From “tax state” to “debt state”

The paper is motivated by Joseph A. Schumpeter's The Crisis of the Tax State. It inquires whether the buildup of government debt in peacetimeprosperity is a threat to the stability, existence or creation of viable tax states. The paper begins by setting out Schumpeter's conception of the tax state and the nature of recent political-economic events which have reinvigorated the concept. Next the paper sets out some simple debt dynamics and sketches a debt-induced business cycle arising from heavy reliance on debt finance in peacetimeprosperity. Finally, the paper assesses threats to the tax state in light of recent work on path dependence and positive feedback. An attempt is made to throw some light on whether the plethora of new, and often small, states spawned by the demise of communism can be viable tax states.Essay on Government, the Tax State and Economic Dynamics submitted to the Third Schumpeter Prize Competition.     

“Buy Domestic” Campaigns and Optimal Tariffs

This paper attempts to analyze the strategic use of optimal tariffs and to examine the effects of national bias on the optimal trade policy and social welfare in a two-country, two-good, price competition model derived from Neven et al. (1991). The major findings are as follows. (1) If all consumers prefer the domestic good, then buy domestic campaigns will decrease the prohibitive tariff rate and increase local welfare. (2) If at least some consumers prefer the foreign good, but not to a great extent, then buy domestic campaigns will not change the optimal tariff rate, but may improve local welfare. (3) When all consumers greatly prefer the foreign good, then promotion of buy domestic decreases the optimal tariff rate, but it cannot improve social welfare. With this framework, we also prove that buy domestic campaigns serve as a substitute for tariffs with respect to a strategic trade policy.     

Vertical and Horizontal Trust Networks in Bureaucracies: Evidence from the Third Reich

In a seminal contribution to the literature on bureaucracy, Breton and Wintrobe (The Logic of Bureaucratic Conduct: An Economic Analysis of Competition, Exchange, and Efficiency in Private and Public Organization. New York, NY: Cambridge University Press, 1982) develop a model wherein subordinates and superiors in a bureaucratic structure trade with each other to advance the objectives of the superiors. The success of such an organizational arrangement (for superiors) is based upon the development of vertical trust networks in a way that facilitates the promise of informal payments by superiors in return for informal services provided by their subordinates. Breton and Wintrobe [Journal of Political Economy 94 (1986) 905] also provide a theoretical application of their model by describing the Nazi bureaucracy as a conglomeration of competing agencies that zealously carried out the Final Solution to the Jewish question. As an extension, this note develops two compelling empirical examples of vertical and horizontal trust networks within the Nazi regime: Einsatzgruppen As (Special Action Detachments) attempt to liquidate all Lithuanian Jews after the German invasion of the U.S.S.R. in 1941 and the 20 July 1944 attempt to assassinate Adolf Hitler.JEL Classification: D23, D73.     

Mutually Destructive Bidding: The FCC Auction Design Problem

In general, synergies across license valuations complicate the auction design process. Theory suggests that a simple (i.e., non-combinatorial) auction will have difficulty in assigning licenses efficiently in such an environment. This difficulty increases with increases in fitting complexity. In some environments, bidding may become mutually destructive. Experiments indicate that a properly designed combinatorial auction is superior to a simple auction in terms of economic efficiency and revenue generation in bidding environments with a low amount of fitting complexity. Concerns that a combinatorial auction will cause a threshold problem are not borne out when bidders for small packages can communicate.     

Individual Decision Making in a Negative Externality Experiment

The experimental treatments analysed in this paper are simple in that there is a unique Nash equilibrium resulting in each player having a dominant strategy. However, the data show quite clearly that subjects do not always choose this strategy. In fact, when this dominant strategy is not a focal outcome it does not even describe the average decision adequately. It is shown that average individual decisions are best described by a decision error model based on a censored distribution as opposed to the truncated regression model which is typically used in similar studies. Moreover it is shown that in the treatments where the dominant strategy is not focal dynamics are important with average subject decisions initially corresponding to the focal outcome and then adjusting towards the Nash prediction. Overall, 66.7% of subjects are consistent with Payoff Maximization, 27.8% are consistent with an alternate preference maximization and 5.6% are random.     

On designing economic agents that behave like human agents

This paper explores the idea of constructing theoretical economic agents that behave like actual human agents and using them in neoclassical economic models. It does this in a repeated-choice setting by postulating artificial agents who use a learning algorithm calibrated against human learning data from psychological experiments. The resulting calibrated algorithm appears to replicate human learning behavior to a high degree and reproduces several stylized facts of learning. It can therefore be used to replace the idealized, perfectly rational agents in appropriate neoclassical models with calibrated agents that represent actual human behavior. The paper discusses the possibilities of using the algorithm to represent human learning in normal-form stage games and in more general neoclassical models in economics. It explores the likelihood of convergence to long-run optimality and to Nash behavior, and the characteristic learning time implicit in human adaptation in the economy.     

