analytical solution for an investment problem under uncertainties with shocks abstract we derive the optimal investment decision in a project where both demand and investment cost are stochastic processes eventually subject to shocks we extend the approach used in dixit and pindyck 1994 to deal with two sources of uncertainty and we assume that the underlying processes are jump diffusion processes assuming certain conditions on the parameters we are able to derive a closed expression for the value of the firm finally we present comparative statics for the investment threshold with respect to the relevant parameters

boundary optima and the theory of public goods supply a comment abstract campbell and truchon provide a new generalized samuelson condition that takes care of all interior and boundary pareto optimal allocations they observe that interior optima may be limit cases in the set of all pareto optima this comment shows that by using kolm s triangle the phenomenon observed in public good economies is not special but can be found in private good economies too

income dispersion and counter cyclical markups recent advances in measuring cyclical changes in the income distribution raise new questions how might these distributional changes affect the business cycle itself we show how counter cyclical income dispersion can generate counter cyclical markups in the goods market without any preference shocks or price setting frictions in recessions idiosyncratic labor productivity shocks raise income dispersion lower the price elasticity of demand and increase imperfectly competitive firms optimal markups the calibrated model explains not only many cyclical features of markups but also cyclical and long run patterns of standard business cycle aggregates

generalized samuelson conditions and welfare theorems for nonsmooth economies abstract we give intuitive samuelson conditions for a very general class of economies smoothness and monotonicity are not required we provide necessary and sufficient conditions for all pareto efficient allocations including those on the boundary we prove that if all agents have a cheaper point the supporting prices fully decentralize the allocation we also show first and second welfare theorems as corollaries to the characterization of efficient allocations

limited participation and exchange rate dynamics does theory meet the data the paper explores the empirical dimensions of a new open economy macronomy model characterized by credit market frictions we find that these frictions are essential for the model to match a large set of moments of german data moreover the simulated impulse response functions to supply and nominal shocks are consistent with var findings since the model is estimated on moments rather than on conditional irfs this underlines the ability of the model to match the data finally monetary shocks do not seem to be the primary driving force behind the aggregate dynamics which is consistent with the var literature

fixed costs of adjustment coordination and industry investment we test whether smooth industry level investment dynamics result from explicit aggregation of asynchronous and possibly lumpy firm level investment we compare the deviations of optimal from actual firm behavior across industries categorized by their ratios of idiosyncratic uncertainty to the sum of idiosyncratic and aggregate uncertainty the deviations are represented by the residuals of a cointegrating regression that is derived from the firm s first order condition under no adjustment costs in support of models with asynchronous firm decisions we find a significant negative relationship across industries between idiosyncratic uncertainty and the persistence of these residuals

the inexorable and mysterious tradeoff between inflation and unemployment this paper discusses the short run tradeoff between inflation and unemployment although this tradeoff remains a necessary building block of business cycle theory economists have yet to provide a completely satisfactory explanation for it according to the consensus view among central bankers and monetary economists a contractionary monetary shock raises unemployment at least temporarily and leads to a delayed and gradual fall in inflation standard dynamic models of price adjustment however cannot explain this pattern of responses reconciling the consensus view about the effects of monetary policy with models of price adjustment remains an outstanding puzzle for business cycle theorists several years ago i gave myself a peculiar assignment i decided to try to summarise all of economics in ten simply stated principles the purpose of this task was to introduce students to the economic way of thinking in the first chapter of my textbook principles of economics i figured if god could boil all of moral philosophy down to ten commandments i should be able to do much the same with economic science most of the ten principles i chose were microeconomic and hard to argue with they involved the importance of tradeoffs marginal analysis the benefits of trade market efficiency market failure and so on i allocated the last three principles to macroeconomics the first of these was a country s standard of living depends on its ability to produce goods and services which i viewed as the foundation of all growth theory the second was prices rise when the government prints too much money which i took to be the essence of classical monetary theory the last of my ten principles is the subject of today s lecture society faces a short run tradeoff between inflation and unemployment perhaps not surprisingly this statement turned out to be controversial when my publisher sent out the manuscript for review a few readers objected

a quantitative evaluation of payroll tax subsidies for low wage workers an equilibrium search approach abstract phelps phelps e 1994 low wage employment subsidies versus the welfare state american economic review 84 54 58 presented the case for a low wage subsidy policy since the mid 1990s france has experimented with this strategy this paper evaluates the effect of this policy on employment and also on output and welfare we construct an equilibrium search model incorporating wage posting and specific human capital investment where unemployment and the distribution of both wages and productivity are endogenous we estimate this model using french data numerical simulations show that the prevailing minimum wage allows a high production level to be reached by increasing training investment even though the optimal minimum wage is lower we show that payroll tax subsidies enhance welfare more than a reduction in the minimum wage when they are spread over a large range of wages in order to avoid specialization in low productivity jobs

pricing in a customer market in standard pricing models movements in demand are partially offset by price responses in a customer market however price markups may decrease with high demand thus price may magnify rather than stabilize demand movements i consider a monopolist selling a good of which first time consumers are uncertain repeat customers know that the product works the monopolist trades the objectives of exploiting past customers and attracting new ones in a period with many new potential customers the monopolist gives more weight to attracting and lowers its markup last i examine some evidence on whether expansions are periods with disproportionately many new customers

state dependent pricing and the dynamics of money and output standard macroeconomic models of price stickiness assume that each firm leaves its price unchanged for a fixed amount of time we present an alternative model in which the pricing decision depends on the state of the economy we find a method of aggregating individual price changes that allows a simple characterization of macroeconomic variables the model produces a positive money output correlation and an empirical phillips curve in addition the impact of monetary shocks depends crucially on the current level of output which points to a natural connection between state dependent microeconomics and state dependent macroeconomics i introduction there is a long tradition in macroeconomics of attributing the real effects of nominal demand shocks to nominal price stickiness in this view if there is no change in prices when nominal demand rises then quantities must bear the burden of adjustment hence nominal price rigidity provides the friction needed for nominal demand shocks to be transmitted to the real economy standard models of this transmission mechanism such as fischer 1977 and taylor 1980 are based on the assumption that each firm leaves its price unchanged for a fixed amount of time the main reason for considering such time dependent pricing rules is their analytic tractability constraining firms to adjust their prices at prespecified times both simplifies the derivation of equilibrium strategies and allows the use of powerful time series techniques to analyze aggregate dynamics the main disadvantage of the timedependent approach is that between price adjustments firms are not allowed to respond even to extreme changes of circumstance this makes it difficult to know whether the qualitative effects of money in these models are the result of nominal rigidities per se or of the exogenously imposed pattern of price changes an alternative approach to modeling price stickiness is to allow the price setting decision to depend on the actual state of the

