Stabilization versus insurance: Welfare effects of procyclical taxation under incomplete markets

We construct and calibrate a general equilibrium business cycle model with unemployment and precautionary saving. We compute the cost of business cycles and locate the optimum in a set of simple cyclical fiscal policies. Our economy exhibits productivity shocks, giving firms an incentive to hire more when productivity is high. However, business cycles make workers' income riskier, both by increasing the unconditional probability of unusuallylong unemployment spells, and by making wages more variable, and therefore they decrease social welfare by around one-fourth or one-third of 1% of consumption. Optimal fiscal policy offsets the cycle, holding unemployment benefits constant but varying the tax rate procyclically to smooth hiring. By running a deficit of 4% to 5% of output in recessions, the government eliminates half the variation in the unemployment rate, most of the variation in workers'aggregate consumption, and most of the welfare cost of business cycles.

Long term debt with hidden borrowing

We consider borrowers with the opportunity to raise funds from a competitive baking sector,that shares information about borrowers, and an alternative hidden lender. We highlight thatthe presence of the hidden lender restricts the contracts that can be obtained from the banking sector and that in equilibrium some borrowers obtain funds from both the banking sector and the (inefficient) hidden lender simultaneously. We further show that as the inefficiency of the hidden lender increases, total welfare decreases. By extending the model to examine a partially hidden lender, we further highlight the key role of information.

The challenge of representative design in psychology and economics

The demands of representative design, as formulated by Egon Brunswik (1956), set a high methodological standard. Both experimental participants and the situations with which they are faced should be representative of the populations to which researchers claim to generalize results. Failure to observe the latter has led to notable experimental failures in psychology from which economics could learn. It also raises questions about the meaning of testing economic theories in abstract environments. Logically, abstract tests can only be generalized to abstract realities and these may or may not have anything to do with the empirical realities experienced by economic actors.

Ignorance promotes competition: An auction model with endogenous private valuations

We study a situation in which an auctioneer wishes to sell an object toone of N risk-neutral bidders with heterogeneous preferences. Theauctioneer does not know bidders preferences but has private informationabout the characteristics of the ob ject, and must decide how muchinformation to reveal prior to the auction. We show that the auctioneerhas incentives to release less information than would be efficient andthat the amount of information released increases with the level ofcompetition (as measured by the number of bidders). Furthermore, in aperfectly competitive market the auctioneer would provide the efficientlevel of information.

Multi-period vendor managed inventory systems

In this paper we develop two models for an inventory system in which the distributormanages the inventory at the retailers location. These type of systems correspondto the Vendor Managed Inventory (VMI) systems described ib the literature. Thesesystems are very common in many different types of industries, such as retailingand manufacturing, although assuming different characteristics.The objective of our model is to minimize total inventory cost for the distributorin a multi-period multi-retailer setting. The inventory system includes holdingand stock-out costs and we study the case whre an additional fixed setup cost ischarged per delivery.We construct a numerical experiment to analyze the model bahavior and observe theimpact of the characteristics of the model on the solutions.

Causes of subcontracting: Evidence from panel data on construction firms

This paper examines factors explaining subcontracting decisions in the construction industry. Rather than the more common cross-sectional analyses, we use panel data to evaluate the influence of all relevant variables. We design and use a new index of the closeness to small numbers situations to estimate the extent of hold-up problems. Results show that as specificity grows, firms tend to subcontract less. The opposite happens when output heterogeneity and the use of intangible assets and capabilities increase. Neither temporary shortage of capacity nor geographical dispersion of activities seem to affect the extent of subcontracting. Finally, proxies for uncertainty do not show any clear effect.

Separated by a common currency? Evidence from the Euro changeover

We study the price convergence of goods and services in the euro area in 2001-2002. To measure the degree of convergence, we compare the prices of around 220 items in 32 European cities. The width of the border is the price di¤erence attributed to the fact that the two cities are in different countries. We find that the 2001 European borders are negative, which suggests that the markets were very integrated before the euro changeover. Moreover, we do not identify an integration effect attributable to the introduction of the euro. We then explore the determinants of the European borders. We find that different languages, wealth and population differences tend to split the markets. Historical inflation, though, tends to lead to price convergence.

Price regulation of plastic money: A critical assessment of Spanish rules

Recent decisions by the Spanish national competition authority (TDC) mandate paymentsystems to include only two costs when setting their domestic multilateral interchange fees(MIF): a fixed processing cost and a variable cost for the risk of fraud. This artificiallowering of MIFs will not lower consumer prices, because of uncompetitive retailing; but itwill however lead to higher cardholders fees and, likely, new prices for point of saleterminals, delaying the development of the immature Spanish card market. Also, to the extent that increased cardholders fees do not offset the fall in MIFs revenue, the task of issuing new cards will be underpaid relatively to the task of acquiring new merchants, causing an imbalance between the two sides of the networks. Moreover, the pricing scheme arising from the decisions will cause unbundling and underprovision of those services whose costs are excluded. Indeed, the payment guarantee and the free funding period will tend to be removed from the package of services currently provided, to be either provided by third parties, by issuers for a separate fee, or not provided at all, especially to smaller and medium-sized merchants. Transaction services will also suffer the consequences that the TDC precludes pricing them in variable terms.

Does it cost to be virtuous? The macroeconomic effects of fiscal constraints

We study whether and how fiscal restrictions alter the business cycle features of macrovariables for a sample of 48 US states. We also examine the typical transmission properties of fiscal disturbances and the implied fiscal rules of states with different fiscal restrictions. Fiscal constraints are characterized with a number of indicators. There are similarities in second moments of macrovariables and in the transmission properties of fiscal shocks across states with different fiscal constraints. The cyclical response of expenditure differs in size and sometimes in sign, but heterogeneity within groups makes point estimates statistically insignificant. Creative budget accounting is responsible for the pattern. Implications for the design of fiscal rules and the reform of the Stability and Growth Pact are discussed.

