nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2015‒08‒25
twenty-two papers chosen by



  1. Credit imperfections, labor market frictions and unemployment: a DSGE approach By Imen Ben Mohamed; Marine Salès
  2. Impacts of Universal Health Coverage: A Micro-founded Macroeconomic Perspective By Huang, Xianguo; Yoshino, Naoyuki
  3. Macroeconomic Dynamics in a Model of Goods, Labor and Credit Market Frictions By Nicolas Petrosky-Nadeau; Etienne Wasmer
  4. The Welfare Cost of Inflation Risk Under Imperfect Insurance By Olivier Allais; Yann Algan; Edouard Challe; Xavier Ragot
  5. Macroeconomic Volatility and Trade in OLG Economies By Antoine Le Riche
  6. Universal Basic Income versus Unemployment Insurance By Alice Fabre; Stéphane Pallage; Christian Zimmermann
  7. Self-enforcing Debt, Reputation, and the Role of Interest Rates By Victor Filipe Martins da Rocha; Yiannis Vailakis
  8. Incorporating Financial Cycles in Output Gap Measures: Estimates for the Euro Area By Pau Rabanal; Marzie Sanjani
  9. Indeterminacy and Sunspots in Two-Sector RBC Models with Generalized No-Income-Effect Preferences By Frédéric Dufourt; Kazuo Nishimura; Alain Venditti
  10. Precautionary saving and aggregate demand By Xavier Ragot; Julien Matheron; Juan Rubio-Ramirez; Edouard Challe
  11. dynamics of assets liquidity and inequality in economies with decentralized markets By Maurizio Iacopetta
  12. The dynamic implications of energy-intensive capital accumulation By Burcu Afyonoglu Fazlioglu; Agustin Pérez-Barahona; Cagri Saglam
  13. Invest as You Go: How Public Health Investment Keeps Pension Systems Healthy By Paolo Melindi-Ghidi; Willem Sas
  14. Common and Country Specific Economic Uncertainty By Haroon Mumtaz; Konstantinos Theodoridis
  15. A Model of the Twin Ds: Optimal Default and Devaluation By Vivian Yue; Stephanie Schmitt-Grohe; Martin Uribe; Seunghoon Na
  16. Employer-provided health insurance and equilibrium wages with two-sided heterogeneity By Arnaud Chéron; Pierre-Jean Messe; Jerome Ronchetti
  17. An Algorithm for Solving Simple Sticky Information New Keynesian DSGE Model By Chattopadhyay, Siddhartha; Agrawal, Manasi
  18. Declining labor turnover and turbulence By Fujita, Shigeru
  19. New Evidence on Mobility and Wages of the Young and the Old By Hansen, Jörgen; Lkhagvasuren, Damba
  20. An Equilibrium Model of the Timing of Bankruptcy Filings By Satyajit Chatterjee
  21. A Reputational Theory of Firm Dynamics By Moritz Meyer-ter-Vehn; Simon Board
  22. Time-Consistent Institutional Design By Martin Ellison; Charles Brendon

  1. By: Imen Ben Mohamed (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics); Marine Salès (ENS Cachan - École normale supérieure - Cachan)
    Abstract: We construct and estimate a new-Keynesian DSGE model, integrating sticky prices in goods market and frictions in labor and credit markets. A search and matching labor market and a costly-state verication framework in the credit market are introduced. Capital spending, vacancy posting costs and wage bill require to be paid in advance of production and thus require external nancing in a frictional credit market. Search and matching in labor market is uncertain and costly. We nd that the procyclicality of the risk premium (the cost of external over internal funds) impacts the vacancy posting decision and thus the level of unemployment in the economy. Credit markets frictions may be the source of lower posting vacancies, lower bargained wages and higher unemployment level. Then, the transmission channel of shocks among both markets is investigated. We also analyze to what extent frictions alter main variables response to monetary and credit shocks. An empirical evidence is presented by regressing principle variables in both markets using a Bayesian VAR method. The shocks identication is based on sign restrictions and penalty function strategies. Moreover, the theoretical model is log-linearized around the steady-state and estimated using a Bayesian approach. The calibration is based on post-war US data and observed variables cover the period 1960-2007. We nd that asymmetric information in the credit market pushes up the marginal cost of labor by adding a risk premium to the negotiated wage, to compensate for uncertainty related to the recruitment process eciency. Although the wage is a result of a right-to-manage bargaining process, credit market imperfections aect labor supply through the nal good mark-up.
