Volume 2, Issue 3

We find evidence in the OECD cross-country data to support the Knightian view that non-diversifiable economic risks shape equilibrium entrepreneurship in an occupational choice model. Differential social insurance of entrepreneurial and labor risk is found to be statistically significant and detrimental to entrepreneurship. The crowding-out effect of public production of private goods on entrepreneurship dominates the crowding-in effect of public production of public goods in the OECD data. Weak evidence is found for the proposition that the rate of entrepreneurship is related to the degree of income inequality and to the union power in the economy. The results also suggest that in countries with low GDP per capita ratio, self-employment is high.

We offer some empirical evidence on the likely scale of control and indicator problems surrounding alternative monetary targets and a direct inflation target. The links between monetary policy actions and inflation are estimated in dynamic linear models using the Kalman filter. We compare alternative intermediate-target and final-target monetary strategies using German data from the end of the Bretton Woods system until 1997. The estimation results show that broad money dominates narrow money as an intermediate target, while control problems involved in targeting broad money are larger than for direct inflation targets.

Experimental studies of risk and time preference typically focus on one of the two phenomena. The goal of this paper is to investigate the (possible) correlation between subjects' attitude to risk and their time preference. For this sake we ask 61 subjects to price a simple lottery in three different scenarios. At the first, the lottery premium is paid `now'. At the second, it is paid `later'. At the third, it is paid `even later'. By comparing the certainty equivalents offered by the subjects for the three lotteries, we test how time and risk preferences are interrelated. Since the time interval between `now' and `later' is the same as between `later' and `even later', we also test the hypothesis of hyperbolic discounting. The main result is a statistically significant negative correlation between subjects' degrees of risk aversion and their (implicit) discount factors. Moreover, we show that the negative correlation is independent of the method used to elicit certainty equivalents (willingness to pay versus willingness to accept).

This paper considers a capital accumulation model with the specific feature that adjustment costs depend on investment relative to the size of the capital stock. This framework has, beyond its plausible yet neglected setting, a number of interesting consequences. In particular, the possibility of multiple equilibria, of an unstable steady state and thus of a (`history dependent') threshold associated with concavity is surprising given a voluminous literature on multiple, history-dependent equilibria emphasizing non-concavities (or convexities).

This article discusses the effects of corporate tax asymmetries under investment irreversibility. We introduce a tax scheme where the tax base is given by the firm's return net of a rate of relief. When the firm's return is less than the imputation rate, however, no tax refunds are allowed. Unlike symmetric tax systems, the scheme proposed is neutral with respect not only to income uncertainty but also to policy uncertainty.

The paper analyzes a Heckscher-Ohlin (HO) model with efficiency-wage unemployment (henceforth HO e model). We show that all HO results have close HO e analogues. Additionally, conditions are derived under which immigrants might not only find employment for themselves but also raise employment for natives. Moreover, we analyze the ranking of countries with respect to their rate of unemployment, showing that this ranking may be reversed as countries move from autarky to trade. All results are clearly linked to factor intensities and the pattern of intersectoral wage differentials.

In this comment, we answer the question posed in Svensson's (2000) paper `Does the P* Model Provide any Rationale for Monetary Targeting?' - in contrast to him - in the affirmative. We argue that a strategy of monetary targeting can be rationalized within the P* framework. Furthermore, we demonstrate that money growth targeting is a special form of inflation forecast targeting based on a `limited' information set. In contrast to `full information' inflation forecast targeting, monetary growth targeting is likely to be more robust under changing conditions of the real world.