foreign direct investment and technological capabilities in brazilian industry the purpose of this paper is to make a contribution to a further understanding of the implications of the growing presence of foreign affiliates for deepening technological capabilities tcs in brazilian industry it proposes a tc classification that emphasises the distinction between the use and generation of knowledge and presents a methodology for composing tc proxies by means of an innovation survey database the findings suggest that both foreign and domestics firms have accumulated substantial capabilities for using existing technology but only shallow capabilities for locally generating technologies however foreign affiliates score higher than their local counterparts in more complex capabilities confirming their centrality in the brazilian learning system this gives ground for urging the elaboration of strategic foreign direct investment fdi policies that strengthen and deepen local tcs

does informative media commentary reduce politicians incentives to pander abstract elections sometimes give policy makers incentives to pander i e to implement a policy that voters think is in their best interest even though the policy maker knows that a different policy is actually better for the voters pandering incentives are typically attenuated when voters learn prior to the election whether the policy chosen by the incumbent truly was in their best interest this suggests that the media can improve accountability by reporting to voters information about whether an incumbent made good policy choices we show that although media monitoring does sometimes eliminate the incumbent s incentive to pander in other cases it makes the problem of pandering worse furthermore in some circumstances incumbent incentives are improved when the media acts as a yes man suppressing some information that indicates the policy maker made the wrong choice we explain these seemingly paradoxical results by focusing on how media commentary affects voters tendency to apply an asymmetric burden of proof to the incumbent based on whether she pursues popular or unpopular policies

yes men integrity and the optimal design of incentive contracts in a pioneering approach towards the explanation of the phenomenon of yes man behavior in organizations prendergast 1993 argued that incentive contracts in employment relationships generally make a worker distort his privately acquired information this would imply that there is a trade off between inducing a worker to exert costly effort and inducing him to tell the truth in contrast we show that with optimally designed contracts which we term integrity contracts the worker will both exert effort and report his information truthfully and that hence the first best can be achieved

screening and signaling in communication in this paper we analyze a model of repeated strategic communication between a sender and a receiver the sender has private information on a policy relevant variable but does not know the receiver s motives together with the desire of the sender to please the receiver and the desire of the receiver to be pleased the two sided incomplete information creates an interesting communication problem in which players can choose to use information strategically we analyze various modes of communication which allow for information transmission and we compare them in terms of both the quality of the policy implemented and the welfare of the players

corporate conservatism and relative compensation this paper demonstrates that in a simple setting with managerial concern for reputation and asymmetric information on ability most managers may refrain from undertaking innovations that stochastically dominate an industry standard common components of uncertainty lead to market inferences of managerial ability based on relative performance managers who undertake the industry standard are consequently evaluated with a more accurate benchmark than those innovating discontinuities in compensation when performance is low because of firings lead managers to have differing valuations of an accurate benchmark depending on type in particular very high and very low ability managers are more likely to undertake superior innovations than those of average ability

changing one s mind when the facts change incentives of experts and the design of reporting protocols experts often collect and report information over time what reporting protocol elicits the most information here a principal receives reports sequentially from an agent with privately known ability who observes two signals about the state of the world the signals differ in initial quality and unlike previous work differ in quality improvement the paper finds that mind changes inconsistent reports can signal talent if a smart agent improves faster also sequential reports dominate when the principal s decision is very sensitive to information a single report dominates if the mediocre agent s signals improve faster or the agent is likely mediocre

the wisdom of the minority we consider a simple variant of the canonical model of social learning and show that in many situations it is optimal for an agent to abandon her own information and follow the minority rather than the majority this possibility depends on two economically meaningful requirements agents are differentially informed and observe only the number of agents having chosen each option such as consumers observing only market shares we show that minority wisdom arises when information is sufficiently heterogeneous and the well informed are not overly abundant yet the conditions necessary are not overly restrictive in fact it is possible for the minority to be wise even when the minority consists of a lone dissenter and a majority of citizens are well informed

a model of public opinion management abstract policymakers often motivate their decisions using information collected by government agencies while more information can help hold the government to account it may also give policymakers an incentive to meddle with the work of bureaucrats this paper develops a model of biased information gathering to examine how different disclosure rules and the degree of independence of government agencies affect citizen welfare disclosure rules and agency independence interact in subtle ways we find that secrecy is never optimal and yet insulating the agency from political pressure so that its information is always unbiased may also not be socially optimal a biased information gathering process can benefit the government by helping it to shape public opinion but it can also benefit the public by curbing the government s tendency to implement its ex ante favored policy thus mitigating the agency conflict between policymakers and the public

macro economy stock market and oil prices do meaningful relationships exist among their cyclical fluctuations this paper examines the relationship among consumer price index industrial production stock market and oil prices in greece initially we use a unified statistical framework cointegration and vecm to study the data in levels we then employ a multivariate var model to examine the relationship among the cyclical components of our series the period of the study is from 1996 1 to 2008 6 findings suggest that oil prices and the stock market exercise a positive effect on the greek cpi in the long run cyclical components analysis suggests that oil prices exercise significant negative influence to the stock market in addition oil prices are negatively influencing cpi at a significant level however we find no effect of oil prices on industrial production and cpi finally no relationship can be documented between the industrial production and stock market for the greek market the findings of this study are of particular interest and importance to policy makers financial managers financial analysts and investors dealing with the greek economy and the greek stock market

the long run relationship between stock return dispersion and output based on the rational that some industry groups are more closely linked to the business cycle than others we re examined a previous analysis on the long term relationship between stock return dispersion by industry and gross domestic product gdp which evaluated data until 1987 by extending it to 2008 using mean square forecast errors msfe statistics we find that incorporating the return dispersion in vector autoregressive var models enhances their forecasting power for output gdp in the long run this article also determines that the relationship between stock return dispersion by industry and gdp is tenuous in the recent decade from 1999

stock market returns and inflation evidence from other countries this paper investigates the relation between common stock returns and inflation in twenty six countries for the postwar period our results do not support the fisher hypothesis which states that real rates of return on common stocks and expected inflation rates are independent and that nominal stock returns vary in one to one correspondence with expected inflation there is a consistent lack of positive relation between stock returns and inflation in most of the countries

