control rights in complex partnerships this paper develops a theory of the allocation of authority between two players who are in a complex partnership that is a partnership which produces impure public goods we show that the optimal allocation depends on technological factors the parties valuations of the goods produced and the degree of impurity of these goods when the degree of impurity is large control rights should be given to the main investor irrespective of preference considerations there are some situations in which this allocation is optimal even if the degree of impurity is very low as long as one party s investment is more important than the other party s if the parties investments are of similar importance and the degree of impurity is large shared authority is optimal with a greater share going to the low valuation party if the importance of the parties investments is similar but the degree of impurity is neither large nor small the low valuation party should receive sole authority we analyze an extension in which side payments are infeasible we check for robustness of our results in several dimensions such as allowing for multiple parties or for joint authority and apply our results to interpret a number of complex partnerships including those involving schools and child custody jel d02 o23 h41 l31

transaction costs and the robustness of the coase theorem this paper explores the extent to which the presence of ex ante transaction costs may lead to failures of the coase theorem in particular we identify and investigate the basic hold up problem which arises whenever the parties to a coasian negotiation have to pay some ex ante costs for the negotiation to take place we then show that a coasian solution to this hold up problem is not available this is because a coasian solution to the hold up problem typically entails a negotiation about the payment of the costs associated with the future negotiation which in turn is associated with a fresh set of ex ante costs and hence with a new hold up problem

bargaining with imperfect enforcement the game theoretic bargaining literature insists on a noncooperative bargaining procedure but implicitly assumes cooperative implementation of agreements in reality courts cannot implement agreements costlessly and parties often prefer to use noncooperative implementation we present a bargaining model which incorporates the idea that agreements may be enforced noncooperatively we show that this has a substantial impact in limiting the inequality of agreements and results in a nonmonotonicity of the discount rate the model also explains why some parties may have incentives to deliberately write incomplete contracts as a way to enhance their bargaining power

financial portfolio management through the goal programming model current state of the art abstract since markowitz 1952 formulated the portfolio selection problem many researchers have developed models aggregating simultaneously several conflicting attributes such as the return on investment risk and liquidity the portfolio manager generally seeks the best combination of stocks assets that meets his her investment objectives the goal programming gp model is widely applied to finance and portfolio management the aim of this paper is to present the different variants of the gp model that have been applied to the financial portfolio selection problem from the 1970s to nowadays

changes in transportation infrastructure and commuting patterns in us metropolitan areas 1960 2000 population decentralization has been a salient feature of the landscape of most u s urban areas since 1950 nathaniel baum snow 2007 documents that the aggregate population of central cities of the 139 largest metropolitan areas henceforth msas declined by 17 percent between 1950 and 1990 while aggregate msa population growth was 72 percent during this period expansion of the highway network in urban areas accounts for about one third of the gap in central city and msa population growth rates while transport network expansions clearly generated urban population decentralization there is little evidence to date on how this decentralization manifested itself as changes in employment locations and commuting patterns in this paper i present evidence indicating that employment decentralization occurred apace with residential decentralization between 1960 and 2000 such that their relative spatial concentrations remained remarkably unchanged a byproduct has been that most commutes of msa residents no longer involve central cities at all central cities as defined by their geographies in 1960 were the origin and or destination of only 38 percent of commutes made by msa residents in 2000 down from 66 percent in 1960 using planned portions of the interstate highway system as a source of exogenous variation estimates reported in section iii indicate that urban highway construction played a pivotal role in generating this shift new highways primarily increased the number and fraction of commuting flows within suburban areas at the expense of commutes within central cities because within suburb commutes are longer than other types of commutes on average results are consistent with gilles duranton matthew turner s 2009 evidence that the elasticity of kilometers driven with respect to lane kilometers of highways in urban areas is one 1

coase theorem complexity and transaction costs this paper by introducing complexity considerations provides a dynamic foundation for the coase theorem and highlights the role of transaction costs in generating inefficient bargaining negotiation outcomes we show when the players have a preference for less complex strategies the coase theorem holds in negotiation models with repeated surplus and endogenous disagreement payoffs if and only if there are no transaction costs specifically complexity considerations select only efficient equilibria in these models without transaction costs while every equilibrium induces perpetual disagreement and inefficiency with transaction costs we also show the latter is true in the rubinstein bargaining model with transaction costs