    Date: 2015–05–22
    URL: http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01082471&r=all
  2. By: Huang, Xianguo (Asian Development Bank Institute); Yoshino, Naoyuki (Asian Development Bank Institute)
    Abstract: This paper studies the impact of tax-financed universal health coverage schemes on macroeconomic aspects of labor supply, asset holding, inequality, and welfare, while taking into account features common to developing economies, such as informal employment and tax avoidance, by constructing a dynamic stochastic general equilibrium model with heterogeneous agents. Agents have different education levels, employment statuses, and idiosyncratic shocks. Given three tax financing options, calibration results suggest that the financing options matter for outcomes both at the aggregate and disaggregate levels. Universal health coverage, financed by labor income tax revenue, could reduce inequality due to its large redistributive role. Social welfare cannot be improved when labor decisions are endogenous and distortions are higher than the redistributive gains for all tax financing options. In the absence of labor supply choice, mild welfare gains are found.
    Keywords: universal health coverage; DSGE model; idiosyncratic shocks; social welfare
    JEL: E24 E26 E62 H23 H51 J11
    Date: 2015–08–10
    URL: http://d.repec.org/n?u=RePEc:ris:adbiwp:0533&r=all
  3. By: Nicolas Petrosky-Nadeau (ECON - Département d'économie - Sciences Po); Etienne Wasmer (ECON - Département d'économie - Sciences Po)
    Abstract: This paper shows that goods-market frictions drastically change the dynamics of the labor market, bridging the gap with the data both in terms of persistence and volatility. In a DSGE model with three imperfect markets - goods, labor and credit - we find that credit- and goods-market imperfections are substitutable in raising volatility. Goods-market frictions are however unique in generating persistence. The two key mechanisms generating autocorrelation in growth rates and the hump-shaped pattern in the response to productivity shocks are related to the goods market: i) countercyclical dynamics of goods market tightness and prices, which alter future profit flows and raise persistence and ii) procyclical search effort in the goods market, by either consumers, firms or both, raises both amplification and persistence. Expanding our knowledge of goods market frictions is thus needed for a full account of labor market dynamics.
    Date: 2014–02
    URL: http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01073540&r=all
  4. By: Olivier Allais (CORELA - Laboratoire de Recherche sur la Consommation - INRA); Yann Algan (CORELA - Laboratoire de Recherche sur la Consommation - INRA); Edouard Challe (CORELA - Laboratoire de Recherche sur la Consommation - INRA); Xavier Ragot (CORELA - Laboratoire de Recherche sur la Consommation - INRA)
    Abstract: What are the costs of inflation fluctuations and who bears those costs? In this paper, we investigate this question by means of a quantitative incomplete-market, heterogenous-agent model wherein households hold real and nominal assets and are subject to both idiosyncratic labor income shocks and aggregate inflation risk. A key feature of our analysis is a nonhomothetic specification for households' preferences towards money and consumption goods. Unlike traditional specifications, ours allows the model to reproduce the broad features of the distribution of monetary assets (in addition to being consistent with the distribution of nonmonetary assets). Inflation risk is found to generate significant welfare losses for most households, i.e., between 1 and 1.5 percent of permanent consumption. The loss is small or even negative for households at the very top of the productivity and/or wealth distribution.
    Date: 2015–05
    URL: http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01169656&r=all
  5. By: Antoine Le Riche (AMSE - Aix-Marseille School of Economics - EHESS - École des hautes études en sciences sociales - Centre national de la recherche scientifique (CNRS) - Ecole Centrale Marseille (ECM) - AMU - Aix-Marseille Université)
    Abstract: This chapter analyzes the effect of international trade on the local stability properties of economies in a Heckscher-Ohlin free-trade equilibrium. We formulate a two-factor (capital and labor), two-good (consumption and investment), two-country overlapping generations model where countries only differ with respect to their discount rate. We consider a CES non increasing returns to scale technology in the consumption good sector and a Leontief constant returns to scale technology in the investment good sector. In the autarky equilibrium and the free-trade equilibrium, we show the existence of endogenous cycles with dynamic efficiency when the consumption good is capital intensive, the value of the elasticity of intertemporal substitution in consumption is intermediate and the degree of returns to scale is sufficiently high. Finally using a numerical simulation, we show that period-two cycles can occur in the free-trade equilibrium although one country is characterized by saddle-point stability in the autarky equilibrium.
