Stability,sequential rationality,and subgame consistency

In this paper we analyze dynamic strategic behavior by means of the idea of "stability." We develop a solution concept of "sequentially stable equilibrium (SSE)" that satisfies subgame consistency. All SSEs are characterized by the largest stable set that yields exactly all the backward induction outcomes. We also provide a refinement of the SSE. We compare the SSE and its refinement with some existing solution concepts in the literature We are grateful to the editor and two anonymous referees for very useful comments and suggestions that led to this revision. We thank Chih Chang, Yi-Chun Chen, Chenying Huang, Huiwen Koo, Man-Chung Ng, Shyh-fang Ueng, and Chun-Hsien Yeh for helpful comments and discussions. We also thank participants in seminars at Academia Sinica, National Dong Hwa University, and the Third Pan-Pacific Game Theory Conference. Financial support from the Social Sciences and Humanities Research Council of Canada (SSHRC), the National Science Council of Taiwan, and the Economic and Social Research Council of the UK is gratefully acknowledged. The usual disclaimer applies.     

The structure of authority, federalism, commitment and economic growth

Summary. In a neoclassical growth model with many regions and a mobile factor, two federal arrangements are considered. In the first federal arrangement the central government chooses a uniform tax policy, whereas in the second each regional government chooses its own tax policy. The main result is that the first federal arrangement leads to high tax rates and economic stagnation, whereas the second leads to low tax rates and economic growth. This result stems from a time consistency problem. The lack of tax competition forces a time consistency problem on the central government under the first federal arrangement. In contrast, regional tax competition acts as a commitment device under the second federal arrangement. The fundamental feature in the environment that gives rise to different abilities of the state to commit is the different structure of authority within the state.Received: 10 February 2003, Revised: 2 December 2003, JEL Classification Numbers: H77, O41, E60, C73, E13.Ronald A. Edwards: This is a revision of Chapter 3 of my University of Minnesota Ph.D. I thank my advisor Edward C. Prescott for his encouragement and numerous helpful discussions. I also thank Tim Kehoe for many useful discussions as well as Beth Allen, Berthold Herrendorf, Arilton Teixeira and two anonymous referees for helpful comments. This research was assisted by an International Predissertation Fellowship from the Social Science Research Council and the American Council of Learned Societies with funds provided by the Ford Foundation.     

支持卓越研究的加拿大发现资助计划及其启示

本文研究分析了加拿大自然科学与工程研究理事会的发现资助计划,研究了发现资助计划的特色、预算、遴选标准。通过它对世界级最好研究人员的支持、设立“发现加速器奖”和它资助研究产生的国际影响三个方面,重点研究了该计划对卓越研究的支持。希望对我国研究计划的设立有一些启示。     

Perspective on the second Outlook: The social and behavorial sciences

In the essays prepared by NAS for the first Outlook, current research in the natural sciences and technology were treated carefully and thoughtfully, but the social sciences were largely overlooked. To remedy this in the second Outlook, the Social Science Research Council was asked to prepare essays on the ways in which social science research can illuminate national problems or contribute to policy discussions. Six such essays describe continuing and developing research traditions on social problems such as aging and health.     

Outsourcing of innovation

This paper looks at the outsourcing of research and development (R&D) activities. We consider cost reducing R&D and allow manufacturing firms to decide whether to outsource the project to research subcontractors or carry out the research in-house. We use a principal-agent framework and consider fixed and revenue-sharing contracts. We solve for the optimal contract under these constraints. We find that allowing for revenue-sharing contracts increases the chance of outsourcing and improves economic efficiency. However, the principal may still find it optimal to choose a contract that allows the leakage to occur—a second-best outcome when leakage cannot be monitored or verified. Stronger protection of trade secrets can induce more R&D outsourcing without inhibiting technology diffusion and increase economic efficiency, as long as it does not significantly lengthen the product cycle. We have benefitted from comments from Andy Daughety, Bob Becker, Rick Bond, Kenneth Chan, Kenji Fujiwara, Shingo Ishiguro, Ron Jones, Seiichi Katayama, Pravin Krishna, Stephanie Lau, Jennifer Reinganum, Koji Shimomura, Eden Yu, two anonymous referees, an editor, and seminar participants at Arizona State, Indiana, Kobe, Osaka, Purdue, Michigan State, UC-Irvine, Vanderbilt, the American Economic Association Meeting in Philadelphia, the Midwest Economic Theory and International Trade Meetings at Indianapolis, the Public Economic Theory Conference in Beijing (China), the WTO and Globalization Conference at Hitotsubashi (Japan), the ETSG meeting in Nottingham (UK), and the CES-IFO Conference in Munich (Germany). We also thank Marketa Sonkova for research assistance. Financial support by the Research Grants Council of Hong Kong SAR, China (Project No. CityU1476/05H) and the Department of Economics and Finance of City University of Hong Kong is acknowledged. The usual disclaimer applies.     

