Working papers

We study panel data regression models when the shocks of interest are aggregate and possibly small relative to idiosyncratic noise. This speaks to a large empirical literature that targets impulse responses via panel local projections. We show how to interpret the estimated coefficients when units have heterogeneous responses and how to obtain valid standard errors and confidence intervals. A simple recipe leads to robust inference: including lags as controls and then clustering at the time level. This strategy is valid under general error dynamics and uniformly over the degree of signal-to-noise of macro shocks.

Most societies in the world contain strong group identities and the culture supporting these groups is highly persistent. This persistence in turn gives rise to a
practical problem: how do and should societies with strong group identities organize themselves for exchange and public good provision? In this paper, we develop a theoretical framework that allows us to study, normatively and positively, the relationship between social structure, state capacity, and economic activity.

Are the players “commonly meta-certain” of an interactive belief model itself? The paper formalizes what it means by: “a player is (meta-)certain of her own belief-generating map” or “the players are (meta-)certain of the profile of belief-generating maps (i.e., the model).” The paper shows: a player is (meta-)certain of her own belief-generating map if and only if her beliefs are introspective. The players are commonly (meta-)certain of the model if and only if, for any event which some player i believes at some state, it is common belief at the state that player i believes the event. This paper then asks whether the “common meta-certainty” assumption is needed for epistemic characterizations of game-theoretic solution concepts. The paper shows: common belief in rationality leads to actions that survive iterated elimination of strictly dominated actions, as long as each player is logical and (meta-)certain only of her own strategy and belief-generating map

Algorithms are becoming the standard tool for bidding in auctions through which digital advertising is sold. To explore how algorithmic bidding might affect functioning of these auctions, this study undertakes a series of simulated experiments where bidders employ Artificial Intelligence algorithms (Q-learning and Neural Network) to bid in online advertising auctions. We consider both the generalized second-price (GSP) auction and the Vickrey-Clarke-Groves (VCG) auction. We find that the more detailed information is available to the algorithms, the better it is for the efficiency of the allocations and the advertisers profit. Conversely, the auctioneer revenues tend to decline as more complete information is available to the advertiser bidding algorithms. We also compare the outcomes of algorithmic bidding to those of equilibrium behavior in a range of different specifications and find that algorithmic bidding has a tendency to sustain low bids both under the GSP and VCG relative to competitive benchmarks. Moreover, the auctioneer revenues under the VCG setting are either close to or lower than those under the GSP setting. In addition, we consider three extensions commonly observed in the data: introduction of a non-stategic player, bidding through a common intermediary, and asymmetry of the information across bidders. Consistent with the theory, the non-strategic player presence leads to increased efficiency, whereas bidding through a common intermediary leads to lower auctioneer revenue compared to the case of individual bidding. Moreover, in experiments with information asymmetry, more informed players earn higher rewards.

We evaluate how traditional parties may respond to populist parties on issues aligning with populist messages. During the 2020 Italian referendum on the reduction of members of Parliament, we conducted a large-scale field experiment, exposing 200 municipalities to nearly a million impressions of programmatic advertisement. Our treatments comprised two video ads against the reform: one debunking populist rhetoric and another attributing blame to populist politicians. This anti-populist campaign proved effective through demobilization, as it reduced both turnout and the votes in favor of the reform. Notably, the effects were more pronounced in municipalities with lower rates of college graduates, higher unemployment, and a history of populist votes. This exogenous influence introduced a unique populist dynamic, observable in the 2022 national election where treated municipalities showed increased support for Brothers of Italy, a rising populist party, and decreased support for both traditional parties and the populists behind the 2020 reform. A follow-up survey further showed increased political interest and diminished trust in political institutions among the residents of municipalities targeted by the campaign.

In a recent paper, Lin & Palfrey (2024) developed a theory of cognitive hierarchies (CH) in sequential games and observed that this solution concept is not reduced-normal-form invariant. In this note I qualify and explain this observation. I show that the CH model is normal-form invariant, and that the differences arising from the application of the CH model to the reduced normal form depend only on how randomization by level-0 types is modeled. Indeed, while the uniform behavior strategy in the extensive form yields the uniform mixed strategy in the normal form, the latter does not correspond to the uniform randomization in the reduced normal form, because different reduced strategies may correspond to sets of equivalent strategies with different cardinalities. I also comment on (i) the invariance of the CH model to some transformations of the sequential game, and (ii) the independence of conditional beliefs about co-players' level-types.

We study whether a better knowledge of the functioning of pay-as-you-go pension systems and recent demographic trends affects natives’ attitudes towards immigration. In two online experiments conducted in Italy and Spain, we randomly treated participants with a video explaining how, in pay-as-you-go systems, the payment of current pensions depends on the contributions paid by current workers. The video also informs participants about population aging trends in their countries. The treatment increases knowledge of pay-as-you-go systems and future demographic trends for all participants. However, it improves attitudes towards migrants only for treated participants who do not support populist and anti-immigrant parties.

We document the spiral of populism in Europe and the direct and indirect role of economic insecurity shocks. Using survey data on individual voting, we make two contributions to the literature, namely: (1) Economic insecurity shocks have a significant impact on the populist vote share, directly as demand for protection, and
indirectly through the induced changes in trust and attitudes; (2) A key consequence of increased economic insecurity is a drop in turnout. The impact of this largely neglected turnout effect is substantial: conditional on voting, when economic insecurity increases almost 40% of the induced change in the vote for a populist party comes from the turnout channel.

This paper empirically shows that the imbalance between an ethnic group’s political and military power is crucial to understanding the likelihood that such a group engages in a conflict. We develop a novel measure of a group’s military power by combiningmachine learning techniques with rich data on ethnic group characteristics and
outcomes of civil conflicts in Africa and theMiddle East. We couple thismeasure with available indicators of an ethnic group’s political power as well as with a novel proxy based on information about the ethnicity of cabinet members. We find that groups characterized by a highermismatch betweenmilitary and political power are between 30% and 50% more likely to engage in a conflict against their government depending on the specification used. We also find that the effects of power mismatch are nonlinear, which is in agreement with the predictions of a simplemodel that accounts for the cost of conflict. Moreover, our results suggest that high-mismatched groups are typically involved in larger and centrist conflicts. The policy implication is that powersharing recommendations and institutional design policies for peace should consider primarily the reduction of power mismatches between relevant groups, rather than focusing exclusively on equalizing political power in isolation.

We analyze the infinite repetition with imperfect feedback of a simultaneous or sequential game, assuming that players are strategically sophisticated---but impatient---expected-utility maximizers. Sophisticated strategic reasoning in the repeated game is combined with belief updating to provide a foundation for a refinement of self-confirming equilibrium. In particular, we model strategic sophistication as rationality and common strong belief in rationality. Then, we combine belief updating and sophisticated reasoning to provide sufficient conditions for a kind of learning---that is, the ability, in the limit, to exactly forecast the sequence of future observations---thus showing that impatient agents end up playing a sequence of self-confirming equilibria in strongly rationalizable conjectures of the one-period game.

How do people form beliefs about novel risks, with which they have little or no experience? Motivated by survey data we collected in 2020, which showed that beliefs about Covid’s lethality depended on a range of personal experiences in unrelated domains, we build a model based on the psychology of selective memory. When a person thinks about an event, different experiences compete for retrieval, and retrieved experiences are used to simulate the event based on how similar they are to it. The model yields predictions on how experiences interfere with each other in recall and how non domain-specific experiences bias beliefs based on their similarity to the assessed event. We test these predictions using data from our Covid survey and from a primed-recall experiment about cyberattack risk. Experiences and their measured similarity to the cued event successfully help explain beliefs, with patterns consistent with our theory. Our approach offers a new, structured way to study and jointly account for systematic biases and substantial belief heterogeneity.

