europe vs america institutional hysteresis in a simple normative model we show how the differences in us and european institutions can arise in a normative model the paper focuses on the labor market and the government s decision to set unemployment benefits in response to an unemployment shock the government balances insurance considerations with the tax burden of benefits and the possibility that they introduce adverse incentive effects whereby benefits increase unemployment it is found that when an adverse shock occurs benefits should be increased most when the adverse incentive effects of benefits are largest adjustment costs of changing benefits introduce hysteresis and can help explain why post oil shock benefits remained high in europe but not in the us desirable features of the model are that we obtain an asymmetry out of a symmetric environment and that the mechanism yielding hysteresis is both simple requires the third derivative of the utility function to be non negative and self correcting empirical evidence concerning the role of corporatism is discussed

unknown wage offer distribution and job search duration abstract if job searchers do not know the wage offer distribution they are facing they might take the wage structure in their last firm as a prior doing so reservation wages will be biased which will also bias unemployment duration using data for austrian workers it is shown that workers seem to have good knowledge of expected mean wages but less so for higher moments of the wage offer distribution

unemployment insurance taxes and unemployment unemployment insurance is financed by a tax on wages below a given ceiling daniel s hamermesh 1977 advocates raising this ceiling on distributional grounds in a job search model this does decrease unemployment among low wage workers but also increases unemployment among high wage workers and lowers everyone s expected after tax wage an increase in the ceiling combined with a proportionate reduction in the tax rate decreases unemployment for low wage workers while increasing their after tax wage without affecting high wage workers at all when unemployment benefits and wages are taxed at one rate employment and wages are independent of that rate

long forward and zero coupon rates can never fall in frictionless markets having no arbitrage the asymptotic zero coupon rate never falls the same is true of the long forward rate the long par coupon rate can rise and fall due to forward rate movements at short maturities this article relates the three types of interest rates and formalizes and proves the impossibility results for falling asymptotic rates these results can be tested in a parametric term structure specification that is rich enough to identify a time series of long rates the results show that it is not possible to specify arbitrarily the long forward or zero coupon rate process copyright 1996 by university of chicago press

the second fundamental theorem of asset pricing a new approach this article presents a new definition of market completeness that is independent of the notions of no arbitrage and equivalent martingale measures our definition has many advantages all shown herein first it preserves the second fundamental theorem of asset pricing even in complex economies second under our definition the market can be complete yet arbitrage opportunities exist this is important in practice and stands in contrast to the traditional definitions third under the assumption of no arbitrage and when used in the standard models our definition is equivalent to the traditional one

bond pricing and the term structure of interest rates a new methodology for contingent claims valuation this paper presents a unifying theory for valuing contingent claims under a stochastic term structure of interest rates the methodology based on the equivalent martingale measure technique takes as given an initial forward rate curve and a family of potential stochastic processee for its subsequent movements a no arbitrage condition restricts this family of processes yielding valuation formulae for interest rate sensitive contingent claims which do not explicitly depend on the market prices of risk examples are provided to illustrate the key results in relation to the term structure of interest rates arbitrage pricing theory has two purposes the first is to price all zero coupon default free bonds of varying maturities from a finite number of economic fundamentals called state variables the second is to price all interest rate sensitive contingent claims taking as given the prices of the zero coupon bonds this paper presents a general theory and a unifying framework for understanding arbitrage pricing theory in this context of which all existing arbitrage pricing models are special cases in particular vasicek 1977 brennan and schwartz 1979 langetieg 1980 ball and torous 1983 ho and lee 1986 schaefer and schwartz 1987 and artzner and delbaen 1988 the primary contribution of this paper however is a new methodology for solving the second problem i e the pricing of interest rate sensitive contingent claims given the prices of all zero coupon bonds the methodology is new because i it imposes its stochastic structure directly on the evolution of the forward rate curve ii it does not require an inversion of the term structure to eliminate the market prices of risk from contingent claim values and iii it has a stochastic spot rate process with multiple stochastic factors influencing the term structure the model can be used to consistently price and hedge all contingent claims american or european on the term structure and it is derived from necessary and more importantly sufficient conditions for the absence of arbitrage the arbitrage pricing models of vasicek 1977 brennan and schwartz 1979 langetieg 1980 and artzner and delbaen 1988 all require an iformerly titled bond pricing and the term structure of interest rates a new methodology

dynamic tax incidence and intergenerationally neutral reform the paper proposes a basic definition of intergenerational neutrality in the overlapping generations model when agents have a pure life cycle motive of savings the derivation of intergenerationally neutral tax effects provides a redistribution free benchmark case that isolates the relative price effects of taxes and the deadweight losses associated with them the paper clarifies the intergenerational incidence which has to be determined simultaneously with the substitution effects of taxes on savings a tax reform example demonstrates how taxes with diverging intergenerational incidence may be combined to achieve intergenerational neutrality finally the paper extends the analysis of generational tax incidence to the case of a small open economy

search theoretic models of the labor market a survey we survey the literature on search theoretic models of the labor market we show how this approach addresses many issues including the following why do workers sometimes choose to remain unemployed what determines the lengths of employment and unemployment spells how can there simultaneously exist unemployed workers and unfilled vacancies what determines aggregate unemployment and vacancies how can homogeneous workers earn different wages what are the tradeoffs firms face from different wages how do wages and turnover interact what determines efficient turnover we discuss various modeling choices concerning wage determination and the meeting process including recent models of directed search