The Idea of Culture in the Social Sciences

An Institutionalist critique that draws from selected contributions of Veblen and Myrdal initiates a convergence debate. Challenged is a Neoclassical interpretation of economic processes expected to lead toward a catching up with respect to per capita output of Germany's poorer eastern region with the richer western region. Economic method is considered, and the Institutionalist School of Thought rooted in contributions of Veblen as well as Myrdal is touted for offering higher levels of explanatory power than the Neoclassical School. We challenge the usefulness of laws in Economic Science, and especially their applicability to the empirical economy. Instead of automatic forces driving a meliorative trend, we seek to establish that human agency and policy play determining roles in affecting economic and societal outcomes in Germany's eastern region.     

A framework for the decomposition of poverty differences with an application to poverty differences between countries

We propose an Oaxaca-Blinder-like decomposition of poverty differences. The decomposition is based on a parametric model of the income distribution and can be used to decompose differences in poverty rates across countries or years. Poverty differences are decomposed into differences in the underlying distribution of poverty-relevant characteristics and differences in the incidence of poverty conditional on these characteristics. We illustrate our method by comparing levels and patterns of relative poverty in the USA, Great Britain and Germany during the 1990s. Our results suggest that the higher aggregate poverty rates in the USA and in Britain relative to Germany were mostly accounted for by higher poverty rates conditional on characteristics, which were partly offset by a more favourable distribution of poverty-relevant characteristics, in particular higher employment rates.This paper is part of the research programme of the TMR Network ‘Living Standards, Inequality and Taxation’. Financial support from the European Union (Contract #ERBFMRXCT980248), the UK Economic and Social Research Council, the University of Essex, and the Deutsche Forschungsgesellschaft (DFG) is gratefully acknowledged. The data used in this study were made available by Cornell University (Cross-National Equivalent File), the University of Michigan (Panel Study of Income Dynamics), the UK Data Archive (British Household Panel Survey), and the German Institute for Economic Research (German Socio-Economic Panel). Martin Biewen would like to thank the Institute for European Studies and the Department for Policy and Management at Cornell University, in particular Jonas Pontusson, Richard Burkhauser and Dean Lillard, for their hospitality and support. We are also grateful for comments by Bernd Fitzenberger, Joachim Winter, Christoph M. Schmidt, an anonymous referee and seminar participants in Essex, Heidelberg and Mannheim. Last but not least, we thank Nick Cox for providing us with updated versions of his Stata programs for drawing quantile plots.First version received: May 2003/Final version received: December: 2003     

Economic evolution and the science of synergetics

This paper deals with synergetic methods, which have developed as a sub-field of the self-organisation approach in the natural sciences. Such methods have been used successfully to model structural transitions in physio-chemical contexts. The synergetic approach is explained in a non-technical way and the main elements of the synergetic methodology are introduced. The extent to which such methods can be applied in the presence of historical time series data, which are subject to underlying processes of evolutionary economic change, is assessed. Proposals, concerning more appropriate synergetic methods for evolutionary economic application, are considered.The research from which this paper is derived was supported by an Australian Research Council Large Grant. We would like to thank University of Queensland Emergent Complexity and Organisation in Economics [(ECO)²] Research Group participants-David Anthony, Bryan Morgan and Pradeep Philip-for their comments and criticisms on an earlier draft of this paper (Foster and Wild 1994). We are also grateful to Ulrich Witt for his detailed comments and Gerard Milburn (UQ Physics) for helping us to understand how synergetics is applied in physics. Three anonymous referees also provided invaluable comments on the journal submission. However, the usualcaveat applies.     

The impact of risk aversion on information transmission between firms

This paper investigates whether and to what extent the presence of risk aversion affects the welfare implications of information transmission in one of the most fundamental oligopoly models—a Cournot duopoly model with common demand uncertainty. It aims to make a bridge between the literature dealing with information sharing in oligopoly and the one discussing the firm under uncertainty. We can show that the average output level of each firm is quite sensitive to the type and amount of information, and that the presence of risk aversion has an effect of decreasing the welfare of firms, whence information transmission may sometimes be harmful rather than beneficial to risk averse firms. These results have some policy implications.We are indebted to Hirofumi Uzawa, Masao Fukuoka, Ryuzo Sato, Koichi Hamada, Michihiro Ohyama, Kunio Kawamata, Yasunori Ishii, Noboru Sakashita, Koji Okuguchi, and Masamichi Kawano for useful comments and discussions. An earlier version of this paper was presented at the Annual Meeting of the Japan Association of Economic Theory and Econometrics, University of Tsukuba, October 1989, and at the Keio Conference on Market Mechanism and Industrial Organization, Hakone, November 1989. Any errors which may remain are our sole responsibility. Partial financial help from the Tokyo Council for Economic Research, New York University, and the Ministry of Education, Grant C-01530001 is gratefully acknowledged.     

