learning to believe in sunspots a number of authors have shown that competitive economies may possess sunspot equilibria that is rational expectations equilibria in which purely extrinsic uncertainty affects equilibrium prices and allocations 2 such results demonstrate that it does not require a lack of faith in the rationality of market participants to believe that competitive markets may be subject to purely speculative fluctuations driven solely by expectations 3 the mere existence of sunspot equilibria as solutions to a system of marketclearing conditions however might not be judged sufficient to indicate that competitive markets with rational participants could ever be subject to speculative instability the sunspot equilibria represent states of affairs in which agents act differently in the case of different realizations of the sunspot variable and it is rational for each agent to do so but it might be thought unlikely that the beliefs of all the participants in the market could ever come to be coordinated so as to bring about an equilibrium of that kind it is rational to believe that sunspots convey information about future states of affairs once the economy is in a sunspot equilibrium but why would rational agents ever begin to believe in such a thing so as to create the conditions under which the belief is rational in order to address such a question one must go beyond the mere statement of the conditions for equilibrium and discussion of what states of affairs satisfy them one must specify an explicit dynamic process according to which the beliefs of agents adjust when out of equilibrium any exercise of this kind is necessarily unsatisfactory as there is no univocal meaning for the postulate of rational behavior outside of an equilibrium it may well be the case that

the phillips curve macroeconomic policy and the welfare of canadians a review of the two competing paradigms explaining inflation and unemployment fluctuations singles out the keynesian phillips curve as the clear empirical winner over its classic competitors reestimation of the canadian phillips curve for 1957 90 identifies a sharp structural shift toward a high degree of unemployment hysteresis after 1972 the recent attempt of macropolicy to flatten the aggregate demand curve and limit supply side shock accommodation which aims at lower and more stable inflation is then shown to make unemployment higher and more unstable on average to an extent that is an increasing function of the degree of hysteresis understanding and reducing hysteresis and developing a consensus based incomes policy that has a chance of alleviating the dismal trade off should therefore to top research and policy priorities

risk aversion and the intertemporal behavior of asset prices in this article we characterize economies in which both cash flows and forward prices follow random walks we show in the case of geometric random walks that the preferences of the representative investor are of the constant proportional risk aversion type we also show the conditions under which spot prices follow random walks and under which the equivalent martingale measure is non state dep endent

stability of functional rational expectations equilibria abstract in this paper we examine a representative agent forecasting prices in a first order self referential overlapping generations model we first consider intermediate stage learning where agents update the forecasting rule every m periods we show that in theory and simulations the learning rule does not converge to the rational expectations equilibrium ree we next consider two stage learning where agents learn the functional mapping between the current forecast function and the previous forecast function we show that in theory and simulations the two stage learning rule converges to the ree journal of economic literature classifications numbers c62 c63 d83

on the existence of sunspot equilibria in an overlapping generations model abstract the existence of sunspot equilibria is shown in a one commodity overlapping generations model without stationarity assumptions on preferences endowments or nominal taxes the essential assumption is that there is a continuum of perfect foresight equilibria the technique is also useful for constructing stationary sunspot equilibria when they exist consumption in a sunspot equilibrium is shown to lie within the range consistent with perfect foresight

contracts as a barrier to entry it is shown that an incumbent seller who faces a threat of entry into his or her market will sign long term contracts that prevent the entry of some lower cost producers even though they do not preclude entry completely moreover when a seller possesses superior information about the likelihood of entry it is shown that the length of the contract may act as a signal of the true probability of entry

exclusive contracts and protection of investments we consider the effect of a renegotiable exclusive contract restricting a buyer to purchase from only one seller on the levels of noncontractible investments undertaken in their relationship contrary to some informal claims in the literature we find that exclusivity has no effect when all investments are fully specific to the relationship i e are purely internal exclusivity does matter when investments affect the value of the buyer s trade with other sellers i e have external effects we examine the effects of exclusivity on investments and aggregate welfare and the private incentives of the buyer seller coalition to use it

two remarks on the property rights literature we first point out that the recent property rights literature is based on three assumptions 1 that contracts are always subject to renegotiation 2 that the exercise of a property right confers a private benefit and 3 that parties are risk neutral building on hart moore 1999 we provide conditions under which an optimal contract consists of nothing more than an assignment of property rights we also examine the robustness of some of the literature s standard predictions about asset ownership to the introduction of mechanisms for eliciting parties ex post willingness to pay for the assets such as options or financial markets to illustrate the issue we revisit the hart moore 1990 proposition that joint ownership is suboptimal and argue that ownership by a single party is dominated by joint ownership with put options

simple contracts renegotiation under asymmetric information and the hold up problem abstract in this article it is demonstrated that voluntary bargaining over a collective decision under asymmetric information may well lead to ex post efficiency if the default decision is non trivial it is argued that the default decision may be interpreted as a simple contract that the parties have written ex ante this result is used in order to show that simple unconditional contracts which are renegotiated may allow the hold up problem to be solved even if the parties valuations are private information

