Estimation and Identification of Structural Parameters in the Presence of Multiple Equilibria

This paper studies quantitative implications of model economies that exhibit multiple equilibria. The goal is to assess two interrelated issues. First, do economies with multiple equilibria have falsifiable predictions? Second, is the identification of structural parameters possible in economies that exhibit multiple equilibria? We raise these questions within a general framework and then study a series of examples to determine how the existing literature has addressed them. These examples illustrate cases in which parameters can be identified and models falsified.

Dollarization and the conquest of hyperinflation in divided societies

This study argues that the delegation of monetary policy control by one country to another can reduce inflation in the delegating country. Hyperinflation is common in a divided society, one in which special interest groups can pressure a weak central government to issue money to finance their own demands while neglecting the country’s overall welfare. A commitment device like dollarization or a currency board, which gives control of the divided country’s money supply to another country, can eliminate this inflation bias. This is illustrated by Argentina’s experience with inflation and a currency board which, in effect, gave control of Argentina’s money supply to the United States. This argument is made precise using a two-country overlapping generations model to study the effects of delegation. The study also finds that a dollarization treaty between the two countries can be welfare-improving for bothDollarization

The Cost of Labor Adjustment: Inferences from the Gap

We study labor adjustment costs. We specify a dynamic optimization problem at the plant-level, allowing for both convex and non-convex adjustment costs. We estimate the parameters of the adjustment process using an indirect inference procedure in which simulated moments are matched with data moments. For this study we use estimates of reduced-form adjustment functions obtained by the gap methodology' reported in Caballero-Engel as data moments. Contrary to evidence at the micro level in support of non-convex adjustment costs, our findings indicate that piecewise quadratic adjustment costs are sufficient to match these aggregate moments.

The Economics of Labor Adjustment: Mind the Gap

We study the inferences about labor adjustment costs obtained by the 'gap methodology' of Caballero and Engel [1993] and Caballero, Engel and Haltiwanger [1997]. In that approach, the policy function of a manufacturing plant is assumed to depend on the gap between a target and the current level of employment. Using time series observations, these studies reject the quadratic cost of adjustment model and find that aggregate employment dynamics depend on the cross sectional distribution of employment gaps. We argue that these conclusions may not be justified. Instead these findings may reflect difficulties measuring the gap. Thus it appears that the gap methodology, as currently employed, may be unable to: (i) identify the costs of labor adjustment and (ii) assess the aggregate implications of labor adjustment costs.

On the Nature of Capital Adjustment Costs

This paper studies the nature of capital adjustment at the plant-level. We use an indirect inference procedure to estimate the structural parameters of a rich specification of capital adjustment costs. In effect, the parameters are optimally chosen to reproduce the nonlinear relationship between investment and profitability that we uncover in the plant-level data. Our findings indicate that a model which mixes both convex and nonconvex adjustment costs with irreversibility fits the data best.

Product Warranties and Double Moral Hazard

This paper explores a model of warranties in which moral hazard problems play a key role. The goal is to understand the important characteristics of warranties including their provision of incomplete insurance and the relationship between product quality and coverage. We analyze a model in which buyers and sellers take actions which affect a product’s performance. Since these actions are not cooperatively determined, an incentives problem arises. We characterize the optimal warranty contract and undertake comparative statics to determine the predicted correlation of warranty coverage and product quality

Monopoly Provision of Product Quality with Uninformed Buyers

This essay is concerned with a monopolist’s incentives to provide a high quality goods when some of its customers cannot observe quality prior to purchase. We show that if all buyers have the same tastes for quality, the monopolist will not try to take advantage of the poorly informed. When tastes differ, however, some quality randomization may become profitable as a means to loosen binding self-selection constraints. The profitability of randomization is shown to depend upon the relative degrees of risk aversion of the buyers and on the convexity of the firm’s cost of quality function. We view our results as pointing to some potential benefits from imperfect quality control

Dragons in the Drawing Room: Chinese Embroideries in British Homes

Chinese embroideries have featured in British domestic interiors since at least the seventeenth century. However, Western imperial interests in China during the mid-nineteenth and early twentieth century created a particular set of meanings around Chinese material culture, especially a colonial form of nostalgia for pre-nineteenth century China, with its emperors and 'exotic' court etiquette. This article examines the use of Chinese satin-stitch embroideries in British homes between 1860 and 1949, and explores how a range of British identities was constructed through the ownership, manipulation and display of these luxury Chinese textiles

Risk Management Strategies by Australian Farmers

Australian farmers operate in one of the most risky environment in the world. They have to cope with various sources of risk in their businesses. This paper reports results of two case studies undertaken to examine the issues of farming risks and risk management strategies in Australia. The first case study found that climate variability, financial risk, marketing risk, and personal risk were regarded as the major sources of farming risk in the Upper Eyre Peninsula of South Australia. The main management strategies used by farmers included diversifying varieties, minimising tillage, minimising area of risky crops and maximising area of the least-risky crop, having high equity, having farm management deposits and other off-farm investments, and "leaving marketing to experts". The second case study revealed that climate variability was ranked as the most important source of farming risk in southwest Queensland. This was then followed by financial risks, government policy, and marketing risks. The main management strategies used were enterprise diversification (having predominantly cattle and farming cash crops), conserving moisture, using zero till planting, diversified sales (selling only part of the farm's production at any one time), and having off-farm investments. The paper then attempts to reconcile the two case studies by comparing the results with studies from the United States of America, Canada, Netherlands, and New Zealand.risk, risk management, strategies, farmers, Australia, Farm Management, Risk and Uncertainty,

Business Cycles: Theory, Evidence and Implications

This paper looks at recent advances in the study of aggregate fluctuations. Our emphasis is on three prominent areas of research: the stochastic growth model, economies which exhibit macroeconomic complementarities and models that emphasize heterogeneity. Each section of the paper outlines the theory, discusses relevant empirical evidence and then discusses some implications of the analysis.