multiple equilibria and deterrence in airline markets we use data from the us airline industry to estimate a model of entry deterrence we model the interaction among airlines as a repeated static game where we allow for a very general form of heterogeneity we consider a menu of three alternative games that describe the strategic interaction among airlines simultaneous and sequential move games and a sequential move game with deterrence investments following bernheim 1984 deterrence investments include all investment that raises barriers to entry and for which the incumbent must incur some investment costs we show that the profits that incumbents can make in the sequential game both with and without deterrence investments are larger than those that they can make if the game is played simultaneously thus we find that on average it is profitable for all firms to deter new entrants with the exception of united airlines remarkably united airlines was under bankruptcy protection during the period of analysis suggesting that its deterrence investments were not credible overall we find that the data is explained better by a model where firms make deterrence investments thus we cannot reject the hypothesis that incumbents deter entrants in the airline industry

macroeconomic equilibrium and reform in a transitional economy we build a general equilibrium macro model of a transitional economy to reflect four stylized facts among these are that central planning has left a legacy of highly concentrated industry and a residue of price controls and rationing an almost classical dichotomy obtains in the model monetary expansion leaves output and employment unchanged despite the existence of unemployment though leisure time declines however the economy displays a high degree of complementarity between the state controlled and private sectors giving rise to keynesian multiplier effects we also analyse the effects of price liberalization and privatization on the properties of the economy

spatial competition monopolistic competition and optimum product diversity abstract this is a republication of a passage from william vickrey s 1964 book microstatics which presents important results in spatial competition and monopolistic competition

wage indexation and the time consistency of government policy this paper concerns the role of wage indexation as a mechanism for enabling an economy to achieve outcomes that would not otherwise be time consistent the desirability of indexation depends on the size of real and nominal shocks and on a policymaker s incentives for short run inflation surprises policymakers incentives to utilize wage indexation are examined and it is found that weak policymakers are more likely to choose wage indexation hence in an electoral equilibrium voters may choose a policymaker who cares more about unemployment than inflation but who chooses wage indexation to commit to low inflation copyright 1995 by the editors of the scandinavian journal of economics

ten little treasures of game theory and ten intuitive contradictions this paper reports laboratory data for games that are played only once these games span the standard categories static and dynamic games with complete and incomplete information for each game the treasure is a treatment in which behavior conforms nicely to predictions of the nash equilibrium or relevant refinement in each case however a change in the payoff structure produces a large inconsistency between theoretical predictions and observed behavior these contradictions are generally consistent with simple intuition based on the interaction of payoff asymmetries and noisy introspection about others decisions

macroeconomic policy in a large unionised economy this paper models an economy with many sectors in each sector a monopoly union sets the nominal wage and then firms choose output the economy is large in that all agents treat the general price level as fixed the paper focusses on policy effects on employment an increase in government expenditure in one sector will increase decrease total employment as sectoral employment is above below average a general increase in government expenditure in fixed proportions will have a positive employment multiplier below unity policy which increases employment will lead to higher welfare

inflation and reputation in many macroeconomic models with rational expectations optimal policy is time inconsistent and therefore announced policy may not be credible this paper models the government s credibility explicitly using kreps and wilson s analysis time consistent optimal government policy emerges as a sequential equilibrium in a repeated game this policy is at least as good as the inconsistent optimal policy and dominates the consistent policy when reputational effects are ignored thus the analysis resolves the problem of specifying a credible optimal policy in such models the results show why attempts to disinflate may lead to recession even with perfectly flexible prices this abstract was borrowed from another version of this item

