monetary policy committees individual and collective reputations this paper looks at the incentives of individual members of a monetary policy committee to gain a reputation for inflationary toughness i show a policy maker can have more or less incentive to build a reputation when part of a group but group policy making leads to higher expected social welfare not publishing individuals votes raises the temptation to inflate and lowers expected social welfare if the culture or rules of a central bank puts more weight on senior policy makers the incentive to build a reputation is greater but expected social welfare may be higher or lower

capture by threat we analyze a simple stochastic environment in which policy makers can be threatened by nasty interest groups in the absence of these groups the policy maker s desire for reelection guarantees that good policies are implemented for every realization of the shock when pressure groups can harass the policy maker good policies will be chosen for only a subset of states of nature hence honest and able leaders might implement bad policies and needed reforms could be delayed in order to make good policies more likely the public will want to increase the cost of exerting pressure for nasty groups and provide rents to those in power this last result can be used to explain the existence of political parties they play a role resembling that of the supervisor in the literature on collusion in hierarchical agency a rational public may also choose to ignore negative media reports on a politician s personal life and in general elect strong political leaders the prevalence of coercive methods of infl

moral hazard with several agents abstract we consider a situation in which a principal hires two agents whose cooperation is technically profitable and study three models that incorporate different assumptions about the agents cooperative behavior we find a close relationship between the agents commitment capacity and the characteristics of the optimal contract a greater capacity to cooperate leads to more efficient outcomes we also show that unless agents form a team the efficient level of mutual help is not achieved in equilibrium

the role of party reputation in the formation of policy abstract this paper shows that a party can credibly establish a platform more moderate than the ideology of its members and thereby raise the probability that the party s nominee wins the election a lame duck incumbent optimally implements his party s platform in order to maintain his party s reputation for having a moderate platform this increases the likelihood that his party retains power when candidates credibly locate themselves in policy space via this mechanism we show that if candidates are sufficiently impatient then their policies are bounded away from one another the policy convergence result is not robust

cooperation in ongoing organizations this paper argues that overlapping games can provide a natural theory of long lived organizations it shows that participation in organizations of infinite duration changes the incentives of agents with finite lives and will induce more cooperation than a static model would predict after developing the general theory we apply it to the description of career paths in organizations and show that it can be optimal to give the youngest workers the most arduous tasks

a review of scott e page s the difference how the power of diversity creates better groups firms schools and societies this assessment of scott page s the difference princeton university press 2007 emphasizes the depth and breadth of the book s coverage and arguments and checks them against existing empirical evidence when available it argues that the book navigates artfully between being a manifesto for diversity and rigorous science writing while at the same time marketing economic science in new ways the review welcomes the book s popularization of richer aspects of everyday decision making individual and collective and its making an excellent case for the social significance of abstract economic theorizing especially about problem solving it praises the book s lively interpretations of statistical tools of decision making by means of enticing narratives the book s rhetoric urges us to move beyond accepting diversity as a matter of taste or even because of its beneficial effects on the production function and ultimately adopts its powerful logic it speculates that the book s true impact will likely come after thorough empirical research in empirical endeavors issues of definition especially of identity and of measurement and evaluation of policies that would enhance diversity would be decisive in democratic societies policies may pose new dilemmas as they benefit from public interest in overcoming the accumula tion of past disadvantages jel d23 z13

policymakers horizon and the sustainability of international cooperation abstract this paper examines the impact of policymakers horizon on the sustainability of international cooperation we describe a prisoners dilemma game between two infinitely lived countries run by policymakers we show that re election incentives can act as a discipline device making it easier to sustain cooperation between policymakers with finite but potentially renewable mandates than between infinitely lived policymakers we also show that when voting suffers from a recency bias policymakers may have incentives to collude to get re elected and term limits may help international cooperation

the dispersion of employees wage increases and firm performance previous studies examining intra firm wage dispersion and firm performance have focused on wage levels the authors of this study argue that for purposes of comparing wage dispersion s positive inc