anti herding and strategic consultation in this paper i analyze how careerist decision makers aggregate and use information provided by others i find that decision makers who are motivated by reputation concerns tend to anti herding i e they excessively contradict public information such as the prior or others recommendations i also find that some decision makers may deliberately act unilaterally and not consult advisers although advice is costless moreover advisers to the decision maker may not report their information truthfully even if the advisers care only about the outcome they bias their recommendation since they anticipate inefficient anti herding behavior by the decision maker

the weak form efficiency of the finnish and scandinavian stock exchanges a comparative note on thin trading this note adds to previous scandinavian evidence produced by the jennergren korsvold 1974 1975 jennergren 1975 jennergren toftnielsen 1977 korhonen 1977 and s0rensen 1982 studies of stock market return randomness in daily data sets from the oslo and stockholm stock exchanges jennergren korsvold 1975 found evidence of nonrandomness in a majority of the 45 stocks studied a similar result was later reported for the copenhagen exchange by jennergren toft nielsen 1977 subsequent studies by jennergren 1975 and s0rensen 1980 further indicated that the serial correlation inherent in stockholm and copenhagen data was strong enough to allow supernormal yields on simple filter strategies 2 the data for our study consist of daily trading or when closings did not occur bid prices adjusted for dividends and issues for all stocks quoted on the helsinki stock exchange hese between february 2 1970 and december 31 1981 along with data on daily trading volumes for the years 1977 81 3 the price file is based on the kop index file 4 throughout this note comparisons with previous results for other scandinavian exchanges are made allowing for variations in sample periods we attempt a study of whether a smaller annual turnover of an exchange effects the degree of nonrandomness exhibited by its stock returns of the

the evolution of managerial expertise how corporate culture can run amok this paper investigates how noisy evaluation of worker skills affects human capital investments and hiring individuals distort investments toward skills that most managers can evaluate dynamically when workers become managers managerial expertise can become increasingly skewed over time raising investment distortions and reducing output if firms select managerial expertise strategically efficient investments can be retrieved when a identifying whether workers skills matter more than distinguishing among skilled workers and b initial investment distortions are small otherwise such strategic design worsens long run outcomes finally we determine when short run affirmative action policies are effective

ex ante versus ex post optimal promotion rules the case of internal promotion i introduction the literature on promotion practices within the firm identifies two distinct roles for a firm s promotion policies promotions serve both as a way for the firm to efficiently assign workers to tasks and as a way for the firm to reward prior performance 1 in this article i explore the time inconsistency problem that arises as a result of the dual nature of the promotion decision in particular i show that the common practice of favoring internal candidates for promotion can be understood as a response by firms to the problem of time inconsistency 2 consider a firm in which promotions serve as a reward for prior expenditures of effort and or prior investments in human capital the optimal promotion policy for this firm depends on the time frame from which we view the problem the ex ante optimal promotion rule is the optimal rule when the problem is viewed from a date prior to young workers deciding to work at this firm this rule takes into account both the assignment aspects of the promotion decision and that promotions serve as a reward for prior performance there is a second relevant rule however because at the date of the promotion decision the effects of promotion serving as a reward for prior performance are in the past for example in a world where the possibility of future promotion serves to increase the effort levels of young workers by the time of the promotion decision those effort choices have already been made hence the ex post optimal rule only takes into account the assignment aspects of the promotion decision the time inconsistency problem that arises is now clear total profits are maximized when the firm follows the ex ante optimal promotion rule but in the absence of commitment this is not how the firm behaves at the time of the promotion decision the firm has an incentive to ignore the effects of promotion serving as a reward for prior performance and instead follow the ex post optimal rule in other words the profits of the firm are decreased because at the time of the promotion decision the firm maximizes current profits and the anticipation of this behavior by workers has deleterious effects on behavior in prior periods in this article i explore a specific example of this time inconsistency problem consider a firm s decision concerning whether to fill a managerial position by promotion from within or by hiring an outsider i show that when confronted with this decision the firm faces the exact situation described that is the ex post optimal rule shows no preference for promotion from within over hiring from the outside whereas the ex ante optimal rule exhibits a preference for promoting from within the logic here is that the possibility of receiving the higher managerial wage in the future reduces the wage required to attract young workers into the firm but only the ex ante optimal rule takes this into account the result is that in the absence of commitment the firm hires from the outside too often the conclusion is that the establishment of an internal labor market in which the firm favors promotion from within can be understood as a way that the firm avoids this time inconsistency problem this result extends a finding in malcomson 1984 that article also shows that an internal labor market in which hiring from the outside is restricted can arise in a world where promotion serves as a reward for prior performance in that work however there is no time inconsistency problem the reason is that malcomson assumes workers are homogeneous and thus at the time of the promotion decision it is weakly optimal for the firm to have all promotions be from within in contrast i assume that workers are heterogeneous and find that if the firm maximizes ex post profits it lowers total profits the result is an internal labor market that not only limits hiring from the outside but also constrains the firm to behave in a manner different from that which maximizes profits at the time the promotion decision is made

misselling through agents this paper analyzes the implications of the inherent conflict between two tasks performed by direct marketing agents prospecting for customers and advis ing on the product s suitability for the specific needs of customers when structuring salesforce compensation firms trade off the expected losses from misselling unsuitable products with the agency costs of providing market ing incentives we characterize how the equilibrium amount of misselling and thus the scope of policy intervention depends on features of the agency problem including the internal organization of a firm s sales process the transparency of its commission structure and the steepness of its agents sales incentives jel m31 m37 m52 when purchasing unfamiliar products consumers often rely on information and advice pro vided by representatives of the seller this creates the possibility of misselling the question able practice of a salesperson selling a product that may not match a customer s specific needs 1 this problem is particularly severe in markets for technically complex products such as con sumer electronics auto repairs medical care and retail financial services including securities pensions insurance policies and mortgages an important feature of these markets is that the seller often deals with the customer through an agent rather than directly for example financial brokers typically recommend purchase of a specific product after inquiring about their customers particular circumstances and needs the possibility of abuse has led to regulation in some of these markets most notably for securities transactions the financial industry regulatory authority finra the major self regulatory organization for securities firms operating in the united states mandates that broker dealers make a reasonable effort to obtain information about the individual characteristics of their noninstitutional cus tomers and to ensure that their recommendations are suitable to customers financial situations

