Culture, caution, and trust

Trust is an important determinant of economic development. Understanding its origins is therefore critical. We develop a principal-agent model with heterogeneous players to determine the aggregate amount of trustworthiness and trust in a society. People are distributed according to their preference toward caution, which we model as loss aversion. The first two moments of the distribution across principals and agents—along with institutional quality—are critical to the process by which trustworthiness and trust are formed. A direct effect suggests that more caution leads to less societal trust. An indirect effect of greater caution, working through trustworthiness, leads to more trust. Paradoxically, the net effect is almost always positive. The results are similar when we use expected utility theory. Different distributional assumptions can influence the results.     

Sunk Costs, Market Access, Economic Integration, and Welfare

The nature of the equilibrium that arises after economic integration is shown to depend crucially on how initial entry costs are divided along two separate dimensions: market access versus technology costs, and fixed versus sunk costs. There are three post-integration equilibrium regimes: a traditional trade theory regime which arises when both market access costs and fixed costs are small, a new trade theory regime which arises when market access costs are small but fixed costs are high, and a market access regime which arises when market access costs are high. While the first two regimes have already appeared in the literature, the third is new. The sign, magnitude, and qualitative behavior of the welfare effects of integration across all three regimes depend on the configuration of these costs.     

Learning,Matching, and Aggregation

Fictitious play and stimulus–response/reinforcement learning are examined in the context of a large population where agents are repeatedly randomly matched. We show that the aggregation of this learning behavior can be qualitatively different from learning at the level of the individual. This aggregate dynamic belongs to the same class of simply defined dynamic as do several formulations of evolutionary dynamics. We obtain sufficient conditions for convergence and divergence which are valid for the whole class of dynamics. These results are therefore robust to most specifications of adaptive behavior.Journal of Economic LiteratureClassification Numbers: C72, D83.     

Promises, trust, and contracts

A transaction involving a buyer and a competitive seller isstudied under the hypothesis that individuals may have a certaintendency to keep promises. The parties can choose a completecontract where costly arrangements are made so that it is verifiablewhether the seller has delivered a certain quality. Alternatively,they can choose an incomplete contract where the quality agreedupon by the two parties is unverifiable, and one party is giventhe residual right to decide whether the quality is indeed delivered.Although complete contracts are always available, it may beoptimal to use incomplete contracts, and social surplus canincrease in contract costs. Social surplus is higher when thebuyer has the residual right if under this arrangement incompletecontracts are optimal; and social surplus is higher when theseller has the residual right if only under this arrangementincomplete contracts are optimal.     

VOTING,LOBBYING, AND THE DECENTRALIZATION THEOREM

This paper revisits the well‐known fiscal “Decentralization Theorem” by relaxing the role of the assumption that governments are benevolent, while retaining the assumption of policy uniformity. If, instead, decisions are made by majority voting, the theorem fails. Specifically, (i) centralization can welfare‐dominate decentralization even if there are no externalities and regions are heterogeneous and (ii) decentralization can welfare‐dominate centralization even if there are positive externalities and regions are homogeneous. Similar results are obtained if a benevolent government is subject to lobbying. Hence, the Decentralization Theorem is not robust to relatively minor deviations away from the benchmark of a purely benevolent government.     

Coups,regime transitions,and institutional consequences

Coups and regime transitions are events that typically are intended to change the basic institutional framework of a country. Which specific institutions change and the consequences of these changes nevertheless remains largely unknown. Change after a coup or transition implies that some form of political or judiciary barrier has been erected or removed. We therefore focus on what happens to the quality of judicial institutions and political corruption around coup attempts and other types of regime transitions. We hypothesize that when coups are conducted by members of the incumbent political elite, they are likely to remove barriers to change while coup makers outside of the ruling elite are more likely to do the opposite and thus protect themselves from what remains of the elite in the political system. Using the new Bjørnskov-Rode coup dataset, our results suggest that successful coups are associated with degradation of institutions, with successful military coups in particular having a significant negative effect. Results are more varied for civilian coups where we find indications of differences depending on whether the coup makers are part of a political elite or not. We also explore whether the incumbent regime influences the effect of coup attempts on institutional change.     

