asset pricing implications of pareto optimality with private information we compare the empirical performance of a standard incomplete markets asset pricing model with that of a novel model with constrained pareto optimal allocations we represent the models stochastic discount factors in terms of the cross sectional distribution of consumption and use these representations to evaluate the models empirical implications the first model is inconsistent with the equity premium in the united states united kingdom and italy the second model is consistent with the equity premium and the risk free rate in all three countries if the coefficient of relative risk aversion is roughly 5 and the quarterly discount factor is less than 0 5

learning by doing vs learning from others in a principal agent model abstract we introduce learning in a principal agent model of output sharing under moral hazard we use social evolutionary learning to represent social learning and reinforcement experience weighted attraction ewa and individual evolutionary learning iel to represent individual learning learning in the principal agent model is difficult due to the stochastic environment the discontinuity in payoffs at the optimal contract and the incorrect evaluation of foregone payoffs for iel and ewa social learning is much more successful in adapting to the optimal contract than standard individual learning algorithms a modified iel using realized payoffs evaluation performs better but still falls short of social learning

computing multi period information constrained optima this paper presents a detailed theoretical derivation and justification for methods used to compute solutions to a multi period including infinite period continuum agent unobservedeffort economy actual solutions are displayed illustrating cross sectional variability in consumption and labour effort in the population at a point in time and variability for a typical individual over time the optimal tradeoff between insurance and incentives is explored and the issue of excess variability is addressed by consideration of the analogue full information economy and various restricted contracting regimes

dynamic financial constraints distinguishing mechanism design from exogenously incomplete regimes we formulate and solve a range of dynamic models of constrained credit insurance that allow for moral hazard and limited commitment we compare them to full insurance and exogenously incomplete financial regimes autarky saving only borrowing and lending in a single asset we develop computational methods based on mechanism design linear programming and maximum likelihood to estimate compare and statistically test these alternative dynamic models with financial information constraints our methods can use both cross sectional and panel data and allow for measurement error and unobserved heterogeneity we estimate the models using data on thai households running small businesses from two separate samples we find that in the rural sample the exogenously incomplete saving only and borrowing regimes provide the best fit using data on consumption business assets investment and income family and other networks help consumption smoothing there as in a moral hazard constrained regime in contrast in urban areas we find mechanism design financial information regimes that are decidedly less constrained with the moral hazard model fitting best combined business and consumption data we perform numerous robustness checks in both the thai data and in monte carlo simulations and compare our maximum likelihood criterion with results from other metrics and data not used in the estimation a prototypical counterfactual policy evaluation exercise using the estimation results is also featured

breakthroughs deadlines and self reported progress contracting for multistage projects we study the optimal incentive schemes for multistage projects staged financing pervasive in both venture capital and research grants arises as a feature of the optimal contract the nature of progress plays an important role when progress is tangible incentives are provided through a series of deadlines and a reward scheme that decreases over time early progress in one stage gives the agent more time and funding to complete the next one when progress is intangible unverifiable progress reports are used despite the fact that the information in the report has no social value the optimal contract involves a soft deadline wherein the principal guarantees funding up to a certain date if the agent reports progress at that date then the principal gives him a relatively short deadline to complete the project if not then a probationary phase begins in which the project is terminated at a constant rate until progress is reported we explore the implications for welfare and optimal project design

time consistent taxation by a government with redistributive goals abstract in a dynamic economy whose government is interested in both equity and efficiency time consistency problems arise even if the government has access to nondistortionary tax instruments moral hazard in production leads to a nondegenerate distribution of income which the government would like to flatten ex post self enforcing social agreements can mitigate the tendency toward excessive redistribution we investigate the nature of the distortions caused by the time consistency problem and show that in the constrained optimal equilibrium usually a linear tax schedule is imposed this remains true if renegotiation of the social agreement is possible journal of economic literature classification numbers c7 c73 e6 h21

the monetary compensation mechanism an alternative to the clean development mechanism abstract one of the key challenges in resolving global warming problem is how to induce developing countries to reduce emissions the cdm was proposed in the kyoto protocol as a means of obtaining the cooperation of developing countries in controlling greenhouse gases but it has some intrinsic problems and has generated considerable controversy this paper presents an alternative mechanism the monetary compensation mechanism mcm i study the characteristics of this mechanism with a dynamic principal agent model by solving the model numerically i obtain the optimal solution for a scenario based on 1990 data the monetary compensation rate under the mcm is comparable to the price of cers in the cdm but the mcm has several advantages over the cdm

