interpreting economic time series this paper explores some of the implications for econometric practice of the principle that people s observed behavior will change when their constraints change in dynamic contexts a proper definition of people s constraints includes among them laws of motion that describe the evolution of the taxes they must pay and the prices of the goods that they buy and sell changes in agents perceptions of these laws of motion or constraints will in general produce changes in the schedules that describe the choices they make as a function of the information that they possess until very recently received dynamic econometric practice ignored this principle the practice of dynamic econometrics should be changed so that it is consistent with the principle that people s rules of choice are influenced by their constraints this is a substantial undertaking and involves major adjustments in the ways that we formulate estimate and simulate econometric models

note testing regret bell s recent paper bell d e 1983 risk premiums for decision regret management sci 29 1156 1166 in this journal provides useful foundations for the regret approach to decision theory this work is all the more important because regret that is the pain of having chosen incorrectly is one of the few radical departures from the conceptual framework of the ubiquitous expected utility model and its variants despite providing many of the parametric accoutrements deemed necessary for the acceptance of a model he has not i believe proposed a test which is the most appropriate to establish the validity of regret

regret and feedback information in first price sealed bid auctions we investigate the effect of regret related feedback information on bidding behavior in sealed bid first price auctions two types of regret are possible in this auction format a winner of the auction may regret paying too much relative to the second highest bid and a loser may regret missing an opportunity to win at a favorable price in theory under very general conditions being sensitive to winning and paying too much should result in lower average bids and being sensitive to missing opportunities to win at a favorable price should result in higher bids for example the u s government s policy of revealing losing bids may cause regret sensitive bidders to anticipate regret and bid conservatively decreasing the government s revenue we test these predictions in the laboratory and find strong support for both

releasing the regret lock consumer response to new alternatives after a sale this research examines how consumers behave after they miss a sale and subsequently face a smaller sale for the same or different product according to the proposed theory a two way interaction is predicted in which adding another similar alternative to the choice set leads to higher choice deferral without prior sale information but lower choice deferral with information about missing a larger sale on one of the alternatives in addition the new alternative in the choice set becomes more attractive and captures most of the market share the results from three lab experiments and one field experiment confirm the hypotheses and the proposed mechanism the article concludes with a discussion of the theoretical and managerial implications of the findings

precommitment in competing vertical chains the design of distribution channels is an important marketing decision since a revision implies costly reorganization hence it makes sense to study strategic motives of alternative distribution devices a precommitment is a strategic move that affects the other players expectations on how oneself will behave and thus induces them to choose in one s own favor schelling 1960 how these tactics can be used by firms to favorably influence competition between vertical chains is the topic of the literature reviewed in this survey jel classification l22 l42 l81

the social costs of monopoly and regulation posner reconsidered focuses on social costs of monopoly and trade regulation in the united states benefit of marginal changes on antitrust activities equality of cost in obtaining monopoly and expected profit of monopolist elasticity of inputs in obtaining monopoly ebsco

risk attitude under two alternative theories of choice under risk abstract anticipated utility theory and prospect theory have been proposed as descriptive models of choice under uncertainty this paper examines the concept of risk attitude under these two theories and considers the relationship between risk attitude under von neumann morgenstern expected utility theory and risk attitude under these alternative theories a risk premium analysis is conducted and risk premia are partitioned to characterize the complex nature of risk attitude under these theories comparative risk aversion across individuals is also considered

general equilibrium theory with imperfect competition abstract this survey is organized as follows i introduction ii the main issues iii negishi s model iv objective demand in the cournot nash framework v objective demand in the bertrand nash framework vi the assumption of quasi concavity of the profit functions vii compromises between the conjectural and the objective approach viii insights into the notion of perfect competition ix conclusion

estimating markups and market conduct with multidimensional product attributes we demonstrate how to estimate a model of oligopoly pricing when products are multi dimensionally differentiated we provide an empirical counterpart to recent theoretical work on product differentiation using specifications informed by economic theory we estimate price cost margins for products differentiated in many dimensions

target zones and exchange rate dynamics this paper develops a simple model of exchange rate behavior under a target zone regime it shows that the expectation that monetary policy will be adjusted to limit exchange rate variation affects exchange rate behavior even when the exchange rate lies inside the zone and is thus not being defended actively somewhat surprisingly the analysis of target zones turns out to have a strong formal similarity to problems in option pricing and investment under uncertainty

risk premiums for decision regret some people find decision making under uncertainty difficult because they fear making the wrong decision wrong in the sense that the outcome of their chosen alternative proves to be worse than could have been achieved with another alternative these people may be willing to pay a premium to avoid consequences that produce this decision regret this paper continues an earlier investigation into the normative implications of decision regret and looks at situations where the joint probability distribution of consequences between alternatives is not specified at the time of the decision it includes a discussion of cases where the outcomes produced by alternatives not chosen are never resolved a consequence of this model of preferences for risky situations is that two components of risk aversion may be identified decreasing marginal value and regret aversion