    Date: 2014–11
    URL: http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01079773&r=all
  6. By: Alice Fabre (AMSE - Aix-Marseille School of Economics - EHESS - École des hautes études en sciences sociales - Centre national de la recherche scientifique (CNRS) - Ecole Centrale Marseille (ECM) - AMU - Aix-Marseille Université); Stéphane Pallage (CIRPEE and Département des Sciences Economiques - UQAM - Université du Québec à Montréal); Christian Zimmermann (Federal Reserve Bank of St. Louis)
    Abstract: In this paper we compare the welfare effects of unemployment insurance (UI) with an universal basic income (UBI) system in an economy with idiosyncratic shocks to employment. Both policies provide a safety net in the face of idiosyncratic shocks. While the unemployment insurance program should do a better job at protecting the unemployed, it suffers from moral hazard and substantial monitoring costs, which may threaten its usefulness. The universal basic income, which is simpler to manage and immune to moral hazard, may represent an interesting alternative in this context. We work within a dynamic equilibrium model with savings calibrated to the United States for 1990 and 2011, and provide results that show that UI beats UBI for insurance purposes because it is better targeted towards those in need.
    Date: 2014–11
    URL: http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01083459&r=all
  7. By: Victor Filipe Martins da Rocha (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS - Université Paris IX - Paris Dauphine, EESP - Sao Paulo School of Economics - FGV - Fundação Getulio Vargas); Yiannis Vailakis (Adam Smith Business School - University of Glasgow)
    Abstract: How domestic costs of default do interact with the threat of exclusion from credit markets to determine interest rates and sovereign debt sustainability? In this paper, we address this question in the context of a stochastic general equilibrium model with lack of commitment and self-enforcing debt in which default has two consequences: loss of access to international borrowing and output costs. In contrast to Bulow and Rogoff (1989), we show that part of the ability to borrow is merely attributed to the threat of credit exclusion, or equivalently, to the loss of the sovereign's reputation. Apart from the limit case–analyzed by Hellwig and Lorenzoni (2009)–where output costs are absent, equilibrium interest rates are always higher than growth rates, implying that the way "reputation for repayment" supports debt does not depend on whether debt limits allow agents to exactly roll over existing debt period by period.
    Date: 2014–12–18
    URL: http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01097114&r=all
  8. By: Pau Rabanal (IMF); Marzie Sanjani (International Monetary Fund)
    Abstract: During the early 2000s, the euro area periphery countries experienced a credit and house price boom, but with moderate CPI inflation. We suggest a new approach for analyzing the role of credit and house prices in potential output and estimating the output gap. We present a two-country DSGE model for the core and periphery of the euro area, with financial frictions at the household level. We use several macroeconomic variables, including house prices and household credit for each region, to estimate the model. We find that, in the core, the measure of output gap is independent of financial frictions and is similar to that obtained with the Hodrick and Prescott filter, because of the absence of a credit boom. On the contrary, in the periphery, the presence of financial frictions amplify economic fluctuations and the output gap. We also present evidence of the trade-offs faced by the European Central Bank when trying to stabilize two regions in a currency union with divergent economic cycles.
    Date: 2015
    URL: http://d.repec.org/n?u=RePEc:red:sed015:426&r=all
  9. By: Frédéric Dufourt (AMSE - Aix-Marseille School of Economics - EHESS - École des hautes études en sciences sociales - Centre national de la recherche scientifique (CNRS) - Ecole Centrale Marseille (ECM) - AMU - Aix-Marseille Université, IUF - Institut Universitaire de France - M.E.N.E.S.R. - Ministère de l'Éducation nationale, de l’Enseignement supérieur et de la Recherche); Kazuo Nishimura (KIER, Kyoto University - Kyoto University, RIEB, Kobe University - Kobe University); Alain Venditti (AMSE - Aix-Marseille School of Economics - EHESS - École des hautes études en sciences sociales - Centre national de la recherche scientifique (CNRS) - Ecole Centrale Marseille (ECM) - AMU - Aix-Marseille Université, EDHEC - EDHEC Business School)
    Abstract: We analyze sunspot-driven fluctuations in the standard two-sector RBC model with moderate increasing returns to scale and generalized no-income-effect preferences à la Greenwood, Hercovitz and Huffman [13]. We provide a detailed theoretical analysis enabling us to derive relevant bifurcation loci and to characterize the steady-state local stability properties as a function of various structural parameters. We show that local indeterminacy occurs through flip and Hopf bifurcations for a large set of values for the elasticity of intertemporal substitution in consumption, provided that the labor supply is sufficiently inelastic. Finally, we provide a detailed quantitative analysis of the model. Computing, on a quarterly basis, a new set of empirical moments related to two broadly defined consumption and investment sectors, we are able to identify, among the set of admissible calibrations consistent with sunspot equilibria, the ones that provide the best fit of the data. The model properly calibrated solves several empirical puzzles traditionally associated with two-sector RBC models.
