tipping points in macroeconomic agent based models abstract the aim of this work is to explore the possible types of phenomena that simple macroeconomic agent based models abms can reproduce we propose a methodology inspired by statistical physics that characterizes a model through its phase diagram in the space of parameters our first motivation is to understand the large macro economic fluctuations observed in the mark i abm devised by delli gatti and collaborators in this regard our major finding is the generic existence of a phase transition between a good economy where unemployment is low and a bad economy where unemployment is high we then introduce a simpler framework that allows us to show that this transition is robust against many modifications of the model and is generically induced by an asymmetry between the rate of hiring and the rate of firing of the firms the unemployment level remains small until a tipping point beyond which the economy suddenly collapses if the parameters are such that the system is close to this transition any small fluctuation is amplified as the system jumps between the two equilibria we have explored several natural extensions of the model one is to introduce a bankruptcy threshold limiting the firms maximum level of debt to sales ratio this leads to a rich phase diagram with in particular a region where acute endogenous crises occur during which the unemployment rate shoots up before the economy can recover we also introduce simple wage policies this leads to inflation in the good phase or deflation in the bad phase but leaves the overall phase diagram of the model essentially unchanged we have also explored the effect of simple monetary policies that attempt to contain rising unemployment and defang crises we end the paper with general comments on the usefulness of abms to model macroeconomic phenomena in particular in view of the time needed to reach a steady state that raises the issue of ergodicity in these models

myopic loss aversion revisited in this paper we reexamine several experimental papers on myopic loss aversion by analyzing individual rather than aggregate choice patterns we find that the behavior of the majority of subjects is inconsistent with the hypothesis of myopic loss aversion

on the optimality of the nordic system of dual income taxation abstract in recent years the nordic countries have introduced a so called dual income tax which combines a proportional tax on capital income with progressive taxation of labour income the paper argues that this asymmetric treatment of the two types of income can be defended on pure efficiency grounds because the progressivity of the labour income tax serves to reduce the private return to human capital investment thereby offsetting the tendency of a proportional comprehensive income tax to discriminate in favour of such investment the analysis is based on an overlapping generations model of a small open economy where consumers face a trade off between investment in human capital and investment in non human capital extended versions of the model allow for liquidity constraints and an endogenous labour leisure choice

real rigidities and the non neutrality of money rigidities in real prices are not sufficient to create rigidities in nominal prices and real effects of nominal shocks and by themselves small frictions in nominal adjustment such as costs of changing prices create only small non neutralities but this paper shows that substantial nominal rigidity can arise from a combination of real rigidities and small nominal frictions the paper shows the connection between real and nominal rigidity given the presence of nominal frictions both in general and for two specific sources of real rigidity one arising from goods market imperfections and the other from labour market imperfections

anomalies the equity premium puzzle stable url http links jstor org sici sici 0895 3309 28199724 2911 3a1 3c191 3aatepp 3e2 0 co 3b2 0the journal of economic perspectives is currently published by american economic association your use of the jstor archive indicates your acceptance of jstor s terms and conditions of use available athttp www jstor org about terms html jstor s terms and conditions of use provides in part that unless you have obtainedprior permission you may not download an entire issue of a journal or multiple copies of articles and you may use content inthe jstor archive only for your personal non commercial use please contact the publisher regarding any further use of this work publisher contact information may be obtained athttp www jstor org journals aea html each copy of any part of a jstor transmission must contain the same copyright notice that appears on the screen or printedpage of such transmission the jstor archive is a trusted digital repository providing for long term preservation and access to leading academicjournals and scholarly literature from around the world the archive is supported by libraries scholarly societies publishers and foundations it is an initiative of jstor a not for profit organization with a mission to help the scholarly community takeadvantage of advances in technology for more information regarding jstor please contact support jstor org http www jstor orgfri aug 17 15 58 04 2007

heuristic learning and the discovery of specialization and exchange abstract i develop and calibrate an agent based model of boundedly rational adaptive agents in a two good production and exchange economy to replicate human subject outcomes in the same eight person experimental economy to test agents ability to capture human behavior i extend the model and use its output to make predictions about a second experimental environment in which the group of eight agents is slowly constructed by merging smaller groups this environment improves human subject performance in the specialization and exchange task and commensurate improvement emerges for some parameterizations of the agent based model this iterative process yields incremental improvement of decision level theories about economic discovery

optimal simple monetary and fiscal rules under limited asset market participation the combination of limited asset market participation and consumption habits generates indeterminacy for empirically plausible calibrations of a business cycle model characterized by price and nominal wage rigidities equilibrium determinacy is restored by demand management policies based on simple fiscal rules in this regard fiscal control of nominal income growth is particularly effective in addition the complementarity between the taylor rule and the fiscal feedback on nominal income growth produces relatively large welfare gains limiting both aggregate and intragroup volatilities

tax reform and automatic stabilization an income tax provides implicit insurance by dampening the variability of disposable income and consumption using an empirical framework derived from the consumption insurance literature and data from the panel study of income dynamics we examine the effect of federal income tax reforms of the 1980 s on automatic stabilization of consumption overall erta and tra86 reduced consumption stability by about 50 percent recently increased eitc generosity restored or enhanced consumption insurance the welfare cost of moving to the post tra86 system is sizable for relatively risk averse households facing large income risk but is much more modest for the typical household jel h21