macroeconomic effects of price controls the role of market structure the impetus for the current study comes from an attempt to understand the results of israel s stabilisation programme of july i985 the programme consisted of a sharp reduction in aggregate spending via an increase in net taxes and a moderate reduction in government spending a devaluation followed by a fixed exchange rate and price and wage controls the results of the programme are reported in table i in the first quarter that followed the implementation of the programme i e the third quarter of i985 aggregate spending declined exports increased imports declined the real wage rate declined and employment declined these results can be explained by a conventional competitive macroeconomic model as i will show in section ii during the next six months all the variables reversed their course this would be easy to explain with a conventional competitive model if the price controls had been removed however they were not and it is difficult to reconcile the comovement of the reported variables in their presence especially intriguing is the simultaneous increase in the real wage rate and employment this is so because in a competitive model price controls lead to excess demand in this case increased spending has no price or employment effects while a wage increase reduces employment the difficulty is further aggravated by the fact that contrary to the model s prediction almost no shortages have been observed in addition as shown in section ii partial relaxation of price controls is also incapable of explaining the data with this type of model this led me to study a macroeconomic model with oligopolistic markets i have chosen to work with a particular form of imperfect competition which proves to be useful for the purpose at hand it is however possible to think about alternatives which are also of interest clearly it is pointless to cover all these

learning behavior and mixed strategy nash equilibria abstract the paper considers whether an adaptive justification like those commonly available for non interactive optimization models can be found for the mixed strategy nash equilibrium although it is known that such a justification is frequently available for pure strategy equilibria it is shown that all members of a wide class of behaviorally plausible learning mechanisms must fail to converge in almost all games in which the equilibrium involves mixed strategies an exact formal analogy is developed which allows these learning mechanisms to be viewed as discrete ta tonnement processes in properly chosen competitive exchange economies in the analogy the instability derives from the independence of excess demand functions except at the boundaries from own prices this independence arises because of the linearity in probabilities of von neumann morgenstern risk preferences and therefore does not extend to pure strategy equilibria in general thus assuming that agents will play equilibrium strategies implicitly assumes more sophistication when the equilibrium involves mixed strategies than when it involves only pure strategies

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

savings and stabilization policy in a pre post socialist economy a simple macroeconomic model of a reforming socialist economy is presented with queuing in period one but market clearing prices in period two if queues grow longer each household chooses to save more not because it is forced but to economize on queuing effort for the benchmark case perfect foresight immediate price liberalization is the government s optimal policy it raises welfare the more so the greater is the monetary overhang and in terms of full prices it is deflationary at least eventually the model then is modified to allow for indexation a resale market adaptive expectations and limited credibility copyright 1995 by ohio state university press

the influence of black markets on a queue rationed centrally planned economy abstract in centrally planned economies in which prices are fixed and the rationing mechanism is waiting line queues we show that an equilibrium of waiting times exists we then introduce a black market in which individuals can trade commodities that they have acquired through the official economy an equilibrium of black market prices and waiting times is shown to exist further the economy with a black market is queue efficient however the introduction of black markets is not necessarily a pareto improvement over an economy without black markets even when we allow winners to compensate losers

signalling wage controls and monetary disinflation policy focuses on wage control and monetary disinflation policy how the crucial variable to control is the money supply and wage and price controls should be avoided because of their macroeconomic costs the two types of government as being low inflation governments and high inflation governments how wage controls have microeconomic costs

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

reputation and imperfect information abstract a common observation in the informal literature of economics and elsewhere is that is multistage games players may seek early in the game to acquire a reputation for being tough or benevolent or something else but this phenomenon is not observed in some formal game theoretic analyses of finite games such as selten s finitely repeated chain store game or in the finitely repeated prisoners dilemma we reexamine selten s model adding to it a small amount of imperfect or incomplete information about players payoffs and we find that this addition is sufficient to give rise to the reputation effect that one intuitively expects

monopolistic competition credibility and the output costs of disinflation programs an analysis of price controls abstract brazil argentina and israel all used price controls as part of disinflation programs in 1985 1986 in each case they were intended to break an inertial component of inflation this paper focuses on the interaction between lack of credibility of government monetary policy announcements and the price setting behavior of forward looking firms we show that this interaction can lead to inertia extending well beyond the price setting period lack of credibility is then shown to lead to output losses during a disinflation program the paper analyses asset price behavior during disinflation programs with and without price controls and the influence of credibility problems finally we show that if past government policy has any information content about future government policy cheating on current announcements of tight policy buys current employment gains during the price control period at the cost of higher inflation afterwards sustaining low inflation after the price control period thus requires restrictive monetary policy during the price control period