real rigidities and the non neutrality of money rigidities in real prices are not sufficient to create rigidities in nominal prices and real effects of nominal shocks and by themselves small frictions in nominal adjustment such as costs of changing prices create only small non neutralities but this paper shows that substantial nominal rigidity can arise from a combination of real rigidities and small nominal frictions the paper shows the connection between real and nominal rigidity given the presence of nominal frictions both in general and for two specific sources of real rigidity one arising from goods market imperfections and the other from labour market imperfections

trigger target rules need not be optimal with fixed adjustment costs a simple comment on optimal money holding under uncertainty literature concerning the transactions theory of demand for money often contains the assumption that simple trigger target rules are optimal when each financial transaction is accompanied by a fixed cost the validity of this assumption is examined in this paper using a simple example it is shown that the optimal money rule in discrete time models of money demand may be much more complicated than the simple rules assumed to be optimal in the literature however when considering continuous time models of money demand or when adjustment of the money stock is allowed in one direction only simple trigger target rules are in fact optimal copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

time to build and capacity choice abstract this paper studies how demand uncertainty and time to build interact in affecting irreversible investment activity using impulse control methods we find the optimal timing and size of investment for a firm such as an electric utility that considers expanding its capacity in order to meet an uncertain demand when the construction lag is short uncertainty delays investment while increasing its size once it takes place however for comparatively long and realistic times to build the sensitivity to uncertainty is drastically reduced and the results can even be reversed more uncertainty can speed up investment and reduce its size

overdrafts and the demand for money this paper presents a stochastic analysis of the demand for interest bearing money such as now accounts when overdrafting is allowed at some penalty rate it is shown that the short run interest elasticity of money demand is probably large in absolute value and negative but in the long run this elasticity is much smaller or even positive it is also argued that current definitions of the monetary aggregates which exclude unused credit may spuriously generate instability of money demand an alternative definition of money stock is suggested and seems to be conceptually more satisfying copyright 1990 by american economic association

investment under uncertainty with price ceilings in oligopolies abstract we study the impact of price cap regulation on the level and timing of investment in an oligopolistic cournot industry facing stochastic demand we find that a price ceiling affects investment decisions in two mutually competing ways it makes the option to defer investment more valuable but at the same time it reduces the incentive for firms to strategically underinvest in order to raise prices we show that while sensible price cap regulation speeds up investment a low price cap can be a disincentive for investment there exists an optimal price cap independent of market concentration the competitive investment price trigger that maximizes investment incentives and in the long term increases industry installed capacity this optimal price cap becomes less effective and less robust as the market becomes more competitive and as demand volatility increases errors in estimation of the optimal price cap have asymmetric effects underestimation has more dire consequences than overestimation

macroeconomic implications of s s versus accelerator finished goods inventory strategies abstract large scale disaggregated simulation techniques involving 315 firms in 21 different industries holding 6 615 different stockpiles of purchased materials inputs are used to evaluate the implications for the stability of the economy of alternative strategies for managing inventories the simulations reveal that an s s form of production scheduling results in a somewhat less stable economy than is obtained with accelerator type inventory management

simulating the inventory cycle abstract simulations of the inventory cycle utilizing a model based on 84 interacting firms in 21 industries reveals that the ratio of the variance of sales to the variance of output is an unreliable indicator of how seriously firms attempt to smooth production or whether such efforts in the aggregate even out economic fluctuations it is also shown that the two slow estimates of the speed of adjustment reported in many econometric studies of united states data may result in part from aggregation bias rather than from limitations of the flexible accelerator model itself

cross sectional heterogeneity and the persistence of aggregate fluctuations abstract the microevidence indicates that small firms grow faster than big firms i argue that this relationship between the expected growth rate of a firm and its size may provide a microfoundation for the well known high degree of persistence of shocks to aggregate output the logic goes as follows almost any shock tends to temporarily alter firms incentive to invest in growth thereby leading to a reallocation of firms across size categories if small firms grow faster than big ones the impact effect of the shock on aggregate output is gradually absorbed but as fast growing small firms become big and start to grow at the lower rate of big firms the rate at which the shock is absorbed decreases over the adjustment path as a result shocks are absorbed yet at a very low decreasing rate which induces long memory in aggregate output i argue that this transmission mechanism may reconcile the microevidence with the observed degree of aggregate persistence it requires changes in neither the number of firms in the market nor the rate of technological progress it is merely the result of the cross sectional heterogeneity that we observe in real economies

equilibrium in a durable goods market with lumpy adjustment abstract durable goods are an important component of the business cycle equilibrium models of durable goods markets are made difficult by the lumpy nature of individual purchases we show that a straightforward approximation of the distribution of durable goods holdings gives rise to a tractable equilibrium model we analyze the case of competition as well as that of a monopoly producer

cross sectional efficiency and labour hoarding in a matching model of unemployment we study positive and normative aspects of steady state equilibrium in a market where firms of endogenous size experience idiosyncratic shocks and undergo a costly search process to hire their workers the stylized model we propose highlights interactions between job security provisions and sectoral shocks in determining the natural rate of unemployment the allocation of labour and the extent of labour hoarding and rationalizes cross sectional asymmetries of gross employment flows at the firm level in our model where productivity and search costs are dynamically heterogeneous across firms decentralized wage bargains imply important cross sectional inefficiencies which overshadow the static search inefficiencies on which simpler models focus

mutually exclusive investment with technical uncertainty a firm which faces technical uncertainty as in pindyck 1993 can choose between two mutually exclusive investment projects projects 1 and 2 the added option to exercise project 2 makes the firm less likely to exercise project 1 an increase in the degree of technical uncertainty the investment rate or the investment value upon completion for project 2 encourages the firm to exercise project 2 by increasing the trigger level of the expected cost of project 2 this however ambiguously affects the firm s incentive to exercise project 1 as the firm would rather implement project 1 2 in a region where the expected cost of project 2 is relatively high low

implications of state dependent pricing for dynamic macroeconomic models abstract state dependent pricing sdp models treat the timing of price changes as a profit maximizing choice symmetrically with other decisions of firms using quantitative general equilibrium models which incorporate a generalized s s approach we investigate the implications of sdp for topics in two major areas of macroeconomic research the early 1990s sdp literature and more recent work on persistence mechanisms first we show that state dependent pricing leads to unusual macroeconomic dynamics which occur because of the timing of price adjustments chosen by firms as in the earlier literature in particular we display an example in which output responses peak at about a year while inflation responses peak at about 2 years after the shock second we examine whether the persistence enhancing effects of two new keynesian model features namely specific factor markets and variable elasticity demand curves depend importantly on whether pricing is state dependent in an sdp setting we provide examples in which specific factor markets perversely work to lower persistence while variable elasticity demand raises it

