Toward a theory of labor market institutions

Standard economic analysis holds that labor market rigidities are harmfulfor job creation and typically increase unemployment. But many orthodoxreforms of the labor market have proved difficult to implement because ofpolitical opposition. For these reasons it is important to explain why weobserve such regulations. In this paper I outline a theory of how they may arise and why they fit together. This theory is fully developed in aforthcoming book (Saint-Paul (2000)), to which the reader is referred forfurther details.

Monetary policy with signal extraction from the bond market

Monetary policy is conducted in an environment of uncertainty. This paper sets upa model where the central bank uses real-time data from the bond market togetherwith standard macroeconomic indicators to estimate the current state of theeconomy more efficiently, while taking into account that its own actions influencewhat it observes. The timeliness of bond market data allows for quicker responsesof monetary policy to disturbances compared to the case when the central bankhas to rely solely on collected aggregate data. The information content of theterm structure creates a link between the bond market and the macroeconomythat is novel to the literature. To quantify the importance of the bond market asa source of information, the model is estimated on data for the United Statesand Australia using Bayesian methods. The empirical exercise suggests that thereis some information in the US term structure that helps the Federal Reserve toidentify shocks to the economy on a timely basis. Australian bond prices seemto be less informative than their US counterparts, perhaps because Australia is arelatively small and open economy.

Selective hiring and welfare analysis in labor market models

Firms select not only how many, but also which workers to hire. Yet, in standardsearch models of the labor market, all workers have the same probability of being hired.We argue that selective hiring crucially affects welfare analysis. Our model is isomorphicto a search model under random hiring but allows for selective hiring. With selectivehiring, the positive predictions of the model change very little, but the welfare costsof unemployment are much larger because unemployment risk is distributed unequallyacross workers. As a result, optimal unemployment insurance may be higher and welfareis lower if hiring is selective.

Determining underlying macroeconomic fundamentals during emerging market crises: Are conditions as bad as they seem?

Emerging market crises are characterized by large swings in both macroeconomic fundamentalsand asset prices. The economic significance of observed movements in macroeconomicvariables is obscured by the brief and extreme nature of crises. In this paper we propose to study the macroeconomic consequences of crises by studying the behavior of effective fundamentals, constructed by studying the relative movements of stock prices during crises. We find that these effective fundamentals provide a different picture than that implied by observed fundamentals. First, asset prices often reflect expectations of improvement in fundamentals after the initial devaluations; specifically, effective depreciations are positive but not as large as the observed ones. Second, crises vary in their effect on credit market conditions, with investors expecting tightening of credit in some cases (Mexico 1994, Philippines 1997), but loosening of credit in others (Sweden 1992, Korea 1997, Brazil 1999).

Information revelation and market incompleteness

\documentstyle[portada,11pt]{article}This paper shows that the presence of private information in aneconomy can be a source of market incompleteness even when it is feasibleto issue a set of securities that completely eliminates the informationalasymmetries in equilibrium. We analyze a simple security design model in which avolume maximizing futures exchange chooses not only the characteristics ofeach individual contract but also the number of contracts. Agents have rationalexpectations and differ in information, endowments and, possibly, attitudestoward risk. The emergence of complete or incomplete markets in equilibriumdepends on whether the {\it adverse selection effect} is stronger or weakerthan the {\it Hirshleifer effect}, as new securitiesare issued and prices reveal more information. When the Hirshleifer effectdominates, the exchange chooses an incomplete set of financial contracts, andthe equilibrium price is partially revealing.

Market versus limit orders in an imperfectly competitive security

This paper analyzes the choice between limit and market orders in animperfectly competitive noisy rational expectations economy. There is a uniqueinsider, who takes into account the effect their trading has on prices. If theinsider behaves as a price taker, she will choose market orders if her privateinformation is very precise and she will choose limit orders otherwise. On thecontrary, if the insider recognizes and exploits her ability to affect themarket price, her optimal choice is to place limit orders whatever the precisionof her private information.

The impact of the reference price system on the pharmaceutical market: A theoretical approach

This article analyses the impact of the reference pricesystem on the price-setting strategies of thepharmaceutical firms and on the level of generic usage.This model is the first to take explicitly into accountthe impact of the reference price mechanism on the levelof competition between brand-name and generic drugs andnational pharmaceutical spending. We consider aduopolistic model with one firm producing the brand-namedrug, whose patent has already expired, and the otherproducing the corresponding generic version. We work ina partial equilibrium framework where firms set pricessequentially and consumers face heterogeneous switchingcosts.We show that brand producers compensate thedecline of profits by selling greater quantities insteadof charging higher prices, thus fostering pricecompetition in the pharmaceutical market. This result isa consequence of both the assumption of a verticallydifferentiated model and the introduction of thereference price system.

Employment consequences of restrictive permanent contracts: Evidence from Spanish labor market reforms

Temporary employment contracts allowing unrestricted dismissals wereintroduced in Spain in 1984 and quickly came to account for most new jobs.As a result, temporary employment increased from around 10% in themid-eighties to more than 30% in the early nineties. In 1997, however,the Spanish government attempted to reduce the incidence of temporaryemployment by reducing payroll taxes and dismissal costs for permanentcontracts. In this paper, we use individual data from the Spanish LaborForce Survey to estimate the effects of reduced payroll taxes anddismissal costs on the distribution of employment and worker flows. Weexploit the fact that recent reforms apply only to certain demographicgroups to set up a natural experiment research design that can be usedto study the effects of contract regulations. Our results show that thereduction of payroll taxes and dismissal costs increased the employmentof young workers on permanent contracts, although the effects for youngwomen are not always significant. Results for older workers showinsignificant effects. The results suggest a moderately elastic responseof permanent employment to non-wage labor costs for young men. We alsofind positive effects on the transitions from unemployment and temporaryemployment into permanent employment for young and older workers, althoughthe effects for older workers are not always significant. On the otherhand, transitions from permanent employment to non-employment increasedonly for older men, suggesting that the reform had little effect ondismissals.

Do market conditions affect preferences? Evidence from experimental markets with excess supply and excess demand

We study whether people's preferences in an unbalanced market are affected by whether they are on the excess supply side or the excess demand side of the market. Our analysis is based on the comparison of behavior between two types of experimental gift exchange markets, which vary only with respect to whether first or second movers are on the long side of the market. The direction of market imbalance could influence subjects' motivation, as second movers, workers, might react differently to favorable actions by first movers, firms, in the two cases. Our data show strong deviations from the standard game-theoretic prediction. However, we only find secondary treatment effects. First movers are not more generous when they are in excess supply and second movers do not respond less favorably when they are in excess demand. Competition has only minor psychological effects in our data.