Agency in a market setting

This paper examines a market in which a continuum of principals and agents interact in a game. Principals offer contracts while agents decide on sets of acceptable contracts. A mechanism from a class satisfying efficiency, unbiasedness, and continuity properties then matches principals and agents. With risk neutral agents, when the contribution of principals and agents to the total gains from trade in a pairing are additively separable, the equilibria of the game coincide with the competitive equilibria for the market. In particular, all contracts used in Nash equilibrium induce first-best effort levels. Both principals and agents have exogenous opportunities outside this market. In equilibrium, agents have endogenously determined outside opportunities available from employment by another principal, and this may be the binding participation constraint in a principal-agent pairing. The results are extended to special non-separable cases and to the case of identical risk averse agents.We are grateful to seminar participants at Indiana University, the University of Kentucky, and Vanderbilt University for comments on earlier versions of this work. Referees' comments led us to generalize the model and to more clearly specify the point of the paper.     

Climate Policies and Induced Technological Change: Which to Choose, the Carrot or the Stick?

Policies to reduce emissions of greenhousegases such as CO₂, will affect the rate andpattern of technological change in alternativeenergy supply and other production processes.Imperfections in markets for non-pollutingtechnologies imply that a decentralised economydoes not deliver a socially optimal outcome,and this could justify policy interventionssuch as subsidies. This paper considers thewelfare effects of technology subsidies as partof a carbon abatement policy package. We arguethat the presence of spillovers in alternativeenergy technologies does not necessarily implythat subsidy policies are welfare improving. Weillustrate this point in the context of ageneral equilibrium model with two forms ofcarbon-free energy, an existing alternative energy which is a substitute for carbon-basedfuels, and new vintage energy which providesa carbon-free replacement for existing energyservices. Subsidisation of alternative energyon the grounds of spillover effects can bewelfare-worsening if it crowds-out new vintagetechnologies.     

Nachfragesysteme für österreich

Summary This paper gives an empirical reexamination of the Linear-Expenditure-hypothesis for Austria. It starts with a brief theoretical discussion of the principal properties and restrictions of the Linear-Expenditure-System (LES). To obtain empirical estimates of the parameters of the LES two different estimation procedures are applied, i.e. the original method used byStone and a simplified version of the Systems-Least-Squares-approach (following theMarquardt-algorithm). There are no essential differences between these estimates. They all seem plausible and satisfy the theoretical restrictions.Usually the stability (i.e. time-invariance) of the parameters is accepted without proof. Using the Moving-Window-Regression-technique, however, most of the estimates vary significantly in time. To obtain a direct proof of the time-dependence of the parameters the LES is reestimated now including trend-factors. Especially results considering time-dependent marginal-budget-shares are considerably better than the static-model results.The conclusion of this paper is that the static version of the LES does not explain the consumer behaviour in Austria and that much more effort should be spent on the estimation of dynamic demand systems.     

Alternative Modelle und Hypothesen der Konsum- und Sparentscheidung(1)

Summary For the analysis of the allocation of personal disposable income to the different consumption goods and savings, an indirect-addilog-expenditure-system (IAES) has been constructed. Compared to the linear-expenditure-system (LES) the IAES to far more flexible and is not based upon the idea of minimum-consumption- or minimum-saving-quotas. On the other hand, marginal income shares are not fixed parameters. The IAES allows the derivation of a systematic savings- and consumption-function and supplies consistent income elasticities. But it will be shown that consistent demand systems are only restrictively able to consider all major determinants of the decision-problem consumption or saving. The derived system does not only neglect the effects of wealth on consumption and savings but also the results of real income fluctuations due to the business cycle. Also phenomena like unemployment and uncertainties regarding estimates of the future or inflation are neglected. With the help of an adjustment-procedure a part of these disadvantages has been eliminated. The adjustment with regard to the entire private consumption and savings supplied income elasticities which lead to an almost constant consumption- and savings-share in the period under investigation.     

Economics as mechanism: The mind as machine in Hayek's sensory order

InThe Sensory Order, Friedrich A. Hayek describes the human mind as an apparatus of classification that evolves through experience and that reaches decisions by modeling the alternative courses of action that are available to it. Hayek's mechanistic conception of mind argues aginst the possibility of central planning and against the cogency of any rule that denigrates subjective decision making by employers or other economic agents. As implied by Gödel's proof, no brain, human or mechanical, can ever be sufficiently complex to explain itself. There will therefore always be certain knowledge and rules that cannot be articulated to the satisfaction of a central planner or tribunal.     

