bulls bears and market sheep abstract a deterministic excess demand model of stock market behavior is presented that generates stochastically fluctuating prices and randomly switching bear and bull markets

estimating the intensity of choice in a dynamic mutual fund allocation decision abstract the paper analyzes the intensity of choice in an agent based financial optimization problem mean variance optimizing agents choose among mutual funds of similar styles but varying performance we specify a model for the allocation of new funds switching between funds and withdrawals and obtain statistically significant estimates of the intensity of choice parameter this estimate is also given economic interpretation through the underperformance of funds that use an active style we find that agents with relative risk aversion of 2 will move 1 of their funds from active to passive for an extra 34 basis points of return

shipwrecks and treasure hunters we examine dynamic search as a game in which two rivals explore an island for a hidden prize of known value in every period until its discovery the players decide how much of the unsearched area to comb if a player finds the prize alone he wins it and the game ends players have a per period discount factor and costs proportional to the area they search first as a benchmark for efficiency we solve the one player search problem second in the two player setting we show that typically there is inefficient over search a result akin to the tragedy of the commons however for players with intermediate levels of patience there is the possibility of inefficient under search as players incorporate the expected future payoffs in their current search decisions finally with patient players several counterintuitive results can arise for example players might be better off searching a larger island or looking for a less valuable prize

wealth driven selection in a financial market with heterogeneous agents we study the co evolution of asset prices and individual wealth in a financial market with an arbitrary number of heterogeneous boundedly rational investors using wealth dynamics as a selection device we are able to characterize the long run market outcomes i e asset returns and wealth distributions for a general class of competing investment behaviors our investigation illustrates that market interaction and wealth dynamics pose certain limits on the outcome of agents interactions even within the wilderness of bounded rationality as an application we consider the case of heterogeneous mean variance optimizers and provide insights into the results of the simulation model introduced by levy levy and solomon 1994

optimal fiscal feedback on debt in an economy with nominal rigidities we examine the impact of different degrees of fiscal feedback on debt in an economy with nominal rigidities where monetary policy is optimal we look at the extent to which different degrees of fiscal feedback enhances or detracts from the ability of the monetary authorities to stabilise output and inflation using an objective function derived from utility we find the optimal level of fiscal feedback to be small there is a clear discontinuity in the behaviour of monetary policy and welfare either side of this optimal level as the extent of fiscal feedback increases optimal monetary policy becomes less active because fiscal feedback tends to deflate inflationary shocks however this fiscal stabilisation is less efficient than monetary policy and so welfare declines in contrast if fiscal feedback falls below some critical value either the model becomes indeterminate or optimal monetary policy becomes strongly passive and this passive monetary policy leads to a sharp deterioration in welfare

taking stock a rigorous modelling of animal spirits in macroeconomics modelling animal spirits this paper is a survey of the burgeoning literature that seeks to take the enigmatic concept of the animal spirits more seriously by building heterodox macro dynamic models that can capture some of its crucial aspects in a rigorous way two approaches are considered the discrete choice and the transition probability approach where individual agents face a binary decision and choose one of them with a certain probability these assessments are adjusted upward or downward in response to what the agents observe which leads to changes in the aggregate sentiment and the macroeconomic variables resulting from the corresponding decisions typical applications of the two approaches alternatively give rise to what will be called a weak and a strong form of animal spirits on the whole the literature included in this survey provides examples of applications of a modelling tool that demonstrates a considerable flexibility within a canonical framework

bubble formation and in efficient markets in learning to forecast and optimise experiments this experiment compares the price dynamics and bubble formation in an asset market with a price adjustment rule in three treatments where subjects 1 submit a price forecast only 2 choose quantity to buy sell and 3 perform both tasks we find deviation of the market price from the fundamental price in all treatments but to a larger degree in treatments 2 and 3 mispricing is therefore a robust finding in markets with positive expectation feedback some very large recurring bubbles arise where the price is three times larger than the fundamental value which were not seen in former experiments