rational expectations and policy credibility following a change in regime we examine the dynamic path of an economy after a change in regime when neither the policy to be followed nor the reactions of the public are known the model is an application of kreps and wilson s reputation model to barro and gordon s macroeconomic policy game equilibrium is defined to be the dynamically consistent solution to a game between the government and the private sector it involves mixed strategies and bayesian learning by both sides until the uncertainty about government and public behaviour is resolved the absence of complete credibility of government policy and intransigence of private sector wage demands increase the output loss of disinflation the analysis also sheds light on the strategic nature of economic policymaking and the role of information in macroeconomics

price distortion and shortage deformation or what happened to the soap the model of this paper generalizes the classical theory of consumer behavior to the more general case of prices that are not necessarily market clearing suppose that in addition to the money cost some sort of search waiting or other quasi fixed effort cost is needed to obtain goods the presence of this quasi fixed cost element will trigger an inventory policy a shortage equilibrium occurs when effort costs are such that in the corresponding inventory policy the flow of desired consumption does not exceed the available supply flow stock hoarding a critical phenomenon in the economics of shortage emerges as a natural component of this model a complete characterization of a stationary shortage equilibrium is given comparative statics and welfare analysis are performed the dynamic transition between steady states is analyzed to give insight into the mechanics of how shortages develop copyright 1991 by american economic association

fiscal policy monetary targets and the price level in a centrally planned economy an application to the case of china this paper presents a planned economy monetary model of china a money supply equation links changes in broad money to government transactions evaluated at official prices the demand for real money balances by consumers equals the nominal demand for money deflated by an unobserved true price index the model explains money demand as the divergence between the then official and true price indices changes in the money supply are explained by government transactions while money demand is explained by real income and the anticipated true rate of inflation the true rate of inflation is 2 5 times the official rate copyright 1987 by ohio state university press

currency prices terms of trade and interest rates a general equilibrium asset pricing cash in advance approach currency prices terms of trade and interest rates a general equilibrium asset pricing cash in advance approach

the technology of decontrol some macroeconomic issues by the time east europe was being pressed into stalin s authoritarian mould as soviet troops took over the region at the end of the second world war there was little more to be said in western theorising about the subordination of markets to a central plan from barone s i908 ministry of production in a collectivist state to lerner s i944 economics of control the issue was the allocative efficiency of the state in maximising a social preference function by the late i 940s a communist party determined to assume that role was in power in nine european and three asian countries each having a long term objective to overtake and surpass the performance of capitalism but more immediately to use central planning as the economic expression of a political monopoly in i990 the east european parties have forfeited that monopoly and have patently failed in the competition with capitalism as successor governments turn to the market it is the economics of decontrol that must be formulated throughout the industrialised capitalist world during the i98os the state has been rolled back in favour of the market deregulation and privatisation took place within a well established environment of market clearing prices and profit seeking transactions not so in the ussr and eastern europe for four decades stretching to six for the soviet union administrative direction has eliminated or marginalised the market which now must be rebuilt virtually from scratch the history of the two countries which broke with stalin s form of control is of no help yugoslavia had too little of a central plan and hungary had too little of a market 1 when mikhail gorbachev launched perestroika in i985 hungary and china had begun to re establish market relations and to allow some private enterprise to compete with a dominant state there and elsewhere the process was impeded by the hold of the communist party2 on political and economic activity those countries in which by i990 that hold had been relaxed started the process of decontrol and the establishment of equilibria within which a normal market can operate section i of this paper describes the preconditions for dismantling the soviettype economy section ii sets out the institutional and structural characteristics of the economy which must be unmade the required changes are considered

stagflationary effect of government bond financing in the transforming chinese economy a general equilibrium analysis abstract this paper studies how the method of government debt financing affects the macroeconomic performance of the transforming chinese economy the investigation is conducted within the context of an endogenous growth model that incorporates the major institutional features of the chinese economy using this framework we evaluate the effects on the growth rate of output and inflation if the chinese government relies more on bonds and less on money creation for budget deficit and debt repayment financing it is shown that although this policy change can reduce the growth rate of the money supply it can generate a stagflationary effect reducing the rate of output growth while raising the rate of inflation if the initial fraction of government deficit and debt repayment financed by bonds is sufficiently small and the tax rate on labor income is sufficiently low

