CES Journal online

• Tullock's Mystery of Government Growth
  
  The basic source of the reseach Gordon Tullock intends to do while at CES is an accidental discovery. One of his research assistants misunderstood his instructions and got some data which seemed to be both new and exciting. It showed that from the founding of American government until 1929, except during wartime, there was practically no change in the share of GNP absorbed by the American government. From 1952 on there has been a steady and continuous growth that is remarkably regular as well. Wagner's law, which has been well documented for European countries, ultimately became operative in the U.S., too. While in Munich, Tullock intends to collect more data and to explain Wagner's law in the light of modern economic theory.
  Gordon Tullock is one of the founders of the Public Choice school and is now working as Karl Eller Professor of Economics and Political Science at the University of Tuscon, Arizona. While at CES in June and part of July, he will give three lectures on "Problems in Rent Seeking", a topic which is first and foremost connected with his name. He will also give a seminar in the Munich Economics Colloquium on "Coordination without Command or Market", a bio-economic topic in which he recently became quite interested. From examining how ants or bees do it, Tullock investigates whether we can learn anything from the way in which the allocation problem is being solved in nature. [hf]
  
  
  
• Economic Policy Panel Meeting at CES
  
  For two years now, CES has been one of the editors of the journal Economic Policy, together with CEPR (London) and Delta (Paris). In April, the Economic Policy panel met in Munich to discuss the contents of the journal's Volume 25. Eight authors were invited to present their papers on well-defined research projects. A selection of these papers will be included in the upcoming issue of Economic Policy. Two discussants for each paper and a broad open discussion guarantee the outstanding quality of the articles, which have made Economic Policy the leading policy journal in Europe.
  The single articles covered a variety of fields, where a particular emphasis was placed on the urgent problem of unemployment. Peter Birch Sørensen (Copenhagen) studied the topic from a public finance perspective, whereas Daniel Cohen, Arnaud Lefranc und Gilles Saint-Paul (Paris) compared the French and the U.S. unemployment problems. Another topic which has been in newspaper headlines was discussed by Norvald Instefjord, Patricia Jackson und William Parraudin (London), who investigate securities fraud in investment banks and stock market trade. Orazio Attanasio und James Banks (London) tried to trace back differences in savings behaviour to differences in the female labour market participation rate, the liberalisation of financial markets and the public pension policy. Economic aspects of the arms trade were examined by Paul Levine (Surrey) and Ron Smith (London), whereas Aloys Prinz (Mainz) studied European drug policy. Massimo Motta (Barcelona) and Michele Polo (Mailand) gave a paper on concentration and public policies in the broadcasting industry. [hf/hb]
  
  
  
• Environment and Welfare State: Both are quite useful after all
  
  Agnar Sandmo, who will visit CES in June, is professor of economics at the Norwegian School of Economics and Business Administration in Bergen. His main fields of research have been the economics of uncertainty and public economics. He was president of the European Economics Association and editor of the European Economic Review. He also was coeditor and associate editor of the Journal of Public Economics. He is also a member of the CES Council.
  Sandmo's current research interests include the public economics of the environment, which was the subject of his Lindahl Lectures at the University of Uppsala last year and a topic in which he has been interested for many years. He is currently revising and extending his lecture notes with a view to preparing them for book publication. Among the topics to be discussed there are the environment as a public good, the evaluation of benefits, alternative methods of externality control, Pigovian taxes under second-best conditions and the international dimension of environmental problems.
  A further topic on which Sandmo is engaged concerns the economics of the welfare state - another of his long-term interests. The current debate, both in Scandinavian countries and elsewhere, is about reforms designed to correct some of the adverse efficiency effects of welfare state arrangements, and to bring the growth of public sector budgets under tighter control. While it is easy to justify the concern both for efficiency and budget discipline, there may be a tendency in the debate to play down the benefits of the welfare state. [jvw]
  
  
  
