Endogenous Market Turbulence

In this paper I study a nonlinear feedback trading model which can generate stable, unstable, turbulent or chaotic asset returns depending on market conditions. The dynamics are driven by the stochastic price impact of net order flow (inverse market liquidity). If price impact grows beyond exogenous threshold values, liquidity dries up and asset returns become turbulent. In the absence of fundamental factors, the occurrence of turbulence and chaos is entirely endogenous. The results highlight the critical role of maintaining stable market-making conditions for averting “liquidity black holes”

ENDOGENOUS GROWTH AND ENDOGENOUS BUSINESS CYCLES

This paper presents a computable general equilibrium model of endogenous (stochastic) growth and cycles that can account for two key features of the aggregate data: balanced growth in the long-run and business cycles in the short-run. The model is built on Schumpeter's idea that economic development is the consequence of the periodic arrival of innovations. There is growth because each subsequent innovation leads to a permanent improvement in the production technology. Cycles arise because innovations trigger a re-allocation of resources between production and R&D. The quantitative implications of the calibrated version of our model are very similar to those of Kydland and Prescott's (1982) model. Moreover, our model can correct two serious shortcomings of RBC models: it can account for the persistence in output growth and the asymmetry of growth within the business cycle.endogenous growth, endogenous business cycles, innovation, R&D

Endogenous Correlation

We model endogenous correlation in asset returns via the role of heterogeneous expectations in investor types, and the dynamic impact of imitative learning by investors. Learning is driven by relative performance. In addition, we allow a cautious slow learning pace to reflect institutional conditions. Imitative learning shapes the market ecology that influences price formation. Using the model of non-imitative agents as a benchmark, our results show that the dynamics of imitative learning endogenously induce a significant degree of asset dependency and patterns of non-constant correlation. The asymmetric learning effect on correlation, however, implies a self-reinforcing process, where a bearish condition amplifies the effect that further exacerbates asset dependency. We conclude that imitative learning, even when rational, can to a certain extent account for the phenomena of market crashes. Our results have implications for transparency in regulation issues

Endogenous Lobbying

In this paper we present a citizen-candidate model of representative democracy with endogenous lobbying. We find that lobbying induces policy compromise and always affects equilibrium policy outcomes. In particular, even though the policy preferences of lobbies are relatively extreme, lobbying biases the outcome of the political process toward the centre of the policy space, and extreme policies cannot emerge in equilibrium. Moreover, in equilibrium, not all lobbies participate in the policy-making process.Endogenous lobbying, citizen-candidate model, representative democracy.

Endogenous Constitutions

We present a theory of the choice of alternative democratic constitutions, a majoritarian or a consensual one, in a n unequal society. A majoritarian democracy redistributes resources from the collectivity toward relatively few people, and has a relatively small government and low level of taxation. A consensual democracy redistributes resources toward a broader spectrum of social groups but also have a larger government and a higher level of taxation. A consensual system turns out to be preferred by the society when ex ante income inequality is relatively low, while a majoritarian system is chosen when income inequality is relatively high. Moreover, we obtain that consensual democracies should be expected to be ruled more often by center-left coalitions. Finally, our model also provides a new rationale, based on the endogeneity of the political system, of the positive or absent (rather than negative) association between equality and redistribution transpiring from the cross-sectional evidence of developed countries presented in some recent studies. Some historical and empirical evidence supporting our results is provided.Endogenous Constitutions; Consensual Democracy; Majoritarian Democracy; Inequality; Heterogeneity; Redistribution

War and endogenous democracy

Many episodes of extension of franchise in the 19th and especially in the 20th century occurred during or in the aftermath of major wars. Motivated by this fact, we offer a theory of political transitions which focuses on the impact of international conflicts on domestic political institutions. We argue that mass-armies, which appeared in Europe after the French Revolution, are an effective military organization only if the conscripted citizens are willing to put effort in fighting wars, which in turn depends on the economic incentives that are provided to them. The need to provide such incentives implies that an oligarchy adopting a mass-army may voluntarily decide to promise some amount of income redistribution to its citizens, conditionally on satisfactory performance as soldiers. When the elite cannot credibly commit to provide an incentive-compatible redistribution, they may cope with the moral hazard problem of the citizens-soldiers only by relinquishing political power to them through the extension of franchise. This is because democracy always implements a highly redistributive fiscal policy, which makes fighting hard incentive-compatible for the citizens-soldiers. We show that a transition to democracy is more likely to occur when the external threat faced by an incumbent oligarchy is in some sense intermediate. A very high external threat allows the elite to make credible commitments of future income redistribution in favor of the citizens, while a limited external threat makes optimal for the elite not making any (economic or political) concession to the masses. Some historical evidence consistent with our theory is also provided

ENDOGENOUS NOISE TRADERS

We construct a parsimonious model of a financial market where the marginal investor is an endogenous noise trader. Such a trader anticipates that future shocks may force him to exit his position. In compensation he requires a higher return. We show that the original seller of the asset pays the required return. This can only be optimal if the seller has access to an investment opportunity that gives a sufficiently high return, compared to the noise trader's investment opportunities. We also show that, if the noise trader expects to get informative signals, the required return does not necessarily decrease, as claimed in the earlier literature.Market microstructure; no-trade theorems; adverse selection

Endogenous Product Cycles

We construct a model of the product cycle featuring endogenous innovation and endogenous technology transfer. Competitive entrepreneurs in the North expend resources to bring out new products whenever expected present discounted value of future oligopoly profits exceeds current product development costs. Each Northern oligopolist continuously faces the risk that its product will be copied by a Southern imitator, at which time its profit stream will come to an end. In the South, competitive entrepreneurs may devote resources to learning the production processes that have been developed in the North. There too, costs (of reverse engineering) must be covered by a stream of operating profits. We study the determinants of the long-run rate of growth of the world economy, and the long-run rate of technological diffusion. We also provide an analysis of the effects of exogenous events and of public policy on relative wage rates in the two regions.

Endogenous Collateral

We study an economy where there are two types of assets. Consumers' promises are the primitive defaultable assets secured by collateral chosen by the consumers themselves. The purchase of these personalized assets by ¯- nancial intermediaries is ¯nanced by selling back derivatives to consumers. We show that nonarbitrage prices of primitive assets are strict submartin- gales, whereas nonarbitrage prices of derivatives are supermartingales. Next we establish existence of equilibrium, without imposing bounds on short sales. The nonconvexity of the budget set is overcome by considering a continuum of agentsEndogenous collateral