partnerships lemons and efficient trade we analyze the possibility of efficient trade with informationally interdependent valuations and with a dispersed ownership a crucial role is played by the sign of the derivatives that measure how valuation functions depend on others signals if valuations are increasing functions of other agents signals it is more difficult to achieve efficient trade with interdependent values than with private values where the respective derivatives are zero in contrast if valuations are decreasing functions of other agents signals it is easier to achieve efficient trade with interdependent values our results unify and generalize the insights of cramton et al 1987 myerson and satterthwaite 1983 and akerlof 1970

endogenous trading constraints with incomplete asset markets abstract this paper endogenizes the borrowing constraints on capital in a production economy with incomplete markets we find that these limits get looser with income a property that is consistent with us data on credit limits the framework with endogenous limits is then used to study the effects of a revenue neutral tax reform that eliminates capital income taxes our results illustrate that it is very important to take into account the effects of tax policies on the limits throughout the transition these effects can be big enough to change the overall conclusion about the desirability of a tax reform

on corporate borrowing credit spreads and economic activity in emerging economies an empirical investigation abstract we document a considerable increase in foreign financing by the corporate sector in emerging economies emes since the early 2000s mainly in the form of bond issuance and claim that it has opened up an important channel by which external financial factors can drive economic activity in these economies such claim is substantiated by a strong negative relationship between economic activity and an external financial indicator that we construct for several emes using micro level data on spreads of bonds issued by emes corporations in foreign capital markets three salient features characterize such a negative relationship first the financial indicator has considerable predictive power on future economic activity in these economies even after controlling for other potential drivers of business cycles such as movements in sovereign spreads and global financial risk among others second on average an identified adverse shock to the financial indicator generates a large and protracted fall of real output growth in these economies and up to 14 of its forecast error variance is associated to this shock lastly fluctuations in this indicator also respond strongly to shocks in global financial risk emanating from world capital markets thereby implying that changes in corporate spreads also serve as a powerful propagating mechanism of the effect of changes in global investors risk appetite in emerging markets

credit and inflation under borrowerʼs lack of commitment here we investigate the existence of credit in a cash in advance economy where there are complete markets but for the fact that agents cannot commit to repay their debts defectors are banned from the credit market but they can use money balances for saving purposes without uncertainty deflation crowds out credit completely the equilibrium allocation however is efficient if the government deflates at the time preference rate efficiency can also be restored with positive inflation for any non negative inflation rate below the optimal level the volume of credit and the real interest rate increase with inflation our results hold when idiosyncratic uncertainty is introduced and households are sufficiently impatient but in one instance efficiency cannot be restored if the deflation rate is nearby the rate of time preference our numerical examples suggest that the optimal inflation rate is not too large for reasonable levels of patience and risk aversion finally we present a framework where the use of money arises endogenously and show that it is tantamount to our cash in advance framework our results hold in this modified environment

bailouts time inconsistency and optimal regulation a macroeconomic view a common view is that bailouts of firms by governments are needed to cure inefficiencies in private markets we propose an alternative view even when private markets are efficient costly bankruptcies will occur and benevolent governments without commitment will bail out firms to avoid bankruptcy costs bailouts then introduce inefficiencies where none had existed although granting the government orderly resolution powers which allow it to rewrite private contracts improves on bailout outcomes regulating leverage and taxing size is needed to achieve the relevant constrained efficient outcome the sustainably efficient outcome this outcome respects governments incentives to intervene when they lack commitment

revisiting the lemons market this article extends the standard competitive adverse selection model by allowing for qualitatively different information structures of agents on the informed side of the market using the stylized framework of the market for used cars we examine the welfare properties of equilibria under the assumption that a fraction of the sellers remains uninformed about a parameter that is relevant for their own transaction whether market performance increases or decreases in the number of uninformed sellers is shown to depend on 1 the potential gains from trade in the market and 2 the average quality of the sellers information structure

