repeated moral hazard and contracts with memory the case of risk neutrality we consider a repeated moral hazard problem where both the principal and the wealth constrained agent are risk neutral in each of two periods the agent can exert unobservable effort leading to success or failure incentives provided in the second period act as carrot and stick for the first period so that the effort level induced in the second period is higher after a first period success than after a failure if renegotiation cannot be prevented the principal may prefer a project with lower returns i e a project may be too good to be financed or similarly an agent can be overqualified this article offers a new perspective on dynamic moral hazard problems consider a riskneutral principal who can hire a risk neutral but wealth constrained agent the agent can exert unobservable effort which increases the likelihood of success in the one shot problem there is a well known trade off between effort incentives and rent extraction which leads to a downward distorted effort level compared to the first best solution we extend the standard model by assuming that there is a second period in which the principal can make an investment to continue the project and the agent can again exert unobservable effort it turns out that there are several interesting insights that so far have escaped the literature on repeated moral hazard which was focused on the case of risk averse agents in particular if the principal can commit not to renegotiate the second period incentives can be used to partially circumvent the limited liability constraint in the second period the principal induces the agent to choose a particularly high effort level following a first period success and a particularly low effort level following a first period failure the prospect of a higher second period rent following a first period success motivates the agent to exert more effort in the first period i e rents in the second period act as reward and punishment for the first period it should be emphasized that we assume no technological impact of a first period success or failure on the second period technology nevertheless an optimal dynamic contract exhibits memory hence if an outsider observed today a principal agent pair that was successful and another identical pair that was not successful he would be right to predict that the first pair also is more likely to succeed tomorrow in other words a serial correlation across periods which we sometimes refer to as a hot hand effect is generated endogenously merely based on incentive considerations 2

migration and wages of young men a two period nested logit migration model with selectivity is specified the model is then applied to a sample of young u s male workers from nine different census divisions to study the choices they faced in the first two years after completing full time schooling we find evidence of the existence of unobserved similarities in the divisions within each census region we find that locational choices in one period affect locational choices of individuals in subsequent periods we test for selectivity in division specific wage equations and find little evidence of selectivity in the wage equations of most divisions and evidence of negative selection in the wage equations of two divisions excerpt

feebates rebates and gas guzzler taxes a study of incentives for increased fuel economy abstract us fuel economy standards have not been changed significantly in 20 years feebates are a market based alternative in which vehicles with fuel consumption rates above a pivot point are charged fees while vehicles below receive rebates by choice of pivot points feebate systems can be made revenue neutral feebates have been analyzed before this study re examines feebates using recent data assesses how the undervaluing of fuel economy by consumers might affect their efficacy tests sensitivity to the cost of fuel economy technology and price elasticities of vehicle demand and adds assessments of gas guzzler taxes or rebates alone a feebate rate of 500 per 0 01 gallon per mile gpm produces a 16 percent increase in fuel economy while a 1000 per 0 01 gpm results in a 29 percent increase even if consumers count only the first 3 years of fuel savings unit sales decline by about 0 5 percent but sales revenues increase because the added value of fuel economy technologies outweighs the decrease in sales in all cases the vast majority of fuel economy increase is due to adoption of fuel economy technologies rather than shifts in sales

the role of search costs in determining the relationship between inflation and profit margins previous empirical studies have found a negative relationship between inflation and industry profit margins recent theoretical findings however suggest that buyer search costs can significantly impact this relationship we use an actual measure of search cost that varies across wholesale industries to estimate the impact of these costs on the relationship between inflation and markups using firm level data from 57 industries we show that margins increase during inflation if search costs become sufficiently high our findings reconcile the theoretical and empirical literatures on this topic

prizes and lemons procurement of innovation under imperfect commitment the literature on r d contests implicitly assumes that contestants submit their innovation regardless of its value this ignores a potential adverse selection problem the present paper analyzes the procurement of innovations when the procurer cannot commit to never bargain with innovators who bypass the contest we compare xed prize tournaments with and without entry fees and optimal scoring auctions with and without minimum score requirement our main result is that the optimal xed prize tournament is more pro table than the optimal auction since preventing bypass is more costly in the optimal auction

the relationship between the markup and inflation in the g7 economies and australia an i 2 analysis of inflation and the markup is undertaken for the g7 economies and australia we find that the levels of prices and costs are best described as i 2 processes and that except for japan a linear combination of the log levels of prices and costs cointegrate to the markup that is integrated of order 1 it is also shown that the markup in each case co integrates with inflation and that higher inflation is associated with a lower markup in the long run

migration under uncertainty about quality of locations abstract this paper develops a search theoretic framework for analyzing migration decisions of workers who can only observe the quality of a location by migrating to the location after accepting a job there after learning the location quality the worker can stay at the current job search locally at the same location or search for a job at another location leading to repeat migration this paper develops the properties of optimal search migration and repeat migration decisions and finds how revealed location quality influences the tradeoffs between local search and repeat migration the effects of search costs and better job opportunities on the reservation levels of wages and revealed quality levels are also determined

renegotiating moral hazard contracts under limited liability and monotonicity in a principal agent model with unobservable effort and possible renegotiation contracts are assumed to satisfy two natural restrictions limited liability for the agent and monotonicity of payments for the principal the main result is that if the agent has the renegotiation bargaining power any contract is weakly pareto dominated by a debt contract journal of economic literature classification numbers d820 l140 o261

describability and agency problems this paper suggests a reason other than asymmetric information why agency contracts are not explicitly contingent on the agent s performance or actions two ingredients are essential to this reason the first is the written form that contracts are required to take to be enforceable the second is a form of discontinuity in the parties preferences and in the technology that transforms actions into a probabilistic outcome we show that under these conditions the chosen contract may not be explicitly contingent on the agent s actions although in principle such actions are contractible and observable to all parties to the contract court included

evidence on the functional relationship between relative price variability and inflation with implications for monetary policy this paper considers the functional relationship between relative price variability rpv and inflation using quarterly personal consumer expenditure data in the us over 1967q1 2003q1 deriving some implications for monetary policy non parametric regression techniques are used to explore the shape of the rpv function and this shape is related to the theory outlined by rotemberg 1982 1983 the empirical rpv function yields a plausible optimal value of inflation in the region of five percentage points which is consistent with this theory and lies within the range of values cited by recent evaluations of sand and grease effects

migrant information job search and the remigration decision labor force migration poses two important questions for the economist the first concerns the nature magnitude and direction of labor force response to perceived earnings differentials over space the latter and more complex question concerns the effectiveness or efficiency of this response namely migration and other market mechanisms in reducing these earnings differentials over time both questions are addressed in this paper by examining relationships among 1 quality of information obtained prior to a move 2 search duration at the migration destination and 3 the likelihood of subsequent perhaps corrective remigration these relationships are analyzed using the human capital model of migration remigration and data from the 1970 u s census excerpt

moral hazard contracting and private credit markets this paper studies the impact of credit markets on optimal contracting when the agent s interim preference over upcoming contracts is private information because personal financial decisions affect it via the wealth effect the main result is a severe loss of incentive provision equilibrium contracts invariably cause the agent to shirk i e exert minimal effort if the agent s private financial decision precedes moral hazard contracting the basic intuition is that committing on another private variable other than the effort level exposes the parties to further exploitation of efficient risk sharing by relaxing the incentive constraint that was binding ex ante unless the risk sharing was fully efficient to begin with

search sticky prices and inflation this paper examines equilibrium in a deflationary environment in a market with free entry where consumers search and firms set prices on individual units of the commodity prices attached to newly produced goods are continuously adjusted prices attached to previously produced goods can only be changed at a cost deflation cuts into the market power created by the need to search for the good thus consumers welfare is inverse u shaped in deflation

erratum standards versus standards the effects of different pollution restrictions when economists refer to pollution standards they almost universally mean uniform restrictions on pollution emissions e g william j baumol and wallace e oates 1975 ch 13 susan rose ackerman 1973 david besanko 1978 however in practice standards take many forms not only emissions restrictions but restrictions on pollution per unit of output or per unit of an input restrictions on the use of a polluting input or mandated use of a particular pollution control technology these specifications of regulations will have a variety of effects on a firm s resource allocation decisions for instance allowing pollution per unit of output as the standard instead of directly restricting the level of pollution gives the firm some choice in addition to reducing pollution it can increase its output to dilute the pollution this paper examines the effects of five different forms of pollution standards on input decisions the level of production and firm profits the results show that the different standards by providing firms with different incentives change the firm s allocation decisions and affect the relative profitability of the standards section i reviews the existing literature on the incentives of different instruments the following section describes the model to be used five different forms of pollution constraints are individually examined in section iii using a graphical approach their relative effects as well as some special cases are assessed in section iv finally section v raises the case of different standards when firms are not identical

industry structure and the dynamics of price adjustment using annual us data for gross domestic product originating by sector between 1947 and 1997 it is shown that a negative long run relationship between inflation and the markup is present across the sectors as well as in the aggregate data a preliminary explanation based on industry structure is explored for the relative sizes of the impact of inflation on the markup in the long run for the various sectors

search costs sticky prices and markups this article investigates how search costs price stickiness and product durability influence the impact of inflation on firm markups we provide evidence that each of these three factors plays an independent role in influencing the responsiveness of markups to inflation although we find that the direct effect of inflation on markups is negative offsetting positive influences of inflation on markups arise in industries that produce durable experience goods with flexible prices thus our results indicate that markups of industries producing nondurable search goods with sticky prices tend to experience unambiguously negative impacts from inflation

money as a unit of account we develop a theory that rationalizes the use of a dominant unit of account in an economy agents enter into non contingent contracts with a variety of business partners trade unfolds sequentially in credit chains and is subject to random matching by using a dominant unit of account agents can lower their exposure to relative price risk avoid costly default and create more total surplus we discuss conditions under which it is optimal to adopt circulating government paper as the dominant unit of account and the optimal choice of currency areas when there is variation in the intensity of trade within and across regions

money unit of account and nominal rigidity abstract in order to characterize the properties required to fulfill the roles of money as a unit of account uoa as well as a medium of exchange moe we consider the choice of a uoa in the context of a micro founded model where inflation uncertainty exists and some conversion cost is incurred in using a uoa that is different from an moe we show that it is not the level of inflation but its volatility that matters for the choice of a uoa in the presence of inflation uncertainty money can still become both an moe and a uoa as long as the conversion cost is higher than its maximum buyers are willing to bear for ensuring stable consumption against inflation uncertainty also the choice of a uoa in the presence of fiat money as an moe determines endogenously the nominal price rigidity or flexibility an economy adopting money as a uoa yields the short run nominal rigidity and the phillips curve relationship

price dispersion and inflation evidence from israel the paper considers the question whether observed price differentials reflect perceived differences in quality service agreements or location or whether information imperfections can explain this phenomenon it sets out theoretical arguments linking inflation to reductions in the information stock held by agents and thus to greater price dispersion the hypothesis is tested using monthly price data for 13 uniquely defined goods sold in israel between 1971 and 1984 price dispersion is shown to be positively related to the rate of market price inflation since inflation is an unlikely proxy for changes in perceived characteristics the findings support price dispersion theories based on optimally imperfect decision making

real wages profit margins and inflation in turkish manufacturing under post liberalization this article reports investigations into the behaviour of gross profit margins mark ups in turkish manufacturing industries for the post 1980 liberalization period in relation to price inflation trade liberalization openness and real wage costs panel data econometrics over 29 subsectors of turkish manufacturing are used over the period 1980 1996 results suggest that profit margins are positively and significantly related both to price inflation and real wage costs however openness is found to have very little impact on profit margins

the role of federal renewable fuel standards and market structure on the growth of the cellulosic biofuel sector abstract this article examines the effect of the renewable fuel standards and market power on the growth of the cellulosic biofuel sector we develop a sectoral model to show how changes in the regulations governing cellulosic fuel production affect the equilibrium quantity of cellulosic ethanol based on model calibration for washington state we find that existing low cost waivers purchased by obligated parties in lieu of cellulosic fuel production negate the effectiveness of the renewable fuel standard to induce the production and consumption of cellulosic biofuels however raising waiver price slightly relative to the status quo significantly increases the equilibrium quantity of cellulosic ethanol the high cost of cellulosic ethanol production is often cited as the cause of the lack of cellulosic ethanol production which is used to justify low waiver prices our policy message is the converse the low current waiver price significantly contributes to the cellulosic ethanol market stagnation in the context of the current biofuel policy

separation of unit of account from medium of exchange the separation of a unit of account uoa from a medium of exchange moe in the commodity money system is investigated by considering explicitly a seller s choice of uoa in terms of either an moe or a unit of metal weight if the likelihood of debasement of an moe and its rate are high enough the price is posted in terms of a unit of metal weight rather than an moe interestingly this moe uoa separated equilibrium yields the flexible nominal price whereas an moe uoa integrated equilibrium yields the sticky one this implies the nominal price rigidity in the fiat money system where moe and uoa are integrated

renegotiation and optimality in agency contracts we analyse renegotiation in a hidden action principal agent model contract renegotiation offers are made by the agent a refinement is imposed on the principal s beliefs if precisely one action is optimal with respect to both the principal s and the agent s contracts the principal believes that that action has been taken with the refinement imposed perfect bayesian equilibrium allocations are identical to the second best in the classical principal agent model without renegotiation when renegotiation is led by the agent and when equilibria satisfy the refinement equilibrium allocations are ex ante efficient incentive contracting is a common mechanism for promoting ex ante investments and for avoiding ex post opportunistic behaviour in a long term or continuing economic relationship the classical principal agent model holmstrom 1979 grossman and hart 1983 is a natural framework for this class of problem in such a model a risk averse agent performs an action on behalf of a risk neutral principal the agent s action is unobservable and affects the principal s revenue in a random fashion the derivation and characterization of efficient compensation schemes have been the major focus in the principal agent literature generally the incentives to motivate a costly action from the agent take the form of profit sharing the agent s reward is made contingent on his random performance outcomes

ambiguity aversion and the absence of wage indexation abstract this paper analyzes optimal wage contracting assuming agents are not subjective expected utility maximizers but are instead ambiguity or uncertainty averse decision makers who maximize choquet expected utility we show that such agents will choose not to include any indexation coverage in their wage contracts even when inflation is uncertain unless the perceived inflation uncertainty is high enough significantly the exercise does not presume any exogenous costs e g transactions costs of including indexation links

stock returns and inflation in a principal agent economy abstract we study a monetary system in which final goods sell on spot markets while labor and dividends sell through contracts firms and workers confuse absolute and relative price changes a positive price level shock makes sellers think they are producing better goods than they really are they split this apparent windfall with workers who get a higher real wage hence unexpected inflation shifts real income from firms the principals to workers the agents and thereby lowers stock returns a predictable money supply rulestrictlypareto dominates random money supply rules journal of economic literatureclassification numbers e43 e51

testing the purchasing power parity through i 2 cointegration techniques this paper contributes to the empirical literature on the purchasing power parity ppp over the post bretton woods period by providing a time series based interpretation of the controversial evidence characterizing the dynamics of real exchange rates it is shown that the persistence of deviations from the ppp between a set of european countries and the united states may be empirically attributed to the presence of i 2 stochastic trends in prices using consumer price indices interestingly the slow adjustment towards the equilibrium can be modelled through integral proportional equilibrium correction models and this evidence can be partly reconciled with theories where the inflation rate reduces the markup of profit maximizing firms acting on imperfectly competitive markets copyright 2005 john wiley sons ltd

contract negotiation and the coase conjecture a strategic foundation for renegotiation proof contracts what does contract negotiation look like when some parties hold private information and negotiation frictions are negligible this paper analyzes this question and provides a foundation for renegotiation proof contracts in this environment the model extends the framework of the coase conjecture to situations in which the quantity or quality of the good is endogenously determined and to more general environments in which preferences are nonseparable in the traded goods as frictions become negligible all equilibria converge to a unique outcome which is separating efficient and straightforward to characterize

a sequential study of migration and job search this paper designs a multiarmed bandit mab sequential model for the analysis of the migration job search process the implications either are compatible with well known migration behavior or when novel are also plausible for example regions with large wage variability attract migrants and regions with large nonpecuniary returns increase both in migration and out migration a major advantage of this approach is the relative ease with which martingale estimators can be derived from the martingale structure of the model these martingale methods are exemplified for the return migration phenomenon

quadratic engel curves and consumer demand this paper presents a model of consumer demand that is consistent with the observed expenditure patterns of individual consumers in a long time series of expenditure surveys and is also able to provide a detailed welfare analysis of shifts in relative prices a nonparametric analysis of consumer expenditure patterns suggests that engel curves require quadratic terms in the logarithm of expenditure while popular models of demand such as the translog or the almost ideal demand systems do allow flexible price responses within a theoretically coherent structure they have expenditure share engel curves that are linear in the logarithm of total expenditure we derive the complete class of integrable quadratic logarithmic expenditure share systems a specification from this class is estimated on a large pooled data set of u k households models that fail to account for engel curvature are found ro generate important distortions in the patterns of welfare losses associated with a tax increase

house prices borrowing constraints and monetary policy in the business cycle i develop a general equilibrium model with sticky prices credit constraints nominal loans and asset prices changes in asset prices modify agents borrowing capacity through collateral value changes in nominal prices affect real repayments through debt deflation monetary policy shocks move asset and nominal prices in the same direction and are amplified and propagated over time the financial accelerator is not constant across shocks nominal debt stabilises supply shocks making the economy less volatile when the central bank controls the interest rate i discuss the role of equity debt indexation and household and firm leverage in the propagation mechanism finally i find that monetary policy should not target asset prices as a means of reducing output and inflation volatility

market power and inflation market power exercised by firms has become central to macroeconomics recent theoretical work highlights the importance of the relation between market power and inflation we examine this relation for individual firms in eleven u s industries our econometric framework exploits restrictions from dynamic theory and information from financial markets to generate quantitative evidence on the responsiveness of market power to inflation we find that inflation usually has a positive effect on market power this relation is heterogeneous across the eleven industries and statistically significant positive relations are concentrated in industries with little market power

frictional goods markets theory and applications we analyse dynamic general equilibrium models with more or less directed search by informed buyers and random search by uninformed buyers this nests existing specifications and generates new insights a quantitative application concerns the welfare cost of inflation which is known to be quite high with pure random search and low with pure directed search our calibration implies the impact of inflation is fairly low in part because in addition to the usual costs it provides benefits by more heavily taxing high price sellers that inefficiently profit from exploiting the uninformed other applications analyse analytically and numerically changes in credit conditions and information

welfare implications of the renewable fuel standard with an integrated tax subsidy policy abstract this paper derives the optimal integrated tax subsidy policy where one input is taxed and revenues are used to subsidize the use of a substitute input to reduce greenhouse gas emissions given the existing policies under the renewable fuel standard policies we measure the welfare effects and impact on cellulosic ethanol production after implementing the tax subsidy policy using a general equilibrium model a revenue neutral integrated tax subsidy scheme leads to a small positive tax rate for crude oil and a large positive subsidy for cellulosic ethanol because the former has a larger emissions coefficient than the latter the overall welfare effects of an integrated tax subsidy scheme are less than a 1 increase for the economy but the growth in the cellulosic ethanol industry could range from 28 to 238 because the revenues from taxing crude oil are directly used to subsidize cellulosic ethanol production

counting the cost of the intifada consumption saving and political instability in israel in this paper we investigate some of the ways in whichshort term variations in the magnitude of politicalinstability can impact on macroeconomic performance takingthe example of israel since 1987 several indicators ofpolitical instability are found to have a significant impacton aggregate consumption and savings and explain a large partof poor israeli savings performance over recent years

advanced consideration of migration and the choice of destination a joint decision this paper fills an important gap in the migration literature by examining the interrelation between advanced consideration of migration and other migration decisions such as the choice of destination it is shown that advanced consideration of migration via its interaction with some personal and locational factors can affect the destination choice and the potential destination characteristics on the other hand can trigger advanced considerations of migration furthermore the results show that incorporation of advanced consideration of migration helps explain the anomalies observed in the literature e g it offsets the negative impact of a high unemployment rate in a region so that migrants would move to a high unemployment area if they can plan ahead and make an effective job search

structural unemployment cyclical unemployment and income inequality this is the first study that decomposes unemployment into its structural and cyclical components and investigates their impact on income distribution controlling for the influence of inflation increases in structural unemployment have a substantial aggravating impact on income inequality inflation has a progressive impact which is due to the unexpected component the study demonstrates that previous work failed to take into account the stochastic trend behavior of the variables consequently specifications used by previous research cannot predict the behavior of income shares after 1983 whereas the specification used by this paper generates accurate forecasts the results also indicate that a sustained gnp growth is not necessarily associated with an improvement in income inequality because sustained gnp growth can coexist with increased structural unemployment

imperfect information specificity of schooling and rate of return migration abstract international migration is a dynamic process having moved into a country of destination a migrant may after a while decide to return to his country of origin the aggregate rate of return migration among a group of migrants is studied imperfect imformation leading to unrealized expectation of the migrants and changes in rates of return to schooling across countries over time are modelled as factors contributing towards return migration schooling is decomposed into schooling acquired before migration and after migration to take account of its specificity to the country in which it is acquired

the relation between price and marginal cost in u s industry an examination of data on output and labor input reveals that some u s industries have marginal cost well below price the conclusion rests on the finding that cyclical variations in labor input are small compared with variations in output in booms firms produce substantially more output and sell it for a price that exceeds the costs of the added inputs the paper documents the disparity between price and marginal cost where marginal cost is estimated from annual variations in cost it considers a variety of explanations of the findings that are consistent with competition but none is found to be completely plausible

an i 2 analysis of inflation and the markup an i 2 analysis of australian inflation and the markup is undertaken within an imperfect competition model it is found that the levels of prices and costs are best characterized as integrated of order 2 and that a linear combination of the levels which may be defined as the markup cointegrates with price inflation from the empirical analysis we obtain a long run relationship where higher inflation is associated with a lower markup and vice versa the impact in the long run of inflation on the markup is interpreted as the cost to firms of overcoming missing information when adjusting prices in an inflationary environment copyright 2001 john wiley sons ltd

after you sir hold up direct externalities and sequential investment we propose a solution to the hold up problem the parties in a contract can avoid the inefficiencies caused by the possibility of opportunistic behaviour and implement the first best level of investment if they make their investment decision sequentially one party observing the choice made by the other party before making his own choice unlike the existing literature the proposed solution leads to the efficient choice of investment even when there are two sided direct externalities journal of economic literatureclassification numbers d23 d82

unobservable investment and the hold up problem we study a two person bargaining problem in which the buyer may invest and increase his valuation of the object before bargaining we show that if all offers are made by the seller and the time between offers is small then the buyer invests efficiently and the seller extracts all of the surplus hence bargaining with frequently repeated offers remedies the hold up problem even when the agent who makes the relation specific investment has no bargaining power and contracting is not possible we consider alternative formulations with uncertain gains from trade or two sided investment

european inflation dynamics abstract we provide evidence on the fit of the new phillips curve npc for the euro area over the period 1970 1998 and use it as a tool to compare the characteristics of european inflation dynamics with those observed in the u s we also analyze the factors underlying inflation inertia by examining the cyclical behavior of marginal costs as well as that of its two main components namely labor productivity and real wages some of the findings can be summarized as follows a the npc fits euro area data very well possibly better than u s data b the degree of price stickiness implied by the estimates is substantial but in line with survey evidence and u s estimates c inflation dynamics in the euro area appear to have a stronger forward looking component i e less inertia than in the u s d labor market frictions as manifested in the behavior of the wage markup appear to have played a key role in shaping the behavior of marginal costs and consequently inflation in europe

labor force migration and allocative efficiency in the united states the roles of information and psychic costs this paper examines the relative importance of information psychic and other costs of relocation as mitigating factors off sets to spatial earnings differentials within the migration decision the method employed for this examination is based upon 1 observation of relationships between the geographic allocation and personal characteristics of labor force migrants and 2 inferences drawn from these observations about the relative importance of various relocation cost components empirical analyses of the migration decision based upon this indirect method provide important insights on both the determinants and allocative efficiency of interstate labor force migration in the united states excerpt

search price setting and inflation a model of monopolistic competition in an inflationary environment is developed which embodies optimal sequential search price dynamics and entry on the part of consumers and firms respectively equilibrium price strategies are s s these bounds increase continuously with consumer search costs and so does price dispersion indeed the whole equilibrium varies smoothly from the competitive bertrand to the monopolistic diamond 1971 end of the spectrum the latter s paradoxical result is explained as a limiting case where frictions on firms side of the market price adjustment costs but not on buyers search costs tend to zero a positive relationship between smooth and perfectly anticipated inflation and price dispersion or uncertainty is established

moral hazard and renegotiation with multiple agents we investigate the effects of contract renegotiation in multi agent situations where risk averse agents negotiate a contract offer to the principal after the agents observe a common unverifiable perfect signal about their actions we show that renegotiation with multiple agents reduces the cost of implementing any implementable action profile down to the first best level even though the principal cannot observe the agents actions moreover it is sufficient for the principal to use a simple initial contract in the sense that it consists of no more than a single sharing scheme for each agent and the total payments to the agents are the same regardless of the realised state an important implication is that decentralization in the sense of delegated negotiation and proposals from the agents can be as effective as centralized schemes that utilize revelation mechanisms in unrestricted ways

collusion and renegotiation in hierarchies a case of beneficial corruption corruption opportunities arise when a principal delegates enforcement or audit authority to a supervisor the supervisor may then strike a deal with the agent she is supposed to monitor and conceal important information from the principal corruption imposes a constraint on governance and appears therefore to be harmful for the principal we show that this need not be the case in our model the prospect of corruption can make the principal better off the reason is that the collusion possibility generates dynamic effects which in cases where only limited intertemporal commitments can be made may be beneficial for the principal

a note on optimal taxation in the presence of externalities abstract i consider the problem of optimal taxation with externalities in a general setup encompassing most of optimal taxation models found in the literature it is demonstrated that when direct taxation of externalities is possible optimal taxes can be expressed as the sum of the optimal pigouvian taxes and the optimal taxes in a related problem without externalities regardless of what other tax instruments are available this result generalizes the so called principle of targeting

inflation and efficiency in search markets this paper examines how inflation affects efficiency and output in monopolistically competitive search markets it formalizes the conventional wisdom linking higher inflation price dispersion and increased resources devoted to search it also brings to light the induced exit of arms which reduces rent dissipation but the most important effect of inflation is how it alters the distribution of real transactions prices whether this reduces or promotes efficiency and output is shown to depend critically on preferences and market structure and especially on whether search costs are large or small relative to consumer surplus

nominal contracting and monetary targets drifting into indexation we look for a theoretical justification of nominal wage contracts in household diversification of risk in a calibrated general equilibrium model we find from stochastic simulation that if both productivity and monetary shocks are temporary then optimal wage contracts are overwhelmingly nominal the model suggests that the persistence in monetary shocks not only raises wage protection but also reduces welfare in a world where productivity shocks are persistent as both theory and our empirical results for the oced suggest they are this suggests that this central bank practice is due for review

job search and immigrant assimilation an earnings frontier approach this study examines labor market assimilation by measuring the information utilized by immigrants during job search assimilation is assumed to occur whenever such information increases with length of residence in the united states and repeated job searches the authors assert that information utilized during job search reduces differentials between actual and potential maximum attainable earnings coauthors are henry w herzog jr richard a hofler and alan m schlottmann copyright 1992 by mit press

renegotiation of sales contracts this paper studies moral hazard contracts that may be renegotiated after an agent chooses an unobservable effort unlike in previous models a contract here contains only one compensation scheme and the agent has all the bargaining power in the renegotiation stage using a relatively weak forward induction refinement all equilibria are shown tb be second best efficient renegotiation occurs in every equilibrium if the effort set is rich the only equilibrium initial contract is a sales contract i e a scheme which sells the project to the agent this captures the idea that a party the principal who has an inherently weak renegotiation position will sometimes insist on a simple initial contract

sticky prices and costly credit we develop a theory of money and credit as competing payment instruments then put it to work in applications agents use cash and credit because the former latter is subject to the inflation tax transaction costs frictions that make the choice of payment method interesting also imply equilibrium price dispersion we derive closed form solutions for money demand and show how to simultaneously account for the price change facts cash credit shares in micro data and money interest correlations in macro data the effects of inflation on welfare price dispersion and markups are discussed as are nonstationary equilibria with dynamics in the price distribution

optimal contracts when enforcement is a decision variable this paper analyzes choice theoretic costly enforcement in an intertemporal contracting model with a differentially informed investor and entrepreneur an intertemporal contract is modeled as a mechanism in which there is limited commitment to payment and enforcement decisions the goal of the analysis is to characterize the effect of choice theoretic costly enforcement on the structure of optimal contracts the paper shows that simple debt is the optimal contract when commitment is limited and costly enforcement is a decision variable theorem 1 in contrast stochastic contracts are optimal when agents can commit to the ex ante optimal decisions theorem 2 the paper also shows that the costly state verification model can be viewed as a reduced form of an enforcement model in which agents choose payments and strategies as part of a perfect bayesian nash equilibrium

what is a fair co2 tax increase on fair emission reductions in the transport sector we examine how individual preferences for fair reductions of carbon dioxide co2 emissions affect the support for increases in the co2 tax on gasoline and diesel we assume that people not only care about their own material welfare but also have preferences for fairness in policy design and we explore the implications using original data from a mail questionnaire sent to a representative sample of the swedish population the main result is that fairness in policy design does matter those respondents who adhere to a fairness principle tend to be relatively more positive to increases in the co2 tax one possible explanation for this result is that there is a relatively high degree of reciprocity regarding the origin of emissions and the fairness regarding who should bear the burden of co2 reductions via a split sample analysis we also find that the relative importance of fairness principles is dependent upon whether one uses a car often or not this sheds light on the potential goal conflict between the importance of fairness principles and self interest in the form of a need for private car transportation

contracts and money why are contracts not fully indexed in a setting in which fully indexed contracts are feasible we find that when price level data are gathered with delay these contracts are not renegotiation proof the contracts that replace them entail a lower level of welfare for the parties to that contract they also imply that real variables respond to nominal shocks

why are prices sticky the dynamics of wholesale gasoline prices the menu cost interpretation of sticky prices implies that the probability of a price change should depend on the past history of prices and fundamentals only through the gap between the current price and the frictionless price we find that this prediction is broadly consistent with the behavior of nine philadelphia gasoline wholesalers nevertheless we reject the menu cost model as a literal description of these firms behavior arguing instead that price stickiness arises from strategic considerations of how customers and competitors will react to price changes

unexpected inflation real wages and employment determination in union contracts this paper examines the effect of nominal contracting provisions on employment determination in union contracts in most contracts the nominal wage rate is wholly or partially predetermined real wage rates therefore contain unanticipated components that reflect unexpected price changes and the degree of indexation the empirical analysis based on a large sample of indexed and nonindexed contracts suggests that unexpected real wage changes are associated with systematic employment responses in the opposite direction the author concludes that nominal contracting provisions play a potentially important role in the cyclical properties and persistence of employment movements in the union sector copyright 1990 by american economic association

estimates of the variance of u s inflation based upon the arch model it is generally agreed that the unpredictability of future inflation is a major component of the welfare loss associated with inflation perfectly predicted inflation might induce some costs through institutional rigidities governmental interference and transaction costs but in the long run these should be rather minimal as these institutions adopt various forms of indexing when inflation is unpredictable risk averse economic agents will incur a loss even if prices and quantities are perfectly flexible in all markets inflation is a measure of the relative price of goods today and goods tomorrow thus uncertainty in tomorrow s price impairs the efficiency of today s allocation decisions friedman in his nobel lecture 8 argues convincingly that higher variability of inflation would lead to decreased output ceteris paribus he then conjectures that higher rates of inflation are generally associated with higher variability of inflation and presumably greater uncertainty about future rates if this is true then higher rates of inflation would also be associated with low levels of output which implies a positively sloped phillips curve this paper uses a new statistical technique arch to estimate the conditional mean and variance of inflation from u s time series data the main finding is that the variance of inflation in the seventies was only slightly greater than in the sixties

outmigration of foreign born members in canada this paper studies the partial effect of various socio economic characteristics on the rate of outmigration of the foreign born from the canadian population the data sets used are based on the microdata of the 1971 and 1981 censuses of population it is found that migrants with high school education have the highest propensity to outmigrate while those with less than high school education have the lowest the propensity to outmigrate is positively related to the age of the migrant males tend to have a higher propensity to outmigrate while having a command of official languages reduces the propensity to outmigrate summary in fre excerpt

moral hazard and capital structure dynamics we base a contracting theory for a start up firm on an agency model with observable but nonverifiable effort and renegotiable contracts two essential restrictions on simple contracts are imposed the entrepreneur must be given limited liability and the investor s earnings must not decrease in the realized profi to f thefirm all message game contracts with pure strategy equilibria and no third parties are considered within this class of contracts equilibria and regardless of who has the renegotiating bargaining power debt and convertible debt maximize the entrepreneur s incentives to exert effort these contracts are optimal if the entrepreneur has the bargaining power in renegotiation if the investor has the bargaining power the same is true unless debt induces excessive effort in the latter case a non debt simple contract achieves efficiency the non contractibility of effort does not lower welfare thus when the non contractibility of effort matters our results mirror typical capital structure dynamics an early use of debt claims followed by a switch to equity like claims

nominal contracting theories of unemployment evidence from panel data this paper examines economywide and sector specific responses of real wages to nominal shocks using micro panel data from the national longitudinal survey of young men the observed response patterns provide no support for nominal contracting theories of unemployment which predict that nominal surprises should be negatively correlated with real wages in fact both inflation and money growth surprises are found to be essentially uncorrelated with real wages either a real business cycle model or a model with rigidities in commodity prices could be consistent with these results copyright 1993 by american economic association

migration and remigration of male household heads in turkey 1963 1973 this article offers an overview of aggregate migration flows in turkey during 1963 73 and then develops models for explaining the qualitative and quantitative importance of various factors behind migration and remigration during 1963 73 the framework is based on the economic theories of migration that view geographic mobility as a response to differential earning opportunities distributed over time and across space the analysis accounts for the impact of regional and macroeconomic variables on migration status while controlling for personal characteristics including migration history the model uses a discrete choice formulation that accounts for consideration of remigration at the time of the initial migration decision migration status is assessed at the province district and village levels over 5 and 10 year intervals the author uses six different definitions of migration during 1950 80 turkey experienced rapid urbanization and migration from economically backward areas to more dynamic areas usually in the western region data for the study were obtained from a sample of household heads from the male survey portion of the 1973 retrospective survey of the structure of population and population problems findings indicate that undesirable work conditions in the sending area such as limited job opportunities lack of job related security and unemployment plus human capital variables had a strong impact on the migration decision the main finding is that regional and macroeconomic variables had a significant impact when individual heterogeneity was controlled for it is argued that policy variables can reverse the impact of economic variables only by inducing extreme changes in the human capital variables migration policies should be directed at changing broad regional economic structures findings varied with the definition of migration and time results improved by distinguishing between return migrants and repeat migrants

financial markets and inflation under imperfect information abstract this paper studies the effects of inflation on the operation of financial markets and shows how the ability of financial intermediaries to distinguish among heterogenous firms is reduced as inflation rises this point is illustrated by presenting a simple model where inflation affects firms productivity in particular productivity differentials narrow as inflation increases this effect creates incentives for risky and less productive firms to behave as high productivity firms at high rates of inflation this may result in financial intermediaries being unable to differentiate among customers

home economic conditions and the decision to migrate new evidence for the u s labor force labor force response to differential economic conditions across space has received considerable attention within the economic literature on labor mobility and migration based upon research on this topic described within survey articles by greenwood 6 ritchey 20 and shaw 23 a consensus has developed namely that the level and propensity of labor force out migration from an area are unaffected by economic conditions within that area on the other hand demographic characteristics of the resident population and economic conditions outside the area are commonly believed to have significant influence on both the magnitude and direction of this outflow this apparent economic paradox was supported by early work of perloff et al 19 lowry 14 and lansing and mueller 10 although a significant exception appeared in a later study by miller 17 recent econometric studies have in general reconfirmed this paradox for instance graves 5 234 found results for origin economic conditions that run counter to the usual expectations levy and wadycki 12 present origin economic variables that are either insignificant or of wrong sign finally in one of the most recent and comprehensive studies of place to place migration fields 3 27 concludes that in

employment status and the decision to migrate the purpose of this paper is to examine the demographic and socioeconomic determinants of migration for both the employed and unemployed hypotheses concerning the effects of age education and public services are developed and tested using data on interstate migration of the u s labor force from 1965 to 1970 for individuals at risk to either primary or repeat migration the age and education selectivity of migration were in general confirmed however for unemployed potential primary migrants education selectivity was not observed it was also found that the provision of welfare services have little or no impact on the migration decision of the unemployed however unemployment was shown to significantly affect the role played by educational quality and training accessibility within the migration decision excerpt