the duration of unemployment and unexpected inflation an empirical analysis from chapter 1 the point of departure for the collection of studies presented in the following is the message delivered by american economists during the beginning of the 70 s that a proper understanding of the unemployment problem requires a dynamic view of the labor market in general and unemployment in particular the dynamic view should emphasize the flows into and out of unemployment by analyzing these flows a better understanding should be obtained of i the causes of unemployment and ii the welfare consequences of unemployment the first study presented in chapter 2 aims at giving an empirical picture of the dynamics of unemployment in sweden several decompositions of unemployment which highlight the causes and welfare implications of unemployment are made in chapter 3 one possible explanation to the longer unemployment spells during the seventies is examined namely the unemployment benefits which were extended in different ways for different groups both in 1968 and in 1974 the analytical approach in the chapter is to analyze the surviving rates of the unemployed i e the probability of remaining unemployed from one period quarter to the next in chapter 4 the same analytical approach is applied to the analysis of the cyclical fluctuations of unemployment spells the search theoretic literature has suggested two different explanations of these cyclical fluctuations one has emphasized the importance of inflationary surprises and the other the quantity rationing constraints facing the unemployed the empirical importance of these comparative explanations are analyzed using swedish and u s data a model of the transition rate for the unemployed which captures both mechanisms is specified the study in chapter 5 aims at giving an improved empirical picture of unemployment as a welfare and distributional problem the first issue analyzed is whether unemployment has deleterious effects on individuals subsequent labor market prospects in particular the subsequent wage level the second issue analyzed is whether unemployment tends to hit the relatively low paid in the labor force the issue whether unemployment duration rather than the stock of unemployed should be the guideline for labor market policy is also discussed in the chapter in chapter 6 finally some important topics for future research in this field are dicussed

rent dissipation through electricity prices of publicly owned utilities a public choice model is presented in order to explain the fact that publicly owned electricity utilities rarely price at marginal cost in practice it is shown that if i government revenues are raised through proportional taxes ii median income is less than mean income and iii the share of a consumer s spending on electricity decreases with income then the price resulting from a majority rule and universal voting is below marginal cost the determination of a fixed subscription fee is also considered empirical evidence of our results is obtained from pricing and consumption data for hydro qu6bec

does centralization increase the size of government abstract are fiscal programs larger or smaller if they are run centrally rather than locally in a prospective federation we abstract completely from well understood economic issues and focus instead on the political effects of centralization for fiscal programs with benefits broadly spread in the population such as redistributive transfer schemes social insurance and general government consumption centralization changes the coalition of voters who favor a large program in a direction that depends on the nature of the redistributive instrument for fiscal programs with localized benefits such as provision of local public goods centralization creates opportunities for rent seeking which increases the size of government

job security and job search in more than one labor market i introduction a person looking for a new job faces a choice not only of which jobs to accept but where to search for a job in this connection differences in job security across sectors of the economy would appear to be a major concern of many workers however job security has not found a commensurate place in the literature on job search largely due to the single sector orientation of standard search models this paper analyzes the optimal search behavior of unemployed workers who may search in two distinct labor markets or sectors of the economy it is shown that the optimal policy assigns the same reservation wage but different search intensities in each sector the search literature has generally assumed that a worker searches for a job in a single labor market jobs differ from each other once found but while searching all jobs look the same to a worker until an offer is made in this context jobs with higher layoff rates have been shown to induce higher lower or no different reservation wages than similar jobs with lower layoff rates depending upon the specifics of the models which are not compelling examples include burdett and mortensen 1980 hey and mavromaras 1981 ioannides 1981 sargent 1987 and wright 1986 1987 despite our intuitions these studies provide no strong suggestion that a worker will be more likely to become employed in a type of job which offers greater job security all else equal it is otherwise in a multi sector world while the reservation wages associated with the two sectors of the economy are equal despite differences in layoff rates a worker will search more intensively in the sector with a lower layoff rate ii the model the model is simple the worker maximizes his expected wealth in a continuous time stationary environment over an infinite time horizon there are two sectors a and b each is characterized by a permanent layoff rate an offer arrival rate and a wage offer distribution the model generalizes the standard search paradigm and generalizes easily to n sectors accordingly familiar derivations will be omitted they can be found in fallick 1990 an unemployed worker may search for a job in either or both of the sectors simultaneously he pays search costs depending upon how much he searches in total the worker may not search while employed and there is no possibility of being recalled to a previous job the worker may move from unemployment to employment in either sector by receiving and accepting a wage offer from that sector wage offers from sector j j a b are random variables drawn independently from a constant exogenous distribution function f sup j w offers expire immediately if not accepted an employed worker may move from employment in either sector to unemployment by being laid off every job in a sector has the same layoff rate an employed worker never quits it would never be optimal to quit anyway assume that the instantaneous probability of receiving a job offer from sector j is equal to alpha sub j sigma s sub j where alpha sub j the offer arrival rate is the exogenous instantaneous probability that an offer from sector j arrives during the period the term alpha sub j is constant over time the term sigma s sub j is a function of the intensity with which the worker searches in sector j while unemployed normalize the total amount of search intensity available at any one time to unity so that s sub a s sub b is less than or equal to 1 let sigma center dot be an increasing concave function with sigma 0 0 sigma 1 1 sigma prime 0 infinity and sigma prime 1 0 the instantaneous probability of a permanent lay off from a job in sector j is lambda sub j there is a constant marginal cost of searching c assume that job offers and layoffs are generated by constant poisson processes in standard fashion the instantaneous probability of receiving more than one offer simultaneously vanishes

rising longevity education savings and growth this paper examines the impact of declines in adult mortality on growth in an overlapping generations model with public education and imperfect annuity markets a decline in mortality affects growth through three channels first it raises the saving rate and thereby increases the rate of physical capital accumulation second it reduces accidental bequests lowers investment and thereby lowers the rate of physical capital accumulation third it may lead the median voter to increase the tax rate for public education initially but lower the tax rate in a later stage starting from a high mortality rate as found in many third world populations the net effect of a decline in mortality is to raise the growth rate however starting from a low mortality rate such as is found in most industrial populations the net effect of a further decline in mortality is to reduce the growth rate the findings appear consistent with recent empirical evidence

labor market matching with precautionary savings and aggregate fluctuations we analyze a bewley huggett aiyagari incomplete markets model with labor market frictions consumers are subject to idiosyncratic employment shocks against which they cannot insure directly the labor market has a diamond mortensen pissarides structure firms enter by posting vacancies and match with workers bilaterally with match probabilities given by an aggregate matching function wages are determined through nash bargaining we also consider aggregate productivity shocks and a complete set of contingent claims conditional on this risk we use the model to evaluate a tax financed unemployment insurance scheme higher insurance is beneficial for consumption smoothing but because it raises workers outside option value it discourages firm entry we find that the latter effect is more potent for welfare outcomes we tabulate the effects quantitatively for different kinds of consumers we also demonstrate that productivity changes in the model in steady state as well as stochastic ones generate rather limited unemployment effects unless workers are close to indifferent between working and not working thus recent findings are corroborated in our more general setting

