energy disruptions interfirm price effects and the aggregate economy in an economy with many imperfect competitors monopolistic competition firms that pass through higher oil prices during a disruption will affect the demand for firms in other industries firms that charge higher prices for their final product will include the effect on their own final product in their private decisions but will exclude the effect on the final products of other firms although a pecuniary externality these actions will reduce society s welfare unlike the case of a perfectly competitive market this situation creates a societal risk that is much wider than an externality in any single market policy interest shifts from one of punishing persian gulf oil producers to one of cushioning an industrialized economy from sudden disruptions caused by political and military conflicts although the value of reducing oil use depends upon a number of unknown parameters with wide distributions a representative numerical example suggests that it may approach 5 per barrel

the impact of the 1992 cable act on household demand and welfare i measure the benefit to households of the 1992 cable act in light of strategic responses by cable systems to the regulations mandated by the act a discrete choice differentiatedproduct model of household demand for all offered cable television services forms the basis of the analysis aggregation over households and service combinations to the level of the data permits estimation on a cross section of cable markets from before and after the act the results indicate that while the regulations mandated price reductions of 10 17 for cable services observed system responses yielded no change in household welfare post act changes in cable prices are responsible for most of the difference

estimating the extent of potential competition in the korean mobile telecommunications market switching costs and number portability abstract number portability service in the mobile communications market is believed to play an important role in lowering the switching costs which can increase the level of competition among providers the aim of this study was to estimate the switching costs and consumers valuation of the number portability service in the korean mobile communications market using conjoint analysis and the stated preference approach the analysis showed that the switching costs have been lowered considerably since number portability has been in force however a significant level of switching costs still remains despite number portability finally this paper provides some implications for the competition strategy in the mobile communications market

wage contracts and business cycle models abstract the paper introduces an explicit production technology into a business cycle model with nominal rigidities and evaluates the modified model using criteria similar to those commonly used to assess real business cycle rbc models in general the model compares favorably to standard rbc models and is superior in several important respects it reproduces the observed correlation of average labor productivity and hours as well as the relative volatilities of hours and output and requires technological shocks of a lower magnitude to generate the observed volatility of output finally the modified model is capable of reproducing some of the stylized response patterns from the recent empirical literature

models of inflation expectations formation a comparison of household and economist forecasts the recent appreciation of the critical role played by expectations of inflation in the behavior of macromodels has stimulated empirical studies of the formation of expectations by different groups time series survey data on expectations of inflation exist now for economists households and businesses these data have been used as independent variables in explaining wage behavior gordon 16 turnovsky and wachter 34 and de menil and bhatta 5 prices turnovsky and wachter 34 and wachtel 36 interest rates gibson 14 hendershott and van horne 19 pearce 30 and mishkin 27 and consumption wachtel 36 generally with a significant improvement in explanatory power they have also been used as dependent variables in attempts to determine how expectations are formed by gordon 15 mullineaux 28 jacobs and jones 20 and figlewski and wachtel 9 for the economist survey van duyne 35 for the household survey and leonard 23 and de leeuw and mckelvey 4 for businesses given their different levels of knowlege of economics and perspectives one might expect that the models used by the different groups to forecast inflation would

