explaining fashion cycles imitators chasing innovators in product space abstract this paper considers the problem of a fashion trend setter confronting an imitator who can produce the same product at lower cost a one dimensional product space is considered which is an abstraction of the key attribute of some consumer good three broad strategies can be optimal for the fashion leader 1 never innovate which milk profits from the initially advantageous position but ultimately concede the market without a fight 2 innovate once but only once which just temporarily defers conceding the market 3 cycle infinitely around product space never letting the imitator catch up and capture the market sometimes the cycles start immediately sometimes the innovator should wait for a time before beginning the cycles the optimal solution exhibits strong state dependency with so called skiba curves separating regions in state space where various of these strategies are optimal there are even instances of intersecting skiba curves in most cases analytical expressions can be stated that characterize these skiba curves

measurement matters recent results from monetary economics reexamined inferences about the effects of money on economic activity may depend importantly on the choice of a monetary index because simple sum aggregates cannot internalize pure substitution effects this hypothesis is investigated by replicating five recent studies that have challenged an aspect of the conventional wisdom about the effects of money on aggregate activity in four of the five cases the qualitative inference in the original study is reversed when a simple sum monetary aggregate is replaced by a divisia index of the same asset collection the results are mixed in the fifth case

inflation and welfare in a monetary economy it is in everyone s private interest to try to get someone else to hold non interest bearing cash and reserves but someone has to hold it all so these efforts must simply cancel out all of us spend several hours per year in this effort and employ thousands of talented and highly trained people to help us these person hours are simply thrown away wasted on a task that should not have to be performed at all

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

capital market imperfections and the consumption function a model is presented in which there is asymmetric information between borrowers and lenders two questions are asked i would liquidity constraints in such a model take the form of credit rationing or of a wedge between borrowing and lending rates and ii how do these constraints affect the aggregate consumption function some empirical

why present oriented societies undergo cycles of drug epidemics musto the american disease yale university press new homen 1987 hypothesizes that cycles of drug use arise when the current generation of youth no longer remembers the adverse experiences of their forebears this paper underlines this hypothesis through the results of an optimal control model of drug epidemics that incorporates an endogenous initiation function models the reputation of a drug as being determined by memories of past use and finds the optimal drug treatment strategy interestingly unless the societal discount rate is quite low if memories of past users decay moderately quickly the optimal strategy is cyclic hence not only do we find that those who forget the past are condemned to repeat it but also that for those who forget the past and over value the present it may even be optimal to have their future recreate the past these findings are illustrated by numerical analysis based on empirical data from the current us cocaine epidemic

the optimal inflation tax when money reduces transactions costs abstract it has been argued that if money acts as an intermediate good the optimal inflation tax is zero this paper reexamines such a claim in the context of a model in which money reduces transactions costs it is shown that modeling money as an intermediate good does not necessarily imply that the optimal inflation tax is zero the optimality of a zero inflation tax depends on the properties of the transactions costs technology in particular if the transactions costs technology does not exhibit constant returns to scale it is optimal to resort to the inflation tax

a complete characterization of optimal growth paths in an aggregated model with a non concave production function the convexity of technology has played a crucial role in economic analyses of optimal one sector growth problems for example two of the key results on the traditional model of ramsey 1928 that have relied on the convexity of the technology are that optimal intertemporal growth involves moving monotonically towards a unique steady state as in cass 1965 koopmans 1965 and that the value function is a concave differentiable function of the initial capital stock as in benveniste and scheinkman 1979

the incidence and persistence of corruption in economic development abstract economic development and bureaucratic corruption are determined jointly in a dynamic general equilibrium model of growth bribery and tax evasion corruption arises from the incentives of public and private agents to conspire in the concealment of information from the government these incentives depend on aggregate economic activity which in turn depends on the incidence of corruption the model produces multiple development regimes transition between which may or may not occur in accordance with recent empirical evidence the relationship between corruption and development is predicted to be negative

sovereign debt markets in light of the shadow economy we investigate the controversial role of the informal sector in the economy of 64 countries between 2003 and 2007 by focusing for the first time on the impact it has on sovereign debt markets in addition to a standard ordered probit regression we employ two nonparametric neural network modeling techniques in order to capture possible complex interactions between our variables results confirm our main hypothesis that the informal sector has significant adverse effects on credit ratings and lending costs mlp neural networks offer the best fit to the data followed by the rbf neural networks and probit regression respectively the results do not change with respect to the stage of economic development of a country and contradict views about the possibility of significant economic benefits arising from the informal sector our study has important implications especially in the context of the ongoing sovereign debt crisis since it suggests that a reduction in the informal sector of financially challenged countries is likely to help in relaxing credit risk concerns and cutting down lending costs finally a decision tree analysis is used to exploit the inherent discreteness in the data and derive intuitive rules with respect to the level of the informal sector

