Current Papers |
Self-Enforcing Wage Contracts Redux
By: Jonathan Thomas and Tim Worrall
Abstract: This paper provides a personal perspective on self-enforcing wage contracts. We present a simple version of the model of Thomas-Worrall (1988) and explains its motivation, contribution and methodology. We discuss some of its limitations, the development of literature and its connection to the literature on relational contracting with an observable effort cost. We suggest some open questions for the future development of the literature.
Date: September 2022
Keywords: Limited Commitment • Relational Contracts • Risk Sharing
JEL Classification: C61 • D86 • J41 • L14 • M55
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Optimal Sustainable Intergenerational Insurance
By: Francesco Lancia, Alessia Russo and Tim Worrall
Abstract: How should successive generations insure each other when the enforcement of transfers between them is limited? This paper examines transfers that maximize the expected discounted utility of all generations subject to a participation constraint for each generation. The resulting optimal intergenerational insurance is history dependent even when the environment is stationary. Consequently, consumption is heteroskedastic and autocorrelated across generations. The optimal intergenerational insurance arrangement is interpreted as a pay-as-you-go social security scheme with means testing and a mixture of flat-rate and contributory-related elements. With logarithmic preferences, the pension received when old depends on the contribution rate paid when young.
Date: December 2020 (Revised December 2021)
Keywords: Intergenerational insurance • Limited commitment • Risk sharing • Social Security • Stochastic overlapping generations
JEL Classification: D64 • E21 • H55
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Recent Papers |
Portfolio Sales and Signaling
By: Spiros Bougheas and Tim Worrall
Abstract: This paper extends the DeMarzo and Duffie (1999} signaling model from single sales to portfolio sales.
It shows that the extended model can account for retention of low quality assets and help explain why retained assets may be of varying quality.
Date: February 2017 (Updated November 2018)
Keywords: Securitization • Skin in the game • Signaling • Tranching
JEL Classification: D82 • G21 • G23
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Currency Areas and Voluntary Transfers
By: Pierre M. Picard and Tim Worrall
Abstract: Fiscal integration has long been recognized as an important issue in determining whether countries decide to establish a common currency area. Fiscal integration between sovereign states is, however, limited by the ability of countries to commit to fiscal transfers. This paper supposes that fiscal transfers between countries must be voluntary and asks how this influences the choice between a currency area and a flexible exchange rate regime. It presents a model with wage rigidity in which, absent transfers, or with first-best consumption sharing transfers, the flexible exchange rate regime dominates the currency area. Nevertheless, the currency area may be optimal because it enables more risk sharing to be sustained. We show that this is true for a plausible set of parameter values and consider the robustness of the conclusions to some modifications of the model.
Date: May 2015 (Updated February 2020)
Keywords: Optimal currency area • fiscal and monetary union • limited
commitment • mutual insurance
JEL Classification: F12 • F15 • F31 • F33 • F45
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Stochastic Stability of Monotone Economies in Regenerative Environments
By: Sergey Foss, Vsevolod Shneer, Jonathan Thomas and Tim Worrall
Abstract: We introduce and analyse a new class of monotone stochastic recursions in
a regenerative environment which is essentially broader than that of Markov
chains. We prove stability theorems and apply our results to two canonical models in recursive economics, generalising some known stability results to the cases
when driving sequences are not independent and identically distributed.
Date: January 2015 (Revised June 2017)
Keywords: Monotone Economy • Markov Chain • Stochastic Recursion • Driving Sequence • Renegerative Sequence • Existence and Uniqueness of a Stationary
Distribution • Stochastic Stability • Bewley-Huggett-Aiyagari Model • Risk-Sharing Model
JEL Classification: C61 • C62
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Is a Policy of Free Movement of Workers Sustainable?
By: Pierre M. Picard and Tim Worrall
Abstract: This paper studies the costs and benefits of the adoption of the policy of free movement for
workers. For the countries to agree on uncontrolled movement of workers, the short run costs
must be outweighed by the long term benefits that result from better labour market flexibility
and income smoothing. We show that such policies are less likely to be adopted when
workers are impatient and less risk averse workers, when production technologies display
decreasing returns and when countries trade a share of their products.
