expectationally driven market volatility an experimental study abstract we study the existence and robustness of expectationally driven price volatility in experimental overlapping generation economies in the theoretical model under study there exist pure sunspot equilibria which can be learned if agents use some adaptive learning rules our data show the existence of expectationally driven cycles but only after subjects have been exposed to a sequence of real shocks and learned a real cycle in this sense we show evidence of path dependent price volatility journal of economic literature classification numbers c62 c92 f17 e32 e44

the winner s curse experiments with buyers and with sellers this paper explores the winner s curse phenomena as it was studied experimentally by kagel and levin experiments with the winner s curse are complicated by the fact that subjects can lose money and the experimenter has only a limited means of collecting it from them thus subjects enjoy only limited liability which has theoretical implications for behavior in the kagel and levin experiments subjects were removed from the bidders competition after losses reached a predetermined value this experimental procedure has unknown implications for the results so ambiguity exists about whether the winner s curse was actually observed in this study their results were replicated in an environment in which subjects were not removed the case in which competitors are sellers is also studied bankruptcy cannot be a problem in sellers competition in both cases the winner s curse is observed thus the limited liability cannot be an explanation for the phenomenon reported by kagel and levin in addition the paper examines the bidding behavior of all individuals and shows that this behavior does not fit any of the tested theories either on the aggregate or individual level the winner s curse did not disappear over time during the conduct of the research

an exploration in the theory of exchange rate regimes three exchange rate regimes a float a one sided peg and a cooperative peg are evaluated and compared in terms of efficiency and welfare levels the framework of analysis embodies country specific monies with the money of each country being used to transact in its commodity markets and its currency denominated bonds welfare levels depend only on consumption levels in the presence of perfect foresight all equilibrium allocations are pareto efficient in a floating exchange rate regime the perfect foresight equilibrium allocation coincides with an equilibrium of a costless barter economy the same result holds in a one sided peg if the pegging country s exchange rate stabilizing authority breaks even over time in a cooperative peg regime there is a different equilibrium allocation for each combination of exchange rate levels and monetary policies problems of policy coordination and conflicts in desired monetary policies are discussed

getting there exploring the role of expectations and preproduction delays in processes of organizational founding because of preproduction delays environmental conditions at founding cannot explain organization building decisions taken earlier as a consequence environmental conditions at founding cannot explain organizational founding future levels of resource availability may be estimated but not directly observed by potential entrepreneurs at the time at which they decide to enter preproduction in this paper we take these considerations as our starting point to build a dynamic feedback model of organization founding according to the model organizational founding is driven by expectations that entrepreneurs form about future levels of resources and only indirectly by current levels of population density we explore the behavior of the model under a variety of experimental conditions we show that the qualitative behavior of the model is consistent with studies that have linked the duration of preproduction stage with fluctuations in density during population maturity our simulation analyses sustains three main conclusions first historical trajectories of organizational populations that are consistent with empirical observations may be produced by mechanisms that are not directly dependent on density second alternative hypotheses about how expectations are formed produce qualitatively different historical trajectories of density third fluctuations in numbers of organizations are linked to specific aspects of individual organization building decisions

a search theoretic approach to monetary economics the essential function of money is its role as a medium of exchange the authors formalize this idea using a search theoretic equilibrium model of the exchange process that captures the double coincidence of wants problem with pure barter one advantage of the framework described here is that it is very tractable the authors also show that the model can be used to addre ss some substantive issues in monetary economics including the potenti al welfare enhancing role of money the interaction between specializat ion and monetary exchange and the possibility of equilibria with multip le fiat currencies copyright 1993 by american economic association

dollarization and currency exchange abstract we use a dual currency money search model to study dollarization agents hold portfolios consisting of two currencies one of which is risky we use numerical methods to solve for the steady state distributions of currency portfolios transaction patterns and value functions as risk increases agents increasingly use the safe currency as a medium of exchange dollarization occurs furthermore the safe currency trades for multiple units of the risky currency this type of currency exchange and the corresponding nominal exchange rate are often observed in black market or unofficial currency exchange markets in developing countries due to decentralized trading a distribution of exchange rates arises whose mean and variance change in predictable ways when currency risk increases