choosing and sharing implementing a project like a nationwide nuclear waste disposal which benefits all involved agents but brings major costs only to the host is often problematic in practice revelation issues and redistributional concerns are significant obstacles to achieving stable agreements we address these issues by proposing the first mechanism to implement the efficient site the host with the lowest cost and share the exact cost while retaining total control over realized transfers our mechanism is simple and in the vein of the well known divide and choose procedure the unique nash equilibrium outcome of our mechanism coincides with truthtelling is budget balanced individually rational and immune to coalitional deviations more generally our mechanism can also handle the symmetric case of positive local externalities e g olympic games and even more complex situations where the usefulness of the project regardless of its location is not unanimous

discretionary policy in a monetary union with sovereign debt this paper examines the interactions between multiple national fiscal policymakers and a single monetary policy maker in response to shocks to government debt in some or all of the countries of a monetary union we assume that national governments respond to excess debt in an optimal manner but that they do not have access to a commitment technology this implies that national fiscal policy gradually reduces debt the lack of a commitment technology precludes a random walk in steady state debt but the need to maintain national competitiveness avoids excessively rapid debt reduction if the central bank can commit it adjusts its policies only slightly in response to higher debt allowing national fiscal policy to undertake most of the adjustment however if it cannot commit then optimal monetary policy involves using interest rates to rapidly reduce debt with significant welfare costs we show that in these circumstances the central bank would do better to ignore national fiscal policies in formulating its policy

optimal discretionary monetary and fiscal policies in a country size heterogeneous monetary union abstract this paper develops a new keynesian model of a monetary union where atomistic small economies coexist with a large economy it explores how the level of public debt shapes non cooperative discretionary policies it evaluates welfare losses for small and large member countries the paper demonstrates that higher public debt levels hamper business cycle stabilization for the union as a whole and in particular penalize the stabilization performance of small country members while cooperation and monetary leadership is preferable to fiscal leadership for the union as whole and for the small countries the big country prefers fiscal leadership where it explores a larger strategic power vis a vis the common monetary policy authority political support for cooperation may be hard to achieve under low debt levels cooperative stabilization outcomes are relatively similar to the non cooperative ones

costly search and mutual fund flows this paper studies the flows of funds into and out of equity mutual funds consumers base their fund purchase decisions on prior performance information but do so asymmetrically investing disproportionately more in funds that performed very well the prior period search costs seem to be an important determinant of fund flows high performance appears to be most salient for funds that exert higher marketing effort as measured by higher fees flows are directly related to the size of the fund s complex as well as the current media attention received by the fund which lower consumers search costs

choosing wisely a multibidding approach reaching decisions about the location of noxious facilities such as dump sites environmentally hazardous plants nuclear power generators and the like is a highly contentious issue for instance in february 2000 the u s senate decided that nationwide nuclear waste would be shipped to the yucca mountain site in nevada conditional to it being approved as a high level nuclear waste repository despite the attractive compensation package the state of nevada voiced vehement opposition president clinton vetoed the bill and in may 2000 the senate failed to overturn it as such the major problem facing the u s nuclear industry on where to site a high level radioactive waste repository remains virtually unresolved neither are decisions about the location of desirable events easily solvable every two years the international olympic committee selects hosts for the summer and winter games a procedure that is constantly under review and revision in order to bring about the best possible outcome until about a year ago the decision was made by a vote based on bids and plans submitted by candidate cities however the recent controversy surrounding the choice of salt lake city to host the 2002 winter games culminated in the design of a new procedure for choosing the host of the 2006 winter games this procedure called for the selection of two finalist cities in this case turin and sion immediately after which the host was selected by secret ballot in this case turin another similar issue is currently the subject of heated debate in spain the spanish government both on the national and local level has recently been discussing various possible projects for transferring water from rivers in the north of spain to the arid southern regions the parties involved have conflicting interests with regard to several aspects of the projects proposed particularly the water rich regions are hesitant to give up parts of their water resources the parties involved have still not agreed upon the choice of a transport mode or the size of the transfer payments that would compensate the localities that are relinquishing part of the water supply these and several other cases belong to a class of problems in which a group of agents has to choose one out of several projects a project is efficient if it maximizes the aggregate welfare of the group members reaching an efficient outcome is trivial when the designer has all the relevant information however it is often the case that the parties concerned possess much more information than the designer hence the designer faces a nontrivial problem if she wishes to optimally choose one of the projects moreover from a normative point of view even if the designer has all the information it is easier to justify the use of a fixed procedure to reach a decision than to modify the procedure for various cases in light of information disclosed or already available to the designer several well known methods are available for the problem of choosing one out of a set of alternatives one class of methods consists of various voting schemes such as majority voting or the borda rule the outcomes generated by these methods need not be efficient due to strategic behavior on the part of the agents another class of methods consists of vickreyclarke groves mechanisms for this class truthtelling is a dominant strategy that always results in the choice of an efficient alternative however these mechanisms are not budgetbalanced and the payments collected from the perez castrillo department of economics code universitat autonoma de barcelona 08193 bellatera barcelona spain wettstein department of economics bengurion university of the negev monaster center for economic research beer sheva 84105 israel we thank herve moulin for his helpful suggestions suresh mutuswami who encouraged us to check for strong nash equilibria and francis bloch mark gradstein moshe justman jordi masso and two anonymous referees for their useful comments perez castrillo gratefully acknowledges financial support from bec2000 0172 and 2000sgr 00054