publicity of debate and the incentive to dissent evidence from the us federal reserve transparency in committee decision making may have clear benefits by making members more accountable to outside observers we consider one potential cost the possibility that publishing records of deliberations will make members more reluctant to offer dissenting opinions we construct a model that compares incentives for members with career concerns to voice dissent when deliberations occur in public or in private we test the model using an original dataset based on deliberations of the federal reserve s federal open market committee asking whether the fomc s 1993 decision to begin releasing transcripts of its meetings has altered incentives for dissent we find evidence that this is indeed the case there has been much recent discussion of the advantages of transparency in agency relationships both in and outside of government while research has attempted to model this issue theoretically there has been less progress with empirical tests a problem due no doubt in large part to the fact that it is difficult to make before and after comparisons of a shift in transparency often no data are available on an agent s actions prior to the establishment of transparency in this article we focus on one specific type of transparency publishing verbatim transcripts of committee meetings and one specific reason why this type of transparency might not be desirable the possibility that the quality of deliberation on a committee will suffer if the deliberations take place in public we develop a theoretical model that helps to identify the potential costs of this type of transparency and we then test the model empirically using an original dataset on deliberations of the federal reserve s federal open market committee fomc our dataset is unique in that it records views expressed by policymakers at fomc meetings and not just their official votes our empirical tests focus in particular on the observed effect of the institutional change that occurred in 1993 when the fomc decided to begin releasing transcripts of its meetings after a delay of five years transparency is a particularly relevant issue in monetary policy because it is commonly argued that when central banks take actions such as publishing macroeconomic forecasts revealing individual votes on monetary policy committees or releasing minutes of meetings this will lead to improved economic outcomes while simultaneously facilitating democratic accountability 1

decision making in committees transparency reputation and voting rules in this paper i analyze the effect of the transparency of the decision making process in committees on the decisions that are eventually taken i focus on committees whose members are motivated by career concerns so that each member tries to enhance his own reputation when the decision making process is secretive the individual votes of the committee members are not exposed to the public but only the final decision thus individuals are evaluated according to the group s decision i find that in such a case group members are induced to comply with preexisting biases for example if the voting rule demands a supermajority to accept a reform individuals vote more often against reforms and exacerbate the conservatism of the voting rule when the decision making process becomes transparent and individual votes are observed this effect disappears and such committees are then more likely to accept reforms i also find that coupled with the right voting rule a secretive procedure may induce better decisions than a transparent one

corporate strategies for fdi in the context of latin america s new economic model abstract the nem in latin america radically altered foreign direct investment inflows to the region previously restrictive national policies became ones that facilitated foreign direct investment fdi in the context of new business opportunities transnational corporations tncs took a new look at the region in the context of their evolving corporate strategies examples being efficiency seeking corporate strategies in the automotive mexico and the apparel industry caribbean basin and the market access strategy for services in the telecommunications and electrical energy industries brazil two interrelated problems arose a tnc objectives were often attained but those linked to national development goals often were not and b national policies did not channel fdi to priority development activities

informative cheap talk in elections why do office motivated politicians sometimes espouse views that are non congruent with their electorate s can non congruent statements convey any information about what a politician will do if elected and if so why would voters elect a politician who makes such statements furthermore can electoral campaigns also directly affect an elected official s behaviour we develop a model of credible cheap talk costless and non binding communication in elections the foundation is an endogenous voter preference for a politician who is known to be non congruent over one whose congruence is sufficiently uncertain this preference arises because uncertainty about an elected official s policy preferences generates policymaking distortions due to reputation career concerns we show that cheap talk can alter the electorate s beliefs about a politician s policy preferences and thereby affect the elected official s behaviour informative cheap talk can increase or decrease voter welfare with a greater scope for welfare benefits when reputation concerns are more important

foreign direct investment exports and imports in mexico this paper analyses the liberalisation of foreign direct investment fdi in mexico since the late 1980s and its relationships with exports and imports such a process has eased the access of multinational corporations mncs to the country which has promoted exports however it has also resulted in a higher import content and the displacement of local firms which has limited mexico s economic development through the balance of payments constraint the analysis is supported by the existence of linkages bidirectional granger causality between exports imports and fdi

well informed intermediaries in strategic communication this paper studies how a sender with private information can influence the decisionmaker through well informed intermediaries both the sender and the intermediary may be independently objective or biased with the objective type assumed to pass on the most accurate information while the biased type wanting to push a particular agenda but also to appear objective although using one s own information is a sign of objectivity the biased intermediary selectively incorporates the sender s information to push his agenda and his truth telling incentives always decrease in those of the biased sender s hence measures raising the sender s reputation cost worsen the intermediary s distortion and may make the decisionmaker strictly worse off in contrast the biased sender s and the intermediary s truth telling incentives are strategic complements if they report simultaneously

ingratiation experimental evidence we investigate experimentally ingratiatory behavior expressed by opinion conformity both individuals performance at a task and their opinions on various topics can be observed before unequal payoffs are assigned by a second mover in some treatments first movers can change their opinion after learning that held by the second mover we find evidence of high ingratiation indices as opinion conformity is rewarded however second movers reward conformity less when it is common knowledge that opinions can be manipulated strategically introducing a monetary cost for changing opinion reduces ingratiation introducing performance related pay for the second mover makes ingratiation less rewarding but does not eliminate it completely reducing the noise in the measurement of ability has little effect