can enforcement constraints explain the patterns of capital flows after financial liberalizations abstract a standard small open economy model would have problems accounting for the pattern of capital flows into capital poor economies that open to the rest of the world such types of models would predict extremely large and very sudden capital flows putting these predictions at odds with the data while the bulk of the literature has focused on the role of inputs frictions to produce slower capital flows this article presents an exploration into the role of financial frictions in particular enforcement constraints to produce endogenously slow capital flows we are left with three main findings first enforcement constraints are helpful frictions for producing slow capital flows however these flows do not exhibit the degree of persistence observed in the data finally when we extend our model to mimic declining values of financial autarky the model is able to produce more persistent capital inflows that are more in line with the data although these deficits revert into surpluses more quickly than in the data we are left with a finding that leads to a promising line of research models that include endogenously increasing costs of defaulting are better suited to reproduce the patterns of capital flows into opening economies

foundations of dominant strategy mechanisms wilson 1987 criticizes applied game theory s reliance on common knowledge as sumptions in reaction to wilson s critique the recent literature of mechanism design has adopted the goal of finding detail free mechanisms in order to eliminate this re liance in practice this has meant restricting attention to simple mechanisms such as dominant strategy mechanisms however there has been little theoretical foundation for this approach in particular it is not clear the search for an optimal mechanism that does not rely on common knowledge assumption would lead to simpler mechanisms rather than more complicated ones this paper tries to fill the void in the context of an expected revenue maximizing auctioneer we investigate some foundations for using simple dominant strategy auctions

information and the market for lemons this paper revisits akerlofs 1970 classic adverse selection market and asks the following question do greater information asymmetries reduce the gains from trade perhaps surprisingly the answer is no better information on the selling side worsens the buyers curse thus lowering demand but may shift supply as well whether trade increases or decreases depends on the relative sizes of these effects a characteization is given on the other hand improving the buyers information i e making private information public unambiguously improves trade so long as market demand is downward sloping

informal insurance arrangements with limited commitment theory and evidence from village economies recent work on consumption allocations in village economies finds that idiosyncratic variation in consumption is systematically related to idiosyncratic variation in income thus rejecting the hypothesis of full risk pooling we attempt to explain these observations by adding limited commitment as an impediment to risk pooling we provide a general dynamic model and completely characterise efficient informal insurance arrangements constrained by limited commitment and test the model using data from three indian villages we find that the model can fully explain the dynamic response of consumption to income but that it fails to explain the distribution of consumption across households

does institutional change spread across countries explaining spatial patterns in human rights if a country improves its human rights record will neighbouring countries benefit beneficial spillovers could justify intervention by the un or one of the many other organisations that internationally fight human rights violations we document that countries human rights performances often resemble the human rights situation of their neighbours however exploiting time variation in a spatial panel we find that much of that resemblance is simply determined by the shared geographical location changes in neighbouring countries have little influence on local human rights suggesting that contemporaneous spillovers and interactions are limited

liquidity constrained markets versus debt constrained markets this paper compares two different models in a common environment the first model has liquidity constraints in that consumers save a single asset that they cannot sell short the second model has debt constraints in that consumers cannot borrow so much that they would want to default but is otherwise a standard complete markets model both models share the features that individuals are unable to completely insure against idiosyncratic shocks and that interest rates are lower than subjective discount rates in a stochastic environment the two models have quite different dynamic properties with the debt constrained model exhibiting simple stochastic steady states while the liquidity constrained model has greater persistence of shocks

dynamics and heterogeneity of inter and intranational risk sharing this study extends the empirical model of incomplete risk sharing developed by crucini 1999 by allowing unequal income pooling and explores the implications of using an alternative measure for aggregate risk based on samples from canadian provinces g 7 and oecd countries spanning the years 1961 2008 we show that the empirical procedure used by crucini tends to overstate the average degree of risk sharing and understate the dispersion of risk sharing when compared to our unequal income pooling model the empirical results from our unequal pooling model show that i the degree and dispersion of risk sharing across canadian provinces g 7 countries and oecd countries remain stable over time ii the degree of risk sharing across canadian provinces is higher than that across the g 7 and oecd countries and iii the degree of risk sharing seems positively related to equity and trade diversification

robustness and linear contracts abstract we consider a moral hazard problem where the principal is uncertain as to what the agent can and cannot do she knows some actions available to the agent but other unknown actions may also exist the principal demands robustness evaluating possible contracts by their worst case performance over unknown actions the agent might potentially take the model assumes risk neutrality and limited liability and no other functional form assumptions very generally the optimal contract is linear the model thus offers a new explanation for linear contracts in practice it also introduces a flexible modeling approach for moral hazard under nonquantifiable uncertainty jel d81 d82 d86