• Games People Play
  
  In April, Professor Jonathan Thomas from the University of Warwick, England, visited CES. His main field of interest is game theory. During his stay he worked on incomplete information in repeated games. The scientific work of Thomas concentrates on models in which players are uncertain of the type of player they are playing against. For example, one player may not know the payoff function of another, or alternatively, a player may think that there is a small chance that his opponent is irrationally committed to some fixed strategy. The question then arises as to what extent the usual results from complete information repeated games carry over to this environment; in particular, if the amount of incomplete information is small, is the set of equilibria of the incomplete information games close to that of the complete information games? The answer depends critically upon what is assumed about the players' relative rates of time preference. Currently Thomas is studying games where players' interests are well aligned, so that players would all agree what the best outcome is. In the standard model, there are equilibria where players fail to coordinate on this desirable outcome. Professor Thomas investigates whether the introduction of a small amount of irrationality can facilitate the emergence of a coordinated equilibrum.
  The guest will give a series of lectures on the theory of sovereign debt. These lectures will cover the pure theory of international lending to a sovereign country, issues arising during the debt crisis when a large number of countries failed to meet their debt servicing obligations, and some recent developments including suggestions for an international bankruptcy court. [mt]
  
  
  
• Dixit: A Political Economy View of Europe's Future
  
  Avinash Dixit, Professor of Economics at Princeton University, will visit CES in June. During his impressive academic career he has worked in such a wide range of fields as international trade, industrial organization, public economics, growth and development theory, and the theory of investment under uncertainty. His current main research interest is positive political economy, that is, study of the political processes that produce economic policies. Dixit was the first Distinguished Fellow of the CES, and delivered the Munich Lectures in Economics in 1994 on the very subject of positive political economy. The resulting monograph, titled The Making of Economic Policy: A Transaction-cost Politics Perspective, was published by MIT Press in 1996.
  During his second stay at the CES, Dixit will concentrate his research on two topics: First, he will consider the interaction between the future European central bank and the sovereign governments of the EU countries. Secondly, he will examine the interaction between the income redistribution policies of different levels of government in a federal system. Both are timely topics for the current state of economic development in Europe. [jvw]
  
  
  
• Individual Preferences: Private Truths, Public Lies?
  
  Timur Kuran, Professor of Economics and King Faisal Professor of Islamic Thought and Culture at the University of Southern California in Los Angeles, is to spend June 1997 at CES. He will give a three-lecture course entitled "Individual Choice and Its Discontents", in which he will challenge the assumption of economic rationality
  Kuran works in several overlapping fields, all of them at the intersection of economics and its sister disciplines, like political science or sociology. He is the author of Private Truths, Public Lies: The Social Consequences of Preference Falsification, published with Harvard University Press. The starting-point of the book is that individual preferences might be distorted due to perceived social pressure. Kuran provides a unified account of how this preference falsification causes the preservation of widely disliked economic structures, breeds ignorance and confusion, and hides the potential for social change. J.C.B. Mohr will publish a German edition under the title Leben in Lüge: Die sozialen Folgen von Präferenzverfälschungen. [hf]
  
  
  
• Winds of Change, Time-Path Dependency, and Europe
  
  Daniel Gros, from CEPS in Brussels, is author of the "Winds of Change", the most comprehensive monography on the economics and politics of the transition of Eastern Europe towards the market system (with Alfred Steinherr). While visiting CES in March, he focussed on the potential integration of the new market economies into the European Union. The process of European integration has evolved in the directions of deepening and widening. Europe went from the Coal and Steel Community to the Customs Union of the Common Market Treaty and then on to the Internal Market programme of 1992. The next step should be Economic and Monetary Union in 1999. At the same time the membership of this evolving institution increased from 6 to 15. These two long term trends cannot be explained just by a general desire for European integration or simply the winds of change. Each step required hard political choices and had to overcome vested interests. Powerful economic interests must also have been behind this process.
  Gros maintains that the process of European integration is time dependent, exhibiting a significant positive feedback. The continuing deepening results from a reduction of trade barriers, which brings about economic progress and increases the constituency for reducing the remaining barriers even further. Any initial trade liberalization (even if the motives are non- economic) could thus set into motion a continuing process of increases in trade, resulting in the demand for further liberalization, which in turn results in further increases in trade, and so on.
  Gros suggests that the extension of the European Union to the East could be facilitated by a similar process: the larger the area covered by the Union, the more attractive it becomes for outsiders to join, but as more and more countries join, its attractiveness increases even further - both for old and new members. [hb]
  