Transformation or Transmogrification? Ackerman, Hobbes (as in Calvin and Hobbes), and the Puzzle of Changing Constitutional Identity

In this article, I argue that Ackerman's approach to constitutional change is unable to distinguish between changes of degree and changes in kind, or between changes that transform and changes that transmogrify. As a consequence, the model Ackerman proposes fails at its most elemental purpose of illuminating questions of constitutional identity. Transformations fails to tell us who We the People really are or about what we are constituted.     

A competitive general equilibrium model of technology transfer,innovation, and obsolescence

A general equilibrium production model is developed where technologies are embodied in capital goods of different vintages indexed in a continuum. A difference in the extent of existing knowledge determines a wage gap between a developed (north) and a developing region (south). With free flow of technology, relatively backward technologies move to the south. With innovation in the north, a technology cycle is created by which some of the technologies are pushed out of the north into the south. This also tends to widen the wage gap between the regions.     

Ein Entscheidungsmodell für Konsumieren und Sparen

Summary The present study analyses the simultaneous problem of consumption and saving by means of a consistent demand system; for this purpose the linear—expenditure—system (LES), developed by R. Stone, has been modified and used as a methodological base. Saving takes, for the sake of operationality, the character of a consumer—good and becomes an argument of the utility function. The usual neoclassical assumption of utility maximization allows the derivation of a linear expenditure system of consumption and saving (LESSC) when prices and income are given. The simultaneous LESSC-model has remarkable weaknesses, however: the assumption of certainty, the static character of the model, the disregard for major savings—motives and private expenditure on homebuiding led to bad elasticity—estimates. The assumpion of directly—additive utility functions causes furthermore collinearity between income—and price—elasticities such that the meaning of the derived elasticities is greatly reduced.The income—elasticities derived from the LESSC are positive throughout but show a remarkable variance. The calculation of the Friedman—bias demonstrates a rather strong bias due to the assumption of certainty. A modification resulted in income—elasticities of private consumption and savings of around 0,93 (unmodified: 0,88) and 1,41 (unmodified: 1,76). The demand for consumption goods of great necessity was income—inelastic whereas the demand for goods of less importance to survival was income—elastic. An analysis of income—elasticities of the disaggregated system and the relation between transitory components of consumption and income existing in Austria gave the impression that unexpected changes in income are not only reflected in saving but also in changes of the consumption—structure.The respective price—elasticites are all negative and smaller than 1. For less important consumption—goods lower price—elasticities have been measured and for easily substitutable goods higher ones. Marked crossprice—elasticities could only by discovered with clothing and food products. Generally it can be said that an increase in prices of goods of the daily needs hits both the expenditure on easily substitutable consumption goods and causes dissaving.A comparison with the elasticities calculated through OLS shows a greater reliance of LESSC—elasticities as far as data of differing aggregation levels are concerned.

---

---

Mécanique Sociale may one day take her place along with Mécanique Celeste throned each upon the double—sided height of one maximum principle, the supreme pinnacle of moral as of physical science.     

Anonymous sequential games: Existence and characterization of equilibria

Summary In this paper we consider Anonymous Sequential Games with Aggregate Uncertainty. We prove existence of equilibrium when there is a general state space representing aggregate uncertainty. When the economy is stationary and the underlying process governing aggregate uncertainty Markov, we provide Markov representations of the equilibria.Table of notation Agents' characteristics space ( ) - A Action space of each agent (aA) - Y Y = x A - Aggregate distribution on agents' characteristics - (X) Space of probability measures onX - C(X) Space of continuous functions onX - _X Family of Borel sets ofX - State space of aggregate uncertainty ( ) - x _t=1 aggregate uncertainty for the infinite game - = (₁,₂,...,_t,...) - ^{t t} (₁, ₂,..., _t) - L₁(^t,C ×A),v _t Normed space of measurable functions from ^t toC( x A) - 8o(^t,( x A)) Space of measurable functions from ^tto( x A) - X^t X^t= x _s=1 ^t X - _X ^t Borel field onX ^t - v Distribution on - v_t Marginal distribution of v on ^t - v(^t)((¦^t)) Conditional distribution on given ^t - v^t(^s)(v_t(¦^s)) Conditional distribution on ^t given ^s (wheres) - _t Periodt distributional strategy - Distributional strategy for all periods =(₁,₂,...,_t,...) - _t Transition process for agents' types - ( _t,^t,y)(P _t+1(, _t , ^t ,y)) Transition function associated with _t - u _t Utility function - V _t (, a, , ^t) Value function for each collection (, a, , ^t ) - W _t (, , ^t ) Value function given optimal action a - C() Consistency correspondence. Distributions consistent with and characteristics transition functions - B() Best response correspondence (which also satisfy consistency) - E Set of equilibrium distributional strategies - x _t=1 ( ^t , (x A)) - S Expanded state space for Markov construction - (, a, ) Value function for Markov construction - P( _t ^* , _t y)(P(, _t ^* , _t , _y )) Invariant characteristics transition function for Markov game We wish to acknowledge very helpful conversations with C. d'Aspremont, B. Lipman, A. McLennan and J-F. Mertens. The financial support of the SSHRCC and the ARC at Queen's University is gratefully acknowledged. This paper was begun while the first author visited CORE. The financial support of CORE and the excellent research environment is gratefully acknowledged. The usual disclaimer applies.     