sustainable plans and mutual default this paper presents a simple general equilibrium model of optimal taxation in which both private agents and the government can default on their debt as a benchmark we consider ramsey equilibria in which the government can precommit to its policies at the beginning of time but in which private agents can default we then consider sustainable equilibria in which both government and private agent decision rules are required to be sequentially rational we adapt abreu s 1988 optimal trigger strategies to completely characterize the entire set of sustainable equilibria in particular we show that when there is sufficiently little discounting and government consumption fluctuates enough the ramsey allocations and policies in which the government never defaults can be supported by a sustainable equilibrium by way of an example we show that the larger the variance of government consumption the easier it is to support good outcomes we also show for moderate discount factors that in the best sustainable equilibrium tax rates are more volatile and debt is smaller than in the ramsey equilibrium

globalization and risk sharing we study the effects of globalization on risk sharing and welfare like the previous literature we assume that governments cannot commit to enforce the repayment of debts owed by their citizens unlike the previous literature we assume that governments cannot discriminate between domestic and foreign creditors when enforcing debt payments this creates novel interactions between domestic and international trade in assets i increases in domestic trade raise the benefits of enforcement and facilitate international trade in fact in our set up countries can obtain international risk sharing even in the absence of default penalties ii increases in foreign trade raise the costs of enforcement and hamper domestic trade as a result globalization may worsen domestic risk sharing and lower welfare we show how these effects depend on various characteristics of tradable goods and explore the roles of borrowing limits debt renegotiations and trade policy

the robustness of equilibria to incomplete information a number of papers have shown that a strict nash equilibrium action profile of a game may never be played if there is a small amount of incomplete information see for example carlsson and van damme 1993a we present a general approach to analyzing the robustness of equilibria to a small amount of incomplete information a nash equilibrium of a complete information game is said to be robust to incomplete information if every incomplete information game with payoffs almost always given by the complete information game has an equilibrium which generates behavior close to the nash equilibrium we show that many games with strict equilibria have no robust equilibrium and examine why we get such different results from existing refinements if a game has a unique correlated equilibrium it is robust a natural many player many action generalization of risk dominance is a sufficient condition for robustness

correlated equilibrium as an expression of bayesian rationality if it is common knowledge that the players in a game are bayesian utility maximizers who treat uncertainty about other players actions like any other uncertainty then the outcome is necessarily a correlated equilibrium random strategies appear as an expression of each player s uncertainty about what the others will do not as the result of willful randomization use is made of the common prior assumption according to which differences in probability assessments by different individuals are due to the different information that they have where information may be interpreted broadly to include experience upbringing and genetic makeup copyright 1987 by the econometric society

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite

migration and sovereign default risk abstract during sovereign debt crises countries experience persistent economic declines spiking spreads and outflows of capital and workers to account for these salient features we develop a sovereign default model with migration and capital accumulation the model has a two way feedback default risk lowers workers welfare and induces emigration which in turn intensifies default risk by lowering tax base and investment compared with a no migration model our model produces higher default risk lower investment and a more profound and prolonged recession we find that migration accounts for almost all of the lack of recovery in gdp during the recent spanish debt crisis

why conditional aid does not work and what can be done about it abstract this paper studies a simple reform that introduces ex post incentives for the donor to reward good policies contrary to existing practices instead of committing aid to each recipient ex ante and making aid conditional on reform the donor centralizes the disbursement decision by committing aid to a group of countries the actual amount disbursed to each individual country would depend on its relative performance this explicit linkage of the allocation and disbursement decisions has two important advantages as compared to present practices first it raises the opportunity cost of disbursing aid ex post thereby giving the donor stronger incentives to reward good policies second competition among recipients allows the donor to make inferences about common shocks which otherwise conceal the recipient s choice of action this enables the donor to give aid more efficiently

robustness of simple menus of contracts in cost based procurement abstract we consider a model of cost based procurement in which the principal faces knightian uncertainty about the agent s preferences for cost reduction we show that a particularly simple incentive scheme a menu comprising a fixed price contract and a cost reimbursement contract minimizes the maximum expected payment where this maximum is taken over the set of possible agent preferences for some parameters of the problem a range of alternative incentive schemes also satisfy this criterion we show that the simple incentive scheme is not weakly dominated by any of the alternatives there does not exist an alternative mechanism for which the expected payment is no higher for all realizations of the agent s preferences and strictly lower for some realization