pharmaceutical price controls and entry strategies abstract this paper finds that the use of price controls has a statistically and quantitatively important effect on the extent and timing of the launch of new drugs firms headquartered in countries that regulate price reach fewer markets than those in countries without price controls companies avoid price controlled markets and are less likely to introduce products in additional markets after entering a price controlled country launches into low price european countries are further delayed following legalization of parallel imports the results suggest that price regulation in one country affects entry into other countries and may affect the strategies of domestic firms

structure induced equilibria and perfect foresight expectations this paper extends the work on structure induced equilibria by explicitly considering voters expectations the standard assumption of myopic expectations is contrasted with the alternative assumption of perfect foresight expectations in the institutional setting examined perfect foresight means voters know how the outcome on the first issue in a sequence of two issues conditions majority rule outcomes on the second issue if voters act on this knowledge when voting on the first issue then several important results follow first voters may possess multipeaked preferences defined over the first issue with a majority cycle resulting so that there is no equilibrium to the whole sequence of elections second even if cycling does not result the exact location of the equilibrium involves a broader conspiracy than previously thought a conspiracy of not only preferences and institutional structure but also voters expectations as conditioned by that structure

the 1971 1974 controls program and the price level an econometric post mortem abstract this paper provides new empirical evidence on the effects of the nixon wage price controls on the price level the major new wrinkle is that the controls are created as a quantitative rather than just a qualitative phenomenon through the use of a specially constructed series indicating the fraction of the economy that was controlled according to the estimates by february 1974 controls had lowered the non food non energy price level by 3 4 percent after that point and especially after controls ended in april 1974 a period of rapid catch up inflation eroded the gains that had been achieved leaving the price level from zero to 2 percent below what it would have been in the absence of controls the dismantling of controls can thus account for most the burst of double digit inflation in non food and non energy prices during 1974

equilibrium political budget cycles political business cycle theories generally rely on nominal rigidities and voter myopia this paper offers an equilibrium theory that preserves some basic insights from earlier models though with significant refinements the political budget cycle emphasized here is in fiscal policy rather than output and inflation it arises via a multidimensional signal process one can consider the welfare implications of proposals to mitigate the cycle and the effects of altering the electoral structure copyright 1990 by american economic association

macroeconomic effects of imf sponsored programs in latin america output costs program recidivism and the vicious cycle of failed stabilizations we investigate the effects of imf stabilization programs and the reasons behind the unusually high imf activity and relatively low program completion rates in latin america we base our tests on a panel and distinguish between imf program approvals and completion we find that latin america has higher output costs of imf programs especially when completed no improvement in the current account and a much higher likelihood of program failure and recidivism than other regions the common finding that entering into an imf supported program incurs real short run costs on the economy is entirely driven by the experiences in latin america

price controls in liberia abstractin 2009 the liberian government removed a wide reaching set of price controls compared with goods never subject to price ceilings goods whose prices were liberalized showed increased pri

participation games market entry coordination and the beautiful blonde abstract we find the nash equilibria for monotone n player symmetric games where each player chooses whether to participate examples include market entry games coordination games and the bar room game depicted in the movie a beautiful mind the symmetric nash equilibrium involves excessive participation a common property resource problem if participants payoffs are decreasing in the number of participants and insufficient participation if payoffs are increasing with decreasing payoffs there can be many equilibria but with increasing payoffs there are only 3 some comparative static properties of changing one player s participation payoffs are counterintuitive especially with more than two players

monopolistic competition relative prices and output adjustment in the open economy abstract this paper explains price and output dynamics in an open economy characterized by a monopolistic competitive market structure in which pricing decisions incur costs this leads producers to pre set the price path for several periods the paper derives an optimal pricing rule including the optimal pre setting horizon it does so for a rational expectation equilibrium characterized by staggered unsynchronized price setting for which the degree of staggering is endogenously determined

