REPEC
WP2017/3: Sustainable Financial Obligations and Crisis CyclesAbstract: The ability to distinguish between sustainable and excessive debt develop- ments is crucial for securing economic stability. By studying US private sector credit loss dynamics, we show that this distinction can be made based on a mea- sure of the incipient aggregate liquidity constraint, the nancial obligations ratio. Specically, as this variable rises, the interaction between credit losses and the business cycle increases, albeit with dierent intensity depending on whether the problems originate in the household or the business sector. This occurs 1-2 years before each recession in the sample. Our results have implications for macropru- dential policy and countercyclical capital-buers. Keywords: debt sustainability; credit losses; nancial crises; nancial obligations; smooth transition regression; non-linear cointegration. JEL: E32, E44, G01 Date: 1970 Jan 01 |
WP2017/2: Liquidity risk and collective moral hazardAbstract: Banks individually optimize their liquidity risk management, often neglecting the externalities generated by their choices on the overall risk of the …nancial system. This is the main argument to support the regulation of liquidity risk. However, banks may have incentives to optimize their choices not strictly at the individual level, but engaging instead in collective risk-taking strategies, which may intensify systemic risk. In this paper we look for evidence of such collective behaviors, with an emphasis on the period preceding the global …nancial crisis. We …nd strong and robust evidence of peer e¤ects in banks’liquidity risk management. This result suggests that incentives for collective risk taking behaviors may play a role in banks’choices, thus calling for a macroprudential approach to liquidity risk regulation. Keywords: banks, liquidity risk, regulation, herding, peer e¤ects, Basel III, macro- prudential policy, systemic risk JEL: G21, G28 Date: 1970 Jan 01 |
WP2017/1: Regularity of a general equilibrium in a model with infinite past and futureAbstract: We develop easy-to-verify conditions assuring that comparative statics in a general equilibrium model where time is a real line is feasible, i.e., the implicit function theorem is applicable. Consider an equilibrium equation, $Upsilon(k,E)=k$ of a model where an equilibrium variable (k) is a continuous bounded function of time, real line, and the policy parameter (E) is a locally integrable function of time. The key conditions are time invariance of the equilibrium map $Upsilon$ and the requirement that the Fourier transform of the derivative of the map $Upsilon$ with respect to the equilibrium variable k does not return unity. Further, in a general constant-returns-to-scale production and homogeneous life-time-utility overlapping generations model we show that the first condition is satisfied at a balanced growth equilibrium and the second condition is satisfied for ``almost all'' policies that give rise to such equilibria. Keywords: Overlapping generations, implicit function theorem, determinacy, time-invariance, comparative statics JEL: C02, C62, D50. Date: 2017 Feb 27 |
WP2016/1: Redeem or Revalue? Some Public-Debt Calculus.Abstract: This paper studies the fiscal-monetary response to a sharp increase in the level of the public debt. To that end, we employ a general equilibrium model with distortionary income tax, distortionary financing, and endogenous capital accumulation. The model is calibrated to the US and EU economies. A main result is that in both economies the QE is superior, welfare-wise, to other policy prescriptions to the problem of explosive debt. A major difference between the EU and the US is that a Taylor rule of tight monetary and fiscal policy could reduce the US public debt, but given the fundamental properties of the EU economy, this policy cannot achieve this goal in Europe. Keywords: Distorting Taxes; Fiscal Solvency; Laffer curve in a monetary economy; Liquidity ; Rate of self financing of tax cuts; Quantitative Easing JEL: E44; E47; E58; E63; H30; H63; Date: 2016 Jul 30 |
WP2015/8: The chase of a multi-armed economist for the elusive social discount rateAbstract: The social discount rate debate has been plagued by the use of inadequate one-agent models and vague analysis. The Weitzman-Gollier puzzle (resolution) is picked here to illustrate. Keywords: policy evaluation, social discount rate, social welfare JEL: D61, H30 Date: 2015 Nov 18 |
WP2015/7: Discounting and Welfare Evaluation of PoliciesAbstract: If policy discounting is to have any welfare relevance, it must be a derivative of a social welfare function. If that derivative is to have a net present value form, the baseline allocation must be stationary. Given a stationary baseline in an overlapping generations growth economy the inter-generationally fair discount rate under the relative utilitarian welfare function equals the growth rate of per-capita consumption, roughly, 2% for the U.S. This differs from the interest rate, even in the golden rule equilibrium unless population growth is null. Keywords: policy evaluation, discounting, social welfare function, social discount rate, overlapping generations JEL: D50, H43, H50. Date: 2015 Nov 18 |
WP2015/6: Experience Based Dynamic Choice: A Revealed Preference ApproachAbstract: We use the revealed preference method to derive a model of dynamic choice where the agent’s past experience may influence her current decisions. Our model generalizes the classical individual choice model which is rationalized by utility maximization, and reduces to that model in the absence of experience. As the agent gains experience her utility changes but only in a very restricted fashion. Every period, after an alternative is chosen, the utility of that, and only that alternative, may change while the utility of all other alternatives remains fixed. The model provides a platform on which many behavioral dynamic phenomena may be examined. We utilize it and look into the behavioral implications of bounded memory, status quo bias and variety seeking. Keywords: Experience, Dynamic Choice, Memory, Status Quo Bias, Revealed Preference JEL: D11, D83. Date: 2015 Nov 18 |
