risk sharing and contagion in networks we investigate the socially optimal design of financial networks that allows to tackle the trade off between risk sharing and contagion we identify conditions on the shock distribution under which full integration or maximal segmentation is optimal we also show that under different conditions the optimal network displays different levels of strength of linkages to other firms or intermediate degrees of segmentation in the latter case the individual and social incentives to establish linkages are not necessarily aligned when firms face heterogeneous distributions of risks they should optimally form linkages only with firms facing risks of the same kind

hybrid r d we develop a model of r d collaboration in which individual firms carry out in house research on core activities and undertake bilateral joint projects on non core activities with other firms we develop conditions on the profit functions of the firm under which r d investments in different projects of a firm are complementary we show that this condition is met by standard price and quantity setting oligopoly models we then study the relation between the number of joint projects and investments and profits in this context we identify a second aspect of complementarity equilibrium investments in in house as well as in each joint project are increasing in the number of projects however we find that an increase in number of joint projects of all firms lowers collective profits suggesting the presence of excessive incentives for conducting research

learning about a new technology pineapple in ghana this paper investigates the role of social learning in the diffusion of a new agri cultural technology in ghana we use unique data on farmers communication patterns to define each individual s information neighborhood conditional on many potentially confounding variables we find evidence that farmers adjust their inputs to align with those of their information neighbors who were surpris ingly successful in previous periods the relationship of these input adjustments to experience further indicates the presence of social learning in addition applying the same method to input choices for another crop of known technol ogy correctly indicates an absence of social learning effects jel d83 013 033 q16

information gathering through alliances abstract the effect of a firm s uncertainty regarding technological development on the formation of alliances is examined and it is shown that this uncertainty is positively related to the number of alliances however higher uncertainty also makes the firm less likely to ally with others if the collected information is redundant the higher the similarity between the technological regimes of potential alliance partners the lower the incentive to ally also direct ties are preferred to indirect ones if uncertainty is high since direct ties yield more accurate information than indirect ties

inequality and informality abstract this paper presents theory and evidence on the determinants of the size of the informal sector we propose a simple theoretical model in which it is positively related to income inequality more so under weak institutions and is negatively related to the economy s wealth these predictions are then empirically validated using different proxies of the size of the informal sector income inequality and institutional quality the results are shown to be robust with respect to a variety of econometric specifications we also find that government interventions through regulations lose much of its robustness in the presence of the above factors

the effect of entry on r d networks we investigate the effect of potential entry on the formation and stability of r d networks considering farsighted firms we show that the presence of a potential entrant often alters the incentives of incumbent firms to establish an r d link in particular incumbent firms may choose to form an otherwise undesirable r d collaboration in order to deter the entry of a new firm moreover an incumbent firm may refrain from establishing an otherwise desirable r d collaboration expecting to form a more profitable r d link with the entrant finally potential entry may lead an inefficient incumbent to exit the market we also perform a welfare analysisand show that market and societal incentives are often misaligned

endogenous formation of cooperation structures abstract i consider a cooperation formation game in which players choose independently with whom they wish to cooperate in a given coalitional game and players payoffs follow a solution imposed on the coalitional game i study the resulting equilibrium cooperation structure and how cooperation evolves under best response and fictitious play learning processes journal of economic literatureclassification numbers c71 c72

the shadow economy in transition countries friend or foe a policy perspective abstract by treating the shadow economy as a distinct entity rather than just a symptom of policy failures we are able to examine its short term and dynamic consequences for development first we construct measures of the size of the shadow economy in 25 transition countries for 1990 97 we find hysterisis suggesting that once established the shadow economy is hard to remove a dollar decline rise in official gdp is attenuated by a shadow expansion contraction of 31 25 cents we then examine whether the shadow economy prevents merely slows down or actually promotes economic growth and competitiveness and through what mechanisms we also consider implications for policymaking

informal sector regulatory compliance and leakage abstract the paper models a vertically related formal and informal sector and endogenizes the size and regulatory compliance status of the informal sector when the formal sector can circumvent costly regulations by outsourcing polluting intermediate goods from the informal sector stricter regulations increase when the composition effect of regulation dominates its scale effect or decrease total pollution and may even have a non monotonic impact we identify conditions under which a partially compliant informal sector acts as a source of leakage and examine implications for optimal enforcement policy further we show that price discrimination by the formal sector when it purchases the intermediate goods from the informal sector can worsen regulatory compliance by the informal sector and lead to more pollution

the political economy of israeli protectionism an empirical analysis the aim of this study was to examine the tariff structure in israel in terms of the four main theoretical models of endogenous commercial policy the empirical results for levels of protection in israel support several of the models in particular the pressure group model performs well and especially the variable that represents the lobbying power of the histadrut public sector in israel this is consistent with the longstanding political power of the histadrut in israel the histadrut s role in the israeli economy rises above the western concept of a labor union and takes on a quasi governmental function the clearest example of this elevated status is seen when the government included the histadrut as part of the commission charged with the responsibility of carrying out the nominal liberalization process of the 1960s evidently it is this kind of political economic power that allowed the histadrut to affect the level of protection histadrut dominated industries received

estimating the size of the shadow economy in spain a structural model with latent variables there has recently been a revival of international interest in measuring the size of the shadow economy the current study adopts an approach to the spanish case that is based on the theory of unobservable variables this methodology involves the estimation of structural models mimic which analyses a set of causes of the shadow economy while simultaneously taking into account its influence upon a series of indicators the proposed model permits the determination of a relative evolution over time of the size of the shadow economy which requires the calibration of the model with an exogenous estimation in order to obtain real values the exogenous estimation employed is that obtained by a monetary method based on a money demand function the results show a considerable shadow economy measuring between 8 and 18 8 of gdp in the period 1976 2002 and demonstrate that the shadow economy is significantly influenced by the tax burden the degree of regulation and unit labour costs a positive correlation is