a positive theory of the earnings relationship of unemployment benefits in a wage bargaining model a stronger earnings relationship of unemployment benefits may reduce wages therefore the benefit structure significantly influences profits and trade union utility raising the question as to how the benefit structure is determined in the political process we consider a government that chooses the earnings relationship in order to maximize its political support our model predicts a strong earnings relationship under right wing governments and a weak relationship when unions are influential using panel data for 19 oecd countries we find support for these theoretical predictions moreover we show that the earnings relationship varies negatively with openness

operative gift and bequest motives the ricardian equivalence theorem which is the proposition that changes in the timing of lump sum taxes have no effect on assumption or capital accumulation depends on the exist of operative altruistic motives for intergenerational transfers these transfers can be bequests from parents to children or gifts from children to parents in order for the ricardian equivalence theorem to hold one of these transfer motives must be operative in the sense that the level of the transfer is not determined by a corner solution resulting from a binding non negativity constraint this paper derives conditions that determine whether the bequest motive will be operative the gift motive will be operative or neither motive will be operative in a model in which consumers are altruistic toward their parents and their children this abstract was borrowed from another version of this item

how changes in labor demand affect unemployed workers this study analyzes the manner in which certain favorable shifts in labor demand affect job search although all shifts increase reservation wages they do not necessarily decrease expected unemployment spell durations and increase expected post unemployment wages so that upward sloping short run phillips curves may occur a result due to chamberlain is used to demonstrate that if the wage offer distribution is restricted to be logconcave two of the shifts guarantee downward sloping phillips curves for one of these two shifts previous research by flinn and heckman used logconcavity in a different manner to achieve properly shaped phillips curves

unemployment insurance and redistributive taxation abstract this paper studies the simultaneous determination of the socially optimal levels of unemployment insurance income taxation and experience rating it argues that there is a normative justification for state unemployment insurance when the government wishes to use redistributive taxes but cannot enforce lump sum transfers it is not socially optimal for there to be full experience rating of unemployment insurance schemes one distortion should be used to off set another the state must then intervene in the provision of insurance for those without jobs

state business cycles and their relationship to the national cycle structural and institutional determinants during business cycles state and regional incomes fluctuate in the same direction as national income in some states and regions income fluctuates more than the national average in other states and regions it fluctuates less although no general explanation for differences in business cycles across states exists an influential set of explanations focuses on differences in price flexibility gordon 2 3 has discussed the employment implications of sticky prices and made some international comparisons of unemployment rates his results imply that decreased price flexibility leads to increased variability of income and employment olson 6 7 and colander and olson 1 have suggested that differences in state unemployment rates arise from differences in price flexibility differences in price flexibility in turn originate in differences in structural characteristics and institutions 2 if a state s structure and institutions allow prices to be flexible most of the adjustment to changes in aggregate demand will be made by prices rather than output if a state s institutions tend to enforce price rigidity most of the adjustment to changes in aggregate demand will be made by output rather than prices the absence of acceptable state price indices prevents direct tests of the hypothesis that differences in price flexibility explain differences in income variability across states the inability to measure price flexibility by state turns out not to be a serious problem however because we are primarily interested in what determines the magnitude of fluctuations in state income institutional and structural differences across states lead to the differences in price flexibility that cause differences in the business cycle price flexibility is merely the transmission mechanism moreover it may not be the only transmission mechanism structural and institutional factors may affect state business cycles through a host of channels we will therefore focus directly on the relationship between structures and institutions and state business cycles by adopting such a procedure we may miss a particular transmission variable but we will be more likely to identify the total effect of structure and institutions on performance institutional and structural variables will be compared across states rather than regions an attractive alternative we used states rather than regions because states embody the political

informal family insurance and the design of the welfare state we study unemployment benefit provision when the family also provides social insurance in the benchmark case more generous state transfers crowd out family risk sharing one for one an extension gives the state an advantage in enforcing transfers through taxes whereas families rely on self enforcement more generous state transfers lead to more than one for one reductions in intra family insurance so that total transfers to the unemployed fall as the state s generosity increases this does not imply that the optimal size of the welfare state is zero our results still hold when families are assumed to be better than the state at monitoring job search activities of unemployed

an equilibrium analysis of optimal unemployment insurance and taxation a two person two period general equilibrium model with uncertainty about second period labor productivity is developed the model is used to consider potential welfare pareto gains from both a stylized unemployment insurance system and from a negative income tax system welfare gains are possible if individuals are sufficiently homogeneous when both programs are operated simultaneously complete insurance is always feasible but is optimal only if the labor supply curve is negatively sloped

job search and cyclical unemployment a model economy is described that integrates job search and signal extraction analysis equilibrium differs from search models without signal extraction in that even with a fixed real sector unemployment fluctuates stochastically it differs from standard signal extraction models because search introduces persistence in fact unemployment follows a second order difference equation with coefficient that are functions of current and lagged values of the stochastic shocks thus the model has the potential to mimic actual business cycle data despite the fact that the underlying shocks are independently and identically distributed policy implications are discussed

parental altruism life expectancy and dynamically inefficient equilibria macrodynamic models with finite lifetime and selfish individuals may feature dynamically inefficient equilibria while models with infinite lifetime and altruistic individuals cannot do strong intergenerational altruism and high life expectancy prevent the occurence of inefficient equilibria to answer this question we present a continuous time olg model which generalizes the blanchard buiter weil model our main innovation relies on the introduction of parental altruism whose intensity is variable we show that parental altruism and life expectancy actually favor overaccumulation theoretical results are illustrated by a parametrization from us data our numerical exercises suggest that the us economy is dynamically inefficient mainly because life expectancy is sufficiently short

stochastic volatilities and correlations of bond yields i develop an interest rate model with separate factors driving innovations in bond yields and their covariances it features a flexible and tractable affine structure for bond covariances maximum likelihood estimation of the model with panel data on swaptions and discount bonds implies pricing errors for swaptions that are almost always lower than half of the bid ask spread furthermore market prices of interest rate caps do not deviate significantly from their no arbitrage values implied by the swaptions under the model these findings support the conjectures of collin dufresne and goldstein 2003 dai and singleton 2003 and jagnnathan kaplin and sun 2003

