money anticipated changes and policy effectiveness the lucas sargent wallace l s w proposition states that expected policy changes have no influence on real economic variables even in the short run see robert lucas 1972 and thomas sargent and neil wallace 1975 one form of empirical test of the l s w proposition the neutrality proposition began with robert barro s 1977 1978 seminal articles supporting the neutrality proposition however more recent papers including those by david small 1979 john makin 1982 and frederic mishkin 1982a b have reexamined the relationships between anticipated and unanticipated money vs output unemployment and inflation and have found evidence suggesting that anticipated monetary changes do have real effects all of the above cited studies use expectations procedures which estimate for example a money growth equation over the entire period under consideration however this approach assumes that when expectations are being formed at the beginning of the period economic agents have the relevant information for the entire period in this note i reexamine the impact of expected vs unexpected monetary changes focusing on the informational restrictions actually faced by economic agents when formulating expectations the structure of the model used here is similiar to the models of barro and mishkin a measure of real output is assumed to be a function of a policy variable and a vector of predetermined variables the policy variable can be decomposed into anticipated and unanticipated components algebraically

what was the message of friedman s presidential address to the american economic association it is widely accepted that the importance of friedman s presidential address to the american economic association lies in its criticism of policy based on the phillips curve however it is argued here that a reading of the text does not support such a view and this and other considerations suggest that any such aim was far from friedman s mind in 1967 his objective was the quite different one of making a case for policy rules rather than discretion

the random walk hypothesis of the exchange rate abstract we show that the exchange rate can follow a random walk without assuming risk neutrality we are thus able to derive a random walk hypothesis for the exchange rate which is associated with a risk premium that may differ from zero

the role of market forces in assuring contractual performance the conditions under which transactors can use the market repeat purchase mechanism of contract enforcement are examined increased price is shown to be a means of assuring contractual performance a necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance this will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm specific assets advertising investments thereby become a positive indicator of likely performance

real and monetary determinants of real exchange rate behavior theory and evidence from developing countries abstract this paper develops a dynamic model of real exchange rate rer behavior in developing countries a three goods economy exportables importables and non tradables is considered residents of this country hold domestic and foreign assets and there is a dual exchange rate regime there is a government that consumes importables and non tradables a distinction is made between equilibrium and disequilibrium movements of the rer the determinants of real exchange rate misalignment are studied with emphasis placed on the role of devaluations and balance of payments crises the implications of the model are tested using data for 12 developing countries the results obtained are generally favorable for the model the issue of rer stationarity is also analyzed

vertical contracts in the video rental industry a large body of theoretical work has explored the channels through which vertical contracts can induce efficiency improvements however it is also important to study vertical contracts empirically in order to gain insight into the relative size of different types of efficiency gains in this paper i empirically analyse a contractual innovation in the vertically separated video rental industry prior to 1998 video stores obtained inventory from movie distributors using simple linear pricing contracts in 1998 revenuesharing contracts were widely adopted i investigate the effect of the introduction of revenue sharing contracts on firms profits and consumer welfare i analyse a new panel data set of home video retailers that includes information on individual retailers contract and inventory choices as well as rentals and contract terms for 246 movie titles and 6137 retailers in the u s during each week of 1998 and 1999 and the first half of 2000 a structural econometric model of firms behaviour is developed that describes the nature of firms contract choices estimates from this model indicate that both upstream and downstream profits increase by 10 under the revenue sharing contract for popular titles for less popular titles the effects can be even larger i also estimate that consumers benefit when revenue sharing contracts are adopted

substituting for the state institutions and industrial development in eastern nigeria abstract this article examines the recent dynamic industrialization experience in one town nnewi part of eastern nigeria s industrial axis the article suggests that insights from institutional economics can be used to help explain the case of dynamic industrialization in an unpromising economic environment nnewi industrialists have successfully filled the gaps left by failures of both the market and the state in particular by using both international linkages and alternative culturally based networks they have reduced information uncertainties and principal agent problems lowering the transaction costs faced by other would be industrialists in nigeria