Date: March 2014 (Revised March 2015)
Keywords: Migration • labour market flexibility • sustainable plan
JEL Classification: F22 • J61
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Dynamic Relational Contracts under Complete Information
By: Jonathan P. Thomas and Tim Worrall
Abstract:
This paper considers a long-term relationship between two agents who both undertake an action or investment that produces a joint benefit. Agents have
an opportunity to expropriate some of the joint benefit for their own use. Agents have quasi-linear preferences. Two cases are considered: where agents are risk averse but where limited liability constraints do not bind, and where agents are risk neutral and subject to limited liability constraints. We ask how to structure the investments and division of the surplus over time to avoid expropriation. In the risk-averse case, the dynamics of actions and surplus may or may not be monotonic depending on whether or not a first-best allocation can be sustained. Agents may underinvest but never overinvest. If the first-best allocation is not sustainable, there is a trade-off between risk sharing and surplus maximization; surplus may not be at its constrained maximum even in the long run and the “amnesia” property of pure risk-sharing models fails to hold. In contrast, in the risk-neutral case there may be an initial phase in which one agent overinvests and the other underinvests. Both actions and surplus converge monotonically to a stationary state, where surplus is maximized subject to the self-enforcing constraints.
Date: January 2014 (Revised January 2016, Revised August 2017)
Keywords: Risk sharing • limited commitment • self-enforcement • relational contracts
JEL Classification: C61 • C73 • D86 • D91 • L14
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Sustainable Migration Policies
By: Pierre M. Picard and Tim Worrall
Abstract: This paper considers whether countries might mutually agree a policy
of open borders, allowing free movement of workers across countries.
For the countries to agree, the short run costs must outweighed by
the long term benefits that result from better labour market
flexibility and income smoothing. We show that such policies are
less likely to be adopted when workers are less risk averse workers
and when countries trade more. More surprisingly, we find that some
congestion costs can help. This reverses the conventional wisdom
that congestion costs tend to inhibit free migration policies.
Date: September 2011
Keywords: Migration • limited commitment • self-enforcement • repeated games
JEL Classification: F22 • J61 • R23
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Dynamic Relational Contracts with Credit Constraints
By: Jonathan P. Thomas and Tim Worrall
Abstract: This paper considers a long-term relationship between two agents who
undertake costly actions or investments which produce a joint
benefit. Agents have an opportunity to expropriate some of the joint
benefit for their own use. The question asked is how to structure
the investments and division of the surplus over time so as to avoid
expropriation. It is shown that investments may be either above or
below the efficient level and that actions and the division of the
surplus converges to a stationary solution at which either both
investment levels are efficient or both are below the efficient
level.
Date: March 2010
Keywords: Credit constraints • limited commitment • self-enforcement • relational contracts
JEL Classification: C61 • C73 • D86 • D91
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Research Notes |
Watch Out for Winners and Losers: Odd-Implied Brexit Sentiment and FTSE Returns
By: Costas Milas, Tim Worrall and Robert Zymek
Abstract:
Using changes in Brexit sentiment implied in betting odds, we investigate which companies' stock returns underperform relative to the market following a rise in
the perceived likelihood of Brexit (relative "Brexit losers"), and which companies outperform the market (relative "Brexit winners"). We find evidence for such abnormal returns for
103 out of 618 companies in the FTSE All-Share Index. According to our results, 81 companies record negative abnormal returns, marking them out as possible relative Brexit losers;
22 companies record positive abnormal returns, suggesting they are possible relative Brexit winners. Therefore, for every one relative Brexit winner there are four relative Brexit
losers.
