---------------------------------------------------------------------------- NEP: New Economics Papers All new papers ---------------------------------------------------------------------------- Edited by: Marco Novarese http://ideas.repec.org/e/pno2.html Universita del Piemonte Orientale Date: 2005-03-13 Papers: 219 This document is in the public domain, feel free to circulate it. ++++++++++++++++++++++++++++++++++++++++++++++++++ + Note: Access to full contents may be restricted+ ++++++++++++++++++++++++++++++++++++++++++++++++++ 1. Competing or Colluding in a Stochastic Framework Adriana Breccia Hector Salgado-Banda This paper addresses the issue of anticompetitive and collusive practices in a continuous-time real option framework. We extend the symmetrical duopoly under uncertainty model by Dixit and Pindyck (1994), by granting a patent to the first innovator that files an application. The patent-investment race model is used to focus on long-term collusive agreements signed under a cooperative bargaining structure. The contributions are as follows. First, we show that, in a stochastic framework, competition always leads to different forms of inefficiency. Second, it is proved that, when entrepreneurs can sign long-term contracts via cooperative bargaining, collusion is always beneficial ex-ante since inefficiency disappears. Third, we show that whilst collusion always delays innovation, it does not necessarily delay competition. Depending on a number of economic, as well as firm-specific factors, collusion can actually accelerate competition. Keywords: Bargaining, Collusion, Competition, Geometric Brownian Motion,Nash Demand Game, Stackelberg Game JEL: C7 D8 K4 L13 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:bbk:bbkefp:0504&r=all 2. Liquidity provision in the overnight foreign exchange market Geir Hoidal Bjonnes (Norwegian School of Management) Dagfinn Rime (Norges Bank) Haakon O. Aa. Solheim (Statistics Norway (SSB)) We presents evidence that non-financial customers are the main liquidity providers in the overnight foreign exchange market using a unique daily data set covering almost all transactions in the SEK/EUR market over almost ten years. Two main findings support this: (i) The net position of non-financial customers is negatively correlated with the exchange rate, opposed to the positive correlation found for financial customers; (ii) Changes in net position of non-financial customers are forecasted by changes in net position of financial customers, indicating that non-financial customers take a passive role consistent with liquidity provision. Keywords: Microstructure, International finance, Liquidity JEL: F31 F41 G15 Date: 2004-11-05 URL: http://d.repec.org/n?u=RePEc:bno:worpap:2004_13&r=all 3. Wage formation under low inflation Steinar Holden (University of Oslo and Norges Bank) This paper reviews the literature on the effects of low steady- state inflation on wage formation, focusing on four different effects. First, under low inflation, downward nominal wage rigidity (DNWR) may prevent real wage cuts that would have happened had inflation been higher. Second, wages (and prices) are given in nominal contracts, and inflation affects both how often wages are adjusted, and to what extent wages are set in a forward-looking manner. Third, incomplete labour contracts may provide workers with scope for inflicting costs on the firm without violating the contract, thus forcing the firm to accept a rise in nominal wages. Fourth, if effort depends on wages relative to a reference level, and workers and firms underweight inflation when updating the reference level, positive but moderate inflation may reduce wage pressure. The paper ends by a brief survey of empirical evidence, and a discussion of whether labour markets may adapt to a low inflation environment. Keywords: wage formation, nominal contracts, downward nominal wage rigidity, inflation JEL: J5 J3 E31 Date: 2004-11-10 URL: http://d.repec.org/n?u=RePEc:bno:worpap:2004_14&r=all 4. Large T and small N : A three-step approach to the identification of cointegrating relationships in time series models with a small cross-sectional dimension. Roger Hammersland (Norges Bank) This paper addresses cointegration in small cross-sectional panel data models. In addition to dealing with cointegrating relationships within the cross-sectional dimension, the paper explicitly addresses the issue of cointegration between cross- sections. The approach is based upon a well-known distributional result for the trace test when some of the cointegrating vectors are a priori known, and advocates a three-step procedure for the identification of the cointegrating space when dealing with two- dimensional data. The first step of this procedure utilizes traditional techniques to identify the long-run relationships within each cross-sectional unit separately. In the second step these first step relationships are then treated as known when searching for potential long run relationships between units in a joint analysis comprising the whole cross-sectional dimension. The third step of the procedure then finally reestimate all free parameters of the identified long-run structure to get rid of a potential simultaneity bias as a result of a non-diagonal covariance matrix. Identification of the long-run structures of Norwegian exports and international interest rate relationships are used as examples. Norwegian mainland exports have here been divided into two cross-sectional units; the traditional goods sector and the service sector. While in the study of international interest rate relationships the two sectors investigated are Germany and the US. The examples are used to address the more general issues of the degree of independence in capital markets and in goods markets of small open economies. Keywords: Cointegration, Panel data, transmission mechanism, monopolistic competition, exports JEL: C32 C33 E43 F12 F41 Date: 2004-11-12 URL: http://d.repec.org/n?u=RePEc:bno:worpap:2004_15&r=all 5. Oil wealth and real exchange rates: The FEER for Norway Q. Farooq Akram (Norges Bank) It is often argued that Norway’s sizeable net foreign assets based on its petroleum wealth imply an appreciation of its real exchange rate to a permanently strong level. We investigate this issue within the framework of the fundamental equilibrium real exchange rate (FEER) approach. It is shown that the strength of the FEER depends on the share of imports that can be financed by petroleum (based) revenues. Projections of the FEER over a long horizon suggest that the petroleum wealth implies a stronger equilibrium exchange rate than the rate that would have balanced ( non-petroleum) foreign trade in each period. However, the FEER depreciates steadily over time with growth in imports relative to petroleum revenues and converges towards the rate that balances foreign trade. A permanently strong FEER presupposes that e.g. imports stay constant over time. Our results are in accord with the behaviour of the real exchange before and after the discovery of Norway’s petroleum resources. Keywords: Equilibrium real exchange rate, FEER, econometric analysis JEL: C32 C53 F31 F41 Date: 2004-11-17 URL: http://d.repec.org/n?u=RePEc:bno:worpap:2004_16&r=all 6. Savers, Spenders and Fiscal Policy in a Small Open Economy Egil Matsen (Norwegian University of Science and Technology and Norges Bank) Tommy Sveen (Norges Bank) Ragnar Torvik (Norwegian University of Science and Technology and Norges Bank) This paper analyzes the effects of fiscal policy in an open economy. We extend the savers-spenders theory of Mankiw (2000) to a small open economy with endoge- nous labor supply. We first show how the Dornbusch (1983) consumption-based real interest rate for open economies is modified when labor supply is endogenous. We then turn to the effects of fiscal policy when there are both savers and spenders. With this heterogeneity taken into account, tax cuts have a short-run contractionary effect on domestic production, and increased public spending has a short- run expan- sionary effect. Although consistent with recent empirical work, this result contrasts with those of most other theoretical models. Transitory changes in demand have per- manent real effects in our model, and we discuss the implications for real exchange- rate dynamics. We also show how "rational" savers may magnify or dampen the responses of "irrational" spenders, and show how this is related to features of the utility functions. Keywords: rule-of-thumb consumers, fiscal policy, open economy JEL: E21 E62 F41 Date: 2004-12-29 URL: http://d.repec.org/n?u=RePEc:bno:worpap:2004_18&r=all 7. The degree of independence in European goods markets : An I(2) analysis of German and Norwegian trade data Roger Hammersland (Norges Bank) It is almost common knowledge that foreign trade in Europe is characterized by an acceptance of prices set by the world market. Coupled with a constant profit share in domestic sectors this makes European exports vulnerable to vagaries of international demand and prices as well as to crowding out in the wake of shocks to supply. These circumstances have been used to legitimate special measures geared towards shielding the sector from adverse shocks and general preferential treatment in the past. In fact econometric evidence is not totally at odds with this view. However, neither exports in a large European economy like Germany nor in a small open one, like Norway, are characterized by price taking behavior. On the contrary, both nations show strong evidence of monopolistic power in the process governing external prices, implying that supply shocks to a large extent can be passed on to prices. On the other hand exports seem to be heavily subject to the vicissitudes of international trade, a feature compatible with exports determined by demand ex post for prices fixed ex ante. Keywords: Polynomial Cointegration, Higher Order Non- Stationarity Monopolistic Competition, Exports JEL: C32 F12 F14 Date: 2004-12-30 URL: http://d.repec.org/n?u=RePEc:bno:worpap:2004_19&r=all 8. Who was in the driving seat in Europe during the nineties, International financial markets or the BUBA? Roger Hammersland (Norges Bank) The purpose of this paper is to reexamine empirically the relationship between long-term interest rates in well integrated ? nancial markets. The analysis focuses on long-term