at the movies the economics of exhibition contracts i introduction the literature on profit sharing stresses asymmetric information profit sharing occurs when a party has private information that cannot be credibly revealed or when a party s actions cannot be observed economists avoid taste based explanations such as risk sharing stigler and becker 1977 and other factors that may lead to sharing such as measurement costs we describe a real world sharing contract that is widely used the movie exhibition contract and argue that asymmetric information is not the main cause of sharing two explanations based on difficulties with forecasting revenue fit the facts better the first is that movie distributors studios or independent distributors and exhibitors theater owners are both risk averse and exhibition contracts are designed to share risk the second is that the sharing rules accompanied by ex post adjustments economize on measurement costs transaction costs and long term relationships also affect contractual practices we use an original data set of 2 769 exhibition contracts to inform our models and test hypotheses the data includes all contracts involving 13 theaters owned by wehrenberg theatres a prominent st louis exhibitor over roughly two years our models explain the sharing that occurs and the conditions that lead to adjustments and our findings may be relevant for other contracting environments our explanations for the features of exhibition contracts complement those of de vany and eckert 1991 and de vany and walls 1996 who emphasize that difficulties with forecasting demand necessitate the use of short term contingency rich contracts some other work on nonexhibition aspects of the movie business also compares asymmetric information models to alternatives ravid 1999 tests and rejects a model of asymmetric information at the project selection stage ravid and basuroy 2004 consider risk aversion at the project selection stage chisholm 1993 1997 and weinstein 1998 compare principal agent models to alternatives in studies of contracts between studios and talent in the next subsection we describe the basic features of modern exhibition contracts after that we describe how the sharing rules evolved over time and argue that asymmetric information does not explain the sharing rules section ii contains our models section iii contains our empirical work and section iv concludes the modern movie exhibition contract the unit of analysis is a single movie in a single theater a theater is a building that may contain multiple auditoriums although there is typically a boilerplate contract between each distributor and exhibitor that specifies general conditions that apply to all individual contracts terms such as sharing rules and run lengths vary by movie and theater a typical run ends after four to eight weeks but the run may be adjusted after early revenues are observed and holdover clauses may be used to extend the run as long as revenue is sufficiently high de vany and eckert 1991 and de vany and walls 1996 attribute adjustable runs to imprecise forecasts we focus on explaining the peculiar revenue sharing rule that is common in modern contracts some contracts are aggregate deals in which each side s percentage share remains fixed throughout the run but most are sliding scale deals in a sliding scale deal each week the distributor gets the maximum of two possible payments 1 90 of the movie s weekly ticket revenue over the house nut which is a flat payment to the exhibitor 2 a floor payment some percentage of the weekly ticket revenue that typically declines according to a sliding scale as the weeks go by perhaps 70 in the first week 60 by the third week and as low as 30 at the end of the run if the parties anticipate that revenue might peak in the second or later weeks which can occur when the movie opens before a holiday weekend for example the contract includes a best weeks clause that ensures that the high floor payments are associated with the high demand weeks

incentives in principal agent relationships this article identifies some of the major issues that have been examined in the literature on incentives the article begins by discussing the frictions that lie at the heart of incentive problems next the principal s optimal response to these frictions is explored taking as given the characteristics of the agents with whom the principal interacts in a nonrepeated setting the design of individualized contracts contests and tournaments is analyzed then the principal s task of selecting the best agent is addressed and repeated agency relationships are considered

stabilization policies in an explosive economy announcements and expectations abstract the article studies an economy where the option of inflating away the debt becomes attractive because a sequence of budget deficits has raised the stock of debt to a point where the expenditure cuts or tax increases required to stabilize the economy are politically hard to sell the dynamic of the economy is characterized by the interplay between policy announcements and private agents behaviour in reply to them