    Date: 2015–03
    URL: http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01131411&r=all
  10. By: Xavier Ragot (Paris School of Economics); Julien Matheron (Banque de France); Juan Rubio-Ramirez (Duke University); Edouard Challe (Ecole Polytechnique)
    Abstract: We formulate and estimate a tractable macroeconomic model with time-varying precautionary savings. We argue that the latter affect aggregate fluctuations via two main channels: a stabilizing aggregate supply effect working through the supply of capital; and a destabilizing aggregate demand effect generated by a feedback loop between unemployment risk and consumption demand. Using the estimated model to measure the contribution of precautionary savings to the propagation of recent recessions, we find strong aggregate demand effects during the Great Recession and the 1990-1991 recession. In contrast, the supply effect at least offset the demand effect during the 2001 recession
    Date: 2015
    URL: http://d.repec.org/n?u=RePEc:red:sed015:404&r=all
  11. By: Maurizio Iacopetta (OFCE - OFCE - Sciences Po)
    Abstract: An algorithm for computing Dynamic Nash Equilibria (DNE) in an extended ver- sion of Kiyotaki and Wright (1989) (hereafter KW) is proposed. The algorithm com- putes the equilibrium pro.le of (pure) strategies and the evolution of the distribution of three types of assets across three types of individuals. It has two features that together make it applicable in a wide range of macroeco- nomic experiments: (i) it works for any feasible initial distribution of assets; (ii) it allows for multiple switches of trading strategies along the transitional dynamics. The algorithm is used to study the relationship between liquidity, production, and inequality in income and in welfare, in economies where assets fetch di¤erent returns and agents have heterogeneous skills and preferences. One experiment shows a case of reversal of fortune. An economy endowed with a low-return asset takes over a similar economy endowed with a high-return asset because, in the former economy, a group of agents abandon a rent-seeking trading behavior and increase their income by trading and producing more intensively. A second experiment shows that a reduction of market frictions leads both to higher income and lower inequality. Other experiments evaluate the propagation mechanism of shocks that hit the assets.returns. A key result is that trade and liquidity tend to squeeze income inequality.
    Date: 2014–12
    URL: http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01099374&r=all
  12. By: Burcu Afyonoglu Fazlioglu (TOBB-ETU University Turkey - [-]); Agustin Pérez-Barahona (ECO-PUB - Economie Publique - Institut national de la recherche agronomique (INRA) - AgroParisTech, Department of Economics, Ecole Polytechnique - CNRS - Polytechnique - X); Cagri Saglam (Bilkent University - Bilkent University)
    Abstract: We study the implications of assuming diff erent energy intensities for physical capital accumulation and fi nal good production in an overlapping generations (OLG) resource economy. Diff ering from the standard OLG literature, but consistently with the empirical evidence, physical capital accumulation is assumed to be relatively more energy-intensive than consumption. Focusing on exhaustible resources, we fi nd that OLG equilibria can exhibit a "non-classical behaviour": our model can generate complex dynamics where extraction may increase during some periods and decrease afterwards. As a consequence, in contrast to the classical response predicted by the standard approach, resource prices may not increase monotonically. This result points out the importance of the assumptions about energy intensity considered in the literature.