an intertemporal model of industrial exit a finite horizon model of industrial exit is developed after an initial lag most exits are by young firms the duration of the lag is positively related to sunk entry costs but not due to the fallacy of sunk costs the conception of entry differs from previous research as a result not all entrants are identical and firm size affects the rate of learning on average larger new firms last longer entrepreneurs in declining firms act more lazily as the firm declines a number of empirical observations about declining firms are organized by the model

price discrimination by u s and german exporters the insensitivity of the u s trade balance to the sharp depreciation of the dollar in the past three years has revived interest in the relationship between exchange rates and the trade balance a central issue in most analyses of the relation between the current account and the exchange rate concerns the price adjustment process the simple integrated competitive market model predicts that local currency prices should change in proportion to the nominal exchange rate for a country too small to influence world prices the relationship between local currency import prices and exchange rates has been referred to as the pass through relationship in the empirical literature in international economics if the proportional relationship between import prices and exchange rates holds pass through is said to be complete accounts of recent u s experience cite the failure of dollar prices of imported goods to rise in proportion to exchange rates i e incomplete pass through as an important factor in explaining the persistence of the trade deficit unfortunately observations on pass through alone provide limited insight into the behavior of markets since incomplete pass through is consistent with at least two fundamentally different paradigms one is the standard competitive model of trade in which the law of one price holds but exchange rate fluctuations are associated with large changes in import demand due to other factors for example if dollar appreciation is correlated with increases in world demand and industry marginal cost is increasing then pass through will be less than complete the other is an imperfectly competitive model in which exporters are capable of price discriminating across destination markets a phenomenon paul krugman 1987 has labeled pricing to market in this model incomplete pass through is typically associated with fluctuations in the markup of price over marginal cost on exports 2 these fluctuations in markups are believed to be countryspecific they do not reflect the behavior of prices to other export destinations both models are plausible explanations of recent u s experience unfortunately it is impossible to distinguish between these competing models using only information on import prices and exchange rates for a single country in order to distinguish between the competing models an empirical analysis of goods prices and exchange rates must be capable of measuring either marginal cost or the markup over marginal cost either of these tasks poses formidable empirical problems much of the empirical literature in industrial organization has been concerned with precisely these issues since markups are an important measure of the competitiveness of industries

a divisible search model of fiat money this paper extends the kiyotaki wright search model of fiat money to allow for divisible money and goods the extension allows me to examine the standard issues in monetary economics such as the neutrality and superneutrality of money by severing the artificial link in the kiyotaki wright model between the money supply and the number of money holders it is shown that money is neutral but not superneutral money growth generates a trading opportunity effect it changes the fraction of different agents in the economy and hence changes the probability with which agents have a successful match in addition money growth has a negative effect on the real money balance that is familiar in walrasian monetary models the balance of the two effects can imply a positive optimal money growth rate

search bargaining money and prices the goal of this paper is to extend existing search theoretic models of fiat money which until now have assumed that the price level is exogenous by explicitly incorporating bilateral bargaining this allows us to determine the price level endogenously and leads to additional insights concerning the role of money for example we find that monetary equilibria are generally inefficient in the sense that output and prices differ from the solution to a social planner s problem although the difference can become small as the discount rate or search friction vanishes we also find that there exist nonstationary inflationary equilibria

currency exchange in a random search model this paper investigates foreign exchange trading a phenomenon that typically accompanies international trade a search theoretic general equilibrium approach is adopted to study a two country two currency model for some parameter values of the model there exist some pure strategy equilibria in which commodity currency trade is conducted primarily through local currency and in which there is active currency currency exchange the coexistence of valued foreign currency and its local non acceptability conforms largely with the country specific cash in advance constraint that is often assumed exogenously in international finance literature

