Economics Insights @ CBS

We develop a dynamic theory of resource wars and study the conditions under which such wars can be prevented. Our focus is on the interaction between the scarcity of resources and the incentives for war in the presence of limited commitment. We show that a key parameter determining the incentives for war is the elasticity of demand. Our first result identifies a novel externality that can precipitate war: price-taking firms fail to internalize the impact of their extraction on military action.

We develop an incomplete-markets q-theoretic model to study entrepreneurship dynamics. Precautionary motive, borrowing constraints, and capital illiquidity lead to underinvestment, conservative debt use, under-consumption, and less risky portfolio allocation. The endogenous liquid wealth-illiquid capital ratio w measures time-varying financial constraint. The option to accumulate wealth before entry is critical for entrepreneurship. Flexible exit option is important for risk management purposes.

The fact that minimum wages seem especially binding for young workers has led some countries to adopt age-differentiated minimum wages. We develop a dynamic competitive two-sector labor market model where workers with heterogeneous initial skills gain productivity through experience.

We examine an analyst's sale and distribution of information related to short-term price movements, but unrelated to underlying firm value. By selling non-fundamental information, the analyst increases competition on the signal, but prices become more sensitive to net order flow, creating an offsetting increase in the non-fundamental signal's value. More precise non-fundamental information is more widely distributed.