renegotiation and symmetry in repeated games abstract the paper derives a theory of renegotiation proofness in symmetric repeated games based on a notion of equal bargaining power according to consistent bargaining equilibrium a player can mount a credible objection to a continuation equilibrium in which he receives a particular expected present discounted value if there are other self enforcing agreements that never give any player such a low continuation value after any history the definition does not imply strongly symmetric solutions but under modest assumptions consistent bargaining equilibria of infinitely repeated games with perfect monitoring are strongly symmetric such solutions have an unusually elementary characterization journal of economic literature classification numbers c7 c72

generalising interest rate duration with directional derivatives direction x and applications conventional or fisher weil duration is an ordinary derivative that measures the response of portfolio value to marginal parallel shifts in the term structure while other proposed measures are generally specific to particular interest rate processes in this paper we show that portfolio responses to arbitrary shifts in the term structure may be handled by the use of frechet or directional derivatives presenting a simple algorithm for the directional derivative of a fixed interest portfolio viewed as a set of cash flows for a given portfolio one can locate the most sensitive areas along the term structure by computing a function or profile direction x that gives the term structure movement to which the portfolio is most exposed immunisation techniques can be based on choosing ancillary assets that ensure that the portfolio directional derivative is zero or as close to zero as possible this generalises approaches based on factor models of the term structure the analysis is applied to both continuous and discrete time

duration measures immunization and utility maximization abstract this paper explores the conditions under which a risk averse investor behaves like an immunizer in choosing the maturity structure of a balance sheet the setting is similar to grove s study in that the liabilities are assumed fixed but differs in the assumed evolution of interest rates m a grove on duration and the optimal maturity structure of the balance sheet bell journal of economics and management science 5 1974 696 709 it transpires that the circumstances under which a risk averse investor behave like an immunizer are not as limited as concluded in grove s study the model thus explains the extensive use of immunization by the business community

single factor duration models in a discrete general equilibrium framework single factor duration models sfdms for valuing debt securities have gained rapid acceptance by bond practitioners in recent years but slower acceptance by academics in large measure the slower academic acceptance reflects the lack of a rigorously developed underlying economic or financial theoretic base partially as a result some sfdms have undesirable behavioral characteristics foremost among these is that they appear to be inconsistent with accepted general equilibrium conditions this paper has two purposes the first is to construct explicitly the theoretical underpinnings of the model and the second is to develop the conditions under which the model does satisfy general equilibrium conditions this is done in sections i and ii respectively

concrete agglomeration benefits do roads improve urban connections or just attract more people cities with more roads are more productive however it can be unclear whether roads increase productivity directly through improved intra urban connections or indirectly by attracting more people our theory suggests that population responses may obscure the direct connectivity effects of roads indeed conditional on population size highway density does not affect productivity in a sample of us metropolitan areas however when exploiting exogenous variation in urban populations we find that highway density improves agglomeration benefits moving from the 50th to the 75th percentile of highway density increases the productivity to population elasticity from 2 to 4 moreover travel based measures outperform population size as a measure of agglomeration externalities

urban growth and transportation we estimate the effects of interstate highways on the growth of u s cities between 1983 and 2003 we find that a 10 increase in a city s initial stock of highways causes about a 1 5 increase in its employment over this 20 year period to estimate a structural model of urban growth and transportation we rely on an instrumental variables estimation that uses a 1947 plan of the interstate highway system an 1898 map of railroads and maps of the early explorations of the u s as instruments for 1983 highways we investigate the role of interstate highways in the growth of u s cities our investigation is in three parts in the first we develop a simple structural model describing the joint evolution of highways and employment in cities in the second we develop an instrumental variables strategy that allows us to identify key parameters of our structural model we are also able to provide out of sample evidence for the validity of our estimates and for the central assumptions of our model in the third we use our estimates to assess counterfactual transportation policies we find that a 10 increase in a city s stock of interstate highways causes about a 1 5 increase in its employment over 20 years and that an additional kilometre of highway allocated to a city at random is associated with a larger increase in employment or population than is a road assigned to a city by the prevailing political process our results also suggest that too many new highways were built between 1983 and 2003 these findings are important for three reasons first transportation generally and infrastruc ture in particular are large segments of the economy the median u s household devotes about 18 of its income to road transportation while all levels of government together spend another 200 billion dollars annually overall the value of capital stock associated with road transporta tion in the u s tops 5 trillion dollars united states bureau of transportation statistics 2007 2010 given the magnitude of transportation expenditures it is important that the impact of these expenditures on economic growth be carefully evaluated and not assessed on the basis of the claims of advocacy groups our analysis provides a basis for assessing whether these resources are well allocated our results also provide useful guidance to policy makers charged with planning cities since changes in a city s transportation infrastructure cause changes to the city s employment new transportation infrastructure causes complementary changes in the demand for public utilities and schools our results provide a basis for estimating the magnitude of such changes finally this research is important to furthering our understanding of how cities operate and grow transportation costs are among the most fundamental quantities in theoretical models

