network models and financial stability abstract systemic risk is a key concern for central banks charged with safeguarding overall financial stability in this paper we investigate how systemic risk is affected by the structure of the financial system we construct banking systems that are composed of a number of banks that are connected by interbank linkages we then vary the key parameters that define the structure of the financial system including its level of capitalisation the degree to which banks are connected the size of interbank exposures and the degree of concentration of the system and analyse the influence of these parameters on the likelihood of knock on defaults first we find that the better capitalised banks are the more resilient is the banking system against contagious defaults and this effect is non linear second the effect of the degree of connectivity is non monotonic i e initially a small increase in connectivity increases the contagion effect but after a certain threshold value connectivity improves the ability of a banking system to absorb shocks third the size of interbank liabilities tends to increase the risk of knock on default even if banks hold capital against such exposures fourth more concentrated banking systems are shown to be prone to larger systemic risk all else equal in an extension to the main analysis we study how liquidity effects interact with banking structure to produce a greater chance of systemic breakdown we finally consider how the risk of contagion might depend on the degree of asymmetry tiering inherent in the structure of the banking system a number of our results have important implications for public policy which this paper also draws out

credit and inflation under borrowerʼs lack of commitment here we investigate the existence of credit in a cash in advance economy where there are complete markets but for the fact that agents cannot commit to repay their debts defectors are banned from the credit market but they can use money balances for saving purposes without uncertainty deflation crowds out credit completely the equilibrium allocation however is efficient if the government deflates at the time preference rate efficiency can also be restored with positive inflation for any non negative inflation rate below the optimal level the volume of credit and the real interest rate increase with inflation our results hold when idiosyncratic uncertainty is introduced and households are sufficiently impatient but in one instance efficiency cannot be restored if the deflation rate is nearby the rate of time preference our numerical examples suggest that the optimal inflation rate is not too large for reasonable levels of patience and risk aversion finally we present a framework where the use of money arises endogenously and show that it is tantamount to our cash in advance framework our results hold in this modified environment

sulfur dioxide control by electric utilities what are the gains from trade title iv of the 1990 clean air act amendments caaa established a market for transferable sulfur dioxide so2 emission allowances among electric utilities this market offers firms facing high marginal abatement costs the opportunity to purchase the right to emit so2 from firms with lower costs and this is expected to yield cost savings compared to a command and control approach to environmental regulation this paper uses econometrically estimated marginal abatement cost functions for power plants affected by title iv of the caaa to evaluate the performance of the so2 allowance market specifically we investigate whether the much heralded fall in the cost of abating so2 compared to original estimates can be attributed to allowance trading we demonstrate that for plants that use low sulfur coal to reduce so2 emissions technical change and the fall in prices of low sulfur coal have lowered marginal abatement cost curves by over 50 percent since 1985 the flexibility to take advantage of these chan

skill biased technological change and rising wage inequality some problems and puzzles the recent rise in wage inequality is usually attributed to skill biased technical change sbtc associated with new computer technologies we review the evidence for this hypothesis focusing on the implications of sbtc for overall wage inequality and for changes in wage differentials between groups a key problem for the sbtc hypothesis is that wage inequality stabilized in the 1990s despite continuing advances in computer technology sbtc also fails to explain the evolution of other dimensions of wage inequality including the gender and racial wage gaps and the age gradient in the return to education

pricing risk in economies with heterogeneous agents and incomplete markets habit formation has been proposed as a possible solution to the equity premium puzzle this paper extends the class of models that support the habits explanation in order to account for heterogeneity in earnings wealth habits and consumption i find that habit formation does indeed increase the equity premium however contrary to earlier results the habit hypothesis does not imply a price for risk as largeas the one measured in the data there are three reasons for this first households in a habits economy modify their consumption savings decision second they modify their portfolio choice these two changes in behavior diminish the consumption fluctuations faced by households third the composition of the set of agents pricing risk in the economy changes so that relatively better self insured households end up pricing risk jel d52 g12 e21 c68

financial contagion through capital connections a model of the origin and spread of bank panics financial contagion is modeled as an equilibrium phenomenon in a dynamic setting with incomplete information and multiple banks the equilibrium probability of bank failure is uniquely determined we explore how the cross holding of deposits motivated by imperfectly correlated regional liquidity shocks can lead to contagious eects conditional on the failure of a financial institution we show that contagion is possible in the unique equilibrium of the economy and characterize exactly when it may exist at the same time we identify a direction of flow for contagious eects which provides a rationale for localized financial panics simulations identify the optimal level of interbank deposit holdings in the presence of contagion risk our results suggest that when the probability of bank failure is low maximal levels of interbank holdings are optimal when cross holding of deposits is complete we demonstrate that the intensity of contagion is increasing in the size of regionally aggregate liquidity shocks

costs of business cycles for unskilled workers abstract unskilled workers are subject to a much larger risk of unemployment during recessions than are skilled workers moreover unskilled workers earn less income which limits their ability to self insure we examine how this heterogeneity in unemployment risk and income across different skill groups translates into heterogeneity in the cost of business cycles we find that the welfare cost of business cycles for unskilled workers is substantially higher than the welfare cost for skilled workers

