BOOK of Abstracts ESEM97 Economic Theory

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52th ECONOMETRIC

SOCIETY EUROPEAN MEETING

BOOK OF ABSTRACTS

Toulouse, France

August 27 - August 30, 1997

NOTICE

Abstracts are presented in the order of session numbers. Presenters are listed by their entire last names capitalised. The presenters' affiliation and the co-author(s)' names are also provided. The alphabetical list of all presenters is included at the end of the book of abstracts.

Request of Papers

The procedure is as follows. In an area called "Rue Intérieure" on the map, you will find a display of panels with envelopes. Each envelope has the name of the author(s) and the title of one paper. Envelopes follow the order of session numbers. You will find labels with your name and address in the Meeting bag. If interested in receiving a paper, take one of those labels and place it in the corresponding envelope.

Only the author is responsible for mailing you the paper after the Meeting. No papers will be distributed during the Meeting by the Meeting staff.

To the authors

We shall be grateful to you for distributing the requested papers promptly. This task is an important part of the Meeting.

ECONOMETRICS

ECONOMIC THEORY

ET1 ANIMAL SPIRITS

Macroeconomic Coordination Failure under Oligempory

Paul MADDENMADDEN, P.,

University of Manchester, U.K.

Esma Gaygisiz

Each sector of a multi-sector overlapping generations model is characterised by oligempory, with a given number of firms who are oligopsonists in the sectoral labour market (where labour supply is spatially differentiated) and oligopolists in the sectoral (homogeneous) output market. As a firm raises wages beyond the local full employment level, acquiring labour from competitors, sectoral output supply becomes constant and the firm suddenly faces a perfectly elastic output demand curve. The resulting discontinuities create multiple, steady-state Pareto-ranked equilibria; the associated sunspot equilibria are consistent with some stylized business cycle facts.

Keywords: Coordination failure, oligempory

ET1 ANIMAL SPIRITS

Indeterminacy and Expectations Driven Fluctuations with Variable Factor Utilisation and Unemployment

Patrick A. PINTUSPINTUS, A.,

CEPREMAP, France

This paper studies the influence of variable capital and labor utilization on local indeterminacy and expectations driven fluctuations in one-sector models with constant returns to scale. It is shown that although a variable utilization reduces the range of input substitution compatible with endogenous business cycles, expectations driven fluctuations are more plausible in the context of an "intensive" use of factors reducing the actual elasticity of capital-labor substitution. The argument is general enough to apply equally well to alternative business cycle models with substitutable inputs. In addition, unemployment is a possible outcome and is consistent with endogenous cycles in the model with variable labor utilization (effort) and efficiency wages. In contrast with the recent literature, the analysis does not rely on increasing returns to scale in production. Accordingly, the results are not at variance with recent empirical studies emphasizing the importance of variable utilization and denying the evidence of increasing returns.

Keywords: input utilization and substitution, local indeterminacy, expectations driven fluctuations, local bifurcations

ET2 MONETARY POLICY 1

Monetary Union and Default on Public Debt: Is there a way out of the German Dilemma

Samir JAHJAHJAHJAH, S.,

ECARE-CEME, Belgium

We analyze default risk on public debt. We show that default risk is a substitute to devaluation risk. In a simple framework we determine Stackelber equilibria in a game between a Central Banker and n governments.When fiscal and monetary instruments are decentralized we find three possible equilibria depending on the debt. We find here a theoretical ground for fiscal and debt criteria. A German dilemma however arises if a highly indebted country join in a monetary union as in equilibrium, inflation is above its target value and repudiation could occur. We look for mechanisms that help alleviate that dilemma. Conditional distribution of revenues from seigniorage proofs to be an efficient and incentive compatible way to achieve a reduction of repudiation.

Keywords: Economic and Monetary Union, Fiscal Policy, Taxataion, Central Bank, Default Risk, Debt Management

ET2 MONETARY POLICY 1

Monetary and Fiscal Discipline in the EMU

Laura BOTTAZZIBOTTAZZI, L.,

IGIER, Italy

Paolo Manasse

Abstract not received from the author

ET2 MONETARY POLICY 1

Macroeconomic Effects of EMU

Frank BOHNBOHN, F.,

Heidelberg University, Germany

Abstract not received from the author

ET3 ASSET PRICING UNDER ASYMMETRIC INFORMATION

Heterogeneous Investors, Firm Quality and Security Design in Emerging Markets

Mahdi MOKRANEMOKRANE, M.,

Université de Cergy-Pontoise, France

Laurent Augier

We analyze the optimal type of financial instrument to issue for a firm that takes into account the informational asymmetries that exist in credit relationships, particularly in emerging markets. Investors are assumed heterogenous in the sens that they do notall have access to the same information concerning the quality of firms seeking funds. The motivation to innovate emanates fromthe issuer who may split its asset's revenues and hense create complex securities. We show that splitting assets is not always optimal for a good quality firm and that a determinant factor is the shape of the random demand from the least informed investors. In certain cases, issuing complex securities may enhance the quality of available market information. The market thus becomes more liquid and efficient. The link between financial market informativeness and economic growth is discussed.

ET3 ASSET PRICING UNDER ASYMMETRIC INFORMATION

Strategic Trading in a Dynamic Noisy Market

Dimitri VAYANOSVAYANOS, D.,

Stanford University, U.S.A.

This paper studies a dynamic, stationary model of a financial market with a large trader and small noise traders. At each period the large trader receives a privately observed stock endowment, and trades with competitive market-makers in order to share dividend risk. When the time between trades goes to 0, the trading process consists of two phases. During the first very short phase, the large trader sells a fraction of his endowment and is identified by the market-makers. He then completes his trades during the second longer phase. Closed-form solutions are obtained for a special case.

ET3 ASSET PRICING UNDER ASYMMETRIC INFORMATION

Why Include Put Options in New Equity Offerings

Salvatore CANTALECANTALE, S.,

INSEAD, France

The purpose of this paper is to show how the underpricing phenomenon occurring in IPOs could be solved giving firms the possibility to attach to the portion of the equity they sell an option-like claim. The put option, modeled in this paper as a lump sum paid by the insiders of the firm to the new stockholders in some selected states, will help reducing the asymmetry of information existing between insiders and outsiders of the firms, allowing ''good'' firms to sell the package they offer at the full information value.

Keywords: IPO, Finance Policy, Security Design

ET4 AUDITING

Internal Control and External Evasion: A Model of Business Tax Compliance

Kong-Pin CHENCHEN, K. P.,

Academia Sinica, Taiwan

C.Y. Cyrus Chu

This paper offers the first attempt at a theoretical modelling of business income tax evasion. While individual tax evasion is essentially a portfolio selection problem which decides the proportion devoted to a risky asset (the amount evaded) given the penalty and inspection rate set by the tax authorities, business tax evasion is much more complicated. When the owner of a firm decides to evade, he not only risks being detected by the tax authority but more importantly, the optimal compensation scheme offered to the employees will be distorted. Specifically, part of the information which is valuable in inferring the employees' effort cannot be written into the contract, which distorts the effort exerted by the employees. Thus, evasion increases the proportion of the profit retained by the firm at the expense of internal control. Applications to transfer pricing and vertical integration are also suggested.

ET4 AUDITING

Interdependent Auditors as Fiscal Gatekeepers

Luigi Alberto FRANZONIFRANZONI, L., A.,

University of Bologna, Italy

Abstract not received from the author

ET4 AUDITING

Auditing, Reputation and Mandatory Rotation

Martin SUMMERSUMMER, M.,

University of Regensburg, Germany

During the last years some spectacular firm failures after clean audit reports have lead to a new debate about regulations for the auditing industry. In this debate the benefits of an auditor from long term relations with the client have been frequently seen as a thereat to auditor independence. It has therefore been suggested to restrict an auditor's tenure by introducing mandatory rotation. This paper investigates this argument in a simple game theoretic framework. The main result of the analysis is that in a world where the public can learn whether an auditor is trustworthy or not regulation by rotation rules is impairing independence rather than enhancing it.

Keywords: Auditing, Reputation, Regulation, Information

ET5 PUBLIC GOODS PROVISION

Concern for Status, Rank-Order Contests, and Contributions to a Public Good

E. Ünal ZENGINOBUZZENGINOBUZ, E.,

Bogazici University, Turkey

We study the consequences of concern for relative position and status in a public good economy. We consider a group of agents engaged in a contest whereby a set of rewards are distributed according to relative position. The extent of concern for rewards, together with their relative magnitude, has an impact on willingness to contribute to public goods. Depending on whether higher private good consumption is rewarded or punished, the contest for relative position either exacerbates or ameliorates the free-riding problem. We also consider how an appropriate reward scheme can be designed to induce more efficient levels of public good.

Keywords: status, public goods, voluntary contributions, rank-order contests, reward schemes

ET5 PUBLIC GOODS PROVISION

Altruism, Voluntary Contributions and Neutrality. The Case of Environmental Quality

Pierre-André JOUVETJOUVET, P. A.,

Université de Lille 3, France

Philippe Michel, Pierre Pestieau

This paper develops a dynamic model wherein production generates pollution that is viewied as a public bad by consumers. There are two types of consumers: those who are altruist à la Barro-Becker and leave bequests to their children and those who are pure life-cyclers. Both types of consumers voluntarily contribute to the quality of environment. It appears that if bequests by altruists and voluntary contributions by all are positive, redistribution is neutral. To achieve optimality, one needs a tax on capital to reach the optimal level of pollution and a differential subsidy on altruistic and non altruistic consumers' contributions.

Keywords: Altruism, Public goods, Environmental management, Voluntary contriibutions, Intertemporal choice and growth

ET5 PUBLIC GOODS PROVISION

Voluntary Public-good Provision Under Uncertainty with Nash and Non-Nash Behaviour

Ronald S. WARREN JR.WARREN JR. R.,

University of Georgia, U.S.A.

Donald C. Keenan, Iltae Kim

Recent studies have shown that individuals may be induced to increase their (voluntary) supply of a public good in response to increases in uncertainty about either (i) the contributions of others to the provision of the public good; or (ii) the response of others to an individual's own contribution to the public good. We extend previous analyses by showing that the compensated response of an individual's public-good supply to increases in such risks can be completely characterized in terms of the monotonicity of endogenous measures of absolute and relative risk aversion. We then establish additional conditions on these measures which are sufficient to determine the total, uncompensated response. Our results are sufficiently general to encompass most previous findings as special cases.

Keywords: public goods, free riding, uncertainty

ET6 EXPERIMENTAL ECONOMICS 1

Strategic Complementarity as a Cause of Nominal Rigidity and the Short-Run Non-Neutrality of Money

Jean-Robert TYRANTYRAN, J. R.,

University of Zurich, Switzerland

Ernst Fehr

This paper examines whether an exogenous anticipated monetary shock causes real economic effects, i.e. whether anticipated money is neutral. A major finding is that an anticipated monetary shock can in fact be massively non-neutral in the short run, if the economic environment is characterized by strategic complementarity. Controlled ceteris paribus variation of the environment allows to isolate for a cause of monetary non-neutrality. If the environment is characterized by strategic substitutability, anticipated monetary shocks are largely neutral.

ET6 EXPERIMENTAL ECONOMICS 1

Theoretically Robust But Empirically Invalid - An Experimental Investigation into Tax Equivalence

Georg KIRCHSTEIGERKIRCHSTEIGER, G.,

University of Vienna, Austria

Rudolf Kerschbamer

This paper tests Liability Side Equivalence, i.e. the principle that the effects of a tax do not depend on which side of the market has to pay the tax. Experimental evidence is presented showing that subjects are, on average, better off if the liability to pay a tax rests on the other side of the market. An explanation for this violation of Liability Side Equivalence is that a change in the distribution of tax liabilities induces a shift in behaviorally relevant social norms and that this shift affects the outcome of the tax. Our results explain some striking empirical observations and have important policy implications.

Keywords: Tax Equivalence, Tax Incidence, Social Norms

ET6 EXPERIMENTAL ECONOMICS 1

Insider Trading and Transparency in Multiple Dealer Financial Markets

Mathijs A. VAN DIJKVAN DIJK, M.,

Maastricht University, The Netherlands

Ronald Huisman, Kees G. Koedijk, Irma W. van Leeuwen

Keywords: Altruism, Public goods, Environmental management, Voluntary contriibutions, Intertemporal choice and growth

ET7 RATIONALITY IN GAMES

Undecidable Statements in Game Theory

Christian EWERHARTEWERHART, C.,

University of Bonn, Germany

The paper points towards formally undecidable statements in non-cooperative game theory. For a version of the centipede game, we show that it is undecidable whether a deviation from the backward induction path is possible under commonly assumed rationality or not. The approach retraces various impossibility results in the definition of rational behavior to the presence of undecidable statements. It is argued that the problem of undecidability can be avoided by assuming that each player has a private epistemic model of his opponents.

Keywords: Game theory, rationality, undecidability

ET7 RATIONALITY IN GAMES

Hierarchies of Conditional Beliefs and Interactive Epistemology in Dynamic Games

Pierpaolo BATTIGALLIBATTIGALLI, P.,

Princeton University, U.S.A.

We show how to extend the construction of infinite hierarchies of beliefs (Mertens and Zamir (1985), Brandenburger and Dekel (1993)) from the case of probability measures to the case of conditional probability systems (CPSs) defined with respect to a fixed collection of relevant hypotheses. The set of hierarchies of CPSs satisfying common knowledge of coherency conditional on every relevant hypothesis corresponds to a universal type space. This construction provides a unified framework to analyze the epistemic foundations of solution concepts for dynamic games. As an illustration, we derive some results about conditional common certainty of rationality and rationalizability in multistage games with observed actions.

ET7 RATIONALITY IN GAMES

Recall in Extensive Form Games

Klaus RITZBERGERRITZBERGER, K.,

Institute for Advanced Studies, Austria

This paper considers alternative definitions of perfect recall in extensive form games. Decompositions of perfect recall into an ordering of information sets and memory requirements are derived. It can be shown that perfect recall is not necessarily an implication of rationality. But the decompositions of perfect recall allow the identification of a condition under which perfect recall is indeed an implication of rationality. And this condition is weaker than conditions to the same effect in the previous literature.

Keywords: Extensive Form Games, Perfect Recall, Rationality

ET8 DUOPOLY THEORY

Price Competition when Consumer Behaviour is Characterized by Conformity or Vanity

Isabel GRILOGRILO, I.,

CORE, Belgium

Oz Shy, Jacques-François Thisse

It has long been recognized that the pleasure of consuming a good may be affected by the consumption choice of other consumers. At least two types of motivations may explain such a behavior. In some cases social pressures may lead to conformity; while in some other cases individuals may feel the need of exclusiveness under the form of vanity. Such externalities have proven to be important in several markets where the decision to buy a product is positively or negatively affected by the number of consumers purchasing the same product. However, the market and welfare implication of these effects are still unclear. To investigate them, we propose to graft the consumption externality model onto the spatial duopoly model. When conformity is present but not too strong, both firms remain in business but price competition is fiercer and results in lower prices. The market share of the large firm increases with the population size; as the population keeps rising, the large firm serves the entire market and sets a price which has the nature of a limit price. When conformity is strong enough, different equilibria may exist. These equilibria are such that only one firm has a positive market share or both firms split the market. At the other extreme, when vanity is at work, price competition is relaxed.

Keywords: Price competition, network, consumption externality

ET8 DUOPOLY THEORY

Endogenous Stackelberg Leadership

Eric VAN DAMMEVAN DAMME, E.,

Tilburg University, The Netherlands

Sjaak Hurkens

We consider a linear quantity setting duopoly game and analyze which of the players will commit when both players have the possibility to do so. To that end, we study a 2-stage game in which player can either commit to a quantity in stage 1 or wait till stage 2. We show that committing is more risky for the high cost firm and that, consequently, risk dominance considerations, as in Harsanyi and Selten (1988), allow the conclusion that only the low cost firm will choose to commit. Hence, the low cost firm will emerge as the endogenous Stackelberg leader.

ET8 DUOPOLY THEORY

Will the High-Quality Producer Please Stand Up? Signalling in Duopoly

Per Baltzer OVERGAARDOVERGAARD, P.,

University of Aarhus, Denmark

Mark Hertzendorf

This paper analyzes how duopoly competition may affect the incentives of firms to signal quality through their pricing strategies. Of the two firms, one has a high quality, and one has a low quality, but initially the potential customers are unable to verify who has the high quality. The incentives of the firms are such that the high quality firm is interested in revealing its identity, whereas the low quality firm would prefer to conceal its identity. We study the scope for separation of the two types and show how this is related to the size of the quality difference. If the difference is small, separation is impossible, but if the difference is sufficiently large, the high quality firm can successfully separate in equilibrium. Among other things, we show that whether there is pooling or separation, in the focal equilibrium the prices of both firms are likely distorted upwards compared to the case where customers are able to observe the qualities before purchase.

Keywords: Duopoly signaling, quality uncertainty, pooling vs. separation

ET9 INTERNAL LABOUR MARKETS

Strategic Recruiting and the Chain of Command- On the Abuse of Authority in Internal Labour Markets

Guido FRIEBELFRIEBEL, G.,

Université des Sciences Sociales, France

Michael Raith

If managers and their subordinates have the same basic qualifications, organizations could benefit from replacing unproductive superiors by more productive subordinates. This, however, could give rise to strategic recruiting. Anticipating the danger of being replaced, unproductive superiors might deliberately recruit unproductive subordinates in order to protect themselves, or engage in other forms of abuse of authority which could be harmful for the organization. We show that the common practise of restricting communication between non-adjacent levels in the organization's hierarchy by means of a chain of command can be an effective way of securing the incentives for superiors to recruit the best possible subordinates. We discuss some alternative instruments and general implications of our analysis for organizational design.

Keywords: Hierarchies, Strategic Recruiting, Internal Labor Markets, Abuse of Authority

ET9 INTERNAL LABOUR MARKETS

Authority and Incentives in Organisations

Gaute TORSVIKTORSVIK, G.,

University of Bergen, Norway

Trond E. Olsen

Abstract not received from the author

ET9 INTERNAL LABOUR MARKETS

The Value of Lifetime Employment and Promotions when Human Capital is General

Pier Angelo MORIMORI, P., A.,

University of Florence, Italy

Human capital theory maintains that firm attachment and low turnover are due to the presence of specific human capital. The paper challanges this view by showing that general human capital can cause them too. Owing to unverifiability investment is likely to be inefficient in competitive spot markets. This inefficiency, however, can be remedied under plausible conditions by long-term employment contracts involving promotions as incentives. A critical requirement for these contracts is that the employer can commit herself to lifetime employment. General human capital is thus shown to be a cause of low turnover just as firm-specific human capital. This result, which is consistent with empirical observation, prompts a critical reconsideration of the way turnover data are usually interpreted in the light of human capital theory.

Keywords: Promotions, careers, firm attachment, general human capital

ET10 VOTING THEORY 1

Electoral Evolution, The Quota One Case

Salvador BARBERABARBERA, S.,

Universitat Autònoma de Barcelona, Spain

M. Maschler, J Shalev

Abstract not received from the author

ET10 VOTING THEORY 1

A Characterization of Median Voter Schemes

Anna BOGOMOLNAIABOGOMOLNAIA, A.,

Universitat Autònoma de Barcelona, Spain

The median rule is known to be a strategy-proof social choice function when alternatives are points in a Euclidean space and preferences are single-peaked. In this paper, we explore the possibility of relating strategy-proofness, single-peakedness and the median voter principle from a general point of view, in an abstract setting where alternatives are not endowed a priori with any spatial structure. Given an anonymous onto social choice function F which aggregates n-tuples of alternatives into alternatives, we give necessary and sufficient conditions under which F is a median voter rule for an appropriate embedding of the set of alternatives into some Euclidean space. We also characterize the maximal domain of preferences under which such functions would be strategy-proof.

ET10 VOTING THEORY 1

Solutions to Condorcets Paradox for a Large Number of Votes

Andranik TANGIANTANGIAN, A.,

Fern Universität Hagen, Germany

We provide intuitive, formal, and computational evidence that in a large society Condorcet's paradox (the intransitivity of social preference obtained by pairwise vote) can hardly occur. For that purpose, we compare two models of social choice, one based on voting and another one based on summing cardinal utilities, expressed either in reals, or integers. We show that, under very weak assumptions, the probability that both models provide the same decision results tends to 1 as the number of voters increases. In particular, this implies that Condorcet's and Borda's methods tend to give the same decisions as the number of voters increases. Therefore, in the model with a large number of voters, the transitivity of the Borda preference is inherent in a majority preference as well. We provide computed tables which demonstrate how rapidly vanishes the fraction of intransitive majority preferences. In conclusion we explain how to use these tables in practical applications and make some comments on electoral systems.

Keywords: social choice, intransitivity of majority preference, ordinal utility, cardinal utility, Borda count, Condorcet count

ET11 WAGE STRUCTURES 1

Two-Stage Bargaining and Minimum Wages in a Dual Labour Market

Torben TRANÆSTRANÆS, T.,

University of Copenhagen, Denmark

Karsten Stæhr, Mark A. Roberts

This paper studies two-stage bargaining under the assumption that agreements reached at central levels extend beyond the unionized sector of the economy. We consider the case where bargaining is decentralized and identify conditions under which firms and unions will experience a communality of interest in extending coverage of a minimum wage to the non-unionized part of the economy. In many countries the labour market comprises a primary sector with high non-market clearing wages and job queues, and a secondary sector where the wage clears the market. This particular sectoral structure is determined endogenously by our model.

Keywords: Multi-stage Bargaining, Minimum Wages, Dual Labour Market, Coverage Extension

ET11 WAGE STRUCTURES 1

Two-Wage Schemes and Frequently Observed Output

Eero LEHTOLEHTO, E.,

Labour Institute for Economic Research, Helsinki, Finland

In the two-wage scheme considered the attainment of the output target is remunerated by a bonus wage. In a static case the first-best can be approximated through extremely severe penalties. In a multi-period case with an agent observing how output evolves during the total contract period, uncertainty related to money payments can be eliminated at the expense of the risk costs due to unexpected effort adjustments. These costs can, however, be made arbitrarily small by diversifying the required effort adjustments between periods. The first-best can be reached without the use of extremely severe penalties, if the number of intermediate observations are numerous enough.

Keywords: Two-wage scheme, principal-agent, moral hazard, dynamic programming

ET11 WAGE STRUCTURES 1

Holdouts Induce Lower Wage Increases If Contracts Are Backdated

Wilko BOLTBOLT, W.,

De Nederlandsche Bank, The Netherlands

Harold Houba

In this paper a standard strategic wage bargaining model is extended to incorporate backdating of new contracts. It is shown that the minimum and maximum wage contract are negatively related to the length of delay. Motivated by Dutch evidence the necessary and sufficient conditions for inefficient equilibria with lengthy holdouts are derived. Surprisingly, the settlement wage negatively depends on the degree of inefficiency of such an equilibrium and this dependence does not disappear in the limit as the discount factor tends to unity.

Keywords: strategic bargaining, holdouts, backdating, settlement wages

ET12 CORPORATE FINANCE 1

Is There Adverse Selection in the Credit market

Otto TOIVANENTOIVANEN, O.,

University of Warwick, U.K.

Robert Cressy

Despite a huge theoretical literature on adverse selection in credit markets little hard empirical evidence exists for its importance in business lending. Moreover, existing theoretical approaches invariably beg the question of symmetric versus asymmetric information regimes by assuming a first best equilibrium in which collateral plays no role. This paper begins to rectify these deficiencies by constructing models of lending under the two regimes that accomodate the stylised facts of lending, in particular the prevalence of collateral in loan contracts. The models are constructed to be potentially valid under either asymmetric or symmetric information. Regimes are distinguished from each other by differences in their collateral determinants. The models are then tested individually and against each other using data on some 3000 loans recently made by a representative UK bank. The empirical results reject adverse selection in favor of symmetric but imperfect information.

ET12 CORPORATE FINANCE 1

The Impact of Financial Constraints on Mark-up: Theory and Evidence from Italian Firm Level Data

Anna BOTTASSOBOTTASSO, A.,

CERIS-CNR, Italy

Marzio Galeotti, Alessandro Sembenelli

In this paper we look at both the theoretical and empirical behavior of price-cost margins when capital market imperfections affect firms' mark-up policies. We present a model of a firm operating in an industry with differentiated product and facing imperfect capital markets for financing operations. We use this model to assess the cyclical behavior of margins when internal and external sources of finance are imperfect substitutes. The model results in an Euler equation describing the optimal price path chosen by the firm which we estimate using data from several hundreds Italian firms over the period 1977-1993. The empirical results suggest that: (i) capital market imperfections exist in the sense that firms in our sample pay a premium on external finance which depends on the debt to sales ratio; (ii) according to our estimates, constrained firms find it optimal to cut price compared to unconstrained firms; (iii) if firms are more likely to be financially constrained in recession, our overall results imply that financial market imperfections tend to make mark-ups pro-cyclical.

Keywords: Mark-up; Financing Constraints, Differentiated Products

ET12 CORPORATE FINANCE 1

Do Coupon Payments Matter?

Saugata BANERJEEBANERJEE, S.,

KOC University, Turkey

H. Ugur Koyluoglu

This paper addresses the issue of coupon payments and how it affects the probability of bankruptcy and hence the value of debt. Using innovative path integration (cell-to-cell mapping) methodology, in a framework of risk-neutrality and a flat-term structure, it is shown that for highly leveraged firms, the size of the coupon is an important determinant of the probability of bankruptcy, when the value of a firm's total assets follows a process that is distinct from the process that determines its available cash assets, and the firm faces a liquidity cost. Shortcomings of traditional debt-valuation models that do not consider the effect of coupon size are pointed out. An important factor, that of management's strategy for dealing with cash shortages (liquidating versus short-term borrowing) is highlighted. Implications for optimal coupon size are discussed.

Keywords: cash flow, debt coupon, bankruptcy, debt valuation

ET13 OVERLAPPING GENERATION MODELS: TAXATION

Optimal Linear Taxation in an Overlapping-Generations Framework:

A Comparison between Time Consistent and Time-Inconsistent Policies

Thierry PAULPAUL, T.,

Université de Grenoble II, France

Philippe Michel

Abstract not received from the author

ET13 OVERLAPPING GENERATION MODELS: TAXATION

The Economic Effects of Restrictions on the Government Budget

Christian GHIGLINOGHIGLINO, C.,

University of Geneva, Switzerland

Karl Shell

It is a standard result that in simple overlapping generations economies with perfect financial markets and lump-sum taxes and transfers, restrictions on the government budget do not limit the set of achievable equilibria. In the present paper it is shown that for more general economies, the conditions under which this invariance result holds can typically be stated in terms of the number of available tax instruments. In particular, for policies that only consists in anonymous consumption taxes, whether or not a zero deficit may be restored without changing the equilibrium allocation depend on the number of consumers and of commodities. A similar result holds in the presence of borrowing constraints.

Keywords: Overlapping-Generations Economies, Economic Policy, Government budget deficit, Optimal taxation

ET13 OVERLAPPING GENERATION MODELS: TAXATION

Growth Effects of Income Taxation in an OLG Model with Intergenerational Human Capital Externalities

Don I. Asoka WOEHRMANNWOEHRMANN, D.,

Otto von Guericke Universität Magdeburg, Germany

This paper examines the growth effects of income taxation in an overlapping generations model with intergenerational human capital externalities. In contrast to recent endogenous growth models assuming an infinite planning horizon, it can be shown that neither labor income taxation nor capital income taxation depress long-run growth. Our most striking result is that an increase of the tax rate on capital income can lead to a higher growth rate by increasing the relative attractiveness of investments in human capital. More general, any tax policy that favors human capital as opposed to physical capital is translated into a higher long-run growth rate of the economy.

Keywords: Endogenous growth, overlapping generations, human capital, education, taxation

ET14 SPACE

Migration and Environment

Markus HAAVIOHAAVIO, M.,

University of Helsinki, Finland

The literature has shown that perfect household mobility can act as a coordination mechanism inducing selfish countries to internalize international externalities created by transboundary pollution. This paper develops a differential game to study if the result can be by extended to situations where households are only imperfectly mobile. The conclucions of the paper are rather surprising: while costless migration still implies efficiency, imperfect mobility can actually create new dynamic distortions and lower the quality of the environment.

Keywords: national environmental policy, perfect and imperfect household mobility, differential games, perfect Markov equilibrium, commitment, tragedy of the commons

ET14 SPACE

The Inadequacy of Pigouvian Taxes in a Spatial Framework

Sakari UIMONENUIMONEN, S.,

University of Vaasa, Finland

We reconsider in a spatial general equilibrium framework the classic pollution externality problem where one firm pollutes and other firm suffers from pollution. We show that the property rights to the environment and the associated compensation of victims play an essential role in the optimal Pigouvian solution. The property rights must be defined in a definite way in order that an optimal spatial structure of the economy can be achieved. The result contradicts the Pigouvian tradition which defines property rights for the victims' advantage (i.e gives no property rights to the polluter) but does not compensate them.

Keywords: Pigouvian taxes, pollution externality, property rights, spatial general equilibrium, victim compensation

ET14 SPACE

Dual Labour Markets, Urban Unemployment and Multicentric Cities

Yves ZENOUZENOU, Y.,

Université de Paris 2, France

Tony E. Smith

A two-sector model of urban unemployment is developped which focuses on the formation of a secondary sector in response to a primary sector demand shock. The optimal location of this (single firm)sector is shown to be at the edge of the city. Conditions are then established under which the new labor market equilibrium involves both a decrease in unemployment and an increase in net income for those unemployed. When all unemployment benefits are financed by local taxation of firms, it is shown that profit incentives may exist for the primary sector to subsidy the entry of a secondary sector.

ET15 ECONOMIC EVOLUTION

Rigidity and Flexibility in Social Systems

Joseph E. HARRINGTON JR.HARRINGTON JR., J., E.,

The Johns Hopkins University, U.S.A.

Within a hierarchical social system like a corporation or a government, this paper explores whether its members will be receptive or resistant to change. Though, depending on the parameters, either a rigid or a flexible norm could emerge, a rigid norm is found to be more robust. A flatter social system is conducive to a flexible norm prevailing. While a more volatile environment reduces the relative performance of a rigid rule, increased volatility can cause the emergence of a rigid norm because it makes a rigid rule easier to imitate.

Keywords: Flexibility, Hierarchies, Social Learning, Social Norms

ET15 ECONOMIC EVOLUTION

Convention and Social Mobility in Bargaining Situations

Giovanni PONTIPONTI, G.,

University College London, U.K.

Robert M. Seymour

This paper studies the evolution of a population whose members use their social class to coordinate their actions in a simple tacit bargaining game. In the spirit of Rosenthal and Landau [1979], we interpret the equilibrium behaviours that the players may adopt, as a function of their class, as customs. Players may change their class depending on the outcome of the game, and may also change their custom, as a result of some learning process. We are interested in the characterization of the fixed points of the adjustment process over the space of classes and customs from a distributional point of view. We find that, although any custom (when it operates alone) generates the same limiting class distribution as any other, these limiting distrbutions can be ranked with respect of their mobility. If players are allowed to change their custom when they find it unsatisfactory, then social mobility appears to be the key variable to predict the type of custom which will predominate in the long run even though, in general, no one custom is dominant. In particular, customs which promote social mobility appear to exhibit, in all the cases we have analysed, stronger stability properties.

Keywords: Conventions, Social Mobility, Evolutionary Dynamics

ET15 ECONOMIC EVOLUTION

Efficiency and Evolution of Social Preferences and Pro-Social Behaviour

Manfred KÖNIGSTEINKÖNIGSTEIN, M.,

Humboldt-University of Berlin, Germany

If two players agree upon a work contract and engage in joint production afterwards, individual effort relies upon the terms of the contract. The subgame perfect equilibrium depends on the production technology and may be inefficient, if the players are egoistic. In contrast, social preferences may lead to an efficient solution. A crucial question is, whether such preferences can be evolutionarily stable, if the reproductive success of an individual depends solely on income. The main result is that they are evolutionarily stable and may be superior to egoism for generic subsets of the technology set.

Keywords: evolution, social preferences, work contracts, joint production

ET16 ASSET PRICING

A General Subordinated Stochastic Process for Derivative Pricing

Jean-Philippe LESNELESNE, J. P.,

Université de Cergy, France

Jean-Luc Prigent

A general subordinated stochastic process is proposed to model the dynamics of an option underlying asset. We prove that this class of models can be considered generically as limit of discrete time models in which the number of transactions is random. We also derive several results for the valuation of contingent claims in this framework. In particular, we compare the impacts of different choices of subordinator processes on the options valuation.

Keywords: subordinated processes, option pricing, jump processes

ET16 ASSET PRICING

A Note on Martingale Equivalence and the "Fundamental Theorem of Asset Pricing"

Gianluca CASSESECASSESE, G.,

Universitá Commerciale "Luigi Bocconi", Italy

In this paper it is proved a necessary and sufficient condition for semimartingale asset prices to admit a locally equivalent martingale measure. This is a well known condition for financial economics given that it roughly amounts to excluding arbitrage opportunities. The proof makes use of the decomposition for process that are locally of integrable variation and of elements of the theory of random measures. This characterisation may be considered as the most general version of the Capital Asset Pricing Model (CAPM). It is shown how it generalizes previously known results, which are derived from it as a corollary. It is also shown what is the exact structure of price processes admitting martingale measures and what kind of restrictions must they satisfy. On the other hand, this same description of price characteristics is then employed to give an easy and general proof of the so-called "fundamental theorem of asset pricing" which states that the existence of a martingale measure is equivalent to a suitably defined notion of no-arbitrage, namely no-free-lunch-with-vanishing-return (NFLVR). This theorem is also extended to the case in which prices are general cadlag processes, thus providing a meaningful explanation of the role of semimartingale processes to model financial prices.

