Minimizing the Price of Tranquility: How to Discourage Scotland's Secession from the United Kingdom

What some view as overly-generous funding of the Scottish parliament results from Scotland.s credible threat to secede from the United Kingdom. Scotland is shown to benefit from a second mover advantage in a non-cooperative sequential game over the allocation of public funds. Various reform proposals are criticized for not recognizing that reform of Scottish government finances must be consistent with Scotland.s credible threat. Fiscal autonomy -- in which the Scottish parliament finances a much greater proportion of its spending from Scottish-sourced taxes, is demonstrated to be a viable reform within the existing political context and, in some circumstances, could remove Scotland.s second mover advantage. We also use a cooperative bargaining game model to demonstrate that an Australian style grants commission would not be a viable reform in the British context.

An Experimental Study of Complex-Offer Auctions: Payment Cost Minimization vs. Offer Cost Minimization

A Payment Cost Minimization (PCM) auction has been proposed as an alternative to the Offer Cost Minimization (OCM) auction to be used in wholesale electric power markets with the intention to lower the procurement cost of electricity. Efficiency concerns about this proposal have relied on the assumption of true production cost revelation. Using an experimental approach, I compare the two auctions, strictly controlling for the level of unilateral market power. A specific feature of these complex-offer auctions is that the sellers submit not only the quantities and the minimum prices at which they are willing to sell, but also the start-up fees that are designed to reimburse the fixed start-up costs of the generation plants. I find that both auctions result in start-up fees that are significantly higher than the start-up costs. Overall, the two auctions perform similarly in terms of procurement cost and efficiency. Surprisingly, I do not find a substantial difference between less market power and more market power designs. Both designs result in similar inefficiencies and equally higher procurement costs over the competitive prediction. The PCM auction tends to have lower price volatility than the OCM auction when the market power is minimal but this property vanishes in the designs with market power. These findings lead me to conclude that both the PCM and the OCM auctions do not belong to the class of truth revealing mechanisms and do not easily elicit competitive behavior.

The Continuing Practice and Impact of Discrimination

This chapter provides a detailed discussion of the evidence on housing and mortgage lending discrimination, as well as the potential impacts of such discrimination on minority outcomes like homeownership and neighborhood environment. The paper begins by discussing conceptual issues surrounding empirical analyses of discrimination including explanations for why discrimination takes place, defining different forms of discrimination, and the appropriate interpretation of observed racial and ethnic differences in treatment or outcomes. Next, the paper reviews evidence on housing market discrimination starting with evidence of segregation and price differences in the housing market and followed by direct evidence of discrimination by real estate agents in paired testing studies. Finally, mortgage market discrimination and barriers in access to mortgage credit are discussed. This discussion begins with an assessment of the role credit barriers play in explaining racial and ethnic differences in homeownership and follows with discussions of analyses of underwriting and the price of credit based on administrative and private sector data sources including analyses of the subprime market. The paper concludes that housing discrimination has declined especially in the market for owner-occupied housing and does not appear to play a large role in limiting the neighborhood choices of minority households or the concentration of minorities into central cities. On the other hand, the patterns of racial centralization and lower home ownership rates of African-Americans appear to be related to each other, and lower minority homeownership rates are in part attributable to barriers in the market for mortgage credit. The paper presents considerable evidence of racial and ethnic differences in mortgage underwriting, as well as additional evidence suggesting these differences may be attributable to differential provision of coaching, assistance, and support by loan officers. At this point, innovation in loan products, the shift towards risk based pricing, and growth of the subprime market have not mitigated the role credit barriers play in explaining racial and ethnic differences in homeownership. Further, the growth of the subprime lending industry appears to have segmented the mortgage market in terms of geography leading to increased costs of relying on local/neighborhood sources of mortgage credit and affecting the integrity of many low-income minority neighborhoods through increased foreclosure rates.

Equity Markets, the Money Market, and Long-Run Monetary Neutrality

This paper outlines a process for teaching long-run neutrality of money, drawing an analogy between equity markets and the money market. The key points in the discussion include the following: (1) What is the price of money? (2) Why does the long-run demand for money trace out a rectangular hyperbola? (3) Why does the slow adjustment of goods and service prices to changes in the stock of money lead to a different short-run demand for money? and (4) Why does a successful currency reform generate similar short-run movements in the price of money as movements in equity share prices after a change in the supply of shares? I have used this approach successfully for over 30 years at all levels, wherever I need to discuss the money market in a macroeconomic model.