Crime,punishment, and prejudice

We examine the link between the penalties used to punish convicted criminals and judicial prejudice against defendants. In our model, agents choose to commit crimes if their privately observed utility from doing so is high enough. A crime generates noisy evidence, and defendants are convicted when the realized amount of evidence is sufficiently strong to establish the probability of guilt beyond a fixed threshold. We show that if convicted offenders are incarcerated, poorer individuals face a strong prior prejudice in trials and are therefore convicted with less evidence than richer individuals. At the same time, they commit crimes more frequently. Penalties such as monetary fines can eliminate this bias, but may also reverse it. We fully characterize the penalty schedule that guarantees an unbiased equilbrium. We extend the model such that agents also differ in characteristics such as race or gender. We show biased outcomes (targeted at subgroups of the population) may still exist, even if all members of the population are ex-ante alike in their economic characteristics.     

Modern slavery,corruption, and hysteresis

We develop a model where firms profit from coercing workers into employment under conditions violating national law and international conventions and where corrupt public servants prosecuting violations of the rules are willing to turn cases down if bribed. Firms and public servants are heterogeneous. Firms benefit differently from the use of coerced labour whereas public servants have differing intrinsic motivations to behave honestly. Moreover, there is a socially determined warm-glow effect: honest public servants feel better if their colleagues are honest too. The determination of bribes is modelled via Nash bargaining between the firm and the corrupt civil servant. It is shown that multiple equilibria and hysteresis are possible. Depending on history, an economy may be trapped in a locally stable high-corruption, high-slavery equilibrium and major changes in government policies may be necessary to move the economy out of this equilibrium. Moreover, we show that trade bans that are effective in reducing slavery in the export industry tend to raise slavery in the remainder of the economy. It is possible that this leakage effect dominates the reduction of slavery in the export sector.     

Time,congestion, and public goods

This paper considers intermediate and final public goods as stocks from which consumers obtain a flow of services by expending scarce time. The services so obtained depend on the time other individuals spend utilizing these same goods. Optimality conditions are derived for both stock levels and flow usage where tolls are required to cover costs. The elasticities in the resulting formulae are endogenous in the sense that only certain values are permissible. In the intermediate good case, at the optimum, the public good will always be locally optimally supplied and locally underutilized to a degree which depends on the congestion parameter.     

Democracy,Rule of Law,Corruption Incentives,and Growth

We bridge the gap between the standard theory of growth and the mostly static theory of corruption. Some public investment can be diverted from its purpose by corrupt individuals. Voters determine the level of public investment subject to an incentive constraint equalizing the returns from productive and corrupt activities. We concentrate on two exogenous institutional parameters: the “technology of corruption” is the ease with which rent‐seekers can capture a proportion of public spending. The “concentration of political power” is the extent to which rent‐seekers have more political influence than other people. One theoretical prediction is that the effects of the two institutional parameters on income growth and equilibrium corruption are different according to the constraints that are binding at equilibrium. In particular, the effect of judicial quality on growth should be stronger when political power is concentrated. We estimate a system of equations where both corruption and income growth are determined simultaneously and show that income growth is more affected by our proxies for legal and political institutions in countries where political rights and judicial institutions, respectively, are limited.     

Wages,work, and unemployment

This paper provides new evidence on unemployment durations for individuals in Great Britain using a three state Markov framework in a competing risk setting and a nationally representative data set. The analysis is based on the premise that an individual's movements between labour market states can be represented by a Markov process. The modelling procedure combines the dynamic properties of the search approach to unemployment while using the labour supply decision at each moment in time in response to the expected wage to include participation decisions. Using this framework, we are able to determine the effect of individual characteristics, including the expected wage, on labour market behaviour. The model is estimated separately for men and women, and for young and mature workers, to investigate whether labour market behaviour differs for these groups. The validity of the Markov assumptions are tested using different model specifications, and changes in the model over calendar time are also presented.     

Hedonic price equilibria, stable matching, and optimal transport: equivalence, topology, and uniqueness

Hedonic pricing with quasi-linear preferences is shown to be equivalent to stable matching with transferable utilities and a participation constraint, and to an optimal transportation (Monge–Kantorovich) linear programming problem. Optimal assignments in the latter correspond to stable matchings, and to hedonic equilibria. These assignments are shown to exist in great generality; their marginal indirect payoffs with respect to agent type are shown to be unique whenever direct payoffs vary smoothly with type. Under a generalized Spence-Mirrlees condition (also known as a twist condition) the assignments are shown to be unique and to be pure, meaning the matching is one-to-one outside a negligible set. For smooth problems set on compact, connected type spaces such as the circle, there is a topological obstruction to purity, but we give a weaker condition still guaranteeing uniqueness of the stable match.     