the welfare cost of inflation in canada and the united states abstract this paper follows lucas econometrica 68 2000 247 and estimates the welfare cost of inflation in the post world war ii canadian and u s economies we use recent advances in the field of applied econometrics to estimate the interest elasticity of money demand and report significantly smaller welfare costs estimates than lucas econometrica 68 2000 247

the intertemporal substitution model of labour market fluctuations an empirical analysis the paper uses two approaches to study whether aggregate fluctuations in employment and unemployment may be explained within a market clearing framework as intertemporal substitution in labour supply first log linear equations for labour supply and unemployment are estimated using a forecasting model to measure wage and price expectations second a utility function is used to derive and estimate an equation for labour supply as a function of the current real wage and consumption the influence of expected future real wages and interest rates is captured by the consumption variable the empirical results do not support the intertemporal substitution model

optimal control of drug epidemics prevent and treat but not at the same time drug use and related problems change substantially over time so it seems plausible that drug interventions should vary too to investigate this possibility we set up a continuous time version of the first order difference equation model of cocaine use introduced by everingham and rydell 1994 extended to make initiation an endogenous function of prevalence we then formulate and solve drug treatment and prevention spending decisions in the framework of dynamic optimal control under different assumptions about how freely drug control budgets can be manipulated insights include 1 the effectiveness of prevention and treatment depend critically on the stage in the epidemic in which they are employed prevention is most appropriate when there are relatively few heavy users e g in the beginning of an epidemic treatment is more effective later 2 hence the optimal mix of interventions varies over time 3 the transition period when it is optimal to use extensively both prevention and treatment is brief 4 total social costs increase dramatically if control is delayed

on the instability of long run money demand and the welfare cost of inflation in the united states we evaluate the policy implications of measuring the welfare cost of inflation accounting for instabilities in the long run money demand for the u s over the period 1900 2013 we extend the analysis and reassess the results reported in lucas 2000 and ireland 2009 also considering the recent theoretical contributions of lucas and nicolini 2015 and berentsen et al 2015 breaks in the long run money demand give rise to regime dependent welfare cost estimates we find that the welfare cost is about 0 1 of annual income over 1976 2013 as compared to 0 8 over 1945 1975 overall these values are substantially lower than those reported in the literature

optimal control of interacting systems with dnss property the case of illicit drug use abstract in this paper we generalize a one dimensional optimal control problem with dnss property to a two dimensional optimal control problem this is done by taking the direct product of the model with itself i e we combine two similar system dynamics under a joint objective functional that is separable in both states and controls this framework can be applied to the construction of various optimal control problems such as optimal marketing of related products optimal growth of separate but interacting economies or optimal control of two related capital stocks we study such a system for a particular case drawn from the domain of drug control the main result of this paper is that in this domain even a modest amount of interaction can sometimes make a very big difference hence drawing conclusions by simplifying the real world into two independent one dimensional models may be problematic methodologically the combination of two systems with dnss property leads to a fascinating series of situations with multiple optimal steady states and associated threshold behavior these instances reflect some important recent developments in optimal dynamic control theory

seigniorage and the welfare cost of inflation abstract this paper empirically investigates the restrictions embodied in a sidrauski type model for the cross relations between consumption money holdings inflation and assets returns using quarterly data for the high inflation economy in israel 1970 1988 using a set of the estimated parameters it is shown that the model s implications for seigniorage are quite different than those from a cagan type model that is while the model is able to account for the observed stability of the seigniorage gnp ratio a cagan type model predicts a laffer curve for seigniorage the estimates also imply sizeable welfare costs of inflation

skiba thresholds in a model of controlled migration abstract this paper presents a dynamic optimization model of a central challenge of us housing policy deconcentrating poverty via housing mobility programs without inducing middle class flight we explore two versions both with and without the possibility that poor families assimilate into the middle class both demonstrate multiple equilibria with a skiba point separating initial conditions for which the optimal strategy leads to substantial flight from those leading to a stronger middle class population we also find an interesting mathematical phenomenon of a lens focusing the trajectories in a sense that allows for the coexistence of three saddles and an unstable equilibrium

leading bureaucracies to the tipping point an alternative model of multiple stable equilibrium levels of corruption we present a novel model of corruption dynamics in the form of a nonlinear optimal dynamic control problem it has a tipping point but one whose origins and character are distinct from that in the classic schelling 1978 model the decision maker choosing a level of corruption is the chief or some other kind of authority figure who presides over a bureaucracy whose state of corruption is influenced by the authority figure s actions and whose state in turn influences the pay off for the authority figure the policy interpretation is somewhat more optimistic than in other tipping models and there are some surprising implications notably that reforming the bureaucracy may be of limited value if the bureaucracy takes its cues from a corrupt leader