interest rates in the US and Germany and has been carried out within the framework of a ?ve dimensional VAR for the simultaneous determination of short- and long-term interest rates in the US and Germany and the rate of exchange rate depreciation. The results strongly support the existence of a long-run relationship between the long-term German and the longterm US interest rate and imply a full pass-through of changes in the long-term US rate into the corresponding German rate. The analysis also substantiates that the direction of causality goes from the longterm US to the long-term German interest rate. With regard to the possibility of controlling the long end of the market on the part of the Bundesbank, the paper apparently takes on a rather pessimistic view, as there is nothing to indicate a long-run relationship between shortand long-term German interest rates. However, the strong in?uence that short-term German interest rates exhibit on German long-term interest rates in the very short run according to the structural model of this paper, might be taken to indicate that the opposite is the case, as e ects originating from expectations of future short-term interest rates might totally neutralize an unequivocally positive short-run portfolio e ect in the long run. If this is the case, there is nothing strange to the fact that one is unable to identify a long- run relationship between short- and long-term German interest rates. On the contrary, it is exactly what to be expected if the monetary transmission mechanism works appropriately. Keywords: Cointegration, Simultaneous Equation Models, International Interest Rate Linkages, Transmission Mechanism JEL: C32 E43 E52 E58 Date: 2004-12-31 URL: http://d.repec.org/n?u=RePEc:bno:worpap:2004_20&r=all 9. House prices in Norway 1819-1989 Oyvind Eitrheim (Norges Bank) Solveig K. Erlandsen (Norges Bank) Annual house price indices for four Norwegian cities are presented for the period from 1819 to 1989. The indices are constructed on the basis of nominal housing transaction prices compiled from the real property registers of the cities. Existing Norwegian house prices indices generally cover a few decades and usually start in the mid-1980s. Hence, we present new information about Norwegian house prices for more than 160 years. The house price indices seem to fit well in with historical events and available indicators of the Norwegian economy. The overall trend in nominal house prices is upward sloping over the two centuries. However, in real terms the picture looks different, in particular in the first half of the twentieth century. Keywords: Economic history, house prices, repeat sales indices JEL: N10 E31 C81 Date: 2004-11-11 URL: http://d.repec.org/n?u=RePEc:bno:worpap:2004_21&r=all 10. Turning Qualitative into Quantitative Evidence: A Well-Used Method Made Explicit A.W. Carus Sheilagh Ogilvie Keywords: Many historians now reject quantitative methods as inappropriate to understanding past societies. It is argued here, however, that no sharp distinction between qualitative and quantitative concepts can be drawn, as almost any concept used to describe a past society is implicitly quantitative. Many recent advances in understanding have been achieved by deriving quantitative evidence from qualitative evidence, and using it jointly and dialectically with the qualitative evidence from which it is derived. Its reliability as quantitative evidence can be improved by indexing it against other quantitative evidence from the same community or population during the same period. We suggest that this triangulation method can be extended to many apparently qualitative types of sources that have not previously been used in this way. The potential of turning qualitative into quantitative evidence, then, despite its successes over the past decades, has hardly begun to be exploited. Keywords: quantitative methods; qualitative methods; methodology; economic history; local studies; case studies; cliometrics JEL: A12 B40 C10 C80 J10 N01 N30 N90 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cam:camdae:0512&r=all 11. Testing Slope Homogeneity in Large Panels M. Hashem Pesaran Takashi Yamagata This paper proposes a modified version of Swamy’s test of slope homogeneity for panel data models where the cross section dimension (N) could be large relative to the time series dimension (T). We exploit the cross section dispersion of individual slopes weighted by their relative precision. Using Monte Carlo experiments, we show that the test has the correct size and satisfactory power in panels with strictly exogenous regressors for various combinations of N and T. For autoregressive (AR) models the test performs well for moderate values of the root of the autoregressive process, but with roots near unity a bias-corrected bootstrapped version performs well even if N is large relative to T. The cross section dispersion tests are used to test the homogeneity of slopes in autoregressive models of individual earnings using the PSID data and show statistically significant evidence of slope heterogeneity in the earnings dynamics. Keywords: Testing Slope Homogeneity, Hausman Type Tests, Cross Section Dispersion Tests, Monte Carlo Results, PSID Earnings Dynamics JEL: C12 C33 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cam:camdae:0513&r=all 12. Managing migration: the Brazilian case Eduardo L. G. Rios-Neto (Cedeplar-UFMG) The objective of this paper is to present the Brazilian migration experience and its relationship with migration management. The article is divided into three parts. First, it reviews some basic facts regarding Brazilian immigration and emigration processes. Second, it focuses on some policy and legal issues related to migration. Finally, it addresses five issues regarding migration management in Brazil. Keywords: international migration, immigration, emigration, migration management, migration policies, migration laws, Brazil JEL: F22 K49 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:cdp:texdis:td249&r=all 13. Inappropriate technology and innovation systems at the periphery: notes on Celso Furtado's contributions for a dialogue between evolutionists and structuralists Eduardo da Motta e Albuquerque (Cedeplar-UFMG) This paper focuses on "inappropriate technology" as formulated by Celso Furtado. The concept of "inappropriate technology" may be, on the one hand, an enlightening assessment of the technological condition of underdevelopment and, on the other hand, a helpful "focusing device" for an agenda on innovation systems at the periphery. Furtado's approach on inappropriate technology may uncover the social roots of the well know "low- growth trap" of less-developed economies. Celso Furtado explains how inappropriate technology is related to the polarization "modernization-marginalization" that characterizes economies with immature systems of innovation, as the Brazilian economy. This concept also highlights how difficult it is to overcome the complex interplay among unequal income distribution, localized and blocked technical progress and unsustainable economic growth. To overcome the inappropriate technology a dual institutional building seems to be necessary: the innovation systems might co- evolve with welfare systems. Keywords: Celso Furtado, evolutionary theory, innovation systems, welfare systems, catching up process JEL: O30 B29 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:cdp:texdis:td254&r=all 14. Asymptotic distribution of a simple linear estimator for VARMA models in echelon form Jean-Marie Dufour Tarek Jouini In this paper, we study the asymptotic distribution of a simple two-stage (Hannan-Rissanen-type) linear estimator for stationary invertible vector autoregressive moving average (VARMA) models in the echelon form representation. General conditions for consistency and asymptotic normality are given. A consistent estimator of the asymptotic covariance matrix of the estimator is also provided, so that tests and confidence intervals can easily be constructed.

Dans cet article, nous etudions la distribution asymptotique d’un estimateur lineaire simple en deux etapes (de type Hannan-Rissanen) pour un processus vectoriel autoregressif-moyenne-mobile (VARMA) stationnaire et inversible, formule sous la forme echelon. Nous donnons des conditions generales qui assurent la convergence et la normalite asymptotique de l’estimateur. Nous fournissons aussi un estimateur convergent de la matrice de covariance asymptotique de l’estimateur, ce qui permet de construire facilement des tests et des intervalles de confiance. Keywords: time series, VARMA, stationary; invertible; echelon form, estimation, asymptotic normality, bootstrap, Hannan-Rissanen, series chronologiques; VARMA, stationnaire, inversible, forme echelon, estimation, normalite asymptotique, bootstrap, Hannan-Rissanen JEL: C3 C32 C53 Date: 2005-02-01 URL: http://d.repec.org/n?u=RePEc:cir:cirwor:2005s-06&r=all 15. The Canonical Type Space of Interdependent Preferences Faruk Gul Wolfgang Pesendorfer Date: 2005-03-04 URL: http://d.repec.org/n?u=RePEc:cla:levrem:666156000000000565&r=all 16. The Rhetoric of Inequity Aversion Avner Shaked Date: 2005-03-04 URL: http://d.repec.org/n?u=RePEc:cla:levrem:666156000000000570&r=all 17. The Rhetoric of Inequity Aversion – Reply Ernst Fehr Klaus M. Schmidt Date: 2005-03-04 URL: http://d.repec.org/n?u=RePEc:cla:levrem:666156000000000574&r=all 18. Is the American Model Miss World? Choosing between the Anglo- Saxon model and a European-style alternative Henri de Groot Richard Nahuis Paul Tang In Lisbon, the European Union has set itself the goal to become the most competitive economy in the world in 2010 without harming social cohesion and the environment. The motivation for introducing this target is the substantially higher GDP per capita of US citizens. The difference in income is mainly a difference in the number of hours worked per employee. In terms of productivity per hour and employment per inhabitant, several European countries score equally well or even better than the United States, while at the same time they outperform the United States with a more equal distribution of income. The European social models are at least as interesting as the US model that is often considered a role model.

In an empirical analysis for OECD countries, we aim to unravel 'the secret of success'.

