What explains the current low rate of employment in the US? While there has substantial debate over this question in recent years, we believe that considerable added insight can be derived by focusing on changes in the labour market at the turn of the century. In particular, we argue that in about the year 2000, the demand for skill (or, more specifically, for cognitive tasks often associated with high educational skill) underwent a reversal. Many re-searchers have documented a strong, ongoing increase in the demand for skills in the decades leading up to 2000. In this paper, we document a decline in that demand in the years since 2000, even as the supply of high education workers continues to grow. We go on to show that, in response to this demand reversal, high-skilled workers have moved down the occupational ladder and have begun to perform jobs traditionally performed by lower-skilled workers. This de-skilling process, in turn, results in high-skilled workers pushing low-skilled workers even further down the occupational ladder and, to some degree, out of the labor force all together. In order to understand these patterns, we offer a simple extension to the standard skill biased technical change model that views cognitive tasks as a stock rather than a flow. We show how such a model can explain the trends in the data that we present, and offers a novel interpretation of the current employment situation in the US.

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During the last thirty years, US business cycles have been characterized by coun-tercyclical technology shocks and very low inflation variability. While the first fact runs counter to an RBC view of fluctuation and calls for demand shocks as a source of fluctuations, the second fact is difficult to reconcile with a New Keynesian model in which demand shocks are accommodated. In this paper we show that non-inflationary demand driven business cycles can be easily explained if one moves away from the representative agent framework on which the New Keynesian model and the RBC model are based. We show how changes in demand induced by changes in perceptions about the future can cause business cycle type fluctuations when agents are not perfectly mobile across sectors. As we use an extremely simple framework, we discuss the generality of the results and develop a modified New Keynesian model with non inflationary demand driven fluctuations. We also document the relevance of our main assumptions regarding labor market segmentation and incomplete insurance using PSID data over the period 1968-2007.

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We use search and bargaining theory to develop an empirically tractable specification of the job creation curve and to derive an instrumental variable strategy to estimate and test its validity. We estimate the job creation curve using city-level observations for 1970-2007. We find that U.S. city-industry level labor market outcomes conform well to restrictions implied by search and bargaining theory. Using 10-year differences, we estimate the elasticity of the job creation curve with respect to wages to be -0.3. We interpret this relatively low elasticity as reflecting a low propensity for individuals to become entrepreneurs when labor costs decline.

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Over the 1980s and 1990s the wage differentials between men and women declined significantly while returns to education increased. We ask if this reflects a change in the relative price of skills which are more abundant in both women and more educated workers. In parallel to the aggregate pattern, we find male-female and education wage differentials moved in opposite directions 1980-2000 across metropolitan areas. Our estimates are larger when we isolate variation mostly likely driven by technological change, and imply most of the decline in the male-female wage differential 1980-2000 was driven by changes in the relative price of skills.

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This paper provides new evidence in support of the idea that bouts of optimism and pessimism drive much of US business cycles. In particular, we begin by using sign-restriction based identification schemes to isolate innovations in optimism or pessimism and we document the extent to which such episodes explain macroeconomic fluctuations. We then examine the link between these identified mood shocks and subsequent developments in fundamentals using alternative identification schemes (i.e., variants of
the maximum forecast error variance approach). We find that there is a very close link between the two, suggesting that agents' feelings of optimism and pessimism are at least partially rational as total factor productivity (TFP) is observed to rise 8-10 quarters after an initial bout of optimism. While this later finding is consistent with some previous findings in the news shock literature, we cannot rule out that such episodes reflect self-fulfilling beliefs. Overall, we argue that mood swings account for over 50% of business cycle fluctuations in hours and output.

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In this paper we present a spatial equilibrium model where search frictions hinder the immediate reallocation of workers both within and across local labour markets. Because of the frictions, firms and workers find themselves in bilateral monopoly positions when determining wages. Although workers are not at each instant perfectly mobile across cities, in the baseline model we assume that workers flows are sufficient to equate expected utility across markets. We use the model to explore
the joint determination of wages, unemployment, house prices and city size (or migration). A key role of the model is to clarify conditions under this type of spatial equilibrium setup can be estimated. We then use U.S. data over the period 1970-2007 to explore the fit of model and it quantitative properties of the model. Our main goal is to highlight forces that influence spatial equilibria at 10 year intervals.

