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.

Guns and butter - but no margarine: The impact of Nazi economic policies on German food consumtion, 1933-38

The German population's material standard of living during the 'peace years' of the Nazi regime (1933-38) is much debated. We use hitherto disregarded consumption data and the axiom of revealed preferences to test whether the material standard of living improved. We find that the food consumption bundle realized in 1935-36 must have been inferior to that of 1927-28 although GDP per capita was much higher. Even in 1937-38 consumers were probably worse off compared to 1927-28. We conclude that increasing consumption constraints forced German consumers to a diet and thus to a material standard of living that were much more frugal than national income figures suggest. --

Catching-up and falling behind: knowledge spillover from American to German machine tool makers

In our days, German machine tool makers accuse their Chinese competitors of violating patent rights and illegally imitating German technology. A century ago, however, German machine tool makers used exactly the same methods to imitate American technology. To understand the dynamics of this catching-up process we use patent statistics to analyze firms' activities between 1877 and 1932. We show that German machine tool makers successfully deployed imitating and counterfeiting activities in the late 19th century and the 1920s to catchup to their American competitors. The German administration supported this strategy by stipulating a patent law that discriminated against foreign patent holders and probably also by delaying the granting of patents to foreign applicants. Parallel to the growing international competitiveness of German firms, however, the willingness to guarantee intellectual property rights of foreigners was also increasing because German firms had now to fear retaliatory measures in their own export markets when violating foreign property rights within Germany. --

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

Moral Hazard in a Mutual Health-Insurance System: German Knappschaften, 1867–1914

The Knappschaft underlies Bismarck’s sickness and accident insurance legislation (1883 and 1884), which in turn forms the basis of the German social-insurance system today and, indirectly, many social-insurance systems around the world. The Knappschaften were formed in the medieval period to provide sickness, accident, and death benefi ts for miners. By the mid-nineteenth century, participation in the Knappschaft was compulsory for workers in mines and related occupations, and the range and generosity of benefi ts had expanded considerably. Each Knappschaft was locally controlled and self-funded, and their admirers saw in them the ability to use local knowledge and good incentives to deliver benefi ts at low cost. This paper focuses on a problem central to any insurance system, and one that plagued the Knappschaften as they grew larger in the later nineteenth century: the problem of moral hazard. Replacement pay for sick miners made it attractive, on the margin, for miners to invent or exaggerate conditions that made it impossible for them to work. Here we outline the moral hazard problem the Knappschaften faced as well as the internal mechanisms they devised to control it. We then use econometric models to demonstrate that those mechanisms were at best imperfect.Sickness insurance; moral hazard; malingering; Knappschaft; social insurance

Moral hazard in a mutual health-insurance system: German Knappschaften, 1867-1914

This paper studies moral hazard in a sickness-insurance fund that provided the model for social-insurance schemes around the world. The German Knappschaften were formed in the medieval period to provide sickness, accident, and death benefits for miners. By the mid-nineteenth century, participation in the Knappschaft was compulsory for workers in mines and related occupations, and the range and generosity of benefits had expanded considerably. Each Knappschaft was locally controlled and self-funded, and their admirers saw in them the ability to use local knowledge and good incentives to deliver benefits at low cost. The Knappschaft underlies Bismarck’s sickness and accident insurance legislation (1883 and 1884), which in turn forms the basis of the German social-insurance system today and, indirectly, many social-insurance systems around the world. This paper focuses on a problem central to any insurance system, and one that plagued the Knappschaften as they grew larger in the later nineteenth century: the problem of moral hazard. Replacement pay for sick miners made it attractive, on the margin, for miners to invent or exaggerate conditions that made it impossible for them to work. Here we outline the moral hazard problem the Knappschaften faced as well as the internal mechanisms they devised to control it. We then use econometric models to demonstrate that those mechanisms were at best imperfect.sickness insurance, moral hazard, Knappschaft, social insurance

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