In this paper we show that reputation formation in endogenously formed relationships is a decisive determinant for the existence and performance of credit markets. In theabsence of any third party enforcement of debt repayment the contracting parties succeed in establishing stable bilateral...

While the debate on how economic agents form expectations and how these expectationsshould be modelled has been key to modern macroeconomics, money illusion has been ananathema to macroeconomists until recently. The rational expectations revolution in the1970's thoroughly banned the study of...

We are interested in the macroeconomic implications of the separation of ownership and control. An alternative decentralized interpretation of the stochastic growth model is proposed, one where shareholders hire a self-interested manager who is in charge of the firm’s hiring and investment...

For decades economists have considered money illusion aslargely irrelevant. Here we show, however, that money illusion haspowerful effects on equilibrium selection. If we represent payoffs innominal terms almost all subjects play at or close to an inefficientequilibrium whereas if we lift the...

Have the euro and accompanying measures of financial integration had a discernable impact on the degree of diversification of European investors? This is an empirical question that this paper tries to answer by exploring four alternative avenues. First we focus on the final outcome: If European...

This paper reassesses, at the light of economic and financial theory, the well-documented recent evolution of the euro area public debt and equity markets. Doing so leads to associating the EMU and the single market with the changes in fundamentals and financial integration with convergence in...

This paper introduces state dependent utility into the standard Mehra and Prescott (1985) economy by allowing the representative agents coefficient of relative risk aversion to vary with the underlying economys growth rate. Existence of equilibrium is proved and its asymptotic properties...

The evidence from many experiments suggests that people are heterogeneous with regard to their abilities to make rational, forward looking, decisions. This raises the question when the rational types are decisive for aggregate outcomes and when the boundedly rational types shape aggregate...

We study the dynamic general equilibrium of an economy where risk averse shareholders delegate the management of the firm to risk averse managers. The optimal contract has two main components: an incentive component corresponding to a non-tradable equity position and a variable ’salary’...