We construct an index of long term expected earnings growth for S&P500 firms and show that it has remarkable power to jointly predict future errors in these expectations and stock returns, in both the aggregate market and the cross section. The evidence supports a mechanism whereby good news cause investors to become too optimistic about long term earnings growth, for the market as a whole but especially for a subset of firms. This leads to inflated stock prices and, as beliefs are systematically disappointed, to subsequent low returns in the aggregate market and for the subset of firms. Overreaction of long term expectations helps resolve or asset pricing puzzles without time series or cross-sectional variation in required returns.

We document two new facts about the distributions of answers in famous statistical problems: they are i) multi-modal and ii) unstable with respect to irrelevant changes in the problem. We offer a model in which, when solving a problem, people represent each hypothesis by attending “bottom up” to its salient features while neglecting other, potentially more relevant, ones. Only the statistics associated with salient features are used, others are neglected. The model unifies Gambler’s Fallacy, its variation by sample size, under- and overreaction in inference, and insensitivity to multiple signals, all as a byproduct of selective attention. The model also makes new predictions on how controlled changes in the salience of specific features should jointly shape measured attention and biases. We test and confirm these predictions experimentally, including by measuring attention and documenting novel biases predicted by the model. Bottom-up attention to features emerges as a unifying framework for biases conventionally explained using a variety of stable heuristics or distortions of the Bayes rule. 

This handbook chapter studies how natural resource wealth can in many contexts fuel armed conflict. Starting from a simple theoretical model, we stress the role of geography and power mismatch in the so called "natural resource curse". Drawing on recent empirical evidence, the importance of resource abundance, asymmetry and capital-intensiveness is highlighted, alongside local grievances and international interventions. We propose a series of evidence-driven policy conclusions, ranging from "smart green transition" and democratic institution building over labor-market intervention to a series of specific policies requiring international coordination.

This paper discusses the historical and social origins of the bifurcation in the political institutions of China and Western Europe. An important factor, recognized in the literature, is that China centralized state institutions very early on, while Europe remained politically fragmented for much longer. These initial differences, however, were amplified by the different social organizations (clans in China, corporate structures in Europe) that spread in these two societies at the turn of the first millennium AD. State institutions interacted with these organizations, and were shaped and influenced by this interaction. The paper discusses the many ways in which corporations contributed to the emergence of representative institutions and gave prominence to the rule of law in the early stages of state formation in Europe, and how specific features of lineage organizations contributed to the consolidation of the Imperial regime in China. 

This paper explores the tradeoff between competition and financial inclusion given by the vertical integration between mobile network and money operators. Joining novel data on mobile money fees built through the WayBack machine, with sources on network coverage and financials, we examine the staggering across African operators and countries of platform interoperability – a policy that promotes transactions and competition across mobile money operators. Our findings show that interoperability lowers mobile money fees and reduces network coverage and mobile towers, especially in rural and poor districts. Interoperability also results in a decline in various survey metrics of financial inclusion.

We compute new estimates for Total Factor Productivity (TFP) growth in five European countries and in the United States. Departing from standard methods, we account for positive profits and use firm surveys to proxy for unobserved changes in factor utilization. These novelties have a major impact in Europe, where our estimated TFP growth series are less volatile and less cyclical than the ones obtained with standard methods. Based on our approach, we provide annual industry-level and aggregate TFP series, as well as the first estimates of utilization-adjusted quarterly TFP growth in Europe.

JEL Codes: E01, E30, O30, O40

We study the stabilizing role of benefit extensions. We develop a tractable quantitative model with heterogeneous agents, search frictions, and nominal rigidities. The model allows for a stabilizing aggregate demand channel and a destabilizing labor market channel. We characterize each channel analytically and find that aggregate demand effects quantitatively prevail in the US. When feeding-in estimated shocks, the model tracks unemployment in the two most recent downturns. We find that extensions lowered unemployment by a maximum of 0.35 pp in the Great Recession, while the joint stabilizing effect of extensions and benefit compensation peaked at 1.08 pp in the pandemic. 

We offer a theory of changing dimensions of political polarization based on endogenous social identity. We formalize voter identity and stereotyped beliefs as in Bonomi et al. (2021), but add parties that compete on policy and also spread or conceal group stereotypes to persuade voters. Parties are historically connected to different social groups, whose members are more receptive to the ingroup party messages. An endogenous switch from class to cultural identity accounts for three major observed changes: i) growing conflict over cultural issues between voters and between parties, ii) dampening of political conflict over redistribution, despite rising inequality, and iii) a realignment of lower class voters from the left to the right. The incentive of parties to spread stereotypes is a key driver of identity-based polarization. Using survey data and congressional speeches we show that - consistent with our model - there is evidence of i) and ii) also in the voting realignment induced by the ”China Shock” (Autor et al. 2020).

I show that offering monetary rewards to whistleblowers can backfire as a moral aversion to being paid for harming others can reverse the effect of financial incentives. I run a field experiment with employees of the Afghan Ministry of Education, who are asked to confidentially report on their colleagues’ attendance. I use a two-by-two design, randomizing whether or not reporting absence carries a monetary incentive as well as the perceived consequentiality of the reports. In the consequential treatment arm, where employees are given examples of the penalties that might be imposed on absentees, 15% of participants choose to denounce their peers when reports are not incentivized. In this consequential group, rewards backfire: only 10% of employees report when denunciations are incentivized. In the non-consequential group, where participants are guaranteed that their reports will not be forwarded to the government, only 6% of employees denounce absence without rewards. However, when moral concerns of harming others are limited through the guarantee of non-consequentiality, rewards do not backfire: the incentivized reporting rate is 12% 

Debt moratoria that allow borrowers to postpone loan payments are a frequently used tool intended to soften the impact of economic crises. We conduct a nationwide experiment with a large consumer lender in India to study how debt forbearance offers affect loan repayment and banking relationships. In the experiment, borrowers receive forbearance offers that are presented either as an initiative of their lender or the result of government regulation. We find that delinquent borrowers who are offered a debt moratorium by their lender are 4 percentage points (7 percent) less likely to default on their loan, while forbearance has no effect on repayment if it is granted by the regulator. Borrowers who are offered forbearance by their lender also have higher demand for future interactions with the lender: in a follow-up experiment conducted several months after the main intervention, demand for a non-credit product offered by the lender is 10 percentage points (27 percent) higher among customers who were offered repayment flexibility by the lender than among customers who received a moratorium offer presented as an initiative of the regulator. Overall, our results suggest that, rather than generating moral hazard, debt forbearance can improve loan repayment and support the creation of longer-term banking relationships not only for liquidity but also for relational contracting reasons. This provides a rationale for offering repayment flexibility even in settings where lenders are not required to provide forbearance.

Real-world contests are inherently uncertain since the player who exerts the highest effort can still lose. In this paper, I consider a general asymmetric incomplete information contest model with a nonparametric distribution of uncertainty in the contest success function. It generalizes all-pay auctions, Tullock contests, and rank-order tournaments with two asymmetric players. Uncertainty in the contest success function summarizes other factors that influence the contest win outcome apart from the efforts of the players, such as, for example, players’ reputation or luck. First, I nonparametrically identify and estimate the distribution of uncertainty using the information on contest win outcomes and efforts. Next, I nonparametrically identify and estimate the distributions of the players’ costs of exerting effort. The model provides a method to disentangle two sources of player’s advantage: asymmetry in the costs’ distributions and the effect of the uncertainty distribution on the winning probability. As an empirical example, I apply the model to the U.S. House of Representatives elections.

We study mean-variance approximations for a large class of preferences. Compared to the standard mean-variance approximation that only features a risk variability term, a novel index of variability appears. Its neglect in an empirical estimation may result in puzzling in ated risk terms of standard mean-variance approximations.