the when the how and the why of mathematical expression in the history of economic analysis when one reads about the history of the use of mathematical expression in economics one gets the impression of a few brave but lonely innovators like daniel bernoulli 1738 achille isnard 1781 n f canard 1801 johann von thunen 1826 and antoine augustin cournot 1838 present at the creation of economic thought and later a feisty band of visionaries associated with the marginalist revolution at the turn of the century who had the right tools in their rucksacks and then finally the full flowering of activity in the postwar period through it all there is the unmistakable conviction that this movement was cumulative inevitable and indeed natural

agency theory and franchising some empirical results this article provides an empirical assessment of various agency theoretic explanations for franchising including risk sharing one sided moral hazard and two sided moral hazard the empirical models use proxies for factors such as risk moral hazard and franchisors need for capital to explain both franchisors decisions about the terms of their contracts royalty rates and up front franchise fees and the extent to which they use franchising in this article i exploit several new sources of data on franchising to construct a cross section of 548 franchisors involved in various business activities in the united states in 1986 the data are most consistent with a model based on two sided moral hazard the empirical models are also more successful at explaining the extent to which franchisors choose to franchise stores than at explaining the terms of franchise contracts finally contrary to the predictions of several theoretical models i find that royalty rates and franchise fees are not negatively related

explaining the fame of friedman s presidential address it is noted that although in fact it lacks the revolutionary content commonly ascribed to it friedman s presidential address to the american economic association is very highly regarded as an original and formative contribution it is argued that close attention to the literature shows that it was not initially seen as original and only after an interval of five years did the idea of its revolutionary status retrospectively but suddenly become widely accepted the explanation of this change of view is considered four explanations are suggested one involving terminological confusion one involving a change in theoretical priorities and two involving debates of the 1970s which although they did not in fact do so appeared to build on friedman s presentation and by this appearance gave it an undeserved stature

tax subsidies to owner occupied housing an asset market approach inflation reduces the effective cost of homeownership and raises the tax subsidy to owner occupation this paper presents an asset market model of the housing market and estimates how changes in the expected inflation rate affect the real price of houses and the equilibrium size of the housing capital stock simulation results suggest that the accelerating inflation of the 1970s which substantially reduced homeowners user costs could have accounted for as much as a 30 percent increase in real house prices persistent high inflation rates could lead ultimately to a sizable increase in the stock of owner occupied housing

bose einstein dynamics and adaptive contracting in the motion picture industry audiences discover what films they like and spread the word information feedback produces bose einstein dynamics in the motion picture box office revenue distribution information cascades generate box office hits and flops the revenue distribution evolves recursively over the run as a mixture of the opening and a stochastic competition among films the motion picture run is decentralized adaptive and self organizing semistationary admission prices local information and contingency rich contracts match the film rental price and the supply of theatrical engagements to demand copyright 1996 by royal economic society

manufacturers expections of prices and quantities new zealand experience 1964 87 most empirical work on expectations has focused on price expectations this paper extends that work by evaluting the properties of manufacturers expectations of a range of nominal and real variables the data for this study consist of individual firm responses to the new zealand institute of economic research s quaterly tendency survey over an unusally long period of 24 years from 1964 to 1987 measures of accuracy bias and effiency are constructed and the results indicate that the properties fo expectations differ across variables and conclusions drawn from empirical studies of price expectations should not be generalized manufacturers are more accurate at forecasting changes in prices than quantities the mainstream rational expectations hypothesis is rejected for most of the quantity variables but the case for rejection was not so clear for expectations of prices and costs the results are consistent with the view that price expectations behave more like plans than forecasts firms views about co

dynamic stability in a model of dual exchange rates abstract the dynamic stability of a small open economy operating under a regime of dual exchange rates is shown to depend on residents net foreign asset position this result is in contrast to the economy s dynamic behavior under unified fixed rate and flexible rate regimes where stability is unrelated to net foreign asset position

