Hans Jørgen Jacobsen

Endogenous Business Cycles and Stabilization Policies

We analyze the effects of simple stylized economic policy rules, or stabilization principles, when fluctuations in economic activity are created endogenously by self_fulfilling volatile expectations. We study a simple monetary competitive model with intertemporally optimizing agents and a government. We only depart from neoclassical orthodoxy by assuming that a cycle or a sunspot equilibrium, not necessarily a steady state, could be the descriptive dynamic rational expectations equilibrium. The government may then well out of welfare concerns want to conduct systematic stabilization policy through transfers, expenditure, and taxation even though this has distortionary effects. We show that the policy rules that stabilize output in a way that is best for welfare involve countercyclical elements in government activity.

The Product of Capacities and Belief Functions

Capacities (monotone, non-additive set functions) have been suggested to describe situations of uncertainty. We examine the question of how to define the product of two independent capacities. In particular, for the product of two belief functions (totally monotone capacities), there is a unique minimal product belief function. This is characterized in several ways.

Expected utility with lower probabilities

An uncertain and not just risky situation may be modeled using so-called belief functions assigning lower probabilities to subsets of outcomes. In this article we extend the von Neumann-Morgenstern expected utility theory from probability measures to belief functions. We use this theory to characterize uncertainty neutrality and different degrees of uncertainty aversion.

On the effectiveness of economic policy when competition is imperfect and expectations are rational

We study the consequences of imperfect competition in a macro model with only one imperfection; that of labor market competition. Otherwise the model is ‘clean’; agents are optimizers, prices are endogenous, and expectations are rational. We show that, although imperfect competition in itself can explain unemployment (as is well known), it does not in itself give strong support to the use of traditional fiscal policy in fighting unemployment. Fiscal policy will (almost inevitably) have real effects but only through a special effect that may be difficult to control. In many cases fiscal policy cannot create full employment, and it may very well have perverse effects.

Endogenous, imperfectly competitive business cycles

We investigate how imperfect competition affects the occurrence and the properties of endogenous, rational expectations business cycles in an overlapping generations model with constant returns to scale in production. The model has explicit product and labor markets all characterized by monopolistic competition. An implicit assumption of barriers to entry justifies that the number of firms is fixed even when positive profits occur. It turns out that both market power of firms on the product markets and market power of unions on the labor markets make the occurrence of cycles more likely. In particular, imperfect competition on the product markets and the positive profits associated with it may have the effect that there is a cycle even if the labor supply curve is increasing in the real-wage rate. For competitive cycles is required not only a decreasing labor supply curve, but a wage elasticity below -½ (at stationary equilibrium). Market power on the labor markets may have the effect that imperfectly competitive cycles are in accordance with certain empirical regularities (some well known, some reported in the paper) concerning fluctuations in output and involuntary unemployment. Since involuntary unemployment does not occur under perfect competition such regularities are incompatible with competitive cycles

Testing the Intransitivity Explanation of the Allais Paradox

This paper uses a two-dimensional version of a standard common consequence experiment to test the intransitivity explanation of Allais-paradox-type violations of expected utility theory. We compare the common consequence effect of two choice problems differing only with respect to whether alternatives are statistically correlated or independent. We framed the experiment so that intransitive preferences could explain violating behavior when alternatives are independent, but not when they are correlated. We found the same pattern of violation in the two cases. This is evidence against intransitivity as an explanation of the Allais Paradox. The question whether violations of expected utility are mainly due to intransitivity or to violation of independence is important since it is exactly on this issue the main new decision theories differ.

A Macro Model of Conjectural Equilibrium

A macro example of Hahns (1978) model of conjectural equilibrium is studied in order to gain some insight into the general concept of conjectural equilibrium and its relation to fixprice equilibrium. In particular, the conjecture functions are specified; elasticities of conjectured prices relative to trades at perceived constraints are assumed constant. For given elasticities, the complete set of conjectural equilibria is computed along with the price constellations compatible with different types of equilibrium, i.e., the regimes.

On the structural difference between the evolutionary approach of Young and that of Kandori, Mailath and Rob

We provide robust examples of symmetric two-player coordination games in normal form that reveal that equilibrium selection by the evolutionary model of Young (1993) is essentially different from equilibrium selection by the evolutionary model of Kandori, Mailath and Rob (1993).

Rebalancing Unemployment Benefits in a Unionized Labor Market

The basic trade union model is extended to allow for a more sophisticated unemployment benefit system consisting of two benefit levels, one for short-term and one for long-term unemployed, and a rule determining whether an unemployed is short- or long-term. The purpose of this extension is twofold: to get a more realistic analysis of the actual benefit systems in most countries and to analyze alternative reforms to the traditional one of changing a uniform benefit level. Reforms that rebalance the benefit rates holding constant either expected utility of an unemployed, aggregate benefit expenditures, or aggregate utility of union members can reduce unemployment.

Decreasing Unemployment Increases Welfare

In a private ownership, production economy we show that under a smoothness assumption on production sets, an allocation involving unemployment and voluntary trades is always Pareto dominated by another attainable allocation where all the unemployed work (more).