We consider a model of a limit order book and determine the optimal tick size set by a social planner who maximizes the welfare of market participants. In a 2-period model where only two agents arrive sequentially, the tick size is a friction that constrains investors to use discrete price grids, and as a consequence the optimal tick size is equal to zero. However, in a model with sequential arrival of more than two investors who can endogenously either take liquidity or supply liquidity by undercutting or queuing behind existing orders, the tick size is positive: it is a strategic tool a social planner uses to optimally affect the choice made by investors between liquidity demand and supply. In addition, the optimal tick size is a function both of the value of the asset and of trading volume. The policy implication of such findings is that the European tick size regime and the “Intelligent Ticks” Nasdaq proposal dominate Reg. NMS Rule 612 that formalizes the tick size regime for the U.S. markets. Using data  from the U.S. and the European markets we test our model’s empirical predictions.

Why, in the face of scandals and misbehaviors, do partisan supporters hardly change their minds about their favored candidates? We study individuals’ online engagement with negative news on candidates in the 2016 US Presidential Election. Compared to independents, partisan users avoid commenting bad news on their favorite candidate, but seek them on its opponent, a political “ostrich effect”. When they do comment on bad news about their candidate, they try to rationalize them, display a more negative sentiment, and are more likely to cite scandals of the opponent. This behavior is consistent with the predictions of a model of online interactions where paying attention to non-consonant news is emotionally or psychologically costly, while paying attention to consonant ones is pleasing. Because users enjoy receiving positive feedback on their views, intrinsic biases that drive ideological segregation are amplified on social media.

We explore how business groups use internal labor markets (ILMs) in response to changing economic conditions. We show that following the exit of a large industry competitor, groupaffiliated firms expand and gain market share by increasing their reliance on the ILM to ensure swift hiring, especially of technical managers and skilled blue collar workers. The ability to take advantage of this shock to growth opportunities is greater in firms with closer access to their affiliates’ human capital, as geographical proximity facilitates employee relocations across units. Overall, our findings point to the ILM as a prominent mechanism making affiliation with a business group valuable at times of change. For the ILM to perform its role in the face of industry shocks, group sectoral diversification must be combined with geographical proximity between affiliates. 

We study the implications of employment targets on firm dynamics during the privatization of the East German economy. Exploiting novel contract-level data, we document three stylized facts. First, the policy distorted firm size choices and generated bunching of firms around their committed employment target. Second, exploiting heterogeneous labor preferences of privatizers, we show that assigning tight commitments to firms causes an increase in employment growth and leads to higher productivity growth. Finally, tighter commitments also result in significant costs by leading to increased firm exit. We interpret these results through the lens of a dynamic model with endogenous productivity growth at the firm level. The model highlights that while tight commitments distort the employment decision statically and lead to a higher exit probability, they also induce a “catch-up” increase in productivity growth. This is because although firm profits are lower under tight commitments, marginal profits with respect to  productivity are higher. We calibrate the model to our data and find that the policy lead to a 3 percentage points higher aggregate TFP growth thanks to the productivity improvements of firms with tight contracts. 

We investigate the impact of prices on ratings using Airbnb data. We theoretically illustrate two opposing channels: higher prices reduce the value for money, worsening ratings, but they increase the taste-based valuation of the average traveler, improving ratings. Results from panel regressions and a regression discontinuity design suggest a dominant value-for-money effect. In line with our model, hosts strategically complement lower prices with higher effort more when ratings are relatively low. Finally, we provide evidence that, upon entry, strategic hosts exploit the dominant value-for-money effect. The median entry discount of seven percent improves medium-run monthly revenues by three percent.

We propose that the mathematical representation of situations of strategic interactions, i.e., of games, should separate the description of the rules of the game from the description of players’ personal traits. Yet, we note that the standard extensive-form partitional representation of information in sequential games does not comply with this separation principle. We offer an alternative representation that extends to all (finite) sequential games the approach adopted in the theory of repeated games with imperfect monitoring, that is, we describe the flow of information accruing to players rather than the stock of information retained by players, as encoded in information partitions. Mnemonic abilities can be represented independently of games. Assuming that players have perfect memory, our flow representation gives rise to information partitions satisfying perfect recall. Different combinations of rules about information flows and of players mnemonic abilities may give rise to the same information partition . All extensive-form representations with information partitions, including those featuring absentmindedness, can be generated by some such combinations. 

Macroeconomic  outcomes depend on the distribution of markups across firms and over time, making firm-level markup estimates key for macroeconomic analysis. Methods to obtain these estimates require data on the prices that firms charge. Firm-level data with wide coverage, however,  primarily comes from financial statements, which lack information on  prices. We use an analytical framework to show that trends in markups or the dispersion of markups across firms can still be well-measured with such data. Finding the average level of the markup does require pricing data, and we propose a consistent estimator for such settings. We validate the analytical results with simulations of a quantitative macroeconomic model and firm-level administrative production and pricing data. Our analysis supports the use of financial data to measure trends in aggregate markups.

We provide two characterizations, one axiomatic and the other neuro-computational, of the dependence of choice probabilities on deadlines, within the widely used softmax representation (see below picture) where pt (a; A) is the probability that alternative a is selected from the set A of feasible alternatives if t is the time available to decide, is a time dependent noise parameter measuring the unit cost of information, u is a time independent utility function, and a is an alternative-specific bias that determines the initial choice probabilities and possibly reflects prior information. Our axiomatic analysis provides a behavioral foundation of softmax (also known as Multinomial Logit Model when a is constant). Our neuro-computational derivation provides a biologically inspired algorithm that may explain the emergence of softmax in choice behavior. Jointly, the two approaches provide a thorough understanding of soft-maximization in terms of internal causes (neurophysiological mechanisms) and external effects (testable implications).

Journal of Economic Literature Classification Numbers: C70, D83

We evaluate linear stochastic discount factor models using an ex-post portfolio metric: the realized out-of-sample Sharpe ratio of mean-variance portfolios backed by alternative linear factor models. Using a sample of monthly US portfolio returns spanning the period 1968-2016, we find evidence that multifactor linear models have better empirical properties than the CAPM, not only when the cross-section of expected returns is evaluated in-sample, but also when they are used to inform one-month ahead portfolio selection. When we compare portfolios associated to multifactor models with mean-variance decisions implied by the single-factor CAPM, we document statistically significant differences in Sharpe ratios of up to 10 percent. Linear multifactor models that provide the best in-sample fit also yield the highest realized Sharpe ratios.

The Italian civil war and the Nazi occupation of Italy occurred at a critical juncture, just before the birth of a new democracy. We study the impact of these traumatic events by exploiting geographic heterogeneity in the duration and intensity of civil war, and the persistence of the battlefront along the "Gothic line" cutting through Northern-Central Italy. We find that the Communist Party gained votes in postwar elections where the Nazi occupation lasted longer, mainly at the expense of centrist parties. This effect persists until the late 1980s and appears to be driven by equally persistent changes in political attitudes.

We provide both an axiomatic and a neuropsychological characterization of the dependence of choice probabilities on time in the softmax (or Multinomial Logit Process) form (see below picture) MLP is the most widely used model of preference discovery in all fields of decision making, from Quantal Response Equilibrium to Discrete Choice Analysis, from Psychophysics and Neuroscience to Combinatorial Optimization. Our axiomatic characterization of softmax permits to empirically test its descriptive validity and to better understand its conceptual underpinnings as a theory of agents'rationality. Our neuropsychological foundation provides a computational model that may explain softmax emergence in human behavior and that naturally extends to multialternative choice the classical Diffusion Model paradigm of binary choice. These complementary approaches provide a complete perspective on softmaximization as a model of preference discovery, both in terms of internal (neuropsychological) causes and external (behavioral) effects.

uential findings that, we argue, face serious identification problems. Thus, while banks with low capital can be an important source of aggregate inefficiency in the long run, their contribution to the severity of the great recession via capital misallocation was modest.