loss aversion with a state dependent reference point this study investigates reference dependent choice with a stochastic state dependent reference point the optimal reference dependent solution equals the optimal consumption solution no loss aversion if the reference point is selected fully endogenously given that loss aversion is widespread we conclude that the reference point generally includes an important exogenously fixed component we develop a choice model in which adjustment costs can cause stickiness relative to an initial exogenous reference point using historical u s investment benchmark data we show that this model is consistent with diversification across bonds and stocks for a wide range of evaluation horizons despite the historically high risk premium of stocks compared to bonds this paper was accepted by peter wakker decision analysis

measuring organizational downside risk despite widespread incorporation of risk measures in strategy research there is little consensus regarding the meaning and measurement of risk in contrast to the variability measures widely used in strategy studies this paper draws from behavioral decision theory finance and management theory to present an alternative perspective on organizational risk downside risk the paper explains three categories of organizational downside risk measures based on the concept of lower partial moments the latter sections of the paper present considerations involved in specifying operational measures of downside risk and an empirical comparison of alternative downside risk measures

or forum perspectives on utility theory utility theory is a branch of decision analysis that is concerned with building models to explain and guide choice behavior under uncertainty in situations in which long run expected values are too simplistic beginning with bernoulli in the 18th century researchers have tried to analyze how people do and how people should make decisions when risk aversion is a factor in this paper we review some recent developments in the area

exchange rate rules and macroeconomic stability this paper discusses exchange rate rules in their role as macroeconomic instruments we abstract throughout from the trend part of exchange rate behaviour a crawling peg necessitated by differences in trend inflation and emphasise instead the implications of exchange rate rules in providing flexibility of real wages or in affecting the stability of output or prices

evaluating the extended target zone proposal for the g 3 this paper evaluates the extended target zone proposal of williamson and miller using the national institute world economic model gem williamson and miller s proposals envisage that real exchange rates will be controlled by movements in relative interest rates that fiscal policy will be used to steer nominal demand towards a target which depends on capacity utilization inflation and the current balance and that the average level of world interest rates will be used to control global nominal demand we evaluate the performance of these rules for the united states germany and japan over the period 1975 84 using control methods to determine the best choice of parameters in the feedback rules we then consider how history would have differed from actual events had such rules been in place the results suggest that such rules would have led to a significant improvement in economic performance exchange rate variability would have been reduced and the dramatic increase in united states interest rates which took place after 1980 would have been avoided this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

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

cournot walras and locally consistent equilibria abstract a kth order locally consistent equilibrium k lce is an imperfectly competitive general equilibrium allocation at which firms perceive only a kth order taylor expansion of their true demand curves it is shown that under simple regularity conditions the set of kth order locally consistent equilibrium strategies coincides with the set of cournot walras equilibria as soon as k 1 in addition a characterization of the set of negishi equilibria or 0 lces and an existence result for 1 lces in private ownership economies are provided

output effects of government purchases the theoretical analysis focuses on the distinction between temporary and permanent movements in government purchases under plausible conditions the temporary case involves an output response that is positive less than one to one with the change in government purchases and larger than that generated by an equal sized but permanent shift in purchase the equilibrium real rate of return rise in the temporary case but changes little in the permanent one defense purchases are divided empirically into permanent and temporary components by considering the role of temporary wars no temporary shifts in nondefense purchases were isolated empirical results verify an expansionary output effect for temporary purchases that exceeds that of permanent purchases the results for some other expectational hypotheses are found to be generally supportive of the theory

value at risk and inventory control the purposes of this paper are two fold on the one hand we shall provide a decision analysis justification for the value at risk var approach based on ex post disappointment decision making arguments we shall show that the var approach is justified by a disappointment criterion in other words the asymmetric valuation between ex ante expected returns above an appropriate target return and the expected returns below that same target level provide an explanation for the var criterion when it is used as a tool for var efficiency design second this paper provides applications to inventory management based on var risk exposure although the mathematical problems arising from an application of the var approach tuned to current practice in financial risk management are difficult to solve analytically solutions can be found by application of standard computational and simulation techniques a number of cases are solved and formulated to demonstrate the paper s applicability

an interpretation of recent research on exchange rate target zones how do exchange rate bands work compared to completely fixed rates between realignments or more precisely what are the dynamics of exchange rates interest rates and central bank interventions within exchange rate bands does the difference between bands and completely fixed exchange rates matter and if so which of the two arrangements is best or more precisely what are the tradeoffs that determine the optimal bandwidth this article will present an interpretation of some selected recent theoretical and empirical research on exchange rate target zones with emphasis on main ideas and results and without technical detail

