a two person game of information transmission we consider a statistical decision problem faced by a two player organization whose members may not agree on outcome evaluations and prior probabilities one player is specialized in gathering information and transmitting it to the other who takes the decision this process is modeled as a game qualitative properties of the equilibria are analyzed the impact of improving the quality of available information on the equilibrium welfares of the two individuals is studied better information generally may not improve welfare we give conditions under which it will

the ceo arms race author affiliation natalia gritsko department of economics university of tennessee 916 volunteer boulevard 532 stokely management center knoxville tn 37996 usa e mail ngritsko utk edu valentina kozlova dagger department of economics university of tennessee 916 volunteer boulevard 534 stokely management center knoxville tn 37996 usa e mail vkozlova utk edu corresponding author william neilson double dagger department of economics university of tennessee 916 volunteer boulevard 523 stokely management center knoxville tn 37996 usa e mail wneilson utk edu bruno wichmann department of resource economics and environmental sociology university of alberta 503 general services edmonton ab t6g 2h1 canada e mail bwichmann ualberta ca acknowledgment we wish to thank the editor and two anonymous referees as well as seminar participants at the university of tennessee for their helpful comments and suggestions 1 introductionover the past decade both journalists and academics have written about the level of chief executive officer ceo pay both in the united states and in europe in 1989 the average ceo total compensation in the united states was 2 3 million this increased to 8 4 million in 1999 and reached 11 4 million in 2009 1 at the same time average annual worker income in the united states rose from only 32 438 to 38 376 2 recently this type of earnings discrepancy has attracted the interest of politicians the media and the general public and it is the driving force behind movements such as occupy wall street 3 because of the large increase in ceo pay and because it is so high relative to the pay of ordinary workers much of the recent academic literature on executive compensation has sought to rationalize these trends the conventional approach to this issue entails investigating whether increased ceo pay is matched by increased value to the firm to this end finkelstein and boyd 1998 find that pay is positively correlated with managerial discretion and murphy and zabojnik 2004 2007 argue that increased ceo pay follows from increases in the general as opposed to specific human capital required for the job rajgopal shelvin and zamora 2006 find that increased demand for talented ceos caused by market wide shocks forces firms to set ceo pay high in order to retain their more talented ceos geletkanycz boyd and finkelstein 2001 go on to demonstrate that ceos receive premiums for strategically valuable external networks and westphal boivie and ming chng 2006 document that these networks include informal friendship networks with top executives of both suppliers and financial institutions kroll et al 1997 schaefer 1998 and gabaix and landier 2008 show that ceo compensation increases with the size of the average firm in the economy most recently chang dasgupta and hilary 2010 tested whether firm performance and high pay reflect ceo ability or something else such as other firm assets either physical or human or simply luck they rejected their other explanations in favor of high ceo pay reflecting high ceo ability an alternative approach looks for reasons why ceo pay might be higher than would be consistent with the usual labor market approach bebchuk fried and walker 2002 consider the fact that ceos have some ability to set their own pay allowing them to extract rents dow and raposo 2005 explore the implications of ceo contracts being different from typical principal agent contracts because the former change over time in accordance with firm s performance and strategic direction aggarwal and samwick 1999 argue that ceo compensation is positively sensitive to rival firms performance more recently malmendier and tate 2009 found that firms pay award winning ceos more even though they do not perform better than their non award winning matches suggesting alternative benefits of having a highly paid superstar ceo

conflict and the social contract we consider social contracts for resolving conflicts between two agents who are uncertain about each other s fighting potential applications include international conflict litigation and elections even though only a peaceful agreement avoids a loss of resources if this loss is small enough then any contract must assign a positive probability of conflict we show how the likelihood of conflict outbreak depends on the distribution of power between the agents and their information about each other

arms races and negotiations two players simultaneously decide whether or not to acquire new weapons in an arms race game each player s type determines his propensity to arm types are private information and are independently drawn from a continuous distribution with probability close to one the best outcome for each player is for neither to acquire new weapons although each prefers to acquire new weapons if he thinks the opponent will there is a small probability that a player is a dominant strategy type who always prefers to acquire new weapons we find conditions under which the unique bayesian nash equilibrium involves an arms race with probability one however if the probability that a player is a dominant strategy type is sufficiently small then there is an equilibrium of the cheap talk extension of the game where the probability of an arms race is close to zero copyright 2004 wiley blackwell