We study monotone, continuous, and quasiconcave functionals defifined over an M-space. We show that if g is also Clarke-Rockafellar differentiable at (see below picture) , then the closure of Greenberg- Pierskalla differentials at x coincides with the closed cone generated by the Clarke-Rockafellar differentials at x. Under the same assumptions, we show that the set of normalized Greenberg-Pierskalla differentials at x coincides with the closure of the set of normalized Clarke-Rockafellar differentials at x. As a corollary, we obtain a differential characterization of quasiconcavity a la Arrow and Enthoven (1961) for Clarke-Rockafellar differentiable functions.

a Hahn-Banach Theorem for modules of this kind;

a topology on the f-algebra that has the special feature of coinciding with the norm topology when the algebra is a Banach algebra and with the strong order topology of Filipovic, Kupper, and Vogelpoth (2009), when the algebra of all random variables on a probability space is considered.

As a leading example, we study in some detail the duality of conditional Lp-spaces.

Maccheroni, Marinacci, and Rustichini [17], in an Anscombe-Aumann framework, axiomatically characterize preferences that are represented by the variational utility functional where u is a utility function on outcomes and c is an index of uncertainty aversion. In this paper, for a given variational preference, we study the class of functions c that represent V. Inter alia, we show that this set is fully characterized by a minimal and a maximal element, c* and d*. The function c*, also identified by Maccheroni, Marinacci, and Rustichini [17], fully characterizes the decision maker's attitude toward uncertainty, while the novel function d* characterizes the uncertainty perceived by the decision maker.

Experimental evidence suggests that agents in social dilemmas have belief-dependent, otherregarding preferences. But in experimental games such preferences cannot be common knowledge, because subjects play with anonymous co-players. We address this issue theoretically and experimentally in the context of a trust game, assuming that the trustee's choice may be affected by a combination of guilt aversion and intention-based reciprocity. We recover trustees' belief-dependent preferences from their answers to a structured questionnaire. In the main treatment, the answers are disclosed and made common knowledge within each matched pair, while in the control treatment there is no disclosure. Our main auxiliary assumption is that such disclosure approximately implements a psychological game with complete information. To organize the data, we classify subjects according to their elicited preferences, and test predictions for the two treatments using both rationalizability and equilibrium. We find that guilt aversion is the prevalent psychological motivation, and that behavior and elicited beliefs move in the direction predicted by the theory.

We study a Mean-Risk model derived from a behavioral theory of Disappointment with multiple reference points. One distinguishing feature of the risk measure is that it is based on mutual deviations of outcomes, not deviations from a specific target. We prove necessary and sufficient conditions for strict first and second order stochastic dominance, and show that the model is, in addition, a Convex Risk Measure. The model allows for richer, and behaviorally more plausible, risk preference patterns than competing models with equal degrees of freedom, including Expected Utility (EU), Mean-Variance (MV), Mean-Gini (MG), and models based on non-additive probability weighting, such a Dual Theory (DT). For example, in asset allocation, the decision-maker can abstain from diversifying in a risky asset unless it meets a threshold performance, and gradually invest beyond this threshold, which appears more acceptable than the extreme solutions provided by either EU and MV (always diversify) or DT and MG (always plunge). In asset trading, the model allows no-trade intervals, like DT and MG, in some, but not all, situations. An illustrative application to portfolio selection is presented. The model can provide an improved criterion for Mean-Risk analysis by injecting a new level of behavioral realism and flexibility, while maintaining key normative properties.

Subject classifications: Utility/preference: Estimation. Decision analysis: Risk.

Area of review: Decision Analysis.

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JEL codes: G10, G18, D81.

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'Crises feed uncertainty. And uncertainty affects behaviour, which feeds the crisis.'
Olivier Blanchard, The Economist, January 29, 2009

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Furthermore, we show how the extremal transfers can be put to use in mechanism design problems where Revenue Equivalence does not hold. To this end we rst explore the role of extremal transfers when the agents with type dependent outside options are free to participate in the mechanism. Finally, we consider the question of budget balanced implementation. We show that an allocation rule can be implemented in an incentive compatible, individually rational and ex post budget balanced mechanism if and only if there exists an individually rational extremal transfer scheme that delivers an ex ante budget surplus.

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We develop and estimate a medium scale macroeconomic model that allows for unemployment
and staggered nominal wage contracting. In contrast to most existing quantitative models,
employment adjustment is on the extensive margain and the employment of existing workers is
efficient. Wage rigidity, however, affects the hiring of new workers. The former is introduced
via the staggered Nash bargaing setup of Gertler and Trigari (2006). A robust finding is that
the model with wage rigidity provides a better description of the data than does a flexible wage
version. Overall, the model fits the data roughly as well as existing quantitative macroeconomic
models, such as Smets and Wouters (2007) or Christiano, Eichenbaum and Evans (2005). More
work is necessary, however, to ensure a robust identification of the key labor market parameters.

This paper reconsiders the developments of model evaluation in macroeconometrics over the last forty years. Our analysis starts from the failure of early empirical macroeconomic models caused by stagflation in the seventies. The different diagnosis of this failure are then analyzed to classify them in two groups: explanations related to problems in the theoretical models that lead to problems in the identification of the relevant econometric model and explanations related to problems in the underlying statistical model that lead to misspecification of the relevant econometric model. Developments in macroeconometric model evaluation after the failure of the Cowles foundation models are then discussed to illustrate how the different critiques have initiated different approaches in macroeconometrics. The evolution of what has been considered the consensus approach to macroeconometric model evaluation over the last thirty years is then followed. The criticism moved to Cowles foundation models in the early seventies might apply almost exactly to DSGE-VAR model evaluation in the first decade of
the new millenium. However, the combination of general statistical model, such as a Factor Augmented VAR, with a DSGE model seems to produce forecasts that perform better than those based exclusively on the theoretical and on the statistical model.

We estimate the effect of political regime transitions on growth with semi-parametric methods, combining difference in differences with
matching, that have not been used in macroeconomic settings. Our semi-parametric estimates suggest that previous parametric estimates
may have seriously underestimated the growth effects of democracy. In particular, we find an average negative effect on growth of leav-
ing democracy on the order of -2 percentage points implying effects on income per capita as large as 45 percent over the 1960-2000 panel.
Heterogenous characteristics of reforming and non-reforming countries appear to play an important role in driving these results.

Kewords: Fiscal Policy, Term Structure, regime switching, Bayesian estimation

Kewords: Subjective probability, Preference hierarchies, Type spaces, Beliefs
hierarchies, Common belief, Expected utility, Incomplete information,
Correlated equilibria

Kewords: Retailers' power, Hold-up, Supplier's under-investment

Our paper seeks to answer this question by providing evidence on the

age-productivity and age-earnings profiles for a sample of plants in three

manufacturing industries (forest, industrial machinery and electronics) in

Finland. Our main result is that exposure to rapid technological and managerial

changes does make a difference for plant productivity, less so for wages. In

electronics, the Finnish industry undergoing a major technological and

managerial shock in the 1990s, the response of productivity to age-related

variables is first sizably positive and then becomes sizably negative as one

looks at plants with higher average seniority and experience. This declining

part of the curve is not there either for the forest industry or for industrial

machinery. It is not there either for wages in electronics. These conclusions

survive when a host of other plausible productivity determinants (notably,

education and plant vintage) are included in the analysis. We conclude that

workforce aging may be a burden for firms in high-tech industries and less so in

other industries.

