"Gold Rushes Fever in Business Cycles" (with Fabrice Collard and Franck Portier), Journal
Of Monetary Economic, 2011.
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.
"Propagation of International News Shocks" (with Martial Dupaigne and Franck Portier), Review of Economic Dynamics, Volume 14(1) January 2011.
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 , 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.
"Endogenous Sill-Bias in Technology Adoption: City Level Evidence from the IT Revolution",
(with Mark Doms and Ethan Lewis), Journal of Political Economy, Volume 118(5),
October 2010, 988-1036.
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
"Organizational Skill and Management in the Theory of Economic Growth" (with Patrick
Francois). 2010, 77(1), 90-126. Review of Economic Studies.
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.
"Letting Different Views about Business cycles compete" (with Bernd Lucke).
NBER Macroeconomics Annual 2009, 2010, Volume 24, 413-455.
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.
"Taxes and Employment Subsidies in Optimal Redistribution Programs", (with Charles
Blackorby and Deszo Salay). March 2009, American Economic Review
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.
"Mondialisation et Disparite de Revenus". Actualite Economique, 2007.
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
"When can Changes in Expectations cause Business Cycle Fluctuations." (with Franck
Portier). 135(1), July 2007, 458-477, Journal of Economic Theory.
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.
"News, Stock Prices and Economic Fluctuations", (with Franck Portier ), American
Economic Review, 96(4), September 2006, 1293-1307
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.
"Globalization, Returns to Accumulation, and the World Distribution of Income" (with
Fabrice Collard), Journal of Monetary Economics, 53(5), 2006, 879-909.
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.
"Stock Prices, Total Factor Productivity and Economic Fluctuations: Evidence from Japanese
Data and US Sectoral Data. (with Franck Portier), Journal of Japanese and the International
Economy , 19, 2005, 635-652.
Here we supplement some earlier work (Beaudry and Portier ) 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.
"Medium Run Macroeconomics", Canadian Journal of Economics, 38(4), November 2005
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.
"Explaining Productivity Growth: The Role of Demographics " (with Fabrice Collard and
David Green), International Productivity Monitor, 10, spring 2005, 49-65.
" Changes in the World Distribution of Output-per-capita 1960-98: How a Standard
Decomposition tells an Unorthodox Story" (with Fabrice Collard and David Green). The
Review of Economics and Statistics, 87(4), 2005, 741-753.
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.
"Demographics and recent productivity performance: insight from cross-country
comparisons" (with Fabrice Collard and David Green), Canadian Journal of Economics, vol
38(2), May 2005, 309-344.
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.
" Changes in US Wages 1976-2000: Ongoing Skill Bias or Major Technological Change."
(with David Green), Journal of Labor Economics, 23(3), July 2005.
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).
"Exploring Pigou's Theory of Cycles" (with Franck Portier), Journal of Monetary
Economics ,vol 51(6), 2004, 1183-1216.
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.
"An Equilibrium Analysis of Information Aggregation in Investment Markets with discrete
Decisions", (with Francisco Gonzalez), Journal of Economic Theory, 113(1), November 2003,
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.
"The Changing Structure of Wages in the US and Germany: What explains the differences?"
(with David Green), American Economic Review, June 2003, pp 573-603.
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.
"Recent Technological and Economic Change among Industrialized Countries: Insights from
Population Growth", (with Fabrice Collard), Scandinavian Journal of Economics, vol 105(3),
2003, pp 441-463.
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.
" Canada-US Integration and Labour Market Outcomes; A perspective within the general
context of globalization", (with David Green), in North American Linkages: Opportunities and
Challenges for Canada, Richard Harris Editor, University of Calgary Press, 2003, pp 253-280.
The PDF link is missing.
"Population Growth and Economic Outcomes During the Information Revolution", (with
David Green) , Review of Economic Dynamics, October 2002
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.
"France during the Great Depression", (with Franck Portier), Review of Economic
Dynamics, January 2002.
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.
"The Cost of Business Cycles and the value of stabilization Policy" (with Carmen Pages),
European Economic Review), August 2001.