contractual solutions to the hold up problem this paper considers a general version of the hold up problem where n agents first make relation specific investments and then must agree on some collective action it is shown that first best solutions exist under a variety of different assumptions about the nature of information asymmetries

monetary and fiscal policy design at the zero lower bound evidence from the lab the global economic crisis of 2007 8 pushed many advanced economies into a liquidity trap a macroeconomic scenario characterised by nomial rates at the zero lower bound zlb low inflation and output below trend we design an experiment to generate empirical evidence on the effectiveness of policies aimed at managing expectations against liquidity traps in a controlled laboratory environment where expectations are elicied directly from human subjects our results suggest that monetary policy alone is not sufficient to insulate the economy form the risk of falling into a liquidity trap even if it preventively cuts the policy augmented with a fiscal switching rule succeeds in avoiding and escapiing liquidity trap episodes we also measure larger than unity fiscal mulipliers when monetary policy is constrained by the zlb experimental results in different treatments are well explained by adaptive learning

investments holdup and the form of market contracts the authors analyze incomplete contracts to induce efficient investment with exogenous switching costs fixed price contracts are efficient generate some rigidity in prices are renegotiated intermittently by possibly small amounts and when inflation is positive generate asymmetric responses to shocks all consistent with evidence on prices and wages with two sided specific investments efficiency requires prices to have sufficient escalator clauses to avoid renegotiation as observed in many long term contracts a third case with one sided specific investments can generate take or pay contracts and explain why firms sometimes pay for specific investments that appear to benefit employees directly

estimating willingness to pay for improved water quality in the presence of item nonresponse bias this article deals with the problem of item nonresponse in contingent valuation surveys using a payment card method by applying a grouped data sample selection estimation technique that is capable of imputing the missing values conditional upon a respondent s decision to answer a willingness to pay question the advantage of the technique lies in its ability to utilize all of the information in the sample permitting a more efficient estimation in the presence of item nonresponse bias the major determinants of willingness to pay appear to be household income number of children education perception of existing water quality and identification with environmental issues copyright 2003 oxford university press

the principal agent relationship with an informed principal ii common values in many circumstances a principal may have relevant private information when she proposes a contract to an agent we analyze such a principal agent relationship as a noncooperative game the principal proposes a contract which is accepted or rejected by the agent who for most of our analysis has no private information the contract is executed if accepted otherwise the reservation allocation takes effect this allocation may be determined by a pre existing contract which the principal by her proposal is attempting to renegotiate or it may simply be the no trade point in this paper we assume that the principal s information directly affects the agent s payoff before solving the game we discuss pareto efficiency with asymmetric information we define an incentive compatible allocation to be weakly interim efficient wie if there exists no alternative incentive compatible allocation that both parties prefer for all possible beliefs that the agent might have about the principal s private information type we show that any wie allocation is interim efficient ie for some beliefs the rothschild stiglitz wilson rsw allocation relative to the reservation allocation l is the allocation that maximizes the payoff of each type of principal within the class of incentive compatible allocations that guarantee the agent at least the utility he gets from a irrespective of his beliefs about the principal s type the equilibrium set of the contract proposal game consists of the allocations that weakly pareto dominate the rsw allocation thus there is a unique equilibrium outcome if and only if the latter is ie and the equilibrium outcome is the rsw allocation itself after characterizing the equilibrium allocations we study those that are renegotiation proof when either the principal or the agent leads the renegotiation we then compare our contract proposal game which is a signaling model with its screening counterpart we conclude by extending our results to the case in which the agent as well as the principal has private information under the assumption of quasi linear preferences

on the low frequency relationship between public deficits and inflation summary we estimate the low frequency relationship between fiscal deficits and inflation and pay special attention to its potential time variation by estimating a time varying vector autoregression model for us data from 1900 to 2011 we find the strongest relationship neither in times of crisis nor in times of high public deficits but from the mid 1960s up to 1980 employing a structural decomposition of the low frequency relationship and further narrative evidence we interpret our results such that the low frequency relationship between fiscal deficits and inflation is strongly related to the conduct of monetary policy and its interaction with fiscal policy after world war ii copyright 2015 john wiley sons ltd

the principal agent relationship with an informed principal the case of private values we analyze the principal agent relationship when the principal has private information as a three stage noncooperative game contract proposal acceptance refusal and contract execution we assume that the information does not directly affect the agent s payoff private values equilibrium exists and is generically locally unique moreover it is pareto optimal for the different types of principal the principal generically does strictly better than when the agent knows her information equilibrium allocations are the walrasian equilibria of an economy where the traders are different types of principal and exchange the slack on the agent s individual rationality and incentive compatibility constraints