Date: June 2016
Keywords: Brexit • Betting Markets • Abnormal Returns • FTSE All-Share Index • Political Economy
JEL Classification: G12 • G18 • D72 • P16
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Watch out for the impact of Scottish independence opinion polls on UK’s borrowing costs
By: Costas Milas and Tim Worrall
Abstract: As the date of the Scottish independence referendum approaches, the debate of both sides of the
campaign has increasingly focused on the economic consequences for an independent Scotland and
the Rest of the UK. Perhaps surprisingly, very little (if any) attention has been given to the
implications of Scottish independence polls for current economic developments and in particular
what Scottish opinion polls imply for current borrowing costs in the UK. This note tests the impact of
opinion poll results on the spread between the UK 10-year government bond yield and the UK 5-year
government bond yield over and above the impact of other economic fundamentals. We estimate
that a 12 percentage point increase in the Yes rating relative to the No rating increases the 10-year
borrowing costs relative to the 5 year borrowing costs by up to 24 basis points.
Date: April 2014
Keywords: Opinion Polls • Term Structure • Political Economy
JEL Classification: G12 • G18 • D72 • P16
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Older Working Papers |
Cost Padding in Regulated Monopolies
By: Spiros Bougheas and Tim Worrall
Abstract: This paper considers a regulated monopoly that can pad or falsify its costs to increase
its cost reimbursement from a regulator. The firm can also engage in a cost reducing
investment before it enters into a regulatory contract. The investment in cost reduction
determines the firm type and the paper derives the optimum incentive compatible falsification
contracts and an equilibrium for the type distribution. It shows that at the optimum
price setting regulation is relaxed and the regulator tolerates some cost padding. There
is under-investment in cost reduction and investment is distorted away from the cost
minimizing level. It also shows that where there is an equilibrium type distribution it is
continuous and there are no mass points.
Date: January 2009
Keywords: Cost padding • costly state falsification • endogenous screening
JEL Classification: D82 • L43 • L52
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Dynamic Relational Contracts
with Consumption Constraints
By: Jonathan P. Thomas and Tim Worrall
Abstract: This paper considers a long-term relationship between two agents who undertake
costly actions or investments which produce a joint benefit. Agents have an opportunity
to expropriate some of the joint benefit for their own use. The question asked
is how to structure the investments and division of the surplus over time so as to
avoid expropriation. It is shown that investments may be either above or below
the efficient level and that actions and the division of the surplus converges to a
stationary solution at which either both investment levels are efficient or both are
below the efficient level.
Series: Keele Economics Research Papers, No. 2007/16, December 2007
Keywords: Consumption constraints • relational contracts • self-enforcement
JEL Classification: C61 • C73 • D74 • D92 • L22
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Evaluating the Performance of
UK Research in Economics
By: Nicholas Vasilakos, Gauthier Lanot and Tim Worrall
Abstract: This paper reports on available bibliometric evidence on the performance of UK
research in economics. It examines some standard and non-standard sources of
bibliometric evidence and in particular evidence from the ISI and EconLit databases
and the Repository of Papers in Economics (RePEc). It also reports on research capacity
of UK economics and some non-bibliometric sources of evidence.
Series: Keele Economics Research Papers, No. 2007/10, August 2007
Keywords: Research evaluation • bibliometrics
JEL Classification: A10 • I23
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Limited Commitment Models
of the Labour Market
By: Jonathan P. Thomas and Tim Worrall
Abstract: We present an overview of models of long-term self-enforcing labour contracts in
which risk sharing is the dominant motive for contractual solutions. A base model is
developed which is sufficiently general to encompass the two-agent problem central
to most of the literature, including variable hours. We consider two-sided limited
commitment and look at its implications for aggregate labour market variables. We
consider the implications for empirical testing and the available empirical evidence.
We also consider the one-sided limited commitment problem for which there exists
a considerable amount of empirical support.
Series: Keele Economics Research Papers, No. 2007/11, September 2007
Keywords: Labour contracts • self-enforcing contracts • business cycles • unemployment
JEL Classification: E32 • J41
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Time Consistency and Intergenerational Risk Sharing
By: Tim Worrall
Abstract:It is shown how intergenerational risk sharing can be
achieved by transfers from the young generation to the old
generation such that the young generation will never have an
incentive to unilaterally renege on the transfer. This contradicts a
claim made in Gordon and Varian (1988) that intergenerational
risk-sharing is infeasible because of problems of time consistency.
It is shown however, that even in a stationary environment, time
consistent transfers are non-stationary when utility is monotone
increasing.
