economic deregulation days of reckoning for microeconomists economic deregulation of american industry is one of the most important experiments in economic policy of our time 1 in 1977 17 percent of u s gnp was produced by fully regulated industries 2 by 1988 following ten years of partial and complete economic deregulation of large parts of the transportation communications energy and financial industries that total had been cut significantly to 6 6 percent of gnp 3 the political forces behind the decision to change the market conditions under which roughly 600 billion of u s output is produced were strong and varied but according to political scientists martha derthick and paul quirk 1985 p 36 deregulation would never have occurred if economists especially microeconomists had not generally supported it through their research 4 in retrospect it is fair to ask were microeconomists able to develop a theoretical and empirical framework to explain regulation and its effects and to form predictions of deregulation s effects were they able to predict the actual effects of deregulation this paper surveys the evidence to address these questions and of

innovation and growth supply and demand factors in the recent us expansion it is widely held that the social economic context of the us characterised by labour market flexibility and deregulation of product and capital markets lies at the basis of the innovative capacity displayed by the country s productive system in the 1990s thus accounting for the growth differential with europe starting from a different interpre tative model of innovation and growth the paper focuses on both supply institutional and technological and demand factors it is argued that when their interaction is taken into account there is no strong evidence that more deregulated labour and product markets are among the factors allowing for us growth in accordance with the view that there is no single road to innovation and growth this leaves room for the exploration and implementation of policies that might reconcile innovation and growth with safeguards such as those provided by europe s social institutions

the tragedy of the commons and socialization theory and policy we revisit the tragedy of the commons in an dynamic overlapping generations economy peopled of shepherds who decide how many sheep they let graze on a common parcel of land while relying on di fferent forms of rationality nash players pure or impure kantian players we examine the dynamics of heterogeneity and land congestion when the prevalance of those di fferent forms of rationality evolves over time follow ing a vertical oblique socialization process a la bisin and verdier 2001 we study the impacts of a quota and of a tax on the congestion of land and we show that introducing a quota may in some cases reduce the proportion of kantians pure and impure and worsen the tragedy of commons with respect to the laissez faire finally we examine whether a government should promote either a pure or an impure kantian morality by comparing the relative fi tness of pure impure kantians and their interactions with the congestion of land

incentives in principal agent relationships this article identifies some of the major issues that have been examined in the literature on incentives the article begins by discussing the frictions that lie at the heart of incentive problems next the principal s optimal response to these frictions is explored taking as given the characteristics of the agents with whom the principal interacts in a nonrepeated setting the design of individualized contracts contests and tournaments is analyzed then the principal s task of selecting the best agent is addressed and repeated agency relationships are considered

aggregate comparative statics abstract in aggregative games each player s payoff depends on her own actions and an aggregate of the actions of all the players many common games in industrial organization political economy public economics and macroeconomics can be cast as aggregative games this paper provides a general and tractable framework for comparative static results in aggregative games we focus on two classes of games 1 aggregative games with strategic substitutes and 2 nice aggregative games where payoff functions are continuous and concave in own strategies we provide simple sufficient conditions under which positive shocks to individual players increase their own actions and have monotone effects on the aggregate the results are illustrated with applications to public good provision contests cournot competition and technology choices in oligopoly

a biological theory of social discounting we consider a growth model in which intergenerational transfers are made via stocks of private and public capital private capital is the outcome of individuals private savings while decisions regarding public capital are made collectively we hypothesize that private saving choices evolve through individual selection while public saving decisions are the result of group selection the main result of the paper is that the equilibrium rate of return to private capital is at least 2 3 percent more than the rate of return to public capital in other words social choices involving intertemporal trade offs exhibit much more patience than individual choices do jel d11 d71 d91 h43 policy issues often involve intergenerational trade offs one highly publicized and polarizing example concerns the appropriate response to global warming while nordhaus 1994 concluded that there was no need to enact draconian policies to reduce co 2 emissions immediately stern 2006 insisted that the situation was in fact dire the difference in position can be attributed almost exclusively to the rates of time preference assumed by these two authors nordhaus used a few percent based on estimates deriving from private economic behavior while stern essentially set it equal to zero on the basis of a philosophical stance it then becomes clear that co 2 emissions should be taken seriously if for some reason private rates of time preference are too high when applied to public decisions since such decisions should then be made on the basis of a lower rate 1

government intervention in production and incentives theory a review of recent contributions national science foundation the commissariat general du plan and the center for energy policy research at m i t

