HETEROGENEITY,REDISTRIBUTION, AND THE FRIEDMAN RULE*

We study monetary models with nondegenerate stationary distributions of money holdings. We find that the Friedman rule does not typically maximize ex post social welfare. An increase in the rate of growth of the money supply has two effects: the standard distortionary, or rate‐of‐return, effect makes money a less desirable asset for all moneyholders. A second, redistributive effect, creates a transfer from one type of agent to the other. An increase in the rate of growth of money away from the Friedman rule can produce a rate‐of‐return effect that dominates the standard effect.     

INTERCONNECTION AGREEMENT BETWEEN INTERNET SERVICE PROVIDERS AND THE OPTIMAL POLICY INTERVENTION: THE CASE OF COURNOT‐TYPE COMPETITION UNDER NETWORK EXTERNALITIES*

We derive the optimal subsidy policy for an interconnection agreement between two symmetric Internet service providers (ISPs) competing á la Cournot in a network service market. The interconnection quality agreed upon is lower than the socially optimal level, as suggested by Crémer et al. (2000 ). In the basic model where both ISPs compete in the domestic market, the optimal investment subsidy rate depends positively on the strength of network externalities. In the extended model where home and foreign ISPs compete in the home market, the optimal subsidy rate for the home government is higher than in the basic model.     

INFORMATION SHARING IN UNION–FIRM RELATIONSHIPS*

Large firms often negotiate wage rates with labor unions. When they do, an ex ante agreement to share information should make it more likely that they will reach an agreement and capture the gains from trade. However, if the firm refuses to share information, the union may shade down its wage demand to increase the probability of acceptance. This reduction in the wage can increase the joint surplus of the agents and increase social welfare. As a result, there are some circumstances in which bargaining with incomplete information can be better for the agents and society than bargaining with complete information.     

WATER QUALITY TRADING IN THE PRESENCE OF ABATEMENT‐COST SHARING

This paper examines how water quality trading interacts with nonpoint‐source abatement‐cost sharing (e.g., as currently practiced by the National Resource Conservation Service through its Environmental Quality Incentives Program [EQIP]) to promote the participation of nonpoint sources in a water quality market, participation that has thus far been noticeably lacking nationwide. As such, an idealized version of water quality trading is envisioned, where water quality trading and nonpoint cost sharing are treated as complementary policy instruments rather than substitutes. Toward this end, the subgame‐perfect equilibrium concept is used to model a “multilateral contracting” relationship between the regulatory authority and nonpoint sources when the regulator has incomplete information about the nonpoint sources' production costs. We characterize ex ante (or second‐best) nonpoint abatement levels when the regulator chooses cost‐share rates in concert with a water quality market. Numerical analysis indicates that current EQIP cost‐share rates would likely be lower and more flexibly determined in the presence of water quality trading. (JEL Q53)     

THE BROTHER‐IN‐LAW EFFECT*

When a firm is forced to pay abnormally high wages, hiring transfers rents. This effectively endows the employer with the ability to grant favors, and he may wish to do so even at some cost to efficient production. We refer to this as the brother‐in‐law effect. This article analyzes its consequences. When the brother‐in‐law effect is due to unionization, decisions regarding both the number and type of workers employed could be inefficient; overemployment could obtain even relative to the workforce that would be employed without unionization. We also identify cases in which nepotism improves efficiency.     

THE LIQUIDITY TRAP,THE REAL BALANCE EFFECT,AND THE FRIEDMAN RULE*

This article studies the behavior of the economy and the efficacy of monetary policy under zero nominal interest rates using a model with population growth that nests, as a special case, the conventional specification in which there is a single infinitely lived representative agent. The article shows that with a growing population, monetary policy has distributional consequences that give rise to a real balance effect, thereby eliminating the liquidity trap. These same distributional effects, however, can also work to make many agents much worse off under zero nominal interest rates than they are when the nominal interest rate is positive.     

DIVIDED WE STAND,UNITED WE FALL: THE HUME‐NORTH‐JONES MECHANISM FOR THE RISE OF EUROPE*

The “great divergence” between Europe and the rest of the world occurred relatively recently. What enabled Europe, with all its laggards, to dominate the previously successful Eastern economies? This article emphasizes one important mechanism, highlighting the contrast between the European states system and Eastern empires. Political competition for a mobile tax base in a states system forces rulers to provide relatively more secure property rights. By effectively limiting the “exit” options of the ruled, an empire rewards its ruler with a captive tax base that can be subjected to higher levels of expropriation. As a result, the states system encourages faster capital accumulation and growth.     

RISK‐SHARING MATCHING AND MORAL HAZARD

In this study we model the endogenous relationship formation between risk‐averse principals and agents in a CARA‐normal framework. Agents exert unobservable efforts to increase mean outputs and reduce risks. We show that risk‐reduction efforts are more important than mean‐increasing efforts in determining the matching patterns. Compared to cases without moral hazard, the agency problem in risk reduction induces more positive‐assortative matchings.     

