CER-ETH Research Seminar, Fall Term 2015

Everyone who is interested is cordially invited!

If you would like to receive our weekly invitation via e-mail, or if you have any other question, please contact Christian Waibel

Speakers

Francesco Squintani

Members of a group value informed decisions and hold ideological preferences. A leader is granted authority to take a decision on their behalf. Good leadership depends on characteristics of moderation and judgement. The latter emerges endogenously via the advice that is communicated by members to the leader. Trustworthy advice requires ideological proximity to the leader. An implication is that the group maychose a relatively extreme leader with a large number of trustworthy allies. Paradoxically, this may happen even when it is in the group’s collective interest to choose a more moderate one. We develop our analysis further in the context of two-party competition where each party chooses a leader who implements her preferred policy if elected. Then a party may choose an extreme leader who defeats a moderate one chosen by the opposing party. Our results highlight the importance of party cohesion and the relations between a leader and her party. We show that these can be more important to securing electoral victory than proximity of a leader’s position to the median voter.

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Alexander Zimper

Roy Radner's (1979) rational expectations equilibrium (=REE) is the standard general equilibrium concept for asset economies with asymmetric information. In a REE every agent maximizes his expected utility with respect to his private information augmented with the information revealed through a common forecast function that--self-fulfillingly--becomes the equilibrium price function. This paper argues that the REE concept may give rise to implausible  equilibrium net-trades. To exclude these implausible equilibria, we introduce the rationalizable information equilibrium (=RIE) as an alternative general equilibrium concept which explicitly formalizes the cognitive reasoning processes of highly rational agents. In a RIE equilibrium prices and net-trades must be consistent with the notion that every agent infers information from  net-trade decisions at given prices under the assumption that all agents' respective expected utility maximization problems are common knowledge  between them. We prove the refinement result that every revealing RIE with  an one-one equilibrium price function is also a revealing REE whereas the  converse statement is not true. We also prove existence of no-trade RIE.

Leonardo Melosi

We develop a dynamic general equilibrium model in which the policy rate signals the central bank’s view about macroeconomic developments to price setters. The model is estimated with likelihood methods on a U.S. data set that includes the Survey of Professional Forecasters as a measure of price
setters' ’infl‡ation expectations and real-time non-revised data from the Federal Reserve’s Greenbook as a measure of the central bank’s expectations about in‡flation and the output gap. In the 1970s, U.S. monetary policy is found to signal persistent infl‡ationary shocks, accounting for why infl‡ation and infl‡ation expectations were so persistently heightened. Signaling effects of monetary policy also explain why infl‡ation expectations adjusted more sluggishly than infl‡ation after the robust monetary tightening of the 1980s.

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Michael Kumhof

In the intermediation of loanable funds model of banking, banks accept deposits of pre-existing real resources from savers and then lend them to borrowers. In the real world, banks provide financing through money creation. That is they create deposits of new money through lending, and in doing so are mainly constrained by profitability and solvency considerations. This paper contrasts simple intermediation and financing models of banking. Compared to otherwise identical intermediation models, and following identical shocks, financing models predict changes in bank lending that are far larger, happen much faster, and have much greater effects on the real economy.

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Albert Ma

Each of two experts may exert effort to acquire information about clients’' service cost. Effort and acquired signal are private information. In a market, an expert may refer the client to the other for a fee. In equilibrium, only one expert exerts effort and refers successfully, yet effort and referral are inefficient. Organizations such as integrated fi…rm, partnership, and mutual agreement achieve the fi…rst best. Expert's’ costs are reassigned in these organizations. Integration sets up a gatekeeping protocol: the owner-expert exerts effort, and refers to the employee-expert. Under partnership or mutual agreement, each expert exerts effort and refers efficiently.

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Vincent Martinet

We propose a new criterion which reflects both the concern for rights and the concern for welfare in the evaluation of economic development paths. The concern for rights is captured by a pre-ordering over combinations of thresholds corresponding to floors or ceilings on various quantitative indicators. The resulting constraints on actions and on levels of state variables are interpreted as minimal rights to be guaranteed to all generations, for intergenerational equity or legacy purposes. They are endogenously chosen within the set of all feasible thresholds, accounting for the \cost in terms of welfare" of granting these rights. Such a criterion could embody the idea of sustainable development. We apply the criterion to the standard Dasgupta-Heal-Solow model of resource extraction and capital accumulation. We show that if the weight given to rights in the criterion is suciently high, the optimal solution is on the threshold possibility frontier. The development path is then \driven" by the rights. In particular, if a minimal consumption is considered as a right, constant consumption can be optimal even with a positive utility discount rate. The shadow values of rights constraints play an important role in the determination of the rate of discount to be applied to social investment projects.

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Simon Dietz

Reducing emissions of CO2 today is expected to reduce climate damages in the future. In this paper, we examine the question of whether fighting climate change has the additional advantage of reducing the aggregate risk borne by future generations. This raises the question of the ‘climate beta’, i.e. the elasticity of climate damages with respect to a change in aggregate consumption. We first describe a simple analytical model of the contrasting effects on the climate beta of three key uncertainties: technological progress, the carbon-climate response and the damage intensity of warming. We further identify to what extent their effects depend on the structure of damages, in particular whether they are assumed to be multiplicative or additive. We then show that in the DICE integrated assessment model the climate beta is positive and close to unity, due above all to the effect of uncertainty about technological progress. In estimating the social cost of carbon, this would justify using a relatively larger rate to discount expected climate damages. On the other hand, expected climate damages are themselves made larger by this effect and overall the NPV of emissions reductions today is increased by the climate beta.

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Philippe Mongin

We introduce a ranking of multidimensional alternatives, including uncertain prospects as a particular case, when these objects can be given a matrix form. This ranking is separable in terms of rows and columns, and continuous and monotonic in the basic quantities. Owing to the theory of additive separability developed here, we derive very precise numerical representations over a large class of domains (i.e., typically not of the Cartesian product form). We apply these representation to (1) streams of commodity baskets through time, (2) uncertain social prospects, (3) uncertain individual prospects. Concerning (1), we propose a finite horizon variant of Koopmans's (1960) axiomatization of infinite discounted utility sums. The main results concern (2). We push the classic comparison between the ex ante and ex post social welfare criteria one step further by avoiding any expected utility assumptions, and as a consequence obtain what appears to be the strongest existing form of Harsanyi's (1955) Aggregation Theorem. Concerning (3), we derive a subjective probability for Anscombe and Aumann's (1963) finite case by merely assuming that there are two epistemically independent sources of uncertainty.

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Kristof Bosmans

We provide an ethical justification to aggregate money metrics.  The core axiom is a transfer principle among equals (individuals with the same preferences) that preserves the overall efficiency of the distribution. This transfer principle, together with a handful of other standard axioms, leads to a continuous, increasing, and Schur-concave welfare function defined over money metrics.