a one factor model of interest rates and its application to treasury bond options 1990 a one factor model of interest rates and its application to treasury bond options financial analysts journal vol 46 no 1 pp 33 39

how the equity market responds to unanticipated events we examine the market reaction of prices volume spreads and trading location when firms experience events that are totally unanticipated by the equity market in terms of both timing and content we find that the response time is longer than previous studies have reported selling pressure wider spreads and higher volume remain significant for over an hour we also find an immediate price reaction for overnight events however the market takes longer to react to events that occur when it is open these findings may shed light on the efficacy of trading halts

ricardian equivalence long run leviathan abstract this paper presents a heterogenous overlapping generations with altruism model in which intergenerational discounting is stochastic the model nests three popular macroeconomics models those of ramsey economic journal 38 152 1928 543 559 diamond american economic review 55 1965 1126 1150 and a variant of the blanchard journal of political economy 93 2 1985 223 247 buiter the economic journal 98 391 1988 279 293 weil journal of public economics 38 2 1989 183 198 model it is shown that under a mild condition originally derived by weil journal of monetary economics 19 3 1987 377 391 the long run capital intensity is robust to practically every popular theoretical criticism of the standard ricardian model these criticisms include the imperfect inheritability of time preference parameters and hence finite horizons on the part of all households myopia in the form of overly discounting the future borrowing constraints distortionary labor taxation exchange strategic bequest motives common cultural constraints egalitarian bequests and primogeniture endogenous fertility and joy of giving while precautionary saving can theoretically violate long run neutrality the asymptotic capital intensity is still bounded below by preference parameters the overall conclusions are sharply at odds with those found in most articles dealing with the theoretical foundations of ricardian equivalence

the determination of unemployment benefits while much empirical research exists on labor market consequences of unemployment benefits there is remarkably little evidence on the forces determining benefits we present a simple model where workers desire insurance against unemployment risk and benefits increase the unemployment rate we then conduct one of the first empirical analyses of the determinants of the parameters of the benefit system using data for developed countries for 1971 89 controlling for year and country fixed effects and the government s political color we find evidence that the level of benefits falls when the unemployment rate is high this is consistent with wright s tax effect

social mobility and stability of democracy re evaluating de tocqueville an influential thesis often associated with de tocqueville views social mobility as a bulwark of democracy when members of a social group expect to join the ranks of other social groups in the near future they should have less reason to exclude these other groups from the political process in this article we investigate this hypothesis using a dynamic model of political economy as well as formalizing this argument our model demonstrates its limits elucidating a robust theoretical force making democracy less stable in societies with high social mobility when the median voter expects to move up respectively down she would prefer to give less voice to poorer respectively richer social groups our theoretical analysis shows that in the presence of social mobility the political preferences of an individual depend on the potentially conflicting preferences of her future selves and that the evolution of institutions is determined through the implicit interaction between occupants of the same social niche at different points in time

term structure movements and pricing interest rate contingent claims this paper derives an arbitrage free interest rate movements model ar model this model takes the complete term structure as given and derives the subsequent stochastic movement of the term structure such that the movement is arbitrage free we then show that the ar model can be used to price interest rate contingent claims relative to the observed complete term structure of interest rates this paper also studies the behavior and the economics of the model our approach can be used to price a broad range of interest rate contingent claims including bond options and callable bonds

unemployment insurance design inducing moving and retraining evidence suggests that unemployed individuals can sometimes aect their job prospects by undertaking a costly action like deciding to move or retrain realistically such an opportunity only arises for some individuals and the iden tity of those may be unobservable ex ante the problem of characterizing con strained optimal unemployment insurance in this case has been neglected in previous literature we construct a model of optimal unemployment insurance where multiple incentive constraints are easily handled the model is used to analyze the case when an incentive constraint involving moving costs must be respected in addition to the standard constraint involving costly unobserv able job search in particular we derive closed form solutions showing that when the moving retraining incentive constraint binds unemployment bene ts should increase over the unemployment spell with an initial period with low bene ts and an increase after this period has expired

do bonds span the fixed income markets theory and evidence for unspanned stochastic volatility most term structure models assume bond markets are complete that is that all fixed income derivatives can be perfectly replicated using solely bonds however we find that in practice swap rates have limited explanatory power for returns on at the money straddles portfolios mainly exposed to volatility risk we term this empirical feature unspanned stochastic volatility usv while usv can be captured within an hjm framework we demonstrate that bivariate models cannot exhibit usv we determine necessary and sufficient conditions for trivariate markov affine systems to exhibit usv for such usv models bonds alone may not be sufficient to identify all parameters rather derivatives are needed

the role of unemployment insurance in an economy with liquidity constraints and moral hazard the potential welfare benefits of unemployment insurance along with the optimal replacement ratio are studied using a quantitative dynamic general equilibrium model to provide a role for unemployment insurance agents in our economy face exogenous idiosyncratic employment shocks and are unable to borrow or insure themselves through private markets in the absence of moral hazard replacement ratios as high as 65 are optimal and the welfare benefits of unemployment insurance are quite large however if there is moral hazard and the replacement ratio is not set optimally but is instead set to an empirically plausible value the economy can be much worse off than it would be without unemployment insurance

the political economy of public employment programs abstract what are the welfare implications of a political equilibrium where the choice of active labor market programs almps have to please the employed majority this issue is examined in an equilibrium model featuring matching frictions and worker firm wage bargaining it turns out that the welfare consequences depend on the nature of almps and the political weight attributed to firm interests if firm values carry little political weight and programs contribute to wage pressure the employed will opt for excessive program activity

social policy by popular demand why are unemployment benefits more generous in some countries this article argues that citizens trade off the redistributive and insuring effect of social insurance as a result the distribution of risk in a society has important consequences via popular demand for social policy making at the microlevel the article shows that in addition to income the risk of unemployment is a key predictor of individual level preferences for unemployment benefits based on the microlevel findings the article argues that at the macrolevel the homogeneity of the risk pool is an important determinant of benefit generosity the more equally unemployment risk is distributed the higher unemployment replacement rates are empirical testing at both levels finds support for this account of social policy by popular demand

