exchange rate policy union wage index and credibility abstract optimal exchange rate regimes for small open economies with economy wide wage setting and privately optimal wage indexation schemes are analysed a fully discretionary exchange rate regime a managed float offers flexibility while a credible fixed exchange rate regime offers price stability due to the time inconsistency problem optimal wage indexation under a managed float may imply complete indexation of wages to prices a managed float is shown to be unambiguously superior to a binding fixed exchange rate regime if wage setters value price stability as high as the policy maker does

the social structure of a national securities market in this article a national securities market the stock options market is characterized as a social structure represented by the networks of actors who traded options on the floor of a major securities exchange trading among actors exhibited distinct social structural patterns that dramatically affected the direction and magnitude of option price volatility the argument that this market is socially structured is constructed in four parts behavioral assumptions about the nature of economic actors models of micronetworks models of macronetworks and price consequences in the ideal typical model of the market actors are assumed to be hyperrational and never to act opportunistically with these behavioral assumptions the micronetworks of actors should be expansive a condition which would result in undifferentiated and homogeneous macronetworks such macronetworks would tend to reduce the volatility of option prices but in the empirical market studied here actors are subject to bounded rationality a

the new institutional economics this outstanding book presents new original contributions from some of the world s leading economists including ronald coase douglass c north masahiko aoki oliver e williamson and harold demsetz it demonstrates the extent and depth of the new institutional economics research programme which is having a worldwide impact on the economics profession

three problems of social organisation institutional law and economics meets habermasian law and democracy this paper attempts to identify certain implications of habermasian ethics for the economic analysis of law it does so by demonstrating a complementarity between the habermas of between facts and norms and the veblen ayres commons tradition s of economic analysis three unresolved problems of social organisation raised by the institutionalists are addressed the legitimacy of the status quo ante buchanan schmid the legitimacy of society s transaction structure klevorick and the problem of social order hobbes platteau discourse ethics demonstrates how these problems may be resolved the model of human agency adopted in institutional law and economics permits an easier fit with discourse ethics than would be possible with the neoclassical traditions

the family and the state the immaturity of children sometimes precludes efficient arrangements between children and parents or others responsible for child care the difficulty in establishing efficient relations within families provides the point of departure for our interpretation of the heavy state involvement in the family the authors believe that a surprising number of state interventions mimic the agreements that would occur if children were capable of arranging for their care many regulations of the family improve the efficiency of family activities these interventions include subsidies to education and training social security and other old age support subsidies to births laws that limit access to divorce and the sale of children and laws that require parents permission for early marriage and other choices of children families that leave bequests can force children to repay parents for investments in human capital by reducing bequests therefore these families do not underinvest in childrens human capital by contrast families that do not leave bequests often poorer families do underinvest in children the state may subsidize schools and other training facilities to raise investments in children by poorer families to efficient levels authors modified

models of currency crises with self fulfilling features the discomfort a government suffers from speculation against its currency determines the strategic incentives of speculators and the scope for multiple currency market equilibria after describing an illustrative model in which high unemployment may cause an exchange rate crisis with self fulfilling features the paper reviews some other self reinforcing mechanisms recent econometric evidence seems consistent with the practical importance of these mechanisms

the law and economics movement in the last thirty years the scope of economics has expanded dramatically beyond its traditional domain of explicit market transactions today there is an economic theory of property rights of corporate and other organizations of government and politics of education of the family of crime and punishment of anthropology of history of information of racial and sexual discrimination of privacy even of the behavior of animals and overlapping all these but the last of law 2 some economists oppose this expansion in whole or more commonly in part 3 there are a number of bad reasons all i think closely related for such opposition and one slightly better one 1 one bad reason is the idea that economics means the study of markets so that nonmarket behavior is simply outside its scope this type of argument owes nothing really to economics but instead reflects a common misconception about language more specifically a failure to distinguish among three different types of word or concept the first type illustrated by the term marginal cost is purely conceptual the term is rigorously and unambiguously defined by reference to other concepts just as numbers are but again like numbers there is no observable object in the real world that it names try finding a firm s marginal costs on its books of account the second type of word illustrated by rabbit refers to a set of real world objects few such words are purely referential one can speak of a pink rabbit or a rabbit the size of a man without misusing the word even though one is no longer using it to describe anything that exists nevertheless the referential function dominates finally there are words like law religion literature and economics which are neither conceptual nor referential such words resist all efforts at definition they have in fact no fixed meaning and their dictionary definitions are circular they can be used but not defined 4 one cannot say that economics is what economists do because many noneconomists do economics one cannot call economics the science of rational choice either the word rational lacks a clear definition and passing that difficulty there can be noneconomic theories of rational choice in which few predictions of ordinary economics may hold for example because the theory assumes that people s preferences are unstable there can also be nonrational economic theories an example is the type of survival theory in industrial organization in which firms that randomly hit on methods of lowering their costs expand vis a vis their rivals another example is marxism one cannot call economics the study of markets either not only because that characterization resolves the question of the domain of eco judge u s court of appeals for the seventh circuit senior lecturer university of chicago law school 1111 e 60th st chicago il 60637 i thank gary becker frank easterbrook william landes geoffrey miller richard porter george stigler geoffrey stone and alan sykes for comments on a previous draft and nir yarden for research assistance see for example gary becker 1976 jack hirshleifer 1985 p 53 george stigler 1984 gerard radnitzky and peter bernholz 1986 2 for a recent conspectus of economic analysis of law see my book 1986 3see for example ronald coase 1978 coase is of course a leading figure in the economics of property rights so his opposition is far from total 4for an excellent discussion see john ellis 1974 ch 2

