A Principal-Agent Theory of En Banc Review

This paper adds to the existing literature on en banc rehearingsin two ways. First, I incorporate theoretical results from theliterature on Supreme Court certiorari decisions and argue thatthe ideological direction of panel decisions should influencethe probability of en banc rehearing only in conjunction withthe panel's ideological predisposition. Second, I build uponexisting theories of en banc review by incorporating the multiplelevels of the judicial hierarchy into the context in which thecircuit decides to hear a case en banc. From these insights,I develop and test three hypotheses about the determinants ofen banc review. Specifically, I contend that the ideologicalrelationship between a three-judge panel, the full circuit,and the Supreme Court should all interact with the ideologicalorientation of the panel's decision when the circuit decideswhether or not to review the panel en banc. Original data includingall en banc rehearings between 1986 and 1996 are then used totest the theoretical predictions. The empirical analysis providesconsiderable support for the hypotheses. The findings representtwo important advances in the study of the judicial hierarchy:They highlight the strategic interaction between ideologicaldisposition and panel composition in the en banc review processand demonstrate the incentives created by the multiple levelsof the federal judiciary. More broadly, the theory and findingsdeveloped here have implications for strategic auditing in apolitical hierarchy. (JEL K40, D72)     

Dynamic lobbying: Evidence from foreign lobbying in the U.S. Congress

How do interest groups decide which member of Congress to target when decisions are made collectively? Do lobbying strategies change as legislation advances? Answering these questions is challenging due to a lack of systematic observations of lobbying contacts. I answer these questions using a novel data set constructed from reports submitted by lobbyists on behalf of South Korea regarding its free trade agreement with the United States for 10 years. I show that a diverse set of politicians are contacted but the timing, intensity, and strategy of lobbying contacts vary by politicians' institutional positions as well as their predisposed preferences for free trade.     

Dynamic product differentiation strategies: an examination of the interplay of firm and industry characteristics

Technologically dynamic industries are characterised by the availability of ample differentiation opportunities. Implementing an appropriate product differentiation strategy is a critical determinant of entrant success in such industries. Firms typically have to engage in two sequential decisions. They need to first decide whether to differentiate and if they decide to do so, they need to choose between a horizontal and a vertical differentiation strategy. Despite the growing literature on the consequences of product differentiation strategy, limited attention has been paid to ascertaining the determinants of these dynamic decisions. We suggest that a complex interplay of firm-level (firm size and pre-entry experience) and industry (technology regime) characteristics impacts the choice of differentiation strategies. Empirical tests using multinomial logit models on data obtained from a census of all entrants into the personal computer industry between 1974 and 1994 support our theory.     

Directed search with multi-vacancy firms

I construct a directed search model in which firms decide whether to enter a market and how many positions to create. Within this framework, the number of firms and the size of each firm are determined endogenously, wages play an allocative role in the matching process, and the frictions inherent in this process derive from the equilibrium behavior of workers and firms. I characterize the (unique) equilibrium. Comparative statics generate testable implications for cross-sectional variation in matching efficiency, as well as the dynamic behavior of vacancies and unemployment. Moreover, allowing for ex-ante heterogeneity across firms, the model can easily and naturally generate the observed relationship between firm size, wages, profitability, and hiring.     

On the Strategic Use of Representative Democracy in International Agreements

We consider as endogenous the choice of the delegation rule in an international agreement between two countries. We study three potential types of delegation: strong, weak or no delegation, the latter case corresponding to direct democracy. We show that populations decide to bind themselves by delegating the national policy decision-making to a "powerful conservative representative," in order to improve their bargaining position. These noncooperative behaviors of countries when they decide on their delegation rule induce negative political externalities between countries, which cancel the gains achieved by the internalization of economic externalities in the case of political integration. We then examine the consequences of ratification by referendum. We conclude that a Pareto improvement of the international agreement would be to incorporate an ex post referendum.     

The influence of lagged unanticipated money on real variables: A simple illustrative model

The paper extends a simple rational expectations model to allow for the possibility that relative demand shocks are serially correlated, and some suppliers face decision lags so that they must decide what quantity of output to produce some time before they actually produce it. The model implies that current and lagged monetary shocks can have real output effects, and that the coefficients linking output to current and past monetary shocks can exhibit a variety of patterns. I would like to thank C.L.F. Attfield, D. Demery and J. Haskell for their helpful comments, and two anonymous referees for their suggestions on an earlier draft. I am responsible for any errors that remain.     

Budget deficits, capital flows, and long-term interest rates: Cointegration findings for the united kingdom

This study uses cointegration tools to decide whether a long-term relationship exists between budget deficits and nominal long-term interest rates in the United Kingdom, as previous regression estimates have implicitly assumed. Based on maximum eigenvalue, trace, and likelihood ratio tests, as well as two cointegrating vectors, this study finds that a long-term positive relationship exists between the nominal 20-year government bond rate and the central government budget deficit.     

