Economics Research Works

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Path Curves and Plant Buds: an Introduction to the Work of Lawrence Edwards
(International Institute for Applied Systems Analysis, 1979-07) Almon, Clopper
Lawrence Edwards has shown that many flowering plants have buds with an outline in the form of a path curve, the curve that a point follows under repeated projective transformation of the plane into itself. Edwards, however, did not give a formula for these curves nor did he fit the curves by the standard method of least squares. This paper gives an elementary exposition of the method used by Edwards, shows its relation to projective geometry, and then uses homogeneous coordinates, linear differential equations and characteristic values and vectors of a matrix to derive the formula for path curves. This formula is then used to fit path curves by least squares to data provided by Edwards for the buds of 150 plants. Most buds are fit very closely.
Nonrandom Mixing Models of HIV Transmission
(Springer-Verlag, 1989) Kaplan, Edward H.; Cramton, Peter; Paltiel, A. David
Models of HIV transmission and the AIDS epidemic generally assume random mixing among those infected with HIV and those who are not. For sexually transmitted HIV, this implies that individuals select sex partners without regard to attributes such as familiarity, attractiveness, or risk of infection. This paper formulates a model for examining the impact of nonrandom mixing on HIV transmission. We present threshold conditions that determine when HIV epidemics can occur within the framework of this model. Nonrandom mixing is introduced by assuming that sexually active individuals select sex partners to minimize the risk of infection. In addition to variability in risky sex rates, some versions of our model allow for error (or noise) in information exchanged between prospective partners. We investigate several models including random partner selection (or proportionate mixing), segregation of the population by risky sex rates, a probabilistic combination of segregation and random selection induced by imperfect information (or preferred mixing), and a model of costly search with perfect information. We develop examples which show that nonrandom mixing can lead to epidemics that are more severe or less severe than random mixing. For reasonable parameter choices describing the AIDS epidemic, however, the results suggest that random mixing models overstate the number of HIV infections that will occur.
Shrewd Bargaining on the Moral Frontier: Toward a Theory of Morality in Practice
(Philosophy Documentation Center, 1991) Dees, J. Gregory; Cramton, Peter
From a traditional moral point of view, business practitioners often seem overly concerned about the behavior of their peers in deciding how they ought to act. We propose to account for this concern by introducing a mutual trust perspective, where moral obligations are grounded in a sense of trust that others will abide by the same rules. When grounds for trust are absent, the obligation is weakened. We illustrate this perspective by examining the widespread ambivalence with regard to deception about one’s settlement preferences in negotiation. On an abstract level, such deception generally seems undesirable, though in many individual cases it is condoned, even admired as shrewd bargaining. Because of the difficulty in verifying someone’s settlement preferences, it is hard to establish a basis for trusting the revelations of the other party, especially in competitive negotiations with relative strangers.
Promoting Honesty in Negotiation: An Exercise in Practical Ethics
(Philosophy Documentation Center, 1993) Cramton, Peter; Dees, J. Gregory
In a competitive and morally imperfect world, business people are often faced with serious ethical challenges. Harboring suspicions about the ethics of others, many feel justified in engaging in less-than-ideal conduct to protect their own interests. The most sophisticated moral arguments are unlikely to counteract this behavior. We believe that this morally defensive behavior is responsible, in large part, for much undesirable deception in negotiation. Drawing on recent work in the literature of negotiations, we present some practical guidance on how negotiators might build trust, establish common interests, and secure credibility for their statements thereby promoting honesty. We also point out the types of social and institutional arrangements, many of which have become commonplace, that work to promote credibility, trust, and honesty in business dealings. Our approach is offered not only as a specific response to the problem of deception in negotiation, but as one model of how research in business ethics might offer constructive advice to practitioners.
The Determinants of U.S. Labor Disputes
(University of Chicago Press, 1994) Cramton, Peter; Tracy, Joseph S.
We present a bargaining model of union contract negotiations, in which the union decides between two threats: the union can strike or continue to work under the expired contract. The model makes predictions about the level of dispute activity and the form the disputes take. Strike incidence increases as the strike threat becomes more attractive, because of low unemployment or a real wage drop during the prior contract. We test these predictions by estimating logistic models of dispute incidence and dispute composition for U.S. labor contract negotiations from 1970 to 1989. We find empirical support for the model's key predictions, but these associations are weaker after 1981.
Wage Bargaining with Time-Varying Threats
(University of Chicago Press, 1994) Cramton, Peter; Tracy, Joseph S.