Our regression results show that income redistribution (through a social security system) does not necessarily lead to lower participation and higher unemployment, provided that countries supplement it with active labour market policies. Especially, spending on employment services like job-search assistance and vocational guidance, seems effective. Furthermore, the results suggest that generous unemployment benefits of short duration contribute to employment without widening the income distribution. Keywords: welfare states; income inequality; employment; unemployment; participation; labour; labour market; labour market policies; labour market policy; labor; labor market; labor market policies; labor market policy; labour productivity; labor productivity; productivity JEL: H30 J22 J58 Date: 2004-10 URL: http://d.repec.org/n?u=RePEc:cpb:discus:40&r=all 19. Trialing incentive based policy to control dryland salinity in the Bet Bet Catchment, north central Victoria. Jeffery Connor (Policy and Economics Research Unit,CSIRO Land and Water) John Ward (Policy and Economics Research Unit,CSIRO Land and Water) Proceedings of the Salinity Solutions Conference "Working with Science and Society" 2 – 5 August 2004, Bendigo, Victoria. Keywords: Australia;salinity;environmental management JEL: Q0 Q1 Q2 Date: 2004-08 URL: http://d.repec.org/n?u=RePEc:csi:report:04_01&r=all 20. Performance Measurement, Expectancy and Agency Theory: An Experimental Study Randolph Sloof (Faculty of Economics and Econometrics, Universiteit van Amsterdam) Mirjam van Praag (Faculty of Economics and Econometrics, Universiteit van Amsterdam) Theoretical analyses of (optimal) performance measures are typically performed within the realm of the linear agency model. An important implication of this model is that, for a given compensation scheme, the agent's optimal effort choice is unrelated to the amount of noise in the performance measure. In contrast, expectancy theory as developed by psychologists predicts that effort levels are increasing in the signal-to-noise ratio. We conduct a real effort laboratory experiment to assess the relevance of this prediction in a setting where all key assumptions of the linear agency model are met. Moreover, our experimental design allows us to control expectancy exactly as in Vroom's (1964) original expectancy model. In this setting, we find that effort levels are invariant to changes in the distribution of the noise term, i.e. to expectancy. Our results thus confirm standard agency theory and reject this particular aspect of expectancy theory. Keywords: Expectancy theory; agency theory; performance measurement; experiments JEL: J33 C91 D81 URL: http://d.repec.org/n?u=RePEc:dgr:uvatin:20050026&r=all 21. What price civil justice? Brian G Main Alan Peacock In the jurisdictions both of England and Wales and of Scotland, the civil justice system is currently the subject of intense critical appraisal. This paper considers the current status of civil justice, beginning by asking what we expect from our system of civil justice and going on to analyse the supply and demand of civil legal services in market terms. The authors conclude that there is scope in the system for substantial experimentation with procedural reform. They suggest that as much as possible should be done to encourage the development of a cafeteria-style of civil justice system with improved information flows for consumers, and provision for innovations such as cost capping and risk sharing between legal representatives and clients, so providing consumers with more freedom of choice. URL: http://d.repec.org/n?u=RePEc:edn:esedps:6&r=all 22. A structural cointegrating VAR approach to macroeconometric modelling A Garratt K Lee M H Pesaran Yongcheol Shin In this paper we discuss the 'structural cointegrating VAR' approach to macroeconometric modelling and compare it to other approaches currently followed in the literature, namely the large- scale simultaneous equation macroeconometric models, the structural VARs, and the dynamic stochastic general equilibrium models. The structural cointegrating VAR approach has the attractive features that the estimated long-run relationships embedded in the model are theory consistent, and have a clear economic interpretation, and yet the short-run dynamics are flexibly estimated within a VAR framework. The approach is illustrated using a small quarterly macroeconometric model of the UK. The uses of the model in impulse response analysis and probability forecasting is also discussed. Keywords: Structural Cointegrating VAR, Macroeconomic Modelling, Generalised Impulse Responses, Persistence Profiles, Probability Forecasts. JEL: C32 C5 E17 URL: http://d.repec.org/n?u=RePEc:edn:esedps:8&r=all 23. Vertical Differentiation and Entry Deterrence: A Reconsideration. Lander Beloki (University of Mondragon (Spain)) Jose Maria Usategui (Universidad del Pais Vasco) Keywords: Vertical differentiation, market coverage, entry deterrence, quality competition JEL: L13 D43 Date: 2005-03-07 URL: http://d.repec.org/n?u=RePEc:ehu:dfaeii:200506&r=all 24. Union Formation and Bargaining Rules in the Labor Market. Yolanda Chica (Universidad del Pais Vasco) Maria Paz Espinosa (Universidad del Pais Vasco) Keywords: Union Formation, Sequential Bargaining, Nash Bargaining, Monopoly Union JEL: C72 J51 Date: 2005-03-07 URL: http://d.repec.org/n?u=RePEc:ehu:dfaeii:200507&r=all 25. Does Self-Employment Reduce Unemployment? David B. Audretsch Roy Thurik Andre van Stel M.A. Carree 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 unemploy-ment and self-employment, i.e. "refugee" and "entrepreneurial" effects. We also find that the "entrepreneu-rial" effects are considerably stronger than the "refugee" effects. Keywords: entrepreneurship, Gibrat's Law, self-employment, unemployment JEL: L11 M13 URL: http://d.repec.org/n?u=RePEc:esi:egpdis:2005-07&r=all 26. The Missing Link Zoltan J. Acs Bo Carlsson Pontus Braunerhjelm David B. Audretsch 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, knowledge, innovation and entrepreneurship JEL: O10 L10 URL: http://d.repec.org/n?u=RePEc:esi:egpdis:2005-08&r=all 27. Agglomeration economies and entrepreneurship: testing for spatial externalities in the Dutch ICT industry Erik Stam Frank G. van Oort Although there is growing evidence on the role of agglomeration economies in the formation and growth of firms, both the concepts of agglomeration economies and entrepreneurship tend to be ambiguously defined and measured in the literature. In this study, we aim to improve the conceptualisations and measures of agglomeration economies and entrepreneurship. Indicators of agglomeration economies are analysed in clearly defined urban regimes on three spatial scales in the Netherlands - national zoning, labour market connectedness, and urban size. This is done in order to uncover their effect on two entrepreneurial phases in the firm life cycle - new firm formation and the growth of incumbent firms in the relatively new ICT industry in the Netherlands. In comparison with new firm formation, the growth of incumbent firms is not so much related to spatial clustering of the ICT industry and other localized sources of knowledge economies associated with urban density. Instead, knowledge as an input for growth of incumbent firms is associated with more endogenous (firm internal) learning aspects, reflected by a significant correlate with R&D-investments. Also the effect of local ICT firm competition differs between the two types of firms: a positive effect on new firm formation, but a negative effect on incumbent firm growth. In general, agglomeration economies have stronger effects on the formation of ICT firms than on the growth of ICT firms. Keywords: agglomeration economies, spatial externalities, entrepreneurship, location, urban regimes, ICT industry JEL: D21 L25 L63 L86 M13 O18 R12 R30 URL: http://d.repec.org/n?u=RePEc:esi:egpdis:2005-09&r=all 28. Competition and Efficiency in Markets with Quality Uncertainty Abhinay Muthoo Suresh Mutuswami This paper addresses the following question: Does competition enhance efficiency in markets with quality uncertainty? Using the mechanism design methodology, we characterize the maximal achievable level of efficiency in such markets, and then use this characterization to analyze how maximal efficiency varies with the degree of market competition. We show that the relationship between them is in general a non-trivial function of the main market parameters. In particular we show: (i) for some set of parameter values maximal efficiency is strictly increasing in the degree of market competition (although it never attains the first- best), but only until competition is sufficiently intense; thereafter, maximal efficiency is strictly decreasing in the degree of competition; (ii) for some set of parameter values maximal efficiency is strictly decreasing in the degree of market competition, attaining the first-best when there is no competition; and (iii) for some set of parameter values maximal efficiency is strictly increasing in the degree of market competition, attains the first-best once competition is sufficiently intense, and then remains at the first-best thereafter. Date: 2005-03-07 URL: http://d.repec.org/n?u=RePEc:esx:essedp:593&r=all 29. Urban Transport Pricing Reform With Two Levels Of Government Stef Proost (K.U.Leuven-Center for Economic Studies; UCL - CORE) Akshaya Sen This paper analyses two challenges in the reform of urban transport pricing. The first challenge is the construction of an optimal package of urban transport pricing instruments assuming one benevolent government level that maximizes overall welfare. We examine the welfare gains from implementing in succession better parking prices, improved public transport prices and time varying tolling. It is found that parking and tolling are the most important elements of the optimal package and that the alternative policy instruments are sub-additive in their benefits. The second problem studied is the use of these pricing instruments by different government levels. We examine a case where an urban government controls parking fees and the regional government controls the tolling. Although both government levels have different objective functions, we find that the overall efficiency losses in the Nash and Stackelberg equilibria are limited. JEL: R48 H71 H21 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:ete:etewps:ete0503&r=all 30. Pairwise-Stability and Nash Equilibria in Network Formation Antoni Calvo-Armengol (Universitat Autonoma de Barcelona, Universite de Toulouse Sciences Sociales and CEPR) Rahmi Ilkilic (Universitat Autonoma de Barcelona) Suppose that individual payoffs depend on the network connecting them. Consider the following simultaneous move game of network formation: players announce independently the links they wish to form, and links are formed only under mutual consent. We provide necessary and sufficient conditions on the network link marginal payoffs such that the set of pairwise stable, pairwise-Nash and proper equilibrium networks coincide, where pairwise stable networks are robust to one-link deviations, while pairwise-Nash networks are robust to one-link creation but multi-link severance. Under these conditions, proper equilibria in pure strategies are fully characterized by one-link deviation checks. Keywords: Network formation, Pairwise-stability, Proper equilibrium JEL: C62 C72 D85 L14 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:fem:femwpa:2005.1&r=all 31. Competitive Equilibrium Hyperinflation under Rational Expectations Fernando de Holanda Barbosa (EPGE/FGV) Alexandre Barros da Cunha Elvia Mureb Sallum Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:fgv:epgewp:578&r=all 32. Public Debt Indexation and Denomination, The Case of Brazil: A Comment Rubens Penha Cysne (EPGE/FGV) Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:fgv:epgewp:579&r=all 33. An axiomatization of minimal curb sets Voorneveld, Mark (Dept. of Economics, Stockholm School of Economics) Kets, Willemien (Department of Econometrics and Operations Research) Norde, Henk (Department of Econometrics and Operations Research) Norde et al. [Games Econ. Behav. 