiod model of a regulated firm that has stationary private information which may be revealed through performance if it cannot make commitments to future policies the regulator has an incentive to exploit any information the firm reveals and laffont and tirole show that there is no regulatory policy that is separating over any closed interval a fairness arrangement is proposed in which the firm agrees not to quit if in future periods the regulator allows it to earn a nonnegative profit given the type it revealed in earlier periods the properties of such arrangements are studied and an example is presented in which both the firm and the regulator prefer a fairness arrangement to a policy feasible without commitment

real and monetary cycles in models of keynes wicksell type abstract we formulate a descriptive dynamic macroeconomic model of the keynes wicksell type which incorporates goods labour and financial markets the model has well specified budget constraints with respect to the economic agents households firms and government within it we introduce some standard nonlinearities into the goods and labour markets the dynamics of the general model consist of five differential equations we analyse two and three dimensional subcases to show the existence of real and monetary cycles whose interaction will determine the full dynamics we use numerical simulation to study the dynamics of the full model and the impact of various government fiscal and monetary policies

predictable behavior in financial markets some evidence in support of heiner s hypothesis recently ronald heiner 1983 has proposed a theory of predictable behavior which has its roots in what heiner labels a competence difficulty gap hereafter called a c d gap this gap is a measure of the spread between an economic agent s competence to make an optimizing decision and the difficulty of the decision problem heiner argues that as the c d gap widens the agent is increasingly likely to follow rule governed behavior and it is this rule governed behavior that produces observed regularities in economic behavior if there is no c d gap heiner argues that rule governed behavior would disappear and along with it the observed regularities instead unpredictable behavior characterized by constant perturbation would replace predictable behavior furthermore the dynamic properties of heiner s theory are characterized in his words by sudden switching behavior this switching behavior is described as a sudden reversal of previous behavior and a persistent movement in another direction or behavior of a different kind one of the casual or intuitive examples heiner offers for support of his theory is the switching between buying and selling strategies in financial markets resulting in sudden movement in stock prices p 582 this paper explores this idea and argues that there is more than intuitive support for heiner s speculation that in fact the behavior of daily price changes in financial markets conforms better to the prediction of heiner s theory than to standard efficient market theory predictions

a minsky crisis a model is developed to illustrate hyman minsky s financial crisis theories a key assumption is that the level of wealth in the economy is determined mac roeconomically with the value of firms assets responding to the state of confidence as reflected by discounted quasi rents on capital the second assumption is that there is high substitutability between liabilities of firms and money in the public s portfolio a downward shift in anticipated profits leads wealth to contract and the public to shift portfolio preferences toward money interest rates rise leading to further dampening of expected profits and a debt deflation crisis can occur

heterogeneous beliefs and adaptive behaviour in a continuous time asset price model abstract this paper extends the analysis of the seminal work of brock and hommes 1997 brock and hommes 1998 on heterogeneous beliefs and rational routes to randomness in discrete time models to a continuous time model of asset pricing the resulting model characterised mathematically by a system of stochastic delay differential equations provides a unified approach to deal with adaptive behaviour of heterogeneous agents and market stability impact of lagged price used by chartists to form their expectations for the underlying deterministic model we show not only that the result of brock and hommes on rational routes to market instability in discrete time holds in continuous time but also a double edged effect of an increase in lagged price used by the chartists on market stability for the stochastic model we demonstrate that the interaction and boundedly rational behaviour of heterogeneous agents can generate various market phenomena such as bubbles and crashes and replicate stylised facts including volatility clustering and long range dependence in volatility

bubbles crashes and endogenous expectations in experimental spot asset markets1 spot asset trading is studied in an environment in which all investors receive the same dividend from a known probability distribution at the end of each of t 15 or 30 trading periods fourteen of twenty two experiments exhibit price bubbles followed by crashes relative to intrinsic dividend value when traders are experienced this reduces but does not eliminate the probability of a bubble the regression of changes in mean price on lagged excess bids number of bids minus the number of offers in the previous period p pt a f b 1 o l supports the hypothesis that a e d the one period expected value of the dividend and that f 0 where excess bids is a surrogate measure of excess demand arising from homegrown capital gains losses expectations thus when bt 1 o goes to zero we have convergence to rational expectations in the sense of fama 1970 that arbitrage becomes unprofitable the observed bubble phenomenon can also be interpreted as a form of temporary myopia tirole 1982 from which agents learn that capital gains expectations are only temporarily sustainable ultimately inducing common expectations or priors tirole 1982 four of twenty six experiments all using experienced subjects yield outcomes that appear to the chart s eye to converge early to rational expectations although even in these cases we get 0 and small price fluctuations of a few cents that invite scalping

job destruction and propagation of shocks this paper considers propagation of aggregate shocks in a dynamic general equilibrium model with labor market matching and endogenous job destruction cyclical fluctuations in the job destruction rate magnify the output effects of shocks as well as making them much more persistent interactions between capital adjustment and the job destruction rate play an important role in generating persistence propagation effects are shown to be quantitatively substantial when the model is calibrated using job flow data incorporating costly capital adjustment leads to significantly greater propagation

dynamic natural monopoly regulation time inconsistency moral hazard and political environments this paper quantitatively assesses time inconsistency moral hazard and political ideology in monopoly regulation of electricity distribution we specify and estimate a dynamic model of utility regulation featuring investment and moral hazard we find that 1 there is under investment in electricity distribution capital aiming to reduce power outages 2 more conservative political environments have higher regulated returns and 3 more electricity is lost in distribution in more conservative political environments we quantify the value of regulatory commitment in inducing more investment conservative regulators mitigate welfare losses due to time inconsistency but worsen losses from moral hazard

keynesian macroeconomics without the lm curve the is lm model has been a central tool of macroeconomic teaching and practice for over half a century legions of earlier writers have offered criticisms of the model that have become familiar with the passage of time the model lacks microeconomic foundations assumes price stickiness has no role for expectations and simplifies the economy s complexities to a handful of crude aggregate relationships but countless teachers students and policymakers have found the model to be a powerful framework for understanding macroeconomic fluctuations recent developments have created new difficulties for the is lm model although the new difficulties are less profound than the traditional ones they are more likely to be fatal like all models the is lm model is not universal its assumptions and simplifications make it better suited to analyzing some issues than others and to describing some economic environments than others but neither the issues nor the environment of macroeconomic fluctuations are fixed in terms of issues one major change is that the debates between keynesians and monetarists about the relative effectiveness of monetary and fiscal policy that were central to macroeconomics in the 1960s and 1970s now play only a modest role in the analysis of short run fluctuations in terms of the environment one important change is that most central banks including the u s federal reserve now pay little attention to monetary aggregates in conducting policy but the is lm model is particularly well suited to presenting the debates between keynesians and monetarists and one of its basic assumptions is that the central bank targets the money supply in short recent developments work to the disadvantage of is lm this observation suggests that it is time to revisit the question of whether is lm is the best

