a general mean variance approximation to expected utility for short holding periods the mean variance model is precisely consistent with the expected utility hypothesis only in the special cases of normally distributed security returns or quadratic utility functions there is little evidence however that security returns follow normal distributions see 13 for references and quadratic preferences can be shown to generate implausible results exhibiting increasing absolute risk aversion in the pratt ll arrow 1 2 sense and displaying negative marginal utility after some finite wealth level in addition hakansson 4 has shown that single period mean variance efficient portfolios can have disastrous consequences over time even when return distributions are stationary such criticisms of the mean variance approach within the von neumann morgenstern framework have prompted several writers to suggest that investors maximize the expected value of utility functions with more realistic properties while others have criticized the single period focus of the model one popular alternative utility function is the logarithmic function which exhibits decreasing absolute risk aversion and conveniently leads to myopic decision processes through time i e investors treat each period as if it were the last basing investment decisions on that period s wealth and return distributions only 8 4 other utility functions with constant relative risk aversion such as the power function also imply myopic decision rules within a multiperiod setting

regions of europe a feasible status to be discussed regions of europe jacques dreze a new concept is proposed that of regions of europe which do not have full statehood and belong not to any state but to the community directly without endorsing this possibility and limiting itself to its economic aspects this article discusses the various dimensions of its economic desirability it appears that in general autonomous regions will not find it advantageous to insure each other investigating how assets and liabilities should be apportioned at the time of secession it argues in favour of distributive neutrality net incomes are unchanged by the secession itself in both the seceding region and the rest of the nation how distributive neutrality could be implemented is explored through a number of suggestive examples in general a region receives a share of the public debt related to its share of the public primary deficit with corrections to account for growth unsustainability of the public debt and so on

portfolio diversification futures markets and uncertain consumption prices this paper examines the robustness of the keynes hicks backwardation hypothesis for futures markets in a model that admits diversification and inflation protection as speculative motives it presents a criterion in terms of the correlation of futures price with anticipated consumption net of other asset holdings for the keynes hicks proposition to be true the paper finds the effect of changes in net wealth and commodity demand on the risk premium spread open interest and storage

why democracies produce efficient results by applying the standard tools of microeconomic analysis i argue that democratic markets work as well as economic markets in particular i show that previous work has greatly exaggerated the existence of principal agent and informational problems in electoral markets and has drawn incorrect conclusions

centralized versus decentralized provision of local public goods a political economy approach abstract this paper takes a fresh look at the trade off between centralized and decentralized provision of local public goods it argues that the sharing of the costs of local public spending in a centralized system will create a conflict of interest between citizens in different jurisdictions when spending decisions are made by a legislature of locally elected representatives this conflict of interest will play out in the legislature depending on precisely how the legislature behaves the result may be excessive public spending or allocations of public goods characterized by uncertainty and misallocation across districts the extent of the conflict of interest between districts is affected by spillovers and differences in tastes for public spending thus the relative performance of centralized and decentralized systems depends upon spillovers and differences in tastes for public spending but for different reasons than suggested in the existing literature

on the frequency of large stock returns putting booms and busts into perspective textabstractnumerous articles have investigated the distribution of share prices and find that the returns are fat tailed nevertheless there is still controversy about the amount of probability mass in the tails and hence about the most appropriate distribution to use in modeling returns this controversy has proven hard to resolve as the alternatives are non nested we employ extreme value theory focusing exclusively on the larger observations in order to assess the tail shape within a unified framework we find that at least the first two moments exist this enables one to generate robust probabilities on large returns which put the recent stock market swings into historical perspective

the asymptotic distribution of extreme stock market returns this article presents a study of extreme stock market price movements according to extreme value theory the form of the distribution of extreme returns is precisely known and independent of the process generating returns using data for an index of the most traded stocks on the new york stock exchange for the period 1885 1990 the author shows empirically that the extreme returns obey a frechet distribution copyright 1996 by university of chicago press

on supply constrained equilibria abstract the paper gives sufficient conditions for the existence of an equilibrium with price rigidities and quantity rationing where i demand is never rationed ii net trades of an a priori chosen numeraire are never rationed and iii supply is rationed only when relative prices are downward rigid

losing money on the margin abstract margin trading is popular with retail investors around the world to limit the scale of these investors potential losses regulators impose a system of collateral requirements and margin calls we show in this paper however that the collateral requirement imposed by margin calls results in negative expected returns for these traders whilst also inducing positive skew in the returns distribution investments in assets with symmetric returns when traded on margin instead offer limited losses and a small chance of a large gain much like lottery stocks and other gambles we demonstrate this theoretically and then show empirically using a unique database of account data from a chinese retail brokerage that the realized losses of margin traders are often substantial this leads us to question whether current regulation is appropriate

separation of powers and development abstract we model separation of powers as an instrument against corruption more specifically as a way to decrease the costs of collusion proofness then we show that the value of this institutional design is higher in developing countries unfortunately the same reasons which are behind this higher value also increase the implementation cost of this institution

