market triggered changes in capital structure equilibrium price dynamics we analyze the internal consistency of using the market price of a firm s equity to trigger a contractual change in the firm s capital structure given that the value of the equity itself depends on the firm s capital structure of particular interest is the case of contingent capital for banks in the form of debt that converts to equity when conversion is triggered by a decline in the bank s stock price we analyze the problem of existence and uniqueness of equilibrium values for a firm s liabilities in this context meaning values consistent with a market price trigger discrete time dynamics allow multiple equilibria in contrast we show that the possibility of multiple equilibria can largely be ruled out in continuous time where the price of the triggering security adjusts in anticipation of breaching the trigger our main condition for existence of an equilibrium requires that the consequences of triggering a conversion be consistent with the direction in which the trigger is crossed for the design of contingent capital with a stock price trigger this condition may be interpreted to mean that conversion should be disadvantageous to shareholders and it is satisfied by setting the trigger sufficiently high uniqueness follows provided the trigger is sufficiently accessible by all candidate equilibria we illustrate precise formulations of these conditions with a variety of applications

merger failure and merger profitability the focus of the paper is the effect of merger proposals on the expected profitability of the bidder and the target we illustrate how an unsuccessful bid may increase the profitability of the target but reduce the profitability of the bidding firm relative to the profitability of the firms before the merger offer the profitability of a merger proposal is lowered due to learning from rejection we use our theoretical model to explain empirical work on this issue theoretical work on the profitability of takeovers has rarely focused on the problem of unsuccessful merger proposals or tender offers this is unfortunate because the decision that is generally available to a firm is not whether it should merge with another firm but rather whether it makes a merger proposal or tender offer in this paper we contend that failure to take account of this may bias estimates of the profitability of takeover attempts the focus of the paper is the effect of merger proposals on the expected profitability of the bidding firm and the target firm we describe a theoretical model to show how an unsuccessful bid may increase the profitability of the target but reduce the profitability of the bidding firm relative to the profitability of the firms before the merger offer this is independent of any effect of potential future takeovers on the value of the firm consequently the profitability of a merger proposal will be lower than in the absence of any effect conditional on rejection the assumption causing this result is that a target firm has private information about its profitability which is not available to the bidding firm assume that there is uncertainty about the profitability of the target and that the bidder offers x dollars for the target the target accepts if its profits from not being merged are less than x and is rejected otherwise hence the response of the target to a merger proposal reveals information on the competitiveness or profitability of the target we further assume that the two firms the bidder and target compete in a duopolistic market and play a cournot game in quantities if a merger does not occur therefore we are restricting attention to horizontal mergers in the equilibrium of our model bidding firms that suffer rejection of their we would like to thank peter cramton norman ireland alvin klevorick and james mirrlees and two anonymous referees for helpful comments this is true for e g salant switzer and reynolds 1983 davidson and denekere 1983 perry and porter 1985 and grossman and hart 1980

strategic extremism why republicans and democrats divide on religious values party platforms differ sharply from one another especially on issues with religious content such as abortion or gay marriage given the high return to attracting the median voter why do vote maximizing politicians take extreme positions in this paper we find that strategic extremism depends on an intensive margin where politicians want to induce their core constituents to vote or make donations and the ability to target political messages toward those core constituents our model predicts that the political relevance of religious issues is highest when around one half of the voting population attends church regularly using data from across the world and within the united states we indeed find a nonmonotonic relationship between religious extremism and religious attendance

boom and bust cycles external imbalances and the real exchange rate when the current account balance and net capital outflows do not exactly offset each other international payment flows arise payment flows into a country push the real exchange rate up payment outflows push it down this article uses a model of optimal consumption and portfolio choice to determine the factors that drive international payment flows during boom and bust cycles it shows that during such episodes capital inflows first exceed the deficit on current account strengthening the currency later on when the return on domestic capital reverts to its normal level the current account recovers yet the overall decline of the net foreign asset position provokes a fall of the real exchange rate even below its initial level case studies of countries experiencing rapid economic expansions followed by economic and financial meltdowns confirm the article s theoretical predictions

e ztax tax salience and tax rates this paper examines whether the salience of a tax system affects equilibrium tax rates i analyze how tolls change after toll facilities adopt electronic toll collection etc drivers are substantially less aware of tolls paid electronically i estimate that in steady state tolls are 20 to 40 percent higher than they would have been without etc consistent with a salience based explanation for this toll increase i find that under etc driving becomes less elastic with respect to the toll and toll setting becomes less sensitive to the electoral calendar alternative explanations appear unlikely to be able to explain the findings

crises and exchange rate regimes time to break down the bipolar view we revisit the link between crises and exchange rate regimes err using a panel of 90 developed and developing countries over the period 1980 2009 we find that corner err are not more prone to crises compared to intermediate err this finding holds for different types of crises banking currency and debt and is robust to a wide set of alternative specifications consequently we clearly break down the traditional bipolar view countries that aim at preventing crisis episodes should focus less on the choice of the err and instead implement sound structural macroeconomic policies

