competition under consumer loss aversion we address the effect of expectation based consumer loss aversion on firm strategy in imperfect competition consumers are fully informed about match value and price at the moment of purchase however some consumers are initially uninformed about their tastes and form a reference point consisting of an expected match value and price distribution whereas others are perfectly informed all the time we show that if firms have symmetric costs a larger share of informed consumers leads to a more competitive outcome the reverse holds if cost asymmetry in duopoly is sufficiently large

debt swapping in developing countries a preliminary investigation debt swapping has begun to be used over recent years as one means of alleviating the global debt problem this article undertakes a preliminary investigation of the economics of debt swapping and attempts to identify and assess the principal advantages and disadvantages of such schemes the conclusion reached is that while the benefits outweigh the costs debt swapping will not do very much to tackle the fundamental issues involved in the debt problem an appendix examines the welfare effects of governmental regulation of debt swapping

should developing countries use currency depreciation as a tool of balance of payments adjustment a review of the theory and evidence and a guide for the policy maker the use of currency depreciation as a means of strengthening the balance of payments has long been a contentious issue amongst developing countries especially in their negotiations with the imf this article reviews the various ways in which depreciation might exert its impact a study of the empirical evidence suggests that it may be both an effective and cost effective instrument in many developing countries even though exceptions do exist compared with alternative balance of payments policies use of the exchange rate emerges as possessing many advantages it is concluded that greater emphasis should be placed on the exchange rate in the context of imf programmes than has perhaps been the case in recent years

ten little treasures of game theory and ten intuitive contradictions this paper reports laboratory data for games that are played only once these games span the standard categories static and dynamic games with complete and incomplete information for each game the treasure is a treatment in which behavior conforms nicely to predictions of the nash equilibrium or relevant refinement in each case however a change in the payoff structure produces a large inconsistency between theoretical predictions and observed behavior these contradictions are generally consistent with simple intuition based on the interaction of payoff asymmetries and noisy introspection about others decisions

sequential negotiations with loss averse buyers abstract this paper analyzes sequential negotiations with exogenous breakdown risk between a risk neutral seller and a loss averse buyer who is privately informed about his valuation i show that compared to the risk neutral benchmark loss aversion on the buyer s side softens the rent efficiency trade off for the seller the reason is that the higher the buyer s valuation is the more he has to lose by rejecting the seller s offer thus in equilibrium the seller s profits and overall efficiency are both higher than in the risk neutral case moreover i also show that loss aversion has a redistributive effect by increasing the equilibrium payoff of some low valuation buyers and decreasing that of high valuation ones

task assignment under agent loss aversion we analyze a task assignment model in which a principal assigns a task to one of two agents depending on future states if the agents have concave utility the principal assigns the task to them contingent on the state we show that if the agents are loss averse a state independent assignment assigning the task to a single agent in all states can be optimal even when the principal can write a contingent contract at no cost

the market for quacks a group of n quacks plays a price competition game facing a continuum of patients who recover with probability whether or not they acquire a quack s treatment if patients chose rationally the market would be inactive i assume however that patients choose according to a boundedly rational procedure which re ects anecdotal reasoning this element of bounded rationality has signi cant

political instability and savings in less developed countries evidence from sub saharan africa a four equation model is used to investigate the effects of political instability pi on the savings rate in sub saharan africa utilising a comprehensive measure of pi we find that political instability has a deleterious effect on the savings rate both directly and indirectly through a reduction in investment and economic growth the negative effects of pi on savings rate occurs contemporaneously as well as with a lag we also find that economic growth has a stabilising effect on the political system and that not accounting for these effects through a simultaneous equations model results in biased coefficient estimates these relationships are robust with respect to model specification the implication of our results is that economic factors alone cannot explain the development process in less developed countries

games with unique mixed strategy equilibria an experimental study abstract the results of an experiment studying the choices of subjects playing mixed extensions of three variants of simple 2 2 non constant sum strictly competitive games of the same form matching pennies are presented subjects exhibited a variety of behavioral adaptive learning strategies this heterogeneity of individual behavior produced aggregate dynamics whose estimated steady states are quite different from those predicted by the nash equilibria of those stage games with asymmetrical payoff functions the observed aggregative dynamics are well accounted for both by a quantal equilibrium model of mckelvey and palfrey and by a learning model of roth and erev journal of economic literature classification number c72

competition and price variation when consumers are loss averse we modify the salop 1979 model of price competition with differentiated products by assuming that consumers are loss averse relative to a reference point given by their recent expectations about the purchase consumers sensitivity to losses in money increases the price responsiveness of demand and hence the intensity of competition at higher relative to lower market prices reducing or eliminating price variation both within and between products when firms face common stochastic costs in any symmetric equilibrium the markup is strictly decreasing in cost even when firms face different cost distributions we identify conditions under which a focal price equilibrium where firms always charge the same focal price exists and conditions under which any equilibrium is focal

