A simple note on herd behaviour

In his ‘Simple model of herd behaviour’, (Banerjee A (1992) A simple model of herd behaviour. Q J Econ CVII:797–817) shows that—in a sequential game—if the first two players have chosen the same action, player 3 and all subsequent players will ignore his/her own information and start a herd, an irreversible one. In this paper, we analyse the role played by the tie-breaking assumptions in reaching the equilibrium. We show that: players’ strategies are parameter dependent—an incorrect herd may be reversed; a correct herd is irreversible.

Team production with inequity-averse agents

This paper analyzes the efficiency of team production when risk-neutral agents exhibit other-regarding preferences. It is shown that full efficiency can be sustained as an equilibrium of a budget-balancing mechanism that punishes some randomly chosen agents if output falls short of the efficient level but distributes output equally otherwise. The result depends on agents being sufficiently inequity-averse.

From short-term to long-term orientation—political economy of the policy reform process

Despite the fact that policymakers often have a short-term horizon and prefer discretionary over rule-bound policy, one can observe policy reform with a focus on rules and long-term orientation. Sometimes reforms are driven by crisis, sometimes they are pursued in times of relative prosperity. The paper analyzes reform processes theoretically under the assumption of imperfect knowledge. After the introduction, the second section of the paper shows that rule-bound policy encourages a long-term orientation of policymakers, resulting in higher economic dynamics and growth as compared with discretionary policy. In the third section, the political economy of the reform process, i.e. replacing discretionary by more rule-bound policy, is analyzed in an evolutionary setting. The basic hypothesis is that a policy reform is triggered by three key factors: (1) a worsening economic situation, (2) increasing knowledge of policymakers and the public with respect to the effectiveness of policy paradigms and (3) external, in particular international support. In a fourth section, we present a case study. Finally, we draw conclusions.

Advancing economic analysis beyond the equilibrium framework

Twentieth century economics was dominated by the development and refinement of the concept of economic equilibrium. While it is worthwhile to understand the properties of economic equilibrium, equilibrium concepts have dominated economic thought to the point that they have obscured some of the more important issues economists have always strived to understand. At least since Adam Smith’s time, economists have tried to understand the causes of prosperity, and how economic welfare can be enhanced, but these issues are best understood outside the equilibrium framework. The foundations provided by the Austrian school point toward ways that economic analysis can expand beyond the equilibrium framework.

What is specific about evolutionary economics?

Ever since an “evolutionary” perspective on the economy has been suggested, there have been differing, and partly incommensurable, views on what specifically this means. By working out where the differences lie and what motivates them, this paper identifies four major approaches to evolutionary economics. The differences between them can be traced back to opposite positions regarding the basic assumptions about reality and the proper conceptualization of evolution. The same differences can also be found in evolutionary game theory. Achievements of the major approaches to evolutionary economics and their prospects for future research are assessed by means of a peer survey.

The short and long-run interdependencies between the Eurozone and the USA

We estimate quarterly cointegrating vector autoregressive models for the Eurozone and the USA based on long-run restrictions derived from a dynamic open economy model. Three long-run relations between the Eurozone and the USA emerge: relative purchasing power parity, international interest parity and a stationary output gap between the two economies. Generalized impulse response functions show differences in the dynamic adjustment of the two economies. Due to the I(1)-characteristic of both output series and the stability conditions imposed by the long-run equilibrium relationships, shocks to the model produce level effects only, while growth rates converge to their long-run averages.

The value of rents and the likelihood of conflicts

This paper extends the prey–predator model of Grossman and Kim (J Political Econ 103:1275–1288, 1995) to analyze the relation between the value of a contested rent and the emergence of conflict. We show that an increase in the value of the rent makes a conflict equilibrium more likely. We also analyze the case where the valuation of the rent is different for the two players. We find, for example, that a conflict equilibrium may occur even though the predator has an important disadvantage in warfare. That is when his valuation of the rent is sufficiently high compared to that of the prey.

Transaction tax and stock market behavior: evidence from an emerging market

This study examines the impact of a stamp tax rate increase on market behavior, using data from two stock exchanges in China. We find that when the tax rate increases from 0.3 to 0.5% (which implies that the transaction cost increases by about 1/3) trading volume decreases by 1/3. This implies an elasticity of turnover with respect to a stamp tax of −50% and an elasticity of turnover with respect to transaction cost of −100%. The markets’ volatility significantly increases after the increase in the tax rate. Furthermore, the change in the volatility structure indicates that the markets become less efficient in the sense that shocks are less quickly assimilated in the markets.

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Cournot competition and endogenous firm size

The paper studies the dynamics of firm size in a repeated Cournot game with unknown demand function. We model the firm as a type of artificial neural network. Each period it must learn to map environmental signals to both a demand parameter and its rival’s output choice. However, this learning game is in the background, as we focus on the endogenous adjustment of network size. We investigate the long-run evolution of firm/network size as a function of profits, rival’s size, and the type of adjustment rules used.

What constitutes a convention? Implications for the coexistence of conventions

A model of repeated play of a coordination game, in which stage games have a location in social space and players receive noisy signals of the true location of their games, is reviewed. Sugden (1995) (The coexistence of conventions. J Econ Behav Organ 28:241–256) suggests that, in such a model, there can be a stationary state of convention coexistence only if interaction is non-uniform across social space. This paper shows that an alternative definition of conventions, which links conventions to actions rather than expectations, permits convention coexistence when interaction is uniform. To assess robustness, the concept of a global mutant is introduced, to which certain states of coexistence are robust.