collusion and overlending i introduction for a long time have korean companies been engaged in unbridled expansionism financed through loans inefficient octopus style management and over and duplicate investment thus expediting the structural failure of the economy this failure to concentrate on profits consolidation and efficiency provided the fuse to the bankruptcy bombs that triggered the foreign exchange and economic crises the collusion between the conglomerates financial sector and politicians made this financial monopoly possible chosun ilbo december 26 1997 collusion and overlending in the korean financial sector may be best illustrated by the above editorial highlight of chosun ilbo the most read newspaper in korea its 1997 financial crisis is primarily triggered by continual bankruptcies of chaebols conglomerates which with assistance from politicians had borrowed heavily from financial institutions in financing their investment projects 1 unlike some other asian countries experiencing problems in their financial sector due to shifts in investment projects toward real estates such as japan hong kong and thailand chaebols in korea concentrated mostly on manufacturing activities 2 in this study we establish a tractable model of overlending with three key players namely chaebols financial institutions and politicians as highlighted in chosun ilbo the model is designed to achieve two primary goals that are crucial for matching some key observations during the korean turmoil first we illustrate how overlending can be an equilibrium outcome with collusion between chaebols and politicians when the economic environment is favorable this occurs despite that such a collusion distorts normal borrowing lending operation by causing a discernible shift in loan composition from more to less productive investment projects second we show that as the economic environment gradually deteriorates there can be a shift from a collusion to a no collusion equilibrium the combination of deterioration in fundamentals and expectations of an equilibrium shift can trigger economy wide financial crisis more specifically we construct a simple principal supervisor agent model of corruption and overlending the principal is the formal authority of loan decision making of a financial institution or in short the financial institution the supervisor is a politician who serves as the informational intermediary in the borrowing lending arrangement via his her connections and networking 3 the agent is a chaebol of an unknown type which seeks for external financing of a set of risky projects a politician s favorable signal about the borrowing chaebol s overall performance would grant the approval of the loan to finance an array of risky projects whose returns depend on idiosyncratic shocks that cannot be washed out in aggregation within the chaebol as an outside alternative to making the loan the financial institution can invest in the world capital market where a fixed rate of return is guaranteed this portfolio decision depends on a comparison of the expected average returns on the given set of risky projects with the safe returns on investments in the world capital market while both the chaebol s type and the state of nature are unobservable to the financial institution we for simplicity assume that politician s connections and networking can fully uncover the true type of the chaebol this valuable information possessed by the politician is one that the financial institution has an incentive to purchase but a low type chaebol has an incentive to conceal whether the politician ends up revealing truthfully this information depends on how much to obtain from the lender in terms of general support versus how much to gain from the borrower in terms of bribes or side payments when a low type chaebol has the politician on its side information is distorted and a collusion equilibrium arises

transparency and economic policy we provide a two period model of political competition in which voters imperfectly observe the electoral promises made to other voters imperfect observability generates an incentive for candidates to offer excessive transfers even if voters are homogeneous and taxation is distortionary government spending is larger than in a world of perfect observability transfers are partly financed through government debt and the size of the debt is higher in less transparent political systems the model provides an explanation of fiscal churning it also predicts that groups whose transfers are less visible to others receive higher transfers and that imperfect transparency of transfers may lead to underprovision of public goods from the policy perspective the main novelty of our analysis is a separate evaluation of the transparency of spending and the transparency of revenues we show that the transparency of the political system does not unambiguously improve efficiency transparency of spending is beneficial but transparency of revenues can be counterproductive because it endogenously leads to increased wasteful spending

assets and liabilities and scottish independence scottish independence implies an economic future that is different from remaining in the united kingdom the economic debate largely comes down to whether this would leave scots better or worse off by most measures scotland s current economic standing is very similar to that of an average uk region output per head income and unemployment are almost all exactly the same as the average uk region this is not surprising given the economic and social integration and shared institutions and is consistent with the idea of conditional convergence this suggests that after controlling for differences in institutions and other characteristics so called initial conditions countries tend to converge to similar levels of income 1 however if scotland becomes an independent nation some of the shared uk assets liabilities and institutions would need to be divided up this would change the initial conditions for scotland and the rest of the uk and therefore we would be likely to see a different economic future for both regions see barro and sala i martin 1991

models of currency crises with self fulfilling features the discomfort a government suffers from speculation against its currency determines the strategic incentives of speculators and the scope for multiple currency market equilibria after describing an illustrative model in which high unemployment may cause an exchange rate crisis with self fulfilling features the paper reviews some other self reinforcing mechanisms recent econometric evidence seems consistent with the practical importance of these mechanisms

a new bankruptcy procedure that uses multiple auctions abstract we propose a new bankruptcy procedure that makes use of multiple auctions the procedure is designed to work even when capital markets do not function well for example in developing economies or in economies in transition although it can be used in all economies

a theory of participation in elections we analyze a model of participation in elections in which voting is costly and no vote is pivotal ethical agents are motivated to participate when they determine that agents of their type are obligated to do so unlike previous duty based models of participation in our model an ethical agent s obligation to vote is determined endogenously as a function of the behavior of other agents our model predicts high turnout and comparative statics that are consistent with strategic behavior jel d72

the politics of speculative attacks in industrial democracies recent models of speculative currency crises contend that market expectations of policy behavior can trigger a speculative attack we argue that political processes and partisan objectives inform expectations about the government s commitment to the exchange rate first market actors anticipate periods when the partisan identity of a government may change through an election or a cabinet collapse second party labels provide information to currency traders about the policy objectives of a potential government consequently we contend that the probability of a speculative attack will be higher when markets expect the cabinet to end and when the cabinet dissolution is likely to produce a leftward shift in policy a discrete timesurvival model is used to estimate the probability that a cabinet will dissolve in any given month for sixteen parliamentary democracies from 1970 to 1995 the predicted values are then used as a proxy for market expectations in a model of speculative currency crises