infinitely repeated games with endogenous discounting abstract the standard repeated game setting is changed by allowing one player to decide the time interval between repetitions the resulting folk theorem states that any individually rational stage game strategy combination can be repeated in equilibrium with no threshold discount factor requirement

voters as fiscal conservatives voters penalize federal and state spending growth this is the central result of my analysis of voting behavior in presidential senatorial and gubernatorial elections from 1950 1988 the composition of federal spending growth seems irrelevant the vote loss to the president s party from an extra dollar of defense or nondefense spending is the same however in gubernatorial elections expansion of state welfare spending exacts a disproportionate political price deficit financing of federal or state spending does not appear to matter politically i conclude by discussing the obvious question of why government budgets have grown in the face of this voter hostility

optimal clearing margin capital and price limits for futures clearinghouses abstract we provide a model for a futures clearinghouse to use for setting optimal levels of clearing margin capital and price limits which minimizes the costs to clearing firms and simultaneously protects the clearinghouse from default by clearing firms we show how to estimate the capital requirement which supports the clearinghouse s residual default risk that is not covered by the clearing margin we apply our model to the winnipeg commodity exchange and demonstrate that price limits reduce the sum of optimal clearing margin and capital to a level that is substantially lower than that required in the absence of price limits

futures and options markets their new role in eastern europe abstract this paper addresses the new and potential role of futures and options markets in the liberalizing economies of eastern europe the paper begins with a discussion of the value and utility of such markets to the overall economy the paper then examines the advantages of exchange based markets and considers the barriers to development and use of derivative markets in european europe finally we turn to potential for use of western markets as well as the development of local and regional commodities markets in eastern europe

temporary pareto optimum theory abstract the purpose of this paper is to introduce bounded rationality in the framework of pareto optimality this is done by altering the usual definition of the attainable set to take account of the fact that agents are represented by expectation functions induced by their learning processes two polar cases are examined first we show that a temporary pareto optimum is a temporary competitive equilibrium when expectations are strongly roy consistent second in the general case of weak roy consistency the temporary version of the second welfare theorem cannot always be true moreover the characterizations of a temporary pareto optimum bear some resemblance to those of optimal taxation in an atemporal second best framework

introducing new futures contracts reinforcement versus cannibalism abstract in order to assure survival futures exchanges around the world are in constant search of new futures contracts that will generate a profitable level of trading volume introducing new futures contracts may increase or decrease the volume for those contracts already listed using a multi product hedging model in which the perspective has been shifted from portfolio to exchange management we study these effects using data from two exchanges that differ regarding assets traded and market liquidity amsterdam exchanges versus chicago board of trade we show the usefulness of the proposed method the method may also be used to evaluate the benefits for exchanges that plan to internationalize their activities by merging with another exchange or by cross listing other exchanges futures contracts

optimal innovation of futures contracts this article presents a simple model of the innovation of new futures contracts by transaction volume maximizing futures exchanges in incomplete markets under uncertainty with mean variance preferences and proportional transactions costs we characterize the set of nash equilibria for a number of exchanges simultaneously or sequentially choosing contracts the optimal monopolistic contract design is shown to be pareto optimal an example shows the failure of pareto optimality for aparticularnash equilibrium likewise in a monopolistic multiperiod setting an example shows the failure of pareto optimality given an incentive for the exchange to induce turnover

a political economy theory of partial decentralization we revisit the classic problem of tax competition in the context of federal nations and derive a positive theory of partial decentralization a capital poor median voter chooses to use redistributive capital taxes to provide public goods the expectation of high capital taxes however results in a small capital stock which lowers returns to redistribution the median voter therefore wants to commit to a lower level of capital taxes she does so by setting a partial degree of decentralization in the constitution the equilibrium degree of decentralization balances the positive effect of tax competition on capital taxes with the loss in redistribution that results we show that the degree of decentralization is nonmonotonic in inequality increasing in the redistributive efficiency of public good provision and decreasing in capital productivity when public goods are heterogeneous in their capacity to transfer funds all voters agree that goods with high redistributive capacity should be decentralized

quantitative analysis of feasibility of hydrous ethanol futures contracts in brazil abstract brazil s first ethanol futures contract which was implemented in 2000 failed to offer sufficient liquidity to attract market agents the purpose of this study is to determine whether the new ethanol futures contracts launched by bmf bovespa in 2010 meet the requirements to render them feasible the originality of this work stems from its approach in analyzing different cross hedging possibilities in the food and energy chains this analysis which covers the period of may 2010 to april 2012 evaluates the degree of competition in the sector the price volatility of the spot market the price correlations between its possible substitutes as well as the possibility of cross hedging brazil s ethanol with contracts in international futures markets and their potential degree of substitution the results of this study indicate that the new configuration of bmf bovespa ethanol futures contracts meets the most requirements for viability nevertheless the ethanol distribution sector is relatively concentrated which may limit the liquidity of bmf bovespa ethanol futures contracts