limited knowledge of demand and oligopoly equilibria abstract in a standard model of oligopoly with differentiated products the existence of an equilibrium at which the first order conditions for profit maximisation are simultaneously satisfied for all firms is proved and this is done without imposing any restrictions on the demand functions this is an equilibrium in the following sense although some firms may not necessarily be maximising their profits nevertheless if each firm s knowledge of demand is limited to the linear approximation of its own demand curve then it will believe that it is indeed maximising its profits

negotiations and exclusivity contracts for advertising exclusive advertising on a given media outlet is usually profitable for an advertiser because consumers are less aware of competing products however for such arrangements to exist media must benefit as well we examine conditions under which such exclusive advertising contracts benefit both advertisers and media outlets referred to as stations by illustrating that exclusive equilibria arise in a theoretical model of the media advertisers and consumers who participate in both the product and media markets in the model stations sell advertising space to advertisers and broadcast advertising messages to consumers conditions leading to higher equilibrium levels of advertising can be unprofitable for advertisers because high levels of advertising make consumers better informed and thus lead to fiercer product price competition as a result media stations may be less profitable as well because their payoff is determined as a fraction of the advertiser surplus generated in the product market stations mitigate this effect by offering advertisers exclusive advertising contracts with such contracts consumers are less informed about competing products yielding higher producer surplus it is profitable for stations to offer exclusivity when commercial advertising is an important means for advertisers to inform consumers about their products

markowitz with regret abstract providing a framework to integrate regret as an additional decision criterion in markowitz s model of portfolio selection we propose two different views on regret an investor might feel regret with respect to the ex post best alternative either in terms of return or in terms of preference value under both views regret can be captured by adjusting the vector of expected returns or alternatively by adjusting the return covariance matrix retaining the tractability of the markowitz model the regret model however has very different implications for how asset characteristics affect optimal portfolios while the impact of the skewness of an asset is strengthened the impact of the variance shrinks moreover we show for a variety of real portfolios that the effects of regret on optimal portfolio weights and the ex ante return distribution are large

u s airline deregulation its effects on passengers capital and labor his paper presents an analysis of the effects of airline deregulation on passengers business and personal first class and coach and explores how capital and labor have fared in a free market the evidence corroborates many benefits that proponents of deregulation predicted but it has not worked perfectly prices are not fully competitive and for certain dimensions service quality is down furthermore the contestability hypothesis as applied to the airline industry does not withstand statistical examination

reserves regret and rejoicing in open english auctions auction sellers usually must set a reserve which is the lowest auction price that they will accept i propose that anticipated regret and rejoicing affect reserves regret occurs when the highest bid exceeds the seller s value for the property but is still below the reserve rejoicing occurs when the reserve forces the winning bidder to pay a higher price the impact of regret and rejoicing can be observed by examining sellers learning over sequential auctions particularly when they use a frequency heuristic results from an auction experiment with simulated bidders support the impact of anticipated regret and rejoicing on reserves

inflation and unemployment the world economy today is vastly different from the 1930s when seymour harris the chairman of this meeting infected me with his boundless enthusiasm for economics and his steadfast confidence in its capacity for good works economics is very different too both the science and its subject have changed and for the better since world war ii but there are some notable constants unemployment and inflation still preoccupy and perplex economists statesmen journalists housewives and everyone else the connection between them is the principal domestic economic burden of presidents and prime ministers and the major area of controversy and ignorance in macroeconomics i have chosen to review economic thought on this topic on this occasion partly because of its inevitable timeliness partly because of a personal interest reaching back to my first published work in 1941

directly unproductive profit seeking dup activities this paper propses directly unproductive profit seeking dup activities as a general concept that embraces a wide range of recently analyzed economic activities including the subset of rent seeking activities considered by krueger it then proceeds to provide a synthesis and generalization of the welfare theoretic analysis of such activities by developing a fourfold categorization of cases depending on the levels of distortions before and after the dup activity thus a unification and overview of the subject are achieved

oligopoly games with local monopolistic approximation we propose an oligopoly game where quantity setting firms have incomplete information about the demand function at each time step they solve a profit maximization problem assuming a linear demand function and ignoring the effects of the competitors outputs despite such a rough approximation that we call local monopolistic approximation lma the repeated game may converge at a nash equilibrium of the game played under the assumption of full information an explicit form of the dynamical system that describes the time evolution of oligopoly games with lma is given for arbitrary differentiable demand functions provided that the cost functions are linear or quadratic in the case of isoelastic demand we show that the game based on lma always converges to a nash equilibrium this result compared with best reply dynamics shows that in this particular case less information implies more stability

learning cycles in bertrand competition with differentiated commodities and competing learning rules this paper stresses the importance of heterogeneity in learning we consider a bertrand oligopoly with firms using either least squares learning or gradient learning for determining the price we demonstrate that convergence properties of the rules are strongly affected by heterogeneity in particular gradient learning may become unstable as the number of gradient learners increases endogenous choice between the learning rules may induce cyclical switching stable gradient learning gives higher average profit than least squares learning making firms switch to gradient learning this can destabilize gradient learning which because of decreasing profits makes firms switch back to least squares learning