seigniorage revenue deficits and self fulfilling currency crises abstract this paper examines potential resolutions to the conflict between a fixed exchange rate and seigniorage revenue requirement of a stylized developing economy that gives rise to a currency crisis the government has an informational advantage and can decide when it is optimal to invoke an escape clause i e to drop the peg and float speculators must guess when the crisis will happen based on their assessment of the probability of collapse and this makes pegged exchange rate equilibria unstable

uninformed votes information effects in presidential elections theory recent scholarship has emphasized the potential importance of cues information shortcuts and statistical aggregation processes in allowing relatively uninformed citizens to act individually or collectively as if they were fully informed hypotheses uninformed voters successfully use cues and information shortcuts to behave as if they were fully informed failing that individual deviations from fully informed voting cancel out in a mass electorate producing the same aggregate election outcome as if voters were fully informed methods hypothetical fully informed vote choices are imputed to individual voters using the observed relationship between political information and vote choices for voters with similar social and demographic characteristics estimated by probit analysis of data from national election study surveys conducted after the six most recent united states presidential elections results both hypotheses are clearly disconfirmed at the individual level the average deviation of actual vote probabilities from hypothetical fully informed vote probabilities was about ten percentage points in the electorate as a whole these deviations were significantly diluted by aggregation but by no means eliminated incumbent presidents did almost five percentage points better and democratic candidates did almost two percentage points better than they would have if voters had in fact been fully informed

macroeconomic regime switches and speculative attacks this paper explains a currency crisis as an outcome of a switch in how monetary policy and fiscal policy are coordinated the paper develops a model of an open economy in which monetary policy starts active fiscal policy starts passive and in a particular state of nature monetary policy switches to passive and fiscal policy switches to active the probability of the regime switch is endogenous and changes over time together with the state of the economy the regime switch is preceded by a sharp increase in interest rates and causes a jump in the exchange rate the model predicts that currency composition of public debt affects dynamics of macroeconomic variables furthermore the model is consistent with evidence from recent currency crises in particular small seigniorage revenues

salience and consumer choice we present a theory of context dependent choice in which a consumer s attention is drawn to salient attributes of goods such as quality or price an attribute is salient for a good when it stands out among the good s attributes relative to that attribute s average level in the choice set or more broadly the choice context consumers attach disproportionately high weight to salient attributes and their choices are tilted toward goods with higher quality price ratios the model accounts for a variety of disparate evidence including decoy effects and context dependent willingness to pay it also suggests a novel theory of misleading sales

a currency crisis model with an optimising policymaker abstract a model is presented in which the abandonment of a fixed exchange rate regime is triggered by an optimising policymaker who wants to loosen monetary policy and boost aggregate demand agents in the foreign exchange market know the policymaker s objective function and build expectations of a regime switch into interest differentials the resulting rise in interest rates affects the policymaker s decision to switch regime it is shown that a rational expectations equilibrium exists where the fixed rate is abandoned in response to adverse demand shocks in some circumstances multiple equilibria arise which may lead to self fulfilling crises

delaying the inevitable interest rate defense and balance of payments crises the classical model of balance of payments crises implicitly assumes that the central bank sits passively as international reserves dwindle in practice however central banks typically defend pegs aggressively by raising short term interest rates this paper analyzes the feasibility and optimality of raising interest rates to delay a potential bop crisis interest rate policy works through two distinct channels by raising demand for domestic interest bearing liquid assets higher interest rates tend to delay the crisis higher interest rates however increase public debt service and imply higher future inflation which tends to bring forward the crisis we show that under certain conditions it is feasible to delay the crisis but raising interest rates beyond a certain point may actually hasten the crisis a similar nonmonotonic relationship emerges between welfare and the increase in interest rates it is thus optimal to engage in some active interest rate defense but only up to a certain point i

do conditional cash transfers affect electoral behavior evidence from a randomized experiment in mexico this article reexamines the argument that targeted programs increase pro incumbent voting by persuading beneficiaries to cast ballots against their first partisan choice the evidence comes from the randomized component of progresa the pioneering mexican conditional cash transfer cct program experimental data show that early enrollment in the program led to substantive increases in voter turnout and in the incumbent s vote share in the 2000 presidential election the experiment also reveals that opposition parties vote shares were unaffected by the program thus the electoral bonus generated by ccts may be best explained by a mobilizing rather than persuasive mechanism these findings are difficult to reconcile with the notion that the electoral effects of ccts are a result of prospective concerns triggered by threats of program discontinuation or endogenous program enrollment instead the evidence in this article suggests that ccts mobilizing effects are compatible with programmatic politics

balanced budget redistribution as the outcome of political competition this paper models balanced budget redistribution between socio economic groups as the outcome of electoral competition between two political parties equilibrium is unique in the present model and a sufficient condition for existence is given requiring that there be enough stochastic heterogeneity with respect to party preferences in the electorate the validity of hotelling s principle of minimum differentiation and of director s law are examined under alternative hypotheses concerning administrative costs of redistributions and voter s possibilities both of abstaining from voting and of becoming campaign activists for one of the parties the policy strategy of expected plurality maximization is contrasted with the strategy of maximizing the probability of gaining a plurality incomes are fixed and known so lump sum taxation is feasible however constraints on tax transfer differentiation between individuals are permitted in the analysis