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Business cycles reflect changes over time in the amount of trade between individuals. In this paper we show that incorporating explicitly intra-temporal gains from trade between individuals into a macroeconomic model can provide new insight into the potential mechanisms driving economic fluctuations as well as modify key policy implications. We first show how a "gains from trade" approach can easily explain why changes in perceptions about the future (including "news" about the future) can cause booms and bust. We then turn to fiscal policy, and discuss under what conditions fiscal multipliers can be observed. While much of our analysis is conducted in a flexible price environment, we also present implications of our model for a sticky price environments, as it allows to understand stable-inflation boom-bust cycles. The source of the explicit gains from trade in our setup derives from simply assuming that in the short run workers are not perfect mobile across all sectors of the economy. We provide evidence from the PSID in support of this modeling assumption.

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The adoption and diffusion of technological knowledge is generally regarded as a key element in a country's economic success. However, as is the case with most types of information, the transfer of technological knowledge is likely to be sub ject to adverse selection problems. In this paper we examine whether asymmetric information regarding who knows how to run a new technology efficiently can explain a set of observations regarding within and cross-country patterns of technology diffusion. In particular, we show how the dynamics of adverse selection in the market for technological knowhow can explain (1) why inefficient technology use may take over a market even when better practice is available, (2) why widespread inefficient use may persist unless a critical mass of firms switch to best practice, (3) why efficient adoption of new technologies is more likely to occur where the existing technology is already productive, where wages are already relatively high, and where the new technology is not too great an advance over the old one, and (4) why the international mobility of knowledgeable individuals does not guarantee the diffusion of best practice technology across countries.

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The financial crisis of 2007-2008 started with the collapse of the market for Collateralized Debt Obligations backed by sub-prime mortgages. In this paper we present a mechanism aimed at explaining how a freeze in a secondary debt market can be amplified and propagated to the real economy, and thereby cause a recession. Moreover, we show why such a process is likely to be especially strong after a prolonged expansion based on the growth of consumer credit and
endogenously low risk premia. Hence our model offers a new perspective on the links between the real and financial sectors, and we show how it can help make sense of several macroeconomic features of the 2001-2009 period. The key elements of the model are heterogeneity across agents in terms of risk tolerance, a financial sector that allocates systematic risk efficiently across
agents, and real decisions that depend on the price of risk.

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Does switching the composition of jobs between low-paying and high-paying industries have important effects on wages in other sectors? In this paper, we build on search and bargaining theory to clarify a key general equilibrium channel through which changes in industrial composition could have substantial effects on wages in all sectors. In this class of models, wage determination takes the form of a social interaction problem and we illustrate how the implied sectoral linkages can be empirically explored using U.S. Census data. We find that sector-level wages interact as implied by the model and that the predicted general equilibrium effects are present and substantial. We interpret our results as highlighting the relevance of search and bargaining theory for understanding the determination of wages, and we argue that the results provide support for the view that industrial composition is important for understanding wage outcomes.

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Gold rushes are periods of economic boom, generally associated with large increases in expenditures aimed at securing claims near new found veins of gold. An interesting aspect of gold rushes is that, from a social point of view, much of the increased activity is wasteful since it contributes mainly to the expansion of the stock of money. In this paper, we explore whether business cycle fluctuations may sometimes be driven by a phenomenon akin to a gold rush. In particular, we present a model where the opening of new market opportunities causes an economic expansion by favoring competition for market share, which is essentially a dissolution of rents. We call such an episode a market rush. We construct a simple model of a market rush that can be embedded into an otherwise standard Dynamic General Equilibrium model, and show how market rushes can help explain important features of the data. We use a simulated- moment estimator to quantify the role of market rushes in fluctuations. We find that market rushes may account for half the short run volatility in hours worked and a third of the short run volatility of output.

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We address the question of business cycle co-movements within and between countries. We first show that for the U.S. and Canada as well as for Germany and Austria, a stock market innovation in the large country, that does not affect Total Factor Productivity in the short run, does indeed explain much of Total Factor Productivity changes in the long run. We therefore label such a shock a news about Total Factor Productivity of the large country. This shock is shown to act as a demand shock in the data, creating a boom in the large country as well as in the small one. Second, we propose a two-country-two-sector model that is shown to give realistic quantitative predictions. The model builds on the closed economy model of Beaudry and Portier [2004], in which there are limited possibilities to reallocate factors between investment and consumption good sectors. We also show that a canonical Real Business Cycle two-country model cannot account for those responses to technological news shocks we have identified in the data.

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The introduction and diffusion of IT capital is widely viewed as a technological revolution. This paper uses US metropolitan area-level panel data to examine whether the links between PC adoption, educational attainment and the return to skill conform to the predictions of a model of technological revolutions. Our simple neo-classical model implies that a shift in the technological paradigm will increase the return to skill most where skill is most abundant and where the price of skill is initially low. The model also implies that the return to skill should become temporarily insensitive to increases in supply since, instead of putting downward pressure on the return, an increase in skill supply after a ma jor technological innovation should act only to accelerate the transition to the new technology. We find that cross-metropolitan area changes between 1980 and 2000 conform closely to these and other predictions, suggesting that the era of PC diffusion may well deserve its recognition as a technological revolution.

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Micro level studies in developing countries suggest managerial skills play a key role in the adoption of modern technologies. The human resources literature suggests that managerial skills are difficult to codify and learn formally, but instead tend to be learned on the job. In this paper we present a model of the interactive process between on-the-job managerial skill acquisition and the adoption of modern technology. The environment considered is one where all learning possibilities are internalized in the market, and where managers are complementary inputs to non-managerial workers. The paper illustrates why some countries may adopt modern technologies while others stay backwards. The paper also explains why managers may not want to migrate from rich countries to poor countries as would be needed to generate income convergence.

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There are several candidate explanations for macro-fluctuations. Two of the most common discussed sources are surprise changes in disembodied technology and monetary innovations. Another popular explanation is found under the heading of a preference or more generally a demand shock. More recently two other explanations have been advocated: surprise changes in investment specific technology and news about future technology growth. The aim of this paper is to provide a quantitative assessment of the relative merits of all these explanations by adopting a framework which allows them to compete. In particular, we propose a co-integrated SVAR approach that encompasses all 5 shocks and thereby offers a coherent evaluation of the dynamics they induce as well as their contribution to macro volatility. Our main finding is that surprise changes in technology, whether it be of the disembodied or embodied nature, account for very little of fluctuations. In contrast, expected changes in technology appear to be an important force, with preference/demand shocks and monetary shocks also playing non-negligible roles.

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This paper explores how to optimally set taxes and transfers when taxation authorities: (1) are uninformed about individuals' value of time in both market and non-market activities and (2) can observe both market-income and time allocated to market employment. We show that optimal redistribution in this environment involves distorting market employment upwards for low wage individuals through decreasing wage-contingent employment subsidies, and distorting employment downwards for high wage individuals through positive and increasing marginal income tax rates. In particular, we show that whether a person is taxed or subsidized depends primarily on his wage, with the optimal program involving a cut-off wage whereby workers above the cutoff are taxed as they increase their income, while workers earning a wage below the cutoff receive an income supplement as they increase their income. Finally, we show that the optimal program transfers zero income to individuals who choose not to work.

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This paper uses simple economic theory and cross-country observations to discuss the current process of globalization. the emphasis of the paper is directed at under- standing the effects of globalization on between country income inequality and within country inequality.