the coexistence of stable equilibria under least squares learning abstract in this paper we consider firms that learn about market conditions by estimating the demand function using past market data we show that learning may lead to suboptimal outcomes even when the estimated demand function perfectly fits the observations used in the regression and firms thus perceive to have learned the demand function correctly we consider the salop model with three firms and two types of consumers that differ in their sensitivity to product differences firms do not know the demand structure and they apply least squares learning to learn the demand function in each period firms estimate a linear perceived demand function and they play the perceived best response to the previous period price of the other firms this learning rule can lead to three different outcomes a self sustaining equilibrium the nash equilibrium or an asymmetric learning equilibrium in this last equilibrium one firm underestimates the demand for low prices and it attracts consumers with high sensitivity only this type of equilibrium has not been found in the literature on least squares learning before both the nash equilibrium and the asymmetric learning equilibrium are locally stable therefore the model has coexisting stable equilibria

distinguished lecture on economics in government thinking about international economic coordination i should perhaps begin these remarks by emphasizing that i am not opposed to international cooperation in economic affairs we as economists recognize that conflict in international trade and the development of protectionist policies would reduce the standard of living around the world moreover the immediate effect of a shift to protectionism could be a major worldwide recession the quiet exchange of macroeconomic forecasts and policy plans among government officials that occurs within the framework of the bank for international settlements the oecd the group of 7 the united states great britain france germany japan italy and canada and elsewhere plays an important role in the formulation of domestic economic policies it is also important for maintaining friendly working relationships among governments that senior officials are not surprised by major policy shifts abroad i start with these obvious remarks and with the assertion that i am not opposed to international cooperation in all economic matters because i do not want to be misunderstood when as in this lecture i stress the counterproductive consequences of the international coordination of macroeconomic policy i do not deny that the economies of the world are linked in a way that makes the monetary and budget policies adopted in one country affect the economic performance of other countries but i believe that many of the claimed advantages of cooperation and coordination are wrong that there are substantial risks and disadvantages to the types of coordination that are envisioned and that an emphasis on international coordination can distract attention from the necessary changes in domestic policy moreover the attempt to pursue coordination in a wide range of macroeconomic policies is likely to result in disagreements and disappointments that

life cycle individual thrift and the wealth of nations this paper provides a review of the theory of the determinants of individual and national thrift that has come to be known as the life cycle hypothesis lch of saving applications to some current policy issues are also discussed part i deals with the state of the art on the eve of the formulation of the lch some 30 years ago part ii sets forth the theoretical foundations of the model in its original formulation and later amendment calling attention to various implications distinctive to it and sometimes counter intuitive it also includes a review of a number of crucial empirical tests both at the individual and the aggregate level part iii reviews some applications of lch to current policy issues though only in sketchy fashion as space constraints prevent fuller discussion this abstract was borrowed from another version of this item

the private r d investment response to federal design and technical competitions it is the federal government s role to promote investment in research and development rd and 2 contracting with private firms and nonprofit organizations such as universities to perform rd the winning firm recovered its development costs in the form of profits on the sale of the airplanes and the losing firms did not recoup their r d investment mansfield 1971 p 122

reply putting a premium on regret anand anand p 1985 testing regret management sci 31 114 116 has suggested that measuring the sacrifice a person is prepared to make to avoid regret may be more difficult than i suggest in bell bell d e 1983 risk premiums for decision regret management sci 29 1156 1166 though he believes regret is probably widespread he is concerned that regret may be confounded with other of the psychological phenomena that i have discussed especially disappointment bell bell d e 1985 disappointment in decision making under uncertainty harvard business school working paper 83 18 1982 oper res january february i will use this opportunity for response to set my work in perspective

the crime of 1873 the u s coinage act of 1873 eliminated provision for the free coinage of silver that act cast the die for a gold standard the conventional view is that the act of 1873 was a piece of good fortune this paper indicates that it was the opposite a mistake that had highly adverse consequences this is a judgment about 1873 not 1896 by 1896 when william jennings bryan ran for president on a free silver ticket it was too late to undo the damage bryan was trying to close the barn door after the horse had been stolen

that s what i thought i wanted miswanting and regret for a standard good in a mass customized world how can a standardized product survive in a mass customized world this requires understanding that consumers often experience problems predicting their future hedonic reactions to new experiences such as custom products leading to feelings of regret this form of regret occurs not because the custom product differs from specifications but because consumers miswanted the design they ordered our analytic model shows that regret aversion induces consumers to design custom products to reflect the attributes of the available standard products consequently regret averse consumers may choose the standard product rather than place a custom order the number of available standard products however moderates both these effects two experiments empirically substantiate the key predictions of the analytical model a the custom product s resemblance to the standard product grows with regret aversion associated with miswanting b there exists a segment of regretfully loyal consumers for the standard product in a mass customized world and it expands with regret aversion c both the above effects are weakened by the presence of a second standard product and d the custom product can increase its market share when the number of standard products increases