contagion of self fulfilling financial crises due to diversification of investment portfolios abstract we look at two countries that have independent fundamentals but share the same group of investors each country might face a self fulfilling crisis agents withdrawing their investments fearing that others will a crisis in one country reduces agents wealth this makes them more averse to the strategic risk associated with the unknown behavior of other agents in the second country increasing their incentive to withdraw their investments consequently the probability of a crisis there increases this generates a positive correlation between the returns in the two countries since diversification affects returns in our model its welfare implications are non trivial

equilibrium in securities markets with heterogeneous investors and unspanned income risk abstract in a finite time horizon incomplete market continuous time setting with dividends and investor incomes governed by arithmetic brownian motions we derive closed form solutions for the equilibrium risk free rate and stock price for an economy with finitely many heterogeneous cara investors and unspanned income risk in equilibrium the sharpe ratio is the same as in an otherwise identical complete market economy whereas the risk free rate is lower and consequently the stock price is higher the reduction in the risk free rate is highest when the more risk averse investors face the largest unspanned income risk

the evolution of wealth inequality over half a century the role of taxes transfers and technology over the last 50 years the u s tax system went through a striking transformation that reduced the effective tax rates for top income groups and raised transfers to seniors this paper investigates the macroeconomic repercussions of this change in policy particularly for the distributions of income wealth and consumption changes in taxes and transfers account for nearly half of the rise in wealth concentration nonetheless their impact on the distributions of income and consumption has been minor due to changes in equilibrium prices and the offsetting effects of tax cuts and transfers on the dispersion of consumption results highlight the role of increasing wage dispersion during this period as the main driver of trends in inequality

financial fragility and distress propagation in a network of regions we investigate how the financial fragility in the real economy is affected by the average level of interdependence among agents across different regions of the economy to this end we develop a parsimonious agent based model of firms and banks organized in geographic regions the model is built on the framework of an existing class of models for business fluctuations the goal of our exercise is to clarify the effect on systemic failures of the interplay between network interconnectedness and financial acceleration in particular we investigate the probability of individual and systemic failures with varying levels of interconnectedness we find that in the absence of financial acceleration connectivity makes the system more resilient in contrast in the presence of financial acceleration the probability of both individual and systemic failures are minimized at intermediate level of diversification

international financial crises causes prevention and cures dale jorgenson has bestowed a great honor and no small challenge by inviting me to give this lecture a great honor because of the distinguished list of economists who have preceded me a challenge because of the standard they have set and because there is no greater challenge for any economist than providing a coherent account of significant events to his scientific peers i am sometimes asked by friends about the differences between academic life and life as a public official there are many two stand out first as an academic the gravest sin one can commit is to sign one s name to something one did not write as a public official it is a mark of effectiveness to do so as often as possible second as an academic if a problem is too hard and does not admit of a satisfactory solution there is an obvious response work on a different problem that is not a luxury that one has in government i have been reminded of this often in recent years as we have grappled with financial crises in a number of what had previously been considered emerging markets with unrestrained futures anyone who doubts the social importance of what economists do should consider the debates surrounding these crises hundreds of millions of people who expected rapidly rising standards of living have seen their living standards fall hundreds of thousands if not millions of children have been forced to drop out of school and go to work hundreds of billions of dollars of apparent wealth has been lost the stability of large nations as nations has been called into question and the united states has made its largest nonmilitary foreign policyrelated financial commitments since the marshall plan almost all the issues involved in understanding preventing and mitigating these crises are the stuff of economics courses and research fixed versus flexible exchange rates moral hazard and multiple equilibria speculation and liquidity fiscal and monetary policies regulation and competition what economists think say and do has profound implications for the lives of literally billions of their fellow citizens whether it is discussing the role of derivatives in signaling exchange rate commitments with chinese premier zhu rongji or discussing an nber working paper on inflation targeting with the brazilian central bank governor arminio fraga or discussing alternative approaches to bankruptcy law with indonesia s economic team or optimal debt durations with the mexican authorities i am consistently struck by the impact of the kind of research discussed at the aea meetings the future well being of the world s people in large part will depend on how the ongoing process of global integration works out this is a strong statement but one that is supported by the global economy s post world war i failure and its post world war ii success central to global integration is financial integration the flow of funds and of capital across international borders and as the events of the late 1920 s and early 1930 s remind us central to global disintegration can be international financial breakdowns today i want to reflect on the issue of global financial integration in light of the dramatic and largely unpredicted events of recent years it is perhaps a good time for reflection there has been enough repair that priority can shift from u s department of the treasury 1500 pennsylvania avenue washington dc 20005 this lecture reflects many things i have learned from experiences i have shared with colleagues in the united states government and governments around the world i thank brad delong marty feldstein stephanie flanders ken rogoff andrei shleifer and ted truman for useful comments and suggestions i am especially grateful to nouriel roubini and stephanie flanders for valuable discussions and assistance in the preparation of this lecture the usual disclaimer applies

bank firm relationships financing and firm performance in germany abstract close bank firm relationships that characterize the financial systems in germany and japan are often credited for reducing agency costs and increasing access to capital thus improving the performance of firms critics of these banking systems cite the alternative possibility that conflicts of interests may also arise from both the banks multiple roles with the firm and the opportunity the banks have to use private information to shift risk or to otherwise participate in rent seeking activities we extend the empirical literature by systematically investigating the impact of bank influence on the financing choices and performance of the firm we find that bank influenced firms in germany do benefit from increased access to capital there is however no evidence to support the hypothesis of either higher profitability or growth for bank influenced firms results suggest that the interest payments to debt ratio is significantly higher for bank influenced firms which supports the hypothesis that german universal banks may engage in rent seeking activities and provides evidence of a conflicting interests between creditors and shareholders

