---------------------------------------------------------------------------- NEP: New Economics Papers All new papers ---------------------------------------------------------------------------- Edited by: Marco Novarese http://ideas.repec.org/e/pno2.html Universita del Piemonte Orientale Date: 2005-06-14 Papers: 647 This document is in the public domain, feel free to circulate it. +++++++++++++++++++++++++++++++++++++++++++++++++++ + Access to full-text contents may be restricted. + +++++++++++++++++++++++++++++++++++++++++++++++++++ 1. Implementation of the Ordinal Shapley Value for a three-agent economy David Perez-Castrillo David Wettstein We propose a simple mechanism that implements the Ordinal Shapley Value (Perez-Castrillo and Wettstein [2005]) for economies with three or less agents. Keywords: Ordinal Shapley Value, implementation, mechanism design JEL: C72 D50 D63 Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:aub:autbar:647.05&r=all 2. Collusion in Growing and Shrinking Markets: Empirical Evidence from Experimental Duopolies Klaus Abbink Jordi Brandts We study collusive behaviour in experimental duopolies that compete in prices under dynamic demand conditions. In one treatment the demand grows at a constant rate. In the other treatment the demand declines at another constant rate. The rates are chosen so that the evolution of the demand in one case is just the reverse in time than the one for the other case. We use a box-design demand function so that there are no issues of finding and co-ordinating on the collusive price. Contrary to game-theoretic reasoning, our results show that collusion is significantly larger when the demand shrinks than when it grows. We conjecture that the prospect of rapidly declining profit opportunities exerts a disciplining effect on firms that facilitates collusion and discourages deviation. Keywords: Laboratory experiments, industrial organisation, oligopoly, price competition, collusion JEL: C90 C72 D43 D83 L13 Date: 2005-02-01 URL: http://d.repec.org/n?u=RePEc:aub:autbar:648.05&r=all 3. Capitalism, Unemployment and the Transition to the Contemporary Pattern of Growth Howard Petith A new model of unemployment based on an idea of Marx is presented and used to interpret the development of the British economy from the beginning of capitalism to the present. It is shown that unemployment may be created purposely by capitalists in order to weaken the bargaining position of the workers. This mechanism leads to complex temporal pattern of unemployment and can explain why wages took almost a century and a half to react to the growing capital to labour ratio that characterised early British capitalism. Keywords: Capitalism, Marx, Great Britain, unemployment JEL: E11 E24 N33 O41 O51 P1 Date: 2005-06-03 URL: http://d.repec.org/n?u=RePEc:aub:autbar:649.05&r=all 4. On the Identification of Monetary (and Other) Shocks Martin Menner Hugo Rodriguez Mendizabal The purpose of this paper is twofold. First, we construct a DSGE model which spells out explicitly the instrumentation of monetary policy. The interest rate is determined every period depending on the supply and demand for reserves which in turn are affected by fundamental shocks: unforeseeable changes in cash withdrawal, autonomous factors, technology and government spending. Unexpected changes in the monetary conditions of the economy are interpreted as monetary shocks. We show that these monetary shocks have the usual effects on economic activity without the need of imposing additional frictions as limited participation in asset markets or sticky prices. Second, we show that this view of monetary policy may have important consequences for empirical research. In the model, the contemporaneous correlations between interest rates, prices and output are due to the simultaneous effect of all fundamental shocks. We provide an example where these contemporaneous correlations may be misinterpreted as a Taylor rule. In addition, we use the sign of the impact responses of all shocks on output, prices and interest rates derived from the model to identify the sources of shocks in the data. Keywords: Monetary Policy, Shocks, Identification, Taylor Rules JEL: E32 E52 E58 Date: 2005-05-27 URL: http://d.repec.org/n?u=RePEc:aub:autbar:650.05&r=all 5. Vertical Imbalances and Revenue Assignments in Decentralized Spain Julio Lopez Laborda Carlos Monasterio Escudero This chapter provides an overview of the key issues in public economics arising from the process of territorial decentralisation that has taken place in Spain since the restoration of democracy and the Constitution of 1978, and which resulted in the emergence of the “Autonomic State”. The first section focuses on the assignment of competencies between central and regional levels of government and explains in some detail the methodology used to quantify the “effective cost” of the services devolved to the Autonomous Communities (hereinafter ACs). We have paid special attention to health services, which is the most significant item for regional budgets in quantitative terms. The second section deals with revenue assignment, transfers and borrowing, and describes the two systems established to finance regional expenditure. These are the “common system” (regimen comun) applied in the majority of the ACs and the “charter system” (regimen foral), which is based on the historical rights accorded to the Basque Country and Navarre. The last section appraises the decentralisation process and notes some emerging issues of debate. Keywords: Decentralization, revenue assignments Date: 2005-06-06 URL: http://d.repec.org/n?u=RePEc:ays:ispwps:paper0512&r=all 6. Estimation of the Risk Attitude of the Representative UK Pension Fund Investor Stephen Satchell Wei Xia (School of Economics, Mathematics & Statistics, Birkbeck College) The purpose of this paper is to use UK pension funds asset allocation information to model the risk attitude of the representative UK pension fund investor. Unlike the previous literature on loss aversion, we find that UK pension funds display risk aversion with respect to gains and to losses. Such a finding suggests a greater degree of responsibility by UK pension funds that they are usually credited with. Keywords: LA Utility Function, Non-linear Regression, LAD, UK pension fund Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:bbk:bbkefp:0509&r=all 7. Non-linear dynamics in output, real exchange rates and real money balances: Norway, 1830-2003 Q. Farooq Akram (Norges Bank) Oyvind Eitrheim (Norges Bank) Lucio Sarno (Norges Bank) We characterise the behaviour of Norwegian output, the real exchange rate and real money balances over a period of almost two centuries. The empirical analysis is based on a new annual data set that has recently been compiled and covers the period 1830{2003. We apply multivariate linear and smooth transition regression models proposed by Terasvirta (1998) to capture broad trends, and take into account non-linear features of the time series. We particularly investigate and characterise the form of the relationship between output and monetary policy variables. It appears that allowance for statedependent behaviour and response to shocks increases the explanatory powers of the models and helps bring forward new aspects of the dynamic behaviour of output, the real exchange rate and real money balances. Keywords: Business cycles, real exchange rates, money demand, non-linear modelling, smooth transition regressions. JEL: C51 E32 E41 F31 Date: 2005-06-09 URL: http://d.repec.org/n?u=RePEc:bno:worpap:2005_02&r=all 8. A little bit of Stata programming goes a long way... Christopher F. Baum (Boston College) This tutorial will discuss a number of elementary Stata programming constructs and discuss how they may be used to automate and robustify common data manipulation, estimation and graphics tasks. Those used to the syntax of other statistical packages or programming languages must adopt a different mindset when working with Stata to take full advantage of its capabilities. Some of Stata's most useful commands for handling repetitive tasks: -forvalues-, -foreach-, -egen-, -local- and - matrix- are commonly underutilized by users unacquainted with their power and ease of use. While relatively few users may develop ado-files for circulation to the user community, nearly all will benefit from learning the rudiments of use of the - program-, -syntax- and -return- statements when they are faced with the need to perform repetitive analyses. Worked examples making use of these commands will be presented and discussed in the tutorial. Keywords: Stata, macros, foreach, forvalues, egen, matrix, program, syntax, return JEL: C22 C87 Date: 2005-06-08 URL: http://d.repec.org/n?u=RePEc:boc:bocoec:612&r=all 9. Simple Endogenous Binary Choice and Selection Panel Model Estimators Arthur Lewbel (Boston College) This paper provides numerically trivial estimators for short panels of either binary choices or of linear models that suffer from confounded, nonignorable sample selection. The estimators allow for fixed effects, endogenous regressors, lagged dependent variables, and heterokedastic errors with unknown distribution. The estimators, which converge at rate root n, are based on variants of the Honore and Lewbel (2002) panel binary choice model and Lewbel's (2005) cross section sample selection model. Keywords: Panel Data, Fixed Effects, Binary Choice, Binomial Response, Sample Selection, Treatment, Semiparametric, Latent Variable, Predetermined Regressors, Lagged Dependent Variable, Endogeneity, Instrumental Variable. Date: 2005-02-01 URL: http://d.repec.org/n?u=RePEc:boc:bocoec:613&r=all 10. Metodos de analise regional e urbana: diagnostico aplicado ao planejamento Rodrigo Ferreira Simoes (Cedeplar-UFMG) This paper intends to identify the most important methodological advances on urban and regional methods of analysis for the last fifty years. The aim of the paper is to carry out an applied analysis of the main urban and regional techniques in order to contribute to diagnosis and economy policy on urban and regional economic development. These techniques are divided into three parts: 1) traditional methods; 2) multivariate analysis applied on urban and regional economics; and 3) recent developments. For each technique we will emphasize the most important properties, limits and potentialities to urban and regional development economic policies JEL: R00 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cdp:texdis:td259&r=all 11. Regionalizacao e historia: uma contribuicao introdutoria ao debate teorico-metodologico Alexandre Mendes Cunha (Cedeplar-UFMG) Rodrigo Ferreira Simoes (Cedeplar-UFMG) Joao Antonio de Paula (Cedeplar-UFMG) This paper intends to contribute to the theoretical and methodological debate on regionalization and history. Firstly, it starts discussing the very concept of region on its several related approaches: geography, political economy, history and historiography. Then, a methodological issue is analyzed, that is to say: the paper tries to articulate the most important criteria of spatial segmentation embedded on regionalization (analytical functionalism, heterogeneity and homogeneity) with: a) the necessity of non-anachronism; and b) the necessity of a historical dynamic approach on definition of regional boundaries Keywords: Region, Economic spaces, History, Regionalization JEL: N01 N96 R10 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cdp:texdis:td260&r=all 12. Industrial cores and peripheries in Brazil Edson Paulo Domingues (Cedeplar-UFMG) Ricardo Machado Ruiz (Cedeplar-UFMG) There is considerable evidence to demonstrate that the industrial localization in developing countries shows high level of spatial concentration, and the industrial decentralization is quite restricted to few isolated regions. The aim of this paper is to analyze the Brazilian case to identify the industrial cores and to find out whether Brazil follows this conventional view on industrial location in developing countries. This study is based on a database that merges two sets of data: the first describes 35600 industrial firms, and the second has information on the economic, social and urban structure of 5507 cities (year 2000). Based on these datasets, the industrial cores and their respective peripheries are identified, classified, and discussed. The conclusions are: (1) Brazil has several industrial cores with different scales, structures, and regional level of integration; ( 2) there are large regions with growing industrial peripheries that are strongly tied to the primary cores; these are what we called "spatial industrial agglomerations"; however, we also identified (3) regions that did not manage to build peripheries able to assimilate spillovers generated by its industrial centers; these are the “industrial enclaves”, (4) and also regions that are fully marginalized of the industrialization. Our main conclusion is: the Brazilian economic space is a mixed case. It is not a set of disconnected or isolated industrial islands, but it is still behind a full regional economic integration. Keywords: Brazil, Regional Economics, Industrial Agglomerations, Industry, Regional Development JEL: R11 R12 R23 R30 R58 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cdp:texdis:td261&r=all 13. Impactos da carencia de investimentos na logistica publica de transportes para o agronegocio: discussao teorica e evidencias para o caso brasileiro Ricardo S. Martins (Cedeplar-UFMG) Mauro Borges Lemos (Cedeplar-UFMG) Luiz Alberto Cypriano (Universidade Estadual do Oeste do Parana) This article aimed to elaborate a reflection concerning the impacts of the insufficiences of investments in the Brazilian public logistic of transports and to search evidences of the impacts in the markets of transports logistic services, in the scope of the agribusiness. One understands that the Brazilian agribusiness forms an intensive set of activities in logistic, being, therefore, seriously wronged for the lack of public logistic, especially in that with respect to the transportation systems, that can be disclosed on provision lack, congestions of transport nets. The article emphasizes aspects of the formation of the freight rates in the markets, among sectors without an understandable linking and regions, enhancing aspects of localization, income, consumption and sistemic competitiveness. One conclusion of the article is that the enterprise solutions for the bottlenecks may have the effect to changed themselves into force for the concentration in the commercialization sector. In general, logistic public of transports consists in a strategical characteristic for the growth of the activities of the agribusiness with possibilities of expansion in the Center- West, North and Northeast areas. Keywords: Transportation Systems, Logistic, Agribusiness JEL: L98 R11 Q13 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cdp:texdis:td262&r=all 14. Adam Smith e seu contexto: o Iluminismo escoces Hugo E. A. da Gama Cerqueira (Cedeplar-UFMG) This essay argues that Adam Smith's thought should be interpreted within the intellectual context of the Scottish enlightenment. It discusses the origins and the specific nature of the enlightenment in Scotland in order to highlight the differences between the social theory of the Scottish literati and the dominant approach to economics. Keywords: Adam Smith, Scottish enlightenment, political economy JEL: B30 A13 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cdp:texdis:td263&r=all 15. Arbitrage in foreign exchange markets within the context of a transactional algebra Rodolfo Apreda This paper sets forth the foundations for a transactional approach for the performance of arbitrage in foreign exchange markets. Firstly, we review both the standard model of financial arbitrage and the so-called covered-interest arbitrage environment, and we also lay bare striking shortcomings in these points of view, mainly grounded on a wide- ranging empirical evidence. Next, we move on to what we have labeled in previous research working papers a transactional algebra, from which we expand on its main tools of analysis, namely differential rates, residual information sets, arbitrage gaps and transaction costs functions. Afterwards, we establish and prove the minimal conditions under which a successful arbitrage can be carried out within a transactional algebra. Keywords: transactional algebras, arbitrage, covered-interest arbitrage, differential rates, residual information sets, arbitrage gaps. JEL: F30 F31 G15 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:cem:doctra:290&r=all 16. La governancia en las empresas de familia. Un codigo de buenas practicas para la supervivencia Ernesto Barugel Al analizar la problematica particular de las empresas de familia surgen dos caracteristicas bien distintivas: a) la gran contribucion que realizan estas empresas al desarrollo de las economias donde actuan y b) la altisima probabilidad de desaparecer en sus primeros anos de vida. Para superar esta amenaza es necesario recurrir a las herramientas que nos provee la disciplina llamada "Governancia Corporativa". Esta ha puesto especial enfasis en los problemas organizacionales que se derivan precisamente de la separacion de propiedad y control, pero en este trabajo utilizamos los mismos instrumentos que ella provee, como ser un Codigo de Buenas Practicas, para ordenar la correcta interaccion de las instituciones de gobierno de una empresa que aun concentra la propiedad y el control. La columna vertebral de la necesaria transformacion sera entonces este Codigo de Buenas Practicas que nos permite avanzar en pos de la supervivencia de la organizacion y su crecimiento continuo. Keywords: Governancia; Empresas de familia; Codigos de Buenas Practicas; Propiedad y control; Directorio; Consejo de Familia. JEL: G34 G32 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:cem:doctra:291&r=all 17. El control del financiamiento de los partidos en Argentina. Que cambio con la nueva ley? Delia M. Ferreira Rubio En el presente documento analizamos los alcances, limitaciones y consecuencias de la nueva ley de financiamiento de los partidos politicos y las campanas electorales (Ley 25.600). Para ello, nos preguntamos cuales son las caracteristicas principales del sistema legal vigente en Argentina en materia de financiamiento de partidos y campanas. Luego formulamos un balance provisorio de la experiencia de aplicacion de estas nuevas normas con motivo de la eleccion presidencial del 2003. Por ultimo, partiendo del supuesto de que la transparencia opera como principio rector e informador de la tarea de control y supervision del financiamiento de la politica formulamos algunas sugerencias sobre reformas a introducir en el sistema de control y supervision. Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:cem:doctra:292&r=all 18. Optimal Severance Payment: Theory and Practice Byeongju Jeong I present a model in which the employment contract includes severance payment as an instrument for achieving optimal separation between the firm and the worker. I show that the privately optimal severance payment from the model can replicate the level and the variation in actual severance payments (and notice periods) across OECD countries. I conduct a policy experiment in which the existing unemployment benefits are financed by a separation tax. Under this policy, the actual severance payments need to change only marginally in order to achieve socially optimal separation. Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cer:papers:wp255&r=all 19. Building a Castle on Sand: Effects of Mass Privatization on Capital Market Creation in Transition Economies Zuzana Fungacova In this paper we study the relationship between mass privatization and capital market development in the transition economies. The link is investigated empirically using a panel of data which includes most of the transition countries. Our results confirm the hypothesis that mass privatization exerted a negative influence on capital market functioning in the short and medium term. Results further indicate that in countries with mass privatization, the capital market was established and perceived only as a byproduct of the privatization process and did not serve as a source of capital for the corporate sector. This non- transparent market of thousands of securities caused negative investor sentiment and thus did not contribute to initiating economic growth. Keywords: Privatization, mass privatization, emerging capital markets, capital market. JEL: G15 G28 P34 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cer:papers:wp256&r=all 20. Wages in a Growing Russia: When is a Ten Percent Rise in the Gender Pay Gap Good News? Elena Kozakova The robust Russian economic recovery after the 1998 financial crisis raised the economic standing of the population, especially for low-paid workers, most of whom are women. In this paper I use the Russian Longitudinal Monitoring Survey from 1996 through 2002 to ask whether this helped to reduce the gender wage gap. The wage measurement has been affected by the wage arrears, an integral feature of the Russian labor market in this period. The raw malefemale wage gap for those not affected by wage arrears exhibits a stable pattern save a 10 percentage point increase in 2000. However, this temporal widening of the gap is due to lowwage women becoming more likely to receive their wages in full than low-wage men in 2000. Furthermore, the wage gap is stable for those who consistently receive full wages. Keywords: Russia, wages, discrimination, gender. JEL: J3 J7 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cer:papers:wp257&r=all 21. Projection Methods for Economies with Heterogeneous Agents Radim Bohacek Michal Kejak In this paper we develop a general methodology for solving models with heterogeneous agents by projection methods. Our approach is solely based on the functional forms of agents’ optimal policy rules and on a functional condition on the endogenous stationary distribution. Solving simultaneously the optimal policy rules and the distribution, this paper provides a new methodology for computing equilibria in which the distribution of wealth and income is a part of a social planner’s optimization problem. We do not impose any additional restrictions or assumptions on the equilibrium allocations. Compared to other computational methods, it does not suffer from the curse of dimensionality and provides an efficient tool for computing models of economies with a continuum of heterogeneous agents with several endogenous and exogenous state variables. We illustrate the algorithm on a standard model with uninsurable idiosyncratic risk from labor income. The approximate solution is highly accurate, especially for the distribution function. This method can be used to compute equilibria in economies with heterogeneous agents in which the distribution of wealth and income is a part of a government’s optimization problem. JEL: C61 C68 D30 D58 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cer:papers:wp258&r=all 22. Origin and Concentration: Corporate Ownership, Control and Performance Jan Hanousek Evzen Kocenda Jan Svejnar We analyze the effects of different types and concentration of ownership on performance using a population of firms in a model transition economy after mass privatization. Specifications based on first-differences and unusual instrumental variables show that contrary to conventional wisdom, the effects of privatization and different types of ownership are limited and many types of private owners do not generate performance that is different from that of firms with state ownership. Concentrated ownership has a positive effect but only in some instances and a positive effect of foreign ownership is detectable primarily for majority ownership and foreign industrial firms. The effects of concentrated ownership support the agency theory and go against theories stressing the positive effects of managerial autonomy. Our results are also consistent with managers or stockholders “looting” the firms. The state as a holder of the golden share has a positive effect on employment and in some specifications also on output and profitability. Overall, our results suggest that the expectations and earlier findings of positive effects of privatization on performance were premature, with the effects of many types of ownership being indistinguishable from that of state ownership. Keywords: Ownership, performance, privatization, corporate governance, panel data, endogeneity, industrial. JEL: C33 D20 G32 G34 L20 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cer:papers:wp259&r=all 23. Finding Optimal Measures of Core Inflation in the Kyrgyz Republic Ainura Uzagalieva The ideal measure of inflation should reflect long-run price movements driven by actual demand in the economy and exclude short-term supply shocks. Considering that the CPI does not correspond to such a measure, the purpose of this research is to analyze alternative methods of core (or underlying) inflation and to choose a method suitable for measuring core inflation in the Kyrgyz Republic. The results can be useful for proper monetary policy reaction to inflationary shifts in the Kyrgyz Republic. Keywords: Kyrgyz Republic, inflation, core inflation, monetary policy, smoothing, optimality criteria. JEL: E31 E52 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cer:papers:wp261&r=all 24. Strategic analysis in complex networks with local externalities Galeotti, Andrea Vega-Redondo, Fernando In this paper, we discuss a model with local positive externalities on a complex random network that allows for wide heterogeneities among the agents. The situation can be analyzed as a game of incomplete information where each player's connectivity is her type. We focus on three paradigmatic cases in which the overall degree distribution is Poisson, exponential, and scale-free (given by a power law). For each of them, we characterize the equilibria and obtain interesting insights on the interplay between network topology and payoffs. For example, we reach the somewhat paradoxical conclusion that a broad degree distribution or/and too low a cost of effort render it difficult, if not impossible, to sustain an (efficient) high-effort configuration at equilibrium. Keywords: Complex networks, local externalities Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:clt:sswopa:1224&r=all 25. Consumers networks and search equilibria Galeotti, Andrea We explore the effect of local information sharing among consumers on market functioning. Consumers are embedded in a consumers network, they may costly search non-sequentially for price quotations and the information gather are non-excludable along direct links. We first show that when search costs are low consumers randomize between searching for one price and two price quotations (high search intensity equilibrium). Otherwise, consumers randomize between searching for one price and not searching at all (low search intensity equilibrium). In both equilibria consumers search less frequently in denser networks. The main result of the paper show that when search costs are low the expected price and the social welfare increase, while the consumer surplus decreases, as the consumers network becomes denser. These results are reverse when search costs are high. Keywords: Networks, local externalities, non-sequential search Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:clt:sswopa:1225&r=all 26. Quantiles and medians Chambers, Christopher P. We provide a list of functional equations that characterize quantile functions for collections of bounded and measurable functions. Our central axiom is ordinal covariance. When a probability measure is exogeneously given, we characterize quantiles with respect to that measure through monotonicity with respect to stochastic dominance. When none is given, we characterize those functions which are simply ordinally covariant and monotonic as quantiles with respect to capacities; and we also find an additional condition for finite probability spaces that allows us to represent the capacity as a probability measure. Additionally requiring that a function be covariant under its negation results in a generalized notion of median. Finally, we show that all of our theorems continue to hold under the weaker notion of covariance under increasing, concave transformations. Applications to the theory of ranking infinite utility streams and to the theory of risk measurement are provided. Keywords: Ordinal, quantile, median, axiom, risk measure, value at risk, intergenerational equity Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:clt:sswopa:1222&r=all 27. El cultivo de la cana panelera y la agro industria panelera en el departamento de Santander Amilcar Mojica P Joaquin Paredes V Es innegable que las condiciones de vida de la poblacion colombiana varian aceleradamente, al ritmo de los cambios demograficos, sociales y economicos. En el plano economico, en algunos sectores productivos aun predominan comportamientos y practicas tradicionales que tienden a restar importancia y valor agregado a los productos terminados. Para varios bienes agricolas, la tecnologia no forma parte de los factores de produccion y por ende se ven supeditados a que su produccion adquiera un caracter eminentemente domestico. En muchas regiones colombianas no existe un sentido organizacional y falta vision empresarial, lo cual incide en una menor competitividad de la produccion, respecto de otras regiones. De igual manera, existe escasez de recursos para inversion y el desarrollo de obras de infraestructura basicas es lento. Sin embargo, la posibilidad de obtener riqueza mediante la explotacion de un mismo producto para otros fines ha propiciado un reordenamiento en los procesos y una mayor atencion a las regiones. En efecto, el cultivo de la cana de azucar con fines paneleros en el departamento de Santander, que se consideraba como una actividad agricola mas, pues la tecnologia no formaba parte preponderante de los factores de produccion, se constituye en la actualidad en un sector de mucha importancia para el pais, mas aun con la relevancia adquirida con el proyecto de “Alcoholes Carburantes” extraidos de la cana. El presente informe recoge algunos conceptos importantes relacionados con el cultivo de cana panelera en las principales zonas productoras del pais y de Santander. Se realiza un diagnostico de la agroindustria panelera con enfasis en la produccion, comercializacion y precios del producto; asi como en el desempeno respecto a otros mercados internacionales y finalmente, se esboza los principales aspectos del Proyecto de Alcoholes Carburantes. Date: 2004-12-31 URL: http://d.repec.org/n?u=RePEc:col:000124:000982&r=all 28. El sector industrial del Tolima: aproximacion historica, estructura y dinamica Alvaro Augusto Campos Martinez En virtud de las exenciones tributarias y arancelarias que dispuso el gobierno con el fin de reactivar la economia de la zona afectada por la erupcion del volcan-nevado del Ruiz en 1985, la industria tolimense experimento un periodo de auge entre 1990 y 1995, durante el cual crecio la base industrial y se logro cierto grado de diversificacion; sin embargo, la crisis de los anos 1998 y 1999, que golpeo duramente algunas de las principales ramas industriales de la region, asi como la finalizacion de los incentivos fiscales, condujeron a que un numero importante de factorias cerrara sus puertas o trasladara sus plantas a otras partes del pais, donde se instituyeron estimulos tributarios tales como las denominadas Leyes Paez y Quimbaya para paliar nuevas catastrofes naturales. Date: 2004-12-31 URL: http://d.repec.org/n?u=RePEc:col:000124:000983&r=all 29. The Missing Link: The Knowledge Filter and Entrepreneurship in Endogenous Growth Acs, Zoltan J Audretsch, David B Braunerhjelm, Pontus Carlsson, Bo The intellectual breakthrough contributed by the new growth theory was the recognition that investments in knowledge and human capital endogenously generate economic growth through the spillover of knowledge. Endogenous growth theory does not explain how or why spillovers occur. The missing link is the mechanism converting knowledge into economically relevant knowledge. This Paper develops a model that introduces a filter between knowledge and economic knowledge and identifies entrepreneurship as a mechanism that reduces the knowledge filter. A cross-country regression analysis over the period 1981-2001 provides empirical support for the model. We conclude that public policies facilitating knowledge spillovers through entrepreneurship may be an important new approach to promoting economic growth. Keywords: endogenous growth; entrepreneurship; innovation; knowledge JEL: L10 O10 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4783&r=all 30. R&D Policies, Trade and Process Innovation Haaland, Jan I. Kind, Hans Jarle We set up a simple trade model with two countries hosting one firm each. The firms invest in cost-reducing R&D, and each government may grant R&D subsidies to the domestic firm. We show that it is optimal for a government to provide higher R&D subsidies the lower the level of trade costs, even if the firms are independent monopolies. If firms produce imperfect substitutes, policy competition may become so fierce that only one of the firms survives. International policy harmonization eliminates policy competition and ensures a symmetric outcome. However, it is shown that harmonization is not necessarily welfare-maximizing. The optimal coordinated policies may imply an asymmetric outcome with R&D subsidies to only one of the firms. Keywords: process innovation; R&D; subsidies; trade JEL: F12 F13 F15 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4784&r=all 31. Local Ownership as Private Information: Evidence on the Monitoring-Liquidity Trade-Off Gaspar, Jose-Miguel Massa, Massimo This Paper investigates the impact of ownership patterns on the way the firm is monitored, on the liquidity of its shares, and on its stock price. Building on the literature showing that local mutual funds (funds holding geographically close firms) enjoy superior returns due to private information, we use local ownership as a proxy for the amount of informed investment. Since location is reasonably exogenous, local ownership provides an identifying restriction that is used to address endogeneity concerns that have been raised in the literature (Demsetz and Lehn, 1985). Using data on a broad panel of US firms, we show that informed ownership improves the quality of governance of the firm and induces value-enhancing decisions (less over-investment and fewer but better acquisitions). At the same time, its presence in the firm increases the adverse selection discount required by less informed investors to trade, reducing the firm’s liquidity. Both effects are properly impounded in the firm’s stock price. Our results provide an economic interpretation of why ownership seems to be unrelated to performance. Informed investors affect prices indirectly, and in opposite directions: their monitoring activity tends to raise prices, but the lower liquidity induced by their presence tends to reduce prices. Keywords: corporate governance; liquidity; local ownership; monitoring; mutual funds; private ownership JEL: G23 G30 G32 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4785&r=all 32. Portfolio Diversification, Proximity Investment and City Agglomeration Goetzmann, William Massa, Massimo Simonov, Andrei We study the puzzle of portfolio underdiversification and proximity investment from a novel perspective, linking it to the process of urbanization. We find that urban portfolios are more focused – i.e., less diversified and more concentrated in ‘close’ stocks. We explain it in terms of the process of ‘professional specialization’ that characterizes urban environments. We test this against a number of alternative theories: financial sophistication, social competition and hedging non-financial risk. We show that the very same factors behind the drive to city agglomeration also affect both the degree of portfolio diversification and proximity investing by influencing investor information and risk. Keywords: city agglomeration; portfolio choice; professional specialization; proximity investment; under- diversification JEL: G11 G14 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4786&r=all 33. Mutual Fund Competition and Stock Market Liquidity Massa, Massimo We study how competition in the mutual fund industry affects stock market liquidity. We argue that mutual fund families operate as multi-product firms, jointly choosing fees, performance and number of funds and sharing common research facilities. The family-based organization generates economies of scale in information that induce a trade off between performance and number of funds. The presence of more and relatively less- informed funds impacts the market, increasing stock liquidity. This intuition allows us to use ‘observable’ equilibrium conditions in the mutual fund market that are related to fund informativeness (i.e., fees, size and performance of the funds and number of funds per family), to explain stock market liquidity. We test our theory using the universe of the US actively managed mutual funds in the past 20 years. We identify fund characteristics and relate them to stock liquidity. We show that the fund characteristics affect stocks in the way suggested by our theory: higher fees or better performance reduce stock liquidity, while a higher number of funds per family or bigger fund size increase stock liquidity. Proper identification allows us to pin down the direct impact of funds on stock liquidity, controlling for potential issues of reverse causality. Keywords: financial intermediation; mutual funds; stock liquidity JEL: G11 G12 G14 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4787&r=all 34. Favouritism in Mutual Fund Families? Evidence on Strategic Cross-Fund Subsidization Gaspar, Jose-Miguel Massa, Massimo Matos, Pedro Verga We investigate whether mutual fund families strategically transfer performance across member funds to favour those more likely to increase overall family profits. We find that ‘high family value’ funds (i.e., high fees or high past performers) overperform at the expense of ‘low value’ funds. Such a performance gap is above the one existing between similar funds not affiliated with the same family. Better allocations of underpriced IPO deals and opposite trades across member funds partly explain why high value funds overperform. Our findings highlight how the family organization prevalent in the mutual fund industry generates distortions in delegated asset management. Keywords: IPO; mutual funds Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4788&r=all 35. Hedging, Familiarity and Portfolio Choice Massa, Massimo Simonov, Andrei We exploit the restrictions of intertemporal portfolio choice in the presence of non-financial income risk to design and implement tests of hedging that use the information contained in the actual portfolio of the investor. We use a unique dataset of Swedish investors with information broken down at the investor level and into various components of wealth, investor income, tax positions and investor demographic characteristics. Portfolio holdings are identified at the stock level. We show that investors do not engage in hedging, but invest in stocks closely related to their non-financial income. We explain this with familiarity, that is, the tendency to concentrate holdings in stocks to which the investor is geographically or professionally close or that he has held for a long period. We show that familiarity is not a behavioural bias, but is information-driven. Familiarity-based investment allows investors to earn higher returns than they would have otherwise earned if they had hedged. Keywords: asset pricing; hedging; portfolio decision JEL: G11 G14 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4789&r=all 36. Monetary and Fiscal policy Interaction in the Euro Area with Different Assumptions on the Phillips Curve Bofinger, Peter Mayer, Eric In this Paper we carry over a static version of a New Keynesian Macromodel a la Clarida Gali Gertler (1999) to a monetary union. We will show in particular that a harmonious functioning of a monetary union critically depends on the correlation of shocks that hit the currency area. Additionally a high degree of integration in product markets is advantageous for the ECB as it prevents that national real interest rates can drive a wedge between macroeconomic outcomes across member states. In particular small countries are vulnerable and therefore in need of fiscal policy as an independent stabilization agent with room to breath. Keywords: fiscal policy; inflation targeting; monetary policy; policy coordination JEL: E50 E60 H70 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4790&r=all 37. Does Privatization Raise Productivity? Evidence from Comprehensive Panel Data on Manufacturing Firms in Hungary, Romania, Russia and Ukraine Brown, J David Earle, John S We analyse the impact of privatization on multifactor productivity (MFP) using long panel data for nearly the universe of initially state-owned manufacturing firms in four economies. Controlling for firm and industry-year fixed effects and employing a wide variety of measurement approaches, we estimate that majority privatization raises MFP about 28% in Romania, 22% in Hungary, and 3% in Ukraine, with some variation across specifications, while in Russia it lowers it about 4%. Privatization to foreign rather than domestic investors has a larger impact (about 44%) and is much more consistent across countries. The positive effects emerge within a year in Hungary, Romania, and Ukraine and continue to grow thereafter, but are still ambiguous even after 5 years in Russia. Pre-privatization MFP exceeds that of firms remaining state-owned in all countries, implying that cross-sectional estimates overstate privatization effects. The patterns of the estimated effects cast doubt on a number of explanations for ‘when privatization works’. Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4791&r=all 38. Job Stability Trends, Layoffs and Transitions to Unemployment - An Empirical Analysis for West Germany Bergemann, Annette Mertens, Antje This Paper studies the evolution of job stability in West Germany. Using data from the German Socio-Economic Panel, we first show that the median elapsed tenure declined for men between 1984 and 1999. Second, estimating proportional Cox hazard models with competing risks and controls for stock sampling, we are able to distinguish the reasons for job separation and different transition states. We show that the decline in the stability of men’s jobs can be attributed partly to an increase in layoffs and partly to an increase in transitions to unemployment. These two developments are not significantly related to each other, however. Some evidence is presented that downsizing of large firms might be responsible for part of the decline in job stability. Keywords: duration analysis; job stability; labour mobility; layoffs JEL: C41 J63 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4792&r=all 39. When the Punishment Must Fit the Crime: Remarks on the Failure of Simple Penal Codes in Extensive-Form Games Mailath, George J. Nocke, Volker White, Lucy In repeated normal-form games, simple penal codes (Abreu 1986, 1988) permit an elegant characterization of the set of subgame- perfect outcomes. We show that the logic of simple penal codes fails in repeated extensive-form games. We provide two examples illustrating that a subgame-perfect outcome may be supported only by a profile with the property that the continuation play after a deviation is tailored not only to the identity of the deviator, but also to the nature of the deviation. Keywords: optimal punishment; repeated extensive game; simple penal code; subgame perfect equilibrium JEL: C70 C72 C73 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4793&r=all 40. Active Financial Intermediation: Evidence on the Role of Organizational Specialization and Human Capital Bottazzi, Laura Da Rin, Marco Hellmann, Thomas F Financial intermediaries can choose the extent to which they want to be active investors, providing valuable services like advice, support and corporate governance. We examine the determinants of the decision to become an active financial intermediary using a hand-collected dataset on European venture capital deals. We find organizational specialization to be a key driver. Venture firms which are independent and focused on venture capital alone get more involved with their companies. The human capital of venture partners is another key driver of active financial intermediation. Venture firms whose partners have prior business experience or a scientific education provide more support and governance. These results have implications for prevailing views of financial intermediation, which largely abstract from issues of specialization and human capital. Keywords: financial intermediation; human capital; specialization JEL: G20 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4794&r=all 41. Languages in the EU: The Quest for Equality and Its Cost Fidrmuc, Jan Ginsburgh, Victor The European Union has recently expanded from 15 to 25 countries. In line with this enlargement, the list of official EU languages has grown from 11 to 20. Currently, the EU extends equal treatment to all member countries’ official languages by providing translations for documents and interpreting services for meetings and sessions of the European Parliament. This, however, is costly, especially when recognizing that many Europeans speak one of the procedural languages of the EU - English, French or German - either as their native language or as a foreign language. We compute disenfranchisement rates that would result from using only the three procedural languages for all EU business, and marginal costs per disenfranchised person associated with providing translations and interpreting into the remaining 17 languages. The marginal costs are shown to vary substantially across the different languages, raising important questions about the economic efficiency of equal treatment for all languages. We argue that an efficient solution would be to decentralize the provision of translations. Keywords: cost and benefit analysis; disenfranchisement; European Union; languages JEL: D70 O52 Z13 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4795&r=all 42. Measuring Trend Output: How Useful Are the Great Ratios? Attfield, Clifford Temple, Jonathan Standard macroeconomic models suggest that the ‘great ratios’ of consumption to output and investment to output should be stationary. The joint behaviour of consumption, investment and output can then be used to measure trend output. We adopt this approach for the USA and UK, and find support for stationarity of the great ratios when structural breaks are taken into account. From the estimated vector error correction models, we extract multivariate estimates of the permanent component in output, and comment on trend growth in the 1980s and the New Economy boom of the 1990s. Keywords: great ratios; New Economy; permanent components; structural breaks; trend output JEL: C32 C51 E20 E30 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4796&r=all 43. Bank Lending and Property Prices in Hong Kong Gerlach, Stefan Wensheng, Peng This Paper studies the relationship between residential property prices and lending in Hong Kong. This is an interesting topic for three reasons. First, swings in property prices have been extremely large and frequent in Hong Kong. Second, under the currency board regime, monetary policy cannot be used to guard against asset price swings. Third, despite the collapse in property prices since 1998, the banking sector remains sound. While the contemporaneous correlation between lending and property prices is large, our results suggest that the direction of influence goes from property prices to bank credit rather than conversely. Keywords: bank lending; Hong Kong; property prices JEL: E32 E42 G21 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4797&r=all 44. Risk Shifting, Technology Policy and Sales Contingent Claims: When is Launch Aid to the Aerospace Industry A Subsidy? Kaivanto, Kim Stoneman, Paul This Paper studies the criteria with which the presence or absence of ‘subsidy’ in sales contingent Launch Aid R&D support may be determined when payoff-relevant market incompleteness limits the precision of market-based pricing to non-trivial intervals. The criteria currently employed in WTO and EU proceedings are consistent with correct accounting for the opportunity cost of capital when markets are complete and frictionless, but fail in the presence of payoff-relevant market incompleteness where the interval between bid and ask prices may not be finessed away. An economic definition of subsidy must necessarily capture opportunity cost, and we develop a definition that fully incorporates government’s opportunity cost in both complete and incomplete market settings. With this in hand we then revisit some commonly posed questions concerning the subsidy status of Launch Aid, giving indication of how they may be best resolved by those in possession of the relevant details. Keywords: civil aerospace; incomplete markets; R&D; sales contingent claims; subsidies JEL: D52 F13 H25 L62 O38 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4798&r=all 45. Growth and Epidemic Diseases Bell, Clive Gersbach, Hans We study the formation of human capital and its transmission across generations when a society is assailed by an epidemic disease such as AIDS. We establish that the disease can severely retard economic growth, even to the point of leading to an economic collapse. We also show that the epidemic may exacerbate inequality. Pooling health risks in the society puts the society on a ‘make and break’ road. Keywords: AIDS; epidemic diseases; growth; human capital; pooling risks JEL: E13 I12 I21 O41 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4800&r=all 46. Exchange Rate Volatility and Labour Markets in the CEE Countries Belke, Ansgar Kaas, Leo Setzer, Ralph According to the traditional 'optimum currency area' approach, the case for adopting a common currency is stronger if the countries are subject to relatively similar output shocks. This Paper takes a different approach and highlights the fact that high exchange rate volatility may as well signal high costs for labour markets. The impact of exchange rate volatility on labour markets in the CEECs is analysed, finding that volatility vis-a- vis the euro significantly lowers employment growth and raises the unemployment rate. Hence, the elimination of exchange rate volatility can be considered equally important for labour markets as a removal of employment protection legislation. Keywords: Central and Eastern Europe; currency union; euroization; exchange rate variability; job creation JEL: E42 F36 F42 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4802&r=all 47. The Mystery of Monogamy Gould, Eric D Moav, Omer Simhon, Avi This Paper examines why developed countries are monogamous while rich men throughout history have tended to practice polygyny ( multiple wives). Wealth inequality naturally produces multiple wives for rich men in a standard model of the marriage market where polygyny is not ruled out. Our model demonstrates, however, that while higher male inequality generates more polygyny, higher female inequality produces a more monogamous equilibrium. Moreover, we derive how female inequality in the marriage market is higher in equilibrium as women are valued more for their quality versus quantity of children when human capital becomes more important in determining the distribution of income. As a result, male inequality in traditional societies generates inequality in the number of wives per man, but male inequality in developed societies, where human capital is a larger source of income and inequality, manifests itself as inequality in the quality of their wives. Using data from Cote d’Ivoire, we provide supporting evidence for the main implications of the model. Keywords: human capital; inequality; marriage; mongamy; polygyny JEL: J12 J24 O10 O40 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4803&r=all 48. Natural Resources and Economic Growth: From Dependence to Diversification Gylfason, Thorvaldur This Paper reviews the relationship between natural resource dependence and economic growth, and stresses how natural capital intensity tends to crowd out foreign capital, social capital, human capital, physical capital, and financial capital, thereby impeding economic growth across countries. Specifically, the Paper presents empirical cross-country evidence to the effect that nations that depend heavily on their natural resources tend to have (a) less trade and foreign investment, (b) more corruption, (c) less equality, (d) less political liberty, (e) less education, (f) less domestic investment, and (g) less financial depth than other nations that are less well endowed with, or less dependent on, natural resources. This matters for long-run growth because empirical evidence also suggests that trade, honesty, equality, liberty, education, investment, and financial maturity are all positively and significantly related to economic growth across countries. Before concluding, the Paper briefly compares and contrasts the experience of the OPEC countries with that of Norway, a singularly successful oil producer. Keywords: economic growth; natural resources JEL: O11 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4804&r=all 49. Robust Monetary Policy in the New-Keynesian Framework Leitemo, Kai Soderstrom, Ulf We study the effects of model uncertainty in a simple New- Keynesian model using robust control techniques. Due to the simple model structure, we are able to find closed-form solutions for the robust control problem, analysing both instrument rules and targeting rules under different timing assumptions. In all cases but one, an increased preference for robustness makes monetary policy respond more aggressively to cost shocks but leaves the response to demand shocks unchanged. As a consequence, inflation is less volatile and output is more volatile than under the non-robust policy. Under one particular timing assumption, however, increasing the preference for robustness has no effect on the optimal targeting rule (nor on the economy). Keywords: Knightian uncertainty; min-max policies; model uncertainty; robust control JEL: E52 E58 F41 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4805&r=all 50. Macroeconomic Order Flows: Explaining Equity and Exchange Rate Returns Dunne, Peter Hau, Harald Moore, Michael Macroeconomic models of equity returns perform poorly. The proportion of daily index returns that these models explain is essentially zero. Instead of relying on macroeconomic determinants, our model includes a concept from microstructure order flow. Order flow is the proximate determinant of price in all microstructure models. We explain aggregate equity returns as well as exchange rates in a model with heterogenous beliefs. Belief changes are shown to be observable through order flow. To test the model we construct daily aggregate order flow data from all equity trades in the U.S. and France from 1999 to 2003. Almost 60% of the daily returns in the S&P100 index are explained jointly by exchange rate returns and macroeconomic order flows. Keywords: equities; exchange rates; international macroeconomics; microstructure JEL: F30 F31 G10 G15 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4806&r=all 51. Endogenous Market Incompleteness with Investment Risks Meh, Cesaire A. Quadrini, Vincenzo This Paper studies a general equilibrium economy in which agents have the ability to invest in a risky technology. The investment risk cannot be fully insured with optimal contracts because shocks are private information. We show that the presence of investment risks leads to under-accumulation of capital relative to an economy where idiosyncratic shocks can be fully insured. We also show that the availability of state-contingent (optimal) contracts – compared to simple debt contracts – brings the aggregate stock of capital close to the complete markets level. Institutional reforms that make possible the use of these contracts have important welfare consequences. Keywords: Aggregate Capital; Asymmetric Information; optimal contracts JEL: D58 D82 E20 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4807&r=all 52. Bundling and the Unanimity Rule Erlenmaier, Ulrich Gersbach, Hans In this Paper, we design democratic constitutions that can transcend the shortcomings of the unanimity rule. The constitution embeds the unanimity rule in a set of virtue- supporting principles: (a) broad packages with many public projects (bundling) are allowed, but can only be proposed once in a legislative term; (b) the person who designs the package is also taxed at the highest proposed rate; and (c) subsidies are forbidden. We show that such democratic constitutions can yield efficient public project provision. Keywords: amendment rules; bundling; constitutions; provision of public projects; unanimity rule JEL: D62 D70 H40 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4808&r=all 53. Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues Egert, Balazs Halpern, Laszlo MacDonald, Ronald In this Paper we present an overview of a number of issues relating to the equilibrium exchange rates of the new EU member states from Central and Eastern Europe. In particular, we present a critical overview of the various methods available for calculating equilibrium exchange rates and discuss how useful they are likely to be for the new member states. We then consider some methodological issues, relating to the implementation of an equilibrium exchange rate model for new member states, such as the speed with which equilibrium exchange rates change and issues of implementation. Finally, we present an overview of the various extant measures of equilibrium that have been calculated for the new member states. Keywords: Balassa-Samuelson effect; equilibrium exchange rate; Purchasing Power Parity; tradable prices; transition economies JEL: C15 E31 F31 O11 P17 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4809&r=all 54. Large Devaluations and the Real Exchange Rate Burstein, Ariel Thomas Eichenbaum, Martin Rebelo, Sergio In this Paper we argue that the primary force behind the large drop in real exchange rates that occurs after large devaluations is the slow adjustment in the price of non-tradable goods and services. Our empirical analysis uses data from five large devaluation episodes: Argentina (2001), Brazil (1999), Korea ( 1997), Mexico (1994), and Thailand (1997). We conduct a detailed analysis of the Argentina case using disaggregated CPI data, data from our own survey of prices in Buenos Aires, and scanner data from supermarkets. We assess the robustness of our findings by studying large real-exchange-rate appreciations, medium devaluations, and small exchange-rate movements. JEL: F31 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4810&r=all 55. What We Don't Know About the Monetary Transmission Mechanism and Why We Don't Know It Beyer, Andreas Farmer, Roger E A We study identification in a class of linear rational expectations models. For any given exactly identified model, we provide an algorithm that generates a class of equivalent models that have the same reduced form. We use our algorithm to show that a model proposed by Benhabib and Farmer [1] is observationally equivalent to the standard new-Keynesian model when observed over a single policy regime. However, the two models have different implications for the design of an optimal policy rule. Keywords: Benhabib-Farmer model; Identification; indeterminacy; new-Keynesian model JEL: C39 C62 D51 E52 E58 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4811&r=all 56. Idiosyncratic Volatility and Product Market Competition Gaspar, Jose-Miguel Massa, Massimo This Paper investigates the link between a firm’s competitive environment and the idiosyncratic volatility of its stock returns. We find that firms enjoying high market power, or established in concentrated industries, have lower idiosyncratic volatility. We posit that competition affects volatility in two distinct and inter-related ways. Market power works as a hedging instrument that smoothes out idiosyncratic fluctuations. At the same time, a high degree of market power implies lower information uncertainty for investors and therefore lower return volatility. We find strong support for both effects. Our results contribute to the understanding of recent trends of idiosyncratic volatility, and confirm the important link between stock market performance and the competitive environment of firms. Keywords: competition; idiosyncratic volatility; market powers; uncertainty JEL: G10 G12 L11 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4812&r=all 57. Can Buybacks Be A Product of Shorter Shareholder Horizons? Gaspar, Jose-Miguel Massa, Massimo Matos, Pedro Verga Patgiri, Rajdeep We examine how shareholder investment horizons influence firms’ payout decisions. We find that US firms held by short- term institutional investors have a higher propensity to buybacks shares instead of using dividends. Firm managers seem to respond to the preferred payout policy of investors in their shareholder base. Share buybacks are used by if managers want to appease short-term oriented shareholders, while firms pay dividends if their stock is mostly held by long-term investors who have less need to liquidate their investment and may have a better tax treatment with dividends. We document two effects of investor pressure: for firms initiating payouts through a share buyback we find that the market reaction is lower the more short-term investors are holding the firm’s stock, because such payout decisions are less well monitored; for firms that have already a payout policy at present, the market reacts more positively (and only temporarily) to a buyback in line with investor catering effects. Our findings help explain some of the puzzling recent findings relating the rise in institutional investment to a higher use of share buybacks. Keywords: institutional investors; investment horizon; investor catering; payout policy; repurchases; shareholder heterogeneity; short-termism JEL: G32 G35 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4813&r=all 58. Disposition Matters: Volume, Volatility and Price Impact of Behavioural Bias Goetzmann, William Massa, Massimo We test the market impact of the disposition effect. We rely on the Grinblatt and Han (2002) model and derive testable implications about the expected relationship between the preponderance of disposition investors in the market and stock volatility, return and trading volume. We use a large sample of individual accounts over a six-year period to construct a variable that acts as proxy for the representation in the market of disposition investors. We show that, at a daily frequency, when the fraction of ‘irrational’ investor trades in a stock increases, stock volatility, return and trading volume decrease. We further show that such a stock-specific disposition acts as proxy to aggregates at the market level, generating a common factor. Statistical exposure to such a disposition-related factor explains cross-sectional differences in daily returns, after controlling for a host of other factors and characteristics. Keywords: asset prices; disposition effect; volatility JEL: D10 G10 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4814&r=all 59. History versus Geography: The Role of College Interaction in Portfolio Choice and Stock Market Prices Massa, Massimo Simonov, Andrei We study the link between portfolio choice and different college- based interaction – defined as the one that relates the portfolio choice of an investor to that of the other investors who went to the same college. We explain it in terms of a common cultural imprinting and the development of long-term friendship and alumni network and we directly quantify this bonding effect. We use a new dataset with information on portfolio choice – broken down at the stock level – wealth, income and demographic characteristics of a big panel of investors as well as information on the college they attended and their family situation at the time. We compare college-based interaction to other forms of social interaction, such as educational, professional and geographical interaction, properly controlling for all the standard motivations of portfolio theory, such as hedging of non-financial income risk, familiarity and information effects, wealth and income effect, a host of demographic, geographic and professional dummies, trend-chasing and momentum behaviour. All the different sources of social interaction significantly affect stock-picking as well as the choice between direct and delegated investment, both statistically and economically. College-based interaction is, however, the most important of them and the third single most important factor affecting stock picking. The impact of college-based interaction aggregates at the market level and affects stock prices. For each company, we construct measures of the degree of strength of college-based interaction among shareholders. We show that an increase in the strength of interaction reduces stock return and volatility. This can be rationalized in terms of recent theories on the impact of dispersion of beliefs in the presence of short- sale constraints. Keywords: asset pricing; education; portfolio choice; social interaction JEL: G11 G14 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4815&r=all 60. Theft and Taxes Desai, Mihir Dyck, Alexander Zingales, Luigi This Paper analyses the interaction between corporate taxes and corporate governance. We show that the characteristics of a taxation system affect the extraction of private benefits by company insiders. A higher tax rate increases the amount of income insiders divert and thus worsens governance outcomes. In contrast, stronger tax enforcement reduces diversion and, in so doing, can raise the stock market value of a company in spite of the increase in the tax burden. We also show that the corporate governance system affects the level of tax revenues and the sensitivity of tax revenues to tax changes. When the corporate governance system is ineffective (i.e., when it is easy to divert income), an increase in the tax rate can reduce tax revenues. We test this prediction in a panel of countries. Consistent with the model, we find that corporate tax rate increases have smaller (in fact, negative) effects on revenues when corporate governance is weaker. Finally, this approach provides a novel justification for the existence of a separate corporate tax based on profits. Keywords: corporate governance; Corporate taxation JEL: G30 H25 H26 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4816&r=all 61. Advertising and Pricing at Multiple-Output Firms: Evidence from US Thrift Institutions DeYoung, Robert Ors, Evren We derive five hypotheses regarding market competition, price, and advertising from a theoretical model of a profit maximizing depository institution, and test these conjectures in a simultaneous system of deposit interest rates and advertising expenditures for a data panel of 1,867 thrift institutions that offer 13 different deposit products in 666 local markets in the US between 1994 and 2000. We find some support for each of our hypotheses – branding, information, Dorfman-Steiner, structure- advertising, and structure-price – with the strength of the results often depending on the attributes of the deposit products or the characteristics of the thrifts. Keywords: advertising; depository institutions; structure- performance JEL: G21 L10 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4817&r=all 62. Mutual Funds and the Market for Liquidity Massa, Massimo Phalippou, Ludovic We study how actively managed equity mutual funds select the liquidity level of their equity portfolio and the effects of this selection on performance. We provide evidence of five key determinants of portfolio liquidity: portfolio size, portfolio concentration, the manager’s trading frequency, investment style, and fee structure. We also show that liquidity is a persistent characteristic, but it is nevertheless dynamically managed so as to offset both exogenous liquidity shocks and changes in portfolio characteristics. Liquid funds are seen to strongly overperform (underperform) during illiquid (liquid) times but, on average, net performance is unaffected by liquidity. Keywords: liquidity; mutual funds JEL: G11 G12 G14 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4818&r=all 63. Dispersion of Opinion and Stock Returns Goetzmann, William Massa, Massimo We use a panel of more than 100,000 investor accounts in US stocks over the period 1991-95 to construct an investor-based measure of dispersion of opinion, unlike the analyst based measure used in the literature. We use this measure to test two competing hypotheses: the sidelined investors hypothesis and the uncertainty/asymmetric information hypothesis. We find evidence that supports the sidelined-investors hypothesis. We show that the dispersion of opinion of the investors in a stock is positively related to the contemporaneous returns and trading volume of the stock and negatively related to its future returns. Moreover, dispersion of opinion aggregates across many stocks and generates factors that have a market-wide effect, affecting the stock equilibrium rate of return and providing additional explanatory power in a standard asset-pricing model. This supports the interpretation of dispersion of opinion as a risk factor. We also show that dispersion of opinion among retail investors Granger causes dispersion of opinion among analysts. Keywords: asset prices; dispersion of opinion; volatility JEL: D10 G10 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4819&r=all 64. Shareholder Diversification and IPOs Bodnaruk, Andrij Kandel, Eugene Massa, Massimo Simonov, Andrei We study IPOs by focusing on the degree of portfolio diversification of the shareholders taking the company public. We argue that a less diversified shareholder has more to gain from taking the company public and would be more willing to accept a lower price for the sale of its shares, i.e. tolerate higher underpricing. We test these hypotheses by considering all the IPOs that took place in Sweden in the period 1995-2001. We have obtained detailed information on the portfolio composition of all the investors in the companies being taken public, both before and after the IPO, as well as the portfolio composition of investors in similar (in terms of size, book-to-market and industry) companies not taken public. The information is detailed at the stock level, for both private and public companies. We construct several proxies for portfolio diversification of the shareholders and relate them to both the probability of the IPO and the underpricing. We show that companies held by less diversified shareholders are more likely to go public and suffer a higher underpricing. We show that, as predicted, the degree of diversification explains a significant (economically and statistically) part of the probability of going public, and may account for between one third and one half of the reported underpricing. This suggests that the degree of diversification of controlling shareholders should play a prominent role in the discussion of the process of going public. Keywords: diversification; IPO; underpricing JEL: G12 G14 G24 G32 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4820&r=all 65. Passive Creditors Schoors, Koen Sonin, Konstantin Creditors are often passive because they are reluctant to show bad debts on their own balance sheets. We propose a simple general equilibrium model to study the externality effect of creditor passivity. The model yields rich insights into the phenomenon of creditor passivity, both in transition and developed market economies. Policy implications are deduced. The model also explains in what respect banks differ from enterprises and what this implies for policy. Commonly observed phenomena in the banking sector, such as deposit insurance, lender of last resort facilities, government coordination to work out bad loans and special bank closure provisions, are interpreted in our framework. Keywords: arrears; bad loans; bank closure; bankruptcy; creditor passivity JEL: G21 G28 G33 P50 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4821&r=all 66. Businessman Candidates: Special-Interest Politics in Weakly Institutionalized Environments Gehlbach, Scott Sonin, Konstantin We initiate examination of the political boundaries of the firm by exploring the phenomenon of ‘businessman candidates’: business owners and managers who bypass conventional means of political influence to run for public office themselves. We argue that in-house production of political influence will be more likely in institutional environments where candidates find it difficult to make binding campaign promises. When campaign promises are binding, then a businessman may always pay a professional politician to run on the platform that political competition would otherwise compel the businessman to adopt. In contrast, when commitment to a campaign platform is impossible, then candidate identity matters for the policies that will be adopted ex post, implying that a businessman may choose to run for office if the stakes are sufficiently large. We illustrate our arguments through discussion of gubernatorial elections in postcommunist Russia, where businessmen frequently run for public office, institutions to encourage elected officials to keep their campaign promises are weak, and competition for rents is intense. Keywords: businessman candidates; citizen candidates; elections; institutions; political economy JEL: D72 N40 P16 P26 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4822&r=all 67. What You Sell is What You Lend? Explaining Trade Credit Contracts Burkart, Mike Ellingsen, Tore Giannetti, Mariassunta We use a broad range of contractual information to assess the empirical relevance of different financial theories of trade credit. The common feature of all financial theories is that suppliers have an advantage over other lenders in financing credit-constrained firms. While the reasons for the financing advantage differ across theories, they are usually related either to product characteristics or to market structure. We propose a novel identifying strategy that exploits this insight to analyse the trade credit volume and the contract terms. Our analysis suggests that the most important product characteristic for explaining trade credit volume and contract terms is the ease with which the seller’s product can be diverted. Market power in input and output markets also contributes to explain trade credit patterns. Keywords: collateral; contract theory; moral hazard; trade credits JEL: G32 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4823&r=all 68. Are European Business Cycles Close Enough to be Just One? Camacho, Maximo Perez-Quiros, Gabriel Saiz, Lorena We propose a comprehensive methodology to characterize the business cycle comovements across European economies and some industrialized countries, always trying to ‘let the data speak’. Out of this framework, we propose a novel method to show that there is no ‘Euro economy’ that acts as an attractor to the other economies of the area. We show that the relative comovements across EU economies are prior to the establishment of the Monetary Union. We are able to explain an important proportion of the distances across their business cycles using macro-variables related to the structure of the economy, to the directions of trade, and to the size of the public sector. Finally, we show that the distances across countries that belong to the European Union are smaller than the distances across newcomers. Keywords: business cycle synchronization; cluster analysis; economic integration; european union enlargement; multidimensional scaling JEL: C22 E32 F02 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4824&r=all 69. Shooting the Auctioneer Farmer, Roger E A Most dynamic stochastic general equilibrium models (DSGE) of the macroeconomy assume that labour is traded in a spot market. Two exceptions (Andolfatto [3], Merz [11]) combine the two-sided search model of Mortenson and Pissarides, [14], [13], [15] with a one-sector real business cycle model. These hybrid models are successful, in some dimensions, but they cannot account for observed volatility in unemployment and vacancies. Following a suggestion by Hall, [4] [5], building on work by Shimer [18], this Paper shows that a relatively standard DSGE model with sticky wages can account for these facts. Using a second-order approximation to the policy function I simulate moments of an artificial economy with and without sticky wages. I compute the welfare costs of the sticky wage equilibrium and find them to be small. JEL: E24 E32 J63 J64 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4825&r=all 70. Globalization and Disinflation: A Note Razin, Assaf We analyse how globalization forces induce monetary authorities, guided in their policies by the welfare criterion of a representative household, to put greater emphasis on reducing the inflation rate than on narrowing the output gaps. Specifically, I demonstrate how the relative weight of the output gap term in a utility-based loss function shrinks when the economy is open to international trade in goods, and is integrated to the world capital markets. Keywords: aggregate supply; captial market openness; inflation- output tradeoff; trade openness JEL: E50 F02 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4826&r=all 71. The Effects of Permanent Technology Shocks on Labour Productivity and Hours in the RBC Model Linde, Jesper Recent work on the effects of permanent technology shocks argue that the basic RBC model cannot account for a negative correlation between hours worked and labour productivity. In this Paper, I show that this conjecture is not necessarily correct. In the basic RBC model, I find that hours worked fall and labour productivity rises after a positive permanent technology shock once one allows for the possibility that the process for the permanent technology shock is persistent in growth rates. A more serious limitation of the RBC model is its inability to generate a persistent rise in hours worked after a positive permanent technology shock along with a rise in labour productivity that are in line with what the data suggests. Keywords: hours worked per capita; labour productivity; permanent technology shocks; real business cycle model; vector autoregressions JEL: E24 E32 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4827&r=all 72. Monetary Policy Uncertainty and the Stock Market Locarno, Alberto Massa, Massimo We study the relationship between inflation and stock returns focusing on the signalling content of inflation. Investors use inflation to learn about the stance of the monetary policy. Depending on investors’ beliefs, a change in consumption prices has different effects on the risk premium. A change in consumption prices that confirms investors' beliefs reduces stock risk premia, while a change that contradicts them increases risk premia. This may generate a negative correlation between returns and inflation that explains the Fisher puzzle. We model this intuition and test its implication on US data. We construct a market-based proxy of monetary policy uncertainty, we show that it is priced and that, by conditioning on it, the Fisher puzzle disappears. Keywords: asset pricing; learning risk; monetary policy uncertainty; risk factors JEL: G11 G12 G14 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4828&r=all 73. Limits of Arbitrage and Corporate Financial Policy Massa, Massimo Peyer, Urs Tong, Zhenxu We focus on an exogenous event that changes the cost of capital of a company – the addition of its stock to the S&P 500 index – and investigate how companies react to it by modifying their corporate financial and investment policies. This allows us to test capital structure theories in an ideal controlled experiment, where the effect of the index addition on the stock price is exogenous from a manager’s point of view. Consistent with both traditional theories and Stein’s (1996) market timing theory, we find more equity issues and increases in investment in response to higher index addition announcement returns. However, in the 24 months after the index addition, firms that issue equity and increase investment display negative abnormal returns and they perform worse than firms that issue but do not increase investment. This finding is consistent only with the market timing theory of Stein (1996) and supports a ‘limits of arbitrage’ story in which the stocks display a downward sloping demand curve and companies themselves act as ‘arbitrageurs’ taking advantage of the window of opportunity. Keywords: corporate financial policies; limits of arbitrage; market timing JEL: G30 G31 G32 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4829&r=all 74. The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time Orphanides, Athanasios van Norden, Simon A stable predictive relationship between inflation and the output gap, often referred to as a Phillips curve, provides the basis for countercyclical monetary policy in many models. In this paper, we evaluate the usefulness of alternative univariate and multivariate estimates of the output gap for predicting inflation. Many of the ex post output gap measures we examine appear to be quite useful for predicting inflation. However, forecasts using real-time estimates of the same measures do not perform nearly as well. The relative usefulness of real-time output gap estimates diminishes further when compared to simple bivariate forecasting models which use past inflation and output growth. Forecast performance also appears to be unstable over time, with models often performing differently over periods of high and low inflation. These results call into question the practical usefulness of the output gap concept for forecasting inflation. Keywords: inflation forecasts; output gap; Phillips curve; real- timing data JEL: C53 E37 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4830&r=all 75. Mergers with Product Market Risk Banal - Estanol, Albert Ottaviani, Marco This Paper studies the private incentives and the social effects of horizontal mergers among risk-averse firms. In our model, merging firms are allowed to choose how to split their joint profits, with implications for risk sharing and strategic behaviour in the product market. If firms compete in quantities, consolidation makes firms more aggressive due to improved risk sharing. Mergers involving few firms are then profitable with a relatively small level of risk aversion. With strong enough risk aversion, mergers result in lower prices and higher social welfare. If firms instead compete in prices, consumers do not benefit from mergers with demand uncertainty, but can easily benefit in markets with cost uncertainty. Keywords: market imperfection; mergers and acquisitions; monopolization and horizontal anticompetitive practices; oligopoly JEL: D43 G34 L41 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4831&r=all 76. Liquidity Risk, Leverage and Long-Run IPO Returns Eckbo, B Espen Norli, Oyvind We examine the risk-return characteristics of a rolling portfolio investment strategy where more than six thousand Nasdaq initial public offering (IPO) stocks are bought and held for up to five years. The average long-run portfolio return is low, but IPO stocks appear as ‘longshots’, as five-year buy-and-hold returns of 1000% or more are somewhat more frequent than for non- issuing Nasdaq firms matched on size and book-to-market ratio. The typical IPO firm is of average Nasdaq market capitalization but has relatively low book-to-market ratio. We also show that IPO firms exhibit relatively high stock turnover and low leverage, which may lower systematic risk exposures. To examine this possibility, we launch an easily constructed ‘low minus high’ LMH) stock turnover portfolio as a liquidity risk factor. The LMH factor produces significant betas for broad-based stock portfolios, as well as for our IPO portfolio and a comparison portfolio of seasoned equity offerings. The factor-model estimation also includes standard characteristics-based risk factors, and we explore mimicking portfolios for leverage-related macroeconomic risks. Because they track macroeconomic aggregates, these mimicking portfolios are relatively immune to market sentiment effects. Overall, we cannot reject the hypothesis that the realized return on the IPO portfolio is commensurable with the portfolio’s risk exposures, as defined here. Keywords: asset pricing; capital structure; Initial Public Offering (IPO); liquidity; market efficiency; risk and return JEL: G10 G11 G12 G20 G24 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4832&r=all 77. The Choice of Seasoned-Equity Selling Mechanism: Theory and Evidence Eckbo, B Espen Norli, Oyvind Extending the Myers and Majluf (1984) framework, we present a model for the choice of seasoned-equity selling mechanism. A sequential pooling equilibrium exists which implies a positive market reaction to certain flotation strategies. We examine the model implications using the market reaction to issues on the Oslo Stock Exchange using the full range of flotation methods. The average market reaction is non-negative across all methods, and significantly positive for both rights offerings and private placements, as predicted. We also show that average long-run abnormal stock returns to OSE issuers are indistinguishable from zero, supporting the market rationality assumption underpinning the flotation game. Keywords: adverse selection; equity offering; flotation method; rights offer; sequential equilibrium; underwriting JEL: G20 G24 G30 G32 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4833&r=all 78. Class and Tastes: The Effects of Income and Preference Heterogeneity on Redistribution Fernandez, Raquel Levy, Gilat In this paper we analyze the interaction of income and preference heterogeneity in a political economy framework. We ask whether the presence of preference heterogeneity (arising, for example, from different ethnic groups or geographic locations) affects the ability of the poor to extract resources from the rich and, conversely, whether income inequality affects which preferences are given precedence in society. We study the equilibrium of a game in which coalitions of individuals form parties, parties propose platforms, and all individuals vote, with the winning policy chosen by plurality. Political parties are restricted to offering platforms that are credible (in that they belong to the Pareto set of their members). The platforms specify the values of two policy tools: a general redistributive tax which is lump-sum rebated (or used to fund a general public good) and a series of taxes whose revenue is used to fund specific (targeted) goods tailored to particular preferences or localities. Individuals differ both in income and also as to whether they receive utility from some specific good. Our analysis demonstrates that taste conflict first dilutes but later reinforces class interests. When the degree of taste diversity is low, the equilibrium policy is characterized by some amount of general income distribution and some targeted transfers. As a group, however, the poor obtain less income distribution than if taste heterogeneity did not exist. As taste diversity increases in society, the set of equilibrium policies becomes more and more tilted towards special interest groups and against general redistribution. As diversity increases further, however, these policies are not sustainable. There exists a critical threshold of diversity above which the only policy that can emerge supports exclusively general redistribution. In fact, this policy is identical to the one that would be instituted in the absence of any taste diversity at all. Keywords: diversity; income inequality; political parties; preferences; redistribution JEL: D30 D72 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4834&r=all 79. The Role of Asymmetries and Regime Shifts in the Term Structure of Interest Rates Clarida, Richard Sarno, Lucio Taylor, Mark P Valente, Giorgio We examine the relationship between interest rates of different maturities for the US, Germany and Japan over the period 1982- 2000, using a general, multivariate vector equilibrium correction modelling framework capable of simultaneously allowing for asymmetric adjustment and regime shifts. This approach has a very general underlying theoretical rationale that allows for time- varying term premia and other short-run deviations from the expectations model of the term structure. The resulting non- linear models provide good in-sample fits, display regime switches closely related to key state variables driving monetary policy decisions and have satisfactory out-of-sample forecasting properties. Keywords: forecasting; markov switching; term structure of interest rates JEL: E43 E47 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4835&r=all 80. Globalization and Union Opposition to Technological Change Lommerud, Kjell Erik Meland, Frode Straume, Odd Rune We find that trade unions have a rational incentive to oppose the adoption of labour-saving technology when labour demand is inelastic and unions care much for employment relative to wages. Trade liberalization typically increases trade union technology opposition. These conclusions are reached in a model of international duopoly with monopoly wage setting in one of the countries, and two-way trade. An important stepping-stone for the result is to note that even though trade liberalization means a tougher competitive environment for firms, labour demand tends to increase. We also find that the incentive for technology opposition is stronger in the more technologically advanced country and in the country with the larger home market, complementing earlier explanations for technological catch-up and leapfrogging. Keywords: international unionized oligopoly; technology adaption; trade liberalization JEL: F12 F16 J51 L13 O33 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4836&r=all 81. Cultural Biases in Economic Exchange Guiso, Luigi Sapienza, Paola Zingales, Luigi How much do cultural biases affect economic exchange? We try to answer this question by using the relative trust European citizens have for citizens of other countries. First, we document that this trust is affected not only by objective characteristics of the country being trusted, but also by cultural aspects such as religion, a history of conflicts, and genetic similarities. We then find that lower relative levels of trust toward citizens of a country lead to less trade with that country, less portfolio investment, and less direct investment in that country, even after controlling for the objective characteristics of that country. This effect is stronger for good that are more trust intensive and doubles or triples when trust is instrumented with its cultural determinants. We conclude that perceptions rooted in culture are important (and generally omitted) determinants of economic exchange. Keywords: culture; FDI; financial portfolio; priors and expectations; trade and exchange; trust JEL: D84 F10 F30 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4837&r=all 82. Trade-Inducing Quality Standards for Used Durables Clerides, Sofronis Hadjiyiannis, Costas We construct a theoretical framework to study the impact of asymmetric quality standards on used durable goods on trade flows, profits and consumer welfare. We show that asymmetry in quality standards generates trade in used goods from high to low standard countries while at the same time reducing trade in new goods. The industry in the exporting country benefits from this change while consumers lose out. Consumers in the importing country are the biggest beneficiaries, but domestic industry is hurt. These results suggest that quality standards on used goods are a powerful policy tool whose use should be monitored by the WTO. Keywords: durable goods; quality standards; trade in used goods; used durables JEL: F10 L10 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4838&r=all 83. Do Foreign Investors Care About Labour Market Regulations? Javorcik, Beata Smarzynska Spatareanu, Mariana This study takes a new look at the regulatory determinants of foreign direct investment (FDI) by asking whether labour market flexibility affects FDI flows across 19 Western and Eastern European countries. The analysis is based on firm-level data on new investments undertaken during the 1998-2001 period. The study employs a variety of proxies for labour market regulations reflecting the flexibility of individual and collective dismissals, the length of the notice period and the required severance payment along with a comprehensive set of controls for the business climate characteristics. The results suggest that greater flexibility in the host country’s labour market in absolute terms or relative to that in the investor’s home country is associated with larger FDI flows. The findings indicate that as the labour market flexibility in the host country increases from inflexible (e.g. France) to flexible (e.g. United Kingdom), the volume of investment goes up by between 12% and 26%. FDI in services sectors appears to be more sensitive to labour market regulations than investment in manufacturing. Keywords: firm-level data; foreign direct investment; labour market regulation JEL: F21 F23 J00 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4839&r=all 84. Divide et Impera: Optimal Leniency Programmes Spagnolo, Giancarlo Leniency programmes (or policies) reduce sanctions against cartel members that self-report to the Antitrust Authority. We focus on their ability to directly deter cartels and analogous criminal organizations by undermining internal trust, increasing individual incentives to ‘cheat’ on partners. Optimally designed ‘courageous’ leniency programmes reward the first party that reports sufficient information with the fines paid by all other parties, and with finitely high fines achieve the first best. ‘Moderate’ leniency programmes that only reduce or cancel sanctions, as implemented in reality, may also destabilize and deter cartels by (a) protecting agents that defect (and report) from fines; (b) protecting them from other agents’ punishment; and (c) increasing the riskiness of taking part to a cartel. Keywords: amnesty; antitrust; cartels; collusion; competition policy; corruption; immunity; law enforcement; leniency; oligopoly; organized crime; repeated games; risky cooperation; whistleblowers JEL: L13 L44 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4840&r=all 85. Playing it Safe with Low Conditional Fees versus Being Insured by High Contingent Fees Emons, Winand Under contingent fees the attorney gets a share of the judgement; under conditional fees they get an upscale premium if the case is won, which is, however, unrelated to the adjudicated amount. We compare conditional and contingent fees in a framework where lawyers choose between a safe and a risky litigation strategy. Under conditional fees lawyers prefer the safe strategy, under contingent fess the risky one. Risk-averse plaintiffs prefer conditional fees over contingent fees when lawyering costs are low and vice versa for high lawyering costs. Keywords: conditional fees; contingent fees; incentives; insurance; risk aversion JEL: D82 K10 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4841&r=all 86. Estimating the Effects of Fiscal Policy in OECD Countries Perotti, Roberto This Paper studies the effects of fiscal policy on GDP, inflation and interest rates in five OECD countries, using a structural Vector Autoregression approach. Its main results can be summarized as follows: 1) The effects of fiscal policy on GDP tend to be small: government spending multipliers larger than 1 can be estimated only in the US in the pre-1980 period. 