It is argued in this paper that China has invested heavily in the Hong Kong economy to build trust in its intentions to maintain the present course of economic policy. The investments have the character of hostages because their payoffs depend on a functioning Hong Kong economy. This increases...

In this paper we offer an explanation why a poor majority does not necessarily expropriate a rich minority. We present a dynamic model in which individuals are willing to accept an unequal distribution of income in the current period if they are sufficiently optimistic about their future...

This paper studies how removing barriers to competition in the nontraded goods sector affects the current account, the real exchange rate, and factor prices in a small open economy. We show that the expansion of the nontraded sector that results from a deregulation shock is associated with an...