learning and adaptation s impact on market efficiency a dynamic model with learning and adaptation captures the evolution in trader beliefs and trading strategies through a process of learning and observation traders improve their understanding of the market traders also engage in a process of adaptation by switching between trading strategies based on past performance the asymptotic properties are derived analytically demonstrating that convergence to efficiency depends on the model of adaptation

how optimal is us monetary policy using a small scale microfounded dsge model with markov switching in shock variances and policy parameters we show that the data preferred description of us monetary policy is a time consistent targeting rule with a marked increase in conservatism after the 1970s however the fed lost its conservatism temporarily in the aftermath of the 1987 stock market crash and again following the 2000 dot com crash and has not subsequently regained it the high inflation of the 1970s would have been avoided had the fed been able to commit even without the appointment of paul volcker or the reduction in shock volatilities

solution and estimation of re macromodels with optimal policy macro models of monetary policy typically involve forward looking behavior except in rare circumstances we have to apply some numerical method to find the optimal policy and the rational expectations equilibrium this paper summarizes a few useful methods and shows how they can be combined with a kalman filter to estimate the deep model parameters with maximum likelihood simulations of a macro model with staggered price setting interest rate elastic output and optimal monetary policy illustrate the properties of this estimation approach

first movers non movers and social gains from subsidising entry in markets for nature based recreational goods abstract the importance of ecosystem services for mankind stresses the issue of identifying different institutional solutions to effectively secure their adequate provision much focus has been on services of the public good type and instruments like payments for environmental services we extend this work to consider the possible social gains from supporting development of new markets for nature based recreational goods which may alleviate negative externalities caused by congestion problems our three main questions are i why is there a lack of market development ii can there be social gains from intervention and supporting the development of such markets and iii if so then how could such intervention be best performed we use a two stage non cooperative bayesian simultaneous move game model and show that in spite of apparent potential first mover advantages in a developing market demand uncertainty and sunk costs may equally well result in widespread presence of non movers on the supplier side we show that social gains can be made from offering a subsidy towards the sunk costs analysing three possible subsidy schemes we show a that fixed costs may make rationing optimal b that sequential rationing does not necessarily dominate strict rationing because c the more subsidies are offered the larger each subsidy must be to induce participation and that d the longer a single agent on the market may keep market information to himself the better a non rationing scheme will perform relative to rationing schemes finally e subsidies for second mover entry may be optimal in some cases

structural stochastic volatility in asset pricing dynamics estimation and model contest abstract in the framework of small scale agent based financial market models the paper starts out from the concept of structural stochastic volatility which derives from different noise levels in the demand of fundamentalists and chartists and the time varying market shares of the two groups it advances several different specifications of the endogenous switching between the trading strategies and then estimates these models by the method of simulated moments msms where the choice of the moments reflects the basic stylized facts of the daily returns of a stock market index in addition to the standard version of msm with a quadratic loss function we also take into account how often a great number of monte carlo simulation runs happen to yield moments that are all contained within their empirical confidence intervals the model contest along these lines reveals a strong role for a tamed herding component the quantitative performance of the winner model is so good that it may provide a standard for future research