stock returns inflationary expectations and real activity this paper tests the fisher hypothesis that real stock returns are independent of inflationary expectations on data for the finnish economy a significant negative relationship is found when stock returns are regressed on the rate of inflation a possible explanation is that higher inflation may proxy a drop in the money demand induced by a lower growth in real activity which simultaneously implies a drop in expected future profits and thus a drop in stock prices to test this hypothesis actual growth in real activity is included in the regression equation for aggregate stock returns significant negative coefficients are however still obtained for expected as well as unexpected inflation it is further shown that these relations are quite insensitive to the specification of the expectations formation mechanism

stock prices asset portfolios and macroeconomic variables in ten european countries abstract this paper investigates the relationship between stock indices asset portfolios and macroeconomic variables in ten european countries it is shown that employment imports inflation and interest rates are inversely related to stock prices expectations about future real activity measures for money and the u s yield curve are positively related to stock prices a portfolio of european stock indices was constructed and it is shown that this portfolio is the variable that most strongly explains the variation in the stock prices the associations between stock prices and macroeconomic variables are shown to be strongest in germany the netherlands switzerland and the united kingdom there is a high degree of similarity between the effects in the first three of these countries in several instances the stock prices are related to historic value of economic variables indicating that predictive models can be constructed

political accountability and sequential policymaking abstract we develop a model of political accountability with sequential policymaking when a bureaucrat s actions are transparent his overseer faces a political time inconsistency problem she is tempted to revise her retention rule in the middle of the policymaking process as a result the bureaucrat s equilibrium behavior overemphasizes later tasks if the overseer knows the technology by which policies translate into outcomes then she can eliminate these distortions using task specific budget caps however if the overseer is uncertain about this technology such budget caps introduce ex post inefficiency when uncertainty is sufficiently large and consequential the overseer prefers an institutional environment with a fungible budget and no transparency such an environment allows the overseer to exploit the bureaucrat s expertise though at the cost of weaker overall incentives

transparency in agency the constant elasticity case and extensions this paper considers a hidden action agency problem where the principal has a single source of hidden information concerning the agent s utility the agent s effort productivity or the agent s cost of effort we examine whether the principal should precommit to disclosing these different single sources of information to the agent if the optimal contract is invariant over the hidden information and thus the disclosure rules constant elasticity case such disclosure increases the agent s utility it can raise or lower profit and total surplus depending on the source of hidden information and non disclosure can be optimal if disclosure affects the agent s motivation if the contract varies with the hidden information and thus disclosure rule disclosure or non disclosure can be optimal depending on whether the party s payoff is convex or concave in the information variable respectively

the relation between stock prices and inflationary expectations the international evidence this paper provides empirical evidence on the relation between stock returns and inflationary expectations for nine countries over the period 1971 80 the fisherian assumption that real returns are independent of inflationary expectations is soundly rejected for each major stock market of the world using interest rates as a proxy for expected inflation our data provide consistent support for the geske and roll model whose basic hypothesis is that stock price movements signal negative revisions in inflationary expectations finally a weak real interest rate effect was found for some of these countries

careerist experts and political incorrectness abstract while political correctness is a dominant norm in many public situations we also observe behaviors that are apparently politically incorrect often from professionals and experts this paper examines the flip side of political correctness as analyzed in morris 2001 to shed some light on the elusive notion of political incorrectness and elucidate its equilibrium and welfare properties we show that there are circumstances in which unbiased experts deliberately take a politically incorrect stance out of reputational concerns and identify key elements which give rise to this perverse reputational incentive the results suggest that political incorrectness cannot necessarily be viewed as a sign of blunt honesty when informed experts have long term reputational concerns we also examine the welfare consequences of political incorrectness and argue that this form of information manipulation can be beneficial under some conditions

latin america s new economic model micro responses and economic restructuring abstract this paper introduces a special issue on the microeconomics of latin america under the new economic model nem the paper reviews the rationale and policies of the nem and analyzes the impact of the reforms at the macroeconomic sectoral and microeconomic levels at the firm level the contributions to this issue demonstrate that a considerable adjustment process is taking place as sectoral structural change indices demonstrate however this has not resulted in widespread shifts of resources between sectors nor has it resulted in significant improvement in overall employment productivity and growth the authors analyze the reasons for this disjuncture and suggest policy alternatives

peddling influence through intermediaries a sender may communicate with a decision maker through intermediaries in this model an objective sender and intermediary pass on information truthfully while biased ones favor a particular agenda but also have reputational concerns i show that the biased sender and the biased intermediary s reporting truthfulness are strategic complements the biased sender is less likely to use an intermediary than an objective sender if his reputational concerns are low but more likely to do so if his reputational concerns are moderate moreover the biased sender may be more likely to use an intermediary perceived to be more biased

real asset returns inflation and activity in a small open cash in advance economy abstract the effects of inflation are worked out for a small open economy with cash in advance cia constraints on bond purchases if all transactions are subject to cia constraints an increase in the inflation rate will reduce savings bringing about a current account deficit while the capital stock will be unaffected if investment is not subject to cia constraints an increase in the inflation rate will encourage investment and reduce savings bringing about a current account deficit numerical evaluation of the model gives rise to falls in real interest rates that are in line with recent empirical findings

information management in incentive problems we extend the standard procurement model to examine how an agent is optimally induced to acquire valuable planning information before he choose an unobservable level of cost reducing effort concer

pay equality and industrial politics personnel managers often argue that equitable pay treatment manifested as wage compression is useful because it reduces disharmony among workers but it is far from obvious that a compressed salary structure is morale improving since better workers may feel disenchanted by this scheme however when workers rewards are based on relative comparisons salary compression reduces uncooperative behavior that is detrimental to the firm relative comparisons imply that some reference group must be selected the major result is that within the relevant groups some wage compression is efficient