u s tax policy and health insurance demand can a regressive policy improve welfare abstract the u s tax policy on health insurance is regressive because it subsidizes only those offered group insurance through their employers who also tend to have a relatively high income moreover the subsidy takes the form of deductions from the progressive income tax system giving high income earners a larger subsidy to understand the effect of the policy we construct a dynamic general equilibrium model with heterogenous agents and an endogenous demand for health insurance a complete removal of the subsidy may lead to a partial collapse of the group insurance market reduce the insurance coverage and deteriorate welfare there is however room for improving the coverage and welfare by extending a refundable credit to the individual insurance market

robust comparative statics in large dynamic economies we consider infinite horizon economies populated by a continuum of agents subject to idiosyncratic shocks this framework contains models of saving and capital accumulation with incomplete markets in the spirit of works by bewley aiyagari and huggett models of entry exit and industry dynamics in the spirit of hopenhayn s work and dynamic models of occupational choice and search models as special cases robust and easy to apply comparative statics results are established with respect to exogenous parameters as well as various kinds of changes in the markov processes governing the law of motion of the idiosyncratic shocks

equilibrium consumption and precautionary savings in a stochastically growing economy abstract the derivation of a closed form solution for consumption based on the constant elasticity utility function in the presence of stochastic labor income has proved to be intractable this paper derives a closed form equilibrium relationship between consumption and wealth one that holds along a balanced growth path in a stochastic romer endogenous growth model by employing more general recursive preferences we can disentangle the coefficient of relative risk aversion from the intertemporal elasticity of substitution the effects of key structural parameters on equilibrium consumption and its tradeoff with leisure are analyzed a significant aspect of our analysis concerns the extent to which current risk in the economy is shared between labor and capital this plays an important role in determining the impact of risk on the economy in general and on consumption in particular formal analysis is supplemented with extensive numerical simulations

optimal taxation without state contingent debt in an economy studied by lucas and stokey tax rates inherit the serial correlation structure of government expenditures belying barro s earlier result that taxes should be a random walk for any stochastic process of government expenditures to recover a version of barro s random walk tax smoothing outcome we modify lucas and stokey s economy to permit only risk free debt having only risk free debt confronts the ramsey planner with additional constraints on equilibrium allocations beyond one imposed by lucas and stokey s assumption of complete markets the ramsey outcome blends features of barro s model with lucas and stokey s in our model the contemporaneous effects of exogenous government expenditures on the government deficit and taxes resemble those in lucas and stokey s model but incomplete markets put a near unit root component into government debt and taxes an outcome like barro s however we show that without ad hoc limits on the government s asset holdings outcomes can diverge in importa

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

collective rent dissipation the theory of rent seeking was initiated by tullock 1967 1980 followed by krueger 1974 and posner 1975 and more recently extended in various directions by allard 1988 appelbaum and katz 1986a b c gradstein and nitzan 1989 hillman and katz 1984 1987 hillman and samet 1987 hillman and riley 1989 katz et al 1990 long and vousden 1987 ursprung 1990 and varian 1989 the purpose of this paper is to extend this theory by introducing the possibility of collective group rent seeking with voluntary individual decisions regarding their extent of participation in the collective rent seeking efforts

on the heterogeneous welfare gains and losses from trade how are the gains and losses from trade distributed across individuals within a country first we document that tradable goods constitute a larger fraction of expenditures for poor households second we build a trade model with nonhomothetic preferences to generate the documented relationship between tradable expenditure shares income and wealth and uninsurable earnings risk to generate heterogeneity in income and wealth third we use the calibrated model to quantify the differential welfare gains and losses from trade along the income and wealth distribution in a numerical exercise we permanently reduce trade costs so as to generate a rise in import share of gdp commensurate with that seen in the data from 2001 to 2014 we find that households in the lowest wealth decile experience welfare gains over the transition measured by permanent consumption equivalents that are 67 percent larger than those in the highest wealth decile

individual and aggregate labor supply in heterogeneous agent economies with intensive and extensive margins we develop a heterogeneous agent general equilibrium model that incorporates both intensive and extensive margins of labor supply a nonconvexity in the mapping between time devoted to work and labor services distinguishes between extensive and intensive margins we consider calibrated versions of this model that dier in the value of a key preference parameter for labor supply and the extent of heterogeneity the model is able to capture the salient features of the empirical distribution of hours worked including how individuals transit within this distribution we then study how the various specications inuence labor supply responses to aggregate technology shocks we nd that abstracting from intensive margin adjustment has large eects on the volatility of aggregate hours even if intensive margin uctuates relatively little

efficiency in a pure currency economy with inflation individuals who are buffeted by stochastic shocks will wish to substitute consumption intertemporally to effect this substitution they can enter into insurance contracts or they can use money this paper investigates the connection between optimum insurance and friedman s 1969 concept of the optimum quantity of money using a simplified version of lucas s 1980 pure currency economy monetary efficiency and efficient insurance are equivalent here an example is presented in which an efficient monetary equilibrium exists contrary to bewley s 1983 conjecture in the example the efficient rate of return on real balances is less than the internal rate of discount