a laboratory experiment on the heuristic switching model abstract we present results from the first laboratory experiment on the seminal heuristic switching model introduced by brock and hommes 1997 1998 subjects choose between two alternatives a sophisticated and stabilizing but costly heuristic and a destabilizing but cheap heuristic and are paid according to the performance of the chosen heuristic aggregate choices determine the evolution of a state variable and consequently the performance of both heuristics theoretically an increase in the costs for the stabilizing heuristic generates instability and leads to endogenous fluctuations in both the state variable and the fraction of agents using that heuristic we vary the costs of the stabilizing heuristic in the experiment and find that the predictions of the heuristic switching model are partially confirmed for low costs the dynamics are stable for high costs the dynamics initially are unstable and exhibit the type of bubbles and crashes emblematic for the heuristic switching model however over time the pattern of bubbles and crashes disappears and the dynamics become more stable we estimate a standard discrete choice model on aggregate choice data and observe that subjects have a tendency to become less sensitive to payoff differences when the environment is less stable which has important implications for the application of heuristic switching models

patents imitation and licensing in an asymmetric dynamic r d race abstract rd some may have an advantage in early stages of the r d process while others may have advantages in other stages of the process this paper uses a two firm asymmetric ability multistage r d race model to analyze the effect of patents imitations and licensing arrangements on the speed of innovation firm value and consumers surplus by using numerical analyses to study the mpe of the r d race the paper demonstrates the circumstances under which a weak patent protection regime that facilitates free imitation of any intermediate technology may yield a higher consumers surplus and total surplus than a regime that awards a patent for the final innovation the advantage of imitation may hold even when we allow for voluntary licensing of intermediate technologies

efficient allocation of a prize king solomon s dilemma abstract a planner is interested in allocating an indivisible good a prize to one of many agents in the economy his objective is to give the prize to the agent who values it most without any payments being made by the recipient the planner however does not know the identity of this agent while the agents themselves do this paper shows how the planner can construct simple multistage mechanisms with a unique subgame perfect equilibrium outcome at this outcome the agent who values the prize most gets it without any transfer of money being made by any of the agents or the planner

on the benefits of a monetary union does it pay to be bigger this paper revisits the question of the appropriate domain of a currency area using a new keynesian open economy model in which the world is split into two areas each framed as a continuum of small open regions we show that the adoption of a common currency like the euro can be beneficial for the members of the monetary union since the spill over effects generated by the inflationary policies of the small open economies are likely to outweigh the costs of not tailoring monetary policy to country specific shocks we also show that while the enlargement of the monetary union to another group of small open economies can bring about welfare gains for all countries involved monetary integration of two large economies such as the euro area and the u s will not these findings can help to rationalize the process of the creation and enlargement of multi country currency areas like the eurozone

fiscal sustainability in a new keynesian model recent work on optimal monetary and fiscal policy in new keynesian models suggests that it is optimal to allow steady state debt to follow a random walk in this paper we consider the nature of the time inconsistency involved in such a policy and its implication for discretionary policymaking we show that governments are tempted given inflationary expectations to utilize their monetary and fiscal instruments in the initial period to change the ultimate debt burden they need to service we demonstrate that this temptation is only eliminated if following shocks the new steady state debt is equal to the original efficient debt level even though there is no explicit debt target in the government s objective function analytically and in a series of numerical simulations we show which instrument is used to stabilize the debt depends crucially on the degree of nominal inertia and the size of the debt stock we also show that the welfare consequences of introducing debt are negligible for precommitment policies but can be significant for discretionary policy finally we assess the credibility of commitment policy by considering a quasi commitment policy which allows for different probabilities of reneging on past promises

an analysis of cooperative research and development i analyze the effects of cooperative research whereby member firms agree to share the costs andfruits of a research project before they undertake it in this model industrywide agreements tend to have socially beneficial effects when the degree ofproduct market competition is low when there are r d spillovers in the absence of cooperation when a high degree of sharing is technologically feasible and when the agreement concerns basic research rather than development activities i show that a royalty free cross licensing agreement among any number offirms lowers the equilibrium level of innovation even though it increases the efficiency of r d through sharing