2) There is no evidence that tax cuts work faster or more effectively than spending increases. 3) The effects of government spending shocks and tax cuts on GDP and its components have become substantially weaker over time; in the post-1980 period these effects are mostly negative, particularly on private investment. 4) Only in the post-1980 period is there evidence of positive effects of government spending on long interest rates. In fact, when the real interest rate is held constant in the impulse responses, much of the decline in the response of GDP in the post-1980 period in the US and UK disappears. 5) Under plausible values of its price elasticity, government spending typically has small effects on inflation. 6) Both the decline in the variance of the fiscal shocks and the change in their transmission mechanism contribute to the decline in the variance of GDP after 1980. Keywords: fiscal policy; Government Spending; taxes JEL: E62 E63 H50 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4842&r=all 87. The Macroeconomics of Subsistence Points Ravn, Morten O. Schmitt-Grohe, Stephanie Uribe, Martin This paper explores the macroeconomic consequences of preferences displaying a subsistence point. It departs from the existing related literature by assuming that subsistence points are specific to each variety of goods rather than to the composite consumption good. We show that this simple feature makes the price elasticity of demand for individual goods procyclical. As a result, markups behave countercyclically in equilibrium. This implication is in line with the available empirical evidence. Keywords: business cycles; non-homothetic preferences; time- varying markups JEL: D10 D12 D42 E30 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4843&r=all 88. Inflation Scares and Forecast-Based Monetary Policy Orphanides, Athanasios Williams, John C Central bankers frequently emphasize the critical importance of anchoring private inflation expectations for successful monetary policy and macroeconomic stabilization. In most monetary policy models, however, expectations are already anchored through the assumption of rational expectations and perfect knowledge of the economy. In this Paper, we re-examine the role of inflation expectations by positing, instead, that agents have imperfect knowledge of the precise structure of the economy and policy- makers' preferences, and rely on a perpetual learning technology to form expectations. We find that with learning, disturbances can give rise to endogenous inflation scares, that is, significant and persistent deviations of inflation expectations from those implied by rational expectations, even at long horizons. The presence of learning increases the sensitivity of inflation expectations and the term structure of interest rates to economic shocks, in line with the empirical evidence. We also explore the role of private inflation expectations for the conduct of efficient monetary policy. Under rational expectations, inflation expectations equal a linear combination of macroeconomic variables and as such provide no additional information to the policy-maker. In contrast, under learning, private inflation expectations follow a time-varying process and provide useful information for the conduct of monetary policy. Keywords: inflation forecasts; learning; policy rules; rational expectations JEL: E52 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4844&r=all 89. Granger Causality of the Inflation-Growth Mirror in Accession Countries Gillman, Max Nakov, Anton The Paper presents a model in which the exogenous money supply causes changes in the inflation rate and the output growth rate. While inflation and growth rate changes occur simultaneously, the inflation acts as a tax on the return to human capital and in this sense induces the growth rate decrease. Shifts in the model’s credit sector productivity cause shifts in the income velocity of money that can break the otherwise stable relation between money, inflation, and output growth. Applied to two accession countries, Hungary and Poland, a VAR system is estimated for each that incorporates endogenously determined multiple structural breaks. Results indicate Granger causality positively from money to inflation and negatively from inflation to growth for both Hungary and Poland, as suggested by the model, although there is some feedback to money for Poland. Three structural breaks are found for each country that are linked to changes in velocity trends, and to the breaks found in the other country. Keywords: Granger causality; growth; inflation; structural breaks; transition; VAR; velocity JEL: C22 E31 O42 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4845&r=all 90. Economic Fluctuations in Central and Eastern Europe: The Facts Benczur, Peter Ratfai, Attila We carry out a detailed analysis of quarterly frequency dynamics in macroeconomic aggregates in twelve countries of Central and Eastern Europe. The facts we document include the variability and persistence in and the co-movement among output, and other major real and nominal variables. We find that consumption is highly volatile and government spending is procyclical. Gross fixed capital formation is highly volatile. Net exports are countercyclical. Imports are procyclical, much more than exports. Exports are most procyclical and persistent in open countries. Labour market variables are all highly volatile. Employment is lagging, and often procyclical. Real wages are dominantly procyclical. Productivity is dominantly procyclical and coincidental. Private credit is procyclical and dominantly lagging the cycle. The CPI is countercyclical, and is weakly leading or coincidental. The cyclicality of inflation is unclear, but its relative volatility is low. Net capital flows are mostly leading and procyclical and exhibit low persistence. Nominal interest rates are in general smooth and persistent. The nominal exchange rate is more persistent than the real one. Overall, we find that fluctuations in CEE countries are larger than in industrial countries, and are of similar size than in other emerging economies. This is particularly true about private consumption. The co-movement of variables, however, shows a large degree of similarity. A notable exception is government spending: unlike in industrial economies, it is rather procyclical in transition economies. The findings also indicate that Croatia and the accession group show broadly similar cyclical behaviour to industrial countries. The most frequent country outliers are Bulgaria, Romania and Russia, especially in labour market, price and exchange rate variables. Excluding these countries from the sample makes many of the observed patterns in cyclical dynamics quite homogenous. Keywords: business cycle facts; Central and Eastern Europe JEL: E32 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4846&r=all 91. Macroeconomic Asymmetry in the European Union: The Difference Between New and Old Members Demyanyk, Yuliya Volosovych, Vadym We study the degree of output and consumption asymmetry for the ten new and fifteen original European Union members during the period 1994–2001. We establish basic stylized facts about macroeconomic asymmetry from correlations of GDP and consumption growth rates with corresponding aggregates. In addition, we determine which countries would potentially gain the most from international risk sharing within the European Union employing a utility-based measure suggested by Kalemli-Ozcan, Sorensen and Yosha (2001). We find much higher potential gains for the new members compared to those for original EU-15 countries. In particular, economies with the most volatile and counter-cyclical output growth – Czech Republic, Slovak Republic, and the three Baltic states – might benefit the most. We show that EU enlargement would not reduce the welfare of EU-15 members. If these countries move towards full risk sharing their potential welfare gains after enlargement would be virtually unchanged. Keywords: asymmetry of GDP; consumption insurance; EU enlargement; risk sharing Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4847&r=all 92. On the Fit and Forecasting Performance of New Keynesian Models Del Negro, Marco Schorfheide, Frank Smets, Frank Wouters, Rafael The Paper provides new tools for the evaluation of DSGE models, and applies it to a large-scale New Keynesian dynamic stochastic general equilibrium (DSGE) model with price and wage stickiness and capital accumulation. Specifically, we approximate the DSGE model by a vector autoregression (VAR), and then systematically relax the implied cross-equation restrictions. Let delta denote the extent to which the restrictions are being relaxed. We document how the in- and out-of-sample fit of the resulting specification (DSGE-VAR) changes as a function of delta. Furthermore, we learn about the precise nature of the misspecification by comparing the DSGE model’s impulse responses to structural shocks with those of the best-fitting DSGE-VAR. We find that the degree of misspecification in large- scale DSGE models is no longer so large to prevent their use in day-to-day policy analysis, yet it is not small enough that it cannot be ignored. Keywords: Bayesian Analysis; DSGE models; model evaluation; vector autoregression JEL: C11 C32 C53 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4848&r=all 93. The Impact of Consumer Loss Aversion on Pricing Heidhues, Paul Koszegi, Botond We develop a model in which a profit-maximizing monopolist with uncertain cost of production sells to loss-averse, yet rational, consumers. We first introduce (portable) techniques for analysing the demand of such consumers, and then investigate the monopolist’s pricing strategy. Compared to lower possible purchase prices, paying a higher price in the firm’s pricing distribution is assessed by consumers as a loss, decreasing demand for the firm’s product. We provide conditions under which a firm with continuously distributed marginal cost responds by (locally) eliminating this ‘comparison effect’ and choosing a discrete price distribution; that is, prices are ‘sticky’. Price stickiness is more likely to obtain when the cost distribution has high density, the price responsiveness of demand is low, or consumers are likely to purchase. Whether or not prices are sticky, the monopolist wants to at least mitigate the comparison effect, leading to countercyclical mark-ups. On the other hand, if consumers expect to buy the product, they experience a loss if they end up not consuming it, increasing their willingness to pay for it. Thus, despite the tendency toward price stability, there are also circumstances in which a firm with unchanging cost offers random ‘sales’ to increase customers’ expectation to consume, attracting more demand at high prices. Keywords: (seemingly) Predatory pricing; countercyclical markups; kinked demand curve; monopoly pricing; price stickiness; promotions; reference-dependent utility; sales Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4849&r=all 94. Earnings Manipulation and Incentives in Firms Friebel, Guido Guriev, Sergei We study the effect of earnings manipulation on incentives within the corporate hierarchy. When top management manipulates earnings, it must prevent information leakage from corporate insiders to the outside world. If an insider (e.g. a division manager) gains evidence about earnings manipulation, the threat to blow the whistle can provide them with an additional payment. We show that it is easier for division managers to prove top management’s manipulations when the performance of their own divisions is low. Earnings manipulation therefore undermines division managers’ incentives to exert effort and destroys value. We show that earnings manipulation is more likely to occur in flatter hierarchies; we also discuss implications of the auditing and whistle-blowing regulations of the Sarbanes Oxley Act. Keywords: agency costs; flat hierarchies; Sarbanes Oxley Act; whistleblowing JEL: D23 G30 M40 M52 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4850&r=all 95. Long run Effects of Public Sector Sponsored Training in West Germany Lechner, Michael Miquel, Ruth Wunsch, Conny Between 1991 and 1997 West Germany spent on average about 3.6bn euro per year on public sector sponsored training programmes for the unemployed. We base our empirical analysis on a new administrative database that plausibly allows for selectivity correction by microeconometric matching methods. We identify the effects of different types of training programmes over a horizon of more than seven years. Using bias corrected weighted multiple neighbours matching we find that all programmes have negative effects in the short run and positive effects over a horizon of about four years. For substantive training programmes with duration of about two years gains in employment probabilities of more than 10% points appear to be sustainable, but come at the price of large negative lock-in effects. Keywords: active labour market policy; matching estimation; panel data; programme evaluation JEL: J68 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4851&r=all 96. Wealth Accumulation and Portfolio Choice with Taxable and Tax-Deferred Accounts Gomes, Francisco J Michaelides, Alexander Polkovnichenko, Valery We calibrate a life-cycle model with uninsurable labour income risk and borrowing constraints to match wealth accumulation and portfolio allocation profiles of direct and indirect stockholders in both taxable and tax-deferred accounts. Tax-deferred accounts generate an increase in wealth accumulation that is larger for wealthier households. Furthermore, while the cost of following a fixed contribution rate over the life cycle is small, the optimal rate can differ substantially across households, and the welfare losses from choosing the wrong one can be substantial. Finally, the welfare gain from having access to a tax-deferred account ranges from less than 0.1% to 11.5%, depending on the preference parameters. Keywords: liquidity constraints; portfolio choice; retirement savings; tax-deferred accounts; uninsurable labour income risk JEL: G11 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4852&r=all 97. Optimal Life-Cycle Asset Allocation: Understanding the Empirical Evidence Gomes, Francisco J Michaelides, Alexander We show that a life cycle model with realistically calibrated uninsurable labour income risk and moderate risk aversion can simultaneously match stock market participation rates and asset allocation decisions conditional on participation. The key ingredients of the model are Epstein-Zin preferences, a fixed stock market entry cost, and moderate heterogeneity in risk aversion. Households with low risk aversion smooth earnings shocks with a small buffer stock of assets, and consequently most of them (optimally) never invest in equities. Therefore, the marginal stockholders are (endogenously) more risk averse, and as a result they do not invest their portfolios fully in stocks. Keywords: life-cycle models; liquidity constraints; portfolio choice; preference heterogeneity; stock market participation; uninsurable labour income risk JEL: G11 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4853&r=all 98. Central Bank Forecasts and Disclosure Policy: Why it Pays to be Optimistic Eijffinger, Sylvester C W Tesfaselassie, Mewael F. In a simple macromodel with forward-looking expectations, this Paper looks into disclosure policy when a central bank has private information on future shocks. The main result is that advance disclosure of forecasts of future shocks does not improve welfare, and in some cases is not desirable as it impairs stabilization of current inflation and/or output. This result holds when there is no credibility problem or the central bank’s preference is common knowledge. When there is uncertainty about the central bank’s preference shock, and this uncertainty is not resolved in the subsequent period, advance disclosure does not matter for current outcomes. The reason lies in the strong dependence of one-period-ahead private sector inflation forecasts on central bank actions, which induces the central bank to focus exclusively on price stability in subsequent periods. Another implication of the model is that, in contrast to forecasts of current period shocks emphasized by the literature, forecasts of future shocks may not be revealed to the public by current policy choices because the central bank refrains from responding to its own forecasts. Keywords: central bank disclosure; central bank forecasts; central bank transparency; forward-looking expectations; private information JEL: E42 E43 E52 E58 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4854&r=all 99. World Finance and the US 'New Economy': Risk Sharing and Risk Exposure Miller, Marcus Zhang, Lei The promising prospect of a ‘New Economy’ in the US attracted substantial equity inflows in the late 1990s, helping to finance the country’s burgeoning current account deficit. After peaking in 2000, however, US stocks fell by some 8 trillion dollars in value. To assess the welfare effects of international financial markets in this context, we use an analytically tractable (two-country, two-period, two-state) model of the global economy which allows the country experiencing the favourable supply side ‘shock’ to consume more against expected future output and to spread risk by selling shares. Since irrational exuberance and distorted corporate incentives can cause serious asset overvaluation, however, an asset price ‘bubble’ is also included, where market participants assign unwarranted likelihood to high pay offs. Relative to autarky, internationalizing financial markets does offer welfare gains. But these are small relative to the international wealth transfer that can arise from selling shares globally at inflated prices. Parameter variations suggest that this conclusion is quite robust. A calibrated exercise shows how capital inflows to finance the ‘New Economy’ can be twice the consumption-smoothing deficit on current account; and how market losses – due to ‘misfortune’ or ‘excess upside probability’ – can have global effects on consumption when the bubble bursts. The analysis complements recent econometric studies of the transmission mechanism which find that financial factors are needed to explain why the European economy was so strongly affected by the US downturn starting in 2002. Keywords: capital flows; international transmission of shocks; moral hazard JEL: F32 F41 G15 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4855&r=all 100. Pill, Patch or Shot? Subjective Expectations and Birth Control Choice Delavande, Adeline When choosing a contraception method, women base their decisions on their subjective expectations about the realizations of method- related outcomes. Examples of such outcomes include getting pregnant, contracting a sexually transmitted disease (STD) or experiencing side effects. By conducting a face-to-face survey, I have assembled a unique dataset on women’s subjective expectations regarding existing birth control methods. While respondents have, on average, expectations consistent with actual population outcomes, they exhibit substantial heterogeneity in their subjective beliefs, which emphasizes the need to rely on expectations data when conducting inference. I combine expectations data with observed choices to estimate a random utility model of birth control choice, without making any assumption about expectations. Effectiveness, protection against STDs and partner’s disapproval are found to be the most important factors in the decision process. I have also elicited respondents’ willingness to pay (WTP) for a hypothetical 100% effective birth control method. Remarkably, the median elicited WTP is very close to the estimated parameter for preferences toward pregnancy outcome expressed in dollars. The reported WTPs are incorporated directly in the estimation to fully account for preferences heterogeneity for getting pregnant. Keywords: contraception; subjective expectations; uncertainty JEL: D81 J13 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4856&r=all 101. Does Distance Matter in Spillover? Balazs, Murakozy Halpern, Laszlo This Paper examines the technology transfer through FDI in Hungary, using a large panel dataset of 24,000 firm-level observations. We distinguish horizontal (intra-industry) and vertical (inter-industry) spillovers. Besides the sign and magnitude of these effects we are interested in the spatial structure of these technology transfers. For this we use distance data, correct for sample selection and for the endogeneity of input demand use Arellano-Bond dynamic panel data technique. Our main findings are that there are significant horizontal and backward spillovers for domestic-owned firms suggesting the presence of foreign competitors and customers is beneficial for domestic firms. The effect of regional and county boundaries is insignificant. Using the distance data we find clear spatial structure of spillovers: for domestic firms the foreign presence only matters in very small distance (25 km), for foreign-owned firms the stronger the spillover the larger the distance (50 and 100 km). Keywords: foreign direct investments; spillovers; technology transfer JEL: D24 F14 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4857&r=all 102. Firm-Specific Capital, Nominal Rigidities and the Business Cycle Altig, David E Christiano, Lawrence Eichenbaum, Martin Linde, Jesper Macroeconomic and microeconomic data paint conflicting pictures of price behaviour. Macroeconomic data suggest that inflation is inertial. Microeconomic data indicate that firms change prices frequently. We formulate and estimate a model that resolves this apparent micro/macro conflict. Our model is consistent with post- war US evidence on inflation inertia even though firms re- optimize prices on average once every 1.5 quarters. The key feature of our model is that capital is firm-specific and pre- determined within a period. JEL: E30 E40 E50 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4858&r=all 103. Gains From Trade in Used Goods: Evidence from the Global Market for Automobiles Clerides, Sofronis This Paper investigates the welfare effects of trade liberalization by exploiting a natural policy experiment in the small open economy of Cyprus. A 1993 law relaxed import restrictions on used vehicles and facilitated the flow of used Japanese vehicles into the country. This led to a dramatic shift of consumer purchases from new to used cars and a substantial expansion of the overall market. Estimated welfare gains are of the order of several hundred dollars per purchaser. The findings are indicative of the potential for substantial gains from liberalizing trade in used goods, which could also alter trade flows and production. Keywords: automobile industry; differentiated products; gains from trade; trade liberalization; used goods JEL: F14 L13 L92 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4859&r=all 104. Growth, Distance to Frontier and Composition of Human Capital Aghion, Philippe Meghir, Costas Vandenbussche, Jerome We examine the contribution of human capital to economy-wide technological improvements through the two channels of innovation and imitation. We develop a theoretical model showing that skilled labour has a higher growth-enhancing effect closer to the technological frontier under the reasonable assumption that innovation is a relatively more skill intensive activity than imitation. Also, we provide evidence in favour of this prediction using a panel dataset covering 19 OECD countries between 1960 and 2000 and explain why previous empirical research had found no positive relationship between initial schooling level and subsequent growth in rich countries. In particular, we show that in OECD economies it is crucial to isolate the two separate margins of primary/secondary and tertiary education. Interestingly, the latter type of schooling proves to be a factor of economic divergence. Keywords: convergence; economic growth; education; human capital; imitation; innovation; technological frontier; wave JEL: I20 O30 O40 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4860&r=all 105. Do Demand Curves for Currencies Slope Down? Evidence from the MSCI Global Index Change Hau, Harald Massa, Massimo Peress, Joel Do exchange rates react to exogenous capital movements? We explore this issue based on the redefinition of the MSCI international equity indices announced on 10 December 2000 and implemented in two steps on 30 November 2001 and 31 May 2002. The index changes implied major changes in the representation of different countries in the MSCI world index. Our event study shows a strong announcement effect in which countries with a decreasing equity representation vis-a-vis the US depreciated against the dollar. Around the two implementation dates, we find further systematic, but opposite, exchange rate effects, which can be interpreted as a result of excessive speculation on the first implementation date and insufficient speculation on the second date. Keywords: event study; exchange rates; Global Equity Index Funds; Limits of Arbitrage JEL: F31 G12 G24 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4862&r=all 106. The Evolution of Retirement Conde-Ruiz, Jose Ignacio Galasso, Vincenzo Profeta, Paola We provide a long-term perspective on the individual retirement behaviour and on the future of early retirement. In a cross- country sample, we find that total pension spending depends positively on the degree of early retirement and on the share of elderly in the population, which increase the proportion of retirees, but has hardly any effect on the per capita pension benefits. We show that in a Markovian political economic theoretical framework, in which incentives to retire early are embedded, a political equilibrium is characterized by an increasing sequence of social security contribution rates converging to a steady state and early retirement. Comparative statistics suggest that aging and productivity slow-downs lead to higher taxes and more early retirement. However, when income effects are factored in, the model suggests that periods of stagnation – characterized by decreasing labour income – may lead middle-aged individuals to postpone retirement. Keywords: lifetime income effect; pensions; politico-economic Markovian equilibrium; tax burden JEL: D72 H53 H55 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4863&r=all 107. Policy-oriented Parties and the Choice Between Social and Private Insurance De Donder, Philippe Hindricks, Jean We study the political economy of social insurance in a world where individuals differ in both income and risk. Social insurance is financed through distortionary taxation and redistributes across income and risk. Individuals vote on social insurance that they can complement with insurance bought on the private market. Private insurance is actuarially fair but suffers from adverse selection, which results in a screening equilibrium with partial coverage. The equilibrium social insurance is the result of an electoral competition game where parties maximize the utility of their members. We calculate the equilibrium social insurance offered by the two parties as well as their equilibrium membership, and study how the equilibrium outcome is affected by electoral uncertainty, distortions from taxation, risk aversion and the distribution of risk and income. We then calibrate the model to US data from the PSID survey. Lastly, we study how the political demand for social insurance is affected by the possibility to redistribute through income taxation. Keywords: adverse selection; political economy; redistribution; social insurance JEL: H23 H50 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4864&r=all 108. The Decline of Activist Stabilization Policy: Natural Rate Misperceptions, Learning and Expectations Orphanides, Athanasios Williams, John C We develop an estimated model of the US economy in which agents form expectations by continually updating their beliefs regarding the behaviour of the economy and monetary policy. We explore the effects of policy-makers' misperceptions of the natural rate of unemployment during the late 1960s and 1970s on the formation of expectations and macroeconomic outcomes. We find that the combination of monetary policy directed at tight stabilization of unemployment near its perceived natural rate and large real-time errors in estimates of the natural rate uprooted here-to-fore quiescent inflation expectations and contributed to poor macroeconomic performance. Had monetary policy reacted less aggressively to perceived unemployment gaps, inflation expectations would have remained anchored and the stagflation of the 1970s would have been avoided. Indeed, we find that less activist policies would have been more effective at stabilizing both inflation and unemployment. We argue that policy-makers, learning from the experience of the 1970s, eschewed activist policies in favour of policies that concentrated on the achievement of price stability, contributing to the subsequent improvements in macroeconomic performance of the US economy. Keywords: learning; monetary policy; rational expectations; stagflation JEL: E52 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4865&r=all 109. The Reform of October 1979: How it Happened and Why Lindsey, David E Orphanides, Athanasios Rasche, Robert H This study offers a historical review of the monetary policy reform of October 6, 1979, and discusses the influences behind it and its significance. We lay out the record from the start of 1979 through the spring of 1980, relying almost exclusively upon contemporaneous sources, including the recently released transcripts of Federal Open Market Committee (FOMC) meetings during 1979. We then present and discuss in detail the reasons for the FOMC’s adoption of the reform and the communications challenge presented to the Committee during this period. Further, we examine whether the essential characteristics of the reform were consistent with monetarism, new, neo, or old-fashioned Keynesianism, nominal income targeting, and inflation targeting. The record suggests that the reform was adopted when the FOMC became convinced that its earlier gradualist strategy using finely tuned interest rate moves had proved inadequate for fighting inflation and reversing inflation expectations. The new plan had to break dramatically with established practice, allow for the possibility of substantial increases in short-term interest rates, yet be politically acceptable, and convince financial markets participants that it would be effective. The new operating procedures were also adopted for the pragmatic reason that they would likely succeed. Keywords: Federal Reserve; FOMC; monetary reform; operating procedures; Paul Volcker JEL: E52 E58 E61 E65 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4866&r=all 110. Financial Markets and Wages Michelacci, Claudio Quadrini, Vincenzo We study a labour market equilibrium model in which firms sign optimal long-term contracts with workers. Firms that are financially constrained offer an increasing wage profile: they pay lower wages today in exchange of higher wages once they become unconstrained and operate at a larger scale. In equilibrium, constrained firms are on average smaller and pay lower wages. In this way the model generates a positive relation between firm size and wages. Using data from the National Longitudinal Survey of Youth (NLSY) we show that the key dynamic properties of the model are supported by the data. Keywords: investment financing; long-term contracts; wages JEL: E24 G31 J31 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4867&r=all 111. Foreign Investment, Corporate Ownership, and Development: Are Firms in Emerging Markets Catching Up to the World Standard? Sabirianova Peter, Klara Z Svejnar, Jan Terrell, Katherine Economic development implies that the efficiency of firms in developing countries is approaching that of firms in advanced economies. We examine the extent of this convergence in the Czech Republic and Russia, economies that represent alternative models of implementing development policies, often referred to as the Washington Consensus, that have promoted privatization, competition and foreign investment. We also test hypotheses positing that only firms near the efficiency frontier benefit from these policies and catch up. Using 1992-2000 panel data on virtually all industrial firms in each country, we find that privatization to domestic owners did not markedly improve the efficiency of firms; domestic firms are not catching up to the ( world) efficiency standard given by foreign-owned firms; and the distance of the Russian firms to the efficiency frontier is much larger than that of the Czech firms and continued to grow for most firms beyond 1997 while remaining constant in the Czech Republic. Domestic firms closer to the frontier are not more likely to catch up than firms further from the frontier although foreign firms do exhibit this behaviour. Foreign-owned firms are increasingly displacing domestic firms in the top deciles of the overall distribution of efficiency, due in part to slower ‘learning’ by domestic firms, higher efficiency of foreign startups, and foreigners’ acquisitions of more efficient domestic firms. The two alternative implementations of the Washington Consensus policies have thus not enabled domestic firms to start catching up to the world standard although the Central European model. Keywords: convergence; Czech Republic; economic development; efficiency; foreign direct investment; frontier; ownership; productivity; Russia; Washington Consensus JEL: C33 D20 G32 L20 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4868&r=all 112. Equilibrium Exchange Rates in Central and Eastern Europe: A Meta-Regression Analysis Egert, Balazs Halpern, Laszlo This Paper sets out to analyse the ever-growing literature on equilibrium exchange rates in the new EU member states of Central and Eastern Europe in a quantitative manner using meta-regression analysis. We study the extent to which the estimated real misalignments reported in the literature depend on the underlying theoretical approach (Balassa-Samuelson effect, Behavioural Equilibrium Exchange Rate, Fundamental Equilibrium Exchange Rate) and on other characteristics of the individual studies. We also seek to explore whether we can gain more insight from the literature regarding what determines the size and, perhaps more importantly, the sign of the estimated coefficient of the productivity variable and of two other variables commonly included in real exchange rate determination equations, notably net foreign assets and openness. Keywords: Balassa-Samuelson effect; equilibrium exchange rate; meta-analysis JEL: C15 E31 F31 O11 P17 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4869&r=all 113. Relational Delegation Alonso, Ricardo Matouschek, Niko We explore the optimal delegation of decision rights by a principal to a better informed but biased agent. In an infinitely repeated game a long-lived principal faces a series of short- lived agents. Every period they play a cheap talk game a la Crawford and Sobel (1982) with constant bias, quadratic loss functions and general distributions of the state of the world. We characterize the optimal delegation schemes for all discount rates and show that they resemble organizational arrangements that are commonly observed, including centralization and threshold delegation. For small biases threshold delegation is optimal for almost all distributions. Outsourcing can only be optimal if the principal is sufficiently impatient. Keywords: cheap talk; delegation; relational contract JEL: D23 D82 L23 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4870&r=all 114. Privatization and Restructuring in Concentrated Markets Norback, Pehr-Johan Persson, Lars This Paper examines the restructuring of state assets in markets deregulated by privatizations and investment liberalizations. We show that a net revenue maximizing government has a stronger incentive to restructure than a profit maximizing acquiring firm: A restructuring firm only takes into account how much its own profit will increase. The government internalizes that restructuring increases the sales price not only due to the increase in the acquirer's profit, but also due to a reduced profit for the non-acquirer, whose profits decrease due to its rival's restructuring. We also identify situations where a slow sale can significantly reduce the sales price because of strategic investment and product market effects. Keywords: asset ownership; oligopoly; privatization; restructuring JEL: D44 L13 L33 L40 P31 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4871&r=all 115. A Multi-Country Approach to Factor-Proportions Trade and Trade Costs Markusen, James Venables, Anthony J. Classic trade questions are reconsidered by generalizing a factor-proportions model to multiple countries, multi-stage production, and country-specific trade costs. We derive patterns of production specialization and trade for a matrix of countries that differ in relative endowments (columns) and trade costs ( rows). We demonstrate how the ability to fragment production and/or a proportional change in all countries’ trade costs alters these patterns. Production specialization and the volume of trade are higher with fragmentation for most countries but interestingly, for a large block of countries, these variables fall following fragmentation. Countries with moderate trade costs engage in market-oriented assembly, while those with lower trade costs engage in export-platform production. These two cases correspond to the concepts of horizontal and vertical affiliate production in the literature on multinational enterprises. Increases in specialization and the volume of trade accelerate as trade costs go to zero with and without fragmentation. Keywords: fragmentation; multi-country; multinationals; trade costs JEL: F11 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4872&r=all 116. Bidding in Mandatory Bankruptcy Auctions: Theory and Evidence Eckbo, B Espen Thorburn, Karin S We analyse bidding incentives and present evidence on takeover premiums in Sweden’s mandatory bankruptcy auctions. The typical auction attracts multiple bidders and results in the firm being sold as a going concern. We model the incentive of the bankrupt firm’s main creditor (a bank) to influence the auction outcome. Rules prevent the bank from bidding directly. However, the bank often finances a bidder in the auction, relaxing liquidity constraints. We show that the optimal bid strategy for a bank- bidder coalition mimics the monopolist sales price. In the region where the bank’s debt is impaired, this optimal bid exceeds the private valuation of the bank’s coalition partner (overbidding). We derive new and testable cross-sectional predictions of the overbidding theory, and provide empirical support using auction premiums as dependent variable. Interestingly, there is no evidence that the auctions produce lower (fire-sale) premiums when economic conditions lead one to expect relatively low intra- industry auction demand. Moreover, premiums in transactions where insiders repurchase the firm (salebacks) are on average indistinguishable from premiums in sales to company outsiders, which fails to support self-dealing arguments. Overall, the evidence is consistent with the average auction producing a relatively efficient allocation of the bankrupt firm Keywords: auctions; bankruptcy; efficiency; fire-sale; governance; overbidding; saleback JEL: D44 G21 G32 G33 G34 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4873&r=all 117. Indeterminacy and Unemployment Fluctuations with Constant Returns to Scale in Production Dufourt, Frederic Lloyd-Braga, Teresa Modesto, Leonor We extend the finance-constrained economy proposed by Woodford ( 1986) to incorporate imperfectly insured unemployment, by introducing unions and unemployment benefits financed by labour taxation. We show that this simple extension of the Woodford model changes drastically its stability conditions and local dynamics around the steady state. In fact, in contrast to related models in the literature, we find that under constant returns to scale in production: (i) indeterminacy always prevails in the case of a unitary elasticity of substitution between capital and labour; (ii) flip and Hopf bifurcations occur for empirically credible elasticities of substitution between capital and labour, so that a rich set of dynamics may emerge at ‘realistic’ parameters’ values. Keywords: bifurcations; endogenous fluctuations; imperfectly insured unemployment; indeterminacy JEL: E24 E32 E62 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4874&r=all 118. Disenfranchisement in Linguistically Diverse Societies: The Case of the European Union Ginsburgh, Victor Ortuno-Ortin, Ignacio Weber, Shlomo We consider a linguistically diversified society that has to select a set of official languages. We examine the notion of language disenfranchisement that is created when one or more languages fail to be included in the list of the official ones, implying that some individuals are denied full access to the documents and to the political process in their native tongues. To derive the first of our indices, we use the dichotomous approach that does not take into account a linguistic proximity between languages. To develop a more refined disenfranchisement index, we utilize the Dyen percentage cognate distance matrix that takes into account a linguistic proximity or remoteness of any pair of two languages. We then apply survey and population data on language proficiency in the European Union, calculate disenfranchisement indices and determine optimal sets of official languages that depend on two parameters, society's sensitivity against disenfranchisement and comprehensiveness of the language regime adopted. We also discuss the language challenges faced by the European Union after its enlargement in May 2004. Keywords: disenfranchisement; European Union; languages JEL: D70 O52 Z13 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4875&r=all 119. How to Win Twice at an Auction: On the Incidence of Commissions in Auction Markets Ginsburgh, Victor Legros, Patrick Sahuguet, Nicolas We analyse the welfare consequences of an increase in the commissions charged by intermediaries in auction markets. We argue that while commissions are similar to taxes imposed on buyers and sellers the question of incidence deserves a new treatment in auction markets. We show that an increase in commissions makes sellers worse off, but buyers may strictly gain. The results are therefore strikingly different from the standard result that all consumers weakly lose after a tax or a commission increase. Our results are useful for evaluating compensation in price fixing conspiracies; in particular they suggest that the method used to distribute compensations in the class action against auction houses Christie’s and Sotheby’s was misguided. Keywords: auctions; commissions; intermediation; welfare JEL: D44 L12 L40 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4876&r=all 120. Is Poland the Next Spain? Caselli, Francesco Tenreyro, Silvana We revisit Western Europe’s record with labour-productivity convergence, and tentatively extrapolate its implications for the future path of Eastern Europe. The poorer Western European countries caught up with the richer ones through both higher rates of physical capital accumulation and greater total factor productivity gains. These (relatively) high rates of capital accumulation and TFP growth reflect convergence along two margins. One margin (between industry) is a massive reallocation of labour from agriculture to manufacturing and services, which have higher capital intensity and use resources more efficiently. The other margin (within industry) reflects capital deepening and technology catch-up at the industry level. In Eastern Europe the employment share of agriculture is typically quite large, and agriculture is particularly unproductive. Hence, there are potential gains from sectoral reallocation. However, quantitatively the between-industry component of the East’s income gap is quite small. Hence, the East seems to have only one real margin to exploit: the within-industry one. Coupled with the fact that within-industry productivity gaps are enormous, this suggests that convergence will take a long time. On the positive side, however, Eastern Europe already has levels of human capital similar to those of Western Europe. This is good news because human capital gaps have proved very persistent in Western Europe’s experience. Hence, Eastern Europe does start out without the handicap that is harder to overcome. Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4877&r=all 121. Benefits of Broad-based Option Pay Inderst, Roman Muller, Holger M Future wage payments drive a wedge between total firm output and the output share received by the firm’s owners, thus potentially distorting strategic decisions by the firm’s owners such as, e.g., whether to continue the firm, sell it, or shut it down. Using an optimal contracting approach, we show that the unique optimal firm-wide employee compensation scheme from this perspective is a broad-based option plan. Broad-based option pay minimizes the firm’s expected future wage payments in states of nature where the firm is only marginally profitable, thus making continuation as attractive as possible in precisely those states of nature where, e.g., a high fixed wage would lead the firm’s owners to inefficiently exit. Keywords: Broad Option Pay; Employee Stock Options JEL: J31 J33 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4878&r=all 122. The Effects of Globalization on Worker Training Gersbach, Hans Schmutzler, Armin We examine how globalization affects firms’ incentives to provide general worker training. We consider a three-stage game. In stage 1, firms invest in productivity-enhancing training. In stage 2, they can make wage offers for each others’ workers. Finally, Cournot competition takes place. When two product markets become integrated, that is, replaced by a market with greater demand and more firms, training by each firm increases, provided the two markets are sufficiently small. When barriers between large markets are eliminated, training is reduced. Integration increases welfare if it does not reduce training. However, for large parameter regions, welfare falls if integration reduces training. We also show that opening markets to countries with publicly funded training or cheap, low-skilled labour can threaten apprenticeship systems. Keywords: general worker training; globalization; human capital; oligopoly; turnover JEL: D42 L22 L43 L92 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4879&r=all 123. Optimal Monetary Policy Rules, Asset Prices and Credit Frictions Faia, Ester Monacelli, Tommaso We study optimal monetary policy in two prototype economies with sticky prices and credit market frictions. In the first economy, credit frictions apply to the financing of the capital stock, generate acceleration in response to shocks and the ‘financial markup’ (i.e., the premium on external funds) is countercyclical and negatively correlated with the asset price. In the second economy, credit frictions apply to the flow of investment, generate persistence, and the financial markup is procyclical and positively correlated with the asset price. We model monetary policy in terms of welfare-maximizing interest rate rules. The main finding of our analysis is that strict inflation stabilization is a robust optimal monetary policy prescription. The intuition is that, in both models, credit frictions work in the direction of dampening the cyclical behaviour of inflation relative to its credit-frictionless level. Thus neither economy, despite yielding different inflation and investment dynamics, generates a trade-off between price and financial markup stabilization. A corollary of this result is that reacting to asset prices does not bear any independent welfare role in the conduct of monetary policy. Keywords: asset prices; financial distortions; optimal monetary policy rules; price stability JEL: E52 F41 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4880&r=all 124. Child Labour, Crop Shocks and Credit Constraints Beegle, Kathleen Dehejia, Rajeev H Gatti, Roberta This paper examines the relationship between household income shocks and child labour. In particular, we investigate the extent to which transitory income shocks lead to increases in child labour and whether household access to credit mitigates the effects of these shocks. Using data from a household panel survey in Tanzania, we find that both relationships are significant. We provide evidence that credit constraints could plausibly account for our results, but also discuss alternative interpretations. Keywords: child labour; credit constraints; income shocks JEL: D13 J22 O16 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4881&r=all 125. Retirement Expectations, Pension Reforms and Their Effect on Private Wealth Accumulation Bottazzi, Renata Jappelli, Tullio Padula, Mario We estimate the effect of pension reforms on households’ expectations of retirement outcomes and private wealth accumulation decisions exploiting a decade of Italian pension reforms as a source of exogenous variation in expected pension wealth. Two parameters are crucial to estimate pension wealth: the age at which workers expect to retire and the expected ratio of pension benefits to pre-retirement income. The Survey of Household Income and Wealth, a large random sample of the Italian population, elicits these expectations during a period of intense pension reforms between 1989 and 2002. These reforms had different consequences for different cohorts and employment groups, providing a quasi-experimental framework to study the effect of social security arrangements on expectations of retirement outcomes and household saving decisions. Our main findings are that workers have revised expectations in the direction suggested by the reform and that there is substantial offset between private wealth and perceived pension wealth. Keywords: expectations; pension reform JEL: E21 H55 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4882&r=all 126. On the Community Patent Hoernig, Steffen The European Union will be introducing a Europe-wide patent, the so-called Community Patent. Its aim is to foster innovative activity, but strategic effects between firms competing in R&D have not been considered in the official discourse. We show that, even if these are taken into account, the Community Patent will increase innovative activity and welfare. On the other hand, if the decision of participating in R&D is considered, then this increased R&D will be concentrated into fewer firms. Furthermore, we show that existing asymmetries between countries and firms are bound to increase. Keywords: community patent; participation in R&D; R&D race JEL: L52 O34 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4883&r=all 127. Preferential Trade Agreements as Stumbling Blocks for Multilateral Trade Liberalization: Evidence for the US Limao, Nuno Most countries are members of preferential trade agreements ( PTAs). The effect of these agreements has attracted much interest and raised the question of whether PTAs promote or slow down multilateral trade liberalization, i.e. whether they are a ‘building block’ or a ‘stumbling block’ to multilateral liberalization. Despite this long-standing concern with PTAs and the lack of theoretical consensus there is no systematic evidence on whether they are actually a stumbling block to multilateral liberalization. We use detailed data on US tariff reductions during the most recent multilateral trade round to provide the first systematic evidence that the US’s PTAs were a stumbling block to its multilateral liberalization. We also provide evidence of reciprocity in multilateral tariff reductions that amplify the stumbling block effect. Keywords: MFN tariff concessions; multilateral trade negotiations; preferential trade agreements; reciprocity JEL: D78 F13 F14 F15 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4884&r=all 128. Experimental Evidence on the Persistence of Output and Inflation Adam, Klaus This paper presents experimental evidence from a monetary sticky price economy in which output and inflation depend on expected future inflation. With rational inflation expectations, the economy does not generate persistent deviations of output and inflation in response to a monetary shock. In the experimental sessions, however, output and inflation display considerable persistence and regular cyclical patterns. Such behaviour emerges because subjects’ inflation expectations fail to be captured by rational expectations functions. Instead, a Restricted Perceptions Equilibrium (RPE), which assumes that agents use optimal but ’simple’ forecast functions, describes subjects’ inflation expectations surprisingly well and explains the observed behaviour of output and inflation. Keywords: experiments; output and inflation dynamics; rational expectations; restricted perceptions equilibrium JEL: C91 E32 E37 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4885&r=all 129. Is Cash Negative Debt? A Hedging Perspective on Corporate Financial Policies Acharya, Viral V Almeida, Heitor Campello, Murillo We model the interplay between cash and debt policies in the presence of financial constraints. While saving cash allows constrained firms to hedge against future cash flow shortfalls, reducing current debt – ‘saving borrowing capacity’ – is a more effective way of securing investment in high cash flow states. This trade-off implies that constrained firms will allocate cash flows into cash holdings if their hedging needs are high (i.e., if the correlation between operating cash flows and investment opportunities is low). Those same firms, however, will use free cash flows to reduce current debt if their hedging needs are low. The empirical examination of debt and cash policies of a large sample of firms reveals evidence that is consistent with our theory. In particular, our evidence shows that financially constrained firms with high hedging needs have a strong propensity to save cash out of cash flows while leaving their debt positions unchanged. In contrast, constrained firms with low hedging needs direct most of their free cash flows towards debt reduction, as opposed to cash savings. Our analysis points to an important hedging motive behind standard financial policies such as cash and debt management. It suggests that cash should not be viewed as negative debt. Keywords: cash holdings; debt policies; financing constraints; hedging; risk management JEL: G31 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4886&r=all 130. Location Choice and Employment Decisions: A Comparison of German and Swedish Multinationals Becker, Sascha O. Ekholm, Karolina Jackle, Robert Muendler, Marc-Andreas Using data on German and Swedish multinational enterprises (MNEs) this paper analyses determinants of international location choice and the degree of substitutability of labour across locations. Countries with highly skilled labour forces strongly attract German but not necessarily Swedish MNEs. In MNEs from either country, affiliate employment tends to substitute for employment at the parent firm. At the margin, substitutability is the strongest with respect to affiliate employment in Western Europe. A 1% larger wage gap between Germany and locations in Central and Eastern Europe (CEE) is associated with 900 fewer jobs at German parents and 5,000 more jobs at affiliates in CEE. A 1% larger wage gap between Sweden and CEE is associated with 140 fewer jobs at Swedish parents and 260 more jobs at affiliates in CEE. Keywords: labour demand; location choice; multinational enterprises; multinominial choice; translog cost function JEL: F21 F23 J21 J23 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4887&r=all 131. The US Current Account and the Dollar Blanchard, Olivier Giavazzi, Francesco Sa, Filipa There are two main forces behind the large US current account deficits. First, an increase in the US demand for foreign goods. Second, an increase in the foreign demand for US assets. Both forces have contributed to steadily increasing current account deficits since the mid-1990s. This increase has been accompanied by a real dollar appreciation until late 2001, and a real depreciation since. The depreciation has accelerated recently, raising the questions of whether and how much more is to come, and if so, against which currencies, the euro, the yen, or the renminbi. Our purpose in this paper is to explore these issues. Our theoretical contribution is to develop a simple portfolio model of exchange rate and current account determination, and to use it to interpret the past and explore alternative scenarios for the future. Our practical conclusions are that substantially more depreciation is to come, surely against the yen and the renminbi, and probably against the euro. Keywords: current account; dollar exchange rate; portfolio models JEL: E30 F21 F32 F41 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4888&r=all 132. Credit Crunch and Keynesian Contraction: Argentina in Crisis Fronti, Javier Garcia Miller, Marcus Zhang, Lei The Argentine convertibility regime, where the peso was fixed at parity with the US dollar, ended with a ‘twin crisis’ – a tripling in the price of a dollar and a protracted closure of the entire banking system – accompanied by an economic contraction so severe that it is often referred to as ‘Nuestra gran depresion’. But the government's attempt to imitate President Roosevelt by pesifying dollar loan contracts (while simultaneously protecting dollar depositors) had the effect of destroying bank net worth in the absence of credible compensation. To analyse the macroeconomic effects of credit crunch and currency collapse (and of policies to mitigate them), we turn to a model of crisis, specifically that of Aghion, Bacchetta & Banerjee (2000). Our account, however, combines the supply contraction cause by balance sheet effect with a Keynesian demand contraction due to a domestic credit crunch, exacerbated by unsuccessful resolution of the banking crisis. The latter is analysed as a game of political economy played between government and banks about who pays for the banking crisis induced by default and asymmetric pesification. Keywords: Argentina debt crisis; asymmetric pesification; conflicting beliefs; keynesian recession; twin crisis JEL: E12 E51 F34 G18 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4889&r=all 133. Party Governance and Political Competition with an Application to the American Direct Primacy Castanheira, Micael Crutzen, Benoit SY Sahuguet, Nicolas We analyse how the governance structure of political parties influences electoral competition. Parties choose their organization to manipulate the incentives of politicians to provide effort. We show that intra- and inter-party competition interact to shape these incentives. We also get new insights on the role of information, polarization, and on the value of rents from office. More extreme parties tend to prefer less democratic governance structures. Instead, democratic structures are preferred when voters are ill informed about the candidates’ performance and when the rents from office are low. We use our theory to interpret the introduction of the Direct Primary system in the USA at the beginning of the 20th century. Keywords: candidates; incentives; internal organization; parties JEL: D23 D72 D81 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4890&r=all 134. Intermediation in Innovation Hoppe, Heidrun C. Ozdenoren, Emre The paper offers a new theoretical framework to examine the role of intermediaries between creators and users of new inventions. We find that uncertainty about the profitability of investing in new inventions generates a basis for intermediation. An intermediary may provide an opportunity to economize on a critical component of efficient investment decisions - the expertise to sort `profitable' from `unprofitable' inventions. Our findings may help explain the surge in university patenting and licensing since the Bayh-Dole Act of 1980. The study also identifies several limitations to the potential efficiency of intermediation in innovation. Keywords: innovation; Intermediation; market microstructure; matching; patent licensing; uncertainty JEL: D40 D80 L12 L13 O32 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4891&r=all 135. The Economics of Books Canoy, Marcel van der Ploeg, Frederick van Ours, Jan C The tensions between books and book markets as expressions of culture and books as products in profit-making businesses are analysed and insights from the theory of industrial organisation are given. Governments intervene in the market for books through laws concerning prices of books, grants for authors and publishers, a lower value-added tax, public libraries and education in order to stimulate the diversity of books on offer, increase the density of retail outlets and to promote reading. An overview of the different ways by which countries differ in terms of market structures and government policies is given. Particular attention is paid to retail price maintenance. Due to differences between European countries it is not a good idea to harmonise European book policies. Our analysis suggests that the book market seems quite able to invent solutions to specific problems of the book trade and that, apart from promoting reading, there is little need for government intervention. Keywords: authors; books; diversity; internet; libraries; monopolistic competition; publishers; retail price maintenance; subsidies JEL: D40 D60 L10 L40 Z11 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4892&r=all 136. Pricing Behaviour and the Introduction of the Euro: Evidence from a Panel of Restaurants Gaiotti, Eugenio Lippi, Francesco This paper assembles an original panel of data from 2,500 restaurants in Italy over the 1998-2004 period. The main objective is to study whether the euro cash changeover had an impact on individual pricing behaviour, as it seems to be perceived by consumers. Although the sample is not representative of the whole sector, our interest stems from the possibility of gaining deeper insights from individual data, as well as from the fact that restaurant prices were at the centre of the public discussion. First, the paper analyses the distribution of price changes in several years, to identify what features may contribute to explain the widespread perception of a large effect of the introduction of the euro on prices. Second, the paper discusses the economic mechanisms that may help explaining the impact of the cash changeover on prices. The data show that restaurant prices recorded sizeable increases in both 2001 and 2002 (around 10% and 9%, respectively). The cumulated increase in the price of a meal between 1998 and 2003 is substantial (the index rises by 40%). The changeover might have focused the public attention over this medium-run trend, prompting the attribution of the whole increase to the introduction of the euro. The analysis suggests that such increases reflect in part unfavourable developments on the costs side (strong increases in unit labour costs and fresh food inputs in both years) and strong increases in demand (especially in 2001). Part of the restaurant price increase recorded in 2002, however, does seem ascribable to the effect of the changeover. We find evidence consistent with a ‘menu-cost’ hypothesis for pricing behaviour: the rise in the average meal price is mainly due to a greater fraction of agents who revise their price, rather than to greater individual price revisions. Moreover, more market power (as proxied by a local concentration index) is associated with greater than average price increases during the changeover. A simple interpretation is proposed for this finding, which may also explain why the effects of the cash changeover may have been especially pronounced in this industry as opposed to more competitive ones. Keywords: euro changeover; inflation; menu cost JEL: E50 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4893&r=all 137. Firms' Productivity Growth and R&D Spillovers: An Analysis of Alternative Technological Proximity Measures Cincera, Michele This paper aims at assessing the impact of R&D spillovers on firms’ economic performance as measured by productivity growth. The construction of R&D spillovers is based on Jaffe’s methodology (1986, 1988), which associates econometrics and data analysis. The main objective of the paper is to extend Jaffe’s methodology by examining alternative methods for measuring R&D spillovers and to test their impacts in terms of the robustness of results. In particular, the method used to classify firms into technological clusters as well as the metrics implemented to appreciate firms’ technological proximities which enter the construction of spillovers are further investigated. In addition to R&D spillovers, firms’ own R&D capital, labour and physical capital are estimated by means of a Cobb-Douglas production function. The data set consists of a representative sample of 625 worldwide R&D-intensive firms over the period 1987-1994. Keywords: clustering; panel data; productivity growth; R&D Spillovers JEL: O12 O33 O47 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4894&r=all 138. Globalization and Disinflation: The Efficiency Channel Loungani, Prakash Razin, Assaf The paper analyses how globalization forces induce monetary authorities, guided in their policies by the welfare criterion of a representative household, to put greater emphasis on reducing the inflation rate than on narrowing the output gaps. We demonstrate that the marginal rate of substitution between the output gap and the inflation (at a constant value of the utility- based loss function) rises when the economy is opening up to international trade in goods, and is integrated to the world capital markets. We associate the marginal rate of substitution with the sacrifice ratio, and provide evidence on trade and capital openness effects on inflation, through the efficiency channel. Keywords: capital-account openness; trade openness; utility- based loss function JEL: E50 F40 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4895&r=all 139. Rolling Back the Public Sector - Differential Effects on Unemployment, Investment and Growth van der Ploeg, Frederick The macroeconomic effects of different ways of rolling back the welfare state are analysed. Cutting public spending on market goods induces a lower interest rate, a higher wage, a lower capital stock and a fall in employment. Cutting public employment or the labour income tax rate leads, in contrast, to a lower wage, a higher interest rate and a higher capital stock. Employment rises on impact. If the extra revenues of rolling back the welfare state are handed back via a lower tax rate rather than a lump-sum subsidy, both cutting public employment and cutting public spending on market goods induce an investment boom. Making the tax system less progressive by cutting tax credits and the labour income tax rate induces an investment boom as well. The effects of endogenous growth, adjustment costs for investment and non-Walrasian labour markets on these results are considered as well. Keywords: fiscal retrenchment; growth; investment; labour market; public employment JEL: D90 E20 E60 H30 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4896&r=all 140. Back to Keynes? van der Ploeg, Frederick After a brief review of classical, Keynesian, New Classical and New Keynesian theories of macroeconomic policy, we assess whether New Keynesian Economics captures the quintessential features stressed by JM Keynes. Particular attention is paid to Keynesian features omitted in New Keynesian workhorses such as the micro- founded Keynesian multiplier and the New Keynesian Phillips curve. These theories capture wage and price sluggishness and aggregate demand externalities by departing from a competitive framework and give a key role to expectations. The main deficiencies, however, are the inability to predict a pro-cyclical real wage in the face of demand shocks, the absence of inventories, credit constraints and bankruptcies in explaining the business cycle, and no effect of the nominal as well as the real interest rate on aggregate demand. Furthermore, they fail to allow for quantity rationing and to model unemployment as a catastrophic event. The macroeconomics based on the New Keynesian Phillips curve has quite a way to go before the quintessential Keynesian features are captured. Keywords: bankruptcy; inventories; Keynesian economics; liquidity; monetary policy; monopolistic competition; New Keynesian Phillips curve; nominal wage rigidity; pro-cyclical real wage; unemployment; welfare JEL: E12 E32 E63 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4897&r=all 141. Demand Reduction and Pre-emptive Bidding in Multi-Unit License Auctions Goeree, Jacob K. Offerman, Theo Sloof, Randolph Multi-unit ascending auctions allow for equilibria in which bidders strategically reduce their demand and split the market at low prices. At the same time, they allow for pre-emptive bidding by incumbent bidders in a coordinated attempt to exclude entrants from the market. We consider an environment where both demand reduction and pre-emptive bidding are supported as equilibrium phenomena of the ascending auction. In a series of experiments, we compare its performance to that of the discriminatory auction. Strategic demand reduction is quite prevalent in the ascending auction even when entry by the newcomer imposes a (large) negative externality on incumbents. As a result, the ascending auction performs worse than the discriminatory auction both in terms of revenue and efficiency, while the two auction formats offer similar chances for newcomers to enter the market. Keywords: demand reduction; external effects; multi-license auctions JEL: C91 D44 D45 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4899&r=all 142. Autopsy on an Empire: Understanding Mortality in Russia and the Former Soviet Union Brainerd, Elizabeth Cutler, David M Male life expectancy at birth fell by over six years in Russia between 1989 and 1994. Many other countries of the former Soviet Union saw similar declines, and female life expectancy fell as well. Using cross-country and Russian household survey data, we assess six possible explanations for this upsurge in mortality. Most find little support in the data: the deterioration of the health care system, changes in diet and obesity, and material deprivation fail to explain the increase in mortality rates. The two factors that do appear to be important are alcohol consumption, especially as it relates to external causes of death homicide, suicide, and accidents) and stress associated with a poor outlook for the future. However, a large residual remains to be explained. Keywords: eastern europe; health; mortality; Russia JEL: I12 J10 P36 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4900&r=all 143. Structuring and Restructuring Sovereign Debt: The Role of Seniority Bolton, Patrick Jeanne, Olivier In an environment characterized by weak contractual enforcement, sovereign lenders can enhance the likelihood of repayment by making their claims more difficult to restructure. We show within a simple model how competition for repayment between lenders may result in sovereign debt that is excessively difficult to restructure in equilibrium. Alleviating this inefficiency requires a sovereign debt restructuring mechanism that fulfills some of the functions of corporate bankruptcy regimes, in particular the enforcement of seniority and subordination clauses in debt contracts. Keywords: collective action clause; debt dilution; seniority; sovereign debt; sovereign default JEL: F34 G15 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4901&r=all 144. Exclusive Dealing, Entry and Mergers Fumagalli, Chiara Motta, Massimo Persson, Lars We extend the literature on exclusive dealing by allowing the incumbent and the potential entrant to merge. This uncovers new effects. First, exclusive deals can be used to improve the incumbent’s bargaining position in the merger negotiation. Second, the incumbent finds it easier to elicit the buyer’s acceptance than in the case where entry can occur only by installing new capacity. Third, exclusive dealing reduces welfare because (i) it may trigger entry through merger whereas de novo entry would be socially optimal, and (ii) it may deter entry altogether. Finally, we show that when exclusive deals include a commitment on future prices they will increase welfare. Keywords: antitrust; entry deterrence; exclusive dealing; mergers JEL: K21 L10 L40 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4902&r=all 145. Foreign Direct Investment, Competitive Pressure and Spillovers. An Empirical Analysis of Spanish Firm Level Data Sembenelli, Alessandro Siotis, Georges A short review of the theoretical and empirical evidence indicates that foreign direct investment (FDI) has the potential to increase the intensity of competition as well as to act as a channel for technology transfers. One would expect, all else equal, an increase in average firm performance following a wave of FDI, as multinational corporations (MNCs) enjoy higher levels of efficiency and have the potential to generate positive spillovers. At the same time, the entry of foreign firms has also been associated with an increase in competitive pressure on the domestic market. Using a large firm level dataset covering all sectors of Spanish manufacturing during the period 1983-96, we disentangle these three effects by estimating a dynamic model of firm level performance, which we proxy by profitability. We find that FDI has a positive long-run effect on the profitability of target firms, but this is limited to firms belonging to R&D intensive sectors. In addition, the results indicate that foreign presence dampens margins. However, this effect appears to be more than compensated by positive spillovers in the case of knowledge intensive industries. Keywords: competition; efficiency; foreign direct investment; GMM; panel data; technology transfer JEL: F23 L40 L60 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4903&r=all 146. The Demise of Investment Banking Partnerships: Theory and Evidence Morrison, Alan Wilhelm Jr, William J Until 1970, the New York Stock Exchange prohibited public incorporation of member firms. After the rules were relaxed to allow joint stock firm membership, investment-banking concerns organized as partnerships or closely-held private corporations went public in waves, with Goldman Sachs (1999) the last of the bulge bracket banks to float. In this paper we ask why the Investment Banks chose to float after 1970, and why they did so in waves. In our model, partnerships have a role in fostering the formation of human capital (Morrison and Wilhelm, 2003). We examine in this context the effect of technological innovations which serve to replace or to undermine the role of the human capitalist and hence we provide a technological theory of the partnership’s going-public decision. We support our theory with a new dataset of investment bank partnership statistics. Keywords: collective reputation; going-public decision; human capital; investment bank; partnership JEL: G24 G32 J24 J41 L14 L22 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4904&r=all 147. Entrepreneurship Capital - Determinants and Impact Audretsch, David B Keilbach, Max Since the early 1980s, the role and general perception of entrepreneurship and start-up activities has changed drastically. In this paper, we investigate what determines regions’ entrepreneurial behaviour and the impact of it on regional economic performance. We argue that economic knowledge not only differs from traditional factors of production due to its public goods characteristic but it is also uncertain. With that perspective, the role of entrepreneurship is to take on the corresponding risk by starting up a new firm and thus to ‘test’ uncertain economic knowledge. This implies that knowledge spills over to the start-up firm and therefore entrepreneurship can be expected to have a positive impact on economic performance in a knowledge-based economy. We test this hypothesis using a production function approach. Using data on German regions, we estimate a two-equation system that regresses on both variables, entrepreneurship and economic performance, simultaneously, thus correcting for an endogeneity bias. We find a significant impact of entrepreneurship capital on economic output. On the other hand, spatially-specific entrepreneurship capital is shaped by regional-specific factors. However, the extent of this is different for knowledge based and non-knowledge based measures of entrepreneurship. We derive policy conclusions from our findings. Keywords: economic output; endogeneity bias; entrepreneurship; production function; three stage least squares JEL: M13 O32 O47 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4905&r=all 148. Legal, Actual and Desirable Independence: A Case Study of the Bank of Israel Cukierman, Alex This paper documents the evolution of the legal independence of the Bank of Israel since its creation in 1954 to present times, provides an international comparison, and assesses the changes in the actual independence of the Bank on a yearly basis following the 1985 stabilization of inflation. The data developed in the paper makes it possible to compare the evolution of actual and of legal independence after the 1985 stabilization and to compare the legal independence of the bank with that of other countries at different points in time. The paper also evaluates the level of legal independence embedded in the Levin’s committee recommendations for reform of the Bank of Israel law. The paper shows that various institutional changes have induced, since 1985, substantial changes in the actual independence of the bank without any legislative change. The paper also identifies domestic and international factors that stimulated those changes and evaluates the desirable level of independence for the future. In particular the paper evaluates the pros and the cons of assigning to the bank growth targets, in addition to inflation targets. Keywords: central banks; independence - legal and actual; Israel; monetary institutions and policy JEL: E40 E50 K40 P50 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4906&r=all 149. A Theory of Influence: The Strategic Value of Public Ignorance Brocas, Isabelle Carrillo, Juan D We analyse an agency model where one individual decides how much evidence he collects. We assume that he has free access to information, but all the news acquired becomes automatically public. Conditional on the information disclosed, a second individual with conflicting preferences undertakes an action that affects the payoff of both agents. In this game of incomplete but symmetric information, we show that the first individual obtains rents due to his superior ability to decide whether to collect or forego evidence, i.e., due to his control in the generation of ( public) information. We provide an analytical characterization of these rents, that we label ‘rents of public ignorance’. They can be interpreted as, for example, the degree of influence that a chairman can exert on a committee due exclusively to his capacity to decide whether to keep discussions alive or terminate them and call a vote. Last, we show that similar insights are obtained if the agent decides first how much private information he collects and then how much of this information he transmits to the other agent. Keywords: experimentation; incomplete and symmetric information; information control; informational rents; learning; optimal stopping rule; principal-agent; public ignorance JEL: D82 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4907&r=all 150. Regional Wage and Employment Responses to Market Potential in the EU Head, Keith Mayer, Thierry Recent theoretical work on economic geography emphasizes the interplay of transport costs and plant-level increasing returns. In these models, the spatial distribution of demand is a key determinant of economic outcomes. In one strand, it is argued that higher demand gives rise to a more than proportionate increase in production, a result known as the home market effect. Another strand emphasizes the effects of market sizes on factor prices. In this paper we highlight the theoretical connection between these two strands. We use data on 57 European regions to show how wages and employment respond to differentials in what we call real market potential, a discounted sum of demands derived from the theory. Keywords: gravity equation; home market effects; new economic geography; wage equation JEL: F12 F15 R11 R12 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4908&r=all 151. Parameter Instability, Model Uncertainty and the Choice of Monetary Policy Favero, Carlo A Milani, Fabio This paper starts from the observation that parameter instability and model uncertainty are relevant problems for the analysis of monetary policy in small macroeconomic models. We propose to deal with these two problems by implementing a novel ‘thick recursive modelling’ approach. At each point in time we estimate all models generated by the combinations of a base- set of k observable regressors for aggregate demand and supply. We compute optimal monetary policies for all possible models and consider alternative ways of summarizing their distribution. Our main results show that thick recursive modelling delivers optimal policy rates that track the observed policy rates better than the optimal policy rates obtained under a constant parameter specification, with no role for model uncertainty. Keywords: model uncertainty; optimal monetary policy; parameter instability JEL: E44 E52 F41 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4909&r=all 152. The Predictive Power of the Yield Spread: Further Evidence and A Structural Interpretation Favero, Carlo A Kaminska, Iryna Soderstrom, Ulf This paper brings together two strands of the empirical macro literature: the reduced-form evidence that the yield spread helps in forecasting output and the structural evidence on the difficulties of estimating the effect of monetary policy on output in an intertemporal Euler equation. We show that including a short-term interest rate and inflation in the forecasting equation improves the forecasting performance of the spread for future output but the coefficients on the short rate and inflation are difficult to interpret using a standard macroeconomic framework. A decomposition of the yield spread into an expectations-related component and a term premium allows a better understanding of the forecasting model. In fact, the best forecasting model for output is obtained by considering the term premium, the short-term interest rate and inflation as predictors. We provide a possible structural interpretation of these results by allowing for time-varying risk aversion, linearly related to our estimate of the term premium, in an intertemporal Euler equation for output. Keywords: estimated Euler equation; forecasting; GDP growth; predictability; term structure of interest rates; yield curve JEL: E27 E37 E43 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4910&r=all 153. Monetary Policies for Developing Countries: The Role of Institutional Quality Huang, Haizhou Wei, Shang-Jin Weak public institutions, including high levels of corruption, characterize many developing countries. With a simple model, we demonstrate that institutional quality has important implications for the design of monetary policies and can produce several departures from the conventional wisdom. We find that a pegged exchange rate or dollarization, while sometimes prescribed as a solution to the problem of a lack of credibility, is typically not appropriate in developing countries with poor institutions. Such an arrangement is inferior to an optimal inflation targeting, or a Rogoff-style central banker, whose optimal degree of conservatism is proportional to the quality of institutions. Furthermore, our results cast doubt on the notion that a low inflationary target or a currency board can be used as an instrument to induce governments to strengthen quality of public institutions. Keywords: conservative central banker; corruption; currency board; dollarization; inflation targeting; institutional quality; monetary policy JEL: E52 E58 E61 E62 H50 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4911&r=all 154. Identifying Technology Spillovers and Product Market Rivalry Bloom, Nicholas Schankerman, Mark Van Reenen, John Support for many R&D and technology policies relies on empirical evidence that R&D ‘spills over’ between firms. But there are two countervailing R&D spillovers: positive effects from technology spillovers and negative effects from business stealing by product market rivals. We develop a general framework showing that technology and product market spillovers have testable implications for a range of performance indicators, and exploit these using distinct measures of a firm’s position in technology space and product market space. We show using panel data on US firms between 1981 and 2001 that both technology and product market spillovers operate, but that net social returns are several times larger than private returns. The spillover effects are also revealed when we analyze three high-tech sectors in detail - pharmaceuticals, computer hardware and telecommunication equipment. Using the model we evaluate three R&D subsidy policies and show that the typical focus of support for small and medium firms may be misplaced. Keywords: market value; patents; R&D; spillovers JEL: F23 O31 O32 O33 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4912&r=all 155. Dynamic Consumption and Portfolio Choice with Stochastic Volatility in Incomplete Markets Chacko, George Viceira, Luis M This paper examines the optimal consumption and portfolio choice problem of long-horizon investors who have access to a riskless asset with constant return and a risky asset (‘stocks’) with constant expected return and time varying precision – the reciprocal of volatility. Markets are incomplete, and investors have recursive preferences defined over intermediate consumption. The paper obtains a solution to this problem that is exact for investors with unit elasticity of intertemporal substitution of consumption, and approximate otherwise. The optimal portfolio demand for stocks includes an intertemporal hedging component that is negative when investors have coefficients of relative risk aversion larger than one, and the instantaneous correlation between volatility and stock returns is negative, as typically estimated from stock return data. Our estimates of the joint process for stock returns and precision (or volatility) using US data confirm this finding. But we also find that stock return volatility does not appear to be variable and persistent enough to generate large intertemporal hedging demands. Keywords: dynamic portfolio choice; intertemporal hedging; long- horizon investing; recursive utility; spectral GMM; stochastic volatility JEL: G12 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4913&r=all 156. The Term Structure of the Risk-Return Tradeoff Campbell, John Y Viceira, Luis M Recent research in empirical finance has documented that expected excess returns on bonds and stocks, real interest rates, and risk shift over time in predictable ways. Furthermore, these shifts tend to persist over long periods of time. In this paper we propose an empirical model that is able to capture these complex dynamics, yet is simple to apply in practice, and we explore its implications for asset allocation. Changes in investment opportunities can alter the risk-return tradeoff of bonds, stocks, and cash across investment horizons, thus creating a ‘term structure of the risk-return tradeoff’. We show how to extract this term structure from our parsimonious model of return dynamics, and illustrate our approach using data from the US stock and bond markets. We find that asset return predictability has important effects on the variance and correlation structure of returns on stocks, bonds and T-bills across investment horizons. Keywords: long-horizon investing; mean-variance analysis; risk- return tradeoff; vector autoregression JEL: G12 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4914&r=all 157. Trends in Hours, Balanced Growth and the Role of Technology in the Business Cycle Gali, Jordi The present paper revisits a property embedded in most dynamic macroeconomic models: the stationarity of hours worked. First, I argue that, contrary to what is often believed, there are many reasons why hours could be non-stationary in those models, while preserving the property of balanced growth. Second, I show that the post-war evidence for most industrialized economies is clearly at odds with the assumption of stationary hours per capita. Third, I examine the implications of that evidence for the role of technology as a source of economic fluctuations in the G7 countries. Keywords: non-stationary hours; real business cycles; technology shocks JEL: E32 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4915&r=all 158. Cross-Country Variations in Capital Structures: The Role of Bankruptcy Codes Acharya, Viral V John, Kose Sundaram, Rangarajan K We conduct a theoretical and empirical investigation of the impact of bankruptcy codes on firms’ capital-structure choices. In our theoretical framework, costs of financial distress are endogenously determined as a function of the bankruptcy code. Anticipated liquidation values emerge as the key variable in the capital structure-bankruptcy code link: among other things, the theory predicts that the difference in leverage between a debt- friendly bankruptcy code (such as the UK’s) and a more equity- friendly code (such as the US’s) should be a monotone function of liquidation values. We examine empirical support for the theory by comparing leverages in the US and the UK for the period 1990 to 2002. Our tests use two (inverse) proxies of liquidation values: asset-specificity of the firm, and the fraction of the firm’s assets that are intangibles. We find the theory is strongly backed by the data. The results are robust to considerations such as employing net leverage (debt net of cash holdings) and controlling for other firm characteristics that affect leverage. Keywords: asset-specificity; bankruptcy costs; financial distress; intangibles; leverage JEL: F30 G32 G33 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4916&r=all 159. A Full Equilibrium Relevant Market Test: Application to Computer Servers Ivaldi, Marc Lorinz, Szabolcs The paper defines, implements and compares two empirical tests of relevant markets. While the traditional SSNIP test compares an initial industry equilibrium to an out-of-equilibrium situation, the FERM test, our contribution, compares the same initial equilibrium to an other equilibrium outcome. Hence, it is more in line with the behavioural assumptions of the underlying model of industry equilibrium and this can have significant consequences. We define these concepts formally and apply them to the industry of computer servers by estimating a model on a large dataset. We find several smaller relevant markets in the low-end segment of servers. Keywords: computer servers; differentiated products; relevant market tests JEL: C33 L41 L63 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4917&r=all 160. Are the Welfare State and Distribution Really that Bad for the Economy? Effects of Reciprocal Altruism, Consumer Rivalry and Second Best van der Ploeg, Frederick Democratic countries with substantial inequality and where people believe that success depends on connections and luck induce political support for high tax rates and generous welfare states. Traditional wisdom is that such policies harm the economy, but there is not much evidence that countries with a large welfare state and substantial redistribution have worse economic performance and welfare. One important reason is that governments have been careful to invoke the principles of reciprocity and mutual obligations in the design of the welfare state. Unemployment benefits conditioned on work experience, no misconduct and search effort harm the economy less. Indeed, conditional benefits may even boost employment in an economy with efficiency wages. A second reason is that people care about relative incomes and become unhappy if others earn and consume much more than they do. This explains why people do not seem to get happier, even though societies grow richer and richer. With such consumer rivalry the government wishes to correct for the rat race, even if there is no need for redistribution, by taxing labour. A third reason is that in modern economies many distortions are present and removing one at a time may worsen economic performance. Conversely, increasing tax progression in economies with non-competitive labour markets induces wage moderation and boosts employment. A final reason is that countries with large welfare states typically introduce various pro-growth policies as well. Keywords: altruism; demand management; design of welfare state; happiness; mutual obligations; redistributive taxation; relative incomes; second best JEL: H20 H53 J50 J60 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4918&r=all 161. Retained State Shareholding in Chinese PLCs: Does Government Ownership Reduce Corporate Value? Estrin, Saul Tian, Lihui The role of government shareholding in corporate performance is central to an understanding of China’s newly privatized large firms and the stock market. In this paper, we analyse shareholders as agents that can both harm and benefit companies. We examine the ownership structure of 826 listed corporations and find that government shareholding is surprisingly large. Its effect on corporate value is found to be negative, but non- monotonic. Up to a certain threshold, corporate value decreases as government shareholding stakes increase, but beyond this corporate value begins to increase. We interpret this in terms of ownership concentration and the advantages of government partiality. Keywords: China; corporate governance; government shareholding JEL: G15 G32 G34 L33 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4919&r=all 162. Current Account Theory and the Dynamics of US Net Foreign Liabilities Corsetti, Giancarlo Konstantinou, Panagiotis T This paper provides empirical evidence on the adjustment dynamics of the US net foreign liabilities, net output and consumption. We use empirical techniques that allow us to quantify the relative importance of permanent and transitory innovations. We find that transitory shocks contribute considerably to the variation in all three variables for a horizon up to a year, and their contribution remains significant for a horizon up to five years. A permanent shock – that we interpret as a technological shock – dominates the variation of all variables at longer horizons. In response to this shock, net foreign liabilities, net output and consumption all increase – consistent with the effect of productivity gains raising domestic return to capital and thus generating an inflow of foreign capital. Conversely, shocks that cause net output and consumption to increase temporarily are accompanied by short-run accumulation of net foreign assets – in contrast with traditional model predicting procyclical current account deficits in response to temporary output fluctuations. Instead, our results are qualitatively consistent with predictions of the intertemporal approach to the current account. Keywords: consumption smoothing; current account; international adjustment mechanism; intertemporal approach to the current account; net foreign wealth; permanent- transitory decomposition JEL: C32 E21 F32 F41 