incomplete contracting renegotiation and expectation based loss aversion abstract we consider a simple trading relationship between an expectation based loss averse buyer and a profit maximizing seller when writing a long term contract the parties have to rely on renegotiation in order to ensure materially efficient trade ex post we show that if the buyer expects renegotiation to occur the seller can opportunistically exploit the buyer s attachment to the expected outcome of renegotiation in other words incomplete contracts create a new type of hold up problem if credible the buyer prefers to expect not to renegotiate which gives rise to ex post inefficiencies in a next step we allow the buyer to undertake a non contractible investment we find that loss aversion can mitigate the traditional hold up problem

exchange rate variations and export competitiveness in less developed countries under generalized floating this paper identifies two basic sources of effective exhange rate eer changes under the present system of generalized currency floating and formulates some eer based measures of relative export competitiveness in developing countries these measures are presented and analyzed in terms of their monthly movements and trends over the period from march 1973 to december 1979 for twenty three developing countries export profitability vis a vis import competing production is shown to have been affected by major currency realignments only to a moderate extent normal currency depreciation both small and large is found not to lead necessarily to a permanent improvement in export competitiveness the relationship between the type of exchange rate management and ability of the national authorities to adopt monetary and fiscal policies supportive of real exchange rate adjustment is also empirically examined

does terrorism affect the stock bond covariance evidence from european countries using daily stock and bond returns data from four european countries france germany spain and great britain that have been the victims of significant terrorist activity this study addresses the issue of whether transnational and or domestic terrorist attacks have affected in any significant manner the time varying stock bond covariance their returns and their variances stock and bond markets can be influenced and determined not only by the usual array of macroeconomic factors but also by security shocks such as a terrorist incident that have the potential to affect investors sentiment and portfolio allocation decisions the issue at hand is addressed using a var p garch 1 1 in mean model and the results reported herein indicate that terrorist attacks trigger a flight to safety effect primarily in france and germany and to a smaller degree in great britain and spain

the effect of predatory rent seeking on household saving and portfolio choices a cross section analysis the existence of predatory behavior when measured by the number of lawyers per capita and the crime rate seems to have an impact on saving and investment behavior in u s households where the risk of redistribution are lowest the incentives to save are higher and a fortiriori the willingness to invest in highly vulnerable financial instruments is enhanced either because of low saving rates or because of disintermediation households in states where the risks of redistribution are greater avoid accumulating financial assets

multi dimensional reference dependent preferences in sealed bid auctions how most laboratory experiments differ from the field abstract we study bidding behavior in first and second price sealed bid auctions with loss averse agents our model predicts overbidding in first price induced value auctions consistent with evidence from most laboratory experiments substantially different bidding behavior could result in commodity auctions where money and auction item are consumed along different dimensions of the consumption space differences also result in second price auctions our study thereby indicates that transferring qualitative behavioral findings from induced value laboratory experiments to the field may be problematic if subjects are loss averse

a behavioral analysis of stochastic reference dependence we examine the reference dependent risk preferences of k oszegi and rabin 2007 focusing on their choice acclimating personal equilibria concept we relate their model to other existing generalizations of expected utility we demonstrate that linear gain loss choice acclimating personal equilibria is equivalent to the intersection of quadratic utility and pessimistic rank dependent utility however it has only a trivial intersection i e expected utility with other referencedependent preferences we use these relationships to extend our understanding of k oszegi and rabin s model linking their functional form to behavior demonstrating new applications and deriving new tests and looking for support in existing experimental data 98 words

disappointment in decision making under uncertainty decision analysis requires that two equally desirable consequences should have the same utility and vice versa most analyses of financial decision making presume that two consequences with the same dollar outcome will be equally preferred however winning the top prize of 10 000 in a lottery may leave one much happier than receiving 10 000 as the lowest prize in a lottery this paper explores the implications of disappointment a psychological reaction caused by comparing the actual outcome of a lottery to one s prior expectations for decision making under uncertainty explicit recognition that decision makers may be paying a premium to avoid potential disappointment provides an interpretation for some known behavioral paradoxes and suggests that decision makers may be sensitive to the manner in which a lottery is resolved the concept of disappointment is integrated into utility theory in a prescriptive model