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It is often argued that changes in expectation are an important driving force of the business cycle. However, it is well known that changes in expectations cannot generate positive co-movement between consumption, investment and employment in the most standard neo-classical business cycle models. This gives rise to the question of whether changes in expectation can cause business cycle fluctuations in any neo-classical setting or whether such a phenomenon is inherently related to market imperfections. This paper offers a systematic exploration of this issue. Our finding is that expectation driven business cycle fluctuations can arise in neo-classical models when one allows for a sufficiently rich description of the inter-sectorial production technology; however, such a structure is rarely allowed or explored in macro-models. In particular, the key characteristic which we isolate as giving rise to the possibility of expectation driven business cycles is that intermediate good producers exhibit cost complementarities (i.e., economies of scope) when supplying goods to different sectors of the economy.

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In this paper we show that the joint behavior of stock prices and TFP favors a view of business cycles driven largely by a shock that does not affect productivity in the short run – and therefore does not look like a standard technology shock – but affects productivity with substantial delay – and therefore does not look like a monetary shock. One structural interpretation we suggest for this shock is that it represents news about future technological opportunities which is first captured in stock prices. We show that this shock causes a boom in consumption, investment and hours worked that precede productivity growth by a few years. Moreover, we show that this shock explains about 50% of business cycle fluctuations.

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This paper examines the extent to which the process of globalization can explain the observed widening in the cross–country distribution of output–per–worker. On the theoret- ical front the model highlights why, when the labor market is sub ject to a holdup problem, the opening up of trade will cause an increase in the dispersion of income across countries similar to that observed in the data. The increase in dispersion in the model arises due to the emergence of a discrepancy between the private and social returns to capital accu- mulation that favors capital abundant countries. On the empirical front, we document the relevance of the model by examining whether growth patterns, decomposition exercises and specialization patterns support the model's predictions. Overall we find that over 50% of the recently observed increase in income dispersion across countries can be accounted for by the mechanism exemplified by the model.

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Here we supplement some earlier work (Beaudry and Portier [2004]) with some new evidence obtained from Japanese and U.S. sectoral data. Our results show that (i) In the U.S. as well as for Japan, Stock Prices short run movements incorporate most (all) of the long run shocks to Total Factor Productivity and (ii) the Stock Price news is indeed a shock that does not affect sectoral T F P s on impact, but that increases T F P in the long run in the sectors that are driving T F P growth, namely durable goods, and among them equipment sectors.

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Medium run macroeconomics refers to aggregate economic phenomena that manifests itself over periods of 10 to 25 years. This area of research has emerged over the last decade as a new and distinct field of inquiry. In this paper, I overview a set of personal attempts aimed at understanding certain medium run phenomena such as: changes in the wage structure, changes in the world distribution of income-per-capita and changes in growth patterns across OECD countries. The goal of the paper is to extract general lessons from these experiences. In particular, I will discuss why models of endogenous technological choice may be a good starting point for studying medium run phenomena.

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Why have some countries done so much better than others over the recent past? In order to shed new light on this issue, this paper provides a decomposition of the change in the distribution of output–per–worker across countries over the period 1960–98. The main finding of the paper is that most of the change in shape of the world distribution of income between 1960–1998 can be accounted for by a very substantial and previously unrecognized change in the parameters driving the growth process. In particular, we show that the role of capital deepening forces – that is the role of investment rates and population growth in affecting output – increased dramatically over the period 1978-98 versus 1960-78, and that this increase can account for almost all the observed changes in the world distribution. In contrast, we do not find any significant effects coming through non–linear convergence mechanisms or increased importance of education; both of which have played prominent roles in recent discussion of economic performance. Our results therefore highlight that the period 1978-98 was particularly advantageous to countries which strongly favored capital accumulation, and hence suggests that research aimed at understanding recent differences in economic performances across countries needs to focus on explaining why the social returns to physical capital accumulation where abnormally high over the period 1978-98.