strategic complementarity in business formation aggregate fluctuations and sunspot equilibria the extent to which changes in beliefs can be important factors in initiating economic fluctuations has been a prominent area of investigation for macroeconomists the notion that beliefs about the future influence current decisions is a property of almost all dynamic economic systems the more challenging task is identifying economic environments in which changes in beliefs alone influence current choices in such a way that the variations in beliefs are self fulfilling because the resulting fluctuations arise in the absence of variations in fundamental variables such as preferences and technology they are often termed sunspot equilibria apart from suggesting that instability of expectations may be a distinct source of cyclical volatility sunspot equilibria may also explain why apparently small disturbances in fundamentals lead to large change in macroeconomic aggregates in this study we demonstrate the possibility of sunspot equilibria in an overlappinggenerations economy characterized by a plausible form of strategic complementarity as more agents enter as producers in any particular sector of the economy they create an incentive for agents to enter as producers into other sectors as well 2 the basis for this

is quantity theory still alive this paper investigates whether the quantity theory of money is still alive we argue that it is but that the slippage is not negligible for countries with low inflation the relationship between average inflation and the growth rate of money is tenuous at best a correction for variation in output growth and the opportunity cost of money using theory implied elasticities helps explain the slippage for the period since 1990 inflation targeting at low rates of inflation makes it harder to establish the long run relationship between monetary growth and inflation

renegotiation design with unverifiable information this paper considers a buyer seller relationship with observable but unverifiable investments and or random utility parameters in such situations it is known that contract renegotiation may prevent the implementation of first best outcomes in this paper we show however that efficient investments and optimal risk sharing can typically be achieved provided the initial contract is able to monitor the ex post renegotiation process specifically we focus on the following two features of renegotiation design first default options in case renegotiation breaks down second the allocation of all bargaining power to either contracting party moreover we show that these two features can be obtained in standard rubinstein bargaining games through contractual provisions such as specific performance clauses and penalties for delay or equivalently financial hostages refundable without interest

monetary fiscal policy interaction and fiscal inflation a tale of three countries abstract we study the impact of the interaction between fiscal and monetary policy on the low frequency relationship between the fiscal stance and inflation using cross country data from 1965 to 1999 in a first step we contrast the monetary fiscal narrative for germany the u s and italy with evidence obtained from simple regression models and a time varying var we find that the low frequency relationship between the fiscal stance and inflation is low during periods of an independent central bank and responsible fiscal policy and more pronounced in times of non responsible fiscal policy and accommodative monetary authorities in a second step we use an estimated dsge model to interpret the low frequency measure structurally and to illustrate the mechanisms through which fiscal actions affect inflation in the long run the findings from the dsge model suggest that switches in the monetary fiscal policy interaction and accompanying variations in the propagation of structural shocks can well account for changes in the low frequency relationship between the fiscal stance and inflation

noncooperative bargaining hostages and optimal asset ownership this paper re examines the effect of asset ownership on investment decisions for a joint relationship in the absence of contracts on investment levels it obtains some results which contradict findings by sanford j grossman oliver d hart and john moore in particular it finds that the loss of ownership of an asset may increase the asset loser s investment incentive the difference between this paper and those authors papers stems from the different interpretations of the roles of the threat point and outside options in bargaining this paper also clarifies the role of relationship specific investments as a cause of integration copyright 1998 by american economic association

introduction to the stability of rational expectations equilibrium abstract this paper surveys the literature which examines the stability of the expectations that agents are assumed to have in a rational expectations equilibrium ree this issue is more complex than the usual statistical estimation problem because the relationship between observable variables and payoff relevant variables is endogenous one approach taken in the literature yields convergence to a ree but requires agents to have extensive knowledge about the structure and dynamics of the model that prevails while they learn a second approach does not assume that agents have correctly specified likelihood functions and finds that ree may not be stable

do institutions promote rationality an experimental study of the three door anomaly the three door problem is an example of a systematic violation of a key rationality postulate that has attracted much attention in this seemingly simple individual decision task most people initially fail to apply correctly bayes law and to make the payoff maximizing choice previous experimental studies have shown that individual learning reduces the incidence of irrational choices somewhat but is far from eliminating it we experimentally study the roles of communication and competition as institutions to mitigate the choice anomaly we show that the three door anomaly can be entirely eliminated by these institutions

time and uncertainty in overlapping generations economies this paper shows the general reversibility of every perfect foresight equilibrium of an overlapping generations economy it then shows and characterizes the exist ence of reversible sunspot equilibria in these economies as well which seems to be at odds with our intuition about the irreversibility of a tree of events although the paper establishes also that such reversible stochastic equilibria constitute a negligible subset of all the equilibria of their class their mere existence may be considered somewhat puzzling for this intuition

on low frequency estimates of long run relationships in macroeconomics abstract a number of recent studies have attempted to test propositions concerning long run economic relationships by means of frequency domain time series techniques that concentrate attention on low frequency comovements of variables the present paper emphasizes that many of these propositions involve expectational relationships that are not inherently related to specific frequencies or periodicities thus the association of low frequency time series test statistics with long run economic propositions is not generally warranted that such an association can be misleading is demonstrated by analysis of examples taken from notable papers by geweke lucas and summers

stability chaos and multiple attractors a single agent makes a difference abstract this paper provides an example in which a slight behavioral heterogeneity may fundamentally change the dynamical properties of a nonlinear cobweb market with a quadratic cost function and an isoelastic demand function we consider two types of producers cautious adapters and naive optimizers in a market of naive optimizers a single cautious adapter stabilizes the otherwise exploding market in a market of cautious adapters a single naive optimizer may destabilize the market without him there exists at most one periodic attractor in the market but with him there may appear many and even infinitely many coexisting periodic attractors