global implications of self oriented national monetary rules author s obstfeld maurice rogoff kenneth abstract it is well known that if international linkages are relatively small the potential gains to international monetary policy coordination are typically quite limited but what if goods and financial markets are tightly linked is it then problematic if countries unilaterally design their institutions for monetary stabilization are the stabilization gains from having separate currencies largely squandered in the absence of effective international monetary coordination we argue that under plausible assumptions the answer is no unless risk aversion is very high lack of coordination in rule setting is a second order problem compared to the overall gains from monetary policy stabilization

the formation of price forecasts in experimental markets this study utilizes laboratory experimental methods to evaluate the empirical validity of 1 muthian rational expectations assumptions 2 an adaptive expectations model and 3 an extrapolative expectations model over 5 00 price forecasts from 146 participants in twelve experimental double auction m arkets with a cash reward structure are analyzed the forecasting objective is t hemean price over a sequence of trading periods governed by stationary market parameters the price forecasts are found to be inconsistent with strict muthian rational expectations and the extrapolative modelis not supported by the data however the forecasts generally support the adaptive expectations model copyright 1987 by ohio state university press

net migration endogenous incomes and the speed of adjustment to the north south differential the model of net migration is developed in the next section in section iii the model is used to estimate the net flow of heterogeneous labor over the 1965 to 1970 period between the northern and southern regions of the united states forty eight age education race specific categories of labor constitute the observation set the estimates of the net migration function are then used with the relationship developed in section iv to obtain a measure of the speed for each labor category at which the long run north south income disparity was being eliminated the estimates obtained indicate that migration systematically induced by interregional income differences does operate to close the income differential but that the process is quite slow for every demographic category considered excerpt

toward a theory of international currency we use the framework of random matching games and develop a two country model of the world economy in which two national currencies compete and may be circulated as media of exchange there are multiple equilibria which differ in the areas of circulation of the two currencies in one equilibrium the two national currencies are circulated only locally in another one currency is circulated as an international currency there is also an equilibrium in which both currencies are accepted internationally we also find an equilibrium in which the two currencies are directly exchanged we first characterize the existence conditions of these equilibria in terms of the relative country size and the degree of economic integration and then use an evolutionary approach to equilibrium selection to explain the evolution of the international currency as the two economies become more integrated some welfare implications are also discussed for example a country can improve its national welfare by letting its own currency circulate internationally provided the domestic circulation is controlled for when the total supply is fixed however a resulting currency shortage may reduce the national welfare

on the welfare benefits of an international currency abstract is it beneficial for a country s currency to be used internationally and if so can we quantify the benefit since the emergence of the euro there has been great interest in the consequences of a transfer of the dollar s premier international role to the euro this paper presents a novel model based approach towards assessing the welfare benefits associated with the international use of a country s currency apart from the familiar benefits associated with seigniorage residents of the issuing country experience an increase in the purchasing power of their currency both at home and abroad in the calibration exercise carried out in this paper we find the benefits of an international currency to be quantitatively significant the welfare gain for the euro area in having the euro internationally used ranges from 1 9 to 2 3 of consumption depending on relative inflation rates the rest of the world is not indifferent as to which currency circulates as the dominant international currency conditional on their currency not being used internationally their preference is for the dominant international currency to be the one with the lowest inflation rate

a fundamental theory of exchange rates and direct currency trades in this paper we construct a two country search model to determine the nominal exchange rate between two fiat monies our model allows agents to use any currency to trade for goods in all countries however search frictions restrict agents opportunities for instantaneous arbitrage and hence make the nominal exchange rate determinate the nominal exchange rate depends on the two countries economic fundamentals including the stocks and growth rates of the two monies direct exchanges between currencies are essential and they imply a nominal exchange rate that is different from the relative price between the two currencies in the goods markets there are persistent violations of the law of one price and purchasing power parity in equilibrium despite the fact that prices are perfectly flexible and all goods are tradeable between countries nominal and real exchange rates can move together in the steady state in response to money growth shocks