risk averse rent seeking with shared rents this paper presents a nash equilibrium model of rent seeking behavior in which risk averse players expend resources to obtain a share of a rent as for example in contests for import quota licences results are obtained relating the equilibrium level of lobbying effort by each player to the value of the rent in particular reduced individual lobbying effort is associated with higher rents contested if players are sufficiently risk averse the question of whether the value of rents is a good measure of the resource cost of rent seeking is also considered a simple approximation involving risk and risk aversion parameters is derived for the proportion of rents dissipated in long run equilibrium risk and risk aversion are seen to reduce the rent dissipation ratio below unity copyright 1987 by royal economic society

domestic or global imbalances rising income risk and the fall in the us current account when default leads to exclusion from financial markets the implied loss of consumption smoothing opportunities is more costly when income volatility is high a rise in income risk thus makes default less attractive allowing creditors to relax borrowing limits i show how in an open economy this endogenous financial deepening may reduce aggregate foreign assets in response to a rise in individual income risk against the precautionary savings intuition conditions for this depend on whether default constrains complete or uncontingent contracts the post 1980 rise in us household income risk strongly reduces foreign assets when domestic markets are complete or world interest rates low

a new approach to business fluctuations heterogeneous interacting agents scaling laws and financial fragility abstract in this paper we discuss a scaling approach to business fluctuations our starting point consists in recognizing that concepts and methods derived from physics have allowed economists to re discover a set of stylized facts which have to be satisfactorily accounted for in their models standard macroeconomics based on a reductionist approach centered on the representative agent is definitely badly equipped for this task on the contrary we show that a simple financial fragility agent based model based on complex interactions of heterogeneous agents is able to replicate a large number of scaling type stylized facts with a remarkable high degree of statistical precision

health insurance reform the impact of a medicare buy in abstract the steady state general equilibrium and welfare consequences of a medicare buy in program optional for those aged 55 64 is evaluated in a calibrated life cycle economy with incomplete markets incomplete markets and adverse selection create a potential welfare improving role for health insurance reform we find that adverse selection eliminates any market for a medicare buy in if it is offered as an unsubsidized option to individual private health insurance the subsidy needed to bring the number of uninsured to less than 5 percent of the target population could be financed by an increase in the labor income tax rate of just 0 03 0 18 percent depending on how the program is implemented

household heterogeneity and the transmission of foreign shocks abstract we study the role of heterogeneity in the transmission of foreign shocks we build a heterogeneous agent new keynesian small open model economy hanksome that experiences a current account reversal households portfolio composition and the extent of foreign currency borrowing are key determinants of the magnitude of the contraction in consumption associated with a sudden stop in capital inflows the contraction is more severe when households are leveraged and owe debt in foreign currency in this setting the revaluation of foreign debt causes a larger contraction in aggregate consumption when debt and leverage are concentrated among poorer households closing the output gap via an exchange rate devaluation may therefore be detrimental to household welfare due to the heterogeneous impact of the foreign debt revaluation our hanksome framework can rationalize the observed fear of floating in emerging market economies even in the absence of contractionary devaluations

risk and global economic architecture why full financial integration may be undesirable integration of global financial markets was supposed to lead to greater financial stability as risks were spread around the world the finan cial crisis has thrown doubt on this conclusion a failure in one part of the global economic system caused a global meltdown the recent crisis has shown that in the absence of appro priate government intervention privately profit able transactions may lead to systemic risk this paper provides a general analytic framework within which we can analyze the optimal degree and form of financial integration within this general framework full integration is not in general optimal indeed faced with a choice between two polar regimes full integration or autarky in the simplified model autarky may be superior

incomplete markets labor supply and capital accumulation we explore the accumulation of capital in the presence of limited insurance against idiosyncratic shocks borrowing constraints and endogenous labor supply in the exogenous labor supply case e g aiyagari 1994 huggett 1997 the presence of limited insurance increases the demand for savings for precautionary reasons as a consequence capital and output are higher under incomplete markets we show that if labor hours are endogenous labor supply is likely to be lower under incomplete markets because those agents who experience a high shock to productivity are ex post richer and they work fewer hours in some cases this wealth effect can overcome the aggregate precautionary savings and give rise to lower savings and output under incomplete

how important is intra household risk sharing for savings and labor supply abstract while it is recognized that the family is a risk sharing institution little is known about the quantitative effects of this source of insurance on savings and labor supply in this paper we present a model where workers females and males are subject to idiosyncratic employment risk and where capital markets are incomplete a household is formed by a female and a male who decide on consumption savings and labor supplies in a calibrated version of our model we find that intra household risk sharing has its largest impact among wealth poor households while the wealth rich use mainly savings to smooth consumption across unemployment spells wealth poor households rely on spousal labor supply for instance for low wealth households average hours worked by wives of unemployed husbands are 8 higher than those worked by wives of employed husbands this response in wives hours makes up 9 of lost family income we also study consumption losses upon an unemployment spell precautionary savings and the crowding out effects of the public unemployment insurance program on the extent of risk sharing within the household

asset returns with transactions costs and uninsured individual risk abstract we explore whether incorporating an explicit motive for holding liquid assets within an equilibrium asset pricing model helps explain the following features of asset returns and turnover in the post war u s economy i the low risk free real interest rate ii the large spread between returns on liquid assets and stocks and iii the greater transaction velocity of liquid assets relative to stocks we introduce a demand for liquid assets by adding uninsured individual risk together with differential costs of trading securities numerical simulations attempting to match the return data generate a ratio of liquid assets to income considerably below observed levels

