adaptive versus rational expectations and the fisher effect substantial controversy remains over the causes of interest rate fluctuations this controversy frequently focuses on the role of expected inflation the theoretical determinats of the nominal rate are examined usig the is lm as model and it is shown that the augmented fisher equation is sensitive to the expectations generating mechanism the model assumes that the nominal rate ceteris paribuschanges one for one with expected inflation the total impact however may take any value from zero to one the empirical analysis sequentially estimates reduced form equations based on adaptive and rational expectations the results confirm prior findings that nominal rates do not adjust one for one with inflation the results also yield some insight on the applicability of the assumption of rational versus adaptive expectations

a respecified tax adjusted fisher relation how much will a 1 increase in expected inflation increase nominal interest rates irving fisher s famous equation implies that nominal interest rates will rise in proportion to an increase in expected inflation darby and feldstein correcting the fisher equation for taxation predict a nominal interest rate increase of 1 1 t where t is the marginal tax rate i e if t 3 then a 1 increase in expected inflation should cause a 1 4 rise in interest rates empirical evidence however suggests that the rise in interest rates is much smaller than the darby feldstein prediction estimates are around 9 varying mostly between 5 and 1 15 which is much closer to fisher s original prediction it is important to know the size of the interest rate response to inflation expectations in a world in which inflation and interest rates are volatile and in which tax laws are designed to influence savings and investment through interest rates in this paper we attempt to close the gap between theorized and estimated effects of inflation by incorporating into the fisher equation two important aspects of the u s tax code historic cost depreciation and the lower tax rate on capital gains our model shows that the effect of expected inflation on interest rates is dampened by the lower benefits from depreciation deductions arid the capital gains tax our corrected fisher equation predicts a 1 12 nominal interest rate increase rather than the 1 4 increase implied by the darby feldstein model the our model closes about 56 of the gap between theory and empirical evidence the remainder could be closed by additional refinements in the model or better empirical modeling

the purchasing power of money and nominal interest rates a re examination while it has been known for some time that under uncertainty the original version of the fisher hypothesis is not precisely correct empirical researchers have largely ignored this fact such an omission has possibly resulted in erroneous conclusions concerning other hypotheses most notably the impact of prices on the real economy this paper clarifies some of the previous interpretations of the existing empirical literature and provides a theoretical version of the relation between prices and interest rates empirical tests based on both the livingston survey data and data from time series forecasting models provide support for the fisher effect and the hypothesis that only covariance risk is priced in the treasury bill market one of the basic hypotheses concerning rationality in financial markets is based on statements generally attributed to fisher 18 fisher argued that the nominal or money rate of return on an asset should compensate an investor for his or her required real rate of return and changes in the purchasing power of money for the uncertainty case fisher replaced known purchasing power changes with the expected inflation rate whereas the fisher relationship under certainty is well defined his basic theorem under uncertainty is not precise as fama 15 has argued it is changes in the purchasing power of money not the inflation rate that should concern investors under uncertainty the expected value of one is not by jensen s inequality the inverse of the expected value of the other moreover fama and farber 16 grauer and litzenberger 20 and benninga and protopapadakis 3 have shown that when investors are risk averse the fisher relationship will generally not hold even after adjustment has been made for the distinction between purchasing power changes and the inflation rate in particular these authors show that an adjustment must be made for the fact that the real rate of return on nominal bonds is random while these issues have been discussed in the theoretical literature they have largely been ignored in the empirical work on this topic given the fact that nominal rates do not seem to adjust as rapidly to price changes as fisher hypothesized numerous empirical researchers have expanded the basic fisher model in an attempt to explain this empirical anomaly these extensions include the incorporation of a inflation rate variability and the growth in real output

the effect of fiscal policy on the short run relation between nominal interest rates and inflation this paper presents a simple empirical model of the relation between the inflation rate and the nominal interest rate we show that previous results found in the literature may be attributed to specification error and that there are natural explanations for the observed signs of previous fisher equation estimates our results show that fiscal policy shocks may generate short run negative correlations between changes in inflation and changes in the nominal interest rates these results illustrate the difficulty in discussing the relation between inflation and nominal interest rates without conditioning the analysis with specific assumptions on the course of the economy

communicating subjective evaluations consider managers evaluating their employees performances should managers justify their subjective evaluations suppose a manager s evaluation is private information justifying her evaluation is costly but limits the principal s scope for distorting her evaluation of the employee i show that the manager justifies her evaluation if and only if the employee s performance was poor the justification assures the employee that the manager has not distorted the evaluation downwards for good performance however the manager pays a constant high wage without justification the empirical literature demonstrates that subjective evaluations are lenient and discriminate poorly between good performance levels this pattern was attributed to biased managers i show that these effects occur in optimal contracts without any biased behavior