price volatility and margin requirements in foreign exchange futures markets abstract recent increased volatility in financial markets has stimulated interest in how minimum margin requirements are determined in financial futures contracts and the effects of changing margins on price volatility this paper examines the major foreign currencies traded on the international monetary mart applying a theoretical basis of margins as security deposits the paper finds that the most important factor for determining the default probability of a contract price volatility is the most important determinant of margins this argues against government replacement of exchanges in the margin setting role in addition no consistent relationship is found between margin changes and price volatility which indicates the inability of the government to alter trading behavior by adjusting margin levels

marginal tax reform externalities and income distribution the paper examines welfare improving and revenue neutral directions marginal policy reforms for an economy with nonidentical individuals and an externality that has a feedback effect on the consumption of taxed goods it considers three types of policy instruments the indirect taxes the uniform poll transfer and public abatement this extends the framework set up by ahmad and stern 1984 bovenberg and de mooij 1994 and schob 1996 the theoretical model is illustrated for a specific externality namely congestion caused by peak car transport

why there are organized futures markets i shall present an explanation of the existence of organized futures markets with more predictive power than the two prevailing rival views my explanation briefly is this an organized futures market facilitates trade among strangers one of the rival prevailing views is a defense of futures trading it asserts that an organized futures market furnishes legitimate businessmen with a means of hedging so that they can obtain insurance against price risk the other prevailing view is an attack on organized futures markets it asserts that such markets enable speculators to manipulate prices to the detriment of outsiders who are less well informed and to the detriment of legitimate businessmen such as farmers the attack on organized futures markets likens them to gambling casinos the defense sees them as a form of insurance neither the attack nor the defense is valid the correct explanation is closely related to why we conduct trade using money instead of by barter

sufficient conditions for expected utility to imply mean standard deviation rankings empirical evidence concerning the location and scale condition this paper presents and implements a procedure which examines for empirical support for the location and scale condition the kolmogorov smirnov multisample test is used to determine if the distribution functions describing the nonsystematic risk component of rate of return for portfolios of common stock are equal to one another except for location and scale implications concerning the relationship between mean variance and expected utility efficient sets are noted copyright 1992 by royal economic society

a model of tax reform for belgium abstract the paper deals with determining second best optima and existence conditions of pareto improving directions of tax reform for an economy experiencing keynesian unemployment i e characterised by excess supply of labour and commodities it is then tested whether these existence conditions were fulfilled in belgium in 1982 the model considers the taxation of seven consumption goods plus labour in a ten consumer economy empirical evidence suggests that welfare improving price directions can be found the whole set of these directions is then constructed

optimal hedging by firms with multiple sources of risky revenues abstract we study the hedging behavior of competitive risk averse firms producing under price uncertainty and owning other sources of risky income as well we show that the well known separation property holds when a futures market for the commodity produced is available however unbiased futures market does not imply full hedging by which the firm avoids price risk altogether

nonlinear dependence in finnish stock returns abstract past research into the evolution of finnish stock returns focuses on modeling linear and nonlinear dependence using various arima and garch formulations respectively this paper extends the extant work by using grassberger procaccia correlations dimensions to explore the nature of the nonlinear dynamics in daily finnish stock returns during the 1970s and 1980s nonlinear behavior in both periods is evident a simple garch model removes the nonlinearity in the first decade and dramatically reduces the nonlinearity in the second period this supports the notion that finnish stock returns exhibit nonlinear dependence but that the form of dependence is not chaotic

new insights into smile mispricing and value at risk the hyperbolic model the authors investigate a new basic model for asset pricing the hyperbolic model which allows an almost perfect statistical fit of stock return data after a detailed introduction into the theory they use secondary market data to compare the hyperbolic model to the classical black scholes model the authors study implicit volatilities the smile effect and pricing performance exploiting the full power of the hyperbolic model they construct an option value process from a statistical point of view by estimating the implicit risk neutral density function from option data finally the authors present some new value at risk calculations leading to new perspectives to cope with model risk copyright 1998 by university of chicago press

partial fiscal decentralization reforms and educational outcomes a difference in differences analysis for spain abstract several arguments derived from fiscal federalism theory suggest that decentralization may improve the provision of public goods and services however theory remains inconclusive regarding these effects under partial decentralization the aim of this study is to examine this hypothesis by evaluating the effects on educational outcomes of the partial fiscal decentralization reform that took place in spain during the 1980s since education competences were devolved to the regions at different points in time we can consistently estimate the effects of this reform by applying the differences in differences method and by using the non decentralized regions as the comparison group we find that the reform had a sizeable impact on the percentage of students dropping out early from school the effects are much stronger for regions with a high level of revenues we also find that the effects are concentrated in the high school program and that the reform was not able to improve educational outcomes in the vocational program we interpret these results as evidence that decentralization improved the match between education policy and population preferences

does electoral accountability affect economic policy choices evidence from gubernatorial term limits this paper analyzes the behavior of u s governors from 1950 to 1986 to investigate a reputation building model of political behavior we argue that differences in the behavior of governors who face a binding term limit and those who are able to run again provides a source of variation in discount rates that can be used to test a political agency model we find evidence that taxes spending and other policy instruments respond to a binding term limit if a democrat is in office the result is a fiscal cycle in term limit states which lowers state income when the term limit binds