WP2015/5: The Effect of Ambiguity on Status Quo Bias: An Experimental StudyAbstract: We conduct an experiment to determine the effect of ambiguity on status quo bias. We find no evidence of the bias in the absence of ambiguity and when ambiguity is present both in the status quo option and the alternative. We do find evidence for status quo bias under asymmetric presence of ambiguity, i.e. when the status quo option is non-ambiguous and the alternative is, or when the status quo option is ambiguous and the alternative is not. These findings are not predicted by the existing models of choice with initial endowment, such as the loss aversion model by Kahneman and Tversky (1979) and the incomplete preferences model by Bewley (1986). Our results, combined with the evidence from the endowment effect literature, suggest that dissimilarity between options may be an important determinant of the status quo bias. Keywords: Status Quo Bias, Risk, Ambiguity, Reference Effects. JEL: C91, D11, D81. Date: 1970 Jan 01 |
WP2015/4: Rational Choice with Category BiasAbstract: This paper develops, using the revealed preference approach, a model of choice with an initial endowment and in the presence of alternatives that are grouped into categories. Our model generalizes the classical individual choice model which is rationalized by utility maximization, and reduces to that model in the absence of an initial endowment. Given an exogenous endowment, our decision maker follows a 3-step procedure: First, she identifies the best alternative in the choice set which belongs to the same category as her endowment. This alternative serves as her endogenous reference point which in turn, at the second step, induces a “psychological constraint”. Finally, she chooses the best feasible alternative in her constraint set according to her reference-free utility. The model gives rise to a “category bias” which generalizes the status quo bias by attracting the decision maker towards the endowment’s category but not necessarily towards the endowment itself. It also accommodates recent experimental findings on the absence of status quo bias among goods which belong to the same category. We apply the model to a financial choice problem and show that category bias may lead to a risk premium even with risk neutral agents. Keywords: Status Quo Bias, Categories, Reference Dependence, Risk Premium, Revealed Preference JEL: D03, D11. Date: 2015 Nov 18 |
WP2015/3: Contemplation vs. Intuition. A reinforcement learning approachAbstract: In a search for a positive model of decision-making with observable primitives, we rely on the burgeoning literature in cognitive neuroscience to construct a three-element machine (agent). Its control unit initiates either impulsive or cognitive element to solve a problem in a stationary Markov environment, the element "chosen" depends on whether the problem is mundane or novel, memory of past successes and the strength of inhibition. Our predictions are based on a stationary asymptotic distribution of the memory, which, depending on the parameters, can generate different "characters", e.g., an uptight dimwit, who could succeed more often with less inhibition, as well as a relaxed wise-guy, who could gain more with a stronger inhibition of impulsive (intuitive) responses. As one would expect, stronger inhibition and lower cognitive costs increase the frequency of decisions made by the cognitive element. More surprisingly, increasing the "carrot" and reducing the "stick" (being in a more supportive environment) enhances contemplative decisions (made by the cognitive unit) for an alert agent, i.e., the one who identifies novel problems frequently enough. Keywords: the two-system decision-making, executive control, inhibition, adaptive learning, stochastic approximation JEL: D01. Date: 1970 Jan 01 |
WP2015/2: Equilibria Under Monetary and Fiscal Policy Interactions in a Portfolio Choice Model - Technical AppendixAbstract: This paper analyzes the aftermath of monetary and fiscal policy interactions from the perspective of portfolio choice. In particular, it studies how the presence of income- taxes change the properties of general equilibrium models. It finds that relative to the previous literature [following Leeper (1991)] a new regime exists where a passive fiscal rule combined with a passive monetary rule can still deliver determinacy where the same area of the parameter space would lead to multiple solutions if taxes were lump sum. It characterizes analytically the extent to which tax cuts are self-financing and how the distortionary tax Laffer curve looks near the steady state in order to obtain the size of the new regime. In the new regime, the inflation target can temporarily increase in order to increase seigniorage revenues. With this flexibility, the monetary policy is consistent with the real debt remaining bounded, and the arithmetic that follows is monetarist and unpleasant in the sense of Sargent and Wallace (1981). Keywords: Distorting Taxes; Dynamic Laffer Curve; Fiscal Policy; Liquidity-in- advance; Monetary Policy; Portfolio Choice; Unpleasant Monetarist Arithmetic. JEL: C62; E60; G11; H60; Date: 2016 Feb 22 |