    Date: 2014–10–13
    URL: http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01074201&r=all
  13. By: Paolo Melindi-Ghidi (AMSE - Aix-Marseille School of Economics - EHESS - École des hautes études en sciences sociales - Centre national de la recherche scientifique (CNRS) - Ecole Centrale Marseille (ECM) - AMU - Aix-Marseille Université); Willem Sas (Center for Economic Studies - CES - KU Leuven - CES - KU Leuven)
    Abstract: Better health not only boosts longevity in itself, it also postpones the initial onset of disability and chronic inrmity to a later age. In this paper we examine the potential eects of such compression of morbidity' on pensions, and introduce a health-dependent dimension to the standard pay-as-you-go (PAYG) pension scheme. Studying the long-term implications of such a system in a simple overlapping generations framework, we nd that an increase in public health investment can augment capital accumulation in the long run. Because of this, the combination of health investment with a partially health-dependent PAYG scheme may in fact outperform a purely PAYG system in terms of lifetime welfare.
    Date: 2015–07
    URL: http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01171701&r=all
  14. By: Haroon Mumtaz (Queen Mary University of London); Konstantinos Theodoridis (Bank of England)
    Abstract: We use a factor model with stochastic volatility to decompose the time-varying variance of Macro economic and Financial variables into contributions from country-specific uncertainty and uncertainty common to all countries. We find that the common component plays an important role in driving the time-varying volatility of nominal and financial variables. The cross-country co-movement in volatility of real and financial variables has increased over time with the common component becoming more important over the last decade. Simulations from a two-country DSGE model featuring Epstein Zin preferences suggest that increased globalisation and trade openness may be the driving force behind the increased cross-country correlation in volatility.
    Keywords: FAVAR, Stochastic Volatility, Uncertainty Shocks, DSGE Model
    JEL: C15 C32 E32
    Date: 2015–08
    URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp752&r=all
  15. By: Vivian Yue (Emory University); Stephanie Schmitt-Grohe (Columbia University); Martin Uribe (Columbia University); Seunghoon Na (Columbia University)
    Abstract: This paper characterizes jointly optimal default and exchange-rate policy in a small open economy with limited enforcement of debt contracts and downward nominal wage rigidity. Under optimal policy, default occurs during contractions and is accompanied by large devaluations. The latter inflate away real wages thereby avoiding massive unemployment. Thus, the Twin Ds phenomenon emerges endogenously as the optimal outcome. By contrast, under fixed exchange rates, optimal default takes place in the context of large involuntary unemployment. Fixed-exchange-rate economies are shown to have stronger default incentives and therefore support less external debt than economies with optimally floating rates.
    Date: 2015
    URL: http://d.repec.org/n?u=RePEc:red:sed015:419&r=all
  16. By: Arnaud Chéron (GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Université du Maine, TEPP - Travail, Emploi et Politiques Publiques - UPEM - Université Paris-Est Marne-la-Vallée - CNRS); Pierre-Jean Messe (CEE - Centre d'études de l'emploi - M.E.N.E.S.R. - Ministère de l'Éducation nationale, de l’Enseignement supérieur et de la Recherche - Ministère du Travail, de l'Emploi et de la Santé, TEPP - Travail, Emploi et Politiques Publiques - UPEM - Université Paris-Est Marne-la-Vallée - CNRS, GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Université du Maine); Jerome Ronchetti (TEPP - Travail, Emploi et Politiques Publiques - UPEM - Université Paris-Est Marne-la-Vallée - CNRS, GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Université du Maine)
    Abstract: This paper develops an equilibrium search model that allows rms to invest in worker's health. Heterogeneous health endowment of the employee is not observed by the employer, and rms also dier regarding their productivities. We emphasize that wage and health expenditure policies of the employer are tightly related, and show how those policies relate to rms' type. A noticeable implication is that there is an ambiguous relationship between wage earnings and health expenditures supported by firms.
    Date: 2014
    URL: http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01100345&r=all
  17. By: Chattopadhyay, Siddhartha; Agrawal, Manasi
    Abstract: This paper describes a new algorithm for solving a simple Sticky Information New Keynesian model using the methodology of Wang and Wen (2006). Impulse responses for demand and supply shock have been generated and analyzed intuitively. The strength of our algorithm lies in its analytical solution, which allow to uncover better intuition from the model.
