Comparison of information structures

We introduce two ways of comparing information structures, say ${\cal I}$ and${\cal J}$. First we say that ${\cal I}$ is richer than ${\cal J}$ when forevery compact game $G$, all correlated equilibrium distributions of $G$ inducedby ${\cal J}$ are also induced by ${\cal I}$. Second, we say that ${\cal J}$is faithfully reproducable from ${\cal I}$ when all the players can computefrom their information in ${\cal I}$ ``new information'' that they could havereceived from ${\cal J}$. We prove that ${\cal I}$ is richer than ${\cal J}$if and only if ${\cal J}$ is faithfully reproducable from ${\cal I}$.

Contracting externalities and multiple equilibria in sectors: Theory and evidence

We consider an economy where the production technology has constantreturns to scale but where in the descentralized equilibrium thereare aggregate increasing returns to scale. The result follows froma positive contracting externality among firms. If a firms issurrounded by more firms, employees have more opportunitiesoutside their own firm. This improves employees' incentives toinvest in the presence of ex post renegotiation at the firm level,at not cost. Our leading result is that if a region is sparselypopulated or if the degree of development in the region is lowenough, there are multiple equilibria in the level of sectorialemployment. From the theoretical model we derive a non-linearfirst-order censored difference equation for sectoral employment.Our results are strongly consistent with the multiple equilibriahypothesis and the existence of a sectoral critical scale (belowwich the sector follows a delocation process). The scale of theregions' population and the degree of development reduce thecritical scale of the sector.

Generalized canonical correlation analysis of matrices with different row and column orders

A Method is offered that makes it possible to apply generalized canonicalcorrelations analysis (CANCOR) to two or more matrices of different row and column order. The new method optimizes the generalized canonical correlationanalysis objective by considering only the observed values. This is achieved byemploying selection matrices. We present and discuss fit measures to assessthe quality of the solutions. In a simulation study we assess the performance of our new method and compare it to an existing procedure called GENCOM,proposed by Green and Carroll. We find that our new method outperforms the GENCOM algorithm both with respect to model fit and recovery of the truestructure. Moreover, as our new method does not require any type of iteration itis easier to implement and requires less computation. We illustrate the methodby means of an example concerning the relative positions of the political parties inthe Netherlands based on provincial data.

Exact tests for correlation and for the slope in simple linear regressions without making assumptions

We present an exact test for whether two random variables that have known bounds on their support are negatively correlated. The alternative hypothesis is that they are not negatively correlated. No assumptions are made on the underlying distributions. We show by example that the Spearman rank correlation test as the competing exact test of correlation in nonparametric settings rests on an additional assumption on the data generating process without which it is not valid as a test for correlation.We then show how to test for the significance of the slope in a linear regression analysis that invovles a single independent variable and where outcomes of the dependent variable belong to a known bounded set.

Monetary policy in the Euro area: Lessons from 5 years of ECB and implications for Turkey

We examine monetary policy in the Euro area from both theoretical and empirical perspectives. We discuss what theory tells us the strategy of Central banks should be and contrasts it with the one employed by the ECB. We review accomplishments (and failures) of monetary policy in the Euro area and suggest changes that would increase the correlation between words and actions; streamline the understanding that markets have of the policy process; and anchor expectation formation more strongly. We examine the transmission of monetary policy shocks in the Euro area and in some potential member countries and try to infer the likely effects occurring when Turkey joins the EU first and the Euro area later. Much of the analysis here warns against having too high expectations of the economic gains that membership to the EU and Euro club will produce.

An economic theory of church strictness

This paper makes several contributions to the growing literatureon the economics of religion. First, we explicitly introduce spatial-location models into the economics of religion. Second, we offer a newexplanation for the observed tendency of state (monopoly) churches tolocate toward the "low-tension" end of the "strictness continuum" (ina one-dimensional product space): This result is obtained through theconjunction of "benevolent preferences" (denominations care about theaggregate utility of members) and asymmetric costs of going to a moreor less strict church than one prefers.We also derive implications regarding the relationship between religiousstrictness and membership. The driving forces of our analysis, religiousmarket interactions and asymmetric costs of membership, high-light newexplanations for some well-established stylized facts. The analysis opensthe way to new empirical tests, aimed at confronting the implications ofour model against more traditional explanations.

