Employment and Prices in a Simple Macroeconomy

This exercise sets up interlinked labor and goods markets in a classroom macroeconomy. Students with worker roles are endowed with labor that can be consumed or sold to firms that post wages, purchase labor, and produce goods that can be either consumed or sold to workers. The money from sales is used by firms to purchase labor in the next period. Complicated record keeping is avoided by using ordinary playing cards to represent money and goods. The exercise can stimulate a discussion of potential output, unemployment, and the role of money in determining wages and prices. Use: This experiment can be used in introductory macroeconomics classes to teach concepts of the circular flow, real and money wages, unemployment, and labor market equilibrium and in intermediate classes to consider Keynesian and quantity theories. Time required: Fifteen minutes for reading instructions, 30 to 45 minutes for trading (depending on the number of periods), and 15 minutes for discussion. Materials: You will need one copy of the instructions for each person and one deck of ordinary playing cards for each replicated group of two workers and one firm. No money or other incentives are required.     

Agendas and Strategic Voting

This paper describes a simple classroom experiment in which students decide which projects to fund on the basis of majority voting. Several agendas are used to generate a voting cycle and an inefficiently high level of public spending. Classroom discussion allows students to discover for themselves how to manipulate outcomes through agenda design and strategic voting. The exercise leads naturally to a discussion of political institutions and the size of government. Use: This experiment can be used in introductory and public economics classes to teach concepts of voting cycles and inefficiencies in public choice. Time required: Twenty minutes for reading instructions and taking votes and 15 minutes for discussion. Materials: A printout of the instructions for each participant and one deck of ordinary playing cards for each group of seven voters.     

Teaching Economics with Classroom Experiments: A Symposium

Classroom experiments are effective because students are placed directly into the economic environments being studied. The papers in this special section span diverse applications, for example, speculation and multiple markets, coordination and voting games, and a simple macroeconomy. All experiments can be run with simple props, such as ordinary playing cards. After participating, students bring firsthand experience to the discussion to enhance the effectiveness of the Socratic method. In small classes, these exercises also enable bright undergraduates to run the experiments on their own classmates and to lead the ensuing discussions, creating a special teaching/learning environment.     

Multimarket Equilibrium,Trade, and the Law of One Price

This paper describes the setup of two classroom markets, one with a thin supply side and relatively higher prices. A comparison of the equilibrium price tendencies in the two markets helps students discover how to apply supply and demand analysis in this context. The introduction of speculators, who buy in one market and sell in the other, reduces or eliminates the price disparity. Class discussion can be focused on how “nonproductive” speculation can increase surplus measures of efficiency when price is permitted to convey the correct information about opportunity cost. Use: This experiment can be used in classes in the principles of economics, intermediate economics, or international trade to illustrate supply and demand analysis and the effects of inter-market trade. In upper-level classes, optimal bidding can be addressed as well. Time: Reading instructions and completing five trading rounds takes 30 to 40 minutes. Discussion lasts an additional 15 minutes. Materials: One deck of cards for up to 36 students, one copy of the instructions, and eight small blank slips of paper for each student.     

How Large Looms the Ghost of the Past? State Dependence versus Heterogeneity in Coordination Games

In games with multiple, Pareto‐rankable equilibria and repeated play, does a history of playing an inefficient equilibrium make it harder for players to reach the efficient equilibrium? In other words, can people “get stuck” in bad equilibria? Previous studies have found support for this, but they have relied on naturally occurring variation in precedent. I implement randomized control to establish that precedent effects are important, but that naturally occurring variation exaggerates the importance of precedent. I present evidence that some of the endogeneity of naturally occurring precedents is due to variation in risk attitudes. This is because in the coordination games used, the inefficient equilibrium is associated with a safe strategy. Understanding the causal effect of precedent is important since many development problems are viewed as coordination games. Moreover, an appreciation of the way in which potential heterogeneity may interact with the policy is essential when trying to lift groups out of bad precedents.     

Perfect foresight dynamics in binary supermodular games

The present paper considers equilibrium selection in binary supermodular games based on perfect foresight dynamics. We provide complete characterizations of absorbing and globally accessible equilibria and apply them to two subclasses of games. First, for unanimity games, it is shown that our selection criterion is not in agreement with that in terms of Nash products, and an example is presented in which two strict Nash equilibria are simultaneously globally accessible when the friction is sufficiently small. Second, a class of games with invariant diagonal are proposed and shown to generically admit an absorbing and globally accessible equilibrium for small frictions.     