on the indeterminacy of equilibrium exchange rates in this paper we consider a particular international economic policy regime the laissez faire regime the distinguishing features of which are unrestricted portfolio choice and floating exchange rates and as we show this regime although favored by many economists is not economically feasible it does not have a determinate equilibrium that is an implication of an overlapping generations model more basically it is an implication of the notion that money is wanted only in order to accomplish trades

currency areas and monetary coordination we integrate a monetary search model into open economy macro to analyze the gains from coordinating on inflation search frictions and local congestion lead to a determinate exchange rate between two currencies relative prices deviate from the law of one price because the deviations depend on the cross country differential in money growth each country is tempted to inflate to exploit the deviations policy coordination reduces inflation and improves welfare for all countries in contrast to traditional models the gains from coordination continue to exist even after each country optimally sets a direct tax on the foreign use of the country s currency

nonfundamental uncertainty and exchange rates this paper shows that there can be equilibria in which exchange rates display randomness unrelated to fundamentals this is demonstrated in the context of a two currency one good model with three agent types and cash in advance constraints a crucial feature is that the type i agents for i 1 2 must satisfy a cash in advance constraint by holding currency i while type 3 agents can satisfy it by holding either currency it is shown that real allocations vary across the multiple equilibria if markets for hedging exchange risk do not exist and that the randomness is innocuous if complete markets exist

the birth and growth of toshiba s laptop and notebook computers a case study in japanese corporate venturing abstract this case study presents the under the table birth accelerated growth and ultimate success of two major technological and market innovations 1 the toshiba laptop computer a project vetoed twice by corporate headquarters and 2 the notebook computer a project hidden from headquarters because of the vision persistence and championing efforts of a team of passionate japanese corporate entrepreneurs a new business was created that is now part of toshiba s mainstream operations and that has become a significant contributor to the growth and profitability of the corporation we follow the evolution of this corporate venture from initial failures in 1978 to the success of the laptop computer first in europe 1985 then in the united states and finally in japan this was followed by the reincorporation of the venture in the corporate mainstream 1987 the worldwide success of the notebook computer 1989 and the continued growth of the business in parallel with repeated promotions of the entrepreneurs first a framework is presented for interpreting the case within current theories and practices of the management of innovation and the processes of championing innovative corporate ventures this framework is expanded to include recent studies on how major corporations have achieved worldwide leadership in high tech markets second using the analogy of human life from conception to adulthood the key phases events and entrepreneurial actions of toshiba s pc business are summarized in table 1 third the theoretical framework is applied to a discussion of the unusual aspects of this case fourth we analyze the business strategy and the technology strategy developed by toshiba finally we summarize the cultural and organizational context of toshiba as well as other critical factors that contributed to the enduring success of this corporate venture there are four aspects in addition to the international setting that make this case interesting for both scholars and practitioners 1 the under the table development of both the laptop and notebook 2 the unexpected success of the first product followed by a second success 3 the evolution of champi oning at various organizational levels and 4 the continuity of the strategic vision for toshiba s information systems business from 1978 to the present and how this vision was translated into specific business and technological strategies from the perspective of management of innovation the successes of both the laptop and the notebook computers were due to the back to the future market research and design process summarized in table 2 this process where market requirements drive the design process was developed by the lead entrepreneur tetsuya mizoguchi after repeated failures of the conventional process where the results of rd executive champion mizushima orchestrated the difficult transition of the venture into a corporate mainstream operation the evolution of the championing process is summarized in table 3 using the venkatamaran et al model 1992 we conclude that the most appropriate model for interpreting this case is a combination of the day and venkatamaran et al models which emphasizes both multiple championing roles and the transfer of the lead role from one champion to another during the corporate entrepreneurship process the business strategy and market and technological strategies developed by toshiba for achieving worldwide leadership in the portable pc market are summarized in figures 1 and 2 more broadly the process and critical factors that determined toshiba s success can be visualized according to figure 3 the corporate entrepreneurs and champions were driven away from mainframes by a vision of distributed and interconnected computing that compelled them to focus on personal computers this focus determined the winning business strategy fully compatible portable units which in turn determined the technological and market strategies miniaturization and complementarity to ibm at the same time this focus allowed the entrepreneurs to concentrate their scarce resources on the back to the future design process and develop unique core competencies this coupling of winning strategies with unique core competencies made possible toshiba s potential leadership in the marketplace actual leadership was achieved through continuous step by step learning by doing and through market feedback that further reinforced the adopted strategies and enhanced the core competencies six critical factors contributed to the long term success of the corporate venture 1 the venture had the potential to achieve worldwide leadership in a mainstream area of the corporation 2 the pc market in europe and the united states but not initially in japan was fragmented and highly receptive to unique innovations 3 the corporate entrepreneurs were driven by a long range vision of the business with focused strategies and well defined objectives 4 the entrepreneurs were persistent and undeterred by repeated failures in the marketplace and by the distrust and hostility of headquarters 5 the organizational context because of slack internal controls allowed the diversion of funds and manpower to the under the table venture and finally 6 the role of entrepreneurs evolved from underground innovators to product executive and corporate champions in order to reinforce broaden and implement their vision