regulatory risk vertical integration and upstream investment abstract we investigate the impact of regulatory risk on vertical integration and upstream investment by a regulated firm that provides an essential input to downstream competitors regulatory risk reflects uncertainty about the regulator s commitment to a regulatory policy that promotes the regulated firm s noncontractible investment we show that when the regulator sets the regulatory policy after the vertical industry structure has been established some degree of regulatory risk is ex ante socially beneficial regulatory risk makes vertical integration profitable and stimulates high upstream investment at a lower social cost this occurs for moderate costs of high investment and firms small risk aversion our analysis sheds new light on some relevant empirical patterns in vertically related markets

moral hazard incentive contracts and risk evidence from procurement deadlines and late penalties are widely used to incentivize effort tighter deadlines and higher penalties induce higher effort but increase the agent s risk we model how these contract terms affect the work rate and time to completion in a procurement setting characterizing the efficient contract design using new micro level data on minnesota highway construction contracts that includes day by day information on work plans hours worked and delays we find evidence of ex post moral hazard contractors adjust their effort level during the course of the contract in response to unanticipated productivity shocks in a way that is consistent with our theoretical predictions we next build an econometric model that endogenizes the completion time as a function of the contract terms and the productivity shocks and simulate how commuter welfare and contractor costs vary across different terms and shocks accounting for the traffic delays caused by construction switching to a more efficient contract design would increase welfare by 22 5 of the contract value while increasing the standard deviation of contractor costs a measure of risk by less than 1 of the contract value

sticky price models of the business cycle can the contract multiplier solve the persistence problem we construct a quantitative equilibrium model with firms setting prices in a staggered fashion and use it to ask whether monetary shocks can generate business cycle fluctuations these fluctuations include persistent movements in output along with the other defining features of business cycles like volatile investment and smooth consumption we assume that prices are exogenously sticky for a short time persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices much when they can do so we find that for a wide range of parameter values the amount of endogenous stickiness is small thus we find that in a standard quantitative model staggered price setting alone does not generate business cycle fluctuations

an introduction to the wage curve en conomists and policymakers are interested in understanding the forces that determine the level of unemployment and the level of wages this paper describes an empirical discovery made with the help of international microeconometric evidence covering more than a dozen nations about a link between these two variables the connection can be portrayed on a graph with the level of unemployment on the horizontal axis and the level of wages on the vertical axis then the wage curve as shown in figure 1 is a downwardsloping locus this relationship tells us that holding others things constant if a region has a rise in unemployment in a particular year those who live there will have a fall in their wages in that year what does this curve mean how in a field where fully controlled experiments are almost impossible could there be any convincing scientific basis for this wage curve what is the relationship between the wage curve and a phillips curve other than that the curve of figure 1 looks like a phillips curve with the vertical axis mislabeled how does the wage curve fit into existing economic knowledge and is the empirical finding consistent with competitive theory this paper sketches answers to these kinds of questions the discussion draws on our book the wage curve blanchflower and oswald 1994 where the points raised here are investigated more fully it also rests upon work done by other economists whose work is listed in the paper and the bibliography

real wage rigidities and the new keynesian model most central banks perceive a trade off between stabilizing inflation and stabilizing the gap between output and desired output however the standard new keynesian framework implies no such trade off in that framework stabilizing inflation is equivalent to stabilizing the welfare relevant output gap in this paper we argue that this property of the new keynesian framework which we call the divine coincidence is due to a special feature of the model the absence of nontrivial real imperfections we focus on one such real imperfection namely real wage rigidities when the baseline new keynesian model is extended to allow for real wage rigidities the divine coincidence disappears and central banks indeed face a trade off between stabilizing inflation and stabilizing the welfare relevant output gap we show that not only does the extended model have more realistic normative implications but it also has appealing positive properties in particular it provides a natural interpretation for the dynamic inflation unemployment relation found in the data

equilibrium unemployment job flows and inflation dynamics this paper develops a general equilibrium model to explain a set of facts regarding job flows unemployment and inflation dynamics it integrates a theory of equilibrium unemployment into a monetary model with nominal price rigidities the labor market displays matching frictions and endogenous job destruction the model can explain the cyclical behavior of unemployment job creation job destruction and the joint fluctuations of the labor input along both the extensive and the intensive margin conditional on a shock to monetary policy allowing for variation of the labor input at the extensive margin leads to a significantly lower elasticity of marginal costs with respect to output this helps to explain the sluggishness of inflation and the persistence of output after a monetary policy shock

growth empirics a panel data approach a reply research on convergence has indeed proceeded through several stages in the first represented by such works as baumol 1986 convergence was studied under the implicit assumption that all countries of the sample had the same steady state levels of income this notion of convergence later came to be known as absolute convergence in the second stage represented by papers such as barro and sala i martin 1992 and mankiw romer and weil 1992 the concept of conditional convergence was put forward and rigorously defined it was now emphasized that the growth theory did not imply identical steady state levels of income for all countries and that in studying convergence these differences needed to be allowed however differences in steady state levels were considered under the assumption of parametric homogeneity of the underlying production function yet the assumption that all countries have identical production functions and differ only in the value of the variables of this function and not in its parameters was neither appealing nor tenable in the third stage represented by such works as islam 1995 this assumption of strict parametric homogeneity was relaxed and through the use of panel data methodology the aggregate production function was allowed to differ across countries with respect to the productivity shift parameter however this introduction of heterogeneity was still within the general framework of allowing only the steady state level of income to differ across countries and it maintained the assumption that countries shared the same steady state growth rate it is in this latter respect that lee pesaran and smith 1995 and their current comment 1998 on the basis of that work represent a significant change they have extended the use of the panel data method to allow the countries to differ not only with regard to the steady state level but also with respect to the steady state growth rate g when this is done the rate of convergence a according to their maximum likelihood estimation jumps to 0 23 clearly a different estimation method is not the main reason for this substantial increase because when g is

inflation targeting as a monetary policy rule the purpose of the paper is to survey and discuss in ation targeting in the context of monetary policy rules the paper provides a general conceptual discussion of monetary policy rules attempts to clarify the essential characteristics of in ation targeting compares in ation targeting to other monetary policy rules and draws some conclusions for the monetary policy of the european system of central banks jel classi cation e42 e52