wage indexation and discretionary monetary policy since the early 1970 s both academic researchers and policymakers have devoted considerable attention to the macroeconomic effects of wage indexation however these two groups have focused on different effects starting with jo anna gray 1976 and stanley fischer 1977a formal models emphasize the role of indexation in stabilizing or destabilizing output in contrast informal policy discussions usually focus on the allegation that indexation is inflationary e g arthur okun 1971 mario simonsen 1983 eliana cardoso and rudiger dornbusch 1987 to reduce this gap this paper presents a model of the effects of indexation on inflation and asks whether indexation raises economic welfare when these effects are taken into account until recently it was difficult to formalize the argument that indexation is inflationary because economists lacked models of the sources of inflation this paper applies the insight of robert barro and david gordon 1983a that with discretionary policy the employment gains from surprise inflation tempt the monetary authority to create positive trend inflation as stressed by fischer and lawrence summers 1989 policies that reduce the costs of inflation such as indexation cause barro gordon policymakers to choose higher inflation indeed inflation can rise so much that welfare falls despite greater protection against inflation this effect is appealing because it captures the common argument that indexation weakens policymakers will to fight inflation 1 this is not the end of the story however because wage indexation has a second effect it reduces the employment effects of surprise inflation that is unlike most policies to reduce the costs of inflation such as indexation of interest rates wage indexation steepens the phillips curve in the barrogordon model a steeper phillips curve reduces the temptation to inflate and hence reduces equilibrium inflation since indexation has one inflationary effect lower costs of inflation and one anti inflationary effect a steeper phillips curve the net effect appears ambiguous even if the net effect on inflation is determined the welfare effect may remain unclear if inflation rises the welfare loss might or might not be outweighed by the lower cost of a given amount of inflation 2 these ambiguities cannot be resolved with the barro gordon model alone because the phillips curve and the effect of inflation on welfare are ad hoc it is plausible that indexation affects these relations but the relative strengths of the effects are unclear resolving the ambiguities requires a more structural model in which the effects of indexation are derived rather than assumed this paper studies such a model specifically we use a model of staggered wagesetting based on gray 1976 fischer 1977a b and john taylor 1980 the degree of indexation is an explicit parameter and so we can derive its net effects on inflation and welfare section i of this paper presents our basic model and derives equilibrium inflation in

contract length monetary policy and exchange rate variability abstract this paper investigates the dependence of exchange rate variability on average contract length in the goods market when changes in the money supply are the driving force for movements in the exchange rate it is shown that in general an increase in average contract length will increase the volatility of the exchange rate we then discuss how changes in the money supply process affect average contract length besides providing an explanation for changes in the conditional variance of the exchange rate our results are interesting in the light of the changes in monetary control procedures implemented by the federal reserve board in october 1979 and the consequent increase in exchange rate volatility

bargaining structure and nominal wage flexibility in a model with hetergenous agents wage setting by monopoly unions and monetary policy conducted by a central bank we show that the duration of nominal wage contracts is u shaped in the degree of centralization with intermediate bargaining systems yielding contracts of shorter duration and thus more flexible nominal wages than both decentralized and centralized systems we also find the degree of heterogeneity in the economy the theoretical predictions of the model are tested on oecd data there is empirical support for the main results regarding contract length while there is less support for the predictions regarding the level of centralization

diversification in banking is noninterest income the answer this paper assesses potential diversification benefits in the u s banking industry from the steady shift toward activities that generate fee income trading revenue and other types of noninterest income in the aggregate declining volatility of net operating revenue reflects reduced volatility of net interest income not diversification benefits from noninterest income which is quite volatile and increasingly correlated with net interest income at the bank level greater reliance on noninterest income particularly trading revenue is associated with lower risk adjusted profits and higher risk this suggests few obvious diversification benefits from the ongoing shift toward noninterest income

nominal wage flexibility wage indexation and monetary union membership in a monetary union implies stronger incentives for nominal wage flexibility in the form of wage indexation and shorter contract length than non membership this counteracts the stabilisation policy cost of giving up monetary independence but more wage flexibility is only an imperfect substitute for an individual monetary policy it is possible that an increase in wage flexibility is welfare decreasing because of the accompanying rise in price variability the interaction between wage setting and central bank behaviour may result in either multiple equilibria or a unique full indexation equilibrium

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

modeling structural and temporal variation in the market s valuation of banking firms hidden capital exists whenever the accounting measure of a firm s net worth diverges from its economic value such unbooked capital has on balance sheet and off balancesheet sources this paper develops a model to estimate both forms of hidden capital and to test hypotheses about their determinants in effect the analysis expands the twoindex model by endogenizing the market and interest rate sensitivities of any stock and decomposing each sensitivity into on balance sheet and off balance sheet elements for a sample of banks during 1975 1985 the model finds considerable variation in both forms of hidden capital to the extent that an accounting representation of a firm s net worth diverges from its economic value the firm is said to have hidden capital two sources of hidden capital exist accountants misvaluations of portfolio positions that accounting principles designate as on balance sheet items and the systematic neglect of off balance sheet sources of value that these principles do not permit to be formally booked this paper develops a model for estimating both types of hidden capital the model makes direct use of accounting information on the bookable positions of a firm and separates bookable from unbookable sources of value we use regression analysis to partition the market value of a firm s stock i e its market capitalization mv into two components recorded capital reserves and unrecorded or hidden net worth hidden capital is in turn allocated between values that are unbooked but bookable through asset turnover or writedowns on a historical cost balance sheet under generally accepted accounting principles gaap and values which gaap currently designates as an unbookable offbalance sheet item we estimate the net unbooked value of on balance sheet positions by estimating an intermediate variation ratio k this variable expresses the ratio of the market value to the book value of the collected components of a firm s bookable