WP2015/1: Equilibria Under Monetary and Fiscal Policy Interactions in a Portfolio Choice ModelAbstract: This paper analyzes the aftermath of monetary and fiscal policy interactions from the perspective of portfolio choice. In particular, it studies how the presence of income- taxes change the properties of general equilibrium models. It finds that relative to the previous literature [following Leeper (1991)] a new regime exists where a passive fiscal rule combined with a passive monetary rule can still deliver determinacy where the same area of the parameter space would lead to multiple solutions if taxes were lump sum. It characterizes analytically the extent to which tax cuts are self-financing and how the distortionary tax Laffer curve looks near the steady state in order to obtain the size of the new regime. In the new regime, the inflation target can temporarily increase in order to increase seigniorage revenues. With this flexibility, the monetary policy is consistent with the real debt remaining bounded, and the arithmetic that follows is monetarist and unpleasant in the sense of Sargent and Wallace (1981). Keywords: Distorting Taxes; Dynamic Laffer Curve; Fiscal Policy; Liquidity-in- advance; Monetary Policy; Portfolio Choice; Unpleasant Monetarist Arithmetic. JEL: C62; E60; G11; H60; Date: 2016 Feb 22 |
WP2014/5: SHOPPING IN A SEGREGATED CITYAbstract: We consider the consequences of introducing a Superstore into a city segregated by income. In this monocentric city, consumers and firms live on a continuous line interval. Our model consists of two types of firms; many high-cost perfectly competitive ”Corner Stores” located throughout the city, and one low-cost ”Superstore” located in the outer part of the city and choosing its price strategically. We look to determine the impact of the low price offered by the Superstore on the welfare of both low and high-income consumers. In addition we consider the impact of city income structure on the pricing decision of firms and monopoly profits. Regarding consumer welfare, we find that low-income consumers that are segregated away from the Superstore may still benefit from its entry into the market. More specifically, the impact of the Superstore on the isolated consumer depends on the sensitivity of the local real estate market to the entry of the Superstore and its choice of price. We also find that a greater disparity in disposable income between the two types of consumers makes it more likely that the Superstore will charge a higher price. Keywords: Spatial competition; Segregation; Income disparity Date: 1970 Jan 01 |
WP2014/4: Equilibria Under Monetary and Fiscal Policy Interactions with Distortionary TaxationAbstract: This paper studies how the presence of an income tax changes the properties of general equilibrium models. It fi…nds that relative to the previous literature [following Leeper (1991)] a new area of determinacy exists where a passive …fiscal rule combined with a passive monetary rule can still deliver determinacy where the same area of the parameter space would lead to multiple solutions if taxes were lump sum. It characterizes analytically the extent to which tax cuts are self …financing and how the distortionary tax Laffer curve looks near the steady state in order to obtain the size of the passive …fiscal-passive monetary regime. In this regime, …scal limits bring about a Tobin effect and nominal prices are determined according to the quantity theory of money. Keywords: Distorting Taxes; Dynamic Laffer Curve; Equilibrium Determinacy; JEL: C60; E60; H60; Date: 1970 Jan 01 |
WP2014/3: A Fixed-Point Theory of Price Level Determination in General EquilibriumAbstract: This paper offers a fi…xed-point approach to the issue of price level determination in general equilibrium. It arrives at a solution method for rational expectations models with missing initial conditions for financial wealth. The paper emphasizes the calculation of an equilibrium initial valuation for government debt via a Krasnoselski-Mann-Bailey theorem. The analysis is performed from a global analysis perspective. Abstracting from policies that bring about zero eigen-values permits us to draw conclusions about global dynamics. This approach builds on the Hartman-Grobman Theorem and implies no loss of generality. Keywords: Boundary Value Problems; Distorting Taxes; General Equilibrium; Global Determinacy; Krasnoselski-Mann-Bailey theorem; JEL: C62; C68; E60; H30; H60; Date: 1970 Jan 01 |
WP2014/2: REGULARITY AND STABILITY OF EQUILIBRIA IN AN OVERLAPPING GENERATIONS GROWTH MODELAbstract: In an exogenous-growth economy with overlapping generations we analyse local stability of a balanced growth equilibrium with respect to changes in consumption endowments, which could be interpreted as a transfer policy. We show that generically, in the space of parameters, equilibria around BGE are locally unique and are locally differentiable functions of endowments, with derivatives given by kernels. Further, those equilibria are stable in the sense that the effects of temporary changes decay exponentially towards plus and minus infinity. Keywords: Regularity of Infinite Economies, Policy Evaluation, Overlapping Generations, JEL: D50, H43 Date: 1970 Jan 01 |
WP2014/1: Dynamic Scoring and Monetary PolicyAbstract: I discuss the joint effects of government-taxes and interest-rates. A fiscal authority performs `exogenous' and `endogenous' changes to the income-tax rate and a monetary authority sets the nominal-interest. A wedge between rates of self-financing of tax cuts and the income-tax Laffer curve arrives from the monetary system. I find a new- regime that differs from conventional monetary-fiscal policy interactions. Dynamic scoring exercises show that in the new-regime monetary-policy markedly mitigates negative output effects caused by `exogenous tax actions' designed to reduce public-debt, altogether inducing signi.cant welfare gains. In contrast, where public-debt is at high levels, `exogenous tax cuts' induce welfare losses. Keywords: Distorting Taxes; Liquidity Constraints; Dynamic Laffer Curve; Global Analysis; Liquidity Traps; Sovereign Default; JEL: C60; E60; H20; H30; H60; Date: 1970 Jan 01 |