the provision of incentives in firms i ncentives are the essence of economics despite many wide ranging claims about their supposed importance there has been little empirical assessment of incentive provision for workers the purpose of this paper is to critically overview existing work on the provision of incentives since the interests of workers and their employers are not always aligned a large theoretical literature has emphasized how firms design compensation contracts to induce employees to operate in the firm s interest this literature has reached into many areas of compensation and has pointed to a multitude of different mechanisms that can be used to induce workers to act in the interests of their employers these include piece rates options discretionary bonuses promotions profit sharing efficiency wages deferred compensation and so on my objective here is to evaluate this literature in the light of a growing empirical literature on compensation where possible i will address the literature from two perspectives first an underlying assumption of this literature is that individuals respond to contracts that reward performance accordingly i consider whether agents behave in this way and whether these responses are always in the firm s interest second i address whether firms write contracts with these responses in mind in other words do contracts look like the predictions of the theory incentives are provided to workers

bringing the firm back in local decision making and human capital development in mexico s maquiladora sector summary the recent decline in mexico s maquiladora sector provides an opportunity to reassess the sustainability of basing national economic competitiveness on low wages 1 focusing on human capital as an important component of equitable growth the authors argue that models of its development which consider market factors alone are inadequate combining their own case study with a review of other studies over the past 20 years the authors propose a management centered as opposed to a market centered model of human capital development as a basis for discussing the relative merits of in bond industrial programs and considering measures to improve levels of human capital

a theory of self fulfilling political expectations abstract in their pursuit of being re elected politicians might not choose high quality policies but just conform to popular wisdom the larger are the office spoils and the more precise is an incumbent s knowledge of voter opinion the more likely that she will resort to such populism my main result is that the public s trust or distrust in politicians behavior may be self fulfilling when voters assess the quality of an incumbent politician they will compare her policy choices with their own prior opinion if voters think that the incumbent was just trying to conform a failure to do so will be even more damaging for the incumbent s election chances however this only increases the incumbent s incentives to conform which indeed confirm voters skepticism loosely put a skeptic voter attitude tends to generate conformist politicians while a trusting attitude tends to generate confident ones

is there a local knowledge advantage in federations evidence from a natural experiment in economics the local knowledge advantage is arguably one of the key arguments in favor of decentralizing the public sector however empirical investigations of this particular effect have been scarce this paper tests the existence of the local knowledge advantage in a real world setting specifically it looks at the variation in local knowledge across regions based on the origins and careers of regional politicians assuming that politicians who have spent more time in a particular region possess more and better knowledge of that region than outsiders to avoid the reverse causality problem the paper investigates how local origins affected the performances of politicians in a natural experimental environment studying the responses of regional governors in russia to disastrous forest fires in 2010 we confirm that local knowledge improves gubernatorial performance in a highly centralized federation such as russia though the effect is dependent on access to federal resources obtainable through close ties to the federal center we also discuss alternative interpretations of the local origins of politicians and test whether the effects found are indeed more plausibly explained by local knowledge

a political theory of populism when voters fear that politicians may have a right wing bias or that they may be in uenced or corrupted by the rich elite signals of true left wing conviction are valuable as a consequence even a moderate politician seeking reelection chooses populist policies i e policies to the left of the median voter as a way of signaling that he is not from the right truly right wing politicians respond by choosing more moderate or even left of center policies this populist bias of policy is greater when the value of remaining in o ce is higher for the politician when there is greater polarization between the policy preferences of the median voter and right wing politicians when politicians are indeed more likely to have a hidden right wing agenda when there is an intermediate amount of noise in the information that voters receive when politicians are more forward looking and when there is greater uncertainty about the type of the incumbent we show that similar results apply when some politicians can be corrupted or in uenced through other non electoral means by the rich elite we also show that soft term limits may exacerbate rather than reduce the populist bias of policies

inflation output and money this paper uses money demand theory and a rational expectations version of the quantity theory of money to study inflation in the united states during the post korean war period the major results are as follows 1 the theory and tests explain the phenomenon of stagflation that is the negative relation between inflation and real activity observed during the post 1953 period the analysis calls into question the many variants of the phillips curve which presume that inflation real activity relations are positive 2 consistent with the models of patinkin 1961 and fama 1980 monthly quarterly and annual data indicate that the base currency plus reserves held against deposits is the relevant monetary variable in the inflation process and that demand deposits are irrelevant the direct policy implication is that the base is the key monetary variable in the control of inflation 3 the most convincing evidence for the simple quantity theory view of inflation proposed here comes from the comparison of the conditional exmoney demand theory and the quantity theory of money are used to study the inflation process as predicted by the model monthly quarterly and annual data indicate that inflation is positively related to money growth rates and negatively related to growth rates of real activity the theoretical and empirical origins of stagflation are explained and changes in monetary arrangements to simplify the control of inflation are prescribed

a theory of yes men this paper illustrates an incentive for workers to conform to the opinion of their supervisors when firms use subjective performance evaluation this desire to conform arises endogenously from the firm s need to induce the worker to exert effort the author shows that firms may optimally eschew the use of incentive contracts to retain workers incentives for honesty the author illustrates that the incentive to conform implies inefficiencies even when workers are risk neutral and is likely to lead to more centralized decision making than in the absence of the desire to conform copyright 1993 by american economic association

information aggregation in debate who should speak first abstract privately informed individuals speak openly in front of other members of a committee about the desirability of a public decision each individual wishes to appear well informed for any given order of speech committee members may herd by suppressing their true information with individuals of heterogeneous expertise optimizing over the order of speech can improve the extraction of information but not perfectly so it is not always optimal to use the common anti seniority rule whereby experts speak in order of increasing expertise a committee with more able experts may be afflicted by greater herding problems yielding a worse outcome

money and prices in a small economy a simple rational expectations version of the quantity theory is applied to recent monthly and quarterly finnish data on prices money and related variables it is found that apparently because of sufficient flexibility of the exchange rate money precedes income with a lead of up to eight quarters in sharp contrast with previous phillips curve models the bank of finland s stable money supply policy causes a negative relationship between inflation and real activity when contrasted with models based on international transmission of inflation over fixed exchange rates the monetary model performs surprisingly well the results appear to indicate greater monetary autonomy than that suggested by previous studies