the underground economies tax evasion and information distortion list of contributors preface introduction edgar l feige part i the meaning measurement and policy implications of the underground economies 1 the meaning and measurement of the underground economy edgar l feige 2 information distortions in social systems the underground economy and other observer subject policymaker feedbacks robert r alford and edgar l feige 3 policy illusion macroeconomic instability and the unrecorded economy robert t mcgee and edgar l feige 4 how large or small should the underground economy be bruno frey part ii the underground economy in western developed nations measurement in different laboratories 5 monetary perspective on underground economic activity in the united states richard d porter and amanda s bayer 6 the unrecorded economy and the national income accounts in the netherlands a sensitivity analysis g a a m broesterhuizen 7 assessing the underground economy in the united kingdom michael o higgins 8 the underground economy in the federal republic of germany a preliminary assessment enno langfeldt 9 the underground economy in sweden ingemar hansson 10 the irregular economy of italy a survey of contributions bruno contini 11 the hidden economy in norway with special emphasis on the hidden labor market arne jon isachsen and steiner strom 12 canada s underground economy rolf mirus and roger s smith 13 the underground economy in france philippe barthelemy part iii the underground economy under central planning 14 the soviet second economy in a political and legal perspective f j m feldbrugge 15 second economy and socialism the hungarian experience istvan r gabor bibliography

attack defence and contagion in networks sanjeev goyal acknowledges support from a keynes fellowship cambridge inet institute and european research area complexity net resilience and interaction of networks in ecology and economics adrien vigier acknowledges support from a gates cambridge fellowship as well as a core fellowship from universite catholique de louvain

the economics of hubs the case of monopoly in this paper we study the optimization problem of an unregulated air carrier which is given the exclusive right to satisfy demand for air travel between any pair of cities it chooses a network of connections and a set of prices to maximize profits thus both network design and prices are endogenous we characterize the solution to this optimization problem when demands and costs are symmetric our main result is that if there are economies of density in the number of individuals travelling between two directly connected cities the optimal network is either a hub of size n 1 or one in which every pair of cities is connected directly

networks of collaboration in oligopoly abstract in an oligopoly prior to competing in the market firms have an opportunity to form pair wise collaborative links with other firms these pair wise links involve a commitment of resources and lead to lower costs of production of the collaborating firms we study the incentives of firms to form links and the architecture of the resulting collaboration network we find that incentives to form links are intimately related to the nature of market competition our analysis also suggests that collaborations are used by firms to generate competitive advantage and that strategically stable networks are often asymmetric with some firms having many links while others have few links or are isolated specifically we show that networks with the dominant group architecture stars and inter linked stars are stable we also present some results on the architecture of socially efficient networks

corruption centralization and the shadow economy in their pioneering work on corruption shleifer and vishny 1993 find that a centralized bureaucracy results in lower bribes our paper extends the analysis to economies with formal and informal sectors when corrupt officials operate in both sectors bureaucratic centralization is beneficial when confined to the formal sector however we show that crosssector centralization can result in higher bribes and lower welfare furthermore contrary to choi and thum 2005 we demonstrate that depending on the organization of the bureaucracy and the productivity of the informal sector the presence of the shadow economy may have adverse effects on corruption and welfare

hub and spoke free trade areas theory and evidence from israel we study how the sequential formation of free trade areas affects trade flows between member countries in a three country three good model of comparative advantage if two countries have an fta and both sign a similar agreement with the third trade between the two decreases however if only one of them signs an additional fta a hub and spoke pattern arises and trade between the initial members increases israel s experience lends strong support to our model trade between israel and the eu subject to an fta since 1975 increased by an additional 29 after the introduction of the us israel fta in 1985 on etudie comment la formation sequentielle de zones de libre echange affecte les flux commerciaux entre les pays membres dans un modele d avantage comparatif avec trois pays et trois biens si deux pays ont un accord de libre echange et qu ils signent tous deux un accord similaire avec un tiers pays le commerce entre les deux pays originaux decroit cependant si seulement un des deux pays originaux signe un accord avec le troisieme un reseau en etoile emerge et le commerce entre les deux payx d origine s accroit l experience d israel donne un fort support au modele le commerce entre israel et l union europeenne sujet a un accord de libre echange depuis 1975 s est accru de 29 apres l introduction de l accord de libre echange entre israel et les etats unis en 1985

preferential versus multilateral trade liberalization and the role of political economy abstract in this paper we analyze the effect of the freedom to pursue preferential trade liberalization permitted by article xxiv of the gatt on country s incentives to participate in multilateral negotiations and on feasibility of global free trade we present a model in which countries choose whether to participate in preferential or multilateral trade agreements under political pressures from domestic special interest groups we show that heterogeneity in political preferences across countries plays an important role in determining the relative merits of preferential and multilateral approaches to trade liberalization on one hand the opportunity to liberalize preferentially may be necessary to induce countries with strong political motivations to participate in multilateral free trade negotiations on the other hand when countries share similar political preferences multilateral free trade that would have been politically supported otherwise becomes unattainable if countries can pursue preferential liberalization

illicit activity and money laundering from an economic growth perspective a model and an application to colombia this paper contributes to the economic analysis of illicit activities and money laundering first it presents a theoretical model of long run growth that explicitly considers illicit workers activities and income alongside a licit private sector and a functioning government second it generates estimates of the size of illicit income and provides simulated and econometric estimates of the volume of laundered assets in the colombian economy in the model the licit sector operates in a perfectly competitive environment and produces a licit good through a standard neoclassical production function the illicit sector operates in an imperfectly competitive environment and is composed of two different activities the first activity produces an illicit good that nonetheless is valuable in the market for example illicit drugs the second does not add value to the economy but only redistributes wealth for example robbery kidnapping and fraud the paper provides a series of comparative statics exercises to assess the effects of changes in government efficiency licit sector productivity and illicit drug prices from the model the analysis derives a set of estimable macroeconometric equations to measure the size of laundered assets in the colombian economy in the period 1985 to 2013 the paper assembles a data set whose key components are estimates of illicit income from drug trafficking and common crime illicit incomes increased drastically until 2001 reaching a peak of nearly 12 percent of gross domestic product and then decreasing to less than 2 percent by 2013 the decline overlaps not only in a period of high economic growth but also after the implementation of plan colombia the data set is used to estimate the volume of laundered assets in the economy by applying the kalman filter for the estimation of unobserved dynamic variables onto the derived macroeconometric equations from the model the findings show that the volume of laundered assets increased from about 8 percent of gross domestic product in the mid 1980s to a peak of 14 percent by 2002 and declined to 8 percent in 2013

