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Abstract:
This paper provides a macroeconomic perspective for government interventions in banking crises. Such crises occur when a large number of banks fail to meet capital requirements or are insolvent. Using a macroeconomic model with financial intermediation, our analysis suggests that strict enforcement of capital-adequate rules suffices in prosperous periods. Capital requirements serve as an indicator for crises interventions in critical states which may require interest rate controls and restructuring of the banking industry. These policies can be reinforced by random bail-outs and temporary financial relief, with a large percentage of the costs being covered by current and future owners of banks.
banking crises, deposit insurance, banking regulation

Financial intermediation, macroeconomic risks,

Abstract:
We examine financial intermediation when banks can offer deposit or loan contracts contingent on macroeconomic shocks. We show that the risk allocation is efficient if there is no workout of banking crises. In this case, banks will shift part of the risk to depositors. In contrast, under a workout of banking crises, depositors receive non-contingent contracts with high interest rates while entrepreneurs obtain loan contracts that demand a high repayment in good times and little in bad times. As a result, the present generation overinvests and banks create large macroeconomic risks for future generations, even if the underlying risk is small or zero. This provides a new justification for capital requirements.

Financial Intermediation, Macroeconomic Risks, State Contingent Contracts, Banking Regulation

Abstract:
Starting from the Merton framework for firm defaults we provide the analytics and robustness of the relationship between default probabilities and default correlations. We then derive the implication of these results for the impact of macroeconomic shocks on credit portfolios, for the pricing of loans, and for the design of credit risk models.
pricing of loans, macroeconomic risk, credit risk models

Credit portfolio management, default correlations,

Abstract:
We examine how the correlations of bank loan defaults depend on the correlations of asset returns and how correlations and diversification are affected by macroeconomic risks. We highlight the main properties of the relationship between asset returns and default correlations, illustrating how adverse macroeconomic shocks raise not only the likelihood of defaults, but also the correlation of defaults. The latter effect, called "correlation effect", may account for more than 50% of the increase in the credit risk.

Credit portfolio management, default correlations, macroeconomic shocks, correlation effect, Monte-Carlo Simulation

Abstract:
We examine the optimal allocation of equity and debt across banks and industrial firms when both are faced with incentive problems and firms borrow from banks. Increasing bank equity mitigates the bank-level moral hazard but may exacerbate the firm-level moral hazard due to the dilution of firm equity. Competition among banks does not result in a socially efficient level of equity. Imposing capital requirements on banks leads to the socially optimal capital structure of the economy in the sense of maximizing aggregate output. Such capital regulation is second-best and must balance three costs: excessive risk-taking of banks, credit restrictions banks impose on firms with low equity, and credit restrictions due to high loan interest rates.

Financial intermediation, double incentive problems, bank capital, banking regulation, capital structure of the economy

Abstract:
In a general equilibrium model we examine the optimal allocation of equity and debt across banks and industrial firms when both are plagued by incentive problems and firms can borrow from banks. Competition among banks will not result in a socially efficient level of equity. Imposing capital requirements on banks can trigger the socially optimal capital structure of an economy in the sense of maximizing aggregate output. Such capital regulation is second-best and must balance three costs: gambling of banks, credit restrictions banks impose on firms with low equity, and credit restrictions because of high loan interest rates.

Financial intermediation, double incentive problems, bank capital, banking regulation, capital structure of the economy

Abstract:
The internal ratings based approach (IRB) of the Basel Committee has three problems: few incentives for banks to adopt the IRB approach, a complicated technical framework and very conservative aggregation rules. We suggest the following remedies: First, we suggest a new design of transition rules that produce strong incentives for banks to adopt the IRB approach. Second, we outline a lean IRB approach which is simpler and avoids adjustments and caps that are difficult to justify. This approach can be flexibly calibrated to proxy any IRB approach. Third, we suggest a simple aggregation rule for capital requirements across portfolio segments that takes the diversification effect across segments into account.

Basel II, lean IRB-approaches, credit portfolio risk, transition design, banking

Abstract:
In this paper we develop a new concept of globalization defined as the exposure of a productivity follower industry in one country to the productivity leader in another country. Globalization is measured by the intensity of contacts through trade and foreign direct investment. In a simple model and empirically we show that the exposure of a productivity follower to competition with the leader is highly correlated with the productivity gap of this industry. Competition restricted to one region such as Europe, or North America, or the Far East, is not sufficient to achieve highest productivity levels. Moreover, it turns out that FDI has a weight in the globalization index at least equal to trade. FDI can contribute directly to higher levels of domestic productivity by transferring the best production practices, and put pressur on other domestic producers to improve. The impact of trade on globalization can be weakened by tariffs and non-tariffs.

Abstract:
We examine economic growth, inequality and education when the wellspring of growth is the formation of human capital through a combination of the quality of child-rearing and formal schooling. The existence of multiple steady states is established, including a poverty trap, wherein children work full-time and no human capital accumulation takes place, with continuous growth at an asymptotically steady rate as an alternative. We show that a society can escape from the poverty trap into a condition of continuous growth through a program of taxes and transfers. Temporary inequality is a necessary condition to escape in finite time, but long-run inequalities are avoidable provided sufficiently heavy, but temporary taxes can be imposed on the better-off. Programs aiming simply at high attendance rates in the present can be strongly non-optimal.

Child Labor, Growth and Inequality, Education, Human Capital, Redistributive Policies, Poverty Traps

Abstract:
Most existing estimates of the macroeconomic costs of AIDS, as measured by the reduction in the growth rate of gross domestic product, are modest. For Africa - the continent where the epidemic has hit the hardest - they range between 0.3 and 1.5 percent annually. The reason is that these estimates are based on an underlying assumption that the main effect of increased mortality is to relieve pressure on existing land and physical capital so that output per head is little affected. Bell, Devarajan, and Gersbach argue that this emphasis is misplaced and that, with a more plausible view of how the economy functions over the long run, the economic costs of AIDS are almost certain to be much higher. Not only does AIDS destroy existing human capital, but by killing mostly young adults, it also weakens the mechanism through which knowledge and abilities are transmitted from one generation to the next. The children of AIDS victims will be left without one or both parents to love, raise, and educate them.

The model yields the following results. In the absence of AIDS, the counterfactual benchmark, there is modest growth, with universal and complete education attained within three generations. But if nothing is done to combat the epidemic, a complete economic collapse will occur within three generations. With optimal spending on combating the disease, and if there is pooling, growth is maintained, albeit at a somewhat slower rate than in the benchmark case in the absence of AIDS. If pooling breaks down and is replaced by nuclear families, growth will be slower still. Indeed, if school attendance subsidies are not possible, growth will be distinctly sluggish. In all three cases, the additional fiscal burden of intervention will be large, which reinforces the gravity of the findings.

This paper - a product of the Office of the Vice President, Human Development Network - is part of a larger effort in the network to evaluate the economic consequences of HIV/AIDS.