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

markov perfect risk sharing moral hazard and limited commitment abstract we define characterize and compute markov perfect risk sharing contracts in a dynamic stochastic economy with endogenous asset accumulation and simultaneous limited commitment and moral hazard frictions we prove that markov perfect insurance contracts preserve standard properties of optimal insurance with private information and are not more restrictive than a long term contract with one sided commitment markov perfect contracts imply a determinate asset time path and a non degenerate long run stationary wealth distribution quantitatively we show that markov perfect risk sharing contracts provide sizably more consumption smoothing relative to self insurance and that the welfare gains from resolving the commitment friction are larger than the gains from resolving the moral hazard friction at low asset levels while the opposite holds for high asset levels

repeated moral hazard with effort persistence abstract i study a problem of repeated moral hazard where the effect of effort is persistent over time each period s outcome distribution is a function of a geometrically distributed lag of past efforts i show that when the utility of the agent is linear in effort a simple rearrangement of terms in his lifetime utility translates this problem into a related standard repeated moral hazard the solutions for consumption in the two problems are observationally equivalent implying that the main properties of the optimal contract remain unchanged with persistence for illustration i present the computed solution of an example

endogenous groups and dynamic selection in mechanism design abstract we create a dynamic theory of endogenous risk sharing groups with good internal information and their coexistence with relative performance individualistic regimes which are informationally more opaque inequality and organizational form are determined simultaneously numerical techniques and succinct reformulations of mechanism design problems with suitable choice of promised utilities allow the computation of a stochastic steady state and its transitions regions of low inequality and moderate to high wealth utility promises produce the relative performance regime while regions of high inequality and low wealth produce the risk sharing group regime if there is a cost to prevent coalitions risk sharing groups emerge at high wealth levels also transitions from the relative performance regime to the group regime tend to occur when rewards to observed outputs exacerbate inequality while transitions from the group regime to the relative performance regime tend to come with a decrease in utility promises some regions of inequality and wealth deliver long term persistence of organization form and inequality while other regions deliver high levels of volatility

repeated insurance relationships in a costly state verification model with an application to deposit insurance abstract we consider the problem of an insurer who enters into a repeated relationship with a set of risk averse agents in the presence of ex post verification costs the insurer wishes to minimize the expected cost of providing these agents a certain expected utility level we characterize the optimal contract between the insurer and the insured agents we then apply the analysis to the provision of deposit insurance our results suggest in a deposit insurance context that it may be optimal to utilize the discount window early on and to make deposit insurance payments only later or not at all

the permanent effects of fiscal consolidations abstract the global financial crisis has permanently lowered the path of gdp in all advanced economies at the same time and in response to rising government debt levels many of these countries have been engaging in fiscal consolidations that have had a negative impact on growth rates we empirically explore the connections between these two facts by extending to longer horizons the methodology of blanchard and leigh 2013 regarding fiscal policy multipliers our results provide support for the presence of strong hysteresis effects of fiscal policy the large size of the effects points in the direction of self defeating fiscal consolidations as suggested by delong and summers 2012 attempts to reduce debt via fiscal consolidations have very likely resulted in a higher debt to gdp ratio through their long term negative impact on output

effective tax rates in macroeconomics cross country estimates of tax rates on factor incomes and consumption abstract this paper proposes a method for computing tax rates using national accounts and revenue statistics using this method we construct time series of tax rates for large industrial countries the method identifies the revenue raised by different taxes at the general government level and defines aggregate measures of the corresponding tax bases this method yields estimates of effective tax rates on factor incomes and consumption consistent with the tax distortions faced by a representative agent in a general equilibrium framework these tax rates compare favorably with existing estimates of marginal tax rates and highlight important international differences in tax policy

reputation quality observability and the choice of quality assurance systems participants in a supply chain of agricultural value added products face significant challenges many of the costly distinctive traits desired by consumers are difficult if not impossible to observe even after consumption a complicating factor addressed here is that in some circumstances delivered quality can only be imperfectly learned and or affected stochastically by producers hence both symmetric and asymmetric informational imperfections may be present in order for markets for these classes of goods to arise firms touting the quality of the product need to be trusted a repeated purchases model is developed to explore the fundamental economic factors that lie behind the choice of different quality assurance systems and their associated degrees of stringency by firms differences in the quality discoverability of a sought after attribute attractiveness of a market and the value placed in the future are among the factors contributing to the implementation of widely diverse systems across participants in different markets close attention is paid to the role of reputations in providing the incentives for firms to deliver high quality goods in an environment of symmetrically imperfect information