international business cycles with endogenous incomplete markets backus kehoe and kydland 1992 baxter and crucini 1995 and stockman and tesar 1995 find two major discrepancies between standard international business cycle models with complete markets and the data in the models cross country correlations are much higher for consumption than for output while in the data the opposite is true and cross country correlations of employment and investment are negative while in the data they are positive this paper introduces a friction into a standard model that helps resolve these anomalies the friction is that international loans are imperfectly enforceable any country can renege on its debts and suffer the consequences for future borrowing to solve for equilibrium in this economy with endogenous incomplete markets the methods of marcet and marimon 1999 are extended incorporating the friction helps resolve the anomalies more than does exogenously restricting the assets that can be traded

optimal risk sharing and borrowing constraints in a continuous time model with limited commitment abstract we study a continuous time version of the optimal risk sharing problem with one sided commitment in the optimal contract the agent s consumption is a time invariant strictly increasing function of a single state variable the maximal level of the agent s income realized to date we characterize this function in terms of the agent s outside option value function and the discounted amount of time in which the agent s income process is expected to reach a new to date maximum under constant relative risk aversion we solve the model in closed form optimal consumption of the agent equals a constant fraction of his maximal income realized to date in the complete markets implementation of the optimal contract the alvarez jermann solvency constraints take the form of a simple borrowing constraint familiar from the bewley aiyagari incomplete markets models

optimal fiscal policy in a small open economy with limited commitment abstract we introduce limited commitment into a standard optimal fiscal policy model in small open economies we consider the problem of a benevolent government that signs a risk sharing contract with the rest of the world and that has to choose optimally distortionary taxes on labor income domestic debt and international transfers both the home country and the rest of the world may have limited commitment which means that they can leave the contract if they find it convenient the contract is designed so that at any point in time neither party has incentives to exit we define a small open emerging economy as an economy where the limited commitment problem is active in equilibrium conversely a small open developed economy is an economy in which the commitment problem is not active our model is able to rationalize some stylized facts about fiscal policy in emerging economies i the volatility of tax revenues over gdp is higher in emerging economies than in developed ones ii fiscal policy is procyclical in emerging economies iii emerging economies may graduate from procyclical fiscal policy and adopt countercyclical policies in the long run

efficient sovereign default in this article i show that the key aspects of sovereign debt crises can be rationalized as part of the efficient risk sharing arrangement between a sovereign borrower and foreign lenders in a production economy with informational and commitment frictions the constrained efficient allocation involves ex post inefficient outcomes that resemble sovereign default episodes in the data and can be implemented with non contingent defaultable bonds and active maturity management defaults and periods of temporary exclusion from international credit markets happen along the equilibrium path and are essential to supporting the efficient allocation furthermore during debt crises the maturity composition of debt shifts towards short term debt and the term premium inverts as in the data

aid policies and growth the authors of this paper use a new database on foreign aid to examine the relationships among foreign aid economic policies and growth of per capita gdp in panel growth regressions for 56 developing countries and 6 four year periods 1970 93 they find that the policies that have a great effect on growth are those related to fiscal surplus inflation and trade openness they construct an index for those three policies and have that index interact with foreign aid they have instruments for both aid and aid interacting with policies they find that aid has a positive impact on growth in developing countries with good fiscal monetary and trade policies in the presence of poor policies aid has no positive effect on growth this result is robust in a variety of specifications which include or exclude middle income countries include or exclude outliers and treat policies as exogenous or endogenous they examine the determinants of policy and find no evidence that aid has systematically affected policies either for good or for ill they estimate an aid allocation equation and show that any tendency for aid to reward good policies has been overwhelmed by donors pursuit of their own strategic interests in a counterfactual they reallocate aid reduce the role of donor interests and increasing the importance of policy such a reallocation would have a large positive effect on developing countries growth rates