what do we really know about wages the importance of nonreporting and census imputation in the most frequently used microdata sets over a quarter of all respondents now refuse to answer some questions about their incomes the census bureau has dealt with this problem which has been increasing in severity over time by imputing incomes of non respondents their imputation procedure called the hot deck essentially matches nonrespondents with demographically similar donors in this paper we evaluate the census imputation methodology and raise some questions first the census procedure is tied to commonality of events in the population rather than the more appropriate informational content of regressors clearly the census procedure severely understates income in certain occupations because it is based on the apparently invalid assumption that income does not affect reporting propensities it most likely understates average incomes as well

stationary monetary equilibria in overlapping generations models with incomplete markets abstract the objective of this paper is to study the stationary monetary equilibria of a stochastic overlapping generations model with a general incomplete asset structure it is proved that a stationary equilibrium with a nonzero price of money generically exists and is locally isolated when there is outside money for an open set of economies there is an equilibrium with positive money prices in all states the equilibrium is also given a neat characterisation in terms of the properties of the underlying state prices with only inside money there will instead be a continuum of equilibria journal of economic literature classification numbers d52 d90 e40

sufficient conditions for the existence of sunspot equilibria abstract this paper reports on conditions on agents preferences and endowments sufficient to guarantee the existence of sunspot equilibria in a simple overlapping generations model of pure exchange sunspot equilibria are those in which uncertainty extrinsic to the economy operates through expectations to yield a fulfilled expectations competitive equilibrium in which the extrinsic randomness has real effects on prices and allocations the paper also provides necessary and sufficient conditions for these equilibria to have agents trading in a fixed stock of valued fiat money the condition derived can be interpreted as requiring that intertemporal income effects appropriately dominate substitution effects

cooperative investments and the value of contracting recent articles have shown that contracts can support the efficient outcome for bilateral trade even in the face of specific investments and incomplete contracting these studies typically considered selfish investments that benefit the investor e g the seller s investment reduces her production costs the authors find very different results for cooperative investments that directly benefit the investor s partner e g the seller s investment improves the buyer s value of the good most importantly if committing not to renegotiate the contract is impossible then contracting has no value i e the parties cannot do better than to abandon contracting altogether in favor of ex post negotiation

constructive consumer choice processes consumer decision making has been a focal interest in consumer research and consideration of current marketplace trends e g technological change an information explosion indicates that this topic will continue to be critically important we argue that consumer choice is inherently constructive due to limited processing capacity consumers often do not have well defined existing preferences but construct them using a variety of strategies contingent on task demands after describing constructive choice consumer decision tasks and decision strategies we provide an integrative framework for understanding constructive choice review evidence for constructive consumer choice in light of that framework and identify knowledge gaps that suggest opportunities for additional research

income and the substitution pattern between domestic and international tourism demand this article analyses the role of income in the decision of participating in the tourism demand within 1 year the tourists who are participating can travel to domestic destinations only abroad destinations only or to both of them such a substitution pattern is modelled using a bivariate probit model the analysis is carried out to the regional level using a survey conducted in 15 european eu 15 countries in addition to the traditional socioeconomic variables the analysis adds new variables to the outbound tourism demand modelling such as the attributes of the place of residence the results show that tourism demand is income elastic however there are marked differences in the income elasticities of the probabilities of travelling domestically or abroad above certain income threshold the substitution pattern between destinations takes part the probability of travelling domestically only remains constant whereas the probability of travelling abroad keeps growing additionally the article prov

adaptive learning and monetary exchange abstract this paper investigates three classic questions in monetary theory how can an intrinsically worthless asset such as fiat money maintain value as a medium of exchange what are the short run and long run effects of a change in the money supply what is the social cost of inflation i answer these questions using a microfounded model of monetary exchange that replaces the rational expectations assumption with an adaptive learning rule first i show that monetary exchange is a robust arrangement in the sense that agents are able to learn the stationary monetary equilibrium while the non monetary equilibrium is unstable under learning second an unanticipated monetary injection has real effects in the short run because learning the value of money takes time in the long run agents successfully learn the value of money hence money is neutral third under a constant money growth policy an increase in the growth rate of money increases output in the short run producing a short run phillips curve a ten percent increase in the money growth rate has a social cost of 0 41 percent of output per year alternatively a ten percent decrease in the money growth rate has a social benefit of 0 37 percent of output per year

existence and local uniqueness of functional rational expectations equilibria in dynamic economic models abstract this paper established the existence and local uniqueness of stationary functional rational expectations equilibria for an open set of multi good multi agent pure exchange overlapping generations models in which agents endowments are random such equilibria are given by prices which are functions of one period lagged prices and endowments and of current endowments