bargaining in a network of buyers and sellers abstract we analyze bargaining between buyers and sellers who are connected by an exogenously given network players can make repeated alternating public offers that may be accepted by any of the responders linked to each specific proposer our purpose is to find the conditions of the network which drive the price distribution in equilibrium this paper uses graph theory tools to provide necessary and sufficient conditions regarding the architecture of networks for the subgame perfect equilibrium of the bargaining game to coincide with the walrasian outcome

allocating value among farsighted players in network formation we study the stability of networks when players are farsighted and allocations are determined endogenously the set of strongly efficient networks is the unique von neumann morgenstern farsightedly stable set with bargaining if the value function is anonymous component additive and top convex and the allocation rule is anonymous and component efficient moreover the componentwise egalitarian allocation rule emerges endogenously

a one stage model of link formation and payoff division abstract in this paper we introduce a strategic form model in which cooperation structures and divisions of the payoffs are determined simultaneously we analyze the cooperation structures and payoff divisions that result according to nash equilibria strong nash equilibria and coalition proof nash equilibria we find that no cycle will be formed if a player claims a positive amount for the formation of one of its links and that a player does not necessarily profit from a central position in a cooperation structure journal of economic literature classification numbers c71 c72

cooperation through imitation and exclusion in networks we develop a simple model to study the coevolution of interaction structures and action choices in prisoners dilemma games agents are boundedly rational and choose both actions and interaction partners via payoff biased imitation the dynamics of imitation and exclusion yields polymorphic outcomes under a wide range of parameters whenever agents hold some information beyond their interaction neighbors defectors and cooperators always coexist in disconnected components otherwise polymorphic networks can emerge with a center of cooperators and a periphery of defectors any stochastically stable state has at most two disconnected components simulations confirm our analytical results and show that the share of cooperators increases with the speed at which the network evolves increases with the radius of interaction and decreases with the radius of information

large indivisibles an analysis with respect to price equilibrium and fairness an exchange economy is considered in which there are a finite number of individuals the same number of indivisibles and a fixed amount of a divisible good each individual consumes exactly one of the indivisibles and a certain quantity of the divisible good the existence of prices corresponding to pareto efficient allocations is proved it is also shown that this economy possesses fair allocations income fair allocations coalition fair allocations and pareto efficient egalitarian equivalent allocations in this study the effect of including large indivisibles in an exchange economy will be analyzed the analysis will be carried out with respect to the existence of price equilibrium and with respect to the existence of different forms of fairness the economy consists of a finite number of individuals the same number of indivisibles and a fixed amount of a divisible good it is assumed that each individual consumes exactly one of the indivisibles and some quantity of the divisible good we may interpret the indivisibles as being professions or houses the relationship between price equilibrium and a pareto efficient allocation is well known and proved in a number of cases under different assumptions about preferences and commodities for a standard economy see e g debreu 5 in case of nonconvexities which may also describe a certain type of indivisibility we may have an exact relationship in economies with a continuum of individuals see e g hildenbrand 11 but otherwise an approximate relationship obtains the degree of approximation depends on the degree of nonconvexities in preferences and not on the number of individuals see e g arrow and hahn 1 we will prove the existence of prices characterizing a pareto efficient allocation in a case where the indivisibles play an essential role and where approximate results would be too approximate the indivisibles may be considered large for the individual compared to his total consumption the theory of fairness has developed considerably during the seventies different kinds of concepts of fairness have been introduced and analyzed see daniel 41 foley 81 pazner and schmeidler 121 and schmeidler and vind 141 among others normally these authors have considered models with divisible goods or an infinite number of individuals for exchange economies the existence of fair allocations an envy free and pareto efficient allocation has been proved in

shadow economy and unemployment rate in u s a is there a structural relationship an empirical analysis this article aims to estimate the size of the us shadow economy se using a structural equation approach and to evaluate if a structural relationship exists between the se and the unemployment rate ur in the united states the size of the se is estimated to be decreasing over the last two decades we corroborate the existence of a structural relationship between the se and the ur by using a simple theoretical model furthermore we extend the okun s law to estimate the structural relationship between growth rate of official gdp se and ur our results indicate a significant positive relationship between the se and the ur

does taking the shadow economy into account matter when measuring aggregate efficiency we analyze how adding the shadow economy to official output figures affects estimated technical efficiency at the country level we find that this only slightly affects the ranking of efficiency scores but increases average efficiency in a sample of 87 to 97 countries both developed and developing our results are robust to the functional form of the production technology and the adjustment of labour to account for years of schooling

sovereign debt markets in light of the shadow economy we investigate the controversial role of the informal sector in the economy of 64 countries between 2003 and 2007 by focusing for the first time on the impact it has on sovereign debt markets in addition to a standard ordered probit regression we employ two nonparametric neural network modeling techniques in order to capture possible complex interactions between our variables results confirm our main hypothesis that the informal sector has significant adverse effects on credit ratings and lending costs mlp neural networks offer the best fit to the data followed by the rbf neural networks and probit regression respectively the results do not change with respect to the stage of economic development of a country and contradict views about the possibility of significant economic benefits arising from the informal sector our study has important implications especially in the context of the ongoing sovereign debt crisis since it suggests that a reduction in the informal sector of financially challenged countries is likely to help in relaxing credit risk concerns and cutting down lending costs finally a decision tree analysis is used to exploit the inherent discreteness in the data and derive intuitive rules with respect to the level of the informal sector