two sided uncertainty and up or out contracts a bilateral moral hazard problem provides a rationale for up or out employment contracts the employer sets a wage higher than opportunity cost to induce the worker to invest in firm specific capital if the individual does not make the grade it is in the firm s interest ex post to fire him had the initial arrangement not included provisions for firing individuals the firm would underreport the value of the employee wrecking the incentive scheme the basic model permits both firm and worker to be risk neutral therefore it admits a straightforward multiperiod extension which we also investigate

collusion under asymmetric information when applied to groups the revelation principle postulates a bayesian nash behavior between agents their binding agreements are unenforceable or the principal can prevent them at no cost we analyze instead a mechanism design problem in which the agents can communicate between themselves and collude under asymmetric information we characterize the set of implementable collusion proof contracts both when the principal offers anonymous and nonanonymous contracts after having isolated the nexi and the stakes of collusion we proceed to a normative analysis perform some comparative statics discuss our concept of collusion proofness and provide some insights about transaction costs in side contracting

tobacco taxes and health care costs do canadian smokers pay their way through their health care utilization smokers are generally perceived to be imposing a financial externality on non smokers within health insurance systems to investigate the empirical basis for this view we estimated publicly financed health care expenditure attributable to smoking for the canadian province of ontario and compared it to tobacco taxes paid by ontario smokers both initial estimates and the results of sensitivity analyses performed on key assumptions and parameters of the estimation methodology rejected the hypothesized existence of a financial externality arising from smokers health care utilization

evidence on the varying effect of expected inflation on interest rates boskin michael j mark gertler and charles taylor the impact of inflation on u s productivity and international competitiveness washington d c national planning association 1980 carlton dennis w the disruptive effect of inflation on the organization of markets in robert e hall ed inflation causes and effects chicago the university of chicago press 1982 fama eugene short term interest rates as predictors of inflation american economic review 65 june 1975 269 282 freund william c and paul b manchester productivity and inflation in john d hogan ed dimensions of productivity research vol i houston american productivity center 1980 53 71 geweke john richard meese and warren t dent comparing alternative tests of causality in temporal systems analytic results and experimental evidence journal of econometrics 21 feb 1983 161 194 granger c w j investigating causal relations by econometric models and cross spectral methods econometrica 37 july 1969 424 438 guilkey david k and michael k salemi small sample properties of three tests for granger causal ordering in a bivariate stochastic system this review 64 nov 1982 668 680 houthakker hendrik s growth and inflation analysis by industry brookings papers on economic a ctivity 1979 241 256 hsiao cheng autoregressive modelling and money income causality detection journal of monetary economics 7 1981 85 106 autoregressive modeling and causal ordering of economic variables journal of economic dynamics and control 4 1982 243 259 jarrett j peter and jack g selody the productivity inflation nexus in canada 1963 1979 this review 64 aug 1982 361 367 kendrick john w and elliot s grossman productivity in the united states trends and cycles baltimore the johns hopkins university press 1980 sims christopher a money income and causality american economic review 62 sept 1972 540 552 u s department of commerce bureau of economic analysis the national income and product accounts of the united states 1929 76 statistical tables washington d c superintendent of documents 1981 u s department of labor bureau of labor statistics tables headed industry analytical ratios for the business sector all persons indexes 1977 100 and basic industry data for the business sector all persons printout dated april 27 1983

uncertainty and incentives empirical work testing for a trade off between risk and incentives has had at best mixed success this article provides two simple reasons associated with subjectivity of performance appraisals why we might not expect to see any negative relationship both reasons relate to empirically observed problems associated with monitoring i supervisors sometimes bias their evaluations based on their personal feelings toward their subordinates and ii supervisors will sometimes offer evaluations that reduce their costs these aspects of monitoring are ignored in the standard model and can reverse the usual negative trade off between risk and incentives

delegation of monitoring in a principal agent relationship this paper studies a principal agent relationship with moral hazard in which the principal or the supervisor can monitor the agent s hidden action by using identical monitoring technologies the paper shows that delegation of monitoring to the supervisor is profitable because of two effects with delegation the principal can better regulate the incentives incentive effect and can commit to wage structures to which she could not commit without delegation commitment effect as a logical step collusion is introduced and it is shown that even with the possibility of collusion delegation is an optimal strategy

subjective performance appraisal and inequality aversion making use of a subjective performance appraisal system it is a well established fact that many supervisors tend to assess the employees too good leniency bias and that the appraisals hardly vary across employees of a certain supervisor centrality bias we explain these two biases in a simple theoretical model and discuss determinants of the size of the biases