WP2013/2: Solving Boundary Value Problems in the Fiscal Theory of the Price LevelAbstract: This paper specifi…es determinacy regions in the parameter space of monetary and …fiscal policy interactions in economies with …finance and tax distortions. It shows that the initial valuation of government debt is the …fixed point of a continuous mapping that takes a closed interval on the real line into itself. It implements the Krasnoselski-Mann-Baily theorem to compute the equilibrium real value of nominal government debt. This computation indicates whether policy interactions are sustainable or lead to a default. The model exhibits nominal determinacy if and only if it exhibits real determinacy. Distorting taxes have dramatic effect on determinacy regions. Admissible monetary-…scal policy interactions vary as the economy approaches the peak of its Laffer curve: the range of active …scal responses to government debt narrows,whereas passive …fiscal stances become inconsistent with equilibrium. Furthermore, policy targets vary when regimes switch from passive fiscal stances to active …fiscal stances. Whereas passive fiscal stances focus entirely on secondary defi…cits, active fi…scal stances should focus mainly on primary de…ficits. Keywords: Distorting Taxes; Finance Constraints; Fiscal Rules; Fiscal Theory of Prices; Monetary Fiscal Regimes; Computation of the Equilibrium; JEL: C62; C68; E42; E62; E63; H60 Date: 1970 Jan 01 |
WP2013/1: Scholarly InfluenceAbstract: We introduce a new class of measures of scholarly influence, which we term step-based indices. This class includes the prominent h-index, the publication count, and the i10-index. We show that the class of step-based indices is characterized by three axioms, consistency with worse scientists, consistency with better scientists, and full range. We also introduce a new index, the junior/senior-index, which combines the best features of the h-index with those of the i10-index. |
WP2012/9: Infinite horizon allocation with consumption-dependent utilityAbstract: We consider an economy in which there is an infinite stream of pies, each of size one, one in every period. For each agent, the per-period utility function, which is defined on that period's consumption, is determined by the previous period's consumption. We describe specifications of this model for which no symmetric, efficient, and monotonic way to allocate pies exists. Keywords: Behavioral preferences; Dynamic models; Habits JEL: D01, D03, D30, D31, D63 Date: 2012 Oct 18 |
WP2012/8: The asymptotic core, nucleolus and Shapley value of smooth market games with symmetric large playersAbstract: We study the asymptotic nucleolus of a smooth and symmetric oligopoly with an atomless sector. We show that under appropriate assumptions, the asymptotic nucleolus of the TU market game coincides with the unique TU competitive payoff distribution. This equivalence results from nucleolus of a finite game belonging to its core and the Aumann Core Equivalence, which holds for this economy due to the cut-throat competition among the identical large players. A comparison with the Shapley value yields that in some cases, the asymptotic Shapley value is more favorable for the large traders than the asymptotic nucleolus. This may be interpreted by the `fairness property' of Shapley Value which does not reflect the intense competition among the large traders, accounting for the relative importance of their marginal contribution. Keywords: Mixed games, Oligopoly, JEL: C71, D40, D43. Date: 2012 Sep 20 |
WP2012/7: A Behavioral Arrow TheoremAbstract: In light of research indicating that individual behavior may violate standard assumptions of rationality, we modify the standard model of preference aggregation to study the case in which neither individual nor collective preferences are required to satisfy transitivity or other coherence conditions. We introduce the concept of an ordinal rationality measure which can be used to compare preference relations in terms of their level of coherence. Using this measure, we introduce a monotonicity axiom which requires that the collective preference become more rational when the individual preferences become more rational. We show that for any ordinal rationality measure, it is impossible to nd a collective choice rule which satises the monotonicity axiom and the other standard assumptions introduced by Arrow (1963): unrestricted domain, weak Pareto, independence of irrelevant alternatives, and nondictatorship. Keywords: Aggregation; Axioms; Intransitivity; Coherence; Monotonicity; JEL: D60; D70; D71. Date: 2012 Sep 20 |
WP2012/6: Monetary Policy and Fiscal Limits with No-DefaultAbstract: This paper discusses monetary and fiscal interactions in fiscal stress with no outright default. Two distortions prevail in the economy: income taxes and liquidity constraints. Possible obstructions to fiscal policy include: a ceiling on the equilibrium Debt-to-GDP ratio; zero elasticity of tax revenues; a political intolerance of rising tax rates; A Laffer curve emerges endogenously. In equilibrium, fiscal solvency is brought about through adjustments to the level of nominal prices. Three regimes achieve this goal: FC - an interaction of a fiscal rule that targets both output and public debt with a neutral monetary policy; FD - an interaction of a fiscal rule that targets the primary deficit with an active monetary policy; FDA - an interaction of an austere fiscal rule with a passive monetary policy. Keywords: Distorting Taxes; Finance Constraint; Fiscal Limits; Fiscal Rules; Fiscal Theory of Prices; JEL: E42; E62; E63; H60. Date: 2013 May 19 |