monopolistic competition and bounded rationality abstract this paper shows how a market reaches a unique steady state in monopolistic competition without knowing anything about strategic interdependence and only perceiving a linear demand for its own product every firm follows a simple price strategy to maximize its current profit in each period the strategy is based on a firm s own cost function slope estimate and its sales and price in the previous period we show that a market with asymmetric and non linear demand converges to a unique steady state under rather general conditions

the advantage of tying one s hands ems discipline and central bank credibility abstract it is often argued that the ems is an effective disciplinary device for inflation prone countries in europe since it forces the respective policy makers to pursue more restrictive monetary policies than they would otherwise it is not clear however why these countries should submit themselves to such discipline this paper argues that to answer this question appropriately one must consider that ems membership brings potentially large credibility gains policy makers in inflation prone countries the reason is that not only it attaches an extra penalty to inflation in terms of real appreciation but makes the public aware that the policy maker is faced with such penalty and thus helps to overcome the inefficiency stemming from the public s mistrust of the authorities

target zones and international policy coordination the contrast between the necessary and sufficient conditions for success abstract this paper distinguishes between the necessary and sufficient conditions for adopting exchange rate target zones for improving macroeconomic performance the necessary conditions are easily satisfied but it is much more difficult to design a targetting system which satisfies the sufficient conditions when the exchange rate is an intermediate target on that criterion the gains may be smaller than previously estimated however target zones have important practical advantage they are effective in promoting stability and as a simple but uncontroversial way of securing the coordination necessary to prevent policy makers adopting inefficient or competitive policies

gordon tullock s contributions to the theory of public choice i introduction gordon tullock came to economics and political science through a circuitous route he had almost no formal training in economics beyond a one quarter course that he took as a law student at the university of chicago from henry c simons he served in the foreign service for a number of years his first publications in economics date from the mid 1950s and were on monetary economics campbell and tullock 1954 1957 tullock 1956 tullock s formal entry into academia came in 1958 when he arrived at the thomas jefferson center for studies in political economy and social philosophy part of the department of economics at the university of virginia as a postdoctoral fellow tullock s biography from this point is fairly well known 1 tullock s contributions to economics and political science span almost forty years the following discussion is offered as a modest review of tullock s contributions the presentation is not meant to be detailed or copious but simply efficient in conveying what is important in tullock s work 2 ii methodology and style before turning to tullock s work a brief word is in order about his general approach to economic analysis and his writing style in fact tullock has shown far more interest in obtaining useful results than he has in how he happened to go about obtaining them in this way he has been a methodological anarchist operating under the general maxim that in science anything goes and results count his well known papers generally rely upon simple price theoretic or spatial constructs and perhaps a little algebra and game theory where he has found a need for more formidable tools he has generally acquired them through coauthors this anything goes approach does not seem to have hampered his work he has shown a talent for getting at the essence of problems and avoiding clutter in his work moreover he has shown almost no penchant for methodological exegesis in his work with the major exception of his general insistence that rational economic man models are the best description of behavior in almost any setting on this point he has been steadfast in fact buchanan 1987 uses tullock s emphasis on the homo economicus assumption to describe tullock as a natural economist i think this is an accurate interpretation of tullock we have all known people who are naturally good at things like playing short stop or the piano and in this sense it is analogous to say that tullock has a natural inclination toward economic reasoning and behavior tullock is not a great stylist his normal routine is to dictate the first draft of his papers and work through them from there this allows him to make his points but sometimes not very eloquently or clearly 3 the real question about scientific writing style is whether it matters or not there are protagonists on either side of this issue empirical research laband and taylor 1992 suggests that style has no marginal impact on citations this result can be interpreted in various ways but perhaps the most appropriate interpretation is that researchers have not yet found the margin on which writing style matters tullock of course could interpret this differently to say that style does not matter only results matter and this is what he has been about nonetheless mccloskey lists tullock along with several other modern economists as a good writer to wit when you read any of these in economics pay attention this is as good as it gets 1987 9 this either defends tullock s writing skills or calls into question the care with which mccloskey drew up his list of economists as writers iii the calculus the calculus of consent 1962 by james m buchanan and gordon tullock is a work of astounding creativity of all the classic works in the theory of public choice this book stands out for its range and depth of contribution it is moreover a readable book

the impact of bad writing in economics we find significant style differences between articles written by economists for their professional journals and articles by the same economists in the wall street journal we find no evidence that style influences the professional success of economists which suggests that the private rewards to improving the quality of writing are low indeed each community of scholars has probably adopted a professionally correct writing style from which its members diverge little however scholars do alter their rhetorical style to communicate effectively with audiences other than the professional community this suggests that intra and inter group written communication by economists is efficient