We study the joint dynamics of economic and political change. Predictions of the simple model that we formulate in the paper get
considerable support in a panel of data on political regimes and GDP per capita for about 150 countries over 150 years. Democratic cap-
ital - measured by a nation's historical experience with democracy and by the incidence of democracy in its neighborhood - reduces the
exit rate from democracy and raises the exit rate from autocracy. In democracies, a higher stock of democratic capital stimulates growth
in an indirect way by decreasing the probability of a sucessful coup. Our results suggest a virtuous circle, where the accumulation of phys-
ical and democratic capital reinforce each other, promoting economic development jointly with the consolidation of democracy.

The Italian economy is often said to be on a declining path. In this paper, we document that:
(i) Italy�s current decline is a labor productivity problem (ii) the labor productivity slowdown
stems from declining productivity growth in all industries but utilities (with manufacturing
contributing for about one half of the reduction) and diminished inter-industry reallocation of
workers from agriculture to market services; (iii) the labor productivity slowdown has been
mostly driven by declining TFP, with roughly unchanged capital deepening. The only mild
decline of capital deepening is due to the rise in the value added share of capital that
counteracted declining capital accumulation.

We lay out a tractable model for fiscal and monetary policy analysis in
a currency union, and analyze its implications for the optimal design of such
policies. Monetary policy is conducted by a common central bank, which sets
the interest rate for the union as a whole. Fiscal policy is implemented at
the country level, through the choice of government spending level. The model
incorporates country-specific shocks and nominal rigidities. Under our assumptions,
the optimal monetary policy requires that inflation be stabilized at the
union level. On the other hand, the relinquishment of an independent monetary
policy, coupled with nominal price rigidities, generates a stabilization role
for fiscal policy, one beyond the efficient provision of public goods. Interestingly,
the stabilizing role for fiscal policy is shown to be desirable not only from
the viewpoint of each individual country, but also from that of the union as
a whole. In addition, our paper offers some insights on two aspects of policy
design in currency unions: the conditions for equilibrium determinacy and
the effects of exogenous government spending variations.

Pooling forecasts obtained from different procedures typically reduces
the mean square forecast error and more generally improves the quality
of the forecast. In this paper we evaluate whether pooling interpolated
or backdated time series obtained from different procedures can also
improve the quality of the generated data. Both simulation results
and empirical analyses with macroeconomic time series indicate that
pooling plays a positive and important role also in this context.

In this paper we assess the possibility of producing unbiased forecasts for fiscal variables in the
euro area by comparing a set of procedures that rely on different information sets and
econometric techniques. In particular, we consider ARMA models, VARs, small scale semi-
structural models at the national and euro area level, institutional forecasts (OECD), and
pooling. Our small scale models are characterized by the joint modelling of fiscal and monetary
policy using simple rules, combined with equations for the evolution of all the relevant
fundamentals for the Maastricht Treaty and the Stability and Growth Pact. We rank models on
the basis of their forecasting performance using the mean square and mean absolute error
criteria at different horizons. Overall, simple time series methods and pooling work well and are
able to deliver unbiased forecasts, or slightly upward biased forecast for the debt-GDP
dynamics. This result is mostly due to the short sample available, the robustness of simple
methods to structural breaks, and to the difficulty of modelling the joint behaviour of several
variables in a period of substantial institutional and economic changes. A bootstrap experiment
highlights that, even when the data are generated using the estimated small scale multi
country model, simple time series models can produce more accurate forecasts, due to
their parsimonious specification.

Many countries, especially developing ones, follow procyclical fiscal polices, namely spending goes up (taxes go down) in booms and spending goes down (taxes go up) in recessions. We provide an explanation for this suboptimal fiscal policy based upon political distortions and incentives for less-than-benevolent government to appropriate rents. Voters have incentives similar to the starving the Leviathan classic
argument, and demand more public goods or fewer taxes to prevent governments from appropriating rents when the economy is doing well.
We test this argument against more traditional explanations based purely on borrowing constraints, with a reasonable amount of success.

Do countries gain by coordinating their monetary policies if they have different economic structures? We address this issue in the context of a new open-economy macro model with a traded and a non-traded sector and more importantly, with a across-country asymmetry in the size of the traded sector. We study optimal monetary policy under independent and cooperating central banks, based on analytical expressions for welfare objectives derived from quadratic approximations to individual preferences. In the presence of asymmetric structures, a new source of gains from coordination emerges due to a terms-of-trade externality. This externality affects unfavorably the country that is more exposed to trade and its effects tend
to be overlooked when national central banks act independently. The welfare gains from coordination are sizable and increase with the degree of asymmetry across countries and the degree of openness, and decrease with the within-country correlation of sectoral shocks.

We study whether fiscal restrictions affect volatilities and correlations of macrovariables
and the probability of excessive debt for a sample of 48 US states. Fiscal constraints are
characterized with a number of indicators and volatility and correlations are computed in several
ways. The second moments of macroeconomic variables in states with different fiscal constraints
are economically and statistically similar. Excessive debt and the mechanism linking budget
deficit and excessive debts are independent of whether tight or loose fiscal constraints are in
place. Creative budget accounting may account for the results.

We study how constrained fiscal policy can affect regional inflation and output in a two-region model of a monetary union with sticky prices and distortionary taxation. Both government expenditure and taxes can be used to stabilize regional variables; however, the best welfare outcome is obtained under constant taxes and constant regional inflations. With cooperation debt and deficit constraints reduce regional inflation variability, but the path of output is suboptimal. Under non-cooperation the opposite occurs due to a trade-off between taxation and inflation variability. Decentralized rules, rather than constraints, stabilize regional inflation and output. They imply more fiscal action for smaller union members.

We study the mechanics of transmission of fiscal shocks to labor markets. We
characterize a set of robust implications following government consumption, investment
and employment shocks in a RBC and a New-Keynesian model and use part of them to
identify shocks in the data. In line with the New-Keynesian story, shocks to government
consumption and investment increase real wages and employment contemporaneously
both in US aggregate and in US state data. The dynamics in response to employment
shocks are mixed, but in many cases are inconsistent with the predictions of the RBC
model.

Does culture have a causal effect on economic development? The data on European
regions suggest that it does. Culture is measured by indicators of individual values
and beliefs, such as trust and respect for others, and confidence in individual selfdetermination.
To isolate the exogenous variation in culture, I rely on two historical
variables used as instruments: the literacy rate at the end of the XIXth century, and
the political institutions in place over the past several centuries. The political and
social history of Europe provides a rich source of variation in these two variables at a
regional level. The exogenous component of culture due to history is strongly
correlated with current regional economic development, after controlling for
contemporaneous education, urbanization rates around 1850 and national effects.
Moreover, the data do not reject the over-identifying assumption that the two
historical variables used as instruments only influence regional development through
culture. The indicators of culture used in this paper are also strongly correlated with
economic development and with available measures of institutions in a cross-country
setting.

Consumption is striking back. Some recent evidence indicates that
the well-known asset pricing puzzles generated by the difficulties of
matching fluctuations in asset prices with high frequency fluctuations
in consumption might be solved found by considering consumption in
the long-run. A first strand of the literature concentrates on multiperiod
differences in log consumption, a second concentrates on the
cointegrating relation for consumption. Interestingly, only the (multiperiod)
Euler Equation for the consumer optimization problem is
considered by the first strand of the literature, while the cointegrationbased
literature concentrates exclusively on the (linearized) intertemporal
budget constraint. In this paper, we show that using the first
order condition in the linearized budget constraint to derive an explicit
long-run consumption function delivers an even more striking
strike back.

