Finance,investment and innovation: A theoretical and empirical comparative analysis

The paper compares the relative efficiency of country models in the relationship between finance and investments. Results, confirmed under three different panel data estimates (Arellano-Bond GMM method, random and fixed effect estimates) suggest that: i) the UK thick market reduces informational asymmetries for large firms and for those firms providing good signals to shareholders; ii) the Japanese vertical (between firms and banks) integration and horizontal (among firms) integration almost eliminates financial constraints (the horizontal integration effect) and equates agency costs across firms (the vertical integration effect). These results are consistent with the short-termist hypothesis which assumes that the Japanese economic system can process information more efficiently reducing managerial myopic behaviour and thereby determining positive effects on long term growth.     

Constitutions for Local Collective Action and Institutional Interdependence

Collective action can take place at a plurality of levels. It has to be based on a constitution which defines the basic rules of interaction. Here, we are concerned with the problem of the constitutional setting of bottom-up formal institutions with a club nature. The pressure to improve the efficiency of services pushes local administrations to co-ordinate to produce public goods. This process has stimulated the birth of different forms of agencies or private companies with a club nature. The aim of this paper is to discuss the effects of institutional interdependence on the efficiency of this kind of collective action. In order to shed some light on this problem, the paper first discusses the problem of the relativity of efficiency to the institutional setting. A framework of analysis is then discussed to identify the main factors affecting collective action. Finally some evidence will be provided by a comparative institutional analysis performed on some case studies concerning local associational forms among communes in north-eastern Italy.     

On Political Competition: Democracy, Opinion and Responsibility

In this paper, I consider the influence of political competition on opinion. After reflecting on the notion opinion as a concept in the economic analysis of politics, I turn to Hayek's Constitution of Liberty and consider his argument for democracy on the grounds that it is the form of government which best promotes progress in opinion. Yet Hayek's claim that democratically formed opinion improves is unsubstantiated. I turn to accounts of expressive voting thereafter to show why opinions which are realised in the form of votes may be anything other than propitious to democratic culture. I then return to Hayek and consider what becomes of opinion in Law, Legislation and Liberty. His claim that opinion improves under democratic institutions is no longer of great significance to him. Indeed, his account of the rise of bargaining politics provides evidence against the claim that opinion improves. I conclude by asking how democracy can be shielded from opinion, that is, how opinion might be improved in ways which go beyond Hayek's model of political competition outlined in Constitution of Liberty. To this end, I look to accounts of deliberative democracy and expressive politics for support.     

Technological paradigms,patterns of learning and development: An introductory roadmap

This paper presents an evolutionary microeconomic theory of innovation and production and discusses its implications for development theory. Using the notions of technological paradigm and trajectory, it develops an alternative view of firm behavior and learning. It is shown then how these are embedded in broader national systems of innovation which account for persistent differences in technological cappacities between countries. Finally, this bottom-up evolutionary analysis is linked with an institutional top-down approach, and the potential fruitfulness of this dialogue is demonstrated.We thank the discussants and participants at the workshop on Technology and Competitiveness in Developing Countries, Venice, 26/11/93, for their useful comments.The research leading to this work has benefited at various stages from the support of the Italian National Research Council (CNR, Progetto Strategico Combiamento Technologico e Crescita Economica) and of the International Institute of Applied System Analysis (IIASA, Austria).     

Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development

We estimate the respective contributions of institutions, geography, and trade in determining income levels around the world, using recently developed instrumental variables for institutions and trade. Our results indicate that the quality of institutions trumps everything else. Once institutions are controlled for, conventional measures of geography have at best weak direct effects on incomes, although they have a strong indirect effect by influencing the quality of institutions. Similarly, once institutions are controlled for, trade is almost always insignificant, and often enters the income equation with the wrong (i.e., negative) sign. We relate our results to recent literature, and where differences exist, trace their origins to choices on samples, specification, and instrumentation.     