menu costs and phillips curves this paper develops a model of a monetary economy in which individual firms are subject to idiosyncratic productivity shocks as well as general inflation sellers can change price only by incurring a real menu cost we calibrate this cost and the variance and autocorrelation of the idiosyncratic shock using a new u s data set of individual prices due to klenow and kryvtsov the prediction of the calibrated model for the effects of high inflation on the frequency of price changes accords well with international evidence from various studies the model is also used to conduct numerical experiments on the economy s response to various shocks in none of the simulations we conducted did monetary shocks induce large or persistent real responses

on the driving forces behind cyclical movements in employment and job reallocation theory restricts short run job creation and destruction responses and cumulative employment and job reallocation responses to allocative and aggregate shocks we formulate these restrictions and implement them for postwar data on u s manufacturing allocative shocks are the main driving force behind cyclical movements in job reallocation but their contribution to employment fluctuations varies greatly across alternative identification assumptions also the data compel one or both of the following inferences aggregate shocks greatly alter the shape and not just the mean of the cross sectional density of employment growth rates allocative shocks cause short run reductions in aggregate employment

microeconomic rigidities and aggregate price dynamics abstract this paper is an attempt to enrich the characterization of the sluggish behavior of the aggregate price level our contribution to this vast literature is to explicitly consider microeconomic heterogeneity and its interaction with nonlinear microeconomic price adjustment policies the model we propose outperforms the constant probability of adjustment partial adjustment model in describing the path of postwar u s inflation using only aggregate data we infer that the probability that a firm adjusts its price depends on the sign and the magnitude of the deviation of the price from its target level at the aggregate level we find that the aggregate price level responds less to negative shocks than to positive shocks that the size of this asymmetry increases with the size of the shock and that the number of firms changing their prices and therefore the flexibility of the price level to aggregate shocks varies endogenously over time in response to changes in economic conditions

sticky information in general equilibrium this paper develops and analyzes a general equilibrium model with sticky information the only rigidity in goods labor and financial markets is that agents are inattentive sporadically updating their information sets when setting prices wages and consumption after presenting the ingredients of such a model the paper develops an algorithm to solve this class of models and uses it to study the model s dynamic properties it then estimates the parameters of the model using u s data on five key macroeconomic time series it finds that information stickiness is present in all markets and is especially pronounced for consumers and workers variance decompositions show that monetary policy and aggregate demand shocks account for most of the variance of inflation output and hours jel e30 e10

threshold behavior and aggregate fluctuation this paper concerns a propagation mechanism in an economy where many individuals follow a threshold rule and interact with a positive feedback we derive an asymptotic distribution of the propagation size when the number of the agents tends to infinity the propagation distribution exhibits a slower convergence to a deterministic value than it would if the agents followed a smooth adjustment policy this gives rise to significant aggregate fluctuations in a finite lumpy adjusting economy even when the agents are hit by small independent shocks

a structural model of us aggregate job flows this paper contributes to the analysis of jobs flows dynamics through the explicit modelling of job creations and job destructions we propose a simple matching model extended for endogenous separation and tractable heterogeneity the parameters of the model are estimated using a simulation based estimation method we then test the ability of trade externalities generated by the matching process to i propagate reallocation and aggregate disturbances in the whole labor market and ii generate the observed distribution of aggregate job flows the results clearly indicate that the model is able to match the dynamics of us aggregate job flows copyright 2002 john wiley sons ltd

reconsidering the natural rate hypothesis in a new keynesian framework abstract this paper formulates a stylized new keynesian model in which each individual firm can select the frequency of its price adjustments the endogeneity of contract duration has a dramatic impact on the magnitude of the aggregate effects of steady state inflation with a plausible calibration of the magnitude of menu costs and other structural parameters this model predicts a relationship between steady state inflation and the frequency of price adjustment that is reasonably close to the empirical findings of cross country studies furthermore at moderate inflation rates steady state inflation generates relative price distortions that have a non trivial impact on aggregate output but this impact wanes and eventually disappears at much higher annual inflation rates because the frequency of price adjustment approaches that of the flexible price economy

capacity expansion games with application to competition in power generation investments abstract we consider competitive capacity investment for a duopoly of two distinct producers the producers are exposed to stochastically fluctuating costs and interact through aggregate supply capacity expansion is irreversible and modeled in terms of timing strategies characterized through threshold rules because the impact of changing costs on the producers is asymmetric we are led to a nonzero sum timing game describing the transitions among the discrete investment stages working in a continuous time diffusion framework we characterize and analyze the resulting nash equilibrium and game values our analysis quantifies the dynamic competition effects and yields insight into dynamic preemption and over investment in a general asymmetric setting a case study considering the impact of fluctuating emission costs on power producers investing in nuclear and coal fired plants is also presented

stochastic cascades credit contagion and large portfolio losses abstract we analyze an interactive model of credit ratings where external shocks spread by a contagious chain reaction to the entire economy counterparty relationships along with discrete adjustments of credit ratings generate a transition mechanism that allows the financial distress of one firm to spill over to its business partners the spread of financial distress constitutes a source of intrinsic risk for large portfolios of credit sensitive securities that cannot be diversified away we provide a characterization of the fluctuations of credit ratings in large economies when adjustments follow a threshold rule and analyze the effects of downgrading cascades on credit portfolios

a tax competition analysis of congestible public inputs abstract this paper investigates the provision of congestible local public inputs within a tax competition framework public input provision is financed by a business capital tax and by a profits tax on firms as a congestion tax with this tax system local tax and expenditure policies are inefficient because of potential capital outflows the tax mix is inefficient in that the profits tax rate is too high relative to the capital tax rate the level of public input provision is inefficiently low focusing on expenditure inefficiency this analysis of public inputs is compared with wilson s analysis journal of urban economics 1995 38 333 356 of congestible public goods

production chains and general equilibrium aggregate dynamics abstract recent empirical studies reveal that monetary shocks can cause persistent fluctuations in aggregate output in this paper we propose a mechanism to help generate such persistence our dynamic stochastic general equilibrium model features a vertical input output structure with staggered price contracts at each stage of production working through the input output relations and the timing of firms pricing decisions the model generates persistent fluctuations in aggregate output and the observed patterns of price dynamics following a monetary shock output responses are more persistent the greater the number of stages of production and the larger the share of intermediate inputs with a sufficient number of stages the persistence is arbitrarily large if the share of intermediate inputs is one at all but finitely many stages

monopolistic competition business cycles and the composition of aggregate demand abstract we develop a dynamic general equilibrium model with monopolistically competitive firms and endogenous markups and show the possibility of equilibria with persistent fluctuations driven by self fulfilling revisions of expectations for some parameter values such fluctuations are characterized by time series properties similar to those observed in u s postwar business cycles in contrast with the existing literature our results do not rely on the presence of increasing returns or nominal rigidities a key ingredient of the model is the link between markups and the composition of aggregate demand some econometric evidence on the latter is also reported journal of economic literature classification number d43 d58 e32