growth in the shadow of expropriation we propose a tractable variant of the open economy neoclassical growth model that emphasizes political economy and contracting frictions the political economy frictions involve a preference for immediate spending while the contracting friction is a lack of commitment regarding foreign debt and expropriation we show that the political economy frictions slow an economy s convergence to the steady state due to the endogenous evolution of capital taxation the model rationalizes why openness has different implications for growth depending on the political environment why institutions such as the treatment of capital income evolve over time why governments in countries that grow rapidly accumulate net foreign assets rather than liabilities and why foreign aid may not affect growth

decentralized borrowing and centralized default abstract in the past foreign borrowing by developing countries was comprised almost entirely of government borrowing however private firms and individuals in developing countries now borrow substantially from foreign lenders it is often asserted that this surge in private sector borrowing generates excessive borrowing and frequent sovereign defaults in developing countries this paper analyzes the impact of decentralized borrowing using a quantitative model in which private agents decide how much to borrow and the government decides whether to default relative to a model in which the government determines both the level of borrowing and whether to default decentralized borrowing drives up aggregate credit costs and sovereign default risk and reduces aggregate welfare interestingly decentralized borrowing may lead to either too much or too little debt in equilibrium depending on the severity of default penalties

the globalization of liberalization policy diffusion in the international political economy one of the most important developments over the past three decades has been the spread of liberal economic ideas and policies throughout the world these policies have affected the lives of millions of people yet our most sophisticated political economy models do not adequately capture influences on these policy choices evidence suggests that the adoption of liberal economic practices is highly clustered both temporally and spatially we hypothesize that this clustering might be due to processes of policy diffusion we think of diffusion as resulting from one of two broad sets of forces one in which mounting adoptions of a policy alter the benefits of adopting for others and another in which adoptions provide policy relevant information about the benefits of adopting we develop arguments within these broad classes of mechanisms construct appropriate measures of the relevant concepts and test their effects on liberalization and restriction of the current account the capital account and the exchange rate regime our findings suggest that domestic models of foreign economic policy making are insufficient the evidence shows that policy transitions are influenced by international economic competition as well as the policies of a country s sociocultural peers we interpret the latter influence as a form of channeled learning reflecting governments search for appropriate models for economic policy

the origins of human rights regimes democratic delegation in postwar europe the e ftieth anniversary of the un universal declaration on human rights marks an appropriate moment to reconsider the reasons why governments construct international regimes to adjudicate and enforce human rights such regimes include those established under the european convention for the protection of human rights and fundamental freedoms echr the inter american convention on human rights and the un covenant on civil and political rights these arrangements differ from most other forms of institutionalizedinternational cooperation in both their ends and their means unlike international institutions governing trade monetary environmental or security policy international human rights institutions are not designed primarily to regulate policy externalities arising from societal interactions across borders but to hold governments accountable for purely internal activities in contrast to most international regimes moreover human rights regimes are not generally enforced by interstate action although most arrangements formally empower governments to challenge one another such challenges almost never occur the distinctiveness of such regimes lies instead in their empowerment of individual citizens to bring suit to challenge the domestic activities of their own government independent courts and commissions attached to such regimes often respond to such individual claimsby judging that the applicationof domestic rules or legislationviolates international commitments even where such legislationhas been

competitive equilibria with limited enforcement we show how to decentralize constrained efficient allocations that arise from enforcement constraints between sovereign nations in a pure exchange economy these allocations can be decentralized with private agents acting competitively and taking as given government default decisions on foreign debt in an economy with capital these allocations can be decentralized if the government can tax capital income as well as default on foreign debt the tax on capital income is needed to make private agents internalize a subtle externality the decisions of the government can arise as an equilibrium of a dynamic game between governments

consumption smoothing in island economies can public insurance reduce welfare abstract in this paper we study the effects of certain types of public compulsory insurance arrangements for aggregate shocks on private allocations in environments with limited commitment we show that this type of insurance can improve the wellbeing of private situations but it can also deteriorate it we also describe how different characteristics of the environment affect the role of public insurance using data on the mexican progresa program we document the impact that some government programs have in crowding out private transfers

the electronic mail game strategic behavior under almost common knowledge the paper addresses a paradoxical game theoretic example which is closely related to the coordinated attack problem two players have to play one of two possible coordination games only one of them receives information about the coordination game to be played it is shown that the situation with almost common knowledge is very different from when the coordination game played is common knowledge

