"with Divisible Money *nAleksander Berentsen†nEconomics Department (WWZ), University of Basel, SwitzerlandnGuillaume Rocheteau‡nSchool of Economics, Australian National University, AustralianApril 14th, 2003nAbstractnThis paper studies the validity of the Friedman rule in a search model with divisi-blenmoney and divisible goods where the terms of trades are determined endogenously.nWe show that ex post bargaining generates a holdup problem similar to the one em-phasizednin the labour-market literature. Buyers cannot obtain the full return that annadditional unit of money provides to the match, which makes the purchasing power ofnmoney ine .ciently low in equilibrium. Consequently, even though the Friedman rulenmaximizes the purchasing power of money, it fails to generate the first-best allocationnof resources unless buyers have all the bargaining power."
In this paper we study the inefficiencies of the monetary equilibrium and optimal monetary policies in a search economy. We show that the same frictions that give fiat money a positive value generate an inefficient quantity of goods in each trade and an inefficient number of trades (or search decisions). The Friedman rule eliminates the first inefficiency and the Hosios rule the second. A monetary equilibrium attains the social optimum if and only if both rules are satisfied. When the two rules cannot be satisfied simultaneously, which occurs in a large set of economies, optimal monetary policy achieves only the second best. We analyze when the second-best monetary policy exceeds the Friedman rule and when it obeys the Friedman rule. Furthermore, we extend the analysis to an economy with barter and show how the Hosios rule must be modified in order to internalize all search externalities.
We study the role of whistleblowing in the following inspection game. Two agents who compete for a prize can either behave legally or illegally. After the competition, a controller investigates the agents’ behavior. This inspection game has a unique (Bayesian) equilibrium in mixed strategies. We then add a whistleblowing stage, where the controller asks the loser to blow the whistle. This extended game has a unique perfect Bayesian equilibrium in which only a cheating loser accuses the winner of cheating and the controller tests the winner if and only if the winner is accused of cheating. Whistleblowing reduces the frequencies of cheating, is less costly in terms of test frequencies, and leads to a strict Pareto-improvement if punishments for cheating are suffciently large.
This paper provides a survey of recent experimental work in eco-nnomics focussing on social and economic networks.The experimentsnconsider networks of coordination and cooperation,buyer-seller net-nworks,and network formation.
Field evidence suggests that agents belonging to the same group tend to behave similarly,ni.e., behavior exhibits social interaction effects. Testing for such effects raises severenidentification problems. We conduct an experiment that avoids these problems. The mainndesign feature is that each subject simultaneously is a member of two randomly assigned andneconomically identical groups where only members ("neighbors") are different. In both groupsnsubjects make contribution decisions to a public good. We speak of social interactions if thensame subject at the same time makes group-specific contributions that depend on theirnrespective neighbors' contribution. Our results are unambiguous evidence for socialninteractions. A majority of subjects is very strongly influenced by the contributions of theirnrespective neighbors. Roughly ten percent exhibit no social interactions.
Business students are portrayed as behaving too egoistically. The critics call for more socialnresponsibility and good citizenship behavior on the part of business students. We present evidence ofnpro-social behavior in business students. Every student at the University of Zurich has to decide eachnsemester whether he/she wants to contribute to two social funds administrated by the University. Withnthis large panel data set, we can analyze whether business students indeed behave less pro-socially thannother students. Two specific hypotheses are tested: do students select into business studies or does thentraining in business studies indoctrinate students in a negative way? The evidence suggests that therenmay be a selection effect going on. Therefore, economics education does not change the citizenshipnbehavior of business students.
"Happiness research in economics takes reported subjective well-being as a proxynmeasure for utility and has already provided many interesting insights about human well-beingnand its determinants. We argue that future research on happiness in economics has a lot ofnpotential, but that it needs to be guided more by theory. We propose two ways to test theories ofnhappiness, and illustrate them with two applications. First, reported subjective well-being canncontribute towards a new understanding of utility in economics. Here, we study the introductionnof income aspirations in individuals’ utility functions in order to improve our understanding ofnhow income affects individual well-being. Second, happiness data offers a new possibility ofndiscriminating between different models of behavior. This is studied for theories of marriage,nwhich crucially depend on auxiliary assumptions as to what contributes to well-being innmarriage. Both applications are empirically tested with panel data for Germany."
We present an economic experiment on network formation, in which subjects can decide to form links to one another. Direct links are costly but being connected is valuable. The game-theoretic basis for our experiment is the model of Bala and Goyal (2000). They distinguish between two scenarios regarding the flow of benefits through a network, the so-called 1-way and 2-way flow model. Our main results show that the prediction based on Nash and strict Nash equilibrium works well in the 1-way flow model but fails largely in the 2-way flow model. We observe a strong learning dynamic in the 1-way flow model but less so in the 2-way flow model. Finally, costs of a direct link have a positive impact on the occurrence of (strict) Nash networks in the 1-way flow model but a negative impact in the 2-way flow model. In our discussionnon possible explanations for these results we focus on strategic asymmetry and asymmetry with respect to payoffs. We find that the latter asymmetry, i.e., payoff inequity, plays an importantnrole in the network formation process.