do oil producers act as oil igopolists in this paper the author analyzes an oligopoly model of exhaustible resource extraction and develop predictions about relative extraction patterns of different producers using the open quote oil close quote igopoly model of loury one can show that producers with large stocks produce a larger amount but a smaller percentage of their stocks than producers with small stocks the authors extend loury s model to cases where extraction costs differ among producers and where costs are a function of cumulative extraction an increase in extraction costs for a producer causes it to produce less relative to its rivals when extraction costs rise with cumulative extraction producers with large reserves tend to have lower extraction costs and a smaller ratio of cumulative production to initial reserves than producers with small reserves the authors test the predictions of the model using oil industry data and find that the empirical results are consistent with the predictions of open quotes oil close quotes igopoly theory producers with larger reserves extract a smaller share of their reserves and have lower production costs than producers with smaller reserves this pattern holds for 73 countries with oil reserves during the time period 1970 1989 and for approximately 400 us oil companies in 1983 and 1984 more the observed pattern of production for both opec and non opec producers is consistent with open quote oil close quote igopoly theory opec producers do not appear to restrain production given their level of reserves relative to non opec producers thus viewing the oil market as containing one dominant firm opec with a competitive fringe may be misleading further the pattern of extraction observed in oil markets is inconsistent with the pattern predicted by competitive theory 29 refs 5 figs 6 tabs less

omnichannel management with consumer disappointment aversion abstract with the popularity of omnichannel retailing consumers are sophisticated enough to make strategic channel decisions considering the possible disappointment for an unexpected outcome induced by various uncertainties from online and offline channels value uncertainty online can trigger low value disappointment and availability uncertainty offline may cause stock out disappointment this study characterizes the effect of consumers anticipated disappointment aversion behavior on the optimal pricing decisions of retailers with or without inventory constraint in the omnichannel environment when a retailer operates in dual channel and faces offline inventory constraint the concern for consumers homogeneous disappointment aversion changes the threshold above which the retailer implement different channel pricing strategies then we show how the negative impact of disappointment on profit and market can be mitigated by physical showroom mechanism which is increasingly adopted by omnichannel management introduction of a cost effective physical showroom expands the market by relaxing the restriction of stock out disappointment and improves profit as long as consumers low value disappointment is high enough interestingly the low value disappointment benefits the omnichannel in expanding the market coverage by alleviating the constraint exerted by stock out disappointment further discussions regarding the disappointment behavior are derived from the extension of consumers heterogeneity in disappointment aversion

consumer response to the timing of income evidence from a change in tax withholding in 1992 the income tax withholding tables were adjusted so that withholding was reduced a typical worker received an extra 28 80 in take home pay per month in march through december 1992 to be offset by a lower tax refund in 1993 the change in withholding amounted to 0 5 percent of gdp president bush who proposed this change in his state of the union address intended that it provide a temporary stimulus to demand but the policy change involved only the timing of income so under the life cycle permanent income model it would be predicted to have a negligible effect on consumption and aggregate demand this paper reports consumers responses to the change in withholding the results are based on a survey taken shortly after it went into effect forty three percent of consumers report spending the extra take home pay substantially more than the zero percent predicted by the standard models but substantially less than the one hundred percent upon which the policy was predicated the decision to save the income is not explained by expected income growth therefore while behavior of many households is not fully consistent with the life cycle permanent income model liquidity constraints do not appear to account for this behavior this abstract was borrowed from another version of this item

imitation by price and quantity setting firms in a differentiated market abstract we study the evolution of imitation behaviour in a differentiated market where firms are located equidistantly on a salop circle firms choose price and quantity simultaneously leaving open the possibility for non market clearing outcomes the strategy of the most successful firm is imitated behaviour in the stochastically stable outcome depends on the level of market differentiation and corresponds exactly with the nash equilibrium outcome of the underlying stage game for high level of differentiation firms end up at the monopoly outcome for intermediate level of differentiation they gravitate to a mutually non aggressive outcome where price is higher than the monopoly price for low level of differentiation firms price at a mark up above the marginal cost market clearing always results endogenously

prices debt and market structure in an agent based model of the financial market we develop an agent based model in which heterogeneous and boundedly rational agents interact by trading a risky asset at an endogenously set price agents are endowed with balance sheets comprising the risky asset as well as cash on the asset side and equity capital as well as debt on the liabilities side a number of findings emerge when simulating the model we find that the empirically observable log normal distribution of bank balance sheet size naturally emerges and that higher levels of leverage lead to a greater inequality among agents furthermore greater leverage increases the frequency of bankruptcies and systemic events credit frictions which we define as the stickiness of debt adjustments are able to explain a key difference in the relation between leverage and assets observed for different bank types lowering credit frictions leads to an increasingly procyclical behavior of leverage which is typical for investment banks nevertheless the impact of credit frictions on the fragility of the model financial system is complex lower frictions do increase the stability of the system most of the time while systemic events become more probable in particular we observe an increasing frequency of severe liquidity crises that can lead to the collapse of the entire model financial system

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

the response of expenditures to anticipated income changes panel data estimates standard models of intertemporal allocation predict that the time path of expenditures should be independent of the time path of income recently two papers parker 1999 and souleles 1999 have suggested that u s households have a high marginal propensity to spend within year anticipated income changes we use an expenditure survey panel from spain to re examine this issue we exploit two important features of the spanish data first we have quarterly panel data that follows households for more than four quarters second we use the fact that workers are exogenously sorted into one of two payment schemes some receive the same amount each month of the year and others receive an extra payment in june and december the extra payment is large and predictable we examine the detailed pattern of expenditures over the year to see whether they differ between the two groups we fail to find even weak differences we complement this with a conventional euler equation analysis of excess sensitivity our predicting equation for quarterly earnings growth is much better than usual and is likely to give a powerful test of the hypothesis that predictable changes in income do not lead to changes in expenditure patterns the results of this analysis confirm the graphical analysis we find no evidence of excess sensitivity we conclude that households in normal times do smooth consumption over the year we suggest a reconciliation of our results with those of parker and souleles