the economics of development a survey i the subject our definition of the subject will be the use of economic analysis to understand the economies of poor or developing countries this includes in particular how standards of living in the population are determined and how they change over time and further how policy can or should be used in the influence of these processes the definition contains in principle much or most of analytical methods in economics insofar as they can be put to use in the examination of the issues of interest this is as it should be but it poses a problem for a survey in a journal a comprehensive treatment is infeasible so we shall follow a different route the survey will focus on what i take to be the major themes and approaches which characterise the productive aspects of the subject there is therefore no pretence at being exhaustive the purpose is rather to highlight some of the advances many of these have been of real substance there are a number of possible purposes for a survey and it is important to be clear at the outset for whom it is intended what it is and what it is not this survey is addressed to economists and students of economics who know the tools of their trade but not necessarily how they have been applied to and fashioned for the analysis of the economics of developing countries it is a description of the ways in which problems can be productively formulated and approached in terms of examples chosen for their intrinsic importance and interest the vastness of the subject means that we have to be highly selective it does not seek to provide a summary evaluation of the current view of the appropriate response to immediate policy questions it is not a history of thought nor a research manifesto nor an attempt to adjudicate or settle the major debates where they arise naturally from the major purpose some judgements on these subjects will be offered but they do not themselves constitute the primary intent of this survey there are three lines of enquiry or sets of questions which have i suggest been distinctive of the most fruitful work in development economics they will

political bias and war we examine the incentives for countries to go to war as they depend on the comparison between how much their pivotal decision makers have at risk and how much they stand to gain from a war how this ratio compares to the country at large is what we term political bias if there is no political bias then there are always payments that one country would like to make to the other that will avoid a war in the presence of commitment or enforceability of peace treaties if there is a bias on the part of one or both countries then war can result and in some cases cannot be prevented by any transfer payments we examine how war technology and relative wealth levels interact with political bias in determining whether countries make transfers go to war and form alliances our results shed some new light on the uneven contender paradox and the interpretation of the democratic peace

investment dynamics with common and private values abstract we study a dynamic investment game with two dimensional signals where each firm observes its continuously distributed idiosyncratic cost of investment and a discrete signal correlated with common investment returns we demonstrate that the one step property holds and provide an equilibrium existence characterization result reversals are possible where a large number of firms investing in a given round becomes bad news about investment returns welfare is compared to static and rigid timing benchmarks and computed for large economies

conflict and deterrence under strategic risk we examine the determinants of cooperation and the effectiveness of deterrence when fear is a motive for conflict we contrast results obtained in a complete information setting with those obtained in a setting with strategic risk where players have different information about their environment these two strategic settings allow us to identify and distinguish the role of predatory and preemptive incentives as determinants of cooperation and conflict in our model weapons unambiguously facilitate peace under complete information in contrast under strategic risk we show that increases in weapon stocks can have a nonmonotonic effect on the sustainability of cooperation we also show that under strategic risk asymmetry in military strength can facilitate peace and that anticipated peacekeeping interventions may improve incentives for peaceful behavior

coffee economic fluctuations and stabilisation an intertemporal disequilibrium model with capital market imperfections abstract this paper develops a two period disequilibrium model of a small open economy under keynesian unemployment to analyse the effects of temporary anticipated and permanent coffee price shocks the model includes a government sector that administers a commodity price stabilisation fund and allows for capital market imperfections the type of capital market imperfection makes an important difference to the results of the model in particular when the government borrows on more favourable terms than individuals the coffee price stabilisation fund reduces the multiplier effects of temporary and permanent shocks not only in the first but also in the second period by contrast when individuals face an upward sloping supply of capital curve the stabilisation fund shifts some of these effects from the first to the second period

an endogenous timing conflict game abstract we present an endogenous timing conflict game of incomplete information under strategic complementarity the model predicts multiple equilibria in which the outcome follows either a simultaneous move game baliga and sjostrom 2004 or a sequential game which improves social welfare we study the three families of games in the laboratory using gender balanced sessions our results suggest that i social welfare is higher in the endogenous timing and sequential games compared to the simultaneous game ii men and women make similar decisions in the simultaneous and sequential move games and iii in the endogenous timing game women are less willing to commit to the risky action