Why Are There Rich and Poor Countries? Symmetry-Breaking in the World Economy

To explain cross-country differences in economic performance, the economics of coordination failures typically portrays each country in a closed economy model with multiple equilibria and then argues that the Poor countries are in equilibria inferior to those achieved by the Rich. This approach cannot tell us anything about the degree of inequality in the world economy. A more satisfactory approach would be to build a world economy model and show why it has to be separated into the Rich and the Poor regions, i.e., to demonstrate the coexistence of the Rich and Poor as an inevitable aspect of the world trading system. In the present model, the symmetry-breaking of the world economy into the Rich and the Poor occurs because international trade causes agglomeration of different economic activities in different regions of the world. International trade thus creates a kind of pecking order among nations, and as in a game of musical chairs, some countries must be excluded from being Rich.J. Japan. Int. Econ., December 1996,10(4), pp. 419–439. Department of Economics, Northwestern University, Evanston, Illinois 60208     

Using ESPN 30 for 30 to teach economics

Education in economics has trended away from “chalk and talk” toward alternative pedagogical approaches in recent years. This article documents one such approach used to illustrate economic concepts, the use of film clips from ESPN 30 for 30. This series can be used to augment traditional principles' classes or as real world examples of concepts discussed in upper division economic courses. The ESPN 30 for 30 film series merges three different areas of interests: film, sports, and history. Through these diverse spectrums, ESPN 30 for 30 films provides instructors with another resource to use in classrooms and creates an environment that facilitates active learning activities.     

The multinational enterprise and economic internationalism

Multinational enterprises have been praised as means of achieving the most efficient use of the world's resources, and, therefore, as a new means to classical economic internationalism. Examination of their behaviour gives little evidence that they would achieve this goal, for their criteria of decision-making are different and their movement of factors is for company objectives, not economic or market: the market cannot signal long-term investment opportunities. Nor is the multinational enterprise likely to respond to national economic criteria, for its orientation is regional or international, though certainly not yet ‘global’. Conflicts of values and concepts of equity will continue to produce tensions and calls for controls over the multinational enterprise.     

中美战略经济对话:国际经济协调新框架

中美战略经济对话创建了一种宏观经济政策国际协调的新框架,其主要特点是双边、发展中国家对发达国家,以及协调内容超越了传统经济协调范畴。新框架的建立不仅反映了中美两国经济的全球影响越来越大、相互依存度不断提高,而且也是中国加入WTO过渡期结束后进一步发展双边经贸关系的客观需要。中美通过联合经济委员会(JEC)、商务与贸易联合委员会(JCCT)等平台开展的单项经贸协调的历史与实践,为新框架下开展更加广泛、更加深入、更具战略性的协调奠定了基础。尽管新框架对于稳定和发展中美经济乃至战略关系具有积极意义,但是它并不能完全防止两国局部利益的冲突,而且中方在新框架下面临的压力也更为巨大。为此,中方应在参与协调的政策和策略上作好中长期的准备,以寻求中国国家整体经济利益的最大化。     

Coordination failure in an industrial society

Summary Different macroeconomic theories of coordination failure are dealt with. Using simple models it is shown that externalities may lead to multiple Pareto-ranked equilibria or, under suitable assumptions, to a continuum of equilibria. It is argued that in industrial societies imperfect competition is predominant. Therefore, demand externalities may be the main cause of low level equilibria. Trading externalities and searching externalities may play a supplementary role. The theory of coordination failure is based on complete markets and price flexibility. Despite its strong appeal, it has certain shortcomings which are also discussed in the paper.I would like to thank S.K. Kuipers and A. van Schaik for their useful comments on an earlier version of this paper.     

Economics as Theology: Adam Smith's Wealth of Nations

Adam Smith's Wealth of Nations may be read as a work of natural theology similar in general style to Newton's Principia. Smith's ambiguous use of the word “nature” and its cognates implies an intended distinction between a positive sense in which “natural” means “necessary” and a normative sense in which “natural” means “right.” The “interest” by which humans are motivated is “natural” in the first sense, but it may not bring about social outcomes that are “natural” in the second sense. It will do so only if the social institutions within which agents seek their own “interest” are well formed. Smith provides a large-scale, quasi-historical account of the way in which well-formed institutions gradually develop as unintended consequences of private “interest.” In so doing, he provides a theodicy of economic life that is cognate with St. Augustine's theodicy of the state as remedium peccatorum. “If a great book such as Smith's Wealth of Nations is read repeatedly, on even a fifth or a tenth reading one continues to learn new things. I doubt whether anyone will ever fully apprehend all the things that Smith wished to express, and there is even more to learn from an interesting mind than its owner wished to teach us.” George Stigler (1982, p. 108)     

Plague and long‐term development: the lasting effects of the 1629–30 epidemic on the Italian cities

This article aims to analyse the effects of plague on the long‐term development of Italian cities, with particular attention to the 1629–30 epidemic. By using a new dataset on plague mortality rates in 56 cities covering the period c. 1575–1700, an economic geography model verifying the existence of multiple equilibria is estimated. It is found that cities severely affected by the 1629–30 plague were displaced to a lower growth path. It is also found that plague caused long‐lasting damage to the size of Italian urban populations and to urbanization rates. These findings support the hypothesis that seventeenth‐century plagues played a fundamental role in triggering the process of relative decline of the Italian economies.     