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Over the last few decades, countries have experienced quite different patterns of productivity growth. In this paper, we emphasize the role of country level demo- graphics in explaining these differences. In particular, looking over the period 1960–2002, we show that cross-country data support the notion that, starting in the late 1970s, countries went through a period of technological transition that lasted at least until the mid-1990s for the fastest adjusting countries and is still proceeding for the slower adjusting countries. The main claim of the paper is that the country-level rate of labour growth was a key factor driving the speed of adjustment to the new technological paradigm, implying that much of the cross-country difference in economic performance over recent decades can be explained by demographic differences across countries as opposed to the many other factors emphasized in the literature.

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This paper examines the determinants of changes in the US wage structure over the period 1976-2000, with the objective of evaluating whether these changes are best described as the result of ongoing skill-biased technological change, or alternatively, as the outcome of an adjustment process associated with a major discrete change in technological opportunities. The main empirical observation we uncover is that change in both the level of wages and the returns to skill over this period appear to be primarily driven by changes in the ratio of human capital (as measured by effective units of skilled workers) to physical capital. Although at first pass this pattern may appear difficult to interpret, we show that it conforms extremely well to a simple model of technological adoption following a major change in technological opportunities. In contrast, we do not find much empirical support for the view that ongoing (factor-augmenting) skill-biased technological progress has been an important driving force over this period, nor do we find support for the view that physical capital accumulation has contributed to the increased differential between more and less educated workers (in fact, we find the opposite).

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This paper explores a theory of business cycles in which recessions and booms arise due to difficulties encountered by agents in properly forecasting the economy's future needs in terms of capital. The idea has a long history in the macroeconomic literature, as reflected by the work of Pigou (Industrial Fluctuation, MacMillan, London, 1926). The contribution of this paper is twofold. First, we illustrate the type of general equilibrium structure that can give rise to such phenomena. Second, we examine the extent to which such a model can explain the observed pattern of U.S. recessions (frequency, depth) without relying on technological regress. We argue that such a model offer a framework for understanding elements of both the recent U.S. recession and of the Asia downturns of the late 1990s.

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This paper proposes a bridge between the Herding literature and the literature on Rational Expectations under asymmetric information. In particular we examine how the presence of discrete investment decisions affects the properties of a market equilibrium where information is costly to acquire. We choose to focus on the case where individual decisions are discrete since this appears to be the key element behind herding results. Our ob jective is to examine whether the equilibrium occurrence of herding type phenomena is likely to arise when actions are simultaneous (as opposed to sequential) and when prices can convey information. Our main result is that, as long as acquiring information is not too costly, the unique equilibrium outcome of our model is characterized by fluctuations in investment that resemble herding behavior. Specifically, equilibrium realizations of prices and investment may be high simply because uninformed investors are buying under the impression that the high price is a signal of good investment opportunities. Moreover, we find an interesting tradeoff between the size and the frequency of aggregate allocative errors, whereby as the cost of gathering information declines the size of allocative errors increases, even though there occurrence decreases. We believe these results provide new impetus for the view that herding type behavior may be relevant for understanding market fluctuations and even eventually business cycle phenomena.

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Over the last twenty years the wage-education relationships in the US and Germany have evolved very differently, while the education composition of employment has evolved in a surprisingly parallel fashion. In this paper, we show how these patterns shed light on the natyre of recent technological change and how they reveal new insights regarding the relevant tradeoffs between wages and employment. In particular, we show that the US and German experiences (1) support the view that recent technological change involves mainly the endogenous adoption of a new organizational form (as opposed to technological progress which is entirely in factor augmenting form) and (2) highlights the importance of taking into account movements in physical capital when assessing the aggregate tradeoff between the wages and the employment of workers of different skills. In particular, we find that changes in physical capital intensities are key to reconicling the US and German experiences and that, ceteris paribus, the US could have prevented much of the increase in wage inequality observed in the eighties by a faster accumulation of physical capital.

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Cross-country observations on the effects of population growth are used to show why differ- ences in rates of growth in working-age population may be a key to understanding differences in economic performance across industrialized countries over the period 1975–1997 versus 1960–1974. In particular, we argue that countries with lower rates of adult population growth adopted new capital-intensive technologies more quickly than their high population growth counterparts, therefore allowing them to reduce their work time without deterioration of growth in output-per-adult.