evolutionary implementation and congestion pricing we consider an implementation problem faced by a planner who manages a roadway network the problem entails both hidden information and hidden actions we solve the planner s problem by introducing a new class of mechanisms and a new notion of implementation the mechanisms called price schemes attach transfers to the available routes they do not involve direct revelation the method of implementation is evolutionary requiring that players who follow any reasonable myopic adjustment process eventually learn to behave as the planner desires we show that efficient behaviour can be guaranteed using simple decentralized price schemes

symbiosis of monetary and fiscal policies in a monetary union we consider the interaction between the monetary policy in a monetary union and the separate fiscal policies of the member countries we use a barro gordon type model extended to many countries and fiscal policies each country s fiscal policies inflict externalities on other countries and the common monetary policy has its time consistency problem but if the two types of policymakers agree about the ideal levels of output and inflation then this ideal is attained despite disagreements about the weights of the objectives despite ex post monetary accommodation to fiscal profligacy without fiscal coordination without monetary commitment and for any order of moves

fiscal and monetary rules for a currency union abstract this paper addresses the optimal joint conduct of fiscal and monetary policy in a two country model of a currency union with staggered price setting and distortionary taxes a tractable linear quadratic approximation permits a representation of the optimal policy plan in terms of targeting rules in the optimal equilibrium monetary policy should achieve aggregate price stability following a flexible inflation targeting rule fiscal policy should stabilize idiosyncratic shocks allowing for permanent variations of government debt but should abstain from creating inflationary expectations at the union level simple policy rules can approximate the optimal commitment benchmark through a mix of strict inflation targeting and flexible budget rules conversely the welfare costs of balanced budget rules are at least one order of magnitude higher than conventional estimates of the costs of business cycle fluctuactions

interactions of commitment and discretion in monetary and fiscal policies we consider monetary scal interactions when the monetary authority is more conservative than the scal with both policies discretionary 1 nash equilibrium yields lower output and higher price than the ideal points of both authorities 2 of the two leadership possibilities scal leadership is generally better with scal discretion monetary commitment yields the same outcome as discretionary monetary leadership for all realizations of shocks but scal commitment is not similarly negated by monetary discretion second best outcomes require either joint commitment or identical targets for both authorities output socially optimal and price level appropriately conservative or complete separation of tasks jel e61 e63

unique implementation of the full surplus extraction outcome in auctions with correlated types abstract in auctions with correlated types it is possible to design mechanisms such that full surplus extraction can be obtained as the outcome of an equilibrium in which agents use weakly dominant strategies however it is not assured that the outcome is unique we present an example in which no mechanism can yield the full surplus extraction outcome as the unique bayesian equilibrium outcome next we show that in the standard auction model the multiplicity problem can be fully resolved using sequential mechanisms i e we show that it is possible to obtain the full surplus extraction outcome as the unique perfect bayesian equilibrium outcome journal of economic literature classification numbers d44 d70

estimating central bank preferences under commitment and discretion this paper explains u s macroeconomic outcomes with an empirical new keynesian model in which monetary policy minimizes the central bank s loss function the presence of expectations in the model forms a well known distinction between two modes of optimization termed commitment and discretion the model is estimated separately under each policy using maximum likelihood over the volcker greenspan bernanke period comparisons of fit reveal that the data favor the specification with discretionary policy estimates of the loss function weights point to an excessive concern for interest rate smoothing in the commitment model but a more balanced concern relative to inflation and output stability in the discretionary model

information cascades in the laboratory when a series of individuals with private information announce public predictions initial conformity can create an information cascade in which later predictions match the early announcements this paper reports an experiment in which private signals are draws from an unobserved urn subjects make predictions in sequence and are paid if they correctly guess which of two urns was used for the draws if initial decisions coincide then it is rational for subsequent decisionmakers to follow the established pattern regardless of their private information rational cascades formed in most periods in which such an imbalance occurred copyright 1997 by american economic association