power in a theory of the firm transactions take place in the firm rather than in the market because the firm offers power to agents who make specific investments past literature emphasizes the allocation of ownership as the primary mechanism by which the firm does this within the contractibility assumptions of this literature we identify a potentially superior mechanism the regulation of access to critical resources access can be better than ownership because i the power agents get from access is more contingent on their making the right investment and ii ownership has adverse effects on the incentive to specialize the theory explains the importance of internal organization and third party ownership

local economic development agglomeration economies and the big push 100 years of evidence from the tennessee valley authority we study the long run eects of one of the most ambitious place based economic development policies in u s history the tennessee valley authority using a rich panel dataset of counties we conduct an evaluation of the dynamic eects of the tva on local economies in the seventy years following the program s inception we nd that the tva led to short run gains in agricultural employment that were eventually reversed while impacts on manufacturing employment continued to intensify well after the program s subsidies had lapsed a pattern consistent with the presence of strong agglomeration economies in the manufacturing sector economists have long cautioned that the local gains created by place based policies may be oset by losses elsewhere yielding ambiguous eects on the u s as a whole building on the framework in glaeser and gottlieb 2008 we develop a novel approach to assessing the aggregate consequences of shifting the spatial distribution of manufacturing employment our ndings suggest the aggregate productivity gains associated with relocating manufacturing activity to the tva region were probably minimal

transaction costs and the property rights approach to the theory of the firm the standard property rights approach is focused on ex ante investment incentives while there are no transaction costs that might restrain ex post negotiations we explore the implications of such transaction costs prominent conclusions of the property rights theory may be overturned a party may have stronger investment incentives when a non investing party is the owner and joint ownership can be the uniquely optimal ownership structure intuitively an ownership structure that is unattractive in the standard model may now be desirable because it implies large gains from trade such that the parties are more inclined to incur the transaction costs

using linear and goal programming to immunize bond portfolios abstract bierwag and khang s 1979 model of immunizing a portfolio of default free government bonds is expanded here to include default grade corporate bonds the immunizing equation is found to be slightly different both linear and goal programming are shown to be alternative techniques for identifying an investor s optimal immunizing portfolio

financial markets and wages we study a labor market equilibrium model in which flrms sign optimal long term contracts with workers firms that are flnancially constrained ofier an increasing wage proflle they pay lower wages today in exchange of higher wages once they become unconstrained and operate at a larger scale in equilibrium constrained flrms are on average smaller and pay lower wages in this way the model generates a positive relation between flrm size and wages using data from the national longitudinal survey of youth nlsy we show that the key dynamic properties of the model are supported by the data jel classiflcation g31 j31 e24

fixed versus variable rate loans this paper discusses the nature of fixed and variable loan contracts and derives the conditions which determine the optimal quantity of each the results indicate that the payoff functions are quite different and dependent upon the project financed the appropriate conditions for the allocation of loan terms to a set of borrowers are then developed finally the analysis derives the optimal portfolio frontier and risk return trade off for the banking firm here it is demonstrated that the solution is unlikely to be at a point of zero interest rate risk

hedging interest rate risk with futures portfolios under term structure effects this study develops and tests a methodology for reducing interest rate risk in a fixed spot portfolio of assets and liabilities with default free cash flows a minimum variance hedge is constructed by adding a portfolio of financial futures to the spot portfolio theorems are given which establish necessary and sufficient conditions for the existence of unique and zero variance hedges the risk reduction characteristics of the methodology are demonstrated by an empirical analysis unexpected interest rate fluctuations may have significant impact on the market value of both bond portfolios and interest sensitive institutions the early literature on this subject includes the seminal works of samuelson 27 redington 26 and wallas 29 all of whom consider the impact of unexpected interest rate changes on financial institutions briefly their results indicate that interest rate risk is minimized when the mean time of the assets and liabilities are equal assuming equal initial asset and liability values redington coined the term immunization to refer to the absence of interest rate risk the immunization solutions in their simplest form depend on the duration mean time of asset and liability cash flows the concept of duration was apparently developed independently by macaulay 22 and hicks 18 macaulay interested in the effective maturity of a bond defined duration as