Supply,wealth effects,negative multipliers,and stability

This paper is concerned with the Blinder-Solow contention that negative government expenditures multipliers are trivial inasmuch as the resulting equilibrium is unstable in a conventional IS-LM model with constant prices. An aggregate supply side, which features progressive taxation of labor income and a real balances effect in the labor supply equation, is added to the model, and it is shown that negative multipliers are not necessarily inconsistent with local asympototic stability.     

Wealth Effects, Incentives, and Productivity

Comparative static effects of varying the wealth level of a risk-averse agent in a moral hazard setting with limited liability constraints are investigated. There are two principal opposing effects of increasing wealth: the incentive effect, which allows stronger punishments for poor performance, thereby encouraging higher effort; and the preference effect, which reduces the agent's effort incentives owing to income effects in the demand for leisure. It is shown that optimal effort levels are initially constant, subsequently increasing and eventually decreasing in wealth. Hence agents with intermediate wealth levels are the most productive.     

Fundamentals,beliefs, and financial contagion

We study contagion in a model in which financial crises can occur due to both weak fundamentals and adverse self-fulfilling expectations. Contagion emerges only if a crisis in one country leads international investors to rationally update beliefs about fundamentals in other countries. But purely expectational crises may be contagious, as investors may infer that fundamentals are weak. Hence, the structure of information is crucial. The analysis delivers useful lessons for assessing which countries are more vulnerable to contagion, which types of crises are more infectious, and whether increased transparency ameliorates contagion effects.     

Collectives,communes, and incentives

A model of individual-worker incentives in alternative economic organizations—collective, communal, capitalist—is developed. It is demonstrated that, ceteris paribus, incentives are much higher in collectives than in communes, and are likely higher in collectives than in comparable capitalist organizations. The effect on incentives of changes in prices, rent, and organization size is examined, and it is shown that individual incentives in a collective increase with the scale of the organization. The impact of various parameters on hours worked is examined in the framework of utility maximization. The results are compared to those of Domar, Ward, and Vanek.     

Realism,Regularities, and Prediction

Problems are identified with the transcendental argument that Lawson uses to make a case for realism in economics: this argument relies heavily upon an unproblematized conception of Free Will. Lawson's substantive conclusions are not vitiated, but the argument presented here suggests that he underestimates the role of regularities and prediction in economics.     

Insurance,self-control,and contract flexibility

We study a competitive insurance market in which some consumers have too optimistic expectations regarding their future use of preventive measures. When contracts are long-term and inflexible, such naive consumers would increase the costs of insurance for low-risk consumers. The competitive insurance market therefore offers flexible contracts that allow for switching between different tariffs. Sophisticated consumers choose a partial insurance tariff and remain low-risks. Naive consumers choose the same tariff, but later switch to full insurance, and become high-risks. If there are sufficiently many naive consumers, they pay a transfer to sophisticated consumers (so that high-risks subsidize low-risks). In contrast, there are no such transfers when contracts are short-term. The model generates novel implications for the time frame of insurance contracts and insurance requirements.     

Production, trade, prices, exchange rates and equilibration in large experimental economies

We study market equilibration in laboratory economies that are larger and more complex than any that have been studied experimentally to date. Complexity is derived from the fact that the economies are “international” in economic structure with multiple input, output, and foreign exchange markets in operation. The economies have twenty-one markets and due to the fact that they have roughly fifty agents, the economies are characterized by several hundred equations. In spite of the complexity and interdependence of the economy, the results demonstrate the substantial power of the general equilibrium model of perfect competition to predict the direction of movement of market-level variables. Empirical patterns in the convergence process are explored and described.     

TRADE,WAGES, AND PRODUCTIVITY

We develop a general equilibrium monopolistic competition model in which wages, productivity, consumption diversity, and markups respond to trade integration. We structurally estimate the model and simulate the impacts of removing all trade barriers generated by the Canada–U.S. border. Firm selection gets tougher by 8.09% in Canada and by 0.80% in the United States. Markups that consumers face, which are central to welfare, fall by up to 12.11% in Canadian provinces and by up to 2.82% in U.S. states. However, changes in markups measured at the firm level are ambiguous, thus providing a different piece of information.