Abstract:
The article compares the social efficiency of monetary targeting and inflation targeting when central banks may have private information on shocks to money demand and the transparency solution is not feasible because of verifiability problems. Under inflation targeting and monetary targeting, central banks may have an incentive to signal their private information in order to influence the public's expectations about future inflation. We show that inflation targeting is superior to monetary targeting as it makes it easier for central banks to commit to low inflation. Moreover, central banks that are weak on inflation prefer inflation targeting to monetary targeting.

Central Banks, Inflation Targeting, Monetary Targeting, Signaling, Commitment

Abstract:
The article analyses the risk weights of the IRB approaches as suggested by the Basel Committee on Banking Supervision in January 2001. It is shown that the risk weight formulas can be considerably simplified to an elementary formula which has become a part of later suggestions of the Basel Committee.

Banking supervision, Basel 2, IRB

Abstract:
We examine to what extent central banks should release their internal assessments concerning the links between money growth and future inflation, and between employment and inflation. We show that the social value of transparency concerning real shocks is negative since the disclosure of the central bank's private information eliminates the possibility of insuring the public against those shocks. Finally, we discuss a number of further arguments which have to be taken into account before policy conclusions can be drawn.

Central banks, transparency, credibility, disclosure rules.

Abstract:
We present a new approach to endogenizing technological spillovers. Firms choose continuous levels of a cost-reducing innovation before they engage in competition for each other's R&D-employees. Successful bids for the competitor's employee then result in higher levels of cost-reduction. Finally, firms enter product market competition. We apply the approach to the long-standing debate on the effects of the mode of competition on innovation incentives. We show that incentives to acquire spillovers are stronger and incentives to prevent spillovers are weaker under quantity competition than under price competition. As a result, for a wide range of parameters, price competition gives stronger innovation incentives than quantity competition.

Abstract:
In this paper we study how promoting product market competition by reducing mark-ups or by increasing productivity are able to complement labor market reforms. We use a simple general equilibrium model with different types of labor. The bottom-line of the paper is that product market reforms will help to reduce aggregate unemployment under many circumstances even though sectoral unemployment may increase. We also highlight that the mobility of high-skilled workers and the distribution of unemployment across sectors determine whether productivity improvements in one sector affect aggregate unemployment positively or negatively.

Product market competition, unemployment, mobility of labor force, political support for reforms

Abstract:
We develop a product market theory that explains why firms invest in general training of their workers. We consider a model where firms first decide whether to invest in general human capital, then make wage offers for each others' trained employees and finally engage in imperfect product market competition. Equilibria with and without training, and multiple equilibria can emerge. If competition is sufficiently soft and trained workers are substitutes, firms may invest in non-specific training if others do the same, because they would otherwise suffer a competitive disadvantage or need to pay high wages in order to attract trained workers. Government intervention can be socially desirable to turn training into a focal equilibrium.

General Training, Human Capital, Oligopoly, Turnover

Abstract:
When politicians are short-term oriented or future elections do not sufficiently reflect the success of past policies, democratic elections cannot motivate politicians to undertake long-term socially beneficial projects. When politicians can offer incentive contracts which become effective upon reelection, the hierarchy of contracts and elections can alleviate such inefficient decision-making in politics. This mechanism still works if the public cannot commit itself to a reelection scheme or if the public is unsure about the politicians' time preferences. In the non-commitment case, incentive contracts may need to include a golden parachute clause.

Incentive Contracts, Politicians, Long-term Policies, Elections and Contracts, Golden Parachute Clause

Abstract:
We examine wage bargaining in a two-sector economy when the employers and labor unions in each sector are not always aware of all the general equilibrium feedback effects. We show analytically that if agents only consider labor demand effects, low real wages and low unemployment are the result. With an intermediate view, i.e., when partial equilibrium effects within a sector are taken into account, high real wages and unemployment result. If all general equilibrium effects are simultaneously considered, we once again obtain a situation of low wages and unemployment. The assumption that unions and employers' federations are unable to incorporate all feedback effects from other sectors may explain why unemployment in Europe is high.

Sectoral wage bargaining, awareness of general equilibirum effects, unemployment

Abstract:
We examine wage-bargaining in a two-sector economy when employers and labor unions in each sector are not always aware of all general equilibrium feedback effects. We show analytically that if agents only consider labor demand effects, low real wages and low unemployment result. With an intermediate view, i.e., when partial equilibrium effects within a sector are taken into account, high real wages and unemployment result. If all general equilibrium effects are considered at once, low real wages and low unemployment again result. The assumption that unions and employers' federations are not able to incorporate all feedback effects from other sectors may explain the persistence of high unemployment in Europe.

Sectoral Wage-Bargaining, Awareness of General Equilibrium Effects, Unemployment

Abstract:
We examine whether the publication of the individual voting records of central-bank council members is socially beneficial when the public is unsure about the efficiency of central bankers and central bankers are angling for re-appointment. We show that publication is initially harmful since it creates a conflict between socially desirable and individually optimal behavior for somewhat less efficient central bankers. However, after re-appointment, losses will be lower when voting records are published since the government can distinguish highly efficient from less efficient central bankers more easily and can make central bankers individually accountable. In our model, the negative effects of voting transparency dominate, and expected overall losses are always larger when voting records are published.

central banks, transparency, voting

Abstract:
Many governmental programs are effective only if firms make costly investments. The inability of authorities to precommit to a regulatory scheme creates incentives for firms not to invest and to hold up the regulator. This paper describes a simple subsidy/tax scheme embedded in a four-stage mechanism that solves the hold-up problem. We design a self-financing subsidy/tax scheme which benefits a complying firm at the expense of a non-complying firm. In order to be credible, the subsidy and tax rates must maximize social welfare for any combination of investment decisions. We show that there exists a unique subgame perfect equilibrium in which all firms invest and no actual implementation with subsidies and taxes is required. We discuss in which cases the mechanism can work under incomplete information.

Abstract:
In this Paper, we examine the possibilities a principal in a public organization has to motivate agents for productivity improvements where standard stick and carrot incentives cannot be used. The principal's only incentive device is a reallocation of budgets and tasks across agents depending on the extent of productivity improvements revealed by each agent. We first show that, as long as agents do not collude, the principal can use rotation and tournament schemes to eliminate all slack in the organization. Second, to break collusion between agents, the principal must use discriminatory tournament schemes. In some cases, however, there does not exist an incentive scheme to overcome collusion.

Public organizations, incentive schemes, tournament and rotation schemes, collusion

Abstract:
In this paper we examine the possibilities a principal in a public organization has to motivate agents for productivity improvements where standard stick and carrot incentives cannot be used. The principal's only incentive device is a reallocation of budgets and tasks across agents depending on the extent of productivity improvements revealed by each agent. We first show that as long as agents do not collude the principal can use rotation and tournament schemes to eliminate all slack in the organization. Second, to break collusion between agents, the principal must use discriminatory tournament schemes or incentive schemes assigning tasks to agents who do not participate in the productivity improvement exercise.

public organizations, incentive schemes, tournament and rotation schemes, collusion

Abstract:
In this paper we examine how individuals should be treated with respect to taxes, subsidies and agenda setting in constitutions in order to obtain efficient allocations of public goods and to limit tax distortions. We show that if public goods are socially desirable, the simple majority rule as well as taxation constrained to majority winners or a ban on subsidies are second-best constitutions. Equal treatment regarding taxes and subsidies is undesirable. Super majority rules and equal treatment of all citizens with respect to taxes and subsidies, however, is first-best if public goods are socially undesirable. The ex ante expectation of the share and welfare improvements of socially efficient public goods determines which constitution a society will adopt.

