Volume 3, Issue 2

What determines the structure of labour market institutions? I argue that common explanations based on rent seeking are incomplete. Unions, job protection and egalitarian pay structures may have as much to do with social insurance of otherwise uninsurable risks as with rent seeking. In support of this more benign complementary hypothesis the paper presents a range of historical, theoretical and cross-country evidence. The social insurance perspective changes substantially the positive analysis of the future of European labour market institutions. It is not clear that globalization and the `new economy' will force countries to make their labour markets more flexible. These phenomena will probably increase the efficiency costs of existing institutions, but they may also make voters more willing to pay a high premium to preserve institutions that provide insurance.

This paper studies the existence of a world business cycle by examining quarterly and annual comovements in production, prices and interest rates in the three main world economies: Germany, Japan and the US. In accordance with earlier studies, contemporaneous relationships clearly dominate short-term dynamics. The evidence indicates the existence of strong comovements in prices and long-term interest rates, and, to a lesser degree, in GDP and short-term interest rates. They are, however, rather unstable over time.

The paper analyzes strategic trade policy for national and international network effect goods. While tariffs are very effective in securing the domestic producer's sales in case of network effects, our results suggest that strategic trade policy does not pay from a welfare perspective. Another interesting result is the possibility of negative tariffs in equilibrium.

The paper applies contingent claims analysis in a real option investment model in order to investigate taxation's influence on investor's decisions under uncertainty. The results show the distortion from realistic-type tax systems, allow to identify a tax-induced paradox in option valuation for specific settings and acknowledge the property of investment neutrality of well-known `ideal' tax systems in the context of different degrees of irreversibility. Furthermore, it is clarified that the idea of risk-neutral valuation cannot be adopted by the real option approach in general.

In a parimutuel lottery, players face a strategic situation. We investigate how rational lottery players should choose combinations of numbers. Using data from the Austrian Lotto we compare this to actual behavior. We propose a relationship between the number of tickets and the expected loss of taking part, based on both theoretical and empirical findings about players' behavior. Rollovers introduce exogenous price variation allowing to estimate properties of a demand function sensitive to the expected loss. Contrary to previous work our model accounts for conscious selection.