a keynes goodwin model of the business cycle abstract the paper puts forward a dynamic is lm model in four state variables representing real balances inflation income distribution and a so called state of confidence local in stability is characterized by high low interest elasticities of money demand also a hopf bifurcation can be shown to exist freezing inflation and distribution makes a mathematical analysis of the main stability mechanisms in the outer regions possible the global dynamics of the full system is studied by means of numerical simulations it gives rise to unique and stable limit cycles lastly a sensitivity analysis inquires into the impact of parameter changes on the main cycle features

unemployment income distribution and debt financed investment in a growth cycle model abstract as recent experience suggests the most significant economic fluctuations are those that combine real and financial factors this paper works out a simple model that couples a version of goodwin s 1967 growth cycle model of real fluctuations with insights drawn from a model of financial fluctuations based on minsky s financial instability hypothesis vercelli 2000 sordi and vercelli 2006 sordi and vercelli 2012 the model suggested substantially modifies that of keen 1995 who combined insights from goodwin and minsky within a model of fluctuating growth in the real part of the model we introduce the possibility of disequilibrium in the goods market and formalize a mechanism of output adjustment based on the conventional dynamic multiplier the model so obtained may exhibit persistent dynamics and provide insights to enable better understanding of the nature of real world fluctuations

unemployment in britain male unemployment in britain has risen from around 2 per cent in the 1950s to around 17 per cent in 1985 see figure 1 the figures are for male unemployment because there is no consistent series for women 1 even more remarkably unemployment has fallen in only three years out of the last twenty 1973 1978 and 1979 to account for this we need a model that explains both changes in the natural or non accelerating inflation rate of unemployment nairu and deviations from it we use a three equation supply side model centred on the labour market this has two main features the first concerns the determination of employment in the short run the labour demand function that we use cuts through the fruitless debate now raging especially in europe as to whether current unemployment is classical or keynesian according to the classical view employment is too high because real wages are too high according to the keynesian view real wages are not binding and unemployment is high because the product market does not clear with prices too high relative to nominal demand the whole debate is set in the framework of perfect competition yet in perfect competition prices are set by impersonal forces and it is not clear what could possibly stop prices clearing the market it is much more reasonable to think of prices as being set by imperfectly competitive firms existing prices being the best they can think of given the demand they face in this context firms demand for labour will depend on both the real product wage and the level of real aggregate demand this is the demand function we estimate and it conforms both to common sense and to the data however this does not imply that employment can be made to grow without limit by pumping up real demand for in the medium term when price surprises are eliminated our model determines three variables employment real wages and real demand on the basis of three equations an employment equation a price equation and a wage equation thus in the medium term there is a natural level of employment and corresponding to this a natural level of real aggregate demand the second key feature of our model concerns the medium term determination of unemployment in the medium term the planned mark up of wages over prices in wage settlements must be consistent with the mark up of prices over wage costs in employers pricing behaviour for if wage setters try to set real product wages higher than is consistent with employers pricing behaviour this generates ever increasing inflation thus the key to understanding unemployment in the medium term is the behaviour of wage setters if events occur that push them towards too high real wages then unemployment has to rise to offset these influences we shall call these influences wage pressure variables or push factors and they are clearly crucial in understanding unemployment the variables here include the social security system employment protection

the formation of price forecasts in experimental markets this study utilizes laboratory experimental methods to evaluate the empirical validity of 1 muthian rational expectations assumptions 2 an adaptive expectations model and 3 an extrapolative expectations model over 5 00 price forecasts from 146 participants in twelve experimental double auction m arkets with a cash reward structure are analyzed the forecasting objective is t hemean price over a sequence of trading periods governed by stationary market parameters the price forecasts are found to be inconsistent with strict muthian rational expectations and the extrapolative modelis not supported by the data however the forecasts generally support the adaptive expectations model copyright 1987 by ohio state university press

debt cycles instability and fiscal rules a godley minsky synthesis wynne godley and hyman minsky were two macroeconomists who saw the crisis coming this paper develops a simple macrodynamic model that synthesises some key perspectives of their analytical frameworks the model incorporates godley s financial balances approach and postulates that private sector s propensity to spend is driven by a stock flow norm the target net private debt to income ratio that changes endogenously via a minsky mechanism it also includes two fiscal rules a maastricht type fiscal rule according to which the fiscal authorities adjust the government expenditures based on a target net government debt ratio and a godley minsky fiscal rule which links government expenditures with private indebtedness following a counter cyclical logic the analysis shows that i the interaction between the propensity to spend and net private indebtedness can generate cycles and instability ii instability is more likely when the propensity to spend responds strongly to deviations from the stock flow norm and when the expectations that determine the stock flow norm are highly sensitive to the economic cycle iii the maastricht type fiscal rule is destabilising while the godley minsky fiscal rule is stabilising iv the paradox of debt can apply both to the private sector and the government sector

the role of shocks and institutions in the rise of european unemployment the aggregate evidence two key facts about european unemployment must be explained the rise in unemployment since the 1960s and the heterogeneity of individual country experiences while adverse shocks can potentially explain much of the rise in unemployment there is insufficient heterogeneity in these shocks to explain cross country differences alternatively while explanations focusing on labour market institutions explain current heterogeneity well many of these institutions pre date the rise in unemployment based on a panel of institutions and shocks for 20 oecd nations since 1960 we find that the interaction between shocks and institutions is crucial to explaining both stylised facts

economic information versus quality variation in cross country data data quality in the penn world tables varies systematically across countries that have different growth rates and are at different stages of economic development thus intro ducing measurement error correlated with variables of economic interest we explore this problem with three examples from the literature showing that the problem appears to be minor in growth convergence regressions but serious in estimating the effect of income volatility on growth and in a cross country lest of the permanent income hypothesis the results suggest at the least a need for performing appropriate sensitivity tests before draw

determinants and costs of current account reversals under heterogeneity and serial correlation using large panel data sets for analysis of determinants and costs of reversals asks for controls of latent heterogeneity among countries this article performs a bayesian analysis which allows for a parsimonious yet flexible handling of country specific heterogeneity via random coefficients and serially correlated errors consideration of persistence within the employed macroeconomic data is important to gauge the impact of explaining variables suggested by theory correctly bayesian specification tests provide evidence in favour of models incorporating heterogeneity and serial correlation the results suggest that costs of reversals are overestimated when country specific heterogeneity is neglected and stress the importance of external variables in explaining current account reversals results are checked for robustness against the underlying reversal definition

