Differentiating ambiguity and ambiguity attitude

The objective of this paper is to show how ambiguity, and a decision maker (DM)'s response to it, can be modelled formally in the context of a general decision model. We introduce a relation derived from the DM's preferences, called “unambiguous preference”, and show that it can be represented by a set of probabilities. We provide such set with a simple differential characterization, and argue that it is a behavioral representation of the “ambiguity” that the DM may perceive. Given such revealed ambiguity, we provide a representation of ambiguity attitudes. We also characterize axiomatically a special case of our decision model, the “α-maxmin” expected utility model.     

Transfer fee regulations in European football

We analyze the impact of three different transfer fee systems on payoffs, contract lengths, training and effort incentives in European football. The different regimes, being used until 1995 (“pre-Bosman”), currently in use (“Bosman”), and recently approved (“Monti”) differ with respect to the transfer fee an initial club is entitled to depending on whether a player has a valid contract or not. We show that the different systems differ only with respect to the contract length if the contract which maximizes the expected joint surplus of the initial club and the player is feasible under each system. Otherwise, regime P is strictly dominated by regime B in terms of expected social welfare. Regime M leads to higher effort but lower incentives to invest in training compared to system B.     

Rejuveniles and growth

Rejuveniles are “people who cultivate tastes and mind-sets traditionally associated with those younger than themselves” [Noxon, C., 2006. Rejuvenile. Crown Publishers]. In this paper, we study a standard AK growth model of overlapping generations populated by rejuveniles. For our purposes, rejuveniles are old agents who derive utility from “keeping up” their consumption with that of the current young. We find that such cross-generational keeping up is capable of generating interesting equilibrium growth dynamics, including growth cycles. No such growth dynamics is possible either in the baseline model, one where no such generational consumption externality exists, or for almost any other form of keeping up. Steady-state growth in a world with rejuveniles may be higher than that obtained in the baseline model.     

Pollution and life expectancy: How environmental policy can promote growth

This article investigates the influence of environmental policy (EP) on growth in an AK-type growth model, when finite lifetime is introduced and the link between pollution and life expectancy (through the detrimental impact of pollution on health) is taken into account.Using an overlapping generations model à la Blanchard [Blanchard, O. (1985). Debt, deficits and finite horizon. Journal of Political Economy, 93:223-247], we demonstrate that finite lifetime introduces a “generational turnover effect” which modifies the influence of the EP on growth. Thus, when lifetime is finite and independent from pollution, we show that the “generational turnover effect” limits the detrimental impact of the EP on growth, if agents smooth their consumption over time. When pollution negatively influences life expectancy through health, we demonstrate that the “generational turnover effect” is magnified and that the EP and growth have an inverted U-shaped relationship in the steady-state. In this case, we show that the environmental policy is more likely to promote growth (i.e. it stimulates growth for a wider range of environmental taxes) when the impact of pollution on health is important and/or public expenditures in health are low. Finally, using numerical simulations, we find that for the value of parameters that we have chosen, the EP will be more likely to promote growth when agents smooth consumption over time.     

On the practical limits to substitution

This paper considers the arguments for “weak” vs. “strong” sustainability. The weak sustainability position, held by many mainstream neoclassical economists (such as Solow and Weitzman), is that almost all kinds of natural capital can be substituted by man-made capital. The contrary position, known as strong sustainability, holds that many of the most fundamental services provided by nature cannot be replaced by services produced by humans or man-made systems. The paper discusses the limits of substitution from a physical point of view. It concludes that, while there is considerable scope for substitution in some domains, the limits to substitutability in the medium term at least are real and important. In effect, the paper supports the strong sustainability position.     

Arbitrage-free valuation of interest rate securities under forward curves with stochastic speed and acceleration

Arbitrage-free models for valuing interest rate securities posit that stochastic changes in spot or forward interest rates (forward rate “speed”) follow a diffusion process. This paper extends the Heath, Jarrow and Morton [Bond pricing and the term structure of interest rates: a new methodology for contingent claims valuations, Econometrica 60 (1992) 77-105], HJM framework by allowing diffusive shocks to both the “speed” and “acceleration” of forward rates. The arbitrage-free restriction on forward rates is identified and involves volatilities of the speed and acceleration dynamics and their correlation. Although the extended forward rates remain in the diffusive framework and evolve continuously, they may exhibit large changes over short intervals (as with jumps) due to stochastic acceleration. Comparisons of bond prices show that the proposed model generates more complex and intricate shapes for the restricted forward curve with the same number of stochastic factors and volatility.     