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

economic policy advice and political preferences this essay argues that public choice offers an appropriate approach for thinking about economic policy advice first i discuss the nature of the policy advice that is proffered by economists then i specifically suggest that one of the most common modeling features in the public choice literature viz the assumption that individuals have political preferences may be useful in helping us understand the nature of this advice finally i also carry out a tentative exploration of the implications of accepting the perspective that is provided when the suggested modeling feature is used in this context

work costs and nonconvex preferences in the estimation of labor supply models abstract works costs have not been adequately handled in labor supply estimation likely due to their complexity we show that if work costs are not accounted for in the budget and time constraints in a structural labor supply model they will be subsumed into the data generating preferences even if underlying preferences over consumption and leisure are convex the presence of unobservable work costs can make these preferences appear nonconvex however we show that under plausible conditions policy relevant calculations such as estimates of the effect of tax changes on labor supply and deadweight loss measures are not affected by the fact that estimated preferences incorporate work costs

unemployment benefits contract length and nominal wage flexibility we show in a union bargaining model that a decrease in the unemployment benefit level increases not only equilibrium employment but also nominal wage flexibility and thus reduces employment varia

ability location and household demand for internet bandwidth abstract this paper examines consumer preferences for internet bandwidth focusing on technical ability and urban rural location as sources of preference heterogeneity an economic model is outlined that shows that ability decreases the effective price of bandwidth as a result of this decrease part of the total effect of an increase in ability will always be an increase in the demand for bandwidth the implication is empirically investigated with an econometric approach that overcomes the limitations of the aggregated data that is currently available to describe consumer preferences results show that high ability urban consumers are willing to pay a substantive monthly premium for an improvement in bandwidth relative to rural consumers

is equilibrium indexation efficient this paper investigates the welfare properties of equilibrium indexation in a decentralized economy if indexation is costless so all firms index then the equilibrium degree of indexation is efficient but if indexation is costly and this leads some firms not to index equilibrium indexation is inefficient because indexation has externalities for nonindexed firms firms choose too little indexation if labor demand is more responsive to movements in real money than to movements in real wages the results do not depend on the relative importance of real and nominal shocks

retraining in an interdependent system of labor markets a network analysis abstract the study of a system of markets for labor of different categories heterogeneous labor must be based on the recognition that individual workers may move from one category to another through schooling and retraining here such transitions are viewed as a flow through a retraining network the nodes of the network represent various stages of education and acquired abilities the directed links represent avenues of possible schooling and retraining if wages are rigid downwards failing to fall in the face of a weakening demand for labor there may be unemployment at one or several nodes of the retraining network an optimizing principle inspired by developments in the analysis of spatial networks is presented which solves for the supply of labor of each category the number of workers enrolled in the various retraining activities and the possible unemployment at each node of the network the lagrange multiplier of each market balance is the market wage rate whether the labor market is in equilibrium or not

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

externalities from contract length an increase in the length of a firm s labor contract contributes to rigidity in the aggregate price level this increases the variance of aggregate demand but decreases the variance of other firms real wages under certain conditions the net effect is to increase the variance of other firms employment this negative externality implies that the equilibrium contract length in a decentralized economy is greater than the social optimum in other words wages are too rigid copyright 1987 by american economic association