12 (1996) 219] proved that none of the equilibrium concepts in the literature on equilibrium selection in finite strategic games satisfying existence is consistent. A transition to set-valued solution concepts overcomes the inconsistency problem: there is a multiplicity of consistent set-valued solution concepts that satisfy nonemptiness and recommend utility maximization in one-player games. The minimal curb sets of Basu and Weibull [Econ. Letters 36 (1991) 141] constitute one such solution concept; they are axiomatized in this article. Keywords: Minimal curb sets; Consistency JEL: C72 Date: 2005-03-04 URL: http://d.repec.org/n?u=RePEc:hhs:hastef:0589&r=all 34. Learning to be prepared Kets, Willemien (Department of Econometrics and Operations Research) Voorneveld, Mark (Dept. of Economics, Stockholm School of Economics) Behavioral economics provides several motivations for the common observation that agents appear somewhat unwilling to deviate from recent choices: salience, inertia, the formation of habits, the use of rules of thumb, or the locking in on certain modes of behavior due to learning by doing. This paper provides discrete- time adjustment processes for strategic games in which players display precisely such a bias towards recent choices. In addition, players choose best replies to beliefs supported by observed play in the recent past, in line with much of the literature on learning. These processes eventually settle down in the minimal prep sets of Voorneveld (2004, 2005). Keywords: adjustment; learning; minimal prep sets; behavioral bias; salience JEL: C72 D83 Date: 2005-03-07 URL: http://d.repec.org/n?u=RePEc:hhs:hastef:0590&r=all 35. Nonlinear Pricing and the Utility Possibility Set Andersson, Tommy (Department of Economics, Lund University) We consider nonlinear pricing policies that are designed by a social welfare maximizer who operates under a non-negative profit requirement. In our two-type economy, we characterize the set of all feasible nonlinear pricing policies and the frontier of the utility possibility set. Our results provide a link between distortion in consumption and individual, as well as, social welfare. Keywords: Nonlinear Pricing; Budget-Balance; Welfare JEL: D42 D82 Date: 2005-03-04 URL: http://d.repec.org/n?u=RePEc:hhs:lunewp:2005_019&r=all 36. Nonlinear Pricing and the Selection of Welfare Weights Andersson, Tommy (Department of Economics, Lund University) In this paper, we characterize Pareto efficient and budget- balanced nonlinear outlay schedules. The outlay schedules are identified by maximizing a welfare function that is represented by a weighted summation of net utilities over a set of differing consumer types. Our main finding is that if the n>=3 consumer types in the economy are assigned non-negative welfare weights and if a nonlinear outlay schedule where net utility is strictly positive for all consumer types exists, then some of the Pareto efficient and budget-balanced nonlinear outlay schedules cannot be identified by maximizing a weighted summation of net utilities. Keywords: Nonlinear Pricing; Budget-Balance; Welfare weights JEL: D42 D82 Date: 2005-03-04 URL: http://d.repec.org/n?u=RePEc:hhs:lunewp:2005_020&r=all 37. Central bank power is a matter of faith Bengtsson, Ingemar (Department of Economics, Lund University) This paper reconsiders how central banks get involved in the process of determining nominal variables such as market interest rates and inflation rates. It is argued that the traditional story deriving central bank power from its monopoly of issuing base money is flawed. That story - in its various guises - is based on the quantity equation. This equation, however, is only applicable in the hypothetical only-cash-world, i.e. in a world where all transactions has to be paid for with central bank issued notes and coins. Nevertheless, the vast majority of economists would agree that, in practice, central banks seem to influence interest and inflation rates. Here, we suggest that the explanation is that central banks have acquired a role as focal point for those variables. It is possible because interest setting is a coordination game, in which agents have to predict each others expectations. Keywords: entral Banking; Focal Points; Inflation; Monetary Policy; Money; Quantity Theory JEL: C70 E31 E42 E43 E44 E51 E52 E58 Date: 2005-03-04 URL: http://d.repec.org/n?u=RePEc:hhs:lunewp:2005_021&r=all 38. A Fixed Point Theorem for Monotone Functions equivalent to Browers theorem Persson, Hakan (Department of Business, Economics, Statistics and Informatics) A Fixed Point Theorem for Monotone Functions equivalent to Browers theorem Keywords: Increasing function; Fixed point JEL: C65 Date: 2005-03-10 URL: http://d.repec.org/n?u=RePEc:hhs:oruesi:2005_001&r=all 39. The value of improved road safety Hultkrantz, Lars (Department of Business, Economics, Statistics and Informatics) Lindberg, Gunnar (VTI) Andersson, Camilla (Umea University) We report the results of a contingent valuation study of the value of a serious statistical accident (VSSA) in an urban road safety context in Sweden. To account for scale bias of responses ( i.e., the insensitivity of the willingness-to-pay value to the size of the risk reduction being valued) we derive a lower-bound estimate. This is computed from the willingness to pay for a private-good device or a public safety program that completely eliminates the risk of fatal and serious injury road accidents.

We search for values from respondents with self- reported high confidence in their answers. Our conservative estimates result in average benefits of public road-safety measures targeting serious accidents that are greater than previous studies have indicated. Keywords: Value of statistical life; vision zero; contingent valuation; scale bias; scope bias JEL: H43 I18 Q51 Date: 2005-03-10 URL: http://d.repec.org/n?u=RePEc:hhs:oruesi:2005_004&r=all 40. Optimal Redistributive Taxation when Government’s and Agents’ Preferences Differ Blomquist, Soren (Department of Economics) Micheletto, Luca (Department of Economics) Paternalism, merit goods and specific egalitarianism are concepts we sometimes meet in the literature. The thing in common is that the policy maker does not fully respect the consumer sovereignty principle and design policies according to some other criterion than individuals’ preferences. Using the self- selection approach to tax problems developed by Stiglitz (1982) and Stern (1982), the paper provides a characterization of the properties of an optimal redistributive mixed tax scheme in the general case when the government evaluates individuals’ well- being using a different utility function than the one maximized by private agents. Keywords: optimal taxation; behavioral economics; paternalism; merit goods; non-welfarism JEL: H21 H23 Date: 2005-02-21 URL: http://d.repec.org/n?u=RePEc:hhs:uunewp:2005_007&r=all 41. Income Inequality and Growth: A Panel Study of Swedish Counties 1960-2000 Nahum, Ruth-Aida (Department of Economics) This paper explores the relationship between income inequality and growth using panel data on Swedish counties from 1960-2000. Compared to standard methods of estimating this relationship yearly regional level data are used, and inequality is allowed to be endogenous. We find a significant positive impact of inequality on growth, but the magnitude of the effect decreases with the length of the growth period studied. When allowing income inequality to be endogenous, using a panel 2SLS IV estimation, we find positive effect of inequality on 1 to 5-year growth rates, when significant, whereas the effect on 10-year growth rates are not clear cut. Keywords: Income inequality; regional economic growth; panel data JEL: D31 O15 O40 Date: 2005-03-08 URL: http://d.repec.org/n?u=RePEc:hhs:uunewp:2005_008&r=all 42. Demand, Supply and Coordination: An Integrated Theory of the Division of Labor Yijiang Wang Product demand, supply and internal coordination are all explicitly specified in a model to study how they jointly determine the division of labor (job span). A larger job span means fewer workers are used to cover a production process, which is helpful in coordination and product quality, but not in lowering training cost. Although coordination is at the core, the model shows that, in general, job span is affected by all demand and supply factors. With marginal labor productivity declining, job span is narrower when the market is larger, as Adam Smith believed. It is narrower when coordination technology is better or wage is lower. It is likely narrower when unit training cost or productivity is higher. The results are reversed if labor has increasing marginal productivity. These results are either new or shed new light on previous theories of specialization. They have plausible empirical implications. They show the importance of an integrated approach to the study of job design. URL: http://d.repec.org/n?u=RePEc:hrr:papers:0405&r=all 43. The Effects of Interrupted Enrollment on Graduation from College: Racial, Income, and Ability Differences Stephen L. DesJardins Dennis A. Ahlburg Brian P. McCall We present a multiple spells-competing risks model of stopout, dropout, reenrollment, and graduation behavior. We find that students who experience an initial stopout are more likely to experience subsequent stopouts (occurrence dependence) and be less likely to graduate. We also find evidence of the impact of the length of an initial spell on the probability of subsequent events (lagged duration dependence). We simulate the impacts of race, family income, and high school performance on student behavior and show that there are often very large differences between unadjusted rates of student outcomes and adjusted rates. Differences in student performance often ascribed to race are shown to be the result of income, age at entry, and high school performance. URL: http://d.repec.org/n?u=RePEc:hrr:papers:0505&r=all 44. Religion and Education Gender Gap: Are Muslims different from Christians? Mandana Hajj Ugo Panizza (Research Department, Inter-American Development Bank) This paper uses individual-level data from Lebanon to test whether there is a difference between the education gender gap of Muslims and Christians. The paper starts by observing that, in Lebanon, the education gender gap completely disappears for cohorts born after the mid 1960s. Next, the paper uses data for young Lebanese and shows that, other things equal, girls (both Muslim and Christian) tend to receive more education than boys and that there is no difference between the education gender gap of Muslims and Christians. Therefore, the paper finds no support for the hypothesis that Muslims discriminate against female education. Keywords: Religion, Islam, Education, Gender Gap JEL: Z12 I20 O53 URL: http://d.repec.org/n?u=RePEc:idb:wpaper:1001&r=all 45. Economic, Social and Demographic Determinants of Political Participation in Latin America: Evidence from the 1990s Alejandro Gaviria (Universidad Los Andes) Ugo Panizza (Research Department, Inter-American Development Bank) Jessica Seddon Wallack (UC San Diego) This paper uses international data on voter turnout and individual-level data to describe levels and distribution of political participation in Latin America. The paper finds that, while voter turnout in Latin America is rather low, the analysis of more general indicators of political activism reveals that participation is fairly homogenous across socio-economic strata. The finding that participation in Latin America, though low, is comparatively egalitarian seems to partly contradict the perception that Latin America’s history has been one of exclusion and marginalization. Keywords: Democracy, Election, Participation, Latin America JEL: D72 Date: 2003-09 URL: http://d.repec.org/n?u=RePEc:idb:wpaper:1002&r=all 46. The Effect of Fiscal Policy and Corruption Control Mechanisms on Firm Growth and Social Welfare: Theory and Evidence Bernard Gauthier (IEA, HEC Montreal) Jean-Paul Azam Jonathan Goyette (IEA, HEC Montreal) The paper investigates the conflict that arises between the government, its bureaucrats and businesses in the tax collection process. We examine the effect of fiscal policy and corruption control mechanisms on the prevalence of tax evasion and corruption behaviour, and their impact on firm growth and social welfare. We first model a situation where bureaucrats are homogeneous and have complete negotiating power over the firms with which they interact. We show that in such a situation the government can set an optimal tax rate and put in place a corruption control mechanism involving detection of corrupt bureaucrats within the framework of a no-corruption equilibrium. However, when the public administration is composed of heterogeneous types of bureaucrats with the specific ability to impose red tape costs on firms, we show, like Acemoglu and Verdier (2000), that it might be best for the government to allow a certain level of corruption, given the cost of monitoring activities. We also show that the government could face lose-lose as well as win-win situations in the conduct of its fiscal policies. We then verify the predictions of the model using firm- level data collected from 243 businesses in Uganda. We test the effect of monitoring on bribe and tax