We construct a novel model of equilibrium unemployment. Specifically, in a dynamic micro based model, we illustrate that rational and profit maximizing firms can choose to pay wages that exceed the market clearing level to restrict competition. Resulting unemployment and above market clearing...

In this paper we model the process of international investment flows when agents face strategic motives. We show that domestic agents' expectations about the behavior of foreign investors are crucial in the process of the determination of the equilibrium of the domestic economy. Specifically, we...

In this paper we extend the dimensionality of the standard income taxation problem. Specifically, we allow agents to purchase at a price, from the government, discounts on their marginal tax rates. Consequently agents have two decision variables: the level of income they choose to earn and the...

Fully rational agents are allowed to optimize over expectations formation technologies in an environment where it is costly to collect and process information. It is shown in a general equilibrium framework that optimization over expectations by rational and forward-oriented agents can lead to...

The paper develops a model of sudden reversals of in foreign investment flows. The paper suggests that microlevel incentives and microlevel decisions stand at the root of investment crises. Specifically, we argue that if high quality projects are in limited supply and foreign investors are not...

The paper analyzes, in a general equilibrium framework under the assumption of fixed costs and microlevel uncertainty, the impact of transitory aggregate shocks on the behavior of macroeconomic variables. We establish that transitory shocks can have persistent effects and can cause significant...

The optimal labor income taxation problem is cast in the context of the Polish economy. We use the actual Polish data on labor income and the corresponding tax revenue provided by the Polish Tax Authority to calibrate the optimal taxation Problem of Mirrlees to the Polish data. We solve the...

The paper recognizes that expectations and the process of their formation are subject to standard decision making and are determined as a part of equilibrium. Accordingly, the paper presents a basic framework in which the form of expectation formation is a choice variable. At any point in time...

The paper focuses on short run macroeconomic dynamics triggered by demand side shocks. In particular, the paper analyzes, in a general equilibrium framework, the impact of transitory demand side shocks on the behavior of macroeconomic variables and examines the relevance of policy instruments...

We show using elementary arguments that the utilitarian approach to optimal taxation leads to results that are very sensitive to the underlying formulation of the problem. In particular, we argue that there are legitimate optimal taxation problems that admit solutions of a different form than...