Certainty Independence and the Separation of Utility and Beliefs

Economists often operate under an implicit assumption that the tastes of a decision maker are quite stable, while his beliefs change with the availability of new information. We show that for a general class of preferences, a separation of a key component of tastes, the utility function, from the other components of the representation is possible only if the decision maker's preferences satisfy a mild but not completely innocuous condition, called ‘certainty independence’. We also outline the axiomatic characterization of the preferences that obtain such separation, which are a subset of the biseparable preferences.     

Macroeconomic interdependence under incomplete markets

This paper uses a two-country, flexible-price model with overlapping generations of infinitely lived households to study the role of net foreign asset dynamics in the propagation of productivity shocks. Absence of Ricardian equivalence ensures existence of a unique steady-state level of net foreign assets, to which the economy returns following temporary shocks. Model dynamics are significantly different from those of a setup in which terms of trade movements perform all the international adjustment and net foreign assets do not move. The difference relative to a complete markets economy in which net foreign asset movements play no role in shock transmission is smaller. It is amplified if the substitutability across goods rises and if shocks are permanent.     

The nature of the steady state in models of optimal growth under uncertainty

Summary. We study a one-sector stochastic optimal growth model with a representative agent. Utility is logarithmic and the production function is of the Cobb-Douglas form with capital exponent . Production is affected by a multiplicative shock taking one of two values with positive probabilities p and 1-p. It is well known that for this economy, optimal paths converge to a unique steady state, which is an invariant distribution. We are concerned with properties of this distribution. By using the theory of Iterated Function Systems, we are able to characterize such a distribution in terms of singularity versus absolute continuity as parameters and p change. We establish mutual singularity of the invariant distributions as p varies between 0 and 1 whenever . More delicate is the case . Singularity with respect to Lebesgue measure also appears for values such that . For and Peres and Solomyak (1998) have shown that the distribution is a.e. absolutely continuous. Characterization of the invariant distribution in the remaining cases is still an open question. The entire analysis is summarized through a bifurcation diagram, drawn in terms of pairs .Received: 9 April 2002, Revised: 29 October 2002, JEL Classification Numbers: C61, O41.Correspondence to: Tapan MitraThis research was partially supported by CNR (Italy) under the "Short-term mobility" program and by M.U.R.S.T. (Italy) National Group on "Nonlinear Dynamics and Stochastic Models in Economics and Finance" . We are indebted to Rabi Bhattacharya for providing us with the reference to Solomyak's (1995) paper. The present version has benefitted from comments by Mukul Majumdar and two anonymous referees.     

Judicial Branch, Checks and Balances and Political Accountability

This paper attempts to combine the political economics models on separation of powers between the legislature and the executive with public choice theories on the behavior of the judicial branch. We obtain a model of political accountability and checks and balances with up to three government branches: the executive, the legislature and the judiciary. We conclude that an independent judiciary improves the political accountability of democratic systems relative to the political economics models with two government branches. An accommodating judiciary, however, changes the distribution of political rents without improving accountability.     

A Model of the Representation of Interests in a Compound Democracy

This paper provides a model of democratic government as a compound of independent elective and non elective centers of power that compete in fostering the demands of voters and of interest groups. The analysis describes how interests of voters and of pressure groups are represented and under what conditions the compound democracy is more responsive to voters' or to interest groups' demands. These conditions are shown to depend on the center of power's relative opportunity costs at serving a plurality of interests and on the severeness of informational asymmetries between voters and interest groups.     

Employment changes, the structure of adjustment costs, and plant size

In this paper, we analyze the pattern of employment adjustment using a rich panel of Norwegian plants. The data suggest that the frequency of episodes of zero net employment changes is inversely related to plant size. We develop and estimate a simple “q” model of labor demand, allowing for the presence of fixed, linear and quadratic components of adjustment costs. The econometric evidence supports the existence of purely fixed components, unrelated to plant size. As a result, the range of inaction is wider for smaller plants. The quadratic component of costs is also always important. In most specifications fixed costs are higher for employment contractions. The quadratic component is higher during employment contractions compared to expansions for small plants, while this is not true for larger plants.     