the impact of lead time on capital investments abstract we study equilibrium investment strategies of firms competing in stochastic dynamic market settings and facing two types of investment structures investment with significant lead time or time to build and investment without or minor lead time we investigate how investment behavior changes when investment is subject to time to build versus when it is not we characterize equilibrium investment strategies under several information structures and compare results to the social optimum we offer some new results the model predicts that controlling for demand and production and investment costs investments and outputs can be higher in progressive industries which often exhibit time to build than in fast paced industries where time to build is insignificant furthermore for both investment types investment with or without time to build we offer a novel equilibrium in which firms incrementally invest this behavior is driven by demand uncertainty and capacity constraints also expected outputs are lower than cournot outputs as firms face uncertainty moreover the amount of uncertainty has different effects over investment types

investment dynamics with fixed capital adjustment cost and capital market imperfections this paper examines the implications of financing frictions on capital stocks and on capital accumulation in the presence of non convex costs of adjusting the capital stock in this setup finance has an influence on both the level of capital and the timing of investment finance and productivity are complements and finance influences investment the strongest when firms wish to significantly adjust capital for fundamental reasons these theoretical considerations are confronted with uk data while finance is mostly irrelevant for long term capital decision the short run investment function shows a significant impact of finance which is also strongest for strong fundamental investment incentives

a model of welfare competition with evidence from afdc in this paper we test empirically for strategic behavior among the states using the cash support program aid to families with dependent children afdc to motivate the empirical work we adapt wildasin s model of income redistribution 1991 american economic review 81 757 773 to a model of interjurisdictional welfare competition although welfare competition may be generated from different frameworks we choose wildasin s model to illustrate how welfare benefit interdependence is genereated in the context of welfare migration we estimate a representative reaction function for afdc using both cross sections and pooled cross section data after controlling for other determinants of afdc benefit levels and for spatial error autocorrelation we find evidence showing competition 2000 academic press

variable price adjustment costs i introduction costly price adjustment models often called menu cost models see mankiw 1985 are based on the assumption that nominal price changes in product markets are costly with aggregate inflation the optimal pricing policies are state contingent the firm lets its real price drift until it reaches a threshold the nominal price is then changed so as to make the new real price equal to a target value the simplest case is the one sided s s policy studied by sheshinski and weiss 1977 the real price is increased to s after it has been eroded by inflation to s 1 nominal prices are held constant for extended periods of time as is apparent to anyone with eyesight rotemberg 1987 as the timing of price changes is chosen optimally the optimal policies dominate time contingent policies 2 not surprisingly the models have been adopted in the new keynesian literature as a microfoundation for nominal rigidities along with monopolistic competition and coordination failures they have entered the mainstream of that literature 3 given their importance for the new keynesian approach costly price adjustment models require closer scrutiny there are two basic problems first it is not clear what the costs of price adjustment are second there is empirical evidence inconsistent with the standard fixed cost model 4 1 more complex policies are studied by barro 1972 tsiddon 1988 caplin and leahy 1991 and dixit 1991 2 see discussions in blanchard and fischer 1990 and caplin and leahy 1991 a notable exception are time inconsistent problems which may arise in long term contracts 3 rotemberg 1987 ball mankiw and romer 1988 blanchard 1990 and gordon 1990 review macroeconomic applications textbook expositions are in blanchard and fischer 1990 mccafferty 1990 abel and bernanke 1992 and mankiw 1992 4 another issue is how a smooth aggregate price level results from lumpy individual adjustments on this see caplin and spulber 1987 and caballero and engel 1991 the costs of price changes are of two basic types first are the costs of market response customers switching competitors pricing more aggressively etc second are the costs of changing the menu deciding on the new price changing labels informing salesmen and customers etc in existing literature the costs are assumed to be fixed which suggests that they are of the latter type 5 the main criticism of this approach is that as menu costs are small the results are unlikely to be empirically relevant or economically significant mccallum 1989 summarizes this argument in response akerlof and yellen 1985 and mankiw 1985 argued that as the profit function is flat around its maximum profits are not responsive to changes in the real price thus even small costs may result in infrequent price changes empirical evidence supports neither the criticism nor the response the observed frequency of price changes is often too low and real price variations are too large to be generated by a small menu cost for example cecchetti 1986 finds that a typical u s weekly magazine would change its nominal price once every four to six years allowing the real price to deteriorate by about 25 percent results for monopolistic newspapers in canada studied by fisher and konieczny 1992 are similar the average price increase for the twenty six products in israel studied by lach and tsiddon 1992 was 12 percent when the monthly inflation rate was 7 3 percent also in kashyap 1990 price changes vary greatly in size across products sold in the same catalog even though presumably the menu cost is similar with respect to the second problem fixed cost models imply that the size of adjustment rises with inflation the real price is allowed to be eroded more and is reset to a higher value yet in lach and tsiddon 1992 this holds for only sixteen out of twenty six products adjustments become smaller for eight and there is no effect in two cases

structural identification of high and low investment regimes abstract we propose a structural model to investigate the existence and possible differences between low and high regimes of investment expenditures in equipment at the firm level the existence of such differences is predicted by recent theoretical studies of investment behavior stressing the role of asymmetries and non convexities in the adjustment cost technology the structural spike model is estimated for a balanced panel of dutch firms operating in 13 different industrial sectors the flexibility of the structural approach explains why the proposed method outperforms models applying ad hoc spike definitions often encountered in the empirical literature of lumpy investments

boundary optima and the theory of public goods supply abstract this paper derives a generalized optimality condition that is valid for all boundary optima in an economy with many public goods and one private good this condition is then used to show that there is an open subset of pareto optima where samuelson s condition does not hold finally it is shown that allocation and distribution are inextricable at these optima even under conditions that guarantee independence of allocation and distribution at interior optima

can speculative trading explain the volume volatility relation we derive a speculative trading model with endogenous informed trading that yields a conditionally heteroscedastic time series for trading volume and the squared price changes we use half hourly price change and volume data for ibm during 1988 to test the model and estimate the structural parameters using the simulated method of moments estimation procedure although the model seems to do a reasonable job fitting the unconditional moments of the volume and the squared price change processes it fares less well in fitting the relation between current trading volume and lags of trading volume and squared volume s and its lag s relation to squared price changes

the asymmetric effects of demand shocks international evidence on determinants and implications the analysis focuses on the asymmetric effects of demand shocks the evidence across a sample of 19 industrial countries differentiates the effects of expansionary and contractionary aggregate demand shocks on real output growth and nominal wage and price inflation the difference appears consistent with a kinked supply curve that is dependent on the asymmetric flexibility of wages and or prices across countries furthermore the evidence does not support the endogeneity of asymmetric nominal flexibility with respect to demand variability or trend price inflation across countries on average across countries demand variability increases nominal wage and price inflation relative to deflation while exacerbating output contraction relative to expansion the apparent trade off between changes in real and nominal trends provides further support to the supply side explanation of asymmetry