predation reputation and entry deterrence abstract economists often argue that predatory practices are irrational since there exist cheaper or more certain means to gain or maintain a monopoly our gametheoretic equilibrium analysis suggests that if a firm is threatened by several potential entrants then predation may be rational against early entrants even if it is costly when viewed in isolation because it yields a reputation which deters other entrants asymmetric information plays a crucial role in our analysis since it provides the rationale for entrants to base their expectations of the firm s future behavior on its past actions the analysis also suggests methods to treat general reputational phenomena

conflicts and common interests in committees committees improve decisions by pooling members independent information but promote manipulation obfuscation and exaggeration of private information when members have conflicting preferences committee decision procedures transform continuous data into ordered ranks through voting this coarsens the transmission of information but controls strategic manipulations and allows some degree of information sharing each member becomes more cautious in casting the crucial vote than when he alone makes the decision based on own information increased quality of one member s information results in his casting the crucial vote more often committees make better decisions for members than does delegation

foreign investment and the global geography of production why the mexican consumer electronics industry failed abstract explanations of industrial development in late developing countries have become narrowly focused on the capability of governments to promote pressure or punish nationally owned firms often overlooked is the contribution of firms both national and multinational in propelling coordinating and determining the path and location of such development this paper examines the conditions that led to the decline of mexico s consumer electronics industry and presents new evidence to support a more complex account of the role of both industrial and state actors within this process in contrast to the traditional market or state based theories we argue that the decline of mexico s consumer electronics industry largely resulted from its foreign investment regime particularly the timing of investment and the geographical locations of local and foreign manufacturers and the subsequent depth and quality of the relationships between these firms the differences between mexico s regime and that of taiwan during the same period provide further evidence of the important role that foreign firms play in inserting local suppliers into the global production chain we argue that mexico s foreign investment regime and the resulting weak local foreign ties rather than inadequate state policy sealed the fate of mexico s once thriving domestic electronics industry

the roles of reputation and transparency on the behavior of biased experts we analyze situations in which an expert is biased toward some decision but cares also about his reputation in the market for experts the information the expert reveals decreases as his bias moves toward stronger preference for the status quo we show that it is optimal to publicly disclose both the expert s contribution and his identity surprisingly revealing the intensity of the expert s bias doesn t always improve the information he reveals in equilibrium the presence of a second expert raises the first expert s incentives to report truthfully when reports are public but reduces them when they are secret in particular having an option to call another expert may be detrimental in terms of information production if reports are not public finally sequential consultation of experts reduces the information obtained when reports are public but raises it when they are secret

hiding information in electoral competition abstract we model a two candidate electoral competition in which there is uncertainty about a policy relevant state of the world the candidates receive private signals about the true state which are imperfectly correlated we study whether the candidates are able to credibly communicate their information to voters through their choice of policy platforms our results show that the fact that private information is dispersed between the candidates creates a strong incentive for them to bias their messages toward the electorate s prior information transmission becomes more difficult the less correlated are the candidates signals the lower is the signals quality and the stronger is the electorate s prior indeed for weak priors welfare decreases as the prior becomes stronger and welfare always decreases as the signals become less correlated

dictators and their viziers endogenizing the loyalty competence trade off the possibility of treason by a close associate has been a nightmare of most autocrats throughout history more competent viziers are better able to discriminate among potential plotters and this makes them more risky subordinates for the ruler to avoid this rulers especially those who are weakandvulnerable sacrificethecompetenceoftheiragents hiringmediocrebutloyalsubordinates furthermore any use of incentive schemes by a personalistic dictator is limited by the fact that all punishments are conditional on the dictator s own survival we endogenize loyalty and competence in a principal agent game between a dictator and his viziers in both static and dynamic settings the dynamic model allows us to focus on the succession problem that insecure dictators face jel d72 h00 c72 c82

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

optimal contracting with subjective evaluation this paper extends the standard principal agent model to allow for subjective evaluation the optimal contract results in more compressed pay relative to the case with verifiable performance measures moreover discrimination against an individual implies lower pay and performance suggesting that the extent of discrimination as measured after controlling for performance may underestimate the level of true discrimination finally the optimal contract entails the use of bonus pay rather than the threat of dismissal hence neither efficiency wages nor the right to dismiss an employee are necessary ingredients for an optimal incentive contract

the economics of clear advice and extreme options i study a principal agent model in which the agent collects information and then chooses a verifiable action i show that the principal can find it desirable to constrain the agent s action set even though there is no disagreement about the ranking of actions ex post the elimination or penalization of intermediate actions which are optimal when information is poor improves incentives for information collection i characterize optimal action sets when the agent is infinitely risk averse with respect to income shocks and optimal incentive schemes when the agent is risk neutral copyright 2005 wiley blackwell

the strategy of professional forecasting we develop and compare two theories of professional forecasters strategic behavior the first theory reputational cheap talk posits that forecasters endeavor to convince the market that they are well informed the market evaluates their forecasting talent on the basis of the forecasts and the realized state if the market expects forecasters to report their posterior expectations honestly then forecasts are shaded toward the prior mean with correct market expectations equilibrium forecasts are imprecise but not shaded the second theory posits that forecasters compete in a forecasting contest with pre specified rules in a winner take all contest equilibrium forecasts are excessively differentiated

maquila economic reform and corporate strategies abstract corporate strategies in maquila have changed over time while they were originally geared only to the exploitation of low paid low skilled labor nowadays firms are upgrading human capital and increasing the scope and technological complexity of production processes the adoption of the new economic model in host countries aimed precisely at this type of strategy change but cannot solely be credited for it in addition policies regarding maquila under the nem did not achieve all the stated goals regarding corporate strategy change trends in local procurement and technology transfer are still unsatisfactory strengthening of local supply and absorption capabilities is required

do formal salary systems really matter drawing on a single large u s corporation s personnel records for the years 1989 93 the authors analyze an example of the kind of formal salary system used by most large firms they find that this firm s practices were consistent with most of the important conclusions of prior empirical research on internal labor markets the system was highly centralized covering salary levels salary ranges raises and bonuses supervisors had little discretion over pay other than through subjective performance ratings the firm held fairly strictly to the salary rules leading to observable constraints on pay for employees near the top of the salary range these constraints however apparently did not impose important costs on the firm in the form of increased turnover although the system operated without any apparent connection to external factors the authors conclude that it transmitted external labor market forces with little distortion