should unemployment benefits decrease with the unemployment spell abstract in this paper we investigate whether unemployment benefits should decrease with the unemployment spell in a model where both job search intensity and wages are endogenous wages are set by collective agreements bargained by insiders it is shown that a more declining time sequence of unemployment benefits leads to wage increases when the tax rate is given such an effect may imply an increase in unemployment and counteracts the response of job search intensity that can be found in standard job search models with a given wage distribution calibration exercises suggest that it costs twice as much in terms of welfare loss for the long term unemployed workers to reduce the unemployment rate by 1 when wages are endogenous than in the standard job search model

exploring the political economy of labour market institutions labour markets how reforms took place many economists argue that the european unemployment problem relates to large labour market rigidities this paper argues that many of those inflexibilities and the underlying institutional regulations can be understood as the outcome of political influence by incumbent employees this is because many policies that increase unemployment actually benefit these insiders an empirical investigation of the determinants of labour market institutions demonstrates that the observations are consistent with this view the findings imply 1 higher exposure of the employed to unemployment facilitates a reduction in the level of employment protection 2 unemployment benefits are lower the more employment reacts to wages 3 a higher level of unemployment and the existence of a right wing government slow down the growth rate of the minimum wage giles saint paul

a theory of the nominal term structure of interest rates a model of the nominal term structure of interest rates is developed that has a positive and stationary process for the interest rate and delivers closed form expressions for the prices of discount bonds and european options on bonds unlike the one state variable version of the cox ingersoll and ross 1985 model this model even in its one state variable version allows the term premium to change sign as a function of the state and the term to maturity and also allows for shapes of the yield curve that are observed in the u s data but that are disallowed in the cox ingersoll and ross model article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

expert mediated sequential search abstract this paper studies markets such as internet marketplaces for used cars or mortgages in which consumers engage in sequential search in particular we consider the impact of information brokers experts who can for a fee provide better information on true values of opportunities we characterize the optimal search strategy given a price and the terms of service set by the expert and show how to use this characterization to solve the monopolist expert s service pricing problem our analysis enables the investigation of three common pricing schemes pay per use unlimited subscription and package pricing that can be used by the expert we demonstrate that in settings characteristic of electronic marketplaces namely those with lower search costs for consumers and lower costs of production of expert services unlimited subscription schemes are favored finally we show that the platform that connects consumer and experts can improve social welfare by subsidizing the purchase of expert services the optimal level of subsidy forces the buyer to exactly fully internalize the marginal cost of provision of expert services in electronic markets this cost is minimal so it may be worthwhile for the platform to make the expert freely available to consumers

the choice of insurance in the labor market employment protection and unemployment benefits are considered the most prominent insurance devices for workers to protect themselves against the risk of unemployment it occurs that societies either choose a high level of employment protection relative to unemployment benefits or vice versa this paper explains where countries locate on this trade off it is argued that higher coverage of voters out of the labor force with intra household transfers yields a politico economic equilibrium with relatively high employment protection and relatively low unemployment benefits cross country data and survey data on voters preferences are presented that corroborate the outcomes of the model

work incentive effects of taxing unemployment benefits before 1979 unemployment insurance ui benefits were not treated as taxable income in the united states several economists criticized this policy on the ground that not taxing ui benefits while taxing earned income allegedly encourages unemployed persons to conduct longer than socially optimal job searches since 1979 however ui benefits received by persons in higher income families have been subject to income tax this paper investigates whether the introduction of benefit taxation has had the predicted effect of reducing unemployment duration the study uses data on a sample of persons that filed for ui in 1978 or 1979 to examine whether high income claimants collected benefits for shorter periods after the tax change than they did before benefits became taxable as part of the empirical analysis the paper develops a generalization of the weibull distribution and applies a limited dependentvariable technique for this distribution similar to the tobit technique for the normal distribution despite some variation in the results from different model specifications the analysis presents persuasive evidence of a tax effect on unemployment duration the 1979 policy change is estimated to have reduced average compensated unemployment duration among the sampled high income claimants by about one week

capital accumulation and uncertain lifetimes with adverse selection this paper examines the implications of adverse selection in the private annuity market for the pricing of private annuities and the consequent effects on constrption and bequest behavior with privately known heterogeneous mortality probabilities adverse selection causes the rate of return on private annuities to be less than the actuarially fair rate based on population average mortality however a fully funded social security system with compulsory participation can offer an implied rate of return equal to the actuarially fair rate based on population average mortality thus since social security offers a higher rate of return than private annuities consumers cannot completely offset the effects of social security by transacting in the private annuity market using an overlapping generations model with uncertain lifetimes we demonstrate that the introduction of actuarially fair social security reduces the steady state rate of return on annuities and raises the steady state levels of average bequests and average consumption of the young the steady state national capital stock rises or falls according to the strength of the bequest motive this abstract was borrowed from another version of this item

measuring uncertainty about long run predictions long run forecasts of economic variables play an important role in policy planning and portfolio decisions we consider forecasts of the long horizon average of a scalar variable typically the growth rate of an economic variable the main contribution is the construction of prediction sets with asymptotic coverage over a wide range of data generating processes allowing for stochastically trending mean growth slow mean reversion and other types of long run dependencies we illustrate the method by computing prediction sets for 10 to 75 year average growth rates of u s real per capita gdp and consumption productivity price level stock prices and population jel classi cation c22 c53 e17

explaining differences in state growth catching up versus olson in this paper we have tested various explanations for differences in rates of economic growth across states we found no evidence consistent with olson s hypothesis that differences in state age a proxy for the strength of special interest groups can explain differences in state growth furthermore our results indicate that a regression containing only initial income explains most of the variation in the growth of state income in sum a good part of the more rapid growth of southern and other fast growing states is simply a convergence to the national average this convergence is an expected result of basic economic theory given free trade in goods and factors our results are however not necessarily a rejection of the olson hypothesis it may well be that the hypothesis should only be applied to comparisons between nation states not to comparisons between political divisions of the same nation state the institutional and political similarities of the american states may swamp the differences and make the olson hypothesis inapplicable the tendencies cited by olson may indeed be present in the american economy but their differential effect is much too small to explain any of the variation in economic performance across states

modeling the term structure of interest rates a new approach abstract the term structure of interest rates is modeled as a random field with conditional volatility random field models allow consistency with the current shape of the term structure without the need for recalibration however most such models are gaussian with no conditional volatility state dependent volatility is introduced while a key property of gaussian random field models is retained each forward rate is part of a low dimensional diffusion process simplifying estimation and derivatives pricing the modeling approach also implies that in general the set of zero coupon bonds does not complete the market and term structure derivatives cannot always be priced by arbitrage