dynamic analysis of policy lag in a keynes goodwin model stability instability cycles and chaos abstract in this paper we investigate the impact of government s stabilization policy on the dynamic behavior of the economic system in an analytical framework of a keynes goodwin model of the growth cycle in particular we study the effects of the policy lag on macroeconomic stability analytically and numerically it is shown that the increase of the policy lag contributes to destabilize the system and cyclical behavior and chaotic motion emerge in some ranges of the parameter values

economic transition and growth some extensions of neoclassical growth models are discussed that allow for cross section heterogeneity among economies and evolution in rates of technological progress over time the models oer a spectrum of transitional behavior among economies that includes con vergence to a common steady state path as well as various forms of transitional divergence and convergence mechanisms for modeling such transitions and measuring them econo metrically are developed in the paper a new regression test of convergence is proposed its asymptotic properties are derived and some simulations of its nite sample properties are reported transition curves for individual economies and subgroups of economies are estimated in a series of empirical applications of the methods to regional us data oecd data and penn world table data

behavior of the firm under regulatory constraint a recent article by akira takayama discusses an earlier paper by harvey averch and leland l johnson on fair rate of return regulation of public utilities although takayama p 255 agrees with averch and johnson s general conclusions that a firm will tend to increase its investment with the introduction of an active constraint on its rate of return he criticizes the a j argument as being confusing ambiguous and in error takayama then attempts a clarification and presents a new formulation which leads to the a j result quoted above this comment will discuss several of takayama s criticisms in addition to showing that the so called a j effect cannot be derived from the basic assumptions made by both averch and johnson and takayama 1 we will show that the very assumptions used to prove the a j effect by defining the region of x require an assumption that the a j effect exists in the first place

the wage curve a review in the wage qurve david g blancflower and andrew j oswald argue that there is a fundamental negative relation between wages and the unemployment rate in a worker s local labor market blancflower and oswald use large scale micro data sets to estimate this relation for the united states britain and 10 other countries i review their empirical methods and findings and provide some further evidence on the nature of the wage curve relationship in the united states i conclude that there is a strong statistical correlation between rates of pay and local unemployment although the interpretation of this correlation remains unresolved this abstract was borrowed from another version of this item

taxation of economic rents economic rents have long been identified as an efficient tax base in addition the recent literature documents that rent income is highly concentrated and that rents are quickly increasing rent taxation thus seems attractive for reasons of both efficiency and equity nevertheless rent taxation remains a marginal topic in research and policy making in a systematic review of the neoclassical literature on different rent types we find that some types of rents reflect inefficiencies and should thus be minimized while others reward investments and should be supported in line with social welfare what remains for taxation are land rents one of the few true scarcity rents land rents have significant potential to improve the efficiency of the tax system we then begin to develop a comprehensive theory of land rent taxation by identifying relevant efficiency and equity effects the interaction of many of these effects remains unexplored which might explain policymakers hesitation in using land taxes to date

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

preferences and incentives of appointed and elected public officials evidence from state trial court judges we study how two selection systems for public officials appointment and election affect policy outcomes focusing on state court judges and their criminal sentencing decisions first under appointment policy congruence with voter preferences is attained through selecting judges with homogeneous preferences in contrast under election judges face strong reelection incentives while selection on preferences is weak second the effectiveness of election in attaining policy congruence critically depends on payoffs from the job which implies that the effectiveness of election may vary substantially across public offices third reelection incentives may discourage judges with significant human capital from holding office jel d72 k41 understanding systems concerning the selection and retention of public officials and their effects on policy outcomes has long been an important issue in economics e g barro 1973 and ferejohn 1986 in this paper we compare two selection systems for public officials appointment by the head of the executive branch and election by popular votes we study the influence of the selection systems on public officials behavior focusing on state court judges and their criminal sentencing decisions specifically we quantitatively assess the separate role of preference heterogeneity versus reelection incentives in determining sentencing decisions we focus on the behavior of state court judges in the state of kansas which has within state variation in the selection systems 1 we conduct three key analyses

the necessity of delaying economic adjustment abstract i give an explanation for why agents react with a delay to decision and expectation parameters by showing that imperfect agents must adjust very slowly relative to optimally adjusting agents if they begin reacting as soon as the latter agents would react the results follow from the hypothesis of imperfect choice alone irrespective of whether there are any information search transaction or other costs of adjusting decisions the results thereby provide a general reason for observing inertially lagged behavior and also agree with recent asset market experiments whose dynamics are governed by adaptive rather than rational expectations

reviving kalecki s business cycle model in a growth context abstract in 1935 kalecki formulated the first fully specified model of a macroeconomic dynamics in which he studied an endogenous and most elementary business cycle mechanism to revive his insights the present paper adapts his stationary economy to a growth context introducing a reasonable nonlinearity into the investment function it then takes care that the model exhibits persistent cyclical behaviour that is characterized by a unique globally attracting limit cycle this feature is a robust property a calibration of the numerical parameters achieves desired values for the cycle period as well as the amplitudes of the output capital ratio and the capital growth rate it is moreover demonstrated that a one time shock to the dynamics can easily have long lasting effects on the amplitudes despite common misgivings about delay differential equations which here result from kalecki s implementation lag the analysis can be conducted with a limited mathematical effort

effective demand class struggle and cyclical growth the paper presents an analytical model of endogenous cyclical growth in a pure capitalist economy the model integrates keynesian ideas on effective demand with a marxian emphasis on class struggle and the reserve army of labor for reasonable parameter values the model has a unique nontrivial balanced growth equilibrium the equilibrium is unstable and using the poincare bendixson theorem it is shown that the economy will exhibit perpetual fluctuations around the balanced growth path copyright 1989 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

inflation output and money this paper uses money demand theory and a rational expectations version of the quantity theory of money to study inflation in the united states during the post korean war period the major results are as follows 1 the theory and tests explain the phenomenon of stagflation that is the negative relation between inflation and real activity observed during the post 1953 period the analysis calls into question the many variants of the phillips curve which presume that inflation real activity relations are positive 2 consistent with the models of patinkin 1961 and fama 1980 monthly quarterly and annual data indicate that the base currency plus reserves held against deposits is the relevant monetary variable in the inflation process and that demand deposits are irrelevant the direct policy implication is that the base is the key monetary variable in the control of inflation 3 the most convincing evidence for the simple quantity theory view of inflation proposed here comes from the comparison of the conditional exmoney demand theory and the quantity theory of money are used to study the inflation process as predicted by the model monthly quarterly and annual data indicate that inflation is positively related to money growth rates and negatively related to growth rates of real activity the theoretical and empirical origins of stagflation are explained and changes in monetary arrangements to simplify the control of inflation are prescribed

