involuntary unemployment and implicit contracts this paper provides an explanation of involuntary umemployment arising as a consequence of asymmetric information between firms and workers involuntary unemployment is defined as a situation where ex post gains to trade exist a model of labor contracts is developed where the allocations are not ex post optimal it is shown that inferiority of leisure is a necessary and sufficient condition for the existence of involuntary unemployment

substitute goods auctions and equilibrium this paper identifies two notions of substitutes for auction and equilibrium analysis weak substitutes the usual price theory notion guarantees monotonicity of t tonnement processes and convergence of clock auctions to a pseudo equilibrium but only strong substitutes which treats each unit traded as a distinct good with its own price guarantees that every pseudo equilibrium is a walrasian equilibrium that the vickrey outcome is in the core and that the law of aggregate demand is satisfied when goods are divisible weak substitutes along with concavity guarantees all of the above properties except for the law of aggregate demand

involuntary unemployment in economies with efficient risk sharing abstract we study economies where employment lotteries determine random layoffs and incomes for employed and unemployed agents allocate risk efficiently we ask for which specifications are unemployed agents worse off a situation we call involuntary unemployment we show unemployed agents are worse off iff an exogenous increase in wealth decreases aggregate unemployment in a monetary economy we show that in equilibrium the unemployed are worse off iff high inflation implies high unemployment our model also generates nominal wage stickiness as an equilibrium phenomenon but neither involuntary unemployment nor nominal stickiness implies these economies are operating inefficiently or are out of equilibrium

wage employment contracts this paper studies the efficient agreements about the dependence of workers earnings on employment when the employment level is controlled by firms the firms superior information about profitability conditions is responsible for this form of contract governance under plausible assumptions such agreements will cause employment to diverge from efficiency as a byproduct of their attempt to mitigate risk it is shown that if leisure is a normal good and firms are risk neutral employment is always above the efficient level such a one period implicit contracting model cannot therefore be used to explain unemployment as a rational byproduct of risk sharing between workers and a risk neutral firm under conditions of asymmetric information

walrasian equilibrium with gross substitutes in this paper we study the problem of efficient production and allocation of indivisible objects among a set of consumers we assume that the agents preferences depend on the bundle of objects and the quantity of money they consume furthermore we assume that preferences are quasilinear in money and that agents have a large endowment of money with indivisibilities it is well known that many familiar properties of the utility functions fail to ensure existence in their striking analysis of the matching problem kelso and crawford 5 introduce the gross substitutes gs condition which ensures the non emptiness of the core we propose two new conditions and show that with quasilinearity they are equivalent article id jeth 1999 2531 available online at http www idealibrary com on

back to fundamentals equilibrium in abstract economies we propose a new abstract definition of equilibrium in the spirit of competitive equilibrium a profile of alternatives and a public ordering expressing prestige price or a social norm such that each agent prefers his assigned alternative to all lower ranked ones the equilibrium operates in an abstract setting built upon a concept of convexity borrowed from convex geometry we apply the concept to a variety of convex economies and relate it to pareto optimality the magic of linear equilibrium prices is put into perspective by establishing an analogy between linear functions in the standard convexity and primitive orderings in the abstract convexity jel c90 d11 in this paper we return to the fundamental concept of competitive equilibrium and extend the notion to a more abstract setting the extension is based on the idea that competitive equilibrium is a method of creating harmony in an interactive situation with a feasibility restriction and self interested agents it is built around a public ordering of the alternatives which either limits the choices available to the agents or systematically influences their preferences in the standard economic setting this ordering is given by prices that apply equally to all agents these prices determine consumers choice sets and producers preferences we propose an analogous solution concept adjusted to fit more abstract situations in which valuation using prices is replaced by valuation according to a public ordering the road to the construction of the equilibrium concept starts with a discussion of the notion of convexity in the euclidean setting the algebraic notion of convexity is central to the standard analysis of competitive equilibrium since we primarily consider settings that lack an algebraic structure we employ a more abstract form of convexity definitions of convexity involve the primitive phrase b is between the elements a 1 a l in an euclidean space this means that b is an algebraic con vex combination of a 1 a l however the phrase also has a common use in daily conversation for example one can say that game theory is between mathematics and economics and that canada is culturally between the united states the united kingdom and france to accommodate this the first step will be to borrow a formal

optimal labour contracts when workers have a variety of privately observed reservation wages if a firm does not know the individual ex post outside opportunities of its contracted workforce then it can use hours wages and redundancy payments to screen them will a second best contract have underemployment inefficiency or overemployment and with a stochastic contract are those workers randomly selected for layoff worse off than their retained colleagues involuntary layoff or vice versa involuntary retention the answers depend on the nature of the workers preferences two polar cases are looked at corresponding to permanent and temporary layoff the former is characterized by overemployment and involuntary retention the latter by underemployment and involuntary layoff also examined are simple contracts where all retained workers are paid a common wage and all laid off workers receive a common redundancy payment handling asymmetric information in stochastic contracts has led to two technical innovations first a number of results are proved even though all the truth telling constraints are explicitly included second a new regularity condition is found under which the local constraints are sufficient to ensure global incentive compatibility at an optimum

implicit contracts moral hazard and unemployment this paper considers a firm whose marginal revenue product of labor is a random variable we derive the form of an optimal long term contract between workers and the firm under the assumption that labor s marginal product is observed by the firm but not by the workers we show that the existence of asymmetric information causes unemployment to be greater than in a situation where information about labor s marginal product is public or where employment is determined in spot markets in particular unemployment can occur when the marginal product of labor exceeds the reservation wage