the nature of the savings function in developing countries a survey of the theoretical and empirical literature the savings rate marginal or average is regarded as a key performance indicator by development economists and foreign aid practitioners admonish their clients to increase their savings ratio as a primary condition for achieving a satisfactory rate of economic growth however not only have questions been raised regarding the significance of the savings effort as an independent determinant of economic progress but the formulation of policies designed to increase the savings propensity has suffered from a dearth of knowledge regarding the nature of the savings function in developing countries a number of alternative savings hypotheses derived mainly from the literature relating to developed economies have been advanced but the paucity of reliable data has made it difficult to test these hypotheses and obtain results which warrant a reasonable degree of confidence the purpose of this article is a to review the theoretical and empirical literature on the savings function in developing countries b to assess critically the findings with respect to the major hypotheses and c to summarize the state of our knowledge on this important topic we shall begin with a brief review of the nature of the data on savings in developing countries with which economic analysts must work

the expectation based loss averse newsvendor we modify the classic single period inventory management problem by assuming that the newsvendor is expectation based loss averse according to k szegi and rabin 2006 2007 we show that the expectation based loss averse newsvendor orders less than the profit maximizing quantity moreover the order placed by the expectation based loss averse newsvendor features plausible comparative statics of cost and price changes

a theory of disappointment aversion an axiomatic model of preferences over lotteries is developed it is shown that this model is consistent with the allais paradox includes expected utility theory as a special case and is only one parameter beta richer than the expected utility model allais paradox type behavior is identified with positive values of beta preferences with positive beta are said to be disappointment averse it is shown that risk aversion implies disappointment aversion and that the arrow pratt measures of risk aversion can be generalized in a straight forward manner to the current framework copyright 1991 by the econometric society

the provision of public goods under alternative electoral incentives politicians who care about the spoils of office may underprovide a public good because its benefits cannot be targeted to voters as easily as pork barrel spending we compare a winner take all system where all the spoils go to the winner to a proportional system where the spoils of office are split among candidates proportionally to their share of the vote in a winner take all system the public good is provided less often than in a proportional system when the public good is particularly desirable we then consider the electoral college system and show that it is particularly subject to this inefficiency

immigration policy and counterterrorism abstract in a developing country terrorists recruit and allocate their capital skilled labor and unskilled labor between domestic and foreign targets domestic targets require less skilled labor than foreign targets under various strategic scenarios we show how countermeasures against the different terrorist inputs alter the amount and mix of targets as well as how skilled and unskilled immigration quotas by a targeted foreign country affect this mix of attacks we find that increases in skilled labor quotas generally reduce terrorist attacks in the foreign country especially when the terrorists reside in a skill scarce country a number of different strategic scenarios including leader follower are investigated

incentives to cultivate favored minorities under alternative electoral systems a simple model is used to compare under different electoral systems the incentives for candidates to create inequalities among otherwise homogeneous voters by making campaign promises that favor small groups rather than appealing equally to all voters in this game model each candidate generates offers for voters independently out of a distribution that is chosen by the candidate subject only to the constraints that offers must be nonnegative and have mean 1 symmetric equilibria with sincere voting are analyzed for two candidate elections and for multicandidate elections under rank scoring rules approval voting and single transferable vote voting rules that can guarantee representation for minorities in multiseat elections generate in this model the most severely unequal campaign promises

terrorist attacks analyst sentiment and earnings forecasts we examine whether exogenous and extremely negative events such as terrorist attacks and mass shootings influence the sentiment and forecasts of sell side equity analysts we find that analysts w

terrorism and its impact on the cost of debt abstract we extend the literature on the costs of terrorism by examining its long term impact on financial markets an underdeveloped strand of research within the terrorism construct specifically we look at its effect on the sovereign risk of 102 countries a much broader sample than examined before which forms the basis of the cost of debt in those countries postulating that it results in a lower credit rating and that this impact is more pronounced in developing as opposed to developed markets in operationalizing the risk of terrorism we utilize the institute for economics and peace s global terrorism index the most comprehensive index constructed to date which incorporates both the economic and social dimensions of terrorism and is based on the global terrorism database covering 104 000 documented incidents the results of the study support the hypothesis that terrorism results in a higher cost of debt for sovereigns and by extension firms in impacted countries in fact a two point increase in terrorism on the utilized 10 point scale on average results in a half notch reduction in a sovereign s credit rating roughly equivalent to a change in outlook furthermore this impact is more pronounced in developing markets where we find that a comparable two point increase in terrorism on average results in an entire notch downgrade in the sovereign credit rating e g from bb to bb finally we find that our model demonstrates predictive power on an out of sample basis and as such could be useful for investors seeking to construct more efficient diversified asset portfolios

cities under stress this paper studies the effect of terrorist attacks on the internal structure of cities we develop an urban framework with capital structures suitable for the study of this question and analyze the long and short term implications of this type of events in the long run the analysis shows that a terrorist attack will affect urban structure only modestly relative to the potentially large decrease in the level of economic activity in the city land rents will not decline at all locations in the short run agglomeration forces will amplify the effect of the original destruction and will reduce urban economic activity temporarily