strength of preference and risky choice this paper provides conditions under which a utility function under risk can be legitimately interpreted to measure strength of preference between consequences these conditions require that if a decision maker regards the preference difference between acts a and b to be the same as the preference difference between acts a and b for every state of the world then the preference difference between a and b should be regarded as equivalent to the preference difference between a and b a key assumption is that a decision maker s preference differences between acts given one state of the world should be independent of common consequences given other states of the world usefulness of this result is discussed

austrian economics neoclassicism and the market test professor sherwin rosen correctly suggests that the austrian and neoclassical schools can be complementary each accepting much from the other however his recognition of austrian strengths needs to be amplified and his criticisms need softening his appeal to the market test risks encouraging anti intellectual attitudes and practices

a retrospective on the bretton woods system lessons for international monetary reform at the close of the second world war when industrialized nations faced serious trade and financial imbalances delegates from forty four countries met in bretton woods new hampshire in order to reconstruct the international monetary system over the next 25 years with currencies fixed to the american dollar world trade expanded vigorously inflation remained moderate and national income in industrialized countries rose faster than during any other period in this volume three generations of scholars and policy makers some of whom participated in the 1944 conference consider how the bretton woods system contributed to economic stability and rapid growth between 1945 and 1971 and discuss the future of the international monetary system in light of the bretton woods experience since president richard m nixon ended the bretton woods system in 1971 exchange rates have exhibited increasing flexibility after twenty years of floating rates however there is considerable interest in once again limiting exchange rate flexibility the apparent success of the european monetary system a fixed rate arrangement loosely based on the postwar system and the prospect of european monetary unification increase interest in a new internationally stable exchange rate moreover some academics and government officials see fixed rates as a way to help eastern europe and the former soviet union cope with pressing economic and political problems the economists historians political scientists and policy makers who contribute to this volume relate the bretton woods system to earlier fixed rate schemes and consider the political background of the original new hampshire meeting using recenteconomic theory for example work on time consistency and credibility they explore adjustment liquidity and transmission under the system the way it affected developing countries and the role of the international monetary fund in maintaining a stable rate the authors examine th

bilateral trade flows the linder hypothesis and exchange risk bilateral trade flows are used to examine the linder hypothesis and the effect of exchange rate variability in a gra vity type trade model derived from an underlying demand and supply mo del a behavioral model is used to justify examining these issues joi ntly the model performs well empirically using a sample of seventeen countries for the period 1974 82 the authors find overwhelming supp ort for the linder hypothesis and this version of the gravity model moreover they find strong support for the hypothesis that increased exchange rate variability affects bilateral trade flows copyright 1987 by mit press

misery loves company social regret and social interaction effects in choices under risk and uncertainty abstract extensive field evidence shows individuals decisions in settings involving uncertainty depend on their peers decisions one hypothesized cause of peer group effects is social interaction effects an individual s utility from an action is enhanced by others taking the same action we employ a series of controlled laboratory experiments to study the causes of peer effects in choice under uncertainty we find strong peer group effects in the laboratory our design allows us to rule out social learning social norms group affiliation and complementarities as possible causes for the observed peer group effects leaving social interaction effects as the likely cause we use a combination of theory and empirical analysis to show that preferences including social regret are more consistent with the data than preferences including a taste for conformity we observe spillover effects as observing another s choice of one risky gamble makes all risky gambles more likely to be chosen

does model uncertainty really preclude international policy coordination abstract we show that uncertainty about the effects of economic policies far from precluding international macroeconomic policy coordination may actually provide an additional incentive to coordinate policies using 11 global macroeconomic models we find that the welfare gains from coordination which arise solely from the existence of model uncertainty are of roughly the same magnitude as those identified in the standard literature

consumption and portfolio choice under internal multiplicative habit formation this paper explores the optimal consumption and investment behavior of an individual who derives utility from the ratio between his consumption and an endogenous habit we obtain closed form policies under general utility functionals and stochastic investment opportunities by developing a nontrivial linearization to the budget constraint this enables us to explicitly characterize how habit formation affects the marginal propensity to consume and optimal stock bond investments we also show that in a setting that combines habit formation with epstein zin utility consumption no longer grows at unrealistically high rates at high ages and investments in risky assets decrease

on the imperfect substitutability of policy regimes exchange rate targetting vs policy coordination abstract exchange rate targetting is always an imperfect substitute for explicit policy coordination but succeeds when economies are either structurally dissimilar with symmetric shocks or structurally symmetric with dissimilar shocks a joint commitment then generates economies of scale in interventions

