modeling local growth control decisions in a multi city case do spatial interactions and lobbying efforts matter our article analyzes the determinants of local growth control decisions which are modeled as the result of a political struggle between different groups of voters and organized lobbies we show that under specific hypotheses a higher homeownership rate can induce lower levels of controls considering residential choices as endogenous to growth control policies the local decisions to control growth become strategically interdependent assuming imperfect mobility we show that a spatial econometric specification can be directly derived from our theoretical model our empirical analysis concerning the determinants of the taxelocale d equipement a french local development tax is thus naturally based on spatial econometrics its results confirm the major predictions of our model

a political economy model of market intervention we argue that political competition based on income redistribution a la lindbeck and weibull public choice 52 273 297 1987 may cause distortive regulation in a competitive sector for this purpose we propose a model in which imposing a production quota allows the extraction of rents that are then used for vote buying purposes our model permits us to analyze the response of regulatory policy to political factors such as the size of a group of informed voters and the accuracy of their information about the incumbent we also show that the extent of voter influence on policy outcomes is shaped by the state of market demand in particular if demand becomes weaker market intervention increases in a magnitude that depends positively on the electoral weight of informed voters

electoral politics interest groups and the size of government electoral politics interest groups and the size of government i introduction interest groups have been considered main actors in the political drama for some time now by political scientists as in bentley 1908 schattschneider 1935 and truman 1951 and more recently by economist also such as olson 1965 and stigler 1975 despite the widespread consensus on their importance there have been few formal attempts to analyze their impact on public policies thus borooah and van der ploeg 1983 90 were moved to declare that theory based on the importance of different interest groups is badly needed in economics an important exception is becker s 1983 1985 analysis of interest group competition becker draws insights about the nature of the trade offs that occur when interest groups compete for political influence but becker consciously avoids incorporating into his model political institutions such as voting voting rules and candidates 1983 391 4 1985 330 rather he assumes that the political process operates as a veil through which the underlying strengths and demands of various interest groups are revealed this paper takes a different tack but one complementary to becker s approach the analysis is based on an explicit model of the political process that includes interest groups in the model interest group influence is a potential supply of votes for which parties or candidates compete each party seeks a winning coalition of voters and thus engages in implicit logrolling tullock 1959 572 an equilibrium exists in the competition for the support of interest groups and the nature of the equilibrium electoral platforms is identified below embodied in the characterization of the equilibria is a set of parameters that can be said to measure the strengths of the various interest groups and which enable one to identify how candidates change their policy positions in response to a change in the strength of an interest group it is therefore possible to analyze simultaneously the existence of an electoral equilibrium its nature including its normative properties and changes in equilibrium due to shifts in the balance of forces between competing groups 1 in contrast to becker 1983 1985 these analytical features are not assumed outright rather they are based on an underlying model of elections the theoretical underpinnings for this model are discussed in section ii interest groups are often alleged to be responsible in part for recent increases in the size of government in western democracies 2 therefore in sections iii and iv a model of the political process is used to study the impact of an increase in the influence of a particular interest group on government size in the simple models of the public sector considered here increasing group influence per se does not cause the size of the government to increase but an increase in the government s size does result when i there are constraints on the government s ability to change tax shares in response to a shift in group power or ii there is a publicly provided good which benefits one untaxed group and that group s sole concern with government policy is to maximize the amount of the good that it gets the paper concludes by considering some of the normative implications of the results ii interest groups in the electoral process there are two sets of actors in the model parties and interest groups and two sets of relationships which must be analyzed the relationships between interest groups and the parties and the relationship between the parties themselves with respect to the first question this paper investigates the determinants of each interest group s influence on the platforms proposed by the parties with respect to the second it explores whether the competition for votes between the parties produces an equilibrium and if so what its properties are

real government size automatic feedback rules and the measured effectiveness of fiscal policy this paper argues that as intervention fiscal policy means more than simply any change in government spending and this requires of fiscal analysis a measure that separates the allocative from the counter cyclical activities of government defining intervention as an optimal policy rule that responds automatically to privately unanticipated variations in output a general equilibrium model is built to separate the supply side effects of desired changes in the size of government from demand side interventions designed to stimulate aggregate demand the model is tested using the results of a public choice investigation of the real size of government ferris and west 1996 that exercise produces a measure of desired size and through its residual an implicit measure of intervention the paper tests the prediction that increases in desired size increase aggregate supply and that ex post measures of fiscal intervention can be recovered and tested for their effect on aggregate output the test uses citibase