subgame perfect implementation this paper examines the use of stage mechanisms in implementation problems and provides a partial characterization of the set of subgam e perfect implementable choice rules it is shown that in many economic environments virtually an y choice rule can be implemented to illustrate the power of this approach the paper discusses a number of models in which it is possible to implement the first best although it wouldn t have been possible to do so without using stage mechanisms the diversity of these models suggests that subgame perfect implementation may find wide application copyright 1988 by the econometric society

heterogeneous expectations and speculative behavior in a dynamic multi asset framework abstract this paper develops a dynamic model of a financial market where heterogeneous agents invest among multiple risky assets and a risk free asset under a market maker scenario particular attention is paid to the case of two risky assets and two agent types fundamentalists and trend chasers whose beliefs on both first and second moments of the conditional distribution of returns are based on past observations conditions for the stability of the fundamental equilibrium are established and the effect of the correlation between the risky assets is examined it turns out that investors anticipated correlation and dynamic portfolio diversification do not always have a stabilizing role but rather may act as a source of complexity in the financial market

the market for evaluations recent developments in computer networks have driven the cost of distributing information virtually to zero creating extraordinary opportunities for sharing product evaluations the authors present pricing and subsidy mechanisms that operate through a computerized market and induce the efficient provision of evaluations the mechanisms overcome three major challenges first evaluations which are public goods are likely to be underprovided second an inefficient ordering of evaluators may arise and third the optimal quantity of evaluations depends on what is learned from the initial evaluations

implementation of individually rational social choice functions with guaranteed utilities abstract a simple mechanism is presented that allocates an indivisible object between two agents for almost any possible compensation rule furthermore the equilibrium strategy guarantees a level of utility not less than e where e can be arbitrarily small

monetary and fiscal policy interactions in a micro founded model of a monetary union abstract this paper analyzes in detail the mechanisms behind fiscal stabilization policy and the role of policy commitment in a micro founded new keynesian model of a two country monetary union which is hit by supply shocks we also explore the determinants of the gains from fiscal stabilization while monetary policy with identical union members is concerned with stabilizing the union wide economy fiscal policy aims at stabilizing inflation differences and the terms of trade besides exploring optimal policies we also consider monetary and fiscal rules we study these rules both under coordination and non coordination by the fiscal authorities

heterogeneous expectations exchange rate dynamics and predictability abstract this paper proposes a simple chartist fundamentalist model in which we allow for nonlinear time variation in chartists extrapolation rate estimation of the model using monthly data for the major currencies vis a vis the us dollar shows that the model is significant in sample and that it has out of sample predictive power for some of the currencies we investigate the power of tests of the random walk model to detect predictability against the alternative of the proposed model we find that the evidence of short term unpredictability and the long term predictability are consistent with our model

taking stock a rigorous modelling of animal spirits in macroeconomics this paper is a survey of the burgeoning literature that seeks to take the enigmatic concept of the animal spirits more seriously by building heterodox macro dynamic models that can capture some of its crucial aspects in a rigorous way two approaches are considered the discrete choice and the transition probability approach where individual agents face a binary decision and choose one of them with a certain probability these assessments are adjusted upward or downward in response to what the agents observe which leads to changes in the aggregate sentiment and the macroeconomic variables resulting from the corresponding decisions typical applications of the two approaches alternatively give rise to what will be called a weak and a strong form of animal spirits on the whole the literature included in this survey provides examples of applications of a modelling tool that demonstrates a considerable flexibility within a canonical framework

cost reducing r d in oligopoly abstract this paper provides a conjectural variations model to explore competition in cost reducing r d and the nature of the inter firm externalities it is shown that 1 r d investment in a market with price competition becomes optimal if firms expect that changes in their own r d investment are followed by the rival firms 2 the optimal r d subsidies are positive in collusive oligopolies but negative in competitive oligopolies 3 joint r d ventures in oligopoly could reduce total surplus by causing underinvestment and 4 promoting price competition reduces welfare if firms are not collusive in their r d decisions