comment on markets versus governments by acemoglu golosov and tsyvinski one of the oldest and most fundamental debates in economics pertains to the role of markets andgovernment in the allocation of resources there are two dimensions to this debate the rst is inherentlynormative and revolves around the question what role should markets and governments play in the allocationof resources the second dimension is motivated by the varied combinations of markets and governmentsobserved in different economies this leads to a series of positive questions what factors can account for thesedifferent combinations of markets and governments what is the role of political institutions and socialpreferences or culture in shaping the particular combinations that we observe what are the properties of theallocations being implemented by these different arrangements what are the resulting welfare implications this paper seeks to contribute to the normative debate and explores the conditions that make markets moredesirable than governments since markets and governments are viewed as alternative allocation mechanisms the outcome of this comparison depends crucially on the economic environment here the presence ofidiosyncratic risk in labor productivity implies that the ability to enable risk sharing plays a key role in theranking of markets and governments this ability in turn depends on the particular way in which markets andthe government are modelled there are many possible strategies to evaluate the comparative performance of different allocationmechanisms one is to endow the economic environment with a primitive friction such as private informationor limited commitment and ask how close the market and the government can get to the best allocation thatcan be achieved given that friction this paper instead presumes that markets and the government arecharacterized by a different set of frictions in the market setting anonymity or lack of enforcement imply thatthe equilibrium allocation cannot in general sustain full risk sharing on the other hand the government sability to provide insurance is limited by two different frictions first individual abilities are privateinformation second the ruler is not benevolent and can appropriate rents this approach implies that thecomparison of markets and government boils down to a race between frictions the resulting analysisteaches us about the properties of optimal allocations under different sets of frictions but it is silent about theintrinsic comparative advantages of markets and governments since the issue of what government andmarkets can best accomplish is not addressed the question of what role they should play in resource allocationremains open

optimal information disclosure a sender randomly draws a prospect characterized by its profitability to the sender and its relevance to a receiver the receiver observes only a signal provided by the sender and accepts the prospect if his bayesian inference about the prospect s relevance exceeds his opportunity cost the sender s profits are typically maximized by partial information disclosure whereby the receiver is induced to accept less relevant but more profitable prospects switches by pooling them with more relevant but less profitable ones baits extensions include maximizing a weighted sum of sender profits and receiver surplus and allowing the sender to use monetary incentives

informationally robust trade and limits to contagion abstract two agents can each accept or reject a proposed deal whose value for each agent depends on an unknown state and may be positive or negative the deal takes place only if both accept each agent can be imperfectly informed in an arbitrary way about both her own value and the other agent s in such environments contagious adverse selection may prevent the deal from being reached even when it is mutually beneficial ex post we give an upper bound on the ex ante expected welfare loss in equilibrium due to such contagion valid for any information structure the welfare loss is small if negative values are unlikely ex ante and under an assumption of known aggregate gains from the deal our bound is sharp the bound has a succinct description even though the equilibrium itself in any given information structure may be hard to describe explicitly

sovereign risk and secondary markets conventional wisdom says that in the absence of default penalties sovereign risk destroys all foreign asset trade we show that this conventional wisdom rests on one implicit assumption that assets cannot be retraded in secondary markets without this assumption foreign asset trade is possible even in the absence of default penalties this result suggests a broader perspective regarding the origins of sovereign risk and its remedies sovereign risk affects foreign asset trade only if default penalties are insufficient and secondary markets work imperfectly to reduce its effects one can either increase default penalties or improve the working of secondary markets jel f34 g12 g15

quantitative asset pricing implications of endogenous solvency constraints we study the asset pricing implications of an economy where solvency constraints are endogenously determined to deter agents from defaulting while allowing as much risk sharing as possible we solve analytically for efficient allocations and for the corresponding asset prices portfolio holdings and solvency constraints for a simple example then we calibrate a more general model to u s aggregate as well as idiosyncratic income processes we find equity premia risk premia for long term bonds and sharpe ratios of magnitudes similar to the u s data for low risk aversion and a low time discount factor article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

intertemporal distortions in the second best we consider a very general class of public nance problems that encompasses ramsey models of optimal taxation as well as economies with limited commitment private information and political economy frictions we identify a su cient condition to rule out permanent intertemporal distortions at the optimum if there exists an admissible allocation that converges to the rst best steady state then all intertemporal distortions are temporary in the second best we analyze a series of applications to illustrate the signi cance of this result