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In this paper we argue that population growth, through its interaction with recent technological and organizational developments, may account for many cross-country differences in economic outcomes observed among industrialized countries over the past 20 years. In particular, our model illustrates how a large decrease in the price of information technology can create a comparative advantage for high population growth economies to jump ahead in the adoption of computer- and skill-intensive modes of production. They do this as a means of countering their relative scarcity of physical capital. The predictions of the model are that, over the span of the information revolution, industrial countries with higher population growth rates will experience a more pronounced adoption of new technology, a better performance in terms of increased employment rates, a poorer performance in terms of wage growth for less skilled workers, a larger increase in the service sector, and a larger increase in the returns to education. We provide preliminary evidence in support of the theory based on an examination of broad wage movements, employment changes, and computer adoption patterns for a set of OECD countries.

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This paper shows that (i) in contradiction with the conventional view according to which the French depression was mild, there are more similarities than differences between the French and U.S. episode in the Thirties, which is calling for a common or identical explanation of the depression; (ii) technological change (regression or stagnation) is neither sufficient nor necessary to account for the French depression; (iii) institutional and market regulation changes provide an explanation that is quantitatively plauisble, but the causes of those changes are still to be explained.

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This paper o!ers a new perspective on why labor market policies aimed at reducing the cost of business cycles may be warranted and how such policies can be designed in order to improve welfare. To this end, we develop a quantitative dynamic equilibrium model to illustrate how the contractual structure of the labor market may hide signi"cant undiver- si"ed wage risk induced by aggregate #uctuations. The environment analyzed is such that the only imperfectly diversi"ed risk workers bear is the risk of losing their job when the market for new contracts is depressed. When we "t the model to replicate the amount of wage variation estimated from micro-data, we obtain estimates of the potential value of stabilization policies that are substantially larger than those found in the literature. We use this framework to examine several policy issues and, in particular, to show why state-contingent unemployment insurance may dominate non-contingent unemployment insurance schemes.

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In this paper we document the pattern of change in age-earnings profiles across cohorts and evalutate its implications. Using synthetics cohorts from the Survey of Consumer Finances over the period of 1971 to 1993, we show that the age-earnings profiles of Canadian men have been deteriorating for more recent cohorts in comparison with older cohorts. We find this pattern for both high school and university educated workers. In no case do we find evidence that the return to gaining experience has been increasing over time, nor do we find increased within-cohort dispersion of earing. We view these findings as conflicting with the hypothesis that increased skill premia largely explain the observed increase in dipersion of male weekly earnings.

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This paper begins by reviewing the empirical properties of the Phillips Curve in both Canada and the U.S. over the last forty years. In particular, we document the extent to which the slope of the Phillips Curve has declined in both countries over the nineties. Then, building upon a commonly used macromodel, we attempt to explain the decline. The framework we develop focuses on the nature of the Phillips Curve when monetary authorities are imperfectly informed about real developments in the economy but nervertheless try to set monetary policy optimally. Our model explicitly recongnizes two distinct activities performed by the central bank. On one hand, the central bank tries to provide sufficient liquidity to help privat agents exploit gains from trade during periods in whice prices are pre-set. On the other hand, the central bank also performs an informatoin-gathering role as it continously tries to infer the state of the economy. We show how this dual role gives rise to a Phillips Curve relationship with both exhibits causality running from output to prices and justifies a feedback from prices to the setting of monetary instruments. Based on this model, we argue that the observed flattening of the Phillips Curve may be the result of improvements in the manner in which central banks gather information regarding real forces affecting the economy, and that the flattening is not a reflection of a change in the output-inflation tradeoff faced by the central bank. Finally, we compare our proposed explanation of the flattening of the Phillips Curve with leading alternative hypotheses.