austerity in the aftermath of the great recession abstract cross country differences in austerity defined as government purchases below forecast account for 75 of the observed cross sectional variation in gdp in advanced economies during 2010 2014 statistically austerity is associated with lower gdp lower inflation and higher net exports a multi country dsge model calibrated to 29 advanced economies generates effects of austerity consistent with the data counterfactuals suggest that eliminating austerity would have substantially reduced output losses in europe austerity was so contractionary that debt to gdp ratios in some countries increased as a result of endogenous reductions in gdp and tax revenue

growth and risk sharing with private information abstract we examine the impact of incomplete risk sharing on growth and welfare the source of market incompleteness in our economy is private information a household s idiosyncratic productivity shock is not observable by others risk sharing between households occurs through long term contracts with intermediaries we find that incomplete risk sharing tends to reduce the rate of growth relative to the complete risk sharing benchmark numerical examples indicate that the welfare cost and the growth effect of private information are small

optimal mortgage design this article studies optimal mortgage design in a continuous time setting with volatile and privately observable income costly foreclosure and a stochastic market interest rate we show that the features of the optimal mortgage are consistent with an option adjustable rate mortgage option arm under the optimal contract the borrower is given discretion of how much to repay until his balance reaches a certain limit the default rates and interest rate payment on the mortgage correlate positively with the market interest rate gains from using the optimal contract relative to simpler mortgages are the biggest for those who face more income variability buy pricey houses given their income level or make little or no down payment our model thus may help to explain a high concentration of option arms among riskier borrowers jel g20 g21 g33

sticky prices in the euro area a summary of new micro evidence this paper summarises the vast evidence on micro price setting recently obtained for euro area countries we consider studies with micro data on consumer and producer prices as well as survey information the main findings are 1 prices in the euro area are sticky and stickier than in the us 2 downward price rigidity is only slightly more marked than upward price rigidity 3 heterogeneity and asymmetries are observed in price setting and 4 the relevance of theories that explain price stickiness such as implicit or explicit contracts marginal costs and coordination failure is confirmed whereas menu costs pricing thresholds and costly information explanations are judged much less relevant by firms jel c25 d40 e31

optimal unemployment insurance with human capital depreciation and duration dependence this paper studies the effect of human capital depreciation and duration dependence on the design of an optimal unemployment insurance ui scheme our results partially confirm those obtained in most previous studies benefits should decrease with unemployment duration the optimal program also generates two main novel features which are not present in stationary models first if human capital depreciates rapidly enough during unemployment ui transfers are bounded below by a minimal assistance level that arises endogenously in the efficient program second we study the optimality of imposing a history contingent wage tax after reemployment our numerical simulations based on the spanish and us economies show that the wage tax should decrease with the length of worker s previous unemployment spell and become a wage subsidy for long term unemployed workers as a by product of our study we develop a systematic approach suitable for studying recursively a wide range of dynamic moral hazard problems and other models with similar characteristics

on ramsey s conjecture efficient allocations in the neoclassical growth model with private information abstract in his seminal paper of 1928 ramsey conjectured that if agents discounted the future differently in the long run all agents except the most patient would live at the subsistence level the validity of this conjecture was investigated in different environments in particular it has been confirmed in the neoclassical growth model with dynamically complete markets this paper studies this conjecture in a version of this model that includes private information and heterogeneous agents a version of bayesian implementation is introduced and a recursive formulation of the original allocation problem is established efficient allocations are renegotiation proof and the expected utility of any agent cannot go to zero with positive probability if the economy does not collapse if the economy collapses all agents will get zero consumption forever thus including any degree of private information in the neoclassical growth model will deny ramsey s conjecture if efficient allocations are considered

payments systems design in deterministic and private information environments abstract the first setup we study is a deterministic model with spatial separation where we consider alternative payments systems institutions and their implications for allocation and welfare a payments system with period by period settlement in outside money improves on decentralized exchange an efficient allocation is supported by a payments system where settlement is not imposed in the second model there is random matching and unobserved productivity shocks and preference shocks we explore how risk should be shared optimally in this economy and interpret the results in terms of how actual payments systems should operate journal of economic literature classification numbers e4 e5