earmarked taxation welfare versus political support abstract compared with the traditional public finance approach of a monolithic fully informed planner earmarking of taxation is less likely to be optimal if a principal agent setting is considered where taxing and spending are performed by two separate agents which are monitored by the parliament we assume that the parliament either maximizes welfare or expected votes vote maximizers are more inclined to choose earmarking but at the price of inefficiently high costs

welfare economics of decision making with changing preferences the paper considers the properties a decision tree needs to guarantee that there are no preferences such that the sophisticated equilibrium is pareto dominated when all agents act completely myopically it shows that the only decision trees with this property are the most trivial problems the analysis is generalized to agents who are not completely myopic and gives an example of union and shareholder conflict to illustrate the results 1 this paper is concerned with the welfare aspects of decision making in a non cooperative game where the players have different preferences over future actions and must move sequentially typically two outcomes are analysed in this context one is the naive or myopic outcome which is the result of all individuals making irrational myopic choices and the other is the sophisticated or perfect equilibrium 1 the results of hammond 1976 show that if there is no essential inconsistency2 between agents preferences then these two outcomes coincide the welfare comparison when there is essential inconsistency remains an open question and this paper will attempt to provide some answers although this issue has not been explicitly considered the terminology perfect and sophisticated compared to myopic or naive is itself persuasive the literature has tended to enhance this view e g blackorby et al 1973 the sophisticated solution would appear to be an improvement over naive planning by explicitly considering the future preferences each generation realises a level of utility greater than that which is possible under inconsistent naive planning it will be shown that this view is incorrect for all degrees of myopia of course there are many cases where the perfect equilibrium in non cooperative games is inefficient thus it is not surprising that actions by some agents which deviate from rational behaviour can result in a better outcome for all agents it is less obvious that if everyone behaved myopically this is possible yet it will be shown that in all but the most trivial decision trees there always exist preferences such that this is true the following section outlines the model that will be used and section 3 contains the results section 4 gives a topical economic example that reduces to the decision tree structure used extensively in section 3 this example clarifies the structure of the results and also highlights some of the difficulties with introducing precommitment

risk perceptions endogenous demand and regulation of agricultural biotechnology abstract this paper presents a dynamic model of optimal product regulation in which consumer acceptance and the rate of product innovation are included as endogenous variables insights derived from the model are used to critically evaluate recent policy controversies regarding regulation of agricultural biotechnology the results of the analysis indicate that if regulatory policy significantly affects consumer risk perceptions more stringent regulatory requirements than those based solely on scientific risk assessment may be economically efficient when demand is endogenously affected by regulatory policies industry may also benefit from stronger regulations even if this results in a significant increase in product development costs

an equilibrium model of search unemployment this paper develops a simple general equilibrium model with sequential search in which a nondegenerate wage offer distribution is endogenously determined we use this model to analyze the comparati

wealth dynamics in a bond economy with heterogeneous beliefs two types of agents have diverse beliefs about the law of motion for an exogenous endowment one knows the true process and the other learns about it via bayes theorem financial market structure affects the dynamics of the wealth distribution when markets are complete the learning agent loses wealth as in blume and easley 2006 the absence of markets for some arrow securities alters the direction in which wealth is transferred when the only traded asset is a risk free bond the learning agent accumulates wealth both agents survive and the more knowledgeable agent is driven to his debt limit

majority rule and election models abstract this paper surveys the theoretical work that has been done on majority rule and economic models of elections section i provides an overview of the topic section 2 reviews the most important results that have been obtained about majority rule as an abstract collective choice rule section 3 identifies some alternative inferences that can be made from those results section 4 covers some models that include additional features that are present in political institutions where majority rule is used section 5 concentrates on some alternative election models and equilibrium concepts section 6 focuses on election models with abstentions and or candidate uncertainty about voter behaviour section 7 compares and contrasts models where candidates are certain about what the voters choices will be contingent upon about the choices made by the candidates and models where they are uncertain about those choices section 8 closes the survey by identifying some emerging areas of research