Spieltheorie: Ein neues Paradigma der Sozialwissenschaft

Ohne ZusammenfassungDeutsche Fassung des Artikels Game Theory: A New Paradigm of Social Science, erschienen in New Methods of Thought and Procedure (Berlin-Heidelberg-New York: Springer, 1967). — Diese Arbeit wurde teilweise über das Econometric Research Program der Princeton University durch das Office of Naval Research unterstützt.     

Die Komponenten des Rückganges der Ausländerbeschäftigung

Summary During the crisis of 1974/75 the number of foreign workers in Western European countries has been reduced. This has caused a new discussion about the benefits and drawbacks of the employment of foreign workers. Whatever the attitude towards this problem may be, it is useful to decompose the reduction of foreign labour into categories. First of all a certain amount of foreign labour will be reduced due to a general decrease of overall employment. This influence may be called proportionality effect. The share of foreign workers in the different branches of the economy allows the calculation of a structural effect. Both of them measure influences, which concern foreigners as well as nationals. Only the remaining influence is specific to foreigners. It may again be split into a reduction effect and a substitution effect. The former ist concerned with that part of total reduction of foreign workers, which corresponds to the decrease of employment, i.e. employment reduction by dismissal of foreign workers. The latter pertains to that part of reduction, which exceeds the decrease of employment, i.e. by this magnitude domestic labour has been substituted for foreign labour.The application of this model to the years 1974 and 1975 shows no proportionality effect (1974 it is even positive), a limited structural effect, but a high reduction effect. The substitution effect is considerable in 1974 but of minor importance in 1975. So foreign labour in Austria served actually as cyclical buffer but mainly by reduction and only partly by substitution.     

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.     

Coordination as a Criterion for Economic “Goodness”

Welfare economics requires a criterion for economic goodness in regard to a society. Unlike conventional criteria, coordination (among independent decisionmakers) does not violate methodological individualism. The coordination criterion can be objectively deployed to judge events or policies, referring only to the given preference rankings of relevant individuals, given their initial positions. An important variant refers not to the attained (or unattained) state of achieved coordination, but to the ability of events or policies to affect the process through which a better-coordinated state may be approached. Several implications of the coordination criterion are explored.     

Learning in a Laboratory Market with Random Supply and Demand

We propose a simple adaptive learning model to study behavior in the call market. The laboratory environment features buyers and sellers who receive a new random value or cost in each period, so they must learn a strategy that maps these random draws into bids or asks. We focus on buyers' adjustment of the mark-down ratio of bids relative to private value and sellers' adjustment of the corresponding mark-up ratio of asks relative to private cost. The learning model involves partial adjustment of these ratios towards the ex post optimum each period. The model explains a substantial proportion of the variation in traders' strategies. Parameter estimates indicate strong recency effects and negligible autonomous trend, but strongly asymmetric response to different kinds of ex post error. The asymmetry is only slightly attenuated in observational learning from other traders' ex post errors. Simulations show that the model can account for the main systematic deviations from equilibrium predictions observed in this market institution and environment.     

Entropic irreversibility and uncontrolled technological change in economy and environment

A joint production model representing Spaceship Earth is used to explore at a conceptual level, implications of natural resource depletion and economic waste production for economy-environment change. Ecological change is considered as uncontrolled technological innovation, partially induced through disposal of unwanted surpluses (by-products and wastes from economic activity). These surpluses may accumulate as wastelands, or (more likely) contribute to uncontrolled ecological change. Technologically stationary economy-environment steady-state solutions are contrasted with instability and forced change where either the technologies or the patterns of resource allocation in economic and environmental processes are incompatible with a steady state.Thanks to Charles Perrings, Louis Arnoux, and three anonymous referees. Responsbility for any errors or obscurities in argument is mine alone.     