renegotiation proof implementation and time preferences this paper explores how the requirement that the implementation of contracts be renegotiation proof affects the set of contracts that can be implemented in a seller buyer scenario in which the information regarding the agents valuations is nonverifiable this paper explicitly adds a time dimension to an implementa tion problem and introduces a natural criterion of renegotiation proofness for the case of time consuming renegotiation the main insight gained is that the addition of the time dimension enlarges significantly the set of contracts that can be implemented in a renegotiation proof manner jel c70 d23 this paper explores how the requirement that the implementation of contracts be renegotiation proof affects the set of con tracts that can be implemented in a seller buyer scenario in which the informa tion regarding the agents valuations is non verifiable the paper s main contributions are that first it explicitly adds a time di mension to an implementation problem and second it introduces a natural criterion of renegotiation proofness for the case of time consuming renegotiation for concreteness the discussion will be conducted in the context of the following example there are two agents a seller and a buyer who sign a contract for the sale of one unit in the future their valuations for the unit denoted by s and b respectively are not known when they sign the contract they become known to both parties after the contract is signed and before it is imple mented thus when it comes to implement ing the contract the parties information is complete but it is assumed to be nonverifi able i e not observable to third parties such as a court 1 when they sign the con tract the parties want to specify for any possible realization of the valuations s b whether or not there will be trade and the price p s b at which it will take place the contract describes the procedure that will be followed after the valuations are real ized the purpose of this procedure is to make sure that the original intentions of the parties are indeed carried out the idea is that the steps laid out in the contract are independent of s b and hence are en forceable by a third party or by a social convention in game theoretic terms a contract specifies a game form that imple ments the function p in the sense that for all s and b p s b is the resulting game s unique subgame perfect equilibrium out come in the context of this scenario we shall investigate the set of price functions p s b that can be so implemented by a contract and examine how this set is affected by the requirement that the contract be renegotia

optimal monetary and fiscal policy in a currency union we lay out a tractable model for the analysis of optimal monetary and fiscal policy in a currency union the monetary authority sets a common interest rate for the union whereas fiscal policy is implemented at the country level through the choice of government spending in the presence of country specific shocks and nominal rigidities the policy mix that is optimal from the viewpoint of the union as a whole requires that inflation be stabilized at the union level by the common central bank whereas fiscal policy has a country specific stabilization role one beyond the efficient provision of public goods

time variation of higher moments in a financial market with heterogeneous agents an analytical approach a growing body of recent literature allows for heterogenous trading strategies and limited rationality of agents in behavioral models of financial markets more and more this literature has been concerned with the explanation of some of the stylized facts of financial markets it now seems that some previously mysterious time series characteristics like fat tails of returns and temporal dependence of volatility can be observed in many of these models as macroscopic patterns resulting from the interaction among different groups of speculative traders however most of the available evidence stems from simulation studies of relatively complicated models which do not allow for analytical solutions in this paper this line of research is supplemented by analytical solutions of a simple variant of the seminal herding model introduced by kirman 1993 embedding the herding framework into a simple equilibrium asset pricing model we are able to derive closed form solutions for the time variation of higher moments as well as related quantities of interest enabling us to spell out under what circumstances the model gives rise to realistic behavior of the resulting time series

individual expectations limited rationality and aggregate outcomes recent studies suggest that the type of strategic environment or expectation feedback can have a large impact on whether the market can learn the rational fundamental price we present an experiment where the fundamental price experiences large unexpected shocks markets with negative expectation feedback strategic substitutes quickly converge to the new fundamental while markets with positive expectation feedback strategic complements do not converge but show underreaction in the short run and overreaction in the long run a simple evolutionary selection model of individual learning explains these differences in aggregate outcomes

an empirical assessment of optimal monetary policy in the euro area we estimate a new keynesian dsge model for the euro area under alternative descriptions of monetary policy discretion commitment or a simple rule after allowing for markov switching in policy maker preferences and shock volatilities this reveals that there have been several changes in euro area policy making with a strengthening of the anti inflation stance in the early years of the erm which was then lost around the time of german reunification and only recovered following the turmoil in the erm in 1992 the ecb does not appear to have been any more conservative as aggregate euro area policy was under bundesbank leadership the estimates also suggest that the most appropriate description of policy is that of discretion with no evidence of commitment in the euro area as a result although both good luck and good policy played a role in the moderation of inflation and output volatility in the euro area the welfare gains would have been substantially higher had policy makers been able to commit adopting a flexible price level target would lead to outcomes close to commitment