This paper studies how a central bank's preference for robustness against
model misspecification affects the design of monetary policy in a New-Keynesian
model of a small open economy. Due to the simple model structure,
we are able to solve analytically for the optimal robust policy rule, and we
separately analyze the effects of robustness against misspecification concerning
the determination of inflation, output and the exchange rate. We show that
an increased central bank preference for robustness makes monetary policy
respond more aggressively or more cautiously to shocks, depending on the
type of shock and the source of misspecification.

This paper introduces underground activities and tax evasion into a one sector dynamic general equilibrium model with external effects. The model presents a novel mechanism driving the self-fulfilling prophecies, which is triggered by the reallocation of resources to the underground sector to avoid the excess tax burden. This mechanism differs from the customary one, and it is complementary to it. In addition, the explicit introduction of an (even tiny) underground sector allows to reduce aggregate degree of increasing returns required for indeterminacy, and for having well behaved input demand schedules (in the sense they slope down).

Journal of Economic Literature Classification Numbers: O40, E260

A central problem for the game theoretic analysis of voting is that voting games
have very many Nash equilibria. In this paper, we consider a new refinement
concept for voting games that combines two ideas that appear reasonable for voting
games: First, trembling hand perfection (voters sometimes make mistakes when
casting their vote) and second, coordination of voters with similar interests. We
apply this refinement to an analysis of multicandidate elections under plurality rule
and runoff rule.
For plurality rule, we show that our refinement implies Duverger's law: In all
equilibria, (at most) two candidates receive a positive number of votes. For the case
of 3 candidates, we can completely characterize the set of equilibria. Often, there
exists a unique equilibrium satisfying our refinement; surprisingly, this is even true,
if there is no Condorcet winner. We also consider the equilibria under a runoff rule
and analyze when plurality rule and runoff rule yield different outcomes.

Building on recent work on dynamic interactive epistemology, we
extend the analysis of extensive-form psychological games (Geneakoplos,
Pearce & Stacchetti, Games and Economic Behavior, 1989) to
include conditional higher-order beliefs and enlarged domains of pay-off
functions. The approach allows modeling dynamic psychological
effects (such as sequential reciprocity, psychological forward induction,
and regret) that are ruled out when epistemic types are identified with
hierarchies of initial beliefs. We define a notion of psycholigical sequential
equilibrium, which generalizes the sequential equilibrium notion for
traditional games, for which we prove existence under mild assumptions.
Our framework also allows us to directly formulate assumptions about
"dynamic" rationality and interactive beliefs in order to explore strategic
interaction without assuming that players' beliefs are coordinated on an
equilibrium. In particular, we provide an exploration of (extensive-form)
rationalizability in psychological games.

We provide a summary updated guide for the construction, use and evaluation of
leading indicators, and an assessment of the most relevant recent developments in this
field of economic forecasting. To begin with, we analyze the problem of selecting a
target coincident variable for the leading indicators, which requires coincident indicator
selection, construction of composite coincident indexes, choice of filtering methods,
and business cycle dating procedures to transform the continous target into a binary
expansion/recession indicator. Next, we deal with criteria for choosing good leading
indicators, and simple non-model based methods to combine them into composite indexes.
Then, we examine models and methods to transform the leading indicators into
forecasts of the target variable. Finally, we consider the evaluation of the resulting
leading indicator based forecasts, and review the recent literature on the forecasting
performance of leading indicators.

Abstract

Iterated multiperiod ahead time series forecasts are made using a one-period ahead model, iterated forward for the desired number of periods, whereas direct forecasts are made using a horizon-specific estimated model, where the dependent variable is the multi-period ahead value being forecasted. Which approach is better is an empirical matter: in theory, iterated forecasts are more efficient if correctly specified, but direct forecasts are more robust to model misspecification. This paper compares empirical iterated and direct forecasts from linear univariate and bivariate models by applying simulated out-of-sample methods to 171 U.S. monthly macroeconomic time series spanning 1959 - 2002. The iterated forecasts typically outperform the direct forecasts, particularly if the models can select long lag specifications. The relative performance of the iterated forecasts improves with the forecast horizon.

We analyse the panel of the Greenbook forecasts (sample 1970-1996) and a
large panel of monthly variables for the US (sample 1970-2003) and show that
the bulk of dynamics of both the variables and their forecasts is explained by two
shocks. Moreover, a two factor model which exploits, in real time, information
on many time series to extract a two dimensional signal, produces a degree of
forecasting accuracy of the federal funds rate similar to that of the markets, and,
for output and inflation, similar to that of the Greenbook forecasts. This leads us
to conclude that the stochastic dimension of the US economy is two. We also show
that dimension two is generated by a real and nominal shock, with output mainly
driven by the real shock and inflation by the nominal shock. The implication is
that, by tracking any forecastable measure of real activity and price dynamics, the
Central Bank can track all fundamental dynamics in the economy.

How does the relationship between an investor and entrepreneur depend on the legal
system? In a double moral hazard framework, we show how optimal contracts,
corporate governance, and investor actions depend on the legal system. With better
legal protection, investors give more non-contractible support, demand more downside
protection, and exercise more governance. Investors in better legal systems develop
stronger governance and support competencies. Therefore, when investing in a different
legal systems they behave differently than local investors. We test these predictions
using a hand-collected dataset of European venture capital deals. The empirical
results confirm the predictions of the model.

Abstract

We employ Markov-switching regression methods to estimate fiscal policy feedback rules
in the U.S. for the period 1960-2002. Our approach allows to capture policy regime changes
endogenously. We reach three main conclusions. First, fiscal policy may be characterized,
according to Leeper (1991) terminology, as active from the 1960s throughout the 1980s, switching
gradually to passive in the early 1990s and switching back to active in early 2001. Second,
regime-switching fiscal rules are capable of tracking the time-series behaviour of the U.S. primary
deficit better than rules based on a constant parameter specification. Third, regime-switches in
monetary and fiscal policy rules do not exhibit any degree of synchronization. Our results are
at odds with the view that the post-war U.S. fiscal policy regime may be classified as passive at
all times, and seem to pose a challenge for the specification of the correct monetary-fiscal mix
within recent optimizing macroeconomic models considered suitable for policy analysis.

We explore the determinants of yield differentials between sovereign bonds in the Euro
area. There is a common trend in yield differentials, which is correlated with a measure
of the international risk factor. In contrast, liquidity differentials display sizeable heterogeneity
and no common factor. We present a model that predicts that yield differentials
should increase in both liquidity and risk, with an interaction term whose magnitude and
sign depends on the size of the liquidity differential with respect to the reference country.
Testing these predictions on daily data, we find that the international risk factor is consistently
priced, while liquidity differentials are priced only for a subset of countries and
their interaction with the risk factor is crucial to detect their effect.

This paper brings together two strands of the empirical macro literature:
the reduced-form evidence that the yield spread helps in forecasting output
and the structural evidence on the difficulties of estimating the effect of monetary
policy on output in an intertemporal Euler equation. We show that
including a short-term interest rate and inflation in the forecasting equation
improves the forecasting performance of the spread for future output but the
coefficients on the short rate and inflation are difficult to interpret using a
standard macroeconomic framework. A decomposition of the yield spread
into an expectations-related component and a term premium allows a better
understanding of the forecasting model. In fact, the best forecasting model for
output is obtained by considering the term premium, the short-term interest
rate and inflation as predictors. We provide a possible structural interpretation
of these results by allowing for time-varying risk aversion, linearly related
to our estimate of the term premium, in an intertemporal Euler equation for
output.