We study wage bargaining in which the union is uncertain about the firm's willingness to pay and threat payoffs vary over time. Strike payoffs change over time as replacement workers are hired, as strikers find temporary jobs, and as inventories or strike funds run out. We find that bargaining outcomes are substantially altered if threat payoffs vary. If dispute costs increase in the long-run, then dispute durations are longer, settlement rates are lower, and wages decline more slowly during the short-run (and may even increase). The settlement wage is largely determined from the long-run threat, rather than the short-run threat.
Money Out of Thin Air: The Nationwide Narrowband PCS Auction
(Blackwell, 1995) Cramton, Peter
The Federal Communications Commission held its first auction of radio spectrum at the Nationwide Narrowband PCS Auction in July 1994. The simultaneous multiple-round auction, which lasted five days, was an ascending bid auction in which all licenses were offered simultaneously. This paper describes the auction rules and how bidders prepared for the auction. The full history of bidding is presented. Several questions for auction theory are discussed. In the end, the government collected $617 million for ten licenses. The auction was viewed by all as a huge success—an excellent example of bringing economic theory to bear on practical problems of allocating scarce resources.
Why is 'The Market' so Unforgiving? Reflections on the Tequilazo
(1996-09-21) Calvo, Guillermo A.
Mexico’s financial debacle and its impact on other emerging markets (the Tequila effect) has raised many fundamental questions. Mexico achieved fiscal balance in 1993, undertook several fundamental market-oriented reforms, signed a free trade agreement with a very large market (the NAFTA), became a member of the OECD, and was hailed by international institutions as a paramount example of successful reform. Yet, the December 20, 1994, devaluation brought the economy down like a house of cards. Output fell by more than 7 percent in 1995, the current account deficit sharply swung from about 8 percent of GDP in 1994 to zero, and investors turned their noses away from high-yield Mexican public debt even though the international community had plunked about $50 billion in a rescue package. In addition, Mexican problems quickly spread around the world’s emerging markets, including those exhibiting long and enviable track records.
Synergies in Wireless Telephony: Evidence from the Broadband PCS Auctions
(Blackwell, 1997) Ausubel, Lawrence M.; Cramton, Peter; McAfee, R. Preston; McMillan, John
We examine bid data from the first two broadband PCS spectrum auctions for evidence of value synergies. First, we estimate a benchmark regression for the determinants of final auction prices. Then, we include variables reflecting the extent to which bidders ultimately won or already owned the adjacent wireless properties. Consistent with geographic synergies in an ascending-bid auction, prices were higher when the highest-losing bidder had adjacent licenses. The footprints of winning bidders suggest that they were often successful in realizing these synergies.
Monetary and Exchange Rate Policy for Mexico: Key Issues and a Proposal
(1997-06-08) Calvo, Guillermo A.
In these notes I lay out basic considerations which I believe are relevant for the design of monetary/exchange-rate policy, MEP, in Mexico. In my view, there are no ‘magic’ formulas. For some countries, an iron-clad currency board may be a desirable arrangement, while for others flexible exchange rates would be appropriate. This is so because ‘money’, unlike regular goods like bread, derives its value from convention, institutions and, more than any other good, from expectations. Thus, a key consideration in the design of MEP is the credibility of policymakers - - the latter being heavily determined by history and institutions which are, by necessity, countryspecific. Section II discusses some traditional goals of MEP, while Section III examines the role of credibility and flexibility to ensure its effectiveness. Section IV studies the recent experience in Mexico and shows that the proximate case for the 1994 financial debacle was a failed attempt at interest-rate smoothing, coupled with having ignored the role of external factors. Moreover, this section briefly examines MEP after the crisis. It concludes that MEP is highly accommodative and may have contributed to the existence of a “peso problem.” The latter, in turn, may give rise to further real appreciation of the currency. Section V presents a brief summary of the pros and cons of different MEPs. This is complemented in Section VI with a discussion of other policies and considerations that are essential for the sustainability of any MEP. More specifically, I will discuss the role of fiscal policy, management of domestic public debt and the role of the financial sector. Section VII offers some ideas for a MEP for Mexico based on previous considerations. In a nutshell, I propose adopting a system of flexible exchange rates, much like the present one, but with a longer horizon and complemented with a sliding floor on the nominal exchange rate to prevent large and sudden currency appreciation. Furthermore, I argue in favor of free-floating interest rates and no controls on capital mobility, except for reserves requirements aimed at preventing sudden and sizable growth in bank credit. Comparison with present MEP and some criticisms are discussed in Section VIII. Questions about long-term goals and transition are presented in Section IX. Appendix I examines a simple formal model to rationalize the effect of the MEP after the December 1994 crisis, while Appendix II analyzes some technical implications of the proposed exchange rate rule.