bilateral bargaining in networks abstract each connected pair of nodes in a network can jointly produce one unit of surplus a maximum number of linked nodes is selected in every period to bargain bilaterally over the division of the surplus according to the protocol proposed by rubinstein and wollinsky equilibrium in a market with sequential bargaining econometrica 53 1985 1133 1150 all pairs which reach an agreement obtain the discounted payoffs and are removed from the network this bargaining game has a unique subgame perfect equilibrium that induces the dulmage mendelsohn decomposition partition of the bipartite network of the set of nodes in this network

crime and victimization an economic perspective the recent upward trend in crime rates of developing countries has spurred widespread public concern about personal and proprietary insecurity in some countries the questions of crime violence and victimization are attracting more attention from academics and policy makers than traditional economic problems the objective of this paper is to examine the main issues related to crime and victimization from an economic perspective for this purpose the paper combines a review of the main results established in the literature with original research on the causes of crime and the risk factors of victimization the first section provides a review of the estimates of the costs of crime the main theoretical and empirical research on its causes and the relative advantages of official and survey data on crime the second section presents original work on the main causes of violent crime from a cross country perspective the empirical work starts with a basic model of the economic determinants of homicide and robbery rates in turn this empirical model is extended along five dimensions 1 deterrence factors 2 illegal drug related activities 3 demographic issues 4 income and ethnic polarization and 5 social capital the third section reviews recent case studies of latin american cities that rely on survey data to assess the empirical determinants of the probability of victimization these studies focus on three types of risk factors 1 individual characteristics 2 household characteristics and 3 community characteristics the main conclusions from the previous sections are summarized in section four

tax evasion in transition outcome of an institutional clash testing feige s conjecture in albania a field survey of households was conducted in tirana albania in 2000 a response rate of 89 3 yielded 1 340 valid questionnaires allowing me to test feige s in nelson j m tilley c walker l eds transforming post communist political economics national academy press washington dc p 21 conjecture that more tax evasion will be observed when formal and informal institutions clash respondents attitudes towards formal and informal institutions were obtained by applying factor analysis to their responses to a series of attitudinal questions the theoretical importance of the interaction between formal and informal institutions in determining tax evasion finds empirical support in the data

price formation on the marseille fish market evidence from a network analysis abstract the empirical analysis of fish markets always reveals strong price dispersion for homogeneous or very similar goods the problem is how to explain this price dispersion on a market where there is no evident arbitrage explanations proposed by different authors include differences in organization the characteristics of the good and the influences of social interactions between buyers and sellers in line with the last of these three approaches we consider the fish market of marseille as a seller seller network we start by examining the influence of market interactions through a static and then a dynamic econometric model we then analyze the role of the seller s position in the network we bring to light a surprising paradox in that the sellers who share the most buyers with competitors i e the most central sellers charge the highest prices

domestic politics foreign interests and international trade policy reply this paper incorporates the foreign interest in the determination of a country s international trade policy into a model of political competition between candidates contesting elective office we envisage foreign and domestic producer interests as expressing political support for a candidate via campaign contributions and candidates as making trade policy pronouncements to maximize political support from producer interests tariffs are divisive but vers are consistent with conciliatory policy positions yielding mutual gain to foreign and domestic interests no candidate has an interest in formulating a trade policy position using a tariff if a ver is a policy option protection in the developed countries has in recent years often taken the form of bilaterally negotiated voluntary export restraints vers rather than the more traditional unilaterally imposed import restrictions the use of voluntary export restraints has been paralleled by interest in the theoretical literature the effects of vers have been compared with tariffs and quotas and vers have been examined in a political economy framework with a view to identifying the gainers and losers from this form of restric

estimates of the black economy based on consumer demand approaches we propose a consumer demand system approach to estimating the size of the black economy where alternative hypotheses affecting the empirical results can be tested in a nested framework this approach allows for the estimation of the under reporting of household income from various sources dispensing with the need to use arbitrary criteria to classify households by their main source of income it also avoids potential bias in black economy estimates arising from mistaking preference heterogeneity substitution as income effects we illustrate these arguments by estimating the extent to which self employment income in the uk is underreported using parametric and nonparametric techniques the black economy broadly defined as the economic activities that are hidden from public authorities to avoid taxation has recently received increased attention in the literature due to arguments that the rising tax burden and state regulation is driving economic activity underground tanzi and schuknecht 1997 enste and schneider 1998 the usefulness of attempts to estimate the size of the black economy however is a controversial issue the sceptics emphasise the difficulties associated with the precise definition of black economy activities and point to the widely different estimates of the size of these activities resulting from alternative methods dixon 1999 tanzi 1999 thomas 1999 authors approaching the subject in an optimistic frame of mind emphasise positive aspects of estimating the size of the black economy such as the correct measurement of gdp and other macroeconomic variables e g employment and the design of policy and econometric models bhattacharyya 1999 giles 1999 the controversy on estimation issues however does not subtract from the widespread concern about the undesired consequences of the black economy undeclared economic activities reduce the tax base thereby undermining the financing of public goods and social protection a country trying to curtail the loss of tax revenue by raising tax rates can create a vicious cycle as this reinforces the incentive not to declare economic activities to the public authorities high tax rates have a distorting effect resulting in inefficient allocation of resources due to unequal opportunities and willingness to evade in different sectors of the economy and can undermine the ability of the country to compete internationally distortions in the labour market can also arise because individuals working in the black economy may have difficulty in moving from one job to another furthermore in countries where health pension and other social security payments are not universal individuals working in the black economy and their families are outside the

worker substitutability and patterns of unionisation a strategic three party bargaining model is developed in which one distinguished party the firm has to reac h agreements with the other two each of which is a group of workers in the prebargaining stage the two worker groups decide whether to organize jointly or separately the main observation relates the equi librium pattern of unionization to the substitutability in production between the two groups the outcome is joint or separate unions acco rding to whether the two groups are substitute or complementary facto rs of production the analysis also considers possibilities for firm s strategic intervention in the unionization process copyright 1988 by royal economic society