real exchange rate effects of fiscal expansion under trade restrictions we develop a small open economy trade model where either a tariff or a quota or a voluntary export restraint ver exists and where one exported one imported one non traded and one public good are produced within this context we examine the effects of fiscal expansion on welfare and the real exchange rate rer among other things it is demonstrated that when the direct social profitability effect of the public good is positive and the public good is a net complement to the non traded good fiscal expansion causes an appreciation of the rer under free trade and under a tariff when the public good is also a net complement to the imported good the paper identifies additional conditions required to ensure the appreciation of the rer due to fiscal expansion under an import quota or a ver les effets de 1 expansion fiscale sur les taux de change reels quand il y a des restrictions au commerce international les auteurs developpent un modele de commerce international d une petite economie ouverte oiu existe soit un tarif douanier soit un contingentement soit une restriction volontaire des exportations dans ce modele un bien import6 un bien exporte un bien qui n est pas transige internationalement et un bien public sont produits

disinflation and fiscal reform a neoclassical perspective abstract many latin american countries engaged in disinflation programs based on both exchange rate management and fiscal reforms in most of the cases part of the fiscal reform was not implemented and the program had to be abandoned the aftermath of these programs is not encouraging in this paper we show that if the reform process is uncertain and inflation has welfare costs the optimal exchange rate policy indeed implies the initiation of a disinflation program at the announcement of the fiscal reform even if it implies the possibility of a balance of payments crisis finally we show that it is optimal to engage in a sequence of stabilization programs until one of them is successful

the wage price spiral this paper rehabilitates the old wage price spiral it shows that after an increase in aggregate demand the process of adjustment of nominal prices and nominal wages results from attempts by workers to maintain or increase their real wage and by firms to maintain or increase their markups of prices over wages under continuous price and wage setting the process of adjustment would be instantaneous under staggering of price and wage decisions the adjustment takes time the more inflexible real wages and markups are to shifts in demand the higher is the degree of price level inertia and the longer lasting are the effects of aggregate demand on output

queues rations and market comparisons of outcomes for the poor and the rich this paper presents a positive comparison of the outcomes of several alternative allocation systems the queue system convertible and nonconvertible rations and the unhindered market to distribute the limited quantity of a deficit good among heterogeneous individuals the authors show that for the poor the ranking of systems from better to worse is convertible rations nonconvertible rations the queue system and nonintervention the rich are found to be better off under nonintervention than under other systems these and other results are notably robust not only to many parameters of the economy but also to certain types of commodity taxes and administrative costs copyright 1987 by american economic association

measurement of repressed inflation in china abstract we estimate a measure of the repression of the chinese price level by developing a simple analytical model which derives a true rate of inflation on the basis of the different rates of change of the stock of money in circulation and the nominal value of retail sales this true rate of inflation is then used to explain changes in quasi money balances we estimate this model for the period 1979 1988 using quarterly data the results strongly support the hypothesis of repressed inflation the annual rate of inflation of the true price index is approximately 12 4 percent higher than that of the official price index over the 10 year period

optimal accommodation by strong policymakers under incomplete information abstract this paper examines the optimal behavior of a policymaker who is able to precommit labelled strong when the public entertains the possibility that he is either strong or weak unable to precommit the main result is that in the presence of doubts about their type it is optimal even for strong policymakers to partially accommodate inflationary expectations this contrasts with vickers 1986 who finds that when strength is conceived in terms of the relative concern for employment the strong policymaker inflates less under incomplete than under full information the paper also provides a theory of endogenous announcements

monopolistic competition and the effects of aggregate demand how important is monopolistic competition to an understanding of the effects of aggregate demand on output we ask the question at three levels can monopolistic competition by itself explain why aggregate demand movements affect output can it together with other imperfections generate effects of aggregate demand in a way that perfect competition cannot if so can it give an accurate account of the response of the economy to aggregate demand movements the answers are no yes and yes

