Do binding agreements solve the social dilemma?

We investigate experimentally whether “binding agreements” can provide a solution to the social dilemma that arises in the presence of pure public goods. Signing a binding agreement can prevent players from free riding on the contributions to the public good. However, a well known theoretical result is that the outcome of the endogenous formation of agreements is not necessarily efficient. Our setting is a bargaining game in which agreements form sequentially. The individual level of contribution to the public good increases with the size of the coalition reaching an agreement and the global agreement is always the socially optimal structure. There are two equilibrium outcomes, the global agreement and an asymmetric structure, which consists of two coalitions of different sizes, the small one free riding on the contributions of the larger one. We run an experiment which lends force to the theoretical result that outcomes may be inefficient. However, subjects do not play Nash and the experimental outcome is, on average, even more inefficient than the theory predicts. Our analysis leads to the conclusion that different types of behaviour co-exist.     

Fluctuations and response in financial markets: the subtle nature of ‘random’ price changes

Using trades and quotes data from the Paris stock market, we show that the random walk nature of traded prices results from a very delilcated interplay between two opposite tendencies: long-range correlated market orders that lead to super-diffusion (or persistence), and mean revrting limit orders that lead to sub-diffusion (or anti-persistence). We define and study a model where the price, at any instant, is the result of the impact of all past trades, mediated by a non-constant ‘propagator’ in time that describes the response of the market to a single trade. Within this model, the market is shown to be, in a precise sense, at a critical point, where the price is purely diffusive and the average response function almost constant. We find empirically, and discuss theoretically, a fluctuation-response relation. We also discuss the fraction of truly informed market orders, that correctly anticipate short-term moves, and find that it is quite small.     

Discussion of Corporate Governance Reform and Executive Incentives: Implications for Investments and Risk Taking

We discuss the strengths and weaknesses of the article by Cohen, Dey and Lys (CDL). Strengths include persuasive theoretical arguments for impacts of the Sarbanes Oxley Act (SOX) on corporate investment strategies and for several mechanisms through which firms influence changes in risky investments. CDL also provides intriguing opportunities for learning about impacts of external regulatory events and for enriching management accounting research and classroom discussions of management control. Weaknesses include (1) narrow scope, perhaps driven by archival data availability; (2) difficulties in implementing the research design and method; (3) possible bias of incentive and investment measures; (4) incomplete estimates of the effect of SOX on compensation, incentives, and investments; and (5) questionable control of endogeneity. We offer recommendations from extant literature to mitigate these weaknesses in future research.     

Fiscal policy and national saving

This paper uses structural vector autoregressions along with structural measures of fiscal policy to measure the dynamic impact of fiscal policy shocks on the output gap and national saving. Positive shocks to government purchases and negative shocks to real net taxes are found to increase the output gap. Positive shocks to the government's structural surplus increases national saving although the effects are small. Positive shocks to government purchases are found to substantially reduce national saving. Negative shocks to real net tax revenues as a share of potential GDP have a small negative impact on national saving.     

Economics in Institutional Perspective,Memorial Essays in Honor of K. William Kapp

In the past, the standard discussions of market failures in economics textbooks confined themselves to issues involving externalities, public goods, and common property (open access). Subsequent to George Akerlof’s famous article “The Market for ‘Lemons,’” discussions of the problems created by asymmetric information gradually became standard fare, but the issues raised by thinking of asymmetric information in economic matters extend far beyond the used car and health insurance markets that are normally used as the paradigm cases. In fact, consideration of the problems of information will inevitably lead to an examination of the problems of market manipulation and fraud, especially in light of the 2008 financial crisis. Akerlof has travelled this path himself as indicated by his recent book with Robert Shiller, Phishing for Phools (2015). Akerlof and Shiller provide a litany of examples of manipulation and deception in advertising and in many markets including financial markets. They also have a chapter on “The Resistance and its Heroes” that highlights some of the people and agencies that have worked to expose and reduce phishing, but this chapter is remarkably sparse. What this article attempts to do is to fill out some of this history by focusing on the work of American institutional economists from Veblen to Galbraith, who critically examined the issues of manipulation and deception in advertising, salesmanship, and finance. Some general considerations relating to the problem of fraud are also discussed.     

The value of delays: market- and policy-induced adjustment processes as a motivating factor in dynamic entrepreneurship

Reaching societal consensus on how to deal with new issues, e.g. agreeing on commercial law for e-commerce, takes time. Traditional economics has considered such anomalies as market imperfections. By contrast, this paper suggests perceiving such “delays” as windows of opportunity for entrepreneurs. These considerations from evolutionary economics and entrepreneurship will be explored in a case study on disease management services in Germany. It will become clear that detailed ex ante legal regulation restricts entrepreneurial room for variation. To avoid this loss of knowledge generation, the government should abstain from introducing such premature intervention without having to challenge existing meta-rules.     

Concepts and contexts in engineering and technology education: an international and interdisciplinary Delphi study

Inspired by a similar study by Osborne et al. we have conducted a Delphi study among experts to identify key concepts to be taught in engineering and technology education and relevant and meaningful contexts through which these concepts can be taught and learnt. By submitting the outcomes of the Delphi study to a panel of experts in a two-day meeting we were able to add structure to the Delphi results. Thus we reached a concise list of concepts and contexts that can be used to develop curricula for education about engineering and technology as a contribution to technological literacy goals in education.     

Democracy vs. dictatorship

A democratic society is often regarded as a prerequisite for economic growth and development. Yet, most empirical studies are not capable of identifying a positive link between GDP growth and democracy indexes. In addition, it is a stylized empirical fact that: (i) most developing countries are dictatorships; and (ii) many poor dictatorships have experienced high growth performances and emerged from poverty such as South Korea, China and Egypt. Against this background, it is of interest to analyse in which ways the growth performance between autocratic and democratic economies may differ, in particular among low-income countries. To answer this question, we compare the endogenous growth paths of two economies that differ only in their political regimes in the context of an overlapping generations model. The key features of the model are: (i) a positive bequest motive in the form of investments in education or productive public capital (infrastructure); (ii) a higher marginal (inter-temporal) utility of consumption today versus consumption tomorrow in low-income countries (for example, subsistence level of consumption); and (iii) a dictator that cares about her income or the income of her dynasty tomorrow. In this framework, we demonstrate that poor but large and stable dictatorships exhibit a higher equilibrium growth rate than comparable (equally poor) democracies. Moreover, there exists a particular threshold value in income such that the growth-reducing impact of dictatorial consumption (corruption) outweighs the higher (initial) public investments. Above this, the growth rate under democracy dominates the one in dictatorship.     

Discipline and flexibility: a behavioural perspective on microfinance product design

The success of both microcredit and micro-savings products rests upon simplicity and standardization in order to stimulate client discipline. However, these products lack flexibility. This paper attempts to make sense of behavioural product design in microfinance. We focus on the potential trade-offs between discipline and flexibility. While discipline devices encourage clients to make payments on time, microfinance product flexibility improves clients’ day-to-day money management and helps them cope with shocks. Our contribution is twofold. Firstly, we highlight the evidence-based advantages and disadvantages of flexible products in microfinance. Secondly, we present best-practice examples of flexible products offered by microfinance institutions worldwide.