the economics and politics of regulation this article provides a critical survey of the literature on the economics and politics of regulation after some conceptual clarifications the article surveys the evolution of perspectives on regulation during the post second world war period emphasizing especially the interactions between intellectual changes and real world economic and political developments it then looks at some themes that are neglected in the current literature the inevitability of regulation the need to create and not simply regulate markets distributional issues dynamic considerations and the politics of regulation and suggests that incorporating these themes more closely into the discussion will improve our understanding in this area copyright 1997 by oxford university press

a brave new world kantian nashian interaction and the dynamics of global climate change mitigation abstract we model game theoretic situations in which agents motivated by kantian ethics interact with conventional nashian agents we define the concept of generalized kant nash equilibrium which encompasses the nash equilibrium the kantian equilibrium and the kant nash equilibrium as special cases we show the existence and uniqueness of a kant nash equilibrium in a static game of climate change mitigation and derive its properties in a dynamic setting we analyze a differential game of climate change mitigation in the presence of both types of agents and compare their markov emission strategies for both the static model and the dynamic model as the population share of kantians increases the quality of the environment improves and both types of agents are better off

the disinterest in deregulation in the analysis of the costs of monopoly power the usual experiment is to convert a competitive industry into a monopoly and observe the consequent change in consumer s surplus modern contributions have emphasized the deadweight cost of monopoly arnold harberger 1954 and the possibility of an associated rent seeking cost of monopoly gordon tullock 1967 the harberger cost of course refers to the lost consumer s surplus triangle the tullock cost concerns the role of competition for monopoly returns taken together and assuming that the competition for monopoly rents is perfect the total cost of monopoly power is a trapezoid the rectangle of monopoly profits plus the triangle of lost consumer s surplus richard posner 1975 in this paper we approach the monopoly problem in a different spirit we compare three states of the world competition regulation and deregulation in this setting we ask what happens if a monopoly is eliminated through deregulation our analysis suggests that because under most conditions tullock costs cannot be recouped the returns to deregulation are lower than previously thought rent seeking expenditures in the past leave the economy permanently poorer even if competition is restored to the industry in contrast the returns to preventing monopoly in the first place are relatively high in our model an insight afforded by the analysis is an explanation of the persistence of laws and regulations which appear to serve no interest in this regard the example of railroad regulation in the united states comes to mind the standard explanation for such regulation is either that voters and government decision makers are ignorant of basic economics or that a small interest group like railroad firms wins rents at the expense of uninformed or economically rational consumers of rail services who do not find it cost effective to seek deregulation we offer another and perhaps more plausible explanation for the persistence of regulation and the apathy of consumers about the costs of regulation namely the costs of such regulations are for the most part the original rent seeking expenditures that lead to the regulation in the first place and these costs are sunk abolishing so called uneconomic laws does nothing to recover these losses hence there is little political support from any quarter to return to the status quo ante in fact as we shall show such a deregulatory program can easily impose more costs than it is worth there are numerous examples of this point including tariffs and quotas of all sorts subsidies to farmers the postal monopoly organized labor s antitrust exemption the licensing of doctors and so forth the traditional explanations of these monopoly rights namely ignorance of economic common sense and special interest groups are neither sufficient nor necessary since the primary costs of these laws are rent seeking expenditures which are made prior to their passage there is simply little to be gained by changing them now gains would accrue in the form of reduced harberger costs costs would be borne in passing and implementing the deregulatory program it is not that the potential gainers from deregulation are large in number diffuse heterogeneous and face high organizational costs rather they do not exist to any degree interpreted in this light efforts by political action groups such as the right to work foundation stand to be a drain on society s resources they cannot produce anything unless they prevent further monopolization through regulation we do not of course mccormick and shughart clemson university clemson sc 29631 tollison center for the study of public choice george mason university fairfax va 22030 thanks go to james buchanan rex cottle and gordon tullock for helpful comments the usual caveat applies

a reinterpretation of the modern theory of forward exchange rates the modern theory of forward exchange rate determination mt has been widely although not unanimously accepted as an improvement over the traditional interest rate panty theory irpi the latter theory contends that in equilibruim the forward rate f will equal except for transactions costs the interest panty forward rate f 1 covered interest arbitrage cia is a pnmary but as shall be seen not the only force insunng this equilibnum condition for the forward market for example if f exceeds f then covenng arbitrageurs borrow or forego lending in the domestic country purchase the foreign currency on the spot market lend abroad at the foreign interest rate and simultaneously sell the foreign currency including interest on the forward market these transactions cause f to decline and or f to increase until equilibnum is restored motivated in part by early empincal studies of the irpi which found evidence of apparent deviations of f from f and by the intuitively appealing argument that expectations or speculation can also influence f the mt suggests that the equilibrium forward rate is better explained as a weighted average of f and the expected