Using Auctions to Divest Generation Assets
(Elsevier Science, 1997-12) Cameron, Lisa J.; Cramton, Peter; Wilson, Robert
In most states, ratepayers will compensate utilities for their stranded costs. As a result, these costs must be measured as accurately as possible, in a manner that is easily understood by all concerned parties. We describe the options for measuring stranded costs and argue that a simultaneous ascending auction is the best approach.
The Use of Replacement Workers in Union Contract Negotiations: The U.S. Experience, 1980-1989
(University of Chicago Press, 1998) Cramton, Peter; Tracy, Joseph S.
It is argued in many circles that a structural change occurred in U.S. collective bargaining in the 1980s. Strike incidence declined, dispute incidence increased, and the composition of disputes shifted away from strikes and toward holdouts. We investigate the extent to which the hiring of replacement workers can account for these changes. For a sample of over 300 major strikes since 1980, we estimate the likelihood of replacements being hired. We find that the risk of replacement is lower for bargaining units with more experienced workers, and declines during tight labor markets. The composition of disputes shifts away from strikes as the predicted risk of replacement increases. In addition, the overall level of disputes increases as a result of the shift in the composition of disputes. Based on our estimates reducing the predicted replacement risk faced by bargaining units to the pre-1982 levels would have lead to a reduction in the dispute incidence by around 5 percentage points, an increase in the fraction of disputes involving a strike by around 4 percentage points, and an increase in the strike incidence by around 0.8 percentage points.
Uncertain Duration of Reform: Dynamic Implications
(Cambridge University Press, 1998) Calvo, Guillermo A.; Drazen, Allan
We develop a framework to study the effects of policies of uncertain duration on consumption dynamics under both complete and incomplete markets. We focus on the dynamic implications of market incompleteness, specifically on the lack of state-contingent bonds. Two policies are considered: pure output-increasing and tariff-reducing (trade liberalization). With complete markets, the output-increasing policy leads to flat consumption, while with no contingent assets, consumption jumps upward on the announcement of the policy, continues rising as long as the policy is in effect, and collapses when it is abandoned. A similar consumption path obtains in a trade liberalization in the realistic case of low elasticity of substitution and no rebate of tariffs. Market incompleteness rationalizes the existence of gradual changes in consumption.
Auctioning Securities
(University of Maryland, 1998-03) Ausubel, Lawrence M.; Cramton, Peter
Treasury debt and other divisible securities are traditionally sold in either a pay-your-bid(discriminatory) auction or a uniform-price auction. We compare these auction formats with a Vickrey auction and also with two ascending-bid auctions. The Vickrey auction and the alternative ascending-bid auction (Ausubel 1997) have important theoretical advantages for sellers. In a setting without private information, these auctions achieve the maximal revenue as a unique equilibrium in dominant strategies. In contrast, the pay your-bid, uniform-price, and standard ascending-bid auction admit a multiplicity of equilibria that yield low revenues for the seller. We show how these results extend to a setting where bidders have affiliated private information. Our results question the standard ways that securities are offered to the public.
Empirical Puzzles of Chilean Stabilization Policy
(The World Bank Publications, 1998-03-05) Calvo, Guillermo A.; Mendoza, Enrique G.
This paper reviews Chilean stabilization policy during the 1990s and argues that, while the merits of Chilean policy should be praised, there are four puzzles in conventional interpretations of the Chilean experience worth studying. First, the policy of targeting indexed interest rates does not coincide with a policy of targeting real interest rates. Second, there is no systematic link between the decline in inflation and the upward adjustments in indexed interest rates. Third, changes in the exchange rate and in the performance of the external sector help explain the decline in inflation. Fourth, the strong cyclical growth of the real economy was influenced in part by the large and persistent increase in the world price of Copper. We provide statistical evidence favoring these arguments using recursively-identified vector-autoregression models, and sketch a model of staggered pricing under indexation that sheds some light on the Chilean case.
Balance of Payment Crises In Emerging Markets: Large Capital Inflows and Sovereign Governments
(1998-03-15) Calvo, Guillermo A.
