Job market signals and signs

What happens to job market signaling under two-dimensional asymmetric information? With 2 types of productivity and noise, the equilibrium remains separating if an extended single-crossing condition is satisfied. If not, there are partially pooling equilibria where only extreme types can be distinguished, and supplementary information is needed. On-the-job interaction gives employers private information on productivity, which employment relationships may reveal to the market. While sticky wages lead to public revelation of this private information through dismissals, flexible wages do not, allowing employers to do cream skimming. Beyond the 2x2 case, employment relationships are always a noisy sign, so education is valuable as a life-time job market signal for high-ability workers.two-dimensional asymmetric information, private information, informational rents, single-crossing, signals, signs

Reelection or term limits? The short and the long view of economic policy

An incumbent's drive for reelection can lead to political budget cycles. The distortion cycles cause in economic policy may be offset by the information they indirectly provide about the incumbent's competency. The informative content of cycles depends on the sophistication of voters, i.e. on whether they are rational or near rational. In a framework of individual candidates, constitutional clauses that prohibit the reelection of the president eliminate political budget cycles. One-term limits that allow non-immediate reelection also shift the focus from short-run cycles to the long-run soundness of economic policies, and have superior welfare properties. Hence, the choice is not reelection or not, but rather immediate or non-immediate reelection.rotation principle, term limits, non-immediate reelection, political budget cycles, rational and near rational voters.

Separation of Powers and Political Budget Cycles

From a theoretical viewpoint, political budget cycles (PBC) arise in equilibrium when rational voters are imperfectly informed about the incumbent's competency and the incumbent enjoys discretionary power over the budget. This paper focuses on the second condition, examining how executive discretion is affected by the budgetary process under separation of powers. We specifically model PBC in the composition of government spending. The main result is that effective checks and balances in the budgetary process curb PBC. The institutional features of the executive-legislature bargaining game, namely, the actual agenda-setting authority, the status quo location and the degree of legislative oversight and control of the implementation of the budgetary law, play critical roles for the existence and the size of PBC. These results are consistent with recent empirical findings, which show that PBC are more pronounced in developing countries, where there are also less effective checks and balances.Rational political budget cycles; budget composition; separation of powers; checks and balances; budgetary process.

Temporal aggregation in political budget cycles

While existing cross-country studies on political budget cycles rely on annual data, we build a panel with quarterly and monthly data from Latin American and OECD countries over the 1980-2005 period. Disaggregated data allow to center the electoral year more precisely, and show the effects are concentrated in a three-quarter window around elections. Cycles are statistically significant only in Latin America, but the pattern is similar to OECD countries: the budget surplus/GDP ratio falls in the election period and rises in the post-election period. In line with the logic of rational opportunistic manipulation, these effects cancel out.temporal aggregation, electoral window, pre- and post-electoral effects, political budget cycles, rational opportunistic cycles

Elections and the Timing of Devaluations

This paper presents a rational political budget cycle model for the open economy, in which devaluations are delayed in the run-up to elections, in order to increase the electoral chances of the party in office. By concentrating on the closed economy, previous political cycle models had overlooked the influence of elections on the behavior of exchange rates. We introduce voter uncertainty in two different dimensions. Not only are voters uncertain regarding the competency of the incumbent. They also ignore the degree to which the incumbent is opportunistic, i.e. willing to distort the economy for electoral gain. When there is only uncertainty about competence, we obtain a separating equilibrium, like in the previous political budget cycle literature. However, when uncertainty about opportunism is introduced, a partially pooling equilibrium emerges: an incompetent, opportunistic incumbent delays a devaluation until after elections, mimicking a competent incumbent, while the competent does not distort the optimal pattern of the exchange rate, regardless of the degree of opportunism. The model's prediction that there is a tendency to delay devaluations until after elections is used to look at the empirical evidence on devaluations around elections.devaluations, elections, political budget cycles, incomplete information.

Discretional political budget cycles and separation of powers

In contrast to previous empirical work on electoral cycles, which implicitly assumes the executive has full discretion over fiscal policy, this paper contends that under separation of powers an unaligned legislature may have a moderating role. Focusing on the budget surplus, we find that stronger effective checks and balances explain why cycles are weaker in developed and established democracies. Once the discretional component of executive power is isolated, there are significant cycles in all democracies. Whether the political system is presidential or parliamentary, or the electoral rules are majoritarian or proportional, does not change the basic results.political budget cycles, asymmetric information, discretion, separation of powers, checks and balances, veto players, rule of law

Elections and the Timing of Devaluations

This paper presents a rational political budget cycle model for an open economy, in which devaluations are delayed in the pre-election period so as to increase the electoral chances of the party in office. By concentrating on closed economies, previous political cycle models had overlooked the influence of elections on the behavior of exchange rates. Voter uncertainty is introduced in two different dimensions. Not only are voters uncertain regarding the competency of the incumbent, but tey also ignore the degree to which the incumbent is opportunistic.

Job Market Signaling under Two-Dimensional Asymmetric Information

This paper analyzes what happens to the Spence signaling model when there is heterogeneity in two dimensions, competency and character. Competency is productivity at work. Character is the taste for study. If heterogeneity in character is low, the equilibrium is separating. If heterogeneity in character is high, the equilibrium is partially pooling. In the partially pooling equilibrium, only extreme types can be distinguished. Expected competency is monotonically increasing in the level of education. Supplementary information can reveal personal characteristics, acting as a sign of work productivity.Facultad de Ciencias Económica

Job Market Signaling under Two-Dimensional Asymmetric Information

This paper analyzes what happens to the Spence signaling model when there is heterogeneity in two dimensions, competency and character. Competency is productivity at work. Character is the taste for study. If heterogeneity in character is low, the equilibrium is separating. If heterogeneity in character is high, the equilibrium is partially pooling. In the partially pooling equilibrium, only extreme types can be distinguished. Expected competency is monotonically increasing in the level of education. Supplementary information can reveal personal characteristics, acting as a sign of work productivity.Facultad de Ciencias Económica