the open society assesses its enemies shocks disasters and terrorist attacks abstract this paper conducts a systematic investigation of the incidence and economic costs of terrorist attacks at the country level we use newly assembled datasets on terrorist attacks natural disasters and currency crises to answer three different questions what are the determinants of terrorism is there an output cost following a terrorist attack and is that cost larger or smaller in the case of democracies we find that rich countries are the most prone to suffer attacks while democracies are if anything less vulnerable than other countries the cost to output of a terrorist attack is quantitatively small and closely associated with the occurrence of an event rather than the number of casualties finally we find robust evidence that a terrorist attack imposes a lower output cost the more democratic a country is

reference dependent risk attitudes we use koszegi and rabin s 2006 model of reference dependent utility and an extension of it that applies to decisions with delayed consequences to study preferences over monetary risk because our theory equates the reference point with recent probabilistic beliefs about outcomes it predicts specific ways in which the environment influences attitudes toward modest scale risk it replicates classical prospect theory including the prediction of distaste for insuring losses when exposure to risk is a surprise but implies first order risk aversion when a risk and the possibility of insuring it are anticipated a prior expectation to take on risk decreases aversion to both the anticipated and additional risk for large scale risk the model allows for standard consumption utility to dominate reference dependent gain loss utility generating nearly identical risk aversion across situations

expectations as endowments evidence on reference dependent preferences from exchange and valuation experiments while evidence suggests that people evaluate outcomes with respect to reference points little is known about what determines them we conduct two experiments that show that reference points are determined at least in part by expectations in an exchange experiment we endow subjects with an item and randomize the probability they will be allowed to trade subjects that are less likely to be able to trade are more likely to choose to keep their item in a valuation experiment we randomly assign subjects a high or low probability of obtaining an item and elicit their willingness to accept for it the high probability treatment increases valuation of the item by 20 30 copyright 2011 oxford university press

driving fatalities after 9 11 a hidden cost of terrorism we show that the public s response to terrorist threats can have unintended consequences that rival the attacks themselves in severity driving fatalities increased significantly after the 11 september 2001 terrorist attacks events that prompted many travellers to substitute road transportation for safer air transportation after controlling for time trends weather road conditions and other factors we find that travellers response to 9 11 resulted in 327 driving deaths per month in late 2001 moreover while the effect of 9 11 weakened over time as many as 2300 driving deaths may be attributable to the attacks

exploring the dynamics between terrorism and anti terror spending theory and uk evidence abstract recent years have seen governments restricting civic freedoms and legislating significant increases in spending to combat terrorist activities in this paper we investigate the relationship between anti terror spending and terrorism in line with previous findings in the empirical literature on terrorist activity our game theoretic model of the interaction between a benevolent government and a terrorist organization is suggestive of a non linear relation between terrorism and counter terrorism spending using uk data our empirical markov switching implementation provides evidence in favor of this approach the empirical results also show that the probability of transiting into a state with high terror is smaller if defense spending is high

terrorism and attitudes towards minorities the effect of the theo van gogh murder on house prices in amsterdam abstract does fundamentalist islamic terrorism have an effect on the general attitudes towards muslim minorities we use the murder of theo van gogh as an event study to address this question specifically we use the hedonic market model and test for an effect on listed house prices in neighborhoods where more than 25 of the people belong to an ethnic minority from a muslim country type i relative to the other neighborhoods house prices in type i neighborhoods decreased in 10 months by about 3 with a widening gap over time our results are robust to several adjustments including using synthetic control groups finally we find evidence that segregation increased people belonging to the muslim minority were more likely to buy and less likely to sell a house in a type i neighborhood after the murder than before

terrorism and the invisible hook this article investigates and compares the root causes of transnational terrorism and piracy in order to accomplish this we construct a novel data set that catalogues terrorist activity and piracy over the years 1992 2008 paying particular attention to the arabian sea and indian ocean since 1991 these data are then merged with other information detailing the economic political and security posture of each organization during the same period so that we can examine the relationship between economic prosperity security terrorism and piracy the main conclusion is that terrorism is mostly unrelated to economic conditions while piracy responds to both economic payoffs and military deterrents