WP2012/5: Equilibria in an overlapping generations model with transfer policies and exogenous growthAbstract: For an overlapping generations economy with varying life-cycle productivity, non-stationary endowments, continuous time starting at infinity (hence allowing for full anticipation), constant-returns-to-scale production and ces utility we fully characterise equilibria where output is higher than investment, which is strictly positive. Net assets (aggregate savings minus the value of the capital stock) are constant in any equilibrium, and, for balanced growth equilibria (BGE, defined for an economy with stationary endowments), net assets are non-zero only in the golden rule equilibrium, in accord with Gale 1973. The number of BGE is finite. Their parity, however, depends on the life-cycle productivity, in particular, on the relation between the intertemporal elasticity of substitution, the minimal working age and the minimal tax age. Keywords: Infinite Economies, Overlapping Generations, Exogenous Growth JEL: D50 Date: 2012 Mar 05 |
WP2012/4: ACCESS TO BANKING AND INCOME INEQUALITYAbstract: Using a simple model of banking services we consider how deposit-taking banks price for their services and choose the type of deposit customers that they target. In considering a banking model with a consumer population heterogeneous in income we go beyond previous theoretical work on consumer banking, allowing us to determine the role of household income in the access to deposit services. In addition we consider the usage and pricing for Alternative Financial Services (AFS) by households left out of the mainstream banking sector. We look to identify how the prices they pay for financial transactions differs from those in the mainstream sector. We show that, all other things equal, a higher rate of return on investments available to banks is an important factor in lowering financial exclusion, increasing the profitability of low-income consumers for deposit-taking institutions. This would suggest that the possibility of financial exclusion increases in periods of recession. In addition, if the bank's ability to invest is connected to financial exclusion, any regulation restricting the bank's ability to make investments should take this into account. Finally, by introducing specific income distributions to our model, we are able to demonstrate how an increase in income dispersion can lead to a greater proportion of consumers excluded from mainstream banking. |
WP2012/3: COMMUTING AND SHOPPING: DETERMINANTS OF CITY INCOME STRUCTUREAbstract: We demonstrate how firm pricing strategy and determinants of household location can interact to determine city structure. We go beyond previous work on spatial income segregation by endogenizing the tradeoff between households' choice of location and shopping behavior, as well as solving for the firms' optimal pricing strategy in a general equilibrium framework. In this city, consumers and firms live on a continuous line interval. Our model consists of two types of firms; many high-cost perfectly competitive "Corner Stores" located in the Central Business District, and one large low-cost "Superstore", choosing its location and price strategically. We begin by considering a model with homogenous consumers in order to determine the strategy for the Superstore in a spatial model. Then we consider the impact of introducing different income classes to our city structure. We show how the shopping habits of the consumer population, as determined by the relative price of the Superstore and the Corner Stores, can contribute to the various income segregation outcomes described in previous literature. In addition we consider the impact of city income structure on the pricing decision of firms. |
WP2012/2: THE EFFECT OF INCOME INEQUALITY ON PRICE DISPERSIONAbstract: Using a supply/demand consumer model with search, we show under what conditions the distribution of income within a community is related to the type of firms that exist within that community, impacting the level of prices. We assume that searching for the lowest price costs both time and money to the consumer. If time and money costs are high enough low-income consumers cannot afford the monetary cost of search, while wealthy consumer are not willing to take the time to look for the lowest price. The middle class have the right balance of time and money cost of search and therefore are the most aggressive shoppers. We use a supply side model of firm output and pricing strategy to demonstrate that firms located in more informed communities are more likely to enter the market as large low-priced retailers. By connecting these two results, we show under what conditions the size of the middle class can have a negative relationship with the level of prices in a local market. Our paper goes beyond other work on causes of price dispersion by allowing consumers to purchase a continuous amount of the good, and by incorporating a distribution of search costs. Both these modifications allow us to focus more specifically on the link between income distribution and prices. |
WP2012/1: The Nash Bargaining Solution and Interpersonal Utility ComparisonsAbstract: Bargaining theory has a conceptual dichotomy at its core: according to one view, the utilities in the bargaining problem are meaningless numbers (v-N.M utilities), while according to another view they do have concrete meaning (willingness to pay). The former position is assumed by the Nash and Kalai-Smorodinsky solutions, and the latter is assumed by the egalitarian, utilitarian, and equal-loss solutions. In this paper I describe a certain form of equivalence between the set consisting of the former solutions and the set consisting of the latter. This equivalence is the result of an attempt to bridge the gap between the aforementioned views; utilizing this equivalence, I derive a new axiomatization of the Nash solution. Keywords: Bargaining; interpersonal utility comparisons; Nash solution JEL: D63; D71 Date: 2012 Feb 06 |
