Corporate scandals are reflected in excessive top management compensation and fraudulent accounts. These scandals cause an enormous amount of damage, not only to the companies affected, but also to the market economy as a whole. As a solution, conventional wisdom suggests more monitoring and sanctioning of management. We argue that these efforts will create a governance structure for crooks. Instead of solving the problem, they make it worse. Selfish extrinsic motivation is reinforced. We suggest measures which clash with conventional wisdom: selecting employees with pro-social intrinsic preferences, de-emphasizing variable pay for performance and strengthening the participation and self-governance of employees. These measures help to increase intrinsically motivated corporate virtue and honesty.
The analysis of monthly exchange rates is carried out using a model of McCallum, which is based on the concept of Rational Expectations. Applying the model to the CHF/USD exchange rate starting a misspecification analysis, the RE component appears to be a weak point of the model. The theory of rational beliefs of M. Kurz generalizes the RE concept introducing special consideration of Data Generating Processes (DGP). We find, however, some evidence speaking against the rational belief approach (with respect to the CHF/USD exchange rate) which is related to regime switchings and the presence of unobserved variables in the data-generating process. It appears that the rationality of economic agents depends on complex cognitive processes not discussed by Kurz, but taken into account in a ''story'' by Paul De Grauwe. This story will be supplemented in Part II of the paper in order to eliminate the RE component and to proceed with the misspecification analysis of McCallum's model.
"People behave pro-socially in a wide variety of situations that standard economic theory is unable to explain. Social comparison is one explanation for such pro-social behavior: people contribute if others contribute or cooperate as well. This paper tests social comparison in a field experiment at the University of Zurich. Each semester every single student has to decide whether he or shenwants to contribute to two Social Funds. We provided 2500 randomly selected students with information about the average behavior of the student population. Some received the information that a high percentage of the student population contributed, while others received the information that a relatively low percentage contributed. The results show that people behave pro-socially, conditional on others. The more others cooperate, the more one is inclined to do so as well. The type of person is important. We are able to fix the ‘types’ by looking at revealed past behavior. Some persons seem to care more about the pro-social behavior of others, while other ‘types’ are not affected by the average behavior of the reference group."
Under the assumption of normally distributed returns, we analyzenwhether the Cumulative Prospect Theory of Tversky and Kahneman (1992)nis consistent with the Capital Asset Pricing Model. We find that in everynfinancial market equilibrium the Security Market Line Theorem holds.nHowever, under the specific functional form suggested by Tversky andnKahneman (1992) financial market equilibria do not exist. We suggest annalternative functional form that is consistent with both, the experimentalnresults of Tversky and Kahneman and also with the existence of equilibria.
"Money *nAleksander BerentsennEconomics Departement, University of Basel, SwitzerlandnJune 10, 2003nAbstractnThis paper considers a monopolist’s supply of outside paper money in a random-matchingnmodel with divisible money and divisible goods. When binding supplynannouncements are feasible, the revenue-maximizing policy is characterized by anninitial period where the monopolist initiates a currency reform which destroys thenvalue of any old currency, and then issues new money, which the issuer taxes thereafternwith a constant gross growth rate of money. It is shown that this policy is time-consistentnif the trading history of the issuer is public information and if moneyndemanders respond to the relevation of defection by playing autarky."
"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.