a case for incomplete markets we propose a new welfare criterion that allows us to rank alternative financial market structures in the presence of belief heterogeneity we analyze economies with complete and incomplete financial markets and or restricted trading possibilities in the form of borrowing limits or transaction costs we describe circumstances under which various restrictions on financial markets are desirable according to our welfare criterion

a model of electroral competition with interest groups abstract this letter specifies and analyzes a model of electoral competition with interest groups the assumptions used in the model are drawn from the existing literature we i show that certain assumptions that have been used in empirical analyses of voting provide a sufficient condition for the existence of an electoral equilibrium and ii characterize the equilibrium strategies embodied in the characterization is a set of parameters that can be said to measure the electoral strengths of the interest groups we also state the appropriate definition of the pareto relation for our model and note that each of the equilibrium strategies is pareto optimal

the economics and politics of the structure of public expenditure the paper derives a complete system ofdemand equations for public consumptionexpenditures as the outcome of rationalbehaviour in a model where governmentmaximizes expected electoral support theallocation of expenditures is found todepend not only on the prices of publicservices and total expenditure and tosatisfy the constraints of demand theory which have been the focus of attention ofprevious empirical studies of theallocation of public expenditures but inaddition on the prices of privateconsumption goods the distribution ofvoter incomes and the expected change invoter support from varying the levels ofpublic provision

diverse beliefs survival and the market price of risk we study prices and allocations in a complete markets pure exchange economy in which there are two types of agents with different priors over infinite sequences of the aggregate endowment aggregate consumption growth evolves exogenously according to a two state markov process the economy has two types of agents one that learns about transition probabilities and another that knows them we examine allocations the market price of risk and the rate at which asset prices converge to values that would be computed under the assumption that all agents know the transition probabilities cogley and sargent 2008 showed that market prices of risk would be high in an economy with a risk neutral bayesian representative agent who learns about the parameters of a transition matrix for aggregate consumption growth starting with a pessimistic prior in 1933 1 this article studies the robustness of that finding to a per turbation that adds a small fraction of agents who know the parameters of the trans ition matrix traders participate in a walrasian equilibrium in which they do not infer information from prices grossman 1981 23 under what we assume to be the true data generating mechanism the survival of the fittest force analysed by blume and easley 2006 causes the more knowledgeable agents influence on equilibrium prices to grow over time along with their wealth we study how quickly that dissipates the effects of the initial pessimism of the less informed agents on equilibrium prices 4 to give the survival mechanism a large scope to moderate the effects of initial pessim ism we assume complete markets that allow agents to make trades of claims to wealth that are motivated solely by the different subjective probabilities they put on future states that gives the agents many opportunities to place bets that over time stochastically increase the share of wealth of the traders who know transition probabilities we solve a pareto problem to compute competitive equilibrium prices and alloca tions thereby implicitly defining an initial allocation of wealth we study how the market price of risk evolves as a function of the relative pareto weight on the better informed agent among other things we want to know how large the pareto weight on

the equilibrium approach to fiscal policy this paper lays out a simple model for the purpose of bringing together the various strands of the analysis of fiscal policy in an optimizing competitive equilibrium model the discussion centers on the critic al assumptions lying behind the ricardian equivalence proposition th e role of the time profile and composition of public expenditure and the timing of distortional taxation copyright 1988 by ohio state university press

debt and tariffs an empirical investigation of the evolution of revenue systems abstract this paper presents a theoretical framework where government chooses fiscal structure so as to maximize political support and where the evolution of fiscal systems is determined by changing economic political and administrative factors estimating equations are derived and the model is used to explain the development of revenue structure in canada from 1871 to 1913 a period when major revenue sources consisted of the tariff debt and excises the empirical analysis distinguishes between government plans and ex post observations of public revenues and places particular emphasis on the derivation of hypotheses linking economic political and administrative variables to revenue structure

