MONETARY NEUTRALITY UNDER EVOLUTIONARY DOMINANCE OF BOUNDED RATIONALITY

We provide evolutionary game‐theoretic microfoundations to a dynamic complete nominal adjustment in response to a monetary shock by introducing a novel analytical notion that we call boundedly rational inattentiveness. We investigate the behavior of the general price level in a context where a firm can either pay a cost (featuring a random component) to update its information set and establish the optimal price (Nash strategy) or freely use non‐updated information and establish a lagged optimal price (bounded rationality strategy). We devise evolutionary microdynamics (with and without mutation) that, by interacting with the dynamics of the aggregate variables, determines the coevolution of the frequency distribution of information‐updating strategies in the population of firms and the extent of the nominal adjustment of the general price level to a monetary shock. As it turns out, evolutionary learning dynamics take the information‐updating process to a long‐run equilibrium configuration in which, albeit either most or even all firms play the bounded rationality strategy, the general price level is the symmetric Nash equilibrium price and the monetary shocks have persistent, although not permanent, impacts on real output. (JEL E31, C73, D83)     

PRICING UNDER FEDERAL MILK MARKET REGULATION

Federal milk market regulation sets the wholesale price of most fluid milk in this country. This paper explores the purposes served by price-setting procedures under regulation and their quantitative impact. The institutional and theoretical background is provided, and an econometric model of a regulated milk market is estimated. The latter demonstrates that actual prices are consistent with those which would maximize producer benefit in 1960 and 1970, and that regulation produces quite substantial effects on prices and quantities within markets, on price patterns among markets, and on income distribution and economic efficiency.     

ALL-TERRAIN VEHICLES: MARKET REACTION TO RISK INFORMATION

This article examines the market response to new risk information implicit in a recent regulatory stop-sale of new three-wheeled all-terrain vehicles. A hedonic price analysis is used to quantify the stop-sale's impact in the secondhand market, a market segment not directly affected by the stop-sale. The analysis shows a substantial reduction in the price of three-wheeled all-terrain vehicles relative to the price of less risky models. This result is consistent with rational economic behavior and suggests that providing new risk information can improve market effciency.     

RISK ASSESSMENT UNDER A NONLINEAR FISCAL POLICY RULE

In the aftermath of the recent debt crisis, many countries are implementing nonlinear fiscal policy rules, whereby the government's responsiveness to debt strengthens at higher levels of debt. This paper examines how a nonlinear fiscal policy rule affects the possibility of future insolvency in a small open economy. We find that (1) the criteria for a nonlinear fiscal rule to eliminate explosive behavior should be tighter than the ones proposed by Bohn (1998); (2) a country that adopts a nonlinear fiscal rule could substantially reduce the probability of a solvency crisis; and (3) a nonlinear fiscal rule allows a country to reduce the possibility of insolvency without large initial responsiveness. (JEL C63, E62, E63, F34, H63)     

COMPETITIVE FIRM BEHAVIOR UNDER RISK IN DISEQUILIBRIUM TRADING

The objective of this paper is to study the behavior of the purely competitive firm in a market in which traders' plans may not be realized each period. The emphasis of the study is motivated by a desire to introduce explicit price-makers into the theory of competitive markets. The method of introducing price-makers may lead to situations in which markets are not cleared each period and shortages may arise with the realization of plans being in doubt. In this environment traders learn to adjust decisions to offset periodic disappointment. Multiperiod models are introduced to analyze the decision process of the competitive firm in the market and stochastic dynamic programming methods are used to obtain characteristics of optimal plans. Results are compared to the situation in which plans are always realized.     

THEORIES OF RISK: TESTING INVESTOR BEHAVIOR ON THE TAIWAN STOCK AND STOCK INDEX FUTURES MARKETS

This article considers four utility functions—concave, convex, S‐shaped, and reverse S‐shaped—to analyze the behavior of different types of investors on the Taiwan stock index and its corresponding index futures. Using stochastic dominance (SD) rules, we show that the existence of all four investor types is plausible. Risk averters prefer spot to futures, whereas risk seekers prefer futures to spot. Investors with S‐shaped utility functions prefer spot (futures) to futures (spot) when markets move upward (downward). Investors with reverse S‐shaped utility functions prefer futures (spot) to spot (futures) when markets move upward (downward). We show that both spot and futures markets can exist when only risk averters are present, but futures can dominate spot only if there is some risk‐seeking behavior. These results are robust with respect to subperiods, spot returns including dividends, and diversification. (JEL C14, G12, G15)     

INFORMATION VALUE UNDER DEMAND UNCERTAINTY AND ENDOGENOUS MARKET LEADERSHIP

In an oligopoly model with firms choosing to produce in one of two periods, we identify the circumstance under which a firm's having early information regarding stochastic demand results in market leadership. High demand volatility leads to Stackelberg competition with the information‐advantaged firm leading. In the N‐firm case an equilibrium with multiple leaders and multiple followers emerges endogenously. In a duopoly information acquisition game we identify conditions that determine whether neither, one, or both firms will pay to acquire early information and note that one firm's obtaining early information may generate a positive externality benefitting its competitor. Both symmetric and asymmetric outcomes are possible and Stackelberg market leadership may occur in equilibrium, but only when firms have different costs of information. Our finding that an information advantage may convey leadership which then affects the value of information to the players applies to other settings exhibiting first‐mover advantage such as certain public good provision games. (JEL C72, D82, L13)     