political bias and war we examine the incentives for countries to go to war as they depend on the comparison between how much their pivotal decision makers have at risk and how much they stand to gain from a war how this ratio compares to the country at large is what we term political bias if there is no political bias then there are always payments that one country would like to make to the other that will avoid a war in the presence of commitment or enforceability of peace treaties if there is a bias on the part of one or both countries then war can result and in some cases cannot be prevented by any transfer payments we examine how war technology and relative wealth levels interact with political bias in determining whether countries make transfers go to war and form alliances our results shed some new light on the uneven contender paradox and the interpretation of the democratic peace

the principal agent relationship with an informed principal ii common values in many circumstances a principal may have relevant private information when she proposes a contract to an agent we analyze such a principal agent relationship as a noncooperative game the principal proposes a contract which is accepted or rejected by the agent who for most of our analysis has no private information the contract is executed if accepted otherwise the reservation allocation takes effect this allocation may be determined by a pre existing contract which the principal by her proposal is attempting to renegotiate or it may simply be the no trade point in this paper we assume that the principal s information directly affects the agent s payoff before solving the game we discuss pareto efficiency with asymmetric information we define an incentive compatible allocation to be weakly interim efficient wie if there exists no alternative incentive compatible allocation that both parties prefer for all possible beliefs that the agent might have about the principal s private information type we show that any wie allocation is interim efficient ie for some beliefs the rothschild stiglitz wilson rsw allocation relative to the reservation allocation l is the allocation that maximizes the payoff of each type of principal within the class of incentive compatible allocations that guarantee the agent at least the utility he gets from a irrespective of his beliefs about the principal s type the equilibrium set of the contract proposal game consists of the allocations that weakly pareto dominate the rsw allocation thus there is a unique equilibrium outcome if and only if the latter is ie and the equilibrium outcome is the rsw allocation itself after characterizing the equilibrium allocations we study those that are renegotiation proof when either the principal or the agent leads the renegotiation we then compare our contract proposal game which is a signaling model with its screening counterpart we conclude by extending our results to the case in which the agent as well as the principal has private information under the assumption of quasi linear preferences

stock market returns and inflation evidence from other countries this paper investigates the relation between common stock returns and inflation in twenty six countries for the postwar period our results do not support the fisher hypothesis which states that real rates of return on common stocks and expected inflation rates are independent and that nominal stock returns vary in one to one correspondence with expected inflation there is a consistent lack of positive relation between stock returns and inflation in most of the countries

housing markets with indivisibilities abstract a model of a rental housing market in which houses are treated as indivisible commodities is presented a recursive equation that determines a competitive equilibrium is provided and it is argued that this competitive equilibrium is representative of the set of all competitive equilibria using this representative equilibrium several propositions on comparative statics are considered that have to do with how the competitive rents change when certain parameters of the model change

substitutes and stability for matching with contracts we consider the matching problem with contracts of hatfield and milgrom 2005 and we introduce new concepts of bilateral and unilateral substitutes we show that bilateral substitutes is a sucient condition for the existence of a stable allocation in this framework however the set of stable allocations does not form a lattice under this condition and there does not necessarily exist a doctor optimal stable allocation under a slightly stronger condition unilateral substitutes the set of stable allocations still does not necessarily form a lattice with respect to doctors preferences but there does exist a doctor optimal stable allocation and other key results such as incentive compatibility and the rural hospitals theorem are recovered

competitive equilibrium with indivisibilities abstract this paper studies an exchange economy with a finite number of agents in which each agents is initially endowed with a finite number of personalized indivisible commodities we observe that the equivalence theorem of the core and the competitive equilibrium may not hold for this economy when the coalitional form game is generated in the standard manner we provide an alternative definition of the coalitional form game to resolve this problem so that the balancedness of the new defined game provides a useful necessary and sufficient condition for the existence of competitive equilibrium for the original economy journal of economic literature classification numbers c71 d41 d51

unexpected inflation and stock returns revisited evidence from israel this paper examines the effects of unexpected inflation on stock prices using israeli data that provide a direct market based measure of unexpected inflation the price reaction of cpi linked bonds following the cpi announcement the results show that stock prices have a strong negative relationship with unexpected inflation the israeli setting rules out a number of hypotheses advanced in the united states to explain this relationship such as nominal contracting inflationary taxation wealth transfer and money illusion this suggests that the negative effect of unexpected inflation is due to its negative association with real activity and its real economic cost copyright 1996 by ohio state university press