a signaling based theory of contractual commitment to relationships abstract in this paper i present signaling as an explanation for how and why parties commit to relationships when they initially contract about the terms of those relationships two forms of contractual commitment to a relationship are considered a promise to trade in the future contracted quantity and a promise not to trade with anyone else contracted exclusivity a party is said to commit more to a relationship if it commits initially to trade a higher quantity and or to a higher level of exclusivity i characterize equilibrium contracts and therefore commitment both the ability to signal information through an exclusivity commitment and whether the informed party commits more to the relationship when the relationship is more likely to succeed depend on the source of the asymmetry of information

on non uniqueness in rational expectations models an attempt at perspective abstract many macroeconomic models involving rational expectations give rise to an infinity of solution paths even when the models are linear in all variables some writers have suggested that this non uniqueness constitutes a serious weakness for the rational expectations hypothesis one purpose of the present paper is to argue that the non uniqueness in question is not properly attributable to the rationality hypothesis but instead is a general feature of dynamic models involving expectations it is also argued that there typically exists in a very wide class of linear rational expectations models a single solution that excludes bubble or bootstrap effects one that occur only because they are arbitrarily expected to occur a systematic procedure for obtaining solutions free from such effects is introduced and discussed in addition this procedure is used to interpret and reconsider several prominent examples with solution multiplicities including ones developed by fischer black and john b taylor

a monetarist model of inflation abstract we consider an overlapping generations model with new money introduced via autocorrelated lump sum transfers hence the own rate of return on money is fixed implying that dynamic neutrality may fail due to inflation tax effects we derive a condition less restrictive than serial independence of monetary growth rates which is necessary as well as sufficient for neutrality we determine whether various properties of the joint distribution of monetary growth rates and inflation rates which are weaker than neutrality for example positive correlation between the two can be expected to obtain in general settings

holdups standard breach remedies and optimal investment in bilateral trading problems the parties may be hesitant to make relationship specific investments without adequate contractual protection we postulate that the parties can sign noncontingent contracts prior to investing and can freely renegotiate them after information about the desirability of trade is revealed we find that such contracts can induce one party to invest efficiently when courts impose either a breach remedy of specific performance or expectation damages moreover specific performance can induce both parties to invest efficiently if a separability condition holds expectation damages on the other hand is poorly suited to solve bilateral investment problems forthcoming the american economic review please contact the program in law and economics at boalt hall school of law uc berkeley berkeley ca 94720 for a copy of this paper

comments on arrow and on lucas such a number of interesting and provocative things are put forward in lucas and in arrow in this issue that i would like to be able to dissect them in detail for example lucas states that the problem of controlling inflation has been successfully solved in a scientific sense p s405 i am tempted to explore the limits of the set of problems that might be said to be scientifically solved in the lucas sense but i fear that this would take up a good deal of space arrow deplores the use of homogeneity assumptions as a device for adding content to otherwise inconclusive economic theories but presumably he does not believe that the sonnenschien mantel debreu theorem is the ultimate conclusion regarding the useful content of the propositions of general equilibrium theory some restrictions of intermediate strength are presumably called for and i would like to make the case that strong empirical generalizations about the nature of human actors such as those describing the biological requirements for survival are available and relevant in this connection this too would take some space to develop in detail though not as much as the first subject given the constraints i must choose a focus i will focus on what i take to be the main message that lucas has put forward regarding the relationship between adaptive behavior and the rationality assumptions employed in standard economic theory this message is recognizable as the intellectual descendant of similar discussions by friedman and machlup in the 1940s and 1950s and the ideas involved remain extremely influential in the discipline today i will present and comment on my own statement of this position which i following blaug 1980 will call the classic defense of the rationality as

complexity and economic policy a paradigm shift or a change in perspective a review essay on david colander and roland kupers s complexity and the art of public policy in their recent book colander and kupers 2014 argue that viewing the economy as a complex adaptive system should change the way in which we make economic policy this would necessitate a paradigm shift economics has over time tried to produce a coherent model to underpin the dominant laissez faire liberal approach but we have never proved in that model that left to their own devices the participants in an economy will self organize into a satisfactory state this is an assumption complex interactive systems with direct interaction between heterogeneous agents may show no tendency to self equilibrate and will undergo endogenous crises economists should concentrate on the emergence of certain patterns colander and kupers suggest that we may be able to nudge the system into good basins of attraction a more radical view is that there are no fixed basins of attraction these change with the evolution of the system and it is illusory to believe that we can choose good basins we may be able to recognize and influence the emergence of certain states of the economy but we are far from leon walras s dream of economics as a science like astrophysics

combining revealed and stated preference data to estimate the nonmarket value of ecological services an assessment of the state of the science this paper reviews the marketing transportation and environmental economics literature on the joint estimation of revealed preference rp and stated preference sp data the rp and sp approaches are first described with a focus on the strengths and weaknesses of each recognizing these strengths and weaknesses the potential gains from combining data are described a classification system for combined data that emphasizes the type of data combination and the econometric models used is proposed a methodological review of the literature is pursued based on this classification system examples from the environmental economics literature are highlighted a discussion of the advantages and disadvantages of each type of jointly estimated model is then presented suggestions for future research in particular opportunities for application of these models to environmental quality valuation are presented

