Conditional ordering extensions

We produce a solution to the problem of extending a quasiordering conditional on a finite list of ex-ante comparisons between pairs. This constitutes yet another extension of the classical Szpilrajn’s theorem. Some examples of use of our result follow.     

Mobile phone termination charges with asymmetric regulation

We model competition between two unregulated mobile phone companies with price-elastic demand and less than full market coverage. We also assume that there is a regulated full-coverage fixed network. In order to induce stronger competition, mobile companies could have an incentive to raise their reciprocal mobile-to-mobile access charges above the marginal costs of termination. Stronger competition leads to an increase of the mobiles’ market shares, with the advantage that (genuine) network effects are strengthened. Therefore, ‘collusion’ may well be in line with social welfare.      

State prices,liquidity, and default

We show, in a monetary exchange economy, that asset prices in a complete markets general equilibrium are a function of the supply of liquidity by the Central Bank, through its effect on default and interest rates. Two agents trade goods and nominal assets to smooth consumption across periods and future states, in the presence of cash-in-advance financing costs that have effects on real allocations. We show that higher spot interest rates reduce trade and as a result increase state prices. Hence, states of nature with higher interest rates are also states of nature with higher risk-neutral probabilities. This result, which cannot be found in a Lucas-type representative agent model, implies that the yield curve is upward sloping in equilibrium, even when short-term interest rates are fairly stable and the variance of the (macroeconomic) stochastic discount factor is 0. The risk-premium in the term structure is, therefore, a monetary-cost risk premium.     

Testing time-homogeneity of rating transitions after origination of debt

When modelling rating transitions as continuous-time Markov processes, in practice, time-homogeneity is a common assumption, yet restrictive, in order to reduce the complexity of the model. This paper investigates whether rating transition probabilities change after the origination of debt. Accordingly, we develop a likelihood-ratio test for the hypothesis of time-homogeneity. The alternative is a step function of transition intensities. The test rejects time-homogeneity for rating transitions observed over 7 years in a real corporate portfolio. Especially 1-year transition probabilities increase over the first year after origination. This time effect suggests that banks should manage their credit portfolios with respect to the age of debt.      

Keynes and Wagner on government expenditures and economic development: the case of a developing economy

This paper investigates the Keynesian view and the Wagner’s Law on the role of public expenditure on economic growth for Malaysia (1970–2004). The empirical results using the Auto-Regression Distributed Lag (ARDL) model and the ‘bounds test’ (Pesaran et al. in J Appl Econ 16:289–326, 2001) showed evidence of a long run relationship between total expenditures (including expenditures on defense, education, development and agriculture) and Gross National Product. The results also show that with the structural break in 1998, the long run causality is bi-directional for GNP and expenditures on administration and health, supporting both Keynes view and Wagner’s Law. For all other expenditure categories the long run causality runs from GNP to the expenditures, which supports Wagner’s Law. An erratum to this article can be found at     

Secrecy and fairness in plea bargaining with multiple defendants

I consider a model of plea bargaining with multiple codefendants. I mainly compare the equilibrium outcomes under joint negotiations whereby both defendants can observe both plea offers and under separate (secret) negotiations whereby they can observe only their own respective offer. Contrary to the widespread perceptions, the prosecutor is made worse off under secret negotiations or at best as well off as under joint negotiations. I also discuss the implication of equilibrium offers on fairness.      

Monetary policy before and after the euro: evidence from Greece

We model Greek monetary policy in the 1990s and use our findings to address two interrelated questions. First, how was monetary policy conducted in the 1990s so that the hitherto highest-inflation EU country managed to join the euro by 2001? Second, how compatible is the ECB monetary policy with Greek economic conditions? We find that Greek monetary policy in the 1990s was: (i) primarily determined by German/ECB interest rates, though still influenced by domestic fundamentals; (ii) involving non-linear output gap effects; (iii) subject to a deficit of credibility culminating in the 1998 devaluation. On the question of compatibility our findings depend on the value assumed for the equilibrium post-euro real interest rate and overall indicate both a reduction in the pre-euro risk premium and some degree of monetary policy incompatibility. Our analysis has policy implications for the new EU members and motivates further research on fast-growing EMU economies.     

Cultural differences,insecure property rights and the mode of entry decision

We develop a theory of a multinational corporation’s optimal mode of entry in a new market. The foreign firm can choose between a licensing agreement, a wholly owned subsidiary or shared control (joint venture). In an environment in which property rights are insecure, opportunism is possible, and the identification of new business opportunities is costly, we show that the relationship between the quality of the institutional environment and the mode of entry decision is non-monotonic. Licensing is preferred if property rights are strictly enforced, while a joint venture is chosen when property rights are poorly enforced. For intermediate situations, the better use of local knowledge made possible by shared control under a joint venture works as a double edged sword. On the one hand, it makes the monitoring activity of the multinational more credible, on the other it offers insurance to both parties, potentially compromising the incentives faced by the local partner. We are grateful to the Centro Studi Luca d’Agliano for providing financial support. For useful comments we would like to thank Klaus Desmet, Cecilia Testa, Henry Wan and Gerald Willmann and seminar participants at Cornell, Ente Luigi Einaudi, Fundacao Getulio Vargas, Kiel, Milano, Universidad de Sao Paolo, the Midwest International Economics Meetings in Indianapolis, SAET VI conference in Rhodes, and the City University of Hong Kong Conference on Intellectual Property Rights.     

Debreu’s social equilibrium theorem with asymmetric information and a continuum of agents

We provide several different generalizations of Debreu’s social equilibrium theorem by allowing for asymmetric information and a continuum of agents. The results not only extend the ones in Kim and Yannelis (J Econ Theory 77:330–353, 1977), Yannelis and Rustichini (Stud Econ Theory 2:23–48, 1991), but also new theorems are obtained which allow for a convexifying effect on aggregation (non-concavity assumption on the utility functions) and non-convex strategy sets (pure strategies). This is achieved by imposing the assumption of “many more agents than strategies” (Rustichini and Yannelis in Stud Econ Theory 1:249–265, 1991; Tourky and Yannelis in J Econ Theory 101:189–221, 2001; Podczeck in Econ Theory 22:699–725, 2003). To the memory of Gerard Debreu. A preliminary draft was presented in Paris, in April of 2005. I have benefited from the discussion, comments and questions of Erik Balder, Jean-Marc Bonnisseu, Bernard Cornet and Filipe Martins Da-Rocha and Conny Podczeck. A careful and knowledgeable referee made several useful comments and rescued me from a mishap.     

The long-run impact of ICT

This paper examines the growth impact of digital capital in the US and the EU-15 countries from a long-run perspective. It estimates the elasticity of output with respect to Information and Communication Technology (ICT) within a production function framework, by means of a panel cointegration analysis. ICT capital is found to significantly spur GDP growth over time, and above its income share. This sharply contrasts with existing aggregate evidence, and with the view that the growth impact of this factor is confined to the contribution given to the productivity resurgence of the 1990s.