Decreasing marginal impatience in a two-country world economy

By using a two-country model with endogenous time preference, this paper examines the dynamic implication of decreasing marginal impatience (DMI). To ensure stability, we assume that one country has DMI whereas the other has increasing marginal impatience (IMI). The resultant equilibrium dynamics differ from what can be inferred from the analysis of the standard IMI model (e.g., Devereux and Shi in J Int Econ 30:1–25, 1991). An increase in fiscal spending, in either country with DMI or IMI, has always contrasting long-run effects on domestic and foreign consumption and hence on domestic and foreign welfare; and the same policy definitely raises the interest rate in the long run.     

The effect of labor market monopsony on economic growth

In this endogenous growth model, a minimum efficient scale of production and workers’ home-to-work travel costs combine to give firms monopsony power, and this monopsony power leads to slower growth. Monopsony drives the wage below the marginal product of labor. This lower wage leads to lower investment in human capital and thereby to a lower growth rate. This makes investment in human capital – and therefore the growth rate – suboptimal. We provide evidence from a cross-country panel to support our model: Urbanization, which we assume is determined by a country’s exogenous population density and cropland area, positively impacts the wage share of output; the wage share positively impacts educational attainment; higher-income countries have higher wage shares; and within-country upticks in the wage share have a positive lagged effect on the growth rate.     

Limited asset markets participation, monetary policy and (inverted) aggregate demand logic

This paper incorporates limited asset markets participation in dynamic general equilibrium and develops a simple analytical framework for monetary policy analysis. Aggregate dynamics and stability properties of an otherwise standard business cycle model depend nonlinearly on the degree of asset market participation. While ‘moderate’ participation rates strengthen the role of monetary policy, low enough participation causes an inversion of results dictated by conventional wisdom. The slope of the ‘IS’ curve changes sign, the ‘Taylor principle’ is inverted, optimal welfare-maximizing discretionary monetary policy requires a passive policy rule and the effects and propagation of shocks are changed. However, a targeting rule implementing optimal policy under commitment delivers equilibrium determinacy regardless of the degree of asset market participation. Our results may justify Fed's behavior during the ‘Great Inflation’ period.     

A cake for Cournot

A cake division mechanism is presented that is equivalent in terms of the size of the pieces of the cake n players’ receive in equilibrium to the quantities that n firms in a Cournot oligopoly supply in equilibrium. This mechanism extends to equivalence between cake division and Nash’s ‘divide the dollar’ game.     

Tobin's q, investment, and the endogenous adjustment of financial structure

Should q theory be modified to take account of financial structure? This paper analyzes a general equilibrium q model where financial structure affects firm value. Agency costs and taxes combine to yield an interior solution for the endogenous debt–equity ratio. Although q is still a ‘sufficient statistic’ for investment, the endogenous adjustment of financial structure alters the relation between the interest rate and investment. In this model an increase in the corporate tax rate could either raise or lower the steady-state capital stock. Furthermore, both q and investment could jump in opposite directions to that of their steady-state values.     

The optimality of optimal punishments in Cournot supergames

The result of Colombo and Labrecciosa [Colombo, Luca and Labrecciosa, Paola (2006). ‘The suboptimality of optimal punishments in Cournot supergames’, Economics Letters 90, pp. 116–121.] that optimal punishments are inferior to Nash-reversion trigger strategies with decreasing marginal costs is shown to be due to the output when a firm deviates from the punishment path becoming negative.     

Wealth and the capitalist spirit

The wealth distribution in the U.S. is more unequal than either the income or earnings distribution, a fact current models of saving behavior have difficulty explaining. Using Max Weber’s [Weber, M. (1905). The Protestant Ethic and the Spirit of Capitalism. Charles Scribners’ and Sons (1958 translated edition)] idea that individuals may have a ‘capitalist spirit’, I construct and simulate a model where individuals accumulate wealth for its own sake rather than as deferred consumption. Including capitalist spirit preferences in a simple life cycle model, with no other modifications, generates a skewness of wealth consistent with that observed in the U.S. economy. Furthermore, capitalist spirit preferences provide a way to generate decreasing risk aversion with increases in wealth without resorting to idiosyncratic rates of time preference.     