dynamic s s economies in this paper the authors provide a framework to study the aggregate dynamic behavior of an economy where individual units follow s s policies and are subject to aggregate and idiosyncratic shocks they characterize structural and stochastic heterogeneities that ensure convergence of the economy s aggregate to that of its stochastic frictionless counterpart determine the speed at which convergence takes place and describe the transitional dynamics of this economy they study the evolution of the economy s aggregate and the evolution of the difference between this aggregate and that of the difference between this aggregate and that of an economy without microeconomic friction where the latter pertains to a situation where individual units adjust with no delay to all shocks copyright 1991 by the econometric society

economic theory and the world of practice a celebration of the s s model it was the question of how best to balance the costs of ordering and of running out of stock against the costs of holding excess inventory that inspired kenneth arrow theodore harris and jacob marschak to introduce the s s model in 1951 in this celebratory article we show how this model not only answered important practical questions but also opened the door to a quite startling range of important and challenging follow up questions many of great practical importance and analytic depth the s s model has become one of the touchstone models of economics opening new vistas of applied economic theory to all who internalize its structure today it is universally applied to solve questions faced in inventory control the core model elements uncertainty and fixed costs of adjustment are ubiquitous which has resulted in its becoming the general purpose economic model of discrete adjustment the s s model has also become a profound source of inspiration for macroeconomists seeking to understand the role that discrete microeconomic adjustments play in macroeconomic fluctuations looking forward we foresee rapid growth in the use of s s modeling to aid households making complex and costly financial decisions such as when and how to terminate a mortgage in the projected era of household operations research new modeling challenges will arise due to enriched feedback from the world of practice

investment flexibility as a barrier to entry abstract this paper presents a model of investment in a duopoly with firms that choose the scale and timing of investment decision making flexibility and the costs saved by investing in large steps rather than sequences of small steps determine an incumbent s ability to deter entry by a potential competitor entry occurs when these cost savings are very small or very large because the effect of increased industry capacity on the incumbent s assets in place is the same regardless of which firm invests in intermediate cases the incumbent is able to deter entry by making a smaller earlier investment than the potential entrant the smaller investment scale protects the incumbent s assets in place which offsets the incumbent s cost disadvantage from investing in smaller steps than the entrant would choose nevertheless the threat of entry constrains the incumbent s investment behavior and limits its profitability the model is solved using a combination of best response iteration and the projected successive over relaxation method

investment firm value and risk for a system operator balancing energy grids abstract with the liberalization of energy markets integrated energy companies have separated into entities that specialize in production and or transmission of energy transmission of energy requires balancing the grid to guarantee system security which is performed by the independent system operator so when the so faces stochastic demand grid balancing has sizeable consequences on current and future profits and hence on firm value and firm risk we explore these value and risk consequences with and without an investment option to expand transmission capacity we show that firm value consists of the value of the transmission capacity in place plus the value of a short put and a short call option that are the result of the so s balancing actions firm risk without investment option is non linear and determined by the short option positions it is decreasing with increasing energy demand the existence of an option to expand transmission capacity increases firm value and firm risk

inventories and the business cycle an equilibrium analysis of s s policies we develop an equilibrium business cycle model where nonconvex delivery costs lead firms to follow s s inventory policies calibrated to postwar us data the model reproduces two thirds of the cyclical variability of inventory investment moreover it delivers strongly procyclical inventory investment greater volatility in production than sales and a countercyclical inventory to sales ratio our model challenges several prominent claims involving inventories including the widely held belief that they amplify aggregate fluctuations despite the comovement between inventory investment and final sales gdp volatility is essentially unaltered by inventory accumulation because procyclical inventory investment diverts resources from final production thereby dampening fluctuations in sales

the real thing nominal price rigidity of the nickel coke 1886 1959 we report that the price of a 6 5 oz coca cola was 5c from 1886 until 1959 thus we are documenting a nominal price rigidity that lasted more than 70 years the case of coca cola is particularly interesting because during the 70 year period there were substantial changes in the soft drink industry as well as two world wars the great depression and numerous regulatory interventions and lawsuits which led to substantial changes in the coca cola market conditions the nickel price of coke nevertheless remained unchanged we find that this unusual rigidity is best explained by 1 a contract between the company and its parent bottlers that encouraged retail price maintenance 2 a single coin vending machine technology which limited the company s price adjustment options due to limited availability and unreliability of the existing flexible price adjustment technologies and 3 a single coin monetary transaction technology which limited the company s price adjustment options due to the customer inconvenience cost we show that these price adjustment costs are of a different nature than the standard menu cost and their estimates exceed the existing estimates by an order of magnitude a possible broader relevance of the nickel coke phenomenon is discussed in the context of nickel and dime stores which were popular in the us in the late 1800s and the early 1900s

the relation between price and marginal cost in u s industry an examination of data on output and labor input reveals that some u s industries have marginal cost well below price the conclusion rests on the finding that cyclical variations in labor input are small compared with variations in output in booms firms produce substantially more output and sell it for a price that exceeds the costs of the added inputs the paper documents the disparity between price and marginal cost where marginal cost is estimated from annual variations in cost it considers a variety of explanations of the findings that are consistent with competition but none is found to be completely plausible

demand evolution in stochastic inventory systems riskiness increase abstract this paper characterizes demand evolution in the steady state under common inventory policies in a single location stochastic inventory system our results show that downstream demand nonstrictly second degree stochastically dominates upstream orders and the bullwhip effect occurs we provide the link between demand evolution and utility theory for stochastic inventory systems our model is general in that ultimate customer demand follows an arbitrary stationary distribution and the facility may arbitrarily select policy parameters