Keywords: continuous-time asset pricing, CAPM, cadlag processes, semimartingales, arbitrage, no-free-lunch-with-vanishing-risk

ET16 ASSET PRICING

Dynamic Behaviour of Stock Index Futures Mispricing

Mohamed TORGEMANTORGEMAN, M.,

Université des Sciences Sociales, France

This paper focuses on the dynamic behavior of stock index futures mispricing series. For this purpose, I develop a rational expectations general equilibrium model in line of Pfleiderer (1984) with competitive stock and futures markets. These two markets, disconnected by a clientel effect, are linked by particular traders called arbitrageurs. This work extends the static model of Holden (1995) to a multiperiod setting. The paper shows that current mispricing is linked to all future mispricing. In this context, mispricing variability and the mispricing autocorrelation are decreasing with time to maturity. These results suggest, first, a positive relationship between absolute magnitude of mispricing and the time to maturity, second, the presence of mean reversion in index futures mispricing.

Keywords: index futures, mispricing, rational expectations, dynamic behavior, index arbitrage, mean reversion

ET17 INTERNATIONAL TRADE POLICY

Revenue Neutral Trade reform with Many Households, Quotas and Tariffs

James E. ANDERSONANDERSON, J.,

Universität Konstanz, Germany

Government budget balance requires endogenous changes in distortionary taxes following an exogenous reform. The aggregate efficiency of reform depends on the Marginal Cost of Funds (MCF) of tariff or quota changes relative to the MCF of the endogenous taxes or to the Marginal Benefit of Government supplied goods. The aggregate efficiency of tariff liberalization is dubious, while quota liberalization is more likely to be efficient. Social welfare rises with efficiency unless distribution effects are perverse. Plausible sufficient conditions for non-perverse distributional effects are provided. The results frame a diagnostic method for sensitivity analysis in evaluations of trade and tax policies.

Keywords: Marginal Cost of Funds, gradual reform, quotas, social welfare

ET17 INTERNATIONAL TRADE POLICY

Optimal Tariff, Spillovers and North-South Trade

Kresimir ZIGICZIGIC, K.,

Charles University, Czech Republic

This paper investigates the issue of the optimal tariff policy of the domestic country ("North") in an environment in which its trade with the foreign country ("South") is accompanied by a leakage of technological information (spillovers). Three duopoly games were considered. The first one views spillovers as a parameter. In this setting the Northern government sets the tariff anticipating the subsequent competition between the firms. The second game assumes that the spillovers are a strategic variable under the control of the Southern government. The tariff and the optimal level of spillovers (interpreted as the degree of the intellectual property right protection), are determined now through the interaction between the Northern and Southern governments whose decisions precede the decisions of the firms. In the third game, the Northern government erects a tariff only if it observes the violation of intellectual property rights by the Southern government. Such a tariff is called a punitive tariff.

Keywords: Tariff, intellectual property rights, spillovers, strategic trade

ET17 INTERNATIONAL TRADE POLICY

Local Content Requirements, Vertical Co-operation and Foreign Direct Investment

Clive JIE-A-JOENJIE-A-JOEN, C.,

Tinbergen Institute Rotterdam, The Netherlands

Leo Sleuwaegen, René Belderbos

This paper develops a three-stage game to consider the effects of a local content requirement (LCR) in the context of cooperation among vertically related host firms and foreign direct investment (FDI) by a foreign firm. Besides efficiency gains, cooperation has a strategic significance through commitment value which stems from fixed sunk costs. The imposition of a LCR increases the likilihood of foreign investment as it raises the marginal cost of the foreign firm. The threat to establish a local production unit can induce the host firms to commit to cooperate and offer intermediate goods to the foreign firm at a FDI pre-empting price. It is found that a LCR in this case may increase both the likelihood of vertical cooperation and total host country welfare.

Keywords: Local content requirements, vertical cooperation, foreign direct investment

ET18 PUBLIC CHOICE

Fiscal Federalism, Political Equilibrium and Distributive Politics

Guillaume CHEIKBOSSIANCHEIKBOSSIAN, G.,

DELTA (ENS), France

We analyze fiscal federalism from a distributive politics point of view when local public goods are supplied at the federal level. The tendencies to political decentralization result from a trade-off between a competitive run for fiscal external revenues (even if the regional representatives cooperate in the federal instance) and the political gains from having a government closer to the people. The trade-off is biased toward decentralization because the fiscal cometition is not always costly. Then, we study the case when the local governments engage in political actions to influence the federal policy maker, to provide the local public goods they want.

Keywords: Federalism, Distributive Politics, Local Governments, Lobbying

ET18 PUBLIC CHOICE

Administrative Federalism and a Central Government with Regionally Biased Preferences

Robert SCHWAGERSCHWAGER, R.,

Otto-von-Guericke-Universität, Germany

Administrative federalism is defined as a constitution where the central state sets quality standards for public projects, and the local jurisdictions decide which projects are to be carried out. Decentralized decisions are inefficient because of an interjurisdictional spillover. A centralized decision is inefficient because the center is not benevolent but favors one region. For intermediate values of the spillover, it is shown that administrative federalism leads to a higher welfare than both centralization and decentralization. Moreover, because jurisdictions fear to be exploited, they only join a federation whose constitution is administrative federalism but not one with a fully centralized constitution.

Keywords: Federalism, constitution, decentralization

ET18 PUBLIC CHOICE

The Allotment of Publicly Provided Private Goods: An Examination of Bureaucratic Behaviour

Theis THEISENTHEISEN, T.,

Agder College, Norway

This paper provides a positive theory of how a public bureau allocates the output of a private good to the ultimate users of its service. A partial model, where the bureau condition allotments on individual consumption of goods that are beyond its command, is first examined. Secondly, a follower-leader model, where the public bureau takes account of consumers' response to allotments when allotments are decided upon, is considered. The properties of both models are examined, with emphasis on the relationship between individual incomes and indicators of need on the one hand, and allotments on the other hand.

Keywords: Bureaucratic behaviour, Publicly provided private goods, Allotments, Rationing

ET19 INDUSTRIAL ORGANISATION 1

Multimarket Contact, Concavity, and Collusion. On Extremal Equilibria of Interdependent Supergames

Giancarlo SPAGNOLOSPAGNOLO, G.,

Stockholm School of Economics, Sweden

Building on Bernheim and Whinston (1990), this paper analyses the effects of multimarket contact on firms' ability to collude in repeated oligopolies. Taxation, financial market imperfections, separation of ownership from control, tend to make firms' objective function strictly concave in profits. Then market games become "interdependent": firms' payoffs in one market depend on how they are doing in other markets. In this case multimarket contact always facilitates collusion, and may make it sustainable in all markets when - absent multimarket contact - it would not be sustainable in any. The effects of conglomeration and horizontal mergers are also discussed.

Keywords: oligopoly, collusion, repeated games, interdependent games, conglomeration, horizontal mergers

ET19 INDUSTRIAL ORGANISATION 1

Information Transmission, Information Acquisition, and Price Dispersion in "Thin" Homogenous Product Markets

Michael R. BAYEBAYE, M., R.,

The Pennsylvania State University, U.S.A.

John Morgan

Abstract not received from the author

ET19 INDUSTRIAL ORGANISATION 1

Collusion in a Differentiated Product Duopoly under Cost Uncertainty

Benan Zeki ORBAYORBAY, B., Z.,

Istanbul Teknik Üniversitesi, Turkey

This study analyzes the collusion in a differentiated-product duopoly where marginal costs are private information. The aim of the cartel is to maximize total industry profit. If the products are sufficiently different but marginal costs are sufficiently close, firms have incentives to declare their true marginal costs to each other. The implementability of this cartel agreement requires marginal costs to be more close. In some cases sufficient differentiation of products is also necessary for implementation in addition to close marginal costs.

Keywords: Collusion, incomplete information, differentiated products

ET20 MONETARY THEORY

Money Inventories in Search Equilibrium

Aleksander BERENTSENBERENTSEN, A.,

University of Bern, Switzerland

This paper considers money inventories in a search-theoretic model of fiat money. The monetary steady-state equilibrium of our model reveals some interesting properties of money. First, in a monetary equilibrium the expected utility of an individual increases with his money inventory. Second, the marginal expected utility of money decreases. Third, we derive endogenously an upper bound on money holdings and describe precisely the equilibrium behavior of our agents. Agents with money holdings below this upper bound willingly produce and sell for money whereas agents with money holdings above this bound cease their selling and production activities.

Keywords: Money, Decentralized Trade, Search Equilibrium

ET20 MONETARY THEORY

Inflation and the Moneyness of Currencies

Hélène REYREY, H.,

London School of Economics, U.K.

The paper studies the interactions between the medium of exchange and store of value functions of money in a general equilibrium framework. A two-country world economy with cash-in-advance constraints and thick market externalities on the foreign exchange and bond markets is analyzed. It is shown in particular that: (i) high inflation rates divert resources from production to financial intermediation; (ii) the depth of the financial market of the most inflationary country decreases and the velocity of circulation of money in this country increases; (iii) the currency of the less inflationary country tends to become international and to appreciate. Microfounded seigniorage Laffer curves are also derived.

ET20 MONETARY THEORY

Does Money Matter? A Deterministic Model with Cash-in-Advance Constraints in the Labour Market

Erdem BASCIBASCI, E.,

Bilkent University, Turkey

Ismail Saglam

This paper is an attempt to demonstrate the effects of the sequence of transactions on competitive outcomes in economies that operate with money. We study a simple dynamic economy that operates through the use of fiat money under cash-in-advance constraints in all markets. We assume that the labor market opens before the goods market. After describing the economy, we define and characterize its stationary monetary competitive equilibria (SMCE). In all cases where SMCE exist, the real wage turns out to be lower than the marginal product of labor, leaving positive pure profits to the entrepreneur. Neutrality of money is also studied in this context.

Keywords: cash-in-advance constraints, fiat money, monetary competitive equilibrium

ET21 GENERAL EQUILIBRIUM: EXTENSIONS

Existence of General Equilibrium for Spatial Economies

Jean-Philippe MEDECINMEDECIN, J. P.,

Université de Paris 1, France

Abstract not received from the author

ET21 GENERAL EQUILIBRIUM: EXTENSIONS

Clubs and the Market

Birgit GRODALGRODAL, B.,

University of Copenhagen, Denmark

Bryan Ellickson, Suzanne Scotchmer, Willian R. Zame

General equilibrium theory in the tradition of Arrow and Debreu focuses on the anonymous interactions of consumers with the market. Club theory in the tradition of Buchanan focuses on the social activity of consumption. The principal purpose of this paper is to integrate club theory and general equilibrium theory, constructing a framework which incorperates widespread trading of private goods in competitive markets and individual consumption in small groups chosen voluntarily in equilibrium. In such a framework we show equivalence of the core and the set of equilibrium states and existence of an equilibrium for atomless economies. Furthermore, the corresponding results, approximately decentralization of core allocations and existence of approximate equilibria, for a large finite economy are proven.

Keywords: Clubs, Market, Core, Walras equilibria

ET21 GENERAL EQUILIBRIUM: EXTENSIONS

From Each According to their Capacity to Pay: Differentiated Pricing in Clubs

Vicky BARHAMBARHAM, V.,

University of Ottawa, Canada

This paper attempts to explain observed differentiated pricing by clubs, and to study the relationship between the structure of equilibrium prices in small and large economies with collective goods. Clubs are formed via an Œauction-like' mechanism. Players who strongly dislike congestion accept higher prices to reduce club size. In equilibrium individuals with different preferences for the club good may belong to the same club and pay different prices for identical services. We prove a convergence theorem: As the number of participants of each type becomes sufficiently large, the set of strong Nash equilibria converges to the type-optimal allocation under conditions comparable to those required for the existence of the equal treatment core.

ET22 GROWTH

Social Rate of Discount, Distortionary Taxation and Growth. Modelisation and Application to the French Economy

Christophe HURLINHURLIN, C.,

CEPREMAP, Université de Paris I, France

Franck Portier

We propose in this paper an analytical endogenous growth model with public capital and distortionary taxation. We derive what should be the social discount rate that maximizes welfare or growth, with or without constraint on the maximal amount of fiscal revenues that can be raised by lump sum taxation. We are able to derive a growth wedge and a fiscal wedge in the suboptimal level of the social discount rate. We show that in this model where public capital act as an externality for firms and households, the smaller is the amount of revenue that government can get with non distortionary taxation, the smaller the social discount rate is and the larger capital over accumulation is. A calibrated example for the French economy is also proposed to illustrate that point. Keywords: Social discount rate, distortionary taxation, endogenous growth

ET22 GROWTH

Mandatory Profit Sharing, Entrepreneurial Incentives and Capital Accumulation

Renat FRAGELLI-CARDOSOFRAGELLI-CARDOSO, R.,

Escola de Pós-Graduacao em Economia da Fundacao Getulio Vargas, Brazil

The impact of a mandatory tax on profits which is transferred to workers is analyzed in a general equilibrium entrepreneurial model. In the short run, this distortion reduces the number of firms and the aggregate output. In the long run, if capital and labor are bad substitutes, it fosters capital accumulation and increases the aggregate output. In a small open economy with free movement of capital, it improves the welfare of the economy's average individual. One concludes that the benefits of sharing schemes may go beyond the short run employment-stabilization goal focused by the profit sharing literature.

Keywords: profit sharing, incentives, capital accumulation, factor substitution

ET22 GROWTH

Stability Properties in a Growth Model with a Downward Sloping Labour Demand

Alessandra PELLONIPELLONI, A.,

University of Warwick, U.K.

Robert Waldmann

Abstract not received from the author

ET23 INEQUALITY AND THE LABOUR MARKET

Labour Market Networks, Underclasss, and Inequality

Morgan KELLYKELLY, M.,

University College Dublin, Ireland

Lisa Finneran

About half of all vacancies are filled through networks of personal contact. We consider the implications of such labour market networks for inequality. Our central result is that referral networks display threshold behaviour. Above a critical density of referrals, qualified workers at all levels of the network are recruited with probability one. Below the threshold, workers low in the hierarchy are hired with probability zero: an underclass emerges. Although there is no discrimination, workers with the same distribution of ability at different layers of the network have very different average incomes, reflecting differences of social capital in the form of labour market contacts.

Keywords: Labour market networks, inequality, underclasses

ET23 INEQUALITY AND THE LABOUR MARKET

Hierarchical Assignments: Stability and Fairness

Lars-Erik ÖLLERÖLLER, L. E.,

National Institute of Economic Research and Stockholm School of Economics, Sweden

Kimmo Eriksson, Johan Karlander

We study a simple model of the job market, where workers are assigned to employers. We specify conditions under which the market is hierarchical in a natural sense. For such hierarchies we can state explicit values for the earnings in the worker-optimal and the employer-optimal solution, respectively. This is a discrete analogue to the Ricardian differential rent model of Sattinger (1979). We discuss problems of compatibility between fairness and stability of earnings and assignments, and argue for a certain solution.

Keywords: Matches, Pareto-optimal assignments, Hierarchy, Stable sharing

ET23 INEQUALITY AND THE LABOUR MARKET

Mommy Tracks and Public Policy: On Self-Fulfilling Prophecies and Gender Gaps in Promotion

Steinar VAGSTADVAGSTAD, S.,

Norwegian Research Center in Organization and Management, Norway

Kjell Erik Lommerud

Consider a model with two types of jobs. To install workers in fast-track jobs, employers must undertake fixed investments. In return the employers get a fraction of the workers' future product. We show that self-fulfilling expectations may lead to women meeting tougher promotion standards than men: Employers can expect women to have the main responsibility for household work in the future, this reduces the effort she will exert in the labor market, and the more talented she must be to make fast-track initiation profitable. We also show how different family and labor market policy measures affect this form of discrimination. Keywords: discrimination, asymmetric equilibria, family policy

ET24 MECHANISM DESIGN 1

An Optimal IPO Mechanism

Bruno BIAISBIAIS, B.,

Université de Toulouse, France

Jean-Charles Rochet, Peter Bossaert

We study the conflict of interest between the seller and the intermediary in the context of an Initial Price Offering (IPO). Following Rock (1986) we assume that professional investors have private information about the future valuation of the stock on the secondary market. However, we depart from Rock in two respects: we assume that there is perfect collusion between the intermediary and professional investors, and we introduce a second dimension of adverse selection, namely the potential demand of small investors, also assumed to be private information of the intermediary. We determine the characteristics of the optimal mechanism (Theorem 1). Then we show procedure (Theorem 2). This procedure is imilar to a mechanism used in the Paris Bourse, the Mise en ''Vente''. Using an exhaustive data set on these Mises en Vente on the period 1983-1994 we perform a structural test of our model. We find that the conditions that characterize the optimal mechanism are not rejected by the data.

Keywords: Mechanism design, Adverse selection, Initial Public Offerings, Underpricing

ET24 MECHANISM DESIGN 1

Regulating Complementary Input Supply: Cost Correlation and Limited Liability

Jos JANSENJANSEN, J.,

Tilburg University, The Netherlands

The regulator chooses either a monopolist producing two complementary inputs in fixed proportion, or two independent firms producing one input each. The optimal regulatory choice depends on the correlation between the input production costs, and on the producers' liability structure. Full rent extraction is possible for independent firms with limited liability when costs are correlated. Under limited liability monopolistic input supply gives higher expected welfare whenever the correlation coefficient is sufficiently small and positive. For higher correlation coefficients independent input supply is chosen, and the regulatory scheme is non-monotonic in total costs.

Keywords: Regulation, complementary products, correlation, limited liability

ET24 MECHANISM DESIGN 1

Rotating Savings and Credit Associations: The Choice Between Random or Bidding Allocation of Funds

Peter LYK-JENSENLYK-JENSEN, P.,

University of Copenhagen, Denmark

Jens Kovsted

The Rotating Savings and Credit Association (Rosca) is a globally observed informal financial institution. A Rosca is characterised by the mechanism chosen to allocate a pool of savings once to every member of the Rosca. The two most prevalent mechanisms are lottery (Random Rosca) and sequential auctions (Bidding Rosca). A model, incorporating reasonable assumptions on individual preferences and informational structure, is developed. It is subsequently proven that a Rosca organiser aiming at maximising the expected pay-off of Rosca members always chooses to implement a bidding Rosca.

Keywords: Informal financial institutions, Rosca, Rural credit markets, Sequential auctions, Mechanism design

ET25 OVERLAPPING GENERATION MODELS: DYNAMICS

Bifurcations in Pension Models

Jan BOGERSBOGERS, J.,

University of Amsterdam, The Netherlands

Abstract not received from the author

ET25 OVERLAPPING GENERATION MODELS: DYNAMICS

On the Equivalence between Overlapping Generations Models and Symmetric Exchange Economies

Claus WEDDEPOHLWEDDEPOHL, C.,

University of Amsterdam, The Netherlands

Jan Tuinstra

It is proved that an overlapping generations model (OG model) with n identical generations and a single good in each period, is equivalent to a symmetric exchange economy (SEE) with n consumers and n goods. Symmetric means that the consumers in the exchange economy have the same preferences and resources after a permutation of the commodities. The equivalence means that the SEE and the related OG model have the same equilibria. Consequently multiplicity of equilibria in the SEE is equivalent to equilibrium cycles in the OG model. By symmetry the SEE has a symmetric equilibrium price p = (1,1,...,1); it may also have m-tuples of k times permuted equilibrium prices (with mk = n). The related OG model has a single monetary equilibrium with price constant over time, and possibly monetary k-cycles. An n generations OG model can be extended to an r generations OG model (r>n), each generation only consuming in the first n periods of its life. In the equivalent r goods SEE each of r consumers only desires n goods. This permits monetary equilibria in the OG model of period k (r/k is an integer) and, equivalently, r/k tuples of k times permuted equilibria in the SEE. Examples are given for n = 2 (with cycles of any length in the OG model and asymmetric equilibria in the SEE's) and n = 3 (with cycles of period 2, 3 and 4, with equivalent equilibria in the SEE's).

ET25 OVERLAPPING GENERATION MODELS: DYNAMICS

Indeterminacy and Endogenous Fluctuations in an OLG Economy with Productive Externalities

Guido CAZZAVILLANCAZZAVILLAN, G.,

Universita degli Studi di Venezia, Italy

Patrick A. Pintus

In this paper we study the local dynamics generated in the context of an OLG model endowed with current consumption, endogenous labor supply and externalities. Using the geometric approach already developed in our related work, we are able to characterize the local dynamics generated by the model without appealing to any specific representation of preferences and technology. We find that the introduction of productive externalities is sufficient to establish the possibility of local indeterminacy (and, therefore, sunspot equilibria) and endogenous fluctuations with perfect foresight when the elasticity of input substitution is relatively large and close to those values which are standard in the current literature.

ET26 OLIGOPOLY THEORY 1

Strategic Investment in Just-in-Time Manufacturing

Dan KOVENOCKKOVENOCK, D.,

Purdue University, Indiana, U.S.A.

Nerses Kazarian, Maqbool Dada

This paper examines Just-in-Time manufacturing systems by incorporating the Economic Order Quantity (EOQ) model from operations research into a product market duopoly. We consider a two-stage game in which firms first simultaneously invest in setup cost reduction and then simultaneously choose stationary production plans and sales paths. Embedded in the second stage game is the classical tradeoff between setup and inventory holding costs. We obtain a tractable set of equilibria by refining subgame perfection with a forward induction argument, and examine the effect of market structure on equilibrium setup cost reduction, batch sizes, and inventory levels.

Keywords: Imperfect Competition, Oligopoly Theory, Just-in-Time Manufacturing, EOQ model, Logistics costs, Setup cost reduction

ET26 OLIGOPOLY THEORY 1

Strong Time-Consistency in the Cartel-versus-Fringe Model

Cees WITHAGENWITHAGEN, C.,

Eindhoven University of Technology, The Netherlands

Fons Groot, Aart de Zeeuw

Abstract not received from the author

ET27 POLITICAL ECONOMY: LOBBYING

The Political Economy of Protection When Entry Can Erode Rents

Hadi Salehi ESFAHANIESFAHANI, H., S.,

University of Illinois at Urbana-Champaign, U.S.A.

Munir Mahmud

This paper develops a political economy model of trade and industrial policy in an industry where entry can erode rents. In the existing models of trade policy, lobby for protection is carried out by the owners of the fixed-specific factors of production who do not expect the resulting rents be eroded by new entry. While relevant for declining industries, this assumption does not apply to most other cases where lobbying is carried out by firms in industries where no rents can be sustained unless entry is restricted endogenously. We argue that political support for trade restrictions in such cases may persist if incumbent firms can induce entry barriers, through government regulations or other means. We model this phenomenon as an extension of the innovative framework developed by Grossman and Helpman (1994) in which trade policy is the solution to a game between various lobbies and the government leaders. In that framework, the leaders value political contributions from interest groups more than general welfare and introduce distortionary policies as long as the marginal gain by the beneficiaries exceeds the marginal welfare cost discounted by the premium on political contributions. We modify and extend their model in three important ways. First, we assume that the government can restrict entry into protected industries through regulatory policies (or can refrain from enforcing anti-trust rules). As a result, industry size is subject to government control, which creates a motive for lobbying by itself. This also allows the government to control the supply-side deadweight losses caused by distortionary trade policies. As a result, trade interventions are less costly in terms of welfare compared to a situation where entry is not restricted. Also, the equilibrium tariff or subsidy rate is inversely related to the elasticity of domestic demand rather than import demand, as the Grossman-Helpman model implies. Second, in our model, there are no ex ante specific factors and, consequently, lobbying for protection and for entry restriction go hand-in-hand. We find that, other things equal, the rents sustained in an industry are inversely related to the elasticities of the industry's input supply and output demand. Third, we consider the possibility that politicians may place a premium on government revenues (and on importer income in case of trade quotas) commensurate with the premium on contributions. This feature incorporates the revenue explanation for protection into the model and allows the negative relationship between import penetration and tariff rate found by Grossman and Helpman to be reversed, which makes the model more compatible with common empirical findings.

ET27 POLITICAL ECONOMY: LOBBYING

Interest Group Influence and the Delegation of Policy Authority

Randolph SLOOFSLOOF, R.,

University of Amsterdam, The Netherlands

An interest group's choice between lobbying politicians and lobbying bureaucrats, and the decision of politicians whether to delegate policy authority, are investigated simultaneously. Lobbying is modeled as strategic information transmission. By assumption only bureaucrats have the expertise to assess policy relevant information coming from interest groups. Politicians may therefore want to delegate policy authority to them, but they are aware of the different interests bureaucrats may have. In equilibrium politicians weigh the benefits from a more informed policy decision against the shift in policy that is finally implemented. Delegation only occurs when the bureaucracy is not extremely biased, the stakes of the interest group in persuading government are low, and when the group has moderate access to bureaucrats. Surprisingly, politicians sometimes prefer a biased bureaucracy over an unbiased one. A final result is that under reasonable assumptions interest groups typically lobby politicians to induce delegation rather than no-delegation.

Keywords: Interest groups, lobbying, delegation

ET27 POLITICAL ECONOMY: LOBBYING

Regulatory Ambiguity and Corruption

Leonard F. HERKHERK, L.,

The Warsaw University, Poland

Corruption "in the fabric" of a regulatory system refers to a situation in which a regulatory agency seeks to extract rents for itself by interpreting and enforcing its statutory authority in an ambiguous manner. Regulatory ambiguity is associated with the creation of apparently random strictures and loopholes which affect private agents in circumstances which are difficult to predict, and hence hard to avoid. This paper analyzes the role of regulatory ambiguity in the behavior a self-interested regulatory authority which derives income from resolving third-party disputes concerning proper application and enforcement of its own system of rules.

Keywords: Regulatory Ambiguity, Regulatory Efficiency, Corruption

ET28 PRINCIPAL-AGENT MODELS 1

Information and Principal Agent Problems

Ian JEWITTJEWITT, I.,

University of Bristol, U.K.

We characterise when one experiment allows a higher payoff than another for any principal agent problem. The paper therefore carries out Blackwell's program of characterising information, but in the incentive rather than statistical decision theory context. We highlight the relationship with Blackwell information restricted to dichotomies. Assuming monotone likelihood ratio for the distributions both simplifies the conditions and induces a number of connections with other concepts from statisticsand information economics, including power in the Neyman Pearson theory of tests of hypothesis, the Spence-Mirrlees single crossing condition from adverse selection models, and some results from the theory of comparative statics.

Keywords: Blackwell Information, Principal-Agent, Neyman Pearson, Monotone Likelihood Ratio, Spence Mirrlees condition, Comparative Statics

ET28 PRINCIPAL-AGENT MODELS 1

Randomization in Dynamic Principal-Agent Problems

Holger MÜLLERMÜLLER, H.,

Stockholm School of Economics, Sweden

In a seminal paper, Holmström and Milgrom (1987) study a principal-agent problem where the agent continuously controls the drift of a Brownian motion. Their solution is remarkably simple: The optimal sharing rule is a linear function of end-of-period output alone. This paper examines a variant of the Holmström-Milgrom model in which control adjustments take place in arbitrarily small discrete time intervals. It is shown that the first-best can be approached asymptotically by a simple incentive scheme whose real-world counterpart is a random spot check in conjunction with a step function. This suggests that dynamic problems of moral hazard can be mitigated by observing the agent's interim performance.

Keywords: Principal-Agent Problem, Step Functions, Random Spot Checks

ET28 PRINCIPAL-AGENT MODELS 1

The Production of Information through Surveys and the Provision of Quality in Public Utilities:

A Principal-Agent-Users Model

Touria JAAIDANEJAAIDANE, T.,

CEPREMAP, France

Abstract not received from the author

ET29 TECHNOLOGY CHANGE AND GROWTH

Technological Change, Market Rivalry, and the Evolution of the Capitalist Engine of Growth

Pietro F. PERETTOPERETTO, P., F.,

Duke University, U.S.A.

What is the relationship between the rate of population growth and the rate of technological change? This paper answers this question in a model where increasing returns generate long-run growth but where the scale effect of population size is absent. More precisely, the model predicts that steady-state productivity growth does not depend on population size or growth. Imagine an economy where firms sell differentiated goods and accumulate proprietary knowledge through in-house R&D. As each firm invests in R&D, it contributes to the pool of public knowledge and thereby reduces all firms' future R&D costs. These intertemporal spillovers allow the economy to grow at a constant rate in steady state. Along the transition to the steady state, new firms enter the market and expand the variety of goods. With constant population, the steady state is reached when entry peters out and the economy settles into a stable industrial structure with a constant number of firms and a constant growth rate. With growing population, entry never stops and the economy reaches a steady state with a constant entry rate and a constant growth rate. The scale effect is absent in this model because an increase in population size leads to entry. this crowding-in effect generates dispersion of R&D resources across firms and offsets the positive effect of the scale of the economy on the returns to R&D. Thus, changes in the population size and growth rate have only transitory effects on productivity growth. This property allows study of the dynamic response of the economy to demographic shocks. the model predicts patterns of productivity growth, entry, and change in industrial structure that match the experience of several industrialized countries. The model, in addition, matches several of the empirical observations that are often cited as evidence against standard models of endogenous technologicla change.

Keywords: R&D, Technological Change, Population Growth, Entry, Market Structure, Scale Effects

ET29 TECHNOLOGY CHANGE AND GROWTH

Science, Diminishing Returns, and Long-Waves

Chol-Won LILI, C. W.,

University of Glasgow, U.K.

This paper aims to construct a growth model with long-waves of endogenous innovations, underlining the distinction between science and technology. Technological knowledge accumulates in a continuous way, and the scientific knowledge stock increases discontinuously. As a result, scientific progress triggers the acceleration of technological innovations and hence growth. But diminishing returns to technological R&D caused by limited dynamic learning in the R&D sector decelerates the rate of technological change, and the economy converges to temporary stagnation. This process repeats itself endogenously over infinite horizon. A prominent feature is that innovations arrive in cluster, resembling Schumpeter's business cycles. It is shown that (i) an R&D subsidy has only a temporary effect on growth unlike the existing R&D-based models, and (ii) it raises the current growth rate only at the expense of the long-run growth.

ET29 TECHNOLOGY CHANGE AND GROWTH

Innovation, Technology Adaptation and Capital Accumulation in a Vintage Capital Model

Emilio BARUCCIBARUCCI, E.,

Universitá di Firenze, Italy

Fausto Gozzi

In this paper we present a model of capital accumulation and technology innovation/adoption in a vintage capital framework. The model is an infinite horizon/infinite dimensional optimal control model, the firm employs a continuum of technologies (a continuum of heterogeneous capital goods). Capital goods are technology specific, their technology is related to vintage and technology progress. The entrepreneur maximizes the profits obtained by employing a continuum of technologies under the assumption of constant returns to scale and bearing adjustment costs for gross investments. The existence of an optimal investment policy is established and the diffusion of a new technology is proved, i.e. the long run stationary equilibrium can be a single-peaked function of the vintage, first increasing and then decreasing. Two specific models are considered: quality differentiation of vintage capital goods with no technology progress and exogenous technology progress.

Keywords: Capital Accumulation, Heterogeneous Capital Goods, Vintage, Innovation, Technology Adoption

ET29 TECHNOLOGY CHANGE AND GROWTH

Growth Cycles with Technology Shifts and Externalities

Clas ERIKSSONERIKSSON, C.,

University College of Gävle-Sandviken, Sweden

Thomas Lindh

This paper investigates technological cycles induced by shifts in technologies. The key feature is that technological development occurs partly by discrete replacement of obsolete technologies, partly by continuous innovation of components for a pervasive general purpose technology. Allowing for positive technological externalities, closed form analytical solutions for different phases are obtained and the timing of technology shifts endogenized. In contrast to other endogenous growth models, this one implies growth in phases with different properties, but the long-run growth rate depends on parameters in a similar way. The model is capable of reproducing features of e.g. the shift to computer technology.

Keywords: Economic Growth, Cycles, General Purpose Technologies

ET30 FOUNDATIONS OF GAME THEORY

On History-Dependent Mixed Strategies: an Extensive Game "Counter Example" to Harsanyi's Theorem

V. BHASKARBHASKAR, V.,

University of St. Andrews, U.K.

We present an example of an extensive form game with imperfect information with singular properties. Play takes place in two stages; overall payoffs are the sum of stage game payoffs; stage game payoffs are generic. Our example has a continuum of sequential equilibrium outcomes, which is significant in view of Kreps and Wilson (Econometrica 1982). These equilibria are history-dependent, and cannot be purified, i.e. they cannot be approximated by equilibria in behavior strategies of a game with a small amount of private information about payoffs, as in Harsanyi. Our result has implications for the robustness of equilibria in a class of multi-stage games with private observations about actions, including repeated games with private signals, repeated games with overlapping generations of players, and games with community enforcement.

Keywords: Mixed strategies, dynamic games of imperfect information, purification

ET30 FOUNDATIONS OF GAME THEORY

Choquet Rationalizability

Paolo GHIRARDATOGHIRARDATO, P.,

California Institute of Technology, U.S.A.

Michel le Breton

We provide a complete characterization of the implications of the assumption that players in a finite strategic form game maximize expected utilty, but not necessarily with respect to additive beliefs (they are Choquet rational). We show that this enables us to rationalize more strategies than when beliefs have to be additive, but less than can be rationalized by assuming that the players' preferences can be represented by the smallest expectation with respect to a set of priors. Also we find a surprising result that restricting considerably the types of beliefs allowed does not change the set of rational strategies. We consider the extension of these results to the case in which only players' preferences rankings among outcomes are publicly known. Finally we consider the implications of the assumption that there is common belief that players are Choquet rational, i.e., we define Choquet rationalizability.

Keywords: Rationalizability, Revealed Preferences, Belief Functions, Choquet Integrals

ET30 FOUNDATIONS OF GAME THEORY

Evolution of Response Rules and Equilibrium Selection

Wei-Torng JUANGJUANG, W. T.,

Cambridge, U.K.

This paper studies evolution of response rules and their effect on selection of multiple equilibria. Two response rules are investigated here: myopic best response and naive imitation. We analyse their interaction under two frameworks: without or with rule revision. In the first case, the relative size of rule user plays a crucial role on the selection of equilibria. In the second case, we find that Pareto-efficient equilibria dominate risk-dominant ones in the long run. We also characterise a class of rule selection criteria with which all agents use the naive imitation rule and play the Pareto-efficient equilibrium.