political decentralization and corruption evidence from around the world abstract how does political decentralization affect the frequency and costliness of bribe extraction by corrupt officials previous empirical studies using subjective indexes of perceived corruption and mostly fiscal indicators of decentralization have suggested conflicting conclusions in search of more precise findings we combine and explore two new data sources an original cross national data set on particular types of decentralization and the results of a firm level survey conducted in 80 countries about firms concrete experiences with bribery in countries with a larger number of government or administrative tiers and given local revenues a larger number of local public employees reported bribery was more frequent when local or central governments received a larger share of gdp in revenue bribery was less frequent overall the results suggest the danger of uncoordinated rent seeking as government structures become more complex

second best analysis with markets in disequilibrium public sector pricing in a keynesian regime the paper develops pricing rules for a public sector subject to a budget constraint in an economy where the private sector experiences keynesian unemployment excess supply of labour and of commodities both second best and welfare improving pricing rules are studied it is found that such rules can be defined in operational terms in general they are quite complex involve quantities which are not directly observable reservation wages and prices and require evaluation of income and employment multipliers the general equilibrium approach to second best theory thus involves standard macroeconomic concepts and techniques some discussion of methodological issues and of policy objectives inflation versus unemployment is offered in order to facilitate interpretation the corresponding results for an economy with a competitive private sector are first restated

decentralization of governance and development all around the world in matters of governance decentralization is the rage even apart from the widely debated issues of subsidiarity and devolution in the european union and states rights in the united states decentralization has been at the center stage of policy experiments in the last two decades in a large number of developing and transition economies in latin america africa and asia the world bank for example has embraced it as one of the major governance reforms on its agenda for example world bank 2000 burki perry and dillinger 1999 take also the examples of the two largest countries of the world china and india decentralization has been regarded as the major institutional framework for the phenomenal industrial growth in the last two decades in china taking place largely in the nonstate nonprivate sector india ushered in a landmark constitutional reform in favor of decentralization around the same time it launched a major program of economic reform in the early 1990s on account of its many failures the centralized state everywhere has lost a great deal of legitimacy and decentralization is widely believed to promise a range of benee ts it is often suggested as a way of reducing the role of the state in general by fragmenting central authority and introducing more intergovernmental competition and checks and balances it is viewed as a way to make government more responsive and efe cient technological changes have also made it somewhat easier than before to provide public services like electricity and water supply relatively efe ciently in smaller market areas and the lower levels of government have now a greater ability to handle certain tasks in a world of rampant ethnic cone icts and separatist movements decentralization is also regarded as a way of diffusing social and political tensions and ensuring local cultural and political autonomy these potential benee ts of decentralization have attracted a very diverse range

valuing the futures market clearinghouse s default exposure during the 1987 crash futures market clearinghouses are intermediaries that make large volume trading between anonymous parties feasible during the market crash in october 1987 rumors spread that a clearinghouse might fail this paper presents estimates of three measures of the default exposure the authors estimate the traditional summary statistic for risk exposure the tail probabilities they also estimate two economic measures the expected value of the payoffs in the tails and expected value of the payoffs in the tails conditional on landing in the tail the authors estimates indicate the market thought another crash was unlikely but that if one occurred it would be large

equilibrium political budget cycles political business cycle theories generally rely on nominal rigidities and voter myopia this paper offers an equilibrium theory that preserves some basic insights from earlier models though with significant refinements the political budget cycle emphasized here is in fiscal policy rather than output and inflation it arises via a multidimensional signal process one can consider the welfare implications of proposals to mitigate the cycle and the effects of altering the electoral structure copyright 1990 by american economic association

unemployment equilibrium in an economy with linked prices wage inflexibility has been widely regarded in modern writing as a cause of unemployment almost any keynesian or non walrasian equilibrium which involves equilibrium excess supplies also contain some form of wage or price inflexibility yet the micro mechanism of wage inflexibility its causes and form remains somewhat a mystery in this paper we study the allocation of resources in an economy in which prices of some goods or services are linked to other goods or services this is not wage rigidity in the traditional sense but it is a form of rigidity which is widely observed following the recent literature on non walrasian equilibrium see for example dreze 1975 barro and grossman 197 l grandmont and laroque 1976 malinvaud 1977 and many others one would expect the allocation to be attained via a set of quantity constraints on net trades we show in this paper however that the allocation mechanism in the economy will not require a general set of limitations on excess supplies and excess demands but rather will tend to have the following two properties

strategy contingent discounting in repeated pd games abstract this paper introduces a concept of endogenous discounting in repeated pd games agents face specific probabilities of reaching the next stage these probabilities depend on both strategy choices and exogenous yardsticks we find a negative correlation between yardsticks and cooperation