on the need for fiscal constraints in a monetary union the desirability of fiscal constraints in monetary unions depends critically on whether the monetary authority can commit to following its policies if it can commit then debt constraints can only impose costs if it cannot commit then fiscal policy has a free rider problem and debt constraints may be desirable this type of free rider problem is new and arises only because of a time inconsistency problem

experimental evidence on inflation expectation formation using laboratory experiments within a new keynesian sticky price framework we study the process of inflation expectation formation we focus on adaptive learning and rational expectations contrary to the previous literature that mostly studied simple heuristics using a test for rational expectations that allows heterogeneity of expectations we find that we cannot reject rationality for about 40 of subjects more than 20 of subjects are also best described by adaptive learning models where they behave like econometricians and update their model estimates every period however rather than using a single forecasting model switching between models describes their behavior better switching is more likely to occur when experimental economy is in a recession

on the diffusion of new technology a game theoretic approach this paper is an attempt at a rigorous albeit not exceedingly general analysis of the diffusion of new technology in particular consider an industry composed of two firms each using the current best practice technology the firms are assumed to be operating at nash equilibrium output levels generating a market price given demand and profit allocations when a cost reducing innovation is announced each firm must determine when if ever to adopt it based in part upon the discounted cost of implementing the new technology and in part upon the behavior of the rival firm if either firm adopts before the other it can expect to make substantial profits at the expense of the other firm on the other hand the discounted sum of purchase price and adjustment costs may decline with the lengthening of the adjustment period as various quasi fixed factors become more easily variable therefore although waiting costs the firm more in terms of foregone profits it may save money on the cost of purchasing the new technology thus the firm must weigh the costs and benefits of delaying adoption as well as take account of its rival s strategic behavior

the optimal timing of procurement decisions and patent allocations in a patent race social incentives and private incentives may sometimes coincide and at other times diverge too many researchers remain in the race if the social planner cannot determine what stage the researchers have achieved this informational constraint can result in a socially suboptimal outcome we construct a mechanism in which a planner exploits the researchers private information to determine when and to whom to allocate rights to pursue the final prize this mechanism does not require any payments and therefore will not distort earlier investment incentives it is solvable by the iterative elimination of dominated strategies

novelty and disclosure in patent law the stringency of the novelty requirement in patent law affects the pace of innovation because it affects the amount of technical information that is disclosed among firms it also affects ex ante profitability of research we compare weak and strong novelty requirements from the standpoint of social efficiency we ask how our answer depends on the rule that determines which firm gets a patent when two firms have patents pending on the same technology the possible rules are first to invent which applies in the u s and first to file which applies everywhere else

microfoundations for switching behavior in heterogeneous agent models an experiment we run a laboratory experiment to study how human subjects switch between several profitable alternatives framed as mutual funds in order to provide a microfoundation for so called heterogeneous agent models the participants in our experiment have to choose repeatedly between two three or four experimental funds the time series of fund returns are exogenously generated prior to the experiment and participants are paid for each period according to the return of the fund they choose for most cases participants decisions can be successfully described by a discrete choice switching model often applied in heterogeneous agent models provided that a predisposition toward one of the funds is included the estimated intensity of choice parameter of the discrete choice model depends on the structure of the fund returns in particular it increases with correlation between past and future returns this suggests human subjects do not myopically chase past returns but are more likely to do so when past returns are more predictive of future returns a feature that is absent in the standard heterogeneous agent models

firms r d decisions under incomplete information abstract the paper considers a patent race in which firms do not know their relative positions in this setting firms that start in the same position proceed at the highest possible speed and if one firm has an initial advantage it preempts the rival but at the cost of dissipating a significant part of its monopoly rent so the paper shows that incomplete information in a patent race leads to rent dissipation the latter is higher the higher the value of the prize and the lower the cost of r d thus for innovations that provide relatively high profits the time to discovery is shortened but the social losses are likely to be high due to duplication of effort