AND THE BUSINESS CYCLE
BEN SHALOM BERNANKE
A.B., Harvard University
Submitted in Partial Fulfillment
of the Requirements for the
DOCTOR OF PHILOSOPHY
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
Signature of Author.
Deprtment o Economics, May 1979
Chairman, Department Committee
AUG 27 1979
Long-term Commitments, Dynamic. Optimization,
and the. Business Cycl'e
Ben Shalom Bernanke
Submitted to the Department of Economics
on May 14, 1979, in partial fulfillment of the
requirements for the degree of Doctor of Philosophy.
The thesis consists of three loosely connected
essays. Each paper is a theoretical study of some
form of long-term commitment made'by economic agents.
The goal is to relate the derived micro-level decision
models to macroeconomic phenomena, especially the
Chapter 1 analyzes the problem of making irrever-
sible investment decisions when there is uncertainty
about the true parameters of the stochastic economy.
It is shown that increased uncertainty provides an
incentive to defer such investments in order to wait
for new information. Uncertainty and the volatility
of investment demand are connected at the aggregate
In Chapter 2 we look at the commitment of resour-
ces to specific sectors of the economy. It is assumed
that: relative sectoral productivities vary over time,
and that it is costly to transfer resources between
sectors. In both planning and market economy contexts,
we show that dynamic considerations can make periods
of unemployment and excess capacity part of an effi-
cient growth path.
Chapter 3 studies labor contracting in an en-
vironment with capital and a quasi-fixed labor force.
We argue that for exogenous reasons real labor con-
tracts may be incomplete; i.e., unable to contain
certain types of provisions. The resulting second-
best: contracts may lead to situations of apparen