good bye financial repression hello financial crash some unintended consequences of financial liberalization in latin america are analyzed in this paper intrinsic imperfectious in financial markets and the policy dilemmas they pose are reviewed first the stylized facts of southern cone experiments in financial liberization are then presented alternative ways of organlzing domestic capital markets under latin american conditions are discussed and an eclectic reform mongering program is proposed

spot versus forward speculation and hedging a diagrammatic exposition abstract it has recently been recognized that the controversial implication of the modern theory of forward exchange that the forward rate can differ from the rate required for interest parity no longer holds when speculators are allowed to choose between spot and forward speculation this paper shows this result within the diagrammatic apparatus usually used to describe the modern theory the paper also shows the effect of importers and exporters choosing between spot and forward hedging it is observed that when either speculators or traders can choose between money market and forward speculation hedging forward rates equal interest parity rates the diagram can be adapted to consider borrowing lending spreads etc

on the evolutionary stability of altruistic and spiteful preferences abstract this note demonstrates that a result on evolutionary stability presented by bester and guth bester h guth w 1998 journal of economic behavior and organization 34 193 209 applies under more general preference and payoff functions

public versus regulated private enterprise a comparison of public enterprise with regulated private enterprise shows that the efficiencies of privatization stem from the insulation it brings from arbitrary political and self serving influences the critical insulation springs from the costliness of interventions when there is a regulatory compact in place that protects private property from expropriation while it also corrects for market failures that same insulation means that public enteprise is a better form of organization for activities that call for a response to public interest exigencies which cannot be specified in advance or reliably adjudicated after the fact the analysis emphasizes that an appropriate regulatory compact requires institutional support international organizations that seek to implement privatization should consider promoting credible regulatory commitment by requiring countries to execute explicit regulatory compacts and by bringing to bear the weight of their continuing relationship as a means of motivating the countries to conform to such strictures

social rewards externalities and stable preferences this paper examines the role of social rewards as a corrective mechanism for activities which generate externalities the focus of this paper is on the circumstances under which social rewards provide effective and feasible incentive mechanism that may replace laws and regulations in particular social mechanism is effective only in a society in which individuals who care about their standing in the society can survive in the long run we show that the nature of economic interaction between matched players influences whether the socially minded individuals survive in the long run and restricts the effectiveness of social rewards however circumstances exist where the socially minded survive even though relative fitness is determined only by economic payoff 1998 elsevier science s a all rights reserved

the evolution of monetary equilibrium abstract the hahn problem is that even if a monetary equilibrium with valued fiat money exists in general equilibrium a nonmonetary equilibrium with a zero price on money generally also exists why should we expect the former over the latter here i consider the preferences that will survive repeated trading in an exchange economy where agents compete in biological fitness with unobservable preferences and positive assortativity in matching evolutionarily stable preferences implement the competitive equilibrium that maximizes the sum of agents fitnesses in a standard bewley townsend model this implies selection of the monetary over the nonmonetary equilibrium and also implies the survival of agents with money in the utility function trust in fiat money is only a recent development and even today such faith is hardly universal cass and shell 1980

evolution of preferences we endogenize preferences using the indirect evolutionary approach individuals are randomly matched to play a two person game individual subjective preferences determine their behaviour and may differ from the actual objective pay offs that determine fitness matched individuals may observe the opponents preferences perfectly not at all or with some in between probability when preferences are observable a stable outcome must be efficient when they are not observable a stable outcome must be a nash equilibrium and all strict equilibria are stable we show that for pure strategy outcomes these conclusions are robust to allowing almost perfect and almost no observability with the notable exception that inefficient strict equilibria may fail to be stable with any arbitrarily small degree of observability despite being stable with no observability

2 the institutional structure of production 1 prize lecture to the memory of alfred nobel december 9 1991 this abstract was borrowed from another version of this item

economic performance through time prize lecture to the memory of alfred nobel december 9 1993 this abstract was borrowed from another version of this item

regulation institutions and commitment in telecommunications a comparative analysis of five country studies within any system of utility regulation there is a tension between the ability to commit to a stable set of rules and the ability to respond flexibly to changing circumstances countries differ in their institutional endowments and hence in the ways in which they can resolve this tension a first group of countries can design regulatory systems that afford the regulator substantial formal discretion to respond to changing circumstances and can use process to restrain arbitrary action a second group of countries can restrain arbitrary action only by calling on specific substantive rules and may have to sacrifice some flexibility to achieve credible commitment a third group may lack the domestic institutions to put in place a credible and workable regulatory system of any kind