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

a stochastic monopsony theory of the business cycle two distinct regimes contractions and expansions are generated in a model in which goods markets clear and all individuals are optimizing strict wage and price takers have fully rational expectations and are heterogeneous in both preferences and resource endowments involuntary unemployment asymmetric monetary policy effectiveness and a changing relationship between real wages and employment over the business cycle are the result of optimizing behavior by monopsonistic wage setting and price taking firms faced with price uncertainty an upward sloped supply of employees and efficiency wage behavior disequilibrium and involuntary unemployment can occur at the level of the individual firm s labor market jel e32 e52 j41 j42 i introduction for many economists three stylized facts are central to any plausible theory of the business cycle 1 friedman and schwartz 1963 and romer and romer 1994 concluded that monetary shocks have output employment and unemployment effects at least some of the time and such effects are asymmetric with respect to the state of the economy 2 unemployment is subject to fluctuations associated with recessions and expansions and in some recessions has been very high 1 3 the relationship between real wages and employment appears to be time period sensitive as reported by abraham and haltiwanger 1995 although first proposed by keynes modern economists such as benassy 2002 argue that at least some unemployment is best characterized as involuntary and indicates a state of disequilibrium in this article we consider a plausible alternative to disequilibrium explanations of these elements of the business cycle based on goods market imperfections such as those by benassy 2002 and dixon and rankin 1995 who considered monopoly power by firms in the goods market and benassy 1995 who assumed monopoly power by unions in the labor market we assume that the goods market is characterized by competitive market clearing but firms have some monopsony power as reflected in an upward sloped or bounded supply of labor to the firm and the ability to set the optimal wage before knowing the price they will receive for their output which is assumed to be stochastic and making their employment decision these modifications are embedded in an otherwise conventional general equilibrium model in which all agents firms and consumers workers capitalists are fully optimizing and form totally rational expectations and labor may exhibit efficiency wage behavior 2 this is not a representative agent model and cannot be reduced to such individuals are heterogeneous in both their endowments and preferences firms may be heterogeneous with respect to their production technology and the interests of firm owners are distinct from those of their employees the latter is essential to generate the changing regimes that produce predictions that correspond to the stylized facts monetary shocks affect output prices employment and unemployment in an asymmetrical manner consistent with the traditional business cycle the key to understanding these effects is the labor market if the expected quantity of money is generated then the competitive market clearing real wage will result lower than expected quantities of money generate a deficiency of aggregate demand lower than expected output prices and real wages above the competitive wage real wages above the competitive wage are associated with excess supply of labor and involuntary unemployment independent of that associated with efficiency wage behavior this contractionary regime will persist as long as the low quantities of money persist even though all agents have fully rational expectations are optimizing and the goods market clears in this regime increases in the quantity of money increase prices employment and output and employment varies negatively with the real wage efficiency wage behavior may decrease effort as the real wage rate is decreased

the lifeboat problem abstract we study an all pay contest with multiple identical prizes lifeboat seats prizes are partitioned into subsets of prizes lifeboats players play a two stage game first each player chooses an element of the partition a lifeboat then each player competes for a prize in the subset chosen a seat we characterize and compare the subgame perfect equilibria in which all players employ pure strategies or all players play identical mixed strategies in the first stage the partitioning of prizes can lead to coordination failure when players employ nondegenerate mixed strategies in these equilibria some rents are sheltered and rent dissipation is reduced

a double track adjustment process for discrete markets with substitutes and complements we propose a new walrasian tatonnement process called a double track procedure for efficiently allocating multiple heterogeneous indivisible items in two distinct sets to many buyers who view items in the same set as substitutes but items across the two sets as complements in each round of the process a walrasian auctioneer first announces the current prices for all items buyers respond by reporting their demands at these prices and then the auctioneer adjusts simultaneously the prices of items in one set upward but those of items in the other set downward it is shown that this procedure converges globally to a walrasian equilibrium in finitely many rounds

coordination failure multiple equilibria and economic institutions models of coordination failure have equilibria that are not first best because of externalities usually these models display multiple equilibria we provide an example of how the existence of some economic institutions and government policies can be explained as mechanisms for internalizing externalities and selecting the best equilibrium in these settings the example we analyse is that of nominal wage and debt contracts nominal contracts can improve on the underinvestment equilibrium by implementing pareto improving transfers between agents if there are multiple underinvestment equilibria then monetary policy can have real effects because the monetary authority can choose a money supply rule to coordinate beliefs and thereby select the best equilibrium

introduction a symposium on the predatory state economists have adopted two broad perspectives on the state contractual i e provider of public goods and services and predatory coercive and extractive by a predatory state we mean a state that promotes the private interests of dominant groups within the state such as politicians the army and bureaucrats or influential private groups with strong lobbying powers neo institutional economists support an extended version of the contractual perspective in which the state is not simply a benevolent dictator but may itself be composed of predators however it considers predation as only a means to promote protection by contrast a predatory vision of the state argues that while protection and predation are two faces of the same coin a predatory state protects only to promote its predation on the private sector this symposium explores how a predatory approach to the state can shed light on all types of state from liberal democratic to authoritarian and failed ones both in the past and present

the macroeconomics of the great depression a comparative approach recently research on the causes of the great depression has shifted from a heavy emphasis on events in the united states to a broader more comparative approach that examines the interwar experiences of many countries simultaneously in this lecture i survey the current state of our knowledge about the depression from a comparative perspective on the aggregate demand side of the economy comparative analysis has greatly strengthened the empirical case for monetary shocks as a major driving force of the depression an interesting possibility suggested by this analysis is that the worldwide monetary collapse that began in 1931 may be interpreted as a jump from one nash equilibrium to another on the aggregate supply side comparative empirical studies provide support for both induced financial crisis and sticky nominal wages as mechanisms by which nominal shocks had real effects still unresolved is why nominal wages did not adjust more quickly in the face of mass unemployment this abstract was borrowed from another version of this item

stability in a network economy the role of institutions abstract we consider an economy in which agents are embedded in a network of potential value generating relationships agents are assumed to be able to participate in three types of economic interactions autarkic self provision bilateral interaction and multilateral collaboration through endogenously provided platforms we introduce two stability concepts and provide sufficient and necessary conditions on the network structure that guarantee existence in cases of the absence of externalities link based externalities and crowding externalities we show that institutional arrangements based on socioeconomic roles and leadership guarantee stability in particular the stability of more complex economic outcomes requires more strict and complex institutional rules to govern economic interactions we investigate strict social hierarchies tiered leadership structures and global market places