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4920&r=all 163. Why is Long-Horizon Equity Less Risky? A Duration-based Explanation of the Value Premium Lettau, Martin Wachter, Jessica This paper proposes a dynamic risk-based model that captures the high expected returns on value stocks relative to growth stocks, and the failure of the capital asset pricing model to explain these expected returns. To model the difference between value and growth stocks, we introduce a cross-section of long-lived firms distinguished by the timing of their cash flows. Firms with cash flows weighted more to the future have high price ratios, while firms with cash flows weighted more to the present have low price ratios. We model how investors perceive the risks of these cash flows by specifying a stochastic discount factor for the economy. The stochastic discount factor implies that shocks to aggregate dividends are priced, but that shocks to the time-varying price of risk are not. As long-horizon equity, growth stocks co-vary more with this time-varying price of risk than value stocks, which co-vary more with shocks to cash flows. When the model is calibrated to explain aggregate stock market behaviour, we find that it can also account for the observed value premium, the high Sharpe ratios on value stocks relative to growth stocks, and the out-performance of value (and underperformance of growth) relative to the CAPM. Keywords: duration; growth; habit formation; value JEL: G10 G12 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4921&r=all 164. Euler Equation Errors Lettau, Martin Ludvigson, Sydney Among the most important pieces of empirical evidence against the standard representative-agent, consumption-based asset pricing paradigm are the formidable unconditional Euler equation errors the model produces for a broad stock market index return and short-term interest rate. Unconditional Euler equation errors are also large for a broader cross-section of returns. Here we ask whether calibrated leading asset pricing models – specifically developed to address empirical puzzles associated with the standard paradigm – explain these empirical facts. We find that, in many cases, they do not. We present several results. First, we show that if the true pricing kernel that sets the unconditional Euler equation errors to zero is jointly lognormally distributed with aggregate consumption and returns, then values for the subjective discount factor and relative risk aversion can always be found for which the standard model generates identical unconditional asset pricing implications for two asset returns, a risky and risk-free asset. Second, we show, using simulated data from several leading asset pricing frameworks, that many economic models share this property even though in those models the pricing kernel, returns, and consumption are not jointly lognormally distributed. Third, in contrast to the above results, we provide an example of a limited participation/incomplete markets model that is broadly consistent with these empirical facts. Keywords: equity premium; Euler equation; pricing errors JEL: G10 G12 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4922&r=all 165. International Financial Adjustment Gourinchas, Pierre-Olivier Rey, Helene The Paper proposes a unified framework to study the dynamics of net foreign assets and exchange rate movements. We show that deteriorations in a country’s net exports or net foreign asset position have to be matched either by future net export growth ( trade adjustment channel) or by future increases in the returns of the net foreign asset portfolio (hitherto unexplored financial adjustment channel). Using a newly constructed data set on US gross foreign positions, we find that stabilizing valuation effects contribute as much as 31% of the external adjustment. Our theory also has asset-pricing implications. Deviations from trend of the ratio of net exports to net foreign assets predict net foreign asset portfolio returns one quarter to two years ahead and net exports at longer horizons. The exchange rate affects the trade balance and the valuation of net foreign assets. It is forecastable in and out of sample at one quarter and beyond. A one standard deviation decrease of the ratio of net exports to net foreign assets predicts an annualized 4% depreciation of the exchange rate over the next quarter. Keywords: exchange rates; external adjustment; MeeseRogoff; net foreign assets; valuation JEL: F31 F32 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4923&r=all 166. Managerial Leverage is Limited By the Extent of the Market: Hierarchies, Specialization and the Utilization of Lawyers' Human Capital Garicano, Luis Hubbard, Thomas This paper examines hierarchies’ role in the organization of human-capital-intensive production. We develop an equilibrium model of hierarchical organization, then provide empirical evidence using confidential data on thousands of law offices from the 1992 Census of Services. We show how the equilibrium assignment of individuals to hierarchical positions varies with the degree to which their human capital is field-specialized; then show how this equilibrium changes with the extent of the market. When the extent of the market increases, individuals’ knowledge becomes narrower, but deeper. Managerial leverage, the number of workers per manager, optimally increases to exploit this depth. We find empirical evidence consistent with a central proposition of the model: the share of lawyers that work in hierarchies and the ratio of associates to partners increases as market size increases and lawyers field-specialize. Other results provide evidence against alternative interpretations that emphasize unobserved differences in the distribution of demand or ‘firm size effects’, and lend additional support to the view that a role hierarchies play in legal services is to help exploit increasing returns associated with the utilization of human capital. Keywords: division of labour; hierarchy; industry structure; organization; specialization JEL: D21 J24 J44 L11 L23 L84 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4924&r=all 167. Strategic Experimentation and Disruptive Technological Change Schivardi, Fabiano Schneider, Martin This paper studies the diffusion of a new technology that is brought to market while its potential is still uncertain. We consider a dynamic game in which firms improve both a new and a rival old technology while learning about the relative potential of both technologies. We use the model to understand historical evidence on diffusion and market structure. In particular, the model explains why a change in market leadership often goes along with slow diffusion. It also provides a rational explanation for observed ‘incumbent inertia’ and shows how markets can make mistakes in the selection of new technologies. Keywords: dynamic games; innovation; learning; oligopoly JEL: C63 C73 D83 L13 O31 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4925&r=all 168. City Structure, Job Search and Labour Discrimination. Theory and Policy Implications Selod, Harris Zenou, Yves We consider a search-matching model in which black workers are discriminated against and the job arrival rates of all workers depend on social networks as well as distance to jobs. Location choices are mainly driven by the racial preferences of households. There are two possible urban equilibrium and we show that, under some reasonable conditions, all workers are better off in the equilibrium where blacks are close to jobs. We then consider two policies: affirmative action and employment subsidies to the firms that hire black workers. We show that, in cities where black workers reside far away from jobs, the optimal policy is to impose higher quotas or employment subsidies than in cities where they live close to jobs. Keywords: Affirmative Action; employment subsidies; racial preferences; social networks; spatial mismatch JEL: J15 J41 R14 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4926&r=all 169. Job Security and Job Protection Clark, Andrew E Postel-Vinay, Fabien We construct indicators of the perception of job security for various types of jobs in 12 European countries using individual data from the European Community Household Panel (ECHP). We then consider the relation between reported job security and OECD summary measures of Employment Protection Legislation (EPL) strictness on one hand, and Unemployment Insurance Benefit (UIB) generosity on the other. We find that, after controlling for selection into job types, workers feel most secure in permanent public sector jobs, least secure in temporary jobs, with permanent private sector jobs occupying an intermediate position. We also find that perceived job security in both permanent private and temporary jobs is positively correlated with UIB generosity, while the relationship with EPL strictness is negative: workers feel less secure in countries where jobs are more protected. These correlations are absent for permanent public jobs, suggesting that such jobs are perceived, by and large, to be insulated from labour market fluctuations. Keywords: employment protection legislation; perceived job security; unemployment insurance benefits JEL: I31 J28 J65 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4927&r=all 170. Je T'aime, Moi Non Plus: Bilateral Opinions and International Trade Disdier, Anne-Celia Mayer, Thierry This paper studies the relationship between bilateral trade patterns and opinions. It uses the Eurobarometer public opinion surveys published by the European Commission, which provide data on the share of the population in each EU member country in favour of each CEEC joining the EU. Our results first suggest that bilateral opinions have a statistically robust and relatively large effect on imports, even when standard and new covariates capturing proximity between countries are controlled for. We interpret this effect as reflecting a positive impact of ‘bilateral affinity’ on trade patterns. We also show that it is possible to go some way towards explaining the variance in bilateral opinions among our sample. Last we provide some preliminary attempts to determine causality between bilateral opinions and imports. Keywords: bilateral opinions; enlargement; gravity JEL: F10 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4928&r=all 171. Trade Protection and Industry Wage Structure in Poland Goh, Chor-Ching Javorcik, Beata Smarzynska This study examines the impact of Poland’s trade liberalization 1994-2001 on the industry wage structure. The liberalization was undertaken in preparation for Poland’s accession to the European Union and was more pronounced in industries with larger shares of unskilled labour. Our analysis indicates that a decrease in an industry tariff was associated with higher wages being earned by workers employed in the industry, controlling for worker characteristics and geographic variables. The result is robust to including year and industry fixed effects, controlling for industry-level exports, imports, concentration, stock of foreign direct investment and capital accumulation. The finding is consistent with liberalization increasing competitive pressures, forcing firms to restructure and improve their productivity, which in turn translates into higher profits being shared with workers. It could also be potentially attributed to trade liberalization lowering the costs of imported inputs, which enhances firm profitability. The result holds when skilled workers are excluded from the sample, thus suggesting that reductions in trade barriers benefited the unskilled in terms of an increase in wages. Keywords: globalization; trade liberalization; transition; wages JEL: F16 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4929&r=all 172. Asset Pricing Implications of Pareto Optimality with Private Information Kocherlakota, Narayana Pistaferri, Luigi In this paper, we consider a dynamic economy in which the agents are privately informed about their skills, which evolve stochastically over time in an arbitrary fashion. We consider an asset pricing equilibrium in which equilibrium quantities are constrained Pareto optimal. Under the assumption that agents have constant relative risk aversion, we derive a novel asset pricing kernel for financial asset returns. The kernel equals the reciprocal of the gross growth of the x-th moment of the consumption distribution, where x is the coefficient of relative risk aversion. We use data from the Consumer Expenditure Survey ( CEX) and show that the new stochastic discount factor performs better than existing stochastic discount factors at rationalizing the equity premium. However, its ability to simultaneously explain the equity premium and the expected return to the Treasury bill is about the same as existing discount factors. Keywords: asset pricing; consumer expenditure survey JEL: E21 G12 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4930&r=all 173. Does Longevity Cause Growth? Hazan, Moshe Zoabi, Hosny This article challenges conventional wisdom by arguing that greater longevity cannot explain the significant accumulation of human capital during the transition from stagnation to growth. This is because greater longevity raises children’s future income proportionally at all levels of education, leaving the relative return between quality and quantity unaffected. This result is consistent with historical evidence that longevity began to increase long before education did. Our theory also casts doubts on recent findings about a positive effect of health on education. This is because health raises the marginal return on quality and quantity, resulting in an ambiguous effect on the accumulation of human capital. We conclude that longevity and health have had a minor effect, if any, on the transition from stagnation to growth via investment in education. Keywords: education; fertility; growth; health; longevity JEL: I10 I20 J10 O11 O40 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4931&r=all 174. The Corporate Governance of Defined-Benefit Pension Plans: Evidence from the United Kingdom Cocco, Joao Francisco P.D. Volpin, Paolo This paper studies the governance of defined-benefit pension plans in the United Kingdom. We construct a governance measure, equal to the proportion of trustees of the pension plan who are also executive directors of the sponsoring company. Our findings indicate that pension plans of indebted companies with a higher proportion of insider-trustees: (i) invest a higher proportion of the pension plan assets into equities, (ii) contribute less into the pension plan, and (iii) have a larger dividend payout ratio. This evidence supports an agency view, whereby insider-trustees act in the interest of shareholders of the sponsoring company, and not necessarily pension plan members. Keywords: corporate governance; defined benefits; insiders; pension plans; pension trustees JEL: G23 G34 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4932&r=all 175. Rising Trade Costs? Agglomeration and Trade with Endogenous Transaction Costs Duranton, Gilles Storper, Michael While transport costs have fallen, the empirical evidence also points at rising total trade costs. In a model of industry location with endogenous transaction costs, we show how and under which conditions a decline in transport costs can lead to an increase in the total cost of trade. Keywords: agglomeration; trade costs; transaction costs; transport costs; vertically linked industries JEL: D23 D24 R12 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4933&r=all 176. Optimal Sliding Scale Regulation: An Application to Regional Electricity Distribution in England and Wales Hawdon, David Hunt, Lester Levine, Paul L Rickman, Neil This paper examines optimal price (i.e. ‘sliding scale’) regulation of a monopoly when efficiency and managerial effort are not observed. We show how to operationalize this model of incentive regulation and use actual data from electricity distribution in England and Wales to make welfare comparisons of sliding scale regulation with a price cap regime and the First- Best (the full information case). Our method enables us to quantify technical uncertainty as faced by the electricity regulator in the 1990s and shows that there are significant welfare gains from a sliding scale relative to the price cap regime. Keywords: electricity distribution; regulation; sliding scale JEL: L51 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4934&r=all 177. Do Risk Premia Protect from Banking Crises? Gersbach, Hans Wenzelburger, Jan This paper studies the question to what extent premia for macroeconomic risks in banking are sufficient to avoid banking crises. We investigate a competitive banking system embedded in an overlapping generation model subject to repeated macroeconomic shocks. We show that even if banks fully incorporate macroeconomic risks in their pricing of loans, a banking system may enter bankruptcy with probability one. A major cause for this default is that risk premia of a competitive banking system may become too small if the capital base is low. Keywords: banking crises; banking regulation; financial intermediation; macroeconomic risks; risk premia JEL: D41 E40 G20 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4935&r=all 178. A Simple Model of Economic Geography a la Helpman-Tabuchi Murata, Yasusada Thisse, Jacques-Francois This paper explores the interplay between commodities’ transportation costs and workers’ commuting costs within a general equilibrium framework a la Dixit-Stiglitz. Workers are mobile and choose a region to work in as well as an intra-urban location in which to live. We show that a more integrated economy need not be more agglomerated. Instead, low transportation costs lead to the dispersion of economic activities. This is because workers are able to alleviate the burden of urban costs by being dispersed, while retaining a good access to all varieties. By contrast, low commuting costs foster the agglomeration of economic activities. Keywords: agglomeration; commuting costs; economic geography; transportation costs; urban costs JEL: F12 R12 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4936&r=all 179. How Transition Paths Differ: Enterprise Performance in Russia and China Bhaumik, Sumon Kumar Estrin, Saul We use enterprise data to analyse and contrast the determinants of enterprise performance in China and Russia. We find that in China, enterprise growth and efficiency is associated with rapid increases in factor inputs, but not correlated with ownership or institutional factors. However, in Russia, enterprise growth is not associated with increases in factor quantity (except for labour) or quality. The main determinants of company performance are instead demand and institutional factors at a regional level. We explore possible interpretations of these results, including the impact of institutional and managerial quality. Keywords: enterprise performance; privatization in Russia and China JEL: D23 L22 O12 P31 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4937&r=all 180. Forms of Democracy, Policy and Economic Development Persson, Torsten The paper combines insights from the recent research programs on constitutions and economic policy, and on history, institutions and growth. Drawing on cross-sectional as well as panel data, it presents new empirical results showing that the form of democracy rather than democracy vs. non-democracy) has important consequences for the adoption of structural polices that promote long-run economic performance. Reforms into parliamentary (as opposed to presidential), proportional (as opposed to majoritarian) and permanent (as opposed to temporary) democracy appear to produce the most growth-promoting policies. Keywords: democratic institutions; economic performance; growth promoting policy JEL: F43 H11 O57 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4938&r=all 181. Marriage and the City Gautier, Pieter A Svarer, Michael Teulings, Coen N Do people move to cities because of marriage market considerations? In cities singles can meet more potential partners than in rural areas. Singles are therefore prepared to pay a premium in terms of higher housing prices. Once married, the marriage market benefits disappear while the housing premium remains. We extend the model of Burdett and Coles (1997) with a distinction between efficient (cities) and less efficient (non- cities) search markets. One implication of the model is that singles are more likely to move from rural areas to cities while married couples are more likely to make the reverse movement. A second prediction of the model is that attractive singles benefit most from a dense market (i.e. from being choosy). Those predictions are tested with a unique Danish dataset. Keywords: city; marriage; mobility; search JEL: J12 J64 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4939&r=all 182. Vive la Revolution! Long Term Returns of 1968 to the Angry Students Maurin, Eric McNally, Sandra The famous events of May 1968, starting with student riots, threw France into a state of turmoil. The period of ‘revolution’ coincided with the time in which important examinations are undertaken. As a result, normal examination procedures were abandoned and the pass-rate for various qualifications increased enormously in that one year. These events were particularly important for students at an early (and highly selective) phase of higher education. They are shown to have pursued further years of education because thresholds were lowered at critical stages (i.e. at entry to university and in the early years of university). These historic events provide a natural experiment to analyse the returns to years of higher education for the affected generation and to consider consequences for their children. Thus, we can contribute to the debate on two very controversial questions in the economics of education: What is the true causal relationship between educational attainment and its labour market value? Is there a causal relationship between the education of parents and that of their children? Much of the existing literature considers the effect of interventions altering an individual’s years of compulsory schooling on the margin rather than an intervention which occurs at a later stage. Our results are based on the latter and show a higher return for an additional year of education than would be suggested by many of the former studies. This may reflect higher returns from an additional year of university education rather than an additional year of compulsory education. Furthermore, the treatment group considered here is on the margin of the higher education system. This study suggests that expanding the university system to accommodate such people can yield very high private returns. There is also evidence of a strong causal relationship between obtaining an additional year of higher education and the educational outcomes of children. Hence our study suggests very positive effects of the ‘1968 events’ for affected cohorts and is of contemporary relevance given the current debate in many countries about widening access to higher education. Keywords: higher education; intergenerational; wages JEL: I20 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4940&r=all 183. Time Consistency of Fiscal and Monetary Policy: A Solution Persson, Torsten Persson, Mats Svensson, Lars E O This paper demonstrates how time consistency of the Ramsey policy (the optimal fiscal and monetary policy under commitment) can be achieved. Each government should leave its successor with a unique maturity structure for the nominal and indexed debt, such that the marginal benefit of a surprise inflation exactly balances the marginal cost. Unlike in earlier papers on the topic, the result holds for quite general Ramsey policies, including time-varying polices with positive inflation and positive nominal interest rates. We compare our results with those in Persson, Persson and Svensson (1987), Calvo and Obstfeld (1990), and Alvarez, Kehoe and Neumeyer (2004). Keywords: ramsey policy; surprise inflation; time consistency JEL: E31 E52 H21 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4941&r=all 184. Learning Foreign Languages.Theoretical and Empirical Implications of the Selten and Pool Model Ginsburgh, Victor Ortuno-Ortin, Ignacio Weber, Shlomo In this paper we adopt the Selten-Pool model (1993) framework of language acquisition that is based on the notion of communicative benefits and learning costs. We consider a model with languages that serve as imperfect substitutes and show that under supermodularity of the communicative benefits function and some other mild conditions, there exists a unique interior linguistic equilibrium. We then derive a demand function for foreign languages that we estimate for English, French, German and Spanish in 13 European countries. Keywords: communicative benefits; estimation of demand functions for languages; European Union; languages; learning costs; linguistic distances JEL: C72 O52 Z13 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4942&r=all 185. Neoclassical Growth and the 'Trivial' Steady State Hakenes, Hendrik Irmen, Andreas If capital is an essential input, the neoclassical growth model has a steady state with zero capital. From this, one is inclined to conclude that an economy starting without capital can never grow. We challenge this view and claim that, if the production function satisfies the Inada conditions, a take-off is possible even though the initial capital stock is zero and capital is essential. Since the marginal product of capital is initially infinite, the ‘trivial’ steady state becomes so unstable that the solution to the equation of motion involves the possibility of a take-off, even without capital. When it happens, the take- off is spontaneous; there is no causality. Keywords: capital accumulation; industrializtion; neoclassical growth model JEL: N60 O11 O14 O41 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4943&r=all 186. Financing and the Protection of Innovators Llobet, Gerard Suarez, Javier The protection that innovators obtain through intellectual property rights crucially depends on their incentives and ability to litigate infringers. Taking patents as a notable example, we study how the financing of legal costs can alter the incentives to litigate in defence of a patent and, thus, the prospects of infringement and the effective protection of the innovator. We compare the resort to a financier once the infringement has occurred (ex-post financing) with patent litigation insurance ( PLI) as well as other ex-ante arrangements based on leverage. We show that the ex-ante arrangements can be designed (for instance, in the case of PLI, by including an appropriate deductible) so as to implement the innovator’s second-best outcome: a situation in which patent predation is deterred without inducing excessive litigation. Keywords: financial strategy; intellectual property; litigation; predation JEL: G32 O34 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4944&r=all 187. Assessing the Foreign Control of Production of Technology: The Case of a Small Open Economy Cincera, Michele van Pottelsberghe, Bruno Veugelers, Reinhilde International R&D activities have grown significantly over the last two decades. Both the number of actors involved, as well as the importance of the technological activity carried out abroad, has considerably increased. We aim to quantify the international generation of knowledge for the case of Belgium, using indicators based on EPO and USPTO patent data (1978-2001). We distinguish among Belgian applicants, affiliates of foreign firms located in Belgium as well as Belgian based firms with affiliates abroad. This approach allows improvement of existing indicators of internationalization of technology based on patent data. The results are consistent with what can be expected for a small open economy such as Belgium. A large part of patents with Belgian inventors are assigned to Belgian affiliates of foreign firms. Hence our more complete indicator of foreign ownership gives a substantially higher foreign control of Belgian inventors. Relatively more knowledge generated by Belgian inventors flows out of the country towards foreign owners of technology, than knowledge generated abroad is owned by Belgian patent applicants. But the share of foreign inventors to Belgian assigned patents is increasing considerably over time, especially in the subcategory of Belgian firms with foreign affiliates. Keywords: Belgian economy; internationalization of R&D; patent statistics JEL: F23 O30 O33 O57 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4945&r=all 188. Demand for Education and Labour Market Outcomes: Lessons from the Abolition of Compulsory Conscription in France Maurin, Eric Xenogiani, Theodora In this paper we examine the effects of the abolition of the compulsory conscription in France on the demand for education and labour market outcomes. The reform took place in 1997 and affected all men born after 1979. Before the reform, staying on in education was a way to defer the national service and get access to more interesting forms of the military service. After the reform, these specific incentives to stay on in education have disappeared and the relative cost of education for men has plausibly increased. As a matter of fact, our data reveal that the reform has been followed by a significant decrease in the number of years spent at school by male students, as well as in the proportion of male degree holders. In contrast, the reform had no significant effect on the demand for education for women nor for men of high socio-economic background. We use this exogenous variation in the demand for education to estimate the effect of education on wages as well as on the probability of being in a manual job at the early stage of one’s career. Keywords: demand for education; natural experiment; wages JEL: I20 J24 J31 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4946&r=all 189. The Early Modern Great Divergence: Wages, Prices and Economic Development in Europe and Asia, 1500-1800 Broadberry, Stephen N Gupta, Bishnupriya Contrary to the claims of Pomeranz, Parthasarathi and other ‘world historians’, the prosperous parts of Asia between 1500 and 1800 look similar to the stagnating southern, central and eastern parts of Europe rather than the developing northwestern parts. In the advanced parts of India and China, grain wages were comparable to those in northwestern Europe, but silver wages, which conferred purchasing power over tradable goods and services, were substantially lower. The high silver wages of northwestern Europe were not simply a monetary phenomenon, but reflected high productivity in the tradable sector. The ‘Great Divergence’ between Europe and Asia was already well underway before 1800. Keywords: asia; development; europe; prices; wages JEL: N10 N30 O10 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4947&r=all 190. Monetary Policy with Single Instrument Feedback Rules Adao, Bernardino Correia, Isabel Horta Teles, Pedro We consider standard cash-in-advance monetary models and show that there are interest rate or money supply rules such that equilibria are unique. The existence of these single instrument rules depends on whether the economy has an infinite horizon or an arbitrarily large but finite horizon. Keywords: interest rate rules; monetary policy; unique equilibrium JEL: E31 E40 E52 E58 E62 E63 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4948&r=all 191. Do Locational Spillovers Pay? Empirical Evidence from German IPO Data Audretsch, David B Lehmann, Erik E This study examines the impact locational spillovers have on firm performance. Based on a uniquely created dataset consisting of high-technology start-ups publicly listed in Germany, this paper tests the proposition of locational spillovers positively affecting firm performance, as measured by abnormally high profits on the stock market. The results provide evidence that geographic proximity and university spillovers are complementary determinants of firm performance. While neither geographic proximity nor academic research spillovers alone can explain firm performance, a combination of both factors results in significant higher stock market performance. The results also show academic spillovers are heterogeneous in their impact depending on the type. In particular, spillovers from social sciences have a different impact on firm performance than do spillovers from natural science. Keywords: firm performance; university spillover; university- firm collaboration JEL: L20 M13 R30 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4949&r=all 192. Did Inflation Really Soar After the Euro Cash Changeover? Indirect Evidence from ATM Withdrawals Angelini, Paolo Lippi, Francesco The introduction of the euro notes and coins during the first months of 2002 was followed by a lively debate on the alleged inflationary effects of the new currency. In Italy, as in the rest of the euro area, survey-based measures signaled a much sharper rise in inflation than measured by the official price indices, whose quality was called into question. In this paper we gather indirect evidence on the behaviour of prices from the analysis of cash withdrawals from ATM and their determinants. Since these data do not rely on official inflation statistics, they provide an independent check for the latter. We present a simple theoretical model in which the relationship between aggregate ATM withdrawals and aggregate expenditure is not homogenous of degree one in the price level, a prediction which is strongly supported by the data. This feature allows us to test the hypothesis that, after the introduction of the euro notes and coins, consumer prices underwent an increase not recorded by official inflation statistics. We do not find evidence in support of this hypothesis. Keywords: currency; euro changeover; inflation JEL: E31 E41 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4950&r=all 193. Allocation of Prizes in Asymmetric All-Pay Auctions Cohen, Chen Sela, Aner We study asymmetric all-pay auctions with multiple objects where players’ values for the objects are common knowledge. The players have different values for the objects but they have the same ranking. The contest designer may award one prize including all the objects to the player with the highest bid, or, alternatively, they may allocate several prizes, each prize including one object such that the first prize is awarded to the player with the highest bid, the second prize to the player with the second-highest bid, and so on until all the objects are allocated. We analyse the distribution of effort in one-prize and multiple-prize contests and show that allocation of several prizes may be optimal for a contest designer who maximizes the total effort. Keywords: auctions; contests JEL: D44 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4951&r=all 194. Belief in a Just World and Redistributive Politics Benabou, Roland Tirole, Jean International surveys reveal wide differences between the views held in different countries concerning the causes of wealth or poverty and the extent to which people are responsible for their own fate. At the same time, social ethnographies and experiments by psychologists demonstrate individuals' recurrent struggle with cognitive dissonance as they seek to maintain, and pass on to their children, a view of the world where effort ultimately pays off and everyone gets their just deserts. This paper offers a model that helps explain: i) why most people feel such a need to believe in a ‘just world’; ii) why this need, and therefore the prevalence of the belief, varies considerably across countries; iii) the implications of this phenomenon for international differences in political ideology, levels of redistribution, labour supply, aggregate income, and popular perceptions of the poor. The model shows in particular how complementarities arise endogenously between individuals' desired beliefs or ideological choices, resulting in two equilibria. A first, ‘American’ equilibrium is characterized by a high prevalence of just-world beliefs among the population and relatively laissez-faire policies. The other, ‘European’ equilibrium is characterized by more pessimism about the role of effort in economic outcomes and a more extensive welfare state. More generally, the paper develops a theory of collective beliefs and motivated cognitions, including those concerning ‘money’ ( consumption) and happiness, as well as religion. Keywords: cognitive dissonance; ideology; inequality; memory; psychology; religion; self-control; social mobility; welfare state; willpower JEL: D31 D72 D80 E62 P16 Z12 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4952&r=all 195. The Foreign Service and Foreign Trade: Embassies as Export Promotion Rose, Andrew K As communication costs fall, foreign embassies and consulates have lost much of their role in decision-making and information- gathering. Accordingly, foreign services are increasingly marketing themselves as agents of export promotion. I investigate whether exports are in fact systematically associated with diplomatic representation abroad. I use a recent cross-section of data covering 22 large exporters and 200 import destinations. Bilateral exports rise by approximately 6-10% for each additional consulate abroad, controlling for a host of other features including reverse causality. The effect varies by exporter, and is non-linear; consulates have smaller effects than the creation of an embassy. Keywords: consulate; country; data; destination; empirical; gravity; import; international; panel JEL: F13 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4953&r=all 196. The Impact of Turkey's Membership on EU Voting Baldwin, Richard Widgren, Mika In this paper, we evaluate the impact of Turkey's membership on EU voting. The aspects that we discuss are decision-making efficiency and the distribution of power in the EU's leading decision making body the Council of Ministers. We compare two alternative Council voting rules: those accepted in the Treaty of Nice and implemented by the Accession Treaty of ten 2004 entrants and the rules that are laid down in the Constitutional Treaty. Keywords: constitutional treaty; EU; Turkey; voting JEL: C71 D71 F02 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4954&r=all 197. Agency Conflicts, Investment and Asset Pricing Albuquerque, Rui Wang, Neng Corporations in most countries are run by controlling shareholders whose cash flow rights are substantially smaller than their control rights in the firm. This separation of ownership and control allows the controlling shareholders to pursue private benefits at the cost of outside minority investors by diverting resources away from the firm and distorting corporate investment and payout policies. We develop a dynamic stochastic general equilibrium asset-pricing model that acknowledges the implications of agency conflicts through imperfect investor protection on security prices. We show that countries with weaker investor protection have more overinvestment, lower market-to-book equity values, larger expected equity returns and return volatility, higher dividend yields, and higher interest rates. These predictions are consistent with empirical findings. We develop new predictions: countries with high investment-capital ratios have both higher variance of GDP growth and higher variance of stock returns. We provide evidence consistent with these hypotheses. Finally, we show that weak investor protection causes significant wealth redistribution from outside shareholders to controlling shareholders. Keywords: agency; asset prices; corporate governance; heterogeneous agents; investor protection; overinvestment; volatility JEL: G12 G31 G32 G34 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4955&r=all 198. Insurance Policies for Monetary Policy in the Euro Area Kuster, Keith Wieland, Volker In this paper, we examine the cost of insurance against model uncertainty for the euro area considering four alternative reference models, all of which are used for policy analysis at the ECB. We find that maximal insurance across this model range in terms of a Minimax policy comes at moderate costs in terms of lower expected performance. We extract priors that would rationalize the Minimax policy from a Bayesian perspective. These priors indicate that full insurance is strongly oriented towards the model with highest baseline losses. Furthermore, this policy is not as tolerant towards small perturbations of policy parameters as the Bayesian policy rule. We propose to strike a compromise and use preferences for policy design that allow for intermediate degrees of ambiguity-aversion. These preferences allow the specification of priors but also give extra weight to the worst uncertain outcomes in a given context. Keywords: euro area; minimax; model uncertainty; monetary policy rules; robustness JEL: E52 E58 E61 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4956&r=all 199. A Phillips Curve for China Scheibe, Jorg Vines, David This paper models Chinese inflation using an output gap Phillips curve. Inflation modelling for the world’s sixth largest economy is a still under-researched topic. We estimate a partially forward-looking Phillips curve as well as traditional backward-looking Phillips curves. Using quarterly data from 1988 to 2002, we estimate a vertical long-run Phillips curve for China and show that the output gap, the exchange rate, and inflation expectations play important roles in explaining inflation. We adjust for structural change in the economy where possible and estimate regressions for rolling sample windows in order to test for and uncover gradual structural change. We evaluate a number of alternative output gap estimates and find that output gaps which are derived from production function estimations for the Chinese economy are of more use in estimating a Phillips curve than output gaps derived from simple statistical trends. Partially forward-looking Phillips curves provide a better fit than backward-looking ones. The identification of a non- increasing exchange rate effect on inflation during a period of large import growth hints at increased pricing to market behaviour by importers. This result is relevant to policies regarding possible exchange rate liberalization in China. Keywords: China; monetary policy; output gap; Phillips curve; structural change JEL: E12 E31 E32 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4957&r=all 200. Forecasting the Spot Exchange Rate with the Term Structure of Forward Premia: Multivariate Threshold Cointegration van Tol, Michel R Wolff, Christian C In this paper we develop a multivariate threshold vector error correction model of spot and forward exchange rates that allows for different forms of equilibrium reversion in each of the cointegrating residual series. By introducing the notion of an indicator matrix to differentiate between the various regimes in the set of nonlinear processes we provide a convenient framework for estimation by OLS. Empirically, out-of sample forecasting exercises demonstrate its superiority over a linear VECM, while being unable to out-predict a (driftless) random walk model. As such we provide empirical evidence against the findings of Clarida and Taylor (1997). Keywords: foreign exchange; multivariate threshold cointegration; TAR models JEL: C51 C53 F31 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4958&r=all 201. Time Variation in Term Premia: International Evidence Jongen, Ron Verschoor, Willem F C Wolff, Christian C This paper examines the validity of the expectations hypothesis of the term structure of interest rates by means of a previously unexploited dataset of market expectations that covers a broad range of EMS versus non-EMS foreign currency deposits. Although we find strong evidence in favour of rejecting the ‘pure’ version of the expectations hypothesis, we still cannot reject the hypothesis that the forward rate is a biased estimate of future interest rate levels. Nevertheless, we find some evidence that the behaviour of market participants, when making predictions about the future level of interest rates, is not entirely in line with what rational behaviour would suggest. We also find that there is strong evidence of time-variation in the term structure of interest rates. Furthermore, while this variation in term premia can be very well explained by low-order variations of the ARMA class models, there is sufficient evidence that the conditional heteroskedasticity of term premia plays an important role in explaining the time-variation. Finally, no significant difference is found between the behaviour of EMS interest rate deposits and non-EMS deposits. Keywords: EMS; expectations hypothesis; interest rate expectations; rationality; survey data; term structure; time-varying term premia JEL: E42 E43 G15 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4959&r=all 202. Loss Functions in Option Valuation: A Framework for Model Selection Bams, Dennis Lehnert, Thorsten Wolff, Christian C In this paper, we investigate the importance of different loss functions when estimating and evaluating option pricing models. Our analysis shows that it is important to take into account parameter uncertainty, since this leads to uncertainty in the predicted option price. We illustrate the effect on the out-of- sample pricing errors in an application of the ad hoc Black- Scholes model to DAX index options. Our empirical results suggest that different loss functions lead to uncertainty about the pricing error itself. At the same time, it provides a first yardstick to evaluate the adequacy of the loss function. This is accomplished through a data-driven method to deliver not just a point estimate of the pricing error, but a confidence interval. Keywords: estimation risk; GARCH; implied volatility; loss functions; option pricing JEL: G12 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4960&r=all 203. Do Mergers Improve Information? Evidence from the Loan Market Panetta, Fabio Schivardi, Fabiano Shum, Matthew We examine the informational effects of M&As by investigating whether bank mergers improve banks’ ability to screen borrowers. By exploiting a dataset in which we observe a measure of a borrower’s default risk that the lenders observe only imperfectly, we find evidence of these informational improvements. Mergers lead to a closer correspondence between interest rates and individual default risk: after a merger, risky borrowers experience an increase in the interest rate, while non-risky borrowers enjoy lower interest rates. These informational benefits appear to derive from improvements in information processing resulting from the merger, rather than from explicit information sharing on individual customers among the merging parties. Our evidence suggests that part of these informational improvements stem from the consolidated banks using ‘hard’ information more intensively. Keywords: asymmetric information; banking; mergers JEL: G21 L15 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4961&r=all 204. How Changes in Benefits Entitlement Affect the Duration of Unemployment van Ours, Jan C Vodopivec, Milan This paper investigates the disincentive effects of the potential duration of unemployment insurance (UI) benefits. The disincentive effects are identified by exploiting changes in the UI system in Slovenia, which involved substantial reductions in the potential benefit duration and had characteristics of a ‘natural experiment’. We find that the change had a positive effect on the exit rate out of unemployment – both to employment and to other destinations – at various durations of unemployment spells and for many categories of unemployed workers. Keywords: job finding rates; potential benefit duration; unemployment insurance JEL: C41 H55 J64 J65 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4962&r=all 205. Product Market Integration, Wages and Inequality Andersen, Torben M Sorensen, Allan International integration strengthening intra-industrial trade may have important implications for employment, wages and inequality. The reason is that product market integration enhances export possibilities through easier access to foreign markets, but also import threats arising from foreign firms entering the domestic market. We explore the implications of these mechanisms in a general equilibrium version of a Ricardian trade model allowing for heterogeneity and imperfect competition in both product and labour markets. International integration is interpreted as a reduction in trade frictions. We find that wage dispersion in general tend to be U-shaped, at first falling and then increasing in product market integration. This finding has important implications not only for the ‘globalization’ debate, but also for empirical analysis. Keywords: comparative advantages; inequality; rent sharing; trade frictions JEL: F15 F16 J39 J50 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4963&r=all 206. Productivity Spillovers, Terms of Trade and the 'Home Market Effect' Corsetti, Giancarlo Martin, Philippe Pesenti, Paolo This paper analyses the welfare implications of international spillovers related to productivity gains, changes in market size, or government spending. We introduce trade costs and endogenous varieties in a two-country general-equilibrium model with monopolistic competition, drawing a distinction between productivity gains that enhance manufacturing efficiency, and gains that lower the cost of firms’ entry and product differentiation. Our model suggests that countries with lower manufacturing costs have higher GDP but supply a smaller number of goods at a lower international price. Countries with lower entry and differentiation costs also have higher GDP, but supply a larger array of goods at improved terms of trade. The sign of the international welfare spillovers depends on terms of trade, but also on consumers’ taste for variety. Higher domestic demand has macroeconomic implications that are similar to those of a reduction in firms’ entry costs. Keywords: productivity; taste for variety; terms of trade; trade JEL: F32 F41 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4964&r=all 207. Trade and Growth with Heterogeneous Firms Baldwin, Richard Robert-Nicoud, Frederic This paper explores the impact of trade on growth when firms are heterogeneous. Our findings can be viewed as relevant to the trade and growth literature on one hand and the heterogeneous- firms trade theory on the other. Our main finding – that freer trade is both anti-growth and welfare worsening from a purely dynamic perspective – contrasts with most findings in the endogenous growth literature. We also show that market-entry costs are anti-growth, but heterogeneity per se is pro-growth. As concerns the heterogeneous-firms literature our main finding is a static-vs.-dynamic trade-off in terms of productivity gains. Freer trade raises measured productivity in a level sense but slows measured productivity growth. Keywords: dynamic versus static efficiency; heterogeneous firms; trade and endogenous growth JEL: H32 P16 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4965&r=all 208. On Sustainable Pay-As-You-Go Systems Demange, Gabrielle An unfunded Social Security system faces a major risk, sometimes referred to as ‘political risk’. In order to account properly for this risk, the paper considers a political process in which the support to the system is asked from each newborn generation. The analysis is conducted in an overlapping generations economy that is subject to macroeconomic shocks. As a consequence, the political support varies with the evolution of the economy. The impact of various factors –intra-generational redistribution, risk aversion, financial markets, governmental debt- on the political sustainability of a pay-as-you-go system is discussed. Keywords: intra-generational redistribution; overlapping generations; pay-as-you-go; political economy; risk; social security system JEL: C72 C78 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4966&r=all 209. Liquidity, Risk-Taking and the Lender of Last Resort Repullo, Rafael This paper studies the strategic interaction between a bank whose deposits are randomly withdrawn, and a lender of last resort (LLR) that bases its decision on supervisory information on the quality of the bank’s assets. The bank is subject to a capital requirement and chooses the liquidity buffer that it wants to hold and the risk of its loan portfolio. The equilibrium choice of risk is shown to be decreasing in the capital requirement, and increasing in the interest rate charged by the LLR. Moreover, when the LLR does not charge penalty rates, the bank chooses the same level of risk and a smaller liquidity buffer than in the absence of a LLR. Thus, in contrast with the general view, the existence of a LLR does not increase the incentives to take risk, while penalty rates do. Keywords: bank supervision; capital requirements; central bank; deposit insurance; lender of last resort; moral hazard; penalty rates JEL: E58 G21 G28 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4967&r=all 210. Favouritism and Financial Incentives: A Natural Experiment Rickman, Neil Witt, Robert Principals who exercise favouritism towards certain agents may harm those who are not so favoured. Other papers have produced evidence consistent with the presence of such favouritism but have been unable to consider methods for controlling it. We address this issue in the context of a natural experiment from English soccer, where one particular league introduced professional referees in 2001-02, thereby changing the financial incentives and monitoring regime faced by these referees. Because the change was not effected in all leagues, the ‘experiment’ has both cross-sectional and intertemporal dimensions. We study the effects of professional referees on an established measure of referee bias: length of injury time in close matches. We find that referees exercised favouritism prior to professionalism but not afterwards, having controlled for selection and soccer-wide effects. The results are consistent with a financial incentive effect as a result of professional referees and indicate that subtle aspects of principal-agent relationships (such as favouritism) are amenable to contractual influence. Keywords: favouritism; financial incentives; referee; soccer JEL: D80 J20 J44 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4968&r=all 211. Information Channels in Labour Markets. On the Resilience of Referral Hiring Casella, Alessandra Hanaki, Nobuyuki Economists and sociologists disagree over markets’ potential to take over functions typically performed by networks of personal connections. First among them is the reliable transmission of information. In this paper we begin from a model of labour markets where social ties are stronger between similar individuals, and thus firms employing productive workers prefer to rely on personal referrals by their employees than to hire on the open anonymous market (Montgomery (1991)). However, we allow workers in the anonymous market to engage in a costly action that has the potential to signal their high productivity. We study the extent to which the possibility of signalling reduces the reliance on the network. We find that the network is remarkably resilient - only for a small minority of parameter values does the network disappear. The problem is that to be effective signalling must fulfill two contradictory requirements: unless the signal is extremely precise, it must be expensive, or it is not informative; but it must be cheap, or the network can undercut it. Keywords: networks; referral hiring; referral premium; signalling JEL: A14 D83 J31 J41 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4969&r=all 212. The Need for Institutional Changes in the Global Financial System: An Analytical Framework Claessens, Stijn Underhill, Geoffrey R D The international financial system has been the subject of much debate following the financial crises of the 1990s. While many reforms have been proposed for and implemented by mostly developing countries, few changes have been made to the international financial system itself. Fundamentally, the design, institutions, and governance of the international system remain very similar to those of two decades ago. The major changes in global financial markets, financial services industries and economies during this period, however, have rendered the international financial system and its governance of out date. In this paper, we analyse the causes and consequences of the failure to reform. We highlight the forces driving the need for changes in the governance of the international financial system, in particular the combination of the global integration processes and the increased role of the private sector. We then provide insights into the desirable institutional structure for international financial decision-making, also as it relates to the legitimacy of the international system in the eyes of the public worldwide. We also discuss the (political economy) factors inhibiting reform. We conclude with suggestions for future research. Keywords: international financial arrangements; international financial institutions; international governance; legitimacy; political economy JEL: F33 F34 K33 N20 O19 P50 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4970&r=all 213. Reforming the Formula: A Modest Proposal for Introducing Development Outcomes in IDA Allocation Procedures Kanbur, Ravi This paper develops a modest proposal for introducing final outcome indicators in the IDA aid allocation formula. It starts with a review of the current formula and the rationale for it. It is argued that this formula, and in particular the Country Policy and Institutional Assessment (CPIA) part of it, implicitly relies too heavily on a uniform model of what works in development policy. Even if this model were valid ‘on average’, the variations around the average make it an unreliable sole guide to the country-specific productivity of aid in achieving the final objectives of development. Rather, it is argued that changes in the actual outcomes on these final objectives could also be used as part of the allocation formula. A number of conceptual and operational objections to this position are considered and debated. The paper concludes that there is much to be gained by taking small steps in the direction of introducing outcome variables in the IDA formula, and assessing the experience of doing so in a few years' time. Keywords: IDA; performance-based aid allocation JEL: O19 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4971&r=all 214. Bertrand Equilibria and Sharing Rules Hoernig, Steffen We analyse how sharing rules affect Nash equilibria in Bertrand games, where the sharing of profits at ties is a decisive assumption. Necessary conditions for either positive or zero equilibrium profits are derived. Zero profit equilibria are shown to exist under weak conditions if the sharing rule is ‘sign- preserving’. For Bertrand markets we define the class of ‘expectation sharing rules’, where profits at ties are derived from some distribution of quantities. In this class the winner-takes-all sharing rule is the only one that is always sign- preserving, while for each pair of demand and cost functions there may be many others. Keywords: Bertrand games; expectation sharing rules; sharing rule; sign-preserving sharing rules; tie-breaking rule JEL: C72 D43 L13 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4972&r=all 215. The Clash of Liberalizations: Preferential vs. Multilateral Trade Liberalization in the European Union Karacaovali, Baybars Limao, Nuno There has been an explosion in the number of preferential trade agreements (PTAs) in the last decade. PTAs are characterized by liberalization with respect to only a few partners and thus, they can potentially clash with and retard multilateral trade liberalization (MTL). Despite this important concern with PTAs, there is almost no systematic evidence on whether they actually affect MTL or not. We model the effect of PTAs on MTL and show that PTAs slow down MTL unless they have a common external tariff and allow for internal transfers. Next, we use detailed data on product-level tariffs negotiated by the European Union in the last two multilateral trade rounds to structurally estimate our model. We confirm the main prediction – the European Union's PTAs have clashed with its MTL – and find that the effect is quantitatively significant. Moreover, we also confirm several auxiliary predictions of the model and provide new evidence on the political economy determinants of MTL in the European Union. Keywords: MFN tariff concessions; multilateral trade negotiations; preferential trade agreements JEL: D78 F13 F14 F15 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4973&r=all 216. Money Demand and Macroeconomic Stability Revisited Schabert, Andreas Stoltenberg, Christian This paper examines how money demand induced real balance effects contribute to the determination of the price level, as suggested by Patinkin (1949,1965), and if they affect conditions for local equilibrium uniqueness and stability. There exists a unique price level sequence that is consistent with an equilibrium under interest rate policy, only if beginning-of- period money enters the utility function. Real money can then serve as a state variable, implying that interest rate setting must be passive for unique, stable, and non-oscillatory equilibrium sequences. When end-of-period money provides utility, an equilibrium is consistent with infinitely many price level sequences, and equilibrium uniqueness requires an active interest rate setting. The stability results are, in general, independent of the magnitude of real balance effects, and apply also when prices are sticky. In contrast, under a constant money growth policy, equilibrium sequences are (likely to be) locally stable and unique for all model variants. Keywords: monetary policy rules; predetermined money; price level determination; real balance effects; real determinacy JEL: E32 E41 E52 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4974&r=all 217. Jump-and-Rest Effects of US Business Cycles Camacho, Maximo Perez-Quiros, Gabriel One of the most extended empirical stylized facts about output dynamics in the United States is the positive autocorrelation of output growth. This paper shows that the positive autocorrelation can be better captured by shifts between business cycle states rather than by the standard view of autoregressive coefficients. This result is extremely robust to different non-linear alternative models and also applies not only to output, but also to the most relevant macroeconomic variables. Keywords: business cycles; output growth; time series JEL: C22 E27 E32 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4975&r=all 218. A Comparison of Direct and Iterated Multistep AR Methods for Forecasting Macroeconomic Time Series Marcellino, Massimiliano Stock, James H Watson, Mark W ‘Iterated’ multiperiod ahead time series forecasts are made using a one-period ahead model, iterated forward for the desired number of periods, whereas ‘direct’ forecasts are made using a horizon-specific estimated model, where the dependent variable is the multi-period ahead value being forecasted. Which approach is better is an empirical matter: in theory, iterated forecasts are more efficient if correctly specified, but direct forecasts are more robust to model misspecification. This paper compares empirical iterated and direct forecasts from linear univariate and bivariate models by applying simulated out-of-sample methods to 171 US monthly macroeconomic time series spanning 1959-2002. The iterated forecasts typically outperform the direct forecasts, particularly if the models can select long lag specifications. The relative performance of the iterated forecasts improves with the forecast horizon. Keywords: forecast comparisons; multistep forecasts; VAR forecasts JEL: C32 E37 E47 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4976&r=all 219. Leading Indicators: What Have We Learned? Marcellino, Massimiliano We provide a summary updated guide for the construction, use and evaluation of leading indicators, and an assessment of the most relevant recent developments in this field of economic forecasting. To begin with, we analyse the problem of selecting a target coincident variable for the leading indicators, which requires coincident indicator selection, construction of composite coincident indexes, choice of filtering methods, and business cycle dating procedures to transform the continuous target into a binary expansion/recession indicator. Next, we deal with criteria for choosing good leading indicators, and simple non-model based methods to combine them into composite indexes. Then, we examine models and methods to transform the leading indicators into forecasts of the target variable. Finally, we consider the evaluation of the resulting leading indicator based forecasts, and review the recent literature on the forecasting performance of leading indicators. Keywords: business cycles; coincident indicators; forecasting; leading indicators; turning points JEL: C53 E32 E37 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4977&r=all 220. Trade Costs and Location of Foreign Firms in China Amiti, Mary Javorcik, Beata Smarzynska This study examines the determinants of entry by foreign firms, using information on 515 Chinese industries at the provincial level during 1998-2001. The analysis, rooted in the new economic geography, focuses on market and supplier access within and outside the province of entry, as well as production and trade costs. The results indicate that market and supplier access are the most important factors affecting foreign entry. Access to markets and suppliers in the province of entry matters more than access to the rest of China, which is consistent with market fragmentation due to underdeveloped transport infrastructure and informal trade barriers. Keywords: foreign direct investment; market access; supply access; trade costs JEL: F10 F23 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4978&r=all 221. Firm Size and the Quality of Entreprenuers Hvide, Hans K Founders of new firms tend to be experienced workers pursuing opportunities related to their previous employment. The paper proposes a simple framework to study the interaction between individual workers’ entrepreneurship decision and established firms’ effort to keep their best workers and ideas. The main insights are twofold. First, taking the firm size as given, larger firms tend to have less fine-tuned wage setting and produce entrepreneurs of higher quality than smaller firms. Second, making firm size endogenous, stronger property rights protection makes the optimal firm size larger (and the average quality of entrepreneurs higher). I apply these ideas to entrepreneurs’ data from a Stanford MBA alumni survey and firm size data from the US software industry. Keywords: entrepreneurship; IPP; patents; private benefits; property rights; software; spin off; start up JEL: G39 J33 J41 J62 K00 L24 L25 M52 M54 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4979&r=all 222. Can we Trust Private Firms as Suppliers of Vaccines for the Avian Influenza? Forslid, Rikard Using a simple monopoly model, this note analyses the incentives of a vaccine producer. Because a vaccine tends to eradicate the disease for which it is intended, it also tends to destroy its own market. This means that monopolistic producers may be tempted, in a socially non-optimal way, to delay the introduction of vaccines against new infections until the disease has spread. Keywords: vaccines JEL: D42 D62 H10 I18 L10 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4980&r=all 223. Monetary Policy in Real Time Giannone, Domenico Reichlin, Lucrezia Sala, Luca We analyse the panel of the Greenbook forecasts (sample 1970-96) and a large panel of monthly variables for the US (sample 1970- 2003) and show that the bulk of dynamics of both the variables and their forecasts is explained by two shocks. Moreover, a two factor model which exploits, in real time, information on many time series to extract a two dimensional signal, produces a degree of forecasting accuracy of the federal funds rate similar to that of the markets, and, for output and inflation, similar to that of the Greenbook forecasts. This leads us to conclude that the stochastic dimension of the US economy is two. We also show that dimension two is generated by a real and nominal shock, with output mainly driven by the real shock and inflation by the nominal shock. The implication is that, by tracking any forecastable measure of real activity and price dynamics, the Central Bank can track all fundamental dynamics in the economy. Keywords: forecasting; large datasets; monetary policy; real time analysis; Taylor rules JEL: C33 C53 E52 E58 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4981&r=all 224. Testing for Reference Dependence: An Application to the Art Market Beggs, Alan Graddy, Kathryn This paper tests for reference dependence, using data from Impressionist and Contemporary Art auctions. We distinguish reference dependence based on ‘rule of thumb’ learning from reference dependence based on ‘rational’ learning. Furthermore, we distinguish pure reference dependence from effects due to loss aversion. Thus, we use actual market data to test essential characteristics of Kahneman and Tversky’s Prospect Theory. The main methodological innovations of this paper are firstly, that reference dependence can be identified separately from loss aversion. Secondly, we introduce a consistent non-linear estimator to deal with measurement errors problems involved in testing for loss aversion. In this dataset, we find strong reference dependence but no loss aversion. Keywords: art; auctions; loss aversion; Prospect Theory; Reference Dependence JEL: D44 D81 L82 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4982&r=all 225. Demand and Distance: Evidence on Cross-Border Shopping Asplund, Marcus Friberg, Richard Wilander, Fredrik While many studies have documented deviations from the Law of One Price in international settings, evidence is scarce on the extent to which consumers take advantage of price differentials and engage in cross border shopping. We use data from 287 Swedish municipalities to estimate how responsive alcohol sales are to foreign prices, and relate the sensitivity to the location’s distance to the border. Typical results suggest that the elasticity with respect to the foreign price is around 0.4 in the border region; moving 200 (400) kilometres inland reduces it to 0. 2 (0.1). Given that cross-country price differences for alcohol and other products are often caused by taxes, our evidence has implications for the debate on tax competition/harmonization. Keywords: cross border shopping; european integration; law of one price; tax competition; tax harmonization JEL: F15 H20 H77 R12 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4983&r=all 226. Home Production, Market Production and the Gender Wage Gap: Incentives and Expectations Albanesi, Stefania Olivetti, Claudia This paper explores the hypothesis that gender wage differentials arise from the interaction between the intra- household allocation of labour and the contractual relation between firms and workers in the presence of private information on workers’ labour market attachment. In our model, if firms believe women to be less attached to market work than men, they will offer them labour contracts with lower earnings and lower hours even in the absence of gender differences in productivity. This implies that it is efficient for wives to allocate more time to home production. Hence, women will be less attached to market work and firms’ expectations are confirmed. If firms instead believe that labour market attachment is the same across genders, they will offer the same labour contracts to male and female workers. Then, the efficient intra-household allocation of labour will not be related to gender. It is statistical discrimination that determines gender differentials in the first type of equilibrium. Given that firms may use gender as a screening device, discrimination actually reduces the incentive problem for firms, eliminating adverse selection. Additionally, our model predicts that, in equilibria with female discrimination, gender earning gaps should be higher in industries/occupations in which the incentive problem is more severe. We use Census data for the year 2000 to show that this is the case. Keywords: gender wage gaps; incentives; labour contracts; private information JEL: D13 D82 J31 J33 J70 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4984&r=all 227. Income Distribution and Demand-Induced Innovations Foellmi, Reto Zweimuller, Josef We utilize Schmookler’s (1966) concept of demand-induced invention to study the role of income inequality in an endogenous growth model. As rich consumers can satisfy more wants than poor consumers, both prices and market sizes for new products, as well as their evolution over time, are determined by the income distribution. We show how a change in the distribution of income affects the incentive to innovate and hence long-run growth. In general, less inequality tends to discourage the incentive to innovate, but this depends on the nature of the redistribution. Keywords: demand composition; growth; inequality; price distortion JEL: D30 D40 L16 O15 O31 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4985&r=all 228. How Changes in Financial Incentives Affect the Duration of Unemployment Lalive, Rafael van Ours, Jan C Zweimuller, Josef This paper studies how changes in the two key parameters of unemployment insurance – the benefit replacement rate (RR) and the potential duration of benefits (PBD) – affect the duration of unemployment. In 1989, the Austrian government made unemployment insurance more generous by changing, simultaneously, the maximum duration of regular unemployment benefits and the earnings replacement ratio. We find that increasing the replacement ratio has much weaker disincentive effects than increasing the maximum duration of benefits. We use these results to split up the total costs to unemployment insurance funds into costs due to changes in the unemployment insurance system and costs due to behavioural responses of unemployed workers. Results indicate that costs due to behavioural responses are substantial. Keywords: maximum benefit duration; policy change; replacement rate; unemployment duration; unemployment insurance JEL: C41 J64 J65 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4986&r=all 229. Where is the Market? Evidence from Cross-Listings Halling, Michael Pagano, Marco Randl, Otto Zechner, Josef We investigate the distribution of trading volume across different venues after a company lists abroad. In most cases, after an initial blip, foreign trading declines rapidly to extremely low levels. However, there is considerable cross- sectional variation in the persistence and magnitude of foreign trading. The ratio between foreign and domestic trading volume is higher for smaller, more export and high-tech oriented companies. It is also higher for companies that cross-list on markets with lower trading costs and better insider trading protection. Foreign trading is high close to the cross-listing date but decreases dramatically in the subsequent six months. This accords with the ‘flow-back hypothesis’ that declining foreign trading is associated with the gravitational pull of the home market. Keywords: cross-listing; flow-back; trading volume JEL: G15 G30 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4987&r=all 230. Non-Discretionary and Automatic Fiscal Policy in the EU and the OECD Melitz, Jacques Official adjustments of the budget balance to the cycle merely assume that the only category of government spending that responds automatically to the cycle is unemployment compensation. But estimates show otherwise. Payments for pensions, health, subsistence, invalidity, childcare and subsidies of all sorts to firms respond automatically and significantly to the cycle as well. In addition, it is fairly common to borrow official figures for cyclically adjusted budget balances, divide by potential output, and then use the resulting ratios to study discretionary fiscal policy. But if potential output is not deterministic but subject to supply shocks, then apart from anything else, those ratios are inefficient estimates of the cyclically-independent ratios of budget balances divided by potential output. (A fortiori, they are inefficient estimates of the cyclically adjusted ratios of budget balances to observed output.) Accordingly, the paper provides separate estimates of the impact of the cycle on the levels of budget balances and the ratios of budget balances to output. In addition, it discusses the relation between the two sorts of estimates. When the focus is on ratios of budget balances to output, the cyclical adjustments depend more on inertia in government spending on goods and services than they do on taxes (which are largely proportional to output). But they depend even still more on transfer payments. Besides calling for different series for discretionary fiscal policy if ratios serve, these results also raise questions about the general policy advice to ‘let the automatic stabilizers work’. Keywords: automatic stabilization; cyclically adjusted budget balances; discretionary fiscal policy JEL: E00 E60 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4988&r=all 231. Commercial Television and Voter Information Prat, Andrea Stromberg, David What is the effect of liberalizing a country’s broadcasting system on the level of information of its citizens? To analyse this question, we first construct a model of state monopoly broadcasting where the government selects the amount of television news coverage of different public policy outcomes, and then sets public policy and political rents. Voters vote retrospectively given the news provided. In equilibrium, the incumbent provides some news coverage, and more so to groups for which reducing policy uncertainty is more important. We then introduce a profit-maximizing commercial channel. It provides more news coverage to groups of voters valuable to advertisers or underprovided by the state monopoly. We test our predictions on a panel of individuals interviewed in the elections before and after the entry of commercial TV in Sweden. We find that people who start watching commercial TV news increase their level of political knowledge more than those who do not. They also increase their political participation more. The positive informational effects are particularly valuable since commercial TV news attracts ex ante uniformed voters. Keywords: commercial television; mass media; public service broadcasting; voter information JEL: L33 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4989&r=all 232. Cooperation in International Banking Supervision Holthausen, Cornelia Roende, Thomas This paper analyses cooperation among national supervisors in the decision to close a multinational bank. The supervisors are asymmetrically informed and exchange information through ’cheap talk’. It is assumed that they consider domestic welfare only. We show that: (1) the supervisors will commit mistakes both of ’type I’ and ’type II’ in the closure decision; (2) the more aligned national interests are, the higher is welfare resulting from the closure decision; (3) the bank can allocate its investments strategically to escape closure; (4) allocating the decision right to an uninformed supranational supervisor can improve closure regulation, especially when interests are very disaligned. Keywords: cheap talk; closure; multinational banks; supervision JEL: F36 G21 G28 L51 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4990&r=all 233. Cannabis Prices and Dynamics of Cannabis Use van Ours, Jan C Williams, Jenny This paper uses duration models and self-reported cannabis histories from young Australians to study the dynamics of cannabis use. We find that low cannabis prices are associated with early initiation into cannabis use. While the decision to quit does not appear to be directly influenced by price, we find that the younger an individual is when they start using cannabis the less likely they are to quit. Therefore, low cannabis prices lead to early use and because of that they lead to a low quit rate and hence a longer duration of use. Keywords: age of initiation; cannabis prices; cannabis use JEL: C41 D12 I19 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4991&r=all 234. The Public Management of Environmental Risk: Separating Ex Ante and Ex Post Monitors Hiriart, Yolande Martimort, David Pouyet, Jerome When firms undertake activities which are environmentally risky, the divergence between social and private incentives to exert safety care requires public intervention. This control occurs both through ex ante regulation and ex post legal investigation. We delineate the respective scopes of those two kinds of monitoring when regulators and judges may not be benevolent. Separation between the ex ante and the ex post monitors of the firm helps to prevent capture. The likelihood of both ex ante and ex post inspections is higher under separation than under integration. This provides a rationale for the widespread institutional trend that has led to the separation of ex ante regulation from ex post prosecution. The robustness of this result is investigated in various extensions. Only when collusion is self-enforcing might it be possible that integration dominates separation. Keywords: environmental risk; exante and ex post investigations; integration and separation; liability; regulation JEL: L51 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4992&r=all 235. Entry, Cost Reduction and Competition in The Portuguese Mobile Telephone Industry Gagnepain, Philippe Pereira, Pedro We study the effect of entry on costs and competition in the Portuguese mobile telephony industry. We construct and estimate a model that includes demand, network, and cost equations. The latter accounts for inefficiency and cost reducing effort. We show that failure to account for cost reducing effort leads to biased estimates of competition in the industry. We also find that our estimated price-cost margins are similar to hypothetical Nash margins, if firms are patient, and have optimistic beliefs about the industry growth. Finally, our results suggest that the entry of a third operator in 1998 led to significant cost reductions, and fostered competition. Keywords: competition; efficiency; empirical analysis; entry; mobile telephony JEL: L13 L43 L93 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4993&r=all 236. A Model of Corporate Liquidity Anderson, Ronald W Carverhill, Andrew We study a continuous time model of a levered firm with fixed assets generating a cash flow that fluctuates with business conditions. Since external finance is costly, the firm holds a liquid (cash) reserve to help survive periods of poor business conditions. Holding liquid assets inside the firm is costly as some of the return on such assets is dissipated due to agency problems. We solve for the firms optimal dividend, share issuance, and liquid asset holding policies. The firm optimally targets a level of liquid assets which is a non-monotonic function of business conditions. In good times, the firm does not need a high liquidity reserve, but as conditions deteriorate, it will target higher reserve. In very poor conditions, the firm will declare bankruptcy, usually after it has depleted its liquidity reserve. Our model can predict liquidity holdings, leverage ratios, yield spreads, expected default probabilities, expected loss given default and equity volatilities all in line with market experience. We apply the model to examine agency conflicts associated with the liquidity reserve, and some associated debt covenants. We see that a restrictive covenant applied to the liquidity reserve will often enhance the debt value as well as the equity value. Keywords: contingent claims; corporate finance; dividend policy; liquidity JEL: G13 G30 G32 G35 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4994&r=all 237. Equilibria in a Dynamic Global Game: The Role of Cohort Effects Heidhues, Paul Melissas, Nicolas We introduce strategic waiting in a global game setting with irreversible investment. Players can wait in order to make a better informed decision. We allow for cohort effects and discuss when they arise endogenously in technology adoption problems with positive contemporaneous network effects. Formally, cohort effects lead to intra-period network effects being greater than inter-period network effects. Depending on the nature of the cohort effects, the dynamic game may or may not satisfy dynamic increasing differences. If it does, our model has a unique rationalizable outcome. Otherwise, there exist parameter values for which multiple equilibria arise because players have a strong incentive to invest at the same point in time others do. Keywords: coordination; equilibrium selection; global game; period-speciifc network effects; strategic complementarities; strategic waiting JEL: C72 C73 D82 D83 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4995&r=all 238. Two at the Top: Quality Differentiation in Markets with Switching Costs Gehrig, Thomas Stenbacka, Rune We explore the effects of switching costs on the subgame perfect quality decisions of oligopolists with repeated price competition. We establish a strong strategic quality premium. We show that competition for the establishment of customer relationships will eliminate low-quality firms in period 1 and that low-quality firms can survive only based on poaching profits. The equilibrium configuration is characterized by an agglomeration of two providers of top-quality as soon as switching cost heterogeneity is sufficiently significant. We demonstrate a finiteness property, according to which the two top-quality firms dominate the market with a joint market share exceeding 50%. Keywords: natural oligopoly; poaching; quality choice; switching costs JEL: D43 L15 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4996&r=all 239. Unemployment and Right-Wing Extremist Crime Falk, Armin Zweimuller, Josef Right-wing extremism is a serious problem in many societies. A prominent hypothesis states that unemployment plays a crucial role for the occurrence of right-wing extremist crime. In this paper we empirically test this hypothesis. We use a previously unused dataset that includes all officially recorded right-wing criminal acts in Germany. These data are recorded by the German Federal Criminal Police Office on a monthly state-level basis. Our main finding is that there is in fact a significant positive relation between unemployment and right-wing criminal activities. We show further that the big difference in right-wing crime between East and West German states can mostly be attributed to differences in unemployment. This finding reinforces the importance of unemployment as an explanatory factor for right- wing crime and questions explanations based solely on the different socialization in former communist East Germany and the liberal West German states. Our data further allow us to separate violent from non-violent right-wing crimes. We show that unemployment is closely related to both types of crimes, but that the association with non-violent crimes is much stronger. Since right-wing crime is committed particularly by relatively young males, we also explore whether the youth unemployment rate is a better predictor for right-wing crime than total unemployment. This hypothesis can be rejected: given total unemployment, a higher share of youth unemployment does not affect right-wing extremist crime rates. Keywords: cost of unemployment; hate crime; right-wing extremism; unemployment Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4997&r=all 240. Product Specific Rules of Origin in EU and US Preferential Trading Agreements: An Assessment Cadot, Olivier Carrere, Celine de Melo, Jaime Tumurchudur, Bolorma Building on earlier work by Estevadeordal, we construct a synthetic index (R-index) intending to capture the restrictiveness on market access due to product specific rules of origin (PSRO) that apply at the tariff-line level. The R-index is constructed for rules of origins under NAFTA and under the single list applying to PANEURO, the new regime applying to all EU preferential trade agreements. The R-index highlights how identical PSRO have different impacts across countries, and how the complexity of PSRO varies across sectors. Having controlled for the extent of tariff preference at the tariff-line level, the R-index contributes to account for differences in utilization rates at the tariff line level. The index is then used to assess composition effects across countries subjected to some set of PSRO and to compute estimates of the compliance costs associated with rules of origin under both regimes. Keywords: costs; NAFTA; PANEURO; rules of origin JEL: F13 F15 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4998&r=all 241. Rules of Origin as Export Subsidies Cadot, Olivier Estevadeordal, Antoni Suwa Eisenmann, Akiko The paper estimates the effect of NAFTA’s rules of origin (ROO) on Mexican access to the US market treating explicitly the endogenous determination of ROOs. The first equation determines Mexico’s NAFTA (preferential) exports to the US as a function of tariff preference and Estevadeordal’s qualitative ROO index. The second equation determines ROO strictness on the basis of a Grossman-Helpman model identifying channels through which lobbying by US intermediate-good producers leads to deep preferences and stiff rules of origin in downstream sectors. The estimates suggest that the creation of a captive market for upstream intermediate-good producers is indeed one of their political determinants. Keywords: NAFTA; regional integration; rules of Origin JEL: F10 F13 F15 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:4999&r=all 242. Welfare Trade-Offs in US Rail Mergers Ivaldi, Marc McCullough, Gerard Since the publication by Williamson (1968) of his seminal paper on antitrust there has been a growing recognition by regulators of the need to assess trade-offs between merger-related efficiency gains and merger-induced increases in market power. This paper addresses that need by presenting a structural econometric model of recent mergers in the US rail industry. The paper extends the structural methodology by evaluating actual (as opposed to simulated) merger effects and by incorporating parametric estimates of merger efficiencies. Our empirical finding is that consumer surplus in US rail freight markets increased by about 30% between 1986 and 2001 despite dramatic industry consolidation, suggesting that to date the Williamson trade-off has favoured rail customers. We find that behaviour in these markets is consistent with the Kreps-Scheinkman (1983) model of a two-stage game where capacities are chosen first and then prices are set to give the Cournot outcome. Keywords: differentiated product markets; logit models; merger analysis; railroads JEL: L11 L13 L41 L92 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5000&r=all 243. Conflicts of Interest in Sell-Side Research and the Moderating Role of Institutional Investors Ljungqvist, Alexander P Marston, Felicia Starks, Laura T Wei, Kelsey D. Yan, Hong Because sell-side analysts are dependent on institutional investors for performance ratings and trading commissions, we argue that analysts are less likely to succumb to investment banking or brokerage pressure in stocks highly visible to institutional investors. Examining a comprehensive sample of analyst recommendations over the 1994-2000 period, we find that analysts’ recommendations relative to consensus are positively associated with investment banking relationships and brokerage pressure, but negatively associated with the presence of institutional investor owners. The presence of institutional investors is also associated with more accurate earnings forecasts and more timely re-ratings following severe share price falls. Keywords: analyst forecast accuracy; analyst recommendations; banking relationships; conflicts of interest; institutional investors; investment banking JEL: G20 G21 G23 G24 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5001&r=all 244. The Impact of TFP Growth on Steady-State Unemployment Pissarides, Christopher Vallanti, Giovanna Theoretical predictions of the impact of TFP growth on unemployment are ambiguous, and depend on the extent to which new technology is embodied in new jobs. We evaluate a model with embodied and disembodied technology, capitalization, and creative destruction effects by estimating the impact of TFP growth on unemployment in a panel of industrial countries. We find a large negative impact which implies that embodied technology and creative destruction play no role in the steady-state dynamics of unemployment. Capitalization effects explain some of the estimated impact but a part remains unexplained. Keywords: capitalization effect; creative destruction; embodied technology; TFP growth; unemployment JEL: E24 J64 O51 O52 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5002&r=all 245. Dynamic Monopoly Pricing and Herding Bose, Subir Orosel, Gerhard O Ottaviani, Marco Vesterlund, Lise This paper studies dynamic pricing by a monopolist selling to buyers who learn from each other’s purchases. The price posted in each period serves to extract rent from the current buyer, as well as to control the amount of information transmitted to future buyers. As information increases future rent extraction, the monopolist has an incentive to subsidize learning by charging a price that results in information revelation. Nonetheless in the long run, the monopolist generally induces herding by either selling to all buyers or exiting the market. Keywords: herd behaviour; informational cascade; monopoly; public information; social learning JEL: D83 L12 L15 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5003&r=all 246. Intermodal and Intramodal Competition in Passenger Rail Transport Ivaldi, Marc Vibes, Catherine The objective of the paper is to elaborate a simulation model to analyse inter and intra-modal competition in the transport industry, based on game theory models. In our setting, consumers choose a transport mode and an operator to travel on a given city- pair; operators strategically decide on prices for the types of service they provide. We derive the market equilibrium and simulate potential scenarios. In particular we measure the impact of entry by a low cost train operator and the effect of a kerosene tax. Hence our framework could serve as a tool to measure the effectiveness of competition on a relevant market or to design marketing strategies. More generally it can be applied in cases of oligopolistic competition when detailed data are not available. Keywords: product differentiation; relevant transport market; simulation model JEL: C35 C81 L11 L13 L92 L93 L98 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5004&r=all 247. Implementing the Stability and Growth Pact: Enforcement and Procedural Flexibility Beetsma, Roel Debrun, Xavier The paper proposes a theoretical analysis illustrating some key policy trade-offs involved in the implementation of a rules-based fiscal framework reminiscent of the Stability and Growth Pact ( SGP). The analysis offers some insights on the current debate about the SGP. Specifically, greater ‘procedural’ flexibility in the implementation of existing rules may improve welfare, thus making the Pact more easily acceptable to euro area Member States. Here, procedural flexibility designates the enforcer’s room to apply well-informed judgment on the basis of underlying policies and to set a consolidation path that does not discourage high- quality policy measures. Yet budgetary opaqueness may hinder the qualitative assessment of fiscal policy, possibly destroying the case for