Incomplete social contracts, constitutions, treatment rules, majority rules

Abstract:
We consider a firm which pays a worker for his effort over several periods. The more the firm pays in one period, the wealthier the worker is in the following periods, and so the more he must be paid for a given effort. This wealth effect can induce an employer to pay little initially and more later on. For related reasons, the worker may work harder than the employer prefers. The incentive contracts firms offer may therefore cap the worker's earnings. Lastly, this wealth ratchet effect can induce excessive firing and turnover.

principal-agent, compensation, moral hazard, wealth effects, Ratchet effects, high-powered incentives

Abstract:
We consider a general equilibrium model where groups operating in a competitive market environment can have several members and make efficient collective consumption decisions. Individuals have the option to leave the group and make it on their own or join another group. We study the effect of these outside options on group formation, group stability, equilibrium existence, and equilibrium efficiency.

Household Behavior, Household Formation, Collective Decision Making, General Equilibrium

Abstract:
We provide a justification why the core principal in liberal democracies one-person-one-vote is socially desirable. We compare two possible constitutions. Under a "fixed democracy", every person has one vote and has the same chance to propose public good provision. Under a "flexible democracy", an agenda setter can additionally propose to limit future participation in voting and agenda setting. We show that a fixed democracy induces more restrictions on attempts of majorities to tax minorities than a flexible democracy. A flexible democracy may be more suited to enable a polity to undertake public projects. This possible advantage is too small to outweigh taxation distortions and citizens unanimously favor the one-person-one-vote rule ex ante.

Abstract:
In this paper we introduce flexible majority decision rules where the size of the majority depends on the proposal made by the agenda setter. Flexible majority rules can mitigate the disadvantages of democracies in the provision of public projects. In many cases, the combination of the principles taxation constraint to majority winners, a ban on subsidies, costly agenda setting and flexible majority rules constitute a socially optimal democratic constitution. Flexible majority rules might also be a useful decision-making procedure in other circumstances.

Flexible Majority Rules, Incomplete Social Contract, Constitutional Treatment Rules, Provision of Public Projects

Abstract:
We investigate a banking system subject to repeated macroeconomic shocks and show that without deposit rate control, the banking system collapses with certainty. Any initial level of reserves will delay the collapse but not avoid it. Even without a banking collapse, the economy still converges to a consumption trap with positive probability. Savings are maximal in the consumption trap, but are used entirely to pay back obligations of banks. No long-term investments can be financed and GDP is minimal. We discuss stronger intervention rules that avoid both a collapse and the consumption trap, confirming that capital requirements are an early indicator signaling when intervention may become necessary. Our analysis provides an explanation why economies which experience a banking crisis may endure long-lasting economic downturns.

Financial Intermediation, Macroeconomic Risks, Banking Crises, Deposit Insurance, Banking Regulation

Abstract:
We examine whether the central bank council of a monetary union should publish its voting records when members are appointed by national politicians. We show that the publication of voting records lowers overall welfare if the private benefits of holding office are sufficiently low. High private benefits of central bankers lower overall welfare under opacity, as they induce European central bankers to care more about being re-appointed than about beneficial policy outcomes. We show that opacity and low private benefits jointly guarantee the optimal welfare level. Moreover, we suggest that non-renewable terms for national central bankers and delegating the appointment of all council members to a European agency would be desirable.

Central banks, transparency voting

Abstract:
We examine whether the central bank council of a monetary union should publish its voting records when members are appointed by national politicians. We show that the publication of voting records lowers overall welfare if the private benefits of holding office are sufficiently low. High private benefits of central bankers lower overall welfare under opacity, as they induce European central bankers to care more about being re-appointed than about beneficial policy outcomes. We show that opacity and low private benefits jointly guarantee the optimal welfare level. Moreover, we suggest that non-renewable terms for national central bankers and delegating the appointment of all council members to a European agency would be desirable.

Central banks, transparency, voting, monetary union

Abstract:
When politicians are provided with insufficient incentives by the democratic election mechanism, we show that social welfare can be improved by threshold contracts. A threshold incentive contract stipulates a performance level which a politician must reach in order to have the right to stand for reelection. Read my lips would turn into read my contracts. Reelection thresholds can be offered by politicians during campaigns and do not impair the liberal principle of free and anonymous elections in democracies.

Elections, Incentive Contracts, Democracy

Abstract:
Many efficient policies imply a temporary deterioration of GDP while the benefits accrue to voters later. Such policies have a down-up characteristic. We show that voters cannot motivate politicians to invest in down-up policies by their reelection decision. The incumbent either undertakes short-term policies or sticks with the status quo. We show that adding an incentive element to the reelection mechanism can solve the investment problem of down-up policies. If a politician wants to stand for reelection, he must accept that his future income or his future reelection possibilities are dependent on macroeconomic developments. Finally, we comment on practical issues when such contracts are used in election races.

Abstract:
This paper studies the question to what extent premia for macroeconomic risks in banking are sufficient to avoid banking crises. We investigate a competitive banking system embedded in an overlapping generation model subject to repeated macroeconomic shocks. We show that even if banks fully incorporate macroeconomic risks in their pricing of loans, a banking system may enter bankruptcy with probability one. A major cause for this default is that risk premia of a competitive banking system may become too small if the capital base is low.

Financial intermediation, macroeconomic risks, banking crises, risk premia, banking regulation

Abstract:
This paper studies the question to what extent premia for macroeconomic risks in banking are sufficient to avoid banking crises. We investigate a competitive banking system embedded in an overlapping generation model subject to repeated macroeconomic shocks.

We show that even if banks fully incorporate macroeconomic risks in their pricing of loans, a banking system may enter bankruptcy with a probability of one. A major cause for this default is that risk premia of a competitive banking system may become too small if the capital base is low.

Financial intermediation, macroeconomic risks, banking crises, risk premia, banking regulation

Abstract:
We examine wage bargaining when employers and labor unions do not always take all general equilibrium effects into account but learn a steady state. If agents do hardly consider general equilibrium effects, low real wages and low unemployment results. With an intermediate view, when partial equilibrium effects are taken into account, high real wages and unemployment results, which may explain the persistence of high unemployment in Europe. If all general equilibrium effects are incorporated at once, again low real wages and low unemployment results. We thus obtain a hump-shaped relationship between the extend of feedback effects incorporated by the bargaining parties and real wages or unemployment.

