The behavioral foundations of Austrian economics

Behavioral and experimental economics present challenges to the neoclassical theory of individual behavior, which is based on individuals making choices within the framework of utility functions that are assumed to have certain well-defined characteristics. Results in behavioral and experimental economics have shown that it is common for individual behavior to systematically deviate from the neoclassical axioms of utility maximization. Austrian economics is also based on axiomatic theories of utility maximization, but the assumptions underlying utility-maximizing behavior are much weaker in the Austrian approach. As a result, they have more solid behavioral foundations and are less subject to challenge by the empirical findings of behavioral and experimental economics. Neoclassical policy conclusions are often overly strong because of its behavioral foundations which are challenged by behavioral and experimental economics and are often misleading because of the comparative static nature of neoclassical welfare economics. For purposes of policy analysis, the Austrian approach provides better insights because of its more realistic behavioral foundations.     

International environment conventions: The case of uniform reductions of emissions

Several serious environmental problems have a global character. International cooperation to reduce emissions for this type of problems often takes the form of an agreement among the cooperating countries to cut back emissions by a uniform percent rate compared with some base year. This type of agreements has two disadvantages. In the first place, it is well known from environmental economics that equal percentage reductions of emissions from different sources usually gives an inefficient outcome, in the sense that the same environmental goals could be achieved at lower costs through a different distribution of emission reductions. A second problem with agreements of equal percentage reductions is that not all countries will find it in their interest to participate in such agreements. In the paper, it is assumed that the set of countries which participate in an agreement is endogenously determined, with a country participating in an agreement provided that this makes the country better off than it would have been in a situation without any agreement. The agreement among the participating countries is assumed to be a uniform percentage reduction of their emissions. The countries have different opinions about what this uniform percentage should be. In the paper, it is assumed that the outcome is determined by the median country of the participating countries. The assumptions above lead to a particular equilibrium, in which some but not all countries cooperate. The equilibrium reduction of emissions for the cooperating countries is also derived. This equilibrium compared with the first best optimum within the context of simple numerical example.Presented at the conference Environmental Cooperation and Policy in the Single European Market, Venice, April 16–20, 1990. The paper is part of the research project Energy and Society at the Centre for Research in Economics and Business Administration (SNF), Oslo. I am grateful to Ignazio Musu and Henk Folmer for useful comments on an earlier version of the paper.     

Implications of Endogenous Group Formation for Efficient Risk-Sharing

The existing literature on sub-game perfect risk-sharing suffers from a basic inconsistency. While a group of size n is able to coordinate on a risk-sharing outcome, it is assumed that deviating subgroups cannot. I relax this assumption and characterise the optimal contract among all coalition-proof history-dependent contracts. This alters the predictions of the standard dynamic limited commitment model. I show that the consumption of constrained agents depends on both the history of shocks and its interaction with the current income of other constrained agents. From this, I derive a formal test for the presence of endogenous group formation under limited commitment.     

The Cambridge capital controversies: contributions from the complex plane

This article takes a fresh look at reswitching. When two production techniques are compared, reswitching occurs when one technique is more viable than the other at a high interest rate, switches to being less viable at a lower rate, and reswitches to being more viable again at even lower rates. For some, reswitching undermines the foundations of neoclassical economics because it belies the idea of a monotonic relationship between relative capital values and factor price. The reswitching equation is an nth degree polynomial having n roots, implying the existence of n interest rates. Conventional analysis uses one interest rate but ignores the others. We argue that the others should not be ignored because all rates are determined simultaneously, and when one rate shifts, all rates shift. We demonstrate that the Samuelson reswitching model possesses a ‘dual’ expression containing every interest rate, the rates being compressed into a composite, interest-rate variable, thereby establishing a role for interest rates previously thought lacking in use and meaning. The relationship between this composite interest rate and capital value does not exhibit reswitching. The notion of a composite interest rate has implications for economics beyond reswitching.     

Whither Monetary Economics?

I argue that monetary economics should be pursued by applying implementation theory to models which contain explicit frictions that make money essential. The argument has two parts. First, I argue that models in which real balances are assumed to be productive—models with money in utility or production functions or with cash-in-advance constraints—contain hidden inconsistencies. Second, I argue that the approach advocated is capable of providing new insights about some of the main issues in monetary economics: the effects of monetary shocks, the welfare cost of inflation, and the roles of inside and outside money.     

Semiparametric Difference-in-Differences Estimators

The difference-in-differences (DID) estimator is one of the most popular tools for applied research in economics to evaluate the effects of public interventions and other treatments of interest on some relevant outcome variables. However, it is well known that the DID estimator is based on strong identifying assumptions. In particular, the conventional DID estimator requires that, in the absence of the treatment, the average outcomes for the treated and control groups would have followed parallel paths over time. This assumption may be implausible if pre-treatment characteristics that are thought to be associated with the dynamics of the outcome variable are unbalanced between the treated and the untreated. That would be the case, for example, if selection for treatment is influenced by individual-transitory shocks on past outcomes (Ashenfelter's dip). This article considers the case in which differences in observed characteristics create non-parallel outcome dynamics between treated and controls. It is shown that, in such a case, a simple two-step strategy can be used to estimate the average effect of the treatment for the treated. In addition, the estimation framework proposed in this article allows the use of covariates to describe how the average effect of the treatment varies with changes in observed characteristics.     