Keywords: Evolution, Response rules, Equilibrium Selection

ET30 FOUNDATIONS OF GAME THEORY

Knowledge of the Game, Rationality, and Backwards Induction

Arnis VILKSVILKS, A.,

Handelshochschule Leipzig, Germany

Aumann has pointed out that most of the recent literature on the logic of backward induction " takes one of the following positions: that common knowledge of rationality (CKR) is impossible in most perfect information games; or, that it is possible, but need not lead to backward induction". Aumann himself argues that CKR implies backward induction. The epistemic logic approach taken in this paper allows us to make sense of these different views within one framework. The implications of "n-th order mutual knowledge of rationality and the game" depend on the precise meaning of "the structure of the game".

Keywords: rationality, backward induction, epistemic logic

ET31 WELFARE ECONOMICS

Optimum Economic Distribution: Equality of Liberties or Sum of Utilities

Serge-Christophe KOLMKOLM, S, C.,

EHESS, France

Abstract not received from the author

ET31 WELFARE ECONOMICS

Fuzzy Poverty Indices

Tony SCHORROCKSSCHORROCKS, T.,

University of Essex, U.K.

S. Subramanian

This paper considers how conventional poverty indices may best be extended to a fuzzy environment in which the traditional `crisp' (or dichotomous) poverty assignment is replaced by a membership function taking values in the unit interval. Suitable analogues are proposed for a variety of standard index properties such as monotonicity, transfer preference, decomposability and scale invariance. It is shown that, in certain circumstances, a unique fuzzy index can be associated with any given conventional index family, and that the fuzzy index may be interpreted as the expected value of the conventional indices. Furthermore, the fuzzy indices not only inherit all the principal index properties of its crisp sub-family, but may also exhibit additional desirable characteristics.

Keywords: Poverty, poverty index, fuzzy sets

ET31 WELFARE ECONOMICS

Critical Levels and the (Reverse) Repugnant Conclusion

Marc FLEURBAEYFLEURBAEY, M.,

THEMA, University of Cergy-Pontoise, France

Charles Blackorby, Walther Bossert, David Donaldson

It is well-known that there is a trade-off regarding the properties of population principles that are used to make social evaluations when the number of people in the society under consideration may vary. The commonly used principles either lead to the repugnant conclusion (which is the case for classical utilitarianism), or they violate the Pareto plus principle and related properties (average utilitarianism is an example of such a principle). This paper examines the nature of this trade-off and shows that the incompatibility between avoiding the repugnant conclusion and the Pareto plus principle is fundamental and not restricted to the commonly used population principles.

Keywords: population ethics, repugnant conclusion, critical levels

ET31 WELFARE ECONOMICS

Economic Transition and Poverty: The Case of the Visegrad Countries

Adam SZULCSZULCSZULC, A.,

Warsaw School of Economics, Poland

In this research poverty in the Visegrad Group countries is compared. Equivalent income is adopted as an individual welfare measure. Poverty indices are calculated using both absolute and relative poverty lines. Comparability across countries is ensured by using purchasing power parities, estimated within the spatial consumer demand system. The highest poverty incidence was found for Poland, the lowest for the Czech Republic. It appears that inequality is more important in producing poverty than an average welfare. Three variables: unemployment, low education and female household head result in statistically significant risk of poverty in all countries.

Keywords: equivalence scales, purchasing power parities, poverty line, risk of poverty

ET32 POLITICAL ECONOMY 1

Do Representative and Direct Democracies Lead to Similar Policy Choices?

Yossi SPIEGELSPIEGEL, Y.,

Tel Aviv University, Israel

Alex Cukiermann

Abstract not received from the author

ET32 POLITICAL ECONOMY 1

The Political Economy of Public Education

Jorge SOARESSOARES, J.,

IGIER and Portuguese Catholic University, Italy and Portugal

This work focuses on the political determination of a public education policy within the context of a general equilibrium macroeconomic model. The primary objective of this paper is to study whether publicly funded education can emerge and be sustained as a political and economic equilibrium in an economy where individual agents are selfish, rational and forward-looking. I construct an overlapping generations general equilibrium model that endogenizes the large involvement of the public sector in human capital investment. The agents work for the first two periods of their lives and then retire during the third period. The first generation agents may also allocate resources to the acquisition of human capital, but they cannot borrow against their future income. In a political equilibrium where the rational and forward-looking agents of the two oldest generations vote for a level of public funding of education, public financing of education is motivated by the complementarity between capital and labor in the production function and appears as an instrument to compensate for the absence of credit markets. Thus, public funding of education does not have to be chosen because of altruism or externalities.

Keywords: Political Economy, General Equilibrium, Education

ET32 POLITICAL ECONOMY 1

Favouritism in Public Good Provision: Institutional Analysis of Countervailing Powers

Wilfried ZANTMANZANTMAN, W.,

Université des Sciences Sociales, France

Using a Principal-Agent framework, this paper analyzes a public good provision problem in which a central government tries to favor one of the regions for political reasons. We show how this favoritism leads the government to distort the revelation mechanism compared to the benevolent case. We then study the effects of decentralization, modeled here by giving some outside options to the regions. We show that in some cases, this constitutional choice, in spite of its costs, can be justified by the desire to avoid excessive unequal treatment between the regions.

Keywords: Political Economy, Mechanism Design, Decentralization, Public Good

ET32 POLITICAL ECONOMY 1

Political Instability, Political Polarisation, and Public Sector Institutional Reforms

Rune Jansen HAGENHAGEN, R., J.,

Norwegian School of Economics and Business Administration, Norway

For a politician holding office today, reforming public sector institutions is an investment; he must spend resources now if he wishes to achieve future gains. Institutions are state variables, but there are no property rights attached to them. Political uncertainty then affects the "profitability" of investment. When political uncertainty is exogenous, underinvestment will result because of the non-appropriability of future benefits in the case of political change. The extent of underinvestment is positively correlated with differences in preferences between incumbent and challenger. However, if investment increases the probability of staying in office, the likelihood of investment might actually increase.

Keywords: Political instability, political polarisation, public sector, institutions, reforms

ET33 TOPICS IN MACROECONOMICS

Depreciation in Use, Shifts and the Workweek of Capital

A. Craig BURNSIDEBURNSIDE, C.,

The World Bank, U.S.A.

I examine a model in which firms can vary the utilization rate of capital by operating different numbers of shifts at plants. Firms do this because capital is allocated prior to the realization of idiosyncratic productivity shocks at the plant level. During expansions firms accept the wage premium and fixed depreciation costs associated with additional shifts, and operate them at their most productive plants. During recessions these shifts are dropped, and the least productive plants are shut down. The model predicts that the Solow residual overstates variation in technology and that small shocks are magnified by variation in capital's workweek.

ET33 TOPICS IN MACROECONOMICS

Borrowing Constraints and Human Capital Investment under Uncertainty

Bipasa DATTADATTA, B.,

University of Leicester, U.K.

James L. Seale

We extend the theory of human capital investment under uncertainty by incorporating the possibility of future borrowing constraints. We show that with increasing risks in returns to human capital investment, an individual may choose to over-invest in the level of human capital in an attempt to decrease the likelihood of being future borrowing constrained, when preferences exhibit decreasing risk aversion. Our results have important implications for empirical and theoretical work in the area of liquidity constraints and human capital investments.

Keywords: Borrowing Constraints, Human Capital Investment, Risks

ET33 TOPICS IN MACROECONOMICS

Infrastructure Privatization in a Neo-Classical Economy: Macroeconomic Impact and Welfare Computation

Pedro C. FERREIRAFERREIRA, P.,

Getulio Vargas Foundation, Brazil

A competitive general equilibrium model is used to study, through simulation, the welfare and allocation impacts of privatization. A positive externality due to infrastructure capital is assumed, so that the government can improve upon decentralized allocation internalizing the externality, but public investment is financed through distortionary taxes. We show that privatization is welfare improving for a large set of economies and that after privatization under-investment is the optimal action. When operation inefficiency in the public sector or subsidy to infrastructure accumulation are introduced, gains from privatization are higher and positive for most reasonable combinations of parameters.

Keywords: Privatization, Infrastructure, Welfare Cost

ET33 TOPICS IN MACROECONOMICS

Welfare Effects of Budget Deficits in a Perfect Foresight Equilibrium Model

Jean CHATEAUCHATEAU, J.,

Université de Paris I, France

This paper presents some quantitative welfare comparisons of budget deficit policies in a representative agent model with perfect foresight. We show that macroeconomic and welfare effects of a temporary substitution of borrowing for distortionary taxation depend, firstly, on the source of the deficits. And secondly, on the way their financing has been chosen. Introducing ajustment costs on investment and productive government expenditures may reverse the welfare gains associated to a particular policy, by affecting short run impact of deficits. We also state that some deficits policies, like delaying tax credit investment or productive government expenditures, may sometimes be self financed.

Keywords: Deficit Finance, Distortionary Taxation, Infrastructures, Welfare Cost

ET34 EXCHANGE RATES

Foreign Exchange Rates under Alternative Expectational Paradigms: A Resolution of the Excess Volatility Puzzle

Robert B.H. HAUSWALDHAUSWALD, R.,

University of Maryland, U.S.A.

The inability to reconcile observed foreign exchange rate volatility with predictions of rational expectations models represents one of the most persistent challenges in international finance. Here, it is shown how this excess volatility puzzle arises from the rational expectations hypothesis itself via the implied volatility transmission mechanism rather than from model specific features. If agents know the true structure of the economy exchange rate variability is a deterministic function of the variability of economic fundamentals. However, if they do not possess structural knowledge volatility arises endogenously as agents with diverse beliefs trade in response to equilibrium realizations even in the absence of new information. This paper explores the consequences of dispensing with the structural knowledge assumption by contrasting exchange rate determination under two different expectational paradigms - rational expectations and rational beliefs. Under rational beliefs agents hold data rather than model consistent expectations. Using a two country Lucas model with an explicit foreign currency market the statistical properties of exchange rate equilibria under both paradigms are compared. Also, the structure and consequences of currency crises as short-lived rational deviations from economic fundamentals are explored. Since rational beliefs contain rational expectations as a special case, the lower bound that rational expectations equilibria provide on both short and long-term variance processes solves the excess volatility puzzle in terms of endogenous volatility generation.

ET34 EXCHANGE RATES

Strategic Vertical Foreign Investment under Exchange Rate Uncertainty

Jean-Marie VIAENEVIAENE, J. M.,

Erasmus University Rotterdam, The Netherlands

Santanu Roy

We investigate the strategic incentives for vertical foreign investment by risk-neutral oligopolistic firms and the effect of exchange rate uncertainty. Firms competing in a domestic final good market meet their input requirements either by investing abroad and producing their input requirement through a foreign subsidiary or by importing at the market price in an oligopolistic intermediate good market abroad. Investing firms can bid up the input price faced by their rivals through strategic purchase. We show that an increase in foreign exchange variability has a positive effect on vertical foreign direct investment and on trade in the intermediate good. We demonstrate the possibility of multiple equilibria as well as complementarity and herding in investment decisions. Keywords: vertical foreign investment, foreclosure, exchange rate uncertainty, intra-firm trade

ET34 EXCHANGE RATES

A Model of Overseas Employment, Remittances and the Real Exchange Rate

Barry MCCORMICKMCCORMICK, B.,

University of Southampton, U.K.

Jackline Wahba

This paper studies the determinants of real exchange rates when workers may migrate overseas and remit in an economy which is distorted by a minimum wage law. The influence of population growth, productivity shocks, and the degree of family altruism upon the stock of overseas migration and urban under-employment are examined. The possibility of multiple equilibria, whereby the economy may settle at either high or low overseas migration, is discussed.

Keywords: remittances, international migration, exchange rates

ET34 EXCHANGE RATES

Determinacy of Equilibrium

Matteo SALTOSALTO, M.,

CORE, Belgium

In pure exchange economies with uncertainty and incomplete nominal asset markets, helicopter money eliminates indeterminacy. This is not necessarily the case when the economy is open and assets are denominated in deifferent currencies. Analogous results obtain in traditional cash-in-advance models.

ET35 CREDIT MARKETS

Public Disclosure and Bank Failures

Tito CORDELLACORDELLA, T.,

IMF, U.S.A., Universitat Pompeu Fabra, Spain

Eduardo Levy Yeyati

We study how public disclosure of banks' risk exposure affects banks' risk taking incentives and we assess how the presence of informed depositors influences the soundness of the banking system. We find that, when banks have a complete control over the volatility of their loans' portfolio, public disclosure reduces the probability of banking crises. However, when banks do not control their risk exposure, the presence of informed depositors may increase the probability of bank failures.

Keywords: Banks, Public Disclosure, Bank Failures, Asymmetric Information

ET35 CREDIT MARKETS

Bertrand Competition for Deposits and Loans under Asymmetric Information: Stiglitz and Weiss Revisited

Frédérique BRACOUDBRACOUD, F.,

University of Namur, Belgium

This paper models Bertrand competition among banks in both deposit and credit markets with asymmetric information (à la Stiglitz and Weiss) about borrowers' quality. Two simple two-stage games are analyzed: the first one deals with banks bidding for deposits before bidding for credit applicants, the second one analyses the reverse case. Credit rationing may emerge in both frameworks but is not due to asymmetric information in the second one. We then analyze a game where banks are compelled to accept all deposits: either credit rationing or the Walrasian outcome emerges. This framework better fits the results of Stiglitz and Weiss.

ET35 CREDIT MARKETS

Government Interventions in Competitive Credit Market

Karel JANDAJANDA, K.,

Charles University, Czech Republic

This paper analyses government interventions attempting to alleviate inefficiencies of credit provision under asymmetric information. There are two possible sources of inefficiency in my model. In transition economy it is credit rationing. In stabilized economy it is use of collateral which is accompanied with a credit rationing if the collateralizable wealth is not high enough. Under Bertrand competition, it is possible to fine tune the size of government interventions according to a desired level of improvement in efficiency.

Keywords: Transition, Competition, Credit, Government intervention

ET36 GENERAL EQUILIBRIUM: INCOMPLETE MARKETS

The Welfare Consequences of Derivative Securities

Beth ALLENALLEN, B.,

University of Minnesota, U.S.A.

Abstract not received from the author

ET36 GENERAL EQUILIBRIUM: INCOMPLETE MARKETS

Pareto Improving Trade Restrictions - An Example

Philip KALMUSKALMUS, P.,

London School of Economics and Political Science, U.K.

Abstract not received from the author

ET36 GENERAL EQUILIBRIUM: INCOMPLETE MARKETS

General Equilibrium with Incomplete Markets of European Options

Ho-Mou WUWU, H. M.,

National Taiwan University, Taiwan

Peter H. Huang

Polemarchakis and Ku (1990) provide a robust counterexample to generic existence of a competitive equilibrium with incomplete markets of European options. We prove that competitive equilibrium exists for generic endowments and asset structures, if European option strike prices are set at-the-money, meaning that strike prices are equal to endogenously determined equilibrium prices of the underlying real asset.

Keywords: general equilibrium, incomplete asset markets, options, martingale property of asset prices, generic existence

ET36 GENERAL EQUILIBRIUM: INCOMPLETE MARKETS

On an Edgeworth Characterization of Rational Expectations Equilibria in Atomless Asset Market Economies

Leonidas C. KOUTSOUGERAKOUTSOUGERA, L.,S

University of Manchester, U.K.

Abstract not received from the author

ET37 THEORY OF THE FIRM

Contract Mix and Ownership

Chong-En BAIBAI, C. E.,

Boston College, U.S.A.

Zhigang Tao

This paper studies intrafirm heterogeneity in organizational form. In a multi-agent, multi-task model where one of the tasks generates a public good, we show that it is optimal for the principal to offer a mix of high-powered and low-powered incentives to ex ante homogeneous agents. In addition, corresponding ownership arrangements are chosen to make the revenue-sharing agreements self-enforcing. We also relate the model to empirical evidence of franchises.

Keywords: Multi-task, Contract Mix, Self-enforcing Agreements, Ownership

ET37 THEORY OF THE FIRM

Firm versus Market in the Allocation of Entrepreneurial Human Capital

Kiyoshi OTANIOTANI, K.,

University of Tsukuba, Japan

This paper considers the problem of firm versus market, taking not the standard transactions cost approach, but a view akin to the Hayek's vision of the market economy. Given the limited entrepreneurial human capital, the knowledge about the entire manufacturing processes of a commodity cannot be owned by a single entrepreneur, but is dispersed among many to make the processes comprised by many firms. Market transactions arise between such firms. Intra-firm transactions exist because the human capital is large enough to allow a firm to comprise multiple processes. This simple view implies observed distinctive patterns of industries including upstream firms' mass production of a few products.

Keywords: Firm, Market, Vertical Integration, Human Capital, Knowledge, Entrepreneur

ET37 THEORY OF THE FIRM

The Firm as a Pool of reputations

Fredrik ANDERSSONANDERSSON, F.,

Lund University, Sweden

Abstract not received from the author

ET37 THEORY OF THE FIRM

Structure of Firms and International Trade

Pertti HAAPARANTAHAAPARANTA, P.,

Helsinki School of Economics, Finland

The paper studies the question whether free trade leads to the international convergence in firm organizations in analogy with the factor price convergence. The analysis utilizes the traditional international trade model into which a choice for the firms with respect to the organization of internal labor markets is embedded. The firms can choose between an "at-will" organization studied by Stole and Zwiebel and a "neoclassical" organization. It is shown that international differences in firm organizations can persist even with free trade. This may explain the persistence of international firm level productivity differentials. With some factor mobility there will be convergence of organizational form but not necessarily to a neoclassical organization.

Keywords: international trade, internal labor markets

ET38 MECHANISM DESIGN 2

Dynamic Provision of Public Goods

Fransisco CANDELCANDEL, F.,

Universidad de Murcia, Spain

In this paper we present a dynamic extension of the well known problem of provision of public goods. We deal with a public project to be provided in several stages (in particular, two). Our approach enphasize two issues: the second stage cannot be realized if the first has not been undertaken, and individuals in the economy change their ex-ante assessment of the public good by experiencing it. We propose sequential mechanisms truthfully implementing the Pareto Optimal Social Choice Rule, showing the differences existing between the dynamic case and the static case.

Keywords: Truthful implementation, Groves mechanisms

ET38 MECHANISM DESIGN 2

Implementing a Stable, Efficient and Symmetric Outcome: The Excludable Public Good Case

Parimal Kanti BAGBAG, P.,

University of Liverpool, U.K.

Eyal Winter

Three key issues in the literature on public good provision are that of stability, efficiency and equity/fairness. To align all three objectives simultaneously is a difficult task. For excludable public goods we construct two sequential move demand-contribution mechanisms that each separately guarantees a unique but different core (i.e. stable) outcome. While one of the mechanisms offers the agents symmetric treatment ex-ante, the core outcome, though efficient by necessity, is lopsided ex-post as agents moving earlier have a clear advantage. The second mechanism, which is somewhat like a twofold repetition of the first mechanism, corrects for the asymmetry in ex-post outcome induced by the first mechanism. Thus the second mechanism not only achieves the efficient level of public good as the outcome of a direct stable agreement, but treats each agent symmetrically ex-ante as well as ex-post and hence is "fair". Both the mechanisms are simple and moreover finite. Also being descriptive and not too far from the way decisions are made in real life, our mechanisms are easy to apply. Finally, the equilibrium outcomes induced by the two mechanisms are immune to deviations by coalitions i.e. they are (perfect) strong equilibria a la Aumann (1959). Journal of Economic Literature

Keywords: Excludable public good, mechanism design, implementation, stand alone core, coalition formation, perfect stronge quilibrium

ET38 MECHANISM DESIGN 2

Strategy-Proof Allocation of a Single Object

Szilvia PAPAIPAPAI, S.,

Koc University, Turkey

The problem of allocating a single indivisible object to one of several selfish agents is considered, where monetary payments are not allowed, and the object is not necessarily desirable to each agent. In addition to strategyproofness, three important properties are considered: Pareto- optimality, nondictatorship, and nonbossiness. It is shown that these four criteria cannot be satisfied by any social choice function, that is, a Gibbard-Satterthwaite-type impossibility result is established for nonbossy mechanisms. However, any two of the additional criteria can be satisfied. We give characterizations of the classes of social choice functions satisfying these three pairs of properties and examine some of their subclasses.

Keywords: strategyproofness, nonbossiness, nondictatorship, indivisibilities

ET38 MECHANISM DESIGN 2

Arbitration in Joint-Production Contracts

Ariane LAMBERT-MOGILIANSKYLAMBERT-MOGILIANSKY, A.,

CEPREMAP, France

This paper analyzes a game of arbitration which takes place in the course of implementation of a joint-production contract, in a situation where relevant variables are not verifiable by a third party. I derive the optimal arbitration mandate in an incentive environment determined by a reputation mechanism. The impact of the mandate on renegotiations is investigated. In this respect, I am close to the renegotiation design approach in Aghion, Dewatripont and Rey (1994). A central result is that the optimal arbitration clause is a commitment technology that enlarges the set of contractible variables. This provides a foundation for the development of private justice: a flexible monitoring of the arbitrators allows for the realisation of gains from cooperation. Keywords: non-verifiability, arbitration, mandate, motivation effort, contractibility

ET39 LABOUR ECONOMICS 1

The Persistence of Slack and Tight Labour Markets

Karl Ove MOENEMOENE, K. O.,

University of Oslo, Norway

Ragnar Nymoen, Michael Wallerstein

We present a model of persistence of both high and low levels of unemployment as a consequence of firms' choice of employment policy. When unemployment is low, workers are harder to replace and firms are more reluctant to layoff in response to low demand, which keeps unemployment low. When unemployment is high, workers are easily replaced when needed and firms layoff workers more frequently, which maintains high levels of unemployment.We show, using British and Norwegian data, that the ease of replacing workers has a significant impact on the growth of employment.

Keywords: Unemployment, hysteresis, hiring/firing, multiple equilibria

ET39 LABOUR ECONOMICS 1

Optimal Employment Subsidies with Heterogeneous Workers under Asymmetric Information

Pierre M. PICARDPICARD, P.M.,

Federal Planning Bureau, Belgium

Pierre Wunsch

In this paper, we analyse the issue of optimal employment subsidies in a general equilibrium framework that incorporates heterogeneous workers and a minimum resource constraint as redistributive instrument against poverty. Government would like to subsidise workers with low human capital but is not able to acquire this information. However when the labour market is competitive, this adverse selection problem is partly solved if the subsidy is granted only to workers accepting the minimum salary. Full employment can then be obtained when government focuses on employment. The idea to grant different subsidies according to other criteria like education or age is finally analysed but rejected under some fair conditions about workers' distribution in human capital.

Keywords: Employment Subsidies, General Equilibrium, Asymmetric Information

ET39 LABOUR ECONOMICS 1

Equilibrium Unemployment and the Time Sequence of Unemployment Benefits

Pierre CAHUCCAHUC, P.,

Université de Paris, France

Etienne Lehmann

This article deals with the consequences of the time sequence of unemployment benefits on unemployment and welfare. The economy is represented by a dynamic general equilibrium model with wages bargained by insiders. The unemployment benefits are financed by a tax rate on wages. For any given tax rate, a more decreasing time sequence of unemployment benefits increases unemployment. Moreover, a welfare analysis shows that a flat sequence of unemployment benefits satisfies Rawls justice criterion.

Keywords: Unemployment insurance, Wage bargaining, Equilibrium Unemployment

ET39 LABOUR ECONOMICS 1

Unemployment Risk, Labour Force Participation and Savings

Peter SIMMONSSIMMONS, P.,

University of York, U.K.

G. Berloffa

This paper investigates individual savings, labour force participation and unemployment risk. Previous theoretical work either assumes that the individual faces a non-constrained labour market, or analyses labour force participation and unemployment risk, but assuming that no savings or borrowing can occur. We assume that each period there are chances of finding an acceptable job offer if the worker is out of the labour force or searching for a job, and a risk of being fired for the employed. Given the time profile of wage rates, the individual has to decide how much to save, whether to search for a job or remain unemployed or to quit a job if employed. For CARA preferences, we are able to characterise analytically the optimal solution and find that there is planned precautionary savings arising from the risk of unemployment and optimal jumps in consumption and savings.

Keywords: Employment Risk, Savings, Labour Force Participation

ET40 CONSUMPTION

Quadratic Logarithmic Demand Systems

Panos PASHARDESPASHARDES, P.,

University of Cyprus, Cyprus

Panayiota Lyssiotou

A Generalised Quadratic Logarithmic (GQL) demand system nesting most rank-2 and rank-3 flexible functional form models is considered. The proposed demand system generalises existing models by including (i) power and cross-product price terms and (ii) price-utility interaction terms in the budget share equations. These generalisations allow price effects on demand to be of higher order and varying with consumer's expenditure. Empirical analysis based on a large sample of individual household data shows that the GQL demand system outperforms less general models on statistical grounds and provides a useful framework for the investigation of consumer behaviour and welfare issues. An empirical illustration is provided by simulating the effects of a hypothetical indirect tax reform.

Keywords: Demand systems, microdata, consumer behaviour, indirect tax reform

ET40 CONSUMPTION

Durable Goods Consumption, Transaction Costs and Uninsurable Income

Guillaume RABAULTRABAULT, G.,

New York University, U.S.A.

Attempts are regularly made to apply to durable expenditures the ideas developed in the non durable consumption literature. These attempts encounter severe technical problems. Indeed, researchers are convinced that durable expenditures are affected by significant transaction costs, which introduce non concavities in the traditional models. The most complete work that takes transaction costs into account in the durable good consumption model is Grossman-Laroque[1989]. However, this model relies on the existence of complete markets. In her empirical work on cars Eberly (Eberly[1994]) finds that for at least $50\%$ of consumers, past labor income matters. This paper develops a model in which the only source of uncertainty is uninsurable income. It rigorously extends some of the results of the `income fluctuation literature' (see for instance Schechtman Escudero[1977]) to this framework. In particular, the ability to smooth the marginal value of wealth across periods of adjustment is discussed. The equalization of the marginal value of consumption from one holding period to another is seen to fail. The theoretical investigation ends with a discussion of the stochastic stability properties of the system as a function of impatience. In the second part, I investigate the properties of the optimal policy function using simulations. A robust conclusion seems to be that impatient consumers adjust their stock much more frequently when they face uninsurable income than when they face complete markets. The sensitivity of the renewal policy to the amount of uncertainty is also discussed.

ET40 CONSUMPTION

Bliss and the Permanent Income Hypothesis

Isabelle LEMAIRELEMAIRE, I.,

INSEE-CREST, France

Guy Laroque

We study the optimal consumption behavior under the set of assumptions associated with the permanent income hypothesis: quadratic utility function, discount rate equal to the interest rate. We modify the condition that savings be equal to zero at infinity, and show that the simple linear consumption function is no more the optimal solution of the problem under free disposal of the assets. We characterize the solution in this case.

ET40 CONSUMPTION

A Neo-Classical Exploration of Consumption and Income Profiles over the Life-Cycle

Monika BÜTLERBÜTLER, M.,

FGN-HSG, Universität St. Gallen, Switzerland

With a neoclassical life--cycle model in continuous time, the effects of uncertain lifetime, endogenous labor supply, and family composition on consumption and income profiles are jointly analyzed. Due to a parsimonious specification, analytical solutions for consumption growth are available for constant intertemporal elasticity of substitution preferences. It is shown that the three extensions can account for a hump in the consumption profile and a strong correlation of consumption and income during working life, as confirmed in many empirical studies. The results are moderately sensitive to the availability of fair annuities and to the way leisure is measured in the utility function. The analysis shows that consumption tracking income cannot be taken as evidence for "liquidity constrained consumers" or against the hypothesis of optimal allocation of consumption over the life-cycle.

Keywords: Life--cycle consumption and income, hump-shape of consumption, annuity markets, endogenous labor supply, family composition

ET41 BARGAINING 1

How (Not) to Signal the Bargaining Power ?

Mehmet BACBAC, M.,

Bilkent University, Turkey

A strong bargaining position can be signaled by delaying offers and/or making a restricted offer that concerns a sufficiently small subset of the issue under negotiation. This paper investigates whether one signaling mode dominates the other or an optimal mixture exists in the first-round separating equilibria of a buyer-seller sequential bargaining game. When the object of potential exchange is a divisible "consumption good", the best signaling strategy of the strong buyer type involves a restricted offer if his optimal consumption path is conservative relative to the weak buyer type. A pure restricted offer may even be a costless, efficient signal. If the object is a divisible "durable good" that promises the buyer a constant stream of benefits, in frictionless bargaining environments the best signaling strategy consists of a pure strategic delay.

Keywords: Bargaining, sequential equilibirium, delay, restrictive agenda

ET41 BARGAINING 1

Bargaining over Risky Assets

Muhamet YILDIZYILDIZ, M.,

Stanford University, U.S.A.

We analyze the equilibria of a game where two agents bargain in order to share the risk in their assets that will pay dividends once at some fixed time. Since the dividends will be paid at a fixed time, agents have no time-preferences over the sure consumptions, i.e., the delay in agreement does not cause dividend loses. Yet, we show that the fact that there will be some information revealed induces time-preferences for risk-averse agents and that, given any information structure the sequential equilibrium consumption is unique and Pareto-optimal at the expiration date of the first offer. It follows that, although the sequential equilibrium consumption is generally inefficient, it is Pareto-optimal if the offers expire immediately. We also show in absence of social risk that, the more risk averse an agent becomes, the worse off he will be and the better off his opponent will be - a dichotomy exhibited by many axiomatic bargaining solution concepts. In presence of social risk, however, risk aversion of an agent may hurt his opponent. Our analysis also suggests that the more gradual is the information revelation, the more even the pay-off distribution we have. Finally, the arrival of an unforeseen information hurts the agents in Paretian sense.

Keywords: risk sharing, bargaining theory

ET41 BARGAINING 1

Strategic Bargaining with Destructive Power

Paola MANZINIMANZINI, P.,

University of Exeter, U.K.

This paper studies a two-player alternating offers bargaining model in which one of the agents has the ability to damage permanently the "pie" bargained over. I show how this feature can result in an increase of the cost of rejecting an offer for the "non-harming player". Beside the "Rubinstenian" bilateral monopoly outcome, I show that it is possible to select a ``harming'' equilibrium in which the sequence of damages to the pie is endogenously determined and payoffs do not vary monotonically with the discount factor.

Keywords: bargaining, commitment

ET41 BARGAINING 1

Rubinstein Bargaining with Two-Sided Outside Options

Clara PONSATIPONSATI, C.,

Universitat Autònoma de Barcelona, Spain

Józef Sákovics

In this note we show that if in the standard Rubinstein model both players are allowed to leave the negotiation after a rejection, in which case they obtain a payoff of zero, then there exist a continuum of subgame-perfect equilibrium outcomes, including some with significant delay. We also fully characterize the case where, upon quitting, the players can take an outside option of positive value.

ET42 AUCTIONS 1

Efficient Auction

Eric MASKINMASKIN, E.,

Harvard University, U.S.A.

Abstract not received from the author

ET42 AUCTIONS 1

A Learning Approach to Auctions

Aner SELASELA, A.,

University of Mannheim, Germany

Schlomit Hon-Snir, Dov Monderer

We analyze a repeated first-price auction in which the types of the players are determined before the first round. It is proved that if every player is using either a belief-based learning scheme with bounded recall or generalized fictitious play learning scheme, then for sufficiently large time, the players' bid are in equilibrium in the one-shot auction in which the types are commonly known.

Keywords: Learning process, fictitious play, first-price auction

ET42 AUCTIONS 1

Auctions of Identical Goods

Paulo K. MONTEIROMONTEIRO, P.,

CORE, Belgium

In this paper I study the optimal auction of several identical objects when there is synergy between the objects valuations.

Kkeywords: Optimal auctions, identical goods, synergy

ET42 AUCTIONS 1

Secret Reserve Prices in a Bidding Model with A Re-Sale Option

Chantale LACASSELACASSE, C.,

University of Ottawa and Competition Bureau of Canada, Canada

Ignatius J. Horstmann

This paper presents a model of auctions in which sellers may choose not to sell an object in spite of receiving a bid above the announced reserve price. In this sense, sellers use a secret reserve price. Such behavior is seen frequently in auctions and yet would be sub-optimal within most existing auction models. In the model, a seller uses re-sale as a means of signaling information about the object's value that cannot easily be communicated via a reserve price announcement. The model predicts that bids for re-auctioned objects increase relative to initial bids on the object and that, on average, prices of both re-auctioned items and those sold at initial auction rise as delay in re-auctioning increases.

ET43 PREFERENCES AND CHOICE

Preference for Flexibility and Freedom of Choice in a Savage Framework

Klaus NEHRINGNEHRING, K.,

University of California, Davis, U.S.A.

We study preferences over Savage acts that map states to opportunity sets and satisfy a state-dependent version of the Savage axioms. Conditional preferences over opportunity sets may be inconsistent with indirect-utility maximization due to a "preference for flexibility" or an intrinsic preference for freedom of choice. On a flexibility interpretation, the main result of the paper characterizes preferences based on maximizing the expected indirect utility in terms of an "Indirect Stochastic Dominance" axiom. The key technical tool of the paper, a version of Moebius inversion also yields a simple and intuitive proof of Kreps's classic result.

ET43 PREFERENCES AND CHOICE

Rational Wishful Thinking and Strategic Ignorance

Thomas MARIOTTIMARIOTTI, T.,

Université de Toulouse, France

Juan D. Carrillo

We analyze the decision of an agent with time-inconsistent preferences to consume a good that exerts a negative externality on future welfare. The extent of the externality is initially unknown, but can be learned via a costless sampling procedure. We identify wishful thinking, or acting under self-restricted information, as a Pareto efficient Markov Perfect Equilibrium of the resulting intra-personal game. Our results emphasize that the manipulation of the information acquisition process involved in such a behavior is consistent with Bayesian rationality at any stage of the learning process, and is robust to the introduction of small experimentation costs.

ET43 PREFERENCES AND CHOICE

Preserving Preference Orderings of Uncertain Prospects under Background Risks

Harris SCHLESINGERSCHLESINGER, H.,

University of Alabama, U.S.A.

Christian Gollier

For any random vector of wealth payoffs (X,Y), let the random variable Z be mutually independent of X and Y. The basic question we address in this paper is the following: If X is preferred by an expected-utility maximizer to Y, when can we say that X+Z is preferred to Y+Z? In other words, when can we guarantee that the addition of an independent background risk Z will not affect the preference ordering of other risks? We consider several alternative restrictions on either the set of admissible utility functions, on the set of random prospects (X,Y), or on the set of background risks Z, which preserve the preference rankings.