from exogenous to endogenous economic networks internet applications economic agents behaviour is affected by their position in a network either exogenous or endogenous in which they interact with a sub set of neighbours only the network s links which may be generated by vertical and or horizontal relations or by more complex morphologies may explain the transition between dynamic equilibria and the instability of economic aggregates moreover networks shape strategic interaction among agents by determining their strategies the problem of access and interconnection particularly relevant in the internet is perhaps the best example a two way feedback between strategies and network structures arises instead when links are endogenous those features are clearly shown in the mechanism underlying the formation of peering links an dr d networks

core and periphery in networks abstract we study a model of network formation where the benefits from connections exhibit decreasing returns and decay with network distance we show that the unique equilibrium network is a periphery sponsored star where one player the center maintains no links and earns a high payoff while all other players maintain a single link to the center and earn lower payoffs both the star architecture and payoff inequality are preserved in an extension of the model where agents can make transfers and bargain over the formation of links under the condition that the surplus of connections increases in the size of agents neighborhoods our model thus generates two common features of social and economic networks 1 a core periphery structure 2 positive correlation between network centrality and payoffs

shadow economies size causes and consequences using various methods the size of the shadow economy in 76 developing transition and oecd countries is estimated average size varies from 12 percent of gdp for oecd countries to 23 percent for transition countries and 39 percent for developing countries increasing taxation and social security contributions combined with rising state regulations are driving forces for the increase of the shadow economy especially in oecd countries according to some findings corruption has a positive impact on the size of the shadow economy and a growing shadow economy has a negative effect on official gdp growth

the shadow economy as an equilibrium outcome abstract we construct a dynamic general equilibrium model of tax evasion where agents choose to report some of their income unreported income requires using a payment method that avoids recordkeeping in some markets cash trade using cash to avoid taxes is the shadow economy in our model we then calibrate our model using money interest rate and gdp data to back out the size of the shadow economy for a sample of countries and compare our measures to traditional reduced form estimates

tobin s q and the importance of focus in firm performance using tobin s q as a measure of performance we seek to estimate the relative importance of industry focus and share effects in determining firm performance our methods are analogous to those of richard schmalensee and like him we find that industry effects account for the majority of the explained variance however we also find that firm effects exist in the form of focus effects that is narrowly diversified firms do better than widely diversified firms we interpret this finding as consistent with profit maximization by firms with different factor endowments

risk sharing across communities this paper studies cross community risk sharing there is now a large body of theoretical and empirical work on informal insurance where people mitigate risk by sharing income a consistent empirical finding is that risk sharing is not complete within villages often the observed sets of individuals 2 one reason researchers suspect is that risk sharing does not take place at the village level but between individuals and families 3 we build a theoretical model where risksharing takes place between pairs of agents there are idiosyncratic shocks to individual income and community level shocks we consider how the opportunity for cross community links affects the shape and efficiency of risk sharing arrangements we find that when links across villages form there can be less risk sharing within a village welfare is higher for those directly or indirectly connected across villages but lower for those with no path connecting them to the other village overall welfare can be higher thus empirical findings that insurance within a village is not complete is not necessarily evidence of an inefficient pattern of risk sharing relations rather the finding is consistent with risk sharing patterns that involve cross community relations and such patterns may yield higher aggregate welfare despite incomplete insurance within a village this paper makes two contributions first it demonstrates the importance of a network analysis by examining pairwise incentives to form relations and the resulting pattern we can see new risk sharing outcomes second with this network model we show how informal risk sharing across communities has both aggregate and distributional effects to study network outcomes we posit a simple two stage model first we provide a benchmark model for risk sharing for a given network then working backwards we consider incentives to form risk sharing links 4 to illustrate consider a rural population and ask how people might link

principles of network development and evolution an experimental study this paper reports on an experimental investigation of the evolution of networks and the individual decision making processes that guide it inasmuch as there is no history of experimental work on network formation part of the paper is devoted to the formulation of problems that can be examined experimentally the results are that networks composed of decentralized decision makers are capable of overcoming complex coordination and learning problems and converge to stationary when it does not occur significant and persistent inefficiencies can result the models of equilibration based on the principle of nash equilibrium are more reliable than models based on the alternative principles of efficiency seeking or focalness of the network configuration however individual decision making within networks is not in accordance with the simple decision rules of nash best response instead we observed complicated strategies that appear to trade short term profits in order to signal to and teach other agents the strategies required for long term profit maximization

labor market institutions taxation and the underground economy abstract the paper aims at qualifying the links between labor market institutions taxation tax monitoring and underground economic activity the proposed model is a continuous time matching model with one commodity roduced either overground or underground underground economic activity arises because of partial compliance with regulations and tax contributions imposed by the government vacancies and workers search are directed at a specific labor market workers are heterogenous in the subjective cost they face when operating in the irregular sector analytical and numerical investigations suggest that interactions between regular and irregular activities can affect standard results of policy interventions in that respect the paper supports the view that policies aiming at increasing individuals benefits of participating in the regular sector are more desirable than a deterrence policy

asset pricing in large information networks we study asset pricing in economies with large information networks we focus on networks that are sparse and have power law degree distributions in line with empirical studies of large scale social networks our theoretical framework yields a rich set of novel asset pricing implications we derive closed form expressions for price volatility profitability and trading volume as functions of the network topology we also study agent welfare and show that the network that optimizes total welfare is typically a uniform one with an intermediate degree of connectedness

equilibria in networks we study a model in which two carriers choose networks to connect cities and compete for customers we show that if carriers compete aggressively e g bertrand like behavior one carrier operating a single hub spoke network is an equilibrium outcome competing hub spoke networks are not an equilibrium outcome although duopoly equilibria in nonhub networks can exist if carriers do not compete aggressively an equilibrium with competing hub spoke networks exists as long as the number of cities is not too small we provide conditions under which all equilibria consist of hub spoke networks