regulation under asymmetric information in water utilities water utilities are reminiscent of network industries and are characterized by important fixed costs these factors contribute to a single firm serving an area justifying public intervention on pricing about one fourth of u s water utilities are private and subject to regulation regulators are unlikely to be perfectly informed and regulation is unlikely to be costlessly implemented these inherent imperfections have led economists to consider the incentive properties of regulatory procedures using the economics of information see david baron 1989 the empirical literature on regulation has focused on evaluating the effects of regulation on prices firms costs efficiency and innovation in such sectors as airlines electricity and energy as surveyed by paul l joskow and nancy l rose 1989 few of these empirical studies rely on the so called theory of regulation regarding the water industry there is an abundant literature on residential water demand firms cost and their efficiency given their public versusprivate nature relying on a model with asymmetric information and a sample of california water utilities frank a wolak 1994 assesses the consumer welfare loss due to asymmetric information and shows that the model with asymmetric information provides a superior description of the cost and demand data to the model under perfect information analyzing pricing for residential water is an important policy issue as the sector recently experienced price increases the problem is even more acute in california because of a high residential demand for water along with population growth water scarcity and the probability of severe droughts relying on a new dataset of 32 districts in california over the 1995 2000 period we analyze regulation of private water utilities for every district the california public utilities commission cpuc chooses a price for water an access fee per meter and a rate of return on capital to satisfy firms revenue requirements we assume that the cpuc is imperfectly informed about firms labor efficiency following david besanko 1984 and wolak 1994 we develop a model in which the firm s capital is used as a screening variable in particular the model has the features of a rate of return regulation we show how the rate of return and the access fee can be determined optimally to control firms rents we then adopt a structural approach to analyze the data a multistep estimator allows us to estimate the key parameters of the model the empirical results show price inelasticity an income effect slightly decreasing returns to scale and a concentration of efficient firms the computation of the optimal rate of return and access fee shows that the cpuc would tend to be cautious by allowing a lower than optimal rate and access fee relying on the estimated parameters a first experiment evaluates the cost of asymmetric information the price would be significantly lower resulting in a gain of consumer surplus a second experiment consists of simulating the outcome of an optimal price cap following the farid gasmi et al 2002 model the price cap became a popular regulatory tool in the 1980s such as for electricity though the incentives resulting in price cap regulation have been questioned by economists the counterfactual simulations show a price increase which results in a significant loss in consumer surplus the increase in firms profit does not however counterbalance this loss supporting the relevance of the actual rate of return mechanism

growth empirics a panel data approach a comment this paper comments on recent developments in the literature on the econometric analysis of international growth and convergence it notes that panel estimates of the neoclassical model accommodating level effects for individual countries through heterogeneous intercepts deal with some of the econometric difficulties arising in some of the earlier cross sectional studies but it notes that in dynamic panels heterogeneity in growth effects and in speeds of convergence renders this estimator inconsistent also the pervasiveness of such heterogeneity is demonstrated in three samples of countries and the effects of incorrectly imposing homogeneity on estimated parameters are illustrated and discussed

regulation asymmetric information and auditing this article analyzes a model of a regulated firm that is better informed about its cost function than is the regulator by auditing at a cost however the regulator is assumed to be able to observe the realized cost of the firm if the regulator finds that the firm had misrepresented its costs at the time at which prices were set he can order a refund to consumers in the optimal policy the regulator audits when the firm reports for pricing purposes that its costs will be high and orders a refund when the auditfinds that realized costs are lower than anticipated given the original report a separation result that obtains for an important case indicates that the initial pricing decision is independent of the auditing decision the auditing decision however depends on the price that was initially set the optimal auditing strategy is characterized and the nature of the welfare gains are identified the methodology used in the analysis involves the characterization of an equilibrium of a revelation game with an ex post observable

incentive regulatory policies the case of public transit systems in france we assess the empirical relevance of the new theory of regulation using a principal agent framework to study the regulatory schemes used in the french urban transport industry taking the current regulatory schemes as given the model of supply and demand provides estimates for the firms inefficiency the effort of managers and the cost of public funds it allows us to derive the first best and second best regulatory policies for each network and compare them with the actual situation in terms of welfare loss or gain fixed price policies lie between fully informed and uninformed second best schemes cost plus contracts are dominated by any type of second best contract from these results we may conjecture that fixed price contracts call for better informed regulators

a stagnationist model of economic growth in an economy subject to persistent excess capacity demand related factors will play a key role in determining patterns of secular change this thesis has a long history in econ omics sometimes in the underworld and occasionally at the height of fashion as recounted by rowthorn 1982 recent manifestations in the first world are the theories of monopoly capitalism of baran and sweezy 1966 and steindl 1952 who in turn follow kalecki 1971 hobson 1902 luxemburg 1951 and the marx of realisation crises and reproduction schemes in volume ii of capital other radicals such as boddy and crotty 1975 add a profit squeeze explanation of the cycle which underlays the dynamics of the growth model specified here in developing countries difficulties in both realisation and sectoral proportions are emphasised as obstacles to growth witness lustig s 1980 review of latin american structuralist theory and dutt s 1984 model which formalises an ongoing controversy in india about how income redistribution might affect prospects for industrialisation all these authors are stagnationist in assuming that both the growth rate and the level of capacity utilisation can be different under different conditions of income distribution and or macroeconomic policy their preferred policies will presumably lead to greater equality increase utilisation or step up growth they typically ask two analytical ques tions how does output respond in the short run to shifts in the income distribution how do output adjustments feed back into distributional dynamics especially under conditions when price and wage inflation rates may be influenced by employment levels productivity changes and conflicting income claims in what follows we set out a simple model to address these questions and explore the implications for macroeconomic policy of the answers that arise since the approach is not familiar to economists with a standard training a verbal description of the growth model is given first those who wish to jump directly into a formal presentation can proceed to section 1 output x is assumed to meet demand in an instantaneous short run we measure activity as the ratio of firms net cash inflow to the value of capital stock i e the rate of profit r during the short run the price level p is fixed by a mark up rule p 1 x wb where r is the mark up rate w the money wage and b the labor output ratio with this rule the share of profits or mark up income in the value of output is r l t let u stand for the output capital ratio or capacity utilization xik by simple identity