The political economy of public education

I study the relationship between income inequality and public spending in education in a voting model. Voters collectively choose the uniform quality level of public education, the amount of a public good, and the tax rate on labor income. Parents can decide to opt-out of the public education system by purchasing private education at the desired quality level, and children’s expected income is assumed to be increasing in the quality of education. I show that higher income inequality is associated with higher governmental spending in education if and only if the expected marginal returns to education are larger for the children of relatively low income parents. In turn, better public education tends to reduce future inequality. These results are consistent with most findings in the empirical literature about public investment in education. Lastly, I show that for other kind of publicly provided goods, such as health care, the relationship with income inequality exhibits an ambiguous or opposite sign.     

Environmental Taxes and First-Mover Advantages

This paper studies whether governments prefer to be leaders or followers in environmental policies. To analyze this question I assume transboundary pollution and two countries that have to decide whether to set environmental taxes sequentially or simultaneously. When taxes are set sequentially an effect, denoted as the sequential setting effect, arises that raises the equilibrium taxes. I show that whether governments prefer to be leaders or followers in taxes depends on the degree to which environmental pollution spills over to trading partners. When this overspill is low enough, taxes are strategic complements and both the leader and the follower obtain greater welfare than under a simultaneous tax setting. However, the leader country obtains greater welfare than the follower. In this case, governments set taxes sequentially. When the degree to which environmental pollution spills over to trading partners is high enough, taxes are strategic substitutes and governments set taxes simultaneously. In this case, each government wants to avoid becoming the follower in taxes.     

Taxes and female labor supply

The Economic Recovery Tax Act of 1981 and the Tax Reform Act of 1986 changed the U.S. income tax structure in a dramatic fashion. In particular, these two reforms reduced the marginal tax rates for married households. In this paper I investigate what part of the rise in labor force participation of married women between 1980 to 1990 (a rise of 13 percentage points) can be accounted by the changes in taxes. I build an heterogeneous agent model populated by married households. Households differ by age and educational attainment levels of their members and decide whether the second earner, the wife, should participate in the labor market. I select parameter values so that the model economy is consistent with the 1980 U.S. economy in terms of income tax structure, wages (skill premium and gender gap), marital sorting (who is married with whom), and female labor force participation. Using counterfactual experiments I find that 20–24 percent of the rise in married female labor force participation is accounted for by the changes in the income tax structure. Changes in wages account for 62–64 percent, and changes in marital sorting account for 14–16 percent of the rise in the participation rate of married women.     

Does corruption slow down innovation? Evidence from a cointegrated panel of U.S. states

I investigate the long-run relationship between corruption and innovative activity using annual data from 48 contiguous U.S. states between 1977 and 2006. Using U.S. data allows me to work with a panel long enough to exploit time series properties of the data. I use two different measures of innovative activity: one measuring the quantity and the other measuring the quality of the patents granted. I also use two different measures of corruption: one based on the number of corruption convictions, the other based on number of corruption stories covered in Associated Press news wires. Following Pedroni (1999, 2000), I estimate the cointegrating relationship between corruption and innovative activity with Fully Modified Ordinary Least Squares (FMOLS). The results indicate that corruption indeed slows down innovation in the long-run.     

University patenting: patterns of faculty motivations

Few papers address the issue of faculty motivations to patent and none comprehensively investigates why faculties decide not to patent. To fill this gap, I surveyed Italian faculty inventors of university-owned patents (N=208) and non-inventors working in the same disciplines (N=416). Major motivations to patent are prestige/reputation and knowledge exchange. Although universities rely almost exclusively on royalties, I show that researchers are sensitive to diverse incentives, whose importance varies according to both personal characteristics and the context. Surprisingly, patents are not perceived by non-inventors as inappropriate to academic activities or as obstacles to publications and conferences.     

Starting Small and Commitment

I study a model of a long-term partnership with two-sided incomplete information. The partners jointly determine the stakes of their relationship and individually decide whether to cooperate with or betray each other over time. I characterize the extremal—interim incentive efficient—equilibria. In these equilibria, the partners generally “start small,” and the level of interaction grows over time. The types of players separate quickly. Further, cooperation between “good” types is viable regardless of how pessimistic the players are about each other initially. The quick nature of separation in an extremal equilibrium contrasts with the outcome selected by a strong renegotiation criterion (as studied in Watson (1999, J. Econ. Theory85, 52–90). Journal of Economic Literature Classification Numbers: C72, C73, D74.     