fear of nuclear war and intercountry differences in the rate of saving fear of nuclear war and intercountry differences in the rate of saving joel slemrod i introduction and review of previous literature can differences in the perceived likelihood of nuclear war explain intercountry differences in saving behavior the analysis presented in this paper based on recent international surveys of attitudes concerning the likelihood of world war suggests that the answer to this question is yes holding other determinants of saving constant a country s saving rate is lower the greater is the fraction of its population that believes a world war is imminent the hypothesis that changes in public perceptions of the likelihood of a nuclear war influence the rate of saving first proposed in slemrod 1982 is consistent with the behavior of an expected utility maximizing consumer faced with a changing probability of the survival of oneself and one s heirs whether the relationship is of quantitative significance is another question the evidence examined to date while not conclusive suggests that it may be slemrod 1986 shows that holding other determinants of saving constant two separate indices of fear of nuclear war have a statistically significant negative correlation with the u s net private saving rate between 1948 and 1984 the analysis suggests that a diminution in the fear of war from its highest postwar level to its lowest postwar level is associated with an increase of 1 7 percentage points in the net private saving rate compared to an average value of 10 6 over this period note that during this period as many as 53 percent of americans believed that the chances of a nuclear war occurring within ten years were at least 50 50 hendershott and peek 1985 1989a using several alternative definitions of savings and investigating other influences on saving also find that increased fear has tended to reduce saving in the postwar u s economy they also hendershott and peek 1989b contend that changes in nuclear fear are an important factor in the movement of real interest rates in the 1970s and 80s while russett and lackey 1987 find no consistent relationship between savings fear of war at the aggregate level for several advanced countries their analysis of individual data from the u s national election survey indicates that for individuals who did some saving actual saving is negatively related to fear of nuclear war they conclude that the most appropriate data set is consistent with the hypothesis that fear of nuclear war reduces saving 1 ii methodology data and results in recent years the gallup international research institutes have annually conducted a poll in as many as thirty three countries concerning attitudes about the likelihood of world war 2 the poll in each country asks a random sample of individuals to assess on a zero to ten scale the likelihood of a world war breaking out in the next ten years 3 table i ranks the countries surveyed in 1986 according to the fraction or respondents who felt that the chance of world war was 50 percent or greater within the next ten years most striking to a student of saving behavior is that the u s stands at the top of the list with 49 percent of the respondents indicating at least a 50 50 chance of a world war occurring within ten years also of special interest is that japan which has had exceptionally high saving rates is near the bottom of the list with only 15 percent of those interviewed professing to a high fear of world war table table i fraction of respondents saying in 1986 that the chance of world war within ten years is 50 percent or greater by country united states 49 italy 22 south africa blacks 49 italy 22 ecuador 45 norway 21 chile 43 austria 20 colombia 42 great britain 20 australia 38 south korea 19 uruguay 38 denmark 18 brazil 34 greece 18 canada 34 luxembourg 18 south africa whites 33 switzerland 18 india 30 west germany 18 argentina 30 finland 17 philippines 27 hongkong 17 ireland 25 japan 15 portugal 25 sweden 15 belgium 24 turkey 15 france 24 netherlands 14 source the gallup poll released january 11 1987

the supply and demand for imports and exports in a simultaneous model previous studies on the behaviour of aggregate exports and imports have tended to ignore the simultaneous relationship between quantity and price this paper investigates the price responsiveness of export and import demand and supply in eight african countries the results indicate that export demand price elasticities are smaller when the sample is african the import supply and demand elasticities were found to be generally large the marshall lerner condition of balance of payment stability is found to be easily satisfied a positively sloped function of export supply is found to exist for a majority of countries in the sample the average time lag of export supply is found to be about a year the disequilibrium model is found to be more appropriate for import demand import supply and export supply

disappointment and dynamic consistency in choice under uncertainty the central proposition of disappointment theory is that an individual forms expectations about uncertain prospects and that if the actual consequence turns out to be worse than or better than that expectation the individual experiences a sensation of disappointment or elation generating a decrement or increment of utility which modifies the basic utility derived from the consequence by incorporating a simple disappointment elation function into a model of individual choice many observed violations of conventional expected utility axioms including violations of savage s sure thing principle and the isolation effect can be predicted and defended as rational and dynamically consistent behaviour

risk averse behavior in generalized matching pennies games in experimental studies of behavior in 2 2 games with unique mixed strategy equilibria observed choice frequencies are systematically different from mixed strategy nash predictions this paper examines experimental results for a variety of such games and shows that a structural econometric model which incorporates risk aversion into a quantal response equilibrium explains the data very well moreover risk aversion estimates are stable across the different games and are close to those obtained from laboratory and field auction data as well as from individual lottery choice experiments

the inadvertent consequences of al qaeda news coverage abstract this paper explores the consequences of al qaeda news coverage related to i subsequent al qaeda attacks ii the group s popularity and iii radicalization i construct a daily index of al qaeda news coverage in the us from cnn nbc cbs fox news the nyt and the wapo to isolate causality i employ an instrumental variable strategy based on disaster deaths everything else equal the us media reports less on al qaeda when more people are dying from disasters worldwide at its mean al qaeda coverage is suggested to cause 0 2 0 3 attacks per day in the upcoming 1 4 weeks i find no evidence that attacks are merely rescheduled because of diminished media exposure rather the total number of attacks increases with coverage this effect is driven by easy to plan attack types and by al qaeda attacks in iraq results are robust to an array of alternative specifications and consistent when considering news coverage on al jazeera al qaeda coverage also increases the group s online popularity and search topics that are potentially indicative of radicalization such as jihad and al qaeda s magazine inspire are receiving more attention on google nevertheless these results should be interpreted carefully as it remains difficult to fully disentangle online interest in al qaeda and sympathy with the group s mission