international deviations from the law of one price the role of search frictions and market share this article examines the size and persistence of international deviations from the law of one price in an industry with search frictions cost differences lead foreign and domestic firms to price differently within countries when local firms are more common in each country there are large and persistent price differences across countries large and persistent changes in international relative costs lead to large and persistent changes in international relative prices dynamic considerations imply that the amount of a cost shock firms pass through to prices is u shaped in the market share of firms receiving the shock

learning about the unknown how fast do entrepreneurs adjust their beliefs this paper seeks to measure the extent to which entrepreneurs adjust their beliefs in the light of new information instead of relying on past experience to guide their decision making we build a model in which entrepreneurs continually receive valuable but noisy market signals about the true but unobserved productivity of their effort and use this information to update their expectations of unobserved productivity the model is estimated using a sample of over 700 self employed britons interviewed in 1999 and 2000 it is found that on average these individuals adjust their expectations of unobserved productivity in the light of new information by only 16 this suggests that while entrepreneurs do exploit new information they give much greater weight to their prior beliefs when forming their expectations also there are no significant differences in terms of expectation formation between males and females employers and non employers and experienced and less experienced entrepreneurs however younger entrepreneurs respond significantly more sensitively to new information than older entrepreneurs do with adjustment rates of 21 compared with 14 respectively we go on to discuss some policy implications of these findings and briefly discuss several features of entrepreneurship education programs that might help entrepreneurs improve this aspect of their business performance

entrepreneurial learning and the existence of credit markets abstract i explore the economic implications of learning by doing by borrower entrepreneurs who are initially imperfectly informed about their innate abilities it is shown how entrepreneurial learning worsens the adverse effects of moral hazard causing the possible disappearance of otherwise viable credit markets and thereby decreasing social welfare the reason is that learning reduces subjective uncertainty about risky future outcomes thus encouraging excessive risk taking behaviour