Labor markets, wage bargaining, learning of general equilibrium effects, unemployment

Abstract:
We propose a flexible majority rule for central bank councils where the size of the majority depends monotonically on the change in interest rate within a particular time frame. Small changes in interest rate require a small share of supporting votes, even less than 50%. We show that flexible majority rules are superior to simple majority rules and can implement the optimal monetary policy under a variety of circumstances.

Central bank, voting, majority rule, flexible majority rules

Abstract:
We propose a flexible majority rule for central-bank councils where the size of the majority depends monotonically on the change in interest rate within a particular time frame. Small changes in interest rate require a small share of supporting votes, even less than 50%. We show that flexible majority rules are superior to simple majority rules and can implement the optimal monetary policy under a variety of circumstances.

Central bank, voting, majority rule, flexible majority rules

Abstract:
In the presence of macroeconomic shocks severe enough to threaten the liquidity or solvency of the banking system, the regulator can rely on the funds concentration effect to save long-term investment projects. Some banks are forced into bankruptcy with the result that other banks obtain more new funds and remain solvent. We investigate two different implementations of the funds concentration effect and the corresponding discriminatory bailout scheme: "random bailout" and "bailout the big ones". While the latter can be problematic in terms of stability, it is superior to the former in terms of welfare and credibility.

Financial Intermediation, Macroeconomic Risk, Banking Regulation, Discriminatory Bailout, Funds Concentration, Aggregate Liquidity, Consistent Expectations

Abstract:
We examine how emission taxes should be refunded to firms in order to create optimal incentives to invest in cleaner technologies. Since refunds cannot be made dependent on investments, an alternative way is to give back taxes to firms according to market shares. We show that universally applicable refunding schemes must be linear in market shares. Moreover, a socially optimal tax/tax refunding scheme exists if pollution is proportional to output and firms compete a la Cournot. If short-term abatement technologies exist, tax/tax refunding schemes can still provide second-best allocations. If firms are price takers, however, refunding taxes according to market shares is harmful. Since imperfect competition is a prominent phenomenon in many polluting industries, the design of socially optimal refunding schemes is an essential part of environmental regulation.

Abstract:
We analyze whether different learning abilities of firms with respect to general equilibrium effects lead to different levels of unemployment. We consider a general equilibrium model where firms in one sector compete a la Cournot and a real wage rigidity leads to unemployment. If firms consider only partial equilibrium effects when choosing quantities, the observation of general equilibrium feedback effects will lead to repeated quantity adjustments until a steady state is reached. When labor is immobile across industries, unempolyment in the steady state is lower than when all general equilibrium effects are incorporated at once. The opposite result is true if labor is mobile.

Product markets, Cournot competition, learning of general equilibrium effects, unemployment

Abstract:
Based on contribution patterns to parties in Germany and elsewhere, we suggest that European democracies should use a mixed system where private funding can play a larger role than public funding. In Germany the high level of public funding for parties can be reduced without expecting undesirable effects if the parties are forced to increase private funding. Private contributions can be unlimited but tight transparency requirements on private funding are necessary. This can be achieved by setting up an independent commission with institutionalized publication rules. Tax deductibility of private contributions should be eliminated.

Campaigns, Funding of Parties, Democracies, Transparency Requirements, Private Contributions

Abstract:
We propose a global refunding scheme as a new international approach to addressing climate change. A global refunding system allows each country to set its carbon emission tax, while aggregate tax revenues are partially refunded to member countries in proportion to the relative emissions reduction they achieve within a period. Nationally determined environmental policies and global refunding create increasing incentives to reduce emissions and may achieve efficiency and equity objectives of global climate policy.

Global Refunding, climate change, international approach, carbon emissions reduction

Abstract:
We consider a model with a politician facing a multi-task problem while in office. The reelection mechanism distorts the allocation of effort in favor of tasks whose outcomes can be measured more precisely than others. We show that a hierarchy of elections and incentive contracts can alleviate this inefficiency, although the incentive contracts need to be based on the same information available to the voters at reelection date.

Abstract:
Are politicians who are concerned about the public's beliefs regarding their competence and their preferences bad politicians? We consider a model where the public is unsure about the competence of an agent and whether the agent is concerned about the consequences of policy decisions (statesman) or only about the public's beliefs (populist). We show that populists distort their decisions in order to avoid being recognized as incompetent or as populists. If the public bases its reelection decision on competence, policy decisions are extremely distorted. Because of this paradox of competence, voters should reelect candidates mainly based on their beliefs about whether a politician is a statesman. This might explain why politicians are so concerned to be perceived as a statesman.

Abstract:
The AIDS epidemic threatens Kenya with a long wave of premature adult mortality, and thus with an enduring setback to the formation of human capital and economic growth. To investigate this possibility, the authors develop a model with three overlapping generations, calibrate it to the demographic and economic series from 1950 until 1990, and then perform simulations for the period ending in 2050 under alternative assumptions about demographic developments, including the counterfactual in which there is no epidemic. Although AIDS does not bring about a catastrophic economic collapse, it does cause large economic costs - and many deaths. Programs that subsidize post-primary education and combat the epidemic are both socially profitable-the latter strikingly so, due to its indirect effects on the expected returns to education - and a combination of the two interventions profits from a modest long-run synergy effect.

Population Policies, Primary Education, Education For All, Adolescent Health, Economic Theory & Research

Abstract:
In a two-sector-economy with real wage rigidity, we examine how technical progress in one sector affects aggregate unemployment. We show that aggregate unemployment decreases for uneven technical change in the case of Cobb-Douglas production functions. For every type of technical progress there are also elasticities of substitution in production and utility functions leading to a rise in unemployment. Moreover, we identify polar cases when unemployment strongly decreases.

Uneven Technical Progress, Elasticities of Substitution, Unemployment

Abstract:
We study household formation in a model where collective consumption decisions of a household depend on the strategic choices of its members. The surplus of households is determined by individual choices of levels of friendliness to each other. A strategic conflict arises from a coupling condition that ceteris paribus, a person's friendlier attitude reduces the individual's influence in the household's collective decision on how to divide the ensuing surplus. While partners in an isolated household choose the minimum level of friendliness, competition for partners tends to promote friendliness. We find that affluence does not buy affection, but can lead to withholding of affection by an affluent partner who can afford to do so. In general, the equilibrium degree of friendliness proves sensitive to the socio-economic composition of the population.

Friendliness, coupling condition, collective decisions, competition for partners, socio-economic composition

Abstract:
We study household formation in a model where collective consumption decisions of a household depend on the strategic choices of its members. The surplus of households is determined by individual choices of levels of friendliness to each other. A strategic conflict arises from a coupling condition that ceteris paribus, a person's friendlier attitude reduces the individual's influence in the household's collective decision on how to divide the ensuing surplus. While partners in an isolated household choose the minimum level of friendliness, competition for partners tends to promote friendliness. We find that affluence does not buy affection, but can lead to withholding of affection by an affluent partner who can afford to do so. In general, the equilibrium degree of friendliness proves sensitive to the socio-economic composition of the population.

