The effects of imperfect auditing on managerial compensation

We study the optimal shareholder–manager contract having the property to induce the manager to exert high effort and truthfully reveal firm performance. This contract design problem is solved under the assumption of imperfect auditing, either because of mistakes or because of collusion between managers and auditors. The imperfection of the audit technology is costless up to a threshold, beyond which it causes a distortion in the incentive compatible contract or even prevents its existence. This result may help explain the observed decline in the use of stock options, tracing it back to an unfocused activity or poor performance of auditors.     

The Solow–Swan model with a bounded population growth rate

The paper analyzes the dynamic of the Solow–Swan growth model when the labor growth rate is non-constant but variable and bounded over time. Per capita capital is seen to stabilize to the non-trivial steady state of the Solow–Swan model with a particular constant labor growth rate. The solution of the model is proved to be asymptotically stable. In case of a Cobb-Douglas production function and a generalized logistic population growth law, the solution is shown to have a closed-form expression via Hypergeometric functions.     

DSGE Models in the Frequency Domains

We use frequency domain techniques to estimate a medium‐scale dynamic stochastic general equilibrium (DSGE) model on different frequency bands. We show that goodness of fit, forecasting performance and parameter estimates vary substantially with the frequency bands over which the model is estimated. Estimates obtained using subsets of frequencies are characterized by significantly different parameters, an indication that the model cannot match all frequencies with one set of parameters. In particular, we find that: (i) the low‐frequency properties of the data strongly affect parameter estimates obtained in the time domain; (ii) the importance of economic frictions in the model changes when different subsets of frequencies are used in estimation. This is particularly true for the investment adjustment cost and habit persistence: when low frequencies are present in the estimation, the investment adjustment cost and habit persistence are estimated to be higher than when low frequencies are absent. Copyright © 2014 John Wiley & Sons, Ltd.     

Balanced growth and structural breaks: evidence for Germany

One of the central hypotheses of the neoclassical growth literature is the balanced-growth hypothesis, which predicts that output, consumption and investment grow at the same rate. Empirically, this implies that the consumption-to-output ratio and the investment-to-output ratio must be stationary and that consumption and investment must be cointegrated with output. This article tests these implications with respect to Germany, using unit root tests and cointegration techniques that allow for an endogenously determined structural break. We find that the long-run growth path of the German economy is consistent with the balanced-growth hypothesis if we allow for a structural break associated with the worldwide productivity slowdown of the early 1970s.     

Capital Commitment and Cournot Competition with Labour-managed and Profit-maximising Firms

The behaviour of labour managed and profit seeking firms in a Cournot duopoly with capital strategic interaction is analysed. When a pure labour managed duopoly is considered, firms choose their capital commitments according to the level of the interest rate, unlike what usually happens when only profit maximising firms operate in the market. If we consider a mixed duopoly, the profit maximising firm under-invests while the labour managed firm over-invests regardless of the rental cost of capital     

Market, civic virtues, and civic bargaining in the medieval and early modern age: some evidence from sixteenth century Italy

In the last decades, historians have shown that the modern market is rooted in the institutional system created in European towns since the middle ages. This approach leads us beyond the usual opposition between market and society or between public and private market. Indeed, in the medieval and early modern age, the market was part of a wider institutional design of civil life, which had a basic conceptual frame of reference in the notion of the common good, a feature typical of such organicistic and hierarchical societies. This paper explores the process of market construction in the medieval and early modern age. I firstly analysed the role of the market in these societies and then focused on the case of foodstuff provision: a key element of the non-written, ancient pact between rulers and people, based on the assurance of subsistence. As a basis for the study, I employed sixteenth century documents regarding Vicenza, a medium-sized town in the Republic of Venice. These show very clearly that, in general, market and price regulation was not the result of arbitrary interventions by public authorities; on the contrary, it was the result of a process of negotiation, which I call civic bargaining. This process involved??to various degrees??public authorities, landowners, merchants and guilds, and the town??s people, the pursuit of the common good being, in practice, a matter of balancing various needs and interests. Present-day economic and social public policies are, in many aspects, an inheritance of the institutional system created in the medieval and early modern age: knowledge of these origins is useful in the present debate regarding economic versus social development, as discussed at the end of the paper.     

Allotment in first-price auctions: an experimental investigation

We experimentally study the effects of allotment—the division of an item into homogeneous units—in independent private value auctions. We compare a bundling first-price auction with two equivalent treatments where allotment is implemented: a two-unit discriminatory auction and two simultaneous single-unit first-price auctions. We find that allotment in the form of a discriminatory auction generates a loss of efficiency with respect to bundling. In the allotment treatments, we observe large and persistent bid spread, and the discriminatory auction is less efficient than simultaneous auctions. We provide a unified interpretation of our results that is based on both a non-equilibrium response to the coordination problem characterizing the simultaneous auction format and a general class of behavioral preferences that includes risk aversion, joy of winning and loser’s regret as specific cases.     

Assessing the functional relationship between CO2 emissions and economic development using an additive mixed model approach

Researchers have suggested that the relationship between the emission of carbon dioxide per capita and the real gross domestic product per capita follows an inverted-U-shaped (so-called environmental Kuznets) curve. Studies have generally used polynomial regression (quadratic or cubic form) to investigate this relationship. It has been recognised that polynomials are not that flexible and that, by choosing the degree of the polynomial, researchers make a priori assumptions. In this paper, we investigate the environmental Kuznets curve hypothesis using a flexible approach from additive mixed models. Such models are well-suited to handle nonlinear covariate effects flexibly and to simultaneously deal with temporal error structure. We consider the following countries: Australia, Austria, Canada, Denmark, Finland, France, Italy, Spain and Switzerland. Our results show the existence of the classic environmental Kuznets curve for France and Switzerland, and of a nonlinear (increasing) relationship for Australia, Italy and Spain. For Austria, the evidence reveals a weak N-shaped relationship. New nonlinear shapes are found for Finland (inverted-L-shape relationship), Canada (a special case of the inverted-L-shape relationship), and Denmark (M-shape relationship). Our findings are complemented by the calculation of the elasticity of the carbon dioxide emission per capita as a percentage of each level of real gross domestic product per capita.     

Inflation and inflation uncertainty in the euro area

This article estimates a time-varying AR-GARCH model of inflation producing measures of inflation uncertainty for the euro area, and investigates their linkages in a VAR framework, also allowing for the possible impact of the policy regime change associated with the start of EMU in 1999. The main findings are as follows. Steady-state inflation and inflation uncertainty have declined steadily since the inception of EMU, whilst short-run uncertainty has stabilised. A sequential dummy procedure provides further evidence of a structural break coinciding with the introduction of the euro and resulting in lower long-run uncertainty. It also appears that the direction of causality has been reversed, and that in the euro period the Friedman-Ball link is empirically supported, consistently with the idea that the ECB can achieve lower inflation uncertainty by lowering the inflation rate.