predetermined wages and prices and the impact of expansionary government policy this paper characterizes the monetary equilibria of an economy with commodity and labour contracts if government policy is not too variable there may exist an equilibrium with predetermined wages and prices in this equilibrium observed changes in the money supply to finance government purchases have persistent real effects the paper also provides theoretical support for an inverse relationship between the degree of indexation in contracts and the persistence of policy effects

the choice of techniques and the optimality of market equilibrium with rational expectations this paper shows that in the absence of a complete set of risk markets prices provide incorrect signals for guiding production decisions even if all individuals have rational expectations concerning the distribution of prices which will prevail on the market next period the market allocation is in general not a constrained pareto optimum essentially the only conditions under which for all technologies the market equilibrium is a constrained pareto optimum are those in which risk markets are redundant we derive the necessary and sufficient conditions for redundancy of risk markets which turn out to be extremely restrictive

the changing responsiveness of wages to price level shocks explicit and implicit indexation the article provides evidence for the u s over the period 1961 84 that the responsiveness of nonunion wages to price level shocks changes through time much as the degree of indexation in union contracts does suggesting that there exists implicit as well as explicit indexation when coupled with the result from previous research that indexation responds positively to inflation uncertainty the findings indicate that greater inflation uncertainty may lead to reduced overall wage rigidity in the context of a rational expectations model with long term wage contracts a decline in the effectiveness of an activist monetary policy could result

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

competitive price adjustment to changes in the money supply in a competitive environment in which ex ante identical sellers set prices the market price cannot always be based on updated information since otherwise there will be no incentive to gather information about changes in demand this result is applied to the case in which changes in the money supply are the only source of uncertainty it is shown that if the possible changes in the money supply are not large the economy will exhibit a positive relationship between money and output but no involuntary unemployment if the possible changes in the money supply are large the economy will exhibit a positive relationship between money and employment allowing for involuntary unemployment

stability and competitive equilibrium in trading networks we introduce a model in which agents in a network can trade via bilateral contracts we find that when continuous transfers are allowed and utilities are quasi linear the full substitutability of preferences is sufficient to guarantee the existence of stable outcomes for any underlying network structure furthermore the set of stable outcomes is essentially equivalent to the set of competitive equilibria and all stable outcomes are in the core and are efficient by contrast for any domain of preferences strictly larger than that of full substitutability the existence of stable outcomes and competitive equilibria cannot be guaranteed

economics and the biologists a review of geerat j vermeij s nature an economic history this essay reviews and criticizes vermeij s nature an economic history and places it in the context of evolutionary economics vermeij presents a natural history written in what he considers economic terms and argues that biologists should know more about economics while the exchanges between economics and biology can sometimes be hazardous and misleading quite a bit could be learned by economists from reading this book

impacts of foreign policies on the gains from research and promotion abstract this paper compares the direct and indirect effects of rest of the world row policy on welfare in country a the direct effect due to the change in world price caused by the policy in the absence of research promotion induced shifts in supply demand and the additional or indirect effect of the policy on the welfare gain to country a from its investment in research and promotion the results showed that the reduction in aggregate economic benefits from research promotion due to a world price reducing policy in row could be in the range of 25 50 of the direct reduction in social welfare due to the row policy in the case of australian beef veal it is possible for the welfare impact of the row policy via research payoff in country a to exceed the direct welfare cost

a neoclassical model of the phillips curve relation this paper integrates the modern theory of unemployment with a limited participation model of money and asks whether such a framework can produce correlations like those associated with the phillips curve as well as realistic labor market dynamics the model incorporates both monetary and real shocks the response of the economy to monetary policy shocks is consistent with recent evidence about the impact of these shocks on the economy

output work hours and employment in the short run of a labour managed firm in its pure form the organisation of a labour managed firm lmf differs radically from that of a profit maximising firm pmf lmfs are found not only in yugoslavia many forms of producers cooperatives and employee owned firms appear in capitalist economies e g jones and svejnar i982 the theory of the lmf is also relevant to the economics of trade unions profit sharing codetermination and internal labour markets this is because where worker participation exists elements of the economic forces prevalent in an lmf can influence management policies on wages employment and investment it follows that by studying the lmf in relation to the pmf we may be better able to grasp the workings of more realistic firm organisations in which both labour and management vie over the division of firm specific rents from this perspective on the theory of the firm we examine the short run behaviour of the competitive lmf and in particular the tendency for output supply employment demand and work hours to differ from the neoclassical norm traditionally the short run analysis of the lmf has focused on its employment response to output price changes the theorem due to ward i958 and vanek i970 holds that an increase in output price causes paradoxically a reduction in employment and output if the lmf maximises per capita remuneration more recent work in which the lmf maximises the member s expected utility over layoff probabilities and remuneration demonstrates that the lmf s response to a higher output price is essentially to increase both output and employment e g steinherr and thisse i979 bonin i98i and miyazaki and neary i983a the key to this result is that these authors distinguish actual workforce which is variable in the short run from lmf membership size which is variable in the long run but fixed in the short run the precise features of this lmf short run behaviour also depend on the nature of the lmf s bankruptcy constraint which is largely determined by the lmf s access to capital markets in this line of analysis however authors have effectively assumed that work hours are institutionally fixed but variability in work hours or effort intensity can also be an important factor in the lmf s response to output price changes because a change in the lmf s output price immediately affects the member worker s per capita some of the basic results of this paper were originally reported in sections 7 8 of our july 1979 mimeographed paper which was read at the second international conference on the economics of worker s self management istanbul june i980 and also in seminars at berkeley british columbia bell labs cornell hitotsubashi kyoto osaka tokyo and toronto in i979 i980 we thank j bonin and the participants of the above conference and seminars for comments on earlier versions in writing the present version we especially benefited from the comments of anonymous referees p evans and t macurdy we are responsible for any remaining errors omissions and ambiguities a detailed computational appendix for our theorems and examples is available on request