the conquest of south american inflation we infer determinants of latin american hyperinflations and stabilizations by using the method of maximum likelihood to estimate a hidden markov model that assigns roles both to fundamentals in the form of government deficits that are financed by money creation and to destabilizing expectations dynamics that can occasionally divorce inflation from fundamentals levels and conditional volatilities of monetized deficits drove most hyperinflations and stabilizations with a notable exception in peru where a cosmetic reform of the type emphasized by marcet and nicolini occurred

contractual signaling relationship specific investment and exclusive agreements i analyze a model of hold up with asymmetric information at the contracting stage the asymmetry of information concerns the value of trade with external parties i show that contractual signaling and efficiency of investment can conflict if only quantity is contractible this conflict generates inefficient equilibria in terms of investment contracting on exclusivity in addition to quantity resolves the conflict and consequently eliminates the inefficiency of investment

estimation of residential electricity demand function in seoul by correction for sample selection bias abstract this paper attempts to estimate the residential electricity demand function in seoul to this end we collected the data from a survey of households in seoul and employed the bivariate model to rectify the undesirable impacts of non response data the results show that the size of family the size of house dummy for having a plasma display panel television dummy for having an air conditioner and the household s income have positive relationships with the residential electricity demand on the other hand electricity price contributes negatively to the residential electricity demand in addition the price and income elasticities were estimated as 0 2463 and 0 0593 respectively implying that residential electricity demand in seoul is price and income inelastic such useful information is expected to help policy makers regulate the residential electricity supply and predict the effect of the price on the residential electricity demand in the future

price smoothing policies a welfare analysis in post wwii experience u s monetary authorities have attempted to eliminate seasonal fluctuations in prices and nominal interest rates developments in financial markets and recently discovered empirical regularities regarding the seasonal cycle seem to make these activities questionable using a money in the utility function model this paper analyzes the welfare properties of price and interest rate smoothing policies and the sense in which the distinction between seasonal and cyclical fluctuations is relevant it is shown that smoothing policies are welfare improving but not optimal and that the origin of the shocks not the persistence of the fluctuations is relevant in formulating policies

imputing a continuous income variable from grouped and missing income observations abstract most cross sectional data sets collect income in a discrete number of categories that is in grouped form to simplify the respondent s task and to encourage a response in spite of such grouped data collection many respondents refuse to provide information on income this paper develops a method to impute a continuous and reliable value for income from grouped and missing income data

imputing a continuous income variable from a bracketed income variable with special attention to missing observations abstract this paper proposes a method based on polychotomous discrete choice methods to impute a continuous measure of income when only a bracketed measure of income is available and for only a subset of the obsevations the method is shown to perform well with cp5 data

the emergence of cooperation among egoists this article investigates the conditions under which cooperation will emerge in a world of egoists without central authority this problem plays an important role in such diverse fields as political philosophy international politics and economic and social exchange the problem is formalized as an iterated prisoner s dilemma with pairwise interaction among a population of individuals results from three approaches are reported the tournament approach the ecological approach and the evolutionary approach the evolutionary approach is the most general since all possible strategies can be taken into account a series of theorems is presented which show 1 the conditions under which no strategy can do any better than the population average if the others are using the reciprocal cooperation strategy of tit for tat 2 the necessary and sufficient conditions for a strategy to be collectively stable and 3 how cooperation can emerge from a small cluster of discriminating individuals even when everyone else is using a strategy of unconditional defection

learning adaptive expectations and technology shocks this study explores the macroeconomic implications of adaptive expectations in a standard growth model we show that the self confirming equilibrium under adaptive expectations is the same as the steady state rational expectations equilibrium for all admissible parameter values but that dynamics around the steady state are substantially different between the two equilibria the differences are driven mainly by the dampened wealth effect and the strengthened intertemporal substitution effect not by escapes emphasised by williams 2003 consequently adaptive expectations can be an important source of frictions that amplify and propagate technology shocks and seem promising for generating plausible labour market dynamics

sunpsots and cycles reconsidered abstract we develop a sufficient condition for the existence of stationary sunspot equilibria in a one good olg economy this condition is of a global nature unlike the usual local indeterminacy condition and lets us prove existence even for independent sunspot processes we use this result to show that the assumption that second period consumption is a normal good is essential to obtaining two of the results in azariadis and guesnerie azariadis and guesnerie 1986 rev economic studies 53 725 737 namely that a whenever sunspot equilibria with two states of nature exist cycles of period two also exist and that b for a given economy the set of matrices generating two state stationary sunspot equilibria is a connected set

does asset ownership always motivate managers outside options and the property rights theory of the firm this paper studies the grossman hart moore ghm property rights approach to the theory of the firm under alternating offers bargaining when managers can pursue other occupations while negotiating over the division of the gains from cooperation the ghm results obtain if taking the best alternative job terminates bargaining outcomes are very different sometimes an agent with an important investment decision should not own the assets he works with sometimes independent assets should be owned together sometimes strictly complementary assets should be owned separately