prudent margin levels in the finnish stock index futures market futures market officials are confronted with the difficult task of setting appropriate margin levels that must balance the costs of trader default and the benefits of increased market liquidity one way to guard against default is prudent margin setting practices designed to protect futures positions from extreme price movements the objective of this research is to extrapolate the probabilities of encountering extreme price movements by applying statistical extreme value theory to the finnish stock index futures market the extreme value technique is found to be appropriate since it generates theoretical margin violation probabilities that closely follow the empirical probability distribution the extrapolated results provide decision makers information on extreme events that have not yet occurred

what determines access to piped water in rural areas evidence from small scale supply systems in rural brazil summary this paper investigates whether small scale water supply systems implemented and operated by water user associations increase access to piped water supply in rural brazil by more than systems by local governments starting from 15 to 16 in the year 2000 access rates in rural areas with water user associations increased to 33 4 in 2010 in areas with local government supply systems access rates only increased to 24 9 based on data from brazilian census and the national water and sanitation survey the empirical analysis in this paper shows that the observed difference is effectively due to project type choice additionally it points toward higher accountability as a potential reason for better results of community based projects in municipalities where social groups requested a new system before the local government started implementation and therefore public awareness for the project was higher the increase in access rates is comparable to the increase in municipalities with water user association projects the same is true if local media is present or political competition in local elections is higher as the effect of project type on access rates might be confounded by simultaneous drivers of project type choice and access rates the quantitative analysis is based on a difference in difference estimator in combination with kernel matching to overcome the endogeneity of project type the treatment effect revealed by this analysis is robust to various specification changes and the robustness checks show no structural differences between treatment and control groups that could bias the results the calculation of matching weights for the kernel matching is informed by semi structured interviews with academics and sector experts in brazil explaining the determinants of project choice the interviews highlight the political economy behind infrastructure expansion in rural brazil

public production and shadow pricing in a model of disequilibrium in labor and capital markets abstract this paper develops second best rules for public investment and employment in various regimes of disequilibrium on the capital and the labour markets the model used is very simple so as to imply rules which can easily be interpreted and contrasted with the current literature on the subject another issue considered is that of possible changes of regimes within a process of welfare improvement involving adjustments in the public production plan it is dealt with through a numerical example which points out that such changes can indeed occur

generalized optimal hedge ratio estimation a generalized approach to estimating optimal hedge ratios on futures markets is developed the generalized approach is not difficult to apply and provides a framework for evaluating the appropriateness of conventional simple regression approaches to optimal hedge ratio estimation in an application to storage hedging of corn soybeans and wheat it is found that simple regression using price levels or returns leads to errors in optimal hedge ratio estimation but that simple regression using price changes provides reasonably accurate estimates

tax reform from the gradient projection viewpoint abstract this paper examines the problems of gradual tax reform desirable small moves of the tax system are determined using the principles of the well known gradient projection algorithm three classical models of public finance are considered for each of them a continuous time dynamic process is exhibited along which the social welfare function increases until convergence to local second best extrema although the selection of trajectories according to the gradient projection method has some arbitrariness it leads to intuitively and economically appealing rules such as a tax reform analog of the classical optimal taxation result on production efficiency

political centralization and government accountability boffa acknowledges financial support from the free university of bolzano ww82 piolatto from the spanish ministry of science and innovation eco 2012 37131 and the government of catalonia 2014 sgr 420 ponzetto from the spanish ministry of science and innovation jci 2010 08414 and eco 2011 25624 the spanish ministry of economy and competitiveness ryc 2013 13838 the government of catalonia 2009 sgr 1157 and 2014 sgr 830 the barcelona gse and the bbva foundation through its first grant for researchers innovators and cultural creators

differences between foreign exchange rate regimes the view from the tails abstract in the literature on the empirical unconditional distribution of foreign exchange rate returns there is indication that the type of distribution function is related to the form of exchange rate regime the analysis has been hampered by the nonnestedness of alternative distribution models the paper investigates the issue by means of extremal analysis which allows for a unified treatment in particular we try to sort out whether apparent distributional differences are due to differences in techniques or in regimes jel f31 f33

myopic perception in repeated games abstract in obtaining the celebrated folk theorem not only everyone must value his future sufficiently high but also everyone must be perceived so by the others this common perception of players time preferences must be maintained even after someone deviates this paper explores the implications of myopic perception in repeated games with perfect monitoring under myopic perception a deviator will not be perceived as a long run player in the continuation game which in turn affects the equilibria in the repeated game before deviation we develop an algorithm to compute a set that characterizes almost all equilibrium payoffs when the discount factor is sufficiently high when the stage game has a unique nash equilibrium and it strictly dominates all other stage game payoffs then under myopic perception the corresponding repeated game has a unique subgame perfect equilibrium

privatization internal control and internal regulation abstract this paper develops a theory of the privatization of public enterprises the relevant decisions are modelled as a three stage process internal control internal regulation and privatization privatization is a move from an overcontrolled public firm to an overcontrolled private firm the firm never achieves the optimal extent of control because the necessary replacement of public by private managers leads not only to the desired reduction of bureaucracy but also to an undesired increase in profits moreover the reduction of overbureacratization is matched by a reduction in the quality of the supplied goods