employment with asymmetric information in an economy without informational and other distortions entrepreneurs and workers can write labor contracts that support a pareto optimal allocation of resources this paper is an attempt to characterize contracts when enterpreneurs are better informed about the state of nature than are their workers asymmetric information generally results in a suboptimal allocation of both risk and worker effort in particular if consumption and leisure are perfect substitutes employment will be less than fully pareto optimal in all but the most favorable states of nature

implicit contracts with asymmetric information and bankruptcy the effect of interest rates on layoffs this paper develops a model in which a firm writes labour contracts with workers and debt contracts with creditors firms have more information than do the owners of the factors of production and they are also subject to limited liability we show that if the limited liability constraint is binding then the employment level is inefficient relative to a situation of symmetric information the firm is then embedded into a partial equilibrium model in which the real rate of interest is exogenously determined we show that increases in the real rate of interest increase the inefficiency of the optimal employment contract and lead to layoffs in more states of nature than would occur at lower real interest rates recent literature in the area of implicit contracts has shown considerable interest in the assumption of asymmetric information henceforth a i papers by azariadis 1982 green and kahn 1982 and grossman and hart 1981 have all shown that a i will interfere with optimal risk sharing but although these models produce non walrasian outcomes it is not clear that they are capable of explaining the observed variations in employment over the business cycle in the absence of a link between the level of employment and other macroeconomic variables these new versions of contract theory are open to the charge that they are presenting a complicated explanation of frictional unemployment one potential link between variations in output and variations in intertemporal prices is suggested by models which explicitly allow for the possibility of bankruptcy sappington 1983 has shown that bankruptcy will generate inefficient outcomes even between risk neutral agents and farmer 1984 has shown that if sappington type contracts are incorporated into a macroeconomic structure then the resulting model predicts that bankruptcies will vary countercyclically over the business cycle although bankruptcy is important however it is unlikely that bankruptcies alone will account for all of the output loss during a recession the purpose of this paper is to show that the assumptions of a i and limited liability will generate a model in which the employment level is inefficient and in which the magnitude of this inefficiency varies systematically with the expected real rate of interest this model predicts that the observed increase in the incidence of layoffs during recessions is directly attributable to the effects of high interest rates on aggregate supply some evidence of the phenomenon to be explained is presented below

labor contracts and the role of monetary policy in an overlapping generations model abstract this paper characterizes labor contracts in a dynamic economy subject to both real and nominal shocks in this environment we compare alternative means of trading labor services spot markets fixed nominal wage contracts and price contingent contracts the welfare ordering of these market structures is shown to depend on the relative variability of the real and nominal shocks and the costs of contingent contracts the paper also investigates the role of monetary policy and the neutrality of feedback rules finally we demonstrate that the optimal policy is nonstochastic

slavery and other property rights the institution of slavery is found mostly at intermediate stages of agricultural development and less often among hunter gatherers and advanced agrarian societies we explain this pattern in a growth model with land and labor as inputs in production and an endogenously determined property rights institution the economy endogenously transits from an egalitarian state with equal property rights to a despotic slave society where the elite own both people and land thereafter it endogenously transits into a free labor society where the elite own the land but people are free

the permissible and the forbidden abstract in many economic situations neither prices nor authority rules rather individual behavior is governed by social norms that specify what is allowed socially acceptable and what is forbidden socially unacceptable these norms can emerge in a decentralized way and can serve as a method to bring order to economic situations the key component of our solution concept is a uniform permissible set which plays a role parallel to that of a price system in competitive equilibrium the concept is analyzed and applied to a variety of economic and social settings

contracts versus salaries in matching workers and firms may bargain over general multidimensional contracts they may negotiate over health benefits housing retirement plans etc substitutes on the other hand is the assumption commonly placed on firms preferences to guarantee the existence of stable matchings of workers and firms in this paper i show that when firms regard contracts as substitutes bargaining over contracts can be embedded into a model of bargaining over wages the economics of the embedding is straightforward except for a small twist when a firm and a worker negotiate over a contract they may bargain over many dimensions however the pareto frontier of contracts is in a sense one dimensional what is better for the worker is worse for the firm so pareto optimal contracts may be viewed as salaries with the better contracts for the firm meaning lower salaries and the better contracts for the worker meaning higher salaries the twist is that a firm s ranking over contracts might be affected by the firm s other hires for example health plan a may be better than b for a firm if it has many employees but b beats a if it has few when contracts are substitutes it turns out that the ranking is not affected in this way hatfield and milgrom 2005 present a model of two sided worker firm matching with contracts a firm will hire a collection of workers and will negotiate a contract with each one of them the model is a generalization of kelso and crawford 1982 where each firm and each worker negotiate a wage 1 kelso and crawford show that when firms demands satisfy gross substitutes the core of the matching market is nonempty hatfield and milgrom show that when the firms preferences over contracts satisfy their notion of substitutes the core of the market is nonempty i show that hatfield and milgrom s model can be embedded into the model of kelso and crawford hatfield and milgrom s assumption of substitutability enables an embedding where firms demands for workers satisfy kelso and crawford s notion of gross substitutes as a result the nonemptiness of the core follows from the argument in kelso and crawford and their salary adjustment algorithm finds a stable matching of workers to firms and a vector of supporting salaries hatfield and milgrom s paper is an elegant analysis of two sided matching it simplifies matching models and makes their relationship to auction models more transpar ent their paper contributes much more than showing the nonemptiness of the core when firms and workers can sign general contracts and my result does not diminish