exchange rates trade liberalization and aid the sri lankan experience abstract in 1977 the sri lankan government embarked on an extensive program of liberalization an important element of which was devaluation to ensure a competitive real exchange rate the 1980s were however marked by an increasing divergence between the real and nominal exchange rates the depreciation of the latter not being matched by similar movements of the former this paper presents an econometric model of real exchange rate behavior in sri lanka among other things it is shown that increased aid inflows have made a significant contribution to the failure of the real exchange rate to match the depreciation in the nominal rate

new york city cab drivers labor supply revisited reference dependent preferences with rational expectations targets for hours and income this paper reconsiders whether cabdrivers labor supply decisions reflect reference dependent preferences following botond koszegi and matthew rabin 2006 we construct a model with targets for hours as well as income both determined by rational expectations estimating using henry s farber s 2005 2008 data we show that the reference dependent model can reconcile his 2005 finding that drivers stopping probabilities are significantly related to hours but not income with the negative wage elasticity of hours found by colin camerer et al 1997 and farber 2005 2008 the model yields sensible estimates that avoid farber s 2008 criticism that drivers income targets are too unstable to allow a useful reference dependent model of labor supply

long live democracy the determinants of political instability in latin america abstract we investigate the underlying causes of political instability in a panel of 18 latin american countries from 1971 2000 we test whether regime type regime durability factionalism income inequality ethnic diversity ethnic discrimination regional spillover effects urban growth and macroeconomic variables matter for instability we find several important results 1 democracy has a significant negative effect on instability that is robust to several alternative specifications 2 factionalised political systems experience higher instability 3 income inequality ethnic fractionalisation and urban growth have important nonlinear effects on instability and 4 of the macroeconomic variables we study only openness to trade has a significant negative effect on instability

equilibrium without independence abstract because players whose preferences violate the von neumann morgenstern independence axiom may be unwilling to randomize as mixed strategy nash equilibrium would require a nash equilibrium may not exist without independence this paper generalizes nash s definition of equilibrium retaining its rational expectations spirit but relaxing its requirement that a player must bear as much uncertainty about his own strategy choice as other players do the resulting notion equilibrium in beliefs is equivalent to nash equilibrium when independence is satisfied but exists without independence this makes it possible to study the robustness of equilibrium comparative statics results to violations of independence

economic environment and agricultural development the importance of macroeconomic policy abstract this article explores the ways in which the macroeconomic balance of the economy and related policies impinge on agriculture in developing countries and considers implications for the design of policies it argues that the extent of macroeconomic balance and the quality of the policies influencing that balance to a large extent define the scope for effective agricultural policies the avoidance of severe balance of payments deficits and rapid inflation are seen as a necessary condition for the promotion of agricultural growth they also have an important influence on the nature and range of agricultural policy options available to governments

macroeconomic consequences of terror theory and the case of israel abstract this paper analyzes the effect of terror on the economy terror endangers life such that the value of the future relative to the present is reduced hence due to a rise in terror activity investment goes down and in the long run income and consumption go down as well governments can offset terror by putting tax revenues into the production of security facing a tide in terror a government that acts optimally increases the proportion of output spent on defense but does not fully offset the tide thus when terror peaks the long run equilibrium with an optimizing government is of lower output and welfare next we show that this theory of terror and the economy helps to understand changes in trend and business cycle of the israeli economy the estimates show that terror has a large impact on the aggregate economy continued terror at the level of the death toll by about the same size as due to car accidents is expected to decrease annual consumption per capita by about 5 in 2004 had israel not suffered from terror during the last 3 years we estimate that the output per capita would have been 10 higher than it is today

how should structural adjustment programs be designed abstract more than seven years have elapsed since the onset of the generalized debt crisis of 1982 yet the affected countries have still not managed to stabilize their economies these countries must now attempt structural adjustment in the midst of pervasive macroeconomic and political instability structural adjustment packages should be designed with this reality in mind this paper argues that structural adjustment programs should strive for sustainability rather than the economic liberalization that they presently stress illiberal policies which do not damage overall macro stability are preferable to liberal policies which are inherently unsustainable or engender macro instability liberalization programs that are not sustainable are likely to bring few benefits but have high costs in terms of private investment the paper discusses some of the chief implications of this opinion for the design of adjustment programs