disaggregating the effect of the business cycle on the distribution of income this paper disaggregates total household income into a complete set of components and studies the comparative cyclicality of these com ponent to economic growth comparisons of the relative responsiveness to gnp growth of wages hours of work and total labor market income of heads and wives and transfer income sources of households are made across income race sex and age groups this provides a picture of the channels by which economic growth produces income change significant differences in elasticities are found to exist both between different income components and between different population groups for the same component the narrowing income distribution in times of high growth occurs primarily because of large elasticities on head s labor market income among the poor both wages and hours show evidence of cycli cality the labor market earnings of women both wives and household heads is far less responsive to growth cyclicality in transfer income varies enormously between population groups and by type of transfer

food stamp caseloads over the business cycle 1 introduction the onset of the current economic downturn following the longest expansion in u s history has renewed interest in the role of automatic stabilizers designed to insure households against negative cyclical income shocks this system of income and consumption stabilizers includes among others the individual income tax and the panoply of social insurance programs such as unemployment insurance and the food stamp program while the income tax and unemployment insurance have received recent attention gruber 1997 auerbach and feenberg 2000 kniesner and ziliak 2002a b little is known about the role of food stamps as an automatic stabilizer even though the program served over 27 million americans at its peak in 1994 this gap in the literature is particularly acute in light of passage of the personal responsibility and work opportunity reconciliation act of 1996 welfare reform act which introduced new rules on cash assistance recipients and thus the nearly half of food stamp recipients who also receive cash welfare moreover the 1996 welfare reform also had a direct administrative effect on the food stamp program by ending the eligibility of some recipients reducing average benefit levels and requiring states to replace paper coupons with electronic benefit transfer cards importantly the welfare reform act also eliminated the entitlement status of the main cash welfare program aid to families with dependent children afdc thus positioning food stamps as a more prominent countercyclical consumption stabilizer a first task in assessing the possible stabilization role of food stamps in the era of welfare reform is to identify the cyclical sensitivity of food stamp caseloads if food stamp caseloads are acyclical then we would expect no role for food stamps in smoothing consumption over the business cycle if however food stamp caseloads are highly cyclical then food stamps may function as an important antirecessionary tool by the same token the new welfare policies may independently affect food stamp caseload movements and interact with the business cycle thereby altering the possible stabilization role of the program in this paper we specify a dynamic model of food stamp caseloads to estimate the responsiveness of the caseload to the business cycle to welfare policies and to interactions between the business cycle and welfare policies unlike cash welfare there has been scant research on the cyclicality of food stamp caseloads 1 wallace and blank 1999 are a recent exception in their use of both static annual and dynamic monthly food stamp caseload models based on state level panel data for the 1980 to 1998 federal fiscal years with annual data food stamp caseloads were strongly countercyclical and reform of afdc led to weak declines in total caseloads 2 specifically they attribute up to 44 of the 1994 to 1998 food stamp caseload decline to economic conditions and about 6 of the decline to welfare reform they reach broadly similar conclusions with monthly data however wallace and blank calculate that upward of 85 of the post 1996 decline in food stamp caseloads can be attributed to welfare reform if one is willing to ascribe all the unexplained residual to welfare reform which as the authors note is undoubtedly an overestimate of welfare reform s effect on food stamp caseloads p 85 in their static models figlio gundersen and ziliak 2000 reached conclusions similar to wallace and blank s estimates with annual level data in their preferred dynamic models they attribute about 35 of the 1994 to 1998 caseload decline to the macroeconomy and virtually nothing to welfare reform we improve on this previous research on food stamp caseloads along several dimensions first we not only follow other research in estimating the impact of afdc policy changes on food stamp caseloads but also examine the impact of policies that are focused directly on food stamps

income volatility and household consumption the impact of food assistance programs the impact offood assistance programs food stamps in a period of rising income inequality in the united states is analyzed using 1978 92 psid data we assess to what extent food assistance can be viewed as an effective insurance to permanent shocks to income the results show that the program has a substantial consumption smoothing effect in the lowincome population the response of food consumption to a permanent income shock is a third lower after accounting for the monetary value of food stamps

a theory of disappointment aversion an axiomatic model of preferences over lotteries is developed it is shown that this model is consistent with the allais paradox includes expected utility theory as a special case and is only one parameter beta richer than the expected utility model allais paradox type behavior is identified with positive values of beta preferences with positive beta are said to be disappointment averse it is shown that risk aversion implies disappointment aversion and that the arrow pratt measures of risk aversion can be generalized in a straight forward manner to the current framework copyright 1991 by the econometric society

revisiting asset pricing under habit formation in an overlapping generations economy abstract by incorporating habit formation into an overlapping generations economy we show that the middle aged consumers savings decision has a substantial impact on the equity premium the higher incentive for savings for the middle aged resulting from the habit formation preference causes an even higher demand for bonds and a lower demand for equity which eventually generates a lower risk free rate and a higher required return for holding equity than does the framework of non habit forming models calibration results verify that the habit formation setting together with an olg framework is capable of yielding lower bond returns and higher equity returns than the standard crra utility models and the borrowing constraint imposed on the young aged consumers amplifies the positive effect of habit formation on the equity premium the findings imply that habit formation preferences within the overlapping generations framework under the borrowing constrained economy can provide a more improved explanation of the equity premium puzzle

automatic stabilizers and economic crisis us vs europe this paper analyzes the effectiveness of the tax and transfer systems in the eu and the us to provide income insurance through automatic stabilization in the recent economic crisis we find that automatic stabilizers absorb 38 of a proportional income shock in the eu compared to 32 in the us in the case of an unemployment shock 47 of the shock is absorbed in the eu compared to 34 in the us this cushioning of disposable income leads to a demand stabilization of up to 30 in the eu and up to 20 in the us there is large heterogeneity within the eu automatic stabilizers in eastern and southern europe are much lower than in central and northern european countries we also investigate whether countries with weak automatic stabilizers have enacted larger fiscal stimulus programs