payments. We also test the effect of tax rates and corruption control mechanisms on firm growth. We compare the effect of actual corruption (as measured by bribe payments) with the effect of government corruption expectations on firms’ growth. Keywords: Corruption, Tax evasion, Tax administration, Firm growth Date: 2004-11 URL: http://d.repec.org/n?u=RePEc:iea:carech:0410&r=all 47. The Prohibition of Alcohol Revisited: the US Case in International Perspective Ruth Dupre (IEA, HEC Montreal) The 13-year American episode of the prohibition of alcohol (1919- 1933) is so notorious and has been so extensively studied that there would not seem to be much to add. However, very little of this work has been done in a comparative and international perspective. Yet, the prohibition movement was international and quite a few countries, particularly the ones with a significant Anglo-Saxon Protestant majority, went through a long lasting and vigorous struggle over the issue. While some of them came quite close to a total ban, they finally adopted different regimes and none went as far as the U.S. Why was it? This is the question addressed in this paper. Using a political economy approach, we try to compare the strength and stakes of the supporters and opponents of prohibition in the U.S., Canada, Australia and New Zealand. As these countries shared many socio-cultural features with the US, this international exploration should shed new light on the American experiment with prohibition, an episode which has always been somehow a paradox in the land of individual freedom and minimalist government.. Date: 2004-11 URL: http://d.repec.org/n?u=RePEc:iea:carech:0411&r=all 48. Econometric Inference, Cyclical Fluctuations, and Superior Information Michel Normandin (IEA, HEC Montreal) This paper presents and assesses a procedure to estimate conventional parameters characterizing fluctuations at the business cycle frequency, when the economic agents’ information set is superior to the econometrician’s one. Specifically, we first generalize the conditions under which the econometrician can estimate these ‘cyclical fluctuation’ parameters from augmented laws of motion for forcing variables that fully recover the agents’ superior information. Second, we document the econometric properties of the estimates when the augmented laws of motion are possibly misspecified. Third, we assess the ability of certain information criteria to detect the presence of superior information. Keywords: Block bootstrap; Hidden variables; Laws of motion for forcing variables; Monte Carlo simulations. JEL: C14 C15 C32 E32 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:iea:carech:0413&r=all 49. E Evaluating Portfolio Value-at-Risk using Semi-Parametric GARCH Models Jeroen V.K. Rombouts (IEA, HEC Montreal) Marno Verbeek In this paper we examine the usefulness of multivariate semi- parametric GARCH models for portfolio selection under a Value-at- Risk (VaR) constraint. First, we specify and estimate several alternative multivariate GARCH models for daily returns on the S&P 500 and Nasdaq indexes. Examining the within sample VaRs of a set of given portfolios shows that the semi-parametric model performs uniformly well, while parametric models in several cases have unacceptable failure rates. Interestingly, distributional assumptions appear to have a much larger impact on the performance of the VaR estimates than the particular parametric specification chosen for the GARCH equations. Finally, we examine the economic value of the multivariate GARCH models by determining optimal portfolios based on maximizing expected returns subject to a VaR constraint, over a period of 500 consecutive days. Again, the superiority and robustness of the semi-parametric model is confirmed. Keywords: multivariate GARCH, semi-parametric estimation, Value- at-Risk, asset allocation. Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:iea:carech:0414&r=all 50. Immigrant earnings profiles in the presence of human capital investment: measuring cohort and macro effects David A. Green Christopher Worswick Considering immigrant earnings in the context of post-arrival human capital investment implies: cohort quality should be defined in terms of the present value of the whole earnings profile; and, an appropriate definition of “macro” effects is obtained using the earnings profile of the native born cohort entering the labour market at the same time as an immigrant cohort. We illustrate this using Canadian immigrant earnings, where there were large cross-cohort earnings declines in the 1980s and 1990s. We find that changes affecting all new entrants play an important role in understanding immigrant earnings. In contrast, earlier approaches imply that “macro” events explain little of immigrant earnings patterns. JEL: J61 J31 Date: 2004-01 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:04/13&r=all 51. Breaking the cycle? The effect of education on welfare receipt among children of welfare recipients Michael B. Coelli David A. Green William P. Warburton We examine the impact of high school graduation on the probability individuals from welfare backgrounds use welfare themselves. Our data consists of administrative educational records for grade 12 students in a Canadian province linked with their own and their parents’ welfare records. We address potential endogeneity problems by: 1) controlling for ability using past test scores; 2) using an instrument for graduation based on school principal fixed effects; and 3) using a Heckman- Singer type unobserved heterogeneity estimator. Graduation would reduce welfare receipt of dropoutsby ? to 3/4. Effects are larger for individuals from troubled family backgrounds and low income neighbourhoods. JEL: I38 I21 Date: 2004-06 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:04/14&r=all 52. Changes in the world distribution of output-per-worker 1960- 98: how a standard decomposition tells an unorthodox story Paul Beaudry Fabrice Collard David A. Green Why have some countries done so much better than others over the recent past? In order to shed new light on this issue, this paper provides a decomposition of the change in the distribution of output-per-worker across countries over the period 1960-98. The main finding of the paper is that most of the change in shape of the world distribution of income between 1960-1998 can be accounted for by a very substantial and previously unrecognized change in the parameters driving the growth process. In particular, we show that the role of capital deepening forces - that is the role of investment rates and population growth in affecting output - increased dramatically over the period 1978-98 versus 1960-78, and that this increase can account for almost all the observed changes in the world distribution. In contrast, we do not find any significant effects coming through non-linear convergence mechanisms or increased importance of education; both of which have played prominent roles in recent discussion of economic performance. Our results therefore highlight that the period 1978-98 was particularly advantageous to countries which strongly favored capital accumulation and hence suggests that research aimed at understanding recent differences in economic performances across countries needs to focus on explaining why the social returns to physical capital accumulation where abnormally high over the period 1978-98. JEL: O33 O41 Date: 2004-09 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:04/15&r=all 53. The role of employment experience in explaining the gender wage gap Michal Myck (Institute for Fiscal Studies) Gillian Paull (Institute for Fiscal Studies) The wage gap between male and female workers has narrowed in both the US and the UK over the past twenty five years. At the same time, employment rates for men and women have converged. This paper examines the relationship between these two facts by analysing the role played by labour market experience in explaining the narrowing gender wage gap. We analyse the relationships between male and female levels of experience and relative wages in the US and the UK over the period 1978 to 2000. The estimation procedure is based on pseudo panels created from cross-sectional data (Current Population Survey (CPS) for the US and Family Expenditure Survey (FES) for the UK). Possible biases from unobserved heterogeneity and the endogeneity of experience are addressed by using an ‘imputed’ measure of experience based on grouped data and by estimating the wage regressions in first differences. Differences in levels of experience are found to explain 39 percent of the gender wage gap in the US and 37 percent in the UK, and failure to control for unobserved heterogeneity is found to understate the role played by total experience in explaining the gap. The gender wage gap has diminished over recent successive cohorts of workers. However, the evidence suggests that the improvements in relative female wages can’t be attributed to changes in relative levels of experience. For each of the successive cohorts we examine, total experience increases the gender wage ratio by a constant 8 to 9 percentage points in the US and the UK. We find that the average experience for female workers relative to male workers has increased over successive cohorts. However, this has either been insufficient to lead to a noticeable effect on relative wages, or changes in the returns to experience have altered affecting female relative earnings unfavourably. Keywords: gender wage gap, returns to experience, artificial panel data JEL: J16 J41 C23 Date: 2004-07 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:04/16&r=all 54. Child support liability and partnership dissolution Ian Walker (Institute for Fiscal Studies and University of Warwick) Yu Zhu This paper studies the determinants of partnership dissolution and focuses on the role of child support. We exploit the variation in child support liabilities driven by an important UK policy reform to separately identify the effects of children from the effect of child support liability. We find strong evidence that an increase in the child support liability significantly reduces dissolution risk. Our results suggest that child support criteria that are based on the non-custodial parent's income, compared to criteria based on aggregate incomes of both parents, would imply much smaller separation rates. Date: 2004-07 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:04/18&r=all 55. Can education compensate for low ability? Evidence from British data Kevin Denny (Institute for Fiscal Studies and University College Dublin) Vincent O'Sullivan This paper uses cross section data to investigate whether the returns to education vary with the level of ability. Using a measure of cognitive ability based on tests taken at ages 7 and 11 we find, unlike most of the existing literature, clear evidence that the return to schooling is lower for those with higher ability indicating that education can act as a substitute for observed ability. We also estimate quantile regression functions to examine how the return to schooling varies across the conditional distribution of earnings. The results show that the return is lower for higher quantiles, suggesting that education is also a substitute for unobserved ability. Keywords: Earnings, education, ability JEL: J31 Date: 2004-08 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:04/19&r=all 56. Understanding the effects of early motherhood in Britain: the effects on mothers Alissa Goodman (Institute for Fiscal Studies) Greg Kaplan (Institute for Fiscal Studies) Ian Walker (Institute for Fiscal Studies and University of Warwick) This paper examines the socio-economic consequences of teenage motherhood for a cohort of British women born in 1970. We apply a number of different methodologies on the same dataset, including OLS, a propensity score matching estimator, and an instrumental variables estimator, using miscarriages as an instrument. We bound the biases introduced through IV due to non-randomness, and misreporting of the instrument. Our results are sensitive to the methodologies used. Taking only observed characteristics into account, the effects of teenage motherhood appear large and negative. The pathways are through bigger family size, and negative labour market outcomes for the mother and her partner, and are mitigated by transfers from the state through the British benefit system. Our IV estimates show that almost all these effects are reduced to zero once unobserved heterogeneity is taken into account. However our IV bounds show that biases introduced by non-randomness and misreporting of our instrument could be responsible for all of this apparent reduction in effects. JEL: J31 Date: 