environmental policy in majoritarian systems abstract this paper sheds new light on the determination of environmental tax policies in majoritarian federal electoral systems such as the u s and derives implications for the environmental federalism debate on whether the national or local government should have authority over environmental taxes in the absence of majority bias the socially preferred policy would be federal district level taxation which accounts both for cross boundary pollution and differences in industry concentration across districts in majoritarian systems however where the legislature consists of geographically distinct electoral districts the majority party at the national or state level favors home districts depending on the location of polluting industries and the associated damages the majority party may therefore impose sub optimally high or low pollution taxes due to a majority bias majority bias can influence the social welfare ranking of alternative environmental tax policies in some cases majority bias may make decentralized or federal uniform taxation the preferred solution

risk aversion and price risk in duality models of production a linear mean variance approach a duality model of production is developed that permits risk aversion and price uncertainty the linear mean variance framework employed is tractable for empirical research in contrast to duality models of risk based on a generalized expected utility function the framework is more general than in standard price certainty models while retaining the simplicity needed for empirical research

a political economy theory of fiscal policy and unemployment this paper presents a political economy theory of fiscal policy and unemployment the underlying economic model is one in which unemployment can arise but can be mitigated by tax cuts and public spending increases such policies are fiscally costly but can be financed by issuing government debt policy decisions are made by a legislature consisting of representatives from different political districts the theory provides a positive account of the simultaneous determination of fiscal policy and unemployment the most important implication of the theory is that debt and unemployment levels should be positively correlated some evidence in support of this prediction is provided using data from a panel of developed countries

short sale restrictions implications for stock index arbitrage abstract this paper offers a study of relevant transaction costs when examining the efficiency of stock index futures markets we suggest that a different transaction cost estimate should be used when testing the upper side of the cost of carry model than when testing the lower side of the model empirical evidence indicates that this explains most of the underpricing observed in the finnish stock index futures market

privatization of public enterprises in this paper the following results of a transition from public to private ownership are obtained the manager of a public firm engages in less effort than is efficient in a privatized firm the manager s effort is chosen efficiently the reward to the manager of a public firm is more differentiated than efficient in the case of an unfavourable economic environment the reward is higher than efficient on the other hand the manager in a privatized firm is always rewarded efficiently it is irrelevant whether the public manager is incompletely informed about the particular mix of government s multiple objectives as long as the government chooses the incentive compatible reward for the manager

the sampling error in estimates of mean variance efficient portfolio weights this paper presents an exact finite sample statistical procedure for testing hypotheses about the weights of mean variance efficient portfolios the estimation and inference procedures on efficient portfolio weights are performed in the same way as for the coefficients in an ols regression ols t and f statistics can be used for tests on efficient weights and when returns are multivariate normal these statistics have exact t and f distributions in a finite sample using 20 years of data on 11 country stock indexes we find that the sampling error in estimates of the weights of a global efficient portfolio is large

the quality and efficiency of public service delivery in the uk and china abstractthe quality and efficiency of public service delivery in the uk and china regional studies this paper examines the efficiency of public service delivery at a regional level in both the uk and china using a method based on data envelopment analysis dea that measures aggregate country level inefficiency this country level inefficiency is then decomposed into three components 1 lack of best practices at a regional level 2 quality of the public service delivery and 3 potential efficiency gains realizable via reallocation of expenditure across regions the empirical results indicate that most uk inefficiency comes from the reallocation effect while most chinese inefficiency is attributable to lack of best practices quality explains more of the expenditure variations in the uk relative to china the paper speculates about fiscal de centralization as a possible explanation for such differences

optimal fiscal policy in open economies with labour market distortions abstract we set up a general equilibrium model with unemployment owing to distortions in the labour market it is shown that a public expansion financed by a distortionary income tax may give rise to a decrease in unemployment even if public goods are pure waste such an expansion may give rise to an increase in welfare if it is associated with a decrease in unemployment since part of the gain from a fiscal expansion is achieved at the expense of welfare in other countries non cooperative policies tend to be too expansionary

general equilibrium when some firms follow special pricing rules in this paper we study the existence of a general equilibrium in an economy in which some of the firms behave competitively whereas others follow special pricing rules an even casual observation of economic reality confirms the need for the inclusion of price setting firms in the study of general equilibrium models and in fact this has been emphasized in the economic literature for some time we consider this a sufficient justification to present a general equilibrium model which allows for both types of behavior price setting as well as price taking behavior the model to be presented will account for a wide range of price setting rules we however find it appropriate to point out at the start that not all economically relevant price setting rules are covered although our model permits the drawing of useful conclusions for the general equilibrium theory of oligopolistic competition through prices it is not especially designed for that purpose in particular our results are not applicable to the general equilibrium analysis with price making monopolistic firms a subject on which there exists some literature 2 our motivation as well as our modelling options and assumptions are directed to two fields where an increased interest in the theoretical foundations recently could be noticed