strategic experimentation understanding change and performance in new ventures abstract this research was motivated by an interest in understanding more about the extent to which entrepreneurs initiate changes along various dimensions of strategy the nature of those changes and their implications for firm performance our interest in this topic began with the observation that within the large body of strategic change literature the research effort has focused almost exclusively on large and established firms moreover a fundamental assumption underlying much of this work is that strategic change involves movement from one dominant strategic approach to another this premise does little to motivate or contribute to the understanding of change and strategy in new ventures where it is less likely that a dominant approach exists thus we drew upon the literature in managerial cognition to develop the idea of strategic experimentation as the conceptual foundation for studying change and strategy in new ventures our basic premise is that in new ventures changes along dimensions of strategy are reflective of a process of trial and error learning whereby the entrepreneur seeks to develop an understanding of the competitive situation and determine how to compete within that context further we suggest that some aspects of the firm s strategy are more likely to be the focus of experimentation than others building on these premises we developed a series of research hypotheses which propose that the greater the level of perceived environmental hostility the higher the level of strategic experimentation that will be undertaken we also propose that experimentation will always be greater along some dimensions of strategy than others and that the degree of environmental hostility will influence the extent to which there are performance benefits associated with strategic experimentation our hypotheses are tested using data from a three year study of over 400 young businesses overall we find support for our assertions for entrepreneurs and their advisors this study has several important implications first it suggests that strategic experimentation is a normal part of the process by which entrepreneurs seek to position their businesses although the present study does not empirically address the linkage between formal planning and experimentation the learning and cognition literature upon which the construct of strategic experimentation is based suggests that no matter how much attention to detail is involved in the preparation of the business plan the actual formation and development of the business will involve considerable adjustment to and or deviation from that plan this is because the process of new business development involves iterative changes in the way the entrepreneur positions his her firm as he she develops an understanding about what does and does not work the results of this study further suggest that some dimensions of the firm s strategy are more likely to change than others specifically it appears that peripheral changes competitive emphasis and time allocation are more likely to be the focus of such learning and adaptation efforts than core features product scope and partnership status this in part is because the former dimensions are easier to change than the latter moreover our results show that ventures in more hostile environments clearly face difficult dilemmas although poor performance may stimulate experimentation along various dimensions of strategy the complexity of learning within a hostile environment suggests that entrepreneurs will have a particularly difficult time determining the type of changes that will make a difference

the importance of focus to market entrants abstract one of the most difficult questions facing entrepreneurs is how broadly to serve a heterogeneous market that is whether it is better to serve a narrow segment of the market hoping to flourish by gaining a relatively high and increasing market share within that segment or whether it is better to attempt to appeal to a broader cross section of the market thereby allowing the firm to succeed with a lower market share among the customers whom it is targeting a narrower focus permits more concentrated use of fixed resources facilitates the building of customer loyalty and lowers the threat of retaliation from generalist incumbents but requires a much higher market share within the firms target market to succeed porter 1980 has identified three generic strategies available to firms low cost differentiation and focus by focus he means that the firm should develop the ability to serve a particular target customer group very well often at the expense of other potential customer groups implicit in the firm s choice to adopt a focus strategy is that it must address the question of how broadly to focus in terms of any given product attribute given its resources and opportunities a fundamental element of the firm s choice of focus is that it is affected by and in turn affects that of its rivals that is focus is a strategic variable in the sense of the word strategic meant by game theorists each firm s optimal choice of action depends on the actions taken by other firms the literature on the optimal degree of focus for new ventures has reached very mixed conclusions the early authors looking at the question were fairly consistent in their recommendation that a highly focused or niche strategy was generally most appropriate later authors recommended that new ventures should enter markets aggressively facing larger incumbents head on the latest studies develop what we describe as a contingency approach arguing that the best approach depends on industry conditions we think that this literature is now at a point where we can advance our understanding by looking at specific industries in some detail as our understanding expands broader empirical work is becoming increasingly difficult because of the number of factors that must be built into any cross sectional model of new venture performance we hope then to develop an understanding of one industry that is generally similar in nature to many other industries from this understanding conclusions of interest to both researchers and practitioners can be drawn future studies of other industries with different fundamental structures will provide similar benefits more specifically this paper is an empirical inquiry into the microbrewery segment of the u s brewing industry designed to investigate the relative merits of specialist firms different degrees of focus the question addressed is whether focus affects specialist firms short run performance in an industry where there are entrenched generalists as well as many new entrpreneurial specialist entrants the analysis confirms several widely held beliefs of industry participants and observers that microbreweries are far more likely to attempt to serve too broad a market segment than to focus too narrowly that microbreweries are in direct competition with imports and that microbreweries benefit from having many microbrewery rivals within the same state furthermore there appear to be some small learning and or reputation effects in the operation of microbreweries as well as a minor novelty factor that benefits recently opened establishments we must note however that the majority of the variation in the performance of microbreweries stems from differences in the management organization or market of individual breweries not captured explicitly by other variables included in the study this finding perhaps should not be surprising given the huge variation in the backgrounds skills and outlooks of microbrewery owners during the segment s early days the lessons learned from this research are of obvious importance to entrepreneurs in many industries it is a very common situation for an entrepreneur to enter a stable industry in which established firms are already in place serving a broad cross section of the market our findings show that in such circumstances a narrowly focused approach to the market is best we can think of numerous examples of where entrepreneurs have either succeeded by focussing on a particular segment of the market or failed by not doing so in fact there are many cases in which firms have done first one and then the other for example and people express airlines at first flourished by focussing on the needs of budget conscious leisure travellers and then collapsed in part because it began to try to serve business travelers and others who are less price sensitive on certain routes one of the hallmarks of an entrepreneurial business is that it suffers severe resource constraints because the entrepreneur s choice of breadth of focus will have profound effects on the resource requirements of the business it is clear that the choice of which segment or segments of the market on which to focus is a fundamental decision made by all entrepreneurs this paper serves to illustrate the importance of this focus decision and to provide some guidance for entrepreneurs concerning the appropriate degree of focus to adopt in entering an established market