Abstract:
We examine the macroeconomic consequences of industry wage-bargaining and product market reforms. We suggest that general equilibrium effects may be important for the evaluation of industry-specific regulations. In particular, we suggest that the European unemployment problem can be traced back partially to insufficient recognition of general equilibrium effects. Moreover, unawareness of general equilibrium effects may be an explanation of why regulations are introduced and why structural reforms are (not) undertaken.

Awareness of general equilibrium effects, unemployment, uneven technological progress, product market reforms, sectoral wage bargaining

Abstract:
We examine the macroeconomic consequences of industry wage bargaining and product market reforms. We suggest that general equilibrium effects may be important for the evaluation of industry-specific regulations. In particular, we suggest that the European unemployment problem can be traced back partially to insufficient recognition of general equilibrium effects. Moreover, unawareness of general equilibrium effects may be an explanation of why regulations are introduced and why structural reforms are (not) undertaken.

industry wage bargaining, structural reforms, general equilibrium effects

Abstract:
We examine a model of campaigns in which contributors support candidates who choose political platforms and engage in costly campaigning. Interest groups decide to whom and how much to contribute. We show that donors may financially support one candidate in order to moderate his opponent's platform, and vote for that opponent to ensure the desired moderate outcome. Interest groups with extreme preferences tend to outspend contributors with moderate policy preferences. Hence, we expect a bimodal distribution of contributions. If donors are not very asymmetrically distributed around the median, we observe a convergence of the political outcome towards the median due to campaigns. In this case, regulatory concerns about elections being bought with unrestricted contributions to campaigns are unfounded.

Abstract:
This paper studies the formation of human capital and its transmission across generations when premature adult mortality is a salient feature of the demographic landscape, either permanently or in the form of a long-period wave that follows the outbreak of an epidemic. We establish several threshold properties of the model, for such a shock can severely retard economic growth, even to the point of leading to an economic collapse. Premature adult mortality may exacerbate inequality under nuclear family arrangements. Pooling mortality risks with equal treatment of all children may fend off, or even induce, a collapse, depending on the initial conditions and the size and duration of the shock. Awareness campaigns may also trigger a collapse by introducing undesirable expectational feedbacks.

epidemic diseases, HIV/AIDS, growth, collapse, pooling

Abstract:
We develop democratic mechanisms where individual utilities are not observable by other people at the legislative stage. We show that an appropriate combination of three rules can yield efficient provision of public projects: first, flexible and double majority rules where the size of the majority depends on the proposal and verifiable parameters and taxed and non-taxed individuals need to support the proposal; second, flexible agenda costs where the agenda-setter has to pay a certain amount of money if his proposal does not generate enough supporting votes; third, a ban on subsidies. We provide a rationale why double majority rules are used in practice. We also show that higher degrees of uncertainty about project parameters can make it easier to achieve first-best allocations and that universal equal treatment with regard to taxation is undesirable.

Democratic constitutions, unobservable utilities, double majority rules, flexible agenda cost rules

Abstract:
We introduce democratic mechanisms where individual utilities are not observable by other people at the legislative stage. We show that the combination of three rules can yield efficient provision of public projects: First, flexible and double majority rules where the size of the majority depends on the proposal and taxed and non-taxed individuals need to support the proposal; second, flexible agenda costs where the agenda-setter has to pay a certain amount of money if his proposal does not generate enough supporting votes; third, a ban on subsidies. We also illustrate that higher dimensional uncertainty about project parameters can make it easier to achieve first-best allocations and that universal equal treatment with regard to taxation is undesirable.

Democratic Constitutions, Unobservable Utilities, Double Majority Rules, Flexible Agenda Cost Rules

Abstract:
We examine whether democratic societies can escape poverty traps. Unrestricted agenda setting with simple majority rules fail to educate a society, because education-enhancing redistribution will not occur. We show that a combination of suitable constitutional rules overcomes this impossibility result: rotating agenda setting and agenda repetition in combination with flexible majority rules or with a tax protection rule.

constitutional design, claims on deductions, flexible majority rules, agenda repetition, poverty traps, child labor

Abstract:
We consider an equilibrium refinement in signaling games by allowing agents to perform costly tests of beliefs by burning money. We apply the refinement in a model where the public is unsure about the ability of an agent, such as a government, to foresee the effects of long-term decisions. Agents with much information about the consequences of decisions should invest either immediately or never. Poorly informed agents should wait for better information. We identify pooling equilibria in which excessive rush or waiting occurs. The burning money refinement eliminates rash and waiting distortions, but it implies wasting money and, for high discount factors, a decrease in welfare. We also identify the conditions under which the public should allow the agent to burn the public's money.

Abstract:
We examine a model in which two politicians compete for office and for wages. Their remunerations are either set by the public or are offered competitively by the candidates during campaigns. Our main finding shows that competitive wage offers by candidates lead to lower social welfare than remunerations pre-determined by the public, since less competent candidates are elected or wage costs and tax distortions are higher.

Incentive contracts, politicians, compensation, elections and wages, free riding, underprovision

Abstract:
We examine a model in which two politicians compete for office and for wages. Their remunerations are either set by the public or are offered competitively by the candidates during campaigns. Our main finding shows that competitive wage offers by candidates lead to lower social welfare than remunerations predetermined by the public, since less competent candidates are elected or wage costs are higher.

Competitive wage offers, remunerations of politicians, elections, free riding and underprovision, incentive contracts

Abstract:
We propose a formal concept of the power of voice in the context of a simple model where individuals form groups and trade in competitive markets. Individuals use outside options in two different ways. Actual outside options reflect the possibility to exit or to join other existing groups. Hypothetical outside options refer to hypothetical groups that are ultimately not formed. Articulation of hypothetical outside options in the bargaining process determines the relative bargaining power of the members of a group, which constitutes an instance of the power of voice. The adopted equilibrium concept endogenizes the outside options as well as the power of voice. In our illustrative example, there exists an equilibrium that uniquely determines the power of voice and the allocation of commodities.

power of voice, competitive equilibria, group formation, bargaining, articulation of outside options

Abstract:
We examine the division of resources among individuals by flexible majority rules where the majority necessary to adopt a proposal depends on the proposal itself. For instance, the size of the majority may increase with the maximal difference between the shares individuals receive. For large discount factors such rules imply an efficient and even distribution of resources. For low discount factors flexible majority rules supplemented by specific agenda-setting rules such as agenda rights for the opposition guarantee envy-free distribution. Uncertainty about discount rates can make it easier to achieve efficient and envy-free allocations.

