THE TENURE GAME: BUILDING UP ACADEMIC HABITS*

Why do some academics continue to be productive after receiving tenure? This paper answers this question by using a Stackelberg differential game between departments and scholars. We show that departments can set tenure rules and standards as incentives for scholars to accumulate academic habits. As a result, academic habits have a lasting positive impact on scholar's productivity, leading to higher productivity growth rates and higher productivity levels.     

Fire Sales in a Model of Complexity

We present a model of financial crises that stem from endogenous complexity. We conceptualize complexity as banks' uncertainty about the financial network of cross exposures. As conditions deteriorate, cross exposures generate the possibility of a domino effect of bankruptcies. As this happens, banks face an increasingly complex environment since they need to understand a greater fraction of the financial network to assess their own financial health. Complexity dramatically amplifies banks' perceived counterparty risk, and makes relatively healthy banks reluctant to buy risky assets. The model also features a novel complexity externality.     

Optimal Delegation

We analyse the design of decision rules by a principal who faces an informed but biased agent and who is unable to commit to contingent transfers. The contracting problem reduces to a delegation problem in which the principal commits to a set of decisions from which the agent chooses his preferred one. We characterize the optimal delegation set and perform comparative statics on the principal's willingness to delegate and the agent's discretion. We also provide conditions for interval delegation to be optimal and show that they are satisfied when the agent's preferences are sufficiently aligned. Finally, we apply our results to the regulation of a privately informed monopolist and to the design of legislatives rules.     

The Over‐the‐Counter Theory of the Fed Funds Market: A Primer

We present a dynamic over‐the‐counter model of the fed funds market and use it to study the determination of the fed funds rate, the volume of loans traded, and the intraday evolution of the distribution of reserve balances across banks. We also investigate the implications of changes in the market structure, as well as the effects of central bank policy instruments such as open market operations, the discount window lending rate, and the interest rate on bank reserves.     

Collective Risk Management in a Flight to Quality Episode

Severe flight to quality episodes involve uncertainty about the environment, not only risk about asset payoffs. The uncertainty is triggered by unusual events and untested financial innovations that lead agents to question their worldview. We present a model of crises and central bank policy that incorporates Knightian uncertainty. The model explains crisis regularities such as market‐wide capital immobility, agents' disengagement from risk, and liquidity hoarding. We identify a social cost of these behaviors, and a benefit of a lender of last resort facility. The benefit is particularly high because public and private insurance are complements during uncertainty‐driven crises.     

THE EFFECTS OF TAXES ON LABOUR IN A DYNAMIC EFFICIENCY WAGE MODEL*

This paper studies the impact of wage and employment taxes in an intertemporal efficiency wage model. Cases with fixed, linear and quadratic adjustment costs associated with job creation are considered. In general, the model shows that an increase in the employment tax leads to an increase in unemployment, reducing job creation, and has ambiguous effect on wages; whereas an increase in the wage tax reduces wages and has ambiguous impact on unemployment and job creation.     

Inflation Targeting Does Not Matter: Another Look at OECD Sacrifice Ratios

Recently in this journal, Gonçalves and Carvalho (2009) concluded that inflation targeters were able to bring inflation down at less cost than nontargeters (p. 242). This comment shows that their conclusion is not robust but instead is the result of comparing a particular subset of inflation targeting (IT) disinflations with nonsimultaneous disinflations that occurred under very different macroeconomic conditions. In their sample, simple extensions such as justifiably varying the treatment group of IT disinflations, to control for common time‐varying effects or to control for the Maastricht Treaty effects, suggest that IT does not matter.     

Simple Monetary Rules under Fiscal Dominance

This paper asks whether interest rate rules that respond aggressively to inflation, following the Taylor principle, are feasible in countries that suffer from fiscal dominance. We find that if interest rates are allowed to also respond to government debt, they can produce unique equilibria. But such equilibria are associated with extremely volatile inflation. The resulting frequent violations of the zero lower bound make such rules infeasible. Even within the set of feasible rules the welfare optimizing response to inflation is highly negative. The welfare gain from responding to government debt is minimal compared to the gain from eliminating fiscal dominance.