on equilibrium for overlapping generations organizations a necessary feature for equilibrium is that beliefs about the behavior of other agents are rational and indi viduals maximize we argue that in stationary olg environments this implies that any future generation in the same situation as the initial generation must do as well as the initial generation did in that situation we conclude that the existing equilibrium concepts in the literature do not satisfy this condition we then propose an alternative equilibrium concept organizational equilibrium that satisfies this condition we show that equilibrium exists it is unique and it improves over autarky without achieving optimality moreover the equilibrium can be readily found by solving a maximization program rios rull thanks the national science foundation for grant sbr 9309514 and the university of pennsylvania re search foundation for their support prescott thanks the national science foundation for grant sbr 9996201 we thank julio davila igor livshits larry jones dan silverman and attendants at seminars in the penn macro lunch group federal reserve bank of minneapolis cornell penn state university macro theory conference the univer sity of rochester ucla and the 1999 midwest theory meetings for comments the views expressed herein are those of the authors and not necessarily those of the federal reserve bank of minneapolis or the federal reserve system

decision making with naive advice in many of the decisions we make we rely on the advice of others who have preceded us for example before we buy a car choose a dentist choose a spouse find a school for our children sign on to a retirement plan etc we usually ask the advice of others who have experience with such decisions the same is true when we make major financial decisions here people easily take advice from their fellow workers or relatives as to how to choose stock balance a portfolio or save for their child s education although some advice we get is from experts most of the time we make our decisions relying only on the rather uninformed word of mouth advice we get from our friends or neighbors we call this aive advice in this paper i will outline a set of experimental results that indicate that word of mouth advice is a very powerful force in shaping the decisions that people make and tends to push those decisions in the direction of the predictions of the rational theory

a theory of collective reputations with applications to the persistence of corruption and to firm quality the paper is a first attempt at modelling the idea of group reputation as an aggregate of individual reputations a member s current incentives are affected by his past behaviour and because his track record is observed only with noise by the group s past behaviour as well the paper thus studies the joint dynamics of individual and collective reputations and derives the existence of stereotypes from history dependence rather than from a multiplicity of equilibria or from the existence of a common trait as is usually done in the literature it shows that new members of an organization may suffer from an original sin of their elders long after the latter are gone and it derives necessary and sufficient conditions under which group reputations can be rebuilt last the paper applies the theory to analyse when a large firm can maintain a reputation for quality 1 collective reputations collective reputations play an important role in economics and the social sciences countries ethnic racial or religious groups are known to be hard working honest corrupt hospitable or belligerent some firms enjoy substantial rents from their reputations for producing high quality products some departments are reported to treat their faculty or students fairly the paper is a first attempt at modelling the idea of group reputation as an aggregate of individual reputations a member s current incentives are affected by her past behaviour and because her track record is observed only with noise by the group s past behaviour as well the paper studies the joint dynamics of individual and collective reputations in a model in which current generations are progressively replaced by new ones and derives the existence of stereotypes from history dependence rather than from a multiplicity of equilibria or from the existence of a common trait as is usually done in the literature see section 2 for a detailed comparison with the literature it shows that new members of an organization may suffer from an original sin of their elders long after the latter are gone and it derives necessary and sufficient conditions under which group reputations can be rebuilt last the paper applies the theory to analyse when a large firm can maintain a reputation for quality let us spell out the building blocks of our theory in more detail a a group s reputation is only as good as that of its members each member is characterized by individual traits such as talent diligence or honesty past individual behaviour conveys information about these traits and generates individual reputations

social contracts as assets a possible solution to the time consistency problem this paper presents a new solution to the time consistency problem that appears capable of enforcing ex ante policy in a variety of settings in which other enforcement mechanisms do not work the solution involves formulating a social contract institution or agreement that specifies the optimal ex ante policy the social contract is effectively sold by succesive old generations to successive young generations who pay for the social contract through the payment of taxes both old and young generations have an economic incentive to fulfill the social contract for the old generation breaking the social contract makes the social contract valueless and the generation suffers a capital loss by not being able to sell it for the young generation the economic advantage of purchasing the existing social contract exceeds its price as well as the economic gain from setting up the a new social contract