    Keywords: New-Keynesian Model, Algorithm
    JEL: C22 C61 C63 E52
    Date: 2015–04–19
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:66074&r=all
  18. By: Fujita, Shigeru (Federal Reserve Bank of Philadelphia)
    Abstract: Supersedes Working Paper 11-44\R. The purpose of this paper is to identify possible sources of the secular decline in the job separation rate over the past four decades. I use a simple labor matching model with two types of workers, experienced and inexperienced, where the former type faces a risk of skill loss during unemployment. When the skill loss occurs, the worker is required to restart his career and thus suffers a drop in his wage. I show that a higher risk of skill loss results in a lower separation rate. The key mechanism is that the experienced workers accept lower wages in exchange for keeping their jobs.
    Keywords: Separation Rate; Wage Loss; Turbulence
    JEL: E24 J31 J64
    Date: 2015–08–07
    URL: http://d.repec.org/n?u=RePEc:fip:fedpwp:15-29&r=all
  19. By: Hansen, Jörgen (Concordia University); Lkhagvasuren, Damba (Concordia University)
    Abstract: We present new evidence on the wage and mobility of young and old workers, which is difficult to explain using standard human capital theory. Instead, we propose a simple dynamic extension of the Roy model, where worker migration and wages are jointly determined at the individual level. According to this model, a higher moving cost among older workers is the main factor driving the lower mobility among this group. Because of the higher moving costs, older workers require a higher wage increase to move across regions than younger workers, a pattern that is consistent with individual-level U.S. data. We also find an interesting dynamic effect suggesting that, given a persistent labor income shock, a higher future moving cost makes workers more mobile today.
    Keywords: geographic mobility, labor mobility by age, labor income shock, moving cost, multi-sector model
    JEL: E24 J31 J61 R23
    Date: 2015–08
    URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp9258&r=all
  20. By: Satyajit Chatterjee (Federal Reserve Bank of Philadelphia)
    Abstract: Existing quantitative-theoretic models of bankruptcy do not make a distinction between bankruptcy and default. In reality, there is always a period of financial distress between default and a bankruptcy filing. The goal of this paper is to develop a model of the timing of bankruptcy filing that can account for financial distress (the period or state during which a delinquent debtor is being pursued by creditors) and informal bankruptcy (where a delinquent debtor does not file for bankruptcy but neither does she repay or be pursued by creditors). The model is used to shed light on time variation in the rate of bankruptcy filings during the last 25 years.
    Date: 2015
    URL: http://d.repec.org/n?u=RePEc:red:sed015:487&r=all
  21. By: Moritz Meyer-ter-Vehn (UCLA); Simon Board (University of California - Los Angeles)
    Abstract: We propose a firm lifecycle model in which the firm privately invests in its quality and thereby its reputation. Over time, both the firm and the market learn about the firm's evolving quality via infrequent breakthroughs. The firm can also exit if its value becomes negative, giving rise to selection effects. In a pure-strategy equilibrium, incentives are single-peaked: the firm shirks immediately following a breakthrough, works for intermediate levels of reputation and shirks again when it is about to exit. This investment behavior yields predictions for the distribution of firm productivity and the survival rate. Finally, we compare the model to two variants: one in which the firm's investment is publicly observed, and a second in which the firm has private information about its product quality.
    Date: 2015
    URL: http://d.repec.org/n?u=RePEc:red:sed015:427&r=all
  22. By: Martin Ellison (University of Oxford); Charles Brendon (University of Cambridge)
    Abstract: This paper reconsiders normative policy design in environments subject to time inconsistency problems, a  la Kydland and Prescott (1977). In these environments there are generally gains to making binding promises about future policy conduct, in the form of an institutional target or mandate. However decisionmakers at different points in time have different preferences about the best promises to make and to keep. We consider the implications of choosing these promises according to a Pareto criterion. A sequence of promises is Pareto efficient if there is no alternative sequence that all current and future policymakers would prefer to switch to. This criterion has the advantage that it can be applied recursively, in environments where, by definition, no policy is recursively Ramsey-optimal. Recursive Pareto efficiency thus provides an appealing normative alternative to standard Ramsey policy. We characterise outcomes in a general setting when promises are chosen to be recursively Pareto efficient. Three examples, explored throughout the paper, highlight how this approach to policy design avoids features of Ramsey policy that are commonly identified as problematic.
    Date: 2015
    URL: http://d.repec.org/n?u=RePEc:red:sed015:495&r=all

General information on the NEP project can be found at https://nep.repec.org. For comments please write to the director of NEP, Marco Novarese at <director@nep.repec.org>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.