Flexible majority rules, division of resources, unanimity rule, simple majority rule, fair division

Abstract:
In this paper we propose minority voting as a scheme that can partially protect individuals from the risk of repeated exploitation. We consider a committee that meets twice to decide about projects where the first-period project may have a long-lasting impact. In the first period a simple open majority voting scheme takes place. Voting splits the committee into three groups: voting winners, voting losers, and absentees. Under minority voting only voting losers keep the voting right in the second period. We show that as soon as absolute risk aversion exceeds a threshold value minority voting is superior to repeated application of the simple majority rule.

voting, minority, durable decision, risk aversion, tyranny of majority rules

Abstract:
This paper analyzes the effects of sociological changes in the form of a shift of influence within two-member households participating in labor and product markets. The most striking effects occur when household members differ in individual preferences and enjoy positive leisure-dependent externalities. For instance, a global sociological change where the "workaholic" member becomes more influential in each working class household can render the working class worse off. A binding restriction on the number of hours an individual is allowed to work can benefit all workers.

household behavior, general equilibrium, externalities, labor supply

Abstract:
We augment a Schumpeterian growth model with a public basic-research sector to examine how much a country should invest in basic research. We find that the closer the country is to the world's technological frontier the more the government should invest in basic research. Basic-research expenditures are increasing with a country's degree of openness as long as innovation sizes are small. We provide possible explanations for the empirical evidence available on basic-research expenditures across countries.

basic research, openness, distance to frontier, economic growth

Abstract:
What is the right balance among policy interventions in order to ensure economic growth over the long run when an epidemic causes heavy mortality among young adults? We argue that, in general, policies to combat the disease and promote education must be concentrated, in certain ways, on some subgroups of society, at first to the partial exclusion of others. This concentration involves what we term the macroeconomics of targeting. The central comparison is then between programs under which supported families enjoy the benefits of spending on health and education simultaneously (DT), and those under which the benefits in these two domains are sequenced (ST). When levels of human capital are uniformly low at the outbreak, DT is superior to ST if the subsequent mortality rate exceeds some threshold value. Outside aid makes DT more attractive; but DT restricts support to fewer families initially and so increases inequality.

epidemic diseases, HIV/AIDS, poverty traps, macroeconomics of targeting, education support, health policies, single and double targeting

Abstract:
What is the right balance among policy interventions in order to ensure economic growth over the long run when an epidemic causes heavy mortality among young adults? We argue that, in general, policies to combat the disease and promote education must be concentrated, in certain ways, on some subgroups of society, at first to the partial exclusion of others. This concentration involves what we term the macroeconomics of targeting. The central comparison is then between programs under which supported families enjoy the benefits of spending on health and education simultaneously (DT), and those under which the benefits in these two domains are sequenced (ST). When levels of human capital are uniformly low at the outbreak, DT is superior to ST if the subsequent mortality rate exceeds some threshold value. Outside aid makes DT more attractive; but DT restricts support to fewer families initially and so increases inequality.

Epidemic diseases, HIV/AIDS, poverty traps, macroeconomics of targeting, education support, health policies, single and double targeting

Abstract:
Collective consumption decisions taken by the members of a household may prove inefficient. The impact on market performance depends on whether household inefficiencies are caused by inefficient net trades with the market or by inefficient distribution of resources within households. Inefficient internal distribution always results in inefficient equilibrium allocations. This leads us to consider competitive forces as a disciplinary device for households. Competition of households for both resources and members can eliminate or reduce inefficient internal distribution.

Abstract:
We examine the legislative game with open rules proposed by Baron and Ferejohn (1989). We first show that the three-group equilibrium suggested by Baron and Ferejohn does not always obtain. Second, we characterize the set of stationary equilibria for simple and super majority rules. Such equilibria are either of the three-group or four-group type. The latter type tends to occur when the size of the legislature becomes larger. Moreover, four-group equilibria imply large delay costs.

Bargaining in legislatures, Baron/Ferejohn model, open rules, three-group and four-group equilibria

Abstract:
We examine the legislative game with open rules proposed by Baron and Ferejohn (1989). We first show that the three-group equilibrium suggested by Baron and Ferejohn does not always obtain. Second, we characterize the set of stationary equilibria for simple and super majority rules. Such equilibria are either of the three-group or four-group type. The latter type tends to occur when the size of the legislature becomes larger. Moreover, four-group equilibria imply large delay costs.

Baron/Ferejohn model, bargaining in legislatures, open rules, three-group

Abstract:
We consider a collective choice process where three players make proposals sequentially on how to divide a given quantity of resources. Afterwards, one of the proposals is chosen by majority decision. If no proposal obtains a majority, a proposal is drawn by lot. We establish the existence of the set of subgame perfect equilibria, using a suitable refinement concept. In any equilibrium, the first agent offers the whole cake to the second proposal-maker, who in turn offers the whole cake back to the first agent. The third agent is then indifferent about dividing the cake between himself and the first or the second agent.

division of a cake, majority decisions, tie-breaking rules

Abstract:
We study an intertemporal model of committee decision-making where members differ in their levels of efficiency. They may acquire costly information that enhances their ability to make a correct decision. We focus on the impact of transparency. We show that the principal’s initial utility is higher under transparency, because members exert more effort, which makes correct decisions more likely. The principal also benefits from transparency later, unless transparency leads to an alignment of the signal qualities of highly efficient and less efficient committee members. In general, committee members are harmed by transparency. Together with the insights from the literature, our results may help to decide when transparency in committees is desirable.

committees, career concerns, experts, transparency, information acquisition

Abstract:
We examine how a shift of bargaining power within households operating in a competitive market environment affects equilibrium allocation and welfare. If price effects are sufficiently small, then typically an individual benefits from an increase of bargaining power, necessarily to the detriment of others. If price effects are drastic the welfare of all household members moves in the same direction when bargaining power shifts, at the expense (or for the benefit) of outside consumers. Typically a shift of bargaining power within a set of households also impacts upon other households. We show that each individual of a sociological group tends to benefit if he can increase his bargaining power, but suffers if others in his group do the same.

household behavior, bargaining power, local and global changes, price effects, general equilibrium

Abstract:
We consider a three-stage game to examine how market integration affects firms' incentives to provide general worker training. In stage 1, firms invest in productivity-enhancing training. In stage 2, they can make wage offers for each others' workers. Finally, Cournot competition takes place. When two product markets become integrated, that is, replaced by a market with greater demand and more firms, training by each firm increases, provided the two markets are initially sufficiently concentrated. When barriers between less concentrated markets are eliminated, training is reduced. Integration increases welfare if it does not reduce training. However, for large parameter regions, welfare decreases if integration reduces training. We also show that opening product markets to countries with publicly funded training or cheap, low-skilled labor can threaten apprenticeship systems.

general worker training, human capital, oligopoly, turnover, globalization

Abstract:
We examine how globalization affects firms' incentives to provide general worker training. We consider a three-stage game. In stage 1, firms invest in productivity-enhancing training. In stage 2, they can make wage offers for each others' workers. Finally, Cournot competition takes place. When two product markets become integrated, that is, replaced by a market with greater demand and more firms, training by each firm increases, provided the two markets are sufficiently small. When barriers between large markets are eliminated, training is reduced. Integration increases welfare if it does not reduce training. However, for large parameter regions, welfare falls if integration reduces training. We also show that opening markets to countries with publicly funded training or cheap, low-skilled labor can threaten apprenticeship systems.