Asymmetric English auctions

This paper studies equilibria of the n-bidder single-object English, or open ascending price, auction in a setting with interdependent values and asymmetric bidders. Maskin (in: H. Siebert (Ed.), Privatization, Institut fur Weltwirtschaften der Universität Kiel, Kiel, 1992, pp. 115-136.) showed that if the values satisfy a “single crossing” condition, then the two-bidder English auction has an efficient equilibrium. In this paper, two extensions of the single crossing condition, the “average crossing” condition and the “cyclical crossing” condition, are introduced. The main result is that under either of these conditions the n-bidder English auction has an efficient equilibrium.     

Selfishness, cooperation, the evolutionary point of view and its implications for economics

The assumed selfishness of market actors could be considered in the context of two perspectives: macroeconomic and microeconomic. The first concerns the market mechanism as the most effective from the social well-being or the wealth of a nation points of view. The latter is based on the premises of the nature of human beings. I have distinguished between two possible ways of understanding selfish forms of behaviour in the market: as rational economic behaviour i.e. the most effective from the gains and losses point of view (i.e. public interests in the works of A. Smith) or as selfish from the psychological point of view (this is mostly presented by J. S. Mill's theory). The first approach seems to be concerned with the creation of the most effective market mechanism from the State's point of view. In the context of historical processes over 400 years, cultural evolution “has been promoting” selfish behaviour; for example, it was widely presented in T. Hobbes' works and then for over 200 years, the theory of A. Smith has been supporting and moulding the institutional context of market and social behaviour. Thus, positive economics describes the market created by the ideas of a neo-classical paradigm, which is based on the normative premises of A. Smith and J. S. Mill. Moreover, the virtual market behaviour described by “effects” (f. e. Veblen's effect) and failures seems to be a manifestation of a discrepancy between market reality and the classical assumptions.The social evolution of human beings has been advantageous to the human species. Moreover, from the social point of view, pro-social behaviour is “natural” as well as desirable and it has been preferred by the cultural evolution. Competitiveness assumes that somebody has to lose, because someone gains. Cooperation looks for gains for all the players. The choice is political, and not imposed by selfishness.     

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.     

Dynamic decision trees for building resilience into future eco-cities

Intensifying global urbanization and environmental changes bring about the imperative of sustainable urban development and decisions upon inescapable pressures and risks, but knowledge integration between disciplines is a limiting contextual challenge. This paper proposes a reformulation, in terms of urban risk management, of an earlier developed ontological scenario generation method. The procedure consists of several steps: (i) identification-and-prioritization of main pressures, (ii) paired discussion of pressures using four-cell matrices, (iii) re-visit of the pressures' priority order, (iv) articulation of short-listed pressures as decision-making questions, and (v) generation of scenarios via “yes/no” responses to each question, in their order of priority. In this article, the method feeds upon the general context described in recent multi-disciplinary urban studies and public strategic plans in the city of Iasi (Romania), to propose a formal procedure for enabling the acceleration of productive decision making towards city sustainability. Answering three top priority questions, namely “Implement a business-friendly and efficient governance system?”, “Develop a resource management system?”, and “Carry out a human capital accelerator strategy?” results in a 4-scenario set: Receding City, Wanting City, Promising City, Inspiring City. The scenarios are discussed in terms of systemic risks at the end of post-communist transition and beginning of the socio-economic convergence with Western Europe.     

Financial development,institutional quality and maximizing-growth trade-off in government finance

This paper studies monetary and fiscal policies in an endogenous growth model with transaction costs. We show that the relation between long-run economic growth and both monetary and fiscal policies is subject to threshold effects, a result that gives account of a number of recent empirical findings. Furthermore, the model shows that, to finance public expenditures, growth-maximizing governments must choose relatively high seigniorage (respectively income taxation), if “institutional quality” and “financial development” indicators are low (respectively high). Thus, our model may explain why some governments resort to seigniorage and inflationary finance, and others rather resort to high tax rates, as a result of growth-maximizing strategies in different structural environments (notably concerning institutional and financial development contexts). In addition, the model allows examining how the optimal mix of government finance changes in response to different public debt contexts. A short empirical section confirms our theoretical results.     