yuliy sannikov winner of the 2016 clark medal yuliy sannikov is an extraordinary theorist who has developed methods that offer new insights in analyzing problems that had seemed well studied and familiar for example decisions that might bring about cooperation and or defection in a repeated play prisoner s dilemma game or that affect the balance of incentives and opportunism in a principal agent relationship his work has broken new ground in methodology often through the application of stochastic calculus methods the stochastic element means that his work naturally captures situations in which there is a random chance that monitoring communication or signaling between players is imperfect using calculus in the context of continuous time games allows him to overcome tractability problems that had long hindered research in a number of areas he has substantially altered the toolbox available for studying dynamic games this essay offers an overview of sannikov s research in several areas

implications of endogenous group formation for efficient risk sharing the existing literature on sub game perfect risk sharing suffers from a basic inconsistency while a group of size n is able to coordinate on a risk sharing outcome it is assumed that deviating subgroups cannot i relax this assumption and characterise the optimal contract among all coalition proof history dependent contracts this alters the predictions of the standard dynamic limited commitment model i show that the consumption of constrained agents depends on both the history of shocks and its interaction with the current income of other constrained agents from this i derive a formal test for the presence of endogenous group formation under limited commitment

optimal risk sharing with effort and project choice we consider first best risk sharing problems in which the agent can control both the drift effort choice and the volatility of the underlying process project selection in a model of delegated portfolio management it is optimal to compensate the manager with an option type payoff where the functional form of the option is obtained as a solution to an ordinary differential equation in the general case the optimal contract is a fixed point of a functional that connects the agent s and the principal s maximization problems we apply martingale duality methods familiar from optimal consumption investment problems

moral hazard optimal unemployment insurance and experience rating abstract this paper is concerned with evaluating alternative unemployment insurance ui schemes in a dynamic economy with moral hazard we consider changes in the size and duration of ui benefits and the effects of experience rating and use a dynamic contracting approach to determine a benchmark optimal allocation radical changes in the current ui system increase welfare but not by much a move to full experience rating has distributional effects but the aggregate effects are negligible

deficits public debt dynamics and tax and spending multipliers cutting government spending can increase the budget defi cit at zero interest rates according to a standard new keynesian model calibrated with bayesian methods similarly increasing sales taxes can increase the budget defi cit rather than reduce it both results suggest limitations of austerity measures at zero interest rates running budget defi cits can be either expansionary or contractionary depending on how they interact with expectations about long run taxes and spending the effect of fi scal policy action is thus highly dependent on the policy regime a successful stimulus therefore needs to specify how the budget is managed not only in the short but also in the medium and long runs

the laffer curve revisited abstract laffer curves for the us the eu 14 and individual european countries are compared using a neoclassical growth model featuring constant frisch elasticity cfe preferences new tax rate data is provided the us can maximally increase tax revenues by 30 with labor taxes and 6 with capital taxes we obtain 8 and 1 for the eu 14 there 54 of a labor tax cut and 79 of a capital tax cut are self financing the consumption tax laffer curve does not peak endogenous growth and human capital accumulation affect the results quantitatively household heterogeneity may not be important while transition matters greatly

consumption commitment and cycles abstract this paper examines the properties of efficient allocations of risk in an economic environment in which the outside enforcement of risk sharing arrangements is infinitely costly in these allocations unanticipated relative productivity movements have effects on both the current and future distribution of consumption across individuals if preferences over consumption and leisure are nonhomothetic these changes in the allocation of consumption will generate persistent cycles in aggregate output that do not occur in efficient allocations when enforcement is costless

optimal taxation in a habit formation economy abstract this paper studies habit formation in consumption preferences in a dynamic mirrlees economy we derive optimal labor and savings wedges based on a recursive approach we show that habit formation creates a motive for subsidizing labor supply and savings in particular habit formation invalidates the well known no distortion at the top result we demonstrate that the theoretical findings are quantitatively important in a parametrized life cycle model average labor and savings wedges fall by more than one third compared with the case of time separable preferences