costly bargaining and renegotiation we identify the inefficiencies that arise when negotiation between two parties takes place in the presence of transaction costs first for some values of these costs it is efficient to reach an agreement but the unique equilibrium outcome is one in which agreement is never reached secondly even when there are equilibria in which an agreement is reached we find that the model always has an equilibrium in which agreement is never reached as well as equilibria in which agreement is delayed for an arbitrary length of time finally the only way in which the parties can reach an agreement in equilibrium is by using inefficient punishments for some of the opponent s deviations we argue that this implies that when the parties are given the opportunity to renegotiate out of these inefficiencies the only equilibrium outcome which survives is the one in which agreement is never reached regardless of the value of the transaction costs

bank income taxes and interest rate risk management a note banks and other financial institutions are concerned with the management of their interest rate risk in the frictionless markets of most finance theory however one interest rate risk management policy is just as good as another hence the finance literature does not provide convincing reasons for managers to want to control interest rate risk consequently the literature has provided little guidance on what to control how far to go with this control or on how to explain differences in interest rate risk exposure among banks given frictionless markets shareholder indifference to the bank s interest rate risk policy plus management s preference to reduce risk could lead to policies that reduce or eliminate exposure to interest rate risk i e to immunization strategies however if part of the reason for the existence of banks is the provision of maturity intermediation services managers who avoid exposure to interest rate risk are likely to come out second best to managers who choose asset and liability portfolios that do expose the bank s shareholders to this risk in this note we develop and analyze a model of bank decisions in which tax considerations induce banks to control interest rate risk in the u s banks have many opportunities to shield current income against federal and state taxation foreign tax credits investment tax credits and investment in tax exempt securities are three examples the tax position of a bank can be thought of as a stock of nonsaleable tax shields usable in the current or in future years the tax shields are an asset and if the bank s income falls below some level then the value of that asset will be reduced either by the loss of tax shielding opportunities or by the postponement of their realization 2 this note treats the bank tax position similarly to the models discussed by brennan and schwartz 2 miller 8 deangelo and masulis 4 and kim 6 however our interest is in the effect of tax shields on risk taking by financial institutions rather than a concern with capital structure decisions 3

striking for a bargain between two completely informed agents this paper models the wage contract negotiation procedure between a union and a firm as a sequential bargaining process in which the union must decide in each period whether or not to strike for the duration of that period we show that there exist subgame perfect equilibria in which the union engages in several periods of strikes prior to reaching a final agreement although both parties are completely rational and fully informed this has implications for other inefficient phenomena such as tariff wars debt negotiations and wars in general we characterize the set of equilibria show that strikes can occur in real time and discuss extensions of the model such as lockouts and the possibility of multiple recontracting opportunities copyright 1991 by american economic association

how to make the metropolitan area work neither big government nor laissez faire we study how political boundaries and tax competition among jurisdictions interact with the labor and land markets to determine the economic structure and performance of metropolitan areas contrary to general belief institutional fragmentation and cross border commuting need not be welfare decreasing but the size of the central city matters for welfare under tax competition the central business district is too small tax competition also prevents public policy enhancing global productivity to produce their full impact although our results support the idea of decentralizing the supply of local public services by independent jurisdictions they also highlight the need of coordinating tax policies

land use worker heterogeneity and welfare benefits of public goods we show that investments in public goods change the optimal land use in their vicinity leading to additional welfare benefits this occurs through two sorting mechanisms first availability of public goods leads to higher population densities second population groups sort according to their preferences for public goods we develop a structural spatial general equilibrium model that accounts for these effects the model is estimated using data on transport infrastructure commuting behaviour land use and land rents for some 3000 zip codes in the netherlands and for three levels of education welfare benefits of investments in public transport infrastructure are shown to differ sharply by workers educational attainment welfare gains from changes in land use account for up to 30 of the total benefits of a transport investment

deadline effects and inefficient delay in bargaining with endogenous commitment abstract bilateral sequential negotiators delay agreements until a deadline if a player that rejects an offer is subsequently committed not to accept any poorer proposal and if the common discount factor is close enough to one journal of economic literature classification numbers c7 c78 j52