uses and abuses of estimates of the underground economy ered valuable by at least a part of society narcotics production and distribution prostitution gambling these activities can be large in some countries and should be counted in the national accounts of all countries although they rarely are their omission affects the comparability of data across countries the incomes generated by illegal activities are rarely taxed many other activities such as those associated with the subsistence or informal sectors are estimated rather than measured and are generally not taxed because of the low value they generate to those who engage in them in conclusion there are many reasons beside the ones discussed in this paper why the measurements of national output may not be complete about two decades ago a few economists became convinced that many normal economic activities that should be measured and taxed were taking place underground or in the shadow thus presumably escaping the attention of the statistical offices of the tax authorities and more generally of the government regulators some of these economists also claimed that like alice in wonderland these hidden activities were growing in a ridiculous fashion see gutmann 1977 and feige 1979 by the late 1970s the role of government had grown enormously so that the level of taxation and the tax rates had risen sharply and regulations had proliferated in many countries see tanzi and schuknecht 1997 these developments had created strong incentives for individuals and enterprises to go underground to avoid taxes and regulatory restrictions thus a good case could be made that what came to be called the underground economy was a phenomenon to worry about newspaper articles were ready to accept the

coalition formation as a dynamic process abstract we study coalition formation as an ongoing dynamic process with payoffs generated as coalitions form disintegrate or regroup a process of coalition formation pcf is an equilibrium if a coalitional move to some other state can be justified by the expectation of higher future value compared to inaction this future value in turn is endogenous it depends on coalitional movements at each node we study existence of equilibrium pcfs we connect deterministic equilibrium pcfs with unique absorbing state to the core and equilibrium pcfs with multiple absorbing states to the largest consistent set in addition we study cyclical as well as stochastic equilibrium pcfs

senate voting patterns on the 1991 extension of the fast track trade procedures prelude to nafta in 1991 then president george bush requested an extension of fast track procedures from congress for the primary purpose of negotiating a north american free trade agreement this paper uses an econometric model to test the importance of three themes related to nafta that surfaced during senate debates over whether to approve the request that of employment effects environmental effects and the impact on immigration from mexico the empirical results show that expected job gains and losses were significant in explaining senate voting patterns on fast track extension immigration was found to be somewhat important but environmental issues were not found to statistically significant in addition the impact of organized labor and political ideology as proxied by political party were found to be important factors that shaped senate voting patterns on fast track

bargaining in stationary networks we study an infinite horizon game in which pairs of players con nected in a network are randomly matched to bargain players who reach agreement are replaced by new players at the same positions in the network we show that all equilibria are payoff equivalent the payoffs and the set of agreement links converge as players become patient several new concepts mutually estranged sets partners and shortage ratios provide insights into the relative strengths of the positions in the network we develop a procedure to deter mine the limit equilibrium payoffs for all players characterizations of equitable and nondiscriminatory networks are also obtained jel c78 d85 competitive equilibrium theory assumes large and anonymous markets in which every buyer can trade with every seller underlying these assumptions are standard goods and services that may be traded at low transaction costs by agents who are not in specific relationships with one another however in many markets goods and services are heterogeneous e g cars apartments or need to be tailored to particular needs e g manufacturing inputs technical support furthermore trad ing opportunities may depend on transportation costs social relationships infor mation advertising trust technological compatibility joint business opportunities free trade agreements etc in such cases it is natural to model the market using a network where only pairs of connected agents may engage in exchange new theories are needed to explore the influence of the network structure on market outcomes many questions arise how does an agent s position in the net work determine his bargaining power and the local prices he faces who trades with whom and on what terms when are prices uniform in the network one possible conjecture is that an agent s bargaining power is determined by his relative number of connections in the network however this simple theory is implausible consider the network of four sellers located at the top nodes and nine buyers located at the bottom nodes depicted in figure 1 assume that each seller supplies one unit of a homogeneous indivisible good each buyer demands one unit of the good and all buyers have identical values for the good the buyer located in the middle has the largest number of links in the network as he is connected to each

endogenous formation of coalitions the formation of coalitions is a fundamental problem in game theory by a coalition is meant a group of players e g economic or political agents which decide to act together as one unit relative to the rest of the players this includes the instances of syndicates unions cartels blocks political parties parliamentary coalitions etc we would like to emphasize that forming a coalition does not eliminate the individual players as decision makers in all interactions with the other players coalition members act as one unit it may be useful to think of a representative agent taking their place 2 however this arrangement will continue only as long as each player finds it desirable to act this way further bargaining occurs among the members of each coalition on how to divide what they obtained together thus the existence of coalitions implies that the interactions among the players will be conducted on two levels first among the coalitions and second within each coalition most of the existing models in economics and game theory assume that the coalition structure is given exogenously instead we try here to obtain it as an endogenous outcome of our model namely we want to be able to predict which coalitions will in fact form in each given situation 3 our theory combines two kinds of game theoretic concepts value and stability the basic idea is first to evaluate the players prospects in the various coalition structures and then based on these values to find which ones are stable we will call this value coalition structure value or cs value for short the reason we are considering coalition structures i e partitions of the set of players into disjoint coalitions rather than just coalitions is that in general players may find it to their advantage to join forces in some situations and to act separately in others all depending on the way the other participants are organized this implies that both the value and the stability concepts should depend on the entire coalition structure the cs value we analyze in this paper was first developed by owen 7

the devil is in the shadow do institutions affect income and productivity or only official income and official productivity this paper assesses the relationship between institutions output and productivity when official output is corrected for the size of the shadow economy our results confirm the usual positive impact of institutional quality on official output and total factor productivity and its negative impact on the size of the underground economy however once output is corrected for the shadow economy the relationship between institutions and output becomes weaker the impact of institutions on total corrected factor productivity becomes insignificant differences in corrected output must then be attributed to differences in factor endowments these results survive several tests for robustness

endogenous job contact networks we use the uk quarterly labour force survey to document the presence of two phenomena first a positive correlation between unemployment rate and the proportion of job seekers who use social networks to nd jobs network use second a non monotone relation between unemployment rate and the proportion of recently employed workers who found their job through friends or relatives network productivity this second relation is positive for low levels of unemployment rate while it becomes negative for high levels of unemployment rate existing models of social networks and labor market generally assume that social networks are exogenous this assumption implies a negative correlation between unemployment rate and network productivity we develop a model where social networks are used to collect job oers but workers decide strategically how much to invest in their network we show that equilibrium job contact networks are dense and more productive in transmitting information when labor market turnover is moderate while they are less productive and segmented into clusters for either high or low turnover the equilibrium response of job contact networks to changes in labor market conditions is sucient to generate