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
"Macroeconomic Uncertainty, the Predictability of Prices and the Allocation of Investment"
(with Mustafa Caglan and Fabio Schiantarelli), American Economic Review , June 2001, 648-
"Cohort Patterns in Canadian Earnings: Assessing the Role of Skill Premia in Inequality
Trends" (with David Green), in The Canadian Journal of Economics, November 2000
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.
" What has happened to the Phillips Curve in Canada over the 1990s? (with Matt Doyle), in
Price Stability and the long term target of Monetary Policy, Bank of Canada, June 2000.
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.
"When is it Harmful to Allow Partial Cooperation", (with Pierre Cahuc and Hubert Kempf),
The Scandinavian Journal of Economics, January 2000.
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.
"What is Happening in the Youth Labour Market", (with Thomas Lemieux and Daniel
Parent), Canadian Public Policy, 2000.
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.
"Employment Outcomes in Canada: A Cohort Analysis", (with David Green), in Adaption
Public Policy to a Labour Market in Transition, IRPP, 2000.
The PDF link is missing.
"Evolution of the Female Labour Force Participation Rate in Canada, 1976-1994". (with
Thomas Lemieux), Canadian Business Economics, 7, May 1999, 57-70.
"Individual Responses to Changes in the Canadian Labour Market", (with David Green), in
Canada in the 21st Century: Responding to the Challenges, Industry Canada, December 1998.
The PDF link is missing.
"Estimating the Effects of Monetary Shocks: A Comparison of DifferentApproaches" (with Makoto Saito) Journal of Monetary Economics, 42, October 1998, 241-261.
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.
"What Do Interest Rates Reveal about the Functioning of Real Business Cycles" (with Alain Guay), Journal of Economic Dynamics and Control, 20, December 1997, 1661-1682.
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.
"Le Chomage des Annees 80: lecons a tirer des Comparaisons Internationales", (with Thomas Lemieux), L'Actualite Economique, septembre 1996, 291-305.
"Alternative Specifications for Consumption and The Estimation of the Intertemporal
Elasticity of Substitution" (with Eric van Wincoop),Economica, August 1996, pp495-512.
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.
"Is the Behavior of Hours Worked Consistent with Implicit Contract Theory?" (with John DiNardo), The Quarterly Journal of Economics, August 1995, pp 742-768.
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.
"Monetary Policy and the Real Exchange Rate in a Price Setting Model of Monopolistic Competition" (with Michael Devereux), Carnegie-Rochester Conference Series, November 1995, 55-102.
The PDF link is missing.
"Contract Renegotiation: A Simple Framework and Implications for Organization Theory"
(with Michel Poitevin), Canadian Journal of Economics, May 1995, 302-335.
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.
"Competitive Screening when Clients can Recontract" (with M.Poitevin), Review of
Economic Studies, 62, September 1995, 401-423.
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.
"Labor Markets in an Era of Adjustment: A Case Study Of Ghana" , (with N.K.Sowa), in Labor Markets in an Era of Adjustment, EDI Symposium Series, World Bank, S.Horton, R.Kanbur and D.Mazumdar Editors, 1994, 357-404.
"The Commitment Value of Contracts Under Dynamic Renegotiation" (with Michel
Poitevin), The RAND Journal., November 1994. 501-517
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.
"Why an Informed Principal May Leave Rents to An Agent", International Economic
Review, November 1994, 821-832.
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.
"Entry Wages Signalling Future Wages: A Foundation to Turnover Models of
Unemployment" Canadian Journal of Economics , November 1994, 884-902.
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.
"Signalling and Renegotiation in Contractual Relationships", (with M. Poitevin)
Econometrica, July 1993, 745-782.
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.
"Do Recessions Permanently Change Output" (with Gary Koop), The Journal of Monetary Economics, June 1993, 149-163.
The PDF link is missing.
"Le rôle du collatéral dans le report des investissements en présence d'asymétries
d'information" (with Marcel Boyer and Michel Poitevin), L'Actualite Economique, March 1993, 117-135.
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.
"The Effects of Implicit Contracts on the Behavior of Wages over the Business Cycle", (with J. DiNardo), Journal of Political Economy, August 1991, 665-688.
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.