Path dependence,self-fulfilling expectations,and carbon lock-in

Growing under the incumbent dirty regime might generate inertia against switching to a clean alternative and lead to the carbon lock-in. I analyze the economics of carbon lock-in through the lens of path dependence and self-fulfilling expectation. The incumbent dirty regime, as the first mover, accumulates an installed base of household users during early lead periods. The installed base generates an effect of path dependence that incentives upcoming households to keep on joining the incumbent dirty regime rather than switch to the clean alternative. Switching could be an expectation-driven selection outcome if expectations are formed about an expanding clean regime which outweighs the path dependence effect. Switching is a welfare-improving outcome if welfare gains by upcoming households switching to the clean regime offset welfare losses by installed-base households locked in the dirty one.     

A theory of political cycles

We study how the proximity of elections affects policy choices in a model in which policymakers want to improve their reputation to increase their reelection chances. Policymakers' equilibrium decisions depend on both their reputation and the proximity of the next election. Typically, incentives to influence election results are stronger closer to the election (for a given reputation level), as argued in the political cycles literature, and these political cycles are less important when the policymaker's reputation is better. Our analysis sheds light on other agency relationships in which part of the compensation is decided upon infrequently.     

Crisis and self-fulfilling expectations: The Turkish experience in 1994 and 2000–2001

In this paper we analyze the role of fundamentals and self-fulfilling expectations in the crisis episodes of Turkey in 1994 and 2001. The question is how much of the occurrence of a crisis can be attributed to market expectations and how much to fundamentals. The model is estimated using a Markov switching framework in which the devaluation expectations affect crisis probability via three different specifications. Such a framework which allows for sunspots performs better than a purely fundamental-based model. The study shows that besides the fundamentals in the economy, shifts in agents' devaluation expectations have played a crucial role and that a Markov switching model with constant transition probabilities provides better estimates for the Turkish currency crises.     

A political economy theory of the soft budget constraint

Why do soft budget constraints exist and persist? In this paper we argue that the prevalence of soft budget constraints can be best explained by the political desirability of softness. We develop an infinite horizon political economy model where neither democratic nor autocratic politicians can commit to policies that are not ex post optimal. We show that because of the dynamic commitment problem inherent in the soft budget constraint, politicians can in essence commit to make transfers to entrepreneurs which otherwise they would not be able to do. This encourages such entrepreneurs to support them politically. Though the soft budget constraint may induce economic inefficiency, it may be politically rational because it influences the probability of political survival. In consequence, even when information is complete, politicians may fund bad projects which they anticipate they will have to bail out in the future. We show that, maybe somewhat surprisingly, dictators who are less likely to lose power, are more likely to use the soft budget constraint as a strategy to gain political support.     

An axiomatic theory of political representation

We discuss the theory of gerrymandering-proof voting rules. Our approach is axiomatic. We show that, for votes over a binary set of alternatives, any rule that is unanimous, anonymous, and gerrymandering-proof must decide a social outcome as a function of the proportions of agents voting for each alternative, and must either be independent of this proportion, or be in one-to-one correspondence with the proportions. In an extended model in which the outcome of a vote at the district level can be a composition of a governing body (with two possible parties), we discuss the quasi-proportional rules (characterized by unanimity, anonymity, gerrymandering-proofness, strict monotonicity, and continuity). We show that we can always (pointwise) approximate a single-member district quota rule with a quasi-proportional rule. We also discuss a more general environment, where there may be more than two parties.     

Government guarantees and self-fulfilling speculative attacks

We develop a model in which government guarantees to banks’ foreign creditors are a root cause of self-fulfilling twin banking-currency crises. Absent guarantees, such crises are not possible. In the presence of guarantees banks borrow foreign currency, lend domestic currency and do not hedge the resulting exchange rate risk. With guarantees, banks will also renege on their foreign debts and declare bankruptcy when a devaluation occurs. We assume that the government is unable or unwilling to fully fund the resulting bailout via an explicit fiscal reform. These features of our model imply that government guarantees lead to self-fulfilling banking-currency crises.     

Can debt crises be self-fulfilling?

Several papers argue that debt crises can be the result of self-fulfilling expectations that no one will lend to a country, triggering default and rationalizing the refusal to lend. I show these coordination failures can be eliminated by a combination of state-contingent securities and a mechanism that allows investors to promise to lend only if enough other investors do so as well. This suggests that runs on the debt of a single borrower (such as the government) can be eliminated and that self-fulfilling features are more plausible when externalities among many decentralized borrowers allow for economy-wide debt runs to occur.     