discretionary fiscal responses to the covid 19 pandemic we analyse discretionary fiscal responses to the covid 19 pandemic we distinguish policies for three phases of the pandemic 1 acute overall disruption 2 initial recovery phase and 3 the longer term we analyse measures already taken in 1 and consider measures relevant for 2 we distinguish between lump sum subsidies such as deferral of tax payments which may ease financial constraints and measures which intentionally affect incentives we also identify factors that are important given the short term nature of the measures

sticky prices as coordination failure this paper links the coordination failure and menu cost approaches to the microeconomic foundations of keynesian macroeconomics if a firm s desired price is increasing in others prices then the gain from price adjustment after a nominal shock is greater if others adjust this strategic complementarity leads to multiple equilibria in the degree of rigidity welfare may be much higher in the equilibria with less rigidity thus nominal rigidity arises from a failure to coordinate price changes jel e12 e30 keynesian macroeconomics waned in the 1970 s because economists grew disenchanted with its weak microeconomic foundations the central difficulty was that keynesian models were based on ad hoc rigidities in nominal wages and prices the 1980 s produced two approaches to reviving keynesian theory the menu cost literature n gregory mankiw 1985 george akerlof and janet yellen 1985 seeks to provide rigorous explanations for nominal rigidities these papers argue that small frictions in price setting are enough to produce large nominal rigidities in contrast the coordination failure literature russell cooper and andrew john 1988 abandons nominal rigidities and seeks alternative foundations for keynesian models the central idea is that many economic activities such as production e g john bryant 1983 trade e g peter diamond 1982 and investment e g nobuhiro kiyotaki 1988 exhibit synergism or strategic complementarity one agent s optimal level of activity depends positively on others activity strategic complementarity can lead to multiple equilibria with high activity equilibria superior to low activity equilibria thus an economy may be stuck in an underemployment equilibrium even though a superior equilibrium exists models with nominal rigidities and models with coordination failures are often presented as competing paradigms 1 this paper shows that this view is incorrect we take a step toward unifying the foundations of keynesian economics by showing that the two sets of ideas are highly complementary nominal rigidity arises from a failure to coordinate price changes this failure has the essential features of coordination failures in previous models flexibility in one firm s price increases the incentives for other firms to make their prices flexible this strategic complementarity leads to multiple equilibria in the degree of nominal rigidity equilibria with less rigidity more active price adjustment are often pareto superior to equilibria with more rigidity these results contribute to our understanding both of coordination failure and of nominal rigidity the range of keynesian phenomena explained by coordination failures is greatly expanded previous coordination failure models contain only real variables and thus ascribe no role to monetary policy or other determinants of nominal spending our results suggest that coordination failure is at the root of inefficient nonneutralities of money theories of nominal rigidities gain new empirical and policy im

first order risk aversion and the equity premium puzzle abstract this paper integrates yaari s dual theory of choice under uncertainty into a multiperiod context and examines its implications for the equity premium puzzle an important property of these preferences is that of first order risk aversion which implies in our model that the risk premium for a small gamble is proportional to the standard deviation rather than the variance since the standard deviation of the growth rate in aggregate consumption is considerably larger than its variance the model can generate both a small risk free rate and a moderate equity premium

evolutionary competition in a mixed market with socially concerned firms abstract in this paper we study an oligopoly market where profit maximizing firms and socially concerned firms compete in quantities confronting remarks by milton friedman and gary becker we are using an evolutionary setting to investigate the endogenous choice of the proper objective of business firms and the influence of product differentiation on the long run survival of firms which pursue non profit motives we find that firms which consider a combination of profit and consumer welfare can indeed have larger market shares and profits than their profit maximizing rivals one insight is that it might pay off for shareholders to consider stakeholder welfare but that the level of social concern should not be too high based on a strategy s profitability we consider asynchronous evolutionary updating with firms selecting nash quantities or choosing best replies to the expected market quantity here we observe that the consumers willingness to pay a price premium for products is crucial for the long run survival of socially concerned firms depending on the degrees of product differentiation and social concern long run outcomes consist either of both types of firms or only one type of firm if the firms propensity to switch between a social or a profit maximizing strategy is sufficiently large steady states are unstable and even complicated dynamics can occur

the reaction of household consumption to predictable changes in social security taxes the key implication of rational expectations and the basic life cycle permanent income hypothesis that predictable changes in income have no effect on the growth rate of consumption expenditures is examined this implication is important for understanding the effectiveness and optimal timing of fiscal policy the causes and propagation of business cycles and the effects of income fluctuations on the growth rate of the economy using household level consumption data from the consumer expenditure survey whether expenditures on nondurable goods increase contemporaneously with predictable changes in social security tax withholding is tested it is found that households do change their consumption expenditures in response to the predictable fluctuations in income induced by the social security tax system

modeling opec behavior economic and political alternatives the predominant approach to modeling opec behavior depends upon the assumption that economic self interest provides the best predictor of the cartel s price and production strategy with rational monopoly behavior the exogenous characteristics of the oil market determine an optimal price path for the group but opec members have diverse economic as well as political goals and uncertainty about oil market responses provides substantial leeway to argue about what is optimal an examination of the five key opec price decisions since 1973 shows that an operational code of advancing political priorities on arab israeli issues while deflecting security challenges better explains saudi arabia s decision making than the economic optimizing approach moreover no economic formula alone is consistent with saudi behavior the balance of internal and external forces of a political or security character on saudi leadership suggests more of a tilt toward price hawkishness than pure considerations of economic self interest would indicate this tilt is reinforced by a systematic weakness on the part of the u s government to exercise a sustained countervailing influence on the kingdom on behalf of moderation