Learning for Innovation and the Skill Premium

The computer revolution took very long to pay off in productivity growth in the computer-using sectors. The relative wage of skilled workers, however, has risen sharply from the early days of the computer revolution onward. As skilled workers wages reflect their productivity, the two observations together pose a puzzle.This paper provides a micro-based explanation for the long diffusion period of the computer revolution. The general equilibrium model of growth zooms in on the research process and provides an explanation for sluggish growth with booming relative wages of the skilled. Technological progress in firms is driven by research aimed at improving the production technology (innovation) and by assimilation of ideas or principles present outside the firm (learning). A new General Purpose Technology (GPT) like the computer revolution generates an initial slowdown in economic growth and an increase in the skill premium.Acknowledgement I am indebted to Theo van de Klundert for suggestions and encouragement. Suggestions by Jan Boone, Bas Jacobs, Patrick Francois, Henri de Groot, Lex Meijdam, Niek Nahuis Sjak Smulders, Harald Uhlig and anonymous referees have contributed to the paper.     

A New Variant of the Winner's Curse in a Coasian Contracting Game

We examine behavior in a Coasian contracting game with incomplete information. Experimental subjects propose contracts, while automaton property right holders or robot players with uncertain preferences respond to those proposals. The most common pattern of proposals observed in these games results in too many agreements and, in some games, payoffs that are stochastically dominated by those resulting from rational proposals (which imply fewer agreements). In this sense, we observe a winner's curse similar to that observed in bidding games under incomplete information, such as the common value auction (Kagel, J.H. and Levin, D. (1986) American Economic Review. 76, 894–920) and the takeover game (Samuelson, W. and Bazerman, M.H. (1985) In Research in Experimental Economics, Vol. 3. JAI Press, Greenwich, pp. 105–137; Ball, S.B., Bazerman, M.H., and Carroll, J.S. (1990) Organizational Behavior and Human Decision Processes. 48, 1–22; Holt, C. and Sherman, R. (1994) American Economic Review. 84, 642–652). While the naïve model of behavior nicely predicts the winner's curse in those previous bidding games, it does not do so here. Instead, an alternative model we call the guarantor model explains the anomalous behavior best. Hence, we suggest this is a new variant of the winner's curse.     

Measuring the severity of unemployment

A social-welfare (illfare) function framework is applied to compare two demographic groups as to the severity of their unemployment experience. This is based on the assumption that for each individual the disutility of unemployment is an increasing and convex function of spell length. The very concept of spell length and its distribution, however, is not unambiguous. In contrast to previous literature which focuses exclusively on the interrupted spell length in a stock of unemployed, we stress the usefulness of the concept of complete spell length in a cohort of unemployed. We establish an equivalence relationship between second-degree dominance in the cohort and first-degree dominance in the stock. For specific illfare functions the disutilityU(x) when applied to the cohort and the disutilityU(x) when applied to the stock will produce the same value of aggregate welfare (illfare).     

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.     

On a mixed competitive-monopolistic macrodynamic model in a monetary economy

In this paper we reconsider the dynamic stability of the mixed competitive-monopolistic system in an analytical framework of the macroeconomic growth model in a monetary economy. We construct a simple monetary growth model in the so-called Keynes-Wicksell tradition and investigate how the degree of competition affects the dynamic stability of the system. Our analysis reveals the destabilizing rather than the stabilizing forces of the monopolistic system in amonetary economy contrary to the usual analyses. We also show that the system produces the purely cyclical behavior at some intermediate degrees of competition by using the Hopf-Bifurcation theorem.This paper was written while the author was staying at the New School for Social Research in New York as a visiting research scholar. Special thanks are due to Prof. Willi Semmler for providing the comfortable research environment and to Komazawa University for the financial support. The author is also grateful to Dr. Reiner Franke and two anonymous referees of this journal for their constructive comments and helpful suggestions. Needless to say, however, only the author is responsible for possible remaining errors.     

“Period three to period two” bifurcation for piecewise linear models

In Hommes, Nusse, and Simonovits (1990) the dynamics of a simple economic model was studied. Although this piecewise linear model is quite simple, its dynamics shows different kinds of behavior such as periodic, quasiperiodic, and chaotic behavior. In particular, a new kind of bifurcation, namely a period three to period two bifurcation, was observed numerically. This paper deals with this new bifurcation phenomenon and we show that the period three to period two bifurcation occurs and is a structurally stable phenomenon in a class of two-dimensional continuous, piecewise linear systems. In particular, the period three to period two bifurcation is a structurally stable phenomenon in economic models with Hicksian nonlinearities.Research in part supported by the Department of Energy (Scientific Computing Staff Office of Energy Research).     