uncertain demand consumer loss aversion and flat rate tariffs we consider a model of firm pricing and consumer choice where consumers are loss averse and uncertain about their future demand possibly consumers in our model prefer a flat rate to a measured tariff even though this choice does not minimize their expected billing amount a behavior in line with ample empirical evidence we solve for the profit maximizing two part tariff which is a flat rate if a marginal costs are not too high b loss aversion is intense and c there are strong variations in demand moreover we analyze the optimal nonlinear tariff this tariff has a large flat part when a flat rate is optimal among the class of two part tariffs

binary payment schemes moral hazard and loss aversion we modify the principal agent model with moral hazard by assuming that the agent is expectation based loss averse according to k o szegi and rabin 2006 2007 the optimal contract is a binary payment scheme even for a rich performance measure where standard preferences predict a fully contingent contract the logic is that due to the stochastic reference point increasing the number of different wages reduces the agent s expected utility without providing strong additional incentives moreover for diminutive occurrence probabilities for all signals the agent is rewarded with the fixed bonus if his performance exceeds a certain threshold

sociopolitical and economic dimensions of development a cross section model 1 of the most important requisites of development is to cultivate those conditions which are appropriate for the generation of a surplus the distribution of which in turn usually generates friction among the various social classes and factions that advance claims to it thus modernization being a process of change has economic social political and institutional dimensions and the changes can result in sociopolitical instability which affects the continuation of the ability of the economy to grow and of the society to develop the objective of this paper is to test for a feedback mechanism that links all the dimensions of modernization together and the introduction of variables that can reflect it in a model and to present some results of an econometric investigation that recognizes this interaction estimation for the model is based on a sample of 104 noncommunist countries for the year 1967 that includes economic and noneconomic variables the model is used to predict the values of the per capita income and gross capital formation both within and outside of the sample period its predictive ability is remarkable as the statistics represented in the tables and charts demonstrate the model is also used in a number of simulations reflecting a variety of social and political conditions and scenarios in this relation it is found for example that the social and political atmosphere has profound effects on the economic evolution of a society the sociopolitical gap defined as the difference between actual sociopolitical envirnoments characterized by various degrees of instability and the sociopolitically stable environment characterized by no sociopolitical violence retards the development process the presence and the magnitude of this gap as well as the various trade offs lead the author to a conclusion of guarded pessimism in relation to the choices and future of developing countries an appendix lists the types of political violence identified as variables

private investment under uncertainty in ghana abstract ghana s economic recovery program saw considerable growth of the economy during 1985 1991 this commendable performance slackened after 1992 a fact which is attributable to poor private investment response following reform this article shows that the poor growth in private investment may be attributed to the perception of uncertainty in the political and economic environment since 1982 the uncertainty is derived from the low credibility of government as it has been unable to assure investors that earlier decisions that showed a bias against private wealth will not be repeated economic incentives arising from reforms do not provide guarantees against poor credibility

income distribution and sociopolitical instability as determinants of savings a cross sectional model the purpose of this cross national study is twofold first it introduces income distribution and sociopolitical instability as arguments in the savings function second it presents some empirical evidence in relation to their quantitative effects on savings it is shown that sociopolitical instability has profound effects on the savings ratio it is also shown that the bulk of savings is produced by the middle income class as a result a redistribution of income at the expense of the upper income class yields a constant or an increased savings ratio developing on whether such a redistribution includes the lower income class or not

sociopolitical instability and the behavior of savings in less developed countries the paper argues for the introduction of sociopolitical instability as a factor in explaining saving behavior it also provides empirical evidence in regard to the quantitative and qualitative relationship between these two variables the empirical results point towards an inverse relationship between sociopolitical instability and savings our estimates are based on a sample of 7 observations from 60 countries a new pooling procedure is used to address the problems of autocorrelation and heteroskedasticity

expectation based loss aversion and strategic interaction abstract by extending the equilibrium concepts of k szegi and rabin 2006 k szegi and rabin 2007 this paper analyzes the strategic interaction of expectation based loss averse players for loss averse players with choice acclimating expectations the utility from playing a mixed strategy is not linear but convex in the probabilities they assign to their pure strategies as a consequence they are generally unwilling to randomize and an equilibrium may fail to exist for players with choice unacclimating expectations by contrast randomizing over their pure strategies may indeed constitute a credible best response and an equilibrium always exists building upon these insights we delineate how expectation based loss averse players differ in their strategic behavior from their counterparts with standard expected utility preferences derive novel strategic effects discuss equilibrium selection and derive equilibrium play for some simple games

terror and the costs of crime abstract this paper argues that terrorism beyond its immediate impact on innocent victims also raises the costs of crime and therefore imposes a negative externality on potential criminals terrorism raises the costs of crime through two channels i by increasing the presence and activity of the police force and ii causing more people to stay at home rather than going out for leisure activities our analysis exploits a panel of 120 fatal terror attacks and all reported crimes for 17 districts throughout israel between 2000 and 2005 after controlling for the fixed effect of each district and for district specific time trends we show that terror attacks reduce property crimes such as burglary auto theft and thefts from cars terror also reduces assaults and aggravated assaults which occur in private homes but increases incidents of trespassing and disrupting the police taken as a whole the results are consistent with a stronger deterrence effect produced by an increased police presence after a terror attack a higher level of policing is likely to catch more people trespassing and at the same time reduce the number of property crimes the decline in crimes committed in private houses is likely an indication that the tendency for individuals to stay home after a terror attack further increases the costs of crime

lessons on monetary policy from the 1980s t he half decade running from mid 1982 to mid 1987 was a pretty good era for u s monetary policy as these things go a sharp easing of policy beginning some time around midyear 1982 helped set in motion a recovery from the most severe business downturn the united states had experienced since the 1930s a downturn that tight monetary policy earlier on had deliberately brought about in order to slow the alarming acceleration of prices the recovery that ensued developed into a sustained expansion that continued without interruption through the end of 1987 thereby setting a new record for the longest recorded business expansion in u s peacetime experience a fiscal policy based on unprecedentedly large and continually growing structural budget deficits was a major factor underlying this record length expansion but at least monetary policy did not stand in the way just as importantly the severe 1981 82 recession served its intended purpose of substantially restoring price stability and even after five years of expansion inflation remained modest by recent historical standards at least as judged by these outcomes for the standard objectives of macroeconomic policy u s monetary policy was a distinct success during these years economists hoping to say something useful about monetary policy have had a tougher time the quantitative relationships connecting income and price movements to the growth of familiar monetary aggregates including especially the m1 measure of the money stock that had been the chief focus of monetary policy during 1979 82 utterly fell apart during this period moreover the collapse of these long standing

the cycle of violence an empirical analysis of fatalities in the palestinian israeli conflict thomas c schelling s the strategy of conflict 1960 laid the groundwork for thinking about conflicts as non zero sum games in which each side may choose to exercise or threaten violence in order to deter or incapacitate the opponent or simply to exact revenge it has been difficult however to test many of the predictions formulated by schelling and others because of the lack of data on the strategic choices of the two sides engaged in a conflict observed at a high enough frequency for statistical tests to have any power this paper uses daily frequency data to analyze the dynamics of violence during four years of the second intifada the most recent outburst of the palestinian israeli conflict

reference dependent consumption plans we develop a rational dynamic model in which people are loss averse over changes in beliefs about present and future consumption because changes in wealth are news about future consumption preferences over money are reference dependent if news resonates more when about imminent consump tion than when about future consumption a decision maker might to generate pleasant surprises overconsume early relative to the optimal committed plan increase immediate consumption following surprise wealth increases and delay decreasing consumption following surprise losses since higher wealth mitigates the effect of bad news people exhibit an unambiguous first order precautionary savings motive

reference points and effort provision a key open question for theories of reference dependent preferences is what determines the reference point one candidate is expectations what people expect could affect how they feel about what actually occurs in a real effort experiment we manipulate the rational expectations of subjects and check whether this manipulation influences their effort provision we find that effort provision is significantly different between treatments in the way predicted by models of expectation based reference dependent preferences if expectations are high subjects work longer and earn more money than if expectations are low

treasury bill rates in the 1970s and 1980s as is widely recognized real interest rates in the early 1980s were at peaks not witnessed since the late 1920s less well perceived is the sharp decline in real interest rates in the middle 1980s to their average levels of the previous quarter century this paper seeks to identify the underlying determinants of the major movements in real six month treasury bill rates the primary innovation is the development of a new monetary policy proxy that explains much of the real rate movement in the 1980s copyright 1992 by ohio state university press

exchange rate reform and its inflationary consequences an empirical analysis for china in examining china s exchange rate policy in the reforming years the study finds empirical evidence of its long run inflationary consequences but the effects appear not to be sizable in the short run while changes in the devaluation rate are positively correlated with the increase in the growth rate of inflation the inflation inertia is also modest the moderate inflationary cost of devaluations provides some explanation of the smooth transition of exchange rate policy regime in china and the authorities ability to put more weight on external competitiveness

political variables in cross country growth analysis the recent boom in cross country growth analysis has renewed the empirical interest in political sources of economic growth a large number of studies have tested political variables in growth regressions and a very heterogenous set of variables has been proposed to measure economically relevant differences in the political systems of countries this paper distinguishes five categories of relevant political variables democracy government stability political violence policy volatility and subjective perception of politics for each of these categories the specification testing method and results of the most relevant studies are presented and are critically discussed the paper concludes that measures of democracy are least successful and measures of policy volatility and subjective perception of politics most successful as explanatory variables in cross country growth regressions