collapsing exchange rate regimes in the presence of a parallel market this paper develops a model of an economy where the fixed exchange rate is overvalued and coexists with a parallel market for foreign currency such a situation persists because the parallel marker is used by the central authorities as an instrument to delay policy changes using the haitian experience this paper estimates a rationing parameter of foreign currency in the official market which translates the extent of tolerance of the parallel market the paper also produces estimates of onestep ahead probability of devaluation rationing has been severe and the probability of collapse has reached high levels during the period studied

stage financing and the role of convertible securities venture capital financing is characterized by extensive use of convertible securities and stage financing in a model where a venture capitalist provides staged financing for a project we illustrate an advantage of convertible debt or warrants over a mixture of debt and equity essentially when the venture capitalist retains the option to abandon the project the entrepreneur has an incentive to engage in window dressing and bias positively the short term performance of the project reducing the probability that it will be liquidated an appropriately designed convertible security prevents such behaviour because window dressing also increases the probability that the venture capitalist will exercise the conversion option becoming the owner of a substantial fraction of the project s equity

determinants and costs of current account reversals under heterogeneity and serial correlation using large panel data sets for analysis of determinants and costs of reversals asks for controls of latent heterogeneity among countries this article performs a bayesian analysis which allows for a parsimonious yet flexible handling of country specific heterogeneity via random coefficients and serially correlated errors consideration of persistence within the employed macroeconomic data is important to gauge the impact of explaining variables suggested by theory correctly bayesian specification tests provide evidence in favour of models incorporating heterogeneity and serial correlation the results suggest that costs of reversals are overestimated when country specific heterogeneity is neglected and stress the importance of external variables in explaining current account reversals results are checked for robustness against the underlying reversal definition

competition for attention we present a model of market competition in which consumers attention is drawn to the products most salient attributes firms compete for consumer attention via their choices of quality and price strategic positioning of a product affects how all other products are perceived with this attention externality depending on the cost of producing quality some markets exhibit commoditized price salient equilibria while others exhibit de commoditized quality salient equilibria when the costs of quality change innovation can lead to radical shifts in markets as in the case of decommoditization of the coffee market by starbucks in the context of financial innovation the model generates the phenomenon of reaching for yield

a group rule utilitarian approach to voter turnout theory and evidence this paper explores a group rule utilitarian approach to understanding voter turnout inspired by the theoretical work of john c harsanyi 1980 and timothy j feddersen and alvaro sandroni 2002 it develops a model based on this approach and studies its performance in explaining turnout in texas liquor referenda the results are encouraging the comparative static predictions of the model are broadly consistent with the data and a structurally estimated version of the model yields reasonable coefficient estimates and fits the data well the structurally estimated model also outperforms a simple expressive voting model

learning large deviations and recurrent currency crises this article studies a version of obstfeld s journal of international economics 43 1997 61 77 escape clause model the model is calibrated to produce three rational expectations equilibria two of these equilibria are e stable and one is unstable dynamics are introduced by assuming that agents must learn about the government s decision rule it is assumed they do this using a stochastic approximation algorithm it turns out that as a certain parameter describing the sensitivity of beliefs to new information gets small the algorithm converges to a small noise diffusion process the dynamics of exchange rate changes are then characterized using large deviation techniques from freidlin and wentzell random perturbations of dynamical systems second edition berlin springer verlag 1998 these methods describe the sense in which the limiting distribution of exchange rate changes is approximated by a two state markov switching process where the two states correspond to the two e stable equilibria the model is calibrated to the exchange rate histories of argentina brazil and mexico currency crises in these countries resemble the predicted escape routes of the model a key feature of these escape routes is that expectations of a devaluation erupt suddenly without large contemporaneous shocks this is consistent with evidence showing that crises are often poorly anticipated by financial markets

belief in a just world and redistributive politics international surveys reveal wide differences between the views held in different countries concerning the causes of wealth or poverty and the extent to which people are responsible for their own fate at the same time social ethnographies and experiments by psychologists demonstrate individuals recurrent struggle with cognitive dissonance as they seek to maintain and pass on to their children a view of the world where effort ultimately pays off and everyone gets their just deserts this paper offers a model that helps explain i why most people feel such a need to believe in a just world ii why this need and therefore the prevalence of the belief varies considerably across countries iii the implications of this phenomenon for international differences in political ideology levels of redistribution labor supply aggregate income and popular perceptions of the poor the model shows in particular how complementarities arise endogenously between individuals desired beliefs or ideological choices resulting in two equilibria a first american equilibrium is characterized by a high prevalence of just world beliefs among the population and relatively laissez faire policies the other european equilibrium is characterized by more pessimism about the role of effort in economic outcomes and a more extensive welfare state more generally the paper develops a theory of collective beliefs and motivated cognitions including those concerning money consumption and happiness as well as religion

the making of the turkish financial crisis abstract at the turn of the century the turkish economy was in need of an urgent stabilization in order to halt a treacherous process of inflation unsustainable public debt accumulation and increasing financial fragility resulting from irresponsible policies and lack of fiscal discipline that had been endemic since the early 1980s the stabilization program launched with support from the imf has however failed to deliver its promises plunging the economy into an unprecedented recession largely because of serious shortcomings in its design as well as in crisis intervention which appears to have drawn no useful lessons from recent crises in emerging markets