Changes in the relationship between short‐term interest rate,inflation and growth: evidence from the UK, 1820–2014

This paper examines the dynamic relationship between interest rates, inflation and economic growth using a long dataset for the UK. The approach adopted enables us to identify structural breaks in the dynamic system (vector autoregression (VAR)). We find interest rates respond much more strongly to growth and inflation over recent decades, and forecast error variance decomposition analysis indicates there is increasing interconnectedness between the variables in recent years. Economic policymakers need to carefully monitor the linkages between these variables and be prepared to adjust their monetary policy tools when faced with structural changes.     

On Measuring Economic Attitudes

The authors examine two affective-domain instruments: one designed to measure the attitudes of students toward economics, and the other, their relative economic attitude sophistication. The development of these measurement tools was commissioned by the Joint Council on Economic Education in 1979. The result is the nationally normed and externally validated, 28-item, two-part Survey on Economic Attitudes reproduced in the appendix of this article. For the first time, the profession has available, for research purposes, an acceptable instrument for measuring changes in student attitudes and opinions as one of the outputs of the instructional process.     

A new model of equilibrium involuntary unemployment

Summary. We show that equilibrium involuntary unemployment emerges in a multi-stage game model where all market power resides with firms, on both the labour and the output market. Firms decide wages, employment, output and prices, and under constant returns there exists a continuum of subgame perfect Nash equilibria involving unemployment and positive profits. A firm does not undercut the equilibrium wage since then high wage firms would attract its workers, thus forcing the undercutting firm out of both markets. Full employment equilibria are payoff dominated by unemployment equilibria, and the arguments are robust to decreasing returns.Received: 21 May 2001, Revised: 15 April 2003, JEL Classification Numbers: D43, E24.Correspondence to: Leo KaasWe thank an anonymous referee, Woojin Lee, Klaus Ritzberger and seminar participants in Konstanz, Manchester, Milan, Prague, Vienna, and Warwick for helpful comments. Financial support from the Economic and Social Research Council (UK) under grant L138251030 and from the Manchester School Visiting Fellowship Scheme is gratefully acknowledged.     

Ascending auctions for multiple objects: the case for the Japanese design

Summary. We consider two ascending auctions for multiple objects, namely, an English and a Japanese auction, and derive a perfect Bayesian equilibrium of the Japanese auction by exploiting its strategic equivalence with the survival auction, which consists of a finite sequence of sealed-bid auctions. Thus an equilibrium of a continuous time game is derived by means of backward induction in finitely many steps. We then show that all equilibria of the Japanese auction induce equilibria of the English auction, but that many collusive or signaling equilibria of the English auction do not have a counterpart in the Japanese auction.Received: 2 September 2004, Revised: 20 April 2005, JEL Classification Numbers: C72, D44.Fabrizio Germano: Correspondence toWe are indebted to Philippe Jehiel for useful discussions and to Nicolas Vieille for suggestions in the proof of Proposition 2; we also thank seminar audiences in Athens, Basel, Beer-Sheva, Berlin, Brussels, Cambridge, Edinburgh, Exeter, Lausanne, Lisbon, London, Louvain-la-Neuve, Namur and Tel Aviv. Germano acknowledges financial support from Euopean Commission, TMR Network Grant ERBFMRXCT0055, “Cooperation and Information” as well from the Spanish Ministry of Science and Technology, Grants SEC2001-0792, SEJ2004-06319, and in form of a Ramon y Cajal Fellowship. Lovo is member of GREGHEC, unité CNRS, FRE-2810. The support of the Economic and Social Research Council (ESRC) is also gratefully acknowledged. The work was part of the programme of the ESRC Research for Economic Learning and Social Evolution.     

SERVICE QUALITY IN REGULATED NETWORK INDUSTRIES

ABSTRACT ** : Economic regulators provide incentives for good quality of service as well as constraints on the prices or revenue which can be charged by firms with monopoly power. Economic theory suggests that regulators should choose standards according to consumers' valuation and the marginal cost of quality improvements, and that firms respond by equalizing the marginal costs from not making improvements (i.e. the regulatory penalty plus any loss in revenue) with the marginal costs of improvement. This paper explores the evidence for such economically rational behaviour by both regulators and regulatees. We use a specially constructed data set on service quality targets and achievements across the main UK utility sectors; documentary evidence from regulators; and interviews with managers in companies subject to those regulators. We conclude that regulators are motivated by political as well as economic factors. And that companies may not respond primarily to the regulator's financial rewards or penalties for their quality targets, with a consequent danger that regulated consumers pay for marketing in unregulated markets; the resulting level of service quality may be ‘too high’ in the economic sense.     