communication in cournot oligopoly abstract this paper studies communication in a static cournot duopoly model under the assumption that the firms have unverifiable private information about their costs we investigate the conditions under which the firms cannot transmit any information through cheap talk and show that when these conditions are violated it may be possible to construct informative cheap talk equilibria if the firms can communicate through a third party communication can be informative even when informative cheap talk is impossible we exhibit a simple mediated mechanism that ensures informative communication and interim pareto dominates the uninformative equilibrium for the firms

coffee export booms and monetary disequilibrium some evidence for colombia the theoretical models that analyse the monetary consequences of export booms show that under a regime of fixed exchange rates they affect not only the demand for money via real income but also the money supply via foreign exchange accumulation within this theoretical framework this study proposes an empirical approach to determine whether the coffee booms of the second half of the 1970s and mid 1980s led to excess money supply in the colombian economy the findings provide evidence in favour of a direct association between coffee export booms and excess money supply implying that external disturbances jeopardize the ability of the economic authorities to carry out successful monetary policy

reputation in long run relationships we model a long run relationship as an infinitely repeated game played by two equally patient agents in each period the agents play an extensive form stage game of perfect information with either locally non conflicting interests or strictly conflicting interests there is incomplete information about the type of player 1 while player 2 s type is commonly known we show that a sufficiently patient player 1 can leverage player 2 s uncertainty about his type to secure his highest pay off compatible with player 2 s individual rationality in any perfect bayesian equilibrium of the repeated game copyright 2012 oxford university press

unique equilibrium in a model of self fulfilling currency attacks even though self fulfilling currency attacks lead to multiple equilibria when fundamentals are common knowledge we demonstrate the uniqueness of equilibrium when speculators face a small amount of noise in their signals about the fundamentals this unique equilibrium depends not only on the fundamentals but also on financial variables such as the quantity of hot money in circulation and the costs of speculative trading in contrast to multiple equilibrium models our model allows analysis of policy proposals directed at curtailing currency attacks

complementarities and macroeconomics poisson games in many situations in macroeconomics strategic complementarities arise and agents face a coordination problem an important issue from both a theoretical and a policy perspective is equilibrium uniqueness we contribute to this literature by focusing on the macroeconomic aspect of the problem the number of potential innovators speculators etc is large in particular we follow myerson that in large games a more realistic model should admit some uncertainty about the number of players in the game myerson r 1998 population uncertainty and poisson games int j game theory 27 375 392 myerson r 2000 large poisson games j econ theory 94 7 45 in more detail we model the coordination problem as a poisson game and investigate the conditions under which unique equilibrium selection is obtained

endogenous destruction in conflict theory and extensions this article develops a general equilibrium model of conflict to characterize the implications of endogenous destruction for bargaining and fighting specifically we consider the scenario where two contending parties engage in bargaining to avoid fighting when there are direct costs e g arms buildups and indirect costs e g destruction to consumable resources of conflict without imposing specific functional form restrictions on conflict production and destruction technologies we show their interactions in determining an optimal decision between fighting and bargaining we find that under the shadow of conflict bargaining is costly as the contending parties always allocate more resources to arming for guarding settlement through bargaining than in the event of fighting in contrast to conventional thinking that bargaining is pareto superior over fighting we show conditions under which fighting dominates bargaining as the nash equilibrium choice the positive analysis may help explain the general causes of fighting without resorting to the assumption of incomplete information or misperceptions jel d74 h56 c7

costly signalling in auctions this paper analyses a dynamic auction in which a fraction of each bid is sunk jump bidding is used by bidders to signal their private information bluffing respectively sandbagging occurs when a weak respectively strong player seeks to deceive his opponent into thinking that he is strong respectively weak a player with a moderate valuation bluffs by making a high bid and drops out if his bluff is called a player with a high valuation should vary his bids and should sometimes sandbag by bidding low to induce lower bids by his rival