equilibrium inflation as determined by a policy committee building upon the work of kydland and prescott 1977 barro and gordon 1983b developed a model explaining excess socially suboptimal inflation as the result of a policy game between the monetary authority and wage setters in an economy in a follow up paper barro and gordon 1983a modified their original model to achieve a lower inflation rate by allowing the monetary authority to acquire a reputation for good behavior in essence this extension models monetary policy as the outcome of an infinitely repeated game between a monetary authority and wage setters in this game wage setters adopt punishment rules for bad monetary authority behavior where bad behavior is an inflation rate higher than expected this extended model of barro and gordon and hence the conclusions derived from it is open to several criticisms see for example canzoneri 1985 and rogoff 1987 first the results hinge on the theory of infinitely repeated games and thus would appear to be of questionable relevance in any economy with finitely lived policy makers second and more fundamentally it is difficult to accept the description of policy as a game between the monetary authority and wage setters one can accept that under certain circumstances an individual wage setter would adopt punishment rules of the type barro and gordon discussed if the individual thought all wage setters were doing so what is left unexplained in the barro and gordon analysis is how or why each individual wage setter when left alone would think and act in such a manner it would seem that some formal coordination among wage setters would be needed to establish punishment rules which suggests a limited applicability of the model to countries with a dominant union or with an aggregate wage setting authority of course this criticism is relevant to other papers in this literature for example backus and driffill 1985 and aspects of canzoneri 1985 the purpose of this paper is to demonstrate how these criticisms can be voided and how the barro and gordon 1983a results can be rehabilitated by modeling monetary policy more realistically

rent seeking and taxation in the ancient roman empire historians maintain that an increase in taxation of the peasant farmers government corruption and misuse of its revenue by the ruling class led to a weakening of the roman empire that culminated in its western demise in the fifth century but it was not just the taxation issue doomed the roman empire but political change from a republic to an emperor that exacerbated the climate of rent seeking behaviour by the ruling classes that culminated in the misallocation of tax resources one category of rent seeking involves the spending of money that the average taxpayer sees as foolish but that benefits a particular group the groups who bear the costs can stop the rent seeking if they are informed these average citizens were peasant farmers who no doubt recognized the costs but were unable to form political coalitions to protect themselves because military control of roman legions was under the tight control of the emperor this was not the case under the republic with the emperors public funds were being

a foundation for markov equilibria in sequential games with finite social memory we study stochastic games with an infinite horizon and sequential moves played by an arbitrary number of players we assume that social memory is finite every player except possibly one is finitely lived and cannot observe events that are sufficiently far back in the past this class of games includes games between a long run player and a sequence of short run players and games with overlapping generations of players an equilibrium is purifiable if some close by behaviour is consistent with equilibrium when agents payoffs in each period are perturbed additively and independently we show that only markov equilibria are purifiable when social memory is finite thus if a game has at most one long run player all purifiable equilibria are markov

a theory of bureaucratization based on reciprocity and collusive behavior this paper addresses how an organization becomes a bureaucracy bureaucratization emerges from a self enforced norm of reciprocity between agents in an organization who exchange favors and promote subgoals which differ from the objective of the firm such collusive behavior becomes harder and harder to prevent over time as a result incentive schemes lose their flexibility and bureaucratization becomes a necessary equilibrium phenomenon in the long run the distribution of agents private information their preferences for the future and the force of the social norm of reciprocity are analyzed in terms of their effects on the long run behavior of the organization and on the speed of the bureaucratization process i introduction any theory of bureaucracy concerned with the analysis of the public sector or designed to understand the behavior of private organizations2 must find out why states and firms end up being more and more inefficient over time why organizations become routinized as they grow older and why unflexible rules unavoidably emerge in the long run in other words any theory of bureaucracy should also be accompanied by a theory of bureaucratization which could help us to understand organizations from a dynamic point of view following weber 1978 we hereafter define the bureaucratization of an organization as the process by which it adopts less flexible rules over time the aim of this paper is to explain this process in the case of the theory of the firm the formation of a dynamic theory of organizations has been on the research agenda at least since marshall who was the first to point out that old organizations and firms tend to decline over time first such

commitment deference and legislative instutions j nformational theories of legislative institutions have demonstrated the potential collective gains from committee specialization due to the use of restrictive amendment procedures for these 5 benefits to be realized however the floor majority must overcome a commitment problem i demonstrate that in a multistage game majority rule combined with the fact that generations of legislators overlap allows the legislature to solve the commitment problem and to sustain legislative norms and institutions even if legislators are finitely lived the model suggests that rather than restrictive amendment procedures it is the committee s expectation of floor deference that sustains committee specialization as a consequence legislative norms may collapse due to an unexpected influx of new members even if the distribution of preferences in the legislature does not change finally i discuss consequences for a comparative study of legislative institutions