Consumption externality, efficiency and optimal taxation in one-sector growth model

In an economy with consumption externalities, existing studies find that a competitive equilibrium is efficient in the long run and remains efficient in transitions if preferences are homothetic. This paper revisits the efficiency issue in an otherwise standard one-sector growth model where consumption externalities affect a utility via their effects on the time preference. We find that even if preferences are homothetic, the externality changes the marginal rate of substitution between now and future and leads to a disparity in the intertemporal elasticity of substitution between the centrally planned economy and a decentralized economy. As a result, a competitive equilibrium is inefficient in transition dynamics. We characterize an optimal tax/subsidy structure that enables the allocation in a decentralized economy to replicate the social optimum.     

Simple sequencing problems with interdependent costs

In this paper we analyze simple sequencing problems under incomplete information and interdependent costs. We prove the necessity of concave cost function for implementability of such problems. Implementability means that one can achieve aggregate cost minimization in ex-post equilibrium. We also show that simple sequencing problems are implementable if and only if the mechanism is a ‘generalized VCG mechanism.’ We then consider first best implementability, that is implementability with budget balancing transfer. We prove that for implementable n agent simple sequencing problems, with polynomial cost function of order (n−2) or less, one can achieve first best implementability. Finally, for the class of implementable simple sequencing problems with “sufficiently well behaved” cost function, this is the only first best class.     

Self-fulfilling patience

This paper explores macroeconomic implications of investment in patience in a standard neoclassical growth model with Becker-Mulligan endogenous time preferences. The endogenous discount rate acts as a new margin for inter-temporal decisions, in addition to the standard margin that hinges on the marginal return of capital. This time preference margin alters the equilibrium dynamics and stability of the neoclassical growth model substantially. When the discount rate is positive, there may exist multiple steady states that are either saddle-point stable or unstable. When the discount rate is negative, the unique steady state is locally indeterminate due to self-fulfilling patience investment. Interestingly, the existence of the local indeterminacy does not need any externality. When the discount rate is zero, various types of bifurcations can happen, leading to rich equilibrium dynamics such as limit cycles and chaos. We show that opening up the closed economy can cause aggregate instability.     

A general equilibrium analysis of financial regulation

This paper utilizes a general equilibrium approach to investigate the factor returns and output effects on a regulated and unregulated sector from imposition of a rate of return on investment regulatory constraint. The results differ from those of the ‘traditional’ partial equilibrium model of the regulated firm as originally developed by Averch and Johnson (AJ). The differences are explained by the fact that the general equilibrium approach assumes the existence of efficient capital markets whereas the AJ approach does not. Introduction of the competitive capital market framework in the study of financial regulation through the general equilibrium methodology is this paper's major contribution.     

A Monte Carlo study on the pitfalls in determining deterministic components in cointegrating models

Recently the use of the so-called ‘Pantula principle’ has been suggested as a means of determining deterministic components in cointegrating models (see Ahking in Journal of Macroeconomics 24, 2002, and Hatemi-J in Economic Modelling 19, 2002). Moreover, the procedure is suggested in the widely used CATS in RATS program (see [Hansen, H., Juselius, K., 1995. CATS in RATS. Estima, United States]). In this paper, we examine, by means of Monte Carlo simulation, the properties of the ‘Pantula principle’. We investigate the five models contained within the Johansen methodology and find that the ‘Pantula principle’ is heavily biased towards choosing the model with an unrestricted constant when the model with a restricted trend is the true one. We suggest a modification that reduces this bias to an important extent.     

Happiness, freedom and control

How do people value freedom of choice? Drawing on economics and psychology the paper provides an hypothesis and empirical evidence on how individuals may value freedom of choice and derive utility from it. It is argued that the degree of perceived control that individuals have over choice – a construct known as the locus of control in psychology – regulates how we value freedom of choice. People who believe that the outcome of their actions depends on internal factors such as effort and skills (the ‘internals’) have a greater appreciation of freedom of choice than people who believe that the outcome of their actions depends on external factors such as fate or destiny (the ‘externals’). We find some evidence in support of this hypothesis using a combination of all rounds of the World and European Values Surveys. A variable that measures freedom of choice and the locus of control is found to predict life satisfaction better than any other known factor such as health, employment, income, marriage or religion, across countries and within countries. We show that this variable is not a proxy of happiness and measures well both freedom of choice and the locus of control. ‘Internals’ are found to appreciate freedom of choice more than ‘externals’ and to be happier. These findings have important implications for individual utility, social welfare and public policies.     