sticky goods prices flexible asset prices monopolistic competition and monetary policy a monetary general equilibrium asset pricing model with sticky goods prices is developed goods prices are set by monopolistically competitive firms that maximize stock market value equilibria with underutilization of resources excess capacity in some states result in contrast to previous monetary asset pricing models the degree of competition affects capacity utilization monetary policy can affect output and resource utilization in addition to real asset prices depending upon the amount of information available to the monetary authority

a correction in elementary public choice geometry this paper corrects a long standing errorin elementary geometrical constructionsthat involve collective choices inmultidimensional settings the seeminglyinnocuous assumption of separability amongarguments in individual utility functionsdoes not imply symmetric indifferencecontours in shared goods space sharedgoods necessarily become gross substituteswhen resource or budgetary constraints areintroduced the corrected constructionsuggests that issue by issue voting is lessefficacious than is indicated in theconventional analysis

stabilization policy and public sector prices abstract this paper analyzes the impact of public sector price increases combined with employment cuts in a dynamic optimizing model if the government adopts a tough layoff policy the real wage is highly flexible and the reforms are perceived to be permanent there is a strong presumption that real output will be higher and inflation lower over all time horizons problems may arise during the adjustment process however when the reforms are not credible or the real wage adjusts slowly to clear the labor market

exchange rates and traded goods prices abstract this paper presents a partial equilibrium model of the determination of domestic and export prices by a monopolistic competitive firm the model stresses the role of exchange rate uncertainty and expectations the most important result of the analysis is that the stochastic properties of deviations from the law of one price are crucially affected by the currency of denomination of export prices using data on domestic and dollar export prices of japanese goods i find that deviations from the law of one price are due to exchange rate surprises but also to price staggering and ex ante price discrimination

recent developments in the theory of rules versus discretion policymaker this perspective on rules versus discretion was changed by kydland and prescott 1977 who looked at rules as a form of commitment a commitment amounts to a binding contract which specifies in advance the actions that someone will take possibly contingent on some exogenous variables that everyone can observe in contrast under discretion a person promises only to take those future actions that will best further his objectives later on such promises are easy to keep thus discretion is the special case of a rule or contract in which none of today s provisions restrict a person s future actions in the area of private business dealings it is natural to think about optimal forms of contracts which would not usually be pure discretion similarly for public policy the perspective becomes the optimal form of rules or prior restrictions even the smart benevolent policymaker is likely to desire and use

the role of saving and investment in exchange rate determination under alternative monetary mechanisms abstract we argue that the demand for national currencies depends on existing payment arrangements for imports and exports therefore exchange rate movements depend on these arrangement as a result the relationship between exchange rate movements and various macroeconomic aggregates like saving and investment depend on what we call the monetary mechanism these points are explicitly demonstrated by studying two extreme monetary mechanisms one in which all payments are done with the seller s currency and one in which all payments are done with the buyer s currency

hungary s transition to the market the case against a big bang hungary paul hare and tamas revesz among eastern european countries hungary s great advantage is that it began economic reforms in 1968 and slowly introduced the institutions of a market economy during the 1980s these measures laid the foundation for a gradual transition to the market without the need for any sharp break with the past policy mistakes were of course made the most serious extending over several years was the 1970s investment boom funded by foreign capital which contributed to hungary s large debt burden despite this the government accounts are not now in substantial deficit and the balance of payments on current account is in modest surplus nevertheless managing the external debt is now the most difficult of hungary s problems it is important that hungarian joint ventures and privatization are now attracting significant quantities of foreign capital given the quite rapid pace of liberalization since the late 1980s the government s commitment to further changes and a reasonably satisfactory macroeconomic balance though inflation is worrying there is no case for a big bang approach in hungary such a shock could only disrupt established market relationships and expectations with little benefit the most valuable forms of aid for hungary would be debt relief and unrestricted access for hungary s products to ec markets

price and advertising signals of product quality we present a signaling model based on ideas of phillip nelson in which both the introductory price and the level of directly uninformative advertising or other dissipative marketing expenditures are choice variables and may be used as signals for the initially unobservable quality of a newly introduced experience good repeat purchases play a crucial role in our model a second focus of the paper is on illustrating an approach to refining the set of equilibria in signalling games with multiple potential signals