on the sign of the investment uncertainty relationship understanding the effects of uncertainty over any decision variable has fascinated economists for a long time risk aversion and incomplete markets are likely to make the investment uncertainty relationship negative e g roger craine 1989 joseph zeira 1989 what happens in the absence of risk aversion and incomplete markets is however ambiguous richard hartman 1972 and andrew b abel 1983 1984 1985 found that in the presence of symmetric convex costs of adjustment mean preserving increases in price uncertainty raise investment of a competitive firm as long as the profit function is convex in prices on the other hand the recent literature on irreversible investment e g robert s pindyck 1988 giuseppe bertola 1988 has shown that increases in uncertainty lower investment all these results have been derived under either risk neutrality or complete markets intuition suggests that the explanation for such a difference lies with the asymmetric nature of adjustment costs in the irreversible investment case as compared with the symmetry of the adjustment cost mechanisms proposed by abel and hartman although this intuition is confirmed in this paper asymmetric adjustment costs are shown not to be sufficient to explain why the results differ in fact a more hidden but at least as important difference between these two literatures is that the former assumes perfect competition and constant returns to scale whereas the latter assumes either imperfect competition or decreasing returns to scale or both 2 the purpose of this paper is to highlight the role of the decreasing marginal return to capital assumption due to either imperfect competition or decreasing returns to scale or both in determining the effects of adjustment cost asymmetries on the sign of the response of investment to changes in uncertainty under risk neutrality for this the paper develops a simple model with a cost of adjustment mechanism general enough to consider both symmetric convexity and irreversibility as special cases one of the most important findings is the lack of robustness of the negative relationship between investment and uncertainty under asymmetric adjustment costs3 to changes in the degree of competition in fact when firms are nearly competitive the conclusion of hartman and of abel holds no matter how asymmetric adjustment costs are studying adjustment cost mechanisms has a central role in understanding the dynamics of investment and its business cycle implications but conclusive results about the sign of the instantaneous relationship between uncertainty and investment should not be department of economics columbia university new york ny 10027 i am grateful to giuseppe bertola prajit dutta glen hubbard anil kashyap richard lyons and the referees for their useful comments 1the financial literature on investment has considered risk aversion through a premium in the discount rate determined by the capm capital asset pricing model intertemporal capm or consumption capm however often this discount rate is left unchanged when studying the response of investment to uncertainty changes e g pindyck 1988 pp 974 5 thereby omitting the effect of changes in uncertainty on investment due to risk aversion and incomplete markets 2in the typical version of the irreversible investment problem there is no cost of upward adjustments thus imperfect competition and or decreasing returns to scale are required to bound the size of the firm 3in this paper asymmetric adjustment cost refers to the case in which it is more expensive to adjust downward than upward certainly the opposite case is a trivial extension of the case studied in this paper

price stickiness in ss models new interpretations of old results abstract what is the relation between infrequent price adjustment and the dynamic response of the aggregate price level to monetary shocks the answer to this question ranges from a one to one link calvo g 1983 prices in a utility maximizing framework journal of monetary economics 12 383 398 to no connection whatsoever caplin a spulber d 1987 menu costs and the neutrality of money quarterly journal of economics 102 703 726 the purpose of this paper is to provide a unified framework to understand the mechanisms behind this wide range of results in doing so we propose new interpretations of key results in this area which in turn suggest the kind of ss model that is likely to generate substantial price rigidity among these new interpretations we revisit caplin and spulber s monetary neutrality result we show that when price stickiness is measured in terms of the impulse response function this result is not a consequence of aggregation as is often assumed but is due instead to the absence of price stickiness at the microeconomic level we also show that the selection effect according to which units that adjust their prices are those that benefit the most is neither necessary nor sufficient to account for the higher aggregate flexibility of ss type models compared to calvo models instead the key concept is the contribution of the extensive margin of adjustment to the aggregate price response the aggregate price level is more flexible than suggested by the microeconomic frequency of adjustment if and only if this term is positive

investment dynamics with information costs investment in physical capital at the micro level is infrequent and large or lumpy the most common explanation for this is that firms face non convex physical adjustment costs the model developed in this paper shows that information costs make investment lumpy at the micro level even in the absence of non convex adjustment costs when collecting and processing information is costly the firm optimally chooses to do it sporadically and to be inactive most of the time this behavior results in infrequent and possibly large capital adjustments the model fits plant level investment rate moments well and it also matches some higher order moments of aggregate investment rates keywords investment dynamics information costs inattentiveness lumpy investment jel classification d21 d83 d92 e22

intermediate goods and business cycles implications for productivity and welfare this paper presents an aggregate demand driven model of business cycles that provides a new explanation for the procyclicality of productivity and simultaneously predicts large welfare losses from monetary nonneutrality the key features of the model are an input output production structure imperfect competition countercyclical markups and for some results state dependent price rigidity true technical efficiency is procyclical even though production takes place with constant returns without technology shocks or technological externalities the paper has observable implications that distinguish it empirically from related work these implications are generally supported by data from u s manufacturing industries copyright 1995 by american economic association

the cyclical behavior of marginal cost and price the author examines the cyclical behavior of price marginal cost margins for u s manufac turing after 1956 short run marginal cost is markedly procyclical this is primarily due to procyclical overtime payments incurred beca use employment is not perfectly flexible in most industries output price fails to respond to the cyclical movement in marginal cost so price marginal cost margins are markedly countercyclical the res ults contradict business cycle theories that explain low production i n a recession by a high real cost of producing they support theories that explain low production in a recession by the inability of firms to sell their output copyright 1987 by american economic association

explicit investment rules with time to build and uncertainty abstract we establish explicit socially optimal rules for an irreversible investment decision with time to build and uncertainty assuming a price sensitive demand function with a random intercept we provide comparative statics and economic interpretations for three models of demand arithmetic brownian geometric brownian and the cox ingersoll ross committed capacity that is the installed capacity plus the investment in the pipeline must never drop below the best predictor of future demand minus two biases the discounting bias takes into account the fact that investment is paid upfront for future use the precautionary bias multiplies a type of risk aversion index by the local volatility relying on the analytical forms we discuss in detail the economic effects for example the impact of volatility on the optimal investment is negligible in some cases it vanishes in the cir model for long delays and in the gbm model for high discount rates

a dynamic economy with costly price adjustments this paper studies a general equilibrium model of a dynamic economy with menu costs each firm s productivity is exposed to idiosyncratic and aggregate productivity shocks around a trend and the money supply to monetary shocks around a trend all consumption pricing and production decisions are based on optimizing behavior there exists a staggered markov perfect equilibrium with prices determined by a two sided s s markup strategy the paper analyzes the optimal markup strategy and investigates the dynamics of the price index and the aggregate output the welfare consequences of the uncertain aggregate productivity and money supply are also examined

a survey of new keynesian theories of aggregate supply and their relation to industrial organization i survey the recent literature on the phillips curve along the way i will try to relate this literature to topics of interest to industrial organization i will also point out the gaps in our understanding and places where more careful micro economic analysis would be helpful to macroeconomists in the conclusion i summarize what an industrial organization economist might take away from this literature

heterogeneous job matches and the cyclical behavior of labor turnover abstract worker flows to and from unemployment simultaneously occur over the us business cycle and the size of the flows is positively linked to the unemployment rate unemployment flows and the unemployment rate are highly volatile persistent and countercyclical inflows lead the unemployment rate and the unemployment rate leads outflows over the business cycle the one sector stochastic growth model is augmented by matching frictions in the labor market and match specific productivity shocks that introduce ex post heterogeneous job matches matching frictions help generate the lead lag relationship between unemployment flows and the unemployment rate combined with heterogeneous job matches they generate endogenous unemployment flows and an unemployment rate whose dynamic characteristics match observed data