exchange rate policy wage formation and credibility abstract since the collapse of the bretton woods system some european countries have pursued discretionary exchange rate policies in order to maintain or enhance the international competitiveness of the traded goods sector these countries which typically feature centralized wage setting have also tended to experience high nominal wage increases the overall outcome may be described as a devaluation wage spiral this paper applies two models of repeated games to analyze the strategic interaction between an exchange rate setting policy maker and a wage setting trade union it is shown how a devaluation wage spiral may result from a conflict of interest over the real wage it is also shown how reputational forces may provide a way out of the devaluation wage spiral

thorstein veblen and post darwinian economics thorstein veblen is noted for his view that economics should be an evolutionary science however although the term evolutionary has been adopted in general terms by subsequent institutional economists there has been remarkably little detailed exploration informed by biology of what veblen meant by an evolutionary science and the character of the post darwinian economics that he attempted to build this essay explores the reasons for veblen s attachment to darwinism informed by developments in biology itself and identifies some distinctive and enduring features of veblen s evolutionary theory copyright 1992 by oxford university press

destabilizing effects of exchange rate escape clauses abstract this paper studies policy rules with escape clauses analyzing as an example fixed exchange rate systems that allow member countries the freedom to realign in periods of stress while well designed escape clause rules can raise society s welfare in principle limited credibility makes it difficult to implement such rules in practice an ems type institution that imposes political costs on policymakers who realign may raise welfare but can also produce equilibria far inferior to an irrevocably fixed exchange rate switches between multiple equilibria may have the character of sudden speculative attacks

an economic theory of central places is not really a theory of spatial economic behaviour instead it is a series of brilliant conjectures about the locational configurations that will result from such behaviour the brilliance of these conjectures is illustrated by the successful applications of the theory to such diverse phenomena as the locational patterns of retailing activity in cities and of service centres in rural areas the size distribution of cities and the diffusion of information and diseases in this paper we outline an economic model of central places 2 our theorising has two distinct purposes first we wish to begin the development of a theory of central places that is based on maximising behaviour of economic agents any theory of economic behaviour from which central places can be derived is necessarily both difficult and cumbersome non convexities in the activities of buying and selling drive the model and thus non differentiabilities and discontinuities abound as one seeks more generality in such circumstances difficulties multiply rapidly in order to begin the job we have used assumptions that are specific and sometimes even crude the second purpose of our theorising is to illustrate the limitations of current central place theory by providing counter examples to some propositions commonly accepted to follow from it for this purpose we need not worry about lack of generality in any of our counter examples of course we are not solely concerned to refute accepted generalisations by doing so we hope to make alternative possibilities apparent what we hope to attain therefore is a theoretical development inspired by the extremely fruitful conjectures of existing central place theory

plea bargaining and prosecutorial discretion a model of plea bargaining with asymmetric information is presented the prosecutor s private information consists of the strength of the case while the defendant s private information consists of h is guilt or innocence in equilibrium a fraction of cases are dismis sed because they are too likely to involve an innocent defendant in the remaining cases the prosecutor s offer of a sentence in exchange for a plea of guilty reveals the strength of the case it is shown t hat unlimited prosecutorial discretion may be socially disadvantageou s since it carries with it the requirement of sequential rationality copyright 1988 by american economic association

strategic entry deterrence in analyzing deterrence of large scale entry two classes of entry barriers may be distinguished an innocent entry barrier is unintentionally erected as a side effect of innocent profit maximization in contrast a strategic entry barrier is purposely erected to reduce the possibility of entry two types of innocent barriers may also be distinguished a postentry absolute advantage has the property that if entry did occur the established firm would be at a profit advantage over the entrant examples are superior technology or product design patents and lower input prices a preentry asymmetry advantage arises from the fundamental preentry asymmetry between established firm and potential entrant before the entrant makes his entry decision the established firm has already committed resources this prior existence gives first move advantages the preentry asymmetry is independent of symmetry or asymmetry in the rules the equilibrium concept of the postentry game that might ensue even if the postentry game will be played according to nash cournot or entrant as leader rules the preentry leadership

product portfolios and the introduction of new products an example from the insecticide industry this article explores how the introduction of new products by multiproduct firms might be affected by existing goods in each firm s portfolio a logit analysis is conducted to estimate the effects of local monopoly power cost advantages and learning characteristics theory is used to determine whether the addition of a new product by a firm s existing portfolio creates the potential for local monopoly power while the chemical similarity of products has the largest effect results nonetheless indicate the empirical significance of potential monopoly power in influencing product introductions by multiproduct firms