Complexities due to sluggish expansion of backstop technologies

This paper considers an economy using a technology that adds to a stock of pollution. Examples that come to mind are SO₂-emissions from burning coal accumulating in the soil and CO₂-emissions from fossil-energy use which are retained in the atmosphere. The stock of pollutants is subject to natural decay, albeit not necessarily of the simple often assumed linear type. In addition, a clean or so-called backstop technology is available that requires costly investments but is characterized by low variable costs (e.g., solar energy or wind power). The costly investments imply a slow build-up of the capacity of the backstop. On the modelling side, this is an essential extension of most of the literature that considers the unrealistic case where a backstop is instantaneously available. The second extension the present paper makes is to consider not only the planning problem but also the competitive outcomes. One of the interesting results is that stable limit cycles may characterize the socially optimal long-run outcome as well as the competitive equilibrium. In a competitive equilibrium pollution-control policy is not necessarily optimal in the sense of corresponding with the social optimum. Although cycling can occur in a competitive equilibrium, just as in the social optimum, relaxation of the control increases the set of parameter values for which complex and unstable behavior arises.     

Liquidity shocks: A new solution to the forward premium puzzle

The frequent empirical failure of uncovered interest rate parity raises a question that has not been definitively answered: why do predictable excess returns on currencies persist in competitive currency markets? Supported by data from nine major currencies for 1978:08–2019:09, I provide a novel resolution to this enduring forward premium puzzle by building on the financial economics literature that explores the economic implications of limited access to capital markets. A liquidity shock, or the urgent demand for liquidity by credit-constrained arbitragers liquidating bond holdings, causes losses from sudden drops in bond prices. Arbitragers require a liquidity premium to compensate for potential losses that vary directly with the interest rate. It is this liquidity premium that explains persistent excess returns on currencies. I argue for policies favoring a low interest rate environment and macroprudential controls that ease liquidity constraints to increase the efficiency of international capital markets by reducing the liquidity premium.     

CREDIBILITY AND RENEGOTIATION OF OUTCOME FUNCTIONS IN IMPLEMENTATION*

Recent research has been motivated by the fact that the outcome function in implementation may not be “credible”. On the one hand, the players may try to renegotiate the final outcome, if there is another outcome which they prefer. On the other hand, the “social planner” may have an incentive not to implement the finaloutcome, if there is another outcome which he prefers. I show that in the exchange economy, the first problem is not serious. a planner with unlimited commitment power can design a “collusion-proof” mechanism, which is stable against all sorts of group devciation, including the ex post trade of goods among the agents. I will, However, argue tha hte second problem (the planner's commitment problem) can be very serious.     

The high/low divide: Self-selection by values in auction choice

Most prior theoretical and experimental work involving auction choice has assumed bidders find out their value after making a choice of which auction to enter. We examine whether or not bidders knowing their value prior to making a choice of which among multiple alternative auction formats to enter impacts their choice decision and/or the outcome of the auctions. The results show a strong impact on auction choice. Subjects with low values choose the first price sealed bid auction more often while subjects with high values choose the ascending auction more often. The number of bidders in each auction, revenue, efficiency and average bidder surplus all end up equalized.     

市场结构及市场效率的实验经济学综述

实验经济学对于市场效率和市场结构的研究最早在1948年由Chamberline开创。经济学家经过大量实验发现,不但市场前提假设关系到市场均衡结果及效率,交易制度也会对均衡产生重大影响。并且,不符合完全竞争市场假设的市场结构也有可能实现资源有效配置。本文对实验经济学关于市场结构及市场效率的相关研究进行了回顾与综述,并重点阐述其对完全竞争市场的研究,以揭示交易制度及市场前提对市场效率的综合影响。本文得到的结论显示：即使没有达到完全竞争市场的严格假设,也可能达到完全竞争市场的均衡状态,因而达到最优的配置效率。并且,对于市场结构——完全竞争、垄断和寡头垄断市场的实验研究也表明,并不是如传统古典经济学模型所言：只有完全竞争的市场结构才能够达到资源的有效配置,垄断市场效率也并不是完全与模型所言一致。而且不同于古典经济学,实验经济学将交易制度看作外生变量,认为其对最终市场效率也会产生很大影响。     

Scientific misconduct and research ethics in economics: an introduction

Abstract

Since the screening of Inside Job in movie theatres around the world in 2010, research integrity in economics has been questioned by scholars and public intellectuals. Prestigious economists and policy makers are accused of conflicts of interest while prominent economists are charged with plagiarism and self-plagiarism. Some of these economists replied to accusations about themselves while many others have preferred not to respond at all. These days, economists hear the following question more often than before: “what is wrong with economics?”     