The possibility of judgment aggregation on agendas with subjunctive implications

The new field of judgment aggregation aims to find collective judgments on logically interconnected propositions. Recent impossibility results establish limitations on the possibility to vote independently on the propositions. I show that, fortunately, the impossibility results do not apply to a wide class of realistic agendas once propositions like “if a then b” are adequately modelled, namely as subjunctive implications rather than material implications. For these agendas, consistent and complete collective judgments can be reached through appropriate quota rules (which decide propositions using acceptance thresholds). I characterise the class of these quota rules. I also prove an abstract result that characterises consistent aggregation for arbitrary agendas in a general logic.     

Using Credible Advice to Overcome Framing Effects

A framing effect occurs when different, but logically equivalent,words or phrases (e.g., 10% employment or 90% unemployment)cause individuals to alter their decisions. Demonstrations offraming effects challenge a fundamental tenet of rational choicetheory and suggest that public opinion is so malleable thatit cannot serve as a useful guide to policymakers. In this articleI argue that most previous work overstates the ubiquity of framingeffects because it forces experimental participants to makedecisions in isolation from social contact and context. I presenttwo experiments where I show that some widely known framingeffects greatly diminish and sometimes disappear when participantsare given access to credible advice about how to decide. I discussthe implications of my findings for rational choice theory,and public opinion and public policy.     

On economic applications of the genetic algorithm: a model of the cobweb type

This paper explores the idea of using artificial adaptive agents in economic theory. In particular, we use Genetic Algorithms (GAs) to model the learning behavior of a population of adaptive and boundedly rational agents interacting in an economic system. We analyze the behavior of a GA in two versions of a model of the cobweb-type, one in which firms make only quantity choices, and the other one in which firms first decide to exit or to stay in the market, and subsequently decide how much to produce. We present simulations with different coding schemes and interpret the rather surprising differences between the results for different setups by employing the mathematical theory for GAs with state-dependent fitness functions. In particular, we explain the relationship between coding and convergence properties of GAs.     

Use of borrowed start-up capital and micro enterprises in Mexico: existence of liquidity constraints

Using the National Survey of Micro enterprises (ENAMIN, Encuesta Nacional de Micronegocios) data I test for the presence of liquidity constraints for obtaining start-up capital in Mexico’s credit markets (formal and informal). I use the bivariate probit model with partial observability to recognize two important decisions in the credit allocation process: first, whether an owner of a micro enterprise wants to apply start-up loan and, second, whether financial institutions decide to provide or not to provide the loan. Finally, I compare the results from this model to those of a simple probit model that looks at whether a micro enterprise owner gets funding or not (i.e. the probit model implicitly assumes that no liquidity constraints exist). The findings of this study show that there is substantial heterogeneity in the socioeconomic background of borrowers, as well as in the sources for start-up capital employed by micro enterprises in Mexico. Moreover, there is clear evidence of liquidity constraints in the market for start-up capital that could hinder the creation and growth of small enterprises. Applying the findings of the study, policy makers could fundamentally increase the effectiveness in establishing an economic environment that fosters growth.

Dynamic adjustment of labor allocation between collective,state, or cooperative farming and private farming in a planned economy

How collective and state farm workers dynamically adjust their labor allocations between farm and private plot is analyzed by adopting a behavioralist (as opposed to a marginalist) approach. Farm workers shift their labor allocations for a given season toward that operation which rewarded them with a better rate of return during the preceding season. This approach is then applied to a hypothetical case where the farm is a cooperative venture between state and farm workers, and farm workers can decide to work exclusively on private plots, or on the farm, or divide their labor in some way between these two operations.     

ON THE USE OF FIRM FIXED EFFECTS AS A PRODUCTIVITY MEASURE FOR ANALYZING LABOR MARKET MATCHING

The present note evaluates the performance of firm fixed effects as a productivity measure when identified from wage regressions with two‐way fixed effects in matched employer‐employee data. This setting is frequently applied to study the matching between workers and firms. Exploiting wage and production data from a large administrative German data set, I find that the correlation between firm fixed effects (FFE) and total factor productivity is close to zero. Once TFP is used, the matching pattern is positive assortative, whereas the two‐way fixed effect technique yields the opposite result.     

Strategic Delegation and the Shape of Market Competition

What shape can we expect market competition to exhibit? This question is addressed in the present paper. Firms are allowed to choose whether to act as quantity or price setters, whether to move early or delay as long as possible at the market stage, and whether to be entrepreneurial or managerial. Moreover, firms can endogenously determine the sequence of such decisions. It is shown that in correspondence of the (unique) subgame perfect equilibrium of the game, all firms first decide to delay, then to act as Cournot competitors, and finally stockholders decide to delegate control to managers. Hence, sequential play between either managerial or entrepreneurial firms, as well as simultaneous play between entrepreneurial firms, are ruled out.