Keywords: background risk, preference ordering, risk vulnerability, stochastic dominance

T43 PREFERENCES AND CHOICE

Welfare, Education and Moral Commitment. Jean Jacques Rousseau Reconsidered

Alexander KRITIKOSKRITIKOS, A.,

Technische Universität Berlin, Germany

Georg Meran

Normative Game theory does not consider cooperation in a Prisoner's Dilemma (PD) as a serious strategy. Recent research has, therefore, introduced nonmonetary values to explain why individuals may choose to cooperate in PD-Games. It is not explained, however, where the values come from! Under the assumption of endogenous preferences we show that educating individuals towards a moral commitment can change preferences in a way that a deliberate willingness for cooperation is created. For that we provide a utility function where the compliance to social norms generates utility.Accordingly, we regard the decisions of morally committed individuals as rational.

Keywords: Economic Methodology, Game Theory, Microeconomics

ET44 PRODUCT DIFFERENTIATION

The Strategic Effect of Retailers' Brands

Jérôme PHILIPPEPHILIPPE, J.,

INSEE-CREST/LEI, France

It is well known that vertical restraints may have a commitment effect that induces strategic responses leading to higher equilibrium prices. We extend this approach to decisions other than vertical restraints, such as the introduction of a new low quality product where high quality products preexist : introducing such a product is seen as a commitment to discriminate the demand and, in some cases, to increase the price of the high quality goods. It induces a strategic response by the opponents and an increase in equilibrium prices. This is closely related to the current extension of retailers' brands.

Keywords: Strategic effect, Differentiation, Discrimination, Price Formation, Vertical Relationships

ET44 PRODUCT DIFFERENTIATION

Vertical Product Differentiation, Network Externalities, and Compatibility Decisions

Anette BOOMBOOM, A.,

Free University Berlin, Germany

Pio Baake

In a model of vertical product differentiation, where the consumer's evaluation of a product depends on its inherent quality and on its network's size, we analyse the subgame perfect equilibrium of a four stage game. First two firms choose their product's inherent quality. Then they might mutually agree on providing an adapter, before competing in prices. Finally, consumers buy. Despite the high quality firm's preference for incompatibility, an adapter is always provided in equilibrium. Social welfare is greater than without an adapter and can be improved by regulating compatibility only for those cases where qualities are differentiated too much.

ET44 PRODUCT DIFFERENTIATION

The Shopkeepers Dilemma: Horizontal Differentiation and Intertemporal Price Discrimination

Susanna SÄLLSTRÖMSÄLLSTRÖM, S.,

Stockholm School of Economics, Sweden

A shopkeeper, who cannot credibly commit to not having a sale at the end of the season, is facing a dilemma in the homogeneous good case in which Coase's conjecture holds. I show that by differentiating the good horizontally, she can price discriminate intertemporally, thereby solving her dilemma. This is possible because differentiating the good increases the strategic uncertainty among potential customers.

Keywords: Coase's conjecture, intertemporal price discrimination, horizontal differentiation

ET44 PRODUCT DIFFERENTIATION

Product Differentiation and the Equilibrium Structure of the Manufacturer-Retailer Relationship

Yohanes E. RIYANTORIYANTO, Y.,

Katholieke Universiteit Leuven, Belgium

Jerzy Mycielski, Filip Wuyt

This paper analyses the equilibrium choice of vertical arrangement chosen by manufacturers in a three-stage bertrand duopoly-game with product differentiation. In the first stage, we endogenize the manufacturers' decision to have a particular form of vertical arrangement. In the second stage manufacturers set the wholesale price, and in the third stage retailers set the retail price. We assume that manufacturers face a competitive supply of retailers. The results show that the equilibrium of vertical arrangement depends on the degree of product differentiation. When products are sufficiently differentiated, manufacturers prefer to have an intra-brand competition. As products are almost homogeneous, a non intra-brand ompetition with an exclusive dealing is the unique equilibrium. Our results are in contrast with other related studies which argue that in quilibrium manufacturers prefer to choose an exclusive dealing.

Keywords: vertical restraints, intra-brand competition, inter-brand competition, bertrand game, product differentiation.

ET45 BARGAINING 2

Sequential Bargaining with Decreasing Discount Factors

Birgitte SLOTHSLOTH, B.,

University of Copenhagen, Denmark

Ebbe Groes

We study two sequential bargaining models, Shaked's n-person bargaining model and the model of two-person bargaining with a smallest money unit. In these games there are unique equilibria when the time horizon is finite, but extreme multiplicity of equilibria when bargaining is continued infinitly with constant discounting. We analyze the in-between case where the games are infinite, but the discount factor decreases towards zero, so in the long run no weight is assigned to the future. It is argued that this class is interesting and empirically relevant. We find that when the discount factor decreases towards zero, the two games have unique perfect equilibria with outcomes analogues to those of Rubinstein's bargaining model.

Keywords: bargaining, n-person bargaining, smallest money unit, decreasing discount factors

ET45 BARGAINING 2

The Solutions of Nash and of Kalai and Smorodinsky as norms in Repeated Bargaining

Frans SPINNEWYNSPINNEWYN, F.,

Katolieke Universiteit Leuven, Belgium

The Nash and Kalai-Smorodinsky solutions are implemented in a repeated game distributing the benefits of an on-going relationship. Repeatedly following a norm is one option. Otherwise, one of the players is randomly selected to revise the interim agreement. When this revision needs mutual consent, the Nash solution is the unique norm which is always obeyed. When no agreement binds disagreeing players, the Kalai-Smorodinsky solution with endogenously determined disagreement outcome is the unique norm which (a) always dominates an open conflict at high levels of friction and (b) can be reached as a sustainable agreement at low levels of friction.

Keywords: cooperative bargaining, noncooperative implementation, repeated games

ET45 BARGAINING 2

Perfect Equilibria of a 2-Person Bargaining Game

Margarida COROMINASCOROMINAS, M.,

Universitat Pompeu Fabra, Spain

We study the set of subgame perfect equilibria of the Hart and Mas-Colell (1996) game for the case of 2 players. We show that if there exists a unique stationary perfect equilibrium, then this is the only perfect equilibrium of the game. Using this result we show that when the breakdown point is feasible the perfect equilibrium is unique. For the more general case, we characterize the set of perfect equilibria payoffs. We go on by studying some of the properties of this set of perfect equilibria payoffs: its shape, efficiency properties or its limiting behavior as the discount tends to 1. We also show that the results keep being true for slight modifications of the game.

Keywords: 2-person bargaining game, perfect equilibria

ET46 SOCIAL INSURANCE AND REDISTRIBUTION

A Politico-Economic Theory of Pension Reform

André DROSTDROST, A.,

University of Cologne, Germany

The proportion of pensioners in the German electorate will increase to 40% until 2030. What does this mean for the political feasibility of a pension reform cutting the contribution rate? This paper shows by an OLG model incorporating a coalitional game that a pension reform will be realizable even if 50% of the electorate are pensioners. Heterogeneous individuals simultaneously vote on the contribution rate and on time credits for education. The pensioners' position on time credits depends on their respective education. Playing supporters and opponents of time credits off against each other, the employees can put through a pension reform.

Keywords: pension reform, public choice, overlapping generations, coalitional games

ET46 SOCIAL INSURANCE AND REDISTRIBUTION

The Equivalence of Pension Systems: A Continuous Time Approach

Koen ALGOEDALGOED, K.,

Katolieke Universiteit Leuven, Belgium

This paper discusses the equivalence between funded and unfunded pension systems when there is no uncertainty apart from the risk of longevity. We consider a pay-as-you-go (unfunded) system in which contributions and benefits of each individual are equal to those of the capital-reserve system. Using this approach, the conditions of equivalence between the capital-reserve systems and the pay-as-you-go systems are derived. By modelling explicitly the life expectancy, the problem of demographic aging is also brought in the right perspective.

Keywords: overlapping generations, pay-as-you-go, capital reserve, Aaron's rule

ET46 SOCIAL INSURANCE AND REDISTRIBUTION

Basic Income and Unemployment in a Unionised Economy

Bruno VAN DER LINDENVAN DER LINDEN, B.,

University of Louvain, Belgium

This paper is concerned with the impact of basic income schemes on unemployment in a dynamic general equilibrium model of a unionised economy. Two schemes are envisaged: A full basic income scheme and a partial one. First, for plausible values of the ratio between unemployment benefits and the net wage, the equilibrium unemployment rate is lower if the unemployment insurance system is abolished and replaced by a higher full basic income scheme. Second, the equilibrium unemployment rate decreases with the level of the partial basic income. Third, the equilibrium unemployment rate increases with the level of the full basic income if workers are risk-averse.

Keywords: Basic income, bargaining, unemployment

ET47 DYNAMIC EQUILIBRIUM AND EXOGENOUS UNCERTAINTY

Sunspot Fluctuations around a Determinate Steady State

Gabriel DESGRANGESDESGRANGES, G.,

DELTA, France

Stéphane Gauthier

We show generic existence of Markovian sunspot equilibria on the growth rates in a linear one step forward looking economy with one predetermined variable. Stochastic fluctuations even arise in the neighbourhood of a determinate steady state in the perfect foresight dynamics. Moreover, asymptotically stable sequences of the state variable exist at equilibrium in any economy. An example of persistent output fluctuations makes less credible the co-ordination on the saddle-stable path converging to the steady state. Keywords: stochastic fluctuations, sunspot equilibrium, determinacy, co-ordination

ET47 DYNAMIC EQUILIBRIUM AND EXOGENOUS UNCERTAINTY

Endogenous Random Asset Prices in Overlapping Generations Economies

Nicole KÖHLERKÖHLER, N.,

University of Bielefeld, Germany

Volker Böhm, Jan Wenzelburger

This paper studies an endogenous random asset price process in an economy with overlapping generations of consumers. The process is primarily driven by the interaction of an exogenous dividend process and by the characteristics of consumers, who maximize expected utility with respect to subjective transition probabilities given by a Markov kernel. The resulting price process is a random dynamical system with expectations feedback of the cobweb type. Existence and uniqueness of unbiased predictions are demonstrated for an example using the CARA-utility function. It is shown that the average share price increases with increasing consumers' subjective mean values, whereas the volatility is only affected by the risk-less rate of return and the volatility of the dividend process.

Keywords: Dynamics, expectations, random asset pricing

ET47 DYNAMIC EQUILIBRIUM AND EXOGENOUS UNCERTAINTY

On the Connection between Correlated Equilibria and Sunspot Equilibria

Julio DAVILADAVILA, J.,

Universidad Autónoma de Barcelona, Spain

Abstract not received from the author

ET48 EXPERIMENTAL ECONOMICS 2

Risk, Complexity, and the Performance of Heuristics

Steffen HUCKHUCK, S.,

Humboldt-University, Germany

Georg Weizsäcker

Systematically varying several parameters of single-stage lottery choice tasks we investigate the question which features of a decision task lead subjects to deviate from maximizing expected monetary value (EV). It turns out that subjects rather rely on heuristics than on explicit calculations, and that the applied heuristics typically select the lottery with the higher EV. Risk avoidance matters, but not systematically. Further important results are that subjects prefer less complex lotteries over more complex ones, and that risk matters the more the less complex the decision task is.

Keywords: expected utility, lottery choices, experiments, heuristics

ET48 EXPERIMENTAL ECONOMICS 2

Assessment Biases in Utility Functions

Christian SEIDLSEIDL, C.,

University of Kiel, Germany

Stefan Traub

This paper investigates assessment biases in utility functions. Based on experimental data of 73 subjects, certainty and lottery equivalence utility functions are derived and analyzed. We observe that experimentally assessed utility functions violate procedure invariance, which follows a bimodal distribution. We find that a response mode bias of probability-dependent utility functions disappears for a lottery equivalence method. Although subjects' risk attitudes are stochastically independent of utility dominance, they contribute to explain the distance of utility functions assessed in different ways. Certainty equivalence utility functions lie above [below] lottery equivalence utility functions for risk averse [risk loving] subjects and exhibit a higher degree of risk aversion. Absolute differences in utility functions are best predicted by the absolute values of risk attitudes.

Keywords: experimental utility function, response mode bias, procedure variance, risk attitude

ET48 EXPERIMENTAL ECONOMICS 2

Principals' Principles when Agents' Actions are Hidden

Claudia KESERKESER, C.,

Universität Karlsruhe, Germany

Marc Willinge

We examine the behavior of subjects in a simple principal-agent game with hidden action. While subjects in the role of agents tend to choose the action which maximizes their expected profit, subjects in the role of principals offer contracts which differ from the theoretical predictions. We identify three principles of contract design. (1) The agents' remuneration for the better outcome is at least as high as the remuneration for the worse outcome. (2) The agent must not risk to make a loss. (3) The net profit of the agent should not be higher than the net profit of the principal.

Keywords: Experimental economics, principal-agent theory

ET49 IMPERFECT COMPETITION

Necessary and Sufficient Conditions for the Existence and Uniqueness of Bertrands Paradox

John MORGANMORGAN, J.,

Princeton University, U.S.A.

Michael R. Baye

Abstract not received from the author

ET49 IMPERFECT COMPETITION

Price Leadership and Buyouts

Dave FURTHFURTH, D.,

University of Amsterdam, The Netherlands

Patrick Van Cayseele

We solve for Stackelberg Equilibria in a Bertrand-Edgeworth Duopoly game. We introduce the Buyout Option, where rivals absorb each others' output before any consumer. It is shown that the efficient firm becomes the endogenous (price) leader, that is bought out by the inefficient follower. In this way players together are able to reach monopoly profits.

Keywords: Bertrand-Edgeworth duopoly, Von Stackelberg equilibria, Endogenous price leadership, Buyouts

ET49 IMPERFECT COMPETITION

Experimentation and Learning about Product Differentiation in Monopoly and Duopoly: A Comparison

Paul BELLEFLAMMEBELLEFLAMME, P.,

Facultés Universitaires Notre Dame de la Paix, France

Francis Bloch

This paper studies learning and experimentation in a simple, unified model of product differentiation. It compares incentives to experiment and the direction of experimentation under price and quantity competition, monopoly and duopoly. The relationship between market structure and experimentation involves two effects: a free-riding effect by which the monopolist invests more in information acquisition than the duopolists and a competitive effect which implies that competing firms benefit more from more accurate information than a monopolist. When firms set quantities, the first effect dominates the second ; when firms set prices, the second effect dominates the first.

Keywords: Bayesian Learning, Market Experimentation, Monopoly, Duopoly, Product Differentiation

ET50 OLIGOPOLY THEORY 2

Workers Skills, Product Quality and Industry Equilibrium

J. GABSZEWICZGABSZEWICZ, J.,

CORE, Belgium

A. Turrini

We develop a model of a vertically differentiated industry where the production of higher quality goods requires a higher fraction of specialized labour. We show that in equilibrium,though supplying different variants of the product, firms tend to cluster either at the bottom or at the top of the quality spectrum, depending on the availability of skilled labour. This switch in equilibrium qualities generates a discontinuous behaviour for the wage rate of skilled workers. When the suply of skilled labour is made endogenous,two equilibria are simultaneously possible: one with low-skill, low quality, the other with high-skill, high-quality. Keywords: quality competition, skill investments

ET50 OLIGOPOLY THEORY 2

Limit Pricing when Incumbents Have Conflicting Interests

Christian SCHULTZSCHULTZ, C.,

University of Copenhagen, Denmark

This paper considers entry into markets where one incumbent prefers entry and another does not. Unlike the entrant both incumbents know market demand. One would like to signal high demand, the other low. In separating equilibria incumbents play the Nash-equilibrium of each state. For separating equilibria to exist, at least one firm should not have too large an interest in changing the entry decision of the entrant compared with the cost of deviating to the Nash-strategy of the other state. In growing markets this condition will tend not to be met, here equilibria are pooling.

Keywords: Oligopoly, entry, incomplete information

ET50 OLIGOPOLY THEORY 2

Promoting Sales Through Coupons In Oligopoly Under Imperfect Price Information

Jose Luis MORAGAMORAGA, J. L.,

Universidad Carlos III, Spain

Emmanuel Petrakis

This paper analyzes sales promotions through coupons in an oligopoly under imperfect price information. Firms can send out coupons that either communicate the price (CCPs) or not (CNCPs). By offering rebates or advertising their prices at distant locations, firms can attract consumers from their rivals' markets. A unique symmetric pure strategy equilibrium is shown to exist where sellers do send out coupons that offer positive rebates. Thus, contrary to the literature, sales promotions are permanent. In the equilibrium with CNCPs, prices, advertising efforts and firms' profits are higher than in the equilibrium with CCPs. However, the equilibrium with CNCPs is not robust if we allow firms to choose the type of coupons as well. In contrast, the equilibrium with CCPs is always robust.

Keywords: Sales Promotions, Coupons, Oligopoly, Imperfect Information, Price Discrimination

ET51 GENERAL EQUILIBRIUM: EXISTENCE

On the Different Notions of Arbitrage and Existence of Equilibrium

François MAGNIENMAGNIEN, F.,

INSEE, France

Cuong Le Van, Rose-Anne Dana

In this paper we first give an existence of equilibrium theorem with unbounded from below consumption sets, by the demand approach, assuming only that the individual rational utility set is compact. We then classify different notions of arbitrage and give conditions under which they are equivalent to the existence of an equilibrium.

ET51 GENERAL EQUILIBRIUM: EXISTENCE

General Equilibrium in an Economy with a Network Externality

Moncef MEDDEBMEDDEB, M.,

Université Paris 1, France

Abstract not received from the author

ET51 GENERAL EQUILIBRIUM: EXISTENCE

Abraham Walds Equilibrium Existence Proof Reconsidered

Reinhard JOHNJOHN, R.,

Rheinische Friedrich-Wilhelms-Universität Bonn, Germany

For his proof of the existence of a general competitive equilibrium Abraham Wald assumed a strictly pseudomonotone inverse market demand function or, equivalently, that market demand satisfies the Weak Axiom of Revealed Preference. It is well known that more recent existence theorems do not need this assumption. In order to clarify its role in Wald's proof, the question of existence of an equilibrium for a modified version of the Walras-Cassel model is reduced to the solvability of a related variational inequality problem. In general, the existence of a solution to such a problem can only be proved by advanced mathematical methods. We provide an elementary induction proof which demonstrates the essence of Abraham Wald's famous contribution.

Keywords: Existence of equilibrium, pseudomonotonicity, variational inequality problem

ET52 RISK AVERSION AND NON ADDITIVE UTILITY

Optimal Risk-Sharing and Pricing Rules when Agents have Non-Additive Expected Utility and Homogenous Expectations

Rose-Anne DANADANA, R. A.,

CEREMADE, Université Paris-Dauphine, France

We consider a pure exchange contingent one good economy where agents are Choquet-expected-utility maximizers with same convex capacity and who have decreasing marginal utility for sure outcomes. We first show that the set of P.O. is identical to that. of an economy where agents are v.n.m. maximizers with same probability. We then show that the structure of equilibria depends on probabilities in the core that minimizes the expected value of aggregate endowment and that small changes in aggregate risk may have drastic welfare implications. We then extend C.C.A.P.M. rules. We show that if an asset return varies like the market, then its excess expected return is positive . Lastly, in the case of no aggregate risk, we consider agents with a set of priors and show that assets have a spread of prices identical to the spread of prices that one obtains when there are market imperfections.

Keywords: Choquet-expected-utility, P.O., equilibria, pricing, spread

ET52 RISK AVERSION AND NON ADDITIVE UTILITY

Optimal Risk-Sharing Rules and Equilibria with Non-Additive-Expected Utility

Jean-Marc TALLONTALLON, J. M.,

CNRS-MAD, Université de Paris I, France

Rose-Anne Dana, Alain Chateauneuf

This paper explores the consequences of non-additive expected utility on risk sharing and equilibrium in a general equilibrium set-up. We first establish that convexity of an agent's preferences is equivalent to the convexity of his capacity and concavity of his utility index. We then show, in the one-good case, that when agents have the same capacity, the set of Pareto-optima is independent of it and identical to the set of optima of an economy where agents are vNM and have same probability, if the capacity's core is non-empty and contains a given probability distribution. The latter is one of the probability laws used to compute the Choquet-expected value of aggregate ressources. Hence, optimal allocations are comonotone. We next consider the case where agents have different capacities with non-empty core intersection. As in the vNM case, nothing general may be said. We however show that if agents are RDEU maximizers with convex distortion functions, then Pareto-optima are comonotone. This is also true in the two-state case. Optima may therefore be fully characterized in the two-agent, two-state case. Equilibrium analysis shows that the equilibrium set of a Choquet economy is in general quite different from the one of a vNM economy. In particular, equilibrium is indeterminate if there is no-aggregate risk. We also establish that convexity of preferences is not needed to prove existence.

Keywords: Risk-sharing, non-additive expected utility, Choquet integral, equilibrium

ET52 RISK AVERSION AND NON ADDITIVE UTILITY

Risk Aversion, Intertemporal Substitution and Timing of the Resolution of Uncertainty

Johanna ETNERETNER, J.,

Université Paris I, France

Kreps and Porteus (1978) introduced a preference class in order to allow the representation of preferences for the date of the resolution of uncertainty. On the other hand, Epstein and Zin (1989) propose a preferences representation which permits to break the link between risk aversion and intertemporal substitution. In the expected utility case, this last preferences class is included in Kreps and Porteus' preferences class. In this paper, we show that three concepts, risk aversion, intertemporal subsitution and timing of the resolution of uncertainty are linked and two of them could determinate the thrid.

Keywords: Risk Aversion, Intertemporal Substitution, Date of the Resolution of Uncertainty

ET53 VOTING THEORY 2

Majority Voting on Orders

Jean LAINELAINE, J.,

ENSAE-LEI, France

Gilbert Laffond

We characterize two lexicographic-type preference extention rules from a set of alternatives to the set of all orders on this set. Alternatives are interpreted as basic economic policy decisions, whereas orders of alternatives represent political platforms, which reveal the degree of priority given to each decision, and among which a collectivity has to choose through majority voting. The main axiom is called tournament-consistency, and states that whenever majority pairwise comparisons of alternatives define a linear order, then this order is also elected when individuals cast their votes on platforms. Tournament consistency thus allows to predict the outcome of majority voting upon orders from the knowledge of preferences on their components.

Keywords: Majority Voting, Tournament, Preference Extention Rule

ET53 VOTING THEORY 2

Why Vote for Losers?

Micael CASTANHEIRACASTANHEIRA, M.,

ECARE, ULB, Belgium

Abstract not received from the author

ET53 VOTING THEORY 2

Aggregation of Preferences with a Variable Set of Alternatives

Jean-François LASLIERLASLIER, J. F.,

Université de Cergy-Pontoise, France

A social choice correspondence called the Essential Set is studied with the help of an axiom called Cloning Consistency. Cloning consistency is the requirement that the formal social choice rule be insensitive to the replication of some alternatives. The Essential set is the set of outcomes of the symmetric, two-party electoral competition : If parties are allowed to present platforms which put more or less emphasis on the various alternatives, the Essential set is the equilibrium platform for the corresponding symmetric two-player zero-sum game.

Keywords: Social Choice, Voting

ET54 LOCATION MODELS

Telecommunications and Urban Spatial Structure

José-Maria CHAMORRO-RIVASCHAMORRO, J. M.,

Universitat Autònoma de Barcelona, Spain

Xavier Martinéz-Giralt

We present a closed city type of model to investigate the impact of the new information and communication technologies on firms where the strategic and control decisions (front-units) are separated from the production and distribution decisions (back-units). Also, consumers can be skilled or unskilled when providing labor to firms. We find a unique equilibrium land use configuration where front-units locate at the city center; skilled workers locate around the front-units; unskilled workers locate at the outskirds of the town; and back-units locate between the skilled and unskilled workers separating both types of consumers.

Keywords: telecommunication, urban economics, equilibrium land configuration

ET54 LOCATION MODELS

Agglomeration in an Core-Periphery Model with Vertically and Horizontally Integrated Firms

Karolina EKHOLMEKHOLM, K.,

IUI, Sweden

Rikard Forsild

This paper analyses the effect of allowing for a more general production structure in the core-periphery (CP) model. The two cases of fully horizontally and vertically integrated firms are treated. The former case is a counter-example to the strong agglomeration effects found in the CP model in that agglomeration is prevented. The introduction of vertically integrated firms tends to break the symmetry of the original CP model, and, in this sense, leads to more agglomeration. However, because it also tends to decrease the parameter space in which full agglomeration occurs it can also be said to lead to less agglomeration.

Keywords: economic geography, agglomeration, horizontally integrated firms, vertically integrated firm

ET54 LOCATION MODELS

Intermodal Competition, Firms Location and Asymmetries in Regional Surpluses

Laurent LINNEMERLINNEMER, L.,

ENSAE, France

Pierre-Philippe Combes

Abstract not received from the author

ET55 ENDOGENOUS GROWTH

Transitional Dynamics of the Search Model with Endogenous Growth

Fabien POSTEL-VINAYPOSTEL-VINAY, F.,

Université de Paris I, France

Abstract not received from the author

ET55 ENDOGENOUS GROWTH

Pareto Improving Social Security Reform with Endogenous Growth

Pascal BELANBELAN, P.,

GREQAM, France

Philippe Michel, Pierre Pestieau

Abstract not received from the author

ET55 ENDOGENOUS GROWTH

Short-Run Uniqueness and Long-Run Multiplicity

Jean-Pierre DRUGEONDRUGEON, J. P.,

Université de Paris I, France

This article is interested in the scope for indeterminacies that result from the occurrence of flow externalities in the technological set of a basic growth model. Alternative roads - unrelated to concavity or discoun- ting restrictions - for turnpike stability results are characterised. Sufficient conditions for indeterminacies are established. The uniqueness of steady states is however not questionned. Upon further restrictions on the production set and on preferences, homothetic growth rays are analysed. First, under related con- ditions to the ones that emerged from the stationary case, locally indeterminate growth rays with multiple converging orbits are admissible. Besides, there appears a new area for indeterminacies that derives from non-stationarity, i.e., the possibility of multiple distinct long-run rays of steady states. It is closely related with the unvalidation of the uniqueness of the equilibrium growth rate and is a direct outcome of the admissibility of multiple stationary values for the external flow effect.

Keywords: external effects, non-stationarity, dynamical indeterminacies, optimal growth

ET56 APPLIED GAME THEORY 1

Not a Game, but an Equilibrium

Jim Y. JINJIN, J.,

Wissenschaftszentrum für Sozialforschung Berlin, Germany

Abstract not received from the author

ET56 APPLIED GAME THEORY 1

Uncertainty, Instrument Choice, and the Uniqueness of Nash Equilibrium: Microeconomic and Macroeconomic Examples

Dale W. HENDERSONHENDERSON, D.,

Board of Governors of the Federal Reserve System, U.S.A.

Ning S. Zhu

This paper contains two examples of static games with two strategic players and a play by nature: (1) a differentiated duopoly game with joint costs and uncertain demands and (2) a macroeconomic game between two countries with inflation-bias preferences confronting uncertain demands for moneys. In both examples, each player can choose either of two variables as an instrument, and reaction functions are linear in the chosen instruments. Uncertainty reduces the number of (Bayesian) Nash equilibria in both games, although not always to one. A surprising result is that a small amount of uncertainty can yield a unique equilibrium that has lower payoffs for both players with no uncertainty.

Keyworlds: Uncertainty, Policy Instrument, Monetary Policy, Oligopoly

ET56 APPLIED GAME THEORY 1

Reforms and Redistribution

Tone OGNEDALOGNEDAL, T.,

University of Oslo, Norway

A majority-voting model with coalition formation is used to analyse the relation between the cost of redistributive policies and agreements about policy changes. The players have common interests in implementing a beneficial reform, but opposite interests with respect to the distribution of gains. The model gives two main results. First, there is a negative relation between the possibility to redistribute gains from a reform and the chance that the parties will agree about the reform. Second, if gains can be redistributed at no costs within coalitions, the only possible agreement is to implement the reform that maximizes total gains with no redistributions.

ET57 LABOUR ECONOMICS 2

Employment Subsidies. Job Additionality Dead-weight Spending as Informational Issues

Pierre M. PICARDPICARD, P.,

Federal Planning Bureau, Brussels, Belgium

Employment subsidies is often criticised because they support jobs would have been created anyway and provide significant windfall gain to private firms. We argue that these two issues of non-additional employment and deadweight spending can be related to the asymmetry of information between government and private firms with respect to their hiring capabilities. We design the optimal employment subsidies for a government concerned by an unemployment externality. When firms do not anticipate the subsidies we show that some firms should systematically be discarded from the subsidies. However, in a dynamic context, the use of past information by government involves significant complications in the design of optimal employment subsidies. Finally we argue that job additionality might not be a relevant measure of subsidy efficiency.

Keywords: Employment Subsidies, Labour Market, Asymmetric Information

ET57 LABOUR ECONOMICS 2

Minimum Wages, Technological Progress and Loss of Skill

Birthe LARSENLARSEN, B.,

University of Copenhagen, Denmark

I consider A search equlibrium model with risk of loss of skill during the experience of unemployement. There are thus two types of unemployement workers: short-term unemployed and long-term unemployed. The economy consists of two types of firms where the most productive firms ernploy short-term unemployed workers. The less productive firms hire long-term unemployed workers. I study the effect of a productivity shock in the most productive firms where wages are flexible and when wages are down-ward sticky. The economic variables considered arc the equilibrium rate of unemployment, short-term and long-term unemployement, wages and wage disparity.

Keywords: Search, Unemployment, Loss of Skill, Wage Rigidity

ET57 LABOUR ECONOMICS 2

The Effects of Redistribution on Intergenerational Mobility: Does Wage Equality Nail the Cobbler to His Last?

Anna SJÖGRENSJÖGREN, A.,

Stockholm School of Economics, Sweden

Equality of outcome is no guarantee for equality of opportunity. We model occupational choice when individuals are heterogeneous with respect to ability and background. It is found that redistribution has implications for intergenerational mobility and talent allocation because its influence on individual occupational choices depends on family background. We conclude that the presence of a trade-off between redistribution and intergenerational mobility depends on the extent of similarity of occupations with regard to ability sensitivity and wage rates, and the degree of individual risk aversion. Whether redistribution occurs within an occupation or simultaneously within and across occupations is also important.

Keywords: Intergenerational mobility, occupational choice, talent allocation, redistribution

ET58 FISCAL AND MONETARY POLICY

Tax Clienteles and Optimal Bond Issuing Policy A Simple Equilibrium Model

Frank ALTROCKALTROCK, F.,

University of Münster, Germany

This paper focusses on a public authority's optimal choice of issued bonds' coupons. We argue that a straightforward application of the after-tax linear programming techniques developed in finance theory to determine efficient bondholding is inappropriate. We specify a model of a simple economy and find that the public authority can never gain from substituting discount and/or premium bonds for par bonds. Furthermore, its issuing policy is irrelevant when in all feasible equilibria the tax-exempt investor is representative. This seems to be the case in the German bond market as our empirical findings suggest.

ET58 FISCAL AND MONETARY POLICY

Effective Interest Rate Policy

Paula DONATIDONATI, P.,

CORE, Belgium

Heracles Polemarchakis

Interest rate policy determines the term structure of interest rates; it is effected through open market operations that accomodate the demand for money balances. Effective interst rate policy modifies the intertemporal allocation of resources; in particular, it modifies the allocation of output between consumption, short and long term investment and, as a consequence, the rate of growth of the economy. The central question of monetary theory is whether interest rate policy can be effective at equilibrium, where individuals have rational expectations and markets clear. When the asset market is incomplete, interst rate policy affects the attainable reallocations of revenue at equilibrium and, thus, it is effective; this formalizes the argument of Tobin (1958), for effective monetary policy when liquidity preference derives from individual behavior under risk. When individuals are asymmetrically inforned, interest rate policy affects the information revealed by prices at equilibrium; this is an additional channel for effective policy, as suggested by Weiss (1982) in response to the argument of Lucas (1972). The possibolity of effective interst rate policy raises the question of the information necessary to determine improving interventions.

Keywords: effective interest rate policy, term structure, incomplete asset market, assymetric information

ET58 FISCAL AND MONETARY POLICY

Staggered Wages and Disinflation Dynamics: What Can More Microfoundations Tell Us?

Guido ASCARIASCARI, G.,

University of Warwick, U.K.

Neil Rankin

In this paper we study the effects of disinflation in a dynamic general equilibrium model with staggered wages. The money wage is fixed by the household-union for two periods, as in Taylor's work. We demonstrate that, once microfoundations are taken into account, the results in a recent paper by Ball rest on ad hoc and unjustifiable assumptions. More microfoundations tell us: (i) unanticipated and anticipated disinflation has negative short- and medium-run effects on output because of a Cagan-type demand-for-money effect that lowers, on impact, the velocity of circulation of money; (ii) disinflations affect output also in the long-run.

Keywords: disinflation, staggered wages/prices

ET59 REPEATED GAMES

Algebraic Complexity of Strategy-Implementing Automatons for Repeated-Play Games

Mark R. JOHNSONJOHNSON, M.,

Tulane University, U.S.A.

The standard proxy for automaton complexity used in game theory is based on the number of states in the minimal automaton. This paper investigates the application of classical algebraic complexity measures, derived from the Krohn-Rhodes Decomposition Theorem to automata used to implement strategies in repeated-play games. Results demonstrate that state-based complexity is insufficienctly fine to distinguish between automatons with the same number of states and different algebraic complexities. More important, the state-based measure is not monotonic in algebraic complexity, viz., there are automatons with three states, that are less complex that some two-states automatons.

Keywords: Game Theory, Algebraic structure, Complexity, Automatons

ET59 REPEATED GAMES

Switching Costs in Frequently Repeated Games

Ruqu WANGWANG, R.,

Northwestern University, U.S.A.

Barton L. Lipman

We show that the standard results for finitely repeated games do not survive two simple variations. We add a small cost of changing actions and consider the effect of increasing the frequency of repetitions within a fixed period of time. We show that this can yield multiple Subgame Perfect Equilibria in games like the Prisoners' Dilemma which normally have a unique equilibrium. Also, it can yield uniqueness in games which normally have multiple equilibria. For example, in coordination games, if the Pareto dominant and risk dominant outcomes coincide, the unique SPE is to repeat this outcome every period.