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In economics, politics and society, examples abound where agents can enter partial cooperatoin schemes, ie, they can collude with a subset of agents. Several contributions devoted to specific settings have claimed that such partial cooperation actually worsens welfare compared to the no-cooperation situation. Our paper assesses this view by highlighting the forces that lead to such results. We find that the nature of strategic spillovers is central to determining whether partial cooperation is bad. Our propositions are then applied to various examples as industry wage bargaining or local public goods.

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This paper analyzes the evolution of the labour market participation rate of men and women age 15 to 24 from 1976 to 1998. The main question being asked is why youth participation rates fell precipitously during the 1990s? We look at two dimensions of this decline: changes in the fraction of youth who participate in the labour market but do not attend school (non-student participation rate) and changes in the employment rate among students. We find that the decline in the non-student participation rate is a consequence of two factors: (i) the overall bad state of the labour market in Canada during the 1990s and (ii) the large increase in school enrolment rates induced by factors other than the state of the labour market. One important finding is that demographic change (baby boom versus baby bust) is a key explanation behind the steep increase in enrolment rates during the 1980s and 1990s. The only component of youth outcomes in the 1990s which we are unable to reasonably explain is the fall in the employment rate of students age 15 to 19.

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This paper compares several methods for estimating the effects of monetary innova- tions on key macroeconomic variables and, subsequently, clarifies issues related to the use of instrumental variables in the identification of structural impulse responses. In particular, we make explicit the property that a measure of monetary policy must satisfy in order to identify the effects of monetary shocks. Within our framework we find that none of the currently popular methods of identifying the effects of monetary shocks are supported by the data. We also indicate how current approaches can be combined to provide unbiased estimates of the effects of monetary disturbances.

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This paper beings by documenting the extent to which the predictions of standard Real Business Cycle (RBC) models are incompatible with observed movements in real interest rates. The main finding of the paper is that extending the baseline model to include habit persistence in consumption and adjustment costs to capital significantly improves the model's empirical performance. In our evaluation of the model's performance, we take special care of estimating and testing predictions of the model using both moments drawn directly from the data and moments calculated after identifying shocks to the stochastic trend.

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This paper uses state-level consumption data to estimate the intertemporal elasticity of substitution of consumption (IES.) In contrast to the results of Hall (1988) and Campbell and Mankiw (1989), we provide evidence indicating that IES is significantly different from zero and probably close to one. Since inference about the IES in the context of the standard Euler equation is problematic as a result of mis-specification bias, we cast most of our discussion in the context of the framework developed by Campbell and Mankiw. This modifies the Euler equation in that a fraction of agents simply consume their income. The use of panel data to examine the relationship between interest rates and consumption growth has two advantages. First, we achieve a significant increase in precision, which in particular allows us to rule out a zero IES. Second, we can use the panel aspect of the data to bypass asset return measurement problems. In particular, we identify a common time component in expected consumption growth that is associated with movements in interest rates when IES is positive.

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This paper examines the determinants of hours worked when employment relationships are influenced by rish-sharing considerations. The environment considered is an extension of the standard symmetric-information risk-sharing model that allows for the possiblity of enforcement problems on the part of both the employer and the employee. We show that this class of rish-sharing models unambiguously predicts hours to be influenced by wages only through an income effet. Using data from the PSID, we find evidence in favor of this extended version of the risk-sharing model.

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This paper prvides a unifying framework for studying renegotiation of contracts in the presence of asymmetric information. We show the interim renegotation does not constrain the set of contracts attainable with full commitment, regardless of whether renegotiation offers are made by the informed or the uninformed agent. Expost renegotiation, however, does constrain the set of attainable contracts. These constraints depend on the identity of the agent making the renegotiation offer. We then show how the theory of contract renegotiation can provie insights for organization theory. Specifically, we show how decentralization of decision making can be an optimal response to the threat of expost renegotiation. Finally, we show that our framework can be used to analyse the trade-off between internal and external markets.