will wage setters ever stagger decisions models featuring the implications of long term contracts typically impose the pattern of negotiation and then develop the implications of this particular structure with no analysis of whether the structure is optimal or stable recent work however focuses on the choice of the timing of wage negotiations across sectors 1 in fethke and policano 1984 we develop a two sector model in which each sector is subject to both aggregate and relative disturbances the main result is that whenever the variability of relative disturbances exceeds the weighted variability of aggregate disturbances a uniformly staggered pattern of negotiation represents a symmetric noncooperative nash solution the twosector case has special properties first the benefit associated with staggered negotiation apparently depends on the existence of large negotiating sectors in the economy second symmetry of relative disturbances in the two sector case leads to the unusual equivalence of the noncooperative and the joint optimization solutions to the problem of determining the optimal negotiation pattern one natural question concerns whether the incentive to stagger negotiation dates will diminish as the number of sectors increases in this paper we develop the three sector case in detail and then generalize the analysis to any number of sectors the results indicate that the more significant are relative disturbances the larger is the number of sectors that will be supported by a stable nash equilibrium with uniformly staggered negotiation dates in an economy characterized by atomistic sectors the incentive to stagger negotiation dates disappears we also compare the joint optimization solution with the nash solution and find that when there are more than two sectors the requirement for uniform staggering to be optimal is more difficult to satisfy under joint optimization than under the nash strategy this di

wage contingencies the pattern of negotiation and aggregate implications of alternative contract structures abstract a model of long term contracts is developed in which the choice of the negotiation pattern is endogenized when disturbances to the economy derive primarily from relative shocks staggered negotiation is optimal because adjustments made by negotiating agents transmit desirable employment effects into sectors that are looked into previously negotiated contracts the price level acts as the transmission mechanism indexation of wages to the price level enhances the benefits of staggered negotiation because the sector specific information revealed by the price level acts as a substitute for explicit inclusion in the contract of sector specific information the degree of persistence and the level of variation in aggregate output and employment measures which are commonly used in comparing the merits of synchronized versus staggered regimes are shown to be inappropriate criteria upon which to judge the optimality of the negotiation pattern

the equilibrium and optimal timing of price changes this paper studies the welfare properties of the equilibrium timing of price changes staggered price setting has the advantage that it permits rapid adjustment to firm specific shocks but the disadvantages that it causes unwanted fluctuations in relative prices and that by creating price level inertia it can increase aggregate fluctuations because each firm ignores its contribution to these problems staggering can be a stable equilibrium even if it is highly inefficient in addition there can be multiple equilibria in the timing of prices changes indeed whenever there is an inefficient staggered equilibrium there is also an efficient equilibrium with synchronized price setting

optimal contract length in a reputational model of monetary policy we develop a reputational model of monetary policy with endogenous contract length in choosing contract length private sector agents trade off recontracting costs against the expected costs resulting from trading under contracts based on incorrect inflation expectations however due to an externality the private and socially optimal contract lengths differ when selecting individual contract length private agents do not consider the effect of contract length on the surprise inflation output trade off in a reputational model of monetary policy this results in an excessive equilibrium inflation rate the socially optimal outcome may be achieved by public policies that reduce recontracting costs

staggered price setting with endogenous frequency of adjustment abstract a model of staggered price setting in which the frequency of price changes is endogenous is presented

estimation of heterogeneous preferences with an application to demand for internet services this paper presents a structural econometric framework for discrete and continuous consumer choices in which unobserved intrapersonal and interpersonal preference heterogeneity is modeled explicitly it outlines a simulation assisted estimation methodology applicable in this framework this methodology is illustrated in an application to analyze data from the u c berkeley internet demand experiment

efficiency wage models of unemployment keynesian economists hold it to be self evident that business cycles are characterized by involuntary unemployment but construction of a model of the cycle with involuntary unemployment faces the obvious difficulty of explaining why the labor market does not clear involuntarily unemployed people by definition want to work at less than the going wage rate why don t firms cut wages thereby increasing profits

valuation of diversified banks new evidence abstract this paper reconsiders the effect of diversification on bank valuation our objective is to provide new evidence based on a unified estimation framework that places particular emphasis on separating the effects of diversification specialised banks vs diversified banks from those of bank type investment banks vs commercial banks consistent with prior studies we find a significant diversification discount at the end of the 1990s our main finding is that it decreases over time and practically vanishes after the financial crisis we do not find support for the hypothesis that the diversification effect is influenced by geographical or regulatory factors the valuation impact of bank characteristics varies over time particularly in the financial crisis but this structural break does not explain the observed decrease of the diversification discount we show that the pre crisis discount is considerably smaller in a robust regression which in part is driven by banks with a large share of non interest income