Keywords: repeated games, switching costs, folk thoerem

ET59 REPEATED GAMES

Cooperation and Computability in N-Player Games

Hamid SABOURIANSABOURIAN, H.,

Cambridge University, U.K.

Luca Anderlini

Abstract not received from the author

ET60 ECONOMIC POLICY AND GROWTH

Taxation and Uncertainty in an Endogenous Growth Model

Christiane CLEMENSCLEMENS, C.,

University of Hannover, Germany

Susanne Soretz

This paper analyzes growth and welfare effects of income taxation in a stochastic endogenous growth model with externalities in human-capital accumulation. The government participates in income risks with the collection of a linear income tax that affects the mean and the variance of after-tax income. We consider the implications on growth and welfare of a rise in the tax rates on deterministic and stochastic components of income and demonstrate that an increase in the latter has an unambiguously positive effect on the expected growth rate, driving it towards the Pareto-optimal one. Paradoxically, this may induce welfare losses and thus differs from the usual outcomes of taxation under uncertainty in growing economies.

Keywords: endogenous growth, taxation under uncertainty

ET60 ECONOMIC POLICY AND GROWTH

Is There a Trade Off Between Growth And Stabilisation Policy?

Keith BLACKBURNBLACKBURN, K.,

University of Manchester, U.K.

George Bratsiotis

This paper present an analysis of the long-run implications of short-term stabilisation policy. The analysis is based on an imperfectly competitive model economy in which price-setting firms and wage-setting unions interact with a monetary authority. Exogenous shocks trigger stochastic fluctuations which are propagated by an endogenous technology such that output follows a non-stationary process. We show that counter-cyclical stabilisation policy has conflicting effects on the cyclical and secular movements in output. This leads to our main result which is that there is a trade off between short-term stabilisation and long-term growth.

Keywords: Growth, business cycles, stabilisation, imperfect competition, endogenous technology

ET60 ECONOMIC POLICY AND GROWTH

Economic Growth, Distributive Policies and an Income cum Investment Subsidy Tax Scheme

Günther REHMEREHME, G.,

TH Darmstadt, Germany

A capital income cum investment subsidy tax is considered to investigate if distribution towards the non-accumulated factor of production (labour) retards growth and if income taxes are bad instruments to finance subsidies. I identify conditions under which the tax scheme is better for growth than other distorting tax schemes. I show that a 'left-wing' (pro-labour) government acts growth maximizing and that distributing income towards labour raises the growth rate. A 'right-wing' (pro-capital) government's preferred policy is not growth maximizing under the tax scheme, but may generate higher growth than its optimal, growth maximizing policy under another tax scheme. For growth maximizing policies the tax scheme's post-tax factor income distribution is generally biased towards labour compared to other tax schemes.

Keywords: Growth, Distribution, Investment Subsidies, Income Taxes

ET61 CORPORATE FINANCE 2

Investment Facing an Endogenous Debt Ceiling: An Explicit Model

Jean-Bertrand CHATELAINCHATELAIN, J-B.,

Banque de France, France

Elisabeth Kremp

A model of investment facing an endogenous debt ceiling derived from explicitly specified capital market frictions is resolved. The explicit solutions of financially constrained investment and of the Lagrange multiplier related to finance constraints are given. It shows that the Lagrange multiplier in recent Euler equation tests (derived from a model assuming an exogenous debt ceiling) is generally misspecified. The explicit solution of the financially constrained investment provides a specification, based on the flow of funds equations, which allows to test directly the dependance on explanatory variables of the endogenous debt ceiling instead of the ''intuitive'' specifications of the Lagrange multiplier. A second theoretical result is that the financially constrained growth path of the firm explains investment delays, without the standard assumption of adjustment costs.

ET61 CORPORATE FINANCE 2

Valuation of Irreversible Entry Option under Uncertainty and Taxation

Luis H.R. ALVAREZALVAREZ, L.,

University of Turku, Finland

Vesa Kanniainen

We analyze the tax effects on a potential firm with an irreversible entry option and subject to risky post-entry earnings. We formulate the problem in terms of optimal stopping and derive both the necessary conditions for optimal entry and the value of the optimal premium by relying on the classical theory of diffusions and the Greenian representation of the stochastic value functional. By modeling uncertainty as a regular diffusion process, we show that to make the entry option invariant with respect to the tax policy when the government owns a call option to a fraction of firm's earnings, the tax allowance has to satisfy a first order non-linear differential equation. We derive qualitative results for neutrality of the tax policy. Using standard geometric Brownian motion to model price uncertainty, we provide examples of the requirements for tax neutrality.

Keywords: Optimal entry premium, tax policy, Johansson-Samuelson theorem, regular diffusion process, Green-kernel, optimal stopping

ET61 CORPORATE FINANCE 2

Does Good News About Cash Flows Raise Optimal Debt Levels?

Sanjay UNNIUNNI, S.,

University of Strathclyde, U.K.

Within a framework of corporate and personal taxation, this paper examines how publicly observed signals about a firm's cash flow prospects affect the firm's optimal capital structure. In a single-period context, positive signals about terminal cash flow, defined in terms of first-order stochastic dominance, will always increase the firm's value, but will reduce its optimal leverage if the cash flow distribution improves proportionately greater for low outcomes than for high ones. An stronger class of improvements, defined in terms of hazard rates, is introduced and is shown to be sufficient to produce an increase in both firm-value and optimal leverage. When extended to a multi-period framework, this model reveals a further complication in the earnings-leverage relationship. An anticipated improvement in future cash flows, even in the strong hazard rate sense, will actually reduce the optimal level of current interest payments while raising the optimal level of future interest payments.

Keywords: Cash Flow Signals, Hazard Rates, Taxation, Optimal Leverage, Firm Value

ET62 ECONOMIC GEOGRAPHY

Research and Development, Regional Spillovers and the Localisation of Economic Activities

Alberto Franco POZZOLOPOZZOLO, A.,

Bank of Italy, Italy

We study the effects of the interaction of increasing returns in manufacturing and local externalities in research, in a model with both transport and congestion costs. Different localisation of the research and manufacturing firms can obtain as an equilibrium, depending on the parameters describing the size of the research sector, the congestion cost and the transport cost. In particular, when the R&D sector is small (thus guaranteeing a lower rate of growth) research firms can indifferently locate in the larger region, together with the majority of productive firms, or in the smaller one, thus creating a 'technological ghetto'; when the R&D sector is large, firms can only locate in the larger region.

Keywords: Research and development, economic geography, growth

ET62 ECONOMIC GEOGRAPHY

Regional Specialisation and Technological Leapfrogging

Mary AMITIAMITI, M.,

Universitat Pompeu Fabra, Spain

This paper investigates circumstances in which technological leapfrogging between regions will occur. Input-output linkages between firms in imperfectly competitive industries create forces for agglomeration of industries in particular locations. A new technology, incompatible with the old, will not benefit from these linkages, so will typically be established in locations with little existing industry and consequently lower factor prices.

ET62 ECONOMIC GEOGRAPHY

Producer Services, Economic Geography and Services Tradability

Albert DE VAALDE VAAL, A.,

University of Nijmegen, The Netherlands

Marianne van den Berg

This paper investigates how the incorporation of producer services linkages affects the outcome of a Krugman-type economic geography model. We thereby specify the production of manufactures such that a variety of producer services is needed to transform tradeable unfinished goods into final consumption goods. We find that services linkages promote the concentration of economic activity in one region, but that it depends on the tradeability of services whether full concentration is achieved. The costs of services trade, as well as the mode by which services trade takes place, are important factors in this respect.

Keywords: economic geography, producer services, economies of scale, tradeability

ET63 PRINCIPAL-AGENT MODELS 2

Proprietary Trading Activities, Risk-Taking Incentives and Compensation Schemes

Nathalie ROSSIENSKYROSSIENSKY, N.,

London Business School, U.K.

This paper investigates the link between the risk-taking behavior of banks' traders and their compensation schemes. Precisely, it analyses under which conditions risk choices may be driven more by the specific nature of incentive contracts than by the investments characteristics In this non-standard moral hazard model, the traders cannot reveal proprietary information for each new position so the bank's shareholders cannot always judge whether their decisions were correct.The major result is that the optimal contracts are convex (e.g. with a bonus component) and can lead the trader to make the shareholders bear unwanted risk compared to the first-best. This differs considerably from the standard underinvestment problem resulting from the optimal contract between a risk-averse agent and a risk-neutral principal.

Keywords: Trading risk, Banks, Risk-taking incentives, Compensation packages

ET63 PRINCIPAL-AGENT MODELS 2

Moral Hazard and Overlapping Generations with Endogenous Occupational Choice

Massimo MORELLIMORELLI, M.,

Iowa State University, U.S.A.

Maitreesh Ghatak, Tomas Sjöström

This paper introduces a general equilibrium, overlapping generations model of the principal-agent problem. Individuals live for two periods and must work when young. When old, they have a choice between becoming principals or remaining workers/agents. Successful workers are paid high wages and may (if the wage is sufficiently high) become principals when old; unsuccessful workers are paid low wages and can become principals only by borrowing money. In a "high wage" equilibrium, an credit market (which makes it costly to borrow money due to, for example, moral hazard between lender and borrower) mitigates the moral hazard problem on the labor market: young workers work harder than in the static model (for a given wage) in order to succeed and become principals (the "American Dream" effect). The extra effort makes it possible for principals to break even with high wages. However, there is a coordination problem. For the same parameter values that give rise to the "high wage" equilibrium, there also exist equilibria where wages are so low that even successful agents need to borrow money if they are to become principal. Effort is then low because wages are low, and because there is no "American Dream".

Keywords: Moral hazard, occupational choice, credit market imperfections, "american dream" effect

ET63 PRINCIPAL-AGENT MODELS 2

The Economics of Career Concerns: Theory and Application to Mission Setting

Mathias DEWATRIPONTDEWATRIPONT, M.,

Université Libre de Bruxelles, Belgium

Jean Tirole, Ian Jewitt

Abstract not received from the author

ET64 VERTICAL RELATIONSHIPS

Switching Costs in Vertically Related Markets

Tommaso M. VALLETTIVALLETTI, T.,

London School of Economics, U.K.

In the presence of switching costs, firms are often interested in expanding current market shares to exploit their customer base in the future. However, if the product is sold by retailers, manufacturers may face the paradoxical problem of extracting too much surplus from the retailer. If this happens, then the latter are not incentived to build a subscriber base. A simple upstream-downstream duopoly model is presented to analyse the mutual incentive for firms to enter into particular trading relationships. It is shown that complete freedom may be advantageous to both pairs of firms. Freedom ensures a reservation payoff to the retailer equal to what he could get if he supplies (part of) his customers to the other manufacturer. The basic story is reminiscent of the classic hold up problem. Partial competition from the other manufacturer gives credibility when long-term contracts are not available. The practical relevance of the findings is discussed with reference to the mobile telecommunications industry in the UK in the period 1985-1996.

Keywords: switching costs, vertical restraints, telecommunications

ET64 VERTICAL RELATIONSHIPS

Resale Price Maintenance and Outlet Density

Vincent VEROUDENVEROUDEN, V.,

Tilburg University, The Netherlands

The paper analyzes the role of resale price maintenance (RPM) in sales contracts between a producer and its distributors. In particular, it considers the 'outlets hypothesis', which states that the use of price floors can be profitable for a producer when it increases the number of resellers that carry its product and increases the total amount of sales. Whereas the existing literature does not provide theoretical support for the 'outlets hypothesis', it is shown in this paper that if demand is fairly inelastic and the fixed costs of the retail outlets are large, raising outlet density through RPM is indeed a profitable option for the producer.

Keywords: vertical restraints, resale price maintenance, outlet density

ET64 VERTICAL RELATIONSHIPS

Vertical Foreclosure as Exit from the Intermediate Market

Eric AVENELAVENEL, E.,

Université de Paris 1, France

Abstract not received from the author

ET65 NON ADDITIVE UTILITY

E-Capacities and the Ellsberg Paradox

Jürgen EICHBERGEREICHBERGER, J.,

Universität des Saarlandes, Germany

David Kelsey

Ellsberg's famous paradox shows that decision-makers give events with 'known' probabilities a higher weight in their outcome evaluation. Ellsberg also suggests a preference representation which has intuitive appeal but lacks an axiomatic foundation. Schmeidler and Gilboa provide an axiomatisation for expected utility with non-additive probabilities. This paper introduces E-capacities as a representation of beliefs which incorporates objective information about the probability of events. It can be shown that the Choquet integral of an E-capacity is the Ellsberg representation. 'The paper further explores properties of this representation of beliefs and provides an axiomatisation for them.

Keywords: Ellilsberg paradox, uncertainty aversion, Choquet integral, non-additve probabilities

ET65 NON ADDITIVE UTILITY

Uncertainty in Partnerships

Willy SPANJERSSPANJERS, W.,

University of Saarland, Germany

David Kelsey

In this paper we analyze the consequences of the presence of Knightian uncertainty for partnerships. In particular, partnerships with symmetric linear production functions are analyzed in a CEU framework. We propose an extention of Nash equilibrium in pure strategies for CEU-games with strategic uncertainty. For a particular class of sharing rules, properties on ex-ante and ex-post efficiency as well as coalition proofness of the corresponding equilibrium outcomes of the partnership are derived.

Keywords: Choquet Expected Utility, Partnerships

ET65 NON ADDITIVE UTILITY

Linear Non-Expected Utility: Axiomatization, Examples and Applications

Sergei GUIREVGUIREV, S.,

Computing Center of Russian Academy of Science, Russia

In expected utility theory risk aversion is equivalent to diminishing marginal utility. The paper studies non-expected utility which is linear and risk-averse. Representation results are obtained and economic examples are provided for two kinds of linearity: linearity with regard to reverse distribution functions and constant absolute and relative risk aversion utility. The representation for the former extends Yaari's dual theory of choice for the case of unbounded random variables. The latter class is far broader. The theory is applied to a model of occupational choice and firm formation in the spirit of Kihlstrom-Laffont with addition of bankruptcies and financial markets.

Keywords: non-expected utility, constant absolute and relative risk aversion, occupational choice, dual theory of choice

ET66 MATHEMATICAL ECONOMICS 1

Long-Run Investments of Uncertain Costs: Stochastic Maximum Principle Approach

Vadim I. ARKINARKIN, V.,

Russian Academy of Sciences, Russia

Alexander D. Slastnikov , Elmira N. Simakova

The paper examines a general economic dynamics model (in discrete time) with the opportunity to invest (irreversibly) some new project - a creation of a new technological mode (new technology). The expenditure of the necessary investments are considered as random with given distribution. The duration of investment process in this model is also random, and its distribution depends on the investor's strategy. We obtain conditions for an existence of `shadow prices' supporting an optimal investment strategy, describe a structure and a dynamics of these prices. Moreover, some specific features of optimal strategies are studied. For the analysis of this model it is applied a special variant of a Stochastic Maximum Principle with the controlled measure, which allows to construct local criteria (`rule of action' at every time) for optimal investments.

Keywords: investments, stochastic maximum principle, shadow prices

ET66 MATHEMATICAL ECONOMICS 1

Degree of Manipulability of Social Choice Procedures the Result of Computational Experiments

Fuad ALESKEROVALESKEROV, F.,

Bogazici University, Turkey

Eldeniz Kurbanov

Abstract not received from the author

ET66 MATHEMATICAL ECONOMICS 1

Profit Functions and Metric Distance: Some New Duality Results

Jean-Baptiste LESOURDLESOURD, J-B.,

Universités d'Aix-Marseille II et III, France

Walter Briec

Abstract not received from the author

ET67 PUBLIC GOODS

Tiebout Economies with Differential Genetic Types and Endogenously Chosen Crowding Characteristics

Myrna WOODERSWOODERS, M.,

University of Toronto, Canada

John P. Conley

Abstract not received from the author

ET67 PUBLIC GOODS

Ratio Equilibria and Voting in a Public Goods Economy with Jurisdictions

Sergio CURRARINI CURRARINI, S.,

CORE, Belgium

In two related papers, Kaneko(1977a, 1977b) has proved an equivalence theorem relating the set of ratio equilibria to the core of a strong voting game. This paper extends in two ways Kaneko's analysis to economies with jurisdictions, each producing a specific public good. First, for economies in which a central authority exists, we provide sufficient conditions for Kaneko's equivalence result to generalize. Next, for economies with independent jurisdictions, we propose a concept of (noncooperative) equilibrium and prove the nonemptiness of the set of equilibrium allocattions under the assumption that each public good is noninferior in the jurisdiction producing it. For this case, we also study a cooperation process among jurisdictions.

Keywords: Ratio Equilibrium, Voting, Core, Public Goods, Jurisdictions

ET67 PUBLIC GOODS

Efficiency in Economies with Jurisdictions and Local Public Projects

Julian R.A. MANNINGMANNING, J.,

Norwegian School of Management, Norway

Traditionally in the literature on local public goods it is assumed that each local public good is a selection from a convex space. In this paper existence is shown for a class of finite models where local public goods are selections from abstract, possibly non-convex, commodity spaces. These equilibria are shown to lie in the core.

Keywords: local public projects, welfare, existence, core

ET68 ENDOGENOUS LOCALISATION IN LABOUR MARKETS

Adaptive Bevaviour, Choice Location and Localization of labour Markets

Andreas KOPPKOPP, A.,

Kiel Institute of World Economics, Germany

Abstract not received from the author

ET68 ENDOGENOUS LOCALISATION IN LABOUR MARKETS

A Perfect Foresight Model of Regional Development and Skill Specialization

Klaus DESMETDESMET, K.,

Stanford University, U.S.A.

A perfect foresight model of a two-region two-sector economy with a continuum of overlapping agents is developed, where there are positive economies in the acquisition of skills. This externality causes specialization, and over time the economy gets divided into a rich manufacturing and a poor agricultural region. The introduction of a new technology either reinforces or reverses this development pattern. Wealth differences are reinforced if, in spite of higher wages, the new technology locates in the advanced region because of skills similar to the needs of the industry. Otherwise the new technology locates where wages are lower, in which case the lagging region overtakes the leading one.

Keywords: regional development, skill specialization, localized externalities, uneven development, technological change, path dependence

ET68 ENDOGENOUS LOCALISATION IN LABOUR MARKETS

Equilibrium Urban Unemployment

Etienne WASMERWASMER, E.,

CREST, France

Yves Zenou

In this paper, we focus on search equilibrium unemployment when a spatial dimension is introduced. By assuming that workers' search efficiency decreases with the distance to he employment-center located at the city-center, two urban equilibrium configurations emerge: either the unemployed reside at the vicinity of the employment-center or locate at the outskirts of the city. If the wage is exogeneously set, we show that the first urban equilibrium is better than the other one because the aggregate matching is more efficient and the unemployment leel is lower. If the wage is endogeneously determined through bargaining, some externalities linked to distance arise in wage determination. This affects the labour market equilibrium: aggregate matching is still more efficient in the first urban equilibrium, but unemployment differences between urban configurations can be reduced.

Keywords: workers' location, urban spatial structure, search intensity, matching function, equilibrium unemployment

ET69 LEARNING AND OLIGOPOLY

Market Diffusion with Two-Sided Learning

Dirk BERGEMANNBERGEMANN, D.,

Yale University, U.S.A.

Juuso Välimäki

Abstract not received from the author

ET69 LEARNING AND OLIGOPOLY

Price Dynamics and Consumer Learning

Xavier VIVESVIVES, X.,

Universitat Autònoma de Barcelona, Spain

Ramon Caminal

Abstract not received from the author

ET69 LEARNING AND OLIGOPOLY

Co-ordination or Collusion?

Johan STENNEKSTENNEK, J.,

Stockholm University, Sweden

The paper investigates the private and social efficiency of two "behavioral" coordination mechanisms. In Cournot oligopoly, firms prefer immediate coordination on the Nash equilibrium (interpreted as a preplay communication) over the best reply dynamics (and fictitous play) which converges to the equilibrium, but with delay (interpreted as a decentralized learning process). In Bertrand oligopoly, firms prefer the learning process. These results indicate that firms have incentives to create institutions, such as trade associations or informal meetings, to facilitate coordination of production capacities, but not prices. Moreover, quantity agreements may even increase social welfare.

Keywords: Coordination, Learning, Information-Sharing, Competition policy

ET70 DYNAMIC INDUSTRIAL ORGANISATION

Price Adjustment During Learning about Demand

Michael H. STÆHRSTÆHR, M.,

The Aarhus School of Business, Denmark

Firms never actually know the demand curve they confront when supplying their product. Therefore, price-setting firms may benefit from receiving better information about their demand conditions. Especially, a firm observing the quantities demanded at particular prices may learn the parameters of its demand function. However, frequent price changes introduce additional noise to the system and this might obstruct the learning process. In this paper it is shown how firms over time can learn their demand functions by actively influencing prices and quantities, and finally, the long run behaviour of prices are studied.

Keywords: Active learning, demand curves, dynamics, incomplete information

ET70 DYNAMIC INDUSTRIAL ORGANISATION

Industry Development under Alternative Market Structures

Marcel BOYERBOYER, M.,

Cirano, Université de Montreal, Canada

M. Moreaux, Pierre Lasserre

We compare the development of an industry (evolution over time of capacity, production and prices) in different contexts. We compare its surplus maximizing development with its development as a protected monopoly, as a perfectly competitive (free entry) industry and as a duopoly of different types (exogenously determined alternative move duopoly, endogenous move duopoly with fixed maximal number of capacity units per firm, endogenous move duopoly with some large maximal number of capacity units per firm). Our objective is to characterize the optimal decision rules of firms and to compare the evolution of the industry as the market grows either in a deterministic way or in a stochastic way under the different market structures.

Keywords: Industry Development, Duopoly, Stochastic Market Growth

ET71 REGULATION 1

Contracting with Capacity Constrained Suppliers Under Variable Demand and Technological Uncertainty

Sarah PARLANEPARLANE, S.,

Universitat Autónoma de Barcelona, Spain

In this paper I analyze optimal and efficient contracting in a 2 task model with 2 capacity constrained and specialized suppliers. I show that it is always possible to maintain efficiency in production using modified second price auctions. Optimality and efficiency coincide when the first best contract induces both suppliers to overstate the cost of the same task (monotone incentives). To guarantee incentive compatibility all firms receive non-negative rents. Optimality and efficiency do not coincide when the first best contract induces each supplier to overstate the cost of the activity in which he is specialized (countervailing incentives). In the optimal contract production is distorted from efficiency over a nondegenerate interval of types so as to extract the full surplus over this interval. Outside this interval production remains efficient and firms get positive rents.

ET71 REGULATION 1

Privatization and Strategic Monitoring

Richard DISNEYDISNEY, R.,

University of London, U.K.

Bulent Nomer, Christopher J. Ellis

This paper describes the sale and optimal regulation of a sequence of public utilities, where monitoring of regulatory compliance is costly. The government is concerned with the revenue raised by successive privatizations as well as the standard objective of efficiency in production. Since lower levels of monitoring are associated with higher expected profits, the government has an incentive to enforce regulations more loosely than it would in a standard static analysis. At each stage in the sequence of privatizations the public updates its distribution of posterior beliefs over the government's regulatory enforcement strategy. The government therefore has to find the optimal consistent enforcement/monitoring strategy that maximises the utility it derives from the sequence of sales.

ET71 REGULATION 1

The Optimal Level of Regulatory Commitment

Christophe WATTSWATTS, C.,

University of Southampton, U.K.

In this article we examine the relative benefits of regulatory commitment and discretion, arising from the incompleteness of contracts. Full commitment gives strong incentives for investment, but leaves the regulator unable to bring prices in line with costs or gives the utility large rents. Full discretion on the other hand offers no incentive to invest, but achieves allocative efficiency. We consider a monopoly firm with known demand but unknown costs and show that the elasticity of demand, the cost of investment, the weight on profits and the level of uncertainty are important factors in determining the optimal level of commitment.

Keywords: regulation, commitment, discretion, incomplete contracts

ET72 HOUSEHOLDS AND TAXATION

Collective Labour Supply with Non-Linear Income Taxation

Oliver DONNIDONNI, O.,

Université de Mons-Hainart, Belgium

Abstract not received from the author

ET72 HOUSEHOLDS AND TAXATION

Consistent Income Taxation when Households Are Heterogeneous

Udo EBERTEBERT, U.,

Carl von Ossietzky Universität Oldenburg, Germany

Patrick Moyes

For a homogeneous population in which all households are identical apart from income, it is well known that the post-tax income distribution is always at least as equal as the pre-tax distribution if and only if the average tax rate is non-decreasing. This paper investigates whether a similar result can be obtained for heterogeneous households, allowing for (i) different possible perceptions of inequality, and (ii) different methods for making household incomes comparable when family sizes differ. We prove the following results: (i) When the equivalizing transformation and the reference household type are both fixed, inequality reduction after tax only requires the fulfillment of a composition condition involving the chosen equivalizing transformation and a suitably progressive net income schedule. However no particular restriction is imposed on the equivalizing transformation. (ii) When the equivalizing transformation is fixed but the reference household type is allowed to vary, then inequality reduction after tax imposes serious restrictions on the tax structure. The equivalizing transformation used to convert the incomes of different types of households and the inequality concept are now no longer independent. (iii) Finally, allowing for the smallest degree of uncertainty regarding the transformation functions results in the impossibility to redistribute income whatever the chosen inequality concept, a result which reinforces previous findings obtained in the particular case of equivalence scales adjustments.

Keywords: Household composition, Equivalence scales, Income taxation, Lorenz dominance

ET72 HOUSEHOLDS AND TAXATION

Minimal Equal Absolute Sacrifice and Absolute Inequality

Patrick MOYESMOYES, P.,

Université Montesquieu Bordeaux IV, France

We analyze in this paper the distributional incidence of income taxation when individual taxes are designed in such a way that the equal sacrifice in terms of utility is minimized. Typically, the redistributive effect resulting from the so-called principle of minimal equal sacrifice will depend on the utility used for measuring the sacrifice incurred by every tax-payer, and the tax revenue to be raised. Focusing on minimal equal absolute sacrifice, we show that the concavity of the utility function is a necessary and sufficient condition for: (i) after tax incomes to be more equally distributed than before tax ones, and (ii) the reduction in after tax inequality to increase with the amount of tax-revenue collected. We further indicate how these results can be extended to minimal equal relative sacrifice and/or relative Lorenz domination by making use of the concept of generalized concave functions. Keywords: Minimal equal sacrifice, Taxation, Inequality, Lorenz dominance

ET73 INTERNATIONAL ECONOMICS

Foreign Aid and Rent-Seeking

Jacob SVENSSONSVENSSON, J.,

The World Bank, U.S.A.

Why has the macroeconomic impact of foreign aid seemingly been so poor in many developing countries? And is there a relationship between the widespread level of corruption and other types of rent-seeking activities and concessional assistance? To answer these questions we provide a simple game-theoretic model of public policy. The model has a number of interesting implications. First, we show that under certain circumstances an increase in government revenue (due to increased foreign aid for example) actually lowers the provision of public projects. Second, we show that the mere expectation of aid disbursements according to the recipients' future needs may suffice to increase rent dissipation in the present period and reduce productive public spending. However, we also show that if the donor community can enter into a binding policy commitment this result may in fact be reversed. Finally, we provide some preliminary empirical evidence in support of the hypothesis that foreign aid in countries suffering from a divided policy process is on average associated with increased corruption.

Keywords: Foreign aid, rent-seeking, divided policy process

ET73 INTERNATIONAL ECONOMICS

The Impact of Exchange Rate Risk on Inter-Country Trade and Production

Michael RÖMMICHRÖMMICH, M.,

Dortmund University, Germany

Erwin Amann

Analysing different arrangements of inter-country trade, this paper investigates the impact of exchange rate risk on production and expected trade. We address the question how a mean-preserving spread of the exchange rate distribution effects strategic aspects of different trading arrangements. We show that in an uncertain environment the efficiency loss induced by double marginalization can in general not to be overcome by negotiation.

Keywords: Trade, Exchange Rate Risk, Bargaining

ET73 INTERNATIONAL ECONOMICS

Nash Equilibria in a Popular Model of Balance-of-Payments Crises

Ivan PASTINEPASTINE, I.,

Bilkent University, Turkey

A widely used version of the Krugman (1979) model of balance-of-payments crises is examined using an alternative equilibrium concept. It is shown that Nash equilibria are a superset of the previously examined "market-clearing" equilibria. In particular, the timing of the balance-of-payments crisis is no longer predictable in the same sense. There may exist a bounded set of states where speculators' rational and self-fulfilling expectations of a crisis can trigger a speculative attack.

ET74 ECONOMICS OF INFORMATION

Provision of Quality and Certification Intermediaries

Gian Luigi ALBANO ALBANO, G.L.,

CORE, Belgium

Informational asymmetries affect the allocation of resources. The last decade has witnessed the outburst of certification as a channel of information transmission about product quality from firms to consumers. Quality can be thought of as an intrinsic characteristic of commodities such as safety or reliability. In this paper, we model information revelation as a strategic variable of a certification intermediary. The amount of disclosed information is shown to deeply influence both the intermediary's profits and the distribution of quality. The model allows for the analysis of some legislative oversights as minimum quality standards. We show how collective interests directly affect the process of certification and, in turn, firms' incentives in providing quality.

Keywords: Information revelation, Disclosure rule, Certification

ET74 ECONOMICS OF INFORMATION

Social Norms, Unemployment Insurance and Moral Hazard

Michael LUNDHOLMLUNDHOLM, M.,

Stockholm University, Sweden

Martin Dufwenberg

The probability of getting a job depends on talent and effort. Effort has positive externalities and a social norm bestows low status on "lazy" individuals and high status on "diligent" ones. The norm is harsher on individuals perceived of as more talented, but talent is private information and therefore individuals cunningly choose effort so as to manipulate the public perception of their talent. We analyze the workings of an unemployment insurance system in such a situation, focusing on how social norms and insurance benefit levels interplay to effect effort choices.

Keywords: Unemployment insurance, social norms, status, moral hazard

ET74 ECONOMICS OF INFORMATION

If You Say "Hot" I Say "Cold": A Model for Informational Differentiation

Mattias R. EFFINGEREFFINGER, M.,

GREMAC, Université des Sciences Sociales, France

Mattias Polborn

We analyze a model related to the strategic herding literature where a second expert maximizes his expected second period value by conforming with a first expert ("herding"). In contrast to the herding literature we assume that an agent is most valuable if he is the only smart agent. We describe an equilibrium in which the second expert always opposes its predecessor's report. We call this anti-herding phenomenon "differentiation". Particular equilibrium characteristica and also real life examples of differentiation are discussed.

ET74 ECONOMICS OF INFORMATION

Monitoring Incentives in Non-Anonymous Markets

Frédéric PALOMINOPALOMINO, F.,

Tilburg University, The Netherlands

Thierry Foucault

We analyze monitoring decisions by large shareholders facing the risk of a liquidity shock. By monitoring the firm, a large shareholder increases its expected value and acquires private information. It follows that a liquidity constrained large shareholder sells her stake at a discount since her trade is interpreted as a potentially- informed trade. This may lead to a socially inefficient level of monitoring activity. We show that when the market structure provides ways for non-anonymous trading, the socially efficient level of monitoring can be reached. Empirical implications of our analyzis are that (i) large shareholders with high liquidity needs should engage less frequently in monitoring activities but that (ii) this observation should be less pronounced when trading of shares in the secondary market can be non-anonymous.

ET75 RESOURCE MANAGEMENT AND ENVIRONMENTAL REGULATION

A Theory of Production with Waste and Recycling

Klaus CONRADCONRAD, K.,

Mannheim University, Germany

The management of solid waste has become an urgent problem. Product responsibility means that a product will accompany its producer from cradle to grave; prevention, recycling and disposal of waste are part of a theory of the firm which we develop under solid residual management. We assume that the government stimulates firms to enhance recycling of resources by a fee on waste. A comparative statics analysis shows the impact of a fee on waste reduction, on the structure of the production process, on recycling, on input demand, material saving effort, number of firms, and on the amount of waste disposal.

ET75 RESOURCE MANAGEMENT AND ENVIRONMENTAL REGULATION

On the Optimal Order of Natural Resource use when the Capacity of the Inexhaustible Substitute is Limited

Pascal FAVARDFAVARD, P.,

Université des Sciences Sociales de Toulouse, France

J.P. Amigues, G. Gaudet, M. Moreaux

Consider a general equilibrium framework where the marginal cost of extraction from several deposits of an exhaustible resource is constant in terms of an inexhaustible perfect substitute and differs between deposits. The instantaneous rate of production from the inexhaustible resource is subject to a capacity constraint. We show, under standard assumptions, that not only may it be optimal to begin using a high cost resource before a lower cost one is depleted, but it may be optimal to begin using it strictly before the lower cost one is even put into use. Thus the intuitive principle is positive natural resources should always be exploited in strictly increasing order of costs, not only does not hold in a general equilibrium context, but may be totally reversed.

Keywords: Natural Resource, Inexhaustible Substitute, Optimal Order,Limited Capacity, General Equilibrium

ET75 RESOURCE MANAGEMENT AND ENVIRONMENTAL REGULATION

Nonpoint Source Pollution Regulation When Polluters Might Cooperate

François SALANIESALANIE, F.,

Université des Sciences Sociales, France

Katti Millock

We analyse the regulation of nonpoint source pollution. In particular, we study the use of peer monitoring to sustain cooperative abatement by a group of polluters. Delegation to a group of polluters has sometimes been proposed under a policy of so called voluntary abatement accords. By solving the problem of a regulator who a priori does not know whether agents are cooperative or not, we explain some features of voluntary abatement accords. The analysis shows that the policy measure proposed in the literature for nonpoint source regulation - an ambient tax - may not be the optimal policy.