new keynesian economics and the phillips curve models with sticky prices are an important part of new keynesian economics the author shows that several of the new keynesian models imply a formulation that is similar to the expectations augmented phillips curve of milton friedman and edmund phelps he then presents new estimates of the new keynesian phillips curve the author uses two proxies for price expectations survey based measures and an econometric based measure originally developed by bennett mccallum 1976 overall the results are consistent with the model but the survey based results are more precise suggesting that the surveys may be better measures of actual expectations copyright 1995 by ohio state university press

high order disequilibrium growth dynamics theoretical aspects and numerical features abstract we investigate an open monetary growth model with sluggish prices and quantities the model combines the dynamics of rose s employment cycle and metzler s inventory cycle with internal nominal dynamics of tobin and external nominal dynamics of dornbusch type implying eight laws of motion four for the real sector and four for the nominal part these intrinsically nonlinear 8d dynamics are asymptotically stable for low adjustment speeds of prices and expectations give rise to hopf bifurcations as adjustment parameters are increased and explosive behavior thereafter extrinsic nonlinearities are therefore added one in capital flows and one in wage behavior these nonlinearities modify the dynamics radically limiting them to domains with economically plausible outcomes also for extreme parameter choices where the dynamics may become chaotic

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

wage dynamics reconciling theory and evidence u s macroeconomic evidence shows a negative relation between the rate of change of wages and unemployment in contrast most theories of wage determination imply a negative relation between the level of wages and unemployment in this paper we ask whether one can reconcile the empirical evidence with theoretical wage relations we reach three main conclusions first we derive the condition under which the two can indeed be reconciled we show the constraints that such a condition imposes on the determinants of workers reservation wages as well as the relative importance of workers outside options as opposed to match specific productivity in wage determination second in the light of this condition we reinterpret the presence of an error correction term in macroeconomic wage relations for most european economies but not in the united states third we show that whether this condition holds or not has important implications for the effects of a number of variables from real interest rates to oil prices to payroll taxes on the natural rate of unemployment this abstract was borrowed from another version of this item

long run economic performance and the labor market 1 introductionthis article studies growth when the economy is not using all its productive resources to establish a bridge among two subdisciplines in economics growth theory and unemployment theory the former is dynamic and considers the impact on output of the growth in inputs under the assumption that unemployment is nonexistent the latter is static and considers the determination of the rate of unemployment under the assumption that the growth of capital is nonexistent our goal herein is twofold on one hand we want to modify slightly the growth models to include the effects of persistent unemployment on long run growth on the other we want to analyze the role played by the accumulation of capital in determining the unemployment rate the underlying assumption in the neoclassical growth model is that even if we admit sticky wages in the short run in the long run the labor market should have time to clear and the economy should return to full employment understood as the level of employment compatible with frictional unemployment therefore what is relevant when talking about growth is the growth of the labor force not the growth of the employed labor force however if the equilibrium employment level in the labor market persistently differs from the more desirable frictional level it is conceivable that this persistent deviation will have an impact on long run growth the average u s unemployment rate during the 1990s was 5 8 while countries such as france and spain maintained double digit unemployment rates in the 1980s and 1990s it seems intuitive that double digit unemployment during two decades should have long lasting effects on standards of living the disparate experiences of some european countries as opposed to the united states in terms of employment rates are due to very different institutional factors in the corresponding labor markets this article studies the impact of labor market institutional variables on long run growth despite a very large literature on both growth and unemployment few papers have jointly studied these two phenomena the exceptions are furuya 1998 and daveri and tabellini 2000 daveri and tabellini study the implications of an increase in labor taxes on both unemployment and economic growth the models in these two papers are of the overlapping generation class but whereas in furuya s the labor market does not clear because of the existence of efficiency wages in daveri and tabellini s the labor market does not clear because of the existence of a union our model is a simple variation of the standard solow model suitable for a first approximation to an empirical investigation of the interrelationship between economic growth and the labor market we use a variation of blanchflower and oswald s 1995 wage curve which is more suitable for integration with a growth model the wage curve shows an empirical inverse relation between unemployment and wage levels this inverse relation is consistent with models of noncompetitive wage determination basically we use a reduced form of the open trade union layard nickell layard and nickell 1985 1986 model of wage determination to explain why the equilibrium unemployment level differs from the frictional level a weakness of relying on trade union behavior to explain unemployment is that in most countries not all workers are unionized union membership varies greatly across countries but in most countries a large part of the labor force is nonunionized however blanchard and summers 1986 argue that the trade union model can be interpreted as describing the behavior of a group of workers that acts as a group even if there is no formal trade union the fact that both capital intensity and productivity affect the equilibrium unemployment rate is implicit in the layard nickell model we emphasize the importance of capital intensity in the determination of unemployment and incorporate unemployment into a growth model

origin of predictable behavior further modeling and applications economic theory is founded on the assumption that agents act as if they are able to maximize according to well behaved preferences regardless of how complex their decision problems might be consequently the theory has never investigated the consequences of a genuine gap between an agent s decision making competence and the difficulty of a decision problem called a c d gap in a recent paper 1983 hereafter called the origin paper i outlined a general theory for investigating the latter possibility a major theme was that recurrent pattern in behavior arises because of decision making uncertainty due to a c d gap so that uncertainty becomes the basic source of predictable behavior here i discuss certain theory topics that were only sketched in the origin paper and briefly suggest a few related applications to pursue these objectives i begin with a short restatement of the reliability condition introduced in the origin paper

the cyclical behavior of marginal cost and price the author examines the cyclical behavior of price marginal cost margins for u s manufac turing after 1956 short run marginal cost is markedly procyclical this is primarily due to procyclical overtime payments incurred beca use employment is not perfectly flexible in most industries output price fails to respond to the cyclical movement in marginal cost so price marginal cost margins are markedly countercyclical the res ults contradict business cycle theories that explain low production i n a recession by a high real cost of producing they support theories that explain low production in a recession by the inability of firms to sell their output copyright 1987 by american economic association

adaptive expectations and perfect foresight in a nonlinear metzlerian model of the inventory cycle it has long been known that the motions of aggregate inventory investment are an important facet of the business cycle see e g blinder and maccini 1991 some elementary insights into the dynamic feedback effects between inventories production and sales were provided by metzler 1941 in a small theoretical model the present note adopts his framework but seeks to overcome the limitation of its linear specifications our basic idea corresponds to the concept of a flexible inventory accelerator while metzler postulated that desired inventory investment in discrete time is equal to the gap between desired and actual stocks of inventories some later studies have introduced a constant proportionality factor for the adjustment of inventories here we go one step further and hypothesize a variable stock adjustment speed as it turns out fast adjustments in a vicinity of the stationary equilibrium cause local instability but if for