on the optimality of path dependent structured funds the cost of standardization abstract this paper examines the suitability of an important class of standard financial structured products namely those whose performances are based on smoothing the return of a given risky underlying asset while providing a guarantee at maturity using various assumptions about the customers attitudes towards risk we show that such standardized products are not optimal even if the financial market volatility is constant as a by product we provide in particular the optimal portfolio value in the regret rejoice framework to go further with the notion of aversion of getting a return smaller than the risk free one using the notion of compensating variation we determine for the first time the monetary losses of providing these standardized products instead of the optimal ones to the customers we show that these monetary losses can be very significant when the volatility of the risky asset is stochastic from the operational point of view such results highly suggest to trade on the volatility index vix and or to introduce derivatives written on it when selling standardized funds in order to better meet investors needs and preferences

applying regret theory to investment choices currency hedging decisions we apply regret theory an axiomatic behavioral theory to derive closed form solutions to optimal currency hedging choices investors experience regret of not having chosen the ex post optimal hedging decision hence investors anticipate their future experience of regret and incorporate it in their objective function we derive a model of financial decision making with two components of risk traditional risk volatility and regret risk we find results that are in sharp contrast with traditional expected utility loss aversion or disappointment aversion theories we discuss the empirical implications of our model and its ability to explain observed hedging behavior

the resource cost of irredeemable paper money since 1971 no major currency has a formal link to a commodity for the first time in history every currency is wholly irredeemable not as a temporary expedient but as a permanent matter monetary economists have generally treated irredeemable paper money as involving negligible real resource costs compared with a commodity currency to judge from recent experience that view is clearly false as a result of the decline in long term price predictability a key question for the future is what if any substitute for a commodity standard will emerge as a long term anchor for the price level

international macroeconomic policy coordination when policymakers do not agree on the true model the authors relax the assumption of the literature on international coordination that policymakers know the true model t wo countries will still be able to agree on a cooperative policy pack age that each believes will improve the objective function relative t o the nash noncooperative solution however the bargaining solution may move the target variables in the wrong direction these points ar e illustrated with monetary and fiscal multipliers taken from simulat ions of ten leading econometric models out of 1 000 possible combina tions of models that could represent u s beliefs non u s beliefs and the true model monetary coordination improves u s welfare in on ly 546 cases copyright 1988 by american economic association

mobility costs frictional unemployment and efficiency with imperfect job information flows it is plausible that the distribution of job offerings becomes more attractive when there are more vacancies and more unemployed with word of mouth communication this condition is derived given this condition steady state equilibrium is not efficient with welfare increased by the introduction of unemployment compensation even though all agents are risk neutral in this way workers become more selective in the jobs they accept

biases from omitted risk effects in standard gamble utilities utilities elicited under the probability equivalence version of the standard gamble procedure systematically exaggerate the utility increments of expensive health interventions that bring the recipient towards full health switching to the alternative certainty equivalence version would introduce the reverse bias the biases arise from anticipated pre and post decision risk effects that expected utility theory omits to include these risk effects partition the future by changes in knowledge into 1 pre choice periods 2 the pre outcome future before the chosen act s outcome becomes known and 3 the more distant post outcome future when that outcome will have become known

locally consistent oligopolistic equilibria are cournot walras equilibria abstract a kth order locally consistent equilibrium is an imperfectly competitive general equilibrium point at which firms only perceive at kth order taylor expansion of their true demand curves it is shown that the set of kth order locally consistent equilibrium strategies coincides with the set of cournot walras equilibria as soon as k 1 under simple regularity conditions

the loser s curse decision making and market efficiency in the national football league draft a question of increasing interest to researchers in a variety of fields is whether the biases found in judgment and decision making research remain present in contexts in which experienced participants face strong economic incentives to investigate this question we analyze the decision making of national football league teams during their annual player draft this is a domain in which monetary stakes are exceedingly high and the opportunities for learning are rich it is also a domain in which multiple psychological factors suggest that teams may overvalue the chance to pick early in the draft using archival data on draft day trades player performance and compensation we compare the market value of draft picks with the surplus value to teams provided by the drafted players we find that top draft picks are significantly overvalued in a manner that is inconsistent with rational expectations and efficient markets and consistent with psychological research this paper was accepted by uri gneezy behav

price inertia and policy ineffectiveness in the united states 1890 1980 this paper introduces a new approach to the empirical testing of the lucas sargent wallace lsw policy ineffectiveness proposition which compares the lsw hypothesis with an alternative that states that prices respond fully in the long run but only gradually in the short run to nominal aggregate demand disturbances the empirical equations estimated for a new set of quarterly data extending back to 1890 exhibit uniformly high responses of real output and low responses of price changes to anticipated changes in nominal gnp the paper compares and tests three alternative methods of introducing persistence effects into the lsw framework