pay for performance and beyond incentives are often associated with narrow financial rewards such as bonuses or executive stock options but in general such rewards are just a small part of the design of incentives properly designed incentive systems have to take into account the full portfolio of activities that the agent can engage in the array of instruments many nonfinancial that are available to influence individuals and consider the factors that motivate them in different settings thinking about incentives as a system of interacting instruments and influences has been a major advance in the economics of incentives in recent years in this lecture i will describe the path from pay for performance to the broader view of incentive systems

leadership based on asymmetric information rational players unconstrained by contracts or formal authority choose to follow a better informed leader whose action reveals part of her information if the leader satisfies a credibility condition then the unique nondegenerate equilibrium solves distinct shirking and coordination problems and achieves the first best if credibility fails as is more likely for a large organization then followers ignore the leader and equilibria are very inefficient appointing multiple leaders or a high cost leader can restore credibility if players invest privately in information then a leader often appears endogenously the equilibrium concept is an original extension of sequential equilibrium to continuous states

pandering to persuade a principal chooses one of multiple projects or an outside option an agent is privately informed about the projects benets and shares the principal s preferences except for not internalizing her value from the outside option we show that for moderate outside option values strategic communication is characterized by pandering the agent biases his recommendation toward conditionally better looking projects even when both parties would be better o with some other project a project that has lower expected value can be conditionally better looking we develop some comparative statics of pandering pandering is also induced by an optimal mechanism without transfers

can private learn from public governance corporate governance is importantly based on agency theory and relies on extrinsic incentives to align the interests of managers employees and shareholders this article argues that in view of recent corporate scandals private governance can learn from public governance 1 goaloriented intrinsic motivation of agents should be supported by fixed incomes and an extensive selection process of employees 2 extrinsic but non monetary incentives e g conferring orders and titles can be used 3 the power of actors should be restricted by a clear division of power appropriate rules of succession and institutionalised competition for positions in firms

a theory of conservatism a free rider problem arises when a group choice between two alternatives has to be made on the basis of privately collected evidence leading to insufficient effort in gathering evidence and an ex ante welfare loss for the group to alleviate the free rider problem the group can commit to a conservative rule whereby the decision is made against the alternative favored by the group s preference or prior when evidence supports it but is not preponderant optimal conservatism increases private incentives to gather evidence and improves the quality of the group decision my result explains why sometimes groups appear overly cautious toward favored alternatives

from extreme to mainstream the erosion of social norms social norms usually persistent can change quickly when new public information arrives such as a surprising election outcome people may become more inclined to express views or take actions previously perceived as stigmatized and may judge others less negatively for doing so we examine this possibility using two experiments we first show via revealed preference experiments that donald trump s rise in popularity and eventual victory increased individuals willingness to publicly express xenophobic views we then show that individuals are sanctioned less negatively if they publicly expressed a xenophobic view in an environment where that view is more popular

effect of investor speculation on earnings management this paper considers how the presence of a speculative investor who bets on a firm s future earnings report affects how the firm s management manipulates that report we examine the influence of the speculator s information on earnings management behavior quality of reported earnings and stock price efficiency we also provide predictions for and interpretations of short window event studies and long window association studies

stock market returns and inflation forecasts this study uses data from the livingston survey of expectations to examine the fisher hypothesis as a model relating expected stock returns and expected inflation we show that the fisher hypothesis holds much better for ex ante expectations than ex post realizations recent studies such as those by nelson 15 jaffe and mandelker 10 bodie 1 fama and schwert 3 and others have shown that the relation between stock returns and inflation is negative in the u s and have concluded that the fisher hypothesis does not hold in the stock market gultekin 9 has expanded the above studies for a large sample of countries besides the u s his time series results for the whole sample also are not consistent with the fisher hypothesis all of these studies use ex post realizations of stock returns and with some exceptions ex post inflation rates in order to test the fisher effect in contrast to earlier research this study uses data from the livingston survey of expectations to test the fisher effect in its pure form as a model relating expected stock returns to expected inflation our findings are remarkably different from those of previous studies which use ex post data expectations data from the livingston surveys show a positive one to one relation between expected stock returns and expected inflation we also find that the expected real return on stocks is not constant over time but is positively related to expected inflation which is contrary to the relation suggested by mundell 14 the next section provides some theoretical considerations and a brief summary of results from earlier research the third section describes the livingston data and presents the empirical results some estimates of the expected real rate return on stocks

eliciting informative feedback the peer prediction method many recommendation and decision processes depend on eliciting evaluations of opportunities products and vendors a scoring system is devised that induces honest reporting of feedback each rater merely reports a signal and the system applies proper scoring rules to the implied posterior beliefs about another rater s report honest reporting proves to be a nash equilibrium the scoring schemes can be scaled to induce appropriate effort by raters and can be extended to handle sequential interaction and continuous signals we also address a number of practical implementation issues that arise in settings such as academic reviewing and online recommender and reputation systems

optimal dissent in organizations we model an organization as a two agent hierarchy an informed decision maker in charge of selecting projects and a possibly uninformed implementer in charge of their execution both have intrinsic preferences over projects this paper models the costs and benefits of divergence between their preferences that is dissent within the organization dissent is useful to 1 foster the use of objective and sometimes private information in decision making and 2 give credibility to the decision maker s choices however dissent comes at the cost of hurting the implementer s intrinsic motivation thereby impairing organizational efficiency we show that dissent can be optimal in particular when information is useful and uncertainty is high moreover dissent remains an optimal organizational form even when implementers can choose their employer or when decision makers have real authority over hiring decisions

special interests and the media theory and an application to climate change a journalist reports to a voter on an unknown policy relevant state competing special interests can make claims that contradict the facts but seem credible to the voter a reputational incentive to avoid taking sides leads the journalist to report special interests claims to the voter in equilibrium the voter can remain uninformed even when the journalist is perfectly informed communication is improved if the journalist discloses her partisan leanings the model provides an account of persistent public ignorance on climate change that is consistent with narrative and quantitative evidence