mass privatization management control and efficiency abstract we present a model where a government chooses the number of individuals to which ownership in a former state owned firm shall be allocated when making this decision the government maximizes the political support it gets from the firm s incumbent manager and from potential shareholders anticipating that a greater dispersion of shares reduces the control of the manager by the firm s new owners it turns out that shares will be allocated to the maximum number of individuals and thus a policy of mass privatization will be implemented if the manager s utility enters the political support function with a higher weight than the welfare of the potential shareholders the result of the political process however need not conflict with the objective of achieving a pareto optimal allocation thus we contradict a widely shared presumption that mass privatization schemes sacrifice efficiency to satisfy political constraints and show that they can be very attractive from an efficiency point of view

income and wealth heterogeneity in the macroeconomy how do movements in the distribution of income and wealth affect the macroeconomy we analyze this question using a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity our main finding is that in the stationary stochastic equilibrium the behavior of the macroeconomic aggregates can be almost perfectly described using only the mean of the wealth distribution this result is robust to substantial changes in both parameter values and model specification our benchmark model whose only difference from the representative agent framework is the existence of uninsurable idiosyncratic risk displays far less cross sectional dispersion and skewness in wealth than u s data however an extension that relies on a small amount of heterogeneity in thrift does succeed in replicating the key features of the wealth data furthermore this extension features aggregate time series that depart significantly from permanent income behavior

survival and long run dynamics with heterogeneous beliefs under recursive preferences i analytically characterize the long run behavior of an economy with two types of agents who differ in their beliefs and are endowed with homothetic recursive preferences agents with more incorrec

home biased expectations and macroeconomic imbalances in a monetary union abstract under monetary union economic dynamics may diverge across countries due to regional inflation differentials and a pro cyclical real interest rate channel yet stability is generally ensured through endogenous adjustment of the real exchange rate the speed of adjustment depends inter alia on the way agents form expectations we propose a model in which agents expectations are largely based on domestic variables and less so on foreign variables we show that such home bias in expectations strengthens the real interest rate channel and causes country specific shocks to generate larger and more prolonged macroeconomic imbalances

market prices of risk with diverse beliefs learning and catastrophes mies with identical patterns of endowments priors and information flows but two different market structures one with complete markets another in which consumers can trade only a single risk free bond we study how opportuni ties to speculate uncommon priors and learn ing affect market prices of risk two types of consumers have diverse beliefs about the law of motion for a random exogenous endowment one type knows the true law of motion while the other type learns about it via bayes s theo

fiscal policy in general equilibrium this paper studies four classic fiscal policy experiments within a quantitatively restricted neoclassical model the authors main findings are as follows 1 permanent changes in government purchases can lead to short run and long run output multipliers that exceed one 2 permanent changes in government purchases induce larger effects than temporary changes 3 the financing decision is quantitatively more important than the resource cost of changes in government purchases and 4 public investment has dramatic effects on private output and investment these findings stem from important dynamic interactions of capital and labor absent in earlier equilibrium analyses of fiscal policy copyright 1993 by american economic association

an introduction to the theory of rational expectations under asymmetric information every good economics textbook contains the cliche that market prices provide signals which facilitate the allocation of resources to their best use in a world not subject to random shocks consumers and producers when faced with competitive prices need look no further than their own preferences or production technology to be able to make a decision they need give no thought to the tastes endowments or technology of other agents however in a world subject to random shocks this is no longer the case agents are faced with the problem of forecasting future states of nature and more importantly of forecasting the impact of these states on the actions of other agents rational expectations theories provide a model of how agents make those forecasts in a world subject to random shocks it will be the case that agents acquire or at least attempt to acquire information about the future realization of the shocks it will in general be the case that different agents have access to different information the fact that information is dispersed throughout the economy has the potential to cause a misallocation of resources relative to what would be the case if all agents knew everything an efficient allocation of resources will in general require the transfer of information from consumers who have some information about their future demands to producers who can take current actions to mitigate avoidable scarcities or surpluses though many classical and neo classical writers emphasize the informational role of prices the standard marshallian or walrasian model of competitive equilibrium does not involve prices transferring information across traders the purpose of this paper is to show that rational expectations models are radically different from walrasian models in an economy where traders have diverse information this is demonstrated by showing that unlike what occurs in a walrasian equilibrium of an economy with heterogeneous information if there is a complete set of insurance markets and utility is additively separable over time then there exists a rational expectations equilibrium which gives consumers the same allocation as if each consumer has access to all of the economy s information this implies that under the above assumptions a central planner with all the economy s information could not pareto dominate the competitive allocation achieved when traders have diverse information and rational expectations this paper makes no attempt to survey the literature on rational expectations the reader is referred to shiller 1978 barro 1981 for a survey of macroeconomics and rational expectations and radner 1980 for a survey of the microeconomics and mathematical theory of rational expectations this paper will however try to outline the evolution of the rational expectations concept from a notion of optimal forecasting to a virtually complete departure from the walrasian model of equilibrium the rest of this section is devoted to a discussion of pre rational expectations ideas

