A herding perspective on global games and multiplicity

Recently, it has been claimed that full-information multiple equilibria in games with strategic complementarities are not robust, because generalizing to allow slightly heterogeneous information implies uniqueness. This paper argues that this "global games" uniqueness result is itself not robust. If we generalize by allowing most agents to observe a few previous actions before choosing, instead of forcing players to move exactly simultaneously, then multiplicity of outcomes is restored. Only a small sample of observations is needed to make our herding equilibrium behave like a full-information sunspot equilibrium instead of a global games equilibrium

On payoff heterogeneity in games with strategic complementarities

Payoff heterogeneity weakens positive feedback in binary choice models in two ways. First, heterogeneity drives individuals to corners where they are unaffected by strategic complementarities. Second, aggregate behaviour is smoother than individual behaviour when individuals are heterogeneous. However, this smoothing does not necessarily eliminate positive feedback or guarantee a unique equilibrium. In games with an unbounded, continuous choice space, heterogeneity may either weaken or strengthen positive feedback, depending on a simple convexity/concavity condition. We conclude that positive feedback phenomena derived in representative agent models will often be robust to heterogeneity.Heterogeneity, multiplicity, discrete choice, strategic complementarity, positive feedback

Precautionary price stickiness

This paper proposes two models in which price stickiness arises endogenously even though firms are free to change their prices at zero physical cost. Firms are subject to idiosyncratic and aggregate shocks, and they also face a risk of making errors when they set their prices. In our first specification, firms are assumed to play a dynamic logit equilibrium, which implies that big mistakes are less likely than small ones. The second specification derives logit behavior from an assumption that precision is costly. The empirical implications of the two versions of our model are very similar. Since firms making sufficiently large errors choose to adjust, both versions generate a strong "selection effect" in response to a nominal shock that eliminates most of the monetary nonneutrality found in the Calvo model. Thus the model implies that money shocks have little impact on the real economy, as in Golosov and Lucas (2007), but fits microdata better than their specification. JEL Classification: E31, D81, C72(S, information-constrained pricing, Logit equilibrium, near rationality, s) adjustment, state-dependent pricing

Distributional dynamics under smoothly state-dependent pricing

Starting from the assumption that firms are more likely to adjust their prices when doing so is more valuable, this paper analyzes monetary policy shocks in a DSGE model with firm-level heterogeneity. The model is calibrated to retail price microdata, and inflation responses are decomposed into “intensive”, “extensive”, and “selection” margins. Money growth and Taylor rule shocks both have nontrivial real effects, because the low state dependence implied by the data rules out the strong selection effect associated with fixed menu costs. The response to firm-specific shocks is gradual, though inappropriate econometrics might make it appear immediate. JEL Classification: E31, E52, D81heterogeneity, menu costs, nominal rigidity, state-dependent pricing, Taylor rule

Employment Fluctuations with Downward Wage Rigidity: The Role of Moral Hazard

This paper studies the cyclical dynamics of Mortensen and Pissarides' (1994) model of job creation and destruction when workers' effort is not perfectly observable, as in Shapiro and Stiglitz (1984). An occasionally-binding no-shirking constraint truncates the real wage distribution from below, making firms' share of surplus weakly procyclical, and may thus amplify fluctuations in hiring. It may also cause a burst of inefficient firing at the onset of a recession, separating matches that no longer have sufficient surplus for incentive compatibility. On the other hand, since marginal workers in booms know firms cannot commit to keep them in recessions, they place little value on their jobs and are expensive to motivate. For a realistic calibration, this last effect is by far the strongest; even a moderate degree of moral hazard can eliminate all fluctuation in the separation rate. This casts doubt on Ramey and Watson's (1997) "contractual fragility" mechanism, and means worker moral hazard only makes the "unemployment volatility puzzle" worse. However, moral hazard has potential to explain other labor market facts, because it is consistent with small but clearly countercyclical fluctuations in separation rates, and a robust Beveridge curve.job matching, shirking, efficiency wages, endogenous separation, contractual fragility

Employment Fluctuations with Downward Wage Rigidity

This paper considers a dynamic matching model with imperfectly observable worker effort as in Shapiro and Stiglitz (1994). In our economy the no-shirking condition endogenously imposes real wage rigidity on the matching market. This generates "contractual fragility" and inefficient separations as in Ramey and Watson (1997). Nonetheless, our main finding is that imperfectly observable effort smoothes job destruction over the cycle. The reason is that firms are forced, in good states, to terminate some marginal jobs that they cannot commit to maintain in bad states. This time-inconsistency problem casts doubts on the importance of inefficient churning as an explanation of observed employment fluctuations. On the other hand, the no-shirking condition implies that the surplus share of firms is pro-cyclical, which can amplify fluctuations in job creation. Thus, our model is consistent with recent evidence that job creation is more important than job destruction in driving labor market fluctuations, and it therefore also tends to generate a robust Beveridge curve.Job matching, wage rigidity, efficiency wages, contractual fragility

The role of fiscal delegation in a monetary union: a survey of the political economy issues

Current proposals to address the European sovereign debt crisis envision some sort of fiscal union to complement the Economic and Monetary Union, backed by stronger sanctions against countries that deviate from budget balance. We argue that sanctions are an indirect approach to balancing budgets, and that member states, and Europe as a whole, could instead consider delegating effective fiscal instruments with a direct budgetary impact to an independent authority. Outside of a fiscal union, a solvent country could establish an independent fiscal authority at the national level, with a mandate to maintain long-term budget balance. Delegating a few powerful fiscal instruments to an institution of this type could cut off speculation about fiscal sustainability without ceding sovereignty to a supranational body. Inside a fiscal union, delegating one or more fiscal levers of each Eurozone member state to a national or European fiscal authority could eliminate moral hazard without relying on sanctions per se. Many fiscal instruments can serve to balance budgets, but in the context of a monetary union the chosen instrument should ideally be one that increases competitiveness when recession looms. The instrument should also be one that is quick and simple to adjust, with a large budgetary impact and minimal redistributional consequences. For consistency with these criteria, we argue that fiscal adjustments should operate on the spending side, rather than the revenue side, and that spending adjustments should affect the prices the government pays, instead of the quantities of goods and services it purchases. We discuss in detail how a system of this sort could be implemente