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This paper examines how the possiblity of recontractng affects the financing of projects when an entrepreneur is privately informed about the distribution of returns. We consider a game where an entrepreneur solicits initial financing for a project from competing uninformed financiers. Once the project is undertaken, but before its returns are realized, the entrepreneur can solicit additional financial contracts fomr competing financiers. It is assumed that these financiers can observe all previously signed contracts and that the seniority of claims is respected in the case of bankruptcy; however, the entrepreneur is nerver committed not to sell junior claims to competing financiers. The main results of the paper are that (1) the equilibrium is characterized by seperation but nevertheless the modalities of financing depend critically on the market's priors about the project's riskiness, in particular, the amount of collateral posted by the entrepreneur varies with the market's prior preceptions about the project, (2) when the market is optimistic about the project, there exists a unique equilibrium outcome, it is seperating, but the standard incentive-compatibility constraints are not binding, (3) even if the market is very pessimistic about a project's chances of success, there always exists an equilibrium in which a good project receives sufficient financing, that is, the market does not collapse due to Lemons effect, (4) the entrepreneur's inability to commit not to recontract may be considered Pareto improving in certain situations. We discuess how the results of the paper may help explain observed financial flows.

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We examine why different renegotiation processes can lead to opposite results regarding the commitment value of third-party contracts in the presence of asymmetric information. Our main result is that a contract loses all strategic value if renegotiation is allowed during the production stage rather than only before production beings. This result casts serious doubt on the relevance of previous findings which emphasize how contracts can have commitment value even in the presence of renegotiatoin. Our analysis can also be used to understand the differences between many of the results in the renegotiation literature.

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This paper characterizes incentive contracts for the situation where a principal is privately informed about the technology governing an agency relationship. In contrast to a standard principal-agent relationship, it is shown that a principal who values effort highly will choose to induce effort by paying a high base wage and low bonus payments. Moreover, the equilibrium contract has the principal transferring rents to the agent even though contracting possibilities are unrestricted and both principal and agent are risk neutral. Consequently, the informed-principal framework is shown to provide a rational for the payment of efficiency wages.

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For both empirical and theoretical reasons, the mechanism by which existing efficiency-wage models link job rationing with turnover costs is unsatisfactory. This paper extends the standard turnover-efficiency-wage model by formally examining the determination of wages as the outcome of a self-enforcing contract. The problem is analysed as a game of asymmetric information in which the entry level wage plays a signalling role about the credibility of the future wage payments. Suggestive evidence in favour of the model is provided by an examination of the restrictions imposed on wage profiles.

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This paper examines how the possibility of renegotiation affects contractual outcomes in environments in which adverse selection is a problem. The game setup is an extension of the one-shot signalling game in which an infinite number of rounds of renegotation are permitted before contracted actions are in fact executed. The main results of the paper are (1) executed contracts may still contain distortions although players can never commit not to renegotiate, (2) the popular "efficient" separating-equilibrium outcome of one-shot signalling games is never an equilibrium outcome when an infinite number of rounds of renegotiation are permitted, (3) standard incentive-compatibility constraints can be easily generalized to incorporate situations that allow for an infinite number of rounds of renegotiation, (4) equilibrium outcomes can be separating and nevertheless depend on the uninformed player's priors as informed type of pool in the first stage and use the renegotation stages to separate, (5) renegotiation in signalling games may lead to outcomes similar to equilibrium outcomes of screening games in which multiple contract purchases are allowed.

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This article studies the potential links between the value of collateral and the investment decisions made by firms. We show that the use of collateral is an endogenous response to the presence of asymmetric information in financial markets. We then show that permanent shocks to the value of collateral can cause firms to temporarily postpone their investments. This creates a link between imperfections in financial markets and inverstment decisions made by firms.

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In this paper we address the question of whether wages are affected by labor market conditions in a manner more consistent with a contract approach than with a standard sport market model. From a simple implicit contract model, we derive implications about the links between wages and past labor market conditions. Using individiual data from the Current Population Survery and the Panel Study of Income Dynamics, we find that an implicit contract model with costless mobility describes these links better than either a simple spot market model or an implicit contract model with costly mobility.

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