evolution and kantian morality what kind of preferences should one expect evolution to favor we propose a definition of evolutionary stability of preferences in interactions in groups of arbitrary finite size groups are formed under random matching that may be assortative individuals preferences are their private information the set of potential preferences are all those that can be represented by continuous functions we show that a certain class of such preferences that combine self interest with morality of a kantian flavor are evolutionarily stable and that preferences resulting in other behaviors are evolutionarily unstable we also establish a connection between evolutionary stability of preferences and a generalized version of maynard smith s and price s 1973 notion of evolutionary stability of strategies

if homo economicus could choose his own utility function would he want one with a conscience reply in my model of the evolution of honesty 1 i assumed the existence of a signal a blush perhaps extreme values of which served to identify some individuals as being honest with certainty joseph harrington notes that without this assumption honest individuals have difficulty invading a population initially dominated by defectors for readers who do not wish to work through the algebra in his comment the argument is easily summarized in nontechnical terms suppose two honest mutants a and b arrive in an uncountably large population consisting entirely of dishonest persons and suppose that the probability that an honest person exhibits an intense blush is say 0 999 while the corresponding probability for everyone else is only 0 001 when a sees an intense blush on the face of b what will then be his estimate of the probability that b is honest assuming that a knows the laws of elementary probability and corrects for the base rate of honest persons in the population it will be zero when virtually everyone in the population is dishonest even a person with an intense blush will be pegged as dishonest provided that even the smallest fraction of dishonest persons also shows an intense blush with

is altruism evolutionarily stable and envy and malevolence remarks on bester and guth abstract in a convincing analysis of the conditions and strength of altruism bester and guth journal of economic behavior organization vol 34 1998 193 209 unfortunately restrict the interpretation of their results their paper provides us with an analysis of the conditions and strength of malevolence or envy as well

kinship incentives and evolution we analyze how family ties affect incentives with focus on the strategic interaction between two mutually altruistic siblings the siblings exert effort to produce output under uncertainty and they may transfer output to each other with equally altruistic siblings their equilibrium effort is non monotonic in the common degree of altruism and it depends on the harshness of the environment we define a notion of local evolutionary stability of degrees of sibling altruism and show that this degree is lower than the kinship relatedness factor numerical simulations show how family ties vary with the environment and how this a ects economic outcomes

economic policy institutions and entrepreneurship economists have debated the issue of state intervention in the economic process in capitalist economies intensively for decades often however without considering the effects of state intervention on entrepreneurship in this paper we undertake a critical analysis of the institutionalist theory of state intervention developed by ha joon chang he identifies two key roles for the state in facilitating structural change namely firstly to pronounce a vision for the future state entrepreneurship and secondly management of conflicts which arise during the process of structural change we also examine how well the swedish model of state intervention fits into chang s model as well as possible drawbacks with the swedish model not least in terms of reducing the incentives for entrepreneurship thirdly we examine the possibility that because of radical changes in its economic and political environment the swedish model has become less successful in carrying out the two key roles outlined by dr chang in the last three decades finally we discuss the implications of these changes for the chang style interventionalist state is there any room left for structural change management by the state in the global era if so what are the appropriate measures and policy levels for this type of intervention and in particular how can proper institutions and incentives for entrepreneurship be used to facilitate the structural change process

homo moralis preference evolution under incomplete information and assortative matching what preferences will prevail in a society of rational individuals when preference evolution is driven by the resulting payoffs we show that when individuals preferences are their private information a convex combination of selfishness and morality stands out as evolutionarily stable we call individuals with such preferences homo moralis a t one end of the spectrum is homo oeconomicus who acts so as to maximize his or her own payoff at the opposite end is homo kantiensis who does what would be the right thing to do in terms of payoffs if all others would do likewise we show that the stable degree of morality the weight placed on the moral goal is determined by the degree of assortativity in the process whereby individuals are matched to interact

downward nominal and real wage rigidity survey evidence from european firms it has been well established that the wages of individual workers react little especially downwards to shocks that hit their employer this paper presents new evidence from a unique survey of firms across europe on the prevalence of downward wage rigidity in both real and nominal terms the authors analyse which firm level and institutional factors are associated with wage rigidity the results indicate that it is related to workforce composition at the establishment level in a manner that is consistent with related theoretical models e g efficiency wage theory insider outsider theory the analysis also finds that wage rigidity depends on the labour market institutional environment collective bargaining coverage is positively related with downward real wage rigidity measured on the basis of wage indexation downward nominal wage rigidity is positively associated with the extent of permanent contracts and this effect is stronger in countries with stricter employment protection regulations