WP2011/15: Demand For Contract Enforcement in A Barter EnvironmentAbstract: Do greater potential gains from trade enhance or erode contracting institutions? In an anonymous exchange environment traders can sign a contract, hence agreeing to interact with the assigned partner, or wait till the next match. Any contract can be endorsed (for a pay) by the enforcement agency, which then observes the interaction with a positive probability known to the traders and punishes the detected infractors. The agency enforces only those contracts that are paid for, and a trader freely chooses whether to endorse his contract. Demand for contract enforcement is the highest amount a proposer of a contract is ready to pay to the agency (in a stationary subgame perfect equilibrium). It may be strictly positive, as we show, even when contracts are broken. Surprisingly, larger potential gains from exchange may dampen the demand, but not always: they may boost the demand for 'high quality' agencies (that oversee the interactions frequently enough). Keywords: Contracting institutions, third party enforcement, demand for contracts, gains from trade JEL: H11, H41, K42, O17 Date: 2011 Dec 06 |
WP2011/14: InefficiencyAbstract: We introduce an ordinal model of efficiency measurement. Our primitive is a notion of efficiency that is comparative, but not cardinal or absolute. In this framework, we postulate axioms that we believe an ordinal efficiency measure should satisfy. Primary among these are choice consistency and planning consistency, which guide the measurement of efficiency in a firm with access to multiple technologies. Other axioms include symmetry, which states that the names of commodities do not matter, scale-invariance, which says that units of measurement of commodities does not matter, and strong monotonicity, which states that efficiency should decrease if the inputs and outputs remain static when the technology becomes unambiguously more efficient. These axioms characterize a unique ordinal efficiency measure which is represented by the coefficient of resource utilization. By replacing symmetry (the weakest of our axioms) with a very mild continuity condition, we obtain a family of path-based measures. Keywords: Efficiency Measurement, Coefficient of Resource Utilization, Ordinal, Choice Consistency, Planning Consistency, Path-based JEL: C43,D24 Date: 2011 Nov 30 |
WP2011/13: Gross substitution and complementarity are not symmetric relationsAbstract: I construct an example of well-behaved (convex, continuous, monotone) preferences over two goods, x and y, such that x is a gross substitute for y but y is a gross complement for x. A sufficient (but not necessary) condition for preventing this "pathology" is that the demand for either good be a strictly increasing function of income. Keywords: Substitution; complementarity; consumer theory; JEL: D01, D11 Date: 2011 Nov 28 |
WP2011/12: Fairness in Bargaining and the Kalai-Smorodinsky SolutionAbstract: A bargaining solution guarantees minimal equity if each player's payoff is at least as large as the minimum of the payoffs assigned to him by the equal-gain (i.e., egalitarian) and equal-loss solutions. The Kalai-Smorodinsky solution is the unique scale-invariant 2-person solution with this property. There does not exist a scale-invariant n-person solution with this property. Keywords: Bargaining; fairness; Kalai-Smorodinsky solution JEL: D63; D71 Date: 2011 Nov 03 |
WP2011/11: Relationships and the availability of credit to New Small FirmsAbstract: We analyze the loans that startup firms obtain from banks by testing our predictions on a set of small, young Italian companies founded during the 1992-2004 period. According to our investigation, the amount of borrowing is determined by (1) the size of the firm, (2), the ability to offer collateral (3) perceived risk. Contrary to expectations, however, the length of the relationship with the lender has a weak influence. |
WP2011/10: Fairness, Efficiency, and the Nash Bargaining SolutionAbstract: A bargaining solution balances fairness and efficiency if each player's payoff lies between the minimum and maximum of the payoffs assigned to him by the egalitarian and utilitarian solutions. In the 2-person bargaining problem, the Nash solution is the unique scale-invariant solution satisfying this property. Additionally, a similar result, relating the weighted egalitarian and utilitarian solutions to a weighted Nash solution, is obtained. These results are related to a theorem of Shapley, which I generalize. For n>=3, there does not exist any n-person scale-invariant bargaining solution that balances fairness and efficiency. Keywords: Bargaining; fairness; efficiency; Nash solution JEL: D63; D71 Date: 2011 Oct 09 |
WP2011/9: Endogenous Bid Rotation in Repeated AuctionsAbstract: I study collusion between two bidders in a general symmetric IPV repeated auction, without communication, side transfers, or public randomization. I construct a collusive scheme, endogenous bid rotation, that generates a payoff larger than the bid rotation payoff. Keywords: Auctions; Bid rotation; Collusion; Repeated games JEL: D44; D82 Date: 2011 Oct 09 |