the fisher hypothesis and international capital markets in a closed economy with interest taxes at rate and with a constant real et rate of interest the nominal rate of interest should rise by 1 1 points for every point rise in the expected rate of inflation however a large body of empirical work examines the determinants of nominal interest rates and generally finds that the coefficient of expected inflation is close to or less than one we model the determination of interest rates in an open economy with taxes under plausible conditions increases in inflation cause the nominal interest rate to rise roughly point for point this suggests that open capital market considerations are central for understanding aggregate economic behavior the analysis also suggests that inflation is not neutral with respect to the real net interest rate earned by domestic savers or paid by domestic borrowers

optimal contracts for lenient supervisors we analyze optimal contracts in a hierarchy consisting of a principal a supervisor and an agent the supervisor is either neutral or altruistic towards the agent but his preferences are private information in a model with two supervisor types we find that the optimal contract may be very simple paying the supervisor a flat wage independent of his type and his evaluation of the agent s effort such a contract induces the neutral type of supervisor to report the agent s performance truthfully while the altruistic type reports favorably independent of performance accordingly overstated performance leniency bias may be the outcome of an optimal contract under informational asymmetries

farm costs and food miles an assessment of the full cost of the uk weekly food basket changes in both farm production and food transport have resulted in the imposition of new levels of environmental costs this study analyses the full costs of foods in the average weekly uk food basket by calculating the costs arising at diverent stages from farms to consumers plates of the 12 commodities assessed livestock produce contributes the most costs per kg the external cost of uk agriculture up to the farm gate is estimated to be 1 51 bn yr i1 it is calculated that a switch to organic production could lead to avoided costs of 1 13 bn yr i1 agricultural and food produce accounts for 28 of goods transported on uk roads currently imposing estimated external costs of 2 35 bn yr i1 the contribution made by sea and air transport is currently trivial owing to low volumes however road transport to carry food from the shop to home is estimated to impose a further 1 28 bn yr i1 to total external costs subsidies not targeted at environmental improvements cost consumers 2 88 bn yr i1 thus the real cost of the per capita uk food basket 24 79 is calculated to be 2 91 more per person wk i1 11 8 if externalities and subsidies are included with farm externalities 81 p domestic road transport 76 p government subsidies 93 p and shopping transport 41 p contributing the most we assess a variety of scenarios for adoption of organic farming localised food systems and sustainable transport to indicate the substantial potential to reduce environmental costs in the uk food system 2005 elsevier ltd all rights reserved

subjective performance measures in optimal incentive contracts objective measures of performance are seldom perfect in response incentive contracts often include important subjective components that mitigate incentive distortions caused by imperfect objective measures this paper explores the combined use of subjective and objective performance measures in respectively implicit and explicit incentive contracts naturally objective and subjective measures often are substitutes sometimes strikingly so we show that if objective measures are sufficiently close to perfect then no implicit contracts are feasible because the firm s fallback position after reneging on an implicit contract is too attractive we also show however that objective and subjective measures can reinforce each other if objective measures become more accurate then in some circumstances the optimal contract puts more weight on subjective measures because the improved objective measures increase the value of the ongoing relationship and so reduce the firm s incentive to renege we also analyze the use of subjective weights on objective performance measures and provide case study evidence consistent with our analyses

an analysis of growth of u s farmland prices 1963 82 increases in expected inflation or real growth in net rental income to land have been proposed as alternative explanations of the dramatic real growth in u s farmland prices in the 1970s in this paper the effect of inflation is shown to be theoretically ambiguous an empirical analysis using u s and international farmland prices suggests that most of the real land price growth can be explained by real growth in net rental income to land increases in expected inflation have had a negative effect on real land prices but the effect of inflation has been comparatively small

the effect of federal deficits and debt on the tax adjusted short term real interest rate the stock versus flow effect of the federal debt deficit on a real interest rate is examined in a reduced form equation the evidence shows a positive and significant linkage between the federal debt and an ex post tax adjusted short term real interest rate

incentives in organizations n 1975 steven kerr published on the folly of rewarding a while hoping for b the argument was simple you get what you pay for kerr distilled this unifying theme from a disparate set of examples involving politicians soldiers doctors orphanage directors professors and students as well as manufacturing and clerical employees and even human resource managers from these examples kerr pp 77980 concluded that two main causes of distorted incentives are fascination with an objective criterion where individuals seek to establish simple quantifiable standards against which to measure and reward performance and overemphasis on highly visible behaviors when some parts of the task are highly visible while others are not it took agency theory 15 years to express kerr s title not to mention to evaluate or extend his conclusions during this period agency theory was obsessed with the tradeoff between incentives and insurance even though clear eyed observations like kerr s about the design and performance of real incentive contracts suggested that several other issues are at least as important fortunately recent work has brought agency theory not only to kerr s position but beyond in this paper i summarize four new strands in agency theory that help me think about incentives in real organizations as a point of departure i begin with a quick sketch of the classic agency model i then discuss static models of objective performance measurement that sharpen kerr s argument repeated game models of subjective performance assessments incentives for skill development rather than simply for effort and incentive contracts between versus within organizations i con