a generalized utility model of disappointment and regret effects on post choice valuation in this paper we show that performance information about forgone alternatives i e alternative that were considered but not chosen can have a significant impact on post choice valuation our approach introduces a new and parsimonious way of looking at satisfaction that combines the literature on post choice valuation with research regarding generalized expected utility theory while the post valuation literature focuses on the selected brand as the valuation s basis e g anderson and sullivan anderson e w m w sullivan 1993 the antecedents and consequences of customer satisfaction for firms marketing sci 12spring 125 143 bolton and drew bolton r j drew 1991 a multistage model of customers assessments of service quality and value j consumer res 17 375 384 we draw on a stream of research in generalized expected utility theory that considers both chosen and forgone alternatives as the basis for valuation e g bell bell d 1983 risk premiums for decision regret management sci 29 1156 1166 and bell d 1985 disappointment in decision making under uncertainty oper res 33 1 27 loomes and sugden loomes g r sugden 1982 regret theory an alternative theory of rational choice under uncertainty the econom j 92 805 824 and loomes g r sugden 1986 disappointment and dynamic consistency in choice under uncertainty rev econom stud 53 271 282 the result is a combined model of post choice valuation that explicitly incorporates both concepts specifically we extend the existing paradigm of post choice valuation to include buyers regret concerning forgone alternatives proposing a generalized utility theory based treatment of post choice product assessment that uses the intuitively appealing concepts of disappointment and regret as the basis we propose a model for conceptualizing post choice valuation that is consistent with the existing literature discuss how this model extends the construct to consider the influence of forgone alternatives and report results of an empirical test that contrasts our model to important recent work in the area e g boulding et al boulding w a kalra r staelin v a zeithaml 1993 a dynamic process model of service quality from expectations to behavioral intentions j marketing res 30february 7 27 our generalized model of post choice valuation is based on the sum of three components that represent factors that may contribute to consumers assessment of a chosen product or service the first component is expected performance the second component is disappointment which captures the discrepancy between actual and expected performance much as the disconfirmation construct in traditional satisfaction research the third component is regret which captures the difference between the performance of the chosen product service and the performance of a forgone product service this perspective is useful in that risk is captured by the disappointment and regret terms providing an intuitively appealing decomposition of post choice valuation and offering several advances over previous representations of disappointment and regret we test our model via a choice experiment participants in the empirical study were asked to make choices between successive lottery pairs they were then given outcome feedback on the forgone alternative as well as on the chosen alternative in each lottery pair immediately following outcome feedback for each choice subjects were asked to evaluate their decision our results clearly suggest an effect of regret on post choice valuation information about the forgone alternative influenced subjects valuation of the chosen alternative we also find evidence that as predicted the effects of disappointment and regret on post choice valuation are asymmetric specifically the negative effect of disappointment on post choice valuation was greater than the positive effect of elation similarly the negative effect of regret was greater than the positive impact of rejoicing our research offers five contributions to the literature on post choice valuation first our results illustrate the advantage of using generalized utility theory as the basis for conceptualizing and modeling post choice valuation we derive a model of post choice valuation that formally captures the components of disappointment and regret and show that the outcome of both the chosen alternative through disappointment and a forgone alternative through regret can influence the chosen alternative s valuation second we formally integrate the concepts of disappointment and regret which have been examined separately for many years into a single model based on a multiattribute preference structure third we argue that the effects of disappointment and regret on post choice valuation are asymmetric and present empirical evidence in this regard fourth our results suggest that word of mouth regarding forgone alternatives may affect post choice valuation extending research that has not heretofore considered forgone outcomes role in this process finally our development provides a preconsumption measure of potential disappointment and regret in modeling choice at the time of choice consumers may visualize the feelings of disappointment and or regret that will be derived at consumption taking into account both the chosen brand and forgone brands our generalized utility theory based approach to the post choice valuation construct can be useful in examining the role of disappointment and regret as preconsumption constructs

the productivity slowdown the oil shocks and the real cycle f ive facts stand out about economic performance in the united states since world war ii the first is that for most of the postwar period the u s has had a slower rate of economic growth than the other major developed democracies except great britain and much lower rates of growth than germany japan and italy the gap between the growth of per capita income of the united states and comparable countries has however tended to diminish over time and the united states has lately grown at about the same rate as most other developed countries the second outstanding fact is that the united states has fallen far behind in many mass production industries in which it used to lead the world whereas it is ahead of other nations in many new and especially high technology industries in automobiles steel tires household appliances and earth moving and farm equipment for example u s production has fallen dramatically in relation to output in most comparable countries and the country has become a net importer of most such products by contrast in newer industries such as computers jet aircraft sophisticated weaponry and high technology in general the united states is often dominant both as producer and exporter the third outstanding fact is that most of the older heartland of american industry roughly the area north and east of an arc drawn from baltimore to st louis to milwaukee has declined dramatically in comparison with the south and the west this change in regional fortunes has been due in large part to migration motivated by differences in economic prospects from the declining to the advancing