a margin scheme that advises on when to change required margin abstract the purpose of a margin requirement is to protect a clearinghouse from members defaults resulting from big losses due to adverse movement of futures prices to decide on how much a margin is required a clearinghouse may refer to a benchmark margin defined as a constant multiple of the forecasted volatility however a benchmark margin only advises on a desirable margin level it gives no advice on whether a clearinghouse should alter existing required margin this paper proposes a margin scheme that can advise on when to change the required margin and if a change is recommended to what level it should be changed the proposed margin scheme can be devised so that the coverage probability and change frequency are controlled at target levels deemed appropriate by the clearinghouse the proposed margin scheme needs a volatility forecast as input this paper shows that among a large number of volatility forecasts implied volatility gives the best results this confirms a conjecture that implied volatility may have more information content than other volatility forecasts as far as margin setting is concerned

shadow prices and public policies in a disequilibrium model of an open economy the paper focuses on the interaction between the goals of optimal stabilization and of allocative efficiency in project evaluation in an economy that is small as an exporter which must maintain trade balance and where some disequilibrium may prevail on goods and labour markets the criteria that are developed reflect an aggregation of profitability and reduction of unemployment additional foreign demand foreign currency savings should be evaluated in welfare terms after weighting by the gap between the relevant market and shadow prices the shadow prices also lead to the definition of an optimal taxation system

accountability and decentralisation in government an incomplete contracts model this paper approaches the question of the appropriate level of decentralisation of power in government as a problem in the allocation of control rights under incomplete contracts the model of the paper compares allocations of power to local central and regional government as alternative means of motivating governments to act in the interests of citizens centralisation allows benefits from policy coordination but has costs in terms of diminished accountability which can be precisely defined as the reduced probability that the welfare of a given region can determine the re election of the government the model is extended to allow for conflicts of interest within regions and externalities between central and local governments in a federation it is also applied to determining levels of fiscal transfer between localities and to circumstances where governments may act as leviathans appropriating resources for their own use

cost functions under production uncertainty we characterize the cost functions which would be consistent with expected utility maximization when production is uncertain it is not generally possible assuming risk aversion to use only expected output as the constraint in a cost minimization problem in some leading cases cost functions consistent with expected utility maximization are particularly useful because they are devoid of risk preferences

optimal administered pricing under capacity constraints abstract this paper addresses the question of how pricing policies can improve the utilization of existing production capacities an optimizing input output model for the indian economy is developed for this purpose where the government s objective is to maximize growth subject to capacity constraints it is found that the optimal prices are related to the keynesian income multipliers associated with increases in the consumption of goods

futures hedging under price basis and production risk we consider the hedging problem of a firm that has three sources of risk price basis and yield uncertainty an exact solution for the optimal futures hedge is derived under the assumption that the three random variables are jointly normally distributed and that utility is of the cara type unlike the mean variance approximation applied in previous research we show that the optimal hedge does depend on risk attitudes even when the agent perceives the futures price as being unbiased the theoretical results are applied empirically to the problem of hedging soybean production in iowa the exact solution relying on cara and normality is compared with numerical solutions under lognormal distributions and crra utility

a critique of tiebout s theory of local public expenditures the last section of this paper presents a rigorous version of tiebout s theory of local public goods it is shown that equilibria exist and are pareto optimal this rigorous theory follows closely the more rigorous part of tiebout s work this rigorous theory makes a number of very special assumptions which make local public goods essentially private the body of this paper presents a series of examples which show that if one tries to generalize the rigorous version of tiebout s theory in a number of interesting directions then equilibria may no longer exist or may not be pareto optimal the conclusion is that tiebout s idea does not lead to a satisfactory general theory of local public goods the goal of this paper is to point out that tiebout s notion of equilibrium with local governments does not have the nice properties of general competitive equilibrium except under very restrictive assumptions tiebout 39 suggested that there are competitive forces which tend to make local governments allocate resources in a pareto optimal fashion consumers choose to live in those towns with the mix of taxes and public goods they prefer local governments choose this mix so as to attract inhabitants this idea may seem intriguing for it suggests that the invisible hand solves an important part of samuelson s perplexing public goods problem 32 tiebout in fact makes an argument which is nearly rigorous i give a rigorous version of his argument at the end of the paper however in this rigorous version so many restrictive assumptions are made that public goods become essentially private in the body of the paper i give a series of examples with which i try to convince the reader that one is forced to adopt tiebout s restrictive assumptions the idea is that if one changes any of his assumptions then either equilibria may not exist or may not be pareto optimal my examples are presented in the context of a general class of tiebout models i consider several subclasses one of which is the special case considered by tiebout in each of the subclasses except that considered by tiebout i give a counterexample either to the existence of equilibrium or to its pareto optimality the subclasses are so chosen that the difficulties they reveal would be shared by any reasonable tiebout model which differed from his special case i believe that my examples controvert tiebout s suggestion 39 last paragraph that his theory compares favorably with competitive equilibrium theory most of the examples in this paper have already appeared in the literature i cite related work as i go along what is new here is that i assemble the examples in a unified argument