'Independence' and the founding of the Federal Reserve

The Federal Reserve is ‘independent’, but contrary to opinions often expressed, it was not intended by its creators to be free from political control, although others involved in the debate over its establishment hoped that it would be. ‘Independence’ was independence from banking interests, not government. A gradual development of independence preceded a much greater acquisition of power during the Reagan Presidency. The lessons of history include the fact that with few changes in the Federal Reserve Act, its position in the American government has been dramatically transformed. Consequently, contrary to common practice in the economics literature, the ‘independence’ (from government) of a central bank evidently cannot be measured by tabulating characteristics of its statutes.     

What norms trigger punishment?

Many experiments have demonstrated the power of norm enforcement—peer monitoring and punishment—to maintain, or even increase, contributions in social dilemma settings, but little is known about the underlying norms that monitors use to make punishment decisions, either within or across groups. Using a large sample of experimental data, we empirically recover the set of norms used most often by monitors and show first that the decision to punish should be modeled separately from the decision of how much to punish. Second, we show that absolute norms often fit the data better than the group average norm often assumed in related work. Third, we find that different norms seem to influence the decisions about punishing violators inside and outside one’s own group.     

The spatial empirical Bayes predictor of the small area mean for a lognormal variable of interest and spatially correlated random effects

The standard small area estimator, the empirical best linear unbiased predictor (EBLUP), estimates small area parameters by way of linear mixed models. The EBLUP assumes normal and independent random small area effects as well as normal and independent random sampling errors. Under these assumptions, the variable of interest also follows a normal distribution. In practice, however, the above assumptions are often violated. The variable of interest is often non-normal and highly skewed, and the small areas are frequently spatially dependent. In this paper, we propose the spatial empirical Bayes predictor (SEBP) of the small area mean of a positively skewed variable of interest in the presence of spatial dependence among the random small area effects. We assume that the variable of interest follows a normal distribution after a log transformation and that its log transform is linked to some auxiliary variables by a nested error regression model. The SEBP is derived under the log-transformed nested error regression model. By way of simulation, we show that compared to its alternatives, i.e., the direct estimator which is solely based on the survey data for the small area under study, the EBLUP which does not take into account spatial dependence and skewness, the empirical Bayes predictor which takes into account skewness but not spatial dependence among the small areas, the SEBP has the smallest average relative bias and average relative root-mean-squared error for various combinations—though not all—of skewness and spatial correlation.     

马克思企业理论和新制度经济学企业理论的比较

本文从企业的产生、企业的边界、企业的内部控制,以及分配三个方面对马克思主义经济学和新制度经济学的企业理论进行比较。马克思主义经济学用历史唯物主义方法将企业看作资本主义经济运行过程中的一个环节,揭示了企业产生和发展的原因,并精辟地分析了隐藏在物的背后的两大阶级之间的矛盾对立关系;新制度经济学采用逻辑实证的方法对企业进行分析,认为交易费用是决定企业产生及规模变化的重要因素,企业内部的控制和分配关系是由效率来决定的——这种将所有生产要素都看作是客观资源的分析方法,掩盖了利益分配的实质,从而忽视了人的主体性因素。     

Interest rate,size and book-to-market effects in Australian financial firms

The Fama–French three-factor model (1993) has been extensively used to study the pricing of nonfinancial stocks. This study provides the first examination of the pricing of Australian financial stocks using the Fama–French framework. The four-factor model (market, size, book-to-market and momentum) augmented with the level, slope and curvature of the interest rate term structure is used to examine the pricing of Australian financial stocks. The interest rate factors have not been previously considered for pricing Australian stocks within the Fama–French framework. Consistent with US evidence, we use a system-based estimation to show that the size and book-to-market factors are not priced in the cross section of the equity returns of Australian financial stocks. Momentum and term spread are priced in the equity returns of both financial and nonfinancial stocks. These findings are robust to the inclusion of control variables such as default spread, the inflation rate and a dummy variable for the global financial crisis.     

电力市场远期合同交易的实验分析

由于电力商品的特殊性,电力市场中的各参与者面临前所未有的风险。远期合同交易的引入不仅可以锁定电价以回避价格风险,还可以对市场成员的交易策略产生影响,抑制市场力和促进竞争。笔者认为实验经济学的方法在电力市场问题的研究中有着广阔的应用前景。     

Buyer groups as strategic commitments

Buyer cooperatives, buyer alliances, and horizontal mergers are often perceived as attempts to increase buyer power. In contrast to prior research emphasizing group size, I show that even small buyer groups composed of buyers with heterogeneous preferences can increase price competition among rival sellers by committing to purchase exclusively from one seller. Without transfer payments, at least one buyer group exists for each pair of sellers and buyer groups membership is chosen to achieve indifference between the two sellers. With transfer payments, and just two sellers, the grand coalition is a coalition-proof subgame perfect equilibrium (CP-SPNE), though equilibria with arbitrarily many buyer groups also exist. With three sellers (and with more sellers when the distribution of buyers is symmetric), a CP-SPNE always exists, all coalition-proof equilibria are payoff equivalent and have at least one buyer group for each pair of firms, so the grand coalition is not an equilibrium.