dynamic determinacy and the existence of sunspot equilibria this paper relates the existence of stationary sunspot equilibria in the vicinity of a conventional stationary state to the phase diagram surrounding the latter we find that the local condition required for a unique equilibrium path returning to the stationary state following any slight disturbance of initial conditions is also sufficient to exclude stationary sunspot equilibria in the stationary state s immediate vicinity in that sense an eigenvalue condition familiar from dynamic analysis can tell us something about the possibilities of local sunspot activity as well journal of

shifting fortunes the political economy of financial liberalization in nigeria abstract on the recommendation of the world bank nigeria began to liberalize its financial sector in 1986 contrary to the prediction of financial repression theory savings and investment decline in the wake of banking deregulation by 1995 the nigerian financial system was in a state of collapse the paper locates the main failure of nigeria s financial deregulation in the political and institutional setting of reform the institutional mechanisms needed to supervise and regulate banking under the new system were absent while private sector banking capacities were weak moreover financial liberalization was quickly captured by a clientalist state as a means of reallocating rents to strategic constituents an additional precipitating factor was macroeconomic instability the paper points to the importance of incorporating political and institutional variables into any model of financial reform or transformation

exchange rate differential and balance of payments under dual exchange markets abstract this paper develops a model of an economy that uses two exchange markets an official market in which the exchange rate is determined by central bank intervention and a free market in which the exchange rate is determined by market forces the official market handles selected imports and exports while the free market handles the remaining imports and exports and capital transactions the model is used to discuss the effects of various policies on the differential between the free and the official exchange rates and on the balance of payments

price level determinacy with an interest rate policy rule and rational expectations abstract this paper reconsiders a result obtained by sargent and wallace namely that price level indeterminacy obtains in their model if the monetary authorities adopt a feedback rule for the interest rate rather than the money stock it is shown that the indeterminacy vanishes if the interest rate rule is chosen so as to have a desired effect on the expected quantity of money demanded this holds even if considerable weight is given in the choice of a rule to the aim of smoothing interest rate fluctuations

inflation and unemployment the world economy today is vastly different from the 1930s when seymour harris the chairman of this meeting infected me with his boundless enthusiasm for economics and his steadfast confidence in its capacity for good works economics is very different too both the science and its subject have changed and for the better since world war ii but there are some notable constants unemployment and inflation still preoccupy and perplex economists statesmen journalists housewives and everyone else the connection between them is the principal domestic economic burden of presidents and prime ministers and the major area of controversy and ignorance in macroeconomics i have chosen to review economic thought on this topic on this occasion partly because of its inevitable timeliness partly because of a personal interest reaching back to my first published work in 1941

franchising and risk management franchising is an important and controversial form of vertical integration allegations of opportunistic behavior by franchisors have led to calls for public regulation and in some states fairness in franchising laws the advisability of such regulation depends on the long run incentives to franchise if franchising is a temporary step on the path to complete ownership integration regulation may be called for alternatively if complete or partial franchising is a permanen t market solution regulation is at least contestable this paper offer s new evidence on the incentives to franchise copyright 1988 by american economic association

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

the other side of the trade off the impact of risk on executive compensation the principal agent model of executive compensation is of central importance to the modern theory of the firm and corporate governance yet the exiting empirical evidence supporting it is quite wea

salaries and piece rates compensation can take many forms remuneration can come as pecuniary payments as fringes such as health and pension benefits or as a nonpecuniary reward such as plush office furniture that costs the firm less than it benefits the worker a significant literature has examined the trade offs between pecuniary and nonpecuniary compensation the modern work having been pioneered by rosen 1974 more recently another body of literature has examined the selection of method of total compensation ignoring the distinction between pecuniary and nonpecuniary payment this work has focused on risk and incentive factors it has resulted in comparisons of compensation based on absolute output levels to that based on relative performance it has also led to explorations of the relation of compensation to experience over the work life 2 little attention has been paid to what may be among the most important and obvious distinction in methods of compensation namely the choice between a fixed salary for some period of time that is paying on the basis of input and some workers receive compensation that is specified in advance and not directly contingent on performance instead it depends on an input measure such as hours worked for others compensation is directly related to output this essay is an attempt to predict a firm s choice of compensation method piece rates are defined more rigorously among the more important factors discussed are worker heterogeneity incentives sorting considerations monitoring costs and asymmetric information one result is that salary workers tend to be of lower quality and more homogeneous than are their piece rate counterparts numerous additional results are provided helpful comments by victoria lazear and yoram weiss are gratefully acknowledged support was provided by the department of labor and the national science foundation 1 see lazear and rosen 1981 stiglitz 1981 holmstrom 1982 green and stokey 1983 2 see lazear 1979 1981 and harris and holmstrom in press