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

the microfoundations project in general equilibrium theory the author 1 argues that the long lived microfoundations project based on general equilibrium models has come to an end and 2 shows that non walrasian models intended to provide microfoundations for macroeconomics are inadequate the arguments are derived from the sonnenschein mantel debreu smd demonstration of the arbitrariness of aggregate excess demands in general equilibrium models of the walrasian arrow debreu mckenzie type the issues raised have significance for the proper method of modeling macroeconomic phenomena for instance the smd results have led a growing number of general equilibrium theorists to make assumptions concerning macroeconomic structure in order to analyze other regularities at the macro level these points validate the position that systematic macroeconomic phenomena are intrinsically macroeconomic copyright 1994 by oxford university press

information and the coase theorem abstract some economists think the coase theorem implies a lot about the proper scope of government intervention in the economy and about the welfare consequences of laissez faire others see it as a mere tautology that if people negotiate efficiently then every outcome will be efficient the coase theorem is important only if we believe that efficient negotiation is likely of course we can attribute inefficiencies to bargaining imperfection but it may not be useful to do so such attitudes sometimes seem to depend more on ideology than on reason this article gives one economist s reasoned view it discusses the coase theorem as a decentralization result and why decentralization results are interesting it considers mechanism design for revealing private information and describes the problems of centralization should the coase theorem should be viewed as a second best result property rights are more efficient than some reasonable alternative does the coase theorem recommend an institution or make

a theory of competition among pressure groups for political influence this paper presents a theory of competition among pressure groups for political influence political equilibrium depends on the efficiency of each group in producing pressure the effect of additional pressure on their influence the number of persons in different groups and the deadweight cost of taxes and subsidies an increase in deadweight costs discourages pressure by subsidized groups and encourages pressure by taxpayers this analysis unifies the view that governments correct market failures with the view that they favor the politically powerful both are produced by the competition for political favors

allocative efficiency of markets with zero intelligence traders market as a partial substitute for individual rationality we report market experiments in which human traders are replaced by zero intelligence programs that submit random bids and offers imposing a budget constraint i e not permitting traders to sell below their costs or buy above their values is sufficient to raise the allocative efficiency of these auctions close to 100 percent allocative efficiency of a double auction derives largely from its structure independent of traders motivation intelligence or learning adam smith s invisible hand may be more powerful than some may have thought it can generate aggregate rationality not only from individual rationality but also from individual irrationality

credibility cost of reneging and the choice of fixed exchange rate regime abstract different forms of fixed exchange rate regimes involve different costs of reneging one potential benefit from joining a monetary union is that the union is less likely to be exposed to speculative attacks compared to more informal fixed exchange rate regimes

fiscal policies and the choice of exchange rate regime a common argument against either a monetary union or a regime or a fixed exchange rates is that they preclude flexible use of the inflation tax the authors address this point of view by comparing three alternative exchange rate regimes a pure float an ems regime in which the exchange rate is fixed but can be realigned and a monetary union the authors model the three regimes as alternative commitments on future seigniorage policies this approac h suggests that it is not possible to pareto rank the three regimes o n the other hand the authors provide intuitive conditions under which each of the systems is superior to the others copyright 1993 by royal economic society

the approach of institutional economics this paper assesses the old institutional economics it emphasizes the importance of key old institutionalist themes concerning the necessity of habits and rules and the role of institutions a problem in the alternative theoretical program of the new institutionalism is the untenability of its assumption of an original institution free market or state of nature even optimizing behavior requires the prior existence of habits and rules although it still lacks a complete and systematic theory the evolutionary approach of the old institutionalists tackles the problem of the interactive relationship of actor to structure without analytical reduction to one or the other

a pedagogical treatment of bilateral monopoly most economists are familiar with the concept of bilateral monopoly an upstream monopolist sells its output to a single downstream buyer that may also be a monopolist in its output market the theory of bilateral monopoly has a rich history that can be traced to the writings of cournot 10 and menger 31 over the 150 or so years that the problem has been under consideration however economists have offered a variety of solutions ranging from a completely determinate intermediate good price and output to a completely indeterminate solution within a specified range interestingly this historical divergence of opinion concerning the correct outcome under bilateral monopoly still persists a clear consensus has not yet emerged surprisingly this lack of unanimity exists despite the fact that bowley 5 provided the theoretically correct solution in 1928 2 even more surprising however is the apparent popularity of the incorrect solution a recent survey of the population of intermediate microeconomic texts on the authors bookshelves revealed that over 80 percent of the current treatments of this topic are in error 3 table i presents the results of that survey those authors who present a correct analysis of bilateral monopoly recognize that optimality requires joint profit maximization this leads them to the correct conclusion regarding the determinate quantity of the intermediate product exchanged of the five treatments we have classified