a battle of the sexes game with incomplete information a battle of the sexes game with incomplete information presents two different efficiency problems coordination and maximizing ex ante expected utility by favoring a player facing high stakes communication and mediation can allow an optimal tradeoff between the two problems this paper gives 1 necessary conditions for and specification of an incentive efficient mediation mechanism and 2 necessary and sufficient conditions for mediation to be required for efficiency these conditions yield additional results concerning the necessity of privacy in communications and the superfluity of enforcement contrary to some recent studies our results demonstrate that unmediated communication is insufficient to achieve incentive efficiency an application to the theory of regulation is suggested

a dynamic theory of resource wars we develop a dynamic theory of resource wars and study the conditions under which such wars can be prevented our focus is on the interaction between the scarcity of resources and the incentives for war in the presence of limited commitment we show that a key parameter determining the incentives for war is the elasticity of demand our first result identifies a novel externality that can precipitate war price taking firms fail to internalize the impact of their extraction on military action in the case of inelastic resource demand war incentives increase over time and war may become inevitable our second result shows that in some situations regulation of prices and quantities by the resource rich country can prevent war and when this is the case there will also be slower resource extraction than the hotelling benchmark with inelastic demand our third result is that because of limited commitment and its implications for armament incentives regulation of prices and quantities might actually precipitate war even in some circumstances where wars would not have arisen under competitive markets copyright 2012 oxford university press

economic adjustment and exchange rates in developing countries in spite of the attention paid exchange rates in recent economic debates on developing countries relatively few studies have systematically analyzed in detail the various ramifications of exchange rate policy in these countries in this new volume from the national bureau of economic research leading economists use rigorous models to tackle various exchange rate issues while also illuminating policy implications that emerge from their analyses the volume divided into four main sections addresses the role of exchange rates in stabilization programs and the adjustment process the importance of exchange rate policy during liberalization reform in developing countries exchange rate problems relevant and unique to developing countries illustrated by case studies and the problems defining measuring and identifying determinants of real exchange rates authors of individual papers examine the relation between commercial policies and exchange rates the role of exchange rate policy in stabilization programs the effectiveness of devaluations as a policy tool and the interaction between exchange rate terms of trade an capital flow this research will not only prove crucial to our understanding of the role of exchange rates in developing countries but will clearly set the standard for future work in the field

domestic and foreign price links in an aggregate supply framework the case of greece abstract using price and wage equations an aggregate supply relationship is derived which relates domestic to foreign prices and output it is shown that among all parameters only the degree of wage indexation matters to the question of whether the nominal exchange rate can affect competitiveness cointegration results support the existence of a long run relationship among the variables of the model which is in conformity with the relationship derived in the theoretical part of the paper empirical analysis a does not confirm relative purchase power parity for greek wholesale price indices and b does not contradict the hypothesis that greek producer prices are homogeneous of degree one in foreign prices

game theory and the spiral model when one state engages in a military buildup other states sometimes take this as a sign that it is more aggressive or expansionist than they previously thought some argue that such increases in mutual suspicion can drive arms races and even lead to war psychological bias is often invoked to explain this pattern of growing suspicions leading to hostility this article presents an incomplete information model of an arms race and investigates when escalations should rationally generate increased fears and when in order to reduce such fears security seekers can refrain from building it shows that escalations rationally provoke fear even in the absence of bias and that weak states and states facing high costs of arms racing and war will be especially likely to refrain from building as a way of signaling benign intentions

cycles of conflict an economic model abstract we propose a model of cycles of conflict and distrust overlapping generations of agents from two groups sequentially play coordination games under incomplete information about whether the other side consists of bad types who always take bad actions good actions may be misperceived as bad and information about past actions is limited conflict spirals start as a result of misperceptions but also contain the seeds of their own dissolution bayesian agents eventually conclude that the spiral likely started by mistake and is thus uninformative of the opposing group s type the agents then experiment with a good action restarting the cycle jel d72 d74 d83 z13

