Creator: Sargent, Thomas J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 032 Keyword: Choices, Uncertainty, and Behavior Subject (JEL): D80 - Information, Knowledge, and Uncertainty: General
Creator: Townsend, Robert M., 1948- Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 077 Abstract:
This thesis consists of a series of essays on the theory of exchange under uncertainty. The first essay examines the welfare implications of futures markets in the context of complete markets for contingent claims. It is shown that in a C-good, S-state world the equilibrium allocations resulting from the operation of pre-state noncontingent futures markets and post-state spot markets may be Pareto optimal. This proposition turns on the fact that a futures contract can be interpreted as a security whose state-specific return is the post-state spot price. If the matrix of spot prices has rank S, then, with futures and spot markets, agents can achieve the same allocations over states as with complete markets for contingent claims.
Keyword: Uncertainty and Markets Subject (JEL): D80 - Information, Knowledge, and Uncertainty: General, Y40 - Dissertations (unclassified), and G10 - General Financial Markets: General (includes Measurement and Data)
Creator: Platt, Glenn J. Series: Law and economics of federalism Abstract:
This paper develops a model of firm location where communities differ by exogenous endowments of a factor of production. Firms choose to locate based on local subsidies to production. Community and firm optimal strategies are then examined. Through the introduction of information asymmetries about the communities' endowments, equilibrium bidding strategies for communities are found. The results show that auction institutions used by firms may in fact be signaling on the part of communities. These results also indicate that community bids reveal information, and restrictions on this bidding may do more harm than good.
Keyword: Tax breaks, Subsidies, Plant location, Tax competition, and Asymmetric information Subject (JEL): H70 - State and local government ; Intergovernmental relations - General, R30 - Production analysis and firm location - General, and D80 - Information, knowledge, and uncertainty - General
Creator: Martin, Antoine and Monnet, Cyril Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 603 Abstract:
This paper proposes a theory of when labor contract should be nominal or, instead, indexed. We find that, contracts should be indexed if prices are difficult to forecast and nominal otherwise. We use a principal-agent model developed by Jovanovic and Ueda (1997), with moral hazard, renegotiation, and where a signal (the nominal value of the sales of the agent) is observed before renegotiation takes place. We show that their result, that the optimal contract is nominal when agents must choose pure strategies, is robust to the case where agents can choose mixed strategies in the sense that, for certain parameters, the optimal contract is still nominal. For other parameters, however, we show that the optimal contract is indexed. Our findings are consistent with two empirical regularities. First prices are more volatile with higher inflation and, second, countries with high inflation tend to have indexed contracts. Our theory suggests that it is because prices are difficult to forecast in high inflation countries that contracts are indexed.
Keyword: Theory of uncertainty and information and Nominal contracts Subject (JEL): E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data), J40 - Particular Labor Markets: General, and D80 - Information, Knowledge, and Uncertainty: General
Creator: Kahn, Charles M. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 266 Abstract:
In this article we use the techniques developed in examining optimal contracting with imperfect information to build a simple equilibrium model of a labor market with imperfect information. We then use the model to examine the effects that imperfect information imposes on labor markets, particularly when compared with full information and noncontractual base lines. We demonstrate that quits increase in periods of high output, without postulating exogenous price rigidity.
Keyword: Spot markets, Job search, Information, Job change, Quitter, and Employment Subject (JEL): D80 - Information, Knowledge, and Uncertainty: General and J24 - Human Capital; Skills; Occupational Choice; Labor Productivity
Creator: Miller, Preston J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 173 Description:
This paper reviews selected studies in the theory of macroeconomic stabilization policy and summarizes their key findings.
Keyword: Macroeconomic stabilzation policy, Stabilization theory, and Uncertainty Subject (JEL): E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy and D80 - Information, Knowledge, and Uncertainty: General
Creator: Fernandes, Ana and Phelan, Christopher Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 259 Abstract:
There is now an extensive literature regarding the efficient design of incentive mechanisms in dynamic environments. In this literature, there are no exogenous links across time periods because either privately observed shocks are assumed time independent or past private actions have no influence on the realizations of current variables. The absence of exogenous links across time periods ensures that preferences over continuation contracts are common knowledge, making the definition of incentive compatible contracts at a point in time a simple matter. In this paper, we present general recursive methods to handle environments where privately observed variables are linked over time. We show that incentive compatible contracts are implemented recursively with a threat keeping constraint in addition to the usual temporary incentive compatibility conditions.
Keyword: Mechanism design and Repeated agency Subject (JEL): D31 - Personal Income, Wealth, and Their Distributions, D82 - Asymmetric and Private Information; Mechanism Design, D30 - Distribution: General, and D80 - Information, Knowledge, and Uncertainty: General
Creator: Zhang, Yuzhe Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 640 Abstract:
In this paper I develop continuous-time methods for solving dynamic principal-agent problems in which the agent’s privately observed productivity shocks are persistent over time. I characterize the optimal contract as the solution to a system of ordinary differential equations, and show that, under this contract, the agent’s utility converges to its lower bound—immiseration occurs. I also show that, unlike in environments with i.i.d. shocks, the principal would like to renegotiate with the agent when the agent’s productivity is low—it is not renegotiation-proof. I apply the theoretical methods I have developed and numerically solve this (Mirrleesian) dynamic taxation model. I find that it is optimal to allow a wedge between the marginal rate of transformation and individuals’ marginal rate of substitution between consumption and leisure. This wedge is significantly higher than what is found in the i.i.d. case. Thus, using the i.i.d. assumption is not a good approximation quantitatively when there is persistence in productivity shocks.
Keyword: Principal-agent problem, Persistence, Efficiency lines, and Stochastic control problem Subject (JEL): E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination, D80 - Information, Knowledge, and Uncertainty: General, and D82 - Asymmetric and Private Information; Mechanism Design