THE POST-KEYNESIAN ‘DEMAND FOR CREDIT’ MODEL*

The post-Keynesian ‘demand for credit’ model is a well-cited piece of empirical evidence to support the contention that the money supply is endogenously rather than exogenously determined. In this paper, the model is critically examined and found to be problematic in several ways. Cointegration techniques are used to estimate a similar model using Australian data.     

MATCHING MARKETS WITH MIXED OWNERSHIP: THE CASE FOR A REAL‐LIFE ASSIGNMENT MECHANISM*

We consider a common indivisible good allocation problem whose popular applications include on‐campus housing, kidney exchange, and school choice. We show that the so‐called New House 4 (NH4) mechanism, which has been in use at MIT since the 1980s, is equivalent to a natural adaptation of the well‐known Gale–Shapley (GS) mechanism. We run two experiments comparing NH4 with the prominently advocated Top Trading Cycles (TTC) mechanism and NH4 with GS. We find that under NH4, the participation rate is significantly higher than under TTC. Based on a new ordinal test of efficiency, NH4 is more likely to Pareto dominate TTC.     

THE MARKET FOR FRANCHISE OPPORTUNITIES*

Franchised distribution accounts for a substantial proportion of retail sales each year. This form of vertical integration is frequently found in the accompaniment of parallel distribution through company-owned establishments. Similarly, franchise contracts are characterized by mixed compensation strategies. This paper contains empirical models of the market for franchise opportunities where incentives for mixed distribution and compensation strategies are evaluated.     

THE CASE FOR REGIONAL POLICIES*

In Britain, as in other countries, we have become acutely aware in recent years of the existence of a 'regional' problem—the problem, that is, of different regions growing at uneven rates; with some regions developing relatively fast and others tending to be left behind. In some ways this problem of fast and slow growing regions has not led to the same kind of inequalities in regional standards of living, in culture or in social structure, in the case of Britain as in some other countries—such as Italy, the United States or France. And in general, the problem of regional inequalities within countries is not nearly so acute as that between the rich and poor countries of the world—with differences in living standards in the ratio of 20:1, or even 50:1, as between the so-called 'advanced' countries and the 'developing' countries. Yet, as investigations by Kuznets and others have shown, the tremendous differences that now divide the rich and poor nations are comparatively recent in origin. They are the cumulative result of persistent differences in growth rates that went on over periods that may appear long in terms of a life-span, but which are relatively short in terms of recorded human history—not more than a few centuries, in fact. Two hundred, or two-hundred-and-fifty years ago, the differences in living standards, or in the 'stage' of both economic and cultural development of different countries, or parts of the globe, were very much smaller than they are today.     

THE DETERMINANTS OF THE QUANTITY‐QUALITY BALANCE IN MONOPOLY*

This paper describes how a monopolist manipulates the balance of quantity and quality in order to increase revenue when its customers treat quantity and quality as substitutes. This ‘skewing’ of quality depends on the characteristics of customer's demand for quality. Customers differ in demand for quality, because they differ in either (i) their preferences and/or (ii) their time cost per unit. The monopolist is constrained to supply the same quality of good to all customers. The price and quality per unit are described under the assumption the monopolist (i) profit maximises; (ii) maximises social welfare subject to a profit constraint. The determinants of the skewing of quantity and quality are found under third‐degree price discrimination and uniform pricing.     

JAPAN: THE CASE FOR A TAYLOR RULE? A SIMPLE APPROACH

Abstract.  In this article I propose two different models for analyzing the conduct of monetary policy, facing certain expectations. The first is a autoregressive model, which implicitly accounts for adaptive expectations, while the second accounts for the rational expectations. I used these models to judge whether or not the Taylor rule can be a good benchmark for the conduct of monetary policy in Japan. The conclusion is that a simple AR model fits the data better than the Taylor rule, and that assuming rational expectations in Japan could be highly misleading, at least since the mid-1990s.     

BENCHMARKING FOR PRODUCTIVITY IMPROVEMENT: A HEALTH‐CARE APPLICATION*

A methodology is developed and applied to compare the performance of publicly funded agencies providing treatment for alcohol abuse in Maine. The methodology estimates a Wiener process that determines the duration of completed treatments, while allowing for agency differences in the effectiveness of treatment, costs of treatment, standards for completion of treatment, patient attrition, and the characteristics of patient populations. Notably, the Wiener process model separately identifies agency fixed effects that describe differences in the effectiveness of treatment (“treatment effects”), and effects that describe differences in the unobservable characteristics of patients (“population effects”). The estimated model enables hypothetical comparisons of how different agencies would treat the same populations. The policy experiment of transferring the treatment practices of more cost‐effective agencies suggests that Maine could have significantly reduced treatment costs without compromising health outcomes by identifying and transferring best practices.