We study optimal monetary policy in two prototype economies with sticky prices and credit
market frictions. In the first economy, credit frictions apply to the financing of the capital stock,
generate acceleration in response to shocks and the financial markup (i.e., the premium on
external funds) is countercyclical and negatively correlated with the asset price. In the second
economy, credit frictions apply to the flow of investment, generate persistence, and the financial
markup is procyclical and positively correlated with the asset price. We model monetary policy
in terms of welfare-maximizing interest rate rules. The main finding of our analysis is that strict
inflation stabilization is a robust optimal monetary policy prescription. The intuition is that, in
both models, credit frictions work in the direction of dampening the cyclical behavior of inflation
relative to its credit-frictionless level. Thus neither economy, despite yielding different inflation
and investment dynamics, generates a trade-off between price and financial markup stabilization.
A corollary of this result is that reacting to asset prices does not bear any independent welfare
role in the conduct of monetary policy.

We provide a long term perspective on the individual retirement behavior
and on the future of early retirement. In a cross-country sample, we
find that total pension spending depends positively on the degree of early
retirement and on the share of elderly in the population, which increase
the proportion of retirees, but has hardly any effect on the per-capita pension
benefits. We show that in a Markovian political economic theoretical
framework, in which incentives to retire early are embedded, a political
equilibrium is characterized by an increasing sequence of social security
contribution rates converging to a steady state and early retirement. Comparative
statics suggest that aging and productivity slow-downs lead to
higher taxes and more early retirement. However, when income effects
are factored in, the model suggests that periods of stagnation - characterized
by decreasing labor income - may lead middle aged individuals to
postpone retirement.

Using a structural Vector Autoregression approach, this paper compares the
macroeconomic effects of the three main government spending tools: government
investment, consumption, and transfers to households, both in terms of the size
and the speed of their effects on GDP and its components. Contrary to a common
opinion, there is no evidence that government investment shocks are more
effective than government consumption shocks in boosting GDP: this is true both
in the short and, perhaps more surprisingly, in the long run. In fact, government
investment appears to crowd out private investment, especially in dwelling and in
machinery and equipment. There is no evidence that government investment pays
for itself in the long run, as proponents of the Golden Rule implicitly or explicitly
argue. The positive effects of government consumption itself are rather limited,
and defense purchases have even smaller (or negative) effects on GDP and private
investment. There is also no evidence that government transfers are more effective
than government consumption in stimulating demand.

This paper studies the effects of fiscal policy on GDP, inflation and interest rates
in 5 OECD countries, using a structural Vector Autoregression approach. Its main
results can be summarized as follows: 1) The effects of fiscal policy on GDP tend
to be small: government spending multipliers larger than 1 can be estimated only
in the US in the pre-1980 period. 2) There is no evidence that tax cuts work faster
or more effectively than spending increases. 3) The effects of government spending
shocks and tax cuts on GDP and its components have become substantially weaker
over time; in the post-1980 period these effects are mostly negative, particularly on
private investment. 4) Only in the post-1980 period is there evidence of positive
effects of government spending on long interest rates. In fact, when the real interest
rate is held constant in the impulse responses, much of the decline in the response
of GDP in the post-1980 period in the US and UK disappears. 5) Under plausible
values of its price elasticity, government spending typically has small effects on
inflation. 6) Both the decline in the variance of the fiscal shocks and the change
in their transmission mechanism contribute to the decline in the variance of GDP
after 1980.

Focusing on signaling games, I illustrate the relevance of the rationalizability
approach for the analysis multistage games with incomplete
information. I define a class of iterative solution procedures, featuring a
notion of forward induction: the Receiver tries to explain the Sender's
message in a way which is consistent with the Sender's strategic sophistication
and certain given restrictions on beliefs. The approach is applied to
some numerical examples and economic models. In a standard model with
verifiable messages a full disclosure result is obtained. In a model of job
market signaling the best separating equilibrium emerges as the unique
rationalizable outcome only when the high and low types are sufficiently
different. Otherwise, rationalizability only puts bounds on the education
choices of different types.

This paper suggests that the main (and possibly unique) source of β- and σ- convergence
in GDP per worker (i.e. labor productivity) across Italian regions over the
1980-2000 period is the change in technical and allocative efficiency, i.e. convergence
in relative TFP levels. To reach this conclusion, I construct an approximation of
the production frontier at different points in time using Data Envelope Analysis
(DEA), and measure efficiency as the output-based distance from the frontier. This
method is entirely data-driven, and does not require the specification of any particular
functional form for technology. Changes in GDP per worker can be decomposed
in changes in relative efficiency, changes due to overall technological progress, and
changes due to capital deepening. My results suggest that: (i) differences in relative
TFP are quantitatively important; (ii) while technological progress and capital
deepening are the main, and equally important, forces behind the rightward shift
in the distribution of GDP per worker, convergence in relative TFP is the main
determinant of the change in the distribution's shape.

We study the effects of model uncertainty in a simple New-Keynesian
model using robust control techniques. Due to the simple model structure, we
are able to find closed-form solutions for the robust control problem, analyzing
both instrument rules and targeting rules under different timing assumptions.
In all cases but one, an increased preference for robustness makes monetary
policy respond more aggressively to cost shocks but leaves the response to
demand shocks unchanged. As a consequence, inflation is less volatile and
output is more volatile than under the non-robust policy. Under one particular
timing assumption, however, increasing the preference for robustness has no
effect on the optimal targeting rule (nor on the economy).

The existing studies of unemployment benefit and unemployment duration suggest that reforms
that lower either the level or the duration of benefits should reduce unemployment. Despite the
large number of such reforms implemented in Europe in the past decades, this paper presents
evidence that shows no correlation between the reforms and the evolution of unemployment.
This paper also provides an explanation for this fact by exploring the
interactions between unemployment benefits and social assistance programmes. Unemployed
workers who are also eligible, or expect to become eligible, for some social assistance
programmes are less concerned about their benefits being reduced or terminated. They will not
search particularly intensively around the time of benefit exhaustion nor will come particularly
less choosy about job offers by reducing their reservation wages. Data from the European
Community Household Panel (ECHP) are used to provide evidence to support this argument.
Results show that, in fact, for social assistance recipients the probability of finding a job is not
particularly higher during the last months of entitlement.

We document the presence of a trade-off between unemployment benefits (UB) and employment protection legislation (EPL) in the provision of insurance against labor market risk. Different countries' locations along this trade-off represent stable, hard to modify, politico-economic equilibria. We develop a model in which voters are required to cast a ballot over the strictness of EPL, the generosity of UBs and the amount of redistribution involved by the financing of unemployment insurance. Agents are heterogeneous along two dimensions:  imployment status - insiders and outsiders - and skills - low and high. Unlike previous work on EPL, we model employment protection as an institution redistributing among insiders, notably in favour of the low-skill workers. A key implication of the model is that configurations with strict EPL and low UB should emerge in presence of compressed wage structures. Micro data on wage premia on educational attainments and on the strictness of EPL are in line with our results. We also find empirical support to the substantive assumptions of the model on the effects of EPL.

Abstract

We study how public policy can contribute to increase the share of early stage and
high-tech venture capital investments, thus helping the development of active venture
capital markets. A simple extension of the seminal model by Holmstrom and Tirole
(1997) provides a theoretical base for our analysis. We then explore a unique panel of
data for 14 European countries between 1988 and 2001. We have several novel findings.
First, the opening of stock markets targeted at entrepreneurial companies positively
affects the shares of early stage and high-tech venture capital investments; reductions
in capital gains tax rates have a similar, albeit weaker, effect. Second, a reduction in
labor regulation results in a higher share of high-tech investments. Finally, we find no
evidence of a shortage of supply of venture capital funds in Europe, and no evidence
of an effect of increased public R&D spending on the share of high-tech or early stage
venture capital investments.