implicit contracts a survey 7mplicit contracts resolve the distribution of uncertainty and utilization of specific human capital between risk averse workers and less risk averse firms incomplete contracts are required to yield involuntary layoffs in contract markets otherwise contracts are efficient and pareto optimal by construction there is a close relation between contract theory and neoclassical labor market theory contracts smooth consumption but increase the volatility of labor supply and labor utilization to demand disturbances because contractural insurance eliminates the income effects of socially diversifiable risks this result is similar to the intertemporal substitution hypothesis however the price mechanism in a contract is substantially different contracts embody a nonlinear two part pricing scheme the lump sum part allocates the income consumption consequences of risks and the marginal pricing part allocates production and labor utilization this implicit pricing mechanism is in all respects flexible though the observed average hourly wage combines both parts and may give the outward appearanceof rigidity furthermore the observed average wage rate in a contract does not reflect marginal conditions necessary for structural econometric estimation indivisibilities appear necessary to account for the split between work sharing and layoffs contracts with private information are also considered in the nonlinear pricing context this abstract was borrowed from another version of this item

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

do financial conglomerates create or destroy value evidence for the eu there is an ongoing debate about whether firm focus creates or destroys shareholder value earlier literature has shown significant diversification discounts firms that engage in multiple activities are valued lower various factors are important in determining the size of the discount for example cross subsidization and agency problems the existing literature however generally focuses on non financial firms or on banks combining investment and commercial banking our paper focuses specifically on the valuation of bank insurance conglomerates we find no universal diversification discount but significant variability the discount is explained by the size increasing the familiarity with the conglomerate business model decreasing and the risk profile decreasing our results are robust to the historical origin the merger record and the age of the conglomerate as well as peer group specification and outlier elimination

bank profitability during recessions this paper contributes to the literature on the relation between bank profitability and economic activity when allowing for stronger co movement of bank profit with economic activity during deep recessions we find a much larger impact of output growth on bank profitability than commonly found in the literature among the different components of bank profit loan losses are the main driver of this result we also find long term interest rates in previous years to be important determinants of bank profit in times of high economic growth our findings are robust to the use of aggregate or individual bank data

equilibrium long term labor contracts the paper presents a labor market equilibrium analysis of implicit contract theory a two period single good model is used to propose consistent notions of labor market equilibrium for long term employment contracts both when labor is specialized and cannot move in the second period and when there is free mobility without costs the result that long term contracts emerge in equilibrium even without mobility costs is novel and contrary to common beliefs the main features of equilibrium are that risk neutral firms will insure risk averse workers against downside risk yielding downward rigid wages wages are not fully rigid as in earlier work on contract theory because workers may quit and wages have to be bid up to retain them the firm gets its return of the insurance deal by paying less than marginal product in the first period the resulting equilibrium is second best and lies between productive efficiency and full insurance workers gain from long term contracts in comparison to spot markets whereas owners may not in the model with specialized skills there exist transfer payments such that both parties are better off within an equilibrium with long term contracts

does uniqueness in banking matter abstract we investigate whether and how the uniqueness of banking activities affects the performance and systemic risk of u s banks we find that banks performing more unique activities exhibit higher profitability and lower risk controlling for size diversification and other key characteristics we further find that banks sensitivity to systemic risk displays an inversely u shaped relation with activity uniqueness we interpret the impact of uniqueness in analogy to recent theories showing that systemic diversity promotes financial stability our study highlights the role of uniqueness in banking and has important implications for policy makers and banking regulators

the effects of real and nominal shocks on union firm contract duration abstract the first theoretical works on labor contract length gray 1978 for example emphasized the existence of a negative relation between contract duration and uncertainty in estimating a linear version of gray s contract length model and an alternative model developed by christofides and wilton our empirical results indicate little evidence of a negative relationship between length and uncertainty in the united states furthermore our findings indicate the presence of significant differences across industries at the two digit sic level in the response of bargain duration to uncertainty