evolution of cooperation in asymmetric commons dilemmas abstract field experiments with asymmetric commons dilemmas have shown that groups who are able to derive high social efficiency also had higher equity compared to groups who were not able to derive significant levels of social efficiency these findings resemble the high productivity in long lasting irrigation systems based on self governance we present an agent based model based on cultural group selection that shows that the patterns observed in the field experiments can be evolved in cases where agents participate regularly in less challenging symmetric public good dilemmas these results indicate that cooperation in asymmetric dilemmas can evolve and persist when the agents contend with other social dilemmas than the asymmetric dilemmas

government size and business cycle volatility how important are credit constraints in this paper we analyse how the availability of credit influences the relationship between government size as a proxy for fiscal stabilization policy and the amplitude of business cycle fluctuations in a sample of advanced oecd countries interpreting relatively low loan to value ratios as an indication of tight credit constraints we find that government size exerts a stabilizing effect on output and consumption growth fluctuations only when credit constraints are relatively tight our results provide support for the hypothesis that credit market frictions play a crucial role in the transmission of fiscal policy

a theory of oil igopoly cournot equilibrium in exhaustible resource markets with fixed supplies the emergence of an effective and powerful cartel in the international petroleum market has stimulated considerable effort among economists to develop models of pricing and supply behavior for this industry 2 this modeling task poses two basic difficulties first as in the standard oligopoly problem one must characterize the behavior of several sellers in a market aware of each other and of their effect on market price second there is here the added difficulty of treating the explicitly intertemporal nature of suppliers decision wherein a limited stock must be optimally allocated over time this paper studies the implications of the simplest non trivial postulates about these two aspects of the problem it is assumed that suppliers are non cooperative cournot nash players each of whom is imagined to select an optimal supply strategy taking as given the strategies of the others moreover it is hypothesized that the feasible strategies are limited to open loop paths chosen at the initial date to maximize the present value of profits in light of the paths of supply which the others have chosen 3 these basic postulates together with a few technical assumptions concerning the structure of resource demand permit one to demonstrate the existence of at least one non cooperative equilibrium concerning thisequilibrium we show that 1 the average and marginal return on resource stocks is inversely related to the size of a player s initial endowment 2 aggregate production decreases over time until all stocks are exhausted while firms with smaller stocks exhaust their supplies no later than firms with larger stocks do 3 the present value of price net of extraction cost declines over time 4 industry production maximizes a weighted average of intertemporal consumer s surplus and producers profits

are consumers forward looking evidence from fiscal experiments how changes in current and future income affect consumer spending is a perennial question in macroeconomics and public finance theoretical constructs such as the permanent income hypothesis are of limited assistance in resolving this issue because they neglect borrowing constraints and other market imperfections that can significantly affect the marginal propensity to spend out of current income recent empirical work has also proven inconclusive since whether consumption responds to income fluctuations by more or less than the permanent income hypothesis predicts turns critically upon whether disposable income follows a random walk or is stationary around a longrun trend see john campbell and angus deaton 1987 this controversy is unlikely to be resolved conclusively because it is notoriously difficult to distinguish a stationary but highly persistent time series from one that is nonstationary these difficulties suggest the importance of searching for natural experiments income shocks with predictable and well understood effects on future income to test models of consumer behavior changes in federal tax and transfer policy during the last two decades provide several episodes of this type analyzing the effects of these tax changes is also central to understanding the role of fiscal policy in affecting national saving this paper examines two aspects of consumer response to tax changes section i argues that consumption responds to temporary income tax shocks by more than the permanent income hypothesis would suggest results from the 1975 tax rebate in particular suggest that a 1 increase in transitory income raises spending by about 20 cents section ii examines consumption responses to tax announcements although the results are not conclusive they suggest that some consumers do not adjust consumption in anticipation of tax changes the final section sketches some implications for analyzing fiscal policy

countercyclical taxes in a monopolistically competitive environment in the context of a neoclassical growth model with monopolistic competition this paper studies the stabilizing effects of countercyclical tax policy when the income tax rate has an additional role of financing government budget deficits consistent with the conventional wisdom countercyclical taxes generally reduce aggregate volatility unless the fiscal response to debt accumulation is weak the presence of monopoly power enhances these effects even when automatic stabilizers successfully stabilize business cycle fluctuations countercyclical taxes are welfare inferior due to reduced precautionary saving motives while if the fiscal response to debt is weak and countercyclical tax policy destabilizing the increased precautionary saving motive is not welfare enhancing as the asset accumulated is government debt rather than capital these results are generally robust nominal inertia may however dominate the precautionary saving mechanism

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

beyond replicator dynamics innovation selection dynamics and optimal diversity we propose a new evolutionary approach to model technological change based on an extension of replicator dynamics with recombination and mutation it gives rise to interactive innovation selection dynamics the model allows studying the combined effects of selection and variety generation on evolutionary economic change the developed framework describes a population of boundedly rational entrepreneurs who decide each period on the allocation of investments in different production technologies they tend to invest in belowaverage cost technologies just as under replicator dynamics in addition they spend a constant fraction of investments captured by mutation and recombination rates on alternative technologies and research on recombinant innovation as opposed to most previous studies mutation and recombination are here conceptual variables with a concrete behavioral interpretation namely describing the decision rules heuristics of investors we compare the dynamics of shares of investments in various technologies for three cases with constant costs of capital with costs decreasing steadily and exogenously over time and with costs depending on the level of cumulative investments for each model version we examine under which conditions the coexistence of technological options is feasible and optimal in terms of minimising the average cost of investments authors abstract

opec the seven sisters and oil market dominance an evolutionary game theory and agent based modeling approach abstract a methodological toolkit comprised of evolutionary game theory and agent based modeling is used to study opec and the seven sisters as they struggled for control over global petroleum markets during the 1960s and 1970s an evolutionary game theory model incorporates heterogeneous populations energy specific variables and behavioral considerations to capture the fundamentals of the applied problem an agent based model is used to provide detailed results and demonstrate the importance of the natural resource to the outcome of the model