The Role of Planning in China's Market Economy

This paper addresses issues raised in ‘The Background of China's Planning Institutional Reform’ circulated in advance of the International Conference on China's Planning System Reform, held on 24–25 March 2004 in Beijing. The discussion is structured around four topics: (1) the scope of planning; (2) the administration of the planning system; (3) methods of planning; and (4) the coordination of planning with market activities. A critical issue is whether the Chinese government is doing too much or too little in planning the broad range of activities in a market economy, and various policy options are examined in relation to this issue. A central conclusion is that as China's economic and political system evolves within the framework of the Five-Year Plan, the scope of planning will naturally reduce as the market sector replaces a number of activities formerly undertaken by government.     

Analysis of a monetary union enlargement in the framework of linear-quadratic differential games

This paper studies the effects of a monetary union enlargement using the techniques and outcomes from an extensive research project on macroeconomic policy coordination in the EMU. Our approach is characterized by two main pillars: (i) linear-quadratic differential games to capture externalities, spillovers and strategic behaviour of (fiscal and monetary) players; and (ii) endogenous coalition formation concepts which enable us to study a creation and stability of different cooperation arrangements. In this paper we focus on the first pillar and construct a multi-player linear-quadratic continuous-time model of 5 countries and 4 central banks to evaluate effects of accession of a new member to an existing MU. Our findings stress the importance of an asymmetric shock confirming basic results of the OCA theory. It comes out that in our setting it is never profitable to enlarge the monetary union when there is a risk of an asymmetric shock. What is more, the potential losses from accession are so high that it can be barely possible to design a transfer system to compensate for a worse situation of some countries.

Endogenous credit-card acceptance in a model of precautionary demand for money

A credit-card acceptance decision by retailers is embedded intoa simple model of precautionary demand for money. The modelgives a new explanation for how the use of credit-cards candiffer so widely across countries. Retailers’ propensityto accept cards reduces the need for buyers to hold cash asthe chance of a stock-out (of cash) is reduced. When retailersmake their decision with respect to credit-card acceptance theydo not take into account the effect that decision has on othersellers. This externality generates multiple equilibria oversome portions of the parameter space.     

Should We Be Afraid of Friedman's Rule?

Should one think of zero nominal interest rates as an undesirable liquidity trap or as the desirable Friedman rule? I use three different frameworks to discuss this issue. First, I restate H. L. Cole and N. Kocherlakota's (1998, Fed. Res. Bank Minn. Quart. Rev., Spring, 2–10) analysis of Friedman's rule: short run increases in the money stock—whether through issuing spending coupons, open market operations, or foreign exchange intervention—change nothing as long as the money stock shrinks in the long run. Second, two simple Keynesian models of the inflationary process with a zero lower bound on nomianl interest rates imply either that deflationary spirals should be common or that a policy close to the Friedman rule and thus some deflation is optimal. Finally, a formal baby-sitting coop model implies multiple equilibria, but does not support the injection of liquidity to restore the good equilibrium, in contrast to P. Krugman (1998, Slate, August 13). J. Japan. Int. Econ., December 2000, 14(4), pp. 261–303. CenER, Tilburg University; Humboldt University, Berlin, Germany; and CEPR Copyright 2000 Academic Press.Journal of Economic Literature Classification Numbers: E31, E41, E50, E51, E52.     

Modeling Energy and Development: An Evaluation of Models and Concepts

Most global energy models are developed by institutes from developed countries, focusing primarily on issues that are important in industrialized countries. Evaluation of the results for Asia of the IPCC/SRES models shows that broad concepts of energy and development, the energy ladder and the environmental Kuznets curve, can be observed in the results of the models. However, improvements can be made in modeling the issues that underlie these concepts, like traditional fuels, electrification, economic structural change, income distribution, and informal economies. Given the rapidly growing importance of energy trajectories of developing countries for global sustainability, the challenge for the future is to develop energy models that include all these aspects of energy and development.     

The Max‐Min Group Contest: Weakest‐link (Group) All‐Pay Auction

We investigate a group all‐pay auction in which each group's effort is represented by the minimum among the effort levels exerted by the group members and the prize is a group‐specific public good. We fully characterize the symmetric equilibria for two groups. There are four types of equilibria: the pure strategy equilibria in which all (active) players exert the same effort; the semi‐pure strategy equilibria in which the players in a group play the same pure strategy whereas those in the other group play the same mixed strategy; the nondegenerate mixed strategy equilibria with continuous support; and the nondegenerate mixed strategy equilibria with discontinuous support. We then analyze a general contest with n groups.     

Democracy, History, and Economic Performance: A Case-Study Approach

Crossnational statistical studies show a positive relationship between the length of time a country has been democratic and its economic performance. Old democracies grow faster, ceteris paribus, and also demonstrate advantages in some economic policies thought to be conducive to growth. However, the causal connections between regime history and economic policy and performance remain opaque. Arguments are highly speculative, for the causal pathways are usually difficult to measure and are not readily testable in a large-N cross-country format. In order to illuminate possible interconnections between regime history and economic performance we identify three countries in the developing world whose recent history may be regarded as illustrative: Brazil, India, and Mauritius. Our analysis of these cases focuses on the achievement of policy consensus and policy reform, both of which are commonly regarded as critical to economic performance. Intensive study of our chosen cases suggests multiple mechanisms by which democratic experience might translate into greater success on these policy dimensions.