cooperation in microcredit borrowing groups identity sanctions and reciprocity in the production of collective goods cooperation to produce collective goods is widespread in society and yet so is its failure theorists have identified competing mechanisms for facilitating group cooperation including group identity sanctions and reciprocity here i use empirical data to explore how these mechanisms influence cooperation in the natural laboratory of microcredit borrowing groups microcredit makes loans to high risk borrowers through borrowing groups in which individuals access to credit is dependent on the behavior of other members of the group thereby creating a social dilemma for members and an opportunity to observe cooperation in real world groups by analyzing both collective goods production loans and compliance repayment i find that the competing mechanisms have differential effects group identity sanctions and reciprocity are all associated with more borrowing in the group only reciprocity however limits loan delinquency and is associated with group longevity suggesting both that collective goods p

rational turnout the neglected role of groups rational choice theories have difficulty accounting for individual participation in collective action voting is among the acts hardest to explain consumption benefits have been proposed to account for nonzero turnout the model presented here establishes a political investment basis for these benefits i argue that voters often act not in isolation but as part of groups with shared interests while individuals still vote because of consumption benefits arising from the act of voting some of these consumption benefits are provided by group leaders out of collective benefits received by the group in return for its votes the collective benefit comes from a candidate adopting policy positions closer to those of the group in passing i show that the widespread availability of public opinion polling increases the candidate s incentive to shift position finally some data from recent off year elections are shown to be consistent with the model

tradition and common property management since management of a common property resource can be undertaken only by a government of finitely lived agents studying the behaviour of such governments is a natural way to study common property management i propose that we regard the choice of management objective by such a government as a move in a game of sequential agents given this framework it is shown that subgame perfect equilibria exist in which successive governments choose the same traditional management objective these strategies enable an economy to overcome any intergenerational externality thus following a tradition of conservation may be a rational response to an intergenerational externality tradition et gestion d une ressource en propriete commune puisque la gestion d une

cooperation and punishment under repeated majority voting in light of the extensive theoretical evidence suggesting absence of equilibrium in voting models tullock 1981 asks why so much stability our results suggest the following answer political agents engaged in long term relationships can sustain highly stable allocations if there are strongly held norms for punishment of defectors 1

regulatory capture a review this article reviews both the theoretical and empirical literatures on regulatory capture the scope is broad but utility regulation is emphasized i begin by describing the stigler peltzman approach to the economics of regulation i then open the black box of influence and regulatory discretion using a three tier hierarchical agency model under asymmetric information in the spirit of laffont and tirole 1993 i discuss alternative modelling approaches with a view to a richer set of positive predictions including models of common agency revolving doors informational lobbying coercive pressure and influence over committees i discuss empirical work involving capture and regulatory outcomes i also review evidence on the revolving door phenomenon and on the impact that different methods for selecting regulators appear to have on regulatory outcomes the last section contains open questions for future research copyright 2006 oxford university press

reply on comment to small firms and the merger mania research on performance differences between small and large firms is booming it emerges relatively separated from the mainstream industrial organization literature inspired by levy s comment on an earlier paper we try to bridge the gap between the two areas especially we screen non cooperative game theoretical models for predictions on performance differences most of them forecast higher profits for larger firms but there exist also some models which predict the opposite for very specific circumstances

behind the revolving door a new view of public utility regulation regulatory officials frequently work for firms they regulate after they leave office this revolving door has been the subject of much scrutiny owing to the natural suspicion of corruption in a time dependent supergame i take a strategic look behind the revolving door and find it can lead to improved performance of regulated industries when firm managers and regulators have finite and concurrent terms investment incentives are minimal staggered terms and revolving doors can result in improved performance of regulated firms when each side s actions at each date are contingent on past outcomes

forward and backward intergenerational goods why is social security good for the environment this paper studies the ability of nonmarket institutions to invest optimally in forward intergenerational goods figs such as education and the environment when agents are selfish or exhibit paternalistic altruism we show that backward intergenerational goods bigs such as social security play a crucial role in sustaining investment in figs without them investment is inefficiently low but with them optimal investment is possible we also show that making the provision of bigs mandatory crowds out the voluntary provision of figs and that population aging can increase investment in figs