change and stability in superpower rivalry we investigate the dynamics of superpower rivalry participants in policy debates within each state use information about expected future threats and economic costs to influence other policy actors and this process of sophisticated reaction links the security policies of these two states into a single rivalry system analysis of vector autoregression models of u s and soviet military expenditures and diplomatic hostility and u s gross national product supports the hypothesis that these policies approximate the behavior of unitary rational states capable of forming rational expectations of each other s future behavior the dynamic response of this system to a wide range of exogenous shocks or innovations reveals the underlying stability of this rivalry system the military expenditures of both states exhibit a cyclical response to innovations with a shorter u s cycle this lack of synchronization creates several problems for analysis and for policy change

to lobby or to partner investigating the shifting political strategies of biopharmaceutical industry associations in innovation systems of south africa and india the role of industry associations in shaping policy through various lobbying activities is well established in most cases while such activities are deemed essential from an industry perspective they also carry negative connotations connected to narrow rent seeking and the pursuit of elites interests which run counter to the public good and discourage competition and subsequent innovation as such industry associations have long been excluded from discussions regarding the relational dynamics and evolution of innovation systems in contrast this paper builds upon more recent work that places industry associations as key intermediary actors that facilitate knowledge exchange and institutional capacity building particularly in the context of developing countries where limited institutional capacities and substantial knowledge gaps can limit both innovation and development employing a qualitative cross national comparison this paper examines the changing roles and activities of biopharmaceutical industry associations in the development of the south african and indian pharmaceutical industries with a particular focus on government industry relations for doing so the paper captures developments during three main periods through which both the south african and indian biopharmaceutical industries have similarly evolved although within different national contexts 1 pre liberalization 2 expanding pluralism and 3 increasing partnership we argue that in south africa and india particular historical trajectories and lack of institutional capacities are shifting industry associations away from ineffective lobbying to a new political approach that emphasizes partnering with government in the pursuit of not only narrow industry objectives but also broader development aims

classical monetary theory new and old the distinctive features of so called new classical monetary theory may be listed as 1 rational expectations 2 quantity th eory of money 3 interest policy indeterminancy 4 market clearin g 5 neutral money and 6 monetary policy ineffectiveness this p aper investigates whether these features actually represent the tradi tion of classical and neoclassical economics since richard cantillon the result is largely negative new classical economics is a mis nomer keynes however with all his effort to create a revolution r emained actually quite close to the tradition copyright 1987 by ohio state university press

price level determinacy and the choice of policy targets under rational expectations abstract we show that in a conventional macro model with rational expectations the government can use monetary policy to peg real interest rates and still attain a determinate price level provided it also pegs some nominal policy variable e g nominal expenditures

contract choice in modern agriculture cash rent versus cropshare e conomists have expended enormous effort examining the rationale for various contractual arrangements in agriculture particularly sharecropping while economists have made considerable theoretical efforts to understand agricultural contracts few empirical studies have been undertaken the dearth of empirical analyses of agricultural contracts is particularly striking for modern western agriculture this is an important omission not only because the existing empirical work tends to focus on the question of efficiency but also because the theoretical models tend to examine contracts that bear little resemblance to those found in the united states today