Foundational explorations for a normative theory of political economy

I set out an individualistic and pragmatic choice framework for a normative theory of political economy, and argue that, given pluralism with respect to individual ends, a consensus on any political or economic institution presupposes that it is perceived to serve as a public means to private ends. Concerning the crucial question of the distribution of the benefits that political and economic cooperation can make possible, I argue that the various models typically employed—those pertaining to competitive market interaction, decision making under uncertainty, bargaining theory, and social choice theory—fail to provide for a stable consensus, i.e., one that is resistant to non-compliance and renegotiation. Since, however, such instabilities are mutually disadvantageous, these approaches fail to establish how rational individuals can capture all the gains that cooperation makes possible. Appealing to a modified version of the social-psychological construction that Rawls introduces in chapter 8 ofA Theory of Justice I argue that stability is a function of a perceived sense of mutual concern. I conclude by arguing that Rawls own egalitarian/efficiency principle gives natural expression to such a concern, and thus can serve as the object of a stable consensus.     

Democracy as a middle ground: A unified theory of development and political regimes

Although many of the worst performing countries over the post-World War II period were autocracies, many of the best were likewise autocratic. At the same time, no long-lived autocracy currently is rich whereas every long-lived democracy is. This paper proposes a theory to account for these observations that rests on the ideas that autocrats are heterogeneous and that elites experience lower land rents with industrialization. In a model calibrated to Britain's development, we show that elites democratize society only after the economy has accumulated enough wealth, and that the democratization date depends importantly on the history of rulers and distribution of land.     

The expectations theory of the term structure: Evidence from inflation forecasts

This paper tests the joint hypothesis of rational expectations and the expectations theory of the term structure using the Livingston survey data on price inflation forecasts. For a variety of sample periods, the paper presents evidence that the data are consistent with the theory. Since inflation forecasts, unlike interest rates, are not linked to specific underlying financial assets, the relationship between longterm and short-term inflation forecasts should not embody risk premia. This paper's findings therefore lend support to the view that a time-varying risk premium is needed to explain the observed term structure of interest rates.     

On the self-fulfilling prophecy of changes in sovereign ratings

We empirically investigate the dynamic interactions between sovereign ratings and the macroeconomic environment using a Panel VAR on annual data for European countries from 1996 to 2013. Our results provide evidence for a significant two-way interaction between the macroeconomic environment and changes in sovereigns' ratings. Thus, rating changes are able to exacerbate a country's boom–bust cycle.     

A dynamic model of expectations equilibrium

This paper describes a dynamic information adjustment process which achieves (rational) expectations equilibria for stochastic exchange environments. An informational temporary equilibrium is an exchange equilibrium in which agents' expectations are conditioned on their initial information and market data generated in previous informational temporary equilibria. An equilibrium is a temporary equilibrium which reveals no further information. This process leads to an equilibrium even when the data observed by agents is insufficient to permit the existence of an expectations equilibrium.     

A general hypothesis of aggregated expectations

The aggregated expectations hypothesis, described here in full for the first time, offers a new way of examining likely future outcomes based upon the most important contributor—expectations—to the individual decisions which aggregate to create these final macro-outcomes. It also offers more powerful actors, especially governments, a new tool for influencing some of those future outcomes. The core concept is that the future outcome of an issue, economic or political, will be largely determined by the expectations of those in the population affected whose aggregated individual decisions will shape that outcome.     

Estimation of the specification error in the expectations theory of the term structure

This paper tackles the issue of the procyclicality of the real wage. We present a dynamic relationship between real wages and employment consistent with the long-run stationary equilibrium using a cointegrated VAR model. We find that wages are anticyclical and that a negative relationship between real wages and employment is necessary to achieve an economically identifiable stationary long run solution. The contentiousness of the topic does not appear so important once we recall some measurement issues and economic features of the Italian labour market.     

Financial expectations and the ‘left-right’ political value scale: Testing for the POUM hypothesis

Using a uniquely defined indicator of political ideology we test whether expectations of future financial well-being have an effect on an individual’s position on the political ‘left-right’ spectrum. We find evidence of a significant “prospect of upward mobility” effect.     

政治理论教学中游戏式教学探析

在新世纪,政治理论教学作为院校思想政治建设的重要环节,缺乏吸引力,教学效果不佳。游戏式教学法能够营造出良好的教学氛围,激发学生强烈的求知欲和兴趣。在政治理论课上采用游戏教学法,可以提高政治理论课的教学质量,增强教学效果。     

Minimum investment requirement,financial market imperfection and self-fulfilling belief

We develop a model in which a strategic complementarity in saving decisions arises due to a minimum investment requirement and financial market imperfection. We explore the role of self-fulling beliefs in determining the long run dynamics. The model exhibits a wide range of dynamic phenomena such as a poverty trap, a big push and a sunspot equilibrium, depending on the level of financial market imperfection. They account for excessive volatility and a sudden change in the saving rate and its macroeconomic consequences without any shocks to fundamentals.