Keywords: peer monitoring, cooperation, voluntary abatement accords, environmental regulation, ambient tax, incomplete information

ET75 RESOURCE MANAGEMENT AND ENVIRONMENTAL REGULATION

The Economics of Green Labels

Lisette IBANEZIBANEZ, L.,

Université de Toulouse I, France

Claude Crampes

Pollution is a public "bad". In neoclassical economic models, when economic agents face environmental externalities, individual rationality is not sufficient to create optimality. By supposing that consumers have an altruistic behavior, we reduce the non-optimality range and we find that a monopoly is socially more efficient with respect to the environment than a duopoly. When consumers do not perfectly distinguish the environmental characteristics of products, producers can adopt a green label to signal their "environmental friendly" output. But polluting firms can be induced to free-ride them. The paper analyzes various perfect Bayesian equilibria reflecting these behaviors.

Keywords: environment, externality, altruism, labels

ET76 STRATEGIC ASPECTS OF MONETARY AND FISCAL POLICY

Are Budget Deficits Used Strategically?

Luisa LAMBERTINILAMBERTINI, L.,

University of California, Los Angeles, U.S.A.

This paper assesses empirically alternative explanations for the widespread increase in public debt experienced by industrialized economies over the last twenty years. First, the strategic explanation of budget deficits is analyzed - namely, that budget deficits are run by current governments to tie the hands of future governments. Two empirical tests are performed. The first uses U.S. quarterly data, the second uses pooled cross-section time-series annual data for sixteen OECD countries. Both tests show no empirical support for the strategic explanation of budget deficits. Second, the view that credit constraints cause budget deficits is empirically assessed. Credit constraints have become more binding since the late 1970s. This is due to the difficulty to borrow for educational purposes combined with a skill-biased technological change and increased import competition from low-wage countries that have raised the incentive to invest in human capital. U.S. time series data on college enrollment shows that primary deficits and credit constraints for educational purposes have both long- and short-run equilibrium relationships.

Keywords: budget deficits, political economy, fiscal policy

ET76 STRATEGIC ASPECTS OF MONETARY AND FISCAL POLICY

Was Schacht Right? Reparations, the Young Plan , and the Great Depression in Germany

Albrecht RITSCHLRITSCHL, A.,

Universitat Pompeu Fabra, Spain

The severity of the Great Depression in Germany has sometimes been blamed on the reparation burden in simplistic fashion. Alternative interpretations relied either on American exports or on malfunctions of the domestic economy, such as demand mismanagement or excessive wage increases during the preceding years. This paper argues for a more subtle link between Germany's macroeconomic performance and these policy responses to the reparation problem. I explain the foreign credit rush of Weimar Germany during the second half of the 1920s from the transfer protection clause of the Dawes Plan, whichgave commercial credits de-facto seniority over reparation claims on Germany. I argue that the transition to the Young Plan in 1929 implied a reversal of this seniority scheme, causing a severe credit crunch in Germany that lasted throughout the Great Depression. That the Young Plan would have just this effect had been the prediction of Schacht, then president of Germany's central bankand leader of the German delegation to the Young Plan negotiations of 1929. Protesting against the Young Plan, Schacht resigned from the presidency of the Reichsbank, only to be re-appointed by the Nazis in 1933. I argue that whatever the criticism of Schacht's later conduct, his verdict of the Young Plan was right. A model of sovereign debt with limited contract enforcement is employed to identify a sequence of reparation regimes with varying degrees of relaxation of Germany's participation constraint in international credit markets. I conclude that given the high amount of German international borrowing during the mid-1920s, abandoning transfer protection in the Young Plan exposed Germany to credit contraction and deflationary budget policies even before the international beginning of the Great Depression. This may have forced her to deflate relative to her trade partners throughout the depression up until 1932.

Keywords: Germany, Great Depression, Sovereign Debt, Reparations

ET76 STRATEGIC ASPECTS OF MONETARY AND FISCAL POLICY

Signalling Fiscal Regime Sustainability

Alessandro PRATIPRATI, A.,

IMF, U.S.A.

Francesco Drudi

This paper develops a signalling model of fiscal stabilizations which accounts for the non-monotonic relationship between credit ratings and primary balances observed since the late 1970s in Ireland, Belgium and Denmark--and to some extent in the early 1990s in Italy. Specifically, our model can explain the sudden deterioration of credit ratings in the wake of a fiscal stabilization. At low levels of government debt, pooling equilibria prevail and no government is expected to default so that primary deficits are associated with a high rating. Instead, at high levels of debt, separating equilibria emerge with dependable governments achieving primary surpluses and non-dependable governments defaulting. When the debt stock becomes large enough to trigger a shift from a pooling to a separating equilibrium, credit ratings drop and recover only when primary surpluses become large and persistent enough to signal that a dependable government is in power.

ET77 QUANTITATIVE THEORY AND BUSINESS CYCLES

The European Unemployment Dilemma

Lars LJUNGQVISTLJUNGQVIST, L.,

Stockholm School of Economics, Sweden

Thomas J. Sargent

Post World War II European welfare states experienced several decades of relatively low unemployment, followed by a plague of persistently high unemployment since the 1980's. We impute the higher unemployment to welfare states' diminished ability to cope with more turbulent economic times, such as the ongoing restructuring from manufacturing to the service industry, adoption of new information technologies and a rapidly changing international economy. We use a general equilibrium search model where workers accumulate skills on the job and lose skills during unemployment.

Keywords: unemployment, economic turbulence, welfare state, Europe

ET77 QUANTITATIVE THEORY AND BUSINESS CYCLES

Crossing the River Grande: Migrations, Business Cycles and the Welfare State

Morten O. RAVNRAVN, M.,

University of Southampton, U.K.

Fabio Canova

In this paper we study the macroeconomic effects of an inflow of low skilled workers into an economy with capital accumulation and two types of agents: low skilled ones which are restricted from participating in financial markets and high skilled ones which own the capital stock. We find that there are substantial dynamic effects following a migration shock. We look at interrelations between these dynamic effects and different fiscal systems for the redistribution of income. The aggregate welfare implications are sensitive to the welfare system: while there are welfare gains without redistribution, these gains might turn into costs when there is redistribution.

Keywords: Migration, business cycles, heterogeneous agents, the welfare state

ET77 QUANTITATIVE THEORY AND BUSINESS CYCLES

Countercyclical Retirements vs. Procyclical Depreciation: Can this Puzzle Be Solved without Vintage Capital Models?

Martial DUPAIGNEDUPAIGNE, M.,

Université de Paris I, France

Xavier Fairise

The depreciation-in-use hypothesis implies the procyclicity of depreciation, whereas observed retirements appear slightly countercyclical. This puzzle justifies the use of vintage capital models which display retirement behaviours; they however appear untractable. This paper investigates an alternative modelling. We introduce maintenance activity in an homogenous capital framework, in which maintenance and production are mutually exclusive. Maintenance activity enables to slow down depreciation but limits the availability of capital for production. We highlight both intratemporal and intertemporal trade-offs between utilization and depreciation rates. Specifically, we identify a countercyclical effect on depreciation due to adjustment costs on capital : increase in the implicit value of capital incites the firm to spare on depreciation through increased maintenance activity. Numerical investigation shows that this model is able to solve the procyclical utilization-countercyclical depreciation puzzle.

Keywords: maintenance activity, endogeneous depreciation, adjustment costs on capital, simulated method of moments

ET77 QUANTITATIVE THEORY AND BUSINESS CYCLES

The Fair Wage Hypothesis and the Business Cycle Puzzle

Fabrice COLLARDCOLLARD, F.,

Université Catholique de Louvain, Belgium

David de la Croix

We extend the benchmark RBC model amending the technology for efficiency wage considerations. Effort is a function of current wage, alternative wage and past wage. The past wage is treated as the worker's past wage (personal norm case) or as the past wage of the society (social norm case). This last model reproduces nicely the high variability of employment and the low variability of wages without requiring additional features such as nominal rigidities or indivisible labor. These results show that efficiency wage considerations are useful to solve the business cycle puzzle when we allow for inter-temporal wage comparisons.

Keywords: efficiency wage, effort, time-nonseparability, RBC, wage sluggishness, business cycle puzzle

ET78 GROWTH AND FINANCIAL MARKETS

Growth Enhancing Bubbles

Jacques OLIVIEROLIVIER, J.,

HEC School of Management, France

This paper shows how speculation in stock markets can increase the long-run growth rate of an economy. In a world where agents have a choice between working and creating new firms, a price-increasing bubble on the value of firms reduces labor supply and enhances firm creation and growth. Hence, stock markets have a positive impact on investment and growth but, contrary to what existing models of financial development would predict, have no effect on the type of investment projects undertaken by agents. On the other hand, speculation in other types of financial markets is growth-impairing. Regulatory implications are briefly discussed.

Keywords: Speculation, stock market, long-run growth

ET78 GROWTH AND FINANCIAL MARKETS

Endogenous Market Structures and Financial Development

Zsolt BECSIBECSI, Z.,

Federal Reserve Bank of Atlanta, U.S.A.

Ping Wang, Mark P. Wynne

Abstract not received from the author

ET78 GROWTH AND FINANCIAL MARKETS

Assets and Growth

Pighi BRAILABRAILA, P.,

Université Catholique de Louvain, Belgium

Claude Wampach

Investment in human capital can be viewed as an individual's decision to shift working effort in between periods. The corresponding concept of transferable labour clarifies the role of labour as an individual specific asset within the theory of risk bearing behaviour under incomplete markets. In an intertemporal framework, transferable labour accounts for economic growth. Higher education results in augmented labour productivities as spillovers in knowledge occur when skilled and unskilled workers interact. Monetary policy and financial intermediation affect economic growth by modifying the asset (payoff) structure and hence the relative return to the labour asset.

Keywords: incomplete markets, human capital formation, financial markets, economic growth

ET78 GROWTH AND FINANCIAL MARKETS

Financial Intermediation and Growth in a Model with Research and Development Activity and Risk Averse Agents

Luca DEIDDADEIDDA, L.,

SOAS, U.K.

Abstract not received from the author

ET79 INTERNATIONAL TRADE

Multilateral Reforms of Trade and Environmental Policy

Arja TURUNEN-REDTURUNEN-RED, A.,

University of New Orleans, U.S.A.

Alan D. Woodland

We consider a competitive trade model in which production activities in each country are assumed to result in environmental damage (pollution). Pollution may be localized, regional or global in its scope and it affects each country's welfare by changing country-specific environmental quality indicators. In each country, trade and environmental policies may be applied. The instruments of trade policy are tariffs, while the environmental policy instruments are described by taxes on polluting emissions. We determine necessary and sufficient conditions for the existence of strict Pareto improving reforms of trade and environmental policy variables. Specific directional recommendations for unilateral and multilateral policy reforms are offered and the interdependence of trade and environmental policy reforms is studied. We show that financial incentives for international cooperation - within our model, multilateral international transfers of income - are not necessary in order to sustain international environmental agreements: such agreements can be sustained if they are accompanied by judicious multilateral reforms of trade tariffs. Trade policy can thus act as a "carrot" for international environmental cooperation.

Keywords: Environmental policy, trade policy, multilateral externalities

ET79 INTERNATIONAL TRADE

Environmental Protection under Bilateral Trade and Imperfect Competition

Roberto BURGUETBURGUET, R.,

Universitat Autònoma de Barcelona, Spain

Jaime Sempere

We analyze how trade considerations affect environmental policies from a social point of view, and how a freer trade affects this environmental policies, both in a context of bilateral trade and imperfect competition. Bilateral reductions of tariffs result in weaker environmental policies if but only if the social marginal cost of production is not very responsive to the environmental instrument. Also, these strategic policies are first best efficient if coordinated ones are. Otherwise strategic policies are too tough with respect to the globally optimal policy if marginal willingness to pay is higher than social marginal cost at the coordinated solution.

Keywords: Environmental policy, bilateral trade, imperfect competition

ET79 INTERNATIONAL TRADE

Waiting on a Ladder? A Three-Country Model of Succession in Industrial Production and Export

Josefa MONTEAGUDOMONTEAGUDO, J.,

Universitat Autònoma de Barcelona, Spain

The purpose of this paper is to study how less developed countries (LDCs) assume leadership in manufacturing industries. The model is a dynamic Ricardian one where the degree of technological advancement determines the ranking of goods by com.

Keywords: comparative advantage, technical progress, Ricardian model

ET79 INTERNATIONAL TRADE

Geography and Comparative Advantage

Luca Antonio RICCIRICCI, L.,

IMF, U.S.A.

This paper investigates the relation between agglomeration of economic activity and the pattern of specialization of countries. We develop a model encompassing a Ricardian comparative advantage, increasing returns to scale, product differentiation, monopolistic competition, trade costs, and factor mobility. Several interesting results arise. An endogenous relative increase in the size of one country makes this country less specialized in the homogeneous constant returns commodity and more specialized in the differentiated increasing returns IRS sectors;. within the IRS industry, this country will become less specialized in the differentiated good in which it has a comparative advantage. Agglomeration occurs not only in large markets, but also in locations with a high average efficiency in the increasing return industry. Ceteris paribus, comparative advantage drives specialization, while absolute advantage drives agglomeration.

Keywords: Agglomeration, Specialization, Ricardian comparative advantage, Monopolistic competition, Scale economies, Location

ET80 EXPERIMENTS: GAMES

A Payoff Uncertainty Explanation of Results in Experimental Centipede Games

Klaus ZAUNERZAUNER, K.,

The University of New South Wales, Australia

This paper investigates how well a simple two-sided incomplete information game (Harsanyi (1973)) with a full support prior can be used to explain non-Nash equilibrium outcomes observed in the centipede game experiments of McKelvey and Palfrey (1982). I estimate the variance of the uncertainty about preferences in several versions of the model, select two models and compare these models to the estimation results of the altruism model and the quantal response models. It is shown that the two selected models have a better fit than the one-parameter altruism and quantal response models and that the estimated variance can explain all qualitative features of these experimental results. In particular, estimated variances fall through repeated play. Compared to the usual incomplete information games with finite types this model induces non-Nash equilibrium behavior without a systematic change of the underlying payoffs of players.

Keywords: experimental economics, game theory, incomplete information, centipede game, Bayes-Nash equilibrium

ET80 EXPERIMENTS: GAMES

Reputation Reciprocity, or: Homo Oeconomicus in Disguise?

Armin FALKFALK, A.,

University of Zurich, Switzerland

Simon Gächter, Judith Kovacs

This paper examines the impact of two of the most important sources of cooperation: reputation and reciprocity. We present experimental data from a two person sequential gift-exchange game, where mutual gains through cooperative behavior are possible. In a „history"-treatment we allow for reputation which is ruled out qua design in a one-shot control treatment. Even in the one-shot treatment we observe much cooperation due to reciprocity. In the history-treatment cooperation consists of reciprocity plus reputation. In a detailed individual data analysis we show that more than 50 percent of the subjects behave reciprocally. Reciprocity is robust across learning sessions.

Keywords: Reputation, Reciprocity, Experimental Economics, Game Theory

ET80 EXPERIMENTS: GAMES

Efficiency, Reciprocity, and Expectations in an Experimental Game

Martin DUFWENBERGDUFWENBERG, M.,

Uppsala University, Sweden

Uri Gneezy

We experimentally investigate the nature of strategic interaction in a 2-player game. Player 1 may take x Dutch guilders (f x) and end the game (player 2 then gets f 0), or let player 2 split f 20 between the players. x is a treatment variable taking values of f 4, 7, 10, 13, and 16. We find that most players 2 "give away" positive amounts (f6 on average), but their choices are independent of x. We explicitly measure the players' beliefs and find that many players 1 expect to get back no more than f x but nevertheless let player 2 split the f 20, and that the behavior by the players 2 is consistent with a theory of a guilt based on psychological game theory.

Keywords: Trust, reciprocity, guilt, expectations, psychological game theory

ET80 EXPERIMENTS: GAMES

Equilibrium Selection in Co-Ordination Games: An Experimental Study of Risk Dominance and Symmetry

Stéphane AYMARDAYMARD, S.,

Université de Montpellier I, France

The purpose of this paper is to test some selection criteria in coordination games. Previous experiments have underlined the importance of risk and uncertainty in subjects decisions. Here, we observe that the risk-dominance criterion could be applied to select an equilibrium in non-evolutionary games. We also observe that other criteria such as Pareto-Optimality and Symmetry can induce a focal equilibrium if they compete with equilibria without any of these properties. When they are confronted, Pareto-Optimality performs better.

Keywords: Experiments, Risk Dominance, Symmetry, Equilibrium Selection, Coordination

ET81 LEARNING IN GAMES

A Simple Adaptive Procedure Leading to Correlated Equilibrium

Andreu MAS-COLELLMAS-COLELL, A.,

Universitat Pompeu Fabra, Spain

Sergiu Hart

We propose a simple adaptive procedure for playing a game. In this procedure, players depart from their current play with probabilities that are proportional to measures of regret for not having used other strategies (these measures are updated every period). It is shown that our adaptive procedure guaranties that with probability one, the sample distribution of play converge to the set of correlated equilibria of the game. To compute these regret measures, a player needs to know his payoff function and the history of play. We also offer a variation where every player knows only his own realized payoff history (but not his payoff function).

Keywords: Correlated equilibrium, Nash equilibrium, adaptive procedure, regret, Blackwell approachability

ET81 LEARNING IN GAMES

A Note on Best Response Dynamics

Ed HOPKINSHOPKINS, E.,

University of Edinburgh, U.K.

We investigate the relationship between the continuous time best response dynamic, its perturbed version and evolutionary dynamics in relation to mixed strategy equilibria. We find that as the level of noise approaches zero, the perturbed best response dynamic has the same qualitative properties as a broad class of evolutionary dynamics. That is, stability properties of equilibria are robust across learning dynamics of quite different origins and motivations. Finally, we consider the relation between the properties of learning dynamics with a high level of noise and some recent anomalous experimental results.

Keywords: Games, Learning, Evolution, Mixed Strategies

ET81 LEARNING IN GAMES

An Analysis of a Simple Reinforcing Dynamics: Learning to Play an "Egalitarian" Equilibrium

Alexandre POSSAJENNIKOVPOSSAJENNIKOV, A.,

Tilburg University, The Netherlands

The paper analyses a simple reinforcing dynamics. The dynamics can be interpreted as a learning dynamics with fixed aspiration level. All payoffs are assumed to be above this aspiration level, therefore all strategies are reinforcong. Different versions of the dynamics exhibit different convergence properties. The analysis starts with one-agent decision problems and proceeds to games. Some results are available for decision problems and simple games. For complex games computer simulations are performed. The hypothesis is that the dynamics favors an "egalitarian" equilibrium even if does not satisfy other refinements.

Keywords: Equilibrium selection, Stochastic learning, Bounded rationality

ET82 APPLIED GAME THEORY 2

Competition with Supply and Demand Functions

Friedel BOLLEBOLLE, F.,

Europa-Universität Viadrina, Germany

If economic agents have to determine in advance their supply or demand in reaction to different market prices we may assume that their strategic instruments are supply or demand functions. The best examples for such markets are the spot markets for electricity in Engand and Wales, in Chile, in New Zealand, in Scandinavia, and perhaps elsewhere. A further example is computerized trading in stock markets, financial markets, or commodity exchanges. As in the case of competition with supply functions alone, we get a continuum of Nash-Bayes equilibria; contrary to competition with supply functions alone, there are no tendencies of prices converging to marginal costs when autonomous demand becomes more uncertain.

ET82 APPLIED GAME THEORY 2

Common Pool Games are Convex Games

Holger MEINHARDTMEINHARDT, H.,

University of Saarland, Germany

For the class of cooperative common pool games the paper focuses on the question, how, during the preplay negotiation process, the ability of coalitions to enforce their claims imposes externalities on the opposition by having an impact on the jointly produced resource. Based upon the result that common pool games are clear games, we are able to derive necessary and sufficient conditions for the convexity of the characteristic function and establish the main result in the paper namely that cooperative common pool games are characterized by increasing returns with respect to the coalition size.

Keywords: TU-Games, cooperative games, convex games, common pool games, clear games

ET82 APPLIED GAME THEORY 2

Equilibrium Allocations of Fair Quasi-Games for Economies with Indivisible Goods

Carmen BEVIÁBEVIÁ, C.,

Universidad Autónoma de Barcelona, Spain

In the first part of the paper we study the strategic aspects of the No-Envy solution for the problem of allocating a finite set of indivisible goods among a group of agents when monetary compensations are possible and, each agent receives, at the most, one indivisible good. In this context we prove that the set of equilibrium allocations of any quasi-game associated with subsolutions of the No-Envy solution coincides with the set of envy-free allocations. That is, under manipulation all the subsolutions of the No-Envy solution are equivalent. In the second part of the paper, the same problem is addressed, but now, we allow each agent to receive more than one indivisible good. In this situation the result is slightly different from the above. We prove that any Equal Income Walrasian allocation can be supported by an equilibrium of any quasi-game associated with subsolutions of the No-Envy solution.

ET82 APPLIED GAME THEORY 2

On the Existence of Nash Equilibrium in Games with Additive Aggregation

Nikolai S. KUKUSHKINKUKUSHKIN, N.,

University of Alicante, Spain

A strategic game is characterized by additive aggregation if all the strategies are reals and each player's utility only depends on his own strategy and the sum of the strategies of the partners. The principal results on the existence of Cournot equilibrium - Novshek's and McManus's - are extended to games with this structure. In particular, in the context of private provision of a public good, the latter result produces a condition on the utilities guaranteeing the existence of an equilibrium regardless of the technology.

Keywords: Additive Aggregation, Nash Equilibrium, Strategic Substitutes, Dual Strategic Substitutes

ET83 AUCTIONS 2

Bidding for Unit-Price Contracts-How Craftsmen Should Bid

Karsten FIESELERFIESELER, K.,

University of Mannheim, Germany

This paper analyses Unit-Price-Contract Auctions which are extensively used in procurement, for example in the craftsmen business. This auction has multidimensional bids and the payment is contingent on ex-post observable information. In a model with symmetric independent private costs, equilibrium bidding mirrors some empirically observable patterns and it involves a non-monotone winning probability. Sometimes the ''lamer'' of two craftsmen is selected, enhancing almost all types to bid very aggressively. Caused by this, Unit-Price Contract Auctions can perform better (from the point of view of the auctioneer) than standard auctions like the first price auction.

Keywords: Auctions, Procurement, Ex-post Observable Information, Multidimensional Bids, Game Theory

ET83 AUCTIONS 2

Testing and "Understanding" Bidding In A First Price Auction

Michael LANDSBERGERLANDSBERGER, M.,

Charles University, Czech Republic

Boris Tsirelson

We prove that bidding under constant absolute risk aversion is equivalent to biding under risk neutrality for a given correspondence between types. Equilibrium bidding strategy under constant absolute risk aversion can be represented in terms of cumulants of the appropriate distribution of types; mean, variance, measure of asymmetry, etc. If the risk aversion is low, higher order cumulants may be ignored. Finally, we established conditions under which a first price auction game induces statistically verifiable structure on the equilibrium distribution of bids.

ET83 AUCTIONS 2

Auctions of Divisible Goods: the Effect of an Elastic Supply

Alessandro PAVANPAVAN, A.,

Universitá Bocconi, Italy

Mario Gilli, Marco Li Calzi

This paper analyses the effects of an elastic supply on the equilibria of uniform-price auctions with divisble goods. We show that the seller through an elastic supply can avoid collusive equilibria that are inefficient with respect to the seller's revenue. Moreover we show that when the number of bidders goes to infinity, even with an unelastic supply collusive situations are not self-enforcing. These results provide a new framework useful for a deeper analysis of auctions of divisible goods.

ET83 AUCTIONS 2

Auctions with an Unknown Number of Bidders Having Affiliated Valuations

Jan VLEUGELSVLEUGELS, J.,

University of Mannheim, Germany

We study auctions where the number of their competitors is unknown to the bidders. The symmetric equilibrium bid functions for risk neutral bidders with affiliated valuations are derived, which gene- ralize the expressions known from Milgrom and Weber in a straight- forward way. The known revenue ranking theorems for different auc- tions still hold with an uncertain size of the bidding participancy. As an application it is shown that the bid-taker does not need to estimate the likely number of participants prior to the auction. This result generalizes to auctions with stochastic bidder entry.

Keywords: Auctions, Uncertain Number of Competitors, Affiliation, Bidding Strategies

ET84 PRICE FORMATION

An Oligopolistic Exchange Process

Michael FLORIGFLORIG, M.,

Université de Paris I, France

Jean-Marc Bonnisseau

We consider an exchange economy and we build an exchange process as follows: the derivative of the allocations is equal to an equilibrium allocation of the linear tangent economy; the derivative of the market commitment is an element of the generalized gradient of the indirect utility function of the linear tangent economy. This approach tries to take into account a strategic behaviour of the consumer at each date of the process in order to obtain a favourable evolution of the process. We show that, whatever are the initial conditions, a process exists and it converges to a Pareto optimal allocation which is also a stationnary point of the process. Keywords: Exchange economy, exchange process, imperfect competition, Pareto optimality

ET84 PRICE FORMATION

Markov Perfect Equilibrium in a Finite Horizon Random Bilateral Exchange System: Existence

Sandro ZARRIZARRI, S.,

University of Geneva, Switzerland

In this paper a multi goods decentralized exchange system is analyzed. The main features of this systems are: (i) Only pairwise (random) matching trade relationships are allowed. (ii) Trade is subject to frictions. (iii) The exchange system operates over a finite number of periods. Here, bilateraltrade relationships are solved by considering noncooperative bargaining theory. Thus, I show the existence of a rational expectation equilibrium in pure (bargaining) strategies. Furthermore, at equilibrium, these strategies fulfill (subgame) perfectness requirements in terms of (Markovian) state variables.

Keywords: Bilateral decentralized exchange system, Markov Perfect Equilibrum in pure Strategies

ET84 PRICE FORMATION

Heterogeneity and Stability: Variation on Scarf Processes

Etienne B. DE VILLEMEURDE VILLEMEUR, E.,

European University Institute, Italy

In an outstanding contribution, Jean-Michel Grandmont (1992) argued that increasing behavioural heterogeneity makes aggregate expenditures more independent of prices. He conjectures that, in the aggregate, weak axiom of revealed preference, gross substitutability, uniqueness and stability of the Walrassian exchange equilibrium would prevail under 'flat enough' distribution of characteristics. This note provide a counter-example showing that the strong macroeconomic regularities that he evidenced cannot be considered as a general property of exchange markets.

ET85 NETWORKS AND HIERARCHIES

Network Competition: I. Overview and Nondiscriminatory Pricing

Patrick REYREY, P.,

Université Toulouse I, France

Jean-Jacques Laffont, Jean Tirole

Many observers of the telecommunications industry predict that regulation will soon give way to competition policy. The paper develops a tractable discrete-choice model of unregulated network competition and analyzes the mature and the transition phase of the industry in this deregulated environment. Networks are interconnected and pay (negotiated or regulated) access charges to each other. They compete in (linear or nonlinear) nondiscriminatory prices for customers, who pick a network and a variable telephone consumption. An equilibrium exists, except for large access charges or for large network substitutability for which the networks are torn between lowering their price to build market share and raising it to reduce their outflow and thereby their access deficit. The paper investigates whether freely negotiated access charges are compatible with effective competition in the mature phase of the industry, and do not erect barriers to entry in the transition towards competition. Last, it analyzes the meaning and impact of the Efficient Component Pricing Rule in the context of network competition.

Keywords: Networks, Telecommunications, Interconnection, Competition Policy

ET85 NETWORKS AND HIERARCHIES

Telecommunicationsusage By Firms: Network Externality Effect in the Production Function

Anna CRETICRETI, A.,

CNET and CREST-LEI, France

The aims of this paper is to analyse telecommunications demand and usage by firms, and to define the effect of the network externalities on the production function. We underline that network externalities may influence the production function acting as technical production externalities. The analysis is developed first in the case of a symmetric situation, and of a leader/follower situation. The model is then generalised and applied to the case of n firms, taking into account different network configurations and indirect links among firms. We show that a crucial interdependence exists between network structure and telecommunicationsusage. A comparison with the literature on communication network and firm's organisation is also presented. The conclusion suggests how this theoretical framework serves to explain several types of business telecommunications usage and under which conditions firms can improve the value of their "input information" gaining access to other firms.

Keywords: Telecommunications Demand, Network externalities, Theory of production

ET85 NETWORKS AND HIERARCHIES

Information Processing Hierarchies

Hakan ORBAYORBAY, H.,

Koc University, Turkey

This paper characterizes optimal hierarchies based on an information processing model introduced by Radner. We show how the delay, number of processors (size) and the number of information items processed (width) are related and determine a feasibility frontier in the space of these variables. The structure of efficient hierarchies implementing the points on the feasibility frontier are always non-regular, i.e., every agent has subordiantes from several different levels.The nature of the long accepted maxim of decreasing returns to scale in management hierarchies is also demonstrated. When the production function of the hierarchy is taken to be the number of information items it can process, we find that returns to size are always decreasing. Returns to delay, interpreted as response time of the hierarchy, are decreasing for efficient organizations, but may be increasing if there is slack, i.e. organization is too large. Finally, we discuss how the underlying abilities of the processors effect marginal returns to size and delay.

Keywords: Information Processing, Hierarchies, Firm Size

ET85 NETWORKS AND HIERARCHIES

Self-Organization in Communication Networks

Sanjeev GOYALGOYAL, S.,

Erasmus University, The Netherlands

Venkatesh Bala

We develop a dynamic model to study the formation of communication networks. In this model, individuals periodically make decisions concerning the continuation of existing information links and the formation of new links, with their cohorts. These decisions trade off the cost of forming links aganist the possible benefits from doing so. We analyze the long run behavior of this process. Our results establish that this process always self-organizes, i.e., starting from an initial network, it converges to a limit network, with probability one. We also prove that the limit network is either the wheel network or the empty network.

Keywords: Networks, coordination, learning, path-dependence, self-organization.

ET86 SEARCH AND LABOUR ECONOMICS

Equilibrium Search with Decreasing Returns to Scale and Hiring Costs: Theory and Estimation

Sebastien ROUXROUX, S.,

CREST-INSEE, France

Jean-Marc Robin

In this paper we theoretically and empirically analyze equilibrium search models of the labor market. The Mortensen equilibrium search model is generalized to allow firms' production functions with decreasing returns to scale of employment and by introducing hiring costs. We characterize equilibrium and derive expressions for the endogenous equilibrium wage distributions. We then characterize the full set of wage (offer) distributions that can in principle be generated by the model. We develop a structural nonparametric estimation method for the productivity distribution. We estimate the model using French longitudinal survey data on labor supply, and we compare the results on the relation between productivities and wages to those obtained using a French panel dataset of firms. The results are informative on the degree to which firms exploit search frictions.

Keywords: Labor market equilibrium, job search, wages, productivity

ET86 SEARCH AND LABOUR ECONOMICS

Fixed or Flexible? Wage Setting in Search Equilibrium

Tore ELLINGSENELLINGSEN, T.,

Stockholm School of Economics, Sweden

Åsa Rosén

Why do some vacancies offer a posted wage whereas others offer a negotiable wage? The paper attempts to endogenize the choice of wage policy in a search model with heterogeneous workers. In particular, we characterize the circumstances under which there exist an equilibrium in which all firms negotiate wages. Generally, a tight labor market favors bargaining over posting, as does large worker heterogeneity. In the equilibrium of our model, labor markets are tighter when workers are more productive, suggesting a reason why wages are more often negotiated for highly paid jobs.

Keywords: Search, Wage offers, Bargaining, Posting

ET86 SEARCH AND LABOUR ECONOMICS

Wage Bargaining with Heterogeneous Labour and Turnover Costs

Jon STRANDSTRAND, J.,

University of Oslo, Norway

I study a model of mobility costs and wage bargaining between heterogeneous workers and identical firms. The market level of employment and minimum quality standard is derived for the market and the efficient solution. Generally, increased hiring and firing costs reduce employment and increase the quality standard, while an increase in the cost of screening out unwanted workers lowers the quality standard. With low worker bargaining power, market employment can be inefficiently high. Moreover, quality standards may be either too high or too low, partly due to screening cost externalities.

ET86 SEARCH AND LABOUR ECONOMICS

Simultaneous Search: Between Search and Walras

Avraham SIMHONSIMHON, A.,

Hebrew University, Israel

Eugene Kandel

We deviate from the traditional search literature by allowing workers to simultaneously sample a number of firms; the larger this number is, the more information a worker has about the labor market. Our model nests the conventional search models and the Walrasian model. We derive conditions for the existence of single wage equilibrium, and show that the wage equals MPL and at the same time there is "frictional" unemployment. The model yields theoretical predictions on comovement of wages and employment; turnover and employment, and, under additional assumptions, inflation and employment. We present empirical evidence supporting some of the predictions.

Keywords: Search, Frictional unemployment, Walras, Turnover, Inflation

ET87 MATCHING MODELS

The Contribution of Buyer Brokers

Paul M. ANGLINANGLIN, P.,

University of Windsor, Canada

Discussions about buyer brokerage often assume that buyers are trying to avoid exploitation by a broker who is employed by the seller, especially when bargaining. This paper questions that assumption by proposing a matching model where, amongst other things, brokers can increase the expected quality of each match. I provide conditions where the type of brokerage does not matter because the incentives do not differ. I also show that the optimal buyer brokerage contract is an increasing function of the price paid by the buyer, at least for some interval. Finally, I comment on other features of an equilibrium in the agency market whose analysis depends on whether buyer brokers act to redistribute bargaining rents or to improve the quality of matches.

Keywords: principal-agent, search, matching, match quality, bargaining, real estate agency

ET87 MATCHING MODELS

Signalling and Screening in a Matching Market

Roman INDERSTINDERST, R.,

Free University Berlin, Germany

We study a matching market with adverse selection, in which both signaling and screening occur. If the market is in steady state and frictions become sufficiently small, there is only an equilibrium in which all contracts are fully revealing. The (signaling) contract of the informed party and the (screening) contract of the uninformed party exhibit similar distortions. An equilibrium may fail to exist. The model allows to study markets where the time structure of offers is unobservable.

Keywords: Matching, Signaling, Screening

ET87 MATCHING MODELS

Word-of-Mouth Communication and Community Enforcement

Matti SUOMINENSUOMINEN, M.,

INSEAD, France

Illtae Ahn

We study community enforcement in a private information, random matching setting, where buyers privately "network" for information and sellers have a short term incentive to supply low quality. We show that high quality can be sold in a sequential equilibrium with population M even when each buyer periodically interacts with only N*(M) players where the limit of N*(M) squared divided by M is finite and non zero as M approaches infinity. We also show that when networking is costly and M is large, low quality is supplied with positive probability in any Nash equilibrium. For this case, we characterize a sequential equilibrium in which both high and low quality are supplied.