using revenue sharing to implement flexible prices evidence from movie exhibition contracts movie exhibition contracts entail revenue sharing terms that go down with weeks since release we develop a simple model to show how the form of these contracts can be explained by the distributors desire to set flexible prices we then use detailed data on theater movie contracts in spain where we exploit the information available at the time of contracting for movies previously released in the u s and other movie and theater characteristics to show how the implications of our flexible pricing argument are supported in the data and differentiate our explanation from prior more standard risk sharing and moral hazard explanations

output the stock market and interest rates this paper develops a simple model of the determination of output the stock market and the term structure of interest rates the model is an extension of the is lm model and borrows from it the assumption that output is determined by aggregate demand and that the price level can only adjust over time to its equilibrium value however whereas the is lm emphasizes the interaction between the interest rate and output this model emphasizes the interaction between asset values and output asset values rather than the interest rate are the main determinants of aggregate demand and output current and anticipated output and income are in turn the main determinants of asset values it is this interaction that the model intends to capture its goal is to characterize the joint response of asset values and output to changes in the environment such as changes or announcement of changes in monetary and fiscal policy as the above brief description makes clear anticipations are central to the story the assumption made in this paper will be one of rational expectations the paper is organized as follows section i describes the model and sections ii iv characterize the behavior of the economy under the extreme but convenient assumption that prices are fixed forever sections v and vi extend the analysis to the case where prices adjust over time to their equilibrium value

revenue sharing in movie exhibition and the arrival of sound i introduction at least since adam smith economists have been intrigued by share contracts there has been a proliferation of models most of which tend to explain the share contract as resulting from some mix of optimal risk bearing and optimal effort motivation 1 a large number of researchers have attempted to test these models empirically sharecropping contracts not surprisingly are the most intensively examined the bibliography in knoeber 2000 but similar studies have been conducted in many other areas for example martin 1988 and lafontaine 1992 examine franchise arrangements hallagan 1978 investigates contracts used to lease gold claims leffler and rucker 1991 analyze a sample of private timber sale contracts goldberg and erickson 1987 study long term contracts for the sale of petroleum coke aggarwal and samwick 1999 investigate incentive contracts between firms and their executives and chisholm 1997 goldberg 1997 and weinstein 1998 all examine profit sharing contracts between fi lm companies and the talent this article differs in an important respect from most previous studies which analyze a cross section of contracts in an attempt to determine how or whether they vary according to the attributes of the contracting parties or the products being contracted for instead it investigates an area where a sudden technology shock led to the rapid and widespread replacement of one form of contracting by another the industry is the motion picture business and the shock was the arrival of sound during the silent film era the vast majority of first run feature films were rented to cinemas for flat daily or weekly payments within two years of the release of the first sound picture revenue sharing contracts were the norm and they remain the norm to this day 2 my goal is to investigate the degree to which the standard economic concerns moral hazard risk sharing and measurement problems can explain this change because the contracting parties remained the same the question becomes what was altered in the nature of the product or in its provision so as to have altered correspondingly the incentives faced i conclude the following first the advent of sound fundamentally changed the inputs live music and other acts supplied by the exhibitor and central to the show were replaced by a soundtrack and short sound films supplied by the film company the benefit of deterring exhibitor shirking through the use of flat rental fees which made the exhibitor full residual claimant declined accordingly the party whose effort makes the largest contribution to marginal product generally receives the largest proportion of the residual claims and in the decades following the arrival of sound the proportion of residual claims collected by film companies rose steadily in addition average revenue per film increased with sound whereas the cost of ensuring that exhibitors reported attendance revenue honestly done by locating a film company s representative in the theater remained the same the ex post division of revenue necessary for revenue sharing thus became cheaper on a per film basis finally uncertainty ab out the value in terms of expected attendance revenue of the early sound films appears to have raised the cost of negotiating lump sum rental fees and thus promoted experiments with revenue sharing however although this may have contributed initially it cannot explain the practice s persistence uncertainty about film values declined as talking films became better known ii the nature of the problem a film company contracts with an exhibitor so that they may jointly produce the final good a movie presentation 3 to that end each supplies essential inputs the film company provides the movie itself assembled from a variety of inputs and some sort of national advertising support the exhibitor provides the theater which consists of seating projection equipment a refreshment stand and other support activities and some form of local advertising