social security and retirement an international comparison this article concerns the following items 1 decline in labour force participation 2 social security benefit accrual and the implicit tax on work 3 the importance of the early retirement age 4 the implicit tax on work and labour force participation etc

economic growth population theory and physiology the bearing of long term processes on the this lecture sketches a theory of the secular decline in morbidity and mortality that takes account of changes induced in physiological functioning since 1700 the synergism between technological and physiological improvements has produced a form of human evolution biological though not genetic rapid culturally transmitted and not necessarily stable which is still ongoing in both oecd and developing countries thermodynamic and physiological aspects of economic growth are defined and their impact on growth rates is assessed implications of this theory for population forecasting measurement of national income demand for leisure pension policies and demand for health care are considered excerpt

the ratchet effect and the market for secondhand workers workers in a long term relationship often have an incentive to hide their ability early in the relationship to avoid having the firm increase the level of output expected from them in the future we show that competition for older workers will permit the implementation of efficient piece rate contracts when the difficulty of the job is unobserved by the firm gibbons 1987 has shown that all piece rate contracts will be inefficient together these results may explain why piece rates are common in some jobs such as agricultural work and sales and not as popular for many manufacturing jobs

tax rate effects on interest rates abstract this paper investigates empirically the effects of personal and corporate taxes on taxable interest rates the results suggest that the effective tax rate of marginal investors in the treasury bill market is that of households as opposed to that of tax exempt institutions or corporations

economic evaluation of nutrition policy abstract the good news from prevention research is that it appears possible to dramatically improve health in the us by changing identified risk factors the goal of this paper is to discuss how to evaluate the economic consequences of improvements in nutrition and exercise related health cost benefit analysis and the related tools of cost effectiveness analysis and cost utility analysis are proposed as preferred methods the decision rule is simply if the sum of the potential gains to all those affected by a policy intervention exceed the sum of costs there is a potential gain in societal welfare by this standard preventive interventions can be worthwhile even when they do not reduce lifetime medical expenditures or increase lifetime earnings that is even when the intervention is not a free lunch the distinction between the internal costs for an individual patient versus the external costs an individual s illness imposes on others is an important conceptual issue practical issues include determining whether a poor health habit causes the costs and other results being attributed to it and the completeness of the analysis in principle the analysis should examine all of the effects and resource costs of the intervention including changes in morbidity mortality the quality of life allocations of patient time and caregiving by others as well as traditional health sector costs and changes in productivity improvements in nutrition and exercise related health may also have important implications for public sector finances of programs including medicare and social security

relational incentive contracts standard incentive theory models provide a rich framework for studying informational problems but assume that contracts can be perfectly enforced this paper studies the design of self enforced relational contracts i show that optimal contracts often can take a simple stationary form but that self enforcement restricts promised compensation and affects incentive provision with hidden information it may be optimal for an agent to supply the same inefficient effort regardless of cost conditions with moral hazard optimal contracts involve just two levels of compensation this is true even if performance measures are subjective in which case optimal contracts terminate following poor performance jel c73 d82 l14

collusion delegation and supervision with soft information this paper derives an equivalence principle between organizational forms of supervisory and productive activities we consider an organization with an agent privately informed on his productivity and a risk averse supervisor getting signals on the agent s type in a centralized organization the principal can communicate and contract with both the supervisor and the agent however these two agents can collude against the principal in a decentralized organization the principal only communicates and contracts with the supervisor who in turn sub contracts with the agent we show that the two organizations achieve the same outcome we discuss this equivalence and provide various comparative statics results to assess the e ciency of supervisory structures

real interest rates anticipated inflation and unanticipated money a multi country study a bstractin this paper we examine real interest rate behavior in canada west germany the united states and the united kingdom using a model that yields a semi reduced form equation linking the real interest rate to monetary growth shocks anticipated inflation and expected inflation variance the estimator used in our analysis accommodates regressors from other regressions ensuring that accurate inferences are obtained in all countries we find that increases in anticipated inflation initially dampen real interest rates in addition a significant and negative relationship between unanticipated money shocks and real interest across all countries is discovered inflation variance typically exhibits little explanatory power