Diagnostic Testing in Applied Econometrics*

Economic policy formation and the development of economic theory both rely ultimately upon empirical analysis for their direction and sustenance. Recent contributions from econometric theory suggest that the quality of the advice obtained from applied econometric research can be considerably improved by more systematic testing of empirical models. These new tests help identify both strengths and weaknesses of the models. Though fundamental economic theory and good knowledge of data are the primary ingredients of applied economic research, these new diagnostic tests are an important adjunct to existing methodology. This survey introduces the non-specialist econometrician to diagnostic model testing, and thoughout emphasizes the heuristic rather than the mathematical underpinnings of the testing strategy.     

Friedman and Schwartz (1982) revisited: Assessing annual and phase-average models of money demand in the United Kingdom

Several studies have developed empirical models of U.K. mondy demand using the century of annual and phase-average data in Friedman and Schwartz (1982). The current paper evaluates key models from those studies, employing tests of constancy and encompassing. The evidence strongly favors an annual model from Ericsson, Hendry, and Prestwich (1998a), whereas models based on the phase-average data fare poorly.The first author is a staff economist in the Division of International Finace, Board of Governors of the Federal Reserve System, Washington, DC 20551 USA. The second author is Leverhulme Personal Research Professor of Economics at Nuffield College, Oxford OX1 1NF. The third author was a research assistan in the Division of International Finance at the Federal Reserve Board when this paper was initially drafted. The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System. The first author gratefully acknowledges the generous hospitality of Norges Bank, where he revised some of the material herein. The second author gratefully acknowledges financial support from the U.K. Economic and Social Research Council under grant R000234954. We wish to thank Clifford Attfield, David Demery, and Nigel Duck for compiling the data in Attfield, Demery, and Duck (1995); and Neva Kerbeshian, Helmut Lütkepohl, Jaime Marquez, and two anonymous referees for helpful comments. All numerical results were obtained using PcGive Professional Version 9.0: see Doornik and Hendry (1996). The data may be obtained from the Internet at http://wotan.wiwi.hu-berlin.de/oeknometrie/engl/data.html     

财政政策:遵守规则还是相机抉择

2004年10月,诺贝尔经济学奖的颁发,又一次引发了人们对财政政策时间一致性的关注,遵守规则的政策主张似乎又一次回归主流。通过比较英、美等发达市场经济国家财政政策的变迁以及通过分析政策规则与相机抉择不同的理论假设,我认为在制定财政政策时必须两者兼顾。我国现行的稳健(中性)财政政策恰恰体现了这种思想的内涵与本质。     

Agglomeration, innovation and international research mobility

This paper discusses a model of the New Economic Geography, in which the seminal core-periphery model of Krugman [Krugman, P., 1991, Increasing returns and economic geography, Journal of Political Economy 99, 483–499.] is extended by endogenous research activities. Beyond the common ‘anonymous’ consideration of R&D expenditures within fixed costs, this model introduces in an analytically tractable approach vertical product differentiation in combination with a de-integrated R&D sector. In the context of international factor mobility, the destabilizing effects of a mobile scientific workforce are analyzed. Based upon a simple welfare analysis, a consideration of R&D promoting policy instruments and their spatial implications, this paper makes a contribution to the brain-drain debate.     

Estimation of technical inefficiency effects using panel data and doubly heteroscedastic stochastic production frontiers

In previous studies, measures of technical inefficiency effects derived from stochastic production frontiers have been estimated from residuals which are sensitive to specification errors. This study corrects for this inaccuracy by extending the doubly heteroscedastic stochastic cost frontier suggested by Hadri (1999) to the model for technical inefficiency effects. This model is a stochastic frontier production function for panel data as proposed by Battese and Coelli (1995). The study uses, for illustration of the techniques, data on 101 mainly cereal farms in England. We find that the correction for heteroscedasticity is supported by the data. Both point estimates and confidence intervals for technical efficiencies are provided. The confidence intervals are constructed by extending the “Battese-Coelli” method reported by Horrace and Schmidt (1996) by allowing the technical inefficiency to be time varying and the disturbance terms to be heteroscedastic. The confidence intervals reveal the precision of technical efficiency estimates and show the deficiencies of making inferences based exclusively on point estimates. First version received: March 2000/Final version received: Oct. 2001 RID="*" ID="*"  The authors are grateful to the Economic and Social Research Council for access to their Data Archive which has provided the data for this research. We are indebted to Badi Baltagi and two anonymous referees for their helpful comments and suggestions. The usual caveat applies.