adjustment costs and rational expectations an application to a tobacco export model the effect of adjustment costs on international trade has been captured in an ad hoc fashion in past analysis whereas a certainty environment is many times assumed in this article adjustment costs are explicitly considered in the modeling procedure of tobacco exports from greece and rational expectations are introduced the results are consistent with considerable price competition and a large difference between immediate and long run responses due to adjustment costs that explain in part the evolution of tobacco exports from greece and suggest that higher elasticities might be found in international trade if adjustment costs are properly treated

aggregation and linearity in the provision of intertemporal incentives we consider the problem of providing incentives over time for an agent with constant absolute risk aversion the optimal compensation scheme is found to be a linear function of a vector of n accounts which count the number of times that each of the n kinds of observable events occurs the number n is independent of the number of time periods so the accounts may entail substantial aggregation in a continuous time version of the problem the agent controls the drift rate of a vector of accounts that is subject to frequent small random fluctuations the solution is as if the problem were the static one in which the agent controls only the mean of a multivariate normal distribution and the principal is constrained to use a linear compensation rule if the principal can observe only coarser linear aggregates such as revenues costs or profits the optimal compensation scheme is then a linear function of those aggregates the combination of exponential utility normal distributions and linear compensation schemes makes computations and comparative statics easy to do as we illustrate we interpret our linearity results as deriving in part from the richness of the agent s strategy space which makes it possible for the agent to undermine and exploit complicated nonlinear functions of the accounting aggregates

sophisticated reaction in the u s soviet arms race evidence of rational expectations because of the pervasive security rivalry between the united states and the soviet union information about the expected future behavior of the rival state proves useful to domestic political actors competing to influence budgetary allocations this article examines the hypothesis that in the aggregate this process of sophisticated reaction approximates the behavior of two unitary rational actors capable of forming rational expectations of each other s behavior this rational expectations arms race model implies that the military expenditure series of arms racers should be independent in the granger causal sense but that their residuals should be correlated contemporaneously the latter prediction is inconsistent with bureaucratic process models or alternative expectational formulations and empirical analysis of u s and soviet yearly military expenditures is provided that supports the predictions of the rear model finally some implications of this intimate linkage between the domestic policy processes of these two rival superpowers are briefly discussed

global stability and the choice of policy targets under rational expectations abstract it is shown that if the supply of capital is properly incorporated in a macromodel with rational expectations the government cannot peg its expenditures wholly in real terms since otherwise the economy will be globally unstable

transactions costs and the efficient organization of production a study of timber harvesting contracts a transaction costs framework is developed to explain the choice between lump sum and per unit payment provisions in private timber harvesting contracts predictions about which contract type minimizes the transaction costs of presale measurement and contract enforcement and monitoring are derived and tested using private timber sales contracts from north carolina the empirical results provide strong support for the transaction costs approach and also reject several predictions from a risk based model the transaction costs framework also provides insights into the choice between negotiated and competitive sales procedures

unification of dual exchange markets abstract this paper develops the model of an economy under a dual exchange system comprising an official market with a crawling exchange rate and a free market with a floating exchange rate after analyzing the behavior of the economy under the dual system the paper discusses the effects that switching to a unified floating system or a unified crawling peg system has on the exchange rate and on the balance of payments particularly in the short run the paper shows that these effects depend on the composition of the private sector s portfolio at the time of unification which in turn depends on the various policies that were followed while the economy was under the dual system