General worker training, human capital, oligopoly, turnover, globalization

Abstract:
We design a global refunding scheme as a new international approach to address climate change. A global refunding system allows each country to set its carbon emission tax, while aggregate tax revenues are partially refunded to member countries in proportion to the relative emission reductions they achieve within a given period, compared to some given baseline emissions. In a simple model we show that a suitably designed global refunding scheme is self-enforcing and achieves the social global optimum.

Climate change mitigation, global refunding scheme, international agreements, self-enforcing mechanisms

Abstract:
We design a global refunding scheme as a new international approach to address climate change. A global refunding system allows each country to set its carbon emission tax, while aggregate tax revenues are partially refunded to member countries in proportion to the relative emission reductions they achieve within a given period, compared to some given baseline emissions. In a simple model we show that a suitably designed global refunding scheme is self-enforcing and achieves the social global optimum.

climate change mitigation, global refunding scheme, international agreements, self-enforcing mechanisms

Abstract:
We explore the design of self-financing tax/subsidy mechanisms to solve hold-up problems in environmental regulation. Under Cournot competition, announcing the subsidy rate seems to be preferable to announcing the tax rate. Moreover, for constant marginal damage the hold-up problem can always be solved by setting subsidies. Under Bertrand competition, only announcing the tax rate can induce at least one firm to invest. We suggest that feebate systems in the automotive sector should be designed as self-financing tax/subsidy mechanisms.

hold-up problems, environmental regulation, taxes and subsidies, self-financing mechanisms, emission control

Abstract:
In this paper we assess whether forward guidance for monetary policy regarding the future path of interest rates is desirable. We distinguish between two cases where forward guidance for monetary policy may be helpful. First, forward guidance may reveal private information of the central bank. We argue that vague, non-binding statements may be desirable. Second, forward guidance may be used as a commitment device. In this case, policy forecasts may be desirable in a classic inflation-bias framework but not in a New Keynesian framework.

central banks, transparency, commitment, Federal Reserve, policy inclinations, signaling

Abstract:
We examine whether it is sufficient for central banks to observe and forecast nominal variables only. Analyzing the interplay of wage-setting unions and a central bank we show that although central banks may not gain more information by directly acquiring data about indicators of real shocks in the economy, such activities are nevertheless beneficial for central banks and yield lower social losses. Moreover, the extent of research activities by central banks should depend on the process of union formation.

Central Banks, Wage Bargaining, Information Asymmetries, Indicators for Monetary Policy, Controlling Inflation

Abstract:
We study the allocation of commodities through a two-stage hierarchy of competitive markets. Groups or countries trade at global prices while individuals within a group trade at local prices. We identify the free trade and the autarky equilibrium as polar cases. We show that no other two-stage market equilibria exist if the commodity space is two-dimensional. An example demonstrates that other, so-called intermediate equilibria exist for three-dimensional commodity spaces. The example also exhibits endogenous price distortions in third countries when some countries follow distortionary trade policies. We give two existence proofs for intermediate equilibria in higher dimensions. Each proof provides an explicit construction of special classes of intermediate equilibria.

Abstract:
As the performance of long-term projects is not observable in the short run politicians may pander to public opinion. To solve this problem, we propose a triple mechanism involving political information markets, reelection threshold contracts, and democratic elections. An information market is used to predict the long-term performance of a policy, while threshold contracts stipulate a price level on the political information market that a politician must reach to have the right to stand for reelection. Reelection thresholds are offered by politicians during campaigns. We show that, on balance, the triple mechanism increases social welfare.

elections, threshold contracts, democracy, information markets, triple mechanism

Abstract:
As the performance of long-term projects is not observable in the short run politicians may pander to public opinion. To solve this problem, we propose a triple mechanism involving political information markets, reelection threshold contracts, and democratic elections. An information market is used to predict the long-term performance of a policy, while threshold contracts stipulate a price level on the political information market that a politician must reach to have the right to stand for reelection. Reelection thresholds are offered by politicians during campaigns. We show that, on balance, the triple mechanism increases social welfare.

Elections, threshold contracts, democracy, information markets, triple mechanism

Abstract:
We study how the integration of product and labor markets affects general worker training. When the number of firms under autarky is not too small and training would lead to a sufficiently large productivity increase, integration reduces training, often resulting in lower welfare. We also show that opening product markets to countries with publicly funded training or cheap low-skilled labor can threaten apprenticeship systems.

general worker training, human capital, oligopoly, turnover, globalization

Abstract:
We examine banking competition when deposit or loan contracts contingent on macroeconomic shocks become feasible. We show that the risk allocation is efficient, provided that banks are not bailed out. In this case, banks may shift part of the risk to depositors. The private sector insures the banking sector and banking crises are avoided. In contrast, when banks are bailed out, depositors receive non-contingent contracts with high interest rates, while entrepreneurs obtain loan contracts that demand high repayment in good times and low repayment in bad times. As a result, the present generation overinvests, and banks create large macroeconomic risks for future generations, even if the underlying risk is small or zero.

Financial intermediation, macroeconomic risks, state contingent contracts, banking regulation

Abstract:
We propose a blueprint for an international emission permit market such as the EU trading scheme. Each country decides on the amount of permits it wants to offer. A fraction of these permits is grandfathered, the remainder is auctioned. Revenues from the auction are collected in a global fund and reimbursed to member countries in fixed proportions. We show that international permit markets with refunding lead to outcomes in which all countries tighten the issuance of permits and are better off compared to standard international permit markets. If the share of grandfathered permits is sufficiently small, we obtain approximately socially optimal emission reductions.

climate change mitigation, global refunding scheme, international agreements, international permit markets, tradeable permits

Abstract:
We propose a blueprint for an international emission permit market such as the EU trading scheme. Each country decides on the amount of permits it wants to offer. A fraction of these permits is grandfathered, the remainder is auctioned. Revenues from the auction are collected in a global fund and reimbursed to member countries in fixed proportions. We show that international permit markets with refunding lead to outcomes in which all countries tighten the issuance of permits and are better off compared to standard international permit markets. If the share of grandfathered permits is sufficiently small, we obtain approximately socially optimal emission reductions.

climate change mitigation, global refunding scheme, international permit markets, international agreements, tradeable permits

Abstract:
In this paper, we argue for a regulatory framework under which a bank's required level of equity capital depends on the equity capital of its peers. Such banking-on-the-average rules are transparent and could also be combined with the current regulatory framework. In addition, we argue that banking-on-the-average rules ensure the build-up of bank equity capitals in booms and thus avoid excessive leverage. Prudent banks can impose prudency on other banks. In a simple model of a banking system, we show that a banking-on-the-average framework can deliver the socially optimal solution because it induces banks to abstain from gambling. Moreover, it alleviates socially harmful consequences of conventional equity-capital rules, which may induce banks to excessively cut back on lending or liquidate desirable long-term investment projects in downturns.

banking on the average, equity-capital requirements, banking system, banking crisis