the impact of tax reforms designed to encourage healthier grain consumption in this paper we simulate the effects of tax reforms aimed at encouraging healthier grain consumption we use a rich data set on household grain consumption in 2003 from the market research institute gfk sweden combined with information on the nutritional content of the consumption we estimate behavioral parameters which are used to simulate the impact on the average household of tax reforms entailing either a subsidy on commodities particularly rich in fiber or a subsidy of the fiber density in grain products our results suggest that to direct the fiber intake towards nutritional recommendations reforms with a substantial impact on consumer prices are required regardless of the type of subsidy implemented the increase in the intake of fiber is accompanied by unwanted increases in nutrients that are often overconsumed fat salt and sugar funding the subsidies by taxing these nutrients or less healthy commodities helps to counteract such developments

discretion and bias in performance evaluation most of the economics literature on compensation and organizations builds from the theory of agency for the most part the literature analyzes situations in which agents performance can be controlled by tying compensation to objective performance measures such as output or sales it ignores the fact that most compensation arrangements involve superiors subjectire and hence non contractible judgements about employee performance in our view much of what is interesting about actual employment relations follows from the observation that performance appraisal is a process by which humans judge other humans milkovich and wigdor 1991 this paper studies the implications of subjective performance evaluation for compensation policies and for the efficiency of employment relations our objectives are two fold first we propose the importance of subjectivity of evaluations to better understand organizatlonal practices such as politicking favoritism and compression of wage scales second we hope to orient the study of subjective performance evaluation in ways that are consistent with empirical evidence on what organizations actually do

incentives between firms and within this paper reviews the significant progress in agency theory i e the economic theory of incentives during the 1990s with an eye toward applications to supply transactions i emphasize six recent models in three pairs 1 new foundations for the theory of incentive contracts 2 new directions in incentive theory and 3 new applications to supply transactions by reviewing these six models i hope to establish three things first the theory of incentive contracts needed and received new foundations second new directions in incentive theory teach us that incentive contracts are not the only source of incentives finally and especially relevant to supply transactions the integration decision is an instrument in the incentive problem

government deficits capital flows and interest rates 1988 government deficits capital flows and interest rates applied economics vol 20 no 6 pp 753 765

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

interest rates income taxes and anticipated inflation some new evidence abstract this paper re examines the effect of taxes on the fisher hypothesis using a procedure first proposed by peek and using data through the 1980s and a new data set on expected inflation for the us the tax adjusted hypothesis is rejected in favor of the no tax adjusted hypothesis for the period 1968 iv to 1979 iv for the full sample both hypotheses are accepted these results are thus quite different from those reported by peek a brief discussion of the factors responsible for these differences is provided

piece rate incentive schemes this paper uses recent results from incentive theory to study heretofore informal critiques of piece rate compensation schemes the informal critiques are based on the history of failed attempts to install piece rate compensation schemes at the turn of the century the formal analysis emphasizes the importance of information and commitment in contracting the main result is as follows in a work environment characterized by hidden information and a hidden action if neither the firm nor the worker can commit to future behavior then no compensation scheme piece rate or otherwise can induce the worker not to restrict output

interest rates and inflationary expectations abstract the relationship between inflation and the rate of interest for the united states is examined within a dynamic specification framework which yields direct estimates of the long run as distinct from the short run coefficients the fisher hypothesis as a long run proposition is supported by the data the results are shown to be robust with respect to the choice of the interest rate

communication in repeated games with imperfect private monitoring this paper examines repeated games in which each player observes a private and imperfect signal on the actions played and in which players are allowed to communicate using public messages providing incentives for players to reveal their observations generates revelation constraints that combined with signal imperfections may be a source of inefficiencies however by delaying the revelation of their observations players may economize on the cost of deterring deviations and thereby avoid these inefficiencies because a player would not want to trigger a sanction that would penalize him too revelation constraints also tend to make sanctions difficult to enforce however with at least three players detecting deviations may not require that all the players reveal their observations in that case we obtain a nash threat version of the folk theorem with two players we do not obtain a similar result nevertheless we show that an efficient outcome can almost always be approximated

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

the postwar stability of the fisher effect most research concerning the fisher relationship has concentrated on the magnitude and significance of the response of nominal interest rates to anticipated inflation recently attention has shifted to the stability of that response according to previous estimates the impact of anticipated inflation on interest rates varies substantially over time by extending a standard model to include tax and aggregate supply shock effects we are able to reduce such instability considerably our results also reveal that increased foreign demand for bonds lowers the interest rate

the tenuous trade off between risk and incentives empirical work testing for a negative trade off between risk and incentives has not had much success the data suggest a positive relationship between measures of uncertainty and incentives rather than the posited negative trade off i argue that the existing literature fails to account for an important effect of uncertainty on incentives through the allocation of responsibility to employees when workers operate in certain settings firms are content to assign tasks to workers and monitor their inputs by contrast when the situation is more uncertain they delegate responsibility to workers but to constrain their discretion base compensation on observed output