adaptive behavior and economic theory the relationship between psychological and economic views of behavior once a subject of heavy dispute is now understood in a very similar way by practitioners of both these disciplines and of our sister social sciences in general terms we view or model an individual as a collection of decision rules rules that dictate the action to be taken in given situations and a set of preferences used to evaluate the outcomes arising from particular situation action combinations these decision rules are continuously under review and revision new decision rules are tried and tested against experience and rules that produce desirable outcomes supplant those that do not i use the term adaptive to refer to this trial anderror process through which our modes of behavior are determined if one is interested in modeling particular decisions in any very explicit way it is obviously necessary to think about rather narrow aspects of an individual s entire set of decision rules his or her personality experimental psychology has traditionally focused on the adaptive process by which decision rules are replaced by others in this tradition the influence of the subject s or as an economist says the agent s preferences this essay uses a series of examples to illustrate the use of rationality and adaptation in economic theory it is argued that these hypotheses are complementary and that stability theories based on adaptive behavior may help to narrow the class of empirically interesting equilibria in certain economic models an experiment is proposed to test this idea

the return of the liquidity effect a study of the short run relation between money growth and interest rates in this article i use band pass filters to investigate the short run relationship between money growth and interest rates i find a negative correlation between short run movements in money growth and interest rates which i interpret as evidence that the liquidity effect dominates the anticipated inflation effect

two period cycles in a three period overlapping generations model abstract we study the properties of two period monetary cycles in simple pure exchange overlapping generations economies in which the households live for three periods we demonstrate that these economies can support cycles under a much broader and arguably more plausible range of assumptions than the analogous two period economies we show that economies that fail the well known grandmont econometrica 53 1985 995 condition can have cycles and that economies that satisfy the condition can fail to have cycles in addition we show that economies can have monetary cycles when they do not have conventional monetary steady states and when aggregate demand for assets is not decreasing in the real return rate at a gross real rate of unity

signalling and renegotiation in contractual relationships this paper examines how the possibility of renegotiation affects contractual outcomes in signaling games when an infinite number of rounds of renegotiations are allowed before contracts are executed the main results of the paper are 1 contracts may still contain distortions 2 the popular efficient separating equilibrium outcome is never an equilibrium outcome with renegotiation 3 incentive compatibility constraints can be generalized to incorporate renegotiation 4 equilibrium outcomes can be separating and nevertheless depend on the uninformed player s prior and 5 renegotiation in signaling games may lead to outcomes similar to equilibrium outcomes of screening games in which multiple contract purchases are allowed copyright 1993 by the econometric society

expectational diversity in monetary economies abstract we investigate an overlapping generations monetary economy in which expectations depend upon backward looking predictors of the future price level we use discrete choice theory to model how agents select a predictor based on its past forecast error letting the number of available predictors tend to infinity we obtain the large type limit of the system taking the large type limit dramatically reduces the number of free parameters while maintaining the expectational diversity which we argue is necessary for constructing plausible learning based models the model s dynamics are strongly influenced by the intensity of choice which measures how sensitive an agent s predictor choice is to differences in forecast errors across predictors when the intensity of choice is low the monetary steady state is stable as the intensity of choice increases and if certain parametric restrictions are met the system undergoes a hopf bifurcation in which case we document the existence of highly irregular equilibrium price paths

on the stability of nonsunspot equilibria abstract this paper analyzes the stability of the pareto efficient nonsunspot equilibria as a function of the constraints faced by consumers in their ability to transfer wealth between states of nature equilibria that are stable for the certainty economy define nonsunspot equilibria that are stable in the following two polar cases 1 all consumers are unconstrained 2 all consumers are fully constrained furthermore the stable certainty equilibria with small trade vectors define nonsunspot equilibria that are also stable independently of the constraint levels instability can develop only at intermediate constraint levels and for nonsunspot equilibria that feature sufficiently large trade vectors

the mirrlees approach to mechanism design with renegotiation with applications to hold up and risk sharing the paper studies the implementation problem first analyzed by maskin and moore 1999 in which two agents observe an unverifiable state of nature and may renegotiate inefficient outcomes following play of the mechanism we develop a first order approach to characterizing the set of implementable utility mappings in this problem paralleling mirrlees s 1971 first order analysis of standard mechanism design problems we use this characterization to study optimal contracting in hold up and risk sharing models in particular we examine when the contracting parties can optimally restrict attention to simple contracts such as noncontingent contracts and option contracts where only one agent sends a message

exclusive contracts foster relationship specific investment exclusive contracts prohibit one or both parties from trading with anyone else contrary to earlier findings we show that investments that are specific to the contracting parties may be encouraged by exclusivity results depend on the nature of investments and the bargaining solution the major part of the analysis shows that exclusivity deals designed to assure the supply of essential inputs promote investment infinite penalties for breach even if ex post renegotiable may result in excessive investment in which case a positive but finite damage payment yields the first best outcome

the payoff to work without pay volunteer work as an investment in human capital despite the widespread belief that volunteer work enhances an individual s employment prospects the hypothesis that volunteer work increases one s earnings has