Business cycles, unemployment insurance and the calibration of matching models

This paper theoretically and empirically documents a puzzle that arises when an RBC economy with a job matching function is used to model unemployment. The standard model can generate sufficiently large cyclical fluctuations in unemployment, or a sufficiently small response of unemployment to labor market policies, but it cannot do both. Variable search and separation, finite UI benefit duration, efficiency wages, and capital all fail to resolve this puzzle. However, either sticky wages or match-specific productivity shocks can improve the model's performance by making the firm's flow of surplus more procyclical, which makes hiring more procyclical too.Real business cycles, matching function, unemployment insurance

Productivity Shocks and the Business Cycle: Reconciling Recent VAR Evidence

Gali (1999) used a VAR with productivity and hours worked to argue that technology shocks are negatively correlated with labor and are unimportant for the business cycle. More recently, Beaudry and Portier (2003) studied a VAR in productivity and stock prices. Remarkably, they found that the component which has a permanent impact on productivity is almost identical to that which has no immediate impact on productivity. Moreover, either of these components explains most business cycle variation. Like Gali's results, these observations are inconsistent with early RBC models, but on the other hand they contradict Gali's claim that technology shocks are unimportant for cycles. In this paper, we study trivariate VARs in productivity, hours worked, and stock prices to see how these apparently contradictory results can be reconciled. We find one VAR specification that qualitatively and quantitatively matches the findings of Gali (so that long-run technology shocks drive hours down), and a second specification that matches the main findings of Beaudry and Portier (so that long-run technology shocks increase hours, are similar to the short-run shock to stock prices, and play a major role in generating business cycles). Surprisingly, the difference between these two specifications has nothing to do with estimating in levels or in differences, or with running VARs or VECMs, or with the ordering of variables. The only difference between the two specifications lies in which productivity variable is used: labor productivity (to generate results like Gali's) or TFP (to generate results like those of Beaudry and Portier). Both the original Beaudry and Portier estimations, as well as our findings on the productivity specification, add to the evidence that Gali's findings are not robust. Apparently the cyclical role of technology shocks is only picked up when a sufficiently cyclical productivity series is used in the estimation.Technology shocks, business cycles, news shocks

Costly decisions and sequential bargaining

Este documento estudia un agente cuasirracional que debe escoger entre varias alternativas, pero que se enfrenta a una función de costes para tomar decisiones de manera precisa. A diferencia de la literatura anterior sobre «costes de control», este documento supone que las decisiones llevan su tiempo. Es decir, si dedica más tiempo a su decisión, el agente puede escoger con mayor probabilidad la alternativa más valiosa. Pero, además, supondremos que cuánto tiempo dedicar a la decisión es, también, una decisión costosa. Una disyuntiva entre la precisión y la rapidez de las decisiones es especialmente relevante en una situación estratégica, donde cada agente debe reaccionar a las decisiones de los demás. Este documento desarrolla un ejemplo metodológico sobre decisiones costosas en el contexto de un juego de negociación. El juego se parece al modelo de Perry y Reny (1993), en el que hacer una propuesta, o reaccionar a la propuesta de otro jugador, lleva su tiempo. Pero en el modelo de Perry y Reny dicho tiempo es una cantidad exógena y fija. En contraste, este documento supondrá que cada jugador puede variar la precisión de sus decisiones dedicándoles más o menos tiempo, y de esta manera se endogenizará el orden de las propuestas y reacciones en el juego, y el intervalo de tiempo entre ellas. Al simular equilibrios del juego de negociación numéricamente, obtenemos resultados muy parecidos a los de Binmore, Rubinstein y Wolinsky (1983), salvo que el tiempo para llegar a un acuerdo es positivo, y que algunas ofertas se rechazan. A diferencia del estudio de Perry y Reny, nuestras simulaciones indican que el equilibrio del juego es único siempre y cuando las ofertas se escojan de un conjunto de puntos suficientemente densoThis paper models a near-rational agent who chooses from a set of feasible alternatives, subject to a cost function for precise decision-making. Unlike previous papers in the «control costs» tradition, here the cost of decisions is explicitly interpreted in terms of time. That is, by choosing more slowly, the decision-maker can achieve greater accuracy. Moreover, the timing of the choice is itself also treated as a costly decision. A trade off between the precision and the speed of choice becomes especially interesting in a strategic situation, where each decision maker must react to the choices of others. Here, the model of costly choice is applied to a sequential bargaining game. The game closely resembles that of Perry and Reny (1993), in which making an offer, or reacting to an offer, requires a positive amount of time. But whereas Perry and Reny treat the decision time as an exogenous fixed cost, here we allow the decision-maker to vary precision by choosing more or less quickly, thus endogenizing the order and timing of offers and responses in the game. Numerical simulations of bargaining equilibria closely resemble those of the Binmore, Rubinstein, and Wolinsky (1983) framework, except that the time to reach agreement is nonzero and offers are sometimes rejected. In contrast to the model of Perry and Reny, our numerical results indicate that equilibrium is unique when the space of possible offers is sufficiently finely space