The equity premium puzzle, identified by Mehra and Prescott, states that, for plausible values of the risk aversion coefficient, the difference of the expected rate of return on the stock market and the riskless rate of interest is too large, given the observed small variance of the growth rate in per capita consumption. The puzzle is resolved in the context of an economy with rational expectations once the time separability of von Neumann-Morgenstern preferences is relaxed to allow for adjacent complementarity in consumption, a property known as habit persistence. Essentially habit persistence drives a wedge between the relative risk aversion of the representative agent and the intertemporal elasticity of substitution in consumption.

This paper treats the market for special-interest campaign contributions and political "favors" as a simple asset market. The model yields a simple equilibrium relationship among three variables: the total amount of investor contributions a candidate receives, the monetary value of the favors he has promised, and his probability of winning. Using data on open-seat races for the U.S. House of Representatives, I confront the model with a series of tests. Despite the starkness of the model, the results of these tests are highly supportive.

The logic of revenue comparisons for different types of common-value auctions is substantially altered if the number of participants, rather than being fixed, responds endogenously to the expected profitability from participating. In a thoroughly symmetric model, a seller may prefer that competition be indirect: an auction procedure in which fewer participants are needed to drive the expected profitability from participating down to the level obtainable in other auctions in the economy can attain higher expected revenue if a sale is sufficiently likely. This insight allows a complete revenue ranking of standard auction procedures, with endogenous entry.

The logic of revenue comparisons for different types of common-value auctions is substantially altered if the number of participants, rather than being fixed, responds endogenously to the expected profitability from participating. In a thoroughly symmetric model, a seller may prefer that competition be indirect: an auction procedure in which fewer participants are needed to drive the expected profitability from participating down to the level obtainable in other auctions in the economy can attain higher expected revenue if a sale is sufficiently likely. This insight allows a complete revenue ranking of standard auction procedures, with endogenous entry.

This paper treats the market for special-interest campaign contributions and political "favors" as a simple asset market. The model yields a simple equilibrium relationship among three variables: the total amount of investor contributions a candidate receives, the monetary value of the favors he has promised, and his probability of winning. Using data on open-seat races for the U.S. House of Representatives, the author confronts the model with a series of tests. Despite the starkness of the model, the results of these tests are highly supportive.

The equity premium puzzle, identified by Rajnish Mehra and Edward C. Prescott, states that, for plausible values of the risk aversion coefficient, the difference of the expected rate of return on the stock market and the riskless rate of interest is too large, given the observed small variance of the growth rate in per capita consumption. The puzzle is resolved in the context of an economy with rational expectations once the time separability of von Neumann-Morgenstern preferences is relaxed to allow for adjacent complementarity in consumption, a property known as habit persistence. Essentially, habit persistence drives a wedge between the relative risk aversion of the representative agent and the intertemporal elasticity of substitution in consumption.

Growth in this model is driven by technological change that arises from intentional investment decisions made by profit-maximizing agents. The distinguishing feature of the technology as an input is that it is neither a conventional good nor a public good; it is a nonrival, partially excludable good. Because of the nonconvexity introduced by a nonrival good, price-taking competition cannot be supported. Instead, the equilibrium is one with monopolistic competition. The main conclusions are that the stock of human capital determines the rate of growth, that too little human capital is devoted to research in equilibrium, that integration into world markets will increase growth rates, and that having a large population is not sufficient to generate growth.

Growth in this model is driven by technological change that arises from intentional investment decisions made by profit-maximizing agents. The distinguishing feature of the technology as an input is that it is neither a conventional good nor a public good; it is a nonrival, partially excludable good. Because of the nonconvexity introduced by a nonrival good, price-taking competition cannot be supported. Instead, the equilibrium is one with monopolistic competition. The main conclusions are that the stock of human capital determines the rate of growth, that too little human capital is devoted to research in equilibrium, that integration into world markets will increase growth rates, and that having a large population is not sufficient to generate growth.

Public-service output depends on input expenditures, on own personal characteristics, and on the characteristics of the other residents in the community (the peer group effect). In a community model with public expenditures set by voting, with migration between communities, and with land price differentials (capitalization), it is shown that communities may become heterogeneous in composition and (second-best) inefficient. This equilibrium occurs when the peer group effect is neither "too strong" nor "too weak." The inefficiency arises because an externality is created by migration. The land price differential does not play the part of the "price" of the better peer group but of a transfer payment.

Public-service output depends on input expenditures, on own personal characteristics, and on the characteristics of the other residents in the community (the peer group effect). In a community model with public expenditures set by voting, with migration between communities, and with land price differentials (capitalization), it is shown that communities may become heterogeneous in composition and (second-best) inefficient. This equilibrium occurs when the peer group effect is neither "too strong" nor "too weak." The inefficiency arises because an externality is created by migration. The land price differential does not play the part of the "price" of the better peer group but of a transfer payment.