founded in adversity operations based survival strategies of ventures founded during a recession abstract we examine the survival of 404 new ventures founded during the 2008 recession we find that industry explains a significant but small percentage of variance in survival 2 81 percent and therefore focus on which operations related actions could enhance ventures odds of survival we find marginally significant support for our hypotheses that a venture founded during a recession is more likely to survive if it increases its production efficiency increases both its production efficiency and variable costs or increases both its production efficiency and fixed costs in property plant and equipment our findings demonstrate that operational decisions are key determinants of survival for ventures founded during a recession

efficiency of experimental security markets with insider information an application of rational expectations models the study reports on the ability of competing models of market information integration and dissemination to explain the behavior of simple laboratory markets for a one priced security returns to the security depended upon a randomly drawn state of nature some agents insiders whose identity was unknown to other agents knew the state before the markets opened with replication of market conditions the predictions of a fully revealing rational expectations model are relatively accurate prices adjusted immediately to near rational expectations prices profits of insiders were virtually indistinguishable from non insiders and efficiency levels converged to near 100 percent

a unified framework for monetary theory and policy analysis search theoretic models of monetary exchange are based on explicit descriptions of the frictions that make money essential however tractable versions of these models typically make strong assumptions that render them ill suited for monetary policy analysis we propose a new framework based on explicit micro foundations within which macro policy can be studied the framework is analytically tractable and easily quantifiable we calibrate the model to standard observations and use it to measure the cost of inflation we find that going from 10 percent to 0 percent inflation is worth between 3 and 5 percent of consumption much higher than previous estimates

goods prices and exchange rates what have we learned import prices typically change by a smaller proportion than the exchange rate between the exporting and importing country recent research indicates that common currency relative prices for similar goods exported to different markets are highly correlated with exchange rates between those markets this evidence suggests that incomplete pass through is a consequence of third degree price discrimination while distance matters for market segmentation borders have independent effects the source of the border effect has not been clearly identified furthermore there is little evidence yet to suggest substantial market power is implied by the observed price discrimination

money and prices a model of search and bargaining abstract this paper makes commodities divisible and incorporates bargaining into the search theoretic model of money to determine the purchasing power of money or price it is shown that two monetary equilibria always coexist where fiat money is universally accepted the two equilibria differ in price output welfare and the velocity of money sunspot monetary equilibria exist in which money is universally accepted in all states of the economy multiplicity has novel implications on the effectiveness of currency substitution and exchange market intervention journal of economic literature classification numbers c78 e40

