Interest rate rules, inflation and the Taylor principle: an analytical exploration

Summary. The purpose of this article is to characterize optimal interest rate rules in the framework of a dynamic stochastic general equilibrium model, and notably to scrutinize the “Taylor principle”, according to which the nominal interest rate should respond more than one for one to inflation. This model yields explicit solutions for the optimal rule. We find that the elasticity of response depends on numerous factors, such as the degree of price rigidity, the autocorrelation of the underlying shocks, or which measure of inflation is used. In general the optimal elasticity of the interest rate with respect to inflation needs not be greater than one.Received: 6 November 2003, Revised: 17 August 2004 JEL Classification Numbers: E5, E52, E58.J.-P. Bénassy: I wish to thank Daniel Laskar and an anonymous referee for their perceptive comments on earlier drafts of this paper. Of course all remaining deficiencies are mine.     

More pessimism than greediness: a characterization of monotone risk aversion in the rank-dependent expected utility model

Summary. This paper studies monotone risk aversion, the aversion to monotone, mean-preserving increase in risk (Quiggin [21]), in the Rank Dependent Expected Utility (RDEU) model. This model replaces expected utility by another functional, characterized by two functions, a utility function u in conjunction with a probability-perception function f. Monotone mean-preserving increases in risk are closely related to the notion of comparative dispersion introduced by Bickel and Lehmann [3,4] in Non-parametric Statistics. We present a characterization of the pairs (u,f) of monotone risk averse decision makers, based on an index of greediness G _u of the utility function u and an index of pessimism P _f of the probability perception function f: the decision maker is monotone risk averse if and only if . The index of greediness (non-concavity) of u is the supremum of taken over . The index of pessimism of f is the infimum of taken over 0 < v < 1. Thus, , with G _u = 1 iff u is concave. If then , i.e., f is majorized by the identity function. Since P _f = 1 for Expected Utility maximizers, forces u to be concave in this case; thus, the characterization of risk aversion as is a direct generalization from EU to RDEU. A novel element is that concavity of u is not necessary. In fact, u must be concave only if P _f = 1.Received: 10 April 2001, Revised: 18 November 2003, JEL Classification Numbers: D81. Correspondence to: Michéle CohenAlain Chateauneuf, Michéle Cohen, Isaac Meilijson: We are most grateful to Mark Machina, Peter Wakker and two anonymous referees for very helpful suggestions and comments.     

Estimating Krugman’s Economic Geography Model for the Spanish Regions

This paper estimates Krugman’s (J Polit Econ 99:413–499, 1991) economic geography model using data from the Spanish NUTS 3 regions. The econometric formalization endogenously determines wages in a region as a function of income and wages in other regions. The specification adopted also allows us to study the relation between the agglomeration of economic activity, increasing returns and market access. The first result obtained is that the Spanish economy exhibits a spatial wage structure: wages in a region are positively determined by income and wages in neighboring regions. In second place it is found support for the structural relations of the underlying theoretical model, indicating the importance of scale economies and transport costs in shaping the Spanish economic geography.     

On the impact of leverage constraints on asset prices and trading volume

Abstract. Researchers have used stylized facts on asset prices and trading volume in stock markets (in particular, the mean reversion of asset returns and the correlations between trading volume, price changes and price levels) to support theories where agents are not rational expected utility maximizers. This paper shows that this empirical evidence is in fact consistent with a standard infinite horizon – perfect information – expected utility economy where some agents face leverage constraints similar to those found in todays financial markets. In addition, and in sharp contrast to the theories above, we explain some qualitative differences that are observed in the price-volume relation on stock and on futures markets. We consider a continuous-time economy where agents maximize the integral of their discounted utility from consumption under both budget and leverage constraints. Building on the work by Vila and Zariphopoulou (1997), we find a closed form solution, up to a negative constant, for the equilibrium prices and demands in the region of the state space where the constraint is non-binding. We show that, at the equilibrium, stock holdings volatility as well as its ratio to stock price volatility are increasing functions of the stock price and interpret this finding in terms of the price-volume relation. We would like to thank the editor and two anonimous referees for valuable substantive comments. Our gratitude also to Franklin Allen, Kerry Back, Domenico Cuoco, Xavier Freixas, Sanford Grossman, Michel Habib, Lutz Hendricks, Richard Kihlstrom, Fernando Restoy, Mary Thomson, Jean-Luc Vila, participants to seminars at Birkbeck College, Carnegie-Mellon, Columbia, ESSEC, HEC, IAE, INSEAD, London Business School, London School of Economics, McGill, Michigan, National University of Singapore, Pompeu Fabra, North Carolina, Washington-St-Louis, Wharton, the Jornadas de Economía Financiera BBV, and the Meetings of the Society for Economic Dynamics and Control and the American Finance Association. Special thanks are due to Süleyman Basak for his enthusiastic support and many helpful suggestions. The usual disclaimer applies. We gratefully acknowledge the support of the BBV and Caja de Madrid Foundations and CREF (both authors) and of the Spanish Ministry of Education under DGICYT grant no. PB93-0388 (first author).     