aggregation and optimization with state dependent pricing the literature on the aggregation of s s policies has ignored the impact of aggregate behavior on the individual s optimization problem in the case of pricing the feedback effects are clear not only do pricing strategies determine the evolution of the price level but the evolution of the price level also influences the optimal pricing strategies in this paper we provide a consistent treatment of aggregation and optimization we use this model to analyze three issues in the menu cost pricing literature the relationship between strategic complementarity and the real effects of money the relationship between the variance of the money supply and the correlation between money and output and the relationship between the cost of price adjustment and the size of price adjustment questions concerning the dynamics of aggregate variables such as prices employment investment and consumption represent the core of business cycle analysis one striking feature of these variables is the radical difference between properties of these aggregates and the nature of the individual behavior that underlies them the behavior of a firm s prices investment and employment and the behavior of an individual s consumption all involve frictional elements that lead to discrete adjustment at the microeconomic level heterogeneity among individuals however tends to smooth the behavior of the corresponding aggregates in recent years a large body of research has developed to examine the manner in which microeconomic frictions influence aggregate dynamics one of the centerpieces of this research has been the s s model developed by arrow harris and marschak 1951 the key element of this model is the state dependence of individual decisions agents act when a state variable crosses some critical threshold which balances the cost and benefits of adjustment the aggregate implications of this form of microeconomic behavior have been analyzed by blinder 1981 caplin 1985 and mosser 1991 in the context of inventory dynamics by caplin and spulber 1987 caballero and engel 1991 1993 and caplin and leahy 1991 in the context of prices and by bertola and caballero 1990 caballero 1993 and eberly 1994 in the context of con sumer durables one of the most limiting aspects of these models is that they focus exclusively on the impact that microeconomic inertia has on aggregate dynamics they 1we would like to thank michael harrison loannis karatzas john leahy sr andreu mas colell a co editor and four anonymous referees for helpful discussions and comments and the national science foundation and the sloan foundation for financial support

independence of allocative efficiency from distribution in the theory of public goods when is the pareto optimal amount of public goods independent of income distribution subject to some regularity conditions the answer is when preferences of every individual i can be represented by a utility function of the form u x i y a y x i b i y where x i is i s consumption of private goods and y is the amount of public goods

nonlinear dynamics and econometrics an introduction the empirical modelling of economic time series is dominated by methods that assume linearity of the underlying dynamic economic system the so called frisch slutsky paradigm the main a priori argument in favour of linearity and the reason for its original adoption is its simplicity autoregressive models can be estimated using standard regression packages and there is now a wide range of computer software packages available to estimate models with linear moving average components the dynamics contained in estimated models can be completely characterized by their impulse response functions and directly related to linear models of the macroeconomy the dominance of the frisch slutsky paradigm is not based on any strong a priori belief that the economic system is linear indeed once curvature is introduced into utility functions and or production functions nonlinearity is pervasive in theoretical dynamic models hence the shortage of closed form solutions nor is it based on any convincing empirical evidence that actual economic time series are best described as linear stochastic processes the lq optimization approach namely linear constraints and quadratic objective functions which underlies most econometric applications either implicitly or explicitly is undoubtedly attractive on analytical and computational grounds but can be highly deficient in areas where economic behaviour is dominated by asymmetric costs of adjustments irreversibilities transaction costs or institutional and physical rigidities the challenge facing applied econometrics in dealing with these issues is truly immense reliable statistical techniques are required for detecting dynamic nonlinearities stochastic optimization models that are capable of capturing the primary sources of dynamic nonlinearities and are suitable for empirical analysis need to be developed the possible effects of temporal aggregation and aggregation across commodities and agents need to be worked out in the context of nonlinear dynamic models these are complicated issues solutions to some of which have eluded us even in the case of linear models and promise to be far more complicated when we enter the realm of nonlinear dynamic models it is therefore natural to expect that real progress in the area of nonlinear dynamic econometric models will be slow and hard to come by nevertheless the past two decades have witnessed important advances in the mathematical and statistical analysis of dynamic systems particularly in physics epidemiology and meteorology many of these developments have already found their way into economics and

what inventories tell us about aggregate fluctuations a tractable approach to s s policies abstract we estimate a dsge model with s s inventory policies we find that i taking inventories into account can significantly improve the empirical fit of dsge models in matching the standard business cycle moments in addition to explaining inventory fluctuations ii s s inventory policies can significantly amplify aggregate output fluctuations in contrast to the findings of the recent general equilibrium inventory literature and iii aggregate demand shocks become more important than technology shocks in explaining the business cycle once inventories are incorporated into the model an independent contribution of our paper is that we develop a solution method for analytically solving s s inventory policies in general equilibrium models with heterogeneous firms and a large aggregate state space and we illustrate how standard log linearization methods can be used to solve various versions of our inventory model generate impulse response functions and estimate the model s deep structural parameters

trend inflation indexation and inflation persistence in the new keynesian phillips curve purely forward looking versions of the new keynesian phillips curve nkpc generate too little inflation persistence some authors add ad hoc backward looking terms to address this shortcoming we hypothesize that inflation per sistence results mainly from variation in the long run trend component of inflation which we attribute to shifts in monetary policy we derive a version of the nkpc that incorporates a time varying inflation trend and examine whether it explains the dynamics of inflation when drift in trend inflation is taken into account a purely forward looking version of the model fits the data well and there is no need for backward looking components jel e12 e31 e52 in this paper we consider the extent to which guillermo calvo s 1983 model of nominal price rigidities can explain inflation dynamics without relying on arbitrary backward looking terms in its baseline formulation the calvo model leads to a purely forward looking new keynesian

entry and exit decisions based on a discount factor approach abstract entry and exit decisions under price uncertainty are discussed by a discount factor approach to investment the approach makes it possible to express the value of the firm as a function of a set of trigger prices at which investment takes place and to determine the optimal policy by simple maximization starting with a standard entry exit model by dixit 1989 entry and exit decisions under uncertainty journal of political economy 97 3 620 638 the paper expands to construction and scrapping decisions investment lags diminishing production capacity and limits to the number of lay up periods economic implications are investigated using experimental data and empirical shipping data