the role of promotion in inducing specific human capital acquisition workers routinely carry out activities that increase their productivity with their current employer for which they are not directly compensated for example a worker may be asked to develop relationships with clients or shop floor staff or he may develop a better understanding of how his firm operates firmspecific human capital of this type is difficult to quantify so that it is likely to be difficult to directly compensate the worker for its acquisition this paper is concerned with designing compensation schemes for employees to induce them to collect nonverifiable firm specific human capital if firms develop reputations for fairly compensating workers for skill collection the vagueness of these skills may not provide a significant incentive problem i consider the case where firms do not have the opportunity to develop reputations as a result the acquisition of human capital is subject to a dual moral hazard problem first noted in kahn and huberman 1988 first a worker only collects skills if there is a promise of a higher wage if he does so second the employer has an incentive to claim that the worker has not collected these skills even when he in fact has in order to save on wage costs so on the one hand it is difficult to repay the worker after skills are collected as the firm has an incentive to renege however the worker cannot be repaid before collecting skills as he has no subsequent incentive to collect them following the institutional literature i assume that the firm can commit to a labor contract which attaches wages to different tasks the principal purpose of the paper is to show that the firm can use this ability to commit to a wage scale for different tasks to induce a worker to collect firm specific human capital in the presence of this dual moral hazard problem where the worker is rewarded for skill acquisition by promotion to another job assume that a worker can be assigned to one of two jobs d and

the interaction of explicit and implicit contracts a signaling approach abstract we analyze the interaction of explicit and implicit contracts in a model with selfish and fair principals fair principals are willing to honor implicit agreements selfish principals are not we investigate a separating equilibrium in which principals reveal their type through the contract offer to the agent explicit and implicit contracts are shown to be substitutes since the agent learns the principal s type a selfish principal must rely on explicit incentives a fair principal by contrast can effectively induce implicit incentives and does not need to use explicit incentives we also find a strategic complementarity between explicit and implicit incentives

using cost observation to regulate firms the paper emphasizes the use of accounting data in regulatory or procurement contracts when the supplier 1 has superior information about the cost of the project and 2 invests in cost reduction the main result states that under risk neutrality the supplier announces an expected cost and is given an incentive contract linear in cost overruns this optimal contract moves toward a fixed price contract as the announced cost decreases an investment choice is then introduced and the use of a rate of return regulation is studied

secular trends in the determinants of disability benefits a major justification for devoting resources to the study of public health is the potential to answer questions about the burden of poor health both in terms of the total burden faced by individuals and the burden placed upon publicly funded social insurance programs indeed the adequate provision of social insurance programs is one of the key policy issues of our day a potentially fruitful approach in undertaking this effort is to investigate the effects of specific chronic diseases and injuries upon program participation and benefit levels ideally we would like to know something about the total economic costs of individual diseases using theoretically sound willingness to pay measures in practice however willingness to pay measures cannot be estimated with most available health data though this paper cannot pin down anything as ambitious as the total economic burden of disease it does address the narrower but still important question of what is the burden of chronic illness upon social security disability insurance ssdi payments and it documents how that burden has shifted between different disease groups over the past century furthermore it addresses at least to a limited extent the profound intellectual question of what determines disability and how biomedical economic social and institutional factors determine whether an individual will be disabled in this paper we begin an exploration of newly collected data on the health conditions and disability benefits of union army veteransi and make comparisons to recipients of disability benefits in more recent tinmes we find two main results the first is that there has been a significant shift in the types of diseases that lead to disability both in terms of prevalence rates and benefit levels the second is more surprising the disabled in modern times generally have a greater number of chronic illnesses than did disabled union army veterans even those who were severely disabled this result implies a way of thinking about disease and disability that deserves more research attention in short prior to the advent of modem medicine and the concurrent reductions in the physical demands of work people became disabled not because they had numerous chronic illnesses i e high rates of co morbidity but because individual conditions even ones as simple as hernias or hemorrhoids had much more severely debilitating effects on health and upon the capacity to work than those same conditions do today