the rationale behind interfirm tender offers information or synergy this paper investigates the rationale behind interlirm tender offers by examining the returns realized by the stockholders of lirms that were the targets of unsuccessful tender offers and lirms that have made unsuccessful offers our results suggest that the permanent positive revaluation of the unsuccessful target shares documented by dodd and ruback 1977 and bradley 1980 is due primarily to the emergence of and or the anticipation of another bid that would ultimately result in the transfer of control of the target resources we also find that the rejection of a tender offer has differential effects on the share prices of the unsuccessful bidding firms depending upon whether the tender offer process results in a change in the control of target resources on the basis of these results we conclude that acquisitions via tender offers are attempts by bidding firms to exploit potential synergies not simply superior information regarding the true value of the target resources

costly information acquisition experimental analysis of a boundedly rational model the directed cognition model assumes that agents use partially myopic option value calculations to select their next cognitive operation the current paper tests this model by studying information acquisition in two experiments in the first experiment information acquisition has an explicit financial cost in the second experiment information acquisition is costly because time is scarce the directed cognition model successfully predicts aggregate information acquisition patterns in these experiments when the directed cognition model and the fully rational model make demonstrably different predictions the directed cognition model better matches the laboratory evidence jel d83

currency and financial crises in turkey 2000 2001 bad fundamentals or bad luck this paper attempts to explore the underlying causes of twin crises experienced by turkey in november 2000 and february 2001 we study an extensive set of leading indicators of crises that are drawn from the existing literature our results identify three sets of vulnerabilities in the turkish economy in triggering the financial crisis and bringing about the collapse of the turkish lira these are first the weak external position caused by excessive debt burden combined with the loss of competitiveness second the weak fiscal position resulting from the record levels of interest payments on domestic borrowing and most importantly third weaknesses in the financial and banking sector given these observations we argue that the success of financial sector reform is instrumental not only for putting the economy on a sustainable recovery path but also for reducing the likelihood of similar crises in the future the general lesson to be drawn from this experience is that a sound financial system is a pre condition for the successful operation of a fixed exchange rate regime

the politics of ambiguity politicians face a trade off between the policies that maximize their chances of reelection and their most preferred policies or the policies most preferred by the constituency which they represent this paper analyzes this trade off in a dynamic electoral model in which the voters are not fully informed about the preferences of the incumbent first we show that the incumbent follows a policy which is intermediate between the other party s ideal policy and his own ideal policy second we show that often the incumbent has an incentive to choose procedures which make it difficult for voters to pinpoint his preferences with absolute precision thus politicians may prefer to be ambiguous

information immobility and the home bias puzzle many argue that home bias arises because home investors can predict home asset payoffs more accurately than foreigners can but why does global information access not eliminate this asymmetry we model investors endowed with a small home information advantage who choose what information to learn before they invest surprisingly even when home investors can learn what foreigners know they choose not to investors profit more from knowing information others do not know learning amplifies information asymmetry the model matches patterns of local and industry bias foreign investments portfolio outperformance and asset prices finally we propose new avenues for empirical research

negative voters electoral competition with loss aversion this paper studies how voter loss aversion affects electoral competition in a downsian setting assuming that the voters reference point is the status quo we show that loss aversion has a number of effects first for some values of the status quo there is policy rigidity both parties choose platforms equal to the status quo regardless of other parameters second there is a moderation effect when there is policy rigidity the equilibrium policy outcome is closer to the moderate voters ideal point than in the absence of loss aversion in a dynamic extension of the model we consider how parties strategically manipulate the status quo to their advantage and we find that this increases policy rigidity finally we show that with loss aversion incumbents adjust less than challengers to changes in voter preferences the underlying force is that the status quo works to the advantage of the incumbent this prediction of asymmetric adjustment is new and we test it using elections to us state legislatures the results are as predicted incumbent parties respond less to shocks in the preferences of the median voter

gold monetization and gold discipline gold and its price have emerged as frequent topics of both academic and government debate 2 public attention focused on the gold market since gold s price began fluctuating violently in 1980 and 1981 has turned to gold as a possible means of removing some discretion inherent in the current fiat money system since lack of adherence to monetary rules can lead to problems of dynamic policy inconsistency academic economists have begun seriously to reconsider monetary standards based either on gold or on some other commodity as politically feasible methods of establishing rules 3

explaining the duration of exchange rate pegs abstract this paper is an empirical investigation of the duration of exchange rate pegs in 16 latin american countries and jamaica we identify factors that influence peg duration using logit analysis the real exchange rate and the level of international liquidity are significant determinants of the monthly likelihood of devaluation structural variables such as the openness of an economy and its geographical trade concentration and political variables such as changes in the executive also significantly affect the likelihood of a devaluation there is some evidence that the likelihood of a devaluation first rises and subsequently declines during the first year of a peg

a model of candidate location when one candidate has a valence advantage that under some fairly weak assumptions for all levels of the valence advantage the advantaged candidate chooses a more moderate position than the disadvantaged candidate empirical studies of congressional elections by fiorina 1973 and ansolabehere snyder and stewart 2001 support this result d owns 1957 seminal work presents a puzzle for scholars of u s elections why do candidates not converge to the median voter one of the best explanations is that the candidates themselves have ideological preferences as calvert 1985 and wittman 1977 1983 have shown when candidates have such preferences and they are sufficiently uncertain about the preferences of the median voter then they do not converge although they may moderate their positions from their ideal point the basic version of the calvert wittman model however does not account for another basic fact of u s elections often one of the candidates has an advantage due to a nonpolicy factor such as incumbency greater campaign funds better name recognition superior charisma superior intelligence and so on stokes has dubbed such factors valence factors and he has noted their importance in u s elections stokes 1963 1992 1 in this article i extend the basic calvert wittman model by giving one candidate a valence advantage over the other i show that if the valence characteristics of the candidates are approximately equal then when a candidate s valence advantage increases this causes her to move toward the