asymmetric information bargaining and unemployment fluctuations we construct a dynamic general equilibrium model where wages are determined by bilateral bargaining and the firm has superior information the asymmetry of information introduces unemployment fluctuations and dynamic wage sluggishness because the information of the firm is only revealed gradually wages fall slowly in response to a negative shock and unemployment exhibits additional persistence it is shown that high job destruction will generally be followed by a period of higher than average job destruction that the presence of common shocks introduces an informational externality and that bargaining is an inefficient method of wage determination as compared to implicit contracts

the redistributive roles of unemployment insurance and the dynamics of voting abstract public unemployment insurance is analyzed as the majority voting equilibrium policy of a dynamic stochastic economy abstracting from incentive effects we focus on redistribution some results are because of the distribution of heterogeneous employment opportunities public insurance may be democratically chosen even if complete private markets exist and because of the dynamics even when agents are intrinsically homogeneous the equilibrium benefit level or duration benefit schedule deviates from what has been described as optimal in the literature the effects of differences in the average frequency or duration of unemployment on equilibrium taxes and benefits are investigated with some unanticipated results

why economic reforms fail in the soviet system a property rights based approach jan winiecki why do economic reforms fail in soviet type systems despite the obvious interest of ruling groups in improving the performance of their ailing economies the author applies a property rights based analysis stressing modes of rent maximization by ruling groups as a crucial explanatory variable party apparatchiks and economic bureaucrats particularly benefit from persistent interference in the economic sphere and consequently are most interested in maintaining the status quo the author surveys the impact of these motivations on the content of economic reforms outlines the strategies of counterreformers and predicts the future of reforms in soviet type economies 1 introduction in analyzing the disequilibrium characteristics of contemporary western economies mancur olson 1982 1984a 1984b agrees with the neoclassical macroeconomists in finding that given the tendencies of markets to clear and given the rational expectations of economic agents any disequilibrium indicates that all mutually advantageous transactions have not been consummated having made this point however he asks what can make agents ignore the potential gains from unconsummated transactions and turns his attention toward the structure of incentives and thus of institutions and policies olson insists and rightly so that a satisfactory static and dynamic macroeconomic theory has to explain who among key actors has the incentive to generate economic growth and equilibrate the economy and who does not furthermore no government even an authoritarian one has an incentive to generate serious recessions or disequilibria olson 1984a 637 writes that even in dictatorial systems the dictator has an incentive to make the economy of the country he controls work better since this will generate more tax receipts he can use as he pleases and usually also reduce dissent olson s arguments about incentives institutions and disequilibria offer an ideal basis for an inquiry into why reforms fail in soviet type economies stes in olson s theories of incentives the old roman principle of criminal law cui prodest who gained is applied to modem economies and the results suggest that contrary to widespread opinion it is not necessarily the small but powerful group of high and highest leaders that stands to gain most in terms of power and privilege from the preservation of the existing order a powerful political elite could satisfy its desires for both power and privilege through an alternative undemocratic system one which involves authoritarian don ts rather than totalitarian do s in that perspective the inefficient system of economic control typical in stes involving centrally planned production goals and input rationing would not be a condition sine qua non of an authoritarian solution since totalitarian command and control systems persist however one must seek groups other than the powerful and privileged few which have incentives to resist reforms and keep the economy inefficient the following sections identify the membership and motives of groups having strong incentives to keep the stes inefficient and prevent successful i e market oriented reforms we show how those groups operate and analyze their effects on the economic performance of their countries first the incentives for these groups to prevent decentralized management in the state sector are spelled out then their incentives to prevent the expansion of the more efficient private sector are outlined third having identified who benefits from the status quo and why the paper discusses when and how market oriented reforms are aborted limited or reversed by those who stand to gain from the reforms failure the last two sections consider the prospects of current attempts at economic reform in three specific countries poland the ussr and china and the prospects for economic reform in stes more generally

layoffs wages and unemployment insurance abstract the influence of unemployment insurance on wage and layoff behavior is analyzed in the context of optimal labor contracts responses of contract terms to changes in economic parameters are shown to depend in general on the nature of the initial contract the degree of workers risk aversion and the resolution of bargaining conflict layoffs are not necessarily reduced by an increase in experience rating or a reduction in the ui benefit product demand fluctuations tend to induce procyclical employment fluctuations but not wage fluctuation an implication of optimal contracts with private insurance suggests a reason for government intervention in ui provision

business cycles and labor market search the quantitative implications of labor market search for economic fluctuations are evaluated in the context of a real business cycle model incorporating labor market search into the model is found to improve its empirical performance along several dimensions in particular hours now fluctuate substantially more than wages and the contemporaneous correlation between hours and productivity falls in addition the model replicates the observation that output growth displays positive autocorrelation at short horizons overall the empirical results suggest that the labor market search environment embodies a quantitatively important propagation mechanism copyright 1996 by american economic association

unemployment benefits as a substitute for a conservative central banker in the many years since their introduction positive theories of inflation have rarely been tested this paper documents a negative relationship between inflation and the welfare state proxied by the parameters of the unemployment benefit program that is to be expected in such theories because unemployment benefits make the monetary authority less concerned about the plight of the unemployed building a welfare state has a similar effect to appointing a conservative central banker the relationship holds in a panel of 20 oecd countries over the period 1961 1992 a region where romer finds no evidence of commitment problems it holds controlling for country and time fixed effects country specific time trends other covariates and using a decadal panel interpreted as causal the estimated effect is economically large a 1 standard deviation decrease in benefit duration is predicted to add 1 4 percentage points onto inflation or 31 of the standard deviation in inflation

the effects of social networks on employment and inequality we develop a model where agents obtain information about job opportunities through an explicitly modeled network of social contacts we show that employment is positively correlated across time and agents moreover unemployment exhibits duration dependence the probability of obtaining a job decreases in the length of time that an agent has been unemployed finally we examine inequality between two groups if staying in the labor market is costly and one group starts with a worse employment status then that group s drop out rate will be higher and their employment prospects will be persistently below that of the other group

