IV Working Papers

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 PDF File:
	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: Original Version (Optimal Sustainable Intergenerational Insurance) December 2020. Revised Version December 2023 Keywords: Intergenerational insurance • Limited commitment • Risk sharing • Social Security • Stochastic overlapping generations JEL Classification: D64 • E21 • H55 PDF File:
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 PDF File:
	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 PDF File:
	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 PDF File:
	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 PDF File:
	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 PDF File:
	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 PDF File:
	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 PDF File:
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 PDF File:
	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 PDF File:
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 PDF File:
	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 PDF File:
	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 PDF File: (final report from December 2007 )
	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 PDF File:
	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 PDF File:
	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 PDF File:
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 PDF File: (version from October 2000: )
	Risk Sharing in Village Economies By: Tim Worrall Series: Keele Working Paper Series in Economics, No. 98/15, June 1998 PDF File:
	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 PDF File:
	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 PDF File:
	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 PDF File:
	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 PDF File:
	Foreign Direct Investment and the Risk of Expropriation By: Jonathan P. Thomas and Tim Worrall Series: Keil Working Paper No. 411, February 1990 PDF File:
	Debt with Potential Repudiation By: Tim Worrall Series: Sonderforschungsbereich 178, Universität Konstanz, Diskusionsbeiträge, Serie-II, No. 69, June 1988. PDF File:
	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. PDF File:
	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 PDF File:
	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 PDF File:
	Income Fluctuation and Asymmetric Information By: Jonathan P. Thomas and Tim Worrall Series: University of Western Ontario, Mimeo, December 1985 (Revised March 1986) PDF File:
	Self-Enforcing Wage Contracts By: Jonathan P. Thomas and Tim Worrall Series: University of Cambridge, Economic Theory Discussion Paper No. 74, April 1984 PDF File:
	Implicit Contracts and Asymmetric Information By: Tim Worrall Series: University of Liverpool Discusion Papers in Economics, No. 46, February 1983 PDF File:
	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. PDF File: