wage norms and involuntary unemployment this paper and its sequel consist of a series of models or examples each trying to explain the possibility of non walrasian wage rates and involuntary unemployment equilibrium in recent years there have been many attempts to explain the possibility of equilibrium wages at non market clearing levels with involuntary unemployment there are the wage efficiency models yellen i984 contract models bargaining models e g shaked and sutton i984 to name but a few the common feature of these models and the ones i shall discuss is that involuntary unemployment for a certain range does not lead any agent to change his behaviour my models as in the works of lindbeck and snower i985 i986 are based on the distinction between insiders and outsiders in my models however workers and firms live for more than one period and as a result they may follow norms which are not in their short term interest but are rational in the longrun i shall model the labour market in a repeated game framework the literature on repeated games in recent years has shown that in general there are a large number of equilibria see fudenberg and maskin i986 a major application of repeated games has been to the industrial organisation literature where it has been shown that many types of behaviour on the part of firms e g collusion predatory pricing can be supported as equilibria of the game see fudenberg and tirole i984 my models which are applications of the repeated game to the problems of insiders and outsiders also contain many equilibria the walras ian outcome is one of the possible resulting equilibria there are also others the equilibria that i shall discuss however are those which may help us to understand some stylised facts and at the same time generate non walrasian outcomes i shall try to show that for some levels of unemployment each insider may rationally choose strategies which deter firms from trying to push the wages down and or deter unemployed from under cutting in this paper i shall define insider s as those who follow the norm if an insider deviates from the norm he loses his insider position the firm s agree s to pay higher wages than the market clearing rate because the insiders threaten to go on strike if the firm tries to force down the wages of any one of them and there are not enough unemployed workers to replace all insiders moreover the threat of each insider turns out to be credible because if he does not follow the norm he will lose his insider status and will not be protected by other insiders in the next period and thus will be at the mercy of the firm therefore in this paper the non walrasian outcomes are the result of the firm

the production process in a competitive economy comment in his recent paper in this review samuel bowles 1985 argues that involuntary unemployment in a competitive capitalist economy is an outcome of the marxian notion of class conflict between the firm capitalist and workers the purpose of this comment is not to question the marxian framework but simply to argue that the model and examples in bowles though very interesting do not in any cogent way reflect class conflict let me list the major points made by bowles in the context of a competitive capitalist economy 1 involuntary unemployment leading to reserve army of the unemployed is a reflection of class conflict 2 capitalist technology may be profit maximizing but inefficient and 3 discrimination among identical workers may be profit maximizing i will focus primarily on the first observation which is the heart of the paper the other two can be deduced from the first

radicalism versus gradualism an analytical survey of the transition strategy debate academic debate on a transition strategy for former socialist economies continues even a quarter century after the collapse of the communism in central and eastern europe and the former soviet union in this paper through an analytical survey of 137 preceding studies we present an overall picture of the debate and examine the relationship between the debate attitudes and the literature attributes in related studies we found that the radicalists maintain a consistent debate attitude from the viewpoints of time speed and policy sequence of economic transition while the debate attitude of the gradualists is more diversified we also found that there is another group of researchers that stays within the framework of the radicalism versus gradualism debate while at the same time keeping at arm s length from both the radicalists and the gradualists in addition our regression estimation of qualitative selection models provides interesting findings on the relationship between the debate attitudes and the literature attributes

fraudulent financial reporting and technological capability in the information technology sector a resource based perspective motivated by the disproportionately high incidence of fraudulent financial reporting in the it sector where technological capability is a major source of competitive advantage this study investigates the possible relationship between technological capability and fraud probability in the it sector technological capability is measured by a firm s technical efficiency relative to peers in transforming cumulative r d resources into innovative output which is a source of competitive advantage according to the resource based view rbv of the firm technical efficiency is estimated via data envelopment analysis a sample of fraud firms taken from accounting and auditing enforcement releases is matched with control samples of non fraud firms consistent with the rbv technological capability is found to have a negative and economically significant effect on fraud probability moreover fraud probability is insignificantly associated with the scale efficiency of innovative activities as investment in r d resources per se is not a source of sustainable competitive advantage

blame game politics in a coalition government abstract delays in the adoption of reforms is an important question in political economics this paper explores this issue in the context of a representative democracy where the government is a coalition and citizens observe neither the decision making process nor politicians preferences for a reform we show that a coalition member who favors a reform may nonetheless choose to veto its adoption thus delaying it until after the next election and let his coalition partners share the blame for the non adoption we refer to this strategy as blame game politics we then identify three reasons for a politician to play the blame game one is to make an issue salient in the next election a second reason is to avoid a split in his electorate which is accomplished by hiding his stance on an issue a third reason is to enhance bargaining power during the formation of the next government

psychological factors and stock option exercise we investigate stock option exercise decisions by over 50 000 employees at seven corporations controlling for economic factors psychological factors influence exercise consistent with psychological models of beliefs employees exercise in response to stock price trends exercise is positively related to stock returns during the preceding month and negatively related to returns over longer horizons consistent with psychological models of values that include reference points employee exercise activity roughly doubles when the stock price exceeds the maximum price attained during the previous year

local elites and popular support for economic reform in china and india this article analyzes why it is that china an authoritarian political system has managed to generate more popular support for the reform process than india a democracy the authors argue that when local politicians and bureaucrats are more supportive of the reform process there is likely to be greater popular support for economic reform local political elite may be more supportive of reform in an authoritarian than in a democratic system because the level of local elite support for the reform process is influenced by the incentives faced by local elite in china institutional reform changed the incentives faced by local elite whereas in india reforms have not been accompanied by institutional changes that would encourage local elite to support reform to the same extent as in china the argument is based on local elite and mass surveys conducted in china and india in 1990 and 1996 respectively a logit model controlling for a variety of alternative explanations provides evidence that local elite

a statistical model for multiparty electoral data we propose an internally consistent and comprehensive statistical model for analyzing multiparty district level aggregate election data this model can be used to explain or predict how the geographic distribution of electoral results depends upon economic conditions neighborhood ethnic compositions campaign spending and other features of the election campaign or characteristics of the aggregate areas we also provide several new graphical representations for help in data exploration model evaluation and substantive interpretation although the model applies more generally we use it to help resolve an important controversy over the size of and trend in the electoral advantage of incumbency in great britain contrary to previous analyses which are all based on measures now known to be biased we demonstrate that the incumbency advantage is small but politically meaningful we also find that it differs substantially across the parties about half a percent for the conservatives 1 for the labor party and 3 for the liberal party and its successors also contrary to previous research we show that these effects have not grown in recent years finally we are able to estimate from which party each party s incumbency advantage is predominantly drawn

patterns of transition from plan to market patterns of transition from plan to market martha de melo cevdet denizer and alan gelb hungary s bankruptcy experience 1992 1993 cheryl w gray sabine schlorke and miklos szanyi why and when do governments initiate public enterprise reform jose edgardo campos and hadi salehi esfahani roads land use and deforestation a spatial model applied to belize kenneth m chomitz and david a gray industrial centralization in indonesia j vernon henderson and ari kuncoro guidlines on searching for a dalton improving tax reform an illustration with data from indonesia shlomo yitzhaki and jeffrey d lewis a new data set measuring income inequality klaus deininger and lyn squire

circumstance and choice the role of initial conditions and policies in transition economies the experience of countries in transition from a planned to a market oriented economy has varied greatly the clearest differences are between the east asian countries china and vietnam and the countries of central and eastern europe cee and the former soviet union fsu china and vietnam have contained inflation and benefited from continued high growth in gdp since the beginning of their reforms while all cee and fsu countries have experienced large declines in output and most have experienced hyperinflation but even in cee and the fsu differences are marked some countries have lost over half of their gdp and growth performance in a number of countries is still poor while others are growing strongly some are still suffering from high inflation while others have successfully reduced annual inflation what determines this divergence of outcomes across transition countries no study so far has analyzed the interaction of all factors including initial conditions political change and reforms in a unified framework including cee the fsu china and vietnam the authors examine these broader interactions but focus first on the role of initial conditions such as initial macroeconomic distortions and differences in economic structure and institutions which have been emphasized less in the literature they find that initial conditions and economic policy jointly determine the large differences in economic performance among the 28 transition economies in the sample initial conditions dominate in explaining inflation but economic liberalization is the most important factor determining differences in growth but reform policy choices are not exogenous they depend in turn on both initial conditions and political reform with political reform the most important determinant of the speed and comprehensiveness of economic liberalization other findings provide additional insight into these relationships results show that liberalization has a negative contemporaneous impact but a stronger positive effect on performance over time the results also show that macroeconomic and structural distortions are negatively related to both policy and performance regarding the former unfavorable initial conditions discourage policy reforms but do not diminish their effectiveness once they are implemented the authors find some evidence that the influence of initial conditions diminishes over time this is in part because many of the initial conditions are themselves modified in the course of transition monetary overhangs are dissipated through inflation industrial overhang is eroded as plants shut down and market memory returns through experience

export performance in transition economies trade performance export reorientation in the transition we examine export performance in the transition economies of europe and central asia we conclude that early success in exporting required the simultaneous pursuit of stabilization and liberalization neither liberalizing the foreign trade regime alone nor drastic devaluations of domestic currencies will improve trade performance unless domestic prices are decontrolled inflationary expectations lowered and administrative controls over the economy relaxed within the foreign trade regime removing export controls appears a more immediate priority than relaxing import controls export controls induce undervaluation and high levels of protection that insulate domestic producers and consumers from international markets bartlomiej kaminski zhen kun wang and l alan winters

a model of involuntary unemployment and wage rigidity worker incentives and the threat of dismissal this paper analyzes a model that highlights imperfect monitoring and the threat of dismissal as microeconomic underpinnings for the efficiency wage hypothesis my major innovation is to allow the rules for dismissal as well as the wage to be determined endogenously as the equilibrium of a stackelberg game played between firms and workers the key results are as follows a nontrivial equilibrium where positive output is produced must involve involuntary unemployment in that employed workers are strictly better off than are the unemployed in addition the equilibrium wage is rigid with respect to exogenous shifts in productivity

executive option exercises and financial misreporting abstract several recent papers document that the magnitude of potential gains from stock based compensation is positively related to the likelihood of misreporting in a sample of firms that announce restatements of their financial statements from 1997 to 2002 we examine whether managers realize these potential gains occurring from their accounting choices after controlling for diversification needs and stock price impact we find no significant evidence of higher option exercises by executives in the misreported years however for firms that are more likely to have made deliberate aggressive accounting choices we find significant evidence of higher option exercises for these firms option exercises are higher by 20 60 in comparison to industry and size matched nonrestating firms options exercises by executives are also increasing in the magnitude of the restatement as captured by the effect of the restatement on net income these higher option exercises tend to be more pervasive and are not just confined to the ceo and cfo of the firm

a new view of political accountability for economic performance most political support models imply that in evaluating economic performance voters use a standard that would provide poor predictions of the future and leave the economy vulnerable to manipulation by vote hungry politicians drawing on macroeconomic theory we develop a simple standard of evaluation which encompasses a concern not only for current economic outcomes but also for accurately assessed future consequences of current policies we find that political support for the president can be explained as well by models that assume that voters use this sophisticated standard as by models that assume voter naivete our analysis questions the wisdom of measures typically used to assess voter evaluation of economic performance in a variety of theoretical contexts the results also help to explain the absence of convincing evidence that governments exploit voter ignorance in manipulating the economy

stabilization and growth in transition economies the early experience this paper analyzes the growth and stabilization experience in 26 transition economies in eastern europe the former soviet union and mongolia for the period 1989 1994 inflation rates have declined significantly in most countries following an inflation stabilization program growth resumes after stabilization occurs typically with a lag of about two years reducing inflation thus appears to be a precondition for growth an econometric analysis of the short run determinants of inflation and growth illustrates the key roles of fixed exchange rates improved fiscal balances and structural reforms in spurring growth and lowering inflation and confirms that inflation stabilization programs have been beneficial for growth even after controlling for structural reforms

inertial credit and opportunistic arrears in transition in a transition economy enterprise restructuring may exhibit a laffer curve response to tighter credit as a result of rational collective inertia in the presence of a rigid production structure unenforceable contracts and high adjustment costs a contraction in credit finance subtracts more liquidity than enterprises can generate internally because unrestructured firms are forced to extend trade credit to illiquid buyers an increase in their number increases the availability of forced supplier credit in turn increasing the attractiveness of inertial behavior as trade credit cannot be enforced a critical mass of trade and wage arrears causes pressure for a collective bailout thus validating inertial behavior even by reformable firms

public support for economic reforms in poland using monthly surveys the author examines the impact of aggregate economic conditions on the dynamic of support for the polish program of economic reforms the balcerowicz plan to highlight the ambiguity of the standard retrospective model the author analyzes the impact of subjective perceptions of economic conditions on postures toward the reform program asking if people were extrapolating the past when forming predictions about the future then the effect of these predictions on the postures toward reform is studied finally the author focuses on the distributional effects substantive conclusions concerning the impact of economic conditions on the support of economic reform programs under democracy close the article

do artificial income smoothing and real income smoothing contribute to firm value equivalently abstract this paper examines the potential impacts of artificial smoothing abnormal accruals and real smoothing derivatives on firm value we find that the value of the firm decreases with the magnitude of abnormal accruals and increases with the level of derivative use moreover the accrual discount is more pronounced in firms with weak investor protection and the hedging premium is greater for poorly governed firms these results suggest that although managers can engage in real smoothing to improve the informativeness of firms earnings and thus reduce agency costs they might use artificial techniques to cosmetically improve the income stream in order to expropriate minority shareholders in further support of agency theories we report that poor corporate governance motivates the use of abnormal accruals and discourages derivative use

privatization political risk and stock market development in emerging economies this paper investigates whether privatization in emerging economies has a significant indirect effect on local stock market development through the resolution of political risk we argue that a sustained privatization program represents a major political test that gradually resolves uncertainty over political commitment to a market oriented policy as well as to regulatory and private property rights we present evidence suggesting that progress in privatization is indeed correlated with improvements in perceived political risk our analysis further shows that changes in political risk in general tend to have a strong effect on local stock market development and excess returns in emerging economies we conclude that the resolution of political risk resulting from successful privatization has been an important source for the rapid growth of stock markets in emerging economies

incumbent performance and electoral control in the pure theory of electoral competition citizens compare the platforms of the candidates and vote for the one whose platform is preferred candidate strategies are identified with promises about future performance in office models of this sort have been developed in both static mckelvey 1975 and dynamic kramer 1977 i settings and all appear to have the property that if the set of alternatives is large enough in some sense equilibrium platforms rarely exist but these models have another feature that is quite as disturbing as their instability in the static setting discussed by mckelvey little attention is paid to the possibility that once in office the politician s preferences may diverge from those of his constituents and that he may therefore choose policies at variance from his platform instead it is simply assumed that promises will be kept whether or not such behavior is congruent with the interest of the officeholder it is sometimes argued that an enforcement mechanism may exist to discipline politicians for failing to keep promises but without a specification of the mechanism it is not obvious that it would be in the interests of the

are ceos really paid like bureaucrats a common view is that there is little correlation between firm performance and ceo pay using a new fifteen year panel data set of ceos in the largest publicly traded u s companies we document a strong relationship between firm performance and ceo compensation this relationship is generated almost entirely by changes in the value of ceo holdings of stock and stock options in addition we show that both the level of ceo compensation and the sensitivity of compensation to firm performance have risen dramatically since 1980 largely because of increases in stock option grants

the impact of performance based compensation on misreporting abstract this paper examines the effect of ceo compensation contracts on misreporting we find that the sensitivity of the ceo s option portfolio to stock price is significantly positively related to the propensity to misreport we do not find that the sensitivity of other components of ceo compensation i e equity restricted stock long term incentive payouts and salary plus bonus have any significant impact on the propensity to misreport relative to other components of compensation stock options are associated with stronger incentives to misreport because convexity in ceo wealth introduced by stock options limits the downside risk on detection of the misreporting

building support for taxation in developing countries experimental evidence from mexico abstract drawing on insights from the literature on institutional design how rules shape behavior to achieve desired outcomes this article examines how certain design features of taxes such as allowing for civil society oversight earmark mechanisms that direct tax revenue for a specific purpose and sunset provisions that make the duration of taxes finite affect political support for tax reforms it also evaluates how three important aspects of the fiscal exchange trust in government perceptions of the public good and level of income shape the effect of these design features based on an original survey experiment focusing on the provision of public safety in mexico i find that these design features increase political support for taxation especially among those with low trust in government and low income these findings have important implications not just for mexico but also a number of other countries across latin america that have both low levels of extraction and increased public spending imperatives

lame ducks and local fiscal policy quasi experimental evidence from portugal i use the introduction of mayoral term limits in portugal to identify how an exogenous variation in eligibility for office affects policy decisions relying on a quasi experimental difference in differences approach i find that term limited incumbents pursue more conservative fiscal policies than those who are eligible for re election heterogeneous effects show that the treatment effects primarily reflect the behaviour of right leaning term limited incumbents results are in line with a model in which right leaning officeholders try to maintain a good reputation by pleasing an electorate prone to redistribution while they are eligible but adopt policies closer to their true preferences when term limited

transition to the market economy poland 1989 93 in comparative perspective poland the economic outcomes leszek balcerowicz the principal architect of poland s radical reform strategy in 1990 analyses here its economic outcomes prior to reform the characteristics which distinguished the polish economy from other socialist economies in central europe were the critical nature of the hyperinflation and accompanying macroeconomic crisis in 1989 the magnitude of the country s external debt the particularly strong socio political position of the labour movement in general and of the employees of state enterprises in particular a level of dependence of the ussr which though dramatic was less than that of its neighbours less economic centralization and a greater degree of private ownership in agriculture than elsewhere the last two factors were favorable but the first three most particularly the heavy legacy of hyperinflation were economically unfavorable on balance poland entered reform with a substantial disadvantage nonetheless its macroeconomic performance in the four years which followed reform was relatively better than that of its neighbours the crown jewel of poland s success was the halt of hyperinflation this was not achieved at a relatively greater cost in output cumulative gdp decline was less than elsewhere though after adjustment for the effects of the cmea shock the differences are not large balcerowicz attributes poland s relative success to the salient characteristics of its reform programme it was rapid radical comprehensive and consistent romania for one followed the opposite course of stop go gradualism that country s accelerating inflation and deep decline in output suggests what might have happened to poland had it followed a softer approach

american garch employee stock option valuation abstract we implement a flexible simulation based approach for the fair value of employee stock option eso that accounts for the vesting period departure risk and voluntary suboptimal early exercise we introduce garch effects on the underlying asset and we analyze the price bias with respect to the constant volatility case we also perform a sensitivity analysis with respect to changes in several eso characteristics we compare this valuation with fas 123 method revealing a fas overvaluation finally we value a real eso plan providing the confidence intervals for the estimated eso prices

employee stock option exercises an empirical analysis this paper describes the exercise behavior of over 50 000 employees who hold longterm options on employer stock at eight corporations employees typically exercise options years before expiration commonly sacrificing half of the black scholes value exercise is strongly associated with recent stock price movements the market to strike ratio proximity to vesting dates time to maturity volatility and the employee s level within the company these findings have implications for compensation planners the fasb as it develops a new accounting standard for options and financial statement users and preparers who apply and interpret the new fasb standard

top management compensation and capital structure the interrelationship between top management compensation and the design and mix of external claims issued by a firm is studied the optimal managerial compensation structures depend on not only the agency relationship between shareholders and management but also the conflicts of interests which arise in the other contracting relationships for which the firm serves as a nexus we analyze in detail the optimal management compensation for the cases when the external claims are 1 equity and risky debt and 2 equity and convertible debt in addition to the role of aligning managerial incentives with shareholder interests managerial compensation in a levered firm also serves as a precommitment device to minimize the agency costs of debt the optimal management compensation derived has low pay performance sensitivity with convertible debt instead of straight debt the corresponding optimal managerial compensation has high pay to performance sensitivity a negative relationship between pay performance sensitivity and leverage is derived our results provide a reconciliation of the puzzling evidence of jensen and murphy 1990 with agency theory other testable implications include 1 a relationship between the risk premium in corporate bond yields and top management compensation structures and 2 the announcement effect of adoption of executive stock option plans on bond prices the model yields implications for management compensation in banks and federal deposit insurance reform our results explain the dynamics of top management compensation in firms going through financial distress and reorganization

anticipation and the valuation of delayed consumption this paper presents a model of intertemporal choice that incorporates savoring and dread i e utility from anticipat ion of delayed consumption the model explains why an individual with positive time preference may delay desirable outcomes or get unpleas ant outcomes over with quickly contrary to the prediction of convent ional formulations of intertemporal choice implications of savoring and dread for savings behavior empirical estimation of discount rate s and public policy efforts to combat myopic behavior are explored the model provides an explanation for common violations of the indepe ndence axiom as applied to intertemporal choice copyright 1987 by royal economic society

electoral control in new democracies the perverse incentives of fluid party systems how do fiuid party systems that exist in many new democracies affect democratic accountability to address this question the authors analyze a new database of all legislative incumbents and all competitive elections that took place in poland since 1991 they find that when district level economic outcomes are bad voters in that country punish legislators from a governing party and reward legislators from an opposition party as a result electoral control in poland works through political parties just as it does in mature democracies however the authors also find that in contrast to mature democracies legislators from a governing party tend to switch to an opposition party when the economy in their district deteriorates when they do so their chances of reelection are better than those of politicians who remained loyal to governing parties and are no worse than those of incumbents who ran as opposition party loyalists these empirical results suggest that while elections in new democracies function as a mechanism of political control fiuid party systems undermine the extent to which elections promote democratic accountability

the war making state and privatisation states created with the central purpose of defending national independence resist the process of macro economic reform since it appears to limit their power to pursue this aim the states of the former centrally planned economies were marked out by their extreme subordination to the military drive so the resistance to reshaping the war making state into a market facilitating state is considerable the transition tends to be halted where the old structures of central control are ended without markets supplying alternative imperatives a rent seeking state is created these themes are examined in relationship to privatisation of state owned enterprises in four countries russia china vietnam and the ukraine