reputation in a model of monetary policy with incomplete information abstract previous models of rules versus discretion are extended to include uncertainty about the policymaker s type when people observe low inflation they raise the possibility that the policymaker is committed to low inflation type 1 this enhancement of reputation gives the uncommitted policymaker type 2 an incentive to masquerade as the committed type in the equilibrium the policymaker of type 1 delivers surprisingly low inflation with corresponding costs to the economy over an extended interval the type 2 person mimics this outcome for awhile but shifts eventually to high inflation this high inflation is surprising initially but subsequently becomes anticipated

international factor mobility minimum wage rates and factor price equalization a synthesis this paper examines the behavior of a small open economy facing perfectly elastic supply curves for some of its productive factors in particular the paper derives some comparative statics properties of such economies compares them with the properties of otherwise identical economies in which all factor prices are determined endogenously and investigates the relationship between factor price rigidities factor price equalization and the pattern of specialization among the new results which are proved it is shown that as more and more factor price rigidities are imposed on an economy it comes closer to a state of factor price equalization

economic crisis in a shortage economy it is not unusual for reforming socialist economies to relax wage controls without hardening budget constraints on enterprises or freeing consumer goods prices this policy can be dangerously destabilizing while higher wages permit workers to purchase more of some goods they also tend to exacerbate shortages and to breed waste and corruption beyond a certain level economywide wage hikes will worsen worker welfare this is true regardless of whether deficit goods are strictly rationed are sold randomly at official prices to queuing workers or are offered to workers by insiders only at black market prices however the form of allocation does influence the levels of output and welfare

overconfidence and excess entry an experimental approach psychological studies show that most people are overconfident about their own relative abilities and unreasonably optimistic about their futures e g shelly e taylor and j d brown 1988 neil d weinstein 1980 when assessing their position in a distribution of peers on almost any positive trait like driving ability ola svenson 1981 income prospects or longevity a vast majority of people say they are above the average although of course only half can be if the trait is symmetrically distributed this paper explores whether optimistic biases could plausibly and predictably influence economic behavior in one particular setting entry into competitive games or markets many empirical studies show that most new businesses fail within a few years for example using plant level data from the u s census of manufacturers spanning 1963 1982 timothy dunne et al 1988 estimated that 61 5 percent of all entrants exited within five years and 79 6 percent exited within 10 years most of these exits are failures see also dunne et al 1989a 1989b d shapiro and r s khemani 1987

the welfare costs of price controls for cars and color televisions in poland contrasting estimates of rent seeking from recent experience the welfare costs of price controls can vary enormously depending on the method of allocating the goods in shortage and the possible rent seeking costs that may result with full rent dissipation the welfare loss from price controls on polish color televisions in 1989 was about ten times the standard estimates of distortion costs which ignore rent seeking and was more than 100 percent of the value of domestic producers sales the methods of allocating cars however did not result in rent seeking costs the domestic price controls were an unintended implicit subsidy to imports subsidies for cars were estimated at 43 percent and for color televisions at 22 percent

a model of imperfect competition with keynesian features the recent literature on the reappraisal of keynes has viewed keynesian equilibria as arising when prices are fixed and effective demands and supplies are equilibrated through the adjustment of quantities one problem with this approach is that it lacks a theory of price determination in particular of why prices are fixed in the present paper we show that a number of keynesian features arise in a model in which prices are fully flexible but where agents have some monopoly power one advantage of this approach is that it provides a theory of the determination of both prices and quantities

excess capacity monopolistic competition and international transmission of monetary disturbances analyzes the excess capacity monopolistic competition and international transmission of monetary policy disturbances in the united states sheds light on the international impact of monetary policy emphasis on the spillover effects of monetary disturbances similarity of framework used with open economy macroeconomics