asymmetry in the effects of monetary and government spending shocks contrasting evidence and implications magda kandil 1 introduction recent research on business cycles has produced evidence that demonstrates the asymmetric effects of monetary shocks on economic variables 1 specifically the effect of expansionary monetary shocks on economic variables may be different from that of contractionary shocks the empirical evidence has stimulated efforts to provide an adequate theoretical explanation to the observed asymmetry sources of asymmetry have varied sharply in the theoretical literature primary explanations may be classified into supply side and demand side sources of asymmetry a strand of the theoretical literature has viewed asymmetry of economic fluctuations to be a supply side phenomenon demand shifts along a kinked supply curve are likely to produce varying effects on the economy as to the explanation of the kinked shape of the supply curve competing models offer explanations in one direction some have explained the asymmetric shape of the supply curve by conditions in the labor market this possibility arises in the context of models that advocate the contractual nominal wage rigidity explanation of business cycles the stipulation of wage contracts may allow for asymmetric wage indexation for example if wages are more responsive to expansionary demand shocks compared to contractionary shocks asymmetric wage indexation is consistent with a kinked supply curve in labor and output markets consequently expansionary demand shocks are likely to move the economy along a steeper supply curve 2 alternatively supply side asymmetry may be attributed to conditions in the p roduct market that differentiate price adjustment in the upward and downward directions faced with menu costs firms may be inclined for more frequent and larger adjustments of prices in the upward compared to the downward direction this possibility also is consistent with a steeper supply curve in the face of positive demand shocks compared to negative shocks 3 another line of the theoretical explanations of asymmetric economic fluctuations has emphasized possible asymmetry on the demand side of the economy conditions in the money and or goods markets may differentiate the response of aggregate demand to positive and negative shocks 4 this possibility differentiates the size of aggregate demand shifts in the face of expansionary and contractionary shocks in the absence of supply side asymmetry demand side asymmetry differentiates the severity of economic fluctuations in the face of positive and negative shocks the primary difference between demand side and supply side explanations concerns the output and inflationary effects in response to asymmetry supply side asymmetry produces a trade off between the asymmetric effects of demand shocks on output and their inflationary effects on wages and or prices the response of output growth is larger in the face of demand contraction compared to expansion concurrently the inflationary effect of demand shifts exceeds the deflationary effect on nominal wage and or price in contrast demand side asymmetry produces a positive correlation between the asymmetric effects of demand shocks on real output growth and nominal wage and price inflation that is larger output contraction relative to expansion correlates with smaller inflation relative to deflation of the nominal wage and price in the face of demand shocks the purpose of this investigation is to contrast asymmetry on the demand and supply sides in the face of two specific demand shocks monetary and government spending shocks demand and or supply conditions may differentiate the expansionary and contractionary effects of monetary and fiscal policies the article s analysis will highlight the specifics of this asymmetry the empirical evidence sheds some light on potential explanations of this asymmetry as follows conditions in the credit market and the behavior of ricardian consumers may differentiate the effects of expansionary and contractionary government spending shocks on aggregate demand

on inflation and output with costly price changes a simple unifying result this paper determines the real effects of credible disinflation when price setting is staggered the results are surprising a fairly quick disinflation causes a boom this finding suggests that nominal price rigidity alone does not explain why disinflation is costly in actual economies this abstract was borrowed from another version of this item

conventional monetary policy transmission during financial crises an empirical analysis summary this paper studies the effects of a conventional monetary policy shock in the usa during times of high financial stress the analysis is carried out by introducing a smooth transition factor model where the transition between states normal and high financial stress depends on a financial conditions index employing a quarterly dataset over the period 1970 q1 to 2008 q4 containing 108 us macroeconomic and financial time series i find that a monetary policy shock during periods of high financial stress has stronger and more persistent effects on macroeconomic variables such as output consumption and investment than it has during normal times differences in effects among the regimes seem to originate from nonlinearities in both components of the credit channel i e the balance sheet channel and the bank lending channel copyright 2016 john wiley sons ltd

the samuelson condition and the lindahl scheme in networks abstract we study optimal provision of public goods in the network showing that the samuelson condition and the lindahl scheme can both be substantially extended to characterize the expenditure on such public goods couched in terms of the structure of the network the extended samuelson condition and lindahl scheme formulate precisely how the local publicness of a local public good fundamentally determines its optimal provision and the personalized price that the lindahl tax payer faces independence of the optimal allocation from the distribution of resources at interior samuelsonian solutions in the network generally fails to hold even for the bergstrom cornes preferences

monetary instability the predictability of prices and the allocation of investment an empirical investigation using u k panel data it is often argued that monetary instability reduces the informational content of market signals and thereby hinders the efficient allocation of investment in this paper we use a signal extraction framework to give empirical content to this idea in particular we show why this framework predicts that as monetary uncertainty decreases the cross sectional distribution of investment widens we then explore this hypothesis using panel data information for uk companies over twenty years our data generally support the view that monetary instability may affect investment allocation through its effect on the predictability of prices this abstract was borrowed from another version of this item

time to build option value and investment decisions abstract investment decisions and outlays are often made sequentially for example the rate at which construction proceeds is usually flexible and can be adjusted with the arrival of new information traditional discounted cash flow methods which treat the pattern of investment as fixed ignore this flexibility and understate the value of the project this paper uses contingent claims analysis to derive optimal decision rules and to value such investments we determine the effects of time to build opportunity cost and uncertainty on the investment decision for reasonable parameter values we show how a simple npv rule can lead to gross errors

asymmetric business cycles theory and time series evidence abstract we offer a theory of economic fluctuations based on intertemporal increasing returns agents who have been active in the past face lower costs of action today this specification explains the observed persistence in individual and aggregate output fluctuations even in the presence of i i d shocks because individuals respond to the same shock differently depending on their recent past experience the exact process for output the sharpness of turning points and the degree of asymmetry are determined by the form of heterogeneity our general formulation under certain assumptions reduces to a number of popular state space unobserved components models we find that on us data our general formulation performs better than many of the existing econometric models largely because it allows sharper downturns and more pronounced asymmetries than linear models and is smoother than discrete regime shift models our estimates imply that only modest intertemporal returns are needed for our model to explain us gnp and that heterogeneity across agents plays an important role in the propagation of business cycle shocks

implications of rational inattention abstract a constraint that actions can depend on observations only through a communication channel with finite shannon capacity is shown to be able to play a role very similar to that of a signal extraction problem or an adjustment cost in standard control problems the resulting theory looks enough like familiar dynamic rational expectations theories to suggest that it might be useful and practical while the implications for policy are different enough to be interesting

a tiebout tax competition model abstract this paper analyzes a tiebout tax competition model where heterogeneity of consumer preferences is introduced into a standard tax competition framework following the modern tiebout tradition consumer sorting in the model is achieved through the activities of profit maximizing community developers once sorting is achieved the equilibrium is equivalent to that in a standard tax competition model with immobile but heterogeneous consumers a principal lesson of the analysis is that under capital taxation consumers with high public good demands are worse off than under a head tax regime in pursuit of high levels of public spending high demand communities impose high tax rates which drive away capital the analysis also establishes a number of other results

are workers permanently scarred by job displacements this paper investigates whether workers suffer lasting scars following job displacements using david t ellwood s 1982 terminology scars represent persistent effects whereas blemishes are transitory adjustments which dissipate over time more precisely dislocated individuals are defined as scarred if they continue to earn less or to be unemployed more than their nondisplaced counterparts even after the conclusion of a several year adjustment period