Series: Keele University, Mimeo, December 2006
Keywords: Intergenerational risk-sharing; • social contract • time inconsistency • self-enforcing
JEL Classification: D91 • E61 • H55
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Unemployment Insurance under
Moral Hazard and Limited Commitment:
Public vs Private Provision
By: Jonathan P. Thomas and Tim Worrall
Abstract: This paper analyses a model of private unemployment insurance under limited
commitment and a model of public unemployment insurance subject to moral hazard
in an economy with a continuum of agents and an infinite time horizon. The dynamic
and steady-state properties of the private unemployment insurance scheme are
established. The interaction between the public and private unemployment insurance
schemes is examined. Examples are constructed to show that for some parameter
values increased public insurance can reduce welfare by crowding out private insurance
more than one-to-one and that for other parameter values a mix of both public and
private insurance can be welfare maximising.
Series: Keele Economics Research Papers, No. 2002/20, October 2002
Keywords: Social insurance • moral hazard • limited commitment • unemployment insurance •
crowding out
JEL Classification: D61 • H31 • H55 • J65
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Historical Curiosities |
Informal Insurance Arangements in Village Economies
By: Ethan Ligon, Jonathan P. Thomas and Tim Worrall
Series: Keele Working Paper Series in Economics, No. 97/08, August 1997
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Risk Sharing in Village Economies
By: Tim Worrall
Series: Keele Working Paper Series in Economics, No. 98/15, June 1998
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Mutual Insurance, Individual Savings and Limited Commitment
By: Ethan Ligon, Jonathan P. Thomas and Tim Worrall
Series: Keele Working Paper Series in Economics, No. 98/14, December 1998
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Informal Insurance Arangements in Village Economies
By: Jonathan P. Thomas and Tim Worrall
Series: Liverpool Research Papers in Economics and Finance, No. 9402, November 1994
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Asymmetric Information, Investment Finance and Real Business Cycles
By: Brian Hillier and Tim Worrall
Series: Liverpool Research Papers in Economics and Finance, No. 9313, October 1993
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The Welfare Implications of Costly Monitoring in the Credit Market
By: Brian Hillier and Tim Worrall
Series: Liverpool Research Papers in Economics and Finance, No. 9310, April 1993
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Foreign Direct Investment and the Risk of Expropriation
By: Jonathan P. Thomas and Tim Worrall
Series: Keil Working Paper No. 411, February 1990
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Debt with Potential Repudiation
By: Tim Worrall
Series: Sonderforschungsbereich 178, Universität Konstanz, Diskusionsbeiträge, Serie-II, No. 69, June 1988.
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Income transfers to LDC's under asymmetric information: A two country model
By: Jonathan P. Thomas and Tim Worrall
Series: Sonderforschungsbereich 178, Universität Konstanz, Diskusionsbeiträge, Serie-II, No. 38, November 1987.
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Income Fluctuation and Asymmetric Information: An Example of a Repeated Principal-Agent Problem
By: Jonathan P. Thomas and Tim Worrall
Series: University of Reading Discussion Paper in Economics, Series A, No. 194, November 1987
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Debt with Potential Repudiation: Short-Run and Long-Run Contracts
By: Tim Worrall
Series: University of Reading Discussion Paper in Economics, Series A, No. 186, June 1987
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Income Fluctuation and Asymmetric Information
By: Jonathan P. Thomas and Tim Worrall
Series: University of Western Ontario, Mimeo, December 1985 (Revised March 1986)
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Self-Enforcing Wage Contracts
By: Jonathan P. Thomas and Tim Worrall
Series: University of Cambridge, Economic Theory Discussion Paper No. 74, April 1984
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Implicit Contracts and Asymmetric Information
By: Tim Worrall
Series: University of Liverpool Discusion Papers in Economics, No. 46, February 1983
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Wage Indexation: A Microeconomic Approach
By: Tim Worrall
Series: S.S.R.C. Research Project on the International Transmission of Fluctuations in Economic Activity, Secular Growth and Inflation.
Department of Economic and Business Studies, University of Liverpool, Working paper no. 8303, February 1983.
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