the fisher effect in a signal extraction framework the recent brazilian experience abstract this paper derives a signal extraction framework for examining all testable implications of the fisher equation the signal is the net of taxes nominal interest rate which under the fisher model equals inflation expectation plus the real rate assumed to be constant or a constant plus a martingale difference all alternative linear models can be represented as noise added to the signal the international and brazilian literature are briefly reviewed and the empirical tests reinterpreted in the signal extraction framework the model is tested with brazilian data for the period 1973 1990 using interest rate data on non indexed certificates of deposit from a sample of major brazilian banks the framework detects little noise i e the fisher equation seems to reasonably fit the brazilian evidence this result carries the policy implication that the government cannot have the burden of financing its fiscal deficits ameliorated by issuing non indexed debt in periods when inflation is escalating given the large fluctuations observed in ex post real rates in brazil the reasonable success of the fisher equation also implies the existence of large inflation forecast errors which suggest the need for further research on how agents form inflation expectations when inflation escalates rapidly as it did in the late 1980s in brazil price indices lag behind true inflation this generates a fisher effect even for indexed securities the empirical evidence also corroborates the existence of this fisher effect for indexed securities

fisher s paradox and the theory of interest irving fisher s theory of interest has proved to be a most durable and influential contribution to economic theory a central element of fisher s contribution is the fisher hypothesis that over the longer term the real rate of interest is approximately constant being determined largely by time preference with movements in the nominal interest rate reflecting movements in the rate of inflation one for one the paradox of the fisher hypothesis is that despite its wide acceptance as the cornerstone of interest rate theory most empirical evidence appears to be inconsistent with the hypothesis at least in its strictest form this empirical anomaly was noted by fisher himself who attributed it to money illusion in the fifty years following the publication of the theory of interest a considerable literature has evolved around this paradox the unifying theme of this literature is a common acceptance of the essence of fisher s hypothesis most of the energy in this literature has been devoted to explaining systematic movements in the real rate of interest and to providing reasons why the relationship between the nominal interest rate and inflation may only be approximate in

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

the fisher hypothesis under different monetary regimes we examine the relation between inflation and nominal interest rates under the various monetary regimes in effect in the united states since the turn of the century our data include a newly constructed time series of short term municipal bond yields observed annually since 1902 the results generally support the hypothesis that after tax nominal yields adjust point for point with rationally forecasted inflation for the postwar years but strongly reject that hypothesis for the preceding years we suggest and offer supporting evidence that the difference between the two subperiods may be attributable to differences in the optimal forecasting technique for each era when forecasting is a costly endeavor

different approaches for dealing with social security he u s social security system is a government pension program financed by worker payroll taxes as workers pay in their payroll taxes they accumulate credits toward benefits in the language of pensions this is a defined benefit plan at any point in time one can project tax inflows and benefit outflows based on various economic and demographic assumptions and determine the long run actuarial soundness of the system or to put it another way determine whether the present set of tax and benefit schedules will be consistent in the long term every year such forecasts are made by the social security and medicare trustees now three cabinet officers the commissioner of social security and two outside members social security and medicare boards of trustees 1995 every four years a quadrennial advisory council is appointed to review these forecasts and to comment on relevant policy issues in the past many of these councils have had important impacts on social security policy for example the 1983 greenspan commission proposed a number of measures that saved the system from imminent financial difficulty and the 1975 council recommended changing procedures that had until then led to overindexation of social security for inflation another advisory council was formed in 1994 and i was asked to chair it it also included three members from business three from unions and six others from the private pension industry the self employment sector and independent

accounting for future costs in medical cost effectiveness analysis most medical cost effectiveness analyses include future costs only for related illnesses but this approach is controversial this paper demonstrates that cost effectiveness analysis is consistent with lifetime utility maximization only if it includes all future medical and non medical expenditures estimates of the magnitude of these future costs suggest that they may substantially alter both the absolute and relative cost effectiveness of medical interventions particularly when an intervention increases length of life more than quality of life in older populations current methods overstate the cost effectiveness of interventions which extend life compared to interventions which improve the quality of life

more flexible use of survey data on expectations in macroeconomic models a flexible procedure is proposed whereby both the random and systematic errors in measurement of survey data on inflation expectations can be appropriately handled when these surveys are used in the estimation of macroeconomic models during the period 1952 1980 livingston s two expectations series and the src series systematically underestimated inflation expectations by nearly 25 the asa nber survey however does not exhibit such underestimation thus the use of the livingston or src data as an unbiased measure of the true expectations of inflation would result in overestimation of the fisher effect and the ex ante real interest rate

government borrowing and tax adjusted real and nominal interest rates the purpose of this paper is to test for the effect of federal government budget deficits on one year tax adjusted nominal and real interest rates in an is lm as model the results suggest that the specification of the dependent variable is a crucial issue in the debate over the linkage between deficits and interest rates the evidence shows a positive and significant effect of various measures of the federal government deficit and debt on the real tax adjusted treasury bill rate in both the levels and the first differenced equations but not on the nominal tax adjusted rate the positive and significant deficit debt coefficients are also confirmed when the first differenced equation is estimated by instrumental variables and when the equation is estimated over various time periods thus there is robust evidence of a positive linkage between federal government borrowing and the tax adjusted real but not nominal interest rates