opec behavior a test of alternative hypotheses since interpretations of past and future oil price patterns depends on the model chosen the author tests and compares alternative theories of opec as a first step in validating the choice on any one model the results show that among opec countries the partial market sharing cartel model is the only model not rejected by at least some of the 11 members and gives the best explanation of production in comparison with 11 non opec countries the competitive model could not be rejected for 10 of the 11 non opec producers this raises the question of why if opec is a cartel friedman s predictions have not come true and introduces new questions for future research 19 references 3 tables

investor s choice of shariah compliant replicas and original islamic instruments abstract this paper offers a behavioral perspective on why islamic capital markets are dominated by those financial instruments that almost replicate conventional financial products i e islamic debt bonds and islamic equities in contrast the original islamic instruments involving risk and return sharing musharakah have failed to emerge this paper argues that before the replicas an investor s choice was simply between islamic and non islamic instruments along with risk and return compliance with islamic principles or shariah was an integral part of investor utility as shariah standards came to give legitimacy to other financial structures the investors could then choose between various islamic replicas and the original islamic instruments we argue that once the investor s intrinsic need for shariah compliance is fulfilled an instrument s risk return features would become more important so for loss averse investors with shorter evaluation periods the loss sharing feature of the islamic risk and return instruments musharkah makes them less attractive than islamic debt bonds for longer evaluation periods islamic equities are also shown to outperform the risk and return musharakah instruments using the s p islamic bond index for bond data and the dow jones islamic market world index for islamic equities we confirm these views about investor utility by way of both loss aversion and habit based consumption models the findings suggest that islamic debt bonds and islamic equities have been allowed to jointly crowd out the original islamic risk and return musharakah instruments

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

the significance of federal taxes as automatic stabilizers using the taxsim model for the period 1962 95 we consider the federal tax system s impact as an automatic stabilizer despite the many changes in the tax system there has been relatively little change in its role as an automatic stabilizer we estimate that individual federal taxes offset perhaps as much as 8 percent of initial shocks to gdp we also suggest that the progressive income tax may help to stabilize output via its effect on the supply of labor an additional effect that may even be of similar magnitude to the more traditional path of stabilization through aggregate demand

macroeconomic externalities are pigovian taxes the answer basic welfare economics tells us that many types of externalities can be remedied by proper use of corrective taxes and subsidies this paper shows that this notion also extends to the macroeconomi

social spending and automatic stabilizers in the oecd the macroeconomic literature on automatic stabilization tends to focus on taxes and dismiss the relevance of government expenditure except for unemployment compensation our results go sharply contrary to this view we engage in an empirical analysis of 21 oecd countries from 1982 to 2003 and find that age and health related social expenditure as well as incapacity and sick benefits all react to the cycle in a stabilizing manner while possibly new in the macro literature this conforms to many results in studies in labour economics the policy implications are broad since much previous analysis of discretionary fiscal policy rests on official figures for automatic stabilization there are also major implications for efforts to incorporate automatic fiscal policy in simulation models julia darby and jacques melitz

testing for the cartel in opec non cooperative collusion or just non cooperative this paper extends the framework of green and porter 1984 and porter 1983a to encompass the case of a cartel opec faced by a competitive fringe non opec oil producers estimation of a simultaneous equation switching regression model allows us to examine which market structure better characterizes the world oil market during the 1974 2004 period and to test whether switches between collusive and non cooperative behaviour occurred the null hypothesis that no switch occurred is rejected in favour of the alternative that both cooperative and non cooperative behaviour was observed we find that although there were periods in which oil prices were measurably higher owing to collusion among opec members overall opec has not been effective in systematically raising prices above cournot competition levels our results suggest that on average over the period of study opec s behaviour is best described as cournot competition in the face of a competitive fringe constituted by non opec producers

optimal fiscal policy in open economies with labour market distortions abstract we set up a general equilibrium model with unemployment owing to distortions in the labour market it is shown that a public expansion financed by a distortionary income tax may give rise to a decrease in unemployment even if public goods are pure waste such an expansion may give rise to an increase in welfare if it is associated with a decrease in unemployment since part of the gain from a fiscal expansion is achieved at the expense of welfare in other countries non cooperative policies tend to be too expansionary

how much would us style fiscal integration buffer european unemployment and income shocks a comparative empirical analysis we examine the degree to which federal fiscal integration smoothes income and unemployment shocks across us states we find that roughly 25 cents of every dollar of income shock at the state level is offset by federal fiscal policy this stabilization comes entirely through the federal tax system not through spending stabilizers automatic or otherwise if we apply a comparable amount of cross country stabilization to european union countries as exists across us states greece and spain would be receiving additional transfers of 2 5 percent of gdp

implementing the new fiscal policy activism to many observers the current recession provides compelling circumstances for renewed fiscal policy activism but the strong support for fiscal policy intervention reflects a renewed belief in policy activism that had already appeared before the present crisis however the recent debate about possible fiscal policy interventions suggests that we are still relying on the approaches to discretionary policy used in past periods of policy activism it is not surprising that there have been few advances in discretionary policy design given the lack of favor such policy suffered over many years but if we are going to practice fiscal discretionary policy on a large scale then more attention to policy design is sorely needed this abstract was borrowed from another version of this item

personal income tax progressivity and output volatility evidence from oecd countries this paper investigates empirically the effect of personal income tax progressivity on output volatility using macro data from a sample of oecd countries over the period 1982 2009 our measure of progressivity is based on the difference between the marginal and the average personal income tax rate for the average production worker we find supportive empirical evidence for the hypothesis that higher personal income tax progressivity leads to lower output volatility this effect comes in addition to the stabilizing impact of government size and it is equally important in economic terms all other factors constant countries with more progressive personal income tax systems seem to benefit from stronger automatic stabilizers