oversight of long term investment by short lived regulators certain regulators of economic activity like utility regulators and government procurement officers typically serve for relatively short periods of time the authors consider how to best motivate long term investment in the presence of short lived regulators a firm s investment decision is overseen by one regulator whether the investment is ultimately adopted is determined by a second distinct regulator each regulator is concerned with the welfare of its own contemporary population transfer payments between populations are limited and relevant data cannot be verified by third parties underadoption and underinvestment on average result although overinvestment may also occur under the optimal regulatory charter copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the effects of income distribution and fiscal policy on aggregate demand investment and the budget balance the case of europe this paper develops a multi country post kaleckian model that incorporates the role of the government one key novelty of the model is that it integrates cross country effects of both changes in income distribution and fiscal policy the model is used to estimate econometrically the effects of income distribution and fiscal policy on the components of aggregate demand and the budget balance in eu15 countries the results show that a simultaneous increase in the wage share in all eu15 countries would increase demand and the primary budget balance in all countries a simultaneous increase in government spending turns out to boost economic activity in all the eu15 countries indicating the positive economic effects of expansionary fiscal policy moreover a progressive tax policy that would be implemented simultaneously at the eu level would lead to an increase in output in all countries

taxation income redistribution and debt dynamics in a seven equation model of the business cycle abstract in this paper we investigate the economic dynamics of a seven equation model of the business cycle the main distinctive features of the model are related to a the role played by the public sector in redeploying income between workers and capitalists since it is assumed that the bargaining power of the two classes affects tax rates and transfers levied upon them b the influence that past events have on the agents current behavior with particular regard to consumption patterns c the specification of firms investment function which incorporate keynesian and harrodian elements by assuming that investments are a function of both the difference between interest and profit rate and the discrepancy between actual and desired capital to output ratio since all these assumptions imply possible balance sheets disequilibrium particular regard is dedicated to the analysis of macroagents debt dynamics special emphasis is placed on the analysis of the destabilization of equilibria via hopf bifurcations which leads to the emergence of an interesting and rich cyclical dynamics

optimal monetary policy rules with labor market frictions abstract this paper studies optimal monetary policy rules in a framework with sticky prices matching frictions and real wage rigidities optimal policy is given by a constrained ramsey plan in which the monetary authority maximizes the agents welfare subject to the competitive economy relations and the assumed monetary policy rule i find that the optimal rule should respond to unemployment alongside with inflation this is so since models with matching frictions unlike standard new keynesian models feature a congestion externality that makes unemployment inefficiently high a strong response to inflation remains optimal while a response to output is always welfare detrimental

dynamics of moving average rules in a continuous time financial market model within a continuous time framework this paper proposes a stochastic heterogeneous agent model ham of flnancial markets with time delays to unify various moving average rules used in discrete time hams the time delay represents a memory length of a moving average rule in discrete time hams intuitive conditions for the stability of the fundamental price of the deterministic model in terms of agents behavior parameters and memory length are obtained it is found that an increase in memory length not only can destabilize the market price resulting in oscillatory market price characterized by a hopf bifurcation but also can stabilize an otherwise unstable market price leading to stability switching as the memory length increases numerical simulations show that the stochastic model is able to characterize long deviations of the market price from its fundamental price and excess volatility and generate most of the stylized facts observed in flnancial markets

public utility regulation and bond ratings this paper investigates the extent to which political factors which vary across state public utility commissions affect electric utility bond ratings the paper focuses on the effects of the commissioner selection method election or appointment and other politically determined variables on bond ratings of privately owned and regulated electric utilities the paper develops a generalization of ordered logit that allows the latent risk measure to have a skewed and thicktailed distribution the distributional assumption underlying the standard logit model is strongly rejected empirically both political variables and financial variables are determinants of electric utility bond ratings and election of the puc has a strong negative effect on bond ratings

measuring the dynamic efficiency costs of regulators preferences municipal water utilities in the arid west evidence suggests that municipal water utility administrators in the western us price water significantly below its marginal cost and in so doing inefficiently exploit aquifer stocks and induce social surplus losses this paper empirically identifies the objective function of those managers measures the deadweight losses resulting from their price discounting decisions and recovers the efficient water pricing policy function from counterfactual experiments in doing so the estimation uses a continuous butconstrained control version of a nested fixed point algorithm in order to measure the important intertemporal consequences of groundwater pricing decisions

corruption and inefficiency theory and evidence from electric utilities we investigate the determinants of the efficiency of firms with a focus on the role of corruption we construct a simple theoretical model where corruption increases factor requirements of firms because it diverts managerial effort away from factor coordination we then exploit a unique dataset comprising firm level information on 80 electricity distribution firms from 13 latin american countries for the years 1994 to 2001 as predicted by the model we find that more corruption in the country is strongly associated with more inefficient firms in the sense that they employ more inputs to produce a given level of output the economic magnitude of the effects is large the results hold both in models with country and firm fixed effects the results survive several robustness checks including different measures of output and efficiency and instrumenting for corruption other elements associated with inefficiency are public ownership inflation and lack of law and order but corruption appears to play a separate and more robust role

aggregation and linearity in the provision of intertemporal incentives we consider the problem of providing incentives over time for an agent with constant absolute risk aversion the optimal compensation scheme is found to be a linear function of a vector of n accounts which count the number of times that each of the n kinds of observable events occurs the number n is independent of the number of time periods so the accounts may entail substantial aggregation in a continuous time version of the problem the agent controls the drift rate of a vector of accounts that is subject to frequent small random fluctuations the solution is as if the problem were the static one in which the agent controls only the mean of a multivariate normal distribution and the principal is constrained to use a linear compensation rule if the principal can observe only coarser linear aggregates such as revenues costs or profits the optimal compensation scheme is then a linear function of those aggregates the combination of exponential utility normal distributions and linear compensation schemes makes computations and comparative statics easy to do as we illustrate we interpret our linearity results as deriving in part from the richness of the agent s strategy space which makes it possible for the agent to undermine and exploit complicated nonlinear functions of the accounting aggregates

using ex ante approaches to obtain credible signals for value in contingent markets evidence from the field while contingent valuation remains the only option available for measurement of total economic value of nonmarketed goods the method has been criticized due to its hypothetical nature we analyze field experimental data to evaluate two ex ante approaches to attenuating hypothetical bias directly comparing value statements across four distinct referenda hypothetical cheap talk consequential and real our empirical evidence suggests two major findings hypothetical responses are significantly different from real responses and responses in the consequential and cheap talk treatments are statistically indistinguishable from real responses we review the potential for each method to produce reliable results in the field