a theory of price control price or rent control is but one of many forms of legislative action which interfere with private contracting in the market place to delimit the scope of my analysis i shall use the term price control to refer only to any set of regulations which satisfies the following three conditions first the control must fix the price or income terms of private contracts this categorically excludes any laws which regulate the distribution of income among the contracting parties on a share or percentage basis 2 second the control must involve no appropriation of proceeds to or from the government taxation and subsidization are thus excluded finally the fixing of price must not be associated with direct government sales purchases or manipulation of resources so as to maintain the regulated price 3 by this stipulation price support is also excluded even on such terms legal regulations to control price are still many and varied to evaluate our understanding of the class of phenomena which we seek to explain it is essential that we discover implications refutable by facts by this criterion the available body of economic theory pertaining to price control is deficient indeed the massive literature on the subject offers few such implications 4 an alternative approach to analyzing the observable effects of price control is presented here

increasing returns and the foundations of unemployment theory current approaches to macroeconomic theory divide roughly into two basic schools of thought one approach typically associated with rational expectations views the economy as basically at or near walrasian market clearing equilibrium in which case it becomes very difficult to explain away convincingly the undeniable persistence at times of involuntary unemployment another approach views the underemployed economy as being in a state of temporary fixed price disequilibrium in which case aside from having to repress suspicions that the essence of effective demand failure might not have to do with prices fixed at wrong values there is a lot of rationalising to be done about why profitable adjustments are so slow this paper argues that something like an internally consistent theory of steady state involuntary unemployment is possible and even plausible the cornerstone of this third approach is increasing returns to scale which blocks unemployed agents from breaking out of a low level equilibrium trap unless there is overall coordination or stimulation a simple model is presented which contains the basic ideas

public sector pricing and the real exchange rate we examine the effects of consumption subsidies public enterprise pricing and price controls on the real exchange rate under plausible assumptions we show that permanent reform in these areas leads to a permanent real exchange rate appreciation an empirical application to the 1990 fujimori plan in peru is discussed redistribution purposes sometimes even to buy votes by populist leaders since economic reform usually requires the shutting down of loans from the central bank to parastatals reducing consumption subsidies and increasing public enterprise prices price reform plays an important role in imf and world bank programmes edwards 1989a for example found that public enterprise price increases and reductions in consumption subsidies were involved in 79 and 44 per cent respectively of imf programmes between 1983 and 1985 trade reforms in contrast were present in just 35 per cent of cases to date the real exchange rate effects of public sector price policies have

logical deficiencies in spatial models a constructive critique a fundamental property of any good theoryis logical consistency however two commonassumptions in the rational choice approach topolitical analysis that induced preferences overpolicy are separable and that such preferences areindependent of changes in exogenous factors are notconsistent with the archetypal assumptions ofindividual utility maximization these particularpathologies of spatial models of politics have notbeen well recognized in the political scienceliterature

savings commodity market rationing and the real rate of interest in china abstract the theoretical nature of risk premiums in foreign currency futures markets is derived and studied empirically estimation problems encountered in using futures data are discussed since forward rates and futures prices have been found to be approximately equal and because risk in daily risk premiums in the futures market unbiasedness of daily futures prices as predictors of the following day s futures price is rejected for all currencies reconciliation of daily and monthyl data requires positive serial correlation in daily risk premiums

price controls and rent seeking behavior in developing countries abstract when the price of a good is controlled a nonprice allocation rule must necessarily be substituted for allocation by price examples are first come first served allocation which gives rise to rationing by waiting and allocation by an explicit system of ration coupons with rationing by waiting consumers are induced to pursue activities that economize on waiting costs such as buying a larger quantity per purchase although such responses are individually rational they are socially self defeating in the sense that they lower equilibrium consumer welfare rationing by coupons can avoid some but typically not all of these losses these ideas are developed with examples of model economies and their practical relevance is illustrated with evidence from developing countries

when higher incomes reduce welfare queues labor supply and macro equilibrium in socialist economies starting from a micro model of consumer behavior under rationing by queuing that utilizes gary becker s allocation of time framework we develop a simple macroeconomic model of a socialist economy the length of the queue is the key endogenous variable that equilibrates aggregate supply and aggregate demand comparative statics analysis shows that an increase in wages over money prices brings about longer queues that reduce labor supply output and welfare when shortages grow beyond a certain critical level queues fail to sustain aggregate equilibrium in the economy