The paper shows that the combination of large capital inflows and sovereign governments could give rise to self-fulfilling balance of payments crises. It argues that a current account deficit could impair the resolution of such crises, but the crises themselves could occur even though the current account was in balance. The key is a weak financial sector, possibly made so by an accommodating central bank. In contrast with most of the literature on this subject, the paper endogenizes output and discusses the channels (New Classical and Keynesian) through which a BOP crisis can result in output collapse. Building on a Time to Build model, the paper shows that a growth slowdown can take place even though a BOP crisis brings about no current account reversal.
Efficient Relocation of Spectrum Incumbents
(University of Chicago Press, 1998-10) Cramton, Peter; Kwerel, Evan; Williams, John
Changes in technologies and in consumer demands have made prior radio spectrum allocations far from efficient. To address this problem the FCC has recently reallocated spectrum for more flexible use in bands that are partially occupied by incumbent license holders. Often, it is necessary for the new license holder to relocate incumbents to make efficient use of the spectrum. Regulations structuring the negotiation between incumbent and new entrant can promote efficiency. In particular, giving the new entrant the right to move the incumbent with compensation can reduce negotiation costs and promote efficiency when there is private information about spectrum values but good public information about the cost of relocating the incumbent. We examine the experience of broadband PCS entrants in relocating microwave incumbents. We conclude with some remarks on how these ideas might be applied to digital television spectrum.
Efficient Relocation of Spectrum Incumbents
(1998-10) Cramton, Peter; Kwerel, Evan; Williams, John
Changes in technologies and in consumer demands have made prior radio spectrum allocations far from efficient. To address this problem the FCC has recently reallocated spectrum for more flexible use in bands that are partially occupied by incumbent license holders. Often, it is necessary for the new license holder to relocate incumbents to make efficient use of the spectrum. Regulations structuring the negotiation between incumbent and new entrant can promote efficiency. In particular, giving the new entrant the right to move the incumbent with compensation can reduce negotiation costs and promote efficiency when there is private information about spectrum values but good public information about the cost of relocating the incumbent. We examine the experience of broadband PCS entrants in relocating microwave incumbents. We conclude with some remarks on how these ideas might be applied to digital television spectrum.
The Efficiency of the FCC Spectrum Auctions
(University of Chicago Press, 1998-10) Cramton, Peter
From July 1994 to July 1996, the Federal Communications Commission (FCC) conducted nine spectrum auctions, raising about $20 billion for the U.S. Treasury. The auctions assigned thousands of licenses to hundreds of firms. Were the auctions efficient? Did they award the licenses to the firms best able to turn the spectrum into valuable services for consumers? There is substantial evidence that the FCC’s simultaneous ascending auction worked well. It raised large revenues. It revealed critical information in the process of bidding and gave bidders the flexibility to adjust strategies in response to new information. As a result, similar licenses sold for similar prices, and bidders were able to piece together sensible sets of licenses.
Understanding The Russian Virus, with special reference to Latin America
(1998-10-13) Calvo, Guillermo A.
Although Tequila and Asian crises took the world by surprise and had global repercussions, after a short while financial turmoil remained somewhat regionally confined. Tequila crisis started in Mexico and claimed Argentina as a victim, but the rest of the world was virtually unscathed. Similarly, the Asian crisis began in Thailand and spread all over Asia but did not cause major capital outflows in Latin America. Advanced economies’ financial sectors were little touched by either. Early results, however, strongly suggest that the recent Russian crisis may have more serious implications. Negative effects seem deeper, credit to emerging markets economies, EMs, has frozen, and a major recession in those economies is becoming more likely. Why? This is the central issue addressed in the present note. I will argue that the world capital market is populated by essentially two types of investors: informed, and non-informed (or less-informed). As a general rule, the former lead and the latter follow, and there is no major difference of opinion between the two groups. This system works reasonably well as long as there is no need for one group to carry out a significant portfolio recomposition. For, in that case, one group will have to sell and the other buy. This is precisely what, in my view, happened after Russia’s debt repudiation: the capital loss suffered by Russia’s bond holders, triggered ‘margin calls’ on highly leveraged informed investors, forcing them to sell some of their EM holdings to the other group, i.e., the non-informed (for whom leveraging was less attractive due to their poorer information). This is a complicated operation because the informed investors’ sellout makes the non-informed think that there must be some fundamental problem with EMs. As a result, EM security prices drop by more than can be accounted for by conventional fundamentals. This is key for the explanation offered in this note.