television and voter turnout i use variation across markets in the timing of television s introduction to identify its impact on voter turnout the estimated effect is significantly negative accounting for between a quarter and a half of the total decline in turnout since the 1950s i argue that substitution away from other media with more political coverage provides a plausible mechanism linking television to voting as evidence for this i show that the entry of television in a market coincided with sharp drops in consumption of newspapers and radio and in political knowledge as measured by election surveys i also show that both the information and turnout effects were largest in off year congressional elections which receive extensive coverage in newspapers but little or no coverage on television

committee design with endogenous information this paper is concerned with the arrangements for collective decision making in a world where agents must be motivated to acquire information the analysis identifies some basic forces shaping the design of panels of decision makers referees managers jurors etc in situations where decision makers are useful only in so far as they expend some effort to gain information about the alternatives at hand these situations are common one being the refereeing process where an editor requires the opinions of a number of experts who must read the paper acquire information in order to give an opinion as to publication analogously in committees which screen applicants to a programme the committee members must gain information about the applicant s qualifications and likelihood of success in order to evaluate whether to admit him her finally in trial juries it is important that jurors pay attention to the evidence in order to make an informed judgement 1 we focus on environments where information is a public good in the sense that the social benefits of one decision maker acquiring information exceed the private benefits a good mechanism in this environment must not only aggregate information efficiently but also induce the decision makers to acquire information we analyse the design of voting mechanisms our problem is to choose two parameters which determine both the incentive to acquire information and the efficiency with which information is aggregated the first parameter is the size of the decision making unit the number of committee members the second is the plurality required to overturn the status quo the voting rule our main result is this a voting rule that requires a large plurality in the extreme unanimity to upset the status quo can be optimal only if the information available to each committee member is sufficiently accurate when individual information is noisy the drawback

reserve accumulation and financial crises from individual protection to systemic risk abstract this paper provides a new perspective on the relationship between countries international reserve holdings and financial crises while the local view holds that reserves may prevent domestic crises it overlooks that the accumulation of reserves relaxes the financing constraint of the reserve currency country and may cause a financial crisis in the centre which is transmitted globally according to this global view reserve accumulation might destabilize the international financial system since the crisis affects all countries alike the accumulation of reserves imposes a negative externality on non accumulating countries we integrate this idea in a theoretical model of the optimal amount of reserves and illustrate the gap between local and global optimality the consideration of systemic risk lowers the demand for reserves moreover if a supranational authority determines the optimal level of reserves it internalizes the negative externality and accumulates fewer reserves a macroprudential tax on reserve hoardings might implement the socially optimal solution our calibration analysis shows that these considerations are economically significant they lower the optimal amount of reserves in the benchmark case by 45

would rational voters acquire costly information abstract we analyze an election in which voters are uncertain about which of two alternatives is better for them voters can acquire some costly information about the alternatives in agreement with downs s rational ignorance hypothesis individual investment in political information declines to zero as the number of voters increases however if the marginal cost of information is near zero for nearly irrelevant information there is a sequence of equilibria such that the election outcome is likely to correspond to the interests of the majority for arbitrarily large numbers of voters thus rationally ignorant voters are consistent with a well informed electorate

revealed preference rational inattention and costly information acquisition we develop a revealed preference test for optimal acquisition of costly information the test encompasses models of rational inattention sequential signal processing and search we provide limits on the extent to which attention costs can be recovered from choice data we experimentally elicit state dependent stochastic choice data of the form the tests require in simple cases tests con rm that subjects adjust their attention in response to incentives as the theory dictates

overconfidence in political behavior this paper studies theoretically and empirically the role of overconfidence in political behavior our model of overconfidence in beliefs predicts that overconfidence leads to ideological extremeness increased voter turnout and stronger partisan identification the model also makes nuanced predictions about the patterns of ideology in society these predictions are tested using unique data that measure the overconfidence and standard political characteristics of a nationwide sample of over 3 000 adults our numerous predictions find strong support in these data in particular we document that overconfidence is a substantively and statistically important predictor of ideological extremeness voter turnout and partisan identification jel c83 d03 d72 d83

bank m a a market power story this paper analyzes capital market reactions to international bank m a we investigate the combined stock return patterns of targets bidders and their peers upon takeover announcement and closing or withdrawal we distinguish five common m a hypotheses and relate characteristic and mutually exclusive abnormal stock return patterns to each hypothesis the findings show that there are more investors who believe in gains through the exploitation of market power by the post merger entity than investors who believe in any of the other motives tested in the paper in a multinomial logistic model we show that patterns related to market power significantly concur with large relative target size intra industry mergers and increasing market concentration suggesting a substantial lessening of competition through m a

currency crises with the threat of an interest rate defence while virtually all currency crisis models recognise that the decision to abandon a peg depends on how tenaciously policy makers defend it this is seldom modelled explicitly we add the threat of an interest rate defence to the global game model of morris and shin american economic review 88 1998 with an endogenous defence actions of speculators may become strategic substitutes instead of the usual complements nevertheless our generalised model remains tractable and has a unique threshold equilibrium it provides additional insights for instance the threat of an interest rate defence makes speculation riskier and this may be sufficient to keep speculators out when fundamentals are still relatively strong