exchange rate regimes and export performance of developing countries a fter the breakdown of the bretton woods system in 1973 many developing countries moved away from single currency pegging to more flexible exchange rate regimes an extensive literature on the appropriateness of various exchange rate regimes for developing countries economic performance has developed one issue concerns how developing countries choice of exchange rate regime affects their export performance comparative analyses of the impact of various exchange rate regimes on developing countries exports have however been overlooked different exchange rate regimes give rise to different tendencies for exchange rate misalignments and exchange rate volatility there are two reasons why the exports of developing countries may be subject to more severe consequences of exchange rate misalignments and exchange rate volatility than the exports of developed countries first exporters in developing countries may be expected to be more vulnerable to exchange rate misalignments since developing countries exports are often made up of raw material and agricultural products in which exporters usually have little market power it follows that exporters will have to respond to exchange rate misalignments by changing the export quantity rather than the export price second since developing countries usually have underdeveloped financial markets exchange rate volatility may be more harmful

budget constraints and demand reduction in simultaneous ascending bid auctions the possibility even if arbitrarily small of binding budget constraints in simultaneous ascending bid auctions induces strategic demand reduction and generates significant inefficiencies under mild conditions on the distributions of the bidders values unconstrained bidders behave as if they were liquidity constrained even as the probability that bidders are budget constrained goes to zero

property rights and natural resource conservation a bio economic model with numerical illustrations from the serengeti mara ecosystem this study develops a model for wildlifemigrating seasonally between a conservationarea and a neighbouring area when beingoutside the conservation area harvesting takesplace by a group of small scale farmers thelocal people have two motives for harvesting to get rid of problem animals as roamingwildlife destroys crops and agriculturalproducts and hunting for meat and trophies depending on the specification of the propertyrights the harvesting is legal or illegal itis demonstrated that it is far from clear whichof the two property rights regimes that givesthe highest wildlife abundance hence contraryto what is argued for in the literature handing the property rights over to the localpeople means not automatically more wildlifeand a more sustainable resource utilization the reason lies in the nuisance motive forharvesting the exploitation under the twodifferent property rights regimes areillustrated by numerical calculations with datathat fits reasonable well with the exploitationof the wildebeest population in theserengeti mara ecosystem

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

financial development and the instability of open economies this paper introduces a framework for analyzing the role of financial factors as a source of instability in small open economies our basic model is a dynamic open economy model with a tradeable good produced with capital and a country specific factor we also assume that firms face credit constraints with the constraint being tighter at a lower level of financial development a basic implication of this model is that economies at an intermediate level of financial development are more unstable than either very developed or very underdeveloped economies this is true both in the sense that temporary shocks have large and persistent effects and also in the sense that these economies can exhibit cycles thus countries that are going through a phase of financial development may become more unstable in the short run similarly full capital account liberalization may destabilize the economy in economies at an intermediate level of financial development phases of growth with capital inflows are followed by collapse with capital outflows on the other hand foreign direct investment does not destabilize

currency devaluation aggregate output and the long run an empirical study abstract this paper estimates the effect of currency devaluation on the aggregate output level in six asian countries using a unique methodology developed by wickens et al 1988 economic journal 189 205 the estimated results suggest that devaluation in general is neutral in the long run in some cases it even can have a contractionary effect

a medium term framework for analyzing the real exchange rate with applications to the philippines and tanzania a competitive official real exchange rate is important to external balance and sustainable medium term growth in developing countries this article presents a methodology for estimating appropriate real rate and provides a basis for evaluating the extent to which the prevailing rate is misaligned in particular the medium term equilibrium real exchange rate is evaluated by estimating the effects of structural factors on the trend observed for a country s real rate compared with the rates of its major trading partners taking into account the effects of macroeconomic policy structural factors include terms of trade external capital flows and trade policy plus other factors relevant to the circumstance of individual countries the implied change in the medium term equilibrium real rate is compared with that of a historical reference period the application of this methodology to two developing countries the philippines and tanzania illustrates how it can complement and improve upon other analytic approaches such as those using purchasing power parity and analysis of parallel rates this approach is complemented by an analysis of the relation between a country s real exchange rate and those of its major competitors