2004-08 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:04/20&r=all 57. An assessment of PenSim2 Carl Emmerson (Institute for Fiscal Studies) Howard Reed (Institute for Fiscal Studies) Andrew Shephard (Institute for Fiscal Studies) The Department for Work and Pensions (DWP)’s Pensim2 model is a dynamic microsimulation model. The principal purpose of this model is to estimate the future distribution of pensioner incomes, thus enabling analysis of the distributional effects of proposed changes to pension policy. This paper presents the results of an assessment of Pensim2 by researchers at the IFS. We start by looking at the overall structure of the model, and how it compares with other dynamic policy analysis models across the world. We make recommendations at this stage as to how the overall modelling strategy could be improved. We then go on to analyse the characteristics of most of the individual modules which make up Pensim2, examining the data used and the regression and predictions used in each step. The results from this examination are used to formulate a set of short and medium-term recommendations for developing and improving the model. Finally, we look at what might become possible for the model over a much longer time frame – looking towards developing a ‘Pensim3’ model over the next decade or so. Keywords: pensions; microsimulation; policy analysis JEL: H55 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:04/21&r=all 58. Immigrant health: selectivity and acculturation Guillermina Jasso Douglas S. Massey Mark R. Rosenzweig James P. Smith Date: 2004-01 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:04/23&r=all 59. Comparative advantage and heterogeneous firms Andrew Bernard (Institute for Fiscal Studies and Dartmouth University) Stephen Redding (Institute for Fiscal Studies and University College London) Peter Schott (Institute for Fiscal Studies and Yale University) This paper presents a model of international trade that features heterogeneous firms, relative endowment differences across countries, and consumer taste for variety. The paper demonstrates that firm reactions to trade liberalization generate endogenous Ricardian productivity responses at the industry level that magnify countries' comparative advantage. Focusing on the wide range of firm-level reactions to falling trade costs, the model also shows that, as trade costs fall, firms in comparative advantage industries are more likely to export, that relative firm size and the relative number of firms increases more in comparative advantage industries and that job turnover is higher in comparative advantage industries than in comparative disadvantage industries. JEL: F11 F12 L11 Date: 2004-07 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:04/24&r=all 60. Changes in the distribution of male and female wages accounting for employment composition using bounds Richard Blundell (Institute for Fiscal Studies and University College London) Amanda Gosling (Institute for Fiscal Studies and Univeristy of Essex) Hide Ichimura (Institute for Fiscal Studies and University College London) Costas Meghir (Institute for Fiscal Studies and University College London) This paper examines changes in the distribution of wages using bounds to allow for the impact of non-random selection into work. We show that bounds constructed without any economic or statistical assumptions can be informative. However, since employment rates in the UK are often low they are not informative about changes in educational or gender wage differentials. Thus we explore ways to tighten these bounds using restrictions motivated from economic theory. With these assumptions we find convincing evidence of an increase in inequality within education groups, changes in the "return" to education and increases in the relative wages of women. Date: 2004-09 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:04/25&r=all 61. Income risk and consumption inequality: a simulation study Richard Blundell (Institute for Fiscal Studies and University College London) Hamish Low (Institute for Fiscal Studies and Trinity College, Cambridge) Ian Preston (Institute for Fiscal Studies and University College London) This paper assesses the accuracy of decomposing income risk into permanent and transitory components using income and consumption data. We develop a specific approximation to the optimal consumption growth rule and use Monte Carlo evidence to show that this approximation can provide a robust method for decomposing income risk. The availability of asset data enables the use of a more accurate approximation allowing for partial self-insurance against permanent shocks. We show that the use of data on median asset holdings corrects much of the error in the simple approximation which assumes no self-insurance against permanent shocks. Keywords: income risk, inequality, approximation methods, con- JEL: C30 D52 D91 Date: 2004-10 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:04/26&r=all 62. Imputing consumption in the PSID using food demand estimates from the CEX Richard Blundell (Institute for Fiscal Studies and University College London) Luigi Pistaferri Ian Preston (Institute for Fiscal Studies and University College London) This paper assesses the accuracy of decomposing income risk into permanent and transitory components using income and consumption data. We develop a specific approximation to the optimal consumption growth rule and use Monte Carlo evidence to show that this approximation can provide a robust method for decomposing income risk. The availability of asset data enables the use of a more accurate approximation allowing for partial sef-insurance against permanent shocks. We show that the use of data on median asset holdings corrects much of the error in the simple approximation which assumes no self-insurance against permanent shocks. JEL: C30 D41 D91 Date: 2004-10 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:04/27&r=all 63. Consumption inequality and partial insurance Richard Blundell (Institute for Fiscal Studies and University College London) Luigi Pistaferri Ian Preston (Institute for Fiscal Studies and University College London) This paper describes the transmission of income inequality into consumption inequality and in so doing investigates the degree of insurance to income shocks. It combines panel data on income from the PSID with consumption data from repeated CEX cross-sections and distinguishes between permanent and transitory income shocks. We find some partial insurance of permanent income shocks with more insurance possibilities for the college educated and those nearing retirement. We find little evidence against full insurance for transitory income shocks except among low income households. Tax and welfare benefits are found to play an important role in insuring permanent shocks. Adding durable expenditures to the consumption measure suggests that durable replacement is an important insurance mechanism, especially for transitory income shocks. Date: 2004-11 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:04/28&r=all 64. Updating the UK's code for fiscal stability Carl Emmerson (Institute for Fiscal Studies) Chris Frayne (Institute for Fiscal Studies) Sarah Love (Institute for Fiscal Studies) The 1998 Code for Fiscal Stability sets out the framework within which UK fiscal policy is now set. While having such a code does not make it easier for a Government to meet its fiscal objectives, it may improve the economic credibility of the policy process. To date the Code has generally worked well, and in any case many of the Treasury’s practices exceed the minimum requirements of the Code. However, improvements could be made in the light of recent experiences. In particular it would be preferable for less emphasis to be placed on the precise forecasts for fiscal aggregates and greater emphasis to be placed on the magnitude of the risks to those forecasts. Using the projections contained in the March 2004 Budget, and information on the size of errors made in the past, we estimate that there is now a 60% chance that the Chancellor’s “golden rule” will be met without further tax increases or spending cuts. This compares to 74% for the forecast made by the Treasury 12 months earlier. As well as clarifying how cautious forecasts are, the uncertainty surrounding projections for fiscal aggregates also has implications for the way in which progress towards any fiscal rules should be interpreted. JEL: E62 H62 Date: 2004-11 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:04/29&r=all 65. The effect of a large expansion of pre-primary school facilities on preschool attendance and maternal employment Samuel Berlinski (Institute for Fiscal Studies and University College, London) Sebastian Galiani We provide evidence on the impact of a large construction of pre- primary school facilities in Argentina. We estimate the causal impact of the program on preprimary school attendance and maternal labor supply. Identification relies on a differences-in- differences strategy where we combine differences across regions in the number of facilities built with differences in exposure across cohorts induced by the timing of the program. We find a sizeable impact of the program on pre-primary school participation among children aged between 3 and 5. In spite of this, we do not find much impact on maternal labor market behavior. The implicit childcare subsidy induced by the construction program only appears to have affected positively the labor market supply of the most skilled mothers. Date: 2004-11 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:04/30&r=all 66. Growth, distance to frontier and composition of human capital Jerome Vandenbussche Philippe Aghion (Institute for Fiscal Studies and Harvard University) Costas Meghir (Institute for Fiscal Studies and University College London) 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 labor has a higher growth-enhancing effect closer to the technological frontier under the reasonable assumption that innovation is a relatively more skillintensive activity than imitation. Also, we provide evidence in favor 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. Date: 2004-08 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:04/31&r=all 67. How special is the special relationship? Using the impact of US R&D spillovers on UK forms as a test of technology sourcing Rachel Griffith (Institute for Fiscal Studies) Rupert Harrison (Institute for Fiscal Studies) John Van Reenen How much does US-based R&D benefit other countries and through what mechanisms? We test the 'technology sourcing' hypothesis that foreign research labs located on US soil tap into US R&D spillovers and improve home country productivity. Using panels of UK and US firms matched to patent data we show that UK firms who had established a high proportion of US-based inventors by 1990 benefited disproportionately from the growth of the US R&D stock over the next 10 years. We estimate that UK firms’ Total Factor Productivity would have been at least 5% lower in 2000 (about $14bn) in the absence of the US R&D growth in the 1990s. We also find that technology sourcing is more important for countries and industries who have 'most to learn'. Within the UK, the benefits of technology sourcing were larger in industries whose TFP gap with the US was greater. Between countries, the growth of the UK R&D stock did not appear to have a major benefit for US firms who located R&D labs in the UK. The 'special relationship' between the UK and the US appears distinctly asymmetric. Keywords: international spillovers; technology sourcing; productivity; JEL: O32 O33 F23 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:04/32&r=all 68. Effectiveness of tax incentives to boost (retirement) saving: theoretical motivation and empirical evidence Orazio Attanasio (Institute for Fiscal Studies and University College London) James Banks (Institute for Fiscal Studies and University College London) Matthew Wakefield (Institute for Fiscal Studies) The adequacy of household saving for retirement has become a policy issue all around the world. The UK and US have been in the vanguard of those countries that have tried to encourage retirement saving by providing tax-favoured treatment for particular savings accounts. We consider empirical evidence from these two countries regarding the extent to which funds in some specific tax advantaged accounts (IRAs in the US, TESSAs and ISAs in the UK) represent new savings. Our best interpretation of this evidence is that: only relatively small fractions of these funds can be considered to be "new" saving and so these policies have been an expensive means of encouraging saving; there has been some deadweight