political connection bank credits and growth evidence from turkey the pervasive existence of government owned banks in emerging economies is often justified by their provision of access to credit in remote and underdeveloped regions that are ignored by private banks this paper analyses whether credits provided by government owned and private banks have a significant role in regional growth and whether this role changes in politically connected areas in turkey our findings imply that private banks significantly improve the economic well being in all turkish provinces regardless of their development level or their political connection with the ruling party however credits by government owned banks are found to be positively related to the per capita growth rate only in the less developed provinces that are advocates of the ruling political party and also developed but not politically connected provinces these results suggest that government owned bank credits as implied by the political view are used for funding politically desirable projects or politically connected borrowers

limited attention and income distribution economists have long been interested in the idea that there is a direct circular relation between poverty and low productivity and not just one that is mediated by market failures usually in asset markets the nutrition based efficiency wage model partha dasgupta and debraj ray 1987 is the canonical example of models where this happens however it has been variously suggested see for example t n srinivasan 1994 that the link from nutrition to productivity and especially the link from productivity to nutrition is too weak to be any more than a small part of the story partha dasgupta himself acknowledges this when he writes nutrition productivity construct provides a metaphor for an economic environment harboring poverty traps partha dasgupta 1997 page 5 we propose an alternative approach to this question based on the idea that attention is a scarce resource that is important for productivity specifically people may not be able to fully attend to their jobs if they are also worrying about problems at home and being distracted in this way reduces productivity but not paying attention at home is also costly early symptoms of a child s sickness may go unnoticed water may run out at the end of the day kerosene for lighting lamps at home might run out and make it hard to do homework etc finally the extent to which home life distracts depends on the nature of home life specifically certain goods e g a good baby sitter a 24 hour piped water supply a connection to a power supply grid can reduce the extent of home life distraction these three assumptions generate an interesting relation between income and productivity that is at the core of our model the non poor in this model by virtue of owning distraction saving goods and services at home are able to focus more on their work hence they will be more productive at work and will be able to afford more distraction saving goods this simple two way relationship between in this abstract was borrowed from another version of this item

the international monetary system forty years after bretton woods review essay in may 1984 a distinguished group of central bankers and economists gathered for a conference at bretton woods to consider the evolution of the world monetary system that was born at that location forty years earlier this volume contains nine essays with accompanying discussion on issues of performance and reform of current international monetary arrangements these papers deal with problems facing the industrialized and the lessdeveloped countries and assess the institutions that have been set up to accommodate these problems the major accomplishments of the original bretton woods conference were of course the establishment of the system of payments based on fixed exchange rates and the organization of the world bank and the international monetary fund as the order developed in the late 40 s and early 50 s each central bank saw it as its duty to intervene in foreign exchange markets to ensure an essentially fixed parity of their currency with respect to the dollar the role of the u s was to guarantee the dollar price of gold at 35 an ounce the system has been called a dollar standard because the dollar played the role of a reserve currency one of the paradoxes of the system as robert triffin pointed out in the early 60 s is that in order to produce a continuing and rapid enough expansion of world reserves the u s had to run balance of payments deficits yet continued deficits by the u s threatened the convertibility of the dollar into gold as it happened the system of fixed parities broke down in the early 70 s not because of a lack of reserves but because a glut of dollars made the bretton woods dollar exchange rates untenable the system eventually evolved into one in which most of the industrialized countries currencies more or less are determined by the market while the currencies of most second and third world countries are pegged to a major currency the floating period has been

collapsing exchange rate regimes some linear examples abstract we construct a pair of linear examples to study the collapse time of a fixed exchange rate regime the first example is a perfect foresight continuous time model which allows calculation of the exact collapse time and the tracking of reserves the second example is a discrete time stochastic model which yields an endogenous probability distribution over the collapse time and produces a forward discount of the exchange rate

electoral competition with rationally inattentive voters how do voters allocate costly attention to alternative political issues and how does selective ignorance of voters interact with policy design by politicians we address these questions by developing a model of electoral competition with rationally inattentive voters rational inattention amplies the eects of preference intensity because voters pay more attention where stakes are higher the model has many potential applications and those that we discuss in more detail imply that extremist voters are more attentive and inuential public goods are under provided divisive issues receive more attention and less transparent candidates choose more extreme policies endogenous attention can also lead to multiple equilibria explaining how poor voters in developing countries can be politically empowered by welfare programs

political competition with campaign contributions and informative advertising this paper presents a theory of political competition with campaign contributions and informative political advertising policy motivated parties compete by selecting candidates and interest groups provide contributions to enhance the electoral prospects of like minded candidates contributions are used to finance advertising campaigns that provide voters with information about candidates ideologies voters update their beliefs rationally given the information they have received the paper uses the theory to analyze the welfare economics of contribution limits such limits are shown to redistribute welfare from ordinary citizens to members of interest groups jel d72 h40