Keywords: Quality choice, search for information, information transmission, word-of-mouth communication, community enforcement

ET87 MATCHING MODELS

Endogenous Market Structure and Price Formation

Klaus KULTTIKULTTI, K.,

Tilburg University, The Netherlands

Tuomas Takalo

We study a model where buyers and sellers meet randomly, and sellers have an indivisible good for sale. Trades are consummated either by bargaining or in an auction. In any market one type of agents are in fixed positions, and the other type of agents are randomly distributed on them. The meeting probabilities are consequently determined endogenously. There are four different types of markets depending on the mode of trade, and on who are in fixed positions. The agents may choose which markets they go to. We determine the equilibria of the model. It turns out that there are no equilibria with four or three active markets. Two active markets with bargaining, with sellers in fixed positions, and buyers in fixed positions exist only for parameter values of measure zero. For most parameter values the equilibria consist of a single market.

Keywords: Bargaining, auctions, random matching

ET88 CORPORATE FINANCE 3

Security Design and Managerial Incentives: A Contingent Claims Approach

Turalay KENCKENC, T.,

Birkbeck College, U.K.

Pierre Mella-Barral, William Perraudin

This paper uses contingent claims techniques and differential games to study the optimal design of a firm's securities when a manager exerts effort to control the proportional drift rate of the firm's cash flow. When contracts can be written contingent on the firm's profits but not on managerial effort, the optimal security for outside investors to hold strikes a balance between providing the manager with appropriate incentives and giving him an excessively generous stake in firm profits. If the manager can impose his salary demand on outside investors, ex post efficiency is restored.

ET88 CORPORATE FINANCE 3

Financial Structure as an Incentive Mechanism, when Management values Control

Christian M. PFEILPFEIL, C.,

University of Saarland, Germany

We explain the use of financial structure as an incentive device within a principal-agent model, where an investor has to delegate control over the firm's assets to a self interested management. The investor cannot punish her manager arbitrarily hard by means of the monetary compensation schedule, since he is facing a limited liability constraint. If the manager wants to avoid financial distress, because it is harmful to his human capital, financial structure may complement standard wage compensation schedules as an incentive device and thus increase the investor's expected payoff.

Keywords: financial structure, managerial incentives, moral hazard, limited liability

ET88 CORPORATE FINANCE 3

Changes in Information and Optimal Debt Contracts: the Sea Loan

Yadira GONZALEZ DE LARAGONZALEZ DE LARA, Y.,

European University Institute, Italy

This paper examines a historical contract, the sea loan, which was used to finance long-distance maritime commerce from the times of ancient Greece until the Middle Ages. A single economy general equilibrium model is set up in which, under certain restrictions, the sea loan emerges as the optimal contract and it is claimed that these restrictions were very likely to be satisfied by the economy of that time. It also analyzes the substitution of this contract by the commenda. This occurred because of the new supply of information, which led an efficient improvement in the sense that both the navigation and the commercial risks were shared, while in the former contract the merchant undertook all the commercial risk alone.

Keywords: Asymmetric information, credit, Economic History, insurance

ET88 CORPORATE FINANCE 3

When Do Bidders Purchase a Toehold? Theory and Tests

Arturo BRIS Y CABRERIZOBRIS Y CABRERIZO, A.,

INSEAD, France

Empirical research into public offerings shows that a high proportion of bidders do not trade on the target's shares prior to the tender offer. This paper presents a model in which a potential bidder trades in the open market before announcing a tender offer and the incumbent shareholders form beliefs about the rival's quality given the order size. We show that the optimal strategy for the bidder depends on the market perception of her quality, and that in some situations no trade will be optimal. Our results also provide a theoretical basis for the observed pre-bid stock price dynamics.

Keywords: toeholds, takeovers, corporate control, informed trading

ET89 WAGE STRUCTURES 2

Wage Inequality as Explained by Endogenous Labour Market Segmentation

Laurence RIOUXRIOUX, L.,

DELTA, France

We present a two-sided search model where agents differ by their human capital endowment and where workers of different skill are imperfect substitutes. Then the labor market endogenously divides into disjoint segments and wage inequality depends on the degree of labor market segmentation. The most important results are: 1) overall wage inequality as well as within-group and between-group inequalities increase with relative human capital inequality; 2) within-group wage inequality decreases while between-group and overall wage inequalities increase with the efficiency of the search process; 3) within-group, between-group and overall wage inequalities increase with technological changes. Moreover, we find that the trends in wage inequality in the U.S. and in France over the last twenty years can be explained by a combination of changes in relative human capital inequality, changes in the efficiency of the search process, and changes in technology.

ET89 WAGE STRUCTURES 2

Hiring Decisions in a Two-Tier System within an Efficiency Wage Context: An Application to Spain

Maia GUELL-ROTLLANGUELL-ROTLLAN, M.,

London School of Economics, U.K.

Recent reforms of labour markets in many European countries have introduced temporary contracts. In Spain, temporary contracts have been widely used for all types of jobs with low renewal rates into permanent contracts. These facts are surprising for jobs where long labour relations are a source of efficiency. We examine the choice of contracts in a two-tier system in an efficiency wage model where the duration of contract matters. Results are based on the renewal rate of temporary contracts into permanent contracts: it is found that it has an incentive role which explains the wide use of temporary contracts. The optimal renewal rate is found to be less than one. The mechanism that prevents higher creation of permanent contracts is the vague distinction of the different cases of dismissal. The policy implication is to clarify them.

Keywords: firing costs, two-tier system, temporary contracts, efficiency wage

ET89 WAGE STRUCTURES 2

Skrewness of the Wage Distribution in an Firm and the Substitutability of Labour Inputs

René VAN DEN BRINKVAN DEN BRINK, R.,

Tilburg University, The Netherlands

In this paper we present a model of a firm in which the skewness of the wage distribution in the firm depends on the substitutability of the labor inputs. We consider a wage schedule that is based on games with a permission structure. We show that for supermodular production technologies this wage schedule satisfies the property that the ratio between the wages of employees in two consecutive levels of a firm lies between one and the span of control. Using constant elasticity of substitution (CES) production technologies we show how this ratio increases with the substitutability of the labor inputs.

ET90 INCENTIVES

Why Promotions?

Régis RENAULTRENAULT, R.,

GREMAQ and IDEI, University of Toulouse I, France

Emmanuelle Auriol

Standard economic analysis typically overlooks the social dimension of human behavior. Yet a person's taste is greatly affected by the allocation of resources in society as well as by the consumption patterns of others. Here it is assumed that the introduction of a formal hierarchy directly affects the tastes of agents in an organization: agents with a higher rank have a higher marginal utility of income. As a result the organization designer may wish to use both monetary rewards and the hierarchical structure to provide incentive to work. This is captured by introducing a social status variable for each agent. Social status is viewed as a scarce resource: a higher social status for someone necessarily results in degrading the social status of someone else. It is shown that the introduction of a hierarchy may be harmful to the organization because it distorts work incentives. In spite of being costly, social status may be used as a reward in a dynamic setting. In particular it is optimal to introduce a hierarchy with a promotion system when, due to limited liability, there are restrictions in the use of monetary rewards.

ET90 INCENTIVES

Job Independence as an Incentive Device

Kay MITUSCHMITUSCH, K.,

Freie Universität Berlin, Germany

A firm can either subject its worker to strict rules and regulations or grant him independence and responsibilities. If he is independent, the firm depends on his cooperation, and this gives him bargaining power in individual wage negotiations. Since bargaining power increases with his productivity, independence has favorable incentive effects. But there are some drawbacks. In particular, since the firm can take over control later on, the worker entrenches himself, and this tends to reduce his productivity. Whether independence is granted or not and the degree of cooperation induced by it depend on the contractual and technological environment in a realistic manner.

ET90 INCENTIVES

The Asset Substitution Effect: Valuation and Reduction trough Debt Design

Jean-Paul DECAMPSDECAMPS, J-P.,

University of Toulouse 1, France

Antoine Faure-Grimaud

This paper aims at measuring the asset substitution effect in standard contingent claims models. The objective is also to provide quantitative results about these agency costs while the contract theory literature has mainly delivered qualitative insights. We consider a framework where firms undertake projects with strictly positive net present values. Managers, on the behalf of equityholders, may decide to stop these projects in the future which correponds to a closure of the firm. Keeping the firm as an ongoing concern generates stochastic returns, governed by an exogenous process, closing it yields a certain income, equal to the residual value of the assets. A levered firm departs from the optimal operating policy: debt provides equityholders with incentives to take excessive risks. The spread between the first best rule and the actual equityholders' strategy represents a measure of the agency costs. We first provide an explicit formula for these costs. Second, we derive some comparative statics results. Last, we investigate the properties of alternative debt contracts and the possibility of value creation by protective covenants.

ET91 STRATEGIC TRADE POLICY

A Theory of Trade Policy with imperfect Competition, Special Interests and Foreign Investment

Liansheng WANGWANG, L.,

Australian National University, Australia

Abstract not received from the author

ET91 STRATEGIC TRADE POLICY

Import Restraints Under Vertical Differentiation

Xavier WAUTHYWAUTHY, X.,

IRES-Univercité Catholique de Louvain, Belgium

Nicolas Boccard

We consider the effects of quantitative restrictions to trade in a price setting model of vertical product differentiation. We show that the implications of a quota differ depending on the quality hierarchy prevailing between the domestic and the foreign product. When quality choice is endogenous, a unique hierarchy prevails in a subgame perfect equilibrium with the domestic firm choosing the best available quality. In a SPE, the degree of product differentiation is lower in the presence of a quota than under free trade.

Keywords: quota, price competition, vertical differentiation

ET91 STRATEGIC TRADE POLICY

Why Small Exporting Countries Agree Voluntary Export Restraints: The Oligopolistic Power of the Foreign Supplier

Roberto A. DE SANTISDE SANTIS, R.,

University of Warwick, U.K.

This study analytically shows that a VER serves as an institution to protect incumbent firms of an exporting country. A VER is an entry barrier in the export market. It favours the concentration of industry, and allows established firms to better exploit economies of scale by producing output at lower average cost. Since the break-even price for potential firms is the average cost, entry in the domestic market is also inhibited. A VER also allows the raising of the price cost margin in the export market. However, the smaller the country, the greater the probability of a larger monopoly power in the domestic market as well. From the social point of view, three conventional effects from the elimination of a VER are usually considered: the rent loss effect, the efficiency effect and the export supply price effect. In this study, two further effects on welfare are examined: the increased intermediate inputs cost effect and the variety effect. The global effect on welfare on an exporting country is analytically indeterminate. A general equilibrium model applied to Turkey supports the conjecture that with the elimination of a VER, the loss in social welfare, the higher average cost and the fall of monopoly power of incumbent firms, are the key elements in understanding the rationale beyond VERs.

Keywords: VERs, Imperfect competition, AGE analysis

ET92 EXPERIMENTAL ECONOMICS 3

Cooperation and Punishment - An Experimental Investigation of Norm Formation and Norm Enforcement

Simon GÄCHTERGÄCHTER, S.,

University of Zurich, Switzerland

Ernst Fehr

In this paper we investigate in various treatment conditions the effectiveness of (game-theoretically) incredible punishment opportunities on voluntary contributions to a linear public good. In all our treatment conditions, punishment actually occurred and considerably increased contribution levels. In particular, this holds true for partners, as well as strangers. Partners contributed up to 90 percent and strangers about 60 percent of their endowment. We analyze punishment behavior and find that both, partners and strangers, punish mainly egoistic deviations from average. In this sense, we can observe the formation and enforcement of a social norm of contributing to a public good.

Keywords: Experiments, voluntary contributions, free riding, punishment, social norms

ET92 EXPERIMENTAL ECONOMICS 3

Risk Dominance Selects the Leader. An Experimental Analysis

Massimo MOTTAMOTTA, M.,

Universitat Pompeu Fabra, Spain

Antonio Cabrales, Walther Garcia-Fontes

Abstract not received from the author

ET92 EXPERIMENTAL ECONOMICS 3

An Experimental Study of Adaptive Behaviour in an Oligopolistic Market Game

Rosemarie NAGELNAGEL, R.,

Universitat Pompeu Fabra, Spain

Nicholas J. Vriend

We consider an oligopolistic market game, in which the players are competing firms in the same market of a homogeneous consumption good. The consumer side is represented by a fixed demand equation. The firms decide how much to produce of a perishable consumption good, and they decide upon a number of information signals to be sent into the population in order to attract customers. Due to the minimal information provided, the players do not have a well-specified model of their environment. Our main objective is to characterize the adaptive behavior of the players in such a situation.

Keywords: Market Game, Oligopoly, Adaptive Behavior, Learning

ET93 SEARCH MODELS

The Evolution of Search Behaviour and Equilibrium Selection in a Coconut Economy

Ernesto SOMMASOMMA, E.,

Universitá de Bari, Italy

Huw D. Dixon

This paper analyses the dynamic properties of a stylized barter economy resembling the coconut economy of Diamond (1982). The issues of evolution and equilibrium selection in the presence of multiple Pareto rankable equilibria are addressed. To this end an evolutionary selection mechanism is proposed. Under replicator dynamics, a population of boundedly rational agents searching for trading partners is shown to converge with probability one to the Nash equilibria of the game. The economy shows strong path dependence and often the resulting equilibrium can be predicted from the initial conditions. The case of noisy replicator dynamics is also considered using simulations.

Keywords: Strategic complementarities, supermodular games, bounded rationality, replicator dynamics, coordination failures

ET93 SEARCH MODELS

Complexity, Bounded Rationality, and Heuristic Search

W. Bentley MACLEODMACLEOD, W.,

University of Montreal, Canada, Boston College, U.S.A.

This paper uses the class of heuristic search algorithms to model one aspect of Simon(1955)'s model of bounded rationality, namely that individuals make decisions after having considered only a limited subset of the of possible choices available to them. Secondly, a generalization of the Hopfield network is used to parameterize a class of "hard'' decision problems. When the heuristic search algorithm applied to this problem the result is behavior that has many of the features of observed human decision making. First the deviation from the optimal choice increases with the complexity of the environment. Secondly, the quality of decision making is an approximately linear function of the logarithm of the time spent analyzing the problem.

ET93 SEARCH MODELS

Search and Self-Confidence

Alf Erling RISARISA, A.,

University of Bergen, Norway

Sjur Didrik Flåm

We explore optimal search for individual improvement when agents have different confidence in own ability. Under Bayesian updating of such confidence we show that agents enjoying more favorable opinions ex ante tend to wind up with better final outcomes. Thus, repeated search is likely to confirm initial prejudices.

ET94 REGULATION 2

The Baumol-Willig Rule under Socially Optimal Non-Linear Pricing

Maria VAGLIASINDIVAGLIASINDI, M.,

University of Edinburgh, U.K.

Michael Waterson

The aim of this paper is to consider the optimality of a simple rule, like ECPR, under non-linear pricing for intermediate and final goods. The analysis focuses on the interactions between regulation and competition in a second degree price discrimination setting. Rather specific assumptions regarding competition and pricing are generally made by the related literature. Enlarging the pricing options we show the Baumol-Willig rule to be relatively robust as a guide to socially optimality when the incumbent remains the monopolist of an intermediate good (e.g. a network facility) consumed both internally and by a potential competitor.

Keywords: Regulation, access pricing, cream skimming, competitive issues

ET94 REGULATION 2

Intertemporal Diversification in Banking

J.-P. NIINIMÄKINIINIMÄKI, J-P.,

University of Helsinki, Finland

Abstract not received from the author

ET95 IMPERFECT COMPETITION IN OLG

Multiplicity of Imperfectly Competitive Equilibria and Involuntary Unemployment

Leo KAASKAAS, L.,

University of Bielefeld, Germany

In an overlapping generations model with Cournot competition on the commodity market it is shown that a continuum of stationary states and perfect foresight trajectories exists with unemployment at arbitrary low wages. Responsible for this is the influence that different forecast functions have on the objective demand curve, even though they are consistent with perfect foresight. With an example it is shown that simple adaptive and constant memory forecast rules generate such unemployment equilibria. The corresponding temporary equilibrium dynamics may display stable unemployment and unstable full employment equilibria.

Keywords: Imperfect Competition, Overlapping Generations, Perfect Foresight Equilibria

ET95 IMPERFECT COMPETITION IN OLG

Intergenerational and International Welfare Leakages of a Product Subsidy in a Small Open Economy

Ben J. HEIJDRAHEIJDRA, B.,

University of Amsterdam, The Netherlands

Leon J.H. Bettendorf

A dynamic overlapping-generations model of a small open economy with imperfect competition in the goods market is constructed. Product subsidization boosts output and employment both in the impact period and in the new steady state. The real exchange rate depreciates in the long run but the impact effect is ambiguous. If the labour supply effect is weak and the economy is not very open, the exchange rate appreciates at impact. Product subsidization has important intergenerational distribution effects. Old existing generations gain more than younger existing generations as well as future generations. Bond policy neutralizes the intergenerational inequities and allows the computation of an optimal product subsidy which depends positively on the extent of the domestic scale economies and negatively on the degree of openness of the economy.

Keywords: monopolistic competition, love of variety, returns to scale, intergenerational welfare effects, international trade, industrial policy

ET95 IMPERFECT COMPETITION IN OLG

The Long Run Rate of Growth and Unemployment in an OLG Model when the Labour Market is Non Competitive

Valeri SOROLLA I AMATSOROLLA I AMAT, V.,

Universitat Autonòma de Barcelona, Spain

Using an OLG model with a non competitive labour market, we analyze when a lower unemployment rate is associated with a higher unemployment benefit and the long run rate of growth and unemployment. We find that, if the government cares sufficiently about unemployed workers, then a lower unemployment rate is associated with a higher unemployment benefit. If, in the wage setting process previous wages are considered, the growth rate decreases to minus one and the unemployment rate increases to one. If only present variables are considered, the long run growth rate is equal to the population growth rate and the unemployment rate is always constant.

Keywords: Growth, Unemployment, Trade-Unions, Unemployment Benefit

ET96 ADVERSE SELECTION

Adverse Selection in Durable Good Markets

Alessandro LIZZERILIZZERI, A.,

Princeton University, U.S.A.

Igal Hendel

Adverse selection is an important source of market inefficiency. This paper studies a dynamic model which endogenizes the distribution of ownership when the used market opens. The model also allows a study of the effect of adverse selection on: the market for new goods, manufacturers' incentives, and the structure of leasing contracts. We show that although adverse selection reduces the volume of trade in the used market, in contrast to Akerlof's model, this market never closes. We also discuss the interactions between two brands with different degrees of adverse selection.

Keywords: Durable Goods, Adverse Selection

ET96 ADVERSE SELECTION

Collusion under Adverse Selection and Moral Hazard

Doh-shin JEONJEON, D-S.,

Université des Sciences Sociales Toulouse, France

We analyze the collusion which takes place between two firms under asymmetric information, when production costs are determined both by an efficiency parameter and by effort while the regulator observes only realized costs. First, we find that stakes of collusion may exist for downward manipulation of reports. Second, we characterize collusion-proof contracts and show the condition under which the optimal contract without side-contracting can be implemented in a collusion-proof way. Third, we analyze the optimal collusion-proof effort schedule. Finally, we study when asymmetric information gives rise to transaction costs in side-contracting.

Keywords: asymmetric information, stake of collusion, downward (or upward) manipulation of report, collusion-proof, virtual disutility

ET96 ADVERSE SELECTION

"The Market for Lemons": Does Possibility of Dynamic Trading Improve Market Performance?

Maarten JANSSENJANSSEN, M.,

Erasmus University, The Netherlands

Santanu Roy

Abstract not received from the author

ET97 LEARNING AND CHOICE

Learning and Irreversibility: An Economic Interpretation of the "Precautionary Principle"

Christian GOLLIERGOLLIER, C.,

Université de Toulouse, France

Bruno Jullien, Nicolas Treich

We consider the problem of the optimal use of a good whose consumption can produce damages in the future. Scientific progress is made over time that provides information on the distribution of the intensity of potential damages. Applications of the model are the greenhouse effect, the "mad cow" disease, asbestosis, electromagnetic fields, radon gas exposures, low radiological exposures and genetic manipulations, to give just a few examples. Under which conditions on preferences does more initial scientific uncertainty lead to a lower socially efficient level of early consumption of the good? We show that this is efficient only if absolute prudence is larger than twice absolute risk aversion. Our model contains an irreversibility constraint.

Keywords: Irreversibility, comparison of experiments, precautionary principle, greenhouse effect, mad cow disease, prudence

ET97 LEARNING AND CHOICE

Learning to Like What You Have -Explaining the Endowment Effect

Jörg OECHSSLEROECHSSLER, J.,

Humboldt-University of Berlin, Germany

Georg Kirchsteiger, Steffen Huck

Abstract not received from the author

ET98 CONSUMERS AND MARKETS

Strategic Fragmentation of a Market

Santanu ROYROY, S.,

Erasmus University Rotterdam, The Netherlands

We consider a homogenous good duopoly where, prior to price competition, firms send targeted advertisements to uninformed consumers in order to make them aware of their existence. Consumers informed by only one firm constitute its "captive segment", while those informed by both firms buy from the firm with lower price. In equilibrium, the market is completely fragmented. As cost of advertisement is reduced to zero, the set of equilibria contracts to a unique "fair" division of the market where difference between the market shares of firms reflects differences in their production cost. If the cost of advertisement is large, a relatively inefficient firm may command a larger market share.

Keywords: Market fragmentation, targeted advertisement, strategic competition

ET98 CONSUMERS AND MARKETS

A Nested Logit/CES Model Applied to Hardware/Software Markets

André DE PALMADE PALMA, A.,

Université de Cergy-Pontoise, France

Karim Kilani

This paper describes the joined consumer's decision of hardware and software technology. We introduce a model combining the logit (choice of hardware) and the CES (choice of software). Hardware and software firms are competing within a simultaneous game.

Keywords: Nested Logit, CES Model, Hardware/Software Technologies

ET98 CONSUMERS AND MARKETS

A Simple Test of the Law of Demand for the United States

Eduardo ZAMBRANOZAMBRANO, E.,

Cornell University, U.S.A.

The great general equilibrium theorist Werner Hildenbrand conjectured in 1994 that for any two time periods the vector of changes in prices and the vector of changes in demands point in opposite directions. In this paper I test several versions of this conjecture for the United States and conclude that the data conforms with a version that is indeed a test of the Law of Demand for an economy with a Walrasian demand system that satisfies the weak axiom of revealed preference and that is homogeneous of degree one in income.

Keywords: Law of Demand, General Equilibrium Theory

ET99 IMPLEMENTATION

Unique Implementation in Auctions and in Public Goods Problems

Claude D'ASPREMONTD'ASPREMONT, C.,

CORE, Belgium

Jacques Crémer, Louis-André Gérard-Varet

We present new conditions that guarantee the existence of mechanism with a unique or essentially unique equilibrium in auction and public goods problems with quasi-linear utility function. Theses conditions bear on the information structures of the agents.

ET99 IMPLEMENTATION

Adaptive Dynamics and the Implementation Problem with Complete Information

Antonio CABRALESCABRALES, A.,

Universitat Pompeu Fabra, Spain

This paper studies the equilibrating process of several implementation mechanisms using naive adaptive dynamics. We show that the dynamics converge and are stable, for the canonical mechanism of implementation in Nash equilibrium. In this way we cast some doubt on the criticism of "complexity'' commonly used against this mechanism. For mechanisms that use more refined equilibrium concepts, the dynamics converge but are not stable. Some papers in the literature on implementation with refined equilibrium concepts have claimed that the mechanisms they propose are "simple" and implement "everything" (in contrast with the canonical mechanism). The fact that some of these "simple'' mechanisms have unstable equilibria suggests that these statements should be interpreted with some caution.

Keywords: Implementation, Bounded Rationality, Evolutionary dynamics, Mechanisms

ET99 IMPLEMENTATION

Implementing the Optimal Auction

Bernard CAILLAUDCAILLAUD, B.,

CERAS-ENPC, France

Jacques Robert

In a general framework with independent private values of the bidders, we start from a simple second-price auction that implements the optimal auction, where the winner pays a prespecified price conditional on the winning bid. We then propose a modified game that allows to implement the optimal auction outcome when the seller ignores the distributions of the different bidders' valuations. In this robust implementation procedure, a second-price auction is organized and the winner volunteers a payment to the seller; this payment can then be challenged by another bidder who knows the distribution of the winner's valuation. We finally propose refinments of this simple procedure that ensures uniqueness of the resulting equilibrium.

ET100 MATHEMATICAL ECONOMICS 2

Restrictions on the Equilibrium Manifold : The Differential Approach

Pierre Andre CHIAPPORICHIAPPORI, P.A.,

DELTA, France

L. Ekeland

We consider the properties of excess demand functions and equilibrium manifolds when initial endowments can be individually observed.\ Our point of view is both local and 'differential' (the conditions we look for take the form of partial differnetial equations. We derive necessary and sufficient conditions on the excess demand function, and show that, whenever these are fulfilled, then generically on preferences the initial economy can be uniquely recovered. We then derive necessary conditions on equilibrium manifold, that stem from individual decision making independently from utility maximization; and we show that these conditions are sufficient if the number of agents equals at least the number of commodities minus one. Finally, we show that, when only aggregate endowments are observed, no conditions (but the trivial ones) exist on the equilibrium manifold.

Keywords: aggregation, general equilibrium, equilibrium manifold

ET100 MATHEMATICAL ECONOMICS 2

Relative Utilitarianism: An Improved Axiomatisation

Jean-François MERTENSMERTENS, J-F.,

CORE, Belgium

Amrita Dhillon

Abstract not received from the author

ET100 MATHEMATICAL ECONOMICS 2

Production Equilibria in Vector Lattices with Unordered Preferences: An Approach Using Finite-Dimensional Approximations

Valeri M. MARAKULINMARAKULIN, V.,

Russian Academy of Sciences, Russia

Abstract not received from the author

ET101 INDUSTRIAL ORGANISATION 2

"Lock-In" vs. "Critical Masses"- Industrial Change under Network Externalities

Ulrich WITTWITT, U.,

Max-Planck-Institute for Research Into Economic Systems, Germany

Where increasing returns to adoption play a role in the diffusion of a new technology, technological "lock-in" is now often claimed to occur. However, this result, and the modeling approach that produces it, are problematic. Further innovations could never have a chance of disseminating, if "lock-in" had occurred in the diffusion process of earlier innovations. Yet, in reality, industrial change does not come to a halt. The paper offers a discussion of the apparent paradox. From an alternative modeling approach conditions are derived under which a newly introduced technology can successfully disseminate in the market despite existing network externalities.

Keywords: technological lock-in, industrial change, network externalities, standardization, path-dependence

ET101 INDUSTRIAL ORGANISATION 2

The Auctioning of a Failing Firms Assets

Lars PERSSONPERSSON, L.,

Stockholm University, Sweden

This paper evaluates the welfare consequences of the failing firm defense in E.C. and U.S. merger laws. To describe the acquisition process the paper combines recent developments in the theory of auction with endogenous valuations with an oligopoly standard model. The main result is that the failing firm defense not necessarily performs better than the standard merger law. The reason for this is that the rule ignores the externalities that the acquisition exerts on other firms in the industry and on third parties outside the market.

Keywords: Competition Policy, Failing Firm Defense, Auction, Asset Ownership

ET101 INDUSTRIAL ORGANISATION 2

Buffet Pricing

Babu NAHATANAHATA, B.,

University of Louisville, U.S.A.

Krysztof Ostazewski, Prasanna Sahoo

The paper analyzes a commonly used pricing practice which we call "buffet pricing," where each consumer pays a fixed price for an option to consume unlimited quantity during a specified period of time set by the seller. The analysis shows that even when there are no economies of scale in the production of the good the use of this pricing strategy makes the cost per consumer go down. The declining cost per consumer provides the basic impetus for this form of pricing. We demonstrate the use of this pricing strategy and its implications in three real life situations, a buffet, subway fares and universal health coverage.

Keywords: pricing, price discrimination, quantity independent pricing

ET102 CONTRACT THEORY

Unforeseen Contingencies, Property Rights and Incomplete Contracts

Jean TIROLETIROLE, J.,

University of Toulouse 1, France

Eric Maskin

We scrutinize the conceptual framework commonly used in the incomplete contract literature. This literature usually assumes that contractual incompleteness is due to the transaction costs of describing - or of even foreseeing - the possible states of nature in advance. We argue, however, that such transaction costs need not interfere with optimal contracting (i.e., transaction costs need not be relevant), provided that agents can probabilistically forecast their possible future payoffs (even if other aspects of the state of the nature cannot be forecast). In other words, all that is required for optimality is that agents be able to perform dynamic programming, an assumption always invoked by the incomplete contract literature. Under weak assumptions, this conclusion remains true even if contract renegotiation cannot be ruled out. We also reexamine the literature on assignment of property rights and conclude with some suggestions for future research.

ET102 CONTRACT THEORY

Contracts and Productive Information Gathering

Jacques CRÉMERCRÉMER, J.,

Université des Sciences Sociales de Toulouse, France

Fahad Khalil, Jean-Charles Rochet

We modify a standard Baron-Myerson model by assuming that, instead of knowing the cost of nature, the agent has to incur a cost to learn it. Under these conditions, the principal will offer contracts that, depending on the value of , try to incite the agent to gather or not to gather information. We study the tradeoffs that are involved.

ET102 CONTRACT THEORY

Incomplete Contracts, Hostages and Efficient Investment in Outsourcing Relationships

Stefan WIELENBERGWIELENBERG, S.,

Otto von Guericke University, Germany

Successful outsourcing is often associated with specific investment. However, incomplete contracts give rise to the holdup problem which causes underinvestment. This paper presents solutions to the underinvestment problem assuming the assembler posts a hostage to a third party. Investigating the relationship between the contractual quantity and the hostage, there exist situations in which the hostage value can be decreased by promising a higher quantity with maintaining efficient investment incentives. However, a higher quantity may also require a more valuable hostage to induce efficient investment. Furthermore, a hostage which is of higher value to the assembler than to the subcontractor may preclude efficient investment incentives.

ET102 CONTRACT THEORY

Endogenous Adverse Selection and Cost Monitoring in a Simple Model of Budgeting

Ulf SCHILLERSCHILLER, U.,

University of Cologne, Germany

Many models assume that for exogenous reasons the manager (agent) has more information about the cost variables of his responsibility center than the owner (principal). This paper aims to describe the equilibrium if the manager collects private information endogenously. No cost or revenue variable is contractable between the owner and the m ager. Hence, the owner must elicit the manager's information by a budgeting mechanism. Endogenous adverse selection yields stronger production distortions relative to exogenous adverse selection. Moreover, the manager engages in inefficient rent seeking and overinvests into the acquisition of private information. Monitoring the manager's cost of gathering information limits the production distortion. However, this comes at very high rent-seeking activity. Conversely, if the owner commits not to monitor rent seeking is mitigated but at the cost of stronger production distortions.

Keywords: Endogenous adverse selection, monitoring, budgeting, incomplete contracts, rent seeking

ET103 LABOUR MARKET REGULATION

Unemployment vs. Mismatch of Talents: Reconsidering Unemployment Benefits

Ramon MARIMONMARIMON, R.,

Universitat Pompeu Fabra, Spain

Fabrizio Zilibotti

Abstract not received from the author

ET103 LABOUR MARKET REGULATION

Optimal Income Maintenance and the Unemployable

Greg LEBLANCLEBLANC, G.,

Concordia University, Canada

This paper examines optimal income maintenance policy with asymmetric information about individuals' abilities (cost of accumulating income-generating skills). Some mimimum skill level is required for employment. The `unemployable' are those (low) ability types who find this minimum investment too costly. To guarantee some minimum income level, the governemnt chooses between welfare, workfare, wage subsidies, and training. Results show that the optimal scheme entails training. Further, though complex separating mechanisms are both feasible and encourage investments in skills, the least-cost income maintenance scheme is quite simple, the government offers training at the lowest level consistent with employment to all who want it.

ET103 LABOUR MARKET REGULATION

Re-Balancing Unemployment Benefits in a Unionized Labour Market

Claus Thustrup HANSENHANSEN, C.,

University of Copenhagen, Denmark

Hans Jørgen Jacobsen

The basic trade union model is extended to allow for a more sophisticated unemployment benefit system consisting of two benefit levels, one for short-term and one for long-term unemployed, and a rule determining whether an unemployed is short- or long-term. The purpose of this extension is twofold; to get a more realistic analysis of the actual benefit systems in most countries, and to analyse alternative reforms to the traditional one of changing a uniform benefit level. Reforms that rebalance the benefit rates holding constant either expected utility of an unemployed, aggregate benefit expenditures, or aggregate utility of union members can reduce unemployment.

Keywords: Unemployment Benefits, Trade Unions, Unemployment

ET103 LABOUR MARKET REGULATION

Bertrand Competition, Employment Rationing and Collusion through Centralized Negotiations

Emmanuel PETRAKISPETRAKIS, E.,

Universidad Carlos III, Spain

Amrita Dhillon

This paper studies the role of employment rationing in a unionized oligopolistic industry. Firms bargain collectively with an industry-wide union, before they compete in the product market. Bargaining takes place explicitly over wages, and implicitly over a bonus scheme which specifies the bonus that each employee will receive if firm/industry profits exceed a certain level. After firms have chosen prices, they ask for a number of workers from the union to realize their production plans. The number that each firm actually receives depends on the union's rationing scheme. We show that firms, by a suitable choice of a bonus scheme, can ensure a collusive outcome in a subgame perfect equilibrium. Indeed, firms have no incentive to deviate from the monopoly price knowing that they would be optimally rationed by the union.