corporate prediction markets evidence from google ford and firm x despite the popularity of prediction markets among economists businesses and policymakers have been slow to adopt them in decision making most studies of prediction markets outside the lab are from public markets with large trading populations corporate prediction markets face additional issues such as thinness weak incentives limited entry and the potential for traders with biases or ulterior motives raising questions about how well these markets will perform we examine data from prediction markets run by google ford motor company and an anonymous basic materials conglomerate firm x despite theoretically adverse conditions we find these markets are relatively efficient and improve upon the forecasts of experts at all three firms by as much as a 25 reduction in mean squared error the most notable inefficiency is an optimism bias in the markets at google the inefficiencies that do exist generally become smaller over time more experienced traders and those with higher past performance trade against the identified inefficiencies suggesting that the markets efficiency improves because traders gain experience and less skilled traders exit the market

flexible production in the auto sector industrial reorganization at ford mexico abstract ford mexico is pursuing a single philosophy of flexible production in its mexican plants but with markedly different results an analysis of three plants one a new assembly plant in the north another an established manufacturing plant in central mexico and the third a labor intensive maquiladora plant in the northern border region shows how the factors of labor relations local labor markets complexity of production and whether the plants are new or established affect the implantation of flexible production the resulting systems implanted do not correspond to the ideal lean production model

sunflower management and capital budgeting in organizations ideas are often delegated for evaluation as a means of efficiently aggregating multiple information signals however those who delegate often find it impossible to separate the evaluation of the ideas they delegate from the evaluation of abilities of those delegated the task of assessing these ideas this commingling of the assessment of the idea with that of the individual agent generates a tendency for the agent to ignore his or her own information and instead attempt to confirm the superior s prior belief we refer to this as sunflower management and examine its effects on capital budgeting practices

the wrong kind of transparency in a model of career concerns for experts when is a principal hurt from observing more information about her agent this paper introduces a distinction between information on the consequence of the agent s action and information directly on the agent s action when the latter kind of information is available the agent faces an incentive to disregard useful private signals and act according to how an able agent is expected to act a priori this conformist behavior hurts the principal in two ways the decision made by the agent is less likely to be the right one discipline and ex post it is more difficult to evaluate the agent s ability sorting the paper identifies a necessary and sufficient condition on the agent signal structure under which the principal bene ts from committing not to observe the agent s action the paper also shows the existence of strategic complementarities between information on action and information on consequence the results on the distinction between action and consequence are then used to interpret existing disclosure policies in delegated portfolio management in particular they are consistent with hitherto puzzling evidence that mutual funds systematically overperform pension funds

export processing zones in the dominican republic schools or stopgaps summary the following paper explores the variable consequences of offshore manufacturing in the dominican republic while foreign transplants have been treated as tenants in most of the country and have thereby made transitory contributions to export and employment growth they have been treated as tutors in the cibao valley and have thereby made more lasting contributions of skill and technology what accounts for the variation i find that the agro commercial elites who have traditionally dominated the cibao valley are simultaneously more tolerant of foreign investment than the import competing industrialists found in the capital of santo domingo and more likely to diversify into manufacturing than the absentee landlords found elsewhere in the country

managerial incentives and capital management the paper shows how career concerns rather than effort aversion can induce a natural incongruity in risk preferences between managers and superiors a model based on learning about managerial talent is developed to study second best contractual remedies we show that the optimal wage contract is an option of the value of the manager s human capital for insurance reasons and that consequently rationing of capital is often required to counterbalance the manager s resulting incentive to overinvest rationing is strictly superior to price decentralization offering one reason for the prevalence of centralized capital budgeting procedures

leadership and information an organization makes collective decisions through neither markets nor contracts instead rational agents voluntarily choose to follow a leader in many cases incentive problems are solved the unique nondegenerate equilibrium achieves the first best even though every agent has incentives to free ride the leader has no special talents but is distinguished by getting exclusive access to information a crucial feature is that the leader reveals part but not all of her information it is this maintenance of informational asymmetry that permits achieving the first best jel d23 m54

herd behavior and investment comment in an influential paper david s scharfstein and jeremy c stein 1990 modeled sequential investment by agents concerned about their reputation as good forecasters consider an agent who acts after observing the behavior of another ex ante identical agent scharfstein and stein argue that reputational herding requires that better agents have more correlated signals conditionally on the state of the world they claim that without correlation the second agent would have no incentive to attempt to manipulate the market inference about ability by imitating the behavior of the first agent in this note we show that in their model correlation is not necessary for herding other than in degenerate cases our clarification exploits a parallel with statistical herding introduced by abhijit v banerjee 1992 and sushil bikhchandani et al 1992 henceforth bhw bhw feature investors who maximize expected profits in a common value environment and have access to conditionally independent private signals of bounded precision while still observing the behavior of others eventually the evidence accumulated from observing earlier decisions is sufficiently strong to swamp the private information of a single decision maker thereafter everyone rationally copies the prevailing behavior we notice that payoffs have a common value nature in both the statistical and the reputational model the observed behavior of other agents possibly affects the probability belief attached to different states of the world as well as the payoff conditional on each state herding arises from the interaction of these two channels affecting the expected payoff be it physical or reputational positive differential conditional correlation of signals in the reputational model is tantamount to the introduction of positive payoff externalities in the statistical model this reinforces the tendency to herd already present with independence the fact that differential conditional correlation is not needed for herding is a clear strength of the reputational herding model it is not necessary to assume common unpredictable components of returns at the individual level in order to rationalize the empirical findings that individual prediction errors of security analysts are correlated after setting up scharfstein and stein s model in section i we summarize their findings in section ii and provide a unified definition of herd behavior in section iii section iv contains our critique of their line of argument and clarifies the role of differential conditional correlation in section v we propose alternative robust scenarios where herding would indeed be driven by correlation section vi concludes