RISK, TRANSACTIONS CHARGES, AND THE MARKET FOR FOREIGN EXCHANGE SERVICES

This paper suggests that transactions charges in foreign exchange markets, rather than being solely brokerage fees, represent exchange rate uncertainty in periods of great fluctuations by including remuneration for the assumption of risk by foreign exchange dealers. Since most of the cost of exchange rate uncertainty may be largely endogenously included in the foreign exchange markets, attempts to examine the efficient market hypothesis in these markets should most appropriately include specific consideration of transactions costs. There appears to be empirical support for the premise that transactions charges are positively related to exchange rate risk, and, as well, inclusion of contemporaneous bid-ask spreads into the interest parity schedule leaves few unexplained profits from dollar-pound covered interest arbitrage during the 1970's and underscores the notion of classifying periods by degree of turbulence in analyzing covered interest arbitrage.     

A TEST OF STEADY-STATE GOVERNMENT-DEBT NEUTRALITY

This paper investigates whether in the steady state the real interest rate is an increasing function of both the government debt and government spending. Using data from the period between January 1981 and March 1986, the paper fin& no evidence of such a relationship. These data afford an especially powerful test because the ratio of federal debt to trend output, which had fallen from 93 to 33 percent between January 1948 and December 1980, reversed course after the enactment of the Economic Recovery Tax Act, reaching 47 percent in March 1986.     

FOUCAULDIAN HOG FUTURES:

The development of mega-hog farms is a contentious topic throughout the United States that has garnered a lot of attention in the past five years. This article examines the construction of mega-hog farms in light of Michel Foucault's (1977) analysis in Discipline and Punish . I argue that Foucault provides a good starting point but that to understand current forms of agriculture we must extend his framework to include nonhuman animals as active in discipline and resistance. In order to comprehend how swine farming has shifted from the ancien regime to the disciplinary regime, I provide details on the mutual construction of the swine, the farmer, confinement architecture, and legislation.     

SPECULATIVE INTENSITY AND SPOT AND FUTURES PRICE VARIABILITY

This paper develops a simultaneous stochastic rational-expectations model of futures- and spot-price determination. Using the model, we find that increases in what we term speculative intensity increase spot-price variability arising from storage-cost shocks, but decrease spot-price variability arising from demand shocks. In contrast, increases in speculative intensity unambiguously decrease futures-price variability, regardless of the underlying source of disturbances. We are able to develop these comparative-static results because the model has a unique equilibrium.     

DO PRICES LEAD MONEY? A REEXAMINATION OF THE NEUTRALITY HYPOTHESIS

In one class of theoretical models, real epects occur only if changes in money growth are expected to occur in some future period, if expected in the current period, they are neutral. Some empirical models examine the neutrality of expected current money growth and therefore do not directly address the neutrality of expected future growth. This paper develops an empirical model that explicitly incorporates expected future changes in money growth. A reexamination of the rationality, neutrality, and macro-rational expectations hypotheses over a sample of four countries suggests that the use of expected future money growth results in strong rejections of the neutrality hypothesis.     

A MODEL OF "FAMILY FAIRNESS" AND ITS IMPLICATIONS FOR DEBT NEUTRALITY

Evidence suggests that a signcant proportion, though by no means all, of bequests is equally divided among the beneficiaries. This is inconsistent with standard models of bequests, which predict that equal division should occur only by chance. This paper proposes a modified model incorporating "family fairness" as well as utilitarianism as an influence on behavior. Various implications for debt neutrality are analyzed.     

THE “SALES AGENT” PROBLEM: EFFORT/LEISURE ALLOCATION UNDER PERFORMANCE PAY AS BEHAVIOR TOWARDS RISK

The choice between safe and risky assets represents behavior towards risk: more risk‐averse investors buy more safe assets. We develop and test a general model that applies this intuition to the time allocation between risky effort and risk‐free leisure under linear incentives. When risk increases with effort, risk‐averse agents choose less effort, but when risk is independent of effort, effort choice is unaffected by risk preferences. In many incentive contracts, income risk is multiplicative with, rather than additive to effort, sales commissions being one example. In such cases, lower effort by the risk‐averse is a hitherto undocumented behavior towards risk (JEL C91, M52, J33)     

CORPORATE CONTROL AND RISK

Previous empirical research examining the link between firm risk and the type of stockholder control has yielded conflicting results. These studies have sorted firms into two categories, owner-controlled firms and manager-controlled firms, even though the theoretical discussion implies behavior associated with three distinct groups. This paper argues both theoretically and empirically that an owner-manager has more incentive and more opportunity to take risks than a hired manager. Moreover, a hired manager under the control of a dominant stockholder has less opportunity and less incentive to take risks than managers in firms without a dominant stockholding interest.     

SPECULATIVE STORAGE, FUTURES MARKETS, AND THE STABILITY OF COMMODITY PRICES

A theoretical dynamic model is developed that integrates the micro-behavior of commodity and futures speculators into the simultaneous determination of cash and futures prices in a storable commodity market. The model is used to demonstrate the way in which the introduction of a futures market, by affecting the decisions of speculative inventory holders, alters the distribution of spot prices and to elucidate the conditions that render futures trading stabilizing for cash prices.