Keywords: Centralized Negotiations, Employment Rationing, Unionized Oligopoly, Profit Sharing

ET104 DISTRIBUTION, HUMAN CAPITAL, AND GROWTH

On Externalities, Indeterminacies and Balanced Growth Paths in a Canonical Model of Capital Accumulation

Alain VENDITTIVENDITTI, A.,

CNRS-GREQAM, France

This article is interested in the scope for indeterminacies that originate from capital stock externalities in the reference optimal growth model. Sufficient conditions for local indeterminacies and oscillations are established and rest on a decreasing installation cost for capital. The uniqueness of the steady state is also questioned and conditions for global indeterminacies are captured. Restrictions for balanced growth paths are derived. Their uniqueness and determinacy are established and the way externalities give rise to long run indeterminacies is detailed. A particular attention is devoted to the derivation of the features of the economic fundamentals that underlie the indeterminacy issue.

ET104 DISTRIBUTION, HUMAN CAPITAL, AND GROWTH

Income Inequality, Human Capital Accumulation, and Economic Performance

W. Henry CHIUCHIU, W.,

University of Manchester, U.K.

We show that greater income equality implies higher human capital accumulation and economic performance in an overlapping-generations model with heterogeneity in income and talent. Given liquidity constraints and declining marginal utility, individuals with a given level of talent receive education if their initial income is higher than a threshold level and the threshold is lower for more talented individuals. Assuming the more talented create more human capital when educated, greater initial income equality for one generation then imply not only higher aggregate human capital accumulated by that generation but an improvement in all subseqent generations' initial income distributions.

Keywords: Income inequality, human capital, economic performance, stochastic dominance, growth, higher education

ET104 DISTRIBUTION, HUMAN CAPITAL, AND GROWTH

Gender Bias and Economic Development in an Endogenous Growth Model

Junsen ZHANGZHANG, J.,

Chinese University of Hong Kong, Hong Kong

Jie Zhang, Tianyou Li

This paper develops an endogenous growth model with an explicit gender choice to study interactions between gender bias and economic development. Both pure sex preference and differential human capital endowments are allowed to be possible causes for gender bias. Our analysis shows the crucial role of perpetual growth in reducing gender gaps in terms of the sex ratio and human capital ratio of men and women. In the absence of old-age support, stronger son preference does not slow down economic growth; its role is reflected solely in a higher ratio of boys to girls. It is seen that the pattern of old-age support from sons is both a product of, and a causal factor for, gender gaps. While endowment difference by gender in raw labor capital has no effect on the human capital and sex ratios of children in a long-run growth equilibrium, greater gender preference tends to reduce the long-run human capital ratio but increases the sex ratio. In the presence of old-age support, greater son preference is harmful to economic growth since it reduces old-age support which in turn lowers human capital investment.

Keywords: gender bias, sex ratio, human capital ratio, old-age support, long-run growth

ET104 DISTRIBUTION, HUMAN CAPITAL, AND GROWTH

On Endogenous Growth under Uncertainty

Paul A. DE HEKDE HEK, P.,

Erasmus University Rotterdam, The Netherlands

This paper incorporates uncertainty in two distinct models of endogenous growth. In both models the representative agent is uncertain about the return of investing in knowledge creation, as represented by a probability measure over the relevant parameter. The main purpose is to analyze the effects of risk or volatility in productivity of knowledge creation on the decision variables and the expected long-run growth rate. Both the first as well as the second model may explain part of the observed negative link between volatility and growth.

Keywords: endogenous growth, uncertainty, volatility

ET105 MACROECONOMICS: DYNAMIC MODELS

Expectations Forecasting and Perfect Foresight - A dynamical Systems Approach

Volker BÖHMBÖHM, V.,

University of Bielefeld, Germany

Jan Wenzelburger

The paper studies the formal framework of deterministic dynamical economic laws with an expectations feedback. In such laws the predictors, i.e.~the expectations formation rules have a dominant influence on the dynamical performance. The concept of a perfect predictor, which generates perfect foresight orbits, is proposed and analyzed. Necessary and sufficient conditions for which global as well as local perfect foresight is possible are given. It is shown that perfect predictors exists for the general linear model as well as for models of the cobweb type. For the standard OLG- Model of economic growth, the existence of perfect predictions depends strongly on the savings behavior of the agents.

ET105 MACROECONOMICS: DYNAMIC MODELS

Unbiased Predictions in Economic Dynamical Systems with Random Perturbations and Expectations Feedback

Jan WENZELBURGERWENZELBURGER, J.,

University of Bielefeld, Germany

Volker Böhm

The paper studies economic dynamical systems with an expectations feedback subjected to exogenous perturbations within the framework of random dynamical systems. The notion of an unbiased stochastic predictor is proposed and analyzed. Conditions are discussed under which global as well as local unbiased predictions are possible. A structural characterization is given using mean error functions. It is shown that unbiased predictors exist for general linear systems as well as for models of the cobweb type, confirming results largely known in the literature. For the standard OLG-Model of economic growth with random technological shocks, there are, in general, structural obstacles to the existence unbiased predictions.

Keywords: Dynamics, perfect foresight, rational expectations

ET105 MACRO ECONOMICS: DYNAMIC MODELS

Stability and Predictability of Dynamical Economic Systems with Memory

Anton STIEFENHOFERSTIEFENHOFER, A.,

University of Bielefeld, Germany

The paper studies the dynamic behavior of economic systems with linear memory. Especially, economic systems with an expectation feedback will be considered. A comprehensive characterization between the current form of the memory and the local stability properties will be given. By definition, Lyapunov exponents of a nonlinear system are the generalization of the eigenvalues of a linear systems. Several relations between the length of the memory and the maximal Lyapunov exponents are established. Especially, it is shown that if the length of the memory is increased, the maximal Lyapunov exponents converge to zero. Two examples will be given. The first is a cobweb model with backward looking expectations and the second is a growth model with a linear lag structure in the investment decision variable.

Keywords: Economic Dynamical Systems, Expectation Feedback, Delay Structure, Learning, Predictability, Nonlinear Dynamics

ET105 MACRO ECONOMICS: DYNAMIC MODELS

Dynamics in a Two-Sector Partial Equilibrium Model

Kirsten RALFRALF, K.,

University of Hamburg, Germany

This paper analyses the substitution effects between labour and capital in a two-sector parrtial equilibrium model. In terms of business cycle theory we have a demand shock driving the system from its steady state and the optimal response of labour and capital inputs to endogenous factor price changes as the propagation mechanism. The unique steady state may be indeterminate and sunspot equilibria may exist. Simulations showed the existence of a stable 2-cycle in the perfect foresight dynamics.

Keywords: business cycles, sunspot equilibria, substitution effects

ET106 FINANCIAL MARKETS

Spatial Competition Among Mutual Funds Managers

Fred JOUNEAUJOUNEAU, F.,

CORE, Belgium

A purely financial description of the mutual fund market is proposed. The model describes the market as the result of a spatial competition among managers. The space of this game is the stock market itself. The equivalent of the `transportation costs' are endogenously derived from the agent's utility functions. The model is able to reproduced some characteristic stylized facts: the presence of many similar products, the concentration of the household's demand for mutual funds, the risk level of mutual funds.

ET106 FINANCIAL MARKETS

Competition in Schedules with Common Values

Jean-Charles ROCHETROCHET, J-C.,

Université de Toulouse, France

Bruno Biais, David Martimort

Consider strategic risk-neutral traders competing in schedules to supply liquidity to a risk-averse agent privately informed about the value of the asset and his hedging needs. Imperfect competition in this common value environment is analyzed as a multiprincipal game in which liquidity suppliers offer trading mechanisms in a decentralized way. Each liquidity supplier behaves as a monopolist facing a residual demand curve resulting from the maximizing behavior of the informed agent and the trading mechanisms offered by his competitors. There exists a unique equilibrium in convex schedules. It is symmetric and differentiable and exhibits typical features of market-power: Equilibrium trading volume is lower than ex ante efficiency would require. Liquidity suppliers charge positive mark-ups and make positive expected profits, but these profits decrease with the number of competitors. In the limit, as this number goes to infinity, ask (resp. bid) prices converge towards the upper (resp. lower) tail expectations obtained in Glosten (1993) and expected profits are zero. In this limiting case, competition achieves an interim efficient outcome different from ex ante efficiency.

Keywords: Mechanism design, Multi-principal, Adverse selection, Common values, Market makers, Market microstructure

ET106 FINANCIAL MARKETS

The Auctions of Swiss Government Bonds-Should the Treasury Price Discriminate or Not?

Daniel HELLERHELLER, D.,

Swiss National Bank and University of Bern, Switzerland

Yvan Lengwiler

Ever since Friedman's (1960) contribution, there has been an ongoing controversy about whether the Treasury should auction off its government debt with a discriminatory or with a uniform--pricing format. Many industrialized countries, the United States or Germany, for instance, use discriminatory auctions, while Switzerland applies a uniform--pricing rule. Using recent contributions to multi--unit auction theory, we analyze data on the bids submitted in fifty Swiss Treasury bond auctions. We then construct hypothetical bid functions that would occur under price discrimination. Based on these bid functions, we determine which auction format minimizes the goverment's costs of financing its debt.

Keywords: government bonds, multi-unit auctions, price discrimination, uniform pricing

ET107 ENVIRONMENTAL ECONOMICS

Endogenous Growth and Land Preservation

Santiago J. RUBIORUBIO, S.,

University of Valencia, Spain

Renan-U. Goetz

A model of optimal economic growth with a constant population subject to a constraint on the availability of land is presented. It takes account of the dual character of land as a production factor and as a consumption good (environmental amenities) by determining the optimal intertemporal allocation of land between productive and recreational uses. An extension of the analysis for the case of a growing population with endogenous growth based on human capital accumulation shows that if the rate of discount is not very low then there exists a set of balanced growth paths compatible with a constant allocation of land.

Keywords: intertemporal land allocation, environmental preservation, population growth, endogenous growth, human capital

ET107 ENVIRONMENTAL ECONOMICS

Imperfect Competition, Labour Market Distortions and the Double Dividend Hypothesis

Laura MARSILIANIMARSILIANI, L.,

London Business School, U.K.

Thomas I. Renström

The paper explores the hypothesis of a double dividend from environmental taxation. It is argued that an environmental tax reform, i.e. shifting the burden of taxation away from labour toward the environment can reduce pollution while increasing employment and welfare. The paper presents and solves a general equilibrium model of a closed economy. The analysis is conducted in a second best world, where the economy is distorted by labour taxes. Moreover, other distortions are present: firms are imperfectly competitive and the labour market is characterized by wage bargaining between unions and firms. We find conditions under which employment increases when the revenue from an increase in the energy tax (imposed on firms and households) is fully recycled to cut the rate of the preexistent labour tax. It turns out that the exact nature of these distortions are of crucial importance in assessing the macroeconomic and welfare effects of an environmental tax reform. The contribution of this paper is to show exactly how the sufficient conditions for increase (decrease) in employment and welfare depend on the competitive and technological structure of the economy.

Keywords: Double dividend, environmental tax reform, imperfect competition, wage bargaining

ET107 ENVIRONMENTAL ECONOMICS

Environmental Taxation and the Double Dividend: A Drawback for a Revenue-Neutral Tax Reform

Thorsten BAYINDIR-UPMANNBAYINDIR-UPMANN, T.,

University of Bielefeld, Germany

Matthias Raith

An ecological tax reform is often believed to provide a double dividend, if the revenue from green taxes is used to cut other distortionary taxes. We question this view in a general-equilibrium setting with a non-competitive labor market. We show that a decrease in the labor tax plausibly increases equilibrium employment and lets profits and wage incomes rise. The resulting positive income effect then causes aggregate consumption and thus pollution to rise, implying that environmental quality may be lower than before. Hence, a revenue-neutral environmental tax reform aimed at achieving a double dividend is likely to be counterproductive.

Keywords: Environmental Tax, Double Dividend, Wage Bargaining

ET107 ENVIRONMENTAL ECONOMICS

Agricultural Production and the Optimal Level of Landscape Preservation

Erling VÅRDALVÅRDAL, E.,

University of Bergen, Norway

Rolf Brunstad, Ivar Gaasland

Only market failures justify support to an industry. The amenity value of the landscape can be treated as a public good. Agricultural production will have an effect on this value which is external to agriculture. Recent studies find that the willingness to pay for landscape preservation (WTP) may be considerable. Based on existing studies of WTP we infer the likely values of parameters in a WTP function for Norway. We include this WTP function in the objective function of a price endogenous mathematical programming model for the Norwegian agricultural sector. The optimal size of Norwegian agriculture measured by employment is approximately 20% of the current level while land use stays at about 50% of today's use.

Keywords: Agricultural support, market failure, public goods, landscape preservation

ET108 OVERLAPPING GENERATION MODELS

Collusive Temporary General Equilibrium

Milan HORNIACEKHORNIACEK, M.,

Charles University, Czech Republic

Camelia Bejan, Florin Bidian

We analyze an infinite horizon, discrete time economy with overlapping generations of consumers, living for two periods, and infinitely lived firms. Firms' current period short run production possibility sets depend on the stock of capital acquired in previous periods. They maximize the two period discounted net profit. We prove that there are fulfilled expectations temporary general Markov equilibria in which maximization of the two period discounted net profit is equivalent to maximization of the average discounted net profit over infinite horizon, the consumption stream belongs to the recursive core, and the sum of firms' average discounted net profits is maximized.

Keywords: capital, fulfilled expectations, overlapping generations, recursive core, temporary general equilibrium

ET108 OVERLAPPING GENERATION MODELS

Endogenous Fertility and Human Capital Accumulation in a Gift Model

Nils-Petter LAGERLÖFLAGERLÖF, N.,

Stockholm University, Sweden

In an OLG-model, we let altruistic children supply parents with gifts. Parents can increase old-age consumption by rearing more children, or raising each child's human capital. This gives rise to multiple steady states: one Malthusian, with high fertility and no human capital, around which increases in human capital raise fertility; and one sustained growth path, where fertility is low. Shocks may cause jumps between these states, suggesting some policy measures. For instance, a restrictive policy on fertility can push the economy to sustained growth. It is also found that a pay-as-you-go system reduces fertility, without affecting growth.

Keywords: Endogenous fertility, Human capital, Old-age security

ET108 OVERLAPPING GENERATION MODELS

Parable and Realism in Overlapping Cohorts Models

András SIMONOVITSSIMONOVITS, A.,

Hungarian Academy of Sciences, Hungary

In the Anti-equilibrium, Janos Kornai gave an external critique of the general equilibrium theory. In contrast, in this paper, I try to provide an internal critique of an important subfield, namely of the family of overlapping cohorts models. The essence of my argument is as follows: Theoretical economists, building these models, have defined many useful concepts which can also be used in practical analysis. However, the assumptions underlying these models are so stringent that the results obtained with their help can rarely be used for practical purposes. Much further work need to be done to remove the hindrances from applicability. Keywords: overlapping generations, economic modeling

ET108 OVERLAPPING GENERATION MODELS

Learning Dynamics and the Memory Effect

Stéphane GAUTHIERGAUTHIER, S.,

DELTA, France

This paper investigates into the equivalence between determinacy in the perfect foresight dynamics and stability in a dynamic with learning of a given steady state. This equivalence appears when agents learn some deterministic stationary equilibria, at it is the case in most of the temporary equilibrium literature. Since agents learn a learning rule when recursive algorithms such as ordinary least square are used, this equivalence is broken. Determinacy of the steady state is nevertheless a benchmark for stability under learning of some rules. A connection between learning rest points in two one step forward looking economies contributes toward the understanding of complex dynamical features.

Keywords: dynamics, learning, determinacy, predetermined variable, E-stability

ET109 GENERAL EQUILIBRIUM

On the Transition of Mixed Economies to Market Economies

Gerard VAN DER LAANVAN DER LAAN, G.,

Free University, The Netherlands

Valery A. Vasilev, R.J.G. Venniker

In this paper a continuous time price adjustment process is considered for the transformation of an equilibrium of a mixed economy to a Walrasian equilibrium. The specific feature of the mixed economy model is the presence of dual markets. On the first market prices are set by the central agency, on the secondary market prices are free. Initially, the process only adjusts the free prices untill an equilibrium of the mixed economy given the fixed state prices has been reached. This part of the process is of the tatonnement type, since markets are out of equilibrium and no trade is assumed to occur. The process proceeds by adjusting simultaneously the prices on both the state and secondary markets, such that at any moment an equilibrium for the mixed economy with respect to the actual state prices results. It will be shown that eventually a Walrasian equilibrium for the mixed economy will be reached. Using a simplicial algorithm, a path is generated that yields an approximation of the desired adjustment process, where the inaccuracy of the approximation can be made arbitrarily small.

Keywords: general equilibrium, mixed economy, transition, adjustment process

ET109 GENERAL EQUILIBRIUM

Structure of Equilibria in Mixed Economies

Alexander V. SIDOROVSIDOROV, A.,

University of Novosibirsk, Russia

An economy model with two kinds of prices for each commodity has been considered generalizing the pure exchange economies and economies with rationing. The prices on the first market are determined by a rationing scheme. The flexible prices on the second market are determined by market-clearing mechanism. Besides, there is a possibility to resell some amounts of rationed goods in the second market, obtaining an additional income from the price difference. The conditions providing equilibria existence have been found under assumptions of the consumer's preferences smoothness and desirability hypothesis. Moreover, structure of equilibrium price sets has been described.

Keywords: Mixed economy, equilibrium, smooth manifold

ET109 GENERAL EQUILIBRIUM

Double-edged Population Monotonicity of Walrasian Equilibrium - A Note on the Nature of Competition

Murat SERTELSERTEL, M.,

Bogazici University, Turkey

Muhamet Yildiz

We show that extending an economy by admitting new agents of an incumbent type has a double-edged effect on the Walrasian utilities of the original agents so long as substitution effect dominates income effect on the average (i.e. the inner product of price change and the change in the aggregate demand is non-positive) at the Walrasian prices of the original and the extended economies. In particular, if substitution effect dominates income effect these prices for the aggregate demand of the original economy [resp., extended economy], then incumbent agents of the entrants' type if anything lose [resp., the others if anything gain on the whole, ( i.e.at the Walrasian price of the extended economy, they can collectively buy their aggregate demand exhibited at the Walrasian price of the original economy)].

Keywords: Walrasian equilibrium, double-edged population monotonicity

ET110 GAME THEORY

Existence of Nash Equilibrium in Games with Discontinuous Payoffs

J. Rupert J. GATTIGATTI, J.,

Trinity College Cambridge, U.K.

This paper extends work by Dasgupta & Maskin and Simon to obtain a more general proof for the existence of mixed strategy Nash equilibria in games with discontinuous payoff functions. Following their method of analysis, I consider a sequence of finite games which converge to the discontinuous game in the limit. Sufficient conditions are obtained for the limit of a sequence of Nash equilibria from the finite games to be a Nash equilibrium of the limit game. The resulting conditions are more general than those from previous analyses and, in many cases, easier to apply.

Keywords: Nash Equilibrium, Discontinuous Payoffs

ET110 GAME THEORY

Tracing Equilibria in Extensive Games by Complementary Pivoting

Antoon VAN DEN ELZENVAN DEN ELZEN, A.,

Tilburg University, The Netherlands

Bernhard von Stengel, Dolf Talman

An algorithm is presented for computing an equilibrium of an extensive two-person game with perfect recall. The equilibrium is traced on a piecewise linear path from an arbitrary starting point. If this is a pair of completely mixed strategies, then the equilibrium is normal form perfect. The normal form computation is performed efficiently using the sequence form, which has the same size as the extensive game itself. More precisely, we use an adapted version of Lemke's algorithm. Special attention is paid towards the treatment of degeneracies which are related to the structure of the game.

Keywords: extensive form game, computation, perfect equilibrium, sequence form, complementary pivoting

ET110 GAME THEORY

On the Indices of Zeros of Nash Fields

Fabrizio GERMANOGERMANO, F.,

Université de Lausanne, Switzerland

Stefano DeMichelis

This paper shows a fundamental property of vector fields representing dynamics on spaces of mixed strategies of normal form games whose zeros coincide with the Nash equilibria of the underlying games. The property shown is that the indices of components of zeros of any vector field in this class coincide with the local degrees of the projection map, mapping from the graph of the Nash equilibrium correspondence onto the space of games, evaluated at the corresponding components of Nash equilibria. This property is important since it implies that, for a large class of dynamics, the indices of components of zeros are completely determined by the geometry of the Nash equilibrium correspondence, thus providing a further link between evolutionary game theory, the theory of equilibrium refinements, and the geometry of Nash equilibria.

ET110 GAME THEORY

Bounded Rationality and Induction - The Email Game Revisited

Uwe DULLECKDULLECK, U.,

Humboldt University, Germany

In Rubinstein's (1989) E-Mail game there exists no Nash equilibrium where players use strategies that condition on the E-Mail communication. In this paper I restrict the utilizable information for one player. I show that in contrast to Rubinstein's result that a payoff dominantNash equilibrium exists where players use strategies that condition on the number of messages sent. Therefore induction under the assumption of bounded rational behavior of at least one player leads to a moreintuitive equilibrium in the E-Mail game.

Keywords: Induction, Subgame Perfect Equilibrium, Information sets, Imperfect recall

ET111 ORGANISATIONAL DESIGN

Organizational Structure and Performance

Bauke VISSERVISSER, B.,

European University Institute, Italy

The effect of organizational structure on performance is studied using a project selection framework in which heterogeneous, rational agents can reject or accept projects. Using the expected profits on accepted projects as a criterion, I determine the optimal ordering of agents within a given structure, and compare the performance of different structures. I discuss as well the distance of such organizational forms from the ideal organization that accepts all good projects and rejects all bad ones.

Keywords: Organizational Structure, Project Selection, Organizational Performance

ET111 ORGANISATIONAL DESIGN

Moral Hazard in Sequential Teams

Roland STRAUSZSTRAUSZ, R.,

FU Berlin, Germany

This paper considers a team in which production takes place sequentially and in which agents observe the actions taken by previous agents. We show that for such teams sharing rules exist which are balanced and induce efficient production as the unique equilibrium outcome. This is in contrast to team structures studied by Holmstrom (1982) in which agents act simultaneously. The sharing rule which induces efficient production is simple, intuitive and robust to noise, sabotage, and collusive behavior. It induces efficient production even when agents obtain imperfect information about previous actions.

Keywords: Teams, moral hazard, unique implementation

ET111 ORGANISATIONAL DESIGN

The Average Cost of Information Processing

Andrea PRATPRAT, A.,

Stanford university, U.S.A.

The model of a hierarchy of processors with endogenous capacity is used to prove that, in efficient hierarchies, the average cost of information processing is nondecreasing in the hierarchy size and tends to infinity as the size tends to infinity. A specialized version of the model is used to analyze how the optimal size depends on the environment in which the hierarchy operates.

ET111 ORGANISATIONAL DESIGN

Monitoring versus Incentives: Substitutes or Complements?

Claude FLUETFLUET, C.,

Université de Quebec à Montréal, Canada

Dominique Demougin

This paper analyzes the trade-off between monitoring and incentives in a principal-agent relationship with moral hazard. We derive general results for the case where both parties are risk-neutral and the agent faces a limited liability constraint. The core of our analysis is the comparative statics of the optimal monitoring-incentives mix. We show that the principal uses less monitoring and stronger incentives if the agent's liability limit is relaxed or if monitoring costs increase. An increase in the effort level required from the agent leads to more monitoring or to stronger incentives, or both. In particular, there are cases where the cheapest way to induce more effort is to combine lower powered incentives with much more precise monitoring. The generality of our results follows from the fact that, in the risk-neutral agency problem, all relevant information from any arbitrary information system can be aggregated into a binary statistic.

Keywords: Moral hazard, agency costs, monitoring, information systems, limited liability

ET112 RESEARCH AND DEVELOPMENT

On Research, Free-Riding, and Intellectual Property Rights

Jayasri DUTTADUTTA, J.,

University of Cambridge, U.K.

Kislaya Prasad

Abstract not received from the author

ET112 RESEARCH AND DEVELOPMENT

On Information Sharing, Collusion and Incentives in R&D

Sergei SEVERINOVSEVERINOV, S.,

Stanford University, U.S.A.

I develop a model of competition in R&D performed by firms represented as agencies. The employment relationships are subject to moral hazard. Additionally, employees of different firms can collude by exchanging information. The existence of equilibrium is proved in a duopoly setting. Optimal incentive schemes are characterized and are shown to incorporate relative performance comparisons. When the payoff to the technological leadership is comparatively high, equilibria are asymmetric. One of the firms compensates her employee on the basis of productivity and relative performance. The other firm free-rides on collusion-prevention incentives and rewards her agent on the basis of her productivity only. This provides an explanation for the observed diversity of incentives schemes in the labor markets for researchers and engineers. Profit sharing schemes and bonuses appear in equilibrium for certain cases. The model is extended to analyze the incentives for the formation of a joint research venture between competing firms.

Keywords: competing agency, collusion, information sharing, R&D

ET112 RESEARCH AND DEVELOPMENT

Strategic Sequential Investments and Sleeping Patents

Bart LAMBRECHTLAMBRECHT, B.,

University of Cambridge, U.K.

Abstract not received from the author

ET112 RESEARCH AND DEVELOPMENT

Inducing Information Exchange through Research Joint Ventures

Gülcan ÜNALÜNAL, G.,

The Banks Association of Turkey, Turkey

This study examines successful implementation of horizontal research joint venture (RJV). The RJV is formed to achieve dissemination of knowledge when its dissemination via licensing or R&D spillover is impossible. The RJV sharing rule depends on R&D realizations of firms' projects. Own effort and disclosures are not verifiable. Moral hazard problem is solved by having members that have comparative advantage in their part of knowledge production. Full disclosure of knowledge is achieved by having credible threat that other firm might want to terminate its research project whose probability of occurrence depends on level disclosed knowledge.

Keywords: team production, moral hazard, mechanism design

ET113 MONETARY POLICY 2

Voting and Decisions in the European Central Bank

Matthias BRUECKNERBRUECKNER, M.,

European University Institute, Italy

This paper analyses the interaction between decisions on monetary policy in the future European Central Bank and different voting mechanisms. Using a simple stochastic model for preferences over monetary policy it is shown that the voting mechanism described in the Masstricht treaty leads to inefficient outcomes. The paper shows as well that the inefficiency can be resolved by allowing for sidepayments. The optimal monetary policy can be implemented by a noncooperative bargaining game. Moreover, by modifying the definition of the shares of the ECB, sidepayments can be introduced without drastically changing the institutional design of the ECB.

Keywords: European Monetary Union, voting, bargaining, Shapley value

ET113 MONETARY POLICY 2

Price Rigidities and Monetary Policy in Economies with Many Strategic Agents

Vera SONGWESONGWE, V.,

University of Southern California, U.S.A.

This paper considers a model of monopolistic competition and monetary policy in the presence of multiple equilibria, rankable by output and employment levels. In a simple model of imperfect competition with strategic complementarity amongst agents we show that an increase in the number of strategic agents in the economy increases the level of price rigidity in the economy. The more strategic agents there are in an economy the less flexible are the prices. Multiplicity of equilibria arises due to the presence of strategic complementarity between agents. The resulting equilibria can be Pareto-ranked and we show that there is room for monetary policy in such models.

Keywords: monopolistic competition, price rigidity, multiple equilibria, monetary policy, unemployment, strategic complementarity

ET113 MONETARY POLICY 2

Elections and the Credibility of Monetary Policy

Jonas BJÖRNERSTEDTBJÖRNERSTEDT, J.,

Stockholm School of Economics, Sweden

In the literature on time consistency of monetary policy, the government is assumed to have an observable loss function with an employment goal higher than the natural rate. In this paper this property arises endogenously. The government will have the inflation employment tradeoff that the median voter considers optimal, the employment goal will however be considered too high by all voters. The credibility problems are seen to decrease with the length of the expected period between elections. With elections, appointing a relatively more conservative central bank is ineffectual.

Keywords: monetary policy, credibility, political economy, elections

ET114 ASYMMETRIC INFORMATION: INSURANCE MARKETS

The Insurers as the Informed Party

Bertrand VILLENEUVEVILLENEUVE, B.,

Université de Toulouse 1, France

We assume that, ex-ante, insurers know better the risks than the insured themselves. We model this situation for a monopolistic insurer first, and then for an oligopolistic market. We show that the value of information allocated to insurers only is positive for individuals is the former case and negative in the latter. We also illustrate how the result of Rothschild and Stiglitz are reversed: now the lower risks are better covered. Some difficulties with the refinements of equilibrium in the oligopoly case are addressed.

Keywords: Insurance, Oligopoly, Asymmetric Information

ET114 ASYMMETRIC INFORMATION: INSURANCE MARKETS

No-Commitment and Dynamic Contracts in Insurance Markets with Adverse Selection

Nathalie FOMBARONFOMBARON, N.,

Université Paris X, France

This paper characterizes a two-period model in insurance markets with adverse selection when relationships are governed by a series of short-term contracts. We discuss how the dynamic dimension and the information asymmetries affect the results about existence and efficiency of Nash equilibrium relative to the one-period model. First, the lack of commitment enhances the existence problem when companies share their insureds' loss experience. In contrast, the problem is alleviated when information asymmetries exist between competing insurers. Furthermore, the argument of information asymmetries between companies makes compatible cross-subsidizations with Nash equilibrium as opposed to the well-known result in static model.

Keywords: Adverse selection, Commitment, Cross-subsidizations, Insurance markets, Memory, Nash equilibrium

ET114 ASYMMETRIC INFORMATION: INSURANCE MARKETS

Endogenous Discrimination in an Insurance Market

Mattias POLBORNPOLBORN, M.,

University of Munich, Germany

At the example of a car insurance market, the model analyzes an insurance market with different risk types, but no asymmetric information (neither insurers nor insureds can recognize the risk type). Preferences for different cars (and hence consumption) are correlated with an individual's risk type. The information contained in an individuals choice of a car will be used in a competitive insurance market to discriminate. It is shown that in the market equilibrium too many individuals drive the car which is on average preferred by low risk individuals. Furthermore, the prohibition of discrimination with respect to the type of car may lead to a Pareto improvement.

ET114 ASYMMETRIC INFORMATION: INSURANCE MARKETS

Equilibrium in Competitive Insurance Markets- Revisited

Achim WAMBACHWAMBACH, A.,

University of Munich, Germany

The model of Rothschild and Stiglitz of a perfectly competitive insurance market under adverse selection is extended to allow for different wealth levels to model different degrees of risk-aversion, in addition to the differing risks of the individuals. Our main result is that under perfect competition with free entry profit making contracts are possible and sustainable in equilibrium. Furthermore we show that pooling contracts are feasible in mixed strategies. Generically they will not exist in pure strategies. The effect of the extra dimension of asymmetric information on the equilibrium non-existence problem is ambiguous.

Keywords: insurance markets, adverse selection

ET115 POLITICAL ECONOMY 2

Are Welfare Recipients Dictators in a Democracy? The Political Economy of the Negative Income Tax

Philippe PENELLEPENELLE, P.,

University of Chicago, U.S.A.

This paper examines the extent to which a democratic society characterized by an unequal distribution of income, is capable of transforming potential efficiency gains into actual economy-wide welfare gains. The model emphasizes the distortive effects of these potential efficiency gains on the price of the redistributive program faced at various income levels. These distorted prices in turn affect the voting behavior and equilibrium fiscal policy chosen by the people.

Keywords: Negative Income Tax, Progressivity, Median Voter, Efficiency

ET115 POLITICAL ECONOMY 2

Do Rich Countries Choose Better Governments?

Amartya LAHIRILAHIRI, A.,

University of California, Los Angeles, U.S.A.

Costas Azariadis

We analyze public investment in social infrastructure using a two-period model in which a government must intermediate all infrastructure investment. Voters choose a government from two alternatives types, high quality and low quality. A high quality government obtains higher returns on infrastructure but also demands a bigger consumption payoff for intermediating investment. Thus, electing a good government implies higher taxes for the voting public. We find that these intermediation costs imply threshold effects in the electoral process -- economies above a critical level of first period income elect high quality governments while economies below the threshold elect low quality ones. Infrastructure investment and second period output also exhibit a threshold effect: economies that are richer in period one also tend to grow faster. We study next the optimal choice of government when government actions are observable with "noise". For very small amounts of noise, imperfect information turns out to have no effect on the choice of government and infrastructure provision. However, once the level of noise becomes large, the agency problem raises the cost of intermediation causing reduced infrastructure provision and a bias towards electing low quality governments.

ET115 POLITICAL ECONOMY 2

Regional Integration and Lobbying for Tariffs against Non Members

Olivier CADOTCADOT, O.,

University of California,Los Angeles, U.S.A.

Jaime de Melo, Marcelo Olarreaga

Using an extension of the influence-driven lobbying approach developed by Grossman and Helpman, we study the impact of regional trading arrangements (RIAs) on trade policy towards non-members in a three-good, three-country model. We explore under what conditions the formation of an RIA between countries A and B leads, through lobbying pressure, to a higher or lower tariff against country C. Comparing free-trade areas (FTAs) with and without rules of origin and customs unions (CUs), with varying degress of economic and political integration, we show how increasingly deep integration can lead to rising protection against non-member imports. These results, which abstract from two differences between FTAs and CUs, namely the extent of free-riding in a CU and the component of a CUís tariffs designed to improve the membersí terms of trade, need to be qualified accordingly. As they stand, they nevertheless suggest that FTAs are likely to welfare-dominate CUs.

Keywords: Endogenous tariff, FTA, CU, political economy

ET115 POLITICAL ECONOMY 2

Transforming Economies: Agricultural Mechanisation and the Process of Industrialisation

Rohini PANDEPANDE, R.,

London School of Economics, U.K.

The paper studies how landowners' agricultural investment decisions affect the possibility of successful industrialisation of an economy. We identify conditions under which an economy is characterised by multiple investment equilibria corresponding to different levels of industrialisation. Where there is a coordination failure amongst investors, use of the inefficient traditional agricultural technology and low levels of industrialisation may persist, even where the alternative equilibrium raises welfare. The welfare economics and political economy of coordination are analysed for this type of economy. Inequality in the initial agrarian asset distribution renders the welfare implications of coordination ambiguous. In addition, such inequality may interact with the political process to lead to `political coordination failures'; an elected coordinator may fail to attain the welfare maximising outcome for the economy.

Keywords: Agriculture investment, Coordination Failure, Political Economy

Translated from RTF-format 3/8/97, by Marius Ooms

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