output spillovers from fiscal policy in this paper we estimate the cross country spillover effects of government purchases on output for a large number of oecd countries following the methodology in auerbach and gorodnichenko 2012a b we allow these multipliers to vary smoothly according to the state of the economy and use real time forecast data to purge policy innovations of their predictable components we also consider the responses of other key macroeconomic variables our findings suggest that cross country spillovers have an important impact and also confirm those of our earlier papers that fiscal shocks have a larger impact when the affected country is in recession

the output effect of fiscal consolidation plans abstract we show that the correct experiment to evaluate the effects of a fiscal adjustment is the simulation of a multi year fiscal plan rather than of individual fiscal shocks simulation of fiscal plans adopted by 16 oecd countries over a 30 year period supports the hypothesis that the effects of consolidations depend on their design fiscal adjustments based upon spending cuts are much less costly in terms of output losses than tax based ones and have especially low output costs when they consist of permanent rather than stop and go changes in taxes and spending the difference between tax based and spending based adjustments appears not to be explained by accompanying policies including monetary policy it is mainly due to the different responses of business confidence and private investment

hysteresis and fiscal policy abstract empirical studies support the hysteresis hypothesis that recessions have a permanent effect on the level of output we analyze the implications of hysteresis for fiscal policy in a dsge model we assume a simple learning by doing mechanism where demand driven changes in employment can affect the level of productivity permanently leading to hysteresis in output we show that the fiscal output multiplier is much larger in the presence of hysteresis and that the welfare multiplier of fiscal policy the consumption equivalent change in welfare for one dollar change in public spending is positive negative in the presence absence of hysteresis the main benefit of accommodative fiscal policy in the presence of hysteresis is to diminish the damage of a recession to the long term level of productivity and thus output

on optimal unemployment compensation abstract the design of an optimal unemployment compensation scheme is analyzed using a dynamic principal agent relationship between a risk neutral planner the principal and risk averse workers the agents where the planner s inability to observe workers job search efforts creates a moral hazard problem to design an implementable scheme we require that each agent is guaranteed a minimum level of expected discounted utility regardless of his past history in contrast with previous studies we find that the optimal contract is quite close to actual unemployment compensation schemes both qualitatively and quantitatively

political economy of mechanisms we study the optimal mirrlees taxation problem in a dynamic economy in contrast to the standard approach where the taxation mechanism is operated by a benevolent planner with full commitment power we focus on economies in which policy decisions are made by self interested politicians who cannot commit to policies the society controls politicians using elections we show that the provision of incentives to politicians can be partly separated from redistribution across agents and that political economy constraints can be modeled as introducing additional aggregate distortions in the dynamic mirrlees problem we provide conditions under which the political economy distortions persist or disappear in the long run if the politicians are as patient as the agents the best sustainable mechanism leads to an asymptotic allocation where the aggregate distortions arising from political economy disappear in contrast when politicians are less patient than the citizens positive aggregate labor and capital taxes remain even asymptotically we conclude by providing a brief comparison of centralized

the political economy of indirect control this paper characterizes the efficient sequential equilibrium when a government uses indirect control to exert its authority we develop a dynamic principal agent model in which a principal a government delegates the prevention of a disturbance such as riots protests terrorism crime or tax evasion to an agent who has an advantage in accomplishing this task our setting is a standard dynamic principal agent model with two additional features first the principal is allowed to exert direct control by intervening with an endogenously determined intensity of force which is costly to both players second the principal suffers from limited commitment using recursive methods we derive a fully analytical characterization of the likelihood intensity and duration of intervention the first main insight from our model is that repeated and costly interventions are a feature of the efficient equilibrium this is because they serve as a punishment to induce the agent into desired behavior the second main insight is a detailed analysis of a fundamental tradeoff between the intensity and duration of intervention which is driven by the principal s inability to commit finally we derive sharp predictions regarding the impact of various factors on likelihood intensity and duration of intervention we discuss these results in the context of some historical episodes

getting it done dynamic incentives to complete a project a principal wants an agent to complete a project the agent undertakes unobservable effort which affects in each period the probability that the project is completed we characterize the contracts that the principal sets with and without commitment with full commitment the contract involves the agent s value and wage declining over time in order to give the agent incentives to exert effort the best sequentially rational equilibrium for the principal also involves the agent s wage declining over time while the worst sequentially rational equilibrium for the principal has a constant wage and is in fact the unique stationary equilibrium the best weakly renegotiation proof equilibrium for the principal is achieved by a constant wage that maximizes the principal s payoff conditional on wages being constant we compare these solutions to the efficient outcome