imitators and optimizers in a changing environment abstract we analyze the repeated interaction between an imitating and a myopically optimizing player in an otherwise symmetric environment of changing marginal payoff focusing on finite irreducible environments and the case of strategic substitutes we unfold a trade off between the degree of interaction and the size of environmental shocks the optimizer outperforms the imitator if interaction is weak or shocks are large as to the case of duopoly this translates into small cross price elasticities or large shocks in marginal cost and or the maximum willingness to pay in these cases a changing environment creates selection pressure against imitative behavior

new tests of the new keynesian phillips curve abstract lagged dependent variables typically play an important role in empirical models of inflation do these lags reflect backward looking inflation expectations or do they proxy for rational forward looking expectations as in the new keynesian phillips curve gali and gertler 1999 inflation dynamics a structural econometric analysis journal of monetary economics 44 195 222 attempt to answer this question using gmm to estimate specifications incorporating both lagged and future inflation they report small coefficients on lagged inflation and conclude that the new keynesian model provides a good first approximation to inflation dynamics we show that these tests have low power against alternative backward looking specifications and demonstrate that their results are also consistent with a backward looking phillips curve using an alternative approach we find that the new keynesian pricing model cannot explain the importance of lagged inflation in standard inflation regressions and find that forward looking terms play a very limited role in explaining inflation dynamics

the dynamic efficiency of regulatory constitutions in this article we model regulation as a repeated game between a utility facing a random sequence of demands and a regulator tempted to underreward past investment rate of return regulation designed with a constitutional commitment to an adequate rate of return on capital prudently invested is able to support an efficient investment program as a subgame perfect nash equilibrium for a larger set of parameter values than rate of return regulation without such a commitment furthermore rate of return regulation is superior to price regulation according to the same criterion assuming that the regulator is unable to make state contingent transfer payments

dynamic inconsistencies counterfactual implications of a class of rational expectations models a number of recent papers have developed dynamic macroeconomic models that incorporate rational expectations and optimizing foundations while the theoretical motivation behind these models is sound the dynamic implications of many of the specifications that assume rational expectations and optimizing behavior can be seriously at odds with the data for both inflation and real side variables exhibit gradual and hump shaped responses to real and monetary shocks for models that are intended for monetary policy analysis these dynamic shortcomings should be considered quite serious when monetary policy has only short run effects on real variables the inability to approximately capture the short run responses of inflation or real variables to policy shocks makes a model unsuitable for policy analysis this paper identifies a simple feature common to many dynamic specifications for prices and real variables that causes the problem the paper also discusses several potential solutions to the problem including alterations to the expectations assumption to the order of differencing implicit in the model and to the underlying behavioral assumptions this abstract was borrowed from another version of this item

regulating a monopolist with unknown costs we consider the problem of how to regulate a monopolistic firm whose costs are unknown to the regulator the regulator s objective is to maximize a linear social welfare function of the consumers surplus and the firm s profit in the optimal regulatory policy prices and subsidies are designed as functions of the firm s cost report so that expected social welfare is maximized subject to the constraints that the firm has nonnegative profit and has no incentive to misrepresent its costs we explicitly derive the optimal policy and analyze its properties in their classic papers dupuit 2 and hotelling 5 considered pricing policies for a bridge that had a fixed cost of construction and zero marginal cost they demonstrated that the pricing policy that maximizes consumer well being is to set price equal to marginal cost and to provide a subsidy to the supplier equal to the fixed cost so that a firm would be willing to provide the bridge this first best solution is based on a number of informational assumptions first the demand function is assumed to be known to both the regulator and to the firm while the assumption of complete information may be too strong the assumption that information about demand is as available to the regulator as it is to the firm does not seem unnatural a second informational assumption is that the regulator has complete information about the cost of the firm or at least has the same information about cost as does the firm this assumption is unlikely to be met in reality since the firm would be expected to have better information about costs than would the regulator as weitzman has stated an essential feature of the regulatory environment i am trying to describe is uncertainty about the exact specification of each firm s cost function in most cases even the managers and engineers most closely associated with production will be unable to precisely specify beforehand the cheapest way to generate various hypothetical output levels because they are yet removed from the production process the regulators are likely to be vaguer still about a firm s cost function 12 p 684 as this observation suggests it is natural to expect that a firm would have better information regarding its costs than would a regulator the purpose of this paper is to develop an optimal regulatory policy for the case in which the regulator does not know the costs of the firm one strategy that a regulator could use in the absence of full information about costs is to give the firm the title to the total social surplus and to delegate the pricing decision to the firm in pursuing its own interests which would then be to maximize the total social surplus the firm would adopt the same marginal cost pricing strategy that the regulator would have imposed if the regulator had

is more information always better party cues and candidate quality in u s judicial elections abstract we investigate the influence of electoral rules on voting behavior and the quality of judges using newly collected data on judicial elections and ratings from 39 u s states we find that in partisan elections where candidates party affiliations are listed on the ballot party drives voting behavior and candidate quality has little effect on outcomes in nonpartisan elections where party affiliation is not on the ballot party has a much smaller influence on voting behavior and candidate quality has a substantial effect on outcomes if the primary task of public officials is not to represent voters ideology and their decisions have little variability across parties then we need to seriously consider the potential cost of partisan competition to the extent that partisan voting behavior crowds out the influence of candidate quality on voting outcomes the desirability of the partisan election system should be carefully assessed

the origin of predictable dynamic behavior abstract nonlinear dynamic theory implies optimal decisions often behave like random chaos such random target motion is impossible for imperfect agents to follow without error however they can still gradually approach the optimal target if and only if they partially adjust toward its perceived location so as to induce their behavior to converge to an equilibrium reducing dynamic errors through partial adjustment thereby induces a stable regularity in behavior that otherwise may never evolve this result agrees with the stability properties observed in experimental markets including cobweb auction and asset markets whose dynamics before reaching equilibrium exhibit adaptive rather than rational expectations

gradual wage price adjustments labor market frictions and monetary policy rules abstract in this paper the role of different types of labor market frictions in the dynamics of output and inflation is investigated for this purpose the keynes goodwin model discussed in chen et al 2006 and franke et al 2006 is extended by a labor search and matching module along the lines of mortensen et al 1994 after estimating the resulting model with u s aggregate time series and comparing its dynamics with those of a var model the performance of different types of monetary policy rules for inflation and more generally for macroeconomic stability is analyzed