repeated games played by overlapping generations of players the present paper tries to explain cooperative behaviour in an organization run by a sequence of long but finitely lived agents we show that the folk theorem holds for infinitely repeated games with overlapping generations of finitely lived players any mutually beneficial outcome can approximately be sustained if the player s life span and the overlapping periods are long enough the result is stronger than the usual folk theorems in that it employs no assumption on the stage game such as the full dimensionality of payoff set or multiplicity of equilibria

cooperation in stochastic olg games abstract this paper builds on cremer s quart j econ 101 1986 33 seminal analysis which shows that almost complete cooperation can be achieved as an equilibrium in a game played by overlapping generations of players if the institution in which players cooperate is infinitely lived we analyze a similar model in which the costs of cooperation are subject to random shocks even if these random shocks are very small the range of parameters for which cooperation can be sustained is decreased considerably in comparison to the deterministic case furthermore we show how the efficient outcome can be approximated if the level of cooperation can be varied continuously and the cooperation technology has decreasing or constant returns to scale while this is not possible in the case of increasing returns to scale

recursive contracts firm longevity and rat races an experimental analysis abstract this paper reports the results from a laboratory experiment which investigates the structure of contracts that emerge in overlapping generation firms where future ownership is a perquisite of employment workers in the young generation are offered employment contracts designed by the firms owners who belong to the old generation when old employed workers are granted ownership rights as long as the firm continues to operate in line with theoretical predictions the results indicate that as firm longevity increases the recursive nature of the contracts leads to a rat race characterized by low wages high effort levels and rent dissipation these results have important implications for the optimal management of long lived firms such as partnerships

governance reform in legal service markets this paper discusses proposed governance reforms of legal services markets the model distinguishes between a status quo position supported by a system of professionally enforced collective reputation and forms of governance based more squarely on market mechanisms we identify a number of forces which determine the success of reform focussing particularly on the rent recapture and relationship substitution effects we highlight their impact on client welfare and quality of legal services in different types of market according to whether clients are transient or repeated users of the service

mortal managers and long term goals an impossibility result this article examines decision myopia under effort and risk neutrality an infinite non overlapping sequence of mortal managers is selected and their performance evaluated contracts admit premature termination plant condition depends on maintenance which induces an interstage linkage in production when ability and action are imprecisely known by employers no contract achieves the first best outcome furthermore if the manager discounts less than the owners inefficiency is partially due to moral hazard which resembles myopia optimal contracts infer ability and motivate behavior via manipulation of wage schedules and tenure guidelines

parties as political intermediaries this paper argues that parties regulate competition among like minded factions so as to enhance reputation building by and voter trust in the politicians standing for a given cause while intra and interparty competition contributes to keeping politicians on their toes unbridled competition may encourage politicians to challenge good platforms and to wage competition along socially suboptimal dimensions for example by privileging form over content the paper builds a simple model of intraparty competition and studies whether various hierarchical or democratic party institutions constitute an efe cient form of party governance the paper shows that intraparty disagreements when they occur hurt the party s position in the general election but that their possibility enhances party image and that parties must be able to avoid behind the scene allocations of portfolios and spoils in order to be credible last it analyzes the impact of political polarization and interparty competition on the choice of party governance

on the strength of corporate cultures abstract we model corporate culture s as production technologies for which employees have to undertake culture specific investments that improve their effectiveness at a later date the organization can adopt cultural changes that make this investment partially redundant this leads to under investment however as agents invest more the organization s opportunity cost of a change increases which in turn increases each agents incentives to invest this externality among agents leads to multiple equilibria otherwise similar organizations can thus exhibit either high investment levels and low probability of changes strong culture or low investment levels and high probability of changes weak culture we also explore some implications for the nature and management of corporate culture

intergenerational conflicts of interest and seniority systems in organizations this paper studies the role of a proposed seniority system in an organization the organization consists of at least three overlapping generations of short lived members and chooses either a shortsighted or a farsighted action in each period this results in intergenerational conflicts of interest the old generation desires to obtain an immediate profit while the middle and young generations have incentives to invest for future profits we use a model of infinitely repeated games and demonstrate that the seniority system solves these conflicts in the sense that the farsighted action profile is sustainable in equilibrium