loss from the policies associated with "reshuffling" of existing savings. Continuing improvements in data on individual financial behaviour create scope for future empirical analysis of incentives to save, both within the standard economic framework that we explain and exploit, and by considering extensions to and adaptations of it. Keywords: Saving, tax incentives to save, lifecycle model, household behaviour JEL: D91 H39 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:04/33&r=all 69. Vertical integration and technology: theory and evidence Daron Acemoglu Philippe Aghion (Institute for Fiscal Studies and Harvard University) Rachel Griffith (Institute for Fiscal Studies) Fabrizio Zillibotti (Institute for Fiscal Studies) This paper investigates the determinants of vertical integration using data from the UK manufacturing sector. We find that the relationship between a downstream (producer) industry and an upstream (supplier) industry us more likely to be vertically integrated when the producing industry is more technology intensive and the supplying industry is less technology intensive. Moreover, both of these effects are stronger when the supplying industry accounts for a large fraction of the producer\\\'s costs. These results are generally robust and hold with alternative measures of technology intensity, with alternative estimation straegies, and with or without contraolling for a number of firm and industry-level characteristics. They are consistent with the incomplete contract theories of the firm that emphasize both the potential costs and benefits of vertical integration in terms of investment incentives. Keywords: holdup, incomplete contracts, internal organisation fo the firm, investment, R&D, technology, vertical integration JEL: L22 L23 L24 L60 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:04/34&r=all 70. Waiting lists, waiting times and admissions: an empirical analysis at hospital and general practice level Frank Windmeijer (Institute for Fiscal Studies) Hugh Gravell Pierre Hoonhout We report an empirical analysis of the responses of the supply and demand for secondary care to waiting list size and waiting times. Whereas previous empirical analyses have used data aggregated to area level, our analysis is novel in that it focuses on the supply responses of a single hospital and the demand responses of the GP practices it serves, and distinguishes between outpatient visits, inpatient admissions, daycase treatment and emergency admissions. The results are plausible and in line with the theoretical model. For example: the demand from practices for outpatient visits is negatively affected by waiting times and distance to the hospital. Increases in waiting times and waiting lists lead to increases in supply; the supply of elective inpatient admissions is affected negatively by current emergency admissions and positively by lagged waiting list and waiting time. We use the empirical results to investigate the dynamic responses to one off policy measures to reduce waiting times and lists by increasing supply. Keywords: waiting time; waiting list; hospital admissions JEL: I11 H42 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:04/35&r=all 71. Entry costs and stock market participation over the life cycle Sule Alan Several explanations for the observed limited stock market participation have been offered in the literature. One of the most promising one is the presence of market frictions mostly in the form of fixed entry and/or transaction costs. Empirical studies strongly point to a significant structural (state) dependence in the the stock market entry decision, which is consistent with costs of these types. However, the magnitude of these costs are not yet known. This paper focuses on fixed stock market entry costs. I set up a structural estimation procedure which involves solving and simulating a life cycle intertemporal portfolio choice model augmented with a fixed stock market entry cost. Important features of household portfolio data (from the PSID) are matched to their simulated counterparts. Utilizing a Simulated Minimum Distance estimator, I estimate the coefficient of relative risk aversion, the discount factor and the stock market entry cost. Given the equity premium and the calibrated income process, I estimate a one-time entry cost of approximately 2 percent of (annual) permanent income. My estimated model matches the zero median holding as well as the hump-shaped age- participation profile observed in the data. Keywords: Entry costs; Stock market; Structural estimation JEL: G11 D91 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:05/01&r=all 72. Borrowing constraints, the cost of precautionary saving and unemployment insurance Thomas Crossley Hamish Low (Institute for Fiscal Studies and Trinity College, Cambridge) Job losers exhibit significant heterogeneity in wealth holdings and in the marginal propensity to consume transitory income. We consider potential sources of this heterogeneity, whether (some of) the unemployed face borrowing constraints, and the implications of this heterogeneity for unemployment insurance. We show theoretically how the optimal benefit can depend significantly on borrowing constraints, and on other (non- precautionary) savings motives. We report empirical evidence that i) a quarter of job losers cannot borrow for current consumption, (ii) this constraint is binding for a much smaller fraction, and iii) that \'excess sensitivity\' is not limited to the constrained. Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:05/02&r=all 73. Exploring the returns to scale in food preparation (baking penny buns at home) Thomas Crossley Yuqian Lu We show that as household size increases, households substitute away from prepared foods and towards ingredients. They also devote more time to food preparation. These observations (1) are consistent with a simple model with home production, returns to scale in the time input to food preparation, and varieties of food that differ in the required time input; (2) support the idea that returns to scale in home production are an important source of returns to scale in consumption; and (3), mean that across household sizes, household market expenditures on food are not proportional to food consumption quantities. The latter may provide a partial explanation for a puzzle raised by Deaton and Paxson. Keywords: Household returns to scale, home production, food preparation JEL: D11 D12 D13 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:05/03&r=all 74. Adjustment costs and the identification of Cobb Douglas production functions Steve Bond (Institute for Fiscal Studies and Nuffield College, Oxford) Mans Soderbom Cobb Douglas production function parameters are not identified from cross-section variation when inputs are perfectly flexible and chosen optimally, and input prices are common to all firms. We consider the role of adjustment costs for inputs in identifying these parameters in this context. The presence of adjustment costs for all inputs allows production function parameters to be identified, even in the absence of variation in input prices. This source of identification appears to be quite fragile when adjustment costs are deterministic, but more useful in the case of stochastic adjustment costs. We illustrate these issues using simulated production data. Keywords: Production functions, adjustment costs, identification JEL: D20 D24 C23 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:05/04&r=all 75. The impact of parental income and education on the schooling of their children Arnaud Chevalier Colm Harmon Vincent O'Sullivan Ian Walker (Institute for Fiscal Studies and University of Warwick) This paper addresses the intergeneration transmission of education and investigates the extent to which early school leaving (at age 16) may be due to variations in permanent income, parental education levels, and shocks to income at this age. Least squares estimation reveals conventional results - stronger effects of maternal education than paternal, and stronger effects on sons than daughters. We find that the education effects remain significant even when household income is included. Moreover, decomposing the income when the child is 16 between a permanent component and shocks to income at age 16 only the latter is significant. It would appear that education is an important input even when we control for permanent income but that credit constraints at age 16 are also influential. However, when we use instrumental variable methods to simultaneously account for the endogeneity of parental education and paternal income, we find that the strong effects of parental education become insignificant and permanent income matters much more, while the effects of shocks to household income at 16 remain important. A similar pattern of results are reflected in the main measure of scholastic achievement at age 16. These findings have important implications for the design of policies aimed at encouraging pupils to remain in school longer. Keywords: Early school leaving, intergenerational transmission JEL: I20 J62 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:05/05&r=all 76. Household Nash equilibrium with voluntarily contributed public goods Valerie Lechene (Institute for Fiscal Studies and Wadham College, Oxford) Ian Preston (Institute for Fiscal Studies and University College London) We study noncooperative models with two agents and several voluntarily contributed public goods. We focus on interior equilibria in which neither agent is bound by non negativity constraints, establishing the conditions for existence and uniqueness of the equilibrium. While adding-up and homogeneity hold, negativity and symmetry properties are generally violated. We derive the counterpart to the Slutsky matrix, and show that it can be decomposed into the sum of a symmetric and negative semidefinite matrix and another the rank of which never exceeds the number of public goods plus one. Under separability of the public goods the deviation from symmetry is at most rank two. Keywords: Nash equilibrium, Intra-household allocation, Slutsky JEL: D11 C72 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:05/06&r=all 77. Fiscal Policy Rules and Regime (In)Stability: Evidence from the U.S. Carlo Favero Tommaso Monacelli We employ Markov-switching regression methods to estimate fiscal policy feedback rules in the U.S. for the period 1960-2002. Our approach allows to capture policy regime changes endogenously. We reach three main conclusions. First, fiscal policy may be characterized, according to Leeper (1991) terminology, as active from the 1960s throughout the 1980s, switching gradually to passive in the early 1990s and switching back to active in early 2001. Second, regime-switching fiscal rules are capable of tracking the time-series behaviour of the U.S. primary deficit better than rules based on a constant parameter specification. Third, regime-switches in monetary and fiscal policy rules do not exhibit any degree of synchronization. Our results are at odds with the view that the post-war U.S. fiscal policy regime may be classified as passive at all times, and seem to pose a challenge for the specification of the correct monetary-fiscal mix within recent optimizing macroeconomic models considered suitable for policy analysis. URL: http://d.repec.org/n?u=RePEc:igi:igierp:282&r=all 78. What Role of Legal Systems in Financial Intermediation? Theory and Evidence Laura Bottazzi Marco Da Rin Thomas Hellmann How does the relationship between an investor and entrepreneur depend on the legal system? In a double moral hazard framework, we show how optimal contracts, corporate governance, and investor actions depend on the legal system. With better legal protection, investors give more non-contractible support, demand more downside protection, and exercise more governance. Investors in better legal systems develop stronger governance and support competencies. Therefore, when investing in a different legal systems they behave differently than local investors. We test these predictions using a hand-collected dataset of European venture capital deals. The empirical results confirm the predictions of the model. URL: http://d.repec.org/n?u=RePEc:igi:igierp:283&r=all 79. Monetary Policy in Real Time Domenico Giannone Lucrezia Reichlin Luca Sala We analyse the panel of the Greenbook forecasts (sample 1970- 1996) 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. URL: http://d.repec.org/n?u=RePEc:igi:igierp:284&r=all 80. Building the Infrastructure to Reach and Care for the Poor: Trends, Obstacles and Strategies to overcome them Mavalankar Dileep Ramani K V Patel Amit Shankar Parvathy Infrastructure forms a critical part of health service