collective action with uncertain payoffs coordination public signals and punishment dilemmas how can one analyze collective action in protests or revolutions when individuals are uncertain about the relative payoffs of the status quo and revolution we model a calculus of protest of individuals who must either submit to the status quo or support revolt based only on personal information about their payoffs in deciding whether to revolt the citizen must infer both the benefit of successful revolution and the likely actions of other citizens we characterize conditions under which payoff uncertainty overturns conventional wisdom a when a citizen is too willing to revolt he reduces the incentives of others to revolt b less accurate information about the value of revolution can make revolt more likely c public signals from other citizens can reduce the likelihood of revolt d harsher punishment can increase the incidence of punishment and e the incidence of protest can be positively correlated with that of repression

war signals a theory of trade trust and conflict we construct a dynamic theory of civil conflict hinging on inter ethnic trust and trade the model economy is inhabitated by two ethnic groups inter ethnic trade requires imperfectly observed bilateral investments and one group has to form beliefs on the average propensity to trade of the other group since conflict disrupts trade the onset of a conflict signals that the aggressor has a low propensity to trade agents observe the history of conflicts and update their beliefs over time transmitting them to the next generation the theory bears a set of testable predictions first war is a stochastic process whose frequency depends on the state of endogenous beliefs second the probability of future conflicts increases after each conflict episode third accidental conflicts that do not reflect economic fundamentals can lead to a permanent breakdown of trust plunging a society into a vicious cycle of recurrent conflicts a war trap the incidence of conflict can be reduced by policies abating cultural barriers fostering inter ethnic trade and human capital and shifting beliefs coercive peace policies such as peacekeeping forces or externally imposed regime changes have instead no persistent effects

mediation and peace this article applies mechanism design to the study of international conflict resolution standard mechanisms in which an arbitrator can enforce her decisions are usually not feasible because disputants are sovereign entities nevertheless we find that this limitation is inconsequential despite only being capable of making unenforceable recommendations mediators can be equally effective as arbitrators by using recommendation strategies that do not reveal that one player is weak to a strong opponent a mediator can effectively circumvent the unenforceability constraint this is because these strategies make the strong player agree to recommendations that yield the same payoff as arbitration in expectation this result relies on the capability of mediators to collect confidential information from the disputants before making their recommendations simple protocols of unmediated communication cannot achieve the same level of ex ante welfare as they preclude confidentiality

the strategy of manipulating conflict two decision makers choose hawkish or dovish actions in a con ict game with incomplete information the decision making can be manipulated by extremists who send publicly observed cheaptalk messages the power of extremists depends on the nature of the underlying con ict game if actions are strategic complements a hawkish extremist provocateur can increase the likelihood of con ict by sending messages which trigger a fear spiral of hawkish actions this reduces the welfare of both decision makers if actions are strategic substitutes a dovish extremist paci st can send messages which cause one decision maker to back down and become more dovish this reduces his welfare but bene ts the other decision maker the hawkish extremist is unable to manipulate the decision makers if actions are strategic substitutes and the paci st is equally powerless if actions are strategic complements

selfish drug allocation for containing an international influenza pandemic at the onset recent epidemiologic studies have suggested that the prophylactic use of antiviral drugs could slow down the spread of an influenza epidemic because drug stockpiles are presently scattered in different countries the outbreak of an epidemic gives rise to a game in which each country must make decisions about how best to allocate its own stockpile in order to protect its population we develop a two period multivariate reed frost model to represent the spread of the epidemic within and across countries at its onset we consider the first two periods only to mimic the exponential growth of an epidemic in its early stage while keeping the model tractable preliminary numerical studies suggest that insights from the two period model hold in general when considering the entire time horizon our model captures three critical sources of uncertainty the number of initial infections the spread of the disease and drug efficacy we show that for small probabilities of between country infections the underlying game is supermodular nash equilibrium exists and there is a unique one that is pareto optimal among all existing equilibria further we identify sufficient conditions under which the optimal solution of a central planner such as the world health organization constitutes a pareto improvement over the decentralized equilibrium suggesting that countries should agree on an allocation scheme that would benefit everyone by contrast when the central planner s solution does not constitute a pareto improvement minimizing the total number of infected persons globally requires some countries to sacrifice part of their own population which raises intriguing ethical issues