flexibility. Also, improved budget monitoring and greater transparency increase the benefits from greater procedural flexibility. Overall, we establish that a fiscal pact based on a simple deficit rule with conditional procedural flexibility can simultaneously contain excessive deficits, lower unproductive spending and increase high-quality outlays. Keywords: deficits; fiscal rules; procedural flexibility; Stability and Growth Pact; structural reforms JEL: E62 H60 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5005&r=all 248. Offsetting the Incentives: Rise Shifting and Benefits of Benchmarking in Money Management Basak, Suleyman Pavlova, Anna Shapiro, Alex Money managers are rewarded for increasing the value of assets under management, and predominantly so in the mutual fund industry. This gives the manager an implicit incentive to exploit the well-documented positive fund-flows to relative-performance relationship by manipulating her risk exposure. In a dynamic portfolio choice framework, we show that as the year-end approaches, the ensuing convexities in the manager's objective induce her to closely mimic the index, relative to which her performance is evaluated, when the fund's year-to-date return is sufficiently high. As her relative performance falls behind, she chooses to deviate from the index by either increasing or decreasing the volatility of her portfolio. The maximum deviation is achieved at a critical level of underperformance. It may be optimal for the manager to reach such deviation via selling the risky asset despite its positive risk premium. Under multiple sources of risk, with both systematic and idiosyncratic risks present, we show that optimal managerial risk shifting may not necessarily involve taking on any idiosyncratic risk. Costs of misaligned incentives to investors resulting from the manager's policy are economically significant. We then demonstrate how a simple risk management practice that accounts for benchmarking can ameliorate the adverse effects of managerial incentives. Keywords: benchmarking; fund flows; implicit incentives; portfolio choice; risk management; risk taking JEL: D60 D81 G11 G20 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5006&r=all 249. Does Fertility Respond to Financial Incentives? Laroque, Guy Salanie, Bernard We attempt here to evaluate the sensitivity of fertility to financial incentives in France. We discuss and implement several estimation strategies; our main focus is on a structural model of female participation and fertility based on a microsimulation model of the tax-benefit system. We estimate this model on individual data from the Labor Force Survey. Our results suggest that financial incentives play a sizable role in determining fertility decisions in France. Keywords: benefits; fertility; incentives; population JEL: H53 J13 J22 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5007&r=all 250. Shock Identification of Macroeconomic Forecasts Based on Daily Panels Amstad, Marlene Fischer, Andreas M A new procedure for shock identification of macroeconomic forecasts based on factor analysis is proposed. The identification scheme relies on daily panels and on the recognition that macroeconomic releases exhibit a high level of clustering. A large number of data releases on a single day is of considerable practical interest not only for the estimation but also for the identification of the factor model. The clustering of cross-sectional information facilitates the interpretation of the forecast innovations as real or as nominal shocks. An empirical application is provided for Swiss inflation. We show that the monetary policy shocks generate an asymmetric response to inflation, that the pass-through for CPI inflation is weak, and that the information shocks to inflation are not synchronized. Keywords: common factors; daily panels; inflation forecasting JEL: E52 E58 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5008&r=all 251. Money and the Size of Transactions Zeira, Joseph Consumers make transactions of different sizes over time. This paper shows that this fact, together with transaction costs of various assets, can help in developing a theory of liquidity. Assets with different cost structures are used to purchase different sizes of transactions. This can explain the demand for money itself, the precautionary demand for money, and the demand for cash and demand deposits. Thus consumers use cash for small transactions, demand deposits for larger transactions, and use savings for the largest transactions. Finally, the paper shows that modeling banks as suppliers of liquidity leads to a better understanding of their success as financial intermediaries. Keywords: banks; demand deposits; demand for money; transactions JEL: E40 E41 E51 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5010&r=all 252. Efficient Tuition & Fees, Examinations and Subsidies Gary-Bobo, Robert J. Trannoy, Alain A student's future log-wage is given by the sum of a skill premium and a random personal ‘ability’ term. Students observe only a private, noisy signal of their ability, and universities can condition admission decisions on the results of noisy tests. We assume first that universities are maximizing social surplus, and contrast the results with those obtained when they maximize rents. If capital markets are perfect, and if test results are public knowledge, then, there is no sorting on the basis of test scores. Students optimally self-select as a result of pricing only. In the absence of externalities generated by an individual's higher education, the optimal tuition is then greater than the university's marginal cost. If capital markets are perfect but asymmetries of information are bilateral, i.e., if universities observe a private signal of each student's ability, or if there are borrowing constraints, then, the optimal policy involves a mix of pricing and pre-entry selection based on the university's private information. Optimal tuition can then be set below marginal cost, and can even become negative, if the precision of the university's private assessment of students' abilities is high enough. Keywords: examinations; higher education; incomplete information; state subsidies; tuition fees JEL: D82 H42 I22 J24 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5011&r=all 253. Awareness of General Equilibrium Effects and Unemployment Gersbach, Hans Schniewind, Achim We examine wage bargaining in a two-sector economy when the employers and labour unions in each sector are not always aware of all the general equilibrium feedback effects. We show analytically that if agents only consider labour demand effects, low real wages and low unemployment are the result. With an intermediate view, i.e. when partial equilibrium effects within a sector are taken into account, high real wages and unemployment result. If all general equilibrium effects are simultaneously considered, we once again obtain a situation of low wages and unemployment. The assumption that unions and employers' federations are unable to incorporate all feedback effects from other sectors may explain why unemployment in Europe is high. Keywords: awareness of general equilibirum effects; sectoral wage bargaining; unemployment JEL: D58 E24 J60 L13 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5012&r=all 254. Democratic Mechanisms: Double Majority Rules and Flexible Agenda Costs Gersbach, Hans We develop democratic mechanisms where individual utilities are not observable by other people at the legislative stage. We show that an appropriate combination of three rules can yield efficient provision of public projects: first, flexible and double majority rules where the size of the majority depends on the proposal and verifiable parameters and taxed and non-taxed individuals need to support the proposal; second, flexible agenda costs where the agenda-setter has to pay a certain amount of money if his proposal does not generate enough supporting votes; third, a ban on subsidies. We provide a rationale why double majority rules are used in practice. We also show that higher degrees of uncertainty about project parameters can make it easier to achieve first-best allocations and that universal equal treatment with regard to taxation is undesirable. Keywords: democratic constitutions; double majority rules; flexible agenda cost rules; unobservable utilities JEL: D62 D72 H40 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5013&r=all 255. Optimality and Renegotiation in Dynamic Contracting Battaglini, Marco We characterize the optimal renegotiation-proof contract in a dynamic Principal-Agent model in which the type of the agent may change stochastically over time. Contrary to the case with constant types, the ex ante optimal contract may be renegotiation- proof even if types are highly correlated. The marginal benefit of having some pooling of types in the first period is not monotonic in their persistence level, but the equilibrium level of pooling is non-decreasing in persistence; and, for any level persistence, it is always optimal to partially screen the types by offering a menu of choices to the agent. Despite the non- linearity of the problem, the optimal equilibrium allocation is unique. Keywords: contract theory; dynamic contracts; regulation; renegotiation JEL: D42 L51 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5014&r=all 256. The Costs of Remoteness: Evidence from German Division and Reunification Redding, Stephen Sturm, Daniel This paper exploits the division of Germany after the Second World War and the reunification of East and West Germany in 1990 as a natural experiment to provide evidence of the importance of market access for economic development. In line with a standard new economic geography model, we find that following division cities in West Germany that were close to the new border between East and West Germany experienced a substantial decline in population growth relative to other West German cities. We provide several pieces of evidence that the decline of the border cities can be entirely accounted for by their loss in market access and is neither driven by differences in industrial structure nor differences in the degree of war related destruction. Finally, we also find some first evidence of a recovery of the border cities after the reunification of East and West Germany. Keywords: economic geography; german division; german reunification; market access JEL: F15 N94 O18 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5015&r=all 257. The Insiders' Dilemma: An Experiment on Merger Formation Lindqvist, Tobias Stennek, Johan This paper tests the insiders’ dilemma hypothesis in a laboratory experiment. The insiders’ dilemma means that a profitable merger does not occur, because it is even more profitable for each firm to unilaterally stand as an outsider ( Stigler, 1950; Kamien and Zang, 1990 and 1993). The experimental data provides support for the insiders’ dilemma, and thereby for endogenous rather than exogenous merger theory. More surprisingly, our data suggests that fairness (or relative performance) considerations also make profitable mergers difficult. Mergers that should occur in equilibrium do not, since they require an unequal split of surplus. Keywords: antitrust; coalition formation; experiment; insiders' dilemma; mergers JEL: C78 C92 G34 L13 L41 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5016&r=all 258. Explaining The Equity Risk Premium Lungu, Laurian Minford, Patrick We develop a simple overlapping generations model in which the young have a choice in investing in equities and index-linked bonds. Projections of share price uncertainty over a 30-year period show that the risk associated with such a long-term investment predicts an equity premium that matches historical values. Keywords: equity premium puzzle; risk premium JEL: G12 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5017&r=all 259. Peer Effects in Austrian Schools Schneeweis, Nicole Winter-Ebmer, Rudolf This study deals with educational production in Austria and is focused on the potential impact of schoolmates on students’ academic outcomes. We used PISA 2000 data to estimate peer effects for 15 and 16 year old students. The estimations yield substantial positive effects of the peer groups’ socioeconomic composition on student achievement. Furthermore, quantile regressions suggest peer effects to be asymmetric in favour of low-ability students, meaning that students with lower skills benefit more from being exposed to clever peers, whereas those with higher skills do not seem to be affected much. Social heterogeneity, moreover, has no big adverse effect on academic outcomes. These results imply considerable social gains of reducing stratification in educational settings. Keywords: education; peer effects; PISA study JEL: I21 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5018&r=all 260. Stochastic Optimization and Worst Case Analysis in Monetary Policy Design Zakovic, Stan Rustem, B Wieland, Volker In this paper we compare expected loss minimization to worst- case or minimax analysis in the design of simple Taylor-style rules for monetary policy using a small model estimated for the euro area by Orphanides and Wieland (2000). We find that rules optimized under a minimax objective in the presence of general parameter and shock uncertainty do not imply extreme policy activism. Such rules tend to obey the Brainard principle of cautionary policy-making in much the same way as rules derived by expected loss minimization. Rules derived by means of minimax analysis are effective insurance policies limiting maximum loss over ranges of parameter values to be set by the policy-maker. In practice, we propose to set these ranges with an eye towards the cost of such insurance cover in terms of the implied increase in expected inflation variability. Keywords: euro area; minimax; monetary policy rules; robust control; worst-case analysis JEL: E52 E58 E61 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5019&r=all 261. The Role of Risk Aversion and Intertemporal Substitution in Dynamic Consumption-Portfolio Choicewith Recursive Utility Bhamra, Harjoat S. Uppal, Raman The objective of this paper is to understand the implications for consumption and portfolio choice of the separation of an investor’s risk aversion and elasticity of intertemporal substitution that is made possible by recursive utility, in contrast to expected utility, where the two are governed by the same parameter. In particular, we study exactly how risk aversion and elasticity of intertemporal substitution affect optimal dynamic consumption and portfolio decisions. For a three-date, discrete-time model with a stochastic interest rate, we obtain an exact analytic solution for the optimal consumption and portfolio policies. We find that, in general, the consumption and portfolio decisions depend on both risk aversion and the elasticity of intertemporal substitution. Only in the case where the investment opportunity set is constant, is the optimal portfolio weight independent of the elasticity of intertemporal substitution. We also find that the size of risk aversion relative to unity determines the sign of the intertemporal hedging component in the optimal portfolio, while elasticity of intertemporal substitution affects only the magnitude of the hedging component. Keywords: decision making; intertemporal optimization JEL: D81 D91 G11 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5020&r=all 262. Betting on Hitler - The Value of Political Connections in Nazi Germany Ferguson, Thomas Voth, Hans-Joachim We examine the effect of close ties with the NSDAP on the stock price of listed firms in 1932-33. We consider not only links between the National Socialists and executives, as was common in earlier work, but also with supervisory board members – whose importance is hard to overestimate in the case of German industry. One implication of our work is that, weighted by stock market capitalization in 1932, more than half of listed firms on the Berlin stock exchange had substantive links with the NSDAP. Crucially, stock market investors recognized the value of these links, sending the share prices of connected firms up as the new regime became firmly established. While the market as a whole rose after Hitler’s accession to power, firms with board members known to favour the party (or backing it financially) outperformed the market by 5-10% between January and May 1933. We show that this finding is robust to a range of additional control variables and alternative estimation techniques. Keywords: market efficiency; Nazi party; political connections; stock market returns JEL: E60 G14 G18 N24 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5021&r=all 263. Parallel Trade, International Exhaustion and Intellectual Property Rights: A Welfare Analysis Szymanski, Stefan Valletti, Tommaso This paper analyses the issue of parallel trade (arbitrage) for products protected by intellectual property rights. Many countries have traditionally allowed owners of intellectual property rights to prohibit arbitrage in the face of international price discrimination. In a well-known paper Malueg and Schwartz (1994) showed that this policy decreases social welfare when the same markets are served in both regimes, with and without arbitrage. Their model considered only the setting of prices, and not investment in product development. We consider a two-stage game where firms choose quality first and then prices. Since the threat of arbitrage ex post reduces the incentive to invest ex ante, the net benefits of parallel trade may vanish. We also show that the size of the welfare effects is significantly affected by the presence of a ‘generic’ product, which represents a form of competition for the monopolist. The monopolist will introduce a ‘fighting brand’ to compete with the generic, which dilutes but does not eliminate the result on the adverse effects of parallel trade on investments. Keywords: investments; parallel trade; price discrimination JEL: F13 L12 O34 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5022&r=all 264. Reciprocal Dumping with Bertrand Competition Friberg, Richard Ganslandt, Mattias This paper examines if international trade can reduce total welfare in an international oligopoly with differentiated goods. We show that welfare is a U-shaped function in the transport cost as long as trade occurs in equilibrium. With a Cournot duopoly trade can reduce welfare compared to autarky for any degree of product differentiation. Under Bertrand competition we show that trade may reduce welfare compared to autarky, if firms produce sufficiently close substitutes and the autarky equilibrium is sufficiently competitive. Otherwise it cannot. Keywords: intra-industry trade; oligopoly; product differentiation; reciprocal dumping; transport costs JEL: F12 F15 L13 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5023&r=all 265. Finite State Dynamic Games with Asymmetric Information: A Framework for Applied Work Fershtman, Chaim Pakes, Ariel We present a framework for the applied analysis of dynamic games with asymmetric information. The framework consists of a definition of equilibrium, and an algorithm to compute it. Our definition of Applied Markov Perfect equilibrium is an extension of the definition of Markov Perfect equilibrium for games with asymmetric information; an extension chosen for its usefulness to applied research. Each agent conditions its strategy on the payoff or informationally relevant variables that are observed by that particular agent. The strategies are optimal given the beliefs on the evolution of these observed variables, and the rules governing the evolution of the observables are consistent with the equilibrium strategies. We then provide a simple algorithm for computing this equilibrium. The algorithm is easy to program and does not require computation of posterior distributions, explicit integration over possible future states, or information from all possible points in the state space. For specificity, we present our results in the context of a dynamic oligopoly game with collusion in which the outcome of firms’ investments are random and only observed by the investing agent. We then use this example to illustrate the computational properties of the algorithm. Keywords: cartels; collusive behaviour; dynamic games; numerical analysis JEL: C63 C73 L13 L40 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5024&r=all 266. The Effects of Technical Change on Labour Market Inequalities Hornstein, Andreas Krusell, Per Violante, Giovanni L In this chapter we inspect economic mechanisms through which technological progress shapes the degree of inequality among workers in the labour market. A key focus is on the rise of US wage inequality over the past 30 years. However, we also pay attention to how Europe did not experience changes in wage inequality but instead saw a sharp increase in unemployment and an increased labour share of income, variables that remained stable in the US We hypothesize that these changes in labour market inequalities can be accounted for by the wave of capital- embodied technological change, which we also document. We propose a variety of mechanisms based on how technology increases the returns to education, ability, experience, and ‘luck’ in the labour market. We also discuss how the wage distribution may have been indirectly influenced by technical change through changes in certain aspects of the organization of work, such as the hierarchical structure of firms, the extent of unionization, and the degree of centralization of bargaining. To account for the US- Europe differences, we use a theory based on institutional differences between the United States and Europe, along with a common acceleration of technical change. Finally, we briefly comment on the implications of labour market inequalities for welfare and for economic policy. Keywords: inequality; institutions; labour market; skills; technological change JEL: D30 J30 O30 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5025&r=all 267. The Replacement Problem in Frictional Economies: An 'Equivalence Result' Hornstein, Andreas Krusell, Per Violante, Giovanni L We examine how technological change affects wage inequality and unemployment in a calibrated model of matching frictions in the labour market. We distinguish between two polar cases studied in the literature: a ‘creative destruction’ economy where new machines enter chiefly through new matches, and an ‘upgrading’ economy where machines in existing matches are replaced by new machines. Our main results are: (i) these two economies produce very similar quantitative outcomes, and (ii) the total amount of wage inequality generated by frictions is very small. We explain these findings in light of the fact that, in the model calibrated to the US economy, both unemployment and vacancy durations are very short, i.e., the matching frictions are quantitatively minor. Hence, the equilibrium allocations of the model are remarkably close to those of a frictionless version of our economy where firms are indifferent between upgrading and creative destruction, and where every worker is paid the same market-clearing wage. These results are robust to extensions of the benchmark model that incorporate machine-specific and match- specific heterogeneity. Keywords: creative destruction; inequality; technical change; unemployment; upgrading JEL: J41 J64 O33 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5026&r=all 268. Funding Modes of German Banks: Structural Changes and its Implications Norden, Lars Weber, Martin This paper examines funding modes of German banks and its implications for lending and profitability over the period 1992- 2002. Analysing individual bank data from the Deutsche Bundesbank, we first find that deposits from customers lose ground in relative terms while interbank liabilities increase as a source of funding. Second, we cannot detect a negative impact of the relative decline in deposits on the lending business. In contrast, loans to customers become even slightly more important. Third, the decreasing ability of banks to mobilize deposits from customers and the substitution of deposits by interbank liabilities unfavourably affects the net interest results of savings banks. Keywords: banks; deposit taking; disintermediation; panel analysis JEL: G21 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5027&r=all 269. Agglomeration and the Adjustment of the Spatial Economy Combes, Pierre-Philippe Duranton, Gilles Overman, Henry G. We consider the literatures on urban systems and New Economic Geography to examine questions concerning agglomeration and how areas respond to shocks to the economic environment. We first propose a diagrammatic framework to compare the two approaches. We then use this framework to study a number of extensions and to consider several policy relevant issues. Keywords: diagrammatic exposition; New Economic Geography; urban and regional policy; urban systems JEL: R00 R58 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5028&r=all 270. Real Exchange Rate Overshooting RBC Style Meenagh, David Minford, Patrick Nowell, Eric Sofat, Prakriti This paper establishes the ability of a Real Business Cycle model to account for real exchange rate (RXR) behaviour, using UK experience as empirical focus. We show that a productivity burst simulation is capable of explaining the appreciation of RXR and its cyclical pattern observed in the data. We then test if our model is consistent with the facts. We bootstrap our model to generate pseudo RXR series and check if the ARIMA parameters estimated for the data lie within 95% confidence limits implied by our model. We find that RXR behaviour is explicable within an RBC framework. Keywords: productivity; real business cycle; real exchange rate JEL: E32 F31 F41 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5029&r=all 271. The Affectionate Society: Does Competition for Partners Promote Friendliness? Gersbach, Hans Haller, Hans We study household formation in a model where collective consumption decisions of a household depend on the strategic choices of its members. The surplus of households is determined by individual choices of levels of friendliness to each other. A strategic conflict arises from a coupling condition that ceteris paribus, a person's friendlier attitude reduces the individual's influence in the household's collective decision on how to divide the ensuing surplus. While partners in an isolated household choose the minimum level of friendliness, competition for partners tends to promote friendliness. We find that affluence does not buy affection, but can lead to withholding of affection by an affluent partner who can afford to do so. In general, the equilibrium degree of friendliness proves sensitive to the socio- economic composition of the population. Keywords: collective decisions; competition for partners; coupling condition; friendliness; socio-economic composition JEL: D13 D50 D70 J10 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5030&r=all 272. Information Exchange and Competition in Communications Networks Cambini, Carlo Valletti, Tommaso We develop a model of information exchange between calling parties. We characterize the equilibrium when two interconnected networks compete for such users by charging both for outgoing and incoming calls. We show that networks have reduced incentives to use off-net price discrimination to induce a connectivity breakdown when calls originated and received are complements in the information exchange. This breakdown disappears if operators are allowed to negotiate reciprocal access charges. We also show that a ‘bill-and-keep’ system over access charges can approximate an efficient regime and we discuss when this system emerges from private negotiations. Keywords: access charges; bill-and-keep; information exchange; interconnection; reception charges JEL: L41 L96 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5031&r=all 273. Implementation Cycles in the New Economy Scaramozzino, Pasquale Temple, Jonathan Vulkan, Nir The economic boom of the USA in the 1990s was remarkable in its duration, the sustained rise in equipment investment, the reduced volatility of productivity growth, and continued uncertainty about the trend growth rate. In this paper we link these phenomena using an extension of the classic model of implementation cycles due to Shleifer (1986). The key idea is that uncertainty about the trend growth rate can lead firms to bring forward the implementation of innovations, temporarily eliminating expectations-driven business cycles, because delay is risky when beliefs are not common knowledge. Keywords: implementation cycles; multiple equilibria; New Economy JEL: E32 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5032&r=all 274. Dual Employment Protection Legislation: A Framework for Analysis Dolado, Juan Jose Jansen, Marcel Jimeno-Serrano, Juan Francisco In many countries, Employment Protection Legislation (EPL) establishes different regulations for certain groups of workers who face more disadvantages in the labour market (young workers, women, unskilled workers, etc.) with the aim of improving their employability. Well-known examples are the introduction of atypical employment contracts (e.g. temporary and determined- duration contracts), which ease firing restrictions for some, but not all, workers. This paper discusses the effects of EPL varying among workers of different skills on the level and composition of unemployment, job flows, productivity and welfare. By using an extension of Mortensen-Pissarides’ (1994) search model where heterogeneous workers compete for the same jobs, we are able to identify several key channels through which changing firing costs for some groups of workers affects hiring and firing of all workers and, hence, may have a different impact on aggregate labour market variables than reducing firing costs across the board. Some analytical and simulation results also show that these effects of differentiated firing costs by workers’ skills may be different depending upon the initial state of the labour market. Keywords: firing costs; matching; unemployment JEL: J63 J64 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5033&r=all 275. Regional and Sub-Global Climate Blocs. A Game-Theoretic Perspective on Bottom-up Climate Regimes Buchner, Barbara Carraro, Carlo No international regime on climate change is going to be fully effective in controlling GHG emissions without the involvement of countries such as China, India, the United States, Australia, and possibly other developing countries. This highlights an unambiguous weakness of the Kyoto Protocol, where the aforementioned countries either have no binding emission targets or have decided not to comply with their targets. Therefore, when discussing possible post-Kyoto scenarios, it is crucial to prioritise participation incentives for all countries, especially those without explicit or with insufficient abatement targets. This paper offers a bottom-up game-theoretic perspective on participation incentives. Rather than focusing on issue linkage, transfers or burden sharing as tools to enhance the incentives to participate in a climate agreement, this paper aims at exploring whether a different policy approach could lead more countries to adopt effective climate control policies. This policy approach is explicitly bottom-up, namely it gives each country the freedom to sign agreements and deals, bilaterally or multilaterally, with other countries, without being constrained by any global protocol or convention. This study provides a game-theoretic assessment of this policy approach and then evaluates empirically the possible endogenous emergence of single or multiple climate coalitions. Welfare and technological consequences of different multiple bloc climate regimes will be assessed and their overall environmental effectiveness will be discussed. Keywords: agreements; climate; incentives; negotiations; policy JEL: C72 H23 Q25 Q28 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5034&r=all 276. A Study of Inefficient Going Concerns in Bankruptcy Franks, Julian R Loranth, Gyongyi This paper provides the first large-scale study measuring the bias in favour of going concerns induced by court-administered bankruptcy procedures. Although we find that the large majority of bankrupt firms in our sample of Hungarian firms are kept as going concerns, the evidence suggests that the going concern bias sharply reduces aggregate proceeds to pre-bankruptcy creditors. The high costs are accompanied by the eventual closure and piecemeal sale of three quarters of going concerns. These results arise because of poor court oversight and the compensation scheme awarded to the court appointed trustee managing the bankrupt company. Comparisons with other bankruptcy codes suggest that the application of the code and court procedures have an important impact on outcomes, including the degree of inefficiency. Keywords: Allocation of Control Rights; Bankruptcy Code; Compensation; Recovery Rates JEL: G21 G30 G33 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5035&r=all 277. Regulating Financial Conglomerates Freixas, Xavier Loranth, Gyongyi Morrison, Alan We investigate the optimal regulation of financial conglomerates that combine a bank and a non-bank financial institution. The conglomerate’s risk-taking incentives depend upon the level of market discipline it faces, which in turn is determined by the conglomerate’s liability structure. We examine optimal capital requirements for standalone institutions, for integrated financial conglomerates, and for financial conglomerates that are structured as holding companies. For a given risk profile, integrated conglomerates have a lower probability of failure than either their standalone or decentralized equivalent. However, when risk profiles are endogenously selected conglomeration may extend the reach of the deposit insurance safety net and hence provide incentives for increased risk-taking. As a result, integrated conglomerates may optimally attract higher capital requirements. In contrast, decentralized conglomerates are able to hold assets in the socially most efficient place. Their optimal capital requirements encourage this. Hence, the practice of ‘regulatory arbitrage’, or of transferring assets from one balance sheet to another, is welfare-increasing. We discuss the policy implications of our finding in the context not only of the present debate on the regulation of financial conglomerates but also in the light of existing US bank holding company regulation. Keywords: capital regulation; financial conglomerate; regulatory arbitrage JEL: G21 G22 G28 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5036&r=all 278. A Cross-Country Financial Accelerator: Evidence from North America and Europe Mody, Ashoka Sarno, Lucio Taylor, Mark P A growing literature has examined the importance of credit market imperfections for macroeconomic fluctuations, the so- called financial accelerator. A related literature has provided evidence of international and regional co-movements in macroeconomic fluctuations. We tie together these strands of the literature in that we investigate the importance of both cross- country and country-specific credit cycles in explaining output fluctuations. Using data for four major economies and two world regions from 1973 to 2001, we find that both regional and country- specific components of indicators of credit availability are powerful in explaining output movements. This research provides the first empirical evidence of a cross-country financial accelerator. Keywords: credit cycle; financial accelerator; international business cycles; Kalman filter JEL: E32 E51 F36 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5037&r=all 279. Intermediaries as Bundlers, Traders and Quality Assessors: The Case of UK Tour Operators Clerides, Sofronis Nearchou, Paris Pashardes, Panos We study the intermediary role of tour operators in the market for package tourism. Intermediaries often arise in order to facilitate trade in markets characterized by asymmetric information. In the travel industry policy-makers have tried to address information asymmetries by providing hotel ratings. We argue that those ratings are not accurate indicators of quality. Ratings provided by tour operators are more informative and allow for international comparisons. Intermediation by tour operators provides a better matching of quality with price and therefore leads to a more efficient market outcome. There is, nonetheless, scope for government intervention to improve information provision. Keywords: asymmetric information; intermediaries; middlemen; tour operators; tourism industry JEL: L15 L83 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5038&r=all 280. Pareto Improving Social Security Reform when Financial Markets Are Incomplete Krueger, Dirk Kubler, Felix This paper studies an overlapping generations model with stochastic production and incomplete markets to assess whether the introduction of an unfunded social security system leads to a Pareto improvement. When returns to capital and wages are imperfectly correlated a system that endows retired households with claims to labour income enhances the sharing of aggregate risk between generations. Our quantitative analysis shows that, abstracting from the capital crowding-out effect, the introduction of social security represents a Pareto improving reform, even when the economy is dynamically efficient. However, the severity of the crowding-out effect in general equilibrium tends to overturn these gains. Keywords: aggregate fluctuations; incomplete markets; intergenerational risk sharing; social security reform JEL: D58 D91 E62 H31 H55 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5039&r=all 281. On the Optimal Progressivity of the Income Tax Code Conesa, Juan Carlos Krueger, Dirk This paper computes the optimal progressivity of the income tax code in a dynamic general equilibrium model with household heterogeneity in which uninsurable labour productivity risk gives rise to a nontrivial income and wealth distribution. A progressive tax system serves as a partial substitute for missing insurance markets and enhances an equal distribution of economic welfare. These beneficial effects of a progressive tax system have to be traded off against the efficiency loss arising from distorting endogenous labour supply and capital accumulation decisions. Using a utilitarian steady state social welfare criterion we find that the optimal US income tax is well approximated by a flat tax rate of 17.2% and a fixed deduction of about $9,400. The steady state welfare gains from a fundamental tax reform towards this tax system are equivalent to 1.7% higher consumption in each state of the world. An explicit computation of the transition path induced by a reform of the current towards the optimal tax system indicates that a majority of the population currently alive (roughly 62%) would experience welfare gains, suggesting that such fundamental income tax reform is not only desirable, but may also be politically feasible. Keywords: flat taxes; optimal taxation; progressive taxation; social insurance; transition JEL: E62 H21 H24 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5040&r=all 282. Portfolio Selection with Parameter and Model Uncertainty: A Multi-Prior Approach Garlappi, Lorenzo Uppal, Raman Wang, Tan In this paper, we show how an investor can incorporate uncertainty about expected returns when choosing a mean-variance optimal portfolio. In contrast to the Bayesian approach to estimation error, where there is only a single prior and the investor is neutral to uncertainty, we consider the case where the investor has multiple priors and is averse to uncertainty. We characterize the multiple priors with a confidence interval around the estimated value of expected returns and we model aversion to uncertainty via a minimization over the set of priors. The multi-prior model has several attractive features: One, just like the Bayesian model, it is firmly grounded in decision theory. Two, it is flexible enough to allow for different degrees of uncertainty about expected returns for different subsets of assets, and also about the underlying asset-pricing model generating returns. Three, for several formulations of the multi- prior model we obtain closed-form expressions for the optimal portfolio, and in one special case we prove that the portfolio from the multi-prior model is equivalent to a ‘shrinkage’ portfolio based on the mean-variance and minimum-variance portfolios, which allows for a transparent comparison with Bayesian portfolios. Finally, we illustrate how to implement the multi-prior model for a fund manager allocating wealth across eight international equity indices; our empirical analysis suggests that allowing for parameter and model uncertainty reduces the fluctuation of portfolio weights over time and improves the out-of sample performance relative to the mean- variance and Bayesian models. Keywords: ambiguity; asset allocation; estimation error; portfolio choice; robustness; uncertainty JEL: D81 G11 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5041&r=all 283. Forming Rational Expectations and When it is Right to be 'Wrong' Demertzis, Maria Hughes Hallett, Andrew In this paper we examine the effects of private agents being less than fully rational. We examine this in the context of monetary policy, where the Central Bank may have uncertain preferences either by choice or by necessity. The new feature is that we allow the public to react in two different ways to this uncertainty. They either form rational expectations and internalize the uncertainty about the Central Bank’s preferences in full; or alternatively, and if this process of internalization is costly, it forms a ‘best’ guess regarding those preferences. This implies a certainty equivalence strategy applied to the preference parameters. As those parameters enter the decisions non-linearly, a systematic error emerges. We examine the magnitude of the resulting error in inflation and output, following the assumption of certainty equivalence. Under all reasonable levels of uncertainty this error turns out to be small but involves trading a deflation bias against the cost of gathering the information needed for the full rational expectations solution. Keywords: central bank preference uncertainty; certainty equivalence; rational expectations JEL: E52 E58 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5042&r=all 284. In Praise of Fiscal Restraint and Debt Rules. What the Euro Zone Might Do Now Hughes Hallett, Andrew This paper attempts to reconcile the need for flexibility in fiscal policy, with the need for credibility and consistency in monetary policies. The idea is to generate fewer conflicts between policies but greater discipline within them. We assume an independent central bank and restraints on the use of national fiscal policies. Using a theoretical model, we examine the consequences of assigning leadership to fiscal or monetary policies to exploit the implicit (rule based) coordination available under standard transmission mechanisms, but where priorities and targets differ between policy makers. This works best with fiscal leadership: we introduce a debt rule (with hard or soft targets) to precommit fiscal policies over the longer term, but use monetary independence to guarantee credibility and discipline in the short run stabilization policies. Compared to the uncoordinated solution now operating in Europe, inflation biases are lower and debt repayments higher for no loss in output volatility. That corresponds to the experience of the UK, our benchmark case, whose empirical reaction functions show fiscal leadership. Across ten OECD countries, these gains are estimated to be worth 2%-4% of GDP. Keywords: debt rule; institutional coordination; soft targets; stackelberg leadership JEL: E52 E61 F42 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5043&r=all 285. What Determines the Future Value of an Icon Wine? New Evidence from Australia Anderson, Kym Wood, Danielle To what extent can the future price of icon wines be anticipated from information available at the time of their initial sale by wineries? Using a hedonic model we show that weather variables and changes in production techniques, along with the age of the wine, have significant power in explaining the secondary market price variation across different vintages of each of three icon Australian red wines. The results have implications for winemakers in determining the prices they pay for grapes and charge for their wines, and for consumers/wine investors as a guide to the prospective quality of immature icon wines. Keywords: hedonic pricing model; investment under certainty; wine quality JEL: C23 D12 D44 D80 G12 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5044&r=all 286. Trade Preferences to Small Developing Countries and the Welfare Costs of Lost Multilateral Liberalization Limao, Nuno Olarreaga, Marcelo The proliferation of preferential trade liberalization over the last 20 years has raised the question of whether it slows down multilateral trade liberalization. Recent theoretical and empirical evidence indicates this is the case even for unilateral preferences that developed countries provide to small and poor countries but there is no estimate of the resulting welfare costs. To avoid this stumbling block effect we suggest replacing unilateral preferences by a fixed import subsidy. We argue that this scheme would reduce the drag of preferences on multilateral liberalization and generate a Pareto improvement. More importantly, we provide the first estimates of the welfare cost of preferential liberalization as a stumbling block to multilateral liberalization. By combining recent estimates of the stumbling block effect of preferences with data for 170 countries and over 5,000 products we calculate the welfare effects of the United States, European Union and Japan switching from unilateral preferences to Least Developed Countries to the import subsidy scheme. Even in a model with no dynamic gains to trade we find that the switch produces an annual net welfare gain for the 170 countries ($4,354 million) and for each group: the United States, European Union and Japan ($2,934 million), Least Developed Countries ($520 million) and the rest of the world ($900 million). Keywords: MFN tariff concessions; multilateral trade negotiations; preference erosion; preferential trade agreements JEL: D78 F13 F14 F15 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5045&r=all 287. Optimal Transfers and Participation Decisions in International Environmental Agreements Carraro, Carlo Eyckmans, Johan Finus, Michael The literature on international environmental agreements has recognized the role transfers play in encouraging participation in international environmental agreements (IEAs), but the few results achieved so far are overly specific and do not exploit the full potential of transfers for successful treaty-making. Therefore, in this paper, we develop a framework that enables us to study the role of transfers in a more systematic way. We propose a design for transfers using both internal and external financial resources and making 'welfare optimal agreements' self- enforcing. To illustrate the relevance of our transfer scheme for actual treaty-making, we use a well-known integrated assessment model of climate change to show how appropriate transfers may be able to induce almost all countries into signing a self-enforcing climate treaty. Keywords: climate policy; international environmental agreements; self-enforcing international environmental agreements; transfers JEL: C72 H23 Q25 Q28 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5046&r=all 288. Human Capital and Optimal Positive Taxation of Capital Income Bovenberg, A Lans Jacobs, Bas This paper analyzes optimal linear taxes on capital and labour incomes in a life-cycle model of human capital investment, financial savings, and labour supply with heterogenous individuals. A dual income tax with a positive marginal tax rate on not only labour income but also capital income is optimal. The positive tax on capital income serves to alleviate the distortions of the labour tax on human capital accumulation. The optimal marginal tax rate on capital income is lower than that on labour income if savings are elastic compared to investment in human capital; substitution between inputs in human capital formation is difficult; and most investments in human capital are verifiable. Numerical calculations suggest that the optimal marginal tax rate on capital income is close to the tax rate on labour income. Keywords: capital income taxation; education subsidies; human capital; labour income taxation; life cycle JEL: H2 H5 I2 J2 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5047&r=all 289. Must Try Harder. Evaluating the Role of Effort in Educational Attainment De Fraja, Gianni Oliveira, Tania Zanchi, Luisa This paper is based on the idea that the effort exerted by children, parents and schools affects the outcome of the education process. We test this idea using the National Child Development Study. Our theoretical model suggests that the effort exerted by the three groups of agents is simultaneously determined as a Nash equilibrium, and is therefore endogenous in the estimation of the education production function. Our results support this, and indicate which factors affect examination results directly and which indirectly via effort; they also suggest that affecting effort directly has an impact on results. Keywords: educational achievement; educational attainment; educational outcomes; effort at school; examination results Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5048&r=all 290. Would Multilateral Trade Reform Benefit Sub-Saharan Africans? Anderson, Kym Martin, Will van der Mensbrugghe, Dominique This paper examines whether, in the presence of trade preferences, Sub-Saharan African economies, and especially its poorest households, could gain from multilateral trade reform. The World Bank’s LINKAGE model of the global economy is employed to examine the impact first of current trade barriers and agricultural subsidies, and then of possible outcomes from the WTO’s Doha round. The results suggest moving to free global merchandise trade would boost real incomes in sub-Saharan Africa proportionately more than in other developing countries or in high-income countries, despite a terms of trade loss in parts of the region. Farm employment and output, the real value of agricultural and food exports, the real returns to farm land and unskilled labor, and real net farm incomes would all rise in the region, thereby alleviating poverty. A Doha partial liberalization of both agricultural and no-agricultural trade could take the region some way towards those desirable outcomes, but more so the more both rich and poor countries reduce their applied tariffs. Keywords: computable general equilibrium; multilateral negotiationa; sub-Saharan Africa; trade policy; WTO JEL: C68 D58 F13 F17 O55 Q17 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5049&r=all 291. Measuring Income Elasticity for Swiss Money Demand: What Do the Cantons Say About Financial Innovation? Fischer, Andreas M Recent time-series evidence has reconfirmed the forecasting ability of Swiss broad money. The same money demand studies and others, however, find that the income elasticity is greater than one. Such parameter estimates are difficult to reconcile with transactions demand theory. This study re-examines the estimates for income elasticity in money demand based on cross-regional evidence for Switzerland. Particular attention is given to the influence of regional financial sophistication. The cross- cantonal results find that the income elasticity lies between 0.4 and 0.6. This discrepancy between the two empirical methodologies has important consequences for the conduct of Swiss monetary policy. Keywords: cross-regional estimates; money demand; regional financial sophistication JEL: C21 E41 E50 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5050&r=all 292. Should Uniform Pricing Contraints be Imposed on Entrants? Hoernig, Steffen This paper analyses the effects of universal service obligations, such as uniform pricing, coverage constraints and price caps, on markets newly opened to competition, e.g. broadband services. We show that the requirement of uniform pricing has strong repercussions on coverage decisions. Imposed on the incumbent only, it may distort his coverage decision downward to avoid duopoly entry. If also imposed on entrants it increases the likelihood that entry leads to independent monopolies rather than competition. A large enough coverage constraint on the incumbent re-establishes incentives for duopoly entry, but may lead to higher prices. Keywords: coverage constraints; entry; price caps; uniform pricing; universal service obligations JEL: L43 L51 L52 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5052&r=all 293. Inattentive Consumers Reis, Ricardo A.M.R. This paper studies the consumption decisions of agents who face costs of acquiring, absorbing and processing information. These consumers rationally choose to only sporadically update their information and re-compute their optimal consumption plans. In between updating dates, they remain inattentive. This behaviour implies that news disperses slowly throughout the population, so events have a gradual and delayed effect on aggregate consumption. The model predicts that aggregate consumption adjusts slowly to shocks, and is able to explain the excess sensitivity and excess smoothness puzzles. In addition, individual consumption is sensitive to ordinary and unexpected past news, but it is not sensitive to extraordinary or predictable events. The model further predicts that some people rationally choose to not plan, live hand-to-mouth, and save less, while other people sporadically update their plans. The longer are these plans, the more they save. Evidence using US aggregate and microeconomic data generally supports these predictions. Keywords: bounded rationality; consumption; excess sensitivity; excess smoothness; hand-to-mouth consumers; inattentiveness JEL: D1 D8 D9 E2 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5053&r=all 294. The Time-Series Properties of Aggregate Consumption: Implications for the Costs of Fluctuations Reis, Ricardo A.M.R. While this is typically ignored, the properties of the stochastic process followed by aggregate consumption affect the estimates of the costs of fluctuations. This paper pursues two approaches to modelling aggregate consumption dynamics and to measuring how much society dislikes fluctuations, one statistical and one economic. The statistical approach estimates the properties of consumption and calculates the cost of having consumption fluctuating around its mean growth. The paper finds that the persistence of consumption is a crucial determinant of these costs and that the high persistence in the data severely distorts conventional measures. It shows how to compute valid estimates and confidence intervals. The economic approach uses a calibrated model of optimal consumption and measures the costs of eliminating income shocks. This uncovers a further cost of uncertainty, through its impact on precautionary savings and investment. The two approaches lead to costs of fluctuations that are higher than the common wisdom, between 0.5% and 5% of per capita consumption. Keywords: consumption persistence; costs of fluctuations; models of aggregate consumption JEL: E21 E32 E60 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5054&r=all 295. Who is Against Immigration? A Cross-Country Investigation of Individual Attitudes Towards Immigration Mayda, Anna Maria This paper empirically analyzes both economic and non-economic determinants of attitudes towards immigrants, within and across countries. The two individual-level survey data sets used, covering a wide range of developed and developing countries, make it possible to test for interactive effects between individual characteristics and country-level attributes. In particular, trade and labour economics theories of labour markets predict that the correlation between pro-immigration attitudes and individual skill should be related to the skill composition of natives relative to immigrants in the destination country. Skilled individuals should favour immigration in countries where natives are more skilled than immigrants and oppose it in the other countries. Results based on both direct and indirect measures of the relative skill composition of natives to immigrants are consistent with these predictions. Individual skill and pro-immigration attitudes are positively correlated in countries where the skill composition of natives relative to immigrants is high. Individuals with higher levels of skill are more likely to be pro-immigration in high per capita GDP countries and less likely in low per capita GDP countries. Non- economic variables also appear to be correlated with immigration attitudes but they don’t seem to alter significantly the results on the economic explanations. Keywords: immigration attitudes; international migration; political economy JEL: F1 F22 J61 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5055&r=all 296. Rule-Based Monetary Policy Under Central Banking Learning Aoki, Kosuke Nikolov, Kalin The paper evaluates the performance of three popular monetary policy rules when the central bank is learning about the parameter values of a simple New Keynesian model. The three policies are: (1) the optimal non-inertial rule; (2) the optimal history-dependent rule; (3) the optimal price-level targeting rule. Under rational expectations rules (2) and (3) both implement the fully optimal equilibrium by improving the output- inflation trade off. When imperfect information about the model parameters is introduced, it is found that the central bank makes monetary policy mistakes, which affect welfare to a different degree under the three rules. The optimal history-dependent rule is worst affected and delivers the lowest welfare. Price level targeting performs best under learning and maintains the advantages of conducting policy under commitment. These findings are related to the literatures on feedback control and robustness. The paper argues that adopting integral representations of rules designed under full information is desirable because they deliver the beneficial output-inflation trade-off of commitment policy while being robust to implementation errors. Keywords: learning; monetary policy rules JEL: E31 E50 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5056&r=all 297. Does Self-Employment Reduce Unemployment? Audretsch, David B Carree, Martin A Thurik, A R Roy van Stel, A J This paper investigates the dynamic interrelationship between self-employment and unemployment rates. On the one hand, unemployment rates may stimulate start-up activity of self- employed. On the other hand, higher rates of self-employment may indicate increased entrepreneurial activity reducing unemployment in subsequent periods. These two effects have resulted in considerable ambiguities about the interrelationship between unemployment and entrepreneurial activity. This paper introduces a two equation vector autoregression model capable of reconciling these ambiguities and tests it for data of 23 OECD countries over the period 1974-2002. The empirical results confirm the two distinct relationships between unemployment and self-employment, i.e. ‘refugee’ and ‘entrepreneurial’ effects. We also find that the ‘entrepreneurial’ effects are considerably stronger than the ‘refugee’ effects. Keywords: entreprenuership; Gibrat's Law JEL: L11 M13 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5057&r=all 298. Refugees, Asylum Seekers and Policy in Europe Hatton, Timothy J. Williamson, Jeffrey G The number of refugees worldwide is now 12 million, up from 3 million in the early 1970s. And the number seeking asylum in the developed world increased tenfold, from about 50,000 per annum to half a million over the same period. Governments and international agencies have grappled with the twin problems of providing adequate humanitarian assistance in the Third World and avoiding floods of unwanted asylum seekers arriving on the doorsteps of the First World. This is an issue that is long on rhetoric, as newspaper reports testify, but surprisingly short on economic analysis. This paper draws on the recent literature, and ongoing research, to address a series of questions that are relevant to the debate. First, we examine the causes of refugee displacements and asylum flows, focusing on the effects of conflict, political upheaval and economic incentives to migrate. Second, we examine the evolution of policies towards asylum seekers and the effects of those policies, particularly in Europe. Finally, we ask whether greater international coordination could produce better outcomes for refugee-receiving countries and for the refugees themselves. Keywords: asylum seekers; migration policy; refugees JEL: F22 J10 O15 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5058&r=all 299. Global View of Economic Growth Ventura, Jaume This paper integrates in a unified and tractable framework some of the key insights of the field of international trade and economic growth. It examines a sequence of theoretical models that share a common description of technology and preferences but differ on their assumptions about trade frictions. By comparing the predictions of these models against each other, it is possible to identify a variety of channels through which trade affects the evolution of world income and its geographical distribution. By comparing the predictions of these models against the data, it is also possible to construct coherent explanations of income differences and long-run trends in economic growth. Keywords: economic growth; globalization; international trade JEL: F10 F15 F40 F43 O11 O40 O41 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5059&r=all 300. Strategic R&D Location by Multinational Firms: Spillovers, Technology Sourcing and Competition Belderbos, Rene Lykogianni, Elissavet Veugelers, Reinhilde We analyse strategic interaction in R&D internationalization decisions by two multinational firms competing both abroad and in their home markets and examine different incentives for foreign R&D faced by technology leaders and technology laggards. The model takes into account the impact of local inter-firm R&D spillovers, (non-costless) international intra-firm transfer of knowledge, and the notion that internal R&D increases the effectiveness of incoming spillovers. Greater efficiency of intra- firm transfers and greater spillovers increases the attractiveness of home R&D to the technology leader. The lagging firm in contrast increases the share of foreign R&D as overseas technology sourcing becomes more effective. Greater product market competition encourages the leading firm to engage in foreign R&D to capture a larger share of profits on the foreign market, while laggards concentrate more R&D at home to defend their home market position. The country with a stricter intellectual property rights regime attracts a larger share of R&D by both leader and laggard. Keywords: MNEs; R&D; R&D spillovers JEL: D21 F23 L16 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5060&r=all 301. SMEs and Bank Lending Relationships: The Impact of Mergers Degryse, Hans Masschelein, Nancy Mitchell, Janet This paper studies the impact of bank mergers on firm-bank lending relationships using information from individual loan contracts in Belgium. We analyse the effects of bank mergers on the probability of borrowers maintaining their lending relationships and on their ability to continue tapping bank credit. The Belgian financial environment reflects a number of interesting features: high banking sector concentration; ‘in- market’ mergers with large target banks; importance of large banks in providing external finance to SMEs; and low numbers of bank lending relationships maintained by SMEs. We find that bank mergers generate short-term and longer-term effects on borrowers' probability of losing a lending relationship and on credit availability. Mergers also have heterogeneous impacts across borrower types, including borrowers of acquiring and target banks, borrowers of differing size, borrowers with single versus multiple relationships, and borrowers with differing relationship intensities. Firms borrowing from acquiring banks are less likely to lose their lending relationship, while target bank borrowers are more likely to lose their relationship or see their credit availability harmed. Overlap borrowers – borrowing from two of the merging banks – are less likely to lose their relationship than firms borrowing from only one of the merging banks or firms borrowing from non-merging banks. Keywords: bank lending relationships; bank mergers; SME loans JEL: G21 G32 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5061&r=all 302. Political Predation and Economic Development Azam, Jean-Paul Bates, Robert H Biais, Bruno Economic growth occurs as resources are reallocated from the traditional sector to the more productive modern sector. Yet, the latter is more vulnerable to political predation. Hence, political risk hinders development. We analyse a politico- economic game between citizens and governments, whose type ( benevolent or predatory) is unknown to the citizens. In equilibrium, opportunistic governments mix between predation and restraint. As long as restraint is observed, political expectations improve and the economy grows. Once there is predation, the reputation of the current government is ruined and the economy collapses. If citizens are unable to overthrow this government, the collapse is durable. Otherwise, a new government is drawn and the economy can rebound. Equilibrium dynamics are characterized as a Markov chain. Consistent with stylized facts, equilibrium political and economic histories are random, unstable and exhibit long-term divergence. Our theoretical model also generates new empirical implications on the joint dynamics of income inequality, output and political variables. Keywords: Economic Development; Political Economy; political predation; reputation JEL: D82 H11 O00 O17 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5062&r=all 303. Alliances in the Air: Some Worldwide Evidence Gagnepain, Philippe Marin Uribe, Pedro L We consider an empirical model of worldwide airlines’ alliances that we apply to a large set of companies for the period 1995-2000, with special attention to US and EU carriers. >From the estimation of a cost, capacity and demand system that accounts for cross-price elasticities, we attempt to shed light on several interesting issues: First, we analyse whether alliance members’ networks are complements or substitutes. Second, we construct price-cost margins and test several hypothesis of non- cooperative behaviour such as individual Nash and joint price setting within the alliance. We suggest that current alliances' pricing habits are not uniform and range from individual Nash to more competitive behaviours. Keywords: airline; alliances; cross-price elasticities; Nash behaviour JEL: L11 L13 L41 L93 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5063&r=all 304. Advertising Content Anderson, Simon P Renault, Regis Empirical evidence suggests that most advertisements contain little direct information. Many do not mention prices. We analyse a monopoly firm’s choice of advertising content and the information disclosed to consumers. The firm advertises only product information, price information, or both; and prefers to convey only limited product information if possible. It is socially harmful to force it to provide full information if it has sufficient ability to parse the information imparted, but nor does it help to restrict the information voluntarily provided. Keywords: content analysis; information disclosure; informative advertising; search JEL: D42 L15 M37 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5064&r=all 305. Gifted Kids or Pushy Parents? Foreign Acquisitions and Plant Performance in Indonesia Arnold, Jens Javorcik, Beata Smarzynska This paper uses micro data from the Indonesian Census of Manufacturing to analyse the causal relationship between foreign ownership and plant productivity. To control for the possible endogeneity of the FDI decision, a difference-in-differences approach is combined with propensity score matching. An advantage of this method, which has not been previously applied in this context, is the ability to follow the timing of observed changes in productivity and other aspects of plant performance. The results suggest that foreign ownership leads to significant productivity improvements in the acquired plants. The improvements become visible in the acquisition year and continue in subsequent periods. After three years, the acquired plants outperform the control group in terms of productivity by 34 percentage points. The data also suggest that the rise in productivity is a result of restructuring, as acquired plants increase investment outlays, employment and wages. Foreign ownership also appears to enhance the integration of plants into the global economy through increased exports and imports. Keywords: acquisition; foreign direct investment; productivity JEL: D24 F23 O33 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5065&r=all 306. India's De-Industrialization Under British Rule: New Ideas, New Evidence Clingingsmith, David Williamson, Jeffrey G India was a major player in the world export market for textiles in the early 18th century, but by the middle of the 19th century it had lost all of its export market and much of its domestic market. Other local industries also suffered some decline, and India underwent secular de-industrialization as a consequence. While India produced about 25% of world industrial output in 1750, this figure fell to only 2% by 1900. We use an open, specific- factor model to organize our thinking about the relative role played by domestic and foreign forces in India’s de- industrialization. The construction of new relative price evidence is central to our analysis. We document trends in the ratio of export to import prices (the external terms of trade) from 1800 to 1913, and that of tradable to non-tradable goods and own-wages in the tradable sectors going back to 1765. With this new relative price evidence in hand, we ask how much of the de- industrialization was due to local supply-side influences (such as the demise of the Mughal empire) and how much to world price shocks (such as world market integration and rapid productivity advance in European manufacturing), both of which had to deal with an offset – the huge net transfer from India to Britain before 1815. Whether the Indian de-industrialization shocks and responses were big or small is then assessed by comparisons with other parts of the periphery. Keywords: 18th and 19th century; de-industrialization; globalization; India; price shocks JEL: F10 N70 O20 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5066&r=all 307. Is It Trust we Model? An Attempt to Calculate the Non- Calculative Rosenkranz, Stephanie Weitzel, Utz In this paper we characterize a situation in which non- calculative trust has to play a role in the decision to cooperate. We then analyse the given situation in game theoretical terms and distinguish those aspects of players’ decisions that are cooperative from those that may be interpreted as being trustful. We argue that the cooperative aspect relates to incentives while the trustful (and thus non-calculative) aspect of the decision is related to the framing of the situation. Keywords: alliances; cooperation; focal points; framing; trust JEL: C72 D74 D80 Z13 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5067&r=all 308. Formation of Social Capital in Central and Eastern Europe: Understanding the Gap Vis-a-Vis Developed Countries Fidrmuc, Jan Gerxhani, Klarita Recent Eurobarometer survey data are used to document and explain the stock of social capital in 27 European countries. Social capital in Central and Eastern Europe – measured by civic participation and access to social networks – lags behind that in Western European countries. Using regression analysis of determinants of individual stock of social capital, we find that this gap persists when we account for individual characteristics and endowments of respondents but disappears completely after we control for aggregate measures of economic development and quality of institutions. Informal institutions such as prevalence of corruption appear particularly important. Keywords: capitalism; institutions; social capital; transition JEL: O17 O57 P37 Z13 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5068&r=all 309. Labour Mobility During Transition: Evidence from the Czech Republic Fidrmuc, Jan In this paper, I analyse the development of inter-regional mobility in the Czech Republic during the transition from central planning to a market economy. I show that while the intensity of migration is low and has even fallen during the transition, regional disparities in unemployment rates and earnings have increased. More importantly, labour mobility has little effect in facilitating labour market adjustment to employment shocks. Using aggregate inter-regional migration data and survey data on past and prospective migration and the willingness to move, I find that economic factosr play little role in explaining migration patterns. There is, nonetheless, some tentative evidence of the greater importance of economic considerations in explaining future migration intentions and the willingness to move. Thus, while at present migration appears more of a social or demographic rather than economic phenomenon, its economic role may strengthen in the future. Keywords: labour market adjustment; migration; mobility; regional shocks; survey data JEL: F22 J61 P23 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5069&r=all 310. Why and Where do Headquarters Move? Strauss-Kahn, Vanessa Vives, Xavier This paper analyses decisions regarding the location of headquarters in the US for the period 1996-2001. Using a unique firm-level database of about 30,000 US headquarters, we study the firm- and location-specific characteristics of headquarters that relocated over that period. Headquarters are concentrated, increasingly so in medium-sized service-oriented metropolitan areas, and the rate of relocation is significant (5% a year). Larger (in terms of sales) and younger headquarters tend to relocate more often, as well as larger (in terms of the number of headquarters) and foreign firms, and firms that are the outcome of a merger. Headquarters relocate to metropolitan areas with good airport facilities, low corporate taxes, low average wages, high level of business services and agglomeration of headquarters in the same sector of activity. Keywords: agglomeration externalities; business services; communication costs; congestion; corporate history; mergers; nested logit; taxes JEL: F15 F23 L20 R12 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5070&r=all 311. Robust Monetary Policy in a Small Open Economy Leitemo, Kai Soderstrom, Ulf This paper studies how a central bank’s preference for robustness against model misspecification affects the design of monetary policy in a New-Keynesian model of a small open economy. Due to the simple model structure, we are able to solve analytically for the optimal robust policy rule, and we separately analyse the effects of robustness against misspecification concerning the determination of inflation, output and the exchange rate. We show that an increased central bank preference for robustness makes monetary policy respond more aggressively or more cautiously to shocks, depending on the type of shock and the source of misspecification. Keywords: Knightian uncertainty; min-max policies; model uncertainty; robust control JEL: E52 E58 F41 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5071&r=all 312. Monetary Policy with Judgement: Forecast Targeting Svensson, Lars E O ‘Forecast targeting’, forward-looking monetary policy that uses central-bank judgment to construct optimal policy projections of the target variables and the instrument rate, may perform substantially better than monetary policy that disregards judgment and follows a given instrument rule. This is demonstrated in a few examples for two empirical models of the US economy, one forward looking and one backward looking. A complicated infinite-horizon central bank projection model of the economy can be closely approximated by a simple finite system of linear equations, which is easily solved for the optimal policy projections. Optimal policy projections corresponding to the optimal policy under commitment in a timeless perspective can easily be constructed. The whole projection path of the instrument rate is more important than the current instrument setting. The resulting reduced-form reaction function for the current instrument rate is a very complex function of all inputs in the monetary-policy decision process, including the central bank’s judgment. It cannot be summarized as a simple reaction function such as a Taylor rule. Fortunately, it need not be made explicit. Keywords: forecasts; inflation targeting; optimal monetary policy JEL: E42 E52 E58 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5072&r=all 313. The Impact of the Terms of Trade on Economic Development in the Periphery, 1870-1939: Volatility and Secular Change Blattman, Christopher Hwang, Jason Williamson, Jeffrey G Most countries in the periphery specialized in the export of just a handful of primary products for most of their history. Some of these commodities have been more volatile than others, and those with more volatile prices have grown slowly relative both to the industrial leaders and to other primary product exporters. This fact helps explain the growth puzzle noted by Easterly, Kremer, Pritchett and Summers more than a decade ago: that the contending fundamental determinants of growth - institutions, geography and culture - exhibit far more persistence than do the growth rates they are supposed to explain. Using a new panel database for 35 countries, this paper estimates the impact of terms of trade volatility and secular change on country performance between 1870 and 1939. Volatility was much more important for accumulation and growth than was secular change. Additionally, both effects were asymmetric between Core and Periphery, findings that speak directly to the terms of trade debates that have raged since Prebisch and Singer wrote more than 50 years ago. The paper also investigates one channel of impact, and finds that foreign capital inflows declined steeply where commodity prices were volatile. Keywords: growth; periphery; terms of trade; volatility JEL: F10 N10 O10 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5073&r=all 314. The 'Tampa' Effect. Australian Asylum Policy in International Perspective Hatton, Timothy J. Lim, Audrey Australia’s policies towards asylum seekers hit the headlines when it refused to admit those aboard the Tampa in September 2001. This tough stance and the raft of legislation that followed became known as Australia’s ‘Pacific Solution’. It was clearly intended to deter those who might otherwise arrive by sea or by air to claim asylum in Australia. Several other countries toughened their policies after September the 11th 2001. This paper examines the effects of those policies on the subsequent streams of asylum applications by estimating the effects from panel data using a differences-in-differences approach. We find that the post-Tampa effect for Australia was to cut asylum applications by more than half. In other countries such as New Zealand and the UK, negative policy effects are also found but they are somewhat weaker. We conclude that the deterrent effects of policy are greatest not only when tough policies are enforced but when they are also widely publicised. Keywords: asylum applications; asylum policy; migration JEL: F22 J61 K42 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5074&r=all 315. A Theory of Brinkmanship, Conflicts, and Commitments Schwarz, Michael Sonin, Konstantin Many conflicts and negotiations can be viewed as a dynamic game, where parties have no commitment power. In our model, a potential aggressor demands concessions from the weaker party by threatening a war. The absence of commitment makes a continuous stream of transfers a more effective appeasement strategy than a lump sum transfer. Based on such a strategy, it is possible to construct a self-enforcing peace agreement between risk-neutral parties, even if transfers shift the balance of power. When parties are risk-averse, a self-enforcing peace agreement may not be feasible. The bargaining power of the potential aggressor increases dramatically if she is able to make probabilistic threats, e.g. by taking an observable action that leads to war with positive probability. This ‘brinkmanship strategy’ allows a blackmailer to extract a positive stream of payments from the victim even if carrying out the threat is harmful to both parties. Our results are applicable to environments ranging from diplomacy to negotiations within or among firms, and are aimed to bring together ‘parallel’ investigations in the nature of commitment in economics and political science. Keywords: brinkmanship; commitments; conflicts; war and peace JEL: C78 D74 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5075&r=all 316. Is Political Risk Company-Specific? The Market Side of the Yukos Affair Goriaev, Alexei Sonin, Konstantin The Yukos affair, a high-profile story of the state-led assault on a private Russian company, provides an excellent opportunity for an inquiry into the nature of company-specific political risks in emerging markets. News associated primarily with law enforcement agencies’ actions against company’s managers, not formally related to the company itself, caused significant negative abnormal returns for Yukos. The results are robust and not driven by a few major events, such as the arrests of Yukos’ top managers and shareholders. Stocks of less transparent private Russian companies have been more sensitive to Yukos-related events, especially employee-related charges by the law enforcement agencies. The situation was different for less transparent government-owned companies such as the world-largest natural gas producer Gazprom: they appear to be significantly less sensitive to these events. Actions of regulatory agencies have had predominantly industry-wide impact, whereas law- enforcement agencies’ actions affected shares of large private companies, especially those were privatized in the notorious loans-for-shares privatization auctions. Keywords: company specific political risk; event study; oil; privatization; Russian stock market Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5076&r=all 317. The Benefits of Separating Early Retirees from the Unemployed: Simulation Results for Belgian Wage Earners Desmet, Raphael Jousten, Alain Perelman, Sergio The pool of early retirees is characterized by a large heterogeneity along several criteria. The present paper focuses on the key distinction between those in forced early retirement and those who retire early by individual choice. We start by estimating a retirement probit model for older workers in Belgium. Based on these estimates, we then perform micro-simulations relating to a hypothetical actuarial reform of a pension system, i.e., a reform imposing on average actuarial neutrality with respect to the time of retirement. We explore two scenarios, one where the entire population is subjected to the actuarial system, and one where a duly screened sub-sample of the unemployed is shielded against these actuarial adjustment factors, a group we call the truly unemployed. We evaluate the impact on the average retirement age, the pension budgets as well as indicators of redistribution within the group of the elderly. We find that the extra budgetary gain of exposing this subgroup to the full-blown reform is modest, while the distributional cost is rather high. Our results thus comfort the idea that the budgetary cost of a focused unemployment system are moderate, and that returning the unemployment insurance to its primary role might be a desirable strategy. Keywords: inequality; older worker; retirement JEL: H31 I30 J14 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5077&r=all 318. Networks of Relations and Social Capital Lippert, Steffen Spagnolo, Giancarlo We model networks of relational (or implicit) contracts, exploring how sanctioning power and equilibrium conditions change under different network configurations and information transmission technologies. In our model relations are the links, and the value of the network lies in its ability to enforce cooperative agreements that could not be sustained if agents had no access to other network members’ sanctioning power and information. We identify conditions for network stability and in- network information transmission as well as conditions under which stable sub-networks inhibit more valuable larger networks. The model provides formal definitions for individual and communities’ ‘social capital’ in the spirit of Coleman and Putnam. Keywords: collusion; cooperation; embeddedness; end-network effect; implicit contracts; indirect multimarket contact; industrial districts; networks; peering agreements; relational contracts; social capital; social relations JEL: D23 D43 L13 L29 O17 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5078&r=all 319. The Worldwide Economic Impact of the Revolutionary and Napoleonic Wars O'Rourke, Kevin H The paper provides a comparative history of the economic impact of the Revolutionary and Napoleonic Wars. By focussing on the relative price evidence, it is possible to show that the conflict had major economic effects around the world. Britain's control of the seas meant that it was much less affected than other nations, such as France and the United States. Explicit welfare calculations are provided for four countries, Britain, France, Sweden and the United States. Welfare losses were largest in the US, where they were of the order of 5-6% per annum; by contrast, they lay between 3-4% per annum in France, and between 1.7-1.8% per annum in Britain. On the other hand, the conflict helped pave the way for the more liberal international economic environment of the long 19th century. Keywords: trade; war JEL: F10 N70 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5079&r=all 320. The Simple Geometry of Transmission and Stabilization in Closed and Open Economies Corsetti, Giancarlo Pesenti, Paolo This paper provides an introduction to the recent literature on macroeconomic stabilization in closed and open economies. We present a stylized theoretical framework, and illustrate its main properties with the help of an intuitive graphical apparatus. Among the issues we discuss: optimal monetary policy and the welfare gains from macroeconomic stabilization; international transmission of real and monetary shocks and the role of exchange rate pass-through; the design of optimal exchange rate regimes and monetary coordination among interdependent economies. Keywords: exchange rate pass-through; international cooperation; nominal rigidities; optimal monetary policy JEL: E31 E52 F42 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5080&r=all 321. Offshore Financial Centres: Parasites or Symbionts? Rose, Andrew K Spiegel, Mark This paper analyses the causes and consequences of offshore financial centers (OFCs). Since OFCs are likely to be tax havens and money launderers, they encourage bad behaviour in source countries. Nevertheless, OFCs may also have unintended positive consequences for their neighbours, since they act as a competitive fringe for the domestic banking sector. We derive and simulate a model of a home country monopoly bank facing a representative competitive OFC which offers tax advantages attained by moving assets offshore at a cost that is increasing in distance between the OFC and the source. Our model predicts that proximity to an OFC is likely to have pro-competitive implications for the domestic banking sector, although the overall effect on welfare is ambiguous. We test and confirm the predictions empirically. Proximity to an OFC is associated with a more competitive domestic banking system and greater overall financial depth. Keywords: asset; competitive; cross-section; data; empirical; haven; money; tax; theory JEL: F23 F36 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5081&r=all 322. Outsourcing and Technological Change Bartel, Ann P Lach, Saul Sicherman, Nachum In this paper we argue that an important source of the recent increase in outsourcing is the computer and information technology revolution, characterized by increased rates of technological change. Our model shows that an increase in the pace of technological change increases outsourcing because it allows firms to use services based on leading edge technologies without incurring the sunk costs of adopting these new technologies. In addition, firms using more IT-intensive technologies face lower outsourcing costs of IT-based services generating a positive correlation between the IT level of the user and its outsourcing share of IT-based services. This implication is verified in the data. Keywords: Outsourcing; technological change JEL: M55 O33 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5082&r=all 323. Immigration and Prices Lach, Saul This paper exploits the unexpected arrival of 200,000 FSU immigrants to Israel during 1990 to empirically examine the effect of a change in demand on prices. The main finding is that immigration had a moderating effect on prices during 1990. Controlling for the selection of immigrants into cities and for population growth, a 1 percentage point increase in the share of immigrants in a city decreases prices by about 1.4–1.8%. Even when the increase in population is accounted for, the overall effect of immigration on prices remains negative. This downward effect on prices is stronger in products where demand increases are larger. The negative immigration effect can be explained by the new immigrants searching more intensively for lower prices than the native population. In support of this interpretation, it is shown that the relationship between price dispersion across stores and the share of immigrants has an inverse-U shape as implied by Stahl’s (1989) model of search. Keywords: demand changes; immigration; price changes; search JEL: L10 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5083&r=all 324. The Toehold Puzzle Betton, Sandra Eckbo, B Espen Thorburn, Karin S Although takeover premiums are large, only 2% of twelve thousand bidders initiating control contests for publicly traded targets acquire target shares (toehold) shortly prior to the bid. We argue that, because toeholds deter competition, toehold bidding may trigger target resistance. If resistance simply means withholding a termination agreement, it takes a toehold of 8 % to compensate for the opportunity loss of a typical agreement. As predicted, we find that toehold bidding is significantly more likely when this implied toehold threshold is low. Toehold costs may also arise when target resistance eliminates all bids. We show, however, that the expected marginal toehold effect is positive because toeholds increase the probability of success. Finally, toehold purchases may cause a pre-bid target stock price run-up and increase total takeover costs (markup pricing). However, we find that bidder gains are increasing in both the target run-up and in the toehold. We conclude that friendly bidders appear to abstain from toeholds primarily to avoid toehold-induced target resistance. Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5084&r=all 325. The French Zones D'Education Prioritaire: Much Ado About Nothing? Benabou, Roland Kramarz, Francis Prost, Corinne We provide an assessment of the French ZEP (Zones d’Education Prioritaire), a programme started in 1982 that channels additional resources to schools in disadvantaged areas and encourages the development of new teaching projects. Focusing on middle-schools, we first evaluate the impact of the ZEP status on resources, their utilization (teacher bonuses versus teaching hours) and key establishments characteristics such as class sizes, school enrolments, teachers’ qualifications and experience, and student composition and mobility. We then estimate the impact of the ZEP programme on four measures of individual student achievement: obtaining at least one diploma by the end of schooling, reaching 8th grade, reaching 10th grade and success at the Baccalaureat. We take into account the endogeneity of the ZEP status by using both differences in differences and instrumental variables based on political variables. The results are the same in all cases: there is no impact on student success of the ZEP programme. Keywords: class size; disadvantaged schools; education policy; education production function; School finance JEL: H52 I21 I22 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5085&r=all 326. Factor Supplies and the Direction of Technological Change Svaleryd, Helena Vlachos, Jonas In this paper, we empirically address the hypothesis that there is a relationship between the supply of human capital and the rate and direction of skill-biased technical change (SBTC). Using country- and industry-level data on OECD countries, we find R&D to be positively related to the supply of human capital. There is, however, no indication that this translates into higher rates of SBTC, when SBTC is measured as changes in the wage bill share of skilled labour. Interestingly, both R&D and the rate of SBTC seem to be relatively high in low-skill industries in countries where the supply of human capital is relatively high. Keywords: skill-biased technical change; supply of human capital JEL: J31 O31 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5086&r=all 327. Is the Division of Labour Limited By the Extent of the Market? Evidence from French Cities Duranton, Gilles Jayet, Hubert This paper provides some evidence that the division of labour is limited by the extent of the (local) market. We first propose a theoretical model. Its main prediction is that scarce occupations are over-represented in large cities. Using census data for French cities, we then provide strong empirical support for this prediction. Keywords: division of labour; extent of the market; specialization JEL: J24 J44 R23 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5087&r=all 328. The Real Effect of Banking Crises Dell'Ariccia, Giovanni Detragiache, Enrica Rajan, Raghuram G Banking crises are usually followed by a decline in credit and growth. Is this because crises tend to take place during economic downturns, or do banking sector problems have independent negative effects on the economy? To answer this question we examine industrial sectors with differing needs for financing. If banking crises have an exogenous detrimental effect on real activity, then sectors more dependent on external finance should perform relatively worse during banking crises. The evidence in this paper supports this view. Additional support comes from the fact that sectors that predominantly have small firms, and thus are typically bank dependent, also perform relatively worse during banking crises. The differential effects across sectors are stronger in developing countries, in countries with less access to foreign finance, and where banking crises were more severe. Keywords: bank lending channel; banking crises JEL: E44 G21 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5088&r=all 329. Culture: An Empirical Investigation of Beliefs, Work and Fertility Fernandez, Raquel Fogli, Alessandra We study the effect of culture on important economic outcomes by using the 1970 Census to examine the work and fertility behaviour of women 30-40 years old, born in the US, but whose parents were born elsewhere. We use past female labour force participation and total fertility rates from the country of ancestry as our cultural proxies. These variables should capture, in addition to past economic and institutional conditions, the beliefs commonly held about the role of women in society, i.e. culture. Given the different time and place, only the beliefs embodied in the cultural proxies should be potentially relevant to women’s behaviour in the US in 1970. We show that these cultural proxies have positive and significant explanatory power for individual work and fertility outcomes, even after controlling for possible indirect effects of culture (e.g., education and spousal characteristics). We examine alternative hypotheses for these positive correlations and show that neither unobserved human capital nor networks are likely to be responsible. We also show that the effect of these cultural proxies is amplified the greater is the tendency for ethnic groups to cluster in the same neighbourhoods. Keywords: cultural transmission; family; female labour force participation; fertility; immigrants; neighbourhoods; networks JEL: J13 J21 Z10 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5089&r=all 330. Income and Wealth Concentration in Switzerland Over the 20th Century Dell, Fabian Piketty, Thomas Saez, Emmanuel This paper presents homogeneous series on top shares of income and wealth in Switzerland since 1913 using personal income and wealth tax return statistics. In contrast to other countries such as Canada, France, the United Kingdom, the Netherlands or the United States, top income and wealth shares in Switzerland are strikingly flat over the century, and display no secular downtrend from the early part of the century to the post-World War II period. Switzerland hardly ever implemented a very progressive income and wealth tax structure and top income and wealth tax rates have been very low relative to other developed countries. Therefore, our findings for Switzerland lead much credence to the view that the development of very progressive taxation is the central factor explaining the sustained decline in wealth and income concentration in countries such as Canada, France, the United Kingdom, the Netherlands, or the United States. Keywords: income inequality; taxation; wealth inequality JEL: O15 O52 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:5090&r=all 331. MARGINAL PRODUCTIVITY INDEX POLICIES FOR SCHEDULING A MULTICLASS DELAY-/LOSS-SENSITIVE QUEUE Jose Nino-Mora We address the problem of scheduling a multiclass M/M/1 queue with a finite dedicated buffer for each class. Some classes are delay-sensitive, modeling real-time traffic (e.g. voice, video), whereas others are loss-sensitive, modeling nonreal-time traffic ( e.g. data). Different levels of tolerance to delay and loss are modeled by appropriate linear holding cost and rejection cost rates. The goal is to design well-grounded and tractable scheduling policies which nearly minimize the discounted or long- run average expected cost objective. We develop new dynamic index policies, prescribing to give higher service priority to classes with larger index values, where the priority index of a class measures the marginal productivity of work at its current state. To construct the indices, we deploy the theory of marginal productivity indices (MPIs) and PCLindexability we have introduced in recent work, and further introduce significant extensions to such theory motivated by phenomena observed in the model of concern. The MPI policies are shown to furnish new, insightful structural results, and to exhibit a nearly optimal performance in a computational study. Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:cte:wsrepe:ws053906&r=all 332. A 50 anos de la Curva de Kuznets: Crecimiento Economico y Distribucion del Ingreso en Uruguay y otros Paises de Nuevo Asentamiento desde 1870 Luis Bertola Este trabajo aborda las tendencias de la distribucion del ingreso en Uruguay desde aproximadamente 1870, recurriendo a diferentes fuentes: los movimientos de los precios relativos entre 1870 y 2000 (rentas/salarios, alquileres/salarios, terminos de intercambio), estimaciones del ingreso personal de los principales sectores de actividad economica (1908-1966) y las mas recientes estimaciones en base al ingreso de los hogares de los anos ’60. Los resultados se discuten en dialogo con la curva de Kuznets buscando ampliar la perspectiva mediante comparaciones con paises de nuevo asentamiento: Argentina, Australia y Nueva Zelanda. Se encuentra un patron comun a estos paises: creciente desigualdad durante la primera globalizacion, una tendencia igualitaria desde los ‘20 y profundizada durante la ISI, y una nueva tendencia a la desigualdad en la segunda globalizacion. En Uruguay no aparecen correlaciones estables entre crecimiento y equidad, ni en el largo plazo, ni en las fases de los movimientos ciclicos tipo Kuznets. Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cte:dilfrp:dilf0504&r=all 333. Improved HAR Inference Peter C.B. Phillips (Cowles Foundation, Yale University) Yixiao Sun (Dept. Economics, UCLA, San Diego) Sainan Jin (Guanghua School of Management, Peking University) Employing power kernels suggested in earlier work by the authors 2003), this paper shows how to re.ne methods of robust inference on the mean in a time series that rely on families of untruncated kernel estimates of the long-run parameters. The new methods improve the size properties of heteroskedastic and autocorrelation robust (HAR) tests in comparison with conventional methods that employ consistent HAC estimates, and they raise test power in comparison with other tests that are based on untruncated kernel estimates. Large power parameter (rho) asymptotic expansions of the nonstandard limit theory are developed in terms of the usual limiting chi-squared distribution, and corresponding large sample size and large rho asymptotic expansions of the finite sample distribution of Wald tests are developed to justify the new approach. Exact finite sample distributions are given using operational techniques. The paper further shows that the optimal rho that minimizes a weighted sum of type I and II errors has an expansion rate of at most O( T^{1/2}) and can even be O(1) for certain loss functions, and is therefore slower than the O(T^{2/3}) rate which minimizes the asymptotic mean squared error of the corresponding long run variance estimator. A new plug-in procedure for implementing the optimal rho is suggested. Simulations show that the new plug-in procedure works well in finite samples. Keywords: Asymptotic expansion, consistent HAC estimation, data- determined kernel estimation, exact distribution, HAR inference, large rho asymptotics, long run variance, loss function, power parameter, sharp origin kernel JEL: C13 C14 C22 C51 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:cwl:cwldpp:1513&r=all 334. Economic Transition and Growth Peter C.B. Phillips (Cowles Foundation, Yale University) Donggyu Sul (Dept. of Economics, University of Auckland) Some extensions of neoclassical growth models are discussed that allow for cross section heterogeneity among economies and evolution in rates of technological progress over time. The models offer a spectrum of transitional behavior among economies that includes convergence to a common steady state path as well as various forms of transitional divergence and convergence. Mechanisms for modeling such transitions and measuring them econometrically are developed in the paper. A new regression test of convergence is proposed, its asymptotic properties are derived and some simulations of its finite sample properties are reported. Transition curves for individual economies and subgroups of economies are estimated in a series of empirical applications of the methods to regional US data, OECD data and Penn World Table data. Keywords: Economic growth, Growth convergence, Heterogeneity, Neoclassical growth, Relative transition, Transition curve, Transitional divergence JEL: O30 O40 C33 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:cwl:cwldpp:1514&r=all 335. GMM with Many Moment Conditions Chirok Han (Victoria University of Wellington) Peter C.B. Phillips (Cowles Foundation, Yale University) This paper provides a first order asymptotic theory for generalized method of moments (GMM) estimators when the number of moment conditions is allowed to increase with the sample size and the moment conditions may be weak. Examples in which these asymptotics are relevant include instrumental variable (IV) estimation with many (possibly weak or uninformed) instruments and some panel data models covering moderate time spans and with correspondingly large numbers of instruments. Under certain regularity conditions, the GMM estimators are shown to converge in probability but not necessarily to the true parameter, and conditions for consistent GMM estimation are given. A general framework for the GMM limit distribution theory is developed based on epiconvergence methods. Some illustrations are provided, including consistent GMM estimation of a panel model with time varying individual effects, consistent LIML estimation as a continuously updated GMM estimator, and consistent IV structural estimation using large numbers of weak or irrelevant instruments. Some simulations are reported. Keywords: Epiconvergence, GMM, Irrelevant instruments, IV, Large numbers of instruments, LIML estimation, Panel models, Pseudo true value, Signal, Signal Variability, Weak instrumentation JEL: C22 C23 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:cwl:cwldpp:1515&r=all 336. Nonstationary Discrete Choice: A Corrigendum and Addendum Peter C.B. Phillips (Cowles Foundation, Yale University) Sainan Jin (Guanghua School of Management, Peking University) Ling Hu (Dept. of Economics, Ohio State University) We correct the limit theory presented in an earlier paper by Hu and Phillips (Journal of Econometrics, 2004) for nonstationary time series discrete choice models with multiple choices and thresholds. The new limit theory shows that, in contrast to the binary choice model with nonstationary regressors and a zero threshold where there are dual rates of convergence (n^{1/4} and n^{3/4}), all parameters including the thresholds converge at the rate n^{3/4}. The presence of non-zero thresholds therefore materially affects rates of convergence. Dual rates of convergence reappear when stationary variables are present in the system. Some simulation evidence is provided, showing how the magnitude of the thresholds affects finite sample performance. A new finding is that predicted probabilities and marginal effect estimates have finite sample distributions that manifest a pile- up, or increasing density, towards the limits of the domain of definition. Keywords: Brownian motion, Brownian local time, Discrete choices, Integrated processes, Pile-up problem, Threshold parameters JEL: C23 C25 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:cwl:cwldpp:1516&r=all 337. Limit Theory for Moderate Deviations from a Unit Root under Weak Dependence Peter C.B. Phillips (Cowles Foundation, Yale University) Tassos Magadalinos (Dept. of Mathematics, University of York) An asymptotic theory is given for autoregressive time series with weakly dependent innovations and a root of the form rho_{n} = 1+c/n^{alpha}, involving moderate deviations from unity when alpha in (0,1) and c in R are constant parameters. The limit theory combines a functional law to a diffusion on D[0,infinity) and a central limit theorem. For c > 0, the limit theory of the first order serial correlation coefficient is Cauchy and is invariant to both the distribution and the dependence structure of the innovations. To our knowledge, this is the first invariance principle of its kind for explosive processes. The rate of convergence is found to be n^{alpha}rho_{n}^{n}, which bridges asymptotic rate results for conventional local to unity cases (n) and explosive autoregressions ((1 + c)^{n}). For c < 0, we provide results for alpha in (0,1) that give an n^{(1+alpha) /2} rate of convergence and lead to asymptotic normality for the first order serial correlation, bridging the /n and n convergence rates for the stationary and conventional local to unity cases. Weakly dependent errors are shown to induce a bias in the limit distribution, analogous to that of the local to unity case. Linkages to the limit theory in the stationary and explosive cases are established. Keywords: Central limit theory; Diffusion; Explosive autoregression, Local to unity; Moderate deviations, Unit root distribution, Weak dependence JEL: C22 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:cwl:cwldpp:1517&r=all 338. Sign Tests for Dependent Observations and Bounds for Path- Dependent Options Donald J. Brown (Cowles Foundation, Yale University) Rustam Ibragimov (Dept. of Economics, Yale University) The present paper introduces new sign tests for testing for conditionally symmetric martingale-difference assumptions as well as for testing that conditional distributions of two (arbitrary) martingale-difference sequences are the same. Our analysis is based on the results that demonstrate that randomization over zero values of three-valued random variables in a conditionally symmetric martingale-difference sequence produces a stream of i.i. d. symmetric Bernoulli random variables and thus reduces the problem of estimating the critical values of the tests to computing the quantiles or moments of Binomial or normal distributions. The same is the case for randomization over ties in sign tests for equality of conditional distributions of two martingale-difference sequences. The paper also provides sharp bounds on the expected payoffs and fair prices of European call options and a wide range of path-dependent contingent claims in the trinomial financial market model in which, as is well-known, calculation of derivative prices on the base of no-arbitrage arguments is impossible. These applications show, in particular, that the expected payoff of a European call option in the trinomial model with log-returns forming a martingale-difference sequence is bounded from above by the expected payoff of a call option written on a stock with i.i.d. symmetric two-valued log- returns and, thus, reduce the problem of derivative pricing in the trinomial model with dependence to the i.i.d. binomial case. Furthermore, we show that the expected payoff of a European call option in the multiperiod trinomial option pricing model is dominated by the expected payoff of a call option in the two- period model with a log-normal asset price. These results thus allow one to reduce the problem of pricing options in the trinomial model to the case of two periods and the standard assumption of normal log-returns. We also obtain bounds on the possible fair prices of call options in the (incomplete) trinomial model in terms of the parameters of the asset's distribution. Sharp bounds completely similar to those for European call options also hold for many other contingent claims in the trinomial option pricing model, including those with an arbitrary convex increasing function as well as path-dependent ones, in particular, Asian options written on averages of the underlying asset's prices. Keywords: Sign tests, dependence, martingale-difference, Bernoulli random variables, conservative tests, exact tests, option bounds, trinomial model, binomial model, semiparametric estimates, fair prices, expected payoffs, path-dependent contingent claims, efficient market hypothesis JEL: C12 C14 G12 G14 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:cwl:cwldpp:1518&r=all 339. Competences, conflits et creation de valeur:vers une approche integree de la gouvernance Peter Wirtz (Universite Louis Lumiere (Lyon 2)) L’approche dominante de la gouvernance d’entreprise s’inscrit dans une logique d’essence disciplinaire. Pourtant, la creation de valeur ne se reduit pas a un simple probleme de discipline, mais comporte egalement une dimension cognitive, notamment dans le cas des entreprises innovantes. Fort de ce constat, le present article tente de contribuer a un effort d’integration des explications disciplinaire et cognitive des phenomenes de gouvernance, en defendant l’hypothese selon laquelle le poids respectif des variables disciplinaires et cognitives n’est pas fige, mais depend du stade de developpement des entreprises etudiees. Ce cadre theorique est illustre a travers l’histoire longue du Groupe Air Liquide. Keywords: gouvernance;approche cognitive;approche disciplinaire; cout cognitif JEL: G32 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:dij:wpfarg:1050501&r=all 340. Pour une gouvernance d’entreprise «comportementale»:une reflexion exploratoire-Toward a Behavioral Corporate Governance Theory : An Exploratory View Gerard Charreaux (Universite de Bourgogne) (VF)L’objectif de cet article est de montrer l’interet des approches comportementales, notamment de la finance comportementale, pour construire une theorie de la gouvernance permettant de remedier aux nombreuses lacunes de la theorie juridico-financiere dominante. La reflexion entreprise montre les problemes souleves par la notion de biais comportemental et son integration dans la theorie de la gouvernance.(VA)The objective of this article is to show how behavioral theories, in particular behavioral finance, can help to build a corporate governance theory allowing to fill the many gaps of the dominant law and finance theory. In particular, we underline the problems raised by the concept of behavioral bias and its integration in the corporate governance theory. Keywords: theorie comportementale de la gouvernance;biais comportemental;behavioral corporate governance theory; behavioral bias JEL: G30 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:dij:wpfarg:1050601&r=all 341. Semiparametric estimation in perturbed long memory series. Josu Arteche (Dpto. Economia Aplicada III (UPV/EHU)) The estimation of the memory parameter in perturbed long memory series has recently attracted attention motivated especially by the strong persistence of the volatility in many financial and economic time series and the use of Long Memory in Stochastic Volatility (LMSV) processes to model such a behaviour. This paper discusses frequency domain semiparametric estimation of the memory parameter and proposes an extension of the log periodogram regression which explicitly accounts for the added noise, comparing it, asymptotically and in finite samples, with similar extant techniques. Contrary to the non linear log periodogram regression of Sun and Phillips (2003), we do not use a linear approximation of the logarithmic term which accounts for the added noise. A reduction of the asymptotic bias is achieved in this way and makes possible a faster convergence in long memory signal plus noise series by permitting a larger bandwidth. Monte Carlo results confirm the bias reduction but at the cost of a higher variability. An application to a series of returns of the Spanish Ibex35 stock index is finally included. Keywords: long memory, stochastic volatility, semiparametric estimation JEL: C22 Date: 2005-06-09 URL: http://d.repec.org/n?u=RePEc:ehu:biltok:200502&r=all 342. The Fragile Success of Team Start-ups Veronique Schutjens Erik Stam This article describes the benefits and pitfalls of starting a firm with an entrepreneurial team, drawing on a longitudinal empirical analysis of the life course of 90 team start-ups and 1196 solo start-ups in the Netherlands. In the first three years of their existence, team start-ups perform better than solo start- ups on several success indicators. However, after this start phase, entrepreneurial teams face particular problems in realizing further growth. These team-specific bottlenecks can even threaten firm survival. In later life course phases we found a clear distinction between entrepreneurial teams with stagnating growth and teams that succeeded in solving these problems and went on to realize further growth. Keywords: entrepreneurial teams, start-ups, firm growth, life course analysis JEL: D21 D23 D74 D92 L25 M13 M54 URL: http://d.repec.org/n?u=RePEc:esi:egpdis:2005-17&r=all 343. Optimal Transmission Capacity under Nodal Pricing and Incentive Regulation for Transco Makoto TANAKA This paper examines regulatory incentive mechanisms for efficient investment in the transmission network, taking into account both technological externalities among transmission lines and information asymmetry between the regulator and the transmission company (Transco). First, by adding extra constraints associated with the power flow, we develop an extended price cap mechanism that can internalize technological externalities among transmission lines. We show that this new mechanism induces the Transco to choose the optimal transmission capacity under its budget constraint. An extended form of the Vogelsang and Finsinger (V-F) mechanism is also introduced. Next, we examine the surplus-based scheme with government transfers. We provide a formal analysis of the incremental surplus subsidy (ISS) scheme specifically for the Transco, demonstrating that it induces the Transco to choose the optimal transmission capacity without the budget constraint. Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:eti:dpaper:05021&r=all 344. Price Impact and Survival of Irrational Traders Leonid Kogan (Sloan School of Management, MIT and NBER) Stephan Ross (Sloan School of Management, MIT and NBER) Jiang Wang (Sloan School of Management, MIT and NBER) Mark Westerfield (Economics Department, MIT) Milton Friedman argued that irrational traders will consistently lose money, won’t survive and, therefore, cannot influence long run equilibrium asset prices. Since his work, survival and price impact have been assumed to be the same. In this paper, we demonstrate that survival and price impact are two independent concepts. The price impact of irrational traders does not rely on their long-run survival and they can have a significant impact on asset prices even when their wealth becomes negligible. We also show that irrational traders ’portfolio policies can deviate from their limits long after the price process approaches its long-run limit. We show, in contrast to a partial equilibrium analysis, these general equilibrium considerations matter for the irrational traders long-run survival. In sum, we explicitly show that price impact can persist whether or not the irrational traders survive. Date: 2004-10 URL: http://d.repec.org/n?u=RePEc:fam:rpseri:rp116&r=all 345. The taxation of equity, dividends, and stock prices Richard W. Kopcke The Jobs and Growth Tax Relief Reconciliation Act of 2003 ( JGTRRA) essentially halved the tax rate on dividends and reduced the top tax rate on capital gains. This paper explores the likely effect of JGTRRA on the composition of returns on corporations’ common stock. Both larger corporations’ past behavior and theory suggest that the recent tax cuts are not likely to increase dividend payouts significantly. Instead, in the short run, dividends will continue to rise in the customary way in response to the recovery in earnings. In the longer run, the tax cuts will principally reduce companies’ cost of capital, fostering capital deepening, when the economy is at full employment. With constant returns to scale prevailing at full employment, capital deepening reduces corporations’ average gross return on assets and equity. Because the tax cuts increase the value of each dollar of earnings for shareholders, they could raise price-earnings ratios by more than 10 percent and stock prices by more than 6 percent. By fostering capital deepening, the tax cuts also tend to increase the real compensation of labor at full employment. Keywords: Taxation ; Dividends ; Stock - Prices Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedbpp:05-1&r=all 346. Sales persistence and the reductions in GDP volatility F. Owen Irvine A number of explanations for the observed decline in GDP volatility since the mid-1980s have been offered. Valerie Ramey and Daniel Vine (2003a, 2003b) in a couple of recent papers offer the hypothesis that a decline in the persistence of sales is an explanation for the decline in GDP volatility. Their models show that a decrease in sales persistence leads to a decline in the variance of production relative to the variance of sales. They provide econometric evidence that the persistence of unit automobile sales has declined at both the aggregate and model level. This paper explores reasons why sales persistence may have declined and then tests the Ramey-Vine hypothesis with monthly chain-weighted sales data from 2- and 3-digit manufacturing and trade industries. The estimates confirm the Ramey-Vine findings for motor vehicle retailers, wholesalers, and manufacturers. For a number of industries outside of motor vehicles, especially those in wholesaling and nondurable manufacturing, considerable evidence is found of declines in sales persistence. These declines seem to be consistent with changes in supply and distribution chains that have occurred as the result of the introduction of new information, inventory, and production control systems. However, in equations estimated for aggregate manufacturing, wholesaling, and retail sector sales, declines in sales persistence are not found. Keywords: Gross domestic product Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedbwp:05-5&r=all 347. The stock market and cross country differences in relative prices Borja Larrain This paper studies the impact of stock market development on cross country relative prices (the real exchange rate). A nonlinear relationship is uncovered in the cross section: prices and the stock market increase together in the beginning; then prices fall as the stock market continues to develop. In fact, among rich countries the relationship between prices and the stock market is negative. This result obtains after controlling for per capita income and for endogeneity issues by using legal origins. A small open economy model is presented to explain the connection between stock market development and relative prices: better investment opportunities increase consumption levels and the price of nontradable goods (income effect); but if stock market assets are less labor intensive than previous entrepreneurial technologies, prices can fall as the stock market grows because more labor is available for producing nontradables ( substitution effect). This paper illustrates the connection of the stock market with goods and labor markets; it also has potential implications for the political economy of financial development. In a sideline contribution, it provides prices for entrepreneurial assets. Keywords: Stock market ; Stock - Prices Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedbwp:05-6&r=all 348. Borrowing costs and the demand for equity over the life cycle Steven J. Davis Felix Kubler Paul Willen We construct a life-cycle model that delivers realistic behavior for both equity holdings and borrowings. The key model ingredient is a wedge between the cost of borrowing and the risk-free investment return. Borrowing can either raise or lower equity demand, depending on the cost of borrowing. A borrowing rate equal to the expected return on equity — which we show roughly matches the data — minimizes the demand for equity. Alternative models with no borrowing or limited borrowing at the risk-free rate cannot simultaneously fit empirical evidence on borrowing and equity holdings. Keywords: Households - Economic aspects ; Investments Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedbwp:05-7&r=all 349. State-dependent pricing, inflation, and welfare in search economies Ben R. Craig Guillaume Rocheteau This paper investigates the welfare effects of inflation in economies with search frictions and menu costs. We first analyze an economy where there is no transaction demand for money balances: Money is a mere unit of account. We determine a condition under which price stability is optimal and a condition under which positive inflation is desirable. We relate these conditions to a standard efficiency condition for search economies. Second, we consider a related economy in which there is a transaction role for money. In the absence of menu costs, the Friedman rule is optimal. In the presence of menu costs, the optimal inflation rate is negative for all our numerical examples. A deviation from the Friedman rule can be optimal depending on the extent of the search externalities. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedcwp:0504&r=all 350. Theory, measurement, and calibration of macroeconomic models Paul Gomme Peter Rupert Calibration has become a standard tool of macroeconomics. This paper extends and refines the calibration methodology along several important dimensions. First, accounting for home production is important both in measuring calibration targets and in organizing the data in a model-consistent fashion. For this reason, thinking about home production is important even if the model under consideration does not include home production. Second, investment-specific technological change is included because of its strong balanced growth parameter restrictions. Third, the measurement strategy is laid out as transparently as possible so that others can easily replicate the underlying calculations. The data and calculations used in this paper are available on the web. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedcwp:0505&r=all 351. Exchange rate overshooting and the costs of floating Michele Cavallo Kate Kisselev Fabrizio Perri Nouriel Roubini Currency crises are usually associated with large nominal and real depreciations. In some countries depreciations are perceived to be very costly (“fear of floating”). In this paper we try to understand the reasons behind this fear. We first look at episodes of currency crises in the 1990s and establish that countries entering a crisis with high levels of foreign debt tend to experience large real exchange rate overshooting (devaluation in excess of the long-run equilibrium level) and large output contractions. We then develop a model of a small open economy that helps to explain this evidence. The key element of the model is the presence of a margin constraint on the domestic country. Real devaluations, by reducing the value of domestic assets relative to international liabilities, make countries with high foreign debt more likely to hit the constraint. When countries hit the constraint they are forced to sell domestic assets, and this causes a further devaluation of the currency (overshooting) and a reduction of their stock prices (overreaction). This fire sale can have a significant negative wealth effect. The model highlights a key tradeoff when considering fixed versus flexible exchange rate regimes; a fixed exchange regime can, by avoiding exchange rate overshooting, mitigate the negative wealth effect but at the cost of additional distortions and output drops in the short run. There are plausible parameter values under which fixed exchange rates dominate flexible exchange rates from a welfare perspective. Keywords: Foreign exchange rates ; Financial crises Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedfam:2005-07&r=all 352. Beggar thy neighbor? the in-state vs. out-of-state impact of state R&D tax credits Daniel J. Wilson In this paper, I exploit the cross-sectional and time-series variation in R&D tax credits, and in turn the user cost of R&D, available from U.S. states between 1981-2002 to estimate the elasticity of private R&D with respect to both the within-state ( internal) user cost and the out-of-state (external) user cost. To faciliate comparisons to previous studies of the R&D cost elasticity, I first estimate an R&D cost elasticity omitting external R&D costs; the estimated elasticity is negative, above unity (in absolute value), and statistically significant—a finding quite similar to that found by previous studies based on alternative data. Unlike previous studies, however, I then add the external R&D user cost to the regressions. I find the external-cost elasticity is positive and significant, raising concerns about whether having state-level R&D tax credits on top of federal credits is socially desirable. More importantly, I find the aggregate R&D price elasticity—the difference between the internal- and external-cost elasticities—is far smaller than previously estimated. In fact, the preferred specification yields a zero aggregate elasticity, suggesting a zero-sum game among states and raising questions about the efficacy of R&D tax credits more broadly. Keywords: Taxation ; Research and development Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedfam:2005-08&r=all 353. Temporary partial expensing in a general-equilibrium model Rochelle M. Edge Jeremy B. Rudd This paper uses a dynamic general-equilibrium model with a nominal tax system to consider the effects of temporary partial expensing allowances on investment and other macroeconomic aggregates. Keywords: Tax incentives ; Equilibrium (Economics) Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-19&r=all 354. Branch banking, bank competition, and financial stability Mark Carlson Kris James Mitchener It is often argued that branching stabilizes banking systems by facilitating diversification of bank portfolios; however, previous empirical research on the Great Depression offers mixed support for this view. Analyses using state-level data find that states allowing branch banking had lower failure rates, while those examining individual banks find that branch banks were more likely to fail. We argue that an alternative hypothesis can reconcile these seemingly disparate findings. Using data on national banks from the 1920s and 1930s, we show that branch banking increases competition and forces weak banks to exit the banking system. This consolidation strengthens the system as a whole without necessarily strengthening the branch banks themselves. Our empirical results suggest that the effects that branching had on competition were quantitatively more important than geographical diversification for bank stability in the 1920s and 1930s. Keywords: Branch banks ; Competition Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-20&r=all 355. A review of backtesting and backtesting procedures Sean D. Campbell This paper reviews a variety of backtests that examine the adequacy of Value-at-Risk (VaR) measures. These backtesting procedures are reviewed from both a statistical and risk management perspective. The properties of unconditional coverage and independence are defined and their relation to backtesting procedures is discussed. Backtests are then classified by whether they examine the unconditional coverage property, independence property, or both properties of a VaR measure. Backtests that examine the accuracy of a VaR model at several quantiles, rather than a single quantile, are also outlined and discussed. The statistical power properties of these tests are examined in a simulation experiment. Finally, backtests that are specified in terms of a pre-specified loss function are reviewed and their use in VaR validation is discussed. Keywords: Risk management ; Bank investments Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-21&r=all 356. Growing old together: firm survival and employee turnover Erwan Quintin John J. Stevens Labor market outcomes such as turnover and earnings are correlated with employer characteristics, even after controlling for observable differences in worker characteristics. We argue that this systematic relationship constitutes strong evidence in favor of models where workers choose how much to invest in future productivity. Because employer characteristics are correlated with firm survival, returns to these investments vary across firm types. We describe a dynamic general equilibrium model where workers employed in firms more likely to survive choose to devote more time to productivity enhancing activities, and therefore have a steeper earnings-tenure profile. Our model also predicts that quit rates should be lower in firms more likely to survive, and should tend to fall during slow times, while job destruction rates should rise. These predictions, we argue, are borne out by the existing empirical evidence. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-22&r=all 357. Raising the bar for models of turnover Erwan Quintin John J. Stevens It is well known that turnover rates fall with employee tenure and employer size. We document a new empirical fact about turnover: Among surviving employers, separation rates are positively related to industry-level exit rates, even after controlling for tenure and size. Specifically, in a dataset with over 13 million matched employee-employer observations for France, we find that, all else equal, a 1 percentage point increase in exit rates raises separation rates by 1/2 percentage point on average. Among current year hires, the average effect is twice as large. This relationship between exit rates and separation rates is robust to a host of data and statistical considerations. We review several standard models of worker turnover and argue that a model with firm-specific human capital accumulation most easily accounts for this new empirical fact. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-23&r=all 358. Gestation lags for capital, cash flows, and Tobins's Q Jonathan N. Millar Investment models typically assume that capital becomes productive almost immediately after purchase and that there is no lead time needed to plan. In the case, marginal q is usually sufficient for investment. This paper develops a model of aggregate investment where competitive firms face no adjustment costs other than building and planning delays. In this context, both Tobin's Q and cash flow can be noisy indicators of investment because some shocks fail to outlast the combined gestation lag. The paper demonstrates some empirical facts that challenge prevailing theories of investment but are consistent with gestation requirements. Regressions using aggregate data suggest that it takes at least four quarters for investment to respond to technology shocks and as many as eight additional quarters before productive capacity is affected. Estimates from structural VARs show that only permanent shocks affect investment, but that cash flow and Q react to both permanent and transitory shocks. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-24&r=all 359. Prices, production, and inventories over the automotive model year Adam Copeland Wendy Dunn George Hall This paper studies the within-model-year pricing and production of new automobiles. Using new monthly data on U.S. transaction prices, we document that for the typical new vehicle, prices typically fall over the model year at a 9.2 percent annual rate. Concurrently, both sales and inventories are hump shaped. To explain these time series, we formulate a market equilibrium model for new automobiles in which inventory and pricing decisions are made simultaneously. On the demand side, we use micro-level data to estimate time-varying aggregate demand curves for each vehicle. On the supply side, we solve a dynamic programming model of an automaker that, while able to produce only one vintage of a product at a time, may accumulate inventories and consequently sell multiple vintages of the same product simultaneously. The profit maximizing pricing and production strategies under a build-to-stock inventory policy imply declining prices and hump-shaped sales and inventories of the magnitudes observed in the data. Further, roughly half of the price decline is driven by inventory control considerations, as opposed to decreasing demand. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-25&r=all 360. From the horse's mouth: gauging conditional expected stock returns from investor surveys Gene Amromin Steven A. Sharpe We use data obtained from a series of Michigan Surveys of Consumer Attitudes to study stock market beliefs and portfolio choices of individual investors. We find that expected returns over the medium- and long-term horizon appear to be extrapolated from past realized returns. The findings also indicate that a more optimistic assessment of macroeconomic conditions coincides with higher expected returns and lower expected volatility, implying strongly procyclical Sharpe ratios. These results are given added credence by the empirical finding that reported portfolio concentrations in equities tend to be higher for respondents who anticipate higher returns and lower uncertainty. Overall, our empirical results lend support to the hypothesis that equity valuations are lower during recessions--and-- subsequent returns are higher--because of undue pessimism about future returns, rather than high risk aversion. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-26&r=all 361. The role of data & program code archives in the future of economic research Richard G. Anderson William H. Greene Bruce D. McCullough H. D. Vinod This essay examines the role of data and program-code archives in making economic research "replicable." Throughout science, replication of published results is recognized as an essential part of the scientific method. Yet, historically, both the "demand for"and "supply of" replicable results in economics has been minimal. Previous authors have interpreted this absence of replication as a market failure in which the rational choices of iThis essay examines the role of data and program-code archives in making economic research "replicable." Throughout science, replication of published results is recognized as an essential part of the scientific method. Yet, historically, both the "demand for" and "supply of" replicable results in economics has been minimal. Previous authors have interpreted this absence of replication as a market failure in which the rational choices of individual researchers do not achieve the same equilibrium as would an omnipotent social planner. In this equilibrium, "respect for the scientific method" is not sufficient to motivate either economists or editors of professional journals to ensure the replicability of published results. We enumerate the costs and benefits of mandatory data and code archives, and argue that the benefits far exceed the costs. Progress has been made since the gloomy assessment of Dewald, Thursby and Anderson some twenty years ago in the American Economic Review, but much remains to be done before empirical economics ceases to be a "dismal science" when judged by the replicability of its published results. Keywords: Econometrics ; Research Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-014&r=all 362. Do localization economies derive from human capital externalities? Christopher H. Wheeler One of the most robust findings emerging from studies of industrial agglomeration is the rise in productivity that tends to accompany it. What most studies have not addressed, however, is the potential role played by human capital externalities in driving this relationship. This paper seeks to do so using data from the 1980, 1990, and 2000 US Census covering a collection of 77 (primarily) 3-digit manufacturing industries across a sample of more than 200 metropolitan areas. The analysis generates two primary results. First, a variety of education- and experience- based measures of average human capital rise significantly as an industry's employment in a metropolitan area increases. Hence, clusters of industry do tend to be characterized by larger stocks of human capital. However, second, even after accounting for the level of human capital in a worker's own industry, the overall size of the industry remains strongly associated with wages. Such results suggest that localization economies are largely not the product of knowledge spillovers. Keywords: Regional economics ; Human capital Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-015&r=all 363. Technology and industrial agglomeration: evidence from computer usage Christopher H. Wheeler Although the association between industrial agglomeration and productivity has been widely examined and documented, little work has explored the possibility that these `external' productivity shifts are the product of more advanced technologies. This paper offers a look at this hypothesis using data on individual-level computer usage across a sample of U.S. metropolitan areas over the years 1984, 1989, 1993, and 1997. The results indicate that, for a wide array of industries at the two-, three-, and four- digit SIC level, an industry's scale within a metropolitan area is positively associated with the frequency of computer use by its workers. However, in spite of these observable differences in workplace technology, I also find that estimated localization effects on wages are largely not explained by computer usage. Even after controlling for computer use, there remain significant own-industry scale effects in labor earnings. Keywords: Technology ; Industrial location Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-016&r=all 364. Job flows and productivity dynamics: evidence from U.S. manufacturing Christopher H. Wheeler Through their influence on the cross-sectional distribution of productivity across firms and workers, job creation and destruction likely have an impact on the rate at which aggregate productivity changes over time. However, the nature of this effect is not, a priori, clear. While a broad consensus has emerged suggesting that job destruction enhances productivity by eliminating inefficient production units, theories disagree with regard to the effect of job creation. In particular, `vintage- capital' theories of creative destruction suggest a positive influence since job flows are conjectured to represent the reallocation of labor from low- to high-productivity positions. Others suggest that job creation may, instead, represent the expansion of employment primarily along a lowskill (or low `match- quality') dimension. In such a case, job creation would serve to lower aggregate productivity. This paper estimates the influence of job creation and destruction on total factor productivity (TFP) growth using annual data on 389 4- digit U.S. manufacturing industries over the period 1974-1993. As expected, the results reveal a positive association between job destruction and changes in TFP. Yet, they also indicate that, contrary to the creative- destruction view, job creation tends to have a negative effect on productivity growth. Keywords: Labor productivity Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-017&r=all 365. Sticky-price models and the natural rate hypothesis Javier Andres J. David L?pez-Salido Edward Nelson A major criticism of standard specifications of price adjustment in models for monetary policy analysis is that they violate the natural rate hypothesis by allowing output to differ from potential in steady state. In this paper we estimate a dynamic optimizing business cycle model whose price-setting behavior satisfies the natural rate hypothesis. The price-adjustment specifications we consider are the sticky-information specification of Mankiw and Reis (2002) and the indexed contracts of Christiano, Eichenbaum, and Evans (2005). Our empirical estimates of the real side of the economy are similar whichever price adjustment specification is chosen. Consequently, the alternative model specifications deliver similar estimates of the U.S. output gap series, but the empirical behavior of the gap series differs substantially from standard gap estimates. Keywords: Monetary policy ; Prices Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-018&r=all 366. Do casinos export bankruptcy? Thomas A. Garrett Mark W. Nichols This paper measures the extent to which destination resort casinos export bankruptcy back to visitors' home states. Previous literature has alluded to this possibility, but to date studies have only examined the influence of local casinos on local bankruptcy. Using various survey data, we calculate the number of visits from each state to casino resort destinations in Nevada, New Jersey, and Mississippi. We find strong evidence that states having more residents who visit out-of-state casino resorts have higher bankruptcy filings. This effect is dominant in the south, suggesting that casinos located in wealthier regions are less likely to export bankruptcy. Keywords: Gambling industry ; Bankruptcy Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-019&r=all 367. A comparison of the real-time performance of business cycle dating methods Marcelle Chauvet Jeremy M. Piger This paper evaluates the ability of formal rules to establish U. S. business cycle turning point dates in real time. We consider two approaches, a nonparametric algorithm and a parametric Markov- switching dynamic-factor model. In order to accurately assess the real-time performance of these rules, we construct a new unrevised "real-time" data set of employment, industrial production, manufacturing and trade sales, and personal income. We then apply the rules to this data set to simulate the accuracy and timeliness with which they would have identified the NBER business cycle chronology had they been used in real time for the past 30 years. Both approaches accurately identified the NBER dated turning points in the sample in real time, with no instances of false positives. Further, both approaches, and especially the Markov-switching model, yielded significant improvement over the NBER in the speed with which business cycle troughs were identified. In addition to suggesting that business cycle dating rules are an informative tool to use alongside the traditional NBER analysis, these results provide formal evidence regarding the speed with which macroeconomic data reveals information about new business cycle phases. Keywords: Business cycles Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-021&r=all 368. The delinquency of subprime mortgages Michelle A. Danis Anthony Pennington-Cross This paper focuses on understanding the determinants of the performance of subprime mortgages. A growing body of literature recognizes the substantial lag between the time that a borrower stops making payments on a mortgage and the termination of the loan. The duration of this lag and the method by which the delinquency is ultimately terminated play a critical role in the costs borne by both borrower and lender. Using nested and multinomial logit, we find that delinquency and default are sensitive to current economic conditions and housing markets. Credit scores and loan characteristics also play important roles. Keywords: Mortgages Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-022&r=all 369. A specialized inventory problem in banks: optimizing retail sweeps Suresh K. Nair Richard G. Anderson Deposits held at Federal Reserve Banks are an essential input to the business activity of most depository institutions in the United States. Managing these deposits is an important and complex inventory problem, for two reasons. First, Federal Reserve regulations require that depository institutions hold certain amounts of such deposits at the Federal Reserve Banks to satisfy statutory reserve requirements against customers* transaction accounts (demand deposits and other checkable deposits). Second, some inventory of such deposits is essential for banks to operate one of their core lines of business: furnishing payment services to households and firms. including wire transfers, ACH payments, and check clearing settlement. Because the Federal Reserve does not pay interest on such deposits used to satisfy statutory reserve requirements, banks seek to minimize their inventory of such deposits. In 1994, the banking industry introduced a new inventory management tool for such deposits, the retail deposit sweep program, which avoids the statutory requirement by reclassifying transaction deposits as savings deposits. In this analysis, we examine two algorithms for operating such sweeps programs within the limits of Federal Reserve regulations. Keywords: Banks and banking ; Retail trade Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-023&r=all 370. A flexible finite-horizon identification of technology shocks Neville Francis Michael T. Owyang Jennifer E. Roush Recent empirical studies using infinite horizon long-run restrictions question the validity of the technology-driven real business cycle hypothesis. These results have met with their own controversy, stemming for their sensitivity to changes in model specification and the general poor performance of long run restrictions in Monte Carlo experiments. We propose a alternative identification that maximizes the contribution of technology shocks to the forecast error variance of labor productivity at a long, but finite horizon. In small samples, our identification outperforms its infinite horizon counterpart by producing less biased impulse responses and technology shocks that are more highly correlated with the technology shocks form the underlying model. For U.S. data, we show that the negative hours response is not robust to allowing a greater role for non-technology shocks in the forecast error variance share at a ten year horizon. Keywords: Time-series analysis ; Business cycles Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-024&r=all 371. Foreign exchange rates don't follow a random walk Hui Guo Robert Savickas The paper documents a new empirical result that a high level of aggregate U.S. idiosyncratic stock return volatility is usually associated with a future appreciation in U.S. dollars. The relation is highly significant for most foreign currencies. For example, idiosyncratic volatility accounts for over 20 percent variations of the subsequent change in the Deutsche mark/U.S. dollar rate in the non-overlapping semi-annual data and its improvements over the random walk model in the out-of-sample forecast are statistically significant. We find the similar result*a positive and significant relation between a country*s aggregate idiosyncratic volatility and the future U.S. dollar price of its currency*in France, Germany, and Japan. Moreover, the U.S. default premium provides additional information about future exchange rates. Given that idiosyncratic volatility and the default premium are strong predictors of fundamentals, our results are consistent with monetary models of foreign exchange rates. Keywords: Foreign exchange ; International finance Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-025&r=all 372. Is value premium a proxy for time-varying investment opportunities: some time series evidence Hui Guo Robert Savickas Zijun Wang Jian Yang Campbell and Vuolteenaho (2004) and Brennan, Wang, and Xia (2004) recently argue that the value premium co-moves with investment opportunities and thus reflects rational pricing. This paper extends their analysis by showing that the ICAPM interpretation of the value premium also sheds light on the puzzling empirical relation between the stock market risk and return across time. That is, in contrast with many early authors, it is found to be positive and highly significant after controlling for the covariance between the stock market return and the value premium. Moreover, we also document a positive and significant relation between the value premium and its conditional variance over the post-1963 period. Our results, which appear to be robust using both the realized volatility model and the GARCH model, confirm that the value premium cannot be completely attributed to data mining and irrational pricing. Keywords: Time-series analysis ; Stocks Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-026&r=all 373. Non-parametric, unconditional quantile estimation for efficiency analysis with an application to Federal Reserve check processing operations David C. Wheelock Paul Wilson This paper examines the technical efficiency of U.S. Federal reserve check processing offices over 1980-2003. We use new unconditional quantile estimator of efficiency that avoids some drawbacks of other recently proposed estimators. The new estimator is fully non-parametric, robust with respect to outliers, super-consistent, and converges at rate root-n this avoiding the curse of dimensionality that plagues data envelopment analysis (DEA) estimators. Our methods could be used by policymakers to compare inefficiency levels across offices or by managers of individual offices to identify peer offices. Keywords: Check collection systems ; Payment systems Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-027&r=all 374. The joint dynamics of liquidity, returns, and volatility across small and large firms Tarun Chordia Asani Sarkar Avanidhar Subrahmanyam This paper explores liquidity spillovers in market- capitalization-based portfolios of NYSE stocks. Return, volatility, and liquidity dynamics across the small- and large- cap sectors are modeled by way of a vector autoregression model, using data that spans more than 3,000 trading days. We find that volatility and liquidity innovations in one sector are informative in predicting liquidity shifts in the other. Impulse responses indicate the existence of persistent liquidity, return, and volatility spillovers across the small- and large-cap sectors. Lead and lag patterns across small- and large-cap stocks are stronger when spreads in the large-cap sector are wider. Consistent with the notion that private informational trading in large-cap stocks is transmitted to other stocks with a lag, order flows in the large-cap-stock decile predict both transaction- price-based and mid-quote returns of small-cap deciles when large- cap spreads are high. Keywords: Liquidity (Economics) ; Rate of return ; Securities ; Stocks Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fednsr:207&r=all 375. Who is afraid of the Friedman rule? Joydeep Bhattacharya Joseph Haslag Antoine Martin Rajesh Singh We explore the connection between optimal monetary policy and heterogeneity among agents. We utilize a standard monetary economy with two types of agents that differ in the marginal utility they derive from real money balances-a framework that produces a nondegenerate stationary distribution of money holdings. Without type-specific fiscal policy, we show that the zero-nominal-interest-rate policy (the Friedman rule) does not maximize type-specific welfare; further, it may not maximize aggregate ex ante social welfare. Indeed one or, more surprisingly, both types of agents may benefit if the central bank deviates from the Friedman rule. Keywords: Monetary policy ; Interest rates ; Friedman, Milton ; Banks and banking, Central Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fednsr:208&r=all 376. The simple geometry of transmission and stabilization in closed and open economies Giancarlo Corsetti Paolo Pesenti This paper provides an introduction to the recent literature on macroeconomic stabilization in closed and open economies. We present a stylized theoretical framework, illustrating its main properties with the help of an intuitive graphical apparatus. Among the issues we discuss are optimal monetary policy and the welfare gains from macroeconomic stabilization, the international transmission of real and monetary shocks and the role of exchange rate pass-through, and the design of optimal exchange rate regimes and monetary coordination among interdependent economies. Keywords: Macroeconomics ; Monetary policy ; Foreign exchange rates Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fednsr:209&r=all 377. Consumer search, price dispersion, and international relative price volatility George Alessandria This paper develops a model of consumer search consistent with the evidence of substantial price dispersion within countries. This model is used to study international relative price fluctuations. Consumer search frictions permit firms to price discriminate across markets based on the local wage of consumers. With price dispersion, the market price of a good does not measure its resource cost. This breaks the tight link between relative quantities and relative prices implied by most models. We show that volatile and persistent fluctuations in relative wages lead to volatile and persistent fluctuations in relative prices at the disaggregate level. These deviations from the law of one price substantially increase international relative price volatility. With productivity and taste shocks, the model generates international business cycles that closely match the data Keywords: Prices ; Consumers Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedpwp:05-09&r=all 378. Water, water everywhere: dare I drink a drop? (with apologies to Samuel Taylor Coleridge) Robert Tannenwald Nicholas Turner Given New England’s ample rainfall, green forests, and extensive wetlands, many of the region’s inhabitants might question the notion that it faces potentially severe water shortages. Yet, parts of the region already confront such shortages. These shortages are likely to spread, absent corrective action. This paper describes the characteristics of New England responsible for its looming water problems, identifies areas within the region most vulnerable to such problems, and analyzes alternative strategies for alleviating them. Small, shallow, porous aquifers are the region’s primary geological impediment to trapping and tapping adequate water supplies. Urbanization and a spatial mismatch between economic growth and water availability are contributing factors. Areas within the region most vulnerable to water shortages include, but are not limited to, southern Maine, southern New Hampshire, northern Vermont, and Massachusetts’ North Shore and Route 495 corridor. While no single solution to potential water shortages is clearly superior, the authors conclude that conservation is a promising, effective tactic that should be an important component of any water strategy. Keywords: Water-supply - New England Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedbcr:05-1&r=all 379. The Adjustment of Credit Ratings of Defaulted Issuers Andre Guttler Mark Wahrenburg We provide insights into determinants of the rating level of 371 issuers which defaulted in the years 1999 to 2003, and into the leader-follower relationship between Moody’s and S&P. The evidence for the rating level suggests that Moody’s assigns lower ratings than S&P for all observed periods before the default event. Furthermore, we observe two-way Granger causal-ity, which signifies information flow between the two rating agencies. Since lagged rating changes influence the magnitude of the agencies’ own rating changes it would appear that the two rating agencies apply a policy of taking a severe downgrade through several mild down-grades. Further, our analysis of rating changes shows that issuers with headquarters in the US are less sharply downgraded than non-US issuers. For rating changes by Moody’s we also find that larger issuers seem to be downgraded less severely than smaller issuers. JEL: G15 G23 G33 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:fra:franaf:155&r=all 380. International Patent Pattern and Technology Diffusion Kurt A. Hafner The paper focuses on the impact of business related R&D spending on input factor productivity (IFP) using international patent applications as a technology diffusion channel. Considering the relationship between research and productivity, international patent pattern reflects the link between the source (R&D) and the use (IFP). To estimate patent related spillover effects, I use the estimation techniques developed and proposed by Kao and Chiang (1998) in order to deal with nonstationary and cointegration and to obtain reliable coefficients. I find that patent related foreign R&D spillover effects are present and that the impact on labor productivity for Non-G7 countries is higher due to foreign rather than domestic R&D activities. Keywords: Productivity, R&D, Technology Diffusion, Nonstationary Panels JEL: C12 C23 O30 O40 Date: 2005-06-07 URL: http://d.repec.org/n?u=RePEc:got:cegedp:44&r=all 381. International Trade, Flexible Manufacturing and Outsourcing Carsten Eckel This study analyzes the impact of international trade on the diffusion of flexible manufacturing in a general equilibrium framework. Suppliers produce a flexible base product that can be adapted to the specific input requirements of a continuum of downstream industries. The vertical structure is determined by the trade-off between economies of scope in flexible manufacturing and product specificity of in-house production. In this framework, globalization can lead to alternating waves of insourcing and outsourcing, but once the world market reaches a threshold size, outsourcing prevails. We also derive a number of testable predictions with regard to firm size and productivity measures that are in line with recent empirical and casual evidence. Keywords: International Trade, Flexible Manufacturing, Outsourcing, Vertical Integration, Globalization, General Equilibrium JEL: F12 L11 L22 Date: 2005-06-07 URL: http://d.repec.org/n?u=RePEc:got:cegedp:45&r=all 382. Gravity for FDI Jorn Kleinert Farid Toubal We derive gravity equations from three different general equilibrium models incorporating multinational firms. We show that gravity equations are particularly adapted to the analysis of foreign affiliates\' activities of multinational firms. However, the different theoretical models lead to different specifications and interpretations of the empirical results. This is particularly the case considering gravity equations derived from factor proportion models compared to those derived from proximity concentration theories. Keywords: Gravity equation, multinational firms, heterogeneity JEL: F23 F12 C21 Date: 2005-06-09 URL: http://d.repec.org/n?u=RePEc:got:cegedp:46&r=all 383. Are exports and imports of Chile cointegrated? Dierk Herzer (Universitat Gottingen) Felicitas Nowak-Lehmann D. (Universitat Gottingen) This study examines the long-run relationship between Chilean exports and imports during the 1975-2004 period using unit root tests and cointegration techniques that allow for endogenously determined structural breaks. The results indicate that there exists a long-run equilibrium between exports and imports in Chile, despite the balance-of-payments crisis of 1982-83. This finding implies that Chile\'s macroeconomic policies have been effective in the long-run and suggests that Chile is not in violation of its international budget constraint. Keywords: Exports, imports, cointegration, structural break, Chile JEL: F32 F10 C22 URL: http://d.repec.org/n?u=RePEc:got:iaidps:111&r=all 384. Interactionnel learning: between individual and collective proficiencies of experimentation (In French) Sandrine DARAUT (LEREPS-GRES) The aim of this article is first to consider the supports of learning in relation to their context of emergence from the productive efficiency point of view: we define learning according to the methods of reasoning as well as the material and relational supports, we also make a distinction between individual and organizational levels. At the same time, the question of the transfer and the links between individual and organizational competences, individual and collective processes of learning arises. Here, we support the idea that only individuals learn, sustained by the machine and the colleagues. >From this point of view, we define an interactionnel learning in which Learning By Using is developed. The organizational participants accumulate competences by technical confrontation with the contexts of interactions (Man-Artifact and Man-Man relations). The action relationships are simultaneously recomposed. Keywords: socialization, perceptions, learning organizations, organizational learning, learning in interaction JEL: J24 M54 Date: 2005 URL: http://d.repec.org/n?u=RePEc:grs:wpegrs:2005-13&r=all 385. Phillips-Perron-type unit root tests in the nonlinear ESTAR framework Rothe, Christoph Sibbertsen, Philipp In this paper, we propose Phillips-Perron type, semiparametric testing procedures to distinguish a unit root process from a mean- reverting exponential smooth transition autoregressive one. The limiting nonstandard distributions are derived under very general conditions and simulation evidence shows that the tests perform better than the standard Phillips-Perron or Dickey-Fuller tests in the region of the null. Keywords: Exponential smooth transition autoregressive model, Unit roots, Monte Carlo simulations, Purchasing Power Parity JEL: C12 C32 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:han:dpaper:dp-315&r=all 386. Open Access –julkaiseminen, linkittaminen ja tekijanoikeus - selvitys verkkojulkaisusopimuksissa huomioitavista seikoista Vilanka, Olli (Swedish School of Economics and Business Administration) Kirjastoissa ja yliopistoissa tapahtuvaa tieteellisten toiden verkkokayttoa koskevat tekijanoikeudelliset kysymykset ovat viimeaikoina aiheuttaneet paanvaivaa. Tietoverkot ja digitaalinen ymparisto muodostavatkin tekijanoikeuden kannalta erityisen soveltamisympariston johon perehtyminen edellyttaa tarkempaa tietamysta tiedon siirtamisesta, tietokannoista seka ylipaataan tietoverkkoihin liittyvista teknisista toiminnoista. Koska sovelletut tekniset ratkaisut poikkeavat eri yhteyksissa toisistaan, pyrin kirjoituksessa yleisella tasolla selvittamaan niita kayttajien ja oikeudenhaltijoiden valisia tekijan- ja sopimusoikeudellisia kysymyksia, joita teosten kaytto tietoverkoissa aiheuttaa. Pyrkimyksena on tuoda esiin ne tekijanoikeudellisesti merkitykselliset seikat, jotka verkkojulkaisuja arkistoitaessa, valitettaessa seka linkkeja kaytettaessa tulisi alkuperaisten tekijoiden, kustantajien ja verkkojulkaisijoiden (esimerkiksi kirjasto tai yliopisto) valisissa sopimuksissa ottaa huomioon. Kysymyksia tarkastellaan erityisesti julkaisijan nakokulmasta. Esitys sisaltaa myos kustantajien lupakaytantoa kasittelevan empiirisen tutkimuksen. Tutkimuksessa on tarkasteltu kuinka usein kustantajat ovat vuosien 2000 – 2003 valisena aikana myontaneet luvan julkaista vaitoskirjan artikkeli osana vaitoskirjaa Teknillisen korkeakoulun avoimella ei kaupallisella www-palvelimella. Koska linkeilla on verkkojulkaisutoiminnassa usein merkittava rooli, mutta niiden tekijanoikeudellinen asema on epaselva, kirjoituksen jalkimmaisessa osiossa perehdytaan linkkien tekijanoikeudelliseen asemaan. Keywords: tekijanoikeus; open access; verkkojulkaiseminen; linkittaminen; tietoverkot Date: 2005-06-06 URL: http://d.repec.org/n?u=RePEc:hhb:hanken:0510&r=all 387. A review of universal-service policy Hultkrantz, Lars (Department of Business, Economics, Statistics and Informatics) In some countries, like Sweden, regulatory reform of monopoly industries such as telecom and mail went ahead without much consideration to how competition would affect the universal provision of services.

This paper reviews issues that ought to be considered in the process of shaping a universal-service policy that is conform to market competition. Keywords: auctions; regulation; telecom; rail; mail JEL: L51 L87 L90 Date: 2005-06-07 URL: http://d.repec.org/n?u=RePEc:hhs:oruesi:2005_005&r=all 388. Practicing What We Preach: Using Professional Degree Principles to Improve HRIR and Management Teaching John W. Budd Many of the central principles of professional degrees taught to HRIR and business school students-putting theory into practice, knowing your customers, benchmarking against best practices, and using diverse toolkits for problem solving-are equally valid for the practice of teaching HRIR and business courses. Learning theory needs to be put into practice in the professional classroom, instructors must understand students and their diverse learning styles, teaching practices should be benchmarked against best practices, and instructors need to develop teaching toolkits for creating effective courses. As teachers of professional students, we should practice what we preach. URL: http://d.repec.org/n?u=RePEc:hrr:papers:0605&r=all 389. Monitoring by Peers or by Delegates? Joint Liability Loans and Moral Hazard Jonathan Conning (Hunter College, Department of Economics) I analyze the conditions under which joint liability loans to encourage peer-monitoring would be offered and chosen instead of monitored individual liability alternatives on a competitive loan market when production and monitoring activities are costly and subject to moral hazard. The case for joint liability loans does not rest on an assumed monitoring or information advantage by borrowers but instead on a incentive diversification effect that cannot be replicated by outside intermediaries. Joint liability clauses are chosen to implement a preferred Nash equilibrium in a multi-agent, multi-task game, where each borrower must be given incentives to remain diligent as a financed entrepreneur and as a monitor of others. The framework can be shown to encompass earlier analyses based on costless monitoring and also allows for relative performance evaluation. JEL: D82 G2 G24 Date: 2005 URL: http://d.repec.org/n?u=RePEc:htr:hcecon:407&r=all 390. Preferred vs Actual Working Hours in Couple Households Yi-Ping Tseng (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne) Mark Wooden (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne) Working hours in Australia are quite widely distributed around the population mean. That is, there are relatively many people working both relatively short hours and relatively long hours each week. From a welfare perspective, however, it is not the actual number of hours worked that is of importance, but whether the hours being worked are consistent with individual preferences. In this paper the question of how closely hours preferences are being met is examined using data collected in the first wave of the HILDA Survey. The study focuses specifically on workers in couple households. The analysis involved two main stages. In the first stage, evidence of a significant time divide - the co- existence of many people working part-time hours who would prefer to work longer and many people working very long hours who ould prefer to work fewer hours - is found. The extent of this time divide, however, should not be overstated - the hours of the majority of workers are still reasonably close to their stated preference. The second stage of the analysis focused on identifying the factors associated with mismatch in working hours preferences. The extent of overemployment, for example, is found to rise with age, and is more pronounced among the self-employed and less pronounced among those with a recent history of unemployment. Underemployment, on the other hand, is also associated positively with self-employment, as well as with casual employment. Perhaps of most interest, we find that in couples preferred hours are influenced by whether or not, and the extent to which, partners achieve their working time preferences. That is, if one member of the couple is unable to work as many hours as desired, this leads their partner to prefer more hours. Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:iae:iaewps:wp2005n07&r=all 391. Inverse probability weighted estimation for general missing data problems Jeffrey M. Wooldridge I study inverse probability weighted M-estimation under a general missing data scheme. The cases covered that do not previously appear in the literature include M-estimation with missing data due to a censored survival time, propensity score estimation of the average treatment effect for linear exponential family quasi-log-likelihood functions, and variable probability sampling with observed retainment frequencies. I extend an important result known to hold in special cases: estimating the selection probabilities is generally more efficient than if the known selection probabilities could be used in estimation. For the treatment effect case, the setup allows for a simple characterization of a “double robustness” result due to Scharfstein, Rotnitzky, and Robins (1999): given appropriate choices for the conditional mean function and quasi-log- likelihood function, only one of the conditional mean or selection probability needs to be correctly specified in order to consistently estimate the average treatment effect. JEL: C13 C21 C23 Date: 2004-04 URL: http://d.repec.org/n?u=RePEc:ifs:cemmap:05/04&r=all 392. Estimation of dynamic linear models in short panels with ordinal observation Stephen Pudney (Institute for Fiscal Studies and Institute for Social and Economic Research) We develop a simulated ML method for short-panel estimation of one or more dynamic linear equations, where the dependent variables are only partially observed through ordinal scales. We argue that this latent autoregression (LAR) model is often more appropriate than the usual state-dependence (SD) probit model for attitudinal and interval variables. We propose a score test for assisting in the treatment of initial conditions and a new simulation approach to calculate the required partial derivative matrices. An illustrative application to a model of households’ perceptions of their financial well-being demonstrates the superior fit of the LAR model. Keywords: Dynamic panel data models, ordinal variables, simulated maximum likelihood, GHK simulator, BHPS JEL: C23 C25 C33 C35 D84 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:ifs:cemmap:05/05&r=all 393. Nonparametric inference for unbalance time series data Oliver Linton (Institute for Fiscal Studies and London School of Economics) Estimation of heteroskedasticity and autocorrelation consistent covariance matrices (HACs) is a well established problem in time series. Results have been established under a variety of weak conditions on temporal dependence and heterogeneity that allow one to conduct inference on a variety of statistics, see Newey and West (1987), Hansen (1992), de Jong and Davidson (2000), and Robinson (2004). Indeed there is an extensive literature on automating these procedures starting with Andrews (1991). Alternative methods for conducting inference include the bootstrap for which there is also now a very active research program in time series especially, see Lahiri (2003) for an overview. One convenient method for time series is the subsampling approach of Politis, Romano, andWolf (1999). This method was used by Linton, Maasoumi, andWhang (2003) (henceforth LMW) in the context of testing for stochastic dominance. This paper is concerned with the practical problem of conducting inference in a vector time series setting when the data is unbalanced or incomplete. In this case, one can work only with the common sample, to which a standard HAC/bootstrap theory applies, but at the expense of throwing away data and perhaps losing effciency. An alternative is to use some sort of imputation method, but this requires additional modelling assumptions, which we would rather avoid.1 We show how the sampling theory changes and how to modify the resampling algorithms to accommodate the problem of missing data. We also discuss effciency and power. Unbalanced data of the type we consider are quite common in financial panel data, see for example Connor and Korajczyk (1993). These data also occur in cross-country studies. Date: 2004-04 URL: http://d.repec.org/n?u=RePEc:ifs:cemmap:06/04&r=all 394. Nonparametric estimation of an additive quantile regression model Joel Horowitz (Institute for Fiscal Studies and Northwestern University) Simon Lee (Institute for Fiscal Studies and University College London) This paper is concerned with estimating the additive components of a nonparametric additive quantile regression model. We develop an estimator that is asymptotically normally distributed with a rate of convergence in probability of n-r/(2r+1) when the additive components are r-times continuously differentiable for some r = 2. This result holds regardless of the dimension of the covariates and, therefore, the new estimator has no curse of dimensionality. In addition, the estimator has an oracle property and is easily extended to a generalized additive quantile regression model with a link function. The numerical performance and usefulness of the estimator are illustrated by Monte Carlo experiments and an empirical example. Date: 2004-04 URL: http://d.repec.org/n?u=RePEc:ifs:cemmap:07/04&r=all 395. Endogeneity in quantile regression models: a control function approach Simon Lee (Institute for Fiscal Studies and University College London) This paper considers a linear triangular simultaneous equations model with conditional quantile restrictions. The paper adjusts for endogeneity by adopting a control function approach and presents a simple two-step estimator that exploits the partially linear structure of the model. The first step consists of estimation of the residuals of the reduced-form equation for the endogenous explanatory variable. The second step is series estimation of the primary equation with the reduced-form residual included nonparametrically as an additional explanatory variable. This paper imposes no functional form restrictions on the stochastic relationship between the reduced-form residual and the disturbance term in the primary equation conditional on observable explanatory variables. The paper presents regularity conditions for consistency and asymptotic normality of the two- step estimator. In addition, the paper provides some discussions on related estimation methods in the literature and on possible extensions and limitations of the estimation approach. Finally, the numerical performance and usefulness of the estimator are illustrated by the results of Monte Carlo experiments and two empirical examples, demand for fish and returns to schooling. Date: 2004-10 URL: http://d.repec.org/n?u=RePEc:ifs:cemmap:08/04&r=all 396. Pessimistic portfolio allocation and Choquet expected utility Gilbert W. Bassett Jr Roger Koenker (Institute for Fiscal Studies and University of Illinois) Gregory Kordas Recent developments in the theory of choice under uncertainty and risk yield a pessimistic decision theory that replaces the classical expected utility criterion with a Choquet expectation that accentuates the likelihood of the least favorable outcomes. A parallel theory has recently emerged in the literature on risk assessment. It is shown that a general form of pessimistic portfolio optimization based on the Choquet approach may be formulated as a problem of linear quantile regression. Date: 2004-06 URL: http://d.repec.org/n?u=RePEc:ifs:cemmap:09/04&r=all 397. Identification of sensitivity to variation in endogenous variables Andrew Chesher (Institute for Fiscal Studies and University College London) This lecture explores conditions under which there is identification of the impact on an outcome of exogenous variation in a variable which is endogenous when data are gathered. The starting point is the Cowles Commission linear simultaneous equations model. The parametric and additive error restrictions of that model are successively relaxed and modifications to covariation,order and rank conditions that maintain identifiability are presented. Eventually a just-identifying, non- falsifiable model permitting nonseparablity of latent vari-ates and devoid of parametric restrictions is obtained. The model requires the endogenous variable to be continuously distributed. It is shown that relaxing this restriction results in loss of point identification but set identification is possible if an additional covariation restriction is introduced. Relaxing other restrictions presents significant challenges. Date: 2004-07 URL: http://d.repec.org/n?u=RePEc:ifs:cemmap:10/04&r=all 398. Identification in additive error models with discrete endogenous variables Andrew Chesher (Institute for Fiscal Studies and University College London) In additive error models with a discrete endogenous variable identification cannot be achieved under a marginal covariation condition when the support of instruments is sparse relative to the support of the endogenous variable. An iterated covariation condition with a weak montonicity restriction is shown to have set identifying power. Date: 2004-09 URL: http://d.repec.org/n?u=RePEc:ifs:cemmap:11/04&r=all 399. The Bootstrap and the Edgeworth Correction for Semiparametric Averaged Derivatives Y. Nishiyama Peter Robinson (Institute for Fiscal Studies and London School of Economics) In a number of semiparametric models, smoothing seems necessary in order to obtain estimates of the parametric component which are asymptotically normal and converge at parametric rate. However, smoothing can inflate the error in the normal approximation, so that refined approximations are of interest, especially in sample sizes that are not enormous. We show that a bootstrap distribution achieves a valid Edgeworth correction in case of density-weighted averaged derivative estimates of semiparametric index models. Approaches to bias-reduction are discussed. We also develop a higher order expansion, to show that the bootstrap achieves a further reduction in size distortion in case of two-sided testing. The finite sample performance of the methods is investigated by means of Monte Carlo simulations froma Tobit model. JEL: C23 Date: 2004-10 URL: http://d.repec.org/n?u=RePEc:ifs:cemmap:12/04&r=all 400. On the identification of the effect of smoking on mortality Jerome Adda (Institute for Fiscal Studies and University College London) Valerie Lechene (Institute for Fiscal Studies and Wadham College, Oxford) This paper considers the identification of the effect of tobacco on mortality. If individuals select into smoking according to some unobserved health characteristic, then estimates of the effect of tobacco on health that do not account for this are biased. We show that using information on mortality, morbidity and smoking, it is possible to control for this selection effect and obtain consistent estimates of the effect of smoking on mortality. We implement our method on Swedish data. We show that there is selection into smoking, and considerable dispersion around the average effect, so that health policies that aim at decreasing smoking prevalence and quantities smoked might have less effect in terms of average number of years of life gained than previously estimated. We also empirically show that selection into smoking has increased over the last fifty years with the availability of information on the dangers of smoking, so that future studies comparing smokers and non smokers will spuriously reveal a worsening effect of tobacco on health if they fail to control for selection. Keywords: Health, Duration, Smoking, Selection, Mortality, Life Expectancy, Causality. JEL: I12 Date: 2004-02 URL: http://d.repec.org/n?u=RePEc:ifs:cemmap:13/04&r=all 401. Testing a parametric model against a nonparametric alternative with identification through instrumental variables Joel Horowitz (Institute for Fiscal Studies and Northwestern University) This paper is concerned with inference about a function g that is identified by a conditional moment restriction involving instrumental variables. The paper presents a test of the hypothesis that g belongs to a finite-dimensional parametric family against a nonparametric alternative. The test does not require nonparametric estimation of g and is not subject to the illposed inverse problem of nonparametric instrumental variables estimation. Under mild conditions, the test is consistent against any alternative model and has asymptotic power advantages over existing tests. Moreover, it has power arbitrarily close to 1 uniformly over a class of alternatives whose distance from the null hypothesis is O(n-1/2), where n is the sample size. Date: 2004-09 URL: http://d.repec.org/n?u=RePEc:ifs:cemmap:14/04&r=all 402. A nonparametric test of exogeneity Richard Blundell (Institute for Fiscal Studies and University College London) Joel Horowitz (Institute for Fiscal Studies and Northwestern University) This paper is concerned with inference about a function g that is identified by a conditional moment restriction involving instrumental variables. The function is nonparametric. It satisfies mild regularity conditions but is otherwise unknown. The paper presents test of the hypothesis that g is the mean of a random variable Y conditional on a covariate X . The need to test this hypothesis arises frequently in economics. The test does not require nonparametric instrumental-variables (IV) estimation of g and is not subject to the ill-posed inverse problem that nonparametric IV estimation entails. The test is consistent whenever g differs from the conditional mean function of Y on a set of non-zero probability. Moreover, the power of the test is arbitrarily close to 1 uniformly over a set of functions g whose distance from the conditional mean function is O(n-1/2), where is the sample size. Keywords: Hypothesis test, instrumental variables, specification testing, consistent testing Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:ifs:cemmap:15/04&r=all 403. Spatial design matrices and associated quadratic forms: structure and properties Grant Hillier Federico Martellosio The paper provides significant simplifications and extensions of results obtained by Gorsich, Genton, and Strang (J. Multivariate Anal. 80 (2002) 138) on the structure of spatial design matrices. These are the matrices implicitly defined by quadratic forms that arise naturally in modelling intrinsically stationary and isotropic spatial processes. We give concise structural formulae for these matrices, and simple generating functions for them. The generating functions provide formulae for the cumulants of the quadratic forms of interest when the process is Gaussian, second- order stationary and isotropic. We use these to study the statistical properties of the associated quadratic forms, in particular those of the classical variogram estimator, under several assumptions about the actual variogram. Keywords: Cumulant, Intrinsically Stationary Process, Kronecker Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:ifs:cemmap:16/04&r=all 404. Automatic positive semi-definite HAC covariance matrix and GMM estimation Richard Smith (Institute for Fiscal Studies and University of Warwick) This paper proposes a new class of HAC covariance matrix estimators. The standard HAC estimation method re-weights estimators of the autocovariances. Here we initially smooth the data observations themselves using kernel function based weights. The resultant HAC covariance matrix estimator is the normalised outer product of the smoothed random vectors and is therefore automatically positive semi-definite. A corresponding efficient GMM criterion may also be defined as a quadratic form in the smoothed moment indicators whose normalised minimand provides a test statistic for the over-identifying moment conditions. Keywords: GMM, HAC Covariance Matrix Estimation, Overidentifying Moments JEL: C13 C30 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:ifs:cemmap:17/04&r=all 405. Nonparametric methods for the characteristic model Laura Blow (Institute for Fiscal Studies) Martin Browning (Institute for Fiscal Studies and University of Copenhagen) Ian Crawford (Institute for Fiscal Studies and University of Surrey) Characteristics models have been found to be useful in many areas of economics. However, their empirical implementation tends to rely heavily on functional form assumptions. In this paper we develop a revealed preference-based nonparametric approach to characteristics models. We derive the minimal necessary and sufficient empirical conditions under which data on the market behaviour of individual, heterogeneous, pricetaking consumers are nonparametrically consistent with the consumer characteristics model. Where these conditions hold, we show how information may be recovered on individual consumer’s marginal valuations of product attributes. In some cases marginal valuations are point identi- fied and in other cases we can only recover bounds. Where the conditions fail we highlight the role which the introduction of unobserved product attributes can play in rationalising the data. We implement these ideas using consumer panel data on the Danish milk market. Keywords: Product characteristics, revealed preference JEL: C43 D11 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:ifs:cemmap:18/04&r=all 406. GEL Criteria for Moment Condition Models Richard Smith (Institute for Fiscal Studies and University of Warwick) GEL methods which generalize and extend previous contributions are defined and analysed for moment condition models specified in terms of weakly dependent data. These procedures offer alternative one-step estimators and tests that are asymptotically equivalent to their efficient two-step GMM counterparts. The basis for GEL estimation is via a smoothed version of the moment indicators using kernel function weights which incorporate a bandwidth parameter. Examples for the choice of bandwidth parameter and kernel function are provided. Efficient moment estimators based on implied probabilities derived from the GEL method are proposed, a special case of which is estimation of the stationary distribution of the data. The paper also presents a unified set of test statistics for over-identifying moment restrictions and combinations of parametric and moment restriction hypotheses. Keywords: GMM, Generalized Empirical Likelihood, Efficient Moment Estimation, JEL: C13 C30 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:ifs:cemmap:19/04&r=all 407. Parental income and children's smoking behaviour: evidence from the British Household Panel Survey Laura Blow (Institute for Fiscal Studies) Andrew Leicester (Institute for Fiscal Studies) Frank Windmeijer (Institute for Fiscal Studies) Does money matter? When investigating health behaviour, research often finds a strong positive association between income and healthy behaviour. This could however be due to individual characteristics that determine both income and health investment and is not necessarily due to the role of money per se. In this study we look at this relationship over the generations by studying the association between parental income and children’s prevalence to smoke in Britain using data from the British Household Panel Survey and British Youth Survey. We find an inverse relation between parental income and children’s smoking prevalence, but when looking at within household changes by comparing sibling’s smoking status differences at the same age, we find instead a positive effect. This indicates that within household increases in income lead to an increased probability of smoking of a younger child. Keywords: Child smoking, Parental income, Panel Data JEL: I12 C23 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:05/10&r=all 408. Education subsidies and school drop-out rates Lorraine Dearden (Institute for Fiscal Studies) Carl Emmerson (Institute for Fiscal Studies) Chris Frayne (Institute for Fiscal Studies) Costas Meghir (Institute for Fiscal Studies and University College London) This paper evaluates whether means-tested grants paid to secondary students are an effective way of reducing the proportion of school dropouts. We look at this problem using matching techniques on a pilot study carried out in England during 1999 and 2000 using a specially designed dataset that ensures that valid comparisons between our pilot and control areas are made. The impact of the subsidy is quite substantial with initial participation rates (at age 16/17) being around 4.5 percentage points higher. Full-time participation rates one year later are found to have increased by around 6.4 percentage points which is largely due to the EMA having a significant effect on retention in post compulsory education. These effects vary by eligibility group with those receiving the full payment having the largest initial increase in participation, whilst the effects for those who are partially eligible are only significantly different from the control group in the second year of the program. There is some evidence that the participation rate effect is stronger for boys, especially in the second year, and that the policy goes some way to reducing the gap in dropout rates between boys and girls. It is also clear that the policy has the largest impact on children from the poorest socio- economic background. JEL: H52 I28 J24 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:05/11&r=all 409. Consumption, Wealth, the Elasticity of Intertemporal Substitution and Long-Run Stock Market Returns Carlo Favero Consumption is striking back. Some recent evidence indicates that the well-known asset pricing puzzles generated by the difficulties of matching fluctuations in asset prices with high frequency fluctuations in consumption might be solved found by considering consumption in the long-run. A first strand of the literature concentrates on multiperiod differences in log consumption, a second concentrates on the cointegrating relation for consumption. Interestingly, only the (multiperiod)Euler Equation for the consumer optimization problem is considered by the first strand of the literature, while the cointegrationbased literature concentrates exclusively on the (linearized) intertemporal budget constraint. In this paper, we show that using the first order condition in the linearized budget constraint to derive an explicit long-run consumption function delivers an even more striking strike back. URL: http://d.repec.org/n?u=RePEc:igi:igierp:291&r=all 410. Determinants of Cellular Competition in Asia Chakravarty Sujoy Using data from the International Telecommunications Union (ITU) Database I explore the market for the provision of cellular services in Asia. This study looks at the diffusion of mobile technologies and mobile tariffs over the last decade. It compares the degree of competition, regulation and its effects in Asia with mobile markets in developed countries. It also analyses a 29 country 10 year panel data set in order to study the determinants of mobile penetration in Asia. The results indicate that competition has played a major role in increasing the diffusion of cell phones. The presence of an independent telecommunication regulator as well as increasing capacity of fixed line telephone exchanges has also positively affected the diffusion of mobile services. The last part of the study takes a brief look at the cellular market in India, where mobile service provision has seen startling growth in the last decade. This growth has made for falling tariffs, increase in the number of firms and technologies and a large subscriber base which is still growing at a significant rate. The structure of competition is explored in some detail for regional markets using monthly data from 1997 to 2004. Keywords: Competition, Cellular, Regulation, Telecommunication. JEL: D4 Date: 2005-06-07 URL: http://d.repec.org/n?u=RePEc:iim:iimawp:2005-06-01&r=all 411. The Determinants of Firm Performance: Unions, Works Councils, and Employee Involvement/High Performance Work Practices John T. Addison (University of South Carolina, Universidade de Coimbra and IZA Bonn) Drawing on evidence from the United States and Germany, this paper offers a survey of the effects of worker representation (in unions and works councils) and innovative work practices on firm performance. The focus is on the growing links between these two historically separate literatures. The interaction between worker representation and high performance work practices provides a practical means of peering inside the black box of collective voice, even if there is as yet no well-determined hierarchy for productivity performance and certainly no blue-print for the future of unions. Keywords: worker representation, employee involvement mechanisms, innovative work practices, training, firm/establishment performance JEL: J51 J53 M54 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1620&r=all 412. Structural Labor Market Changes in France Marcello Estevao (International Monetary Fund) Nigar Nargis (University of Dhaka and IZA Bonn) France posted remarkable gains in employment in the second half of the 1990s, suggesting that, beyond cyclical factors, structural unemployment may have changed in the period. We provide a novel methodology to separate structural from cyclical labor market changes and apply it to French household level data from 1990 to 2000. We show that the equilibrium relationship between real wages and unemployment has improved significantly in France in the second half of the 1990s. Further calculations suggest that long-term unemployment will decline substantially in France with respect to its average level in the 1990s if this improved trade-off is not undone. Keywords: employment, wages, bargaining, structural change, labor market JEL: D2 E2 J23 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1621&r=all 413. Dynamic Monopsony: Evidence from a French Establishment Panel Fathi Fakhfakh (Universite Paris II, ERMES) Felix FitzRoy (University of St. Andrews and IZA Bonn) This paper uses a panel of about 6000 French establishments to test some implications of the modern theory of dynamic monopsony or upward sloping labour supply curves for average firm wages. Panel estimates provide strong evidence of a much larger long run employer size - wage effect (ESWE) than found previously, while controlling for worker quality and compensating differentials with lagged wages, and for profitability (rent sharing). Employment expansion also has a positive effect on wages, providing further evidence for upward sloping labour supply (as distinct from the effect of shocks in a perfectly competitive labour market). Keywords: labour supply, dynamic monopsony, firm-size wage effect JEL: C23 J30 J31 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1622&r=all 414. State Dependence in a Multi-State Model of Employment Dynamics Victoria Prowse (Nuffield College, Oxford and IZA Bonn) A multinomial choice framework is used to investigate the nature of women's transitions between full-time employment, part-time employment and non-employment. The stochastic framework allows time varying and time invariant unobserved preferences, and also controls for the possible endogeneity of education, fertility and non-labor income. Significant positive true state dependence is found in both full-time and part-time employment. This finding is robust to the specification of unobserved preferences. The results are used to assess the dynamic effects of three temporary wage subsidies. All three policies have substantial effects on employment behavior for up to 6 years. However, obtaining a permanent increase in employment requires sustained or repeated interventions. Keywords: dynamic labor supply, heterogeneity, multinomial choice, state dependence JEL: C15 C35 J62 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1623&r=all 415. Disagreement in Partners' Reports of Financial Difficulty Robert Breunig (Australian National University) Deborah A. Cobb-Clark (Australian National University and IZA Bonn) Xiaodong Gong (Australian National University and IZA Bonn) Daniella Venn (Department of Employment and Workplace Relations) We use unique data in which both partners report about household finances to demonstrate that there is often disagreement about whether the household has experienced financial difficulty in the past year. Four alternative explanations for this disagreement are tested using the data. The results indicate that disagreement may be related to the severity of the underlying material hardship rather than to gender differences, information asymmetries, or individual (as opposed to household) views of financial difficulty. This implies that standard surveys which collect information about the household’s financial position from a representative individual may fail to completely characterize the nature of material hardship. Keywords: household finances, survey methodology, material hardship JEL: C42 D14 I31 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1624&r=all 416. The Behavioral Effects of Minimum Wages Armin Falk (IZA Bonn and University of Bonn) Ernst Fehr (University of Zurich and IZA Bonn) Christian Zehnder (University of Zurich and IZA Bonn) The prevailing labor market models assume that minimum wages do not affect the labor supply schedule. We challenge this view in this paper by showing experimentally that minimum wages have significant and lasting effects on subjects’ reservation wages. The temporary introduction of a minimum wage leads to a rise in subjects’ reservation wages which persists even after the minimum wage has been removed. Firms are therefore forced to pay higher wages after the removal of the minimum wage than before its introduction. As a consequence, the employment effects of removing the minimum wage are significantly smaller than are the effects of its introduction. The impact of minimum wages on reservation wages may also explain the anomalously low utilization of subminimum wages if employers are given the opportunity of paying less than a minimum wage previously introduced. It may further explain why employers often increase workers' wages after an increase in the minimum wage by an amount exceeding that necessary for compliance with the higher minimum. At a more general level, our results suggest that economic policy may affect people’s behavior by shaping the perception of what is a fair transaction and by creating entitlement effects. Keywords: minimum wages, labor market, monopsony, fairness, reservation wages, entitlement JEL: C91 D63 E64 J38 J42 J58 J68 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1625&r=all 417. The Correlates of Work in a Post-AFDC World: The Results from a Longitudinal State-Level Analysis Dan Lewis (Northwestern University) Spyros Konstantopoulos (Northwestern University and IZA Bonn) Lisa Altenbernd (Northwestern University) Much of the research that has followed welfare reform and new policies such as the Temporary Assistance for Needy Families ( TANF) has focused on identifying the variations in how different states have put the new policy into practice. Less is known however, about how this new policy affects the ability of recipients to earn a living through work. We use panel data from the state of Illinois and examine what explains labor force participation and performance among current and recent TANF recipients. We use both cross-sectional and longitudinal methods to analyze our data. Our results indicate that human capital factors such as education, job skills, and health are important determinants of labor market participation and performance. In addition, we find that long term welfare recipients are equally likely to participate and perform well in the labor market as shorter term welfare recipients. Finally, government housing subsidy appeared to have a positive effect on labor force participation and performance. Keywords: welfare, employment, earnings JEL: I38 J20 J24 J30 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1626&r=all 418. The College Wage Premium, Overeducation, and the Expansion of Higher Education in the UK Ian Walker (University of Warwick, Institute for Fiscal Studies and IZA Bonn) Yu Zhu (University of Kent and Centre for the Economics of Education) This paper provides findings from the UK Labour Force Surveys from 1996 to 2003 on the financial private returns to a degree - the "college premium". The data covers a decade when the university participation rate doubled - yet we find no significant evidence that the mean return to a degree dropped in response to this large increase in the flow of graduates. However, we do find quite large falls in returns when we compare the cohorts that went to university before and after the recent rapid expansion of HE. The evidence is consistent with the notion that new graduates are a close substitute for recent graduates but poor substitutes for older graduates. There appears to have been a very recent increase in the number of graduates getting "non- graduate" jobs but, conditional on getting a graduate job the returns seem stable. Our results are consistent across almost all degree subjects - the exception being maths and engineering where we find that for men, and especially for women, there is a large increase in the proportion with maths and engineering degrees getting graduate jobs and that, conditional on this, the return is rising. Keywords: human capital, higher education, college premium JEL: I20 J30 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1627&r=all 419. Can Endogenous Group Formation Prevent Coordination Failure? A Theoretical and Experimental Investigation Philippe Raab (Bonn Graduate School of Economics and IZA Bonn) This paper studies the effect of endogenous group formation on the outcome in two types of coordination games with multiple Pareto-ranked equilibria. Endogenous group formation means that in each period players are free to choose among two or more groups within which they want to play the coordination game. In the theoretical part we show that a simple myopic best reply dynamics under endogenous group formation leads to the payoff dominant outcome in both types of coordination games, independently of the initial strategy profile. In the experimental part we test this prediction. Our results show that the accuracy of the theoretical prediction is sensitive to the out-of-equilibrium properties of the respective coordination game. If the collective outcome is very sensitive to unilateral deviations, the coordination failure takes the same form under endogenous group formation as in the case of fixed groups. If, however, the coordination game is sufficiently robust against these unilateral deviations, coordination on the payoff dominant equilibrium is observed for the large majority of subjects under endogenous group formation. Moreover, in the former case we find the emergence of equally sized groups, while in the latter case large groups emerge. Interestingly, the respective group sizes can be interpreted as minimizing the individual’s risk of encountering coordination deteriorating players. Keywords: coordination games, endogenous group formation, minimum effort game, median effort game, experiment JEL: C72 C91 C92 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1628&r=all 420. Ethnic Identification, Intermarriage, and Unmeasured Progress by Mexican Americans Brian Duncan (University of Colorado at Denver) Stephen J. Trejo (University of Texas at Austin and IZA Bonn) Using Census and CPS data, we show that U.S.