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Monetary theorists have advanced an intriguing notion: we exchange money to make up for a lack of enforcement, when it is difficult to monitor and sanction opportunistic behaviors. We demonstrate that, in fact, monetary equilibrium cannot generally be sustained when monitoring and punishment limitations preclude enforcement — external or not. Simply put, monetary systems cannot operate independently of institutions — formal or informal — designed to monitor behaviors and sanction undesirable ones. This fundamental result is derived by integrating monetary theory with the theory of repeated games, studying monetary equilibrium as the outcome of a matching game with private monitoring.
Asymmetric social norms
(2017)
Studies of cooperation in infinitely repeated matching games focus on homogeneous economies, where full cooperation is efficient and any defection is collectively sanctioned. Here we study heterogeneous economies where occasional defections are part of efficient play, and show how to support those outcomes through contagious punishments.
We develop a model that reproduces the average return and volatility spread between sin and non-sin stocks. Our investors do not necessarily boycott sin companies. Rather, they are open to invest in any company while trading off dividends against ethicalness. We show that when dividends and ethicalness are complementary goods and investors are sufficiently risk averse, the model predicts that the dividend share of sin companies exhibits a positive relation with the future return and volatility spreads. Our empirical analysis supports the model's predictions.
This paper contributes to the ongoing debate on the relationship between austerity measures and economic growth. We propose a general equilibrium model where (i) agents have recursive preferences; (ii) economic growth is endogenously driven by investments in R&D; (iii) the government is committed to a zero-deficit policy and finances public expenditures by means of a combination of labor taxes and R&D taxes. We find that austerity measures that rely on reducing resources available to the R&D sector depress economic growth both in the short- and long-run. High debt EU members are currently implementing austerity measures based on higher taxes and/or lower investments in the R&D sector. This casts some doubts on the real ability of these countries to grow over the next years.