systemic risk financial contagion and financial fragility abstract although it is hard to arrive at a widely accepted definition for systemic risk it is generally acknowledged that it is the risk of the occurrence of an event that threatens the well functioning of the system of interest financial payments banking etc sometimes to the point of making its operation impossible we model systemic risk with two main components a random shock that weakens one or more financial institutions and a transmission mechanism which transmits and possibly exacerbates such negative effects to the rest of the system our model could be conceptually represented by a network already described in previous works in this work we show how is possible to estimate the distribution of losses for the banking system with our model additionally we show how it is possible to separate the distribution of losses into two components the losses incurred by the initial shock and the losses resulting from the contagion process finally once the distribution is estimated we can derive standard risk measures for the system as a whole another important contribution of this work is that we can follow the evolution of certain risk measures like the expected loss or the cvar in order to evaluate if the system is becoming more or less risky in fact more or less fragile additionally we can decompose the distribution of losses of the whole banking system into the systemic and the contagion elements and we can determine if the system is more prone to experience contagious difficulties during a certain period of time

social times of network spaces network sequences and foreign investment in hungary to model from its inception interenterprise network formation and its interaction with foreign investment across an entire epoch of rapid and profound economic transformation the authors gathered data on the complete ownership histories of 1 696 of the largest hungarian enterprises from 1987 to 2001 they develop a social sequence analysis to identify distinctive pathways whereby firms use network resources to buffer uncertainty hide or restructure assets or gain knowledge and legitimacy during this period networked property grew stabilized and involved a growing proportion of foreign capital cohesive networks of recombinant property were robust and in fact integrated foreign investment although multinationals through their subsidiaries dissolved ties in joint venture arrangements the authors find evidence that they also built durable networks these findings suggest that developing economies do not necessarily face a forced choice between networks of global reach and those of local embedde

huggett economies with multiple stationary equilibria abstract i obtain a closed form solution to a huggett economy with constant absolute risk aversion cara utility when the vector of individual state variables follows a var 1 process with an arbitrary shock distribution the stationary equilibrium is unique if the income process is ar 1 but not necessarily so otherwise with gaussian shocks i provide general sufficient conditions for the existence of at least three equilibria when the income process is either arma 1 1 ar 2 or has a persistent transitory pt representation with negatively correlated shocks the possibility of multiple equilibria calls for caution in comparative statics exercises and policy analyses using heterogeneous agent models as an illustration i provide an example in which the welfare implication of changing the income risk goes in opposite directions depending on the choice of equilibrium

uninsured idiosyncratic production risk with borrowing constraints the author analyzes a general equilibrium model of a heterogeneous agents economy in which the agents are subject to borrowing constraints and uninsurable idiosyncratic production risk

venture capital and the macroeconomy i develop a model of venture capital vc intermediation that quantitatively explains central empirical facts about vc activity and can evaluate its macroeconomic relevance the impact of vc backed innovations is significantly larger than suggested by observed aggregate venture exit valuations even after accounting for large exposures to systematic and uninsurable idiosyncratic risks the risk properties of venture capital play a quantitatively important role in both explaining empirical regularities and shaping the value of ventures contributions to economic growth the model is analytically tractable and yields exact solutions despite the presence of matching frictions imperfect risk sharing and endogenous growth received january 16 2018 editorial decision november 7 2018 by editor stijn van nieuwerburgh

optimal consumption policy under uncertain income this paper considers the consumption behavior of a risk averse consumer with a preference for immediate consumption who faces an uncertain income stream and plans for a finite or infinite number of periods the consumer may borrow up to a limit or save where both saving and borrowing are subject to the same positive rate of interest we derive the optimal consumption policies for both finite and infinite planning horizons investigate their characteristics and analyze their economic and behavioral implications

the financial accelerator in an evolving credit network we model a credit network characterized by credit relationships connecting i downstream d and upstream u firms and ii firms and banks the net worth of d firms is the driver of fluctuations the production of d firms and of their suppliers u firms in fact is constrained by the availability of internal finance proxied by net worth to the d firms the structure of credit interlinkages changes over time due to an endogeneous process of partner selection which leads to the polarization of the network at the aggregate level the distribution of growth rates exhibits negative skewness and excess kurtosis when a shock hits the macroeconomy or a significant group of agents in the credit network a bankruptcy avalanche can follow if agents leverage is critically high in a nutshell we want to explore the properties of a network based financial accelerator

the empirical measurement of rent seeking costs this survey focuses on the efforts carried out mainly by public choice scholars to measure the social cost of rent seeking the concept introduced by gordon tullock in 1967 and coined by anne krueger in 1974 is well known and accepted by the profession but its empirical measurement has fallen behind with respect to its theoretical formulation an often criticized lack in the literature although there are good general surveys none has specifically focused on reviewing the empirical efforts made to measure the phenomenon the purpose of this paper is to provide such a survey it could be said that the rent seeking concept has been fully integrated into economic jargon it is commonly used when some agent seeks to obtain an artificial transfer usually from government and covers all the actions efforts or expenses that the agent has to carry out to obtain the prize the key issue however is the possible social waste that arises in these situations the empirical efforts to measure such waste constitute the main purpose of this survey the concept of rent seeking was introduced by tullock 1967 although the term was first coined by krueger 1974 in a paper not related to the former in a recent paper tullock himself wrote of the history of the concept and the intellectual context within which it arose tullock 2003 starting with the pioneering work by harberger 1954 several studies were conducted during the 1950s in which the calculation of the social cost of monopolies and tariffs always gave the result of very modest figures the first response to these results was made by leibenstein 1966 and his x efficiency which refers to a hypothetical loss in efficiency due to the absence of competition shortly after leibenstein s paper appeared tullock argued that the deadweight costs of monopoly and tariffs understate the true social cost because the expenditures made to capture related rents have to be included so rectangles as well as harberger s triangles have to be included in the calculations let us see this argument once more figure 1 depicts the iconic tullock graphic analysis of rent seeking it represents the demand schedule d for a monopolized good where pm is the monopoly