the optimal inflation path in a sidrauski type model with uncertainty abstract in this paper it is shown that in a sidrauski type model with uncertainty the chicago rule remains valid as a prescription for the average rate of inflation although there is a systematic difference between the perfect foresight and the uncertainty case quantitatively however the difference turns out to be very small the paper shows how to calculate the optimal monetary policy as a function of the state variables using the method of parameterized expectations in terms of expected utility the optimal policy is as good as the simple policy that reduces the money supply at the rate of time preference

the welfare cost of inflation in a cash in advance economy with costly credit the paper presents a modification of the lucas stokey 1983 cash in advance economy in which the representative consumer decides based on relative prices which goods to buy with cash and which with costly credit an explicit baumol 1952 condition emerges that guides this consumer choice deriving and estimating a closed form welfare cost function in an example economy the paper shows that the welfare cost of inflation depends on the margins of substitution the consumer avoids inflation through costly credit and faces higher welfare costs of inflation than in standard cash in advance economies

when in a drug epidemic should the policy objective switch from use reduction to harm reduction a heated debate in drug policy concerns the relative merits of harm reduction e g reducing drugrelated hiv aids transmission vs use reduction controlling drug use per se this paper models whether shifting emphasis between these goals over the course of a drug epidemic might reduce social costs relative to pursuing one or the other exclusively results suggest different answers for different drugs and or countries in particular harm reduction may have always been effective for australia s injection drug use problem but for us cocaine it may not have been in the past even if it could be so today in certain circumstances harm reduction may tip an epidemic toward a high rather than low use equilibrium the location in state space of regions where this occurs can be sensitive to parameter changes suggesting caution may be in order when advocating harm reduction unless there is confidence the epidemic has been modeled and parameterized accurately

why not cut pay abstract i interviewed over 300 business people labor leaders business consultants and counselors of unemployed people all in the northeast of the united states during the recession of the early 1990 s in order to learn why wages and salaries declined in only a few firms employers were reluctant to cut pay because they believed doing so would hurt employee morale leading to lower productivity and current or future difficulties with hiring and retention it was thought that these effects would in the end cost more than the savings from lower pay there were few indications that unemployed people had excessive wage expectations on the contrary many unemployed were too flexible and found themselves rejected by firms as overqualified in most companies pay cuts were not a useful alternative to layoffs because pay cuts would not make it worthwhile to retain many employees and because layoffs harmed morale less than would pay cuts the findings support none of the theories of wage rigidity except those of solow and akerlof that emphasize morale

uncertainty inflation and welfare this paper studies the welfare costs and the redistributive effects of inflation in the presence of idiosyncratic liquidity risk in a microfounded search theoretical monetary model we calibrate the model to match the empirical aggregate money demand and the distribution of money holdings across households and study the effects of inflation under the implied degree of market incompleteness we show that in the presence of imperfect insurance the estimated long run welfare costs of inflation are on average 40 to 55 smaller compared to a complete markets representative agent economy and that inflation induces important redistributive effects across households

how corruption may corrupt abstract the incidence of corruption appears to vary strongly across societies even for comparable activities the model highlights how the profitability of bureaucratic corruption may be related to its frequency and points toward a few mechanisms that can be used in explaining the stylized facts of varying incidence of corruption there might be multiple self fulfilling equilibria levels of corruption even when both supply and demand of corrupt acts are considered

a dynamic model of corruption deterrence abstract this paper presents a model of corruption deterrence with a simple overlapping generations structure built into it a crucial assumption is that when corruption becomes more prevalent in the economy it is harder to audit a corrupt official effectively it is shown that this assumption may give rise to several stationary equilibrium levels of corruption this possibility has been exploited to explain why sometimes a government may temporarily resort to an extremely severe deterrence policy and why the same deterrence scheme may imply quite different levels of corruption a case study is provided to give empirical support to the model

money and growth revisited abstract conventional wisdom is that if public policy can affect the growth rate of the economy the welfare implications of alternative policies will be large in this paper a stochastic dynamic general equilibrium model with endogenous growth and money is examined in this setting inflation lowers growth through its effect on the return to work however the welfare costs of higher inflation are modest the endogenous labor supply is important in producing this result