Output dynamics,flow equilibria and structural change—A prolegomenon to evolutionary macroeconomics

In an evolutionary approach to macroeconomics, the market disequilibrium dynamics resulting from structural change need to be properly represented at the aggregate level. As suggested by the late F.A. Hayek, a suitable equilibrium concept required to this end as a frame of reference, is that of a flow equilibrium. The paper explores the corresponding flow dynamics that draw attention to variables not usually considered in macroeconomic theorizing. Using statistical estimates for these new variables for the West German manufacturing sector during the German unification process allows some important new insights on the relationships between structural change and macroeconomic performance.

Population and economic growth with human and physical capital investments

We present a two-sector endogenous growth model with human and physical capital accumulation to analyze the long-run relationship between population growth and real per capita income growth. Formal education and investment in physical capital are assumed to be two separate components of human capital production. Along the balanced growth path equilibrium, population change may have a positive, negative, or else neutral effect on economic growth depending on whether physical and human capital are complementary/substitutes for each other in the formation of new human capital and on their degree of complementarity.

Generous actors,selfish actions: markets with other-regarding preferences

This paper points out that classical competitive outcomes arise in two different market environments even if agents have non-classical preferences. Consumers with separable, other-regarding preferences behave as if they have classical preferences in competitive equilibrium. These outcomes need not be efficient, but under plausible conditions will be efficient following a redistribution of income. In simple double-auction environments competitive outcomes arise under a wide range of assumptions on preferences even without assuming separability. I discuss the importance of the domain of definition of preferences and how the preferences present in the economy influence the performance of the trading institution.

Urbanizing economics

Action takes place at a given time and place. As a science of human action, economics is, therefore, just as much about the spaces where real action occurs as it is about real time. The implications of real time for social order is better recognized than the significance of “action space.” The living city is the principal locus of action space and enabler of social change as well as the source of fundamental concepts in economic theory. Just as a loss of density and diversity in cities tends to retard dynamic discovery and development, the turn in economic theory in the mid-20th century toward static equilibrium reflected a move from an urban-based to a plantation-based conception of the economy—from the city to the farm. Some recent developments in network theory, game theory, and geography, however, can be interpreted as a re-urbanization of economics.

Special issue: imperfect competition and contemporary macroeconomics. Editor’s introduction

This paper introduces the special issue by tracing out the history of imperfect competition in macroeconomics, particularly since 1980. It argues that in the search for a micro-foundation for nominal rigidity it was necessary to abandon the assumption of competitive equilibrium where all agents are price-takers. This led to models where firms and other optimising agents set wages and prices which were part of the new Keynesian economics of the 1980s. When these were combined with quantitative dynamic equilibrium methods it gave rise to the new neoclassical synthesis models which dominate macroeconomics today. The assumption of imperfect competition provides an equilibrium with different properties to the competitive, and one particular focus is on the relationship between the markup and the fiscal multiplier.

Revenues in discrete multi-unit, common value auctions: a study of three sealed-bid mechanisms

This paper proposes a discrete bidding model for both quantities and pricing. It has a two-unit demand environment where subjects bid for contracts with an unknown redemption value, common to all bidders. Prior to bidding, the bidders receive private signals of information on the (common) value. The relevant task is to compare the equilibrium strategies and the seller’s revenue of the three most common auction formats with two players. The result is that the Vickrey auction always gives the most revenue to the seller, the discriminatory auction follows closely and the uniform auction clearly is the worst due to demand reduction.

Price-setting behavior of Austrian firms

This paper explores nominal rigidities by investigating price-setting behavior of Austrian firms based on survey evidence. Distinguishing between two stages of price setting—first the price reviewing phase and second the price changing phase—our results suggest that the main obstacles to price flexibility lie on the second stage. Our main result is that firms postpone price adjustments, because they are afraid to antagonize customers with frequent price changes. Thus, customer relationships - especially those with consumers—are a major source of price stickiness in the Austrian economy.

Imperfect competition and the modelling of expectations in macroeconomics

We show that when a model of the macroeconomy is based on imperfect, rather than perfect, competition, this may increase the problem of how to model agents’ expectations. We provide a simple example using an overlapping-generations economy with the potential for unemployment. Under certain assumptions about how consumers migrate between locations between the first and second periods of their lives, this extra issue regarding expectations arises. Imperfect competition may increase agents’ forecasting difficulties because they have to forecast not only future equilibrium prices, but also future out-of-equilibrium prices, and by definition the latter are never actually observed.

On local indeterminacy and endogenous cycles in Ramsey models with heterogeneous households

It is well-known that endogenous cycles can occur in Ramsey models with heterogeneous households and borrowing constraints. In this note, we address the issue of robustness in the more general case of endogenous labor supply and we explain the occurrence of local indeterminacy under progressive taxation.

Information Disclosure Policies: When Do They Bring Environmental Improvements?

There has been a growing interest among policy makers on the use of information disclosure policies for pollution control. This paper theoretically assesses the consequences of information disclosure policies and identifies the conditions under which such policies are likely to bring environmental improvements. Based on a dynamic game framework, the paper shows that both eco-labeling and more general full information disclosure policies may not always result in pollution reduction. Full information disclosure policies are likely to be effective if the product is not heavily polluting and if the minimum quality standard is set quite low. The paper also identifies the conditions under which all consumers are strictly better off with information disclosure policies.