birth death and taxes abstract this paper analyzes the effects of lump sum tax policy in an overlapping generations model in which consumers have uncertain longevity it extends previous analyses by considering the case in which private insurance arrangements are actuarially unfair in addition it considers the polar case of actuarially fair insurance and the polar case of no insurance a general condition for debt neutrality is derived this condition depends explicitly on the degree of actuarial unfairness in insurance and on the extent to which parents care about the utility of their children

an exact bond option formula this paper derives a closed form solution for european options on pure discount bonds assuming a mean reverting gaussian interest rate model as in vasicek 8 the formula is extended to european options on discount bond portfolios

shape factors and cross sectional risk abstract galluccio and roncoroni 2006 empirically demonstrate that cross sectional data provide relevant information when assessing dynamic risk in fixed income markets we put forward a theoretical framework supporting that finding based on the notion of shape factors we devise an econometric procedure to identify shape factors propose a dynamic model for the yield curve develop a corresponding arbitrage pricing theory derive interest rate pricing formulae and study the analytical properties exhibited by a finite factor restriction of rate dynamics that is cross sectionally consistent with a family of exponentially weighed polynomials we also conduct an empirical analysis of cross sectional risk affecting us swap euro bond and oil markets results support the conclusion whereby shape factors outperform the classical yield resp price factors i e level slope and convexity in explaining the underlying fixed income resp commodity market risk the methodology can in principle be used for understanding the intertemporal dynamics of any cross sectional data

mismatch versus derived demand shift as causes of labour mobility labour mobility may be caused by shifts in the derived demand for labour on the part of firms or sectors or it may be caused by mismatches between workers and their jobs both reasons may be important and this paper merges them into one model it explores the consequences for a wage tenure relationships and b the issue of sluggishness of wages caused by the implied selectivity of workers into preferred jobs and sectors

a parametric nonlinear model of term structure dynamics recent nonparametric estimation studies pioneered by ait sahalia document that the diffusion of the short rate is similar to the parametric function r superscript 1 5 estimated by chan et al whereas the drift is substantially nonlinear in the short rate these empirical properties call into question the efficacy of the existing affine term structure models and beg for alternative models which admit the observed behavior this article presents such a model our model delivers closed form solutions for bond prices and a concave relationship between the interest rate and the yields we show that in empirical analyses our model outperforms the one factor affine models in both time series as well as cross sectional tests article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

take the money and run political turnover rent seeking and economic growth abstract we find a negative and significant relationship between gubernatorial turnover and u s state economic growth although our finding of an inverse relationship between growth and political instability may seem to contradict olson s 1982a famous hypothesis regarding the growth retarding nature of political stability such constitutional political changes were not primarily what olson had in mind we argue that enhanced political turnover is associated with more rent seeking since payoffs to focusing on special interest redistributive policies vs general growth enhancing ones are greater for less durable regimes therefore we interpret our evidence as supportive of olson s broader argument concerning the negative affect of rent seeking behavior on growth

precautionary saving and accidental bequests this paper presents a simple general equilibrium model of precautionary saving and accidental bequests this model is used to analyze the implications of individual lifetime uncertainty for aggregate consumption and capital accumulation a precautionary demand for saving arises because an individual consumer does not know in advance the date at which he will die and he wants to avoid low levels of consumption in the event that he lives longer than expected an implication of this precautionary saving is that when death does occur the consumer is generally holding some wealth which is then passed on to his heirs in the form of an accidental bequest even if all consumers have the same ex ante mortality probabilities there will be some intracohort variation in the date of death consequently there will be a nondegenerate distribution of bequests left by consumers in a cohort this nondegenerate distribution of bequests left by one generation induces variation in the distributions of wealth consumption and bequests of subsequent generations the importance of bequests in aggregate saving has been established by laurence kotlikoff and lawrence summers 1981 who reported that 80 percent of u s household wealth is inherited wealth one interpretation of this finding is that the simple life cycle model without bequest motives is an inadequate description of saving behavior in the united states but the model i present demonstrates that accidental bequests by selfish consumers can account for a potentially sizeable fraction of aggregate wealth although some part of bequests especially by the wealthy undoubtedly results from an explicit bequest motive accidental bequests also play a role in the intergenerational transfer of wealth as well as in the intragenerational variation in wealth in order to focus on the role of accidental bequests i purposely exclude a bequest motive from the specification of the utility function the effects of lifetime uncertainty on individual consumption behavior were first examined formally in a seminal paper by menachem yaari 1965 yaari s model provided the basic framework for virtually all subsequent work on uncertain lifetimes including well known papers by nils hakansson 1969 stanley fischer 1973 robert barro and james friedman 1977 david levhari and leonard mirman 1977 and kotlikoff and avia spivak 1981 however all of these papers focused on the consumption decision of an individual and ignored the effect of accidental bequests on the behavior of the recipients of these accidental bequests 2 as will be shown at various points in this paper changes in the economic environment can have effects on aggregate behavior which differ sharply from the effects on individual behavior because of the endogenous adjustment of bequests the effects of department of economics harvard university cambridge ma 02138 this paper is a revised version of bequests and social security with uncertain lifetimes nber working paper no 1372 june 1984 i thank olivier blanchard john burbidge christopher cavanagh robert clower stanley fischer benjamin friedman elhanan helpman mervyn king nobuhiro kiyotaki laurence kotlikoff robert mcdonald james pesando julio rotemberg lawrence summers lars svensson mark watson and jeffrey wolcowitz for valuable conversations and correspondence i also thank the participants in seminars at boston university columbia university cornell university federal reserve board harvard university university of iowa mit university of minnesota university of montreal national bureau of economic research north carolina state university the wharton school and yale university and two anonymous referees for their helpful comments i also thank the national science foundation for financial support 1 in the presence of perfect annuity and life insurance markets there may or may not be bequests depending on the presence or absence of a bequest motive but there would be no accidental bequests 2 kotlikoff and spivak focus on the role of the family in providing an incomplete annuities market but stop short of a full scale overlapping generations model in which the distribution of bequests is determined endogenously

minimum wages inequality and unemployment abstract using a median voter model we show that greater equality in the distribution of ability can increase both employment and the politically determined value of the minimum wage thus generating the semblance of a positive association between minimum wages and employment