Abstract:
We integrate individual power in groups into general equilibrium models. The relationship between group formation, resource allocation, and the power of specific individuals or particular sociological groups is investigated. We introduce, via an illustrative example, three appealing concepts of power and show that there is no monotonic relationship between these concepts. Then we examine existence of competitive equilibria with free exit and study whether maximal individual power is consistent with Pareto efficiency. As applications, we discuss when power spillovers occur and we identify human relation paradoxes: positive externalities increase, but none of the household members gains in equilibrium. We further identify implicit, determinate and de facto power.

group formation, competitive markets, power, exit

Abstract:
Vote-buying is widely used by parties in developing countries to influence the outcome of elections. We examine the impact of vote-buying on growth. We consider a model with a poverty trap where redistribution can promote growth. We show that vote-buying contributes to the persistence of poverty as taxed wealthy people buy votes from poor people. We then show that there exists a democratic constitution that breaks vote buying and promotes growth. Such a constitution involves rotating agenda setting, a taxpayer-protection rule and repeated voting. The latter rule makes vote buying prohibitively costly.

vote-buying, political economy, poverty traps, economic development, voting rules, repeated voting

Abstract:
We develop a product market theory that explains why firms provide their workers with skills that are sufficiently general to be potentially useful for competitors. We consider a model where firms first decide whether to invest in industry-specific human capital, then make wage offers for each others' trained employees and finally engage in imperfect product market competition. Equilibria with and without training, and multiple equilibria can emerge. If competition is sufficiently soft, firms may invest in non-specific training if others do the same. Thereby, they avoid having to pay high wages in order to attract trained workers.

industry-specific training, human capital, oligopoly, turnover

Abstract:
We propose a development-compatible refunding system designed to mitigate climate change. Industrial countries pay an initial fee into a global fund. Each country chooses its national carbon tax. Part of the global fund is refunded to developing and industrial countries, in proportion to the relative emission reductions they achieve. Countries receive refunds net of tax revenues. We show that such a scheme can simultaneously achieve efficient emission reductions and equity objectives, as developing countries abate voluntarily, do not have to pay an initial fee, and are net receivers of funds. Moreover, we explore the potential of simple refunding schemes that do not claim tax revenues and only rely on initial fees paid by industrial countries.

climate change mitigation, refunding scheme, international agreements, developing countries

Abstract:
Agents from a homogeneous population organize themselves into productive partnerships and are confronted with a hold-up problem when making relation-specific investments in those partnerships. The problem is mitigated if agents can leave a partnership in which they have invested, bear the costs yet forego the benefits of the investment, join another partnership, invest there anew, and appropriate the surplus created by the new investment. To capture the idea we introduce the notion of reinvestment-proof equilibria in which no agent has an incentive to reinvest or to change his investment in the current firm. We show that the presence of a small inefficient firm causes substantial efficiency gains in all larger firms.

Hold-up problem, firm formation, reinvestment-proof equilibria, efficient firm structure

Abstract:
We analyze a two-country model of Foreign Direct Investment (FDI). Two firms, each of which is originally situated in only one of the two countries, first decide whether to build a plant in the foreign country. Then, they decide whether to relocate R&D activities. Finally, they engage in product-market competition. Our main points are: first, FDI liberalization causes a relocation of R&D activities if intrafirm communication is sufficiently well developed, external spillovers are substantial, competition is not too strong and foreign markets are not too small. Second, such a relocation of R&D activities will usually nevertheless increase domestic welfare since it only occurs if intrafirm communication is well developed and therefore knowledge generated and obtained abroad flows back to the domestic country. Third, the potential of R&D offshoring makes FDI itself more likely. Fourth, when countries are asymmetric, the small-country firm is more likely to offshore its R&D activities into the large country than conversely.

Foreign direct investment, R&D, spillovers, research relocation

Abstract:
We examine whether the publication of the individual voting records of central-bank council members is socially desirable when the preferences of the central bankers differ. We identify two positive effects of transparency. First, central bankers whose preferences differ from those of society may act in the interest of society in order to increase their re-appointment chances. Second, transparency enhances the efficiency of the appointment process since the government can align the preferences of the central-bank council with those of the public over time. In a monetary union, our findings about the desirability of transparency may be reversed.

Abstract:
We consider a model with a politician facing a multi-task problem while in office. The re-election mechanism distorts the allocation of effort in favour of tasks whose outcomes can be measured more precisely than others. We show that a combination of elections and incentive contracts can alleviate this inefficiency. The incentive contract does not require information about the performance of the politician and is self-financing across terms.

Elections, incentive contracts, multi-task problems

Abstract:
In this paper we develop a concept of globalisation at the micro level defined as the exposure of a productivity follower industry in one country to the productivity leader in another country. Globalisation is measured by the intensity of contacts through trade and foreign direct investment. In a simple model and empirically we show that the exposure of a productivity follower to competition with the leader is highly correlated with the productivity gap of this industry. Competition restricted to one region such as Europe, or North America, or the Far East, is not sufficient to achieve highest productivity levels. Moreover, it turns out that foreign direct investment (FDI) has a weight in the globalisation index at least equal to trade. FDI can contribute directly to higher levels of domestic productivity by transferring the best production practices, and put pressure on other domestic producers to improve. The impact of trade on globalisation can be weakened by tariffs and non-tariffs.

Abstract:
We demonstrate that there is a nexus between land transfers and human capital formation. A sequence of land redistributions enables the beneficiaries to educate their children and thus to escape from poverty and to overcome child labor. We find that open access to land markets should be prohibited for beneficiaries for some time. Moreover, a temporary state of inequality among the poor is unavoidable. Finally, a successful land reform allows for the transition of a society from an agriculture-based state of poverty to a human capital-based developed economy.

Poverty, land reforms, land market access, migration, transition

Abstract:
We develop a product market theory that explains why firms invest in general training of their workers. We consider a model where firms first decide whether to invest in general human capital, then make wage offers for each other's trained employees and finally engage in imperfect product market competition. Equilibria with and without training, and multiple equilibria can emerge. If competition is sufficiently soft and trained workers are substitutes, firms may invest in non-specific training if others do the same, because they would otherwise suffer a competitive disadvantage or need to pay high wages in order to attract trained workers. Government intervention can be socially desirable to turn training into a focal equilibrium.

General training, human capital, oligopoly, turnover

Abstract:
We examine how the correlations of bank loan defaults depend on the correlations of asset returns and how correlations and diversification are affected by macroeconomic risks. We highlight the main properties of the relationship between asset returns and default correlations, illustrating how adverse macroeconomic shocks raise not only the likelihood of defaults, but also the correlation of defaults. The latter effect, called correlation effect, may account for more than 50% of the increase in the credit risk.

Abstract:
We study the formation of human capital and its transmission across generations when a society is assailed by an epidemic disease such as AIDS. We establish that the disease can severely retard economic growth, even to the point of leading to an economic collapse. We also show that the epidemic may exacerbate inequality. Pooling health risks in the society puts the society on a 'make and break' road.

Epidemic diseases, AIDS, growth, human capital, pooling risks