Entrepreneurial structure of the mercantile company in pre-industrial Catalonia

The mercantile company was the basic form of enterprise in pre-industrial Catalonia. The aim of this paper is to study the formation and development of the mercantile companies in Barcelona whose end was the wholesale and retail sale of textiles in the botigues de teles (textile retail shops) throughout the eighteenth century. These firms were officially registered before a notary and their deeds reveal how these establishments were administered and managed.The study covers a sample of 121 mercantile companies, and the articles and documentation that were put into effect by 32 notaries who were active in Barcelona in the 18th century have been consulted in their entirety. From an initial selection of documentation, a total of 228 deeds registering companies have been found, 107 of which (47%) relate to the creation of companies whose various activities were centred in taverns, textile manufacturing, braiding.... While the 121 companies, which make up our sample and which account for 53% of the deeds registered with the notaries mentioned above, focused exclusively on the management of textile retail shops located in the commercial heart of the city. Thus one point of interest that the documentation reveals is that the majority of the mercantile companies registered by Barcelona notaries throughout the 18th century were establishments which traded in textiles. The first part of the article focuses on the structural characteristics of these enterprises, the number and socio-professional status of the partners and the extent of each partner s involvement in the administration and management. The second part of the article examines the capital investment made by each partner, their rights and obligations agreed on, the sharing out of profits and possible losses and the duration of the companies. The final aim of the paper is to highlight the evolution of these companies through one specific case.

Bargaining on networks: An experiment

While markets are often decentralized, in many other cases agents in one role can only negotiate with a proper subset of the agents in the complementary role. There may be proximity issues or restricted communication flows. For example, information may be transmitted only through word-of-mouth, as is often the case for job openings, business opportunities, and confidential transactions. Bargaining can be considered to occur over a network that summarizes the structure of linkages among people. We conduct an alternating-offer bargaining experiment using separate simple networks, which are then joined during the session by an additional link. The results diverge sharply depending on how this connection is made. Payoffs can be systematically affected even for agents who are not connected by the new link. We use a graph-theoretic analysis to show that any two-sided network can be decomposed into simple networks of three types, so that our result can be generalized to more complex bargaining environments. Participants appear to grasp the essential characteristics of the networks and we observe a rather consistently high level of bargaining efficiency.

What form of relative performance evaluation?

We study relative performance evaluation in executive compensation whenexecutives have private information about their ability. We assume that thejoint distribution of an individual firm s profit and market movements dependson the ability of the executive that runs the firm. In the equilibrium of theexecutive labor market, compensation schemes exploit this fact to sortexecutives of di ?erent abilities. This implies that executive compensation isincreasing in own performance, but may also be increasing in industryperformance-a sharp departure from standard relative performance evaluation.This result provides an explanation for the scarcity of relative performanceconsiderations in executive compensation documented by the empirical literature.

Timing of seasonal sales

We present a model of timing of seasonal sales where stores chooseseveral designs at the beginning of the season without knowingwich one, if any, will be fashionable. Fashionable designs have achance to fetch high prices in fashion markets while non-fashionableones must be sold in a discount market. In the beginning of theseason, stores charge high prices in the hope of capturing theirfashion market. As the end of the season approaches with goods stillon the shelves, stores adjust downward their expectations that theyare carrying a fashionable design, and may have sales to capture thediscount market. Having a greater number of designs induces a storeto put one of them on sales earlier to test the market. Moreover,price competition in the discount market induces stores to startsales earlier because of a greater perceived first-mover advantage incapturing the discount market. More competition, perhaps due todecreases in the cost of product innovation, makes sales occur evenearlier. These results are consistent with the observation that thetrend toward earlier sales since mid-1970's coincides with increasingproduct varieties in fashion good markets and increasing storecompetition.

The dot-com bubble, the Bush deficits and the US current account

Over the past decade the US has experienced widening current account deficits and a steady deterioration of its net foreign asset position. During the second half of the 1990s, this deterioration was fueled by foreign investment in a booming US stock market. During the first half of the 2000s, this deterioration has been fuelled by foreign purchases of rapidly increasing US government debt. A somewhat surprising aspect of the current debate is thatstock market movements and fiscal policy choices have been largely treated as unrelated events. Stock market movements are usually interpreted as reflecting exogenous changes in perceived or real productivity, while budget deficits are usually understood as a mainly political decision. We challenge this view here and develop two alternative interpretations. Both are based on the notion that a bubble (the dot-com bubble) has been driving the stock market, but differ in their assumptions about the interactions between this bubble and fiscal policy (the Bush deficits). The benevolent view holds that a change in investorsentiment led to the collapse of the dot-com bubble and the Bush deficits were a welfare-improving policy response to this event. The cynical view holds instead that the Bush deficits led to the collapse of the dot-com bubble as the new administration tried to appropriate rents from foreign investors. We discuss the implications of each of these views for the future evolution of the US economy and, in particular, its net foreign asset position.

A medium-scale open economy model of Australia

We estimate an open economy dynamic stochastic general equilibrium (DSGE)model of Australia with a number of shocks, frictions and rigidities, matching alarge number of observable time series. We find that both foreign and domesticshocks are important drivers of the Australian business cycle.We also find that theinitial impact on inflation of an increase in demand for Australian commoditiesis negative, due to an improvement in the real exchange rate, though there is apersistent positive effect on inflation that dominates at longer horizons.