liberalising foreign trade through rose tinted glasses the foreign trade sector has a crucial role to play in economic development trade has variously been described as the engine or handmaiden of growth this key role has stimulated a great deal of interest in the links between trade and growth with the links between trade orientation and exports and exports and growth receiving particularly close attention alongside this time series work there have been a number of multi country studies of trade policy in developing countries those of krueger i 98 i and balassa i 982 are perhaps the best known most of this work has been directed at two questions first what does the structure of protection look like in a given developing country second are there clear links between the structure of protection trade orientation and economic performance it is widely believed in developing countries that the major lending agencies the world bank in particular perceive a clear link between trade orientation and economic performance and that this explains why around three quarters ofall conditions which attach to structural adjustment loans sals feature reform of trade policy the editors of liberalising foreign trade demetrious papageorgiou michael michaely and armeane choksi all of whom are on the world bank staff clearly believe this to be the case judging from their opening statement the benefits of open trading have by now been sufficiently demonstrated and described by economic historians and analysts in this study we take them for granted and turn our minds from the whether to the how vol i p vii in other words it is the timing phasing and sequencing involved in the design and implementation of a trade liberalisation policy that forms the subject matter of the present study vol 7 p i liberalising foreign trade is a world bank organised study which describes and evaluates 36 liberalisation episodes in i 9 countries during the period i950 i982 the study is ambitious in scale28 authors 3 editors 7 volumes and almost 3 ooo pages of text it is the most comprehensive cross country analysis of liberalisation episodes undertaken from a policy perspective a study of this scale is potentially of considerable interest given the liberalisations

the lifetime of a unilateral target zone some extended results abstract in dumas and svensson journal of international economics 36 1994 467 the lifetime of a krugman quarterly journal of economics 106 1991 669 682 type target zone model is found to be extremely long this paper shows that the lifetime of the identical target zone regime can be much lower when real disturbances occur in particular the mean lifetime is found to be very low when real disturbances occur and the real exchange rate elasticity of the demand for domestic goods is very low it is also shown that allowing for monetary disturbances to have real effects has very little effect on the lifetime the results indicate the conditions under which real disturbances might trigger currency crises

bank firm relationships and contagious banking crises this paper argues that in an open economy a banking system with close bank firm relationships may be easily subject to contagious banking crises because it is difficult to distinguish between crony capitalism and good main bank relationships 1 show that if international investors cannot distinguish the bank type the distinction between crony capitalism and good main bank relationships becomes very fuzzy in particular the model can explain sequences of bank defaults within a country even if the insolvent banks are very few ex ante as well as sequences of banking crises among countries that are equally rated by international investors but indeed differ in the ex ante solvency of their banking system

credible pretrial negotiation pretrial negotiation is a structured environment in which to study bargaining with incomplete information when a plaintiff believes that a defendant owes him damages he may first attempt to reach a private settlement before resorting to a costly court imposed judgment a central issue in their negotiations is whether the plaintiff s threat to litigate is credible it is possible for the plaintiff to undermine the credibility of his litigation threat by making a settlement demand that is insufficient as a result the plaintiff must raise his settlement demand to limit the amount of bad news he can learn if his offer is rejected when this credibility constraint is binding traditional comparative static results are reversed in addition even though the defendant is being sued he wants the plaintiff s threat to be credible

optimal sticky prices under rational inattention this paper presents a model in which price setting firms decide what to pay attention to subject to a constraint on information flow when idiosyncratic conditions are more variable or more important than aggregate conditions firms pay more attention to idiosyncratic conditions than to aggregate conditions when we calibrate the model to match the large average absolute size of price changes observed in micro data prices react fast and by large amounts to idiosyncratic shocks but only slowly and by small amounts to nominal shocks nominal shocks have strong and persistent real effects we use the model to investigate how the optimal allocation of attention and the dynamics of prices depend on the firms environment jel e 3 e5 d8

the empirical analysis of fiscal illusion this paper examines the empirical analysis of the five main hypotheses subsumed under the generic term fiscal illusion after placing these hypotheses within a common theoretical framework the paper attempts to evaluate empirical research into the revenue complexity hypothesis the revenue elasticity hypothesis the flypaper effect renter illusion and debt illusion

implications of rational inattention abstract a constraint that actions can depend on observations only through a communication channel with finite shannon capacity is shown to be able to play a role very similar to that of a signal extraction problem or an adjustment cost in standard control problems the resulting theory looks enough like familiar dynamic rational expectations theories to suggest that it might be useful and practical while the implications for policy are different enough to be interesting

policy measures to avoid a currency crisis this paper considers a number of policy measures that may be used to preserve a fixed exchange rate these are analyzed in a model where a switch of exchange rate regime is triggered by an optimizing policymaker in response to extreme economic conditions it is shown how a number of policy measures can be used to alter the balance between the costs and benefits of switching between regimes these policy measures have both a direct effect on the policymaker s choice of regime switching point and an indirect effect through private sector expectations of a regime switch copyright 1995 by royal economic society

attention discrimination theory and field experiments with monitoring information acquisition we link two important ideas attention is scarce and lack of information about an individual drives discrimination in selection decisions our model of allocation of costly attention implies that applicants from negatively stereotyped groups face attention discrimination less attention in highly selective cherry picking markets where more attention helps applicants and more attention in lemon dropping markets where it harms them to test the prediction we integrate tools to monitor information acquisition into correspondence field experiments in both countries we study we find that unfavorable signals minority names or unemployment systematically reduce employers efforts to inspect resumes also consistent with the model in the rental housing market which is much less selective than labor markets we find landlords acquire more information about minority relative to majority applicants we discuss implications of endogenous attention for magnitude and persistence of discrimination in selection decisions returns to human capital and potentially for policy