genetic algorithms and inflationary economies abstract this paper studies overlapping generations economies in which agents use genetic algorithms to learn correct decision rules the results of computer simulations show that a genetic algorithm converges to the unique monetary steady state in case of a constant money supply policy and to the low inflation stationary equilibrium in case of a constant real deficit financed through seignorage features of the genetic algorithm adaptation are compared to the performance of other learning algorithms and to the behavior observed in experiments with human subjects in the same olg environments

modelling cognitively bounded rationality an evaluative taxonomy abstract since its origins in the 1950s the notion of bounded rationality has been incorporated into economic theory using an array of methodological approaches this paper presents a taxonomy by which these approaches can be categorized and understood evaluating each approach against a range of important criteria at a time when the foundations of economic theory are being re examined this paper should be viewed as a first step towards an assessment of the appropriate role that this more realistic view of cognition should take in different areas of economic theory and also of the desirable characteristics of models that incorporate it

incomplete contracts and signaling this article presents a principal agent model in which asymmetric information leads to contractual incompleteness i show that in the presence of transactions costs incompleteness may act as a signal of the principal s type two types of transactions costs are considered those incurred ex ante drafting costs and those incurred ex post enforcement or verification costs i prove that in the presence of either of these costs asymmetric information leads to more contractual incompleteness than full information does

incomplete contracts specific investments and risk sharing an optimal contract design problem is considered contracts which are incomplete and simple are used to investigate the extent to which constrained revisions can mitigate inefficiencies resulting from contractual incompleteness an optimal contract is characterized in two cases first when a contract is being used to facilitate trade between two risk neutral parties who must make relationship specific investments it is possible to implement the first best by a simple contract second when a contract is being used to share risk it is generally not possible to implement the first best when one party is risk neutral however it is possible to implement the first best by assigning all the ex post decision rights to that party

two illustrations of the quantity theory of money breakdowns and revivals by extending his data we document the instability of low frequency regression coefficients that lucas 1980 used to express the quantity theory of money we impute the differences in these regression coefficients to differences in monetary policies across periods a dsge model estimated over a subsample like lucas s implies values of the regression coefficients that confirm lucas s results for his sample period but perturbing monetary policy rule parameters away from the values estimated over lucas s subsample alters the regression coefficients in ways that reproduce their instability over our longer sample jel c51 e23 e31 e43 e51 e52 robert e lucas jr 1980 used near unit slopes of univariate regressions of moving averages of inflation and interest rates on money growth for the united states for the period 1953 1977 to illustrate two central implications of the quantity theory of money that a given change in the rate of change in the quantity of money induces i an equal change in the rate of price inflation and ii an equal change in nominal rates of interest lucas said that those two quantity theoretic propositions

the effects of money growth on inflation and interest rates across spectral frequency bands band spectral regression techniques are used to identify the frequency bands that are most important in the relationships between money growth and inflation and between money growth and the nominal interest rate the results show that cycles in the growth rate of m1 from one to two years long produce higher frequency cycles in inflation and two distinct sets of higher frequency cycles in changes in the nominal interest rate the results support models where predictable changes in money growth produce liquidity and anticipated inflation effects on nominal interest rates copyright 1994 by ohio state university press

two illustrations of the quantity theory of money of two central implications of the quantity theory of money that a given change in the rate of change in the quantity of money induces i an equal change in the rate of price inflation and ii an equal change in nominal rates of interest the illustrations were obtained by comparing moving averages of the three variables in question using quarterly u s time series for the period 1953 77 readers may find the results of interest as additional confirmation of the quantity theory as an example of one way in which the quantity theoretic relationships can be uncovered via atheoretical methods from time series which are subject to a variety of other forces or as a measure of the extent to which the inflation and interest rate experience of the postwar period can be understood in terms of purely classical monetary forces the theoretical background of the study is reviewed very briefly as it is familiar material in the next section the data processing methods are described and rationalized in section ii the illustrations

commodity choice behavior with pigeons as subjects starting from an initial baseline budget line income compensated price changes always resulted in substitution effects consistent with the slutsky hicks theory this behavior cannot be explained by a simple random behavior model similar changes in relative prices that did not originate from the initial baseline budget line resulted in undersubstitution effects the composition of consumption changed in the expected direction but the magnitude of change was not large enough to be consistent with the initial commodity bundle chosen these undersubstitution effects are not explainable by shifting preference patterns or anchoring effects found in inconsistent choice sequences with human subjects

the origin of predictable dynamic behavior abstract nonlinear dynamic theory implies optimal decisions often behave like random chaos such random target motion is impossible for imperfect agents to follow without error however they can still gradually approach the optimal target if and only if they partially adjust toward its perceived location so as to induce their behavior to converge to an equilibrium reducing dynamic errors through partial adjustment thereby induces a stable regularity in behavior that otherwise may never evolve this result agrees with the stability properties observed in experimental markets including cobweb auction and asset markets whose dynamics before reaching equilibrium exhibit adaptive rather than rational expectations