currency competition in a fundamental model of money abstract we study how two fiat monies one safe and one risky compete in a decentralized trading environment the currencies equilibrium values their transaction velocities and agents spending patterns are endogenously determined we derive conditions under which agents holding diversified currency portfolios spend the safe currency first and hold the risky one for later purchases we also examine when the reverse spending pattern is optimal traders generally favor dealing in the safe currency unless trade frictions and the currency risk is low as risk increases or trading becomes more difficult the transaction velocity and value of the safe money increases

the distribution of self employment income in the united kingdom 1976 1991 this paper examines the pattern of uk self employment income inequality between 1976 and 1991 and develops a simple model of the size distribution inequality measures are related to the parameters of this distribution whose economic determinants are explained it is found that the principal cause of rising self employment income inequality over this period was a substantial increase in the heterogeneity of the self employed themselves in contrast the increased numbers engaged in self employment over the period seems to have had no discernible effect on inequality via the parameters of the self employment income distribution

practice makes perfect entrepreneurial experience curves and venture performance abstract this study tackles the puzzle of why increasing entrepreneurial experience does not always lead to improved financial performance of new ventures we propose an alternate framework demonstrating how experience translates into expertise by arguing that the positive experience performance relationship only appears to expert entrepreneurs while novice entrepreneurs may actually perform increasingly worse because of their inability to generalize their experiential knowledge accurately into new ventures these negative performance implications can be alleviated if the level of contextual similarity between prior and current ventures is high using matched employee employer data of an entire population of swedish founder managers between 1990 and 2007 we find a non linear relationship between entrepreneurial experience and financial performance consistent with our framework moreover the level of industry geographic and temporal similarities between prior and current ventures positively moderates this relationship our work provides both theoretical and practical implications for entrepreneurial experience people can learn entrepreneurship and pursue it with greater success as long as they have multiple opportunities to gain experience overcome barriers to learning and build an entrepreneurial experience curve

common currencies vs monetary independence we study the optimal monetary policy in a two country open economy model under two monetary arrangements a multiple currencies controlled by independent policy makers b common currencies with a centralized policy maker our findings suggest that i monetary policy competition leads to higher long term inflation and interest rates with large welfare losses ii the inflation bias and the consequent losses are larger when countries are unable to commit to future policies iii the welfare losses from higher long term inflation dominates the welfare costs of losing the ability to react optimally to shocks

labor supply of new york city cabdrivers one day at a time life cycle models of labor supply predict a positive relationship between hours supplied and transitory changes in wages because such changes have virtually no effect on life cycle wealth previous attempts to test this hypothesis empirically with time series data have not been supportive estimated elasticities are typically negative or nonsignificant such analyses however are vulnerable to measurement error and other estimation problems we use data on daily observations of wages and hours for new york city cab drivers to estimate the supply response to transitory fluctuations in wages cab drivers decide daily how many hours to supply and face wages that are positively correlated within days but largely uncorrelated between days using these data our central finding is that wage elasticities are persistently negative from 5 to 1 in three different samples even after correcting for measurement error using instrumental variables these negative wage elasticities challenge the notion that cab drivers trade off labor and leisure at different points in time and question the empirical adequacy of life cycle formulations of labor supply

open economy macroeconomics developments in theory and policy this paper views developments in open economy macroeconomics through the lens of the debate over european monetary unification the empirical tendency for nominal exchange rate regimes to affect the variability of nominal and real exchange rates alike can be rationalized by sticky price theories or models of asset market liquidity effects but plausible liquidity models have difficulty generating enough persistence to match the data thus the macroeconomic stabilization costs of forgoing the exchange rate realignment option seem pertinent it is argued that our theories of efficiencies due to a common currency remain unsatisfactory despite recent advances the paper concludes by reviewing theories of currency crisis