incumbent behavior vote seeking tax setting and yardstick competition this paper develops a model of the political economy of tax setting in a multijurisdictional world where voters choices and incumbent behavior are determined simultaneously voters are assumed to make comparisons between jurisdictions to overcome political agency problems this forces incumbents into a yardstick competition in which they care about what other incumbents are doing we provide a theoretical framework and empirical evidence using u s state data from 1960 to 1988 the results are encouraging to the view that vote seeking and tax setting are tied together through the nexus of yardstick competition

price limits and capital requirements of futures clearinghouses abstract futures clearinghouses need capital to provide liquidity in case of default by clearing members price limits truncate observed futures prices and prevent observation of clearinghouses true default risk exposure we show how to estimate the true default risk exposure from observed futures prices and model capital requirements using an option pricing model which accounts for non normality of and truncation in observed futures returns we apply the model to the clearinghouse associated with the winnipeg commodity exchange compare required capital levels with actual capital levels and show that ignoring non normality of futures returns causes overall capital requirements to be significantly underestimated

the role of liquidity in futures market innovations i characterize the optimal design of a new futures market an innovation by an exchange in the presence of market frictions futures markets am characterized by both the contract and the level of trader participation both can be determined by an exchange a game in which exchanges simultaneously design markets is c onsidered and a particular equilibrium not necessarily unique is constructed a game in which exchanges sequentially design markets and incur design costs is also considered and the generically unique equilibrium is constructed the nature of equilibrium with multiple exchanges is discussed in these simultaneous and sequential settings illustrating the role played by liquidity considerations both in market design and in the nature of competition between exchanges

margins and the safety of clearing houses abstract the major distinguishing feature of a futures market is the system of margining in providing a guarantee the clearing house bears the risk that price changes will exceed the initial margin a market risk and that members will be unable to pay a credit risk by bad judgement or management it is possible for clearing houses to fail as happened in hong kong in 1987 this paper examines the capital required by clearing houses using the international commodities clearing house in london as an example given the level of margining in 1987 it is found that exposure might exceed 40 million about once per year and 200 million once per thirty years icch needs credit lines to cover these levels of exposure plus enough capital to cover the proportion of these that are defaulted these capital requirements are much smaller than they would be if only one market were being margined there is a large diversification gain from clearing many futures markets how the capital should be obtained through shareholders equity by forming a mutual association or by purchasing insurance is discussed

a theory of debt and equity diversity of securities and manager shareholder congruence this paper shows how the optimal financial structure of a firm complements incentive schemes to discipline managers and how the securities return streams determine the claim holders incentives to intervene in management the theory rationalizes 1 the multipucity of securities 2 the observed correlation between return streams and control rights of securities and 3 the partial congruence between managerial and equity holder preferences over policy choices and monetary rewards as well as the low level of interference of equity in management the theory also offers new prospects for a reappraisal of the earlier corporate finance literature

optimal policy rules and regime switching in disequilibrium models this paper emphasizes the need to search for globally optimal policy levels for public production say in fix price disequilibrium analysis regime specific rules are inadequate they ignore the fact that moving a policy towards its optimal level may move the economy from its initial disequilibrium regime to a different regime where the rule no longer applies

the asymmetric relation between initial margin requirements and stock market volatility across bull and bear markets higher initial margin requirements are associated with lower subsequent stock market volatility during normal and bull periods but show no relationship during bear periods higher margins are also negatively related to the conditional mean of stock returns apparently because they reduce systemic risk we conclude that a prudential rule for setting margins or other regulatory restrictions is to lower them in sharply declining markets in order to enhance liquidity and avoid a depyramiding effect in stock prices but subsequently raise them and keep them at the higher level in order to prevent a future pyramiding effect copyright 2002 oxford university press

margin exceedences for european stock index futures using extreme value theory abstract futures exchanges require a margin requirement that ensures their competitiveness and protects against default risk this paper applies extreme value theory in computing unconditional optimal margin levels for a selection of stock index futures traded on european exchanges the theoretical framework focuses explicitly on tail returns thereby properly accounting for large levels of risk in measuring prudent margin levels the paper finds that common margin requirements are sufficient for each contract with the exception of the norwegian obx index in providing equitable costs for traders in addition the paper shows the underestimation bias in margin levels that are calculated assuming normality differing margin requirements reflect the unconditional and conditional trading environments

a theory of price limits in futures markets abstract the existence of price limits in certain futures markets is explained by demonstrating that price limits may act as a partial substitute for margin requirements in ensuring contract performance their effectiveness is a decreasing function of the amount of information available to traders about the equilibrium futures price which is unobservable in the event of a limit move and the theory predicts that no limits will exist in the markets for financial futures actual limits are broadly consistent with the theory his interpretation plausible as it was was totally misleading with the dangerous verisimilitude of a theory which will fit all or nearly all the facts and yet more entirely miss the truth by a mere accident then would a frank perplexity heritage v sackville west