sovereign debt as intertemporal barter author s kletzer kenneth m wright brian d abstract borrowing and lending between sovereign parties is modeled as intertemporal barter that smoothes the consumption of a risk averse party subject to endowment shocks the surplus anticipated in the relationship offers sufficient incentive for cooperation by all parties including any other competitive agents who are potential lenders to the sovereign the sole punishments consist of renegotiation proof changes in the path of future payments we show that intertemporal trade can be sustained in the absence of any exogenous enforcement of lending relationships whatsoever that is borrowing and lending are possible under anarchy and are supported by punishments that consist of cheating any cheater long term implicit relationships may be fulfilled as the continual renegotiation of simple incomplete short term loans the analysis suggests that the crucial role of the explicit loan contract is the identification of the relationship and the parties involved

income and democracy existing studies establish a strong cross country correlation between income and democracy but do not control for factors that simultaneously affect both variables we show that controlling for such factors by including country fixed effects removes the statistical association between income per capita and vari ous measures of democracy we present instrumental variables estimates that also show no causal effect of income on democracy the cross country corre lation between income and democracy reflects a positive correlation between changes in income and democracy over the past 500 years this pattern is con sistent with the idea that societies embarked on divergent political economic development paths at certain critical junctures jel d7 e 1

human rights treaty ratification of aid receiving countries this paper studies the decision to ratify human rights treaties hrt at the united nations we present new empirical evidence that sheds light on who raties when and why controlling for the quality of domestic human rights institutions high levels of predetermined hrt participation relative to other aid recipients has a signicant positive eect on a country s foreign aid receipts suggesting that aid donors use treaty participation as a criterion to allocate foreign aid surprisingly though we nd that high levels of hrt participation precipitates a decline in the quality of domestic human rights institutions taken together with the result that donors reward treaty participation with foreign aid this suggests that using foreign aid as an incentive for treaty participation has indirect negative consequences for real human rights inconsistent with the traditional view that aid donors have a positive preference for human rights practices in developing countries we show however that the treaty participation of other aid recipients has a strong and positive eect on domestic human rights institutions that more than osets the negative eects

do corrupt governments receive less foreign aid critics of foreign aid programs argue that these funds often support corrupt governments and inefficient bureaucracies supporters argue that foreign aid can be used to reward good governments this paper documents that there is no evidence that less corrupt governments receive more foreign aid on the contrary according to some measures of corruption more corrupt governments receive more aid also we could not find any evidence that an increase in foreign aid reduces corruption in summary the answer to the question posed in the title is no

debt constrained asset markets we develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature if an agent defaults on a contract he can be excluded from future contingent claims markets trading and can have his assets seized he cannot be excluded from spot markets trading however and he has some private endowments that cannot be seized all information is publicly held and common knowledge and there is a complete set of contingent claims markets since there is complete information an agent cannot enter into a contract in which he would have an incentive to default in some state in general there is only partial insurance variations in consumption may be imperfectly correlated across agents interest rates may be lower than they would be without constraints and equilibria may be pareto ranked

more dollars than sense refining our knowledge of development finance using aiddata summary in this introductory essay to the special issue we introduce a new dataset of foreign assistance aiddata that covers more bilateral and multilateral donors and more types of aid than existing datasets while also improving project level information about the purposes and activities funded by aid we utilize that data to provide a brief overview of important trends in foreign aid contributors to this special issue draw on aiddata as well as other sources to analyze aid transparency new donors not previously described or analyzed aid allocation and aid effectiveness our recurring theme in this introductory essay is that aiddata and these initial academic projects refine rather than revolutionize our understanding of aid the database has added significant numbers of new projects dollar amounts donors and details about those projects though there is much more yet to add we worry that aid debates have been driven by too little information and that many claims are based on limited or very poor evidence rectifying these problems will not be instantaneous refining knowledge takes a lot of time and hard work the common feature of the papers in this special issue is their careful attention to nuance and detail in spite of what some recent authors have claimed aid is neither a simple solution nor a sufficient cause of most problems in developing countries its motivations distribution and effects are complex and shifting capturing this complexity requires detailed data careful thought and sophisticated methods that allow scholars to make conditional causal and descriptive inferences 2011 elsevier ltd all rights reserved