Factor Saving Innovation

It has been argued that concave models exhibit less “endogeneity of growth” than models with increasing returns to scale. Here we study a simple model of factor saving technological improvement in a concave framework. Capital can be used either to reproduce itself, or, at some additional cost, to produce a higher quality of capital, which requires less labor input. If better quality capital can be produced quickly, we get a model of exogenous balanced growth as a special case of ours. If, however, better quality capital can be produced slowly, we get a model of “endogenous growth” in which the growth rate of the economy and the rate of adoption of new technologies is determined by preferences, technology and initial conditions. Moreover, in the latter case, the process of growth is necessarily uneven, exhibiting a natural cycle with alternating periods of high and slow growth. Growth paths and technological innovations also exhibit dependence upon initial conditions. The model provides a step toward a theory of endogenous innovation under conditions of perfect competition. Journal of Economic Literature Classification Numbers: O30, O40, D92, C61, D24, D41.     

Measuring fossil resource inequality—A case study for the UK between 1968 and 2000

This paper quantifies fossil resource inequalities amongst income quintiles in the UK between 1968 and 2000. It calculates a resource-based Gini coefficient using an input-output based resource allocation model.The results show that the Gini coefficient for total fossil resource consumption grew by 24% over the time period. By comparison the Gini coefficient for overall household expenditure rose by only 13%. The increase in resource inequality was prompted by the rising demand by high income quintiles for goods and services such as: “fuel and light” (heating and lighting the home), “car use” (private transportation), “recreation”, “travel” and “other services”. The analysis shows further that the Gini coefficient for “direct” fossil resources (“fuel and light” and “car use”) was lower and rose less steeply than the Gini coefficient for fossil resources embodied in other goods and services (indirect fossil resource requirements).Investigation into the drivers behind direct and indirect resource inequalities suggests a number of policy conclusions. Firstly, it is clear that policy initiatives to reduce fossil resource requirements (and the associated climate change impacts) must pay careful attention to distributional differences. Additionally, increased attention needs to be paid to the inequalities associated with indirect fossil resources consumption as well as the more visible direct resource inequalities.     

Animal spirits and the composition of innovation

This paper shows that the Schumpeterian model with both vertical and horizontal innovative research admits many more equilibria than the unique symmetric balanced growth path (BGP) usually highlighted in the literature. Each of a continuum of BGPs is characterized by a different composition of aggregate R&D (vertical versus horizontal).This appears if firms expect self-fulfilling “waves of enthusiasm” in the newly introduced sectors, as is very common in the real world. Pioneers are challenged by more outsiders and the first monopoly of every new good is likely to last less than in more mature industries: By expecting this horizontal innovation is depressed while vertical innovation is more intense. Such “waves of enthusiasm” have a positive effect on growth rates and a negative effect on consumption levels.     

Consumption habits in an overlapping-generations model

This paper introduces consumption habits in the Blanchard (1985) overlapping-generations model. It shows that steady-state capital and consumption are higher if individuals have habits than otherwise. Moreover, “inward habits” lead to higher steady-state capital and consumption compared to “outward habits.”     

Specifying “regime” — A framework for defining and describing regimes in transition research

It is more and more agreed by research and policy that a long-term sustainability of industrialized societies cannot be achieved without fundamental changes at the level of different societal subsystems, such as the agricultural, transportation or water management systems. This view has lead to an increase in the amount of research carried out about the so-called “transitions”. Transitions comprise long-term, fundamental change in societal subsystems and are seen as encompassing co-evolutionary and mutually reinforcing processes in the economic, technological, institutional and socio-cultural domains. Transition research aims at understanding transitions and at finding methods that facilitate change directed towards societal goals (so-called “transition management”).This paper adds to the growing body of concepts of this young research strand. It suggests a framework for defining and describing “regimes”, the systems resulting from the broad and interdisciplinary view taken by transition research. The concept “regime” is of central importance for transition research, since it defines the level of societal systems on which transitions are mainly analysed. What actually is “the regime” to be researched and possibly managed is however usually not given through clear system boundaries but is a matter of framing and deliberation. In order to guide processes of regime identification, the paper develops five defining characteristics of regimes and gives a definition based on them. Further a method useful to structure and graphically represent knowledge about a regime is introduced. Such a structuring of knowledge is an important first step to understand how a regime “works”.     

