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166 countries have some kind of public old age pension. What economic forces create and sustain old age Social Security as a public program? Mulligan and Sala-i-Martin (1999b) document several of the internationally and historically common features of social security programs, and explore “political” theories of Social Security. This paper discusses the “efficiency theories, ” which view creation of the SS program as a full or partial solution to some market failure. Efficiency explanations of social security include the “SS as welfare for the elderly”, the “retirement increases productivity to optimally manage human capital externalities”, “optimal retirement insurance”, the “prodigal father problem”, the “misguided Keynesian”, the “optimal longevity insurance”, the “government economizing transaction costs”, and the “return on human capital investment”. We also analyze four “narrative ” theories of social security: the “chain letter theory”, the “lump of labor theory”, the “monopoly capitalism theory”, and the “Sub-but-Nearly-Optimal policy response to private pensions theory”. The political and efficiency explanations are compared with the international and historical facts and used to derive implications for replacing the typical pay-as-you-go system with a forced savings plan.

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Consider the postage stamp. As title to a future good (or, in this case, service) with monetary value, this humble object is essentially the same as a security. Its value, 37 cents, can be identiÞed with the present value of the service (delivery of a letter) to which its owner is entitled.

We examine price formation in a simple static model with asymmetric information, an infinite number of risk neutral traders and no noise traders. Here we re-examine four results associated with rational expectations models relating to the existence of fully revealing equilibrium prices, the advantage of becoming informed, the costly acquisition of information, and the impossibility of having equilibrium prices with higher volatility than the underlying fundamentals.

Abstract: The paper examines time series properties and efficiency of a securities market where disparately informed traders hold rational expectations and extract signals from the endogenous market price. Two equilibria are calculated, using a method of Sargent to handle the problem of infinite regress. When rational speculation is the sole source of potential trade, the market price reflects all private information, and zero trade occurs. When net supply is perturbed by unobserved noise, the market exhibits a broad range of characteristics cited in empirical literature, including excess volatility, mean reversion, dividend yield effects, trading volume and divergence of opinion. I am indebted to Thomas J. Sargent for helpful discussions. Are securities prices too volatile? This question is central to evaluating how efficiently resources are allocated in a competitive market. A large body of literature suggests that securities markets will generate prices which reflect all available information, even if some traders are better informed than others. Recent empirical studies place this market efficiency

A recursive test procedure is suggested that provides a mechanism for testing explosive behavior, date-stamping the origination and collapse of economic exuberance, and providing valid confidence intervals for explosive growth rates. The method involves the recursive implementation of a right-side unit root test and a sup test, both of which are easy to use in practical applications, and some new limit theory for mildly explosive processes. The test procedure is shown to have discriminatory power in detecting periodically collapsing bubbles, thereby overcoming a weakness in earlier applications of unit root tests for economic bubbles. An empirical application to Nasdaq stock price index in the 1990s provides confirmation of explosiveness and date-stamps the origination of financial exuberance to mid-1995, prior to the famous remark in December 1996 by Alan Greenspan about irrational exuberance in financial

In spirit of the earlier works done by Arthur (1992) and Palmer et al. (1993), this paper models speculators with genetic programming (GP) in a production economy (Muthian Economy). Through genetic programming, we approximate the consequences of \speculating about the speculations of others ", including the price volatility and the resulting welfare loss. Some of the patterns observed in our simulations are consistent with ndings in experimental markets with human subjects. For example, we show that GP-based speculators can be noisy by nature. However, when appropriate nancial regulations are imposed, GP-based speculators can also be more informative than noisy. Key Words: Genetic Programming, Speculators, No-Trade Theorem, Short Selling, Volatility. 1 Motivation and Literature Review While it has been suspected for quite a long time that speculators can be destructive for the stability of markets, this property has not been successfully revealed from many formal models of s...

This paper demonstrates that models of stock market crashes have empirical implications which can be tested using switching-regression econometrics. We show that switching 322 SIMON VAN NORDEN AND HUNTLEY SCHALLER regressions reveal new patterns in the data which go beyond existing stylized facts.

We present a dynamical theory of asset price bubbles that exhibits the appearance of bubbles and their subsequent crashes. We show that when speculative trends dominate over fundamental beliefs, bubbles form, leading to the growth of asset prices away from their fundamental value. This growth makes the system increasingly susceptible to any exogenous shock, thus eventually precipitating a crash. We also present computer experiments which in their aggregate behavior Perhaps one of the most fascinating behaviors of markets is the situation in which valuations placed on a particular asset become “self-fulfilling”. One such scenario arises when prices not only reflect the individual market participant’s valuation of the asset (the fundamentals), but also reflect an extra amount that is often called a “bubble”. This