Asset ownership and market structure in oligopoly: Further results

How does the sale of assets from a small firm to a large firm affect the equilibrium price in oligopoly? Using the ‘cross-sectional differentiation’ technique introduced by Farrell and Shapiro (Rand Journal of Economics, 1990, 21, 275–292), I show that the equilibrium price rises if the common production technology is homogeneous of degree t, 0<t1.     

On the curvature of the reporting function from objective reality to subjective feelings

I suggest the idea of a reporting function, r(.), from reality to feelings. The ‘happiness’ literature claims we have demonstrated diminishing marginal utility of income. I show not, and that knowing r(.)'s curvature is crucial. A quasi-experiment on heights is studied.     

A note on work–leisure choice, human capital accumulation, and endogenous growth

The growth model of Lucas [Lucas Jr., R.E., 1988. On the mechanics of economic development. Journal of Monetary Economics 22 (1), 3–42] is enriched with people having the opportunity to optimally allocate a fraction of their time to non-productive activities (‘leisure’). It is found that the chosen amount of leisure reduces the steady-state rate of growth of per capita output. This implies that the association between income and welfare may not be as strong as it is usually assumed to be. The optimal allocation of time among activities depends on some of the parameters and the marginal product of physical capital per capita.     

An ‘oil’igopoly theory of exploration

This paper develops a theory of ‘oil’igopoly exploration of an exhaustible resource. Strategic exploration and production are jointly derived in a three period subgame perfect equilibrium. While the ‘oil’igopoly theory of exploration shares many features with non-strategic models of exploration and production, there is one important difference. The ‘oil’igopoly theory of exploration predicts that firms who exhaust their proved reserves before they can convert their unproved reserves into proved reserves have an incentive to over-explore, relative to the Nash equilibrium level of exploration. A simple empirical prediction is that firms holding smaller proved reserves should be observed doing more exploration. This prediction is consistent with country-level production and reserve data in the post-World War II era.     

A learning-based model of repeated games with incomplete information

This paper tests a learning-based model of strategic teaching in repeated games with incomplete information. The repeated game has a long-run player whose type is unknown to a group of short-run players. The proposed model assumes a fraction of ‘short-run’ players follow a one-parameter learning model (self-tuning EWA). In addition, some ‘long-run’ players are myopic while others are sophisticated and rationally anticipate how short-run players adjust their actions over time and “teach” the short-run players to maximize their long-run payoffs. All players optimize noisily. The proposed model nests an agent-based quantal-response equilibrium (AQRE) and the standard equilibrium models as special cases. Using data from 28 experimental sessions of trust and entry repeated games, including 8 previously unpublished sessions, the model fits substantially better than chance and much better than standard equilibrium models. Estimates show that most of the long-run players are sophisticated, and short-run players become more sophisticated with experience.     

A systems approach to policy analysis and development planning: Construction sector in the Turkish 5-year development plans

In this study, we propose a new model for systems analysis ‘of’ policy and systems analysis ‘for’ policy with the example of construction sector in the Turkish 5-year development plans.Our proposed model—integrated development management model (IDMM)—is conceptually based on the principles of systems thinking and integrated management approach.We present and discuss the results of our work in which we extracted all construction-related policies and strategies from eight 5-year development plans and analyzed them using the IDMM. In the light of the analyses, we give several answers to the question: “Why did the development plans fail to meet their targets in Turkey?” We propose that any development plan has to have claritas–unitas–integritas–consonantia between the management levels (normative, strategic, and operational) and components (goals, structures, and behavior) of IDMM.The paper is the first work that brings the concepts of development planning and foresight together. In a complementary stance, the time of integrating foresight and development planning has come.