imperfect information and wage inertia in the business cycle nominal wages have less variation about a trend than the money supply does and the variation is more persistent this inertia in the nominal wage is often cited as the principal source of stagflation this paper explains the phenomenon by appealing to temporary wage inflexibility in an environment where agents cannot directly disentangle permanent versus transitory movements in key state variables a wage equation results that is a distributed lag of previous values of the state variables including money nominal wage variation becomes less sensitive to the money supply as agents ability to detect the permanent evolution of the money supply declines

labor management bargaining contract curves and slutsky equations consider a firm in which labor and management bargain over division of the firm s organizational rent and negotiate the firm s policy i emphasize the relationship between the bargainer s contract curve and the firm s slutsky equations i can describe a bargaining firm as a hybrid of a neoclassical profit maximizing firm and a pure labor managed firm i apply the methodology to models of employment contracts and identify three separate circumstances in which labor s bargaining power affects the firm s comparative static behavior first there is inefficiency in contractual bargaining second income effects in the worker s utility function interact with the firm s capital cost burden third labor s interest in long term utility maximization need not coincide with management s interest in profit maximization this last case arises from the incompleteness of the market for property rights in the firm

pareto optima and competitive equilibria with adverse selection and moral hazard this paper explores the extent to which standard general equilibrium analysis of pareto optima and of competitive equilibria can be applied to environments with moral hazard and adverse selection problems allowing for lotteries contracts with random components we first establish that an adverse selection insurance economy a moral hazard insurance economy a signaling economy and a private information labor market economy are all special cases of a simple general structure we then show that techniques for characterizing pareto optimal contracts as solutions to concave programming problems are useful and nice and appear to be broadly applicable allowing for lotteries we show how to characterize the optimal allocations for the adverse selection insurance and labor market economies we then show that standard existence and optimality theorems for competitive equilibria apply in the linear space containing lotteries if agents with characteristics which are distinct and privately observed at the time of initial trading enter the economy wide resource constraints in a homogeneous way other kinds of diversity are not critical for economies with moral hazard which satisfy the homogeneity condition competitive contract markets single out a subset of the optima and thus can be consistent with apparent unemployment and with a random allocation of labor supplied though all households are averse to risk the adverse selection insurance and signaling economies however do not satisfy the homogeneity condition and are difficult to decentralize efficiently with a price system

strong tiebout equilibrium under restricted preferences domain abstract we investigate the existence and give a partial characterization of a strong tiebout equilibrium which consists of an endogenously formed partition of the individuals into disjoint jurisdictions with each jurisdiction producing and financing its own public goods and moreover there exists no group of individuals who can all benefit by establishing their own community in particular no single individual finds it desirable to migrate from his equilibrium jurisdiction the existence proof makes use of the notion of consecutive games which we introduce and show that for such games there always exists a partition with a nonempty core

research payoffs from quality improvement the case of protein in australian wheat a model is developed for evaluating the size and distribution of the economic benefits from research that improves the quality of an export commodity quality improvement achieved by research or by agronomic practices shifts the domestic and or excess demand curves for an export commodity research costs are not modeled but any shift in the supply curve due to a change in yield for example accompanying the quality improvement is included the model is used to estimate the gains from research that increases protein content in australian wheat it is estimated that australia has the potential to obtain net benefits up to a 53 million per year from a one percentage point increase in the protein content in wheat over 90 of these gains accrue to wheat producers

matching with contracts we develop a model of matching with contracts which incorporates as special cases the college admissions problem the kelso crawford labor market matching model and ascending package auctions we introduce a new law of aggregate demand for the case of discrete heterogeneous workers and show that when workers are substitutes this law is satisfied by profit maximizing firms when workers are substitutes and the law is satisfied truthful reporting is a dominant strategy for workers in a worker offering auction matching algorithm we also parameterize a large class of preferences satisfying the two conditions

the adjustment of prices to monetary shocks when trade is uncertain and sequential trade is both uncertain and sequential money surprises are not neutral because prices at the beginning of the trading process cannot depend on its end in contrast with fixed price models in this paper sellers can change prices during trade in contrast with lucas s article here there is no asymmetry in the information about the money supply the price quoted by individual sellers may adjust slowly to changes in the targeted money supply but the distribution of quoted prices adjusts perfectly to these changes and the real price distribution is independent of the anticipated rate of change in the money supply

balance of power and the propensity of conflict we study the role of an imbalance in fighting strengths when players bargain in the shadow of conflict our experimental results suggest in a simple bargaining game with an exogenous mediation proposal the likelihood of conflict is independent of the balance of power if bargaining involves endogenous demand choices however the likelihood of conflict is higher if power is more imbalanced even though endogenous bargaining outcomes reflect the players unequal fighting strengths strategic uncertainty causes outcomes to be most efficient when power is balanced in turn the importance of exogenous mediation proposals depends on the balance of power

competitive equilibrium in an exchange economy with indivisibilities abstract we analyze an exchange economy in which i all commodities except money are indivisible ii agents preferences can be described by a reservation value for each bundle of indivisible objects and iii all agents are price takers we obtain a necessary and sufficient condition under which market clearing prices exist implications for market mechanisms are discussed journal of economic literatureclassification numbers d51 c78