The contracting value of tainted reports in cost reduction settings

While cost accounting is a well-developed discipline with a rich institutional past, it is criticized for being manipulable. This criticism is due, in part, to the existence of multiple, yet equally accepted cost allocation procedures or cost estimation techniques. Employing a principal-agent model, cost accounting is modeled as a menu of alternative methods which, conditional on agent effort, produce noisy, unbiased and independently distributed (i.e., equally defensible) measures from which a single realization is selected ex post as the report used to contract with the agent. Assuming that the report does not indicate which method produced it, the report modeled is “tainted” in that the lowest (most favorable to the agent) outcome is reported, where the “amount” of tainting corresponds to the menu's size. The paper identifies bright-line conditions where the principal's expected net payoff is independent of the amount of tainting, demonstrating that tainting does not necessarily affect the report's incentive value.     

Why the marriage squeeze cannot cause dowry inflation

An influential explanation for rising dowry payments is the “marriage squeeze”. The present paper shows this explanation to be internally inconsistent. The marriage squeeze argument for inflation relies on the fact that population growth leads to an excess supply of brides in the marriage market. This excess supply is resolved by some women postponing marriage, so that the average age of brides increases. In previous studies the argument is stated informally. Here, a matching model of marriage is developed to formally analyze the link between dowry payments and population growth. It is shown that a marriage squeeze cannot yield dowry inflation. In fact, when women who do not find matches at the ‘desirable’ marrying age re-enter the marriage market as older brides, a marriage squeeze is shown to imply dowry deflation. Population change is therefore not a promising explanation for the observed increases in dowry payments.     

Can micro-credit bring development?

We examine the long-run effects of micro-credit on development in an occupational choice model similar to Banerjee and Newman (JPE, 1993). Micro-credit is modeled as a pure improvement in the credit market that opens up self-employment options to some agents who otherwise could only work for wages or subsist. Micro-credit can either raise or lower long-run GDP, since it can lower use of both subsistence and full-scale industrial technologies. It typically lowers long-run inequality and poverty, by making subsistence payoffs less widespread. Thus, an equity-efficiency tradeoff may be involved in the promotion of micro-credit. However, in a worst case scenario, micro-credit has purely negative long-run effects. The key to micro-credit's long-run effects is found to be the “graduation rate”, defined as the rate at which the self-employed build up enough wealth to start full-scale firms. We distinguish between two avenues for graduation: “winner” graduation (of those who earn above-average returns in self-employment) and “saver” graduation (due to gradual accumulation of average returns in self-employment). Long-run development is not attainable via micro-credit if “winner” graduation is the sole avenue for graduation. In contrast, if the saving rate and self-employment returns of the average micro-borrower are jointly high enough, then micro-credit can bring an economy from stagnation to full development through “saver” graduation. Thus the lasting effects of micro-credit may partially depend on simultaneous facilitation of micro-saving. Eventual graduation of the average borrower, rather than indefinite retention, should be the goal of micro-banks if micro-credit is to be a stepping stone to broad-based development rather than at best an anti-poverty tool.     

Foresight and innovation in the context of industrial clusters: The case of some Italian districts

The “territory” is widely recognized in the literature on business strategy as a critical driver of industrial competitiveness (see, as an example, Porter, The Competitive Advantage of Nations). The generation and exploitation of new knowledge, both tacit and explicit, through the process of socialization, articulation, combination and internalization (see Nonaka and Takeuchi, The Knowledge-Creating Company) is essential to enable innovation of processes and products of “local” firms.Our recent Foresight exercises in the metal working and machinery district of Lecco and in the silk district of Como show that Foresight can play an important role in creating and exploiting new knowledge, and that different methodologies can be more or less effective to this aim.Critical technology list and interactive workshops, with the participation of entrepreneurs of SMEs and technologists, are more suited to foster the transfer of technologies that have overcome the initial stage of the life cycle and that have been already applied in other sectors. However, when radical innovations are needed in order to face the challenges posed by global competition, other methodologies, as Scenarios, are more appropriate. Even if these approaches are complex and time and resource consuming, they may be very effective in actively involving the most relevant private and public stakeholders of a district, and in making them to envisage the long term future of the economic, social, and cultural structure of their district. In this way Foresight drives the small entrepreneurs, the district stakeholders and the medium and large size firms to play the critical roles of Nonaka and Takeuchi's “frontline employees”, “senior managers” and “middle managers” in their “knowledge creating company”: the first ones grasp what the district is; the second ones build the vision of what it ought to be; the third ones, serve as a bridge between the future and the present.