the effect of short term information on long term investment an experimental study abstract we present a multi trial experiment that extends the classic experiment of thaler et al 1997 by adding short term information to long term investment the allocation to the risky asset is reduced in the long term when we add short term information

do in work tax credits serve as a safety net we test the eitc s response to economic need using irs data we exploit differences in timing and severity of economic cycles across states because the eitc requires earned income there is a theoretical ambiguity in the credit s cyclicality we find higher unemployment leads to increased likelihood of eitc recipiency and in credit amounts received for married couples but has insignificant effects for single individuals the eitc s protective effects are concentrated among skilled workers the eitc mitigates income shocks for married couples with children and groups likely to have moderate earnings but does not for most recipients single parents with children

varieties of agents in agent based computational economics a historical and an interdisciplinary perspective in this paper we trace four origins of agent based computational economics ace namely the markets origin the cellular automata origin the tournaments origin and the experiments origin along with this trace we examine how these origins have motivated different concepts and designs of agents in ace which starts from the early work on simple programmed agents randomly behaving agents zero intelligence agents human written programmed agents autonomous agents and empirically calibrated agents and extends to the newly developing cognitive agents psychological agents and culturally sensitive agents the review also shows that the intellectual ideas underlying these varieties of agents cross several disciplines which may be considered as a part of a general attempt to study humans and their behavior with an integrated interdisciplinary foundation

evolution as a general theoretical framework for economics and public policy abstract economic and evolutionary thinking have been entwined throughout their histories but evolutionary theory does not function as a general theoretical framework for economics and public policy as it does for the biological sciences in this lead article for a special issue of the journal of economic behavior and organization we first describe how evolution functions as a general theoretical framework in the biological sciences then we consider four reasons why evolution might not need to be consulted for human related subjects such as economics and public policy we conclude that these reasons can be valid in particular cases but they fail for any sizeable human related subject area hence evolution can and should become a general theoretical framework for economics and public policy the other articles in the special issue help to substantiate this claim

the response of household consumption to income tax refunds a central implication of the life cycle or permanent income theory is that consumption should not respond to predictable fluctuations in income tests of this implication have yielded mixed results especially on micro data angus deaton 1992 martin browning and annamaria lusardi 1996 in large part this might be due to the difficulties of isolating the predictable component of income at the micro level most tests proceed by instrumenting for income but since the available instruments are typically poor such tests might be prejudiced against finding significant excess sensitivity of consumption to income john shea 1995 also it is not clear how closely the resulting econometric predictions of income coincide with agents actual expectations of income to avoid these difficulties this paper examines the response of household consumption to a particular type of income that is both predictable and transitory income tax refunds since a refund depends on events in the previous calendar year it is predictable income as regards consumption in the year of its receipt consequently under the life cycle theory consumption should not increase on receipt of a refund 2 in addition to testing the canonical model of consumption this paper provides estimates interpretable as the marginal propensity to consume mpc out of refunds since federal tax refunds now amount to over 80 billion per year averaging well over 1 000 per refund these estimates are of interest in themselves more generally they bear on the impact of even preannounced and temporary changes in fiscal policy the paper begins by surveying related studies in section i section ii describes the data the consumer expenditure survey cex which of the leading u s micro data sets has the most comprehensive coverage of expenditure the empirical specification is set out in section hi section iv reports the results and section v concludes

group contests with internal conflict and power asymmetry we investigate simultaneous inter and intra group conflict in the shadow of within group power asymmetry and complementarity in members group conflict efforts a more symmetric group faces a higher degree of internal conflict and might expend more effort in external conflict when the group conflict effort technology is highly complementary depending on the degree of complementarity the stronger player s relative contribution to external conflict might be higher in a more asymmetric group and as a result it is possible for the weaker player to earn a higher payoff in the absence of any complementarity the rent dissipation is non monotonic with the within group power asymmetry

unemployment insurance as a housing market stabilizer this paper studies the impact of unemployment insurance ui on the housing market exploiting heterogeneity in ui generosity across us states and over time we find that ui helps the unemployed avoid mortgage default we estimate that ui expansions during the great recession prevented more than 1 3 million foreclosures and insulated home values from labor market shocks the results suggest that policies that make mortgages more affordable can reduce foreclosures even when borrowers are severely underwater an optimal ui policy during housing downturns would weigh among other benefits and costs the deadweight losses avoided from preventing mortgage defaults

the effect of income taxation on consumption and labor supply we estimate the incentive effects of income taxation in a life cycle model of consumption and labor supply without intratemporal strong separability we find that consumption and hours worked are direct complements in utility both increase with a compensated increase in the net wage the compensated net wage elasticity is about 0 3 nearly double estimates for u s men from a linear labor supply specification estimated intertemporal elasticities indicate significant intertemporal smoothing of utility the estimated marginal welfare cost of government revenue is 6 20 which is about half the estimated welfare cost when additivity between consumption and leisure is incorrectly imposed

opec and other commodity cartels a comparison abstract the economic literature provides specific characteristics for cartels although the theory of international cartels is not well developed in the literature and every cartel is unique some of these characteristics exist in each cartel this study investigates the existence of these characteristics in six known commodity cartels including opec in addition it compares the oil companies cartel the seven sisters to opec and summarizes the findings of opec econometric models developed in the literature in the last 25 years and concludes that the results do not support cartel or competitive models for opec although other cartels are more successful than opec many books and articles in economics use opec as a cartel example neither statistical tests nor theory support the popular use of opec as a cartel example indeed this article concludes that opec is composed of saudi arabia the dominant world producer plus several distinct sub groups and that separate models are required to explain the behavior of each assigning the power of some opec members to opec has caused confusion about its behavior recent opec success is attributed to political natural and technical capacity limitations in the oil fields that prevented countries from cheating on their quota in other words opec adherence to the quota except for saudi arabia is anything but voluntary