Convention, Social Order, and the Two Coordinations

The word coordination has two meanings, and thesemeanings are often conflated. One meaning, associated with ThomasSchelling, is seen in situations like choosing whether to driveon the left or the right; the drivers must coordinate to eachother's behavior. The other meaning, associated with FriedrichHayek, means that a concatenation of activities is arranged soas to produce good results. Along with the Schelling sense ofcoordination comes the notion of convention, such as drivingon the right. Some conventions are consciously designed; othersemerge without design (or are emergent). Along with the Hayeksense of coordination comes the notion of social order. Somesocial orders, such as the skeleton of activities within thefirm or within the hypothetical socialist economy, are consciouslyplanned. Other social orders, such as the catallaxy of the freesociety, function without central planning (or are spontaneous).Distinguishing between the two coordinations (and, in parallelfashion, between convention and social order) clarifies thinkingand resolves some confusions that have arisen in discussionsof coordination and spontaneous order. The key distinctionsare discussed in the context of the thought of, on the one hand,Menger, Schelling, David Lewis, and the recent path-dependencetheorists, and, on the other hand, Smith, Hayek, Polanyi, Coase,and the modern Austrian economists. The paper concludes witha typology that encompasses the several distinctions.     

On the Durability of King and Council: The Continuum Between Dictatorship and Democracy

In practice one rarely observes pure forms of dictatorship that lack a council, or pure forms of parliament that lack an executive. Generally government policies emerge from organizations that combine an executive branch of government, the king, with a cabinet or parliamentary branch, the council. This paper provides an explanation for this regularity, and also provides an evolutionary model of the emergence of democracy that does not require a revolution. The analysis demonstrates that the bipolar king and council constitutional template has a number of properties that gives it great practical efficiency as a method of information processing and as a very flexible institutional arrangement for making collective decisions.     

Land use, biodiversity, and sustainability

We focus on the effects of deforestation for agricultural purposes on biodiversity. This topic has been dealt with in the recent literature where forested land and biodiversity are treated as synonyms. In contrast to that, this paper distinguishes between forested land and forest itself, the latter being interpreted as a measure of biodiversity. The regenerative capacity of forests is modeled as a function of the own stock and of the habitat size. In particular, the threat of a given minimum viable population to be achieved in the course of the reduction of habitats is taken into account. The corresponding structure of a sustainability indicator is elaborated.     

A general equilibrium framework for the affine class of term structure models

The Duffie and Kan (1966) model, which can be considered as the most general affine term structure formulation, was originally specified in terms of risk-adjusted stochastic processes for its state variables. The goal of the present paper is to derive a Duffie and Kan (1966) model specification under the physical probability measure that is compatible with the formulation given by the authors under the equivalent martingale (money market account) measure. For that purpose, the Duffie and Kan (1966) model will be fitted into a general equilibrium monetary framework. The resulting analytical solution for the vector of factor risk premiums enables the econometric estimation of the model parameters using a time-series or a panel-data approach, and nests, as special cases, several other specifications already proposed in the literature.Received: November 2002, Accepted: February 2004, JEL Classification: E43, G11, G12Financial support by FCTs research grant PRAXISXXI/BD/5712/95 is gratefully acknowledged.     

The “Dorfman Steiner” rule

Conclusion When this research was started, it was guessed that the Dorfman-Steiner rule would lose its relevance in an intertemporal setting. This belief has turned out to be false: along the optimal paths ofp (t) ands (t), and must be equal. The only difference with the Dorfman-Steiner result is that they will be different from unity.The author is chargé de cours at the Faculté Universitaire Catholique de Mons (Belgium). He has greatyl benefited from comments by M. Beuthe and J. J. Lambin.