liaisons dangereuses increasing connectivity risk sharing and systemic risk the recent financial crisis poses the challenge to understand how systemic risk arises endogenously and what architecture can make the financial system more resilient to global crises this paper shows that a financial network can be most resilient for intermediate levels of risk diversification and not when this is maximal as generally thought so far this finding holds in the presence of the financial accelerator i e when negative variations in the financial robustness of an agent tend to persist in time because they have adverse effects on the agent s subsequent performance through the reaction of the agent s counterparties 2012 elsevier b v all rights reserved

why have aggregate skilled hours become so cyclical since the mid 1980 s this paper documents and discusses a dramatic change in the cyclical behavior of aggregate hours worked by individuals with a college degree skilled workers since the mid 1980 s using the cps outgoing rotation data set for the period 1979 1 2003 4 we find that the volatility of aggregate skilled hours relative to the volatility of gdp has nearly tripled since 1984 in contrast the cyclical properties of unskilled hours have remained essentially unchanged we evaluate the extent to which a simple supply demand model for skilled and unskilled labor with capital skill complementarity in production can help explain this stylized fact within this framework we identify three effects which would lead to an increase in the relative volatility of skilled hours i a reduction in the degree of capital skill complementarity ii a reduction in the absolute volatility of gdp and unskilled hours and iii an increase in the level of capital equipment relative to skilled labor we provide empirical evidence in support of each of these effects our conclusion is that these three mechanisms can jointly explain about sixty percent of the observed increase in the relative volatility of skilled labor the reduction in the degree of capital skill complementarity contributes the most to this result

the role of effort for self insurance and its consequences for the wealth distribution i explore the effect of effort as a mechanism to alleviate the idiosyncratic risk faced by individuals in the presence of incomplete markets i construct a dsge model where costly effort determines the probability of being employed the next period and a riskless asset can be used to smooth consumption i first show how effort and assets are inverse related and that a unique stationary equilibrium exists then in a calibrated version of the model to the us economy i show that in the stationary equilibrium a positively skewed wealth distribution arises which is closer to the observed data and has not been obtained by models without ex ante heterogeneity i then use the model to evaluate the effect of unemployment insurance on the wealth distribution

production subsidies and redistribution abstract who gains from stimulating output we explore a dynamic model with production subsidies where the population is heterogeneous in one dimension wealth there are two channels through which production subsidies redistribute resources across the population first poorer agents gain from a rise in wages since to the extent there is an operative wealth effect in labor supply they work harder second because a current output boost will raise consumption today relative to the future thus lowering real interest rates poor agents gain in relative terms since their income is based less on interest income we examine optimal redistribution from the perspective of an arbitrary consumer in the population we show that if this consumer has commitment at time zero to set all present and future subsidy rates and for a class of preferences that admits aggregation in wealth then output stimulation and hence redistribution will only occur at time zero after that subsidies are zero a byproduct of our analysis of this environment is a median voter theorem with direct voting over subsidy sequences at time zero the sequence preferred by the median wealth consumer is the unique outcome we also study lack of commitment since interest rate manipulation is associated with time inconsistency we analyze this case formally by looking at the markov perfect time consistent equilibrium in a game between successive identical decision makers e g the median agent here subsidies persist they are constant over time and are more distortionary than under commitment moreover whereas under commitment asset inequality changes initially in favor of the consumer who decides on policy it does not under lack of commitment

on income fluctuations and capital gains abstract we consider the infinite time horizon problem of asymptotically maximizing the expected accumulated discounted utility in a one good production economy the available capital in a given period is given by the production of the previous period plus a random variable the product of the discount and interest factors is either 1 greater than or 2 equal to one under 1 the optimal policy exists under certain conditions and always under 2 the optimal capital sequence almost surely goes to infinity under 1 with conditions on the utility one almost surely reaches a capital level above which the sequence is increasing

endogenous market incompleteness with investment risks abstract this paper studies a general equilibrium economy in which agents have the ability to invest in a risky technology the investment risk cannot be fully insured with optimal contracts because shocks are private information we show that the presence of investment risks lead to under accumulation of capital relative to an economy where idiosyncratic shocks can be fully insured we also show that the availability of state contingent optimal contracts compared to simple debt contracts brings the aggregate stock of capital close to the complete markets level institutional reforms that make possible the use of these contracts have important welfare consequences

inefficiencies in a model of spatial networks formation with positive externalities abstract in this paper we make an exploratory use of computational techniques genetic algorithms and monte carlo simulations to compute efficient and emergent networks in a spatialized version of the connections model of jackson and wolinski jackson m o wolinski a 1996 a strategic model of social and economic networks journal of economic theory 71 44 74 this approach allows us to observe and discuss inefficiencies that arise in a strategic network formation context with imperfectly link mediated positive externalities to connections and spatial link costs our results highlight that depending on the strength of the externalities emergent and efficient networks may share several structural properties nevertheless emergent networks are insufficiently dense and should be more structured around central agents