spatial models of delegation canonical assumptions this approach may be justified on grounds of tractability but the failure to grasp the significance of different assumptions and push beyond specific models has limited our understanding of the incentives for delegation consequently the justifications for delegation that have received recent scrutiny and testing differ from some of the more plausible justifications offered by informal studies of delegation we show that surprisingly few results in the literature hinge on risk aversion and surprisingly many turn on the ignored though equally canonical technological assumption that uncertainty is fixed relative to policies relaxing the key assumptions about dimensionality and functional forms provides a clearer intuition about delegation one that is closer to classical treatments the theory allows us to relate different institutional features commitment specialization costs monitoring multiple principals to delegation s observable properties lthough the practice of delegation dates back to antiquity the book of exodus refers to itonly in the last century has much scholarship examined its causes and effects and only recently has research focused on developing and testing formal theories that explore the logic of delegation 1 despite this recent surge in formal work on delegation scholars have failed to generalize several important properties of the early pathbreaking models instead of revisiting assumptions that were initially imposed for the sake of convenience recent papers tend to maintain and reinforce the cannonical assumptions applying these limited models to ever richer institutional settings although the breadth of understanding about delegation across various settings is impressive this approach has come at a price it has produced an understanding that only partly captures delegation s informational rationale in even the simplest contexts the literature is rich in predictions about delegation in complicated institutional settings when stylized foundational assumptions are satisfied but poor in explanations for and intuitions about why a poorly informed boss chooses to delegate to subordinates with different preferences moreover we lack an understanding of what basic features drive the boss s choice of which agent is given control of policy for example scholars have provided detailed explanations about how separation of power systems affect delegation by legislatures to agencies but the basic question does the informational rationale for delegation hinge on the boss s risk preferences has been ignored despite the analysis of complicated signaling and screening games between bosses with ex post controls and their subordinates we do not yet understand when or why the ally principle the boss picks the most ideologically similar agent as delegatee fails in simple settings we try to put models of delegation on more solid footing by examining a larger more general set of environments we eschew the canonical assumptions of quadratic utility or even risk aversion unidimensional outcome spaces and additive and homogeneous random shocks to policy our analysis focuses first on two basic questions when does delegation occur and to whom does the boss delegate we then consider richer institutionally driven extensions e g the role of commitment and monitoring devices the impact of multiple bosses and the institution in which their preferences are aggregated through a sequence of nested models with varying levels of abstraction the analysis isolates the relations between various assumptions and different findings

corporate bankruptcy and insider trading the authors document significant sales by the insiders of firms filing bankruptcy petitions prior to the filing date they also find that selling is more intense for top executives and officers and that insiders in general systematically sell stock before prices fall and buy stock after prices have fallen although this trading pattern may simply reflect an implicit compensation arrangement between insiders and stockholders the significant sell off does raise potential questions regarding managements incentives to maximize shareholder wealth throughout the chapter 11 process copyright 1997 by university of chicago press

macropolicies in transition to a market economy a three year perspective countries in transition to market economies have had to implement macroeconoimic stabilization programs at the same time that they were engaged in massive changes of their political institutions and the systemic framework of their economies what has been the interaction of stabilization with economic liberalization and deep institutional reform in the countries of eastern europe in particular the relations among initial conditions political developments reform strategies and outcomes experience in eastern europe suggests that when there is a political breakthrough as in the countries under review a radical stabilization liberalization stragety is probably the least risky approach to reform and will not constrain output or structural reform over the medium term even stabilization that is initially successful in containing inflation will later come under pressure because of social policies and the structural transitions impelled by reform several factors are identified that affect the credibility of reforms and lessons are derived for countries that have stabilized and those that yet face this task

is there a link between executive equity incentives and accounting fraud we compare executive equity incentives of firms accused of accounting fraud by the securities and exchange commission sec during the period 1996 2003 with two samples of firms not accused of fraud we measure equity incentives in a variety of ways and employ a battery of empirical tests we find no consistent evidence that executive equity incentives are associated with fraud these results stand in contrast to assertions by policy makers that incentives from stock based compensation and the resulting equity holdings increase the likelihood of accounting fraud