homogeneity and the transactions demand for money the paper presents the properties of money demand implied by the frenkel jovanovic 1980 inventory model without approximation the money demand function is implicitly defined by the first order condition of the model from the implicit function we show that the elasticities of money demand satisfy a set of homogeneity conditions we also show that increasing transactions cost increases the cash flow elasticity the interest elasticity in absolute value and the uncertainty elasticity but decreases the transactions cost elasticity if the ratio of cash flow uncertainty to the transactions variable is small then the interest elasticity is greater than 1 2 in contrast it lies between 71 and 1 2 when the approximation method is applied

when to make proprietary software open source abstract software can be distributed closed source proprietary or open source developed collaboratively while a firm cannot sell open source software and so loses potential sales revenue the open source software development process can have a substantial positive impact on the quality of a software its diffusion and consequently the demand for a complementary product from which the firm does profit previous papers have considered the firm s option to release software under a closed or open source license as a simple once and for all binary choice we extend this research by allowing for the possibility of keeping software proprietary for some optimally determined finite time period before making it open source furthermore we study the impact of switching costs we show that in case of high in house r d costs the firm always makes the software open source at some point unless switching itself is too expensive the timing however depends on the initial software quality on the other hand when r d is inexpensive the firm opens the source code only when the initial level of software quality is low for intermediate r d costs the firm might have the choice between opening the code immediately opening it at some subsequent and optimally determined time or keeping it closed forever finally we find that whereas high switching costs might prevent firms from adopting an open source business model low switching costs mainly affect the timing of the opening of the source code

time varying hall consumption function some empirical evidence abstract according to the hall consumption function the level of consumption itself follows a random walk with drift which however recent econometric work fails to support compellingly while there are many possible explanations for this failure we pay attention to the neglected possibility that the labour market may not clear and look at the question of whether labour supply rationing matters for consumption behaviour by using u s quarterly data over the period 1948 ii 1980 iv estimation results both from linear and threshold models are compatible with the hypothesized effects of labour supply rationing on consumption autoregressions

optimal dynamic law enforcement abstract in this paper we present an intertemporal extension of becker s journal of political economy 76 1968 169 static economic approach to crime and punishment for a dynamic supply of offenders we determine the optimal dynamic trade off between damages caused by offenders law enforcement expenditures and cost of imprisonment by using pontryagin s maximum principle we obtain interesting insight into the dynamical structure of optimal law enforcement policies it is found that inherently multiple steady states are generated which can be saddle points unstable points and boundary solutions as in other non linear control models there exists a threshold a so called skiba point which makes the optimal enforcement policy dependent on the initial conditions it turns out that above the skiba point the optimal trade off between social costs implies a steady state with a high level of offences while below the threshold the optimal law enforcement should eradicate crime

on the markov switching welfare cost of inflation abstract this paper uses the markov switching approach to account for instabilities in the long run money demand function and compute the welfare cost of inflation in the united states in doing so it circumvents the problem of data mining of some earlier seminal contributions on these issues allowing for complicated nonlinear dynamics and sudden changes in the parameters of the money demand function moreover it extends the sample period and investigates the robustness of results to alternative money demand specifications monetary aggregation procedures and assumptions regarding dynamics aspects of the money demand specification

persistence of corruption some theoretical perspectives summary the paper examines how pervasive corruption can be persistent despite the presence of anti corruption measures and incentives corruption has a strong tendency to persist in the first part we discuss how a high level of corruption or a low level of compliance can be an equilibrium outcome in such a case corruption becomes the social norm in the second part of the paper we use ides from evolutionary game theory to discuss how corrupt behavior can be immune to interventions and it can sustain itself against different individual behavioral norms

inflation and welfare in the steady state this is a paper on expected inflation and welfare in steady state equilibrium the demand for money is an inventory demand with an endogenous payment period the clower constraint is not imposed higher inflation reduces welfare by reducing consumption as people devote more of their real income to maintaining lower average money holdings high inflation does not necessarily promote an increase in the capital stock the mundell tobin effect is absent the policy conclusion is standard deflate at the rate of time preference because capital is held socially optimal consumption falls short of its golden rule level if inside money is allowed it drives out fiat money and welfare is again at a maximum

the efficiency of monetary exchange in search equilibrium search theoretic models of money emphasize monetary exchange as the outcome of economic environments characterized by bilateral trading frictions this paper analyzes the efficiency of monetary exchange in a search model of fiat money where individuals invest costly effort in the exchange process because the optimal effort each individual trader invests in exchange is based upon the private rather than social gains from trade decentralized monetary equilibria are shown to be inefficient relative to the social optimum however for an appropriate division of the gains from trade given to buyers and sellers it is possible to attain social efficiency the nature of these search externalities for monetary exchange and their implications for policy are evaluated and discussed copyright 1997 by ohio state university press