Theory and practice of monetary policy

Summary. We consider an optimally managed renewable resource with stochastic non-concave growth function. We characterize the conditions under which the optimal policy leads to global extinction, global conservation and the existence of a safe standard of conservation. Our conditions are specified in terms of the economic and ecological primitives of the model: the biological growth function, the welfare function, the distribution of shocks and the discount rate. Our results indicate that, unlike deterministic models, extinction and conservation in stochastic models are not determined by a simple comparison of the growth rate and the discount rate; the welfare function plays an important role.Received: 20 October 2004, Revised: 28 February 2005, JEL Classification Numbers: D90, O11, O41, Q32.Santanu Roy: Correspondence toResearch on this paper was completed when the second author visited Cornell University in July, 2003. We thank the Center for Analytic Economics and the Department of Economics at Cornell University for making this research visit possible. The current version has gained considerably from the comments made by an anonymous referee.     

Domestic financial market frictions,unrestricted international capital flows,and crises in small open economies

Summary. We present an example of a small open economy where small increases in the world interest rate may induce a sharp decline in output and a precipitous depreciation of the exchange rate. Due to a costly state verification problem in domestic credit markets, combined with unrestricted international capital flows, our economy generates two long-run equilibria, one with low GDP and a relatively depreciated real exchange rate (RER), and one with high GDP and a relatively appreciated RER. The first is always a saddle, while the second may be a sink or a source, depending on the level of the world interest rate. A crisis is identified with the economy switching from an equilibrium path approaching the high-output steady state to the saddlepath approaching the low-output steady state. In Mexicos recent history, periods of growth associated with appreciation of the RER have alternated with periods of sharp contraction and depreciation of the RER. Our economy displays such behavior in response to changes in the world interest rate.Received: 9 April 2002, Revised: 20 March 2003JEL Classification Numbers: E5, F4.G. Antinolfi, E. Huybens: We thank Steve Fazzari, Tim Kehoe, Todd Keister, Manuel Santos, Karl Shell and especially Bruce Smith for very helpful discussions. Jaime Calleja Alderete, Eduardo Camero Godínez, and Juan Vargas Hernández provided excellent research assistance. All remaining errors are ours. Huybens was an assistant professor in the Centro de Investigación Económica, ITAM, at the time this article was written, and part of this work was completed while Antinolfi was a visiting scholar at the Federal Reserve Bank of St. Louis. The views expressed herein are those of the authors, and do not reflect those of the World Bank or the Federal Reserve Bank of St. Louis. Correspondence to: G. Antinolfi     

A characterization for solutions of stochastic discrete time optimization models

A notion of finitely optimal plan for intertemporal optimization problems as a necessary condition for optimality is introduced. Under interiority of a feasible plan and differentiability of the return function, such a plan satisfies the stochastic analogue of deterministicEuler-Lagrange conditions, which become also sufficient conditions under concavity of the return function. Then, under more general assumptions, a sufficient criterion of optimality based on competitive plans supported by price systems and transversality conditions is discussed. Differently from the current literature, no restrictive hypotheses on the probability measure of the random shocks are assumed.

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Sommario Nella prima parte del lavoro si studiano le soluzioni dettefinitamente ottime che costituiscono una condizione necessaria per l'ottimalità di un piano ammissibile . Sotto ipotesi di interiorità del piano ammissibile e di differenziabilità della funzione obiettivo uniperiodaleF, vengono formulate le condizioni necessarie diEuler-Lagrange in ambito stocastico; aggiungendo l'ulteriore ipotesi di concavità perF, tali condizioni diventano anche sufficienti per l'ottimalità finita.La teoria viene poi estesa al caso sopradifferenziabile ottenendo una generalizzazione delle condizioni di Euler-Lagrange stocastiche che consente di individuare i piani finitamente ottimi mediante la nozione dicompetitività, ovvero supportabilità di un sistema di prezzi aleatori. Con una condizione di trasversalità all'infinito, la competitività diventa condizione sufficiente anche per l'ottimalità propria (cioè non solo finita).La peculiarità della presente trattazione è che tali condizioni sono formulate sotto ipotesi molto generali per quanto riguarda il processo degli shocks esogeni.