changes in budgetary allocations and international comparisons of the social cost of rent seeking a critical note the katz rosenberg measure of rent dissipation across countries fails to encompass the consequences of different political systems wherein allocations are made observations about fiscal federal structures and the particular political structures of different countries affect political discretion in allocating government transfers owing both to the absence of these considerations which are indeed self evident and some other considerations regarding the measure the cross country rankings that katz and rosenberg present are meaningless at best and at worst misleading

asset commonality debt maturity and systemic risk we develop a model in which asset commonality and short term debt of banks interact to generate excessive systemic risk banks swap assets to diversify their individual risk two asset structures arise in a clustered structure groups of banks hold common asset portfolios and default together in an unclustered structure defaults are more dispersed portfolio quality of individual banks is opaque but can be inferred by creditors from aggregate signals about bank solvency when bank debt is short term creditors do not roll over in response to adverse signals and all banks are ine ciently liquidated this information contagion is more likely under clustered asset structures in contrast when bank debt is long term welfare is the same under both asset structures

rent seeking for pure public goods in this paper we present a formal analysis of rent seeking for public goods by two or more groups with different numbers of individuals we begin by considering equally wealthy groups under risk neutrality a case which constitutes our basic model several surprising and interesting results emerge from the analysis of this basic case the problem is then extended to deal with a groups with different wealth levels and b risk aversion this last extension brings about a further crop of interesting and useful results

capital market liberalization economic growth and instability summary this paper reviews briefly the arguments for capital market liberalization and identifies their theoretical and empirical weaknesses this provides the foundations for the argument for intervention in short term capital flows the paper concludes with a brief discussion of the various ways in which such interventions may be implemented 2000 elsevier science ltd all rights reserved

social insurance private health insurance and individual welfare abstract this paper studies the impact of social insurance on individual choices and welfare in a dynamic general equilibrium model with uncertain medical expenses and individual health insurance choices i find that social insurance modeled as the combination of a minimum consumption floor and the medicaid program does not only distort saving and labor supply decisions but also has a large crowding out effect on the demand for private health insurance however despite the distorting effects the net welfare consequence of eliminating social insurance is still negative in most cases in addition the large crowding out effect on private health insurance suggests that the existence of social insurance programs may be one reason why some americans do not buy any health insurance

moral hazard imperfect risk sharing and the behavior of asset returns abstract this paper develops a model of endogenous idiosyncratic risk in a simple two period general equilibrium setting and examines its implications for the behavior of asset returns the model readily generates empirically plausible idiosyncratic risk in consumption and yields more realistic behavior of asset returns than comparable models with perfect insurance the most dramatic effects of imperfect risk sharing however are not on the spreads between asset returns but on their absolute levels overall the results suggest allowing for incomplete markets can contribute to a resolution of the equity premium puzzle

currency and credit are equivalent mechanisms i study a pure exchange economy with many agents whose marginal utility of consumption is stochastically heterogeneous and independent of wealth with realized marginal utility of wealth private information i show that currency and credit are equivalent to a contract that is efficient when the privacy of information is viewed as a constraint and that the cash in advance constraint is an expression of an incentive constraint

fiscal policy with heterogeneous agents and incomplete markets i undertake a quantitative investigation into the short run effects of changes in the timing of proportional income taxes for model economies in which heterogeneous households face a borrowing constraint temporary tax changes are found to have large real effects in the benchmark model a temporary tax cut increases aggregate consumption on impact by around 29 cents for every dollar of tax revenue lost comparing the benchmark incomplete markets model to a complete markets economy income tax cuts provide a larger boost to consumption and a smaller investment stimulus when asset markets are incomplete copyright 2005 wiley blackwell

risk averse rent seekers and the social cost of monopoly power there is now quite general recognition that the social cost of monopoly power encompasses the resources expended by individuals seeking to become the beneficiaries of monopoly rents however since the activity of rent seeking is generally not observable direct estimates of resources expended in quests to acquire monopoly power are usually impossible to come by 1 as a consequence the indirect approach of taking the observed value of monopoly rents as indicative of the unobserved value of the resources expended in rent seeking is quite generally adopted in approaches to evaluation of the social cost of such activity

rent seeking with non identical sharing rules the primary object of this paper is to examine the role of differential sharing rules within a collective rent seeking setting on the possible non existence of nash equilibrium focusing on groups that distribute part of the rent equally among their members and the residual according to relative effort we show that in rent seeking societies applying the two polar sharing rules equilibrium never exists in the general case where groups apply different but not necessarily the polar sharing rules we study the relationship between group variability in distributing rents and the problem of non existence of equilibrium in the rent seeking game

the new keynesian cross abstract the new keynesian nk cross is a graphical and analytical apparatus for heterogeneous agent hank models expressing key aggregate demand objects mpc and multipliers as functions of heterogeneity parameters it affords analytical insights into monetary fiscal and forward guidance multipliers and replicates the aggregate implications of quantitative hank the key parameter the constrained agents income elasticity to aggregate income depends on fiscal redistribution when it is larger smaller than one the effects of policies and shocks are amplified dampened with uninsurable idiosyncratic uncertainty this translates intertemporally through compounding discounting in the aggregate euler equation into further amplification dampening of future shocks