insulation properties of a two tier exchange market in a portfolio balance model when countries peg their currencies to those of their major trading partners they expose themselves to interest sensitive and speculative capital flows that can undermine their ability both to maintain their exchange rate and to pursue an independent monetary policy some countries notably france italy and the belgo luxembourg economic union bleu experimented with two tier exchange rates in the early 1970s in the hopes of insulating their economies from the effects of international capital flows while at the same time protecting foreign trade from exchange rate fluctuations france and italy soon abandoned the experiment but the bleu continues to maintain separate exchange markets with separate exchange rates for current and capital account transactions the commercial exchange rate which relates to the market for current account transactions is generally pegged by the authorities the financial exchange rate determined in the market for capital account transactions is usually free to fluctuate 1 this paper investigates how well a two tier exchange market insulates a small open economy from foreign disturbances taking into account recent developments in the theory of exchange rate determination work by branson 1977 dornbusch 1976 and kouri 1976 suggests that the short run equilibrium value of the exchange rate is determined along with interest rates by demand and supply in the markets for financial assets this asset market or portfolio balance approach to exchange rate determination is particularly well suited to a study of the two tier exchange market one can view the financial exchange rate as a relative asset price it is among the variables that equilibrate asset markets and it is determined in the short run in those asset markets previous theoretical work on the two tier exchange market has generally been within the mundellian framework the financial exchange rate has been treated as equating a flow demand and supply of foreign exchange the asset market approach has the advantage of carefully distinguishing between stocks and flows in particular it treats demands for assets as stock demands that are realized instantaneously so that actual holdings of assets always reflect the desired composition of the portfolio disturbances to portfolio equilibrium create immediate stock adjustments as portfolios are rebalanced causing instantaneous changes in endogenous market clearing variables in addition disturbances alter the rate of accumulation the flow of financial assets over time portfolio balance models of two tier exchange rates can be found in dornbusch 1976 and decaluwe and steinherr 1976 but they differ from the one presented here dornbusch partitioned the exchange market so that interest income a current account transaction was channelled through the financial market that segmentation yields a different expected rate of return on foreign

on the consistency of backward looking expectations the case of the cobweb in dynamic models of economic fluctuations backward looking expectations with systematic forecasting errors are inconsistent with rational behaviour in non linear dynamic models exhibiting seemingly unpredictable chaotic fluctuations however simple habitual rule of thumb backward looking expectation rules may yield non zero but nevertheless non systematic forecasting errors in a chaotic model expectational forecasting errors may have zero autocorrelations at all lags even for rational agents patterns in these forecasting errors may be very difficult to detect especially in the presence of small noise backward looking expectations are then not necessarily inconsistent with rational behaviour we investigate whether simple expectation schemes such as naive or adaptive expectations can be consistent with rational behaviour in the simplest of all non linear dynamic economic models the non linear cobweb model

a precursor to muth tinbergen s 1932 model of rational expectations this paper describes a model published in 1932 in which explicitly rational expectations are used to study a dynamic problem of intertemporal inventory allocation the model is very similar to muth 1961 except that the stochastic process in the latter is serially correlated whereas in tinbergen s model the disturbances are serially uncorrelated hence tinbergen was able to solve a rational expectations model thirty years before muth s much more well known contribution copyright 1991 by royal economic society

covered interest parity a high frequency high quality data study profitable deviations from covered interest parity cip represent riskless arbitrage opportunities and so indicate market ineffic iency previous empirical work on cip uses noncontemporaneously sampl ed data and reports mixed results this paper uses high frequency te n minute high quality data gathered personally by the author in th e london foreign exchange market to test the cip condition the resu lts overwhelmingly support the market efficiency hypothesis copyright 1987 by the review of economic studies limited

to aggregate pool or neither it is well known that even if all forecasters are rational unbiasedness tests using consensus forecasts are inconsistent because forecasters have private information however if all forecasters face a common realization pooled estimators are also inconsistent in contrast we show that when predictions and realizations are integrated and cointegrated microhomogeneity ensures that consensus and pooled estimators are consistent therefore contrary to claims in the literature in the absence of microhomogeneity pooling is not a solution to the aggregation problem we reject microhomogeneity for a number of forecasts from the survey of professional forecasters therefore for these variables unbiasedness can only be tested at the individual level