financial instability in latin america in this paper i deal with a number of issues related to financial instability in latin america i first discuss from a macroeconomic research perspective what i believe are some of the most important policy issues faced by the latin american nations these include the effectiveness of controls on capital inflows the effect of exchange rate depreciation on output and the international transmission of the business cycle second i argue that the economic research agenda on latin america should not ignore history in latin america more so than in any other region in the world there has been a self destructing tendency for repeating history 2003 elsevier ltd all rights reserved

domestic political survival and international conflict is democracy good for peace we build a game theoretic model where aggression can be triggered by domestic political concerns as well as the fear of being attacked in the model leaders of full and limited democracies risk losing power if they do not stand up to threats from abroad in addition the leader of a fully democratic country loses the support of the median voter if he attacks a non hostile country the result is a non monotonic relationship between democracy and peace using polity data we classify countries as full democracies limited democracies and dictatorships for the period 1816 2000 correlates of war data suggest that limited democracies are more aggressive than other regime types including dictatorships and not only during periods when the political regime is changing in particular a dyad of limited democracies is more likely to be involved in a militarized dispute than any other dyad including mixed dyads where the two countries have different regime types thus while full democratization might advance the cause of peace limited democratization might advance the cause of war we also find that as the environment becomes more hostile fully democratic countries become more aggressive faster than other regime types

measuring exchange rate misalignment inflation differentials and domestic relative prices abstract empirical studies of exchange rate misalignment generally use crosscountry differences in overall inflation as proxy measures for a country s real exchange rate rer this paper shows that using such differential inflation proxies introduces two systematic biases in model results understatement of rer movements and a spurious trend towards depreciation these biases can be corrected only with disaggregated data on domestic relative prices of tradable and nontradable products using a standard model with disaggregated data for zimbabwe it is found that proxy based results understate misalignment by almost 25 and exaggerate depreciation by 4 per year

co ordination spillovers and cheap talk abstract we analyze the role of cheap talk in two player games with one sided incomplete information we identify conditions under which 1 players can fully communicate and coordinate on efficient nash equilibria of the underlying complete information game and 2 players cannot communicate so cheap talk does not alter the equilibrium set of the bayesian game we present examples that illustrate several issues that arise when there is two sided incomplete information journal of economic literature classification numbers c72 d82

the political economy of indirect control this paper characterizes the efficient sequential equilibrium when a government uses indirect control to exert its authority we develop a dynamic principal agent model in which a principal a government delegates the prevention of a disturbance such as riots protests terrorism crime or tax evasion to an agent who has an advantage in accomplishing this task our setting is a standard dynamic principal agent model with two additional features first the principal is allowed to exert direct control by intervening with an endogenously determined intensity of force which is costly to both players second the principal suffers from limited commitment using recursive methods we derive a fully analytical characterization of the likelihood intensity and duration of intervention the first main insight from our model is that repeated and costly interventions are a feature of the efficient equilibrium this is because they serve as a punishment to induce the agent into desired behavior the second main insight is a detailed analysis of a fundamental tradeoff between the intensity and duration of intervention which is driven by the principal s inability to commit finally we derive sharp predictions regarding the impact of various factors on likelihood intensity and duration of intervention we discuss these results in the context of some historical episodes

coordination risk and the price of debt abstract creditors of a distressed borrower face a coordination problem even if the fundamentals are sound fear of premature foreclosure by others may lead to pre emptive action undermining the project recognition of this problem lies behind corporate bankruptcy provisions across the world and it has been identified as a culprit in international financial crises but has received scant attention from the literature on debt pricing without common knowledge of fundamentals the incidence of failure is uniquely determined provided that private information is precise enough this affords a way to price the coordination failure comparative statics on the unique equilibrium provides several insights on the role of information and the incidence of inefficient liquidation

arms races and conflict experimental evidence we study escalation and aggression in an experimental first strike game in which two participants play multiple rounds of a money earning task in each round both players can spend money to accumulate weapons the player with more weapons can spend money to strike against the other player which almost totally eliminates the victim s earnings potential and removes their capacity to strike weapons can serve as a means of deterrence in four treatments we find that deterrence is strengthened if weapon stocking cannot be observed that a balance of power is effective in maintaining peace and that mutually beneficial trade decreases the risk of confrontation but not necessarily the likelihood of costly arms races