an endogenous policy model of hierarchical government endogenous policy models usually neglect that government policies are frequently the result of decisions taken at different tiers by different agents each enjoying some degree of autonomy in this paper policies are the outcome of the choices made by two agents within a hierarchy a legislator decides on the budget to be successively spent by a bureaucrat both agents are lobbied by one or two interest groups the combination of sequential decisionmaking and lobbying implies that the interaction between the agent at one tier and the interest group s depends on the exchange between the same interest group s and the agent at the other tier our results concerning multi tier lobbying and legislatorial oversight substantially qualify the conventional wisdom related to one tier lobbying in particular the reaction of the legislator to lobbying at the bureaucratic tier may make lobbying wasteful even when there is no competition from other lobbies moreover the legislator benefits from lobbying only when there is competition between interest groups at the upper tier it is also shown that competition for influence at the bureaucratic tier may work as a perfect substitute for legislatorial oversight extensions of the model indicate its usefulness for the analysis of decisionmaking in other multilevel governance structures like federations or firms

consumption dynamics in general equilibrium a characterisation when markets are incomplete we introduce a methodology for analysing infinite horizon economies with two agents one good and incomplete markets we provide an example in which an agent s equilibrium consumption is zero eventually with probability one even if she has correct beliefs and is marginally more patient we then prove the following general result if markets are effectively incomplete forever then on any equilibrium path on which some agent s consumption is bounded away from zero eventually the other agent s consumption is zero eventually so either some agent vanishes in that she consumes zero eventually or the consumption of both agents is arbitrarily close to zero infinitely often later we show that a for most economies in which individual endowments are finite state time homogeneous markov processes the consumption of an agent who has a uniformly positive endowment cannot converge to zero and b the possibility that an agent vanishes is a robust outcome since for a wide class of economies with incomplete markets there are equilibria in which an agent s consumption is zero eventually with probability one even though she has correct beliefs as in the example in sharp contrast to the results in the case studied by sandroni 2000 29 and blume and easley 2006 8 where markets are complete our results show that when markets are incomplete not only can the more patient agent or the one with more accurate beliefs be eliminated but there are situations in which neither agent is eliminated c 2010 elsevier inc all

stationary equilibria in asset pricing models with incomplete markets and collateral we consider an infinite horizon exchange economy with incomplete markets and collateral constraints as in the two period model of geanakoplos and zame 2002 households can default on their liabilities at any time and financial securities are only traded if the promises associated with these securities are backed by collateral we examine an economy with a single perishable consumption good where the only collateral available consists of productive assets in this model competitive equilibria always exist and we show that under the assumption that all exogenous variables follow a markov chain there also exist stationary equilibria these equilibria can be characterized by a mapping from the exogenous shock and the current distribution of financial wealth to prices and portfolio choices we develop an algorithm to approximate this mapping numerically and discuss ways to implement the algorithm in practice a computational example demonstrates the performance of the algorithm and shows some quantitative features of equilibria in a model with collateral and default

a welfare analysis of convergence to rational expectations abstract this paper investigates a model with intertemporally inconsistent preferences where individuals begin by making mistakes and converge to rational expectations it is shown that the properties of rational expectations do not carry over to paths that monotonically converge to re and that if individuals begin by making mistakes then everyone cannot benefit by convergence to rational expectations