local network externalities and market segmentation this paper models interaction between groups of agents by means of a graph where each node represents a group of agents and an arc represents bilateral interaction it departs from the standard katz shapiro framework by assuming that network benefits are restricted only amongst groups of linked agents it shows that even if rival firms engage in bertrand competition this form of network externalities permits strong market segmentation in which firms divide up the market and earn positive profits the analysis also shows that some graphs or network structures do not permit such segmentation while for others there are easy to interpret conditions under which market segmentation obtains in equilibrium c 2009 elsevier b v all rights reserved

the economics of special interest politics the case of the tariff this paper investigates the interaction of politicians and special interest lobbies the goal is to model the equilibrium levels of redistributive policies such as taxes subsidies tariffs and regulatory decisions the model is applied throughout to the setting of tariffs by contributing to political campaigns special interest lobbies generate economic returns higher tariffs generate revenue for import competing industries through higher product prices higher milk support prices raise dairy farm income and so forth the lobby invests to maximize these net economic returns in evaluating their chances of election politicians weigh the favorable effects of special interest money against the unfavorable association with the lobby and the social cost of the redistributive policy section i explores the lobby s problem it describes a formalization of mancur olson s discussion of the voluntary provision of public goods and optimal contributions by lobbies to political campaigns section ii describes determination of the equilibrium tariff positions of each politician in a political campaign

bayesian learning in social networks we study the perfect bayesian equilibrium of a sequential learning model over a general social network each individual receives a signal about the underlying state of the world observes the past actions of a stochastically generated neighbourhood of individuals and chooses one of two possible actions the stochastic process generating the neighbourhoods defines the network topology we characterize pure strategy equilibria for arbitrary stochastic and deterministic social networks and characterize the conditions under which there will be asymptotic learning convergence in probability to the right action as the social network becomes large we show that when private beliefs are unbounded meaning that the implied likelihood ratios are unbounded there will be asymptotic learning as long as there is some minimal amount of expansion in observations we also characterize conditions under which there will be asymptotic learning when private beliefs are bounded

cheating ourselves the economics of tax evasion no government can announce a tax system and then rely on taxpayers sense of duty to remit what is owed some dutiful people will undoubtedly pay what they owe but many others will not over time the ranks of the dutiful will shrink as they see how they are being taken advantage of by the others thus paying taxes must be made a legal responsibility of citizens with penalties attendant on noncompliance but even in the face of those penalties substantial tax evasion exists and always has the history of taxation is replete with episodes of evasion often notable for their inventiveness during the third century many wealthy romans buried their jewelry or stocks of gold coin to evade the luxury tax and homeowners in eighteenth century england temporarily bricked up their fireplaces to escape notice of the hearth tax collector webber and wildavsky 1986 p 141 this essay reviews what is known about the magnitude nature and determinants of tax evasion with an emphasis on the u s income tax alm 1999 andreoni erard and feinstein 1998 and slemrod and yitzhaki 2002 offer more comprehensive recent reviews of the literature it then places this information into a conceptual and policy context

the existence and computation of competitive equilibria in markets with an indivisible commodity abstract this paper considers an exchange economy called a generalized assignment market in which sellers and buyers trade one indivisible commodity possibly with product differentiation for a perfectly divisible commodity the existence of a competitive equilibrium in this economy is proved using kakutani s fixed point theorem this existence theorem is applied to a production economy in which sellers are formulated as producers with convex cost functions two examples of housing markets are provided and their competitive equilibria are numerically calculated

the monetary method to measure the shadow economy the forgotten problem of the initial conditions abstract we show that when the money demand function used to estimate the size of the shadow economy includes the lagged dependent variable the need to assume a known initial condition reappears as it was the case in the early monetary methods

international trade policy in israel another model unusual circumstances can give rise to economies with special characteristics leo kahane has ventured in the above paper into the realm of one such economy that of israel to study the determination of international trade policy kahane tests using pre 1977 data on israel four theories of endogenous protection that have been previously empirically tested for the united states and canada because a country s institutions and history influence economic and political decision making a simple transplanting of theories and hypotheses can miss alternative more pertinent explanations and in empirical studies the data and results may not be sufficiently discriminating to reveal the appropriate distinctions

a competitive partnership formation process a group of heterogeneous agents may form partnerships in pairs all single agents as well as all partnerships generate values if two agents choose to cooperate they need to specify how to split their joint value among one another in equilibrium which may or may not exist no agents have incentives to break up any existing partnerships or form new partnerships this paper proposes a dynamic competitive adjustment process that always either finds an equilibrium or exclusively disproves the existence of any equilibrium in finitely many steps when an equilibrium exists partnership and revenue distribution will be automatically and endogenously determined by the process moreover several fundamental properties of the equilibrium solution and the model are derived

axiomatization of the shapley value on minimum cost spanning tree games abstract this paper axiomatizes the shapley value on minimum cost spanning tree games by using axioms which are different from those used in network games journal of economic literature classification numbers c71 a14

a general strategy proof fair allocation mechanism abstract this paper studies a general problem of efficiently and fairly allocating n indivisible objects like jobs or houses with a certain amount of money to n persons with a requirement that each person be assigned with one object the precise preferences of individuals over both the objects and money are unknown and manipulable but assumed to follow some general patterns to ensure the existence of a fair allocation a mechanism is developed that elicits honest preferences over both the objects and money and that assigns the objects with some money to individuals efficiently and fairly

a strategic model of social and economic networks we study the stability and efficiency of social and economic networks when self interested individuals can form or sever links first for two stylized models we characterize the stable and efficient networks there does not always exist a stable network that is efficient next we show that this tension persists generally to assure that there exists a stable network that is efficient one is forced to allocate resources to nodes that are not responsible for any of the production we characterize one such allocation rule the equal split rule and another rule that arises naturally from bargaining of the players