Non-computable strategies and discounted repeated games

Summary A number of authors have used formal models of computation to capture the idea of bounded rationality in repeated games. Most of this literature has used computability by a finite automaton as the standard. A conceptual difficulty with this standard is that the decision problem is not closed. That is, for every strategy implementable by an automaton, there is some best response implementable by an automaton, but there may not exist any algorithm forfinding such a best response that can be implemented by an automaton. However, such algorithms can always be implemented by a Turing machine, the most powerful formal model of computation. In this paper, we investigate whether the decision problem can be closed by adopting Turing machines as the standard of computability. The answer we offer is negative. Indeed, for a large class of discounted repeated games (including the repeated Prisoner's Dilemma) there exist strategies implementable by a Turing machine for whichno best response is implementable by a Turing machine.The work was begun while Nachbar was a visitor at The Center for Mathematical studies in Economics and Management Science at Northwestern University; he is grateful for their hospitality. We are also grateful to Robert Anderson and Neil Gretsky and to seminar audiences at UCLA for useful comments, and to the National Science Foundation and the UCLA Academic Senate Committee on Research for financial support. This paper is an outgrowth of work reported in Learning and Computability in Discounted Supergames.     

Augmented serial rules for an excludable public good

Summary. We present a new class of rules named augmented serial rules for the provision of an excludable public good. First, we characterize this class by the four axioms of strategy-proofness, envy-freeness, access independence, and nonbossiness. Second, we identify two important subclasses by imposing an additional axiom: (i) anonymous augmented serial rules by anonymity, and (ii) Moulins serial rule by individual rationality.Received: 31 December 2002, Revised: 9 June 2004, JEL Classification Numbers: D71, D82, H41.This paper is a substantial revision of Serial cost sharing with simple games. I would like to thank Hervé Moulin, Yoshikatsu Tatamitani, an associate editor, and three anonymous referees for helpful suggestions and detailed comments. This research was partially supported by the Ministry of Education, Culture, Sports, Science, and Technology in Japan (Grant-in-Aid for 21st Century COE Program Microstructure and Mechanism Design in Financial Markets).     

Communication in dynastic repeated games: ‘Whitewashes’ and ‘coverups’

Summary. We ask whether communication can directly substitute for memory in dynastic repeated games in which short lived individuals care about the utility of their offspring who replace them in an infinitely repeated game. Each individual is unable to observe what happens before his entry in the game. Past information is therefore conveyed from one cohort to the next by means of communication.When communication is costless and messages are sent simultaneously, communication mechanisms or protocols exist that sustain the same set of equilibrium payoffs as in the standard repeated game. When communication is costless but sequential, the incentives to whitewash the unobservable past history of play become pervasive. These incentives to whitewash can only be countered if some player serves as a neutral historian who verifies the truthfulness of others reports while remaining indifferent in the process. By contrast, when communication is sequential and (lexicographically) costly, all protocols admit only equilibria that sustain stage Nash equilibrium payoffs.We also analyze a centralized communication protocol in which history leaves a footprint that can only hidden by the current cohort by a unanimous coverup. We show that in this case the set of payoffs that are sustainable in equilibrium coincides with the weakly renegotiation proof payoffs of the standard repeated game.Received: 30 September 2002, Revised: 5 August 2003, JEL Classification Numbers: C72, C73, D82.We wish to thank an Associate Editor and Dino Gerardi as well as seminar participants at Arizona State, Columbia, Duke, Georgetown, Indiana, Montreal, Princeton, Rochester, Vanderbilt, VPI, the 2001 NSF/NBER Decentralization Conference, the Summer 2001 North American Econometric Society Meetings, and the Midwest Theory Conference, 2000, for useful comments and suggestions. All errors are our own.