Voting in assemblies of shareholders and incomplete markets

Summary. An economy with two dates is considered, one state at the first date and a finite number of states at the last date. Shareholders determine production plans by voting - one share, one vote - and at -majority stable stock market equilibria, alternative production plans are supported by at most percent of the shareholders. It is shown that a -majority stable stock market equilibrium exists if where S is the number of states at the last date and J is the number of firms. Moreover, an example shows that -majority stable stock market equilibria need not exist for smaller s.Received: 23 December 2002, Revised: 14 June 2004, JEL Classification Numbers: D21, D52, D71, G39. Correspondence to: Hervé CrésThe authors are grateful to an anonymous referee for helpful comments and suggestions. Financial support from the Danish Research Councils and hospitality of HEC is gratefully acknowledged by Mich Tvede and support from Fondation HEC is gratefully acknowledged by Hervé Crés.     

Component efficient solutions in line-graph games with applications

Recently, applications of cooperative game theory to economic allocation problems have gained popularity. We investigate a class of cooperative games that generalizes some economic applications with a similar structure. These are the so-called line-graph games being cooperative TU-games in which the players are linearly ordered. Examples of situations that can be modeled like this are sequencing situations and water distribution problems. We define four properties with respect to deleting edges that each selects a unique component efficient solution on the class of line-graph games. We interpret these solutions and properties in terms of dividend distributions, and apply them to economic situations. This research has been done while the third author was visiting Tinbergen Institute at the Free University, Amsterdam. The research is part of the Research Programme “Strategic and Cooperative Decision Making” at the Department of Econometrics. Financial support from the Netherlands Organization for Scientific Research (NWO) in the framework of the Russian-Dutch programme for scientific cooperation, is gratefully acknowledged. The third author also appreciates partial financial support from the Russian Leading Scientific Schools Fund (grant 80.2003.6) and Russian Humanitarian Scientific Fund (grant 02-02-00189a). We thank three anonymous referees for their valuable comments.     

External cooperation and entrepreneurial orientation in industrial clusters

ABSTRACT

The aim of this paper is to examine the relationship between external cooperation and entrepreneurial orientation (EO). This relationship is explored in cluster environment, wherein entrepreneurial organizations compete and cooperate simultaneously to pursue opportunities. The following hypothesis is tested: External cooperation is positively correlated with entrepreneurial orientation. The hypothesis is tested with a correlation analysis on a sample of 77 small-sized enterprises operating in the Malopolska region in Poland, wherein several clusters are active. Additionally, the regression analysis is conducted to examine the associations between inter-organizational cooperation and EO dimensions. The findings confirm that external cooperation is positively correlated with EO. This observation is confronted with a pro-competitive approach that is a constitutional element of the entrepreneurship concept. Moreover, the findings show that the correlation between external cooperation and a firm’s performance is stronger than between some other EO dimensions and performance. Additionally, the findings show the important role of relationships between organizations and their clients. In the paper, several remarks for development of the theory are discussed, including the need for incorporating inter-organizational cooperation into a set of entrepreneurial traits and reflecting it in entrepreneurial orientation scales. The findings confirm the importance of that direction of theory development that focuses on inter-organizational collaboration in the context of entrepreneurship.     

Incomplete regulation, market competition and collusion

Regulators often do not regulate all firms competing in a given sector. Due to product substitutability, unregulated competitors have incentives to bribe regulated firms to have them overstate their costs and produce less, thereby softening competition. The best collusion-proof contract entails distortions both for inefficient and efficient regulated firms (distortion ‘at the top’). But a contract inducing active collusion may do better by allowing the regulator to ‘team up’ with the regulated firm to indirectly tax its competitor. The best such contract is characterized. It is such that the unregulated firm pays the regulated one to have it truthfully reveals its inefficiency. We finally compare those contracts.     

The Geopolitics of Protected Areas

ABSTRACT

The conservation enterprise is embedded in ideas of the environment through which it promotes a vision of the world and the relations between the non-human and human. The papers in this forum analyse conservation from various vantage points to draw the links between geopolitics and conservation. The authors use three themes to demonstrate these links. The first theme draws on the concept of environmentality to show the mobilization of ecological rationalities and power towards the creation of protected areas. The second pays attention to networks formed across the distance, and how they influence the location and governance of protected areas. The third focuses on the strategies the conservation lobby uses to align local identities with global conservation ideals and goals. Collectively, these themes highlight features of conservation geopolitics.