understanding preferences demand types and the existence of equilibrium with indivisibilities we propose new techniques for understanding agents valuations our classification into demand types incorporates existing definitions substitutes complements strong substitutes etc and permits new ones our unimodularity theorem generalises previous results about when competitive equilibrium exists for any set of agents whose valuations are all of a demand type for indivisible goods contrary to popular belief equilibrium is guaranteed for more classes of purely complements than of purely substitutes preferences our intersection count theorem checks equilibrium existence for combinations of agents with specific valuations by counting the intersection points of geometric objects applications include matching and coalition formation and the product mix auction introduced by the bank of england in response to the financial crisis

iterative auction design for tree valuations we study a special class of multi item valuations tree valuations that exhibit both value complementarity and substitutability we provide a linear programming formulation of the efficient allocation problem that is of polynomial size in the number of agents and items this reveals a new class of valuations for which a walrasian equilibrium exists in the presence of value complementarities an iterative algorithm for this linear program in conjunction with an appropriate payment rule yields an iterative auction that implements the efficient outcome at an ex post perfect equilibrium this auction relies on a simple pricing rule compact demand reports and uses a novel interleaved price update structure to assign final payments to bidders that guarantee truthful bidding

on efficient distribution with private information this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with many consumers each of whom is subject to private idiosyncratic taste shocks we propose a recursive method for finding feasible allocations that are incentivecompatible and that are pareto optimal within this set the method is applied to several parametric examples we find that in an efficient allocation the degree of inequality continually increases with a diminishing fraction of the population receiving an increasing fraction of the resources we discuss the extent to which these allocations can be decentralized via market arrangements this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with private information the economy we study has a constant endowment flow of a single non storable consumption good which is to be allocated each period among a large number of consumers each period these consumers experience unpredictable idiosyncratic privately observed taste shocks affecting their marginal utility of current consumption efficiency dictates that more resources be allocated to those consumers who in any given period have a high marginal utility of current consumption

the redistributive roles of unemployment insurance and the dynamics of voting abstract public unemployment insurance is analyzed as the majority voting equilibrium policy of a dynamic stochastic economy abstracting from incentive effects we focus on redistribution some results are because of the distribution of heterogeneous employment opportunities public insurance may be democratically chosen even if complete private markets exist and because of the dynamics even when agents are intrinsically homogeneous the equilibrium benefit level or duration benefit schedule deviates from what has been described as optimal in the literature the effects of differences in the average frequency or duration of unemployment on equilibrium taxes and benefits are investigated with some unanticipated results

layoffs wages and unemployment insurance abstract the influence of unemployment insurance on wage and layoff behavior is analyzed in the context of optimal labor contracts responses of contract terms to changes in economic parameters are shown to depend in general on the nature of the initial contract the degree of workers risk aversion and the resolution of bargaining conflict layoffs are not necessarily reduced by an increase in experience rating or a reduction in the ui benefit product demand fluctuations tend to induce procyclical employment fluctuations but not wage fluctuation an implication of optimal contracts with private insurance suggests a reason for government intervention in ui provision

nominal wage price rigidity as a rational expectations equilibrium most recent studies of macroeconomic behavior fall into one of two categories the first often called the equilibrium business cycle approach stems from the fundamental contribution of robert e lucas 1972 and related work by thomas sargent and neil wallace 1975 and many others these studies espouse the view that a positive correlation between output and the stock of paper assets can arise if households are unable to identify the source and therefore the permanence of price movements employment and output responses in this view are driven by the intertemporal substitution effect especially the substitution of current leisure for future consumption since cyclical fluctuations in employment are large relative to the corresponding real wage movements substantial wage elasticity of labor supply is required to validate these models the equilibrium approach to business cycles implies certain restrictions on the conduct of monetary policy in particular rational expectations undermine the ability of the monetary authority to influence economic activity in a systematic manner see sargent wallace for an example sticky wages and prices are the cornerstone of an alternative description of macroeconomic behavior rooted vaguely in keynes and more firmly in the dual decision hypothesis of robert clower 1984 this approach studies equilibria with quantity rationing see edmond malinvaud 1977 the rationing story lacks a precise specification of the source of price stickiness offering very little guidance about the eventual causes of price change considerable efforts were made in the 1970 s to fill this lacuna in keynesian macroeconomics beginning with work by martin n baily 1974 and others the implicit contracts literature focused on the incomplete insurability of human capital unable to find insurance against fluctuations in labor income elsewhere workers demand insurance from those best placed to observe labor income their own employers both wage inflexibility and layoffs then can be viewed as an outcome of a joint insurance employment relationship between workers and firms see azariadis 1975 critics like george akerlof and hajime miyazaki 1980 soon discovered that the original contracting models could not produce layoffs without prohibiting severance pay or otherwise limiting the terms of the contract others pointed out that these models were determinedly microeconomic offering few insights into the stickiness of nominal wages or the effectiveness of stabilization policy two quite distinct lines of research developed out of the original implicit contract ideas one focuses on asymmetric information and implementability see the qje 1983 symposium for original work and the review article by oliver hart 1983 as a means of driving a wedge between the ex post marginal rates of substitution of the contractants under some technical assumptions the outcome is involuntary underemployment or unemployment we are most concerned here with the other line of research which sought to fit labor or tdiscussants guillermo calvo columbia university jo anna gray washington state university