-born Mexican Americans who marry non- Mexicans are substantially more educated and English proficient, on average, than are Mexican Americans who marry co-ethnics (whether they be Mexican Americans or Mexican immigrants). In addition, the non-Mexican spouses of intermarried Mexican Americans possess relatively high levels of schooling and English proficiency, compared to the spouses of endogamously married Mexican Americans. The human capital selectivity of Mexican intermarriage generates corresponding differences in the employment and earnings of Mexican Americans and their spouses. Moreover, the children of intermarried Mexican Americans are much less likely to be identified as Mexican than are the children of endogamous Mexican marriages. These forces combine to produce strong negative correlations between the education, English proficiency, employment, and earnings of Mexican-American parents and the chances that their children retain a Mexican ethnicity. Such findings raise the possibility that selective ethnic "attrition" might bias observed measures of intergenerational progress for Mexican Americans. Keywords: intermarriage, Mexican American, intergenerational progress JEL: J12 J15 J62 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1629&r=all 421. Promotions, Demotions, Halo Effects and Earnings Dynamics of American Executives Christian Belzil (CNRS-GATE, CIRANO, CIREQ and IZA Bonn) Michael Bognanno (Temple University and IZA Bonn) This paper explores the dynamics of wage growth in corporate hierarchies. Using panel data techniques, we estimate the causal effect of current and past transitions in reporting level and past earnings growth on components of current earnings and earnings growth using a large panel of US executives. After conditioning on unobserved heterogeneity, current compensation growth is positively correlated with past promotion outcomes but negatively correlated with past compensation growth. In a flexible model of wage growth, there is an important asymmetry between the effect of a promotion and a demotion. The effect of promotion is smaller in magnitude than the effect of a demotion. The causal effect of a promotion is positive on both growth in base pay and total cash compensation but is negative on bonus growth. The effect of a demotion is negative on growth in all pay components. Keywords: earnings growth, promotions, halo effects, hierarchies, internal labor markets JEL: C33 J41 M5 M51 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1630&r=all 422. Variations in the Wage Returns to a First Degree: Evidence from the British Cohort Study 1970 Massimiliano Bratti (University of Milan and IZA Bonn) Robin Naylor (University of Warwick) Jeremy Smith (University of Warwick) As in many other countries, government policy in the UK has the objective of raising the participation rate of young people in higher education, while increasing the share of the costs of higher education paid by students themselves. A rationale for the latter element comes from evidence of a high private return to university undergraduate degrees. However, much of this evidence pre-dates the rapid expansion in the graduate population. In the current paper, we use evidence from a cohort of young people born in Britain in 1970 to update influential evidence on returns to a first degree based on a previous 1958 birth cohort. We also analyse variations in returns by degree subject and by class of degree. Our analysis incorporates proxying and matching, control function and propensity score matching methods. Among other results, we find (i) that the returns to a first degree for men changed very little across the two cohorts while the return for women declined substantially and (ii) evidence of differences in returns to a first degree according to subject area of study and class of degree awarded. Classification-JEL: J3, J4, I2 Keywords: degree, return, subject, class, UK, university Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1631&r=all 423. The Savings Behavior of Temporary and Permanent Migrants in Germany Thomas K. Bauer (RWI Essen, Ruhr University of Bochum, CEPR and IZA Bonn) Mathias Sinning (RWI Essen) This paper examines the relative savings position of migrant households in West Germany, paying particular attention to differences between temporary and permanent migrants. Utilizing household level data from the German Socio-Economic Panel (GSOEP), our findings reveal significant differences in the savings rates between foreign-born and Germanborn individuals. These differences disappear, however, for temporary migrants, if their remittances are taken into account. Fixed effects estimations of the determinants of immigrants’ savings rates reveal that intended return migration does not only affect remittances, but also the savings rate of migrant households in the host country. The results of a decomposition analysis indicate that differences in the savings rate between Germans and foreigners can mainly be attributed to differences in observable characteristics. We do not find strong evidence for an adjustment of the savings rate between immigrants and natives over time, indicating deficits in the long-term integration of permanent migrants in Germany. Keywords: savings, migration JEL: F22 E21 C24 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1632&r=all 424. A Search Model of Discouragement Michael Rosholm (University of Aarhus, AKF and IZA Bonn) Ott Toomet (University of Aarhus and AKF) Discouragement is a process occurring during an unemployment spell. As the spell prolongs, an individual gradually realises that the returns to search can no longer outweigh search costs, and hence she may eventually leave the labour force. This is analysed theoretically in a framework of unemployed search. We construct a search model, which is stationary from the point of view of the individual, but which has nonstationary features. Namely, the unemployed worker is occasionally hit by shocks leading to a decline in job offer arrival rates. These shocks can be due to stigmatisation or to psychological consequences of unemployement affecting search effectiveness. This model enables us to analyse the issue of discouragement, as the returns to search will gradually decline. Even so, the model is actually stationary from the point of view of the individual, which implies that many interesting theoretical results may be derived. Moreover, from the point of view of the researcher, the model exhibits negative duration dependence in the hazard rate into employment and positive duration dependence in the hazard rate into non-participation, features which correspond well to real data. We use the model to analyse theoretically the impact of changes in unemployment insurance and social assistance benefits, and we conduct some simulation exercises based on a calibrated model. Keywords: labour supply, search theory, discouragement JEL: J21 J64 J65 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1633&r=all 425. A Multinomial Logit Model of College Stopout and Dropout Behavior Leslie S. Stratton (Virginia Commonwealth University, CIM and IZA Bonn) Dennis M. O’Toole (Virginia Commonwealth University) James N. Wetzel (Virginia Commonwealth University) Studies of college attrition typically assume that all attrition is permanent. We use data from the 1990/94 Beginning Postsecondary Survey to distinguish between long-term dropout and short-term stopout behavior in order to test that assumption. We find significant differences between those who stop out and those who drop out in the first year. Failure to recognize these differences biases the results of standard attrition models and hence may cause policy makers to pursue inappropriate policy initiatives or incorrectly target at-risk populations. Furthermore, the type of financial aid received is found to have a differential impact on stopout versus dropout probabilities. Keywords: college persistence, college dropout JEL: I21 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1634&r=all 426. Assessing the Welfare Cost of a Fixed Exchange-Rate Policy Niels Arne Dam (Institute of Economics, University of Copenhagen) Jesper Gregers Linaa (Institute of Economics, University of Copenhagen) This paper performs a welfare analysis based on the hypothetical scenario that Denmark gave up its peg and started conducting monetary policy according to a Taylor rule. For this we rely on a dynamic stochastic general equilibrium model for a small open economy that was estimated on Danish data using Bayesian methods. We obtain the result that the gain in welfare is equivalent to a permanent increase of around 0.8 pct in the level of consumption. Examining a range of alternative scenarios does not change this conclusion, unless we assume a degree of policy errors under the Taylor rule that is substantially larger than those estimated by other studies. Keywords: open economy; monetary policy; business cycles; welfare JEL: E3 E4 E5 F4 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:kud:epruwp:05-04&r=all 427. The Common-Trend and Transitory Dynamics in Real Exchange Rate Fluctuations Michael Bergman (Institute of Economics, University of Copenhagen) Yin-Wong Cheung (University of California, Santa Cruz) Kon S. Lai (California State University, Los Angeles) This study explores the sources of real exchange rate fluctuations under the current float. Using a cointegration model of the real exchange rate, the innovations are decomposed into transitory and common-trend components. Both transitory and common-trend innovations are found to explain an appreciable portion of real exchange rate fluctuations, albeit their relative importance can vary across major currencies. Further analysis suggests that common-trend innovations are attribut- able to both productivity and monetary changes, albeit transitory innovations are linked primarily to monetary changes. The empirical results are largely consistent with an open-economy macroeconomic model. Keywords: real exchange rate; common trend; productivity shock; monetary shock JEL: F31 F41 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:kud:kuiefr:200505&r=all 428. Wealth concentration in a developing economy : Paris and France, 1807-1994 Thomas Piketty Gilles Postel-Vinay Jean-Laurent Rosenthal Using large samples of estate tax returns we construct new series on wealth concentration in Paris and France from 1807 to 1994. Wealth concentration in Paris and in France increased until World War I and then fell abruptly. The rise in inequality prior to WWI accelerated (rather than stabilized) during the 1860-1913 period. This was largely driven by the growth of large industrial and financial estates and coincided with the decline of aristocratic fortunes (until the 1840s, the share of aristocrats and real estate in top estates was actually rising). The decline in wealth concentration that followed World War I appears to have been prompted by the 1914-1945 shocks rather than by a two-sector, Kuznets-type process. Inequality fell both in Paris and in the rest of France. Finally, individuals who lived on capital income rather than active entrepreneurs were responsible for the very high levels of wealth concentration observed on the eve of World War I. In the late nineteenth and early twentieth century top wealth holders were in their 70s and 80s, whereas they had been in their 50s in the early the nineteenth century and would be so again after WWII. These results shed new light on the ongoing debate about wealth inequality and growth in the presence of capital constraints. Keywords: wealth concentration, inequality JEL: J14 N20 H20 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:lea:leawpi:0504&r=all 429. The Power of Networks: Integration and Financial Cooperative Performance Martin Desrochers Klaus P. Fischer The purpose of this paper is to perform a cross-country survey of the level of integration of systems of financial cooperatives ( FC) and its effect on measures of performance. We develop a classification scheme based on a theoretical framework that builds on published work using transaction cost economics (TCE) to explain integration of large numbers of financial cooperatives into networks. We identify three critical level of increasing integration we call respectively atomized systems, consensual networks and strategic networks. Further, we test some of the propositions that result from the theoretical framework on an international sample of financial cooperative systems. Based on this analysis we can conclude that: i) Integration is less (more) important is developing (more developed) countries and for very small (large) financial cooperatives as a determinant of efficiency. However, integration tends to reduce volatility of efficiency and performance regardless of development. ii) Integration appears to help control measure of managers' expense preferences that tend to affect performance of FC. iii) Despite high costs of running hub-like organizations in highly integrated system, these systems economize in bounded rationality and operate at lower costs that less integrated systems. Keywords: Transaction cost economics, financial cooperatives, credit unions, networks, corporate governance, technical efficiency, x-efficiency JEL: G2 G3 Date: 2005 URL: http://d.repec.org/n?u=RePEc:lvl:lacicr:0514&r=all 430. Risk Management and Corporate Governance: the Importance of Independence and Financial Knowledge for the Board and the Audit Committee Georges Dionne Thouraya Triki The new NYSE rules for corporate governance require the audit committee to discuss and review the firm's risk assessment and hedging strategies. They also put additional requirements for the composition and the financial knowledge of the directors sitting on the board and on the audit committee. In this paper, we investigate whether these new rules as well as those set by the Sarbanes Oxley act lead to hedging decisions that are of more benefit to shareholders. We construct a novel hand collected dataset that allows us to explore multiple definitions for the financially knowledgeable term present in this new regulation. We find that the requirements on the audit committee size and independence are beneficial to shareholders, although maintaining a majority of unrelated directors in the board and a director with an accounting background on the audit committee may not be necessary. Interestingly, financially educated directors seem to encourage corporate hedging while financially active directors and those with an accounting background play no active role in such policy. This evidence combined with the positive relation we report between hedging and the firm's performance suggests that shareholders are better off with financially educated directors on their boards and audit committees. Our empirical findings also show that having directors with a university education on the board is an important determinant of the hedging level. Indeed, our measure of risk management is found to be an increasing function of the percentage of directors holding a diploma superior to a bachelor degree. This result is the first direct evidence concerning the importance of university education for the board of directors. Keywords: Corporate governance, risk management, corporate hedging, financial knowledge, board independence, audit committee independence, board of directors, university education, empirical test, unrelated directors, NYSE rules, Sarbanes Oxley act, audit committee size, financially educated directors, financially active directors, firm performance JEL: G18 G30 Date: 2005 URL: http://d.repec.org/n?u=RePEc:lvl:lacicr:0515&r=all 431. Collective Labor Supply: a Single-Equation Model and Some Evidence from French Data Olivier Donni Nicolas Moreau In Chiappori's (1988) collective model of labor supply hours of work are supposed flexible. In many countries, however, male labor supply does not vary much. In that case, the husband's labor supply is no longer informative about the household decision process and individual preferences. To identify structural components of the model, additional information is needed. We thus consider an approach in which the wife's labor supply is expressed as a function of the household demand for one specific good. We demonstrate that the main properties of Chiappori's initial model are preserved and apply our results on French data. Keywords: Collective models, Labor supply, Intra-household distribution, conditional demand JEL: D11 D12 D13 J22 Date: 2005 URL: http://d.repec.org/n?u=RePEc:lvl:lacicr:0516&r=all 432. Resisting the Melting Pot: the Long Term Impact of Maintaining Identity for Franco-Americans in New England Mary MacKinnon Daniel Parent The scale of the persistent, concentrated immigration from Mexico is a source of concern to many in the United States. The perception is that Mexicans are not assimilating into mainstream America as previous generations of immigrants did. In this paper we look at the emigration of approximately 1 million French- Canadians who moved to the United States, with the bulk of the migration occurring between the end of the Civil War and 1930 and with most settling in neighboring New England. What makes this episode particularly interesting is the fact that the French- Canadian immigrants exerted considerable efforts to maintain their language and to replicate their home country institutions, most notably the schooling system, in their new country. This explicit resistance to assimilation generated considerable attention and concern in the U.S. over many years. The concerns are strikingly similar to those often invoked today in discussions of policy regarding immigration from hispanic countries, notably Mexico. We look at the convergence in the educational attainment of French Canadian immigrants across generations relative to native English-speaking New Englanders and to other immigrants. The educational attainment of Franco- Americans lagged that of their fellow citizens over a long period of time. Yet, by the time of the 2000 Census, they eventually, if belatedly, appeared to have largely achieved parity. Additionally, we show that military service was a very important factor contributing to the assimilation process through a variety of related channels, namely educational attainment, language assimilation, marrying outside the ethnic group, and moving out of New England. Finally, when we compare Franco-Americans to French-speaking Canadians of the same generations, it is clear that Franco-Americans substantially upgraded their educational attainment relative to what it would have been if they had not emigrated. This suggests that the "pull" factor eventually exerted a dominating influence. Keywords: Immigration, education, long term convergence JEL: J1 J6 N3 Date: 2005 URL: http://d.repec.org/n?u=RePEc:lvl:lacicr:0517&r=all 433. The Method of Endogenous Gridpoints for Solving Dynamic Stochastic Optimization Christopher D. Carroll This paper introduces a method for solving numerical dynamic stochastic optimization problems that avoids rootfinding operations. The idea is applicable to many microeconomic and macroeconomic problems, including life cycle, buffer-stock, and stochastic growth problems. Software is provided. JEL: C6 D9 E2 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:nbr:nberte:0309&r=all 434. Party Discipline and Pork Barrel Politics Gene M. Grossman Elhanan Helpman Polities differ in the extent to which political parties can pre- commit to carry out promised policy actions if they take power. Commitment problems may arise due to a divergence between the ex ante incentives facing national parties that seek to capture control of the legislature and the ex post incentives facing individual legislators, whose interests may be more parochial. We study how differences in %u201Cparty discipline%u201D shape fiscal policy choices. In particular, we examine the determinants of national spending on local public goods in a three-stage game of campaign rhetoric, voting, and legislative decision-making. We find that the rhetoric and reality of pork-barrel spending, and also the efficiency of the spending regime, bear a non-monotonic relationship to the degree of party discipline. JEL: D72 H41 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11396&r=all 435. Equilibrium Impotence: Why the States and Not the American National Government Financed Economic Development in the Antebellum Era John Joseph Wallis Barry R. Weingast Why did states dominate investments in economic development in early America? Between 1787 and 1860, the national government%u2019s $54 million on promoting transportation infrastructure while the states spent $450 million. Using models of legislative choice, we show that Congress could not finance projects that provided benefits to a minority of districts while spreading the taxes over all. Although states faced the same political problems, they used benefit taxation schemes -- for example, by assessing property taxes on the basis of the expected increase in value due to an infrastructure investment. The U.S. Constitution prohibited the federal government from using benefit taxation. Moreover, the federal government%u2019s expenditures were concentrated in collections small projects -- such as lighthouses and rivers and harbors -- that spent money in all districts. Federal inaction was the result of the equilibrium political forces in Congress, and hence an equilibrium impotence. JEL: N0 N4 N7 H1 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11397&r=all 436. Urban Colossus: Why is New York America's Largest City? Edward L. Glaeser New York has been remarkably successful relative to any other large city outside of the sunbelt and it remains the nation's premier metropolis. What accounts for New York's rise and continuing success? The rise of New York in the early nineteenth century is the result of technological changes that moved ocean shipping from a point-to-point system to a hub and spoke system; New York's geography made it the natural hub of this system. Manufacturing then centered in New York because the hub of a transport system is, in many cases, the ideal place to transform raw materials into finished goods. This initial dominance was entrenched by New York's role as the hub for immigration. In the late 20th century, New York's survival is based almost entirely on finance and business services, which are also legacies of the port. In this period, New York's role as a hub still matters, but it is far less important than the edge that density and agglomeration give to the acquisition of knowledge. JEL: N0 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11398&r=all 437. Corruption, Inequality and Fairness Alberto Alesina George-Marios Angeletos Bigger governments raise the possibilities for corruption; more corruption may in turn raise the support for redistributive policies that intend to correct the inequality and injustice generated by corruption. We formalize these insights in a simple dynamic model. A positive feedback from past to current levels of taxation and corruption arises either when wealth originating in corruption and rent seeking is considered unfair, or when the ability to engage in corruption is unevenly distributed in the population. This feedback introduces persistence in the size of the government and the levels of corruption and inequality. Multiple steady states exist in some cases. JEL: D31 E62 H2 P16 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11399&r=all 438. Investor Attention: Overconfidence and Category Learning Lin Peng Wei Xiong Motivated by psychological evidence that attention is a scarce cognitive resource, we model investors' attention allocation in learning and study the effects of this on asset-price dynamics. We show that limited investor attention leads to ``category- learning" behavior, i.e., investors tend to process more market and sector-wide information than firm-specific information. This endogenous structure of information, when combined with investor overconfidence, generates important features observed in return comovement that are otherwise difficult to explain with standard rational expectations models. Our model also demonstrates new cross-sectional implications for return predictability. JEL: G0 G1 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11400&r=all 439. Real Business Cycle Models: Past, Present, and Future Sergio Rebelo In this paper I review the contribution of real business cycles models to our understanding of economic fluctuations, and discuss open issues in business cycle research. JEL: E1 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11401&r=all 440. Efficient Kidney Exchange: Coincidence of Wants in a Structured Market Alvin E. Roth Tayfun Sonmez M. Utku Unver Patients needing kidney transplants may have willing donors who cannot donate to them because of blood or tissue incompatibility. Incompatible patient-donor pairs can exchange donor kidneys with other such pairs. The situation facing such pairs resembles models of the "double coincidence of wants," and relatively few exchanges have been consummated by decentralized means. As the population of available patient-donor pairs grows, the frequency with which exchanges can be arranged will depend in part on how exchanges are organized. We study the potential frequency of exchanges as a function of the number of patient-donor pairs, and the size of the largest feasible exchange. Developing infrastructure to identify and perform 3-way as well as 2-way exchanges will have a substantial effect on the number of transplants, and will help the most vulnerable patients. Larger than 3-way exchanges have much smaller impact. Larger populations of patient-donor pairs increase the percentage of patients of all kinds who can find exchanges. JEL: C7 C6 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11402&r=all 441. FDI and Trade -- Two Way Linkages? Joshua Aizenman Ilan Noy The purpose of this paper is to investigate the intertemporal linkages between FDI and disaggregated measures of international trade. We outline a model exemplifying some of these linkages, describe several methods for investigating two-way feedbacks between various categories of trade, and apply them to the recent experience of developing countries. After controlling for other macroeconomic and institutional effects, we find that the strongest feedback between the sub-accounts is between FDI and manufacturing trade. More precisely, applying Geweke (1982) %u2019s decomposition method, we find that most of the linear feedback between trade and FDI (81%) can be accounted for by Granger-causality from FDI gross flows to trade openness (50%) and from trade to FDI (31%). The rest of the total linear feedback is attributable to simultaneous correlation between the two annual series. JEL: F15 F21 F36 H21 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11403&r=all 442. Importers, Exporters, and Multinationals: A Portrait of Firms in the U.S. that Trade Goods Andrew B. Bernard J. Bradford Jensen Peter K. Schott This paper provides an integrated view of globally engaged U.S. firms by exploring a newly developed dataset that links U.S. international trade transactions to longitudinal data on U.S. enterprises. These data permit examination of a number of new dimensions of firm activity, including how many products firms trade, how many countries firms trade with, the characteristics of those countries, the concentration of trade across firms, whether firms transact at arms length or with related parties, and whether firms import as well as export. Firms that trade goods play an important role in the U.S., employing more than a third of the U.S. workforce. We find that the most globally engaged U.S. firms, i.e. those that both export to and import from related parties, dominate U.S. trade flows and employment at trading firms. We also find that firms that begin trading between 1993 and 2000 experience especially rapid employment growth and are a major force in overall job creation. JEL: F10 F16 F23 J21 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11404&r=all 443. The Value of Health and Longevity Kevin M. Murphy Robert H. Topel We develop an economic framework for valuing improvements to health and life expectancy, based on individuals' willingness to pay. We then apply the framework to past and prospective reductions in mortality risks, both overall and for specific life- threatening diseases. We calculate (i) the social values of increased longevity for men and women over the 20th century; (ii) the social value of progress against various diseases after 1970; and (iii) the social value of potential future progress against various major categories of disease. The historical gains from increased longevity have been enormous. Over the 20th century, cumulative gains in life expectancy were worth over $1.2 million per person for both men and women. Between 1970 and 2000 increased longevity added about $3.2 trillion per year to national wealth, an uncounted value equal to about half of average annual GDP over the period. Reduced mortality from heart disease alone has increased the value of life by about $1.5 trillion per year since 1970. The potential gains from future innovations in health care are also extremely large. Even a modest 1 percent reduction in cancer mortality would be worth nearly $500 billion. JEL: D11 I10 I18 J19 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11405&r=all 444. Alternative Methods of Price Indexing Social Security: Implications for Benefits and System Financing Andrew G. Biggs Jeffrey R. Brown Glenn Springstead This paper explains four methods of "price indexing" initial Social Security retirement benefits, and discusses the effect of each method on the fiscal sustainability of Social Security, benefit levels and replacement rates, redistribution, and sensitivity of system finances to demographic and economic shocks. Of these methods, PIA Factor Indexing would generate the largest cost savings while reducing benefit growth at approximately an equal rate for all income levels. Methods that index the AIME, the formula "bend points," or both, would reduce benefit growth at a slower rate and would have different effects on benefit distribution and system sustainability. JEL: H55 J14 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11406&r=all 445. Tying, Upgrades, and Switching Costs in Durable-Goods Markets Dennis W. Carlton Michael Waldman This paper investigates the role of product upgrades and consumer switching costs in the tying of complementary products. Previous analyses of tying have found that a monopolist of one product cannot increase its profits and reduce social welfare by tying and monopolizing a complementary product if the initial monopolized product is essential, where essential means that all uses of the complementary good require the initial monopolized product. We show that this is not true in durable-goods settings characterized by product upgrades, where we show tying is especially important when consumer switching costs are present. In addition to our results concerning tying our analysis also provides a new rationale for leasing in durable-goods markets. We also discuss various extensions including the role of the reversibility of tying as well as the antitrust implications of our analysis. JEL: L0 L1 L4 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11407&r=all 446. Inequality, Social Discounting and Estate Taxation Emmanuel Farhi Ivan Werning To what degree should societies allow inequality to be inherited? What role should estate taxation play in shaping the intergenerational transmission of welfare? We explore these questions by modeling altruistically-linked individuals who experience privately observed taste or productivity shocks. Our positive economy is identical to models with infinite-lived individuals where efficiency requires immiseration: inequality grows without bound and everyone's consumption converges to zero. However, under an intergenerational interpretation, previous work only characterizes a particular set of Pareto-efficient allocations: those that value only the initial generation's welfare. We study other efficient allocations where the social welfare criterion values future generations directly, placing a positive weight on their welfare so that the effective social discount rate is lower than the private one. For any such difference in social and private discounting we find that consumption exhibits mean-reversion and that a steady-state, cross-sectional distribution for consumption and welfare exists, where no one is trapped at misery. The optimal allocation can then be implemented by a combination of income and estate taxation. We find that the optimal estate tax is progressive: fortunate parents face higher average marginal tax rates on their bequests. JEL: C61 D30 D63 H21 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11408&r=all 447. Employee Sentiment and Stock Option Compensation Nittai K. Bergman Dirk Jenter The use of equity-based compensation for employees in the lower ranks of large organizations is a puzzle for standard economic theory: undiversified employees should discount company equity heavily, and any positive incentive effects should be diminished by free rider problems. We analyze whether the popularity of option compensation for rank and file employees may be driven by employee optimism. We develop a model of optimal compensation policy for a firm faced with employees with positive or negative sentiment, and explicitly take into account that current and potential employees are able to purchase equity in the firm through the stock market. We show that employee optimism by itself is insufficient to make equity compensation optimal for the firm. Any behavioral explanation for equity compensation based on employee optimism requires two ingredients: first, employees need be over-optimistic about firm value, and second, firms must be able to extract part of the implied rents even though employees can purchase company equity in the market. Such rent extraction becomes feasible if employees prefer the non- traded compensation options offered by firms to the traded equity offered by the market, or if the traded equity is overvalued. We then provide empirical evidence confirming that firms use broad- based option compensation when boundedly rational employees are likely to be excessively optimistic about company stock, and when employees are likely to have a strict preference for options over stock. JEL: G3 J3 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11409&r=all 448. What Do Unions Do?: The 2004 M-Brane Stringtwister Edition Richard B. Freeman The Journal of Labor Research 20th anniversary symposium review of What Do Unions Do? offers a unique opportunity to examine how the claims made in the book have fared in ensuing research and to ponder what parts of the book I would change if I could. This paper responds to the 18 critical essays in the journal. It recognizes three major errors of omission: failure to take account of unionism outside the US; failure to analyze public sector unionism; and failure to analyze the effects of unionism on economic growth; and the problem of determining the "optimal level of unionism" on the basis of estimates of what unions do. Ensuing research has found that What Do Unions Do? correctly identified union effects on turnover, fringe benefits, earnings inequality, political action, profits, managerial flexibility and human resource management, and that wage effects vary widely. Estimates of the union effect on productivity tend to be positive but modest, ruling out negative effects on average, but not conclusively establishing positive effects. Critical comments from some of the symposium panelists notwithstanding, I believe that the bulk of the evidence supports the What Do Unions Do? claim that management opposition has been a major factor in the decline in union density in the US. JEL: J0 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11410&r=all 449. The Impact of State Physical Education Requirements on Youth Physical Activity and Overweight John Cawley Chad D. Meyerhoefer David Newhouse To combat childhood overweight, which has risen dramatically in the past three decades, many medical and public health organizations have called for students to spend more time in physical education (PE) classes. This paper is the first to exploit state PE requirements as quasi-natural experiments in order to estimate the causal impact of PE on student activity and weight. We study nationwide data from the YRBSS for 1999, 2001, and 2003 merged with data on state minimum PE requirements from the 1994 and 2000 School Health Policies and Programs Study and the 2001 Shape of the Nation Report. We find that certain state regulations are effective in raising the number of minutes during which students are active in PE. Our results also indicate that additional PE time raises the number of days per week that students report having exercised or engaged in strength-building activities, but lowers the number of days in which students report light physical activity. PE time has no detectable impact on youth BMI or the probability that a student is overweight. We conclude that while raising PE requirements may make students more active by some (but not all) measures, there is not yet the scientific base to declare raising PE requirements an anti- obesity initiative. JEL: I1 I2 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11411&r=all 450. Emigration, Labor Supply, and Earnings in Mexico Gordon H. Hanson In this paper, I examine changes in labor supply and earnings across regions of Mexico during the 1990s. I focus the analysis on individuals born in states with either high-exposure or low- exposure to emigration, as measured by historical data on state migration to the United States. During the 1990s, rates of external migration and interval migration were higher among individuals born in high-migration states. Consistent with positive selection of emigrants in terms of observable skill, emigration rates appear to be highest among individuals with earnings in the top half of the wage distribution. Controlling for regional differences in observable characteristics and for initial regional differences in earnings, the distribution of male earnings in high-migration states shifted to the right relative to low-migration states. Over the decade, average hourly earnings in high-migration states rose relative to low-migration states by 6-9%. JEL: F2 J6 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11412&r=all 451. The Service Economy in OECD Countries Anita Wolfl Improving the performance of the services sector is important to enhance aggregate economic growth. This is primarily since the service sector has become the quantitatively most important sector in all OECD economies. The growing role of services is not only the result of a resource re-allocation towards services, as the sector with low productivity growth. It is also related to demand side factors, such as a high income elasticity of demand for some services, demographic developments, the provision of certain services as public goods, and the growing role of services as providers of intermediate inputs. The empirical evidence points to several areas where employment and productivity growth in services is held back. For example, labour- intensive production in many services industries may reduce the potential for productivity growth. Innovation is held back by obstacles that are particularly relevant for services industries. The evidence also shows that the regulatory environment for services in product and labour markets may affect the scope for employment and productivity growth. However, policy should not necessarily look at services separately from manufacturing industries. In contrast, several services industries show characteristics and problems similar to those of manufacturing industries and the blurring of the two sectors is becoming more and more prevalent. Moreover, addressing some of the problems faced by services may also improve the performance of other industries, since services provide key intermediate inputs to such sectors.

L'Economie de Service dans les Pays de l'OCDE

Il est important d’ameliorer les performances du secteur des services pour renforcer la croissance economique globale. Celui-ci est en effet devenu dans tous les pays de l’OCDE le secteur le plus important sur le plan quantitatif. Le role croissant des services ne resulte pas seulement d’une reaffectation des ressources en direction de cette branche d’activite, dont la productivite augmente peu. D’autres facteurs entrent en ligne de compte du cote de la demande, comme la forte elasticite revenu de la demande de certains services, l’evolution demographique, la fourniture de certains services a titre de biens publics et le role croissant des services en tant que fournisseurs de facteurs de production intermediaires. Les donnees empiriques dont on dispose montrent que l’emploi et la productivite progressent peu dans plusieurs domaines. La forte intensite de main d’?uvre de nombreux secteurs de services peut reduire les possibilites de croissance de la productivite. L’innovation est ralentie par des obstacles qui touchent particulierement les secteurs de services. Les donnees montrent aussi que le cadre reglementaire qui s’applique aux services sur les marches des produits et du travail peut influer sur les capacites de croissance de l’emploi et de la productivite. Cependant, les politiques publiques ne doivent pas necessairement envisager les services separement des industries manufacturieres. Plusieurs secteurs de services presentent en effet des caracteristiques et des problemes similaires a ceux des industries manufacturieres et les limites entre les deux types d’activites s’estompent. En outre, la resolution des problemes rencontres dans les secteurs de services pourra ameliorer les resultats d’autres industries, auxquelles les services fournissent des facteurs de production intermediaires essentiels. Date: 2005-02-11 URL: http://d.repec.org/n?u=RePEc:oec:stiwps:wp2005-3&r=all 452. A World Trade Model with Bilateral Trade Based on Comparative Advantage Anders Hammer Stromman (Norwegian University of Science & Technology Department of Energy and Process Technology, Industrial Ecology Program H?yskoleringen 5, 7491 Trondheim, Norway) Faye Duchin (Department of Economics, Rensselaer Polytechnic Institute, Troy NY 12180-3590, USA) This paper describes an extension of Duchin's World Trade Model to include the explicit representation of transportation costs, permitting the endogenous determination of bilateral trade °ree;ows and region-specific prices. The original model is a linear program that, based on comparative advantage and the minimization of factor use, determines regional production and trade °ree;ows as well as world prices and scarcity rents for m regions, n goods, s transportation sectors, and k factors. The new World Trade Model with Bilateral Trade achieves its objectives by introducing transportation services and geographically dependent transportation requirements for each traded good and each pair of potential trade partners. The formulation of this model and its major properties are presented, and results from a preliminary analysis with 11 regions, 8 goods, 4 transportation sectors, and 6 factors of production are reported and compared with corresponding results from the World Trade Model. JEL: F19 C61 C67 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:rpi:rpiwpe:0509&r=all 453. How do Venture Capitalists Handle Risk in High-Technology Ventures? - some preliminary results Gavin C. Reid Julia A. Smith This paper presents new empirical evidence, obtained by fieldwork methods, on investor risk-handling practice in the UK venture capital industry. Its focus is on high-technology firms and the techniques their venture capital backers use for risk management. The active areas of risk management are explored under the headings of risk premia, investment time horizons, and sensitivity analysis. As an organising framework, risk is divided into ‘agency risk’, ‘business risk’ and ‘innovation risk’. Data were gathered by working through a semi-structured interview agenda in face-to-face meetings with the top venture capital deal-makers in the UK. They were questioned specifically on how they handled risks in high-technology ventures. The interview agenda covered: risk premia, investment time horizon, sensitivity analysis, expected values, cash flow prediction, financial objectives, decision making, and qualitative appraisal. The paper draws on evidence from all eight agenda items, but focuses on the first three. This paper finds that the three categories of risk identified as important, innovation, agency and business risk, have pervasive influences on investor conduct in the UK. Their form of influence was traced under the agenda headings of risk premia, investment time horizon, and sensitivity analysis. It was found that the riskiness of investment types (e. g. seed, MBO etc) could be clearly ranked by investors. These rankings were found to be generally consistent with principles of financial economics. Investors were also asked what factors were most important to their risk appraisals, for given high technology investments. Of a wide range of factors, it was found that the most important to risk appraisal could be directly related to our categories of ‘agency risk’ and ‘business risk’. It was found too that the time profiles of investments and their sensitivity to changed assumptions could be approached using our three risk categories. Of these, ‘innovation risk’ was thought to be particularly high, implying various forms of adaptation by investors, including setting very high hurdle rates of return and deploying radical stress tests of investment models. Keywords: Venture Capital, Risk Management, High-Technology, Fieldwork JEL: G24 D81 L84 M21 L21 URL: http://d.repec.org/n?u=RePEc:san:crieff:0107&r=all 454. Investor and Investee Conduct in the Risk Appraisal of High Technology New Ventures in the UK Gavin C. Reid Julia A. Smith This paper examines, in a high technology context, how investor and investee behave, and interact, in the face of risk. The evidence on which it is based was obtained by fieldwork methods, over the period 2000-2, examining a sample of UK investors and investees active in high technology areas. The paper focuses on four questions: how risky are investments; what affects risk most; what aspects of innovation affect risk; what non-financial factors affect risk most? It finds that there was general agreement between investors and investees about which investments were relatively more or less risky. However, investees were shown to be relatively more risk averse than investors, right across the spectrum of investee types. When it came to factors affecting risk most, there was a clear difference between investors and investees. Agency risk was largely the concern of the investor. Business risk was the investee’s first priority, and agency risk did not figure large in the investee’s mind. This suggests that this component of risk had successfully been shifted on to the investor. Business risk was also a clear concern of investors, but they placed more emphasis on matters like market opportunities and sales, than did investees. The paper concludes that investors and investees generally see risk in the same light, but, that when views differ, this is explicable either by function (producer/ funder) or by relative risk aversion. Keywords: Venture Capital, Risk Management, High-Technology, Fieldwork JEL: G24 D81 L84 M21 L21 URL: http://d.repec.org/n?u=RePEc:san:crieff:0205&r=all 455. Investor Conduct Towards New High Technology Firms: UK Evidence on How Risk is Managed Gavin C. Reid This paper uses statistical analysis to characterise ‘industry practice’, in terms of concordance of investors concerning appropriate practice. The evidence was gathered by field work methods in 2000-01, and refers to the practices of twenty UK venture capital investors, who accounted for the bulk of funds allocated to high technology investments in the UK. This paper has two parts: general and detailed statistical analysis. 1) In the first part, the main finding is of a coherent (and generally statistically significant picture) of investor conduct towards high-technology companies. Thus it is found that investors assign risk premia and expected values, and use risk classes. They adopt relatively short time horizons, but follow quite sophisticated procedures in investment appraisal. For example, they use sensitivity analysis, cash flow prediction, financial modelling, and decision trees. However, they miss out in some sophisticated areas of technical analysis, including Value at Risk (VaR), and simulation methods (including Monte Carlo methods). 2) The second part of the paper focuses on risk, factors influencing it, and innovation. Its aim is to discover if there is a kind of ‘industry standard’ or consensus about what is most important to investors in the high technology area. Largely, that turned out to be the case. The UK venture capitalists are agreed on what are high-risk and low-risk investments. They also agree on what are the key commercial factors affecting risk. However, when it comes to non-commercial factors, this consensus starts to crumble. Finally, so far as features of innovation are concerned, industry consensus starts to break down entirely. Thus, there do remain important areas in which investor practice is opaque. Therefore, there remains a need for further research into investor practice in the UK. Keywords: Venture Capital, Risk Management, High-Technology, Fieldwork JEL: G24 D81 L84 M21 L21 URL: http://d.repec.org/n?u=RePEc:san:crieff:0206&r=all 456. Turbulence, Flexibility and Performance of the Long-lived Small Firm Bernadette Power Gavin C. Reid This paper focuses on a new concern in the small firm’s literature, namely what makes a small firm stay in business for a long time. It reflects a change in economic policy, away from an emphasis on volume of start-ups to an emphasis on quality of start-ups. The basic hypothesis is that flexibility enhances the long run prospects of the small firm. This is explored by examining precipitating causes of organisational change within the small firm, and the consequential adjustments. The study is fieldwork based and uses evidence from face-to-face interviews with 63 owner managers of mature small firms in Scotland. New measures of flexibility and turbulence are used to explain the performance of mature small firms. These depend on our unique body of evidence from interviews with owner managers. Performance is measured using a Likert scale over 28 distinct attributes. Econometric estimates are reported on the relationship between flexibility, turbulence and performance. This is done in two forms. The first involves generalised least squares estimatation ( with heteroskedastic adjustment) of the relationship between turbulence, four measures of flexibility, and performance. The second involves Heckman sample selection estimation, of this performance relationship. It is found that turbulence has a negative effect on performance. Further, this impact is relatively large. Next in importance are those flexibility factors which can be categorised as precipitating causes of organisational change (as opposed to consequential adjustments) within the mature small firm. Finally, trade-off relationships are found to exist between two of the measures of flexibility ( viz. agility and speed). We believe that this trade-off relationship is worthy of further empirical investigation Keywords: Flexibility, Turbulence, Performance, Small Firms JEL: C42 D21 G33 L2 M13 M21 URL: http://d.repec.org/n?u=RePEc:san:crieff:0207&r=all 457. Competitive Firm Behaviour With Simultaneous Price and Output Uncertainty Aredishir J. Dalal Moavia Alghalith While a competitive firm facing price uncertainty has been extensively studied, this is not so for output uncertainty. This paper analyzes the behavior of a competitive firm facing multiplicative output uncertainty, either with or without price uncertainty. We depict equilibrium and obtain comparative statics results with the aid of a diagram which exploits the properties of a covariance term present in the first order conditions. Comparative statics results are obtained for the model with output uncertainty and price certainty and for simultaneous price and output uncertainty (including two simple, specific cases). We first derive results based on the Arrow-Pratt coe?cients of risk aversion, and then supplement these with the Ross measure of relative risk aversion, since this proves useful in the presence of multiple sources of uncertainty. We are able to obtain the intuitively appealing inverse relationship between increases in risk (both price and output) or input prices, and the optimal expected output. However, expected output supply is an increasing function of (expected) price only for “low” levels of risk aversion, and in general the relationship is ambiguous. Keywords: Multiplicative output uncertainty, price uncertainty, comparative statics, Ross increasing relative risk aversion, quadratic utility, Stein's Lemma. JEL: D21 D81 URL: http://d.repec.org/n?u=RePEc:san:crieff:0208&r=all 458. The Choice Between Multiplicative and Additive Output Uncertainty Moavia Alghalith Aredishir J. Dalal When modeling output uncertainty, the multiplicative specification is consistently chosen over the additive form, despite the latter being arguably intuitively more obvious. The rationale for this seems to be that when production risk is the only source of uncertainty, additive uncertainty does not reduce output below the certainty level, while multiplicative uncertainty does. We show that, regardless of the specification of output uncertainty, if hedging is absent and there is simultaneous price and output uncertainty, output is always lower than the situation in which one or both sources of uncertainty are absent. Thus, both models yield qualitatively identical results, i.e., adding a source of uncertainty reduces expected output. Therefore, additive uncertainty is indeed a reasonable a priori method of modeling production uncertainty Keywords: Multiplicative output uncertainty, additive output uncertainty, price uncertainty JEL: D21 D81 URL: http://d.repec.org/n?u=RePEc:san:crieff:0209&r=all 459. The Derived Demand with Hedging Cost Uncertainty in the Futures Markets: Note and Extensions Moavia Alghalith Paroush and Wolf (1992) investigated a perfectly competitive firm which faces input price uncertainty in one input of its two- input production function. The main purpose of their study was to determine the impact of the technological relationship on the derived demand when the input is hedged in a forward or futures market. They found that the partial cross derivatives of the production function and the market structure of the futures price upward or downward bias) affect the derived demand. This note provides two extensions. First, it generalises Paroush and Wolf's theorem by using general utility function (Theorem 1). Second, it adds a new theorem (Theorem 2) that shows the impact of adding basis risk on the optimal hedging. This theorem is equally important since hedging is a decision variable. Below is a description of Paroush and Wolf's model. Keywords: Cost uncertainty, forward market, futures market, hedging, input price uncertainty JEL: D8 URL: http://d.repec.org/n?u=RePEc:san:crieff:0210&r=all 460. The Role of Beliefs for the Sustainability of the Fiscal Constitution Gerald Pech Bernhard Neumaerker Why does the government not defect from the constitution? This article focuses on the dynamic restraints the government faces under the rule of law: violations against unconstitutional laws are not punished under the constitution. If a violating government cannot commit itself never to reinstall the constitution enforcing an unconstitutional law becomes difficult. Citizens' expectations to go unpunished when not complying may be self-fulfilling. Deriving the equilibrium of a global game we show that this mechanism is effectively deterring a government from defecting from a constitutionally permissible tax rate. Keywords: tax evasion, global games, self-fulfilling expectations, dynamic policy restraints JEL: K42 H26 E61 D7 URL: http://d.repec.org/n?u=RePEc:san:crieff:0213&r=all 461. Unique Equilibrium in a Currency Crisis Model with Heterogeneous Agents Gerald Pech This paper extends the currency crisis model of Morris and Shin to the case where players not only hold heterogenous beliefs but also differ in a characteristic feature such as individual transaction costs. It shows that there is a unique aggregate cut off point where the government abandons the peg which is supported by a continuum of individual switching points in the signals. The range of individual intervention levels is wide unless the noise vanishes. Keywords: global games, currency crisis JEL: D82 F31 URL: http://d.repec.org/n?u=RePEc:san:crieff:0214&r=all 462. Empirical Analysis under Additive/Multiplicative Output Uncertainty Moavia Alghalith Empirical studies dealing with price uncertainty are abundant; for example, Arshanapalli and Gupta (1996) derived estimating equations by applying uncertainty analogues of Hotelling's lemma and Roy's identity to the indirect expected utility function (see Pope, 1980, and, Dalal 1990). However, their method is not applicable to the models with price and output uncertainty. Few empirical studies included both price and output uncertainty and focused on hedging. For example, Rolfo (1980) computed the ratio of hedge to expected output for cocoa producers. Lapan and Moschini (1994) calculated the same ratio for soya bean farmers. Assuming simultaneous price and output uncertainty, this paper empirically estimate the most two common forms of output risk: additive risk and multiplicative risk (see Honda,1983, and, Grant 1985). Then it empirically determines which form is more suitable. The theory does not provide a conclusive criteria for the choice between additive risk and multiplicative risk (see Honda,1983). Therefore, the choice should be empirical. Keywords: Cost uncertainty, forward market, futures market, hedging, input price uncertainty JEL: D8 URL: http://d.repec.org/n?u=RePEc:san:crieff:0301&r=all 463. Estimation and Econometric Tests Under Simultaneous Price and Output Uncertainty Moavia Alghalith This paper extends the existing estimation methods to allow empirical estimation and hypothesis testing under simultaneous price and output uncertainty. Keywords: Estimestimating equations, hypotheses testing, output uncertainty, price uncertainty, utility. JEL: D21 D81 URL: http://d.repec.org/n?u=RePEc:san:crieff:0302&r=all 464. Production and Hedging Decisions in the Presence of Basic Risk: Note Moavia Alghalith Paroush and Wolf (1989) modeled output hedging in the presence of basis risk. They showed that (in the absence of scale shift) the optimal hedging and output fall in response to basis risk. However, they used a second-order Taylor's approximation of the utility function. Also, they did not show the impact of basis risk on the ratio of hedging to output (hedging as a fraction of output), which is a more relevant variable than the absolute change in either of the decision variables. The absence of such results constitutes a major gap in the hedging literature. Consequently, this note provides two extensions. First, it generalizes Paroush and Wolf's results (Propositions 1 and 2) by using a general utility function and general distributions. Second, it shows the impact of basis risk on the ratio of hedging to output. Keywords: Cost uncertainty, forward market, futures market, hedging, input price uncertainty JEL: D8 URL: http://d.repec.org/n?u=RePEc:san:crieff:0303&r=all 465. Performance, Firm Size and the Heterogeneity of Competetive Strategy for Long-lived Small Firms: A Simultaneous Equations Approach Bernadette Power Gavin C. Reid This paper examines the relationship between firm size, competitive strategy and performance, for the long-lived small firm in Scotland. It uses structural modelling to test the hypothesis that small firms need to remain small if they are to be long-lived. In a three-equation simultaneous model, performance, size and the dimensions of the competitive strategy of the firm are jointly determined. Econometric estimates of the three equations are reported, using 2SLS and iterated 3SLS. A trade-off is found to exist between firm size and performance. Further, we find that to attain higher equilibrium values of performance, a varied competitive strategy needs to be adopted. Our prescription is that small firms need to adjust downwards in size, and to cultivate a more varied competitive strategy, if there the entrepreneurs are to have a positive influence on performance, thus promoting longevity of their firms. Keywords: Performance, Small Firms, Size, Competitive Strategy, Simultaneity JEL: C42 D21 G33 L2 M13 M21 URL: http://d.repec.org/n?u=RePEc:san:crieff:0307&r=all 466. Firm-Level Social Returns to Education Pedro S. Martins Do workers benefit from the education of their co-workers? We investigate this question drawing on a panel of large Portuguese firms and their workers, using fixed effects and instrumenting average schooling in each firm-year with its lagged value and the lagged share of retirement-age workers. We find evidence of substantial firm-level social returns (at about 19%), much larger than standard estimates of private returns to education, and of sizeable returns accruing to less educated workers but not to their more educated colleagues Keywords: Social Returns to Education, Education Spillovers, Matched Employer-Employee Data, Wages, Portugal. JEL: J24 J31 I20 URL: http://d.repec.org/n?u=RePEc:san:crieff:0404&r=all 467. Do Foreign Firms Really Pay Higher Wages? : Evidence from Different Estimators Pedro S. Martins We contribute to the literature on Foreign Direct Investment and labour markets by examining wage differentials between domestic and foreign firms, drawing on a large Portuguese matched employer- employee panel. Using OLS, the foreign-firm premium is large and significantly positive but falls substantially when firm and worker controls are added. Moreover, the premium also does not vary monotonically with foriegn control, increases along the wage distribution and is generally insignificant when using propensity score matching (PSM). Finally, using differnces-in differences ( DID), we find lower wage growth for workers in domestic firms that are acquired by foreign investors, a result that holds when combining DID and PSM. Overall, our evidence suggests that the commonly-documented OLS premium cannot be interpreted as a casual impact. Keywords: FDI, Wages, Matched Employer-Employee Data, Propensity Score Matching, Portugal JEL: C23 F23 J31 URL: http://d.repec.org/n?u=RePEc:san:crieff:0409&r=all 468. Rational Pricing of Options during the South Sea Bubble: Valuing the 22 August 1720 Options Gary S. Shea (University of St. Andrews) We present evidence of rational pricing South Sea Company liabilities and call options written on South Sea shares. A previously unstudied dataset on South Sea share options is presented. The Company's capital structure of the firm is redefined so that the application of modern financial economic theories can be applied to its valuation. We present evidence that a significant portion of South Sea equity liabilities was in the form of share warrants and conversion (from bonds to shares) privileges and should be so valued. Finally we present a model of the cross-sectional behaviour of share prices, South Sea Company debt and call option values. The model is calibrated and simulated in order to produce estimates of the required return on the Company’s debt and the volatility of the firm’s asset values. We conclude that the jointly estimated value of the firm, its constituent liabilities, third-party call option values and implied volatilities are consonant with rational pricing behaviour during the Bubble, although the model requires extension in several directions in order to present a more complete picture of the South Sea Bubble. Keywords: financial revolution in England, South Sea Company, call options, warrants, convertible bonds JEL: N23 G13 URL: http://d.repec.org/n?u=RePEc:san:crieff:0410&r=all 469. South Sea Company Subscription Shares and Warrant Values in 1720 Gary S. Shea (University of St. Andrews) The values of the famous Subscription Shares issued by the South Sea Company in 1720 have to be split into two components before they can be understood. One component was a fractional claim upon one original share in the firm. The other component, however, was a bundle of share warrants. The information contained in share warrant values is potentially helpful in understanding the South Sea Bubble. Warrant values might also be especially sensitive to "events" and "news" and could provide new ways of marking the turning points in the South Sea Bubble and testing for efficiency of markets. The level and volatility of subscription share prices are both consistent with the hypothesis that the subscription shares were essentially share warrants. Keywords: South Sea Bubble, Royal African Company, arbitrage, market efficiency, call options JEL: N23 G13 URL: http://d.repec.org/n?u=RePEc:san:crieff:0411&r=all 470. Models of Firm Dynamics and the Hazard Rate of Exits: Reconciling Theory and Evidence using Hazard Regression Models Arnab Bhattacharjee This Paper considers empirical work relating to models of firm dynamics. It is shown that a hazard regression model for firm exits, with a modification to accommodate age-varying covariate effects, provides an adequate framework accommodating many of the features of interest in empirical studies on firm dynamics. Modelling implications of some of the popular theoretical models are considered and a set of empirical procedures for verifying theoretical implications of the models are proposed.The proposed hazard regression models can accommodate negative effects of initial size that increase to zero with age (active learning model), negative initial size effects that may increase with age, but stay permanently negative (passive learning model), conditional and unconditional hazard rates that decrease with age at higher ages, and adverse effects of macroeconomic shocks that decrease with age of the firm.The methods are illustrated using data on quoted UK firms. Consistent with the active learning model, the effect of initial size is significantly negative for a young firm and falls to zero with age.The hazard function conditional on size, other firm and industry-level characteristics, and macroeconomic conditions decreases with age only at higher ages, but shows the weaker property of Increasing Mean Residual Life over its entire life-duration. Instability in exchange rates affects survival of very young firms strongly, and the effect decreases to insignificant levels for older firms. Keywords: Firm exit, Learning, Firm Dynamics, Non-proportional hazards, Hazard regression models JEL: C14 C34 C41 C52 D83 L16 L25 URL: http://d.repec.org/n?u=RePEc:san:crieff:0502&r=all 471. Realities of Long-Term Post Investment Performance for Venture-Backed Enterprises Gavin C. Reid Julia A. Smith This paper constructs a model of long-run performance for SMEs that have received venture capital backing. The model explains performance by financial structure. FAME data are used for estimating performance equations over the period 1989 to 2004 for UK businesses in their post-investment period. The econometrics uses robust techniques, including least absolute error (LAE) and Tukey trimean estimation. It is shown that the key determinants of performance (measured by ROSF) are profit margins and risk, with lesser, but significant, roles played by liquidity and gearing. The sample is used to identify consistently high performers, and chronic low performers. From the latter group, two detailed case studies illustrate how chronic low performance can emerge, in each case caused by failure to achieve technological milestones, and thereby failing, ultimately, to convince investors of potential company worth. Keywords: Venture capital, investment performance, LAE estimation, research milestones JEL: G24 G32 L25 M13 O32 URL: http://d.repec.org/n?u=RePEc:san:crieff:0503&r=all 472. On the Possibility of Pareto-improving Pension Reform Tatiana Damjanovic The aim of this paper is two-fold. First, it provides a simple framework for the analyses of the transitions between two steady states with different fiscal policies. This allows us to clarify the existing results on the possibility of Pareto-improving transitions from pay-as-you-go to fully funded pension systems. We show that the reduction in the marginal tax rate is a sufficient condition for the possibility of such pension reforms. Second, the paper investigates the features and the duration of the shortest Pareto-improving pension reform in an open economy. Keywords: Pension reform, Pareto-improving transition, the shortest transition. JEL: H21 H55 E62 URL: http://d.repec.org/n?u=RePEc:san:crieff:0504&r=all 473. A Simple Proof of Lorenz Dominance Criterion Tatiana Damjanovic This article provides a simple proof of the Lorenz dominance criterion for two non-decreasing income transformations. The criterion is extended the most general case, with only very mild restrictions on the form of initial income distribution or the properties of the income transformations. Keywords: Inequality, Income transformation, Lorenz Dominance. JEL: D63 URL: http://d.repec.org/n?u=RePEc:san:crieff:0505&r=all 474. Does More Progressive Tax Make Tax Discipline Weaker? Tatiana Damjanovic This paper investigates the relationship between the disparity in tax base and tax collection. I address the tax collection problem with traditional industrial organization approach. Thus, I model the "tax minimization" industry where the supplier helps taxpayers to avoid their tax liability. I find that lower income inequality as well as a less progressive tax code may result in a smaller number of tax payers committing to their tax duties. Finally, I question the reduction in the highest tax rate as a policy directed at the improvement of tax discipline. Keywords: Endogenous prices, tax collection, inequality, tax progressivity. JEL: H21 H23 H26 URL: http://d.repec.org/n?u=RePEc:san:crieff:0506&r=all 475. Aggregate Dynamics with Heterogeneous Agents and State- Dependent Pricing Vladislav Damjanovic Charles Nolan This paper examines the consequences of (S,s) pricing rules in a dynamic economy with heterogeneous costs of price adjustment. We construct the stationary distributions for aggregate output and prices for our model economy. As a result of our assumption of heterogeneous costs we find that: (i) Some sectors change prices more regularly than others; (ii) Price changes are asynchronized ( relative prices may be moving in opposite directions in different sectors); (iii) The economy may be more sensitive to demand shocks. There is broad empirical support for the predictions of the model. Keywords: Price rigidity, (Ss) pricing, macroeconomic dynamics. JEL: E31 E32 E37 E58 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:san:cdmawp:0505&r=all 476. Aggregation and Optimization with State-Dependent Pricing: A Comment Vladislav Damjanovic Charles Nolan A key argument in Caplin and Leahy (1997) states that the correlation between monetary shocks and output is falling in the variance of the money supply. We demonstrate that this conclusion depends on solving for the correlation in the non-stationary state of the model. In the stationary state, that correlation is initially rising. Keywords: Ss pricing, money-output correlations, macroeconomic dynamics. JEL: E31 E32 E37 E58 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:san:cdmawp:0506&r=all 477. Graph-Based Search Procedure for Vector Autoregressive Models Alessio Moneta Peter Spirtes Vector Autoregressions (VARs) are a class of time series models commonly used in econometrics to study the dynamic effect of exogenous shocks to the economy. While the estimation of a VAR is straightforward, there is a problem of finding the transformation of the estimated model consistent with the causal relations among the contemporaneous variables. Such problem, which is a version of what is called in econometrics “the problem of identification,” is faced in this paper using a semi-automated search procedure. The unobserved causal relations of the structural form, to be identified, are represented by a directed graph. Discovery algorithms are developed to infer features of the causal graph from tests on vanishing partial correlations among the VAR residuals. Such tests cannot be based on the usual tests of conditional independence, because of sampling problems due to the time series nature of the data. This paper proposes consistent tests on vanishing partial correlations based on the asymptotic distribution of the estimated VAR residuals. Two different types of search algorithm are considered. A first algorithm restricts the analysis to direct causation among the contemporaneous variables, a second algorithm allows the possibility of cycles (feedback loops) and common shocks among contemporaneous variables. Recovering the causal structure allows a reliable transformation of the estimated vector autoregressive model which is very useful for macroeconomic empirical investigations, such as comparing the effects of different shocks real vs. nominal) on the economy and finding a measure of the monetary policy shock. Keywords: VARs, Problem of Identification, Causal Graphs, Structural Shocks URL: http://d.repec.org/n?u=RePEc:ssa:lemwps:2005/14&r=all 478. Region-Specific versus Country-specific Poverty Lines in Analysis of Poverty Magne Mogstad, Audun Langorgen and Rolf Aaberge (Statistics Norway) The standard practice in most OECD countries is to measure and evaluate poverty on the basis of a poverty line defined as a specific proportion of the median equivalent income within a country. However, this approach disregards regional differences in prices and needs within a country and may, therefore, provide an incomplete and even an incorrect picture of the extent as well as the geographical and demographical composition of the poor. To account for differences in prices and needs, this paper introduces an alternative method of measuring poverty based on a set of region-specific poverty lines. Applying Norwegian household register data for 2001 we find that the overall extent of poverty is only slightly affected by the change in definition of poverty line. However, the geographical as well as the demographical composition of poverty are shown to depend heavily on whether the method of measuring poverty relies on region- specific or country-specific thresholds. As expected, the results demonstrate that the analysis of poverty based on country- specific thresholds produces downward biased poverty rates in urban areas and upward biased poverty rates in rural areas. Moreover, when region-specific poverty thresholds form the basis of the poverty analysis, we find that the poverty rates among young singles and non-western immigrants are significantly higher than what is suggested by previous empirical evidence based on a joint country-specific poverty line. Keywords: Measurement of poverty; poverty line; geographical and demographical poverty profile JEL: I32 URL: http://d.repec.org/n?u=RePEc:ssb:dispap:408&r=all 479. Choice under Uncertainty and Bounded Rationality John K. Dagsvik (Statistics Norway) This paper develops a theory for probabilistic models for risky choices that can be viewed as an extension of the expected utility theory to account for bounded rationality. One probabilistic version of the Archimedean Axiom and two versions of the Independence Axiom are proposed. In addition, additional axioms are proposed of which one is Luce’s Independence from Irrelevant Alternatives. It is demonstrated that different combinations of the axioms yield different characterizations of the probabilities for choosing the respective risky prospects Keywords: Random tastes; bounded rationality; independence from irrelevant alternatives; choice among lotteries; probabilistic choice for uncertain outcomes. JEL: C25 D11 D81 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:ssb:dispap:409&r=all 480. Can a carbon permit system reduce Spanish unemployment? Taran F?hn, Antonio G. Gomez-Plana and Snorre Kverndokk ( Statistics Norway) This paper addresses the frequently articulated worry for the unemployment impacts of abating CO2 emissions. The Spanish economy is ridden by unemployment rates well above the EU average. At the same time the deviation from EU's intermediate emission goals is more serious than for most other EU countries. We use a CGE model that includes a matching model with two types of labour, and which allows for different pricing rules and returns-to- scale assumptions. Our findings are optimistic. Due to low labour intensity in most of the dirty, Spanish industries, the unemployment rate is hardly affected by introducing an emission permit system. Further, by recycling the sales revenue into reduced labour taxes, unemployment rates fall. Contrary to other studies of Europe, we find that reducing payroll taxes on skilled labour is the most successful in reducing unemployment rates, both through increasing demand and through dampening the supply response to rising wages. All the recycling schemes also generate dividends in terms of welfare, but none offset the abatement costs entirely. Keywords: Spanish unemployment; Tax reform; Emission Permit Auctions; Employment dividend; Matching functions; Increasing returns to scale; Computable general equilibrium models. JEL: D58 J68 Q38 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:ssb:dispap:410&r=all 481. Consequences of the IPPC-directive’s BAT requirements for abatement costs and emissions Jan Larsson and Kjetil Telle (Statistics Norway) The Integration Pollution and Prevention Control (IPPC) directive from the European Union implies that the regulatory emission caps should be set in accordance with each industry’s Best Available Techniques (BAT). The directive is under implementation in Norway, and it represents a refocus of the Norwegian environmental regulations away from economic efficiency towards a BAT principle. We examine the effect of this implementation with respect to expected emission reductions and increases in costs. Data Envelopment Analyses (DEA) is used to construct a frontier of all efficient plants. This provides us with two alternative interpretations of BAT. First, we assume that all the plants emit in accordance with the best practice technology, represented by the frontier, by reducing all inputs proportionally. Second, we assume that all plants emit in accordance with the best practice technology by reducing emissions only. Both interpretations reveal substantial potential for emission reductions. Further, abatement cost estimates indicate that considerable emission reductions can be achieved with low or no social costs, but that the implementation of BAT for all plants involves substantial costs. Keywords: IPPC; BAT; Emissions; Energy intensive industries; DEA; Technical efficiency; Frontier technology. JEL: D21 K23 K32 L61 L65 L73 Q48 R38 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:ssb:dispap:411&r=all 482. Modeling Concentration and Dispersion in Multiple Regression Rolf Aaberge, Steinar Bjerve and Kjell Doksum (Statistics Norway) We consider concepts and models that are useful for measuring how strongly the distribution of a positive response Y is concentrated near a value with a focus on how concentration varies as a function of covariates. We combine ideas from statistics, economics and reliability theory. Lorenz introduced a device for measuring inequality in the distribution of incomes that indicate how much the incomes below the uth quantile fall short of the egalitarian situation where everyone has the same income. Gini introduced an index that is the average over u of the difference between the Lorenz curve and its values in the egalitarian case. More generally, we can think of the Lorenz and Gini concepts as measures of concentration that applies to other response variables in addition to incomes, e.g. wealth, sales, dividends, taxes, test scores, precipitation, and crop yield. In this paper we propose modified versions of the Lorenz and Gini measures of concentration that we relate to statistical concepts of dispersion. Moreover, we consider the situation where the measures of concentration/dispersion are functions of covariates. We consider the estimation of these functions for parametric models and a semiparametric model involving regression coefficients and an unknown baseline distribution. In this semiparametric model, which combines ideas from Pareto, Lehmann and Cox, we find partial likelihood estimates of the regression coefficients and the baseline distribution that can be used to construct estimates of the various measures of concentration/dispersion. Keywords: Spread; concentration; Lorenz curve; Gini index; Lehmann model; Cox regression; Pareto model. JEL: C14 D31 D63 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:ssb:dispap:412&r=all 483. Is Norway immune to Dutch Disease? CGE Estimates of Sustainable Wage Growth and De-industrialisation Erling Holmoy and Kim Massey Heide (Statistics Norway) Norway's petroleum wealth has become considerably more liquid and thereby visible to the public since the mid 1990s. In the policy debate transformation of wealth is often confused with ordinary income. Such a misconception may have contributed to de- industrialisation through real appreciation beyond what is sustainable in a long run perspective. Since re-industrialisation is typically considered difficult, it is important to estimate a norm for sustainable wage growth. In Norway the textbook model of the Small Open Economy (SOE) has often been used for this purpose. We argue that this model neglects important aspects of the Norwegian