Abstract

The aim of this paper is to propose a new method for forecasting Italian
inflation. We expand on a standard factor model framework (see Stock and
Watson (1998)) along several dimensions. To start with we pay special
attention to the modeling of the autoregressive component of the inflation.
Second, we apply forecast combination (Granger (2000) and Pesaran and
Timmermann (2001)) and generate our forecast by averaging the predictions
of a large number of models. Third, we allow for time variation in parameters
by applying rolling regression techniques, with a window of three-years of
monthly data. Backtesting shows that our strategy outperforms both the
benchmark model (i.e. a factor model which does not allow for model
uncertainty) and additional univariate (ARMA) and multivariate (VAR)
models. Our strategy proves to improve on alternative models also when
applied to turning point prediction.

This paper integrates a theory of equilibrium unemployment into a monetary model
with nominal price rigidities. The model is used to study the dynamic response of the
economy to a monetary policy shock. The labor market displays search and matching
frictions and bargaining over real wages and hours of work. Search frictions generate unemployment in equilibrium. Wage bargaining introduces a microfounded real wage
rigidity. First, I study a Nash bargaining model. Then, I develop an alternative
bargaining model, which I refer to as right-to-manage bargaining. Both models have
similar predictions in terms of real wage dynamics: bargaining significantly reduces
the volatility of the real wage. But they have different implications for inflation
dynamics: under right-to-manage, the real wage rigidity also results in smaller
fluctuations of inflation. These findings are consistent with recent evidence
suggesting that real wages and inflation only vary by a moderate amount in
response to a monetary shock. Finally, the model can explain important features of
labor-market fluctuations. In particular, a monetary expansion leads to a rise in job
creation and to a hump-shaped decline in unemployment.

This paper explores the quantitative plausibility of three candidate explanations for the
European productivity slowdown with respect to the US. The empirical plausibility of the
common wisdom on the topic (the "IT usage" hypothesis) is found to crucially depend on
how IT-using industries are defined. If a narrow definition is chosen, the IT usage
hypothesis no longer explains the whole of the EU productivity slowdown but just about
55% of it, with the remaining part to be attributed to other factors than IT, as argued in the
IT irrelevance view. No room is left for IT-producing industries as another potential
vehicle for the US-EU productivity growth gap, instead.

Abstract

Financial intermediaries can choose the extent to which they want to be active
investors, providing valuable services like advice, support and corporate governance.
We examine the determinants of the decision to become an active financial
intermediary using a hand-collected dataset on European venture capital deals. We
find organizational specialization to be a key driver. Venture firms which are
independent and focused on venture capital alone get more involved with their
companies. The human capital of venture partners is another key driver of active
financial intermediation. Venture firms whose partners' have prior business
experience or a scientific education provide more support and governance. These
results have implications for prevailing views of financial intermediation, which largely
abstract from issues of specialization and human capital.

This paper discusses the recent literature on the role of the state in economic development.
It concludes that government incentives to enact sound policies are key to economic success.
It also discusses the evidence on what happens after episodes of economic and political
liberalizations, asking whether political liberalizations strengthen government incentives to
enact sound economic policies. The answer is mixed. Most episodes of economic
liberalizations are indeed preceded by political liberalizations. But the countries that have
done better are those that have managed to open up the economy first, and only later have
liberalized their political system.

Abstract

This paper studies empirically the effects of and the interactions amongst economic and
political liberalizations. Economic liberalizations are measured by a widely used indicator
that captures the scope of the market in the economy, and in particular of policies
towards freer international trade (cf. Sachs and Werner 1995, Wacziarg and Welch 2003).
Political liberalizations correspond to the event of becoming a democracy. Using a
difference-in-difference estimation, we ask what are the effects of liberalizations on
economic performance, on macroeconomic policy and on structural policies. The main
results concern the quantitative relevance of the feedback and interaction effects
between the two kinds of reforms. First, we find positive feedback effects between
economic and political reforms. The timing of events indicates that causality is more
likely to run from political to economic liberalizations, rather than viceversa, but we
cannot rule out feedback effects in both directions. Second, the sequence of reforms
matters. Countries that first liberalize and then become democracies do much better
than countries that pursue the opposite sequence, in almost all dimensions.

We develop a structural model of a small open economy with gradual exchange rate pass-through and endogenous inertia in inflation and output. We then estimate the model by matching the implied impulse responses with those obtained from a VAR model estimated on Swedish data. Although our model is highly stylized it captures very well the responses of output, domestic and imported inflation, the interest rate, and the real exchange rate. However, in order to account for the observed persistence in the real exchange rate and
the large deviations from UIP, we need a large and volatile premium on foreign exchange.

Firing frictions and renegotiation costs affect worker and firm preferences
for rigid wages versus individualized Nash bargaining in a standard
model of equilibrium unemployment, in which workers vary by
observable skill. Rigid wages permit savings on renegotiation costs and
prevent workers from exploiting the firing friction. For standard calibrations,
the model can account for political support for wage rigidity
by both workers and firms, especially in labor markets for intermediate
skills. The firing friction is necessary for this effect, and reinforces
the impact of both turbulence and other labor market institutions on
preferences for rigid wages.

The hazard rate of investment is derived within a real option model, and its properties
are analyzed in order to directly study the relation between uncertainty and investment.
Maximum likelihood estimates of the hazard are calculated using a sample of MNEs that
have invested in Central and Eastern Europe over the period 1990-1998. Employing a
standard, non-parametric specification of the hazard, our measure of uncertainty has a
negative effect on investment, but the reduced-form model is unable to control for nonlinearities
in the relationship. The structural estimation of the option-based hazard is
instead able to account for the non-linearities and exhibits a significant value of waiting,
though the latter is independent from our measure of uncertainty. This finding supports
the existence of alternative channels through which uncertainty can affect investment.

This paper aims to test some implications of the Fiscal theory of
the price level (FTPL). We develop a model similar to Leeper (1991)
and Woodford (1996), but extended so to generate real effects of fiscal
policy also in the "Ricardian" regime, via an OLG demographic
structure. We test on the data the predictions of the FTPL as incorporated
in the model. We find that the US fiscal policy in the period
1960-1979 can be classified as "Non-Ricardian", while it is "Ricardian"
since 1990. According to our analysis, the fiscal theory of the
price level characterizes one phase of the post-war US history.

We use a quantitative model of the U.S. economy to analyze the response
of long-term interest rates to monetary policy, and compare the model results
with empirical evidence. We find that the strong and time-varying yield curve
response to monetary policy innovations found in the data can be explained by
the model. A key ingredient in explaining the yield curve response is central
bank private information about the state of the economy or about its own
target for inflation.

In this paper a simple dynamic optimization problem is solved with the help of
the recursive saddle point method developed by Marcet and Marimon (1999). According
to Marcet and Marimon, their technique should yield a full characterization
of the set of solutions for this problem. We show though, that while their method
allows us to calculate the true value of the optimization program, not all solutions
which it admits are correct. Indeed, some of the policies which it generates as
solutions to our problem, are either suboptimal or do not even satisfy feasibility.
We identify the reasons underlying this failure and discuss its implications for the
numerous existing applications.

We analyze welfare maximizing monetary policy in a dynamic general equilibrium two-country
model with price stickiness and imperfect competition. In this context, a typical terms
of trade externality affects policy interaction between independent monetary authorities. Unlike
the existing literature, we remain consistent to a public finance approach by an explicit
consideration of all the distortions that are relevant to the Ramsey planner. This strategy entails
two main advantages. First, it allows an accurate characterization of optimal policy in an economy
that evolves around a steady state which is not necessarily efficient. Second, it allows to describe
a full range of alternative dynamic equilibria when price setters in both countries are completely
forward-looking and households' preferences are not restricted. We study optimal policy both in
the long-run and in response to shocks, and we compare commitment under Nash competition
and under cooperation. By deriving a second order accurate solution to the policy functions,
we also characterize the welfare gains from international policy cooperation.