labor search and matching in macroeconomics abstract the labor search and matching model plays a growing role in macroeconomic analysis this paper provides a critical selective survey of the literature four fundamental questions are explored how are unemployment job vacancies and employment determined as equilibrium phenomena what determines worker flows and transition rates from one labor market state to another how are wages determined what role do labor market dynamics play in explaining business cycles and growth the survey describes the basic model reviews its theoretical extensions and discusses its empirical applications in macroeconomics the model has been developed against the background of difficulties with the use of the neo classical frictionless model of the labor market in macroeconomics its success includes the modelling of labor market outcomes as equilibrium phenomena the reasonable fit of the data and when inserted into business cycle models improved performance of more general macroeconomic models at the same time there is evidence against the nash solution used for wage setting and an active debate as to the ability of the model to account for some of the cyclical facts

search wage bargains and cycles in this paper i describe an equilibrium model of job matchings with perfect foresight that has the following property the number of people looking for work changes temporarily when there is a temporary shock to the value of labour s marginal product it does not change when the shock is permanent by contrast real wages change temporarily by a small amount when the shock is temporary but change permanently and by a bigger amount when the shock is permanent thus the model offers an explanation for the observation that over the cycle small wage changes are associated with changes in unemployment whereas secularly wage growth does not seem to affect the rate of unemployment the two most common explanations for this observation in the literature the phelps lucas misperceptions model and the lucas rapping intertemporal substitution model are well grounded in equilibrium theory but they have not stood up well to empirical testing the misperceptions model requires more ignorance of aggregate changes than can be reasonably assumed whereas the intertemporal substitution model requires bigger wage elasticities of labour supply than those estimated in the model of this paper neither misperceptions nor changes in the supply of labour play a role in generating the unemployment cycle all agents observe the shocks when they occur and they anticipate correctly the economy s adjustment path but like the new classical explanations of the cycle the model is an equilibrium one in the sense that all private gains from trade are fully exploited at all phases of the cycle although the social gains from trade may not be fully exploited because of search externalities the cycle i derive here is not due to externalities unlike other related perfect foresight models such as diamond s 1982a the structure of the model is such that the externalities do not give rise to multiple equilibria the key element of the model which is responsible for the transmission of output shocks to unemployment is the equation for wages in markets where the allocation of jobs takes place through search both firms and workers have some monopoly power a point emphasised by mortensen 1970 though he attributed only temporary monopoly power and only to firms i use the nash bargaining solution to solve for the equilibrium wage rate and show that the firm s and worker s alternative returns threat points or

love thy children abstract this paper proves that barro s 1974 debt neutrality proposition whose relevance hinges in an economy with bequest motives on bequests being operative in the economy without public debt is not applicable to a wide class of overlapping generation economies those with a weak bequest motive in particular it is shown that the bequest motive is always too weak and public debt therefore non neutral when non physical assets have a well defined function reducing oversavings in the corresponding economy without bequest motive i e when the non altruistic economy is dynamically inefficient

business cycles with costly search and recruiting a business cycle model is developed in which output is traded on lucas phelps islands and labor services on each island are exchanged through costly search and recruiting with transactions externalities the model exhibits persistent involuntary unemployment and inefficient equilibria even though there are no nominal rigidities and no unexploited privately attainable gains from trade it also exhibits employment fluctuations without any real wage fluctuations it yields a lucas aggregate supply curve to a linear approximation it also implies that the natural rate of unemployment depends positively upon the variability and persistence of relative price shocks

public choice and the social insurance paradox a note grant e k and j vanderkamp 1976 the economic causes and effects of migration canada 1965 71 ottawa economic council of canada jenkins g p and c y kuo 1978 on measuring the social opportunity cost of permanent and temporary employment this journal 11 220 39 jenkins g p g glenday j c evans and c montmarquette 1978 trade adjustments assistance the costs ofadjustment and policy proposals ottawa department of industry trade and commerce canada kuo c y 1976 an analysis of the construction workers at glace bay heavy water plant ottawa department of regional economic expansion canada wood k s and h verge 1966 a study of the problems of certain cape breton communities halifax institute of public affairs dalhousie university

the productivity slowdown the oil shocks and the real cycle f ive facts stand out about economic performance in the united states since world war ii the first is that for most of the postwar period the u s has had a slower rate of economic growth than the other major developed democracies except great britain and much lower rates of growth than germany japan and italy the gap between the growth of per capita income of the united states and comparable countries has however tended to diminish over time and the united states has lately grown at about the same rate as most other developed countries the second outstanding fact is that the united states has fallen far behind in many mass production industries in which it used to lead the world whereas it is ahead of other nations in many new and especially high technology industries in automobiles steel tires household appliances and earth moving and farm equipment for example u s production has fallen dramatically in relation to output in most comparable countries and the country has become a net importer of most such products by contrast in newer industries such as computers jet aircraft sophisticated weaponry and high technology in general the united states is often dominant both as producer and exporter the third outstanding fact is that most of the older heartland of american industry roughly the area north and east of an arc drawn from baltimore to st louis to milwaukee has declined dramatically in comparison with the south and the west this change in regional fortunes has been due in large part to migration motivated by differences in economic prospects from the declining to the advancing

beyond keynesianism and monetarism though there is consensus among economists about microeconomic theory neither the keynesian nor the monetarist theory of macroeconomics has attracted a consensus presumably because neither is compelling enough to persuade the skeptical a new approach to the subject that combines insights from each of the familiar schools with considerations that both schools have overlooked is accordingly offered here this argument accepts the evidence that involuntary unemployment and depressions sometimes occur and thus rejects the finding of the new classical or equilibrium macroeconomics that markets always clear and that all individuals and firms are in equilibrium it also rejects the keynesian assumption of wages or prices arbitrarily fixed at disequilibrium levels and insists that any adequate theory must show what interests are served by the existence of involuntary unemployment the theory offered here shows that an institutional or organizational arrangement common in all societies which have experienced widespread unemployment and deep recessions entails that many firms and individuals will be in disequilibrium this disequilibrium becomes more severe when there is unexpected deflation or disinflation the disequilibrium is of precisely the type commonplace in recessions and entails involuntary unemployment the theory also shows how groups of individuals and firms can gain from practices that entail involuntary unemployment and underutilization of resources for others