economy. Instead we use a large scale dynamic CGE-model to estimate sustainable paths for wage growth and the activity in the traded goods sector, especially manufacturing. Under plausible assumptions we find that about 0.5 percent annual reduction of manufacturing employment is sustainable. The real appreciation over the last 7 years has been substantially above a sustainable trend. Keywords: Dutch Disease; multi-sector growth; dynamic CGE- modelling. JEL: F4 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:ssb:dispap:413&r=all 484. An Expenditure Based Estimate of Britain's Black Economy Revisited Knut R. Wangen (Statistics Norway) The seminal paper by Pissarides and Weber (1989) is one of several previous studies trying to measure the size of the black economy. Pissarides and Weber compared the relationship between food expenditure and income in two groups of workers, self- employed and employees in employment, assuming that employees reported income correctly. For a given level of reported income, the self-employed had a higher food expenditure than employees. Pissarides and Weber concluded that self-employed's actual income was 1.55 times reported income, and that this part of the black economy was about 5.5 percent of GDP in the UK in 1982. Presumably due to a too informal argumentation, Pissarides and Weber's estimators are not entirely correct and alternative estimators have been overlooked. In all, I suggest three different interval estimators for mean under-reporting. The first is obtained by formally solving optimization problems which Pissarides and Weber tried to solve informally. The other two follows from recognizing, and incorporating, parameter restrictions which were not fully appreciated. Keywords: Self-Employment; Under-Reporting of Income; Household Consumption; Black Economy; Informal Sector. JEL: D31 E21 H26 H31 J23 O17 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:ssb:dispap:414&r=all 485. A Statistical Model for Simple, Fast and Reliable Measurement of Poverty Astrid Mathiassen (Statistics Norway) The primus inter pares of the UN Millennium Development Goals is to reduce poverty. The only internationally accepted method of estimating poverty requires a measurement of total consumption based on a time and resource demanding household budget or integrated survey over 12 months. Rather than measuring poverty only, say every 5th year, a model is presented to predict poverty based upon a small set of household variables to be collected yearly between two 12 months household surveys. Information obtained from the light surveys may then be used to predict poverty rates. The key question is whether the inaccuracy in these predictions is acceptable. The standard errors presented are lower than the sampling errors to the poverty estimates based on the 12 months household surveys. Predictions based on this sample also indicate that the problem of misspecifications of models is not large. It is recommended to test these models at the country level and if the test results are comparable to those here, apply the approach presented. Keywords: Stochastic model; Poverty measurement; Money metric poverty; Survey methods JEL: C31 C42 C81 D12 D31 I32 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:ssb:dispap:415&r=all 486. Are high oil prices profitable for OPEC in the long run? Finn Roar Aune, Solveig Glomsrod, Lars Lindholt and Knut Einar Rosendahl (Statistics Norway) High oil prices are favourable for OPEC in the short run, but may undermine its future revenues. We search for the optimal oil price level for the producer group, using a partial equilibrium model for the oil market. The model explicitly accounts for reserves, development and production in 4 field categories across 13 regions. Oil companies may invest in new field development or alternatively in improved oil recovery in the decline phase of fields in production. Non-OPEC production is profit-driven, whereas OPEC meets the residual call on OPEC oil at a pre- specified oil price, while maintaining a surplus capacity. According to our results, sustained high oil prices stimulate Non- OPEC production, but its remaining reserves gradually diminish despite new discoveries. Oil demand is only slightly affected by higher prices. Thus, OPEC is able to keep and eventually increase its current market share beyond 2010 even with oil prices around $30 per barrel (2000-$). In fact, an oil price around $40 seems to be profitable for OPEC, even if long-term revenues are not discounted. Sensitivity analyses show that even with many factors working jointly in OPEC's disfavour, the optimal oil price seems to be at least $25. Thus, for OPEC there is a trade-off between high prices and high market share in the short to medium term, but not in the long term. For OECD countries, on the other hand, there is a clear trade-off between low oil prices and low import dependence. Keywords: Oil market; oil price; market power; equilibrium model JEL: L13 Q31 Q41 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:ssb:dispap:416&r=all 487. Macroeconomic effects of proposed pension reforms in Norway Dennis Fredriksen, Kim Massey Heide, Erling Holmoy and Ingeborg Foldoy Solli (Statistics Norway) Ageing combined with generous welfare state schemes makes the present fiscal policy in Norway unsustainable, despite large government petroleum revenues. We estimate to what extent two suggested reforms of the public pension system improve fiscal sustainability and stimulate employment, two main objectives of the reforms. To this end we apply two large models iteratively: 1) a detailed dynamic micro simulation model to estimate government pension expenditures; 2) a large CGE-model to estimate general equilibrium effects on all tax bases and employment, i.e. macroeconomic effects. We find that the reform proposals have much larger effects than typically found for reforms of the tax and trade policy. Whereas maintaining the present system implies that the payroll tax rate must be increased from about 13 percent today to 25 percent in 2050, both proposals imply that taxes can be reduced from the present level in all years up to 2050. Most of this reduction can be attributed to higher employment. Keywords: Population ageing; Fiscal sustainability; Pension reforms; Computable general equilibrium model; Dynamic micro simulation JEL: H30 H55 H62 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:ssb:dispap:417&r=all 488. Effects of demographic development, labour supply and pension reforms on the future pension burden Dennis Fredriksen and Nils Martin Stolen (Statistics Norway) A much higher old-age dependency ratio together with more generous pension benefits will lead to a substantial increase in the future pension burden in Norway. The challenges of financing the increasing pension expenditures depend on the development in demographic characteristics like fertility, mortality and immigration, as well as characteristics affecting supply of labour, like education, disability, retirement age, participation rates and part time work (especially for women), and the design of the pension system. By use of a dynamic micro simulation model the paper analyses and projects how these factors will affect the expenditures and financing of the Norwegian National Insurance Scheme. The model also allows analyses of distributional effects of pension reforms. Keywords: Social security; pension expenditures; demographic forecasts; retirement JEL: H53 H55 J11 J14 J26 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:ssb:dispap:418&r=all 489. Tax Effects on Unemployment and the Choice of Educational Type Annette Alstads?ter, Ann-Sofie Kolm and Birthe Larsen ( Statistics Norway) This paper examines the effect of taxes on the individuals' choices of educational direction, and thus on the economy's skill composition. A proportional labour income tax induces too many workers with high innate ability to choose an educational type with high consumption value and low effort costs. This increases the skill mismatch and aggregate unemployment in the economy. The government can correct for this distortion by use of differentiated tuition fees or tax rates. Keywords: Unemployment; matching; education; optimal taxation; tuition fees JEL: J64 J68 H21 H24 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:ssb:dispap:419&r=all 490. Constructing Panel Data Estimators by Aggregation: A General Moment Estimator and a Suggested Synthesis Erik Biorn (Statistics Norway) A regression equation for panel data with two-way random or fixed effects and a set of individual specific and period specific `within individual' and `within period', estimators of its slope coefficients are considered. They can be given Ordinary Least Squares (OLS) or Instrumental Variables (IV) interpretations. A class of estimators, obtained as an arbitrary linear combination of these `disaggregate' estimators, is defined and an expression for its variance-covariance matrix is derived. Nine familiar `aggregate' estimators which utilize the entire data set, including two between, three within, three GLS, as well as the standard OLS, emerge by specific choices of the weights. Other estimators in this class which are more robust to simultaneity and measurement error bias than the standard aggregate estimators and more efficient than the `disaggregate' estimators, are also considered. An empirical illustration of robustness and efficiency, relating to manufacturing productivity, is given. Keywords: Panel data. Aggregation. Simultaneity. Measurement error. Method of moments. Factor productivity JEL: C13 C23 C43 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:ssb:dispap:420&r=all 491. Non-Bayesian Multiple Imputation Jan F. Bjornstad (Statistics Norway) Multiple imputation is a method specifically designed for variance estimation in the presence of missing data. Rubin’s combination formula requires that the imputation method is “proper” which essentially means that the imputations are random draws from a posterior distribution in a Bayesian framework. In national statistical institutes (NSI’s) like Statistics Norway, the methods used for imputing for nonresponse are typically non-Bayesian, e.g., some kind of stratified hot- deck. Hence, Rubin’s method of multiple imputation is not valid and cannot be applied in NSI’s. This paper deals with the problem of deriving an alternative combination formula that can be applied for imputation methods typically used in NSI’s and suggests an approach for studying this problem. Alternative combination formulas are derived for certain response mechanisms and hot-deck type imputation methods. Keywords: Multiple imputation; survey sampling; nonresponse; hot- deck imputation JEL: C42 C13 C15 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:ssb:dispap:421&r=all 492. Identifying Structural Breaks in Cointegrated VAR Models Havard Hungnes (Statistics Norway) The paper describes a procedure for decomposing the deterministic terms in cointegrated VAR models into growth rate parameters and cointegration mean parameters. These parameters express long-run properties of the model. For example, the growth rate parameters tell us how much to expect (unconditionally) the variables in the system to grow from one period to the next, representing the underlying (steady state) growth in the variables. The procedure can be used for analysing structural breaks when the deterministic terms include shift dummies and broken trends. By decomposing the coefficients into interpretable components, different types of structural breaks can be identified. Both shifts in intercepts and shifts in growth rates, or combinations of these, can be tested for. The ability to distinguish between different types of structural breaks makes the procedure superior compared to alternative procedures. Furthermore, the procedure utilizes the information more efficiently than alternative procedures. Finally, interpretable coefficients of different types of structural breaks can be identified. Keywords: Johansen procedure; cointegrated VAR; structural breaks; growth rates; cointegration mean levels. JEL: C32 C51 C52 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:ssb:dispap:422&r=all 493. The commodity currency puzzle Hilde C. Bjornland and Havard Hungnes (Statistics Norway) This paper addresses the purchasing power parity (PPP) puzzle for commodity currencies. A substantial part of the literature on commodity currencies has found that, despite controlling for the effect of commodity prices, PPP does not hold in the long run. We show that once we also control for the effect of the interest rate differential in the real exchange rate relationship, the discrepancies from PPP are fully accounted for. The analysis is applied to the real exchange rate behaviour in Norway, which has a primary commodity (oil) that constitutes the majority of its exports. We show that with the interest rate differential included in the long run real exchange rate relationship, the real oil price plays a minor role. Adjustment to equilibrium ( half-lives) is also substantially reduced, taking no more than one year on average. Hence, contrary to earlier findings on commodity currencies, we have effectively removed the PPP puzzle. Keywords: Exchange rate; commodity currencies; real oil price; purchasing power parity; uncovered interest parity. JEL: C32 F31 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:ssb:dispap:423&r=all 494. The relationship between firm mobility and tax level: Empirical evidence of fiscal competition between local governments Fredrik Carlsen, Bjorg Langset and Jorn Rattso ( Statistics Norway) The mobility of the tax base may influence fiscal outcomes. The many theoretical contributions about the role of mobility are not matched by empirical evidence. Existing studies address strategic interaction between governments, but have little to say about mobility. We introduce a new measure of mobility conditions based on the geographic profit variability of industrial sectors. The econometric analysis shows a systematic negative relationship between mobility conditions and tax level among municipalities in Norway. The analysis takes into account neighborhood effects in a spatial model, and the endogeneity of mobility conditions is handled with instrumental variables. Keywords: Fiscal competition; mobility; local taxation JEL: H71 H72 H73 C21 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:ssb:dispap:424&r=all 495. The barrier model of productivity growth: South Africa Torfinn Harding and Jorn Rattso (Statistics Norway) The barrier model of productivity growth suggests that individual country productivity is related to the world technology frontier disturbed by national barriers. We offer a country study of the barrier model exploiting the dramatic changes in the linkages to the world economy in South Africa. The productivity growth in the manufacturing sector panel for 1970- 2003 covers a period of political and economic turbulence and international sanctions. The econometric analysis uses tariffs as measure of barrier and fixed effects estimation to concentrate inference to time series properties. The model shows how productivity growth can be understood as a combination of world frontier growth and the tariff barrier to international spillovers. The estimates establish a long run relationship where domestic productivity follows the world frontier and with change of the barrier affecting transitional growth. Keywords: Barriers to growth; technology spillover; South Africa; total factor productivity; econometric analysis JEL: F13 F43 O11 O33 O55 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:ssb:dispap:425&r=all 496. ""Voice" and "Exit" in Japanese Firms during the Second World War: Sanpo Revisited" Tetsuji Okazaki (Faculty of Economics, University of Tokyo) During the Second World War, the Japanese government and private sector searched for and implemented new mechanisms for coordination and motivation. One of these was sangyo hokokukai ( sanpo). Sanpo unit was basically an organization of the employer and employees of each firm, which held meetings to moderate labor relations. Due to the government policy to promote sanpo units, around 70% of the total workers in Japan were organized into sanpo units in the early 1940s. As the members of labor unions and the workers of the companies which had factory committees, were only 7 % and 5% of the total workers in 1936 respectively, sanpo was the first large scale mechanism for Japanese employees to voice. In this paper, I examined the role of sanpo, using prefecture level data and firm level data, based on a framework integrating the "voice view" of unionism and the transaction cost economics. It was found that sanpo reduced the participation rate in labor disputes, and enhanced labor productivity at least in some period. Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:tky:fseres:2005cf345&r=all 497. "Large Market Design in Dominance" Hitoshi Matsushima (Faculty of Economics, University of Tokyo) This paper introduces a new concept of market mechanism design into general economic environments with finite but many traders, where multiple objects are traded and any combination of complements and substitutes is permitted. The auctioneer randomly divides traders into multiple groups. Within each group, trades occur at the market-clearing price vector of another group. With private values, any undominated strategy profile mimics price- taking behavior, enforcing perfect competition. With interdependent values, any twice iteratively undominated strategy profile mimics the rational expectations equilibrium, enforcing ex post efficiency. Our mechanisms are detail-free, i.e., they do not depend on the details of model specification. Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:tky:fseres:2005cf346&r=all 498. "A New Technique for Proving the Existence of Monetary Equilibria in Matching Models with Divisible Money" Kazuya Kamiya (Faculty of Economics, University of Tokyo) Takashi Shimizu (Faculty of Economics, Kansai University) This paper develops a new technique for proving the existence of monetary equilibria in money search models. In money search models with divisible money, the set of equilibria, if it exists, is at least one-dimensional. We develop a method to prove the existence of such a set in a fairly simple way. That is, we first find an endpoint of the set of equilibria and then we prove the existence of a continuum of the set of equilibria from this endpoint. Solving for these equilibria is complicated otherwise than using our method. Thus, our technique is simple but very powerful. Further, we consider a rather complicated bargaining procedure that allows us to prove the existence of equilibria in money search model with perfectly divisible goods and money. Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:tky:fseres:2005cf347&r=all 499. "Short-run and Long-run Effects of Corruption on Economic Growth: Evidence from State-Level Cross-Section Data for the United States" Nobuo Akai (School of Business Administration, University of Hyogo) Yusaku Horiuchi (Asia Pacific School of Economics and Government, Australian National University) Masayo Sakata (Faculty of Politics, Economics and Law, Osaka International University) Theoretical studies suggest that corruption may counteract government failure and promote economic growth in the short run, given exogenously determined suboptimal bureaucratic rules and regulations. As the government failure is itself a function of corruption, however, corruption should have detrimental effects on economic growth in the long run. In this paper, we measure the rate of economic growth for various time spans - short (1998?2000) middle (1995-2000) and long (1991-2000) - using previously uninvestigated state-level cross-section data for the United States. Our two-stage least square (2SLS) estimates with a carefully selected set of instruments show that the effect of corruption on economic growth is indeed negative and statistically significant in the middle and long spans but insignificant in the short span. Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:tky:fseres:2005cf348&r=all 500. Understanding Divergent Views on Redistribution Policy in the United States Louise C. Keely Chih Ming Tan Particular demographic groups are often associated with distinct points of view across various dimensions of redistribution policy. In this paper, we investigate which demographic groups account for heterogeneity in views on welfare policy and views on appropriate levels of overall redistribution. Using data from the General Social Survey and classification tools, we find evidence that classifications of the population by race, socioeconomic status, and age have some predictive power. However, much heterogeneity in views on redistribution policy persists even within these demographic groupings and remains unexplained. Our results suggest that identity-based explanations for variations in these views have to be interpreted with caution. Keywords: Data mining, classification and regression trees, random forests, redistribution preferences, welfare, identity JEL: C45 C49 H50 H53 Date: 2005 URL: http://d.repec.org/n?u=RePEc:tuf:tuftec:0515&r=all 501. To Bundle or Not to Bundle Norman, Peter Fang, Hanming Comparing monopoly bundling with separate sales is relatively straightforward in an environment with a large number of goods. In this paper we show that results that are similar to the asymptotic results can be obtained in the more realistic case with a given finite number of goods provided that the distributions of valuations are symmetric and log-concave. JEL: L11 L12 Date: 2005-06-10 URL: http://d.repec.org/n?u=RePEc:ubc:pmicro:norman-05-06-10-08-19-02&r=all 502. A Neural Networks approach to Minority Game Luca Grilli Angelo Sfrecola The Minority Game comes from the so-called "El Farol bar" problem by W.B. Arthur. The underlying idea is competition for limited resources and it can be applied to different fields such as: stock markets, alternative roads between two locations and in general problems in which the players in the "minority" win. Players in this game use a window of the global history for making their decisions, we propose a neural networks approach with learning algorithms in order to determine players strategies. We use three different algorithms to generate the sequence of minority decisions and consider the prediction power of the neural network associated to that algorithm. The case of sequences generated randomly is also studied. Keywords: Minority Game, Learning Algorithms, Neural Networks. JEL: C45 C70 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:ufg:qdsems:13-2005&r=all 503. Neural Networks to Predict Financial Time Series in a Minority Game Context Luca Grilli Angelo Sfrecola In this paper we consider financial time series from U.S. Fixed Income Market, S&P500, Exchange Market and Oil Market. It is well known that financial time series reveal some anomalies as regards the Efficient Market Hypotesis and some scaling behavior is evident such as fat tails and clustered volatility. This suggests to consider financial time serie as "pseudo"-random time series. For this kind of time series the power of prediction of neural networks has been shown to be appreciable. We first consider the financial time serie from the Minority Game point of view and than we apply a neural network with learning algorithm in order to analyze its prediction power. We show that Fixed Income Market presents many differences from other markets in terms of predictability as a measure of market efficiency. Keywords: Minority Game, Learning Algorithms, Neural Networks, Financial Time Series, Efficient Market Hypotesis JEL: C45 C70 C22 G14 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:ufg:qdsems:14-2005&r=all 504. Was the IMF's Imposition of Economic Regime Change Justified? A Critique of the IMF's Economic and Political Role in Korea During and After the Crisis James Crotty Kang-Kook Lee As late as October 1997 the IMF declared that the Korean economy was experiencing a temporary liquidity squeeze, not a solvency problem. Yet in December 1997 Deputy Managing Director Stanley Fischer declared that Korea suffered from a systemic “breakdown of economic relations” so complete that only radical economic restructuring could restore prosperity. The IMF attached what it called “extreme structural conditionality” to its loan agreements with Korea, demanding a complete and rapid transition from Korea’s traditional East Asian economic model to a globally integrated neoliberal model. We subject the IMF’s assertion that the allocative efficiency of the Korean economy had collapsed by 1997 to a number of empirical tests, including time series and cross-section analyses of capital productivity and corporate profitability, and firm and industry level econometric tests of the proposition that investment spending was excessive and misallocated in the pre-crisis period. This evidence does not support the IMF’s systemic breakdown claim. We conclude that the IMF’s imposition of “extreme structural conditionality” on Korea is best understood as an illegitimate and antidemocratic exercise of power designed to meet the needs of the IMF’s key constituents rather than those of the majority of Korea’s people. Date: 2004 URL: http://d.repec.org/n?u=RePEc:uma:periwp:wp77&r=all 505. Green and Brown? Globalization and the Environment James K. Boyce Globalization – viewed as a process of economic integration that embraces governance as well as markets – could lead to worldwide convergence toward higher or lower environmental quality, or to environmental polarization in which the ‘greening’ of the global North is accompanied by the ‘browning’ of the global South. The outcome will not be dictated by an inexorable logic. Rather it will depend on how the opportunities created by globalization alter balances of power within countries and among them. Date: 2004 URL: http://d.repec.org/n?u=RePEc:uma:periwp:wp78&r=all 506. Another Distortion of Adam Smith: The Case of the "Invisible Hand" Michael Meeropol This paper addresses a major omission in the way textbook writers and journalists utilize Adam Smith’s concept of the “invisible hand” to make Adam Smith an intellectual precursor of modern neo-liberal economic policy. Specifically, the paper addresses the use of the concept of the “invisible hand” by Adam Smith to address two major issues in the debate over neo- liberal policy: the international flow of capital and its role in the location of investment projects and the inequality in the distribution of income that might result from certain policies. The neo-liberal mantra about Adam Smith’s invisible hand asserts that so long as there is sufficient competition and no government intervention beyond the protection of life, liberty and property, the pursuit of individual self interest will result in an improvement in the aggregate well being of society as a whole. This is true even if investments are made overseas and if economic inequality increases. Aside from some contributions to the professional literature, virtually everyone else who writes about the invisible hands ignores what Adam Smith actually said. This paper restates what Smith said when he used the term “invisible hand” in both The Wealth of Nations and in The Theory of Moral Sentiments. It places his use of the term in context to illustrate how far Smith departs from the distortions of his neo-liberal self-described admirers. Date: 2004 URL: http://d.repec.org/n?u=RePEc:uma:periwp:wp79&r=all 507. The Economic Impact of Living Wage Ordinances Mark D. Brenner Drawing upon both prospective and retrospective evidence, this paper reviews the economic effects of local living wage ordinances. I concentrate my attention on the higher costs these measures create for covered firms, as well as their budgetary implications vis-a-vis cities that adopt them. I also briefly review the effect that living wage laws have had on bidding environment for city service contracts. Based on a range of cost estimates associated with living wage laws, I then examine the adjustment channels firms are likely to pursue when adjusting to higher labor costs, including: raising prices; increasing firm productivity; redistributing income within the firm; laying off employees; and relocating out of the area covered by the living wage mandate. Date: 2004 URL: http://d.repec.org/n?u=RePEc:uma:periwp:wp80&r=all 508. Capital Inflows, Policy Responses, and Their Ill Consequences: Thailand, Malaysia, and Indonesia in the Decade Before the Crises Clara Garcia Capital inflows, especially when volatile, denominated in foreign currencies and not properly hedged against exchange rate risks, may pose macroeconomic and financial problems in the recipient economy. In this paper we analyze the mechanisms through which those problems arise; and we assess the policies that national authorities may resort to in order to prevent them, under the assumption that capital inflows are the result of previous stabilization and liberalization packages. Also, we study the use and effectiveness of policy responses to capital inflows in Thailand, Malaysia, and Indonesia in the years prior to the 1997-98 financial crises. We conclude that policies that reinforce the stabilization and adjustment trends of the 1980s are more likely to be (at least partially) ineffective or even counterproductive, whereas the measures that depart from those trends appear to have a higher potential for effectiveness but face obstacles to implementation. Date: 2004 URL: http://d.repec.org/n?u=RePEc:uma:periwp:wp81&r=all 509. Air Pollution and Per Capita Income: A Disaggregation of the Effects of Scale, Sectoral Composition, and Technological Change Rachel A. Bouvier During the last decade, researchers have investigated the relationship between per capita income and environmental quality. This paper disaggregates the relationship between per capita income and emissions of carbon monoxide, carbon dioxide, sulfur dioxide, and volatile organic compounds into scale, composition and technology effects, using data from European and North American countries from the period 1980-1986. Results indicate that the scale effect outweighs the composition and technology effects in the cases of carbon dioxide and volatile organic compounds, while the opposite is true in the cases of carbon monoxide and sulfur dioxide. The results also suggest that greater democracy is associated with lower emissions of all four pollutants. Date: 2004 URL: http://d.repec.org/n?u=RePEc:uma:periwp:wp84&r=all 510. A Future for Small Farms? Biodiversity and Sustainable Agriculture James K. Boyce Small farms play a crucial role in conserving the agricultural biodiversity that underpins long-term food security worldwide. Particularly in centers of crop genetic diversity – such as Mesoamerica in the case of maize (corn) and the Andean region in the case of potatoes – small farmers are the ‘keystone species’ in agricultural ecosystems of great value to humankind. Today, however, a formidable nexus of market forces and political forces threatens both small farmers and the biodiversity they sustain. Countervailing public policies are urgently needed. These should include the removal of existing policy biases against small farmers; social recognition of the contribution of in situ conservation to human well-being; development of markets for ‘traditional’ varieties of crops and livestock; the provision of local public goods in areas where farmers cultivate diversity; payments for the environmental service of on-farm conservation; and support for part-time farming as an element of diversified household livelihood strategies. Date: 2004 URL: http://d.repec.org/n?u=RePEc:uma:periwp:wp86&r=all 511. Exploring the Demographic Factors Affecting Passage of Living Wage Ordinances Oren M. Levin-Waldman An analysis based on data from the Current Population Survey suggests that cities with certain demographics, particularly higher concentrations of immigrants from south of the American border, lower levels of educational attainment, more people in low wage industries, and higher rates of income inequality, appear to be more likely to pass living wage ordinances than those cities that do not have these demographics. Date: 2004 URL: http://d.repec.org/n?u=RePEc:uma:periwp:wp88&r=all 512. Rising Foreign Outsourcing and Employment Losses in U.S. Manufacturing, 1987-2002 James Burke Gerald Epstein Minsik Choi Foreign outsourcing, otherwise known as off-shoring, has become a matter of intense public debate and great concern in the United States presidential contest, especially in light of the large job losses experienced by U.S. workers since George Bush became president. Yet, there is a lack of good data on foreign outsourcing since the early 1990s. This paper presents updated measures of foreign outsourcing for the recent period. Its main findings are that the share of foreign-sourced goods in total manufactured inputs almost doubled – from 12.4% to 22.1%– in U.S. manufacturing between 1987 and 2002. Since the early 1990s, outsourcing has accelerated in key industries and has been associated with a loss of employment. In particular, for the period from 1997 to 2002, there has been a strong association between manufacturing job losses and foreign outsourcing. Date: 2004 URL: http://d.repec.org/n?u=RePEc:uma:periwp:wp89&r=all 513. Guard Labor: An Essay in Honor of Pranab Bardhan Samuel Bowles Arjun Jayadev For Pranab Bardhan, whose contributions to science and to society are honored in this report, power is an essential analytical tool. Its exercise (for better or worse) redirects the course of development and affects the livelihoods of those whose voices and interests are never absent in Bardhan's work: the world's least well off. This paper explores the economic importance of the exercise of power and the resources devoted to this end. Date: 2004 URL: http://d.repec.org/n?u=RePEc:uma:periwp:wp90&r=all 514. Revealed Preferences for Macroeconomic Stabilization David Kiefer In the new Keynesian model of endogenous stabilization governments react quickly to lean against the macroeconomic wind. Governments have ideological objectives with respect to macroeconomic performance, but are constrained by an augmented Phillips curve. Voter influence on macroeconomic policy should be noticeable during election years, when the government and voters disagree about goals. We offer an econometric test of this principal-agent characterization of government control of the political-economic equilibrium and voter control over their governments. This methodology yields an inferences about the functional form of stabilization preferences, the stabilization ideology of Left and Right governments, and possibility a measure of voter ideology. Keywords: Stabilization; philips curve; public policy Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:uta:papers:2005_03&r=all 515. Perfect Price Discrimination is not So Perfect Sara Hsu David Kiefer The foundation of the accepted theory on two-part tariffs is the partial equilibrium analysis first developed by Oi (1971). He argues that the profit maximum obtains from a lump-sum payment ( equal to the consumer surplus) plus a unit price (equal to marginal cost), and that the resulting allocation is Pareto efficient because it is identical to perfect competition (except for lump-sum transfers to the monopoly). He shows that this outcome is identical to first-degree price discrimination. This analysis is widely included in undergraduate and graduate level textbooks, and is often cited as a basis for the public regulation of utilities. A few general equilibrium papers also validate Oi’s partial equilibrium conclusion. By contrast, we present a general equilibrium counterexample that shows that this conventional conclusion cannot be generally correct. Keywords: Oi; partial equalibrium analysis; price discrimination Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:uta:papers:2005_04&r=all 516. Beyond a Wedge in the Door? Women Training for the Construction Trades in the U.S. Gunseli Berik Cihan Bilginsoy This paper uses individual-level data on registered apprenticeship for construction occupations from 31 states in the U.S. to evaluate the variations in the entry and exit of women apprentices, overall and by race/ethnicity, over the 1995-2003 period. We examine how women’s representation among new apprentices, and their attrition and retention rates respond to apprentice, training program, and occupational characteristics. We find that the experiences of White women, Black women and Latinas are not the same. Women’s share in incoming classes has declined primarily due to the decline in White women’s share while the shares of Black women and Latinas have remained relatively constant. White women, however, have higher retention rates than Latinas and Black women. The results confirm previous findings based on data on the early 1990s that program sponsorship has significant impact on women’s representation and retention. Women appear to have better chances of joining the high-skill construction workforce if they enroll in union- contractor joint programs. Joint programs also feature higher ( albeit still very low) shares of women in the incoming classes and higher odds of graduation in comparison with the unilateral contractor programs. We also find that the share of any racial/ethnic sub-group of women responds positively to the shares of the others suggesting synergy among these groups rather than displacement of one by the other. Keywords: apprenticeship training; construction; skilled trades; women; unions JEL: J15 J16 J24 J51 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:uta:papers:2005_05&r=all 517. Exchange Rate Regimes: Latin American Economic Analysis before the Depression Kenneth P. Jameson The early twentieth century role of U.S. “money doctors” in establishing Latin American exchange rate regimes and monetary institutions is relatively well known. For example, the work of Edwin Kemmerer in the Andes has been extensively documented. Not so well-known is the work of Latin American economists on these same issues. This paper examines a number of cases where the Latin American analysts were active players and participants in analyzing the exchange rate and monetary issues and in formulating domestic policy to address them. The role of Latin American economists in a variety of international monetary conferences and commissions from 1903-1922 is investigated. In addition, the paper describes how Alberto Pani guided the formulation of Mexican economic policy after the Mexican Revolution and his ability to chart an independent course for Mexico. The conclusion is that there is evidence of “intense discussions of economic issues” based on Latin Americans’ economic analysis. The role of foreign advisors was often to break the political impasse and to recommend the policy the inviting government wanted to implement. Keywords: exchange rate; Latin America; depression JEL: B1 E42 F3 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:uta:papers:2005_06&r=all 518. Are the Washington Consensus Policies Sustainable? Game Theoretical Assessment for the Case of Ecuador Pedro Francisco Paez This paper presents an evaluation of the so-called Washington Consensus economic policies in the case of Ecuador during the eighties and the nineties in a game theoretical framework. In a multi-period game, in which it acts as Stackelberg leader, the government minimizes a quadratic loss function using stochastic dynamic control techniques. A system of simultaneous equations represents the private agents' aggregate best responses that result from the general equilibrium solutions to the different agents' optimization problems. Its dynamic features show a stable system by itself, isolated from the type of policies that the government chooses. However, the introduction of the specific “style” of neo-liberal policies typical of the Washington Consensus, econometrically captured as they were applied in Ecuador, generates an explosive dynamics in every state variable of the system, suggesting that these types of policies are intrinsically unsustainable. Keywords: economic policy evaluation; poverty; sustainability; neoliberal reforms JEL: C5 C6 C7 E6 I3 Date: 2005-07 URL: http://d.repec.org/n?u=RePEc:uta:papers:2005_07&r=all 519. Economics Ideas and Institutions in Historical Perspective: Cairu and Hamilton on Trade and Finance Matias Vernengo This paper deals with the role of economic ideas in institutional development. Conventional wisdom in Brazilian historiography suggests that, in part, the relative backwarderness of Brazil with respect to the United States was the result of the economic liberalism of its elites, represented by Jose da Silva Lisboa, the Viscount of Cairu. The paper argues that Cairu’s defense of an open economy, integrated to the world economy, in which agricultural production would prevail over the industrial interests, should be seen as a discourse for landowners and the mercantile class connected to the slave trade. It is also argued that, in contrast to Alexander Hamilton, Cairu and the Brazilian elites had a naive view of public finance that is central to understand the backwarderness of Brazilian financial markets. Political conservatism and a negative view of finance are seen as more relevant than liberalism in explaining the relative backwarderness of Brazil. Keywords: Cairu; Hamilton; brazil JEL: B12 B31 N16 N26 Date: 2005-08 URL: http://d.repec.org/n?u=RePEc:uta:papers:2005_08&r=all 520. Free Banking and the Bank of Canada David Laidler (University of Western Ontario) It is argued that today's Canadian monetary system has certain important characteristics in common with a free banking regime such as might have evolved had matters been left to market forces, and that the Bank of Canada's recent success probably has more than a little to do with this fact. It is also argued, however, that, in Canada at the current juncture, further progress towards "free banking" as this alternative is nowadays known, would likely involve unilateral adoption of the US dollar as the basis for the monetary system. Hence, on the 70th anniversary of the Bank of Canada's founding, the author's wish that it may enjoy many happy returns of its birthday is a particularly sincere one. Keywords: Bank of Canada; central banking; free banking; price stability rates; unemployment; multiplier JEL: B22 E24 E59 Date: 2005 URL: http://d.repec.org/n?u=RePEc:uwo:epuwoc:20054&r=all 521. On the morphological structure of a network Vanhoucke, Mario Coelho, Jose Debels, Dieter Tavares, Luis V. In literature, both topological and resource-related measures are used to predict the difficulty of a project scheduling problem. Rapid progress regarding solution procedures has resulted in the development of a number of data generators in order to generate instances under a controlled design and in different standard sets with problem instances. These complexity measures need to serve as predictors for the complexity of the problem under study. In this paper, we report on results for the topological structure of a network. The contribution of this paper is threefold. First, we review six topological network indicators in order to describe the structure of a network in a detailed way. These indicators were originally developed by [20] and have been modified or sometimes completely replaced by alternative indicators in order to give a better description of the topology of a network. Secondly, we generate a large amount of different networks with four network generators. This allows us to draw conclusions on both the performance of different network generators and to give a critical remark on well-known datasets from literature. Our general conclusions are that none of the network generators are able to capture the complete feasible domain of all networks. Moreover, each network generator covers its own network-specific domain and, consequently, contributes to the generation of instance data sets. Finally, we perform computational results on the well-known resource- constrained project scheduling problem to proof that our indicators are reliable and have significant predictive power to serve as complexity indicators. Note Date: 2005-06-08 URL: http://d.repec.org/n?u=RePEc:vlg:vlgwps:2005-9&r=all 522. Breeds of risk-adjusted fundamentalist strategies in an order- driven market Marco LiCalzi (Dept. of Applied Mathematics - University Ca' Foscari Venice) Paolo Pellizzari (Dept. of Applied Mathematics - University Ca' Foscari Venice) This paper studies an order-driven stock market where agents have heterogeneous estimates of the fundamental value of the risky asset. The agents are budget-constrained and follow a value- based trading strategy which buys or sells depending on whether the price of the asset is below or above its risk-adjusted fundamental value. This environment generates returns that are remarkably leptokurtic and fat-tailed. By extending the study over a grid of different parameters for the fundamentalist trading strategy, we exhibit the existence of monotone relationships between the bid-ask spread demanded by the agents and several statistics of the returns. We conjecture that this effect, coupled with positive dependence of the risk premium on the volatility, generates positive feedbacks that might explain volatility bursts. Keywords: price dynamics, statistical properties of returns, market microstructure, agent-based simulations JEL: C8 Date: 2005-06-08 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpco:0506001&r=all 523. Long-term and Short-term Dynamics of the Economic System According to Method of Systems Potential (english version). Grigorii Pushnoi (International Bogdanov Institute) The new method of system dynamics, Method of System Potential ( MSP), is applied for examination of long-term and short-term dynamics of the Economic System. According to MSP two ways of long-term development of a system exist: (1) cyclical and (2) noncyclical dynamics of efficiency index of a system is possible. The cyclical type of development is based on periodical renewal of a system while the noncyclical way means that the system stagnate. Innovative processes are intensively stimulated in first-type systems (with cyclical dynamics) while the second-type systems needs the special pressing instance for realization of innovations. The systems with cyclical dynamics tend to the separate existence (private ownership system)of its constituents because the collapse into united wholeness leads to fall of total 'potential' in a united system . Consolidation of systems with noncyclical dynamics tends to the increment in the total 'potential' of united system. Hypothesis that these two qualitatively different ways of development correspond to 'West' and 'East' ways of evolution is discussed. MSP-cyclical dynamics of economic system corresponds to some quantitative version of N. Kaldor' (1940) business cycle model. Interrelation between MSP business cycle model and N.Kaldor' model is discussed. Keywords: Kaldor' model; cusp catastrophe; East and West; long- term dynamics; deep structure; economic system; business cycle; stagnation; investment and saving functions. JEL: O P Date: 2005-06-04 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpdc:0506001&r=all 524. Knowledge Management in Non-Governmental Organisations: A Partnership for the Future Jose Vasconcelos (University Fernando Pessoa) Paulo Castro Seixas (University Fernando Pessoa) Paulo Gens Lemos (University Fernando Pessoa) Chris Kimble (University of York) This paper explores Knowledge Management (KM) practices for use with portal technologies in Non-Governmental Organizations (NGOs). The aim is to help NGOs become true Civil Society Organizations ( CSOs). In order to deal with more donors (at the top) and more beneficiaries (at the bottom), NGOs working in Humanitarian Aid and Social Development increasingly need systems to manage the creation, accessing and deployment information: within the NGOs themselves, between different NGOs that work together and, ultimately, between NGOs and Society as a whole. Put simply, NGOs are organizations that need an effective KM solution to tackle the problems that arise from both their local-global nature and from the difficulties of effective communication between and within NGOs and Civil Society. To address these problems, the underlying objectives, entities, activities, workflow and processes of the NGO will be considered from a KM framework. This paper presents the needs of a responsible, cooperative and participative NGO from a KM perspective, in order to promote the growth of Communities of Practice in local as well as in global network. Keywords: Knowledge Management, Communities of Practice, Non- Governmental Organisations, Civil Society Organisations, Information Society, Humanitarian Aid, Social Development JEL: F35 O19 O22 O33 Date: 2005-06-06 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpdc:0506002&r=all 525. Wealth, Poverty and Sustainable Development David Barkin (Universidad Autonoma Metropolitana, Xochimilco, Mexico) An analysis of the underlying causes of environment destruction debunks the idea that the poor are the principal cause of environmental degradation in present-day societies. The paper also identifies some of the major areas of economic theory and institutional biases in market economies that generate obstacles to the 'proper' functioning of markets. As a result, even the more advanced prescriptions of modern environmental economics are incapable of explaining the deepening of social and economic polarization and the worsening of the environmental conditions in which poor people must exist. The paper ends with a proposal for overcoming this growing crisis through local participation and action. Keywords: political ecology; sustainability; polarization; heterodox economics; development alternatives JEL: Q Date: 2005-06-09 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpdc:0506003&r=all 526. Changing boundaries and structure of a technological system: lessons from UK retail banking Davide Consoli (Centre for Research on Innovation & Competition CRIC - University of Manchester) This article investigates the factors that have induced and shaped the process of industry evolution of banking in the United Kingdom and, in particular, the reorganization of the retail payments system. It will look at how the effects of technical progress within a changing regulatory framework have contributed to the flourishing of new consumer services, of increasingly specialized technologies and of new models of business organization. In relation to these issues, the paper develops an interpretative framework based on the rapidly expanding body of literature on technological systems. In so doing it argues also that the organization of the payment system has evolved towards a multilayered and increasingly heterogeneous industry in which competition has been fuelled at different levels by the growing diversity of the ecology of agents involved, as well as by the emerging patterns of interaction across them. JEL: G21 L10 L23 O31 Date: 2005-06-10 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpdc:0506004&r=all 527. The effect on retail charges of mergers in the GB electricity market Evens SALIES (GRJM) The opening of the residential UK electricity sector in 1999 motivated several studies of its impact on both the level and structure of retail charges, and on incumbents’ market power. Using regional observations on tariffs offered in January 2004, the present paper supports previous results about the responses of simulated retail charges from actual tariffs to distribution and transmission costs, customers density, the length of low voltage underground circuit, and show new. We investigate whether vertically integrated suppliers have a particular effect on charges ceteris paribus the effect of cost drivers and other suppliers’ specific factors. Keywords: Pricing structure, Industrial Organization, Electricity Retail JEL: C1 C2 C3 C4 C5 C8 Date: 2005-06-02 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpem:0506001&r=all 528. THE PRICE-DIVIDEND RELATIONSHIP IN INFLATIONARY AND DEFLATIONARY REGIMES Jakob Madsen (Copenhagen) Costas Milas (Keele University) This paper argues that the linear price-dividend relationship as predicted in the Gordon model breaks down in regimes of high inflation and deflation. Using data for the US and the UK over the period from 1871 to 2002, nonlinear estimates support the prediction of the model. Keywords: Regime-switching, nonlinearity, price-dividend relationship, inflation and deflation. JEL: G12 E44 Date: 2005-06-06 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpem:0506002&r=all 529. Adaptive Estimation of the Regression Discontinuity Model Yixiao Sun (University of California, San Diego) In order to reduce the finite sample bias and improve the rate of convergence, local polynomial estimators have been introduced into the econometric literature to estimate the regression discontinuity model. In this paper, we show that, when the degree of smoothness is known, the local polynomial estimator achieves the optimal rate of convergence within the Holder smoothness class. However, when the degree of smoothness is not known, the local polynomial estimator may actually inflate the finite sample bias and reduce the rate of convergence. We propose an adaptive version of the local polynomial estimator which selects both the bandwidth and the polynomial order adaptively and show that the adaptive estimator achieves the optimal rate of convergence up to a logarithm factor without knowing the degree of smoothness. Simulation results show that the finite sample performance of the locally cross-validated adaptive estimator is robust to the parameter combinations and data generating processes, reflecting the adaptive nature of the estimator. The root mean squared error of the adaptive estimator compares favorably to local polynomial estimators in the Monte Carlo experiments. Keywords: Adaptive estimator, local cross validation, local polynomial, minimax rate, optimal bandwidth, optimal smoothness parameter JEL: C1 C2 C3 C4 C5 C8 Date: 2005-06-07 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpem:0506003&r=all 530. Another Look At What To Do With Time-Series Cross-Section Data Xiujian Chen (University of Oklahoma) Shu Lin (University of Oklahoma) W. Robert Reed (University of Oklahoma) Our study revisits Beck and Katz’ (1995) comparison of the Parks and PCSE estimators using time-series, cross-sectional data TSCS). Our innovation is that we construct simulated statistical environments that are designed to closely match “real-world,” TSCS data. We pattern our statistical environments after income and tax data on U.S. states from 1960-1999. While PCSE generally does a better job than Parks in estimating standard errors, it too can be unreliable, sometimes producing standard errors that are substantially off the mark. Further, we find that the benefits of PCSE can come at a substantial cost in estimator efficiency. Based on our study, we would give the following advice to researchers using TSCS data: Given a choice between Parks and PCSE, we recommend that researchers use PCSE for hypothesis testing, and Parks if their primary interest is accurate coefficient estimates. Keywords: Panel Data, Panel Corrected Standard Errors, Monte Carlo analysis JEL: C1 C2 C3 C4 C5 C8 Date: 2005-06-08 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpem:0506004&r=all 531. LES REGROUPEMENTS MUNICIPAUX AU QUEBEC ET LEUR INCIDENCE SUR LA MASSE SALARIALE DES MUNICIPALITES : 1992-2000 Gino Santarossa (Ministere Affaires municipales et Region) Marie-Eve Brouard (Ministere Affaires municipales et Region) This study estimates the impact of the municipal groupings between 1992 and 2000 upon municipalities's wage bill in Quebec. Our identification strategy is based on a wage bill reduced form model and the specification of the grouping participation process. The three following methods are used in order to estimate the impact and validate the robustness of the results : fixed effect model, difference in differences estimator with matching on the propensity score and Heckman's treatment parameters estimation method based on sample selection model. The first two estimators were used in a recent study concerning the effects of the groupings upon the fiscal burden and the monetary value of residential properties. Only the smallest municipalities (cantons and parishes) regrouped between 1998 and 2000 had their wage bill increased by 25,0% to 33,0%. Before 1998, the groupings had no incidence on the wage bill of these municipalities and can have reduced that of the cities and the villages. An additional analysis indicates that impacts were significantly important in certain subgroups of regrouped municipalities. About quarter of municipalities regrouped between 1992 and 2000 benefited from a 17,4% average reduction of their wage bill. On the other hand, a 21,0% increase has been observed for an identical proportion of municipalities. Resume Cette etude vise a estimer l'impact des regroupements municipaux survenus entre 1992 et 2000 sur la masse salariale des municipalites au Quebec. Nous appuyons notre demarche empirique sur un modele economique general de determination de la masse salariale et du processus de participation a un regroupement. L'approche methodologique exploite les modeles a effet fixe, l’estimateur difference de differences par la methode d’appariement sur les scores de propension et la methode d'Heckman en coupe transversale. Les deux premiers estimateurs ont ete utilises dans une etude recente qui evaluait les effets des regroupements sur le fardeau fiscal et la valeur marchande des proprietes residentielles. Seuls les cantons, les paroisses ainsi que les municipalites sans designation regroupes entre 1998 et 2000 ont ete touches par des hausses approximatives de 25,0 % a 33, 0% de leur masse salariale par habitant. Avant 1998, les regroupements ont ete sans incidence sur la masse salariale de ces municipalites et peuvent avoir reduit celle des villes et des villages. Une analyse complementaire indique que les impacts ont ete significativement importants dans certains sous-groupes de municipalites regroupees. Environ le quart des municipalites regroupees entre 1992 et 2000 ont beneficie d'une reduction moyenne de 17,4 % de leur masse salariale par habitant. En revanche, une proportion identique a connu des augmentations de 21,0 %. Keywords: evaluation grouping cities treatment effect difference- in- differences heckman propensity score matching cities wage bill JEL: C1 C2 C3 C4 C5 C8 Date: 2005-06-09 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpem:0506005&r=all 532. Trust, communication and equlibrium behaviour in public goods Alexis Belianin (International College of Economics & Finance ICEF , . Higher School of Economics) Marco Novarese (Centre for Cognitive Economics - Universita del Piemonte Orientale) This paper reports a novel cross-cultural public goods game experiment played in real time through Internet. Web-based software was used to compare the contributions to public good of different groups of participants: mixed, consisting of both Italians (students in law and economics) and Russians (students in economics), as well as all-Italian and all-Russian groups. This setup allows for testing for a number of effects, including participants’ awareness of the group composition in terms of nationality and gender of group members; possibility of coordination of one’s strategy during a cheap talk session organized before some of the games was used as an additional control. Our results show that the degree of cooperation is rather high, but does not vary significantly with nationalities of the group members, while communication tends to enhance contributions to public goods. A notable difference between the subjects representing the two nations is an overly strong and increasing cooperativeness of the Russian female participants in contrast to that of the Russian men, as well as the Italians. Keywords: PUBLIC GOODS GAME, CROSS-CULTURAL EXPERIMENT, COOPERATION JEL: C9 Date: 2005-06-01 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpex:0506001&r=all 533. The Impacts of Exercise: An inquiry into the Impact of Exercise on an Individual, Work Performance and Company Profits Erik Arebro (Stockholm School of Economics) Neesh Chand (Stockholm School of Economics) Pia-Maria Molin (Stockholm School of Economics) Supreena Narayanan (Stockholm School of Economics) Anne O’Higgins (Stockholm School of Economics) In the past few decades increasing attention has been devoted to physical exercise. Experts commend exercise for reducing stress levels, lowering blood pressure and increasing general feelings of well-being. In a society increasingly complex and work- oriented, many turn to exercise as a form of release. But is exercise always beneficial? Are there some cases where this increased focus can potentially harm the individual, company and the society at large? This paper investigates how physical exercise impacts the individual, one’s work performance, companies and societies as a whole. While the conventional thought is that it is beneficial in all respects, we apply a possible social constructionist view challenging some of these societal norms. The paper is organized as follows: The first section examines how exercise – holistic and physical – benefits the human body and mind. From there we take a closer look at how these benefits transfer to individual work performance. The impact of this is then discussed on an aggregate, company-wide level. We then present a picture of a future society in which the government plays an active role in encouraging citizens’ fitness. JEL: C9 Date: 2005-06-07 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpex:0506002&r=all 534. Equilibrium PLay and Best Response to (Stated) Beliefs in Constant Sum Games Pedro Rey Biel (University College London) In a laboratory experiment, subjects played ten two-person 3x3 constant sum games and stated beliefs about the frequencies of play by their opponents. Contrary to previous experimental evidence, game-theoretical predictions work well: 80% of actions coincided with Nash equilibrium, subjects were good at predicting the action which was played with highest frequency and 73% of actions taken were best responses to stated beliefs. Complexity, measured by the necessary number of rounds of iterated deletion of dominated strategies to reach the equilibrium, did not affect behavior, although whether games were dominance solvable had an effect. We discuss possible reasons why results differ when the games and the experimental procedures are changed. Keywords: Experiments, Constant Sum Games, Belielfs JEL: C72 C91 D81 Date: 2005-06-08 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpex:0506003&r=all 535. Equilibrium Play and Best Response in Sequential Constant Sum Games Pedro Rey Biel (University College London) We perform a further experiment to check the robustness of the main result in Rey Biel (2005) to sequential play. We find that Equilibrium predictions work even better when the same games are played sequentially: 85% of first movers choose the Equilibrium strategy and 85% of second movers best respond to the action taken by first movers. We conclude by identifying constant sum games as a class of games where experimental subjects' choices coincide with theory predictions and we argue that in such games distributional and reciprocal preferences do not influence subjects' decisions. Keywords: Experiments, Constant Sum Games, Best Response JEL: C72 C91 D81 Date: 2005-06-08 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpex:0506004&r=all 536. Quel prix pour les options UMTS? Une approche par les options reelles. Veronique Bessiere (CREGO - Universite Montpellier 2) Michael Kaestner (GESEM - Universite Montpellier 1) Cet article presente une methodologie d’evaluation des licences UMTS en utilisant un modele d’options reelles. L’acquisition d’une licence est percue comme donnant droit a entreprendre les investissements d’infrastructure du reseau, que la firme peut differer dans le temps. La valeur de la licence correspond alors a l’option d’investissement. Les investissements sont supposes realises en une fois, et les cash-flows futurs qui en resultent sont incertains. L’incertitude sur les cash- flows peut inciter la firme a attendre avant de realiser l’investissement, meme si la VAN esperee est positive. Nous determinons la valeur de la licence UMTS et specifions le seuil de cash-flows pour lequel la VAN devient egale a la valeur de l’option et auquel il devient optimal de realiser l’investissement. Nous discutons l’impact des differents parametres (volatilite et taux de croissance des cash-flows, cout de l’investissement, …) sur la decision d’investissement. Abstract: This article describes a methodology for evaluating UMTS licenses using a real options approach. The acquisition of the license is viewed as the right to undertake the infrastructure investments that the firm can defer. The value of this license equals the value of the investment opportunity. The investment is assumed to be instantaneous and the cash flows associated with the investment are uncertain. This uncertainty of future cash flows might make it attractive to wait before investing even if the expected NPV is positive. The solution specifies the cash flow threshold, where NPV equals the option value and when it the investment should be undertaken. We simulate the impact of different variables (volatility, expected growth rate of cash flows, investment cost, ...) on the investment rule. Keywords: UMTS, real options, simulation JEL: G Date: 2005-06-01 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0506001&r=all 537. Biais cognitifs, asymetrie d’information et formation des prix Michael Kaestner (GESEM, Center for Research in Finance, Montpellier University, France) L'objectif de la Finance comportementale est de proposer une alternative theorique a la Theorie des Marches Efficients, en introduisant des hypotheses moins restrictives quant a la rationalite des individus. La comprehension de la formation des prix sur les marches financiers lorsqu'une partie des investisseurs est susceptible de subir des biais cognitifs constitue une des voies de recherche principales. Nous proposons une extension du modele de Grossman (1980) en integrant des investisseurs qui revisent leurs croyance de maniere erronee, en se basant sur (1) une information a priori erronee et/ou (2) une sur- ou sous-estimation de la qualite de leur signal prive. Nous montrons l'impact de ces erreurs cognitives sur le degre d'efficience du systeme de prix et montrons que les biais individuels sont partiellement transmis aux agents non-informes, qui tentent d'inferer l'information privee. Abstract: Behavioral Finance aims to propose a theoretical alternative to EMH (Efficient Market Hypothesis), allowing for not fully rational behavior. Understanding price formation when some agents are victim of cognitive biases is one of the most important research fields. \hspace{0.6cm}We propose an extension of Grossman (1980)'s framework by integrating investors, who do not update their beliefs fully rationaly, using (1)incorrect priors and/or failing to assess correctly the quality of their private signal. We evaluate the impact of the considered bias on the efficiency of the price system and show that individual biases are partially transmitted to uninformed agents, who try to infer the private signal. Keywords: behavioral finance, bias, price formation JEL: G Date: 2005-06-01 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0506002&r=all 538. Bailout Policy against Financial Intermediation Failures Dmitri Vinogradov (Alfred Weber Institute, Heidelberg University, Germany) Asymmetry in views of depositors and bankers can generate failures of financial intermediation in linking creditors and borrowers, and/or result in excessively high interest rates. Instead of considering asymmetry in assessment of the banks' solvency, this paper focuses on asymmetry in views as to whether an insolvent bank will be liquidated or let to continue. Bailout policy has two effects in this respect: first, an insurance effect, which lowers market interest rates, and secondly, an announcement effect, which rules the asymmetry in beliefs out. The paper was presented at the 21st Symposium on Banking and Monetary Economics, Nice, 2004 Keywords: financial intermediation, limited liability, bailout policy JEL: D0 Date: 2005-06-07 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0506003&r=all 539. Banks versus Markets in Processing the Payments Shock Dmitri Vinogradov (Alfred Weber Institute, Heidelberg University, Germany) The paper focuses on a comparison of bank-based andmarket-based …nancial systems with respect to their ability to smooth the negative consequences of a macroeconomic shock. The model describes a two-market OLG economy with two types of agents ( workers and entrepreneurs) and a financial system represented through either banks or a direct market. The dynamic setting allows for a comparison regarding the speed of economic recovery after the shock. The principal finding is that the market-based system provides better arrangements to speed up the recovery, but concentrates the burden of the shock in one period. In contrast, the bank-based system allows for both quick recovery and postponing and smoothing the negative consequences of the shock over several periods, if proper regulation and interventions are used, otherwise the banking system can collapse. As an example of regulatory interventions, liquidity provisions and a deposit rate ceiling are considered. This allows to give some light on the di¤erence between the roles the Deposit Insurer and the Regulator (LOLR) can play in the evolution of events. In particular, deposit insurance alone can not provide an intertemporal shock smoothing and requires additional regulatory interventions. The Paper is presented at the 22nd Symposium on Banking and Monetary Economics held in June 2005 in Strasbourg Keywords: Financial intermediation, Bank-based system, Market- based system, Regulation, Lelnder of Last Resort, Deposit Insurance JEL: D50 G21 G28 E44 E53 O16 Date: 2005-06-07 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0506004&r=all 540. The Role of Accounting Conservatism in a well-functioning Corporate Governance System Maria Sward (Stockholm School of Economics) Niklas Rosencratz (Stockholm School of Economics) Supreena Narayanan (Stockholm School of Economics) This paper analyses accounting related to corporate governance and is organized as follows. The first section deals with understanding the concept of accounting conservatism. In the second section we analyzed the Relevance of Accounting Conservatism in Corporate Governance to the modern corporate world. The third section includes a Case Study on Ericsson, a Swedish Telecommunications company and conservatism in strong governance firms versus weak governance firms. The fourth part is devoted to the conclusion of our research efforts. From this study, we conclude that there are several reasons to use accounting conservatism in corporate governance and that current empirical evidence indicates that conservatism has increased in the last decades. The value of ?O3 in Table 1 indicates that there is a positive significant level of conservatism in accounting practices followed by Ericsson. When the dependent variable is earnings (X), the asymmetric timeliness of earnings coefficient ?]3 in Table 2 provides an estimate of the level of conservatism. We observe that strong governance firms are more conservative than weak governance firms (0.13 versus 0.04). We expect and hypothesize that strong governance structures will tend to favour accounting conservatism more than weak governance structures. However, excessive dependencies on old structures show poor growth that has been since the oil crisis. JEL: G Date: 2005-06-07 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0506005&r=all 541. The Impact of the Suspension of Opening and Closing Call Silvio John Camilleri (Banking & Finance Dept., FEMA, University of Malta) Christopher J. Green (Economics Dept., Loughborough University) The paper analyses the impact of the suspension of opening and closing call auctions by the National Stock Exchange of India in 1999. We compare volatility, efficiency and liquidity (VEL) of securities before and after suspension, and estimate the value of the auctions using an event study. Following suspension, VEL improved and the CARs were significant but not uniformly positive or negative. We also find that less liquid stocks traded less in the auctions than other securities, especially at the opening, and they experienced the most gains following suspension. This is consistent with there being liquidity externalities associated with auctions, a point previous noted for industrial countries. We conclude that opening and closing call auctions may not necessarily improve share trading in a less liquid emerging market. Keywords: Call Auctions, stock markets, National Stock Exchange of India JEL: G12 G14 G18 Date: 2005-06-07 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0506006&r=all 542. IMPACT OF MERGERS AND AMALGAMATION ON THE PERFORMANCE OF INDIAN COMPANIES Mahesh Kumar Tambi (IIMT, Hyderabad India) This paper is an attempt to evaluate the impact of Mergers on the performance of the companies. Theoretically it is assumed that Mergers improves the performance of the company due to increased market power, Synergy impact and various other qualitative and quantitative factors. Although the various studies done in the past showed totally opposite results. These studies were done mostly in the US and other European countries. I evaluate the impact of Mergers on Indian companies through a database of 40 Companies selected from CMIE’s PROWESS, using paired t- test for mean difference for four parameters; Total performance improvement, Economies of scale, Operating Synergy and Financial Synergy. My study shows that Indian companies are no different than the companies in other part of the world and mergers were failed to contribute positively in the performance improvement. Keywords: Mergers, Amalgamation, Acquisition, Horizontal Mergers, Vertical Mergers, Backward Integration, Foreword Integration, Circular Mergers, Conglomerate Mergers, Congeneric Mergers, JEL: G Date: 2005-06-08 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0506007&r=all 543. Una descripcion general del crecimiento economico en el Africa Subsahariana Juan Carlos Perez Mesa (Universidad de Almeria) Jaime de Pablo Valenciano (Universidad de Almeria) Este articulo trata de servir de introduccion a la situacion de los paises del area sub-sahariana que se caracterizan por tener el menor crecimiento economico y la mas baja productividad mundial. En este contexto se analizan cuales son las principales causas del atraso y se esbozan las soluciones mas urgentes, que pasan, entre otras, por: i) el aumento de la inversion extranjera que sera posible siempre que se mejoren las garantias de funcionamiento de las instituciones; y ii) el aumento del comercio intra-regional. Tambien se realiza un analisis de correlacion entre nivel general economico, desarrollo humano y pobreza Keywords: pobreza, crecimiento, comercio, cluster. JEL: C6 D5 D9 Date: 2005-06-06 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpge:0506001&r=all 544. Openness and Growth in Central-Eastern European Countries Rosa Capolupo (Dipartimento di Scienze Economiche) Giuseppe Celi (Dipartimento di Scienze Economiche) We present evidence of the relationship between trade-openness and growth in the sample of former communist countries before and after the transition from a central planned economy (CPE) to a market economy by applying standard OLS and panel estimation techniques. The main finding is that during the transition the importance of openness on growth per capita has increased sharply by changing the coefficient from a negative sign to a positive and significant one. The result seems to be robust to (i) estimation methods , (ii) different measures of openness adopted and (iii)consistent with the integration view, which states that a higher degree of trade openness spurred by market incentives and comparative advantages enhances the per capita growth rate of economies. Keywords: economic growth, transition economies, trade openness JEL: O47 O42 G30 Date: 2005-06-06 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpge:0506002&r=all 545. THE NEW GROWTH THEORIES AND THEIR EMPIRICS, Discussion Paper in Economics, University of Glasgow, N. 2005-04 (http: //www.gla.ac.uk/Acad/Economics Rosa Capolupo (Dipartimento di Scienze Economiche) The aim of this paper is to update the reviews on endogenous growth theories in order to explore whether recent empirical studies are more supportive of their main predictions. Among the core topics studied in the growth econometric framework, namely, convergence, identifications of growth determinants and factors responsible of growth differences in the data, the primary focus of this paper is on the last two. Since the use of econometrics was originally motivated by convergence issues, in this work we will review econometric studies that test primarily the relevance of endogenous models in terms of significance and robustness of growth’s determinant coefficients. We argue that: (i) causal inference drawn from the empirical growth literature remains highly questionable, ii) there are estimates for a wide range of potential factors but their magnitude and robustness are still under debate. Overall, however, if properly interpreted, endogenous growth models' predictions are increasingly gaining empirical support. Keywords: endogenous growth, growth regressions, convergence JEL: O47 O41 C31 Date: 2005-06-06 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpge:0506003&r=all 546. UTILITY COMPLEX Gopinath VadirajaRao Bangalore (No affiliation) The branch of science (or Economics) that deals with nature, properties, laws and classification of wealth is yet to be named. This branch of science is a mirror image of chemistry. The utility ( I call utility as all that a human being needs) is similar to water. The utility complex of every economic entity, be it an individual or a family or a society or state or nation consists of two components- A) WANTS that consist of goods and services and B)MEANS that consist of money and money related forms of wealth. Every economic entity tries to attain equilibrium between wants and means. If wants are more than means, due to application of Law of Conservation, costlier wants are replaced by cheaper wants or some wants are transfered from Current Wants category to furure Wants category. Wants and Means are forms of wealth and hence cannot be created or destroyed but can be changed to other forms. This leads us to classification of wealth. Keywords: Law of Conservation, Wants and Means JEL: A Date: 2005-06-03 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpgt:0506001&r=all 547. An Overview of Strategy Development Models and the Ward- Rivani Model David Ward (European School of Economics) Elena Rivani (European School of Economics) Numerous models for developing strategy, defining and aligning competitive advantage have been proposed over the years (and even centuries if we consider Arian, Sun Tzu etc.) including probably the most famous of all, the 5 forces model by Porter (P5F). With publications in the field of strategy now in the thousands it is difficult to get an overall picture of how to classify and appreciate strategy tools and models. Mintzberg et al. have developed schools of thought to help alleviate and categorise this problem but this approach lacks a comparison of the models found in industry e.g. BCG, 7S McKinsey, ANSOFF etc. Consequently at academic level (but not only) we see models like P5F, etc. predominate while tools like SWOT, PEST, ARC etc. populate the consultancy arena and operative levels of the organisation. The purpose of this paper is therefore to provide an overview and comparison of selected models used in the development of business strategy along side a brief discussion of schools of strategic thought. Judging by the bibliography searched and, perhaps, the major appeal of this paper, is that a selection of common strategy development models and tools are compared systematically for the first time in one single paper. In fact it was found that models, at least in Italy, are rarely compared and if they are, it is on a one-to-one basis. The intent is to at least start to bridge and compare models and show how new models can be realised. The paper closes with the proposal of a new model, the Ward- Rivani model, which does not claim to be the most universal rather a complementary and perhaps useful platform for future work on strategy. Keywords: Strategy, Models, Porter, Ward-Rivani model JEL: A Date: 2005-06-03 Date: 2005-06-07 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpgt:0506002&r=all 548. What might the Soviet Union learn from the OECD countries in economics and politics ? An article from 1991 with some comments from 2005 Thomas Cool (1991) Jan Tinbergen (1991) Thomas Colignatus (Thomas Cool Consultancy & Econometrics, 2005) When cleaning up my archives I came across a short article of April 1991 co-authored with Jan Tinbergen, on what the Soviet Union might learn from OECD countries in economics and politics. The article apparently never got published, partly since the Soviet Union collapsed in December 1991. Jan Tinbergen died in 1994. Reading the article again in 2005 shows that some arguments still have value. In 2005, an advice, purely my own now, would be that Russia and the other republics of the former Soviet Union apply for membership of the European Union. JEL: A00 Date: 2005-06-05 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpgt:0506003&r=all 549. Theory of Economics in natural societies Krishna Gopal Misra (QUALITYMETER.COM) Conventional economics is unfortunately not wholistic. 'A whole is greater than sum of the parts'. Natural societies are charactistically whole and without duality ('you and me' approach) For example, river, ponds, jungle are whole, none claim to be owners and yet it belongs to every body. Wholistic living is about respecting natural resources without claiming rights. This is wholism. When people have separate wash rooms in stead of the rivers, and have a mechanism to pay for water, this is not wholism but caused by cruel division of the whole that gave rise to a need of private ownership. The dividing a whole reduces it to parts, and causes shortages. Shortages coupled with ownership problem require a body of knowlege to deal with peaceful distribution of a divided whole, and this mechanism of problem solving is 'economics'. The conventional economics based on demand supply is not so far attempted to bring pack parts into whole, but only the peace making in distribution. Keywords: natural economics JEL: A Date: 2005-06-10 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpgt:0506004&r=all 550. Money (Real and Fictitious)Game, Banking and Taxation Krishna Gopal Misra (QUALITYMETER.COM) 'Reality of money' is curiously similar to uncertainty theory of Hisenburg)quantum physics. To some (natural societies), legitimatimacy of exchange control is derived by associating it with certain physical signifiance of 'real' goods. Exchange control is thus decided by producers in commodity exchanges. Others (Republicans of Greek civilization) think, money can be only a symbolic or fictitious unit, and any physical significance attached to it will undermine sanctity (in respect to space and time) of money used as unit for measurement of the prices. Under these circumstanes, exchange control is monopoly of republics and debt engine produces competition and enterprises in people. There are two worlds. Performance of markets (Republics vrs Natural Societies) are going to test which of the prespective and understanding are true and for how long. This article discusses the valuation of prices, unit price or measuring unit for prices, ligitimacy of exchange control in markets, invention of commodity exchanges using 'real' money, invention of 'fictitious' money, banking, state monpoly of exchange control and mathematical legitimacy of interests and taxation. Keywords: money, price, economics, state, production JEL: A Date: 2005-06-10 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpgt:0506005&r=all 551. The Effect of Welfare on Work and Marriage: A View From the States Mickey Hepner (University of Central Oklahoma) W. Robert Reed (University of Oklahoma) This study provides a comprehensive examination of the work and family structure incentives of public assistance, focusing on the consequences of state-determined programs. Such an approach allows state policy- makers to understand the tradeoffs implicit in their current program parameters. It allows them to better identify alternative arrangements that may be more consistent with policy goals. And it discovers linkages between work and family structure incentives that may be otherwise difficult to discern. We follow the previous literature in working through a small set of common scenarios meant to represent typical experiences of public assistance recipients. However, accompanying this study is an EXCEL spreadsheet program that allows interested readers to extend the analysis for the complete set of program participation/family characteristics permutations. The spreadsheet has a user-friendly interface and may be downloaded from the internet. JEL: I38 J22 J12 Date: 2005-06-08 URL: http://d.repec.org/n?u=RePEc:wpa:wuwphe:0506001&r=all 552. The Brazilian Currency Turmoil of 2002: A Nonlinear Analysis Manuela Goretti (University of Warwick) This paper investigates the main sources of instability in Brazil during the currency and financial distress episode of 2002. We test for financial contagion from the Argentine crisis and the impact of factors including IMF intervention and political uncertainty in raising the probability of crisis. The empirical investigation employs a Markov switching model with endogenous transition probabilities. Keywords: Brazil; contagion; financial crises; IMF intervention; Markov switching model; political uncertainty. JEL: C11 C22 F32 F34 F42 Date: 2005-06-04 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpif:0506001&r=all 553. Hellenic Export Prices and European Monetary Integration, 1970- 1995. Theodoros Stamatopoulos (T.E.I. of Crete, University of Piraeus, Greece, & C.E.F.I./Mediterranean University of Aix- Marseille II, France.) We aim to explain the variability of the Hellenic Export Index Unit Value, during the period 1970-1995. The Hellenic index of unit labour cost, an effective index of unit value of European competitors’ exports and the effective exchange rate of the Greek Drachma (GRD) are used as explanatory variables, suggested by the literature and much more by the consequences of the Hellenic accession into the EEC. We found evidence with regards to the sample’s split in the accession’s year 1981 and the equilibrium relationship between Hellenic export prices and exchange rate of GRD during the second sub-period. In addition, in spite of the small size of the Hellenic economy we detected the Greek exporters’ discreet pricing policy, for the first sub- period, this was possible due to the diversification of their destination markets and for the second, the sliding rate policy of the Bank of Greece. The latter policy combined with the European competitors’ pricing policy re-established their margins, with at the most a year lag, whenever the Hellenic labour cost was increased. Keywords: Decomposition Approach; Export Prices Equations; Discreet Pricing Policy; Inconsistent triad; European Monetary Integration; Integration and Co-integration Analysis JEL: F3 F4 Date: 2005-06-05 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpif:0506002&r=all 554. Global Monetary Conditions versus Country-Specific Factors in the Determination of Emerging Market Debt Spreads Mansoor Dailami (World Bank) Paul Masson (Rotman School of Management, University of Toronto) Jean Jose Padou (University of Toronto) We offer evidence in this paper that US interest rate policy has an important influence in the determination of credit spreads on emerging market bonds over US benchmark treasuries, and therefore on their cost of capital. Our analysis improves upon the existing literature and understanding, by addressing the dynamics of market expectations in shaping views on interest rate and monetary policy changes, and by recognizing non-linearities in the link between US interest rates and emerging market bond spreads, as the level of interest rates affects the market's perceived probability of default and the solvency of emerging market borrowers. For a country with a moderate level of debt, repayment prospects would remain good in the face of an increase in US interest rates, so there would be little increase in spreads. A country close to the borderline of solvency would face a steeper increase in the spreads. Simulations of a 200 basis points (bps) increase in US short-term interest rates (ignoring any change in the US 10 year Treasury rate) show an increase in emerging market spreads ranging from 6 bps to 65 bps, depending on debt/GDP ratios. Keywords: emerging market spreads, currency crises, global monetary conditions JEL: F3 F4 Date: 2005-06-06 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpif:0506003&r=all 555. A test of Integration between Emerging and Developed Nation’s Stock Markets Mahesh Kumar Tambi (IIMT, Hyderabad- India) This paper makes an attempt to examine the financial integration between emerging countries and developed countries. Stock market data for six countries USA, CANADA, UK, India, Malaysia and Singapore have been used for the purpose of the study. Cointegration was tested on the basis of various alternative techniques. Results contradict existing literatures and suggest that although developments at international level significantly influence national stock markets, but they are driven mainly by the developments at domestic level. Study also indicates that world equity market is segmented; where developed nations and emerging markets have made separate grouping. In case of India we find that it is positively correlated with all the markets, but this relationship is not highly positive. Keywords: Financial markets Integration, Johansen test, VAR-ECM, Engle- Granger Two stage method, Developed nations, Developing Nations. JEL: F3 F4 Date: 2005-06-08 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpif:0506004&r=all 556. FORECASTING EXCHANGE RATE :A Uni-variate out of sample Approach Mahesh Kumar Tambi (IIMT, Hyderabad-India) In this paper we tried to build univariate model to forecast exchange rate of Indian Rupee in terms of different currencies like SDR, USD, GBP, Euro and JPY. Paper uses Box-Jenkins Methodology of building ARIMA model. Sample data for the paper was taken from March 1992 to June 2004, out of which data till December 2002 were used to build the model while remaining data points were used to do out of sample forecasting and check the forecasting ability of the model. All the data were collected from Indiastat database. Result of the paper shows that ARIMA models provides a better forecasting of exchange rates than simple auto- regressive models or moving average models. We were able to build model for all the currencies, except USD, which shows the relative efficiency of the USD currency market. Keywords: Exchange rate forecasting, univariate analysis, ARIMA, Box- Jenkins methodology, out of sample approach JEL: F3 F4 Date: 2005-06-08 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpif:0506005&r=all 557. ENTREPRENEURS' ATTITUDES, STRATEGY CHOICES, AND FIRM PERFORMANCE Phillip H. Phan (Rensselaer Polytechnic Institute) John E. Butler (Hong Kong Polytechnic University) This paper focuses on how attitudes affect entrepreneur’s strategy selection at the organizational level. It also attempts to discover if contingencies exist in this relationship that may account for differences in firm performance. The model developed, based on the existing literature, is tested using a sample of 60 wineries, still operated by their founding entrepreneurs. The results indicate that entrepreneurs used different approaches to impart their values and beliefs to their firms. While we show that this affects the eventual strategy choice, the data indicates that firms can be equally profitable with multiple sets of attitude and strategy combinations. Keywords: entrepreneurial strategy, beliefs, attitudes, firm performance, emergent strategy, deliberate strategy JEL: D21 L21 M13 Date: 2005-06-04 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpio:0506001&r=all 558. Corporate Governance and Management Succession in Family Businesses Phillip Phan (Rensselaer Polytechnic Institute) John E. Butler (Hong Kong Polytechnic University) Soo Hoon Lee (Old Dominion University) Family businesses carry the weight of economic wealth creation in most economies. In the U.S. alone, family businesses account for 80 to 90 percent of the 18-million business enterprises in the United States, and 50 percent of the employment and GNP. In many ways, the family business is synonymous with the entrepreneurial organization as many were started as a means to provide for the financial well being of the founder's family. Founders who went on to build family empires started many of today's large corporations (e.g., Anheuser-Busch, Dupont, and Seagrams). Still, we know relatively little about the issues peculiar to a family business, such as the process and impact of succession planning. Yet, no recurring event in the life of the family firm is more critical to survival than the transfer of power from the incumbent to the successor. Organizations are especially susceptible to loss of vision and purpose during periods of CEO transition, as the leaders who helped shape the vision are replaced by others who may not share the same values and abilities. This study addresses the importance of understanding business succession planning by proposing and empirically verifying a model of succession planning and firm effectiveness in the family business. It links aspects of succession planning and successor preparation to the effectiveness of transition and from performance. The model depicts multiple interactive relationships, with emphasis placed not only on the planning and process-specific but also on successor-specific factors that lead to effectiveness. Keywords: corporate governance, family businesses, management succession, firm performance, successor characteristics JEL: G34 L21 L23 M12 M13 Date: 2005-06-04 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpio:0506002&r=all 559. Reformas Regulatorias e Reestruturacao no Setor Eletrico Bruno Jose Marques Pinto (Graduate School of Economics at Fundacao Getulio Vargas - EPGE/FGV) The paper examines the economic and regulatory factors that led to an explosion in the wholesale power prices, supply shortages, and utility insolvencies in California’s electricity sector. A necessary first step in determining the lessons learned from the California electricity crisis is a diagnosis of its causes. This requires a clear understanding of the federal and state regulatory infrastructure that governs the US electricity supply industry. The structure of California’s restructured electricity sector and its performance are discussed. The effects on wholesale market prices are analyzed. The regulatory responses leading to utility credit problems and supply shortages are also discussed. The paper concludes with a set of lessons from the California electricity crisis. Keywords: Electricity, eletricidade, regulation, regulacao, California, deregulation JEL: L9 L5 L1 Date: 2005-06-07 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpio:0506003&r=all 560. The Impact of an Old Fleet on the Demand for Air Transportation: The Case of VASP Brazilian Airlines Bruno Jose Marques Pinto (Graduate School of Economics at Fundacao Getulio Vargas - EPGE/FGV) In 05/25/1982, the VASP aircraft broke in two after a hard landing killing 2 people. The pilot's misuse of rain repellant, caused an optical illusion leading to the hard landing. Since that day, VASP started to have constant problems. A brief history about VASP is discussed. After so many problems, VASP lost its market share and became the 4th airline of Brazil, VASP used to be second place. With financial problems, VASP could not buy new airplanes and its fleet was from the 70-80s. This paper aims to study if an old fleet could affect the demand for air transportation. Keywords: Air Transportation, Airline, Demand, VASP, GOL, Brazil JEL: L93 Date: 2005-06-09 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpio:0506005&r=all 561. Changing boundaries and structure of a technological system: lessons from UK retail banking Davide Consoli (Centre for Research on Innovation & Competition CRIC - University of Manchester) This article investigates the factors that have induced and shaped the process of industry evolution of banking in the United Kingdom and, in particular, the reorganization of the retail payments system. It will look at how the effects of technical progress within a changing regulatory framework have contributed to the flourishing of new consumer services, of increasingly specialized technologies and of new models of business organization. In relation to these issues, the paper develops an interpretative framework based on the rapidly expanding body of literature on technological systems. In so doing it argues also that the organization of the payment system has evolved towards a multilayered and increasingly heterogeneous industry in which competition has been fuelled at different levels by the growing diversity of the ecology of agents involved, as well as by the emerging patterns of interaction across them. JEL: G21 L10 L23 O31 Date: 2005-06-10 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpio:0506006&r=all 562. Who supports Free Trade in Latin America? Eugene Beauliue (Univeristy of Calgary & International Trade Canada) Ravi Yatawara (University of Delaware) Wei Guo Wang (University of Calgary) This paper examines individual trade policy preferences across the 17 countries in Latin America. The focus is on whether skilled or unskilled workers are more likely to support liberalized trade and on whether country characteristics, such as factor endowments, alter the preferences of skilled and unskilled workers. Based on the standard Heckscher-Ohlin model and the Stolper-Samuelson theorem, wage inequality in developing countries will decrease under free trade and unskilled workers will benefit. We find that on average skilled workers are more likely than unskilled workers to support free trade in Latin American countries. Separate country regressions reveal that this pattern is only statistically significant in 8 out of 17 Latin American countries. However, there are no countries in our sample in which unskilled workers are statistically more likely to support free trade than skilled workers. Not even in the lowest skill endowed country among our 17 Latin American countries. We also find that people from Latin American countries with higher GDP, faster growth, more cropland, and a longer period of time since reform were more likely on average to support free trade. Keywords: Trade policy; Latin America; Stolper-Samuelson theorem JEL: F1 F2 Date: 2005-06-04 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpit:0506002&r=all 563. An Error Correction Analysis of U.S.