delegated monitoring versus arm s length contracting abstract this paper analyzes the optimal organization of input suppliers in a procurement context we discuss when a top firm chooses to induce information sharing and active coordination between its suppliers consolidation rather than having them contract at arm s length delegation in designing the organization the firm anticipates that different supplier networks have different costs of inducing information revelation from suppliers when the cost of information sharing varies the optimal organization exhibits various discrete degrees of consolidation there is excessive arm s length contracting compared to the case where the top firm controls this organizational choice itself the paper offers also a methodology to study in a unified framework various organizational forms separately analyzed in the literature

determinants of the tariff structure of the israeli industrial sector 1965 1977 abstract this paper examines the determinants of the tariff structure of the israeli manufacturing sector in the mid 1960s and late 1970s a period marked by considerable trade liberalization the empirical results point to the made to measure nature of the tariff structure i e relatively inefficient industries were granted higher rates of protection the relative inefficiency measure which was derived from the ces production function kept a high explanatory power along a wide range of substitution elasticities the empirical results also show that in the early 1960s tariffs favoured low wage labor intensive industries while in the late 1970s industries with high levels of concentration lobbied successfully for higher levels of protection

modeling bilateral electricity markets a complex network approach in electricity markets a pool trading model with a power exchange pool is a typical market organization that attracts much more attention than a bilateral trading model to date quite a few papers have focused on bilateral trading models particularly those under network constraints this trend is due to the model s complexity in terms of the various trading patterns reflecting the self interested behavior of the market participants striving to find potentially profitable transactions in this paper we propose a new approach based on complex networks suitable for assessing different aspects of bilateral market this work strives to analyze the bilateral trading patterns in the electricity markets where physical network constraints need to be considered for the feasible and secure operation of the power systems the goal of the work is to find the stable network structures that can be used to anticipate possible bilateral transactions in the real market place and to provide a novel and applicable approach to studying the bilateral model in electricity markets the proposed approach has been tested on several test systems in which the transmission network structure of the market that accommodates the transactions is considered the proposed model is illustrated with examples using a four bus test system the ieee 30 bus and the ieee 118 bus test systems

the strategy structure of two sided matching markets we study two sided markets in which agents are buyers and sellers or firms and workers or men and women the agents are to form partnerships which provide them with satisfaction and at the same time make monetary transfers e g salaries or dowries the core of this market game is shown to have a particularly nice structure so that precise answers can be given to questions concerning comparative statics and manipulability the idea of using walrasian equilibrium as a mechanism for making allocations with desirable properties of fairness and efficiency has been studied extensively the scheme involves having agents specify their supply and demand functions the competitive equilibria are then calculated and allocations are made accordingly in general this procedure may run into two difficulties first nonuniqueness if there are several equilibria there may be no fair way to decide which one should be implemented and second manipulability if there is only one equilibrium an informed agent may be able to influence it by suitably falsifying his demand data however as we will show here using the walrasian mechanism does work remarkably well for a certain class of important markets these are the matching markets of our title and they include markets for single items like houses where it is assumed that traders do not wish to acquire more than one item they also include labor markets in which it is desired to match workers with jobs at suitable salaries academic markets in which students are to be assigned to educational institutions marriage markets where men and women are matched through negotiating of dowries it turns out that in these markets both the problems of nonuniqueness and manipulability can be resolved in a

multi item auctions a collection of items is to be distributed among several bidders and each bidder is to receive at most one item assuming that the bidders place some monetary value on each of the items it has been shown that there is a unique vector of equilibrium prices that is optimal in a suitable sense for the bidders in this paper we describe two dynamic auction mechanisms one achieves this equilibrium and the other approximates it to any desired degree of accuracy

multi item vickrey english dutch auctions abstract assuming that bidders wish to acquire at most one item this paper defines a polynomial time multi item auction that locates the vcg prices in a finite number of iterations for any given starting prices this auction is called the vickrey english dutch auction and it contains the vickrey english auction sankaran j k 1994 on a dynamic auction mechanism for a bilateral assignment problem math soc sci 28 143 150 and the vickrey dutch auction mishra d parkes d 2009 multi item vickrey dutch auctions games econ behav 66 326 347 as special cases by means of numerical experiments it is showed that when the auctioneer knows the bidders value distributions the vickrey english dutch auction is weakly faster than the vickrey english auction and the vickrey dutch auction in 89 percent and 99 percent respectively of the investigated problems a greedy version of the vickrey english dutch auction is demonstrated to perform even better in the simulation studies

systems competition and network effects this paper discusses firm behavior market performance and the public and private institutions that arise in systems markets i e markets where consumers use compatible components together to generate benefits in such markets which include communications networks and hardware software networks popular products are inherently more valuable these network effects can drive corporate strategies and are critical in understanding innovation in many high technology markets the discussion here emphasizes the dynamics of consumer adoption decisions in the presence of network effects competition between incompatible systems and how suppliers choose which components are compatible and which are not

the formation of a core periphery structure in heterogeneous financial networks recent empirical evidence suggests that nancial networks exhibit a core periphery network structure this paper aims at giving an economic explanation for the emergence of such a structure using network formation theory focusing on intermediation benets we nd that a core periphery network cannot be unilaterally stable when agents are homogeneous the best response dynamics converge to a unique unilaterally stable outcome ranging from an empty to denser networks as the costs of linking decrease a core periphery network structure can form endogenously however if we allow for heterogeneity among agents in size we show that our model can reproduce the observed core periphery structure in the dutch interbank market for reasonable parameter values

the size and development of the shadow economy an empirical investigation from states of india abstract using the state level data from india this paper investigates the size of the hidden economy in indian states over the period 1974 75 to 1995 96 our analysis has shown that after liberalization of the indian economy in 1991 92 the growth in the size of the hidden economy has decreased on an average our results show that the growth in the size of the hidden economy is approximately 4 less in scheduled election years than in all other years we also demonstrate that the growth is significantly lower in those states where the coalition government is in power an increased growth of newspapers and the literacy rates translate to cleaner governance e g to fewer amounts of shadow economy activities in the economy