  
  
• The Measurement of Income Inequality
  
  Michael Hoy, a professor of economics at the University of Guelph, will be visiting CES from May 2 to June 9. He is spending most of his time this year in France visiting GREQAM, the Groupement de Recherche en Economie Quantitative d'Aix-Marseille.
  While at CES, Hoy will introduce us to two of his recent research areas. He will teach a short course on the various methods used to measure and compare income inequality and show how these techniques can be used to compare the progressivity, or equalizing effects, of alternative income tax schemes. He will also present a seminar on how genetic information will affect the efficient and fair operation of insurance markets. The ethical, legal and social implications of this information belong to the topics he will discuss. [hf]
  
  
  
• Weather forecasting in Economics
  
  Hashem Pesaran visited CES in March. He is Professor of Economics at the University of Cambridge, and a Professorial Fellow of Trinity College, Cambridge. Pesaran has taught at Harvard University, the Australian National University, UCLA, and Virginia Polytechnic Institute, to name only a few. He is the founding editor of the Journal of Applied Econometrics and a Fellow of the Econometric Society.
  At CES, Pesaran presented his work with Clive Granger of University of California at San Diego, entitled, "A decision-theoretic approach to forecast evaluation". Pesaran believes that the techniques used in the analysis of weather forecasting may also have important applications in economics. An example is the behavior of central banks. Central Banks have for a number of years set the nominal interest rate in the light of their forecasts of the inflation rate, increasing the rate if their prediction of the inflation rate exceeded a politically determined threshold and vice versa. Pesaran has developed a simple procedure for a comparison of forecasts which is based on the average realized value of the forecasts to the decision maker and he has developed a method to find the "optimal" forecast. [hf]
  
  
  
• Quasi-Markets in Health Care
  
  Professor Hugh Gravelle visited CES during March. He has recently moved from Queen Mary and Westfield College, University of London, to the Centre for Health Economics at the University of York. He now specialises in the economics of primary health care, whilst maintaining an interest in insurance and the economics of law.
  Gravelle has concentrated his attention on the British health care system. The British health care system is quite different from the German one. In Britain, patients must register with a primary care general practitioner who is, apart from emergencies, their only route to secondary care. General practitioners are independent private contractors who hold individual contracts with their local health authority. In 1990 a new general practitioner contract was introduced and the financing of hospitals was changed. Gravelle is interested in the implications of the changed incentives and constraints resulting from these changes for the behaviour of health care providers and their patients.
  Whilst at CES he was able to find out more about the German health care system and the incentives it creates for patients and health care providers. [hb]
  
  
  
• Evolution and Learning in Economic Institutions
  
  Daniel Friedman from the University of California, Santa Cruz, will be at CES in May. During his stay he will continue his research on individual learning behaviour in economic institutions. Friedman, who did his PhD in mathematics, is well known for his work on evolutionary game theory and for his laboratory experiments.
  Economic institutions, such as markets and contract negotiations, shape individual behaviour and economic performance. Moreover, they promote economic efficiency. However, whilst the characteristics of institutions are well known, it is often unknown why some economic institutions prevail while others nearly do not exist. The impact of economic institutions on the process of learning may give an answer on this question. Take as an example the English auction and the second price auction. Since Vickrey's 1961 paper it is well known that these two auctions are equivalent in equilibrium. However, whilst the English auction is very often applied, the sealed price auction is rarely used. The reason may be that the English auction promotes immediate learning of its dominant strategy while learning in the second price auction is much slower.
  During his stay at CES Friedman is to give a lecture on this topic. He will illustrate this theme with a variety of laboratory and field data, using several theoretical models of the learning process. He will also discuss the implications for the development of new institutions such as internet access pricing or the auction of broadcast spectrum rights. [us]
  
  
  
• Contributors
  
  Journal Editor: Holger Feist, Lector: Helge Berger, Contributors: Helge Berger [hb], Holger Feist [hf], Ulrich Scholten [us], Claudio Thum [ct], Marcel Thum [mt], Jacob von Weizsäcker [jvw], Online Journal: Eckhard Wannieck.