WP2011/8: Gradual Negotiations and Proportional SolutionsAbstract: I characterize the proportional N-person bargaining solutions by individual rationality, translation invariance, feasible set continuity, and a new axiom - interim improvement. The latter says that if the disagreement point d is known, but the feasible set is not - it may be either S or T, where S is a subset of T - then there exists a point d' in S, d' > d, such that replacing d with d' as the disagreement point would not change the final bargaining outcome, no matter which feasible set will be realized, S or T. In words, if there is uncertainty regarding a possible expansion of the feasible set, the players can wait until it is resolved; in the meantime, they can find a Pareto improving interim outcome to commit to - a commitment that has no effect in case negotiations succeed, but promises higher disagreement payoffs to all in case negotiations fail prior to the resolution of uncertainty. Keywords: Bargaining; Proportional solutions JEL: C78; D74 Date: 2011 Oct 09 |
WP2011/7: Bribing in second-price auctionsAbstract: An IPV 2-bidder second-price auction is preceded by two rounds of bribing: prior to the auction each bidder can try to bribe his rival to depart from the auction, so that he (the briber) will become the sole participant and obtain the good for the reserve price. Bribes are offered sequentially according to an exogenously given order - there is a first mover and a second mover. I characterize the unique efficient collusive equilibrium in monotonic strategies; in it, the second mover extracts the entire collusive gain. This equilibrium remains an equilibrium even when valuations are interdependent, and if they are separable then the full surplus extraction result continues to hold. Additionally, a family of pooling equilibria is studied, in which all the types of the first mover offer the same bribe. Keywords: Second-price auctions, collusion, bribing, signaling, surplus extraction JEL: D44; D82 Date: 2011 Oct 06 |
WP2011/6: BANACH FAMILIES AND THE IMPLICIT FUNCTION THEOREMAbstract: We generalise the classical implicit function theorem (IFT) for a family of Banach spaces, with the resulting implicit function having derivatives that are locally Lipschitz to very strong operator norms. Keywords: Banach spaces, Implicit Function Theorem JEL: D50; H43 Date: 2011 Oct 04 |
WP2011/5: Which Way to CooperateAbstract: We introduce a two-player, binary-choice game in which both players have a privately known incentive to enter, yet the combined surplus is highest if only one enters. Repetition of this game admits two distinct ways to cooperate: turn taking and cutoffs, which rely on the player's private value to entry. A series of experiments highlights the role of private information in determining which mode players adopt. If an individual's entry values vary little (e.g., mundane tasks), taking turns is likely; if these potential values are diverse (e.g., difficult tasks that differentiate individuals by skill or preferences), cutoff cooperation emerges. JEL: C90; Z13 |
WP2011/4: INTERGENERATIONAL EQUITY AND THE DISCOUNT RATE FOR POLICY ANALYSISAbstract: For two independent principles of intergenerational equity, the implied discount rate equals the growth rate of real per capita income, say, 2%, thus falling right into the range suggested by the U.S. Office of Management and Budget. To prove this, we develop a simple tool to evaluate small policy changes affecting several generations, by reducing the dynamic problem to a static one. A necessary condition is time invariance, which is satisfied by any common solution concept in an overlapping-generations model with exogenous growth. This tool is applied to derive the discount rate for cost-benefit analysis under two different utilitarian welfare functions: classical and relative. It is only with relative utilitarianism, and assuming time-invariance of the set of alternatives (policies), that the discount rate is well defined for a heterogeneous society at a balanced growth equilibrium, is corroborated by an independent principle equating values of human lives, and equals the growth rate of real per-capita income. Keywords: Overlapping Generations, Policy Reform, Intergenerational Equity, Cost-Benefit Analysis, Discount Rate, Utilitarianism JEL: D31;D61;D63;E60;H43 Date: 2011 Jun 01 |
WP2011/3: Should We Have or Should We Have Not, and Who Should Have Paid?Abstract: We analyze an overlapping generations model which explicitly includes a secondary asset market. The economy is affected by a onetime shock which causes some of these assets to become toxic. As a response the government may intervene by buying these assets at market value and removing them from trade. When the shock is not anticipated we find that government intervention cannot improve upon the laissez-faire equilibrium. However, when agents anticipate that a crisis may occur, removing the toxic assets dominates laissez-faire, particularly when the toxic asset holders are financing the intervention scheme. Finally, we show that curbing incentives which drive investors to find high yield opportunities decreases the severity of a crisis once it occurs, but also output. Keywords: Crisis; Toxic Assets; Intervention JEL: E44; E61 Date: 2011 Mar 01 |
WP2011/2: A Simple Bargaining Mechanism That Elicits Truthful Reservation PricesAbstract: We describe a simple 2-stage mechanism that induces two bargainers to be truthful in reporting their reservation prices in a 1st stage. If these prices criss-cross, the referee reports that they overlap, and the bargainers proceed to make offers in a 2nd stage. The average of the 2nd-stage offers becomes the settlement if both offers fall into the overlap interval; if only one offer falls into this interval, it is the settlement, but is implemented with probability 1/2; if neither offer falls into the interval, there is no settlement. Thus, if the bargainers reach the 2nd stage, they know their reservation prices overlap even if they fail to reach a settlement, possibly motivating them to try again. Keywords: Bargaining; truth-telling mechanisms; probabilistic implementation JEL: C72; C78 Date: 2011 Feb 22 |