agent based macroeconomics a baseline model abstract this paper develops a baseline agent based macroeconomic model and contrasts it with the common dynamic stochastic general equilibrium approach although simple the model can reproduce a lot of the stylized facts of business cycles the author argues that agent based modeling is an adequate response to the recently expressed criticism of macroeconomic methodology because it allows for aggregate behavior that is more than simply a replication of microeconomic optimization decisions in equilibrium at the same time it allows for absolutely consistent microfoundations including the structure and properties of markets most importantly it does not depend on equilibrium assumptions or fictitious auctioneers and does therefore not rule out coordination failures instability and crisis by definition a situation that is very close to a general equilibrium can instead be shown to result endogenously from non rational micro interaction

what is new keynesian economics this research was supported by the national science foundation i am grateful to george williams for help with the data and to steven allen laurence ball olivier j blanchard timothy bresnahan charles calomiris dennis carlton robert chirinko russell cooper stanley fischer herschel grossman r glenn hubbard david laidler john leahy assar lindbeck n gregory mankiw david romer julio rotemberg dennis snower john taylor andrew weiss and two anonymous referees for comments on one or more earlier drafts i am also indebted to michael parkin and edmund s phelps for helping to establish the etymology of the phrase new keynesian

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

the role of taxes as automatic destabilizers in new keynesian economics abstract this paper analyses the effects of taxation in new keynesian economics the results show that taxes contribute to price and wage stickiness and moreover that the resulting fluctuations in welfare are magnified by the presence of taxes these results are at odds with the old keynesian idea of automatic stabilizers

the role of food stamps in consumption stabilization although the food stamp program is the largest universal entitlement program in the social safety net little is known about its stabilizing role in household income and consumption using data from the panel study of income dynamics spanning 1980 99 we estimate the volatility of income with and without food stamps coupled with a variance decomposition of consumption among families at high ex ante risk of food stamp participation food stamps reduced income volatility by about 12 percent and food consumption volatility by about 14 percent there was however a marked decline in consumption smoothing benefits of the program in the early 1990s relative to the 1980s

myopic loss aversion disappointment aversion and the equity premium puzzle abstract this paper takes a close look at the behavioural finance explanations of the equity premium puzzle namely myopic loss aversion benartzi s thaler r h 1995 myopic loss aversion and the equity premium puzzle quarterly journal of economics 110 73 92 and disappointment aversion ang a bekaert g liu j 2005 why stocks may disappoint journal of financial economics 76 471 508 the paper proposes a simple specification of loss and disappointment aversion and brings these theories to the data the main conclusion is that a highly short sighted investment horizon is required for the historical equity premium to be explained by loss aversion while reasonable values for disappointment aversion are found also for long investment horizons stocks may not only lose in the short term but also disappoint in the long term

the role of automatic stabilizers in the u s business cycle most countries have automatic rules in their tax and transfer systems that are partly intended to stabilize economic uctuations this paper measures how eective they are at lowering the volatility of u s economic activity we identify seven potential stabilizers in the data and include four theoretical channels through which they may operate in a business cycle model calibrated to the u s data the model is used to compare the volatility of output in the data with counterfactuals where some or all of the stabilizers are shut down our rst nding is that proportional taxes like sales property and corporate income taxes contribute little to stabilization our second

the effects of discretionary fiscal policy on macroeconomic aggregates a reappraisal fiscal stimuli to recover a cascade of academic and layman articles debate the effectiveness of fiscal policy in stimulating the economy backed up by different economic models and empirical support this essay surveys the theoretical predictions and recent empirical vector autoregression var evidence on the short run effects of discretionary fiscal policy on macroeconomic aggregates

the macroeconomic stabilisation effects of social security and 401 k plans this paper investigates how various retirement institutions impact the macroeconomy we find that for every 1 percentage point increase in the output gap net flows of various government programmes including social security decrease by 0 34 percentage points while net flows of 401 k plans increase by 0 05 percentage points in levels for every 1 increase in real gross domestic product net flows from various government programmes shrink by 45 cents whereas net flows from 401 k plans increase by 4 6 cents in other words 401 k plans reduce the automatic stabilisation impact of government programmes by 10 15 moreover we find that social security has a net negative effect on household consumption while 401 k retirement accounts work the opposite way in fact the destabilising effect of 401 k plans on consumption is twice as strong as the one attributed to social security these results highlight a significant problem with 401 k retirement plans and any retirement plan that is dependent on financial markets copyright the author 2012 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

monetary policy and automatic stabilizers the role of progressive taxation we study the effects of progressive labor income taxation in an otherwise standard new keynesian nk model we show that progressive taxation i introduces a trade off between output and inflation stabilization and affects the slope of the phillips curve ii acts as automatic stabilizer changing the responses to technology shocks and demand shocks and iii alters the prescription for the optimal monetary policy the welfare gains from commitment decrease as labor income taxes become more progressive quantitatively the model reproduces the observed negative correlation between the volatility of output hours and inflation and the degree of progressivity of labor income taxation

behavioral heuristics and market patterns in a bertrand edgeworth game abstract this paper studies bertrand price setting behavior when firms face capacity constraints bertrand edgeworth game this game is known to lack equilibria in pure strategies while the mixed strategy equilibria are hard to characterize we explore families of heuristic rules for individual price setting behavior and the resulting market patterns through simulations of agent based models and laboratory experiments overall the individual pricing strategies observed experimentally can be represented approximately by a sales based simple rule in the experiments average market prices tend to converge from above and approach a state resembling a steady state with slow aggregate price variations and low price dispersion around an average near the competitive level however that configuration can be disturbed occasionally by excursions triggered by discrete price raises of some agents salient features of experimental results can be described by simulations where agents use sales based heuristics with parameters calibrated from the experiments the results obtained here suggest the existence of useful complementarities between analytical experimental and agent based simulation approaches