multiple versus single banking relationships theory and evidence a theory of the optimal number of banking relationships is developed and tested using matched bank firm data according to the theory relationship banks may be unable to continue funding profitable projects owing to internal problems and a firm may thus have to refinance from nonrelationship banks the latter however face an adverse selection problem as they do not know the quality of the project and may refuse to lend in these circumstances multiple banking can reduce the probability of an early liquidation of the project the empirical evidence supports the predictions of the model

credit chains and bankruptcy propagation in production networks abstract we present a simple model of a production network in which firms are linked by supplier customer relationships involving extension of trade credit our aim is to identify the minimal set of mechanisms which reproduce qualitatively the main stylized facts of industrial demography such as firms size distribution and at the same time the correlation over time and across firms of output growth and bankruptcies the behavior of aggregate variables can be traced back to the direct firm firm interdependence in this paper we assume that the number of firms is constant and the network has a periodic static structure but the framework allows further extensions to investigate which network structures are more robust against domino effects and if the network is let to evolve in time which structures emerge spontaneously depending on the individual strategies for orders and delivery

the efficiency and stability of r d networks we investigate the efficiency and stability of r d networks in a model with network dependent indirect spillovers we show that the efficient network structure critically depends on the marginal cost of r d collaborations when the marginal cost is low the complete graph is efficient while high marginal costs imply that the efficient network is asymmetric and has a nested structure regarding the stability of network structures we show the existence of both symmetric and asymmetric equilibria the efficient network is stable for small industry size and small cost in contrast for large industry size there is a wide region of cost in which the efficient network is not stable this implies a divergence between efficiency and stability in large industries

financial contagion on the international trade network we combine data on international trade linkages with a network approach to map the global trading system as an interdependent complex network this enables us to obtain indicators of how well connected a country is into the global trading system we use these network based measures of connectedness to explain stock market returns during recent episodes of financial crisis we find that a crisis is amplified if the epicenter country is better integrated into the trade network however target countries affected by such a shock are in turn better able to dissipate the impact if they are well integrated into the network a network approach can help explain why the mexican asian and russian financial crises were highly contagious while the crises that originated in venezuela and argentina did not have such a virulent effect we suggest that a network approach incorporating the cascading and diffusion of interdependent ripples when a shock hits a specific part of the global trade network provides us with an improved explanation of financial contagion jel f10 f36 f40 g15

the risk free rate in heterogeneous agent incomplete insurance economies abstract why has the average real risk free interest rate been less than one percent the question is motivated by the failure of a class of calibrated representative agent economies to explain the average return to equity and risk free debt i construct an economy where agents experience uninsurable idiosyncratic endowment shocks and smooth consumption by holding a risk free asset i calibrate the economy and characterize equilibria computationally with a borrowing constraint of one year s income the resulting risk free rate is more than one percent below the rate in the comparable representative agent economy

intertemporal distortions in the second best we consider a very general class of public nance problems that encompasses ramsey models of optimal taxation as well as economies with limited commitment private information and political economy frictions we identify a su cient condition to rule out permanent intertemporal distortions at the optimum if there exists an admissible allocation that converges to the rst best steady state then all intertemporal distortions are temporary in the second best we analyze a series of applications to illustrate the signi cance of this result

evidence on the insurance effect of redistributive taxation copyright 2010 by the president and fellows of harvard college and the massachusetts institute of technology

cost of business cycles with indivisibilities and liquidity constraints it is almost universally agreed that individuals face incomplete insurance markets and cannot perfectly insure against the idiosyncratic risk in this paper simple general equilibrium models with incomplete insurance markets are examined in order to assess the impact of imperfect insurance on the magnitude of the welfare costs of business cycles two versions of incomplete insurance markets are considered and certain statistical properties of the equilibrium stochastic processes in these environments are compared with those of a perfect insurance economy

the measurability of budget related rent seeking it has been suggested that the extent of rent seeking expenditures arising from attempts to influence budget allocations should be estimated by the absolute magnitude of the observed changes in allocation instead we argue that it is the extent of theex ante prospective changes that determine the level of rent seeking and that in the presence of countervailing activity these may be quite unrelated to the ex post observed values we further argue that the traditional rent seeking model of competition for a pre specified rent is inappropriate in this context

international lending and borrowing in a stochastic stationary equilibrium this paper develops a simple general equilibrium model of international borrowing and lending in which national products are subject to random fluctuations international capital flows arise from the efforts of risk averse households in different countries to self insure against random income fluctuations by accumulating foreign claims that can be used to finance a less variable profile of consumption relative to national income in the absence of aggregate uncertainty a stationary rational expectations equilibrium is shown to exist despite the fact that rates of time preference differ among countries a number of results many of which enrich those in the existing literature are obtained copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

rent seeking for budgetary allocation preliminary results for 20 countries in this paper we present quantitative measures of the proneness of different countries to respond to pressure groups in determining the composition of their spending these in turn help us to derive simple measures of the rent seeking done in relation to the government s spending pie

the implications of changes in hours fluctuations on welfare costs of business cycles abstract hours volatility has changed non monotonically across skill groups since the mid 1980s the welfare cost of business cycles of mid skilled workers became similar to that of high skilled workers while the relative welfare cost of low to high skilled workers remains very high