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

the rigidity of prices this paper uses evidence on individual transaction prices to analyze price behavior the evidence shows that for many transactions pricesremain rigid for periods exceeding one year the rigidity of price ispositively correlated with industry concentration for several productsthe correlation of price changes across buyers is low the paper alsoinvestigates the relationship between price rigidity price change andthe length of time a buyer and seller have been doing business together the author interprets the evidence as emphasizing the importance of nonprice rationing and the inadequacy of models in whichprice movements alone clear markets copyright 1986 by american economic association

does anticipated monetary policy matter an econometric investigation a heated debate has arisen over the policy ineffectiveness proposition associate with the work of lucas sargent and wallace it postulates that anticipated aggregate demand policy will have no effect on business cycle fluctuations so that one deterministic feedback policy rule is as good as any other from the point of view of stabilizing the economy this paper develops a methodology for empirically analyzing rational expectations models displaying this neutrality result and then applies it to the important question of whether anticipated monetary policy matters to the business cycle

the dynastic cycle and the stationary state a dynastic cycle is a periodic alternation of society between despotism and anarchy in a society of farmers rulers and bandits population growth simultaneously impoverishes farmers and reduces the ruler s surplus per head society evolves into a despotic stationary state or into a dynastic cycle dependent on whether poverty among farmers chokes off population growth before the surplus shrinks to the point where rulers turn to banditry copyright 1989 by american economic association

a note on overemployment underemployment in labor contracts under asymmetric information abstract models of labor contracts under asymmetric information may predict either overemployment or underemployment this paper shows that this result depends crucially on whether or not leisure is a normal good if firms are risk neutral

market distortions and benefits from research the benefits from cost reducing research and their distribution under a range of price policies are compared with those that would arise in the absence of the policies while any price policy affects the distribution of research benefits the net national or world benefits may be reduced lef unchanged or increased depending on the nature of the policy and the significance of the country in the world market for the commodity some implications for decisions on price policies and for distortions in incentives for the allocation of resources to research are raised

what is new keynesian economics this research was supported by the national science foundation i am grateful to george williams for help with the data and to steven allen laurence ball olivier j blanchard timothy bresnahan charles calomiris dennis carlton robert chirinko russell cooper stanley fischer herschel grossman r glenn hubbard david laidler john leahy assar lindbeck n gregory mankiw david romer julio rotemberg dennis snower john taylor andrew weiss and two anonymous referees for comments on one or more earlier drafts i am also indebted to michael parkin and edmund s phelps for helping to establish the etymology of the phrase new keynesian

banking and insurance abstract this paper studies the economic role of financial institutions in economies where agents incomes are subject to privately observable idiosyncratic random events the information structure precludes conventional insurance arrangements however a financial institution perhaps best viewed as a savings bank can provide partial insurance by generating a time pattern of deposit returns that redistributes wealth from agents with high incomes to those with low incomes resulting in a level of expected utility higher than that achievable in simple security markets insurance is incomplete because the bank faces a tradeoff between provision of insurance and maintenance of private incentives

predetermined prices and the allocation of social risks we propose a walrasian explanation for the existence of fixed prices i e of trades in which either the price or the quantity exchanged does not reflect all publicly available information such trades result in a rigid price system that facilitates the sharing of social risks they may also cause allocative distortions that increase the equilibrium price of insurance above its actuarially fair level we demonstrate that the market for noncontingent claims is active only when this insurance gain outweighs the cost of allocative distortions fixed price equilibria are constrained optima i e they cannot be dominated by an appropriately constrained central planner

equilibrium in the jungle in the jungle power and coercion govern the exchange of resources we study a simple stylized model of the jungle that mirrors an exchange economy we de ne the notion of jungle equilibrium and demonstrate that a number of standard results of competitive markets hold in the jungle jel classi cation c7 d4 s477 b201

informational diversity over time and the optimality of monetary equilibria abstract the temporal realizations of a random state variable in an overlapping generations model create an informational diversity between members of different generations and require a reexamination of the optimality that competitive equilibria might display in such an environment using an optimality criterion that reflects this informational diversity we prove the optimality of competitive equilibrium in a model with a fixed stock of fiat money a single spot market and good endowments that follow a markov process the need for an optimality criterion that incorporates informational diversity is further motivated by studying the same model with the operation of complete contingent commodities markets

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

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

equilibria and indivisibilities gross substitutes and complements this paper examines an exchange economy with heterogeneous indivisible objects that can be substitutable or complementary we show that a competitive equilibrium exists in such economies provided that all the objects can be partitioned into two groups and from the viewpoint of each agent objects in the same group are substitutes and objects across the two groups are complements this condition generalizes the well known kelso crawford gross substitutes condition and is called gross substitutes and complements we also provide practical and typical examples from which substitutes and complements are both jointly observed

sticky prices money and business fluctuations can nominal contracts create monetary nonneutrality if they arise endogenously in general equilibrium yes if 1 agents have complete information about the money stock and 2 shocks to the system are purely redistributive and private information precluding conventional insurance markets without contracts money is neutral toward aggregate quantities however risk sharing between suppliers and demanders creates an incentive for both parties to use nominal contracts in particular if an increase in the money growth rate signals a rise in the dispersion of shocks to demanders wealth then prices adjust only partially to monetary shocks and money is positively associated with output

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

optimal severance pay with incomplete information this paper contrasts optimal employment contracts in a world of full information and in a world in which the worker s alternative employment possibilities cannot be observed by the firm the difference between income and severance pay that is the opportunity cost of separating will be higher in more productive states of nature with complete wage insurance no longer possible we therefore have an explanation of higher ability individuals receiving high wages in the short run in long term contracts the explanation does not rely as past explanations have done on the imperfections in bonding arrangements or in loan markets