-Mexico Trade Flows Thomas M Fullerton Jr (University of Texas at El Paso) Richard L Sprinkle (University of Texas at El Paso) Estimation of bilateral trade elasticities is less well documented than is the case for aggregate trade flows. This study estimates bilateral trade equations for Mexico and the United States. The empirical analysis is carried out using an error correction approach that allows imports and exports to adjust over time to changes in the independent variables that affect the demands for them. Results obtained indicate that imports and exports between the two neighbors react heterogeneously to variations in domestic prices, foreign prices, and currency values. Lag structures between the two trade equations also differ from each other. Keywords: Bilateral Trade Flows, Error Correction Analysis, Mexico JEL: F14 Date: 2005-06-07 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpit:0506003&r=all 564. Economic Implications of an Ageing Australia Productivity Commission The commissioned study into the ageing of Australia’s population was released April 2005. The Commission found that one quarter of Australians will be aged 65 years or more by 2044-45, roughly double the present proportion. This gives rise to significant policy challenges. The Commission maintains that policy responses would have to be broad and at all levels of government. Policy measures will be needed to reduce the fiscal pressure from ageing and/or to finance the fiscal gap. Reforms would be needed in key human service areas, such as health and aged care, where the pressures of an ageing population will impact most. The resulting fall in labour force participation would also need to be addressed. The Commission shows that raising labour force participation and productivity can partly offset the impacts of an ageing population. These would enhance income growth, helping to sustain economic growth and living standards, and increase the capacity to ‘pay’ for the costs of ageing, as well as through taxation. Keywords: ageing, health, aged care, labour force, labour supply, economic growth, policy measures, productivity, demographic trends, JEL: H Date: 2005-06-06 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpla:0506001&r=all 565. Socio-Economic Differences in the Perceived Quality of High and Low-Paid Jobs in Europe Konstantinos Pouliakas (Centre for European Labour Market Research, University of Aberdeen Business School) Ioannis Theodossiou (Centre for European Labour Market Research, University of Aberdeen Business School) This paper engages in a novel comparison of differences in the perceived quality of high and low-paid jobs across six European labour markets. Utilizing data from six waves (1996-2001) of the European Community Household Panel (ECHP), and after correcting for the selectivity problem that is prevalent in the study of the effect of low pay status on job satisfaction, it is shown that, other things equal, low-paid employees are significantly less satisfied with their jobs compared to those who are high-paid in Greece, Spain, and Finland. In contrast, there appears to be an insignificant difference in the satisfaction of high and low wage workers in the United Kingdom, France and Denmark. The empirical evidence therefore suggests that low-paid jobs in the EU are not universally of low quality, though in some countries low wage workers have experienced the full brunt of both lower paid and bad quality jobs. For these countries policies that centre on the quality of jobs would be of equal importance to those that focus on the level of pay. A homogeneous policy of removing low wage employment through regulation, however, would not necessarily lead to improvement in the welfare of low-paid citizens across all European economies. Keywords: job quality, job satisfaction, low pay, dual labour markets JEL: J28 J42 Date: 2005-06-06 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpla:0506002&r=all 566. Group versus individual discrimination among young workers: a distributional approach Donata Favaro (Universita degli Studi di Padova, Dipartimento di Scienze Economiche 'Marco Fanno') Stefano Magrini (Universita degli Studi di Venezia 'Ca' Foscari', Dipartimento di Scienze Economiche) We evaluate the gender wage gap and the unexplained gender wage differential for workers 15-29 year old during the period 1990- 1997, using a particularly rich set of data from the Italian Social Security System covering all individuals in the labour markets of two Italian provinces. We estimate separate earnings functions for men and women correcting for endogeneity of education and we evaluate gender discrimination by studying the entire distribution of the unexplained wage gap as suggested by Jenkins (1994). We evaluate discrimination against females by means of bivariate density functions. This innovation makes it possible to condition the density distribution on the marginal distribution of any characteristic and to evaluate more precisely the existence of group and individual discrimination. Our analysis suggests that discrimination is not evenly distributed among women, in relation to their characteristics; in particular, there is evidence of lower discrimination against highly educated females. Moreover in 1997, compared to 1990, discrimination increased in a appreciable way, affecting human capital rich females more significantly. While our work is based in a very local context the richness of the data and the methodological innovation give the results a wider application. Keywords: wage differentials, wage discrimination, gender JEL: J Date: 2005-06-07 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpla:0506003&r=all 567. Nascent Necessity and Opportunity Entrepreneurs in Germany. Evidence from the Regional Entrepreneurship Monitor (REM) Joachim Wagner (University of Lueneburg) Using a large recent representative sample of the adult German population this paper demonstrates that nascent necessity and nascent opportunity entrepreneurs are different with respect to some of the characteristics and attitudes considered to be important for becoming a nascent entrepreneur, and that they behave differently. Given the lack of longitudinal data, however, we have no information about the performance of entrepreneurs from both groups in the longer run. Keywords: Necessity entrepreneurship, opportunity entrepreneurship, Germany, REM JEL: J Date: 2005-06-07 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpla:0506004&r=all 568. How Right-to-Work Laws Affect Wages W. Robert Reed (University of Oklahoma) I examine the wage effects of Right-To-Work (RTW). Using state- level data, I estimate that, ceteris paribus, RTW states have average wages that are significantly higher than non-RTW states. This result is robust is across a wide variety of specifications. An important distinctive of this study is that it controls for state economic conditions at the time states adopted RTW. States that adopted RTW were generally poorer than other states. Failure to control for these initial conditions may be the reason that previous studies have not identified a positive wage impact for RTW. Keywords: Right-to-Work JEL: J Date: 2005-06-08 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpla:0506005&r=all 569. Another look at the inflation-productivity trade-off Georgios Bitros (Athens University of Economics & Business) Epaminondas Panas (Athens University of Economics & Business) Our aim in this paper is to test the robustness of the relation between total factor productivity growth and inflation to the specification of the model adopted for its identification. In doing so we estimate a generalized Box-Box cost function using data from the two-digit Standard Industrial Classification of manufacturing industries in Greece during the period 1964-1980. The results confirm that the acceleration of inflation from 1964- 1972 to 1973-1980 reduced total factor productivity growth in a way that was both statistically significant and sizeable. In addition, they reveal that, even when the effect of inflation is separated from the effects of technical change and economies of scale, the choice of functional form is most crucial. The reason being that cost functions such as the translog, the generalized Leontief, and the generalized square root quadratic are not general enough to account for the sensitivity of estimates to model specification. On these grounds then we conclude that, for a precise estimation of the adverse impact of inflation on total factor productivity growth, it is imperative both to sort out the three effects involved and do so by adopting the most general flexible functional form available for the cost function. Keywords: inflation, total factor productivity, generalized Box- Cox cost function, economic growth JEL: E31 O47 Date: 2005-06-02 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpma:0506001&r=all 570. Economic Policies and the Possibilities of Unified GCC Currency manhal shotar (university of qatar) khalid shams (university of qatar) The aim of this study is to identify the extent to which the GCC countries can adopt similar economic policies by the time of the formation of the GCC unified currency in 2010. Among many other convergence standards, the study suggests to examine the economic structure of the GCC countries to identify similarities. Estimating the model using SUR technique, the study finds significant differences between GCC countries economic policies. The results suggest that GCC countries need to grant more policy coordination to lessen the differences in order to facilitate better design of unified economic policies that are conducive to the establishment of a monetary union. Keywords: monetary policies, GCC area JEL: E Date: 2005-06-04 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpma:0506003&r=all 571. A Dynamic Macroeconomic Model for the US Telecommunications Industry Elias Aravantinos (Stevens Institute of Technology, Wesley J. Howe School of Technology Management) Dynamic models have been used in most businesses serving different purposes. The increased changes of the Telecommunications environment have created a dynamic industry emerging new dynamic economic models. We investigated the Telecom industry by conducting macroeconomic and infrastructure analysis. However, this paper uses recent data from the Telecommunications industry to reveal the infrastructure trends and predict the US wireless growth. The analysis is focused on several factors such as the infrastructure described by the Teledensity, the employment and the Telecom revenues in comparison with the Gross Domestic Product (GDP). The purpose of this analysis is to understand the industry’s behavior during a specific period of time, 1984-2003, propose an appropriate economic dynamic model, wireless oriented that identifies the current driving forces and detects the impact of some critical events and trends. Keywords: Dynamic Economic Model, Macroeconomic Analysis, Telecom Act, Teledensity JEL: E Date: 2005-06-05 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpma:0506004&r=all 572. Limited Attention, Interaction and the Growth of a Firm Katsuya Takii (Osaka School of International Public Policy, Osaka University) A person cannot make many decisions at a time, but an organization needs millions of interrelated decisions. We incorporate this idea into investment theory and examine its influence on a firm's growth rate. Two assumptions are emphasized: an agent cannot optimize more than one input at a time, and there is interaction among inputs. Each investment is lumpy, but adjustment is gradual. Without an adjustment cost function and exogenous shocks, we derive the growth rate of a firm. The derived growth rate is independent of firm size and imperfectly correlated with Tobin's Q. Keywords: Limited Attention, Complementarity and Substitutability, Investment, Tobin's Q. JEL: E Date: 2005-06-05 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpma:0506005&r=all 573. Management team and technology strategy for success of high- growth SMEs Daniel Tarka (University of Greenwich, London) Kanes Rajah (University of Greenwich,London) This article explores two of the five major factors that determine success in high-growth small and medium-sized enterprises (SMEs). Research has shown that the internal characteristics of SMEs such as technology strategy and the demographics of the management team are critical and related to the organisational success. High-growth SMEs have been defined as innovative technology companies that introduce new products or services, opening new channels of distribution, pioneering novel production methods and management approaches. A sectorial classification* of “high technology” industries developed at the Department of Trade and Industry was used as a basis for selecting the sample in the study. This embraces the communications, IT, computing, biotechnology, electronics, and medical / life sciences industries. Keywords: Small firms, success, high-growth, technology strategy, management team. JEL: E Date: 2005-06-07 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpma:0506006&r=all 574. Modelo Primario Exportador en la Argentina Post-Devaluacion Leandro Cerutti (Universidad Nacional del Sur) Martin Schrod (Universidad Nacional del Sur) Se analiza la viabilidad del modelo de crecimiento aplicado en nuestro pais luego de la devaluacion. Comenzaremos repasando las principales teorias de crecimiento con el fin de determinar si existe alguna que respalde dicha estrategia de crecimiento. Luego examinaremos el modelo aplicado en nuestro pais en el periodo 1870-1930 para realizar una comparacion con el modelo actual. Entonces teniendo la teoria y la historia como respaldo, intentaremos descubrir si es posible lograr crecimiento basados exclusivamente en la exportacion de productos primarios. Para ello haremos un estudio teorico y empirico para el periodo post- devaluacion. Por ultimo expondremos en forma detallada las limitaciones que a nuestro juicio presenta dicha estrategia de desarrollo, y a modo de conclusion presentaremos distintos escenarios posibles de la economia internacional que afecten la insercion de Argentina en el mundo. Keywords: Modelo primario exportador, insercion de argentina en el mundo, restricciones, soluciones JEL: E Date: 2005-06-08 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpma:0506007&r=all 575. Explicit Evidence on an Implicit Contract Andrew Young (University of Mississippi) Daniel Levy (Bar- Ilan University) We offer the first direct evidence of an implicit contract in a well- known product market—the market for Coca-Cola. The Coca- Cola Company left a substantial amount of written evidence of its implicit contract with its consumers—a very explicit form of an implicit contract. In general, observing implicit contracts directly is impossible because of their implicit nature. In the case of Coca-Cola, however, we are able to document the Company not only saying that it had an important implicit contract with its consumers, but also acting on it. This study makes an additional and unique contribution by exploring quality as a margin of adjustment available to Coca-Cola. We present evidence that the implicit contract included the promise not only of a constant nominal price but also a constant quality. We document the dedication to a 6.5oz serving of the 'Secret Formula.' Indeed, during a period of over 70 years, we find evidence of only a single case of true quality change. By studying the margin of adjustment the Company chose in response to changes in market conditions, we demonstrate that the perceived costs of breaking the implicit contract were large. In addition, we are able to offer one piece of direct evidence on the magnitude of these costs by studying the events surrounding the failed introduction of the New Coke in 1985. Keywords: Implicit Contract, Explicit Contract, Invisible Handshake, Customer Market, Long-Term Relationship, Price Rigidity, Coca-Cola, Nickel Coke JEL: E12 E31 L14 L16 L66 M30 A14 Date: 2005-06-09 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpma:0506008&r=all 576. Investment-Specific Technology Shocks in a Small Open Economy Millan L. B. Mulraine (University of Toronto) This paper re-examines the behavioral responses of key macroeconomic variables in Canada to exogenous shocks to the relative price of investment goods. It does so by developing a stylized two-sector real business cycle model which is simulated to explore its ability to shed new light on the dynamic behavior of the standard small open economy. The results indicate that this model can qualitatively and quantitatively replicate the dynamic features of the Canadian economy, and thus shocks to investment-specific technology can be considered an important propagation mechanism for studying and understanding modern macroeconomic dynamics in small open economies. Keywords: Endogenous rate of time preference, International real business cycle, Investment-specific shocks, Relative price of investment goods, Small open economy JEL: E32 E37 F41 Date: 2005-06-10 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpma:0506009&r=all 577. Basics of topology and the Brouwer fixed point theorem for Economics (in Japanese) Yasuhito Tanaka (Chuo University) Basics of topology and the Brouwer fixed point theorem for Economics JEL: D1 D2 D3 D4 Date: 2005-06-06 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpmi:0506002&r=all 578. Endogenous Leadership in Teams Pedro Rey Biel (University College London) Steffen Huck (University College London) In this paper we study the mechanics of ``leading by example'' in teams. Leadership is beneficial for the entire team when agents are conformists, i.e., dislike effort differentials. We also show how leadership can arise endogenously and discuss what type of leader benefits a team most. Keywords: team production; conformism; leadership; leading by example; endogenous timing JEL: C72 D23 D63 J31 L23 Date: 2005-06-08 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpmi:0506004&r=all 579. ANALYSIS OF RESULTS FROM THE IMPLEMENTATION OF REGULATION ( EEC) 2078/92 Alessandro Ragazzoni (Alma Mater Studiorum-Universita di Bologna) Maurizio Canavari (Alma Mater Studiorum-Universita di Bologna) This paper is concerned with analyzing the CAP policies involving environmental issues and simulating probable results at a farm level of the adoption of agri-environmental measures. JEL: P Q Z Date: 2005-06-04 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpot:0506001&r=all 580. RECENT DEVELOPMENTS OF THE EU FARMLAND MARKETS: NATIONAL VARIABLES AND COMPARATIVE EFFECTS OF THE CAP REFORM IN SELECTED COUNTRIES Guido M. Bazzani (CNR - Consiglio Nazionale delle Ricerche, Italy) Maurizio Canavari (Alma Mater Studiorum-Universita di Bologna) Maurizio Grillenzoni (Alma Mater Studiorum-Universita di Bologna) Alessandro Ragazzoni (Alma Mater Studiorum-Universita di Bologna) The present paper consists of two main parts. The first one gives a picture of the more recent development of the farmland market in selected EC countries since 1985/86. Two main indicators are used to make relatively comparable the observed trends concerning: i) land mobility, ii) farmland values. The second one tries to evaluate the effects of the CAP reform and the influence of national variables overtime, taking into account the following indicators: i) mobility (on land transfers; on tenancy), ii) income (for agricultural or forest use), iii) farmland values (in the plain; in the hill/mountain areas). Considerations on land market complexity and segmentation are finally included, with justification on the empirical approach adopted in the paper. JEL: P Q Z Date: 2005-06-04 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpot:0506002&r=all 581. SUSTAINABLE DEVELOPMENT IN METROPOLITAN AREAS: AN INTRODUCTION Maurizio Grillenzoni (Alma Mater Studiorum-Universita di Bologna) Maurizio Canavari (Alma Mater Studiorum-Universita di Bologna) JEL: P Q Z Date: 2005-06-04 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpot:0506003&r=all 582. Review of National Competition Policy Reforms Productivity Commission In 2004, the Australian Government asked the Productivity Commission to look at the impact on the economy and the community of NCP and related reforms and for areas which offer opportunities for significant gains. The Commission found that the benefits of NCP have greatly outweighed the costs. The benefits have flowed to both low and high income earners, and to country as well as city Australia. The Commission outlines how Australia’s ageing population and other international and domestic pressures necessitate further actions to raise productivity and sustainability. The Commission proposes a wide- ranging agenda for nationally coordinated reform, particularly in the areas of energy and water, freight transport, greenhouse gas abatement and consumer protection. An overarching review of the health system and further reform in vocational education and training are also needed. Keywords: National Competition Policy, NCP, Reforms, Infrastructure, Health, Transport, Education JEL: H I J P Q R Date: 2005-06-06 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpot:0506004&r=all 583. Assistance to Tourism: Exploratory Estimates Productivity Commission In April 2005, the research paper into Assistance to Tourism: Exploratory Estimates, was released. It is the first comprehensive attempt to quantify the extent of assistance to tourism on a comparable basis to that for other industries in Australia. While care is needed in interpreting the results, the estimates suggest that tourism receives a lower rate of Australian Government assistance than the average for the manufacturing and primary sectors, but more than for other service industries. Assistance measures include destination marketing and support for high-profile cultural or sporting events, and funding for art galleries, national parks and transport. This latest research extends the work the Commission and its predecessors have undertaken on tariffs, budgetary and other assistance, particularly in respect to manufacturing, agriculture and more recently, services. Keywords: tourism, tourism assistance, government assistance, australian tourism industry, tourism expenditure JEL: P Q Z Date: 2005-06-06 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpot:0506005&r=all 584. Responsiveness of Demand for Irrigation Water: A Focus on the Southern Murray-Darling Basin D. Appels (Productivity Commission) R. Douglas (Productivity Commission) G. Dwyer (Productivity Commission) This working paper was released in August 2004. This research is part of a suite of research related to water reform, including the effects of expanding water trade and the management of environmental externalities associated with the supply and use of irrigation water. A foundation for this research is a detailed understanding of irrigated agriculture in the southern Murray- Darling Basin, including: the existing patterns of water use; the emerging trade in water property rights and the likely behavioural responses of individual irrigators to changing water prices. This paper explores the determinants of the elasticity of demand for irrigation water. It focuses on three main irrigated industries — rice, dairy and horticulture — to gain a greater understanding of the value that farmers place on water as an input. The paper provides detail relating to farm decision behaviour and biophysical production realities faced by irrigators in the southern Murray-Darling Basin. Keywords: southern murray-darling basin, irrigation, irrigation water, water; rice, dairy, horticulture, biophysical production, water reform, water trade JEL: R Date: 2005-06-06 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpot:0506006&r=all 585. Reform of Building Regulation Productivity Commission The Productivity Commission's final research report, released December 2004, responds to a request by the Australian Government to examine the contribution that national reform of building regulation has made and further reform could make to the performance of the building and construction industry. The Commission found that the Australian Building Codes Board has made progress in reducing regulatory differences across jurisdictions and in basing the Building Code of Australia to performance-based requirements. However, there is scope for further reforms to enhance productivity and to benefit the broader community. The Commission recommends the Australian Government, as well as the State and Territory Governments, continue to be actively involved in reform of building regulation and to negotiate a new Intergovernmental Agreement. The agreement would clarify the objectives of building regulation reform; strengthen the commitment to national consistency; and also affirm the importance of a whole-of-government approach to building regulation. Keywords: Australia; Commissioned study; Australian Building Codes Board (ABCB); Building; Construction; Economics; Inter-Government Agreement; Policy; Reform; Regulation; JEL: A D K Date: 2005-06-06 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpot:0506007&r=all 586. Cheap Food Policy: Fact or Rhetoric James Miller (Mississippi State Department of Agricultural Economics) Keith Coble (Mississippi State Department of Agricultural Economics) The term “cheap food policy” has frequently been used as a descriptor for U.S. commodity programs by those who contend these payments to farmers ultimately result in lower food costs for consumers. More recently, farm policy has been criticized for contributing to the obesity problem in the U.S. by making large quantities of fattening foods widely available and relatively inexpensive. This paper econometrically evaluates the impact of direct government payments to farmers from 1960-1999 on the proportion of disposable income consumers spend on food. The model finds the payments do not significantly affect the affordability of food. Keywords: Agricultural policy, obesity, food policy, technology JEL: Q18 Date: 2005-06-08 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpot:0506008&r=all 587. Exploring the Carbon Kuznets Hypothesis Georg Muller-Furstenberger (University of Bern) Martin Wagner (University of Bern) Benito Muller (Oxford Institute for Energy Studies) The Carbon Kuznets hypothesis conjectures an inverse U{shape relation between GDP and carbon dioxide emissions. We investigate a number of empirical problems with this hypothesis by way of both econometric analysis and CGE modelling. The econometric analysis takes into account the possibility of unit root non{stationary regressors. On a panel of 107 countries covering the years from 1986 to 1998 we ?nd evidence for unit root non{stationarity in log GDP and log emissions. Our discussion therefore focusses of potential pitfalls in estimating the Carbon Kuznets curve in the context of non{stationary panels context. We conclude that current practice in the literature fails to take these potential problems adequately into account. The second conceptual problem considered in the paper is the question of how to inter- pret an observed inverse U{shaped relationship. With the help of a small GCE model, we illustrate the danger of using observed GDP{emission patterns directly as a policy guide. Our model economy, where decarbonization is exogenous, demonstrates in particular that a carbon policy relating to income levels may not be appropriate even in the face of an observed inverse U{pattern between income and emissions. Keywords: Carbon Kuznets curve, non{stationary panel, regressions with integrated variables, CGE modelling JEL: Q20 C12 C13 Date: 2005-06-10 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpot:0506009&r=all 588. The Economic Costs of Corruption: A Survey and New Evidence Axel Dreher (Thurgau Institute of Economics & University of Konstanz) Thomas Herzfeld (Department of Agricultural Economics, University of Kiel) This paper reviews the empirical literature on the economic costs of corruption. Corruption affects economic growth, the level of GDP per capita, investment activity, international trade and price stability negatively. Additionally, it biases the composition of government expenditures. The second part of the paper estimates the effect of corruption on economic growth and GDP per capita as well as on six possible transmission channels. The results of this analysis allows to calculate the total effect of corruption: An increase of corruption by about one index point reduces GDP growth by 0.13 percentage points and GDP per capita by 425 US$. Keywords: Costs of Corruption, Survey, Empirical Evidence JEL: O1 K49 C39 Date: 2005-06-02 URL: http://d.repec.org/n?u=RePEc:wpa:wuwppe:0506001&r=all 589. Some aspects of social choice theory (in Japanese) Yasuhito Tanaka (Doshisha University) Some aspects of social choice theory JEL: D6 D7 H Date: 2005-06-06 URL: http://d.repec.org/n?u=RePEc:wpa:wuwppe:0506002&r=all 590. Algebraic topology and social choice theory, First part (in Japanese) Yasuhito Tanaka (Doshisha University) Algebraic topology and social choice theory JEL: D6 D7 H Date: 2005-06-06 URL: http://d.repec.org/n?u=RePEc:wpa:wuwppe:0506003&r=all 591. Development of social choice theory (in Japanese) Yasuhito Tanaka (Chuo University) Development of social choice theory JEL: D6 D7 H Date: 2005-06-06 URL: http://d.repec.org/n?u=RePEc:wpa:wuwppe:0506004&r=all 592. Basics of social choice theory (in Japanese) Yasuhito Tanaka (Chuo University) Basics of social choice theory JEL: D6 D7 H Date: 2005-06-06 URL: http://d.repec.org/n?u=RePEc:wpa:wuwppe:0506005&r=all 593. Cooperation Breakdowns under Incomplete Property Rights Jean-Pierre Tranchant (CERDI-Universite d'Auvergne) In order to analyze conflict and cooperation between a State and a non ruling group in a general equilibrium, I unite pure rent- seeking models and economic models of conflict under an assumption of incomplete property rights. I show that a unique and globally stable Nash equilibrium exists in this game. Cooperation breakdowns appear to be twofold: generalized conflict driven by a collapse of the State and one- sided rebellion due to the coexistence between a strong State and a weak minority. Natural resources increase the conflict intensity but raise also the cost of rebellion for the ruler inducing this one to be more benevolent toward his minority. Keywords: Incomplete Property Rights, Rent-Seeking, Redistribution, Civil Conflict JEL: C72 D30 H10 Date: 2005-06-08 URL: http://d.repec.org/n?u=RePEc:wpa:wuwppe:0506006&r=all 594. EL DESEMPENO DE LOS GOBIERNOS LOCALES EN CHILE EN LA PRESTACION DE SERVICIOS PUBLICOS AGRICOLAS Paul Lewin Krister Andersson Keywords: Chile, Gasto Publico, Insentivos, gobiernos locales, municipalidades JEL: D6 D7 H Date: 2005-06-08 URL: http://d.repec.org/n?u=RePEc:wpa:wuwppe:0506007&r=all 595. The Virtues of Personal Accounts for Social Security: A Comment to Lazear Alberto Chilosi (Department of Economics University of Pisa) Edward P. Lazear‘s thesis that “personal accounts are more consistent with economic principles, avoid government moral hazard, and provide more security than government Social Security” is unsound. The same applies to a number of other statements that are made in the process of expounding the main thesis. Keywords: Personal accounts, social security, pensions JEL: D6 D7 H Date: 2005-06-09 URL: http://d.repec.org/n?u=RePEc:wpa:wuwppe:0506008&r=all 596. The Effect of FSD Changes in Multiplicative Background Risk on Risk-taking Attitude Yoshitaka Sakagami In this paper, we consider the effect of First-degree Stochastic Dominance (FSD) changes in background multiplicative risk on the risk- taking attitude of a decision maker. First, we consider contractive FSD changes in background multiplicative risk and analyze the effect of these changes. Then, we consider general FSD changes in background multiplicative risk. Also, in the context of coinsurance, we determine the effect of simple FSD changes and Monotone Likelihood Ratio (MLR) changes in multiplicative background risk. Keywords: FSD changes, Multiplicative background risk, risk- taking attitude Date: 2005-06-06 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpri:0506001&r=all 597. A Fast Algorithm for Computing Expected Loan Portfolio Tranche Loss in the Gaussian Factor Model. Pavel Okunev (LBNL & UC Berkeley) We propose a fast algorithm for computing the expected tranche loss in the Gaussian factor model. We test it on a 125 name portfolio with a single factor Gaussian model and show that the algorithm gives accurate results. We choose a 125 name portfolio for our tests because this is the size of the standard DJCDX.NA. HY portfolio. The algorithm proposed here is intended as an alternative to the much slower Moody's FT method. Keywords: Moody's Fourier Transform method, portfolio loss distribution, DJCDX, CDS portfolio, CDS, expected tranche loss Date: 2005-06-07 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpri:0506002&r=all 598. Private Crop Insurers and the Reinsurance Fund Allocation Decision Keith Coble (Mississippi State Department of Agricultural Economics) Robert Dismukes (U.S. Department of Agriculture) Joseph Glauber (U.S. Department of Agriculture) This research investigates the strategic behavior of private crop insurance firms reinsured by the USDA through the Standard Reinsurance Agreement. This arrangement allows the private firm to strategically allocate individual policies into different risk sharing arrangements. Thus, firm earnings are conditioned upon accurately forecasting policy loss experience. Our analysis begins with models investigating the characteristics explaining the placement of policies into the assigned risk fund. Then a simulation model of the SRA is used to compare the post-SRA returns of actual firm allocations to two alternative allocation strategies based on aggregate models and a policy-level econometric forecasting model. Keywords: Risk, insurance, reinsurance, logit, policy JEL: Q18 Date: 2005-06-08 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpri:0506003&r=all 599. Do Conservation Easements Reduce Land Prices? The Case of South Central Wisconsin Kathryn Anderson (UNDP) Diana Weinhold (London School of Economics) While theory strongly suggests that restricting development rights should reduce land prices, empirical evidence of this effect has been notoriously hard to obtain. Indeed, largely based on this difficulty a Congressional committee has recently recommended that tax benefits for such restrictions be severely curtailed. We collect data on 131 land transactions in South Central Wisconsin, including 19 cases of development-restricted parcels. When we use the whole sample to estimate the impact of conservation easements we replicate the results of Nickerson and Lynch (2001), finding a negative but statistically insignificant effect. However we then show that when the sample is appropriately restricted to a more homogenous group of land parcels, our ability to detect an effect increases dramatically. In particular, for vacant agricultural land we find a statistically significant negative impact of conservation easements that ranges up to 50% of land values Keywords: land use, valuation of development rights, conservation easements, hedonic regression JEL: Q24 R52 Date: 2005-06-03 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpur:0506001&r=all 600. Infrastructure in India Deepak Kumar (ICFAI University Press,Hyderabad) The critical aspect in Indian infrastructure is the policy development, with specific steps being laid out for specific policies such as bidding and procurement process, policy planning methodology and the linkages between policy development and economic growth. The bidding and procurement process basically goes through the various steps, needed to get Private Sector Participation (PSP) in various sectors of the infrastructure. Keywords: Infrastructure , India JEL: R Date: 2005-06-04 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpur:0506002&r=all 601. Private Sector Participation in Indian Agriculture : An Overview Deepak Kumar (ICFAI University Press) The share of private sector in capital formation in Indian agriculture is approximately three times more than the public sector. This shows the active involvement of the private agencies in the Indian agriculture sector. Keywords: Indian Agriculture , Private Participation JEL: R Date: 2005-06-06 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpur:0506006&r=all 602. Modelling Water Trade in the Southern Murray-Darling Basin D. Peterson (Productivity Commission) G. Dwyer (Productivity Commission) D. Appels (Productivity Commission) J. Fry (Productivity Commission) Released in November 2004, the paper uses TERM-Water, a bottoms- up regional CGE model of the Australian economy, to examine the regional effects of expanding trade of irrigation water in the southern Murray- Darling Basin. The study finds that water trading dampens the impact of water allocation cuts on gross regional product (GRP). The benefits of introducing trading within irrigation districts are greater than the further benefits of expanding trade to between these regions. Permitting trade of seasonal allocations allows irrigators to reallocate water in reaction to climatic conditions and water availability - and it is this flexibility that enables GRP reductions to be minimised. Keywords: southern murray-darling basin, CGE model, irrigation water, water allocation, water trade, JEL: R Date: 2005-06-06 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpur:0506007&r=all 603. A distribution dynamics approach to regional GDP convergence in reunified Germany Juessen Falko (University of Dortmund, Department of Economics) This paper presents an empirical study of GDP per worker (and per capita) convergence across German labour market regions during 1992 to 2002 using nonparametric techniques. There is evidence for a tendency towards convergence during the observed period, i.e. regions that were less productive in 1992 (East- German regions) established a higher relative GDP in 2002. It is an advantage of our approach that it allows to make predictions about the long run distribution of regional production. We predict a persistent inequality among German regions. This result implies that the substantial regional policy expenditures made by the German government and the EU will not achieve their aim of equalisation, and need therefore to be critically reviewed. Keywords: regional convergence, distribution dynamics, nonparametric econometrics, stochastic kernel, regional policy JEL: C14 C23 O47 R11 Date: 2005-06-06 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpur:0506008&r=all 604. Population Growth in European Cities: weather matters – but only nationally Paul Cheshire (London School of Economics, Department of Geography & Environment) Stefano Magrini (Universita degli Studi di Venezia 'Ca' Foscari', Dipartimento di Scienze Economiche) This paper investigates differences in the rate of growth of population across the large city-regions of the EU12 between 1980 and 2000. The US model which assumes perfect factor mobility does not seem well adapted to European conditions. There is evidence strongly suggesting that equilibrating migration flows between cities in different countries are highly constrained in the EU. However, quality of life motives do seem to be a significant and important feature of differential population growth rates if measured relative to national rather than EU12 values. Once other factors are allowed for, a systematic and highly significant factor determining rates of urban population growth is climatic variation. Cities with better weather than that of their countries have systematically tended to gain population over the past 20 years once other factors – including natural rates of increase in the areas of each country outside the major cities - are allowed for: there is no such effect for climate variables if expressed relative to the value of the EU12 as a whole. On the other hand, there is evidence that the systematic spatial gains from European integration are reflected in a city’s population growth. The results are tested for spatial dependence and remain robust. Keywords: growth; cities; quality of life differences; mobility; migration JEL: R Date: 2005-06-07 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpur:0506009&r=all 605. Tax Cuts and Employment Growth in New Jersey: Lessons From a Regional Analysis W. Robert Reed (University of Oklahoma) Cynthia L. Rogers (University of Oklahoma) The Whitman Administration’s 30 percent reduction in New Jersey’s personal income taxes from 1994-96 is prominently cited as a role model for state fiscal policy. We investigate whether the growth benefits attributed to the Whitman tax cuts are warranted. Panel data methods are applied to annual observations of county-level employment growth from New Jersey and the surrounding economic region. Our analysis does not support the hypothesis that tax cuts stimulated employment growth in New Jersey. While New Jersey did experience substantial employment growth subsequent to the tax cuts, most of this growth was shared by the nearby Economic Areas. Keywords: Tax cuts, economics growth JEL: R58 H71 H24 Date: 2005-06-08 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpur:0506010&r=all 606. Economisch belang van de Vlaamse zeehavens: verslag 2003 Frederic Lagneaux (National Bank of Belgium, Microeconomic Information Department) The Flemish maritime ports play a major role in the Belgian economy, not only in terms of the industries they encompass but also as intermodal centres where transhipment activities are concentrated. This update1 paper provides an extensive overview of the economic importance and development of the Flemish maritime ports, through revised results for the period 1997 - 2003. Focusing on the three major variables of value added, employment and investment, it also provides some information about the financial situation of a few vital sectors in each port. A global indication concerning the financial health of the companies studied is also provided, using the NBB bankruptcy prediction model. In addition, it includes figures with respect to the ongoing growth of several cargo traffic segments and provides an overall picture of social developments in the Flemish maritime ports. The indirect effects of these port activities are estimated in terms of value added and employment. Annual account data from the Central Balance Sheet Office were used for the calculation of direct effects, the study of financial ratios and the analysis of the social balance sheet. The indirect effects were estimated on the basis of data from the National Accounts Institute. In the Flemish maritime ports, direct VA came to almost 11.5 billion euro and total VA - the sum of direct and indirect VA - to 22 billion euro in 2003. In the same year direct and total employment reached respectively 105,000 and 239,000 full-time equivalents, while direct investment reached 2.5 billion euro. The ongoing developments in the maritime ports sector in the Hamburg - Le Havre range continue to affect the port operations: concentration of capital, privatisation of port logistic services, expansion and dispersion of foreign trade, internationalisation of production and consumption patterns, increase in containerised shipments, etc. Production, trade and transport are no longer considered as individual and isolated activities, but are integrated within a single system, while economies of scale continue. Therefore, ports are becoming real logistic centres: ports able to add value to the goods passing through the port area have a major advantage in a climate of increasing international competition. Flemish ports are following this trend, and that is also reflected in the analysis presented in this report. Keywords: branch survey, maritime cluster, subcontracting, indirect effects, transport intermodality, public investments. JEL: C67 H57 J21 L22 L91 L92 R15 R34 R41 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbb:docwpp:200505-1&r=all 607. Expenditure-Based Equalization Transfers Francois Vaillancourt Richard Bird (Rotman School of Management, University of Toronto) None Available Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:ttp:itpwps:0512&r=all 608. Fiscal Discipline before and after EMU - Permanent Weight Loss or Crash Diet? Andrew Hughes Hallett (Department of Economics, Vanderbilt University) John Lewis (Tallinn Technical University and Bank of Estonia) This paper studies the evolution of European fiscal policies and the attempts at budgetary consolidation through three periods: the pre-Maastricht phase (to 1991); the run up to monetary union ( 1992-97), and finally the stability pact phase (1998 onwards). Using three separate indicators ­ the probability of undertaking a consolidation, the degree to which it is sustained, and the probability of exceeding a specified deficit limit ­ we search for structural breaks which could signify a change in the average level of fiscal discipline in these periods. We find increased discipline only up to 1997. Thereafter discipline erodes to the extent that, by 2005, there is less discipline than before the Maastricht process started. We conclude the new fiscal discipline was temporary; a product of the sanction of being denied entry to the Euro, and that EMU itself has had no impact on discipline (in the absence of that sanction). Our methodological innovation is to show the importance of the dynamics of fiscal behaviour: step dummies for changes in the average level of discipline, and trend dummies to capture any decline/increase relative to that average. A single structural break test will miss these dynamic effects, and may generate the erroneous conclusion that fiscal discipline had tightened since the start of phase two of EMU. Keywords: Fiscal consolidation, probit regressions, dynamic structural breaks JEL: H50 H61 E65 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:van:wpaper:0516&r=all 609. Comparing the Socio-Economic Determinants of Men's and Women's International Soccer Performance Victor Matheson (Department of Economics, College of the Holy Cross) Robert Hoffmann (Nottingham University Business School) Chew Ging Lee (University of Nottingham Malaysia Campus) Bala Ramasamy (University of Nottingham Malaysia Campus) We compare the determinants of women's and men's international soccer performance and find that partially different variables are important in the two contexts. While economic and demographic influences hold for both, the particular political and cultural factors differ. These differences highlight the greatly different economic, political and social significance of the sport depending whether it is played by men or women. Keywords: women's football, soccer, FIFA World Ranking, amateur sports, gender inequality JEL: L83 I00 Z13 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:hcx:wpaper:0508&r=all 610. Rationality, Tort Reform and Contingent Valuation: A Classroom Experiment in Starting Point Bias Victor Matheson (Department of Economics, College of the Holy Cross) This simple classroom experiment demonstrates the existence of starting point bias. Asked to place a dollar value on a non- market good such as the loss of a limb or the destruction of a wetland, students place a much smaller value on the loss if a small value is first suggested by the questioner while placing a significantly higher value on the loss when a large value is originally suggested. This experiment can be used in theory classes to demonstrate the limits of individual rationality or in applied classes in law or environmental economics in relation to tort reform or contingent valuation. Keywords: starting point bias, contingent valuation, tort reform, classroom experiment, experimental economics JEL: A2 C42 C91 K41 Q51 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:hcx:wpaper:0509&r=all 611. MONEY AND BUSINESS CYCLE IN A SMALL OPEN ECONOMY Eduardo L. Gimenez (Departamento de Fundamentos de Analisis Economico e Historia Economica. Universidad de Vigo.) Jose M. Martin-Moreno (Departamento de Fundamentos de Analisis Economico e Historia Economica. Universidad de Vigo.) This paper examines the consequences of introducing a cash-in- advance constraint in a small open economy business cycle model for the Spanish economy. A business cycle model is built extending Correia, Neves and Rebelo (1995) small open economy framework and Cooley and Hansen (1995) monetary economy. Money is introduced through a cash-in-advance constraint. The stochastic simulation of the model and its comparation with Spanish data shows that the model is able to mimic the real dimension of the business cycle. In particular the high volatility of compsumtion for the Spanish economy is greatly reproduced. Some features of the nominal dimension are also reproduced. As a negative result the high correlation between money and output, and labor market relations are not reproduced. Keywords: Business Cycle, Cash-in-Advance Constraint, Small Open Economy URL: http://d.repec.org/n?u=RePEc:edg:anecon:0012&r=all 612. PRODUCTIVE PUBLIC SPENDING IN A BALASSA-SAMUELSON MODEL OF DUAL INFLATION Jorge Blazquez (BBVA) Jose M. Martin-Moreno (Departamento de Fundamentos de Analisis Economico e Historia Economica. Universidad de Vigo.) Dual inflation takes place when prices increases in non-tradable goods are higher than those of tradable goods. In this paper, we develop a model where public spending has a positive externality on the production of those sectors. The main results suggested by the paper are the following: 1)An increase in non-productive public spending does not generate dual inflation, as the usual Balassa-Samuelson result states and 2) An increase in productive public spending raises the productivity of those sectors and this can result in dual inflation, dual deflation or no effect on prices. Dual inflation only takes place when public spending has a bigger effect on the production technology of the tradable sector than on the non-tradable one. Keywords: Dual inflation, productive public spending, competitiveness URL: http://d.repec.org/n?u=RePEc:edg:anecon:0014&r=all 613. EFFICIENT ALLOCATION OF LAND BETWEEN PRODUCTIVE USE AND RECRATIONAL USE Eduardo L. Gimenez Fernandez (Departamento de Fundamentos de Analisis Economico e Historia Economica. Universidad de Vigo.) Manuel Gonzalez-Gomez (Departamento de Fundamentos de Analisis Economico e Historia Economica. Universidad de Vigo.) In this paper the efficient allocation of natural recreational areas is anal- ysed. Natural recreational areas have the features of public goods. We present the efficient allocation of this non- excludable public good in a rational general equilibrium model with heterogeneous agents. This allows us to deal with the free- rider problem in the provision of the public good. This framework could be considered as a microfoundation of the Lopez, Shah and Altobello (1994) model. In addition we study both the "existence" value and the "use" value of the recreational area in the same setting. A methodological critique is also made of previous empirical literature. It is suggested that our theoretical framework is a suitable starting point for further empirical research. Finally an empirical application for the Galician case is presented. Our results sug- gest that current allocations of land to natural recreational areas in Galiza are not efficient. Keywords: Land Allocation, Efficient Allocation, Natural Recreational Areas, Public Good, Social Planner Problem, Voluntary Contribution Competitive Equilibrium, Use Value, Existence Value URL: http://d.repec.org/n?u=RePEc:edg:anecon:0015&r=all 614. FUNCIONAL FORMS, SAMPLING CONSIDERATIONS AND ESTIMATION OF DEMAND FOR PROTECTED NATURAL AREAS: THE CIES ISLANDS CASE STUDY IN GALICIA (SPAIN) Manuel Gonzalez Gomez (Departamento de Economia Aplicada. Universidad de Vigo.) Philippe Polome (Departamento de Economia Aplicada. Universidad de Vigo.) Albino Prada Blanco (Departamento de Economia Aplicada. Universidad de Vigo.) In this paper, we present estimates of several models of demand for a natural area using data from surveys on visitors and non- visitors. The estimates take into account the problems of: demand specification, measurement of the cost and of the demand, choosing sampling scheme, and handling the sample. Considering these alternatives allows us to select a model of demand under improved conditions and frees us from initial restrictive hypothesis. The results in terms of prediction of demand and consumer surplus estimates are quite dissimilar, stressing the importance of comparing various models that encompass the range of possible options. Keywords: Travel Cost Method, Endogeneous Stratification, Truncation, Demand specification, Hurdle models URL: http://d.repec.org/n?u=RePEc:edg:anecon:0016&r=all 615. RESTRUCTURING OR DELEGATING: WHICH IS BETTER? Eduardo L. Gimenez Fernandez (Departamento de Fundamentos de Analisis Economico e Historia Economica. Universidad de Vigo.) Manuel Gonzalez-Gomez (Departamento de Fundamentos de Analisis Economico e Historia Economica. Universidad de Vigo.) In a certain industry, a given firm is operating with high costs of production and does not know if this is because the production costs in this industry are intrinsically high or because it is inefficient. To resolve this uncertainty, it must choose between continuing to produce correcting the inefficiency by itself ( restructuring) or transfering a part or all its business to another firm of the same industry which is already efficient ( subcontracting or delegating). Furthermore, regarding the policies of delegating, we consider two, temporary delegation ( renting) and definitive delegation (selling). This paper justifies the existence of policies both of restructuring and subcontracting in a context of asymmetric information. Keywords: Delegation; Transfer of production; Restructuring URL: http://d.repec.org/n?u=RePEc:edg:anecon:0019&r=all 616. LAGGED ADJUSTMENT PROCESSES AND THE NATURAL RATE IN SPAIN: A COMPARISON WITH PORTUGAL Roberto Bande (Departamento de Fundamentos de Analisis Economico. Universidad de Santiago de Compostela) This paper provides new evidence on the recent evolution of the unemployment rate in Spain. Specifically, we interpret the movements of the unemployment rate under the Chain Reaction Theory, whereby unemployment is viewed as the outcome of the interplay of a series of lagged adjustment processes in the labour market with persistent shocks, such that the unemployment needs a certain span of time to endogeneize the effects of such shocks. We show that persistent shocks make the actual Spanish unemployment rate depart from its natural level for prolonged periods of time. Portugal, on the contrary, shows greater labour market flexibility, which allows for faster adjustment, and hence, lower unemployment persistence. URL: http://d.repec.org/n?u=RePEc:edg:anecon:0021&r=all 617. Social Connections and Group Banking Dean S. Karlan (Economic Growth Center, Yale University) Lending to the poor is expensive due to high screening, monitoring, and enforcement costs. Group lending advocates believe lenders overcome this by harnessing social connections. Using data from FINCA-Peru, I exploit a quasi-random group formation process to find evidence of peers successfully monitoring and enforcing joint-liability loans. Individuals with stronger social connections to their fellow group members (i.e., either living closer or being of a similar culture) have higher repayment and higher savings. Furthermore, I observe direct evidence that relationships deteriorate after default, and that through successful monitoring, individuals know who to punish and who not to punish after default. Keywords: Microfinance, Group lending, informal savings, social capital JEL: O12 O16 O17 Z13 URL: http://d.repec.org/n?u=RePEc:egc:wpaper:913&r=all 618. Modified Two Stage Least Squares Estimators for the Estimation of a Structural Vector Autoregressive Integrated Process Cheng Hsiao Siyan Wang We consider the estimation of a structural vector autoregressive model of nonstationary and possibly cointegrated variables without the prior knowledge of unit roots or rank of cointegration. We propose two modified two stage least squares estimators that are consistent and have limiting distributions that are either normal or mixed normal. Limited Monte Carlo studies are also conducted to evaluate their finite sample properties. Keywords: Structural vector autoregression; Unit root; Cointegration; Asymptotic properties; Hypothesis testing JEL: C32 C12 C13 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:scp:wpaper:05-23&r=all 619. What if the UK had Joined the Euro in 1999? An Empirical Evaluation using a Global VAR M. Hashem Pesaran L. Vanessa Smith Ron P. Smith This paper attempts to provide a conceptual framework for the analysis of counterfactual scenarios using macroeconometric models. As an application we consider UK entry to the euro. Entry involves a long-term commitment to restrict UK nominal exchange rates and interest rates to be the same as those of the euro area. We derive conditional probability distributions for the difference between the future realisations of variables of interest (e.g UK and euro area output and prices) subject to UK entry restrictions being fully met over a given period and the alternative realisations without the restrictions. The robustness of the results can be evaluated by also conditioning on variables deemed to be invariant to UK entry, such as oil or US equity prices. Economic interdependence means that such policy evaluation must take account of international linkages and common factors that drive fluctuations across economies. In this paper this is accomplished using the Global VAR recently developed by Dees, di Mauro, Pesaran and Smith (2005). The paper briefly describes the GVAR which has been estimated for 25 countries and the euro area over the period 1979-2003. It reports probability estimates that output will be higher and prices lower in the UK and the euro area as a result of entry. It examines the sensitivity of these results to a variety of assumptions about when and how the UK entered and the observed global shocks and compares them with the effects of Swedish entry. Keywords: Global VAR (GVAR), Counterfactual Analysis, UK and Sweden entry to euro JEL: C32 C35 E17 F15 F42 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:scp:wpaper:05-24&r=all 620. The Role of Industry, Geography and Firm Heterogeneity in Credit Risk Diversification M. Hashem Pesaran Til Schuermann Bjorn-Jakob Treutler In theory the potential for credit risk diversifcation for banks could be substantial. Portfolios are large enough that idiosyncratic risk is diversifed away leaving exposure to systematic risk. The potential for portfolio diversifcation is driven broadly by two characteristics: the degree to which systematic risk factors are correlated with each other and the degree of dependence individual firms have to the different types of risk factors. We propose a model for exploring these dimensions of credit risk diversifcation: across industry sectors and across di¤erent countries or regions. We find that full firm- level parameter heterogeneity matters a great deal for capturing differences in simulated credit loss distributions. Imposing homogeneity results in overly skewed and fat-tailed loss distributions. These differences become more pronounced in the presence of systematic risk factor shocks: increased parameter heterogeneity greatly reduces shock sensitivity. Allowing for regional parameter heterogeneity seems to better approximate the loss distributions generated by the fully heterogeneous model than allowing just for industry heterogeneity. The regional model also exhibits less shock sensitivity. Keywords: Risk management, default dependence, economic interlinkages, portfolio choice JEL: C32 E17 G20 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:scp:wpaper:05-25&r=all 621. Nonclassical Brock-Mirman Economies Manjira Datta (W. P. Carey School of Business Department of Economics) Leonard Mirman (University of Virginia) Kevin Reffett (W. P. Carey School of Business Department of Economics)

We show that monotone methods, especially, those based on lattice theory and lattice programming can produce results, e.g., on the monotonicity of the optimal programs, as well as on the existence of fixed points, consistent with the current macroeconomics literature, in the absence of continuity, differentiability and concavity. We illustrate the use and power of the lattice theory techniques in two simple and very useful models. First, the Brock-Mirman growth model is studied in a nonclassical setting. Here all the assumptions of the original model are made except that the production function is allowed to be non-concave. The second model is an extension of the Brock- Mirman model that goes beyond the planner's solution and allows for decentralized decisions in equilibrium. JEL Classification: C61, C62, D90, E60 URL: http://d.repec.org/n?u=RePEc:asu:wpaper:2179544&r=all 622. Lattice Methods in Computation of Sequential Markov Equilibrium in Dynamic Games Manjira Datta (W. P. Carey School of Business Department of Economics) Leonard Mirman (University of Virginia) Olivier Morand (University of Connecticut) Kevin Reffett (W. P. Carey School of Business Department of Economics)

This paper uses lattice programming methods along with the extension of Tarski's fixed point theorem due to Veinott (1992) and Zhou (1994) to establish sufficient conditions for existence of sequential symmetric Markov equilibrium in a large class of dynamic games. Our method is constructive and we provide specific algorithms for computing equilibrium. These results are applied to the classic fishwar game in the context of a finite horizon. JEL Classification: C62, C63, C73, D90 URL: http://d.repec.org/n?u=RePEc:asu:wpaper:2179545&r=all 623. Explaining the Early Years of the Euro Exchange Rate: an episode of learning about a new central bank Manuel Gomez (No affiliation) Michael Melvin (W. P. Carey School of Business Department of Economics) Many observers were surprised by the depreciation of the euro after its launch in 1999. Handicapped by a short sample, explanations tended to appeal to anecdotes and lessons learned from the experiences of other currencies. Now sample sizes are just becoming large enough to permit reasonable empirical analyses. This paper begins with a theoretical model of pre- and post-euro foreign exchange trading that generates three possible causes of euro depreciation: a reduction in hedging opportunities due to the elimination of the legacy currencies, asymmetric information due to some traders having superior information regarding shocks to the euro exchange rate, and policy uncertainty on the part of the ECB. One empirical implication of the model is that higher transaction costs associated with the euro than the German mark may have contributed to euro depreciation. However, empirical evidence on percentage spreads tends to reject the hypothesis that percentage spreads were larger on the euro than the mark for all but the first few months. This seems like an unlikely candidate to explain euro depreciation over the prolonged period observed. Reviewing evidence on market dynamics around ECB, Bundesbank, and Federal Reserve meetings, there is no evidence suggesting that the market is "front running" in a different manner than the other central banks. However, we do find empirical support for the euro exchange rate to be affected by learning. By focusing on euro- area inflation as the key fundamental, the model is structured toward the dynamics of learning about ECB policy with regard to inflation. While a stated target inflation rate of 2 percent existed, it may be that market participants had to be convinced that the ECB would, indeed, generate low and stable inflation. The theory motivates an empirical model of Bayesian updating related to market participants learning about the underlying inflation process under the ECB regime. With a prior distribution drawn from the pre-euro EMS experience and updating based upon the realized experience each month following the introduction of the euro, the evidence suggests that it was not until the fall of 2000 that the market assessed a greater than 50 percent probability that the inflation process had changed to a new regime. From this point on, trend depreciation of the euro ends and further increases in the probability of the new inflation process are associated with euro appreciation. URL: http://d.repec.org/n?u=RePEc:asu:wpaper:2179608&r=all 624. The Balassa-Samuelson Hypothesis Forty Years Later Berthold Herrendorf (W. P. Carey School of Business Department of Economics) Akos Valentinyi (University of Southampton) It is well known that there are big cross-country differences in aggregate TFP. Are these differences uniform across sectors or are they driven by even larger TFP differences in specific sectors? Some forty years ago, Balassa and Samuelson hypothesized that the biggest TFP differences are in the tradable sectors. Providing empirical support for this hypothesis is hard because of the lack of data on sector inputs and outputs, at least outside the OECD. We get around this problem by employing economic theory to infer the missing information from the expenditure and price data of the 1996 Benchmark Study of the Penn World Tables. We distinguish between tradable and nontradable consumption and investment. We find that Balassa and Samuelson were right: the cross-country TFP differences are much larger in the tradable sectors than in the nontradables ones. URL: http://d.repec.org/n?u=RePEc:asu:wpaper:2180043&r=all 625. Variety and the evolution of refinery processing Bernard Bourgeois (LEPII - Laboratoire d'Economie de la Production et de l'Integration Internationale - http://www. upmf-grenoble.fr/lepii/ - CNRS : FRE2664 - Universite Pierre Mendes-France - Grenoble II) Phuong Nguyen (GAEL - Grenoble Applied Economic laboratory - http://www.grenoble.inra.fr) Pier-Paolo Saviotti (GAEL - Grenoble Applied Economic laboratory - http://www.grenoble.inra.fr) Michel Trommetter (GAEL - Grenoble Applied Economic laboratory - http://www.grenoble.inra.fr) Dans ce papier, les auteurs proposent une methode generique permettant de mesurer la variete au sein d'une famille de technologies. Cette methode de mesure de la variete est appliquee aux technologies du raffinage. Les resultats font apparaitre des comportements classiques de specialisation qui peuvent s'interpreter dans le cadre de la theorie des niches. Keywords: progres technologique,raffinage, petrole, mesure de Weitzman, variete Date: 2005-06-08 URL: http://d.repec.org/n?u=RePEc:hal:papers:halshs-00003937_v1&r=all 626. The bases of a new organisation of the Russian oil sector: between private and State ownership Sadek Boussena (LEPII - Laboratoire d'economie de la production et de l'integration internationale - http://www. upmf-grenoble.fr/lepii/ - CNRS : FRE2664 - Universite Pierre Mendes-France - Grenoble II) Catherine Locatelli (LEPII - Laboratoire d'economie de la production et de l'integration internationale - http://www. upmf-grenoble.fr/lepii/ - CNRS : FRE2664 - Universite Pierre Mendes-France - Grenoble II) The reforms and privatisation programmes of the 1990s structured the Russian oil industry around a few large national and private companies. This organisational structure poses some questions in respect of the Russian authorities will to take back the oil sector. Three factors may explain this evolution. First, the Russian authorities want to ensure the long-term future of the oil industry by encouraging new strategies in exploration. Second, the government can use the oil sector to support economic growth. This would involve sharing out the rent in a different manner. Third, and it is e new but important factor, the State intends to use Russia's oil power in this international relationships with the United States, Europe and Asia (China, Japan, South Korea, and India). The future of the Russian oil industry has some importance for the stability of the international oil market. Could Russia produce 12 Mb/d and challenging the dominant position of the Saudi Arabia? Keywords: industrie petroliere, Russie, droits de propriete, acces aux ressources, politique energetique, politique internationale, reforme du marche Date: 2005-05-30 URL: http://d.repec.org/n?u=RePEc:hal:papers:halshs-00003938_v1&r=all 627. Le secteur petrolier russe : le prive sous la houlette de l'Etat Sadek Boussena (LEPII - Laboratoire d'Economie de la Production et de l'Integration Internationale - http://www. upmf-grenoble.fr/lepii/ - CNRS : FRE2664 - Universite Pierre Mendes-France - Grenoble II) Catherine Locatelli (LEPII - Laboratoire d'Economie de la Production et de l'Integration Internationale - http://www. upmf-grenoble.fr/lepii/ - CNRS : FRE2664 - Universite Pierre Mendes-France - Grenoble II) Les reformes des annees quatre-vingt-dix, centrees sur de vastes programmes de privatisation, ont structure l'industrie petroliere russe autour de quelques grandes compagnies nationales et privees inserees dans un reseau de rapports de pouvoir complexes avec l'Etat federal et les Regions. Cette structure d'organisation incite a s'interroger sur les objectifs poursuivis par l'Etat concernant une industrie dite « strategique ». Keywords: Russie, industrie petroliere, acces aux ressources, droits de propriete, politique internationale Date: 2005-06-01 URL: http://d.repec.org/n?u=RePEc:hal:papers:halshs-00003940_v1&r=all 628. Le progiciel PEE : un nouvel outil au service d'une approche partenariale de l'entreprise Annick Chappaz-Gillot (UPMF - Universite Pierre Mendes France Grenoble II) Ghislaine Destais (LEPII - Laboratoire d'Economie de la Production et de l'Integration Internationale - http://www. upmf-grenoble.fr/lepii/ - CNRS : FRE2664 - Universite Pierre Mendes-France - Grenoble II) S'appuyant sur des informations issues des comptabilites generale et analytique, le progiciel PEE tire son originalite de sa maniere de les apprehender et de les articuler dans un cadre comptable synthetique, ce qui ouvre la voie a une analyse de type systemique des Performances Economiques de l'Entreprise Keywords: progiciel PEE, performance de l'entreprise Date: 2005-06-09 URL: http://d.repec.org/n?u=RePEc:hal:papers:halshs-00003939_v1&r=all 629. Precise Rates in the Law of the Logarithm in the Hilbert Space Wei Huang (Department of Mathematics, Carleton University, LRSP) Keywords: Complete Convergence, Tail Probabilities of Sums of i. i.d Random Variables, the Law of the Logarithm, Strong Approximation JEL: C10 C40 Date: 2004-04-01 URL: http://d.repec.org/n?u=RePEc:pqs:wpaper:0212005&r=all 630. Do experimental subjects favor their friends? Pablo Branas-Garza (Department of Economic Theory and Economic History, University of Granada) Miguel Angel Duran (Department of Economic Theory and Economic History, University of Granada) Maria Paz Espinosa (Universidad del Pais Vasco) Ideally we would like subjects of experiments to be perfect strangers so that the situation they face at the lab is not just a part of a long run interaction. Unfortunately, it is not easy to reach those conditions and experimenters try to mitigate any effects coming form these out-of- the-lab relationships by, for instance, randomly matching subjects. However, even if this type of procedure is used, there is a positive probability that a subject faces a friend or an acquaintance. We find evidence that social proximity among subjects is irrelevant for experiments’ results in dictator games. Thus, although ideal conditions are not met, relations among subjects are not contaminating the experiments’ results. Keywords: experimental procedures, friendship effect, dictator game, fairness. JEL: C99 D63 D64 Date: 2005-06-08 URL: http://d.repec.org/n?u=RePEc:gra:wpaper:05/14&r=all 631. The Welfare Effects of Pfiesteria-Related Fish Kills in Seafood Markets: A Contingent Behavior Analysis George R. Parsons Ash O. Morgan John C. Whitehead (Appalachian State University) Timothy C. Haab We use contingent behavior analysis to study the effects of Pfiesteria related fish kills on the demand for seafood in the Mid-Atlantic region. We use a phone-mail-phone survey to look at the effects of various information provision mechanisms used to ameliorate the effects of misinformation regarding fish kills. A set of demand difference models are estimated based on individual responses to multiple questions about seafood consumption with and without fish kills present and with various health risk information treatments. Random effects Tobit models are used to control for the panel nature of responses and natural censoring of the stated responses. We find that 1) Pfiesteria related fish kills have a significant negative effect on the demand for seafood, 2) seafood consumers are nonresponsive to expert risk information designed to reassure consumers that seafood is safe in the presence of a fish kill, and 3) a mandatory seafood inspection program completely eliminates avoidance costs incurred due to misinformation. We estimate that the aggregate avoidance costs incurred in the month immediately following a Pfiesteria related fish kill is $50-$130 million. JEL: Q51 Date: 2005 URL: http://d.repec.org/n?u=RePEc:apl:wpaper:05-01&r=all 632. Regulation and the Macroeconomy John W. Dawson (Appalachian State University) John J. Seater We introduce a new measure of the extent of federal regulation in the U.S. and use it to investigate the relationship between federal regulation and macroeconomic performance. We find that regulation has statistically and economically significant effects on aggregate output and the factors that produce it - total factor productivity, physical capital, and labor. The effects are multifaceted and complex. Regulation changes the way output is produced by changing the mix of inputs. It also affects both the trends and deviations about the trends in output and its factors of production, and the effects differ across dependent variables. The effects display interesting intertemporal dynamics. Changes in regulation and marginal tax rates offer an explanation for the productivity slowdown of the 1970s. Regulation also has substantial opportunity costs in the form of foregone output. Date: 2005 URL: http://d.repec.org/n?u=RePEc:apl:wpaper:05-02&r=all 633. Mediation, Walrasian Tatonement, and Negotiations as an Exchange Economy David Dickinson (Appalachian State University) Alternative dispute resolution (ADR) procedures, such as mediation and arbitration, are becoming increasingly used to help resolve disputes in a variety of arenas. Among ADR procedures, mediation is the most utilized yet least analyzed procedure. This article examines negotiations and dispute resolution using the tools of general equilibrium theory. Specifically, mediators function as the Walrasian auctioneers of exchange theory by altering trade-off rates among bargaining issues. In this way, mediators facilitate a process leading towards voluntary settlement. This idea of Walrasian mediation is supported by the literature on mediation and mediator techniques, and so this insight opens up mediation to much more rigorous economic analysis. Among the implications of this approach are: 1) successful mediation leads to Pareto efficient settlements; 2) non-neutral mediators—those with a stake in the outcome—can guide negotiators towards preferred outcomes by introducing resources into mediation; 3) mediation Pareto dominates arbitration for resolving disputes. Date: 2005 URL: http://d.repec.org/n?u=RePEc:apl:wpaper:05-05&r=all 634. The Equivalence of Panel Data Estimators under Orthogonal Experimental Design David Dickinson (Appalachian State University) Ronald Oaxaca This paper demonstrates the equivalence between pooled OLS, Fixed Effects, and Random Effects estimates when applied to data generated from an orthogonal experimental design under certain conditions. We show that the point estimates of the treatment effects are identical between these three panel data estimators but that the estimated standard errors differ. Specifically, the estimated variance covariance matrices are identical between FE and RE but differ from that of OLS. Despite the equivalence it is meaningful to test for OLS vs FE/RE because the error distributional assumptions are different. Date: 2005 URL: http://d.repec.org/n?u=RePEc:apl:wpaper:05-07&r=all 635. Contingent Valuation and Random Utility Model Estimates of the Recreational Value of King Mackerel John C. Whitehead (Appalachian State University) This paper estimates the value of king mackerel bag limit changes with both stated and revealed preference methods. The 1997 Marine Recreational Fishery Statistical Survey allows estimation of the value of avoiding bag limit reductions with the random utility model and the contingent valuation method. Using the contingent valuation method, the willingness to pay to avoid a one fish reduction in the bag limit is $2.45 per year. Using the random utility model, the willingness to pay to avoid a one fish reduction in the bag limit for a two-month time period is $10.83. Considering several methodological issues, the difference in willingness to pay between the stated and revealed preference methods is in the expected direction. JEL: Q51 Date: 2005 URL: http://d.repec.org/n?u=RePEc:apl:wpaper:05-08&r=all 636. What is the Value of Public Goods Generated by a National Football League Team: A CVM Approach Bruce K. Johnson Michael J. Mondello John C. Whitehead (Appalachian State University) Using the Contingent Valuation Method, this paper estimates the value of public goods the National Football League’s Jaguars produce for Jacksonville, Florida, including the value of elevating Jacksonville to major league status. It also estimates the incremental value of public goods potentially produced by a National Basketball Association team in Jacksonville. The present value of public goods created by the Jaguars is $25 million or less, far below subsidies provided to attract the Jaguars. For a basketball team, the figure is less than $12.7 million. Sports public goods probably cannot justify the large public expenditures on stadiums and arenas. JEL: H41 Date: 2005 URL: http://d.repec.org/n?u=RePEc:apl:wpaper:05-10&r=all 637. Statistical Discrimination in Labor Markets: An Experimental Analysis David Dickinson (Appalachian State University) Ronald Oaxaca Statistical discrimination occurs when distinctions between demographic groups are made on the basis of real or imagined statistical distinctions between the groups. While such discrimination is legal in some cases (e.g., insurance markets), it is illegal and/or controversial in others (e.g., racial profiling and gender-based labor market discrimination). First moment statistical discrimination occurs when, for example, female workers are offered lower wages because females are perceived to be less productive, on average, than male workers. Second moment discrimination occurs when risk averse employers offer female workers lower wages based not on lower average productivity but on a higher variance in their productivity. Empirical work on statistical discrimination is hampered by the difficulty of obtaining suitable data from naturally-occurring labor markets. This article reports results from controlled laboratory experiments designed to study second moment statistical discrimination in a simulated labor marker setting. Since decision-makers may not view risk in the same way as economists or statisticians (i.e., risk=variance of distribution), we also examine two possible alternative measures of risk: the support of the distribution, and the probability of earning less than the expected (maximum) profits for the employer. Our results indicate that individuals do respond to these alternative measures of risk, and employers made statistically discriminatory wage offers consistent with loss-aversion in our full sample ( though differences between male and female employers can be noted) If one can transfer these results outside of the laboratory, they indicate that labor market discrimination based only on first moment discrimination is biased downward. The public policy implication is that efforts and legislation aimed at reducing discrimination of various sorts face an additional challenge in trying to identify and limit relatively hidden, but significant, forms of statistical discrimination. Date: 2005 URL: http://d.repec.org/n?u=RePEc:apl:wpaper:05-11&r=all 638. Does Monitoring Decrease Work Effort? The Complementarity Between Agency and Crowding-Out Theories David Dickinson (Appalachian State University) Marie-Claire Villeval Agency theory assumes that tighter monitoring by the principal should motivate the agent to raise his effort level. In contrast, the “crowding-out” literature suggests that tighter monitoring may reduce the overall work effort. These two assertions are not necessarily contradictory provided that the nature of the employment relationship is taken into account (Frey 1993). This paper reports on the results of a real-effort laboratory experiment designed to test the relative importance of the disciplining effect and the crowding-out effect of monitoring. We find no strong support for the crowding-out hypothesis and we show that the disciplining effect of monitoring dominates in abstract one-shot relationships as well as in somewhat more interpersonal multi-shot relationships. Principals are not trustful enough to refrain from using the monitoring opportunity and most agents react to a decrease in the monitoring intensity by decreasing their effort. Date: 2005 URL: http://d.repec.org/n?u=RePEc:apl:wpaper:05-12&r=all 639. Nonbinding Suggestions: The Relative Effects of Focal Points versus Uncertainty Reduction on Bargaining Outcomes David Dickinson (Appalachian State University) Lynn Hunnicutt This paper focuses on the effects of nonbinding recommendations on bargaining outcomes. Recommendations are theorized to have two effects: they can create a focal point for final bargaining positions, and they can decrease outcome uncertainty should dispute persist. While the focal point effect may help lower dispute rates, the uncertainty reduction effect is predicted to do the opposite for risk-averse bargainers. Which of these effects dominates is of critical importance in the optimal design of alternative dispute resolution (ADR) procedures, which are becoming increasingly utilized to help resolve disputes in a variety of settings. We theoretically examine the effects of recommendations on the bargaining contract zone. Our theoretical framework, which allows bargainers’ final positions to influence a binding outcome should negotiations fail, provides for a more stringent test of focal points than previously considered. We also present data from controlled laboratory bargaining experiments that are consistent with our model of recommendation effects. Recommendations are empirically shown to influence final bargaining positions and negotiated settlement values. Furthermore, dispute rates are significantly lower when one includes recommendations, even where the recommendation is completely ignored in final-stage arbitration. This highlights a potentially significant role for the use of nonbinding procedures, such as mediation, as a preliminary stage in developing more efficient ADR procedures. Date: 2005 URL: http://d.repec.org/n?u=RePEc:apl:wpaper:05-13&r=all 640. Positive Assortative Mating and Spouses as Complementary Factors of Production: A Theory of Labor Augmentation Paul Gabriel Peter Groothuis (Appalachian State University) This paper develops a model of intellectual labor augmentation to explain both the marriage wage premium and educational assortative mating. We suggest that husbands and wives are complementary factors of production where a spouse’s education and skills augment their partner’s productivity and earnings potential. We test this proposition using data from the 2000 U.S. Census of Population and the 2003 Current Population Survey. Our results indicate that for working couples the marriage premium for husbands and wives is directly related to the education level of their spouses -- suggesting that positive assortative mating may be attributable to the labor market effects of intellectual augmentation of married households. Date: 2005 URL: http://d.repec.org/n?u=RePEc:apl:wpaper:05-14&r=all 641. Shadow Economies of 145 Countries all over the World: What Do We Really Know? Friedrich Schneider Estimations of the size and development of the shadow economy for 145 countries, including developing, transition and highly developed OECD economies over the period 1999 to 2003 are presented. The average size of the shadow economy (as a percent of “official” GDP) in 2002/03 in 96 developing countries is 38.7%, in 25 transition countries 40.1%, in 21 OECD countries 16. 3% and in 3 Communist countries 22.3%. An increased burden of taxation and social security contributions, combined with a labor market regulation are the driving forces of the shadow economy. Finally, the various estimation methods are discussed and critically evaluated. Keywords: shadow economy of 145 countries; tax burden; tax moral; quality of state institutions; regulation; DYMIMIC and other estimation methods JEL: O17 O5 D78 H2 H11 H26 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:cra:wpaper:2005-13&r=all 642. Dominant Strategy Implementation in Pure Exchange Economies Hideki Mizukami (Faculty of Economics, Toyama University) Takuma Wakayama (Graduate School of Economics, Osaka University) In this paper, we consider dominant strategy implementation in classical pure exchange economies with free disposal. We show that quasi-strong-non-bossiness and strategy-proofness together are necessary and sufficient for dominant strategy implementation via the direct revelation mechanism. Moreover, we prove that strategy-proofness is sufficient for dominant strategy implementation, by using an augmented revelation mechanism similar to the one devised by Jackson et al. (1994). This implies that, in classical pure exchange economies, dominant strategy implementability by a certain indirect mechanism is equivalent to truthful implementability in dominant strategy equilibria. Keywords: Quasi-strong-non-bossiness, Strategy-proofness, Augmented Revelation Mechanism, The Revelation Principle JEL: D51 C72 D71 D78 Date: 2004-03 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:osk:wpaper:0403r&r=all 643. The Small Saving Tax Exemption and Japanese Household Asset Allocation Behavior: Impact of the 1988 and 2006 Revisions ( in Japanese) Shizuka Sekita (Graduate School of Economics, Osaka University) This paper calculates effective tax rates on capital income ( interest, dividends, and capital gains on equities) in Japan and analyzes the impact of the revision of the Small Saving Tax Exemption for interest income (the so-called Maruyu System) on Japanese household portfolios. My contributions are as follows: ( 1) I am the first to calculate effective tax rates on interest, dividends, and capital gains on equities from 1973 to 2001 and calculate the effective tax rates on assets to which the exemption applies (Maruyu assets) and those on assets to which the exemption does not apply (non-Maruyu assets). As a result, I found that (2) before the 1988 revision of the exemption, Maruyu assets such as bank and postal savings deposits were given more preferable tax treatment than non-Maruyu assets such as equities, as is the general perception in Japan, but after the 1988 revision, the situation became reversed, with non-Maruyu assets being given more preferable tax treatment than Maruyu assets. Moreover, (3) I use effective tax rates by age group in the empirical analysis, taking into account for the first time the amount of principal that is tax-exempt, and (4) I estimate asset demand equations by three-stage least squares to deal with the endogeneity of rates of return, which is so far not taken into account in analyses of the revision of Maruyu system and household portfolios in Japan. And (5) I calculate the amount of the change in holdings of each asset that is caused by the 1988 and 2006 revisions of the Maruyu system, and it turns out that not only the 1988 revision of the exemption but also the 2006 revision will promote a shift in household portfolios away from Maruyu assets and toward non-Maruyu assets, as expected, but that the magnitude of the impact of the 2006 revision is much less considerable than that of the 1988 revision in the short run as well as the long run. Keywords: Effective tax rates; Household asset allocation; Taxation JEL: G11 H31 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:osk:wpaper:0517&r=all 644. The Estimation of Asymmetric Adjustment Costs for the Number of Workers and Working Hours |Empirical Evidence from Japanese Industry Data Kenji Azetsu (Graduate School of Economics, Kobe University) Mototsugu Fukushige (Graduate School of Economics, Osaka University) In this paper, we investigate the asymmetry of adjustment costs for labour. Using monthly data on Japanese industries, we estimate a model of dynamic labour demand that incorporates adjustment costs for hiring and firing workers, and for changing working hours. Our estimates suggest the following. (1) It is more costly to fire workers than to hire them in all industries. ( 2) This asymmetry between hiring and firing costs is more important for production sectors than for non-production sectors. 3) It is much less costly to adjust working hours than to adjust the number of workers. Keywords: Adjustment costs; Dynamic labour demand; Working hours JEL: J23 J32 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:osk:wpaper:0518&r=all 645. The Restructuring of Cotton Spinning Companies in Postwar Japan Takeshi Abe (Graduate School of Economics, Osaka University) Since the mid-1960s, the Japanese cotton spinning industry has experienced steady decline. However, the whole process of this decline was the synthesis of several different firm strategies within the industry. If we look at this process, three types of firm strategies can be found; (1) positive restructuring from textiles to non-textiles (Kanebo, Nittobo, and Nisshinbo), (2) adherence to textile manufacturing (three shinbo: Kondobo, Tsuzukibo and Omikenshi), and (3) inactive restructuring in some large companies (such as Toyobo). Keywords: cotton spinning companies, postwar Japan, restructuring, Nisshinbo, shinbo, Toyobo JEL: N65 N85 Date: 2005-06 URL: http://d.repec.org/n?u=RePEc:osk:wpaper:0519&r=all 646. Strategy-proof Sharing Hideki Mizukami (Faculty of Economics, Toyama University) Tatsuyoshi Saijo (Institute of Social and Economic Research, Osaka University) Takuma Wakayama (Graduate School of Economics, Osaka University) We consider the problem of sharing a divisible good, where agents prefer more to less. First, we prove that a sharing rule satisfies strategy proofness if and only if it has the quasi- constancy property: no one changes her own share by changing her announcements. Next, by constructing a system of linear equations in a manner that is consistent with quasi-constancy, we provide a way to find every strategy-proof sharing rule. Finally, we identify a necessary and sufficient condition for the existence of non-constant, strategy-proof sharing rules, by examining the relationship between the constancy of strategy-proof sharing rules and the dimension of the solution space of the linear system. Keywords: Strategy-proofness, Bossiness, Non-constancy, Quasi- constancy. JEL: C72 D71 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:osk:wpaper:0505&r=all 647. Regional redistribution policy and welfare in a two-region endogenous growth model Yutaro Murakami (Graduate School of Economics, Osaka University) This paper constructs a two-region endogenous growth model with productive government expenditure to analyze the relationship between regional redistribution of public input and the welfare of residents in each region. This paper shows that the redistribution policy may be Pareto improving if the distribution rate of a more populous region is increased because it raises the equilibrium growth rate. Furthermore, the higher the inequalities between the labor populations are, the greater the possibility of a Pareto improving policy. Keywords: Endogenous growth; Government expenditure; Regional distribution; Welfare; Pareto improving policy JEL: H53 O41 R58 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:osk:wpaper:0507&r=all