the adjustment of the real interest rate to inflation this paper reports tests of carmichael and stebbing s 1983 inverted fisher hypothesis that it is the real rather than the nominal interest rate which adjusts to changes in the expected inflation rate unlike the earlier analysis the results presented here are based on a properly specified estimating equation derived from a short run open economy macro model the results support the inverted fisher hypothesis in the short run but indicate that there is some overshooting of the real interest rate so that after four quarters about 75 of the effect of an expected inflation change is reflected in real rates while the remainder leads to an increase in the nominal rate

implicit contracts incentive compatibility and involuntary unemployment this paper considers the enforceability of employment contracts when employees performance cannot be verified in court so that piece rate contracts are not legally enforceable part i shows that there exists a variety of self enforcing implicit contracts modelled as perfect equilibria in a repeated game and characterizes all the wage and performance outcomes that can be implemented implementation requires a strictly positive surplus from employment the form of the contract depending on how this surplus is divided between firm and employee piece rate contracts and contracts with an informally agreed bonus can be made self enforcing but the use of severance pay and bonding does not extend the set of implementable allocations the resulting contracts resemble actual labor contracts more than do the contracts in standard principal agent models part ii analyses market equilibrium with these contracts also modelled as perfect equilibria in a repeated game and shows that many such equilibria exist unfilled vacancies and unemployed workers can co exist despite the existence of contracts that are potentially mutually beneficial for those jobs that are filled any division of the potential surplus is possible so that the market can have at the same time involuntary unemployment and vacancies that are unfilled despite filled jobs earning positive profits as a criterion for selecting equilibria a notion of renegotiation proofness is applied then either all workers are employed or all jobs filled but any division of the potential surplus is still possible the paper explores what further restrictions on beliefs give rise to a walrasian outcome in which all the potential surplus goes to the short side of the market and to an efficiency wage type outcome in which the potential surplus goes to the long side

expectations surprises and treasury bill rates 1960 82 changes in six month bill rates over semiannual periods in the 1960s and 1970s are successfully related to expected changes and to surprises the latter include unanticipated changes in expected inflation in the growth of industrial production and base money and in inflation uncertainty estimation of the basic equation through the middle of 1983 does not suggest any change in structure moreover the equation explains 60 percent of the extraordinarily high level of real rates since late 1980 largely owing to an excess of unexpected net increases in anticipated inflation over actual increases our estimates provide some support for the expectations theory there appears to be information content in six month forward rates while this content is swamped by the impact of surprises in equations explaining rate changes in terms of forward rates alone the content is clear when proxies for the surprises are included in the equations the height and volatility of interest rates in the early 1980s spectacularly exceeded that of the past half century various researchers have attributed this to the sharp increase and decline in inflation the special characteristics of recent monetary the monetarist experiment and fiscal the structural deficit policies and mysterious or unidentified forces see clarida and friedman 1982 and makin and tanzi 1983 the present paper estimates the relationship between the six month treasury bill rate and its determinants in the 1960s and 1970s the purpose is to test various hypotheses regarding interest rate determination and to determine whether this relationship was altered markedly in the early 1980s the short term bill rate is chosen for investigation for two reasons first the yield on a short term instrument is independent of longer term expectations regarding inflation output growth and fiscal and monetary policies longerterm yields should depend heavily on such variables while reasonably accurate measures of expectations over say a six month horizon can probably be deduced are in fact available from survey data longer term expectations are both more uncertain and vary more widely across market participants second analysis of a short term bill rate allows an easy test of the expectations theory of interest rates recent studies by shiller campbell and schoenholtz 1983 and by mankiw and summers 1983 suggest that observed interest rate movements are unrelated to expected changes in rates extracted from the term structure of short term rates calling into question the validity of the expectations theory but see fama 1983 for an alternative view the six month bill rate is analyzed because it meshes best with the livingston survey data

the effects of inflation and income taxes on interest rates some new evidence this paper reexamines the empirical relation between inflation and interest rates concentrating on the tax effect proposed by darby and feldstein using the random walk intercept model relative responses of taxable yields and tax exempt yields to expected infla tion are estimated the results show that for the sample period 1953 1982 the nominal yields on treasury bills rise at a rate greater than one for one with expected inflation while the nominal yields on default free municipal bonds rise approximately one for one with expected inflation thus the tax adjusted fisher hypothesis by darby and feldstein is empirically supported the components of treasury bills are also extracted and their variances are compared it is shown that variation of expected inflation is not overwhelmingly larger than that of the after tax real rate therefore on an after tax basis changes in the real rate explain a substantial portion of changes in the nominal rate of interest