A theory of international conflict management and sanctioning

In this paper we analyze sanctioning policies in international law. We develop a model of international military conflict where the conflicting countries can be a target of international sanctions. These sanctions constitute an equilibrium outcome of an international political market for sanctions, where different countries trade political influence. We show that the level of sanctions in equilibrium is strictly positive but limited, in the sense that higher sanctions would exacerbate the military conflict, not reduce it. We then propose an alternative interpretation to the perceived lack of effectiveness of international sanctions, by showing that the problem might not be one of undersanctioning but of oversanctioning.

Wh-constructions in cape verdean creole: extensions of the copy theory of movement

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A Walrasian theory of commodity money: Paradoxical results

The objective of this note is to analyze some implications of the model of commodity money described in Banerjee and Maskin (1996) which may seem paradoxical. In order to do this, we incorporate a general production cost structure into the model. We focus on two different results. First, the existence of technologies that make counterfeiting a commodity more difficult may exclude it from being used as medium of exchange. Second, allocative distortions due to problems of asymmetric information may become larger in the presence of such technologies.

Institutional support of the firm: A theory of business registries

Registering originative business contracts allows entrepreneurs and creditors to choose, andcourts to enforce market-friendly contract rules that protect innocent third parties whenadjudicating disputes on subsequent contracts. This reduces information asymmetry for thirdparties, which enhances impersonal trade. It does so without seriously weakening property rights,because it is rightholders who choose or activate the legal rules and can, therefore, minimize thecost of any possible weakening. Registries are essential not only to make the chosen rules publicbut to ensure rightholders commitment and avoid rule-gaming, because independent registriesmake rightholders choices verifiable by courts. The theory is supported by comparative andhistorical analyses.

A leverage theory of reputation building with co-branding: Complementarity in reputation building

We present a leverage theory of reputation building with co-branding. We showthat under certain conditions, co-branding that links unknown firms in a new sectorwith established firms in a mature sector allows the unknown firms to signal a highproduct quality and establish their own reputation. We compare this situationwith a benchmark in which both sectors are new and firms signal their qualityonly with prices. We investigate how this comparison is affected by the nature ofthe technology linking the two sectors and a cross-sector inference problem thatconsumers might face in identifying the true cause of product failure. We find thatco-branding facilitates the process in which a Þrm in the new sector to signal itsproduct quality only if the co-branding sectors produce complementary inputs andconsumers face a cross-sector inference problem. We apply our insight to economicsof superstars, multinational firms and co-authorship.

A theory of reference-dependent behavior

Extensive field and experimental evidence in a variety of environments show that behavior depends on a reference point. This paper provides an axiomatic characterization of this dependence. We proceed by imposing gradually more structure on both choice correspondences and preference relations, requiring increasingly higher levels of rationality, and freeing the decision-maker from certain types of inconsistencies. The appropriate degree of behavioral structure will depend on the phenomenon that is to be modeled. Lastly, we provide two applications of our work: one to model the status-quo bias, and another to model addictive behavior.

Externalities and interdependent growth: Theory and evidence

I formulate and estimate a model of externalities within countriesand technological interdependence across countries. I find that externalreturns to scale to physical capital within countries are 8 percent; thata 10 percent increase of total factor productivity of a country's neighborsraises its total factor productivity by 6 percent; and that a 2 percentannual growth rate of labor productivity can be explained as an endogenousresponse to an exogenous 0.2 percent annual growth rate of total factorproductivity in the steady--state.

Parental altruism under imperfect information: Theory and evidence

Can we reconcile the predictions of the altruism model of the familywith the evidence on intervivos transfers in the US? This paper expandsthe altruism model by introducing e ?ort of the child and by relaxingthe assumption of perfect information of the parent about the labormarket opportunities of the child. First, I solve and simulate a modelof altruism under imperfect information. Second, I use cross-sectionaldata to test a prediction of the model: Are parental transfers especiallyresponsive to the income variations of children who are very attached tothe labor market? The results suggest that imperfect information accountsfor several patterns of intergenerational transfers in the US.