capitalist worker conflict and involuntary unemployment we study a simple model of the determination of the level of employment in which a capitalist decides how many workers to hire and then bargains over the wage with those whom he hires if the capitalist hires all the available workers his position is weak since in the event of a strike he is unable to hire strike breakers for this reason he chooses to leave some workers involuntarily unemployed an increase in unemployment benefits which raises the cost of hiring strike breakers affects the bargaining power of both capitalist and workers under some conditions it leads to a reduction in unemployment casual observation suggests that in every advanced capitalist economy a significant portion of the workforce is persistently unemployed yet in the dominant formal model of such an economy walrasian equilibrium theory such a situation is never a point of rest of the system beginning with clower 1965 and leijonhufvud 1968 on the one hand and with dreze 1975 on the other there has recently been a number of attempts to modify this theory in such a way that there can be unemployment in equilibrium all these attempts non walrasian models retain from walrasian equilibrium theory the view of a capitalist economy as a system of markets which passively mediates the conflicting desires of the individuals in the economy in the walrasian equilibrium analysis this mediation is successful while in the non walrasian models it is not however in both cases the basic image is of an economy in which the individuals interact passively rather than antagonistically both approaches also begin with an exchange economy in some cases the analysis can be extended to incorporate production but it is never the case that the way production is organized is of any consequence it makes no difference whether capital hires labour or labour hires capital to this extent these models do not incorporate a distinguishing feature of a capitalist economy here we study a very simple model in which the struggle over the distribution of output is the centre of attention and in which the fact that capital hires labour rather than vice versa is essential the model views a capitalist economy not as a system for allocating resources but as a way of organizing production which involves a particular set of power relations between its members our premise is that such a viewpoint illuminates some aspects of the phenomenon of unemployment which are otherwise obscured in the model we construct unemployment arises not because the system is incapable of performing the task of coordination but because the capitalists who can decide how many workers to hire are in a better position to secure a large fraction of the output if some workers remain unemployed this sort of reasoning is certainly not new marx s argument concerning the reserve army of the unemployed is perhaps similar though apparently it has not previously been formalized at the basis of our model is the bargaining process between a capitalist and the workers he chooses to employ there are other models of unemployment which are based on such a bargaining process

political economy of mechanisms we study the optimal mirrlees taxation problem in a dynamic economy in contrast to the standard approach where the taxation mechanism is operated by a benevolent planner with full commitment power we focus on economies in which policy decisions are made by self interested politicians who cannot commit to policies the society controls politicians using elections we show that the provision of incentives to politicians can be partly separated from redistribution across agents and that political economy constraints can be modeled as introducing additional aggregate distortions in the dynamic mirrlees problem we provide conditions under which the political economy distortions persist or disappear in the long run if the politicians are as patient as the agents the best sustainable mechanism leads to an asymptotic allocation where the aggregate distortions arising from political economy disappear in contrast when politicians are less patient than the citizens positive aggregate labor and capital taxes remain even asymptotically we conclude by providing a brief comparison of centralized

circumstance and choice this article takes an integrated approach to evaluating the interaction of initial conditions political change reforms and economic performance in a unified framework covering 28 transition economies in east asia central and eastern europe and the fsu initial conditions and economic policy jointly determine the large differences in economic performance among transition economies initial conditions dominate in explaining inflation but economic liberalization is the most important factor determining differences in growth political reform emerges as the most important determinant of the speed and comprehensiveness of economic liberalization raising the important question of what determines political liberalization results suggest the importance of the level of development in determining the decision to expand political freedoms

democracy the market and the logic of social choice this article compares the types of knowledge democracy and the market require to rationally allocate resources i argue that high levels of public ignorance and voters inability to compare the effects of different parties policies make it difficult for parties and elections to rationally allocate resources markets mitigate these problems because the simultaneous existence of multiple firms products facilitates comparisons that mimic the conditions of scientific experimentation the economy of knowledge involved in such comparisons indicates there are epistemic advantages to using firms and markets instead of political parties and elections to allocate scarce resources however in contrast to arguments that markets merely provide better information than political decisions i argue markets epistemic advantages are derived from the way they facilitate comparisons that minimize decision makers need for knowledge or understanding