WP2011/1: Separate control over the local and the asymptotic behaviour in L_p spacesAbstract: We introduce 2 parameter variants L_{p,q} of the Lebesgue spaces, to gain separate control on the asymptotic behaviour (p) and the local behaviour (q). Thus they behave with respect to p like the spaces ell_p and with respect to q like the spaces L_q on a probability space. Convolution behaves very well on those spaces. JEL: C02; C60 |
WP2010/6: The Optimal Design of Rewards in ContestsAbstract: Using contests to generate innovation has and is widely used. Such contests often involve offering a prize that depends upon the accomplishment (effort). Using an all-pay auction as a model of a contest, we determine the optimal reward for inducing innovation. In a symmetric environment, we find that the reward should be set to c(x)/c′(x) where c is the cost of producing an innovation of level x. In an asymmetric environment with two firms, we find that it is optimal to set different rewards for each firm. There are cases where this can be replicated by a single reward that depends upon accomplishments of both contestants. Keywords: contests; innovation; mechanism design JEL: C70; D44; L12; O32 Date: 2010 Nov 22 |
WP2010/5: Insulation Impossible: Monetary Policy and Regional Fiscal Spillovers in a FederationAbstract: This paper studies the interactions of fiscal and monetary policies in the presence of fiscal spillovers within a monetary union. When capital markets are integrated, the fiscal policy of any member country will influence equilibrium wages and interest rates across the whole union. Thus there are fiscal spillovers within a federation. Within a general class of monetary policy rules, there does not exist one that completely insulates agents in one region from fiscal policy in another. We contrast particular rules, such as inflation and interest rate targeting, to illustrate how monetary policy becomes a channel for fiscal policy spillovers. Keywords: Fiscal spillovers; Monetary union JEL: E61; E63; H77; F15 Date: 2010 Sep 07 |
WP2010/4: Demand for Cash with Intra-Period Endogenous ConsumptionAbstract: We study the demand for money when agents can optimally choose mean rates of consumption and cash holdings over a period. Consistent with empirical evidence, we find that agents do not smooth intra-period consumption. Instead, their rate of consumption is positively correlated with their cash position. This positive correlation depends on the volatility of the consumption process. When volatility is very low or very high, agents choose to consume at a relatively high rate immediately after a cash withdrawal, drawing down quite rapidly their cash balances. Later in the period, their rate of consumption and cash depletion is more restrained. This sizeable deviation from consumption smoothing is much less pronounced when volatility is moderate. Keywords: money demand; consumption smoothing; drift control JEL: E41 Date: 2010 Sep 01 |
WP2010/3: The Role of Consumption-Labor Complementarity as a Source of Macroeconomic InstabilityAbstract: The equilibrium ramification of a balanced budget rule are scrutinized in a one sector growth model augmented with investment frictions and a non-separable utility function in consumption and leisure. Edgeworth-complementarity between consumption and labor is formulated so as to generate a positive co-movement of consumption, output, and hours worked, as found in the data. Calibration of the model to the U.S. economy provides evidence that a balanced budget rule with a Taylor type monetary policy induce determinate equilibria. Keywords: Fiscal-Monetary policy; Non-Separable Utility; Consumption-Labor Complementarity; Endogenous Labor; Stabilization; Determinacy; Investment JEL: C62; C63; E4; E52; E61; E62; E63 Date: 2010 Jun 01 |
WP2010/2: Trade Agreements, Bargaining and Economic GrowthAbstract: Rebelo's two-sector endogenous growth model is embedded within a two-country international trade framework. The two countries bargain over a trade agreement that specifies: (i) the size of the foreign aid that the richer country gives to the poorer one; (ii) the terms of the international trade that takes place after the aid is given. Foreign aid is given not because of generosity, but because it improves the capital allocation across the world and thus raises total world production. This world production surplus enables the rich country to raise its equilibrium consumption and welfare beyond their no-aid levels. To ensure it, the rich country uses a trade agreement to condition the aid on favorable terms of trade. Keywords: International trade; Aid; Balanced Growth JEL: F43; O41; P45 Date: 2010 May 30 |
WP2010/1: Consolidated-Budget Rules and Macroeconomic Stability with Income-Tax and Finance ConstraintsAbstract: In some Business-Cycle models a fiscal policy that sets income taxes counter cyclically can cause macroeconomic instability by giving rise to multiple equilibria and as a result to fluctuations caused by self fulfilling expectations. This paper shows that consolidated budget rules with endogenous income-tax rates can be stabilizing if they exhibit monetary dominance, where monetary policy manages expectations by implementing an active interest rate rule. This result is robust for plausible degrees of externalities in production. The size of the government, however, plays a key role in the degree of activeness that the monetary authority should exhibit in order to stabilize the economy. If government spending are not too large relative to private consumption, a neutral monetary policy [such that the real rate of interest is constant in and oﬀ the steady state] is also stabilizing Keywords: Fiscal Policy; Capital-Income Tax; Monetary Policy; Macroeconomic Stabilization; Finance Constraint; Arbitrage Channel; Investment-Based Channel;Consumption-Based Channel; Date: 2010 May 01 |