endogenous games and mechanisms side payments among players we characterize the outcomes of games when players may make binding offers of strategy contingent side payments before the game is played this does not always lead to efficient outcomes despite complete information and costless contracting the characterizations are illustrated in a series of examples including voluntary contribution public good games cournot and bertrand oligopoly principal agent problems and commons games among others

commuting migration housing and labour markets complex interactions commuting migration housing and labour markets are important for the overall economy and for the everyday life of many people commuting makes up a large part of all journeys world wide and many resourcedemanding transport investment projects are initiated to cope with this type of travelling in a range of countries increasing flows of national and international migration are central determinants of demographic developments in industrialised countries the working age population or those aspiring to be part of the economically active population constitute a large proportion of the total population consequently income earned through working represents a major component of total earnings in these economies cahuc and zylberberg 2004 in order to obtain an efficient labour market workers should locate and relocate to where the relevant jobs are to be found from an economic point of view commuting and migration are essential elements for obtaining a well functioning labour market fischer et al 1996 lux and sunega 2012 zabel 2012 finally housing is a basic good and for many people rents or loan repayments make up a relatively large proportion of their overall budget oecd 2011 moreover housing represents a dominating element of homeowners wealth or equity due to its central role during the financial and economic crisis starting around 2007 it has become clear that housing prices are important for the development of the overall economy in many countries for example muellbauer and murphy 2008 zabel 2012 housing and labour markets are linked in many ways when explaining these links it is useful to start with some of the distinguished features of housing markets as already mentioned houses frequently constitute a major part of households wealth moreover earned income from employment is a major

restricted coasean bargaining we investigate the efficiency of coasean bargaining when restrictions are placed on the set of feasible bargaining outcomes when property rights are costly to defend appropriate we find bargaining restrictions may be pareto superior to unconstrainedvoluntary exchange under cost uncertainty over the harmful activity we show an efficient configuration of restrictions must balance the potential reduction in appropriation costs with the possibility of allocatively inefficient bargaining restrictions for an all pay auction we find conditions where precluding bargaining is always ex ante preferable to unrestricted bargaining for cases where the restrictions are contested we show conditions for the continuing existence of welfare improvements

the inefficient use of power costly conflict with complete information recent work across a wide range of issues in political economy as well as in american comparative and international politics tries to explain the inefficient use of power revolutions civil wars high levels of public debt international conflict and costly policy insulation in terms of commitment problems this paper shows that a common mechanism is at work in a number of these diverse studies this common mechanism provides a more general formulation of a type of commitment problem that can arise in many different substantive settings the present analysis then formalizes this mechanism as an inefficiency condition that ensures that all of the equilibria of a stochastic game are inefficient this condition has a natural substantive interpretation large rapid changes in the actors relative power measured in terms of their minmax payoffs may cause inefficiency

does voluntary participation undermine the coase theorem abstract the coase theorem states that costless enforcement of voluntary agreements yields efficient outcomes we argue that previous treatments fail to recognize the full meaning of voluntary it requires a two stage game a non cooperative participation decision followed by coaseian bargaining only among those who choose to participate we illustrate this in a simple public goods model and find outcomes ranging from extremely inefficient to fully efficient however the efficient equilibrium is not robust to even very small transaction costs thus we cast doubt on coaseian claims of universal efficiency finally we outline a kind of coercion that restores efficiency

commuting and taxes theory empirics and welfare implications we examine the effect of interstate differences in income taxes on commuting times our theoretical model introduces a border into a model of an urban area and shows that differences in average tax rates distort commuting patterns but the sign of the effect depends on whether taxes are residence based or employment based empirically tax differentials have a large effect on commuting times for affluent households and mobile households we show that commuting times are a sufficient statistic to measure the spatial welfare effects of tax policy the model and empirical design can be used by economists to study other policy differences this article is protected by copyright all rights reserved

perfect equilibria in a negotiation model rubinstein s alternating offers bargaining model is enriched by assuming that players payoffs in disagreement periods are determined by a normal form game it is shown that such a model can have multiple perfect equilibria including inefficient ones provided that players are sufficiently patient delay is possible even though there is perfect information and the players are fully rational the length of delay depends only on the payoff structure of the disagreement game and not on the discount factor not all feasible and individually rational payoffs of the disagreement game can be supported as average disagreement payoffs indeed some negotiation games have a unique perfect equilibrium with immediate agreement