delivery in any country. Availability, Accessibility, Affordability, Equity, Efficiency and Quality of MNH services highly depend on the distribution, functionality and quality of infrastructure. Most developing countries have invested substantially in developing health infrastructure in rural areas which provides a base for extending MNH services to the poor. Still, there is clear evidence that in many countries there are gaps and inadequacies in health infrastructure. The functionality and utilization of health infrastructure has been sub-optimal or poor due to a variety of reasons. This paper reviews available literature and assesses the coverage and gaps in infrastructure for MNH. It also identifies critical issues in management of infrastructure and analysis their causes and impact on services delivery to the poor. The paper also reviews impacts of reforms on infrastructure and provides some recommendations for improvement of infrastructure management so as to ensure better services to the poor. Date: 2005-03-04 URL: http://d.repec.org/n?u=RePEc:iim:iimawp:2005-03-01&r=all 81. Understanding Export Led Growth and Late Industrialisation to Explain the Differences in the Post Reform Performance of India and China Morris Sebastian Both India and China began to reform in the early eighties, with the Indian reforms being very slow until 1991-92 after which they 'take-off' While there are many differences the crucial difference is that China adopted the same export led growth (ELG) policies of the successful East Asian economies - South Korea, Taiwan, Singapore, Hong Kong and Thailand, while Indian policies have been distinctly laissez-faire. Orthodoxy’s false understanding of ELG (the East Asian trade strategy), which was as far from laissez faire as can be imagined, is the root cause of the failure of other diversified economies in their pursuit of open door policies. Purposeful and massive under valuation of their currency was part of the East Asian strategy, which while making the ratio of exportables to importables close to their international prices, provided for simultaneous export growth and import substitution; something not possible in orthodoxy’s standard work horse -the 2x2x2 model of international trade. Simultaneous import substitution and export production is theoretically possible for economies with idle resources, with the introduction of third non-traded goods sector. ELG can therefore with compatible with little or no protectionism. This aspect of the East Asian trade (and development) strategy has been poorly understood even by the structuralists who otherwise ( on the aspect of the state’s involvement) had demolished the liberal laissez-faire thesis. India's reforms have resulted in considerable discrimination against the manufacturing enterprises. Exports have grown far more slowly than was otherwise possible. The more equal distribution of income in China, and the differences in the macroeconomic policies explain most of the other observed performance differences between the two countries on aspects such as the inward flow of FDI, investment, savings, growth of particular industries. Some of he crucial dimensions of the macroeconomic policies consistent with ELG in the context of China are brought out. These are structural undervaluation of the currency, expansionary monetary policy and exchange rate targeting with only one way openness to the capital account, if at all. The character of FDI itself, which differs sharply between the two countries is related to the differences in the macro economic policies. The Chinese and the East Asian success extends the notion of 'late industrialisation' to one where external demand (along with domestic demand) is realised for the high speed expansion of manufacturing ELG. The supply side of the same strategy is build on exploiting ‘idle’ and underutilised labour which alone is capable of generating the vast gains from trade. Standard models gains from trade are incomparable small in relation. A significant part of the gains do accrue to the destination countries in the from of falling prices so that there are few political difficulties in the pursuit of ELG even by large countries like China. Thus ELG is more akin to a Lewisian process that employs previously underemployed labour for tradables goods production with rising (to high level) investment rates. India is more than ripe for ELG. It can ignore the lessons from the Chinese experience only at much cost to its growth. High growth in excess of 9% is possible with ELG since even with conservatism it is achieving 6+ %. This paper also argues that the mistaken pursuit of laissez-faire as being export led growth in India would only result in the further hollowing out of manufacturing. Keywords: India, China, Pure trade theory, multidimensional issues in trade, non-tradables, undervalued exchange rate, Export led growth, import substituion, open economy, development, late-industrialisation Date: 2005-03-07 URL: http://d.repec.org/n?u=RePEc:iim:iimawp:2005-03-02&r=all 82. GAPS IN “GAAP”: Issues in Nonprofit Accounting and Reporting in India Gandhi Shailesh Nonprofit Organisations (NPOs) in India play an important role as change agents for social and economic development. Though they command substantial amounts of resources, their financial performance measurement and reporting is a major concern. In absence of a single regulatory authority and specific accounting standards for NPOs, the practices of accounting and reporting vary across organisations. Based on an exploratory study, this paper documents the current status on requirements of accounting and reporting vis-a-vis the current practices of NPOs, identifies the gaps, and proposes an action plan to bridge the gaps. The paper classifies the gaps in accounting and reporting under conceptual and institutional frameworks. In order to bridge the gaps in the conceptual framework, the paper recommends the need for developing a uniform accounting and reporting system for all NPOs that should start with conceptualizing information needs of the stakeholders and end with conceptualizing appropriate financial statements to meet these needs and, in the process, resolve any ambiguity in the accounting treatment of specific transactions. At an institutional level, the paper suggests consultative processes among various stakeholders to develop the proposed system and recommends a need for amendments in various Acts to implement it. Date: 2005-03-09 URL: http://d.repec.org/n?u=RePEc:iim:iimawp:2005-03-03&r=all 83. Using a Farmer’s Beta for Improved Estimation of Actual Production History (APH) Yields Carriquiry, Miguel A. Babcock, Bruce A. Hart, Chad E. The effect of sampling error in estimation of farmers’ mean yields for crop insurance purposes is explored using farm-level corn yield data in Iowa from 1990 to 2000 and Monte Carlo simulations. We find that sampling error combined with nonlinearities in the insurance indemnity function will result in empirically estimated crop insurance rates that exceed actuarially fair values by between 2 and 16 percent, depending on the coverage level and the number of observations used to estimate mean yields. Accounting for the adverse selection caused by sampling error results in crop insurance rates that will exceed fair values by between 42 and 127 percent. We propose a new estimator for mean yields based on a common decomposition of farm yields into systemic and idiosyncratic components. The proposed estimator reduces sampling variance by approximately 45 percent relative to the current estimator. Date: 2005-03-07 URL: http://d.repec.org/n?u=RePEc:isu:genres:12260&r=all 84. Inflation Adjustment and Labour Market Structures: Evidence from a Multi-Country Study Nunziata, Luca (Nuffield College, Oxford, University of Milan and IZA Bonn) Bowdler, Christopher (Nuffield College, Oxford) An empirical analysis of the impact of labour market structures on the response of inflation to macroeconomic shocks is presented. Results based on a 20 country panel show that if labour market coordination is high, the effect on inflation of movements in unemployment, import prices, tax rates and productivity is dampened, both on impact and dynamically. In contrast, monopoly power in labour supply, measured by the percentage unionisation of the workforce, appears to amplify the response of inflation to its reduced form determinants. These findings are attributed to the behaviour of wages following movements in demand- and supply- side conditions. Keywords: inflation, input price shocks, labour market coordination, trade union density JEL: E31 J51 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1510&r=all 85. Labor Supply, Home Production and Welfare Comparisons Donni, Olivier (University of Cergy-Pontoise, THEMA and IZA Bonn) We consider the collective model of labor supply with marketable domestic production. We first show that, if domestic production is mistakenly ignored, the “collective” indirect utilities that are retrieved from observed behavior will be unbiased if and only if the profit function is additive. Otherwise, in the non- additive case, the direction and the size of the bias will depend on the complementarity/substitutability of spouses’ time inputs in the production process. We then show that, even if domestic labor supplies are not observed, valid welfare comparisons are possible. This identification result generalizes that in Chiappori (1992). Keywords: household, collective model, labor supply, home production, welfare analysis, identification JEL: D13 J22 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1511&r=all 86. The Employment Effects of Job Creation Schemes in Germany: A Microeconometric Evaluation Caliendo, Marco (DIW Berlin and IZA Bonn) Hujer, Reinhard (University of Frankfurt, ZEW Mannheim and IZA Bonn) Thomsen, Stephan L. (University of Frankfurt) In this paper we evaluate the employment effects of job creation schemes on the participating individuals in Germany. Job creation schemes are a major element of active labour market policy in Germany and are targeted at long-term unemployed and other hard- to-place individuals. Access to very informative administrative data of the Federal Employment Agency justifies the application of a matching estimator and allows to account for individual ( group-specific) and regional effect heterogeneity. We extend previous studies in four directions. First, we are able to evaluate the effects on regular (unsubsidised) employment. Second, we observe the outcome of participants and non-participants for nearly three years after programme start and can therefore analyse mid- and long-term effects. Third, we test the sensitivity of the results with respect to various decisions which have to be made during implementation of the matching estimator, e.g. choosing the matching algorithm or estimating the propensity score. Finally, we check if a possible occurrence of 'unobserved heterogeneity' distorts our interpretation. The overall results are rather discouraging, since the employment effects are negative or insignificant for most of the analysed groups. One notable exception are long-term unemployed individuals who benefit from participation. Hence, one policy implication is to address programmes to this problem group more tightly. Keywords: evaluation, matching, sensitivity analysis, job creation schemes, long-term unemployed JEL: J68 H43 C13 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1512&r=all 87. Estimating the Effect of a Retraining Program for Displaced Workers on Their Transition to Permanent Jobs Cavaco, Sandra (Aarhus School of Business and GATE, Universite Lyon 2) Fougere, Denis (CNRS, CREST-INSEE, CEPR and IZA Bonn) Pouget, Julien (CNRS, CREST-INSEE and IZA Bonn) In this paper we estimate the short-term effects of a French retraining program that was intended to improve reemployment prospects of displaced workers. Our empirical analysis uses non- experimental data collected by the French Ministry of Labour. Transitions from unemployment to permanent vs. temporary jobs are assumed to be generated by a dependent competing risks duration model. Moreover we assume that program entry but also direct transitions from the program to employment are both affected by a selectivity process depending on observable and unobservable individual heterogeneity. We find mixed evidence regarding relevance of the program. For displaced workers who join the program, program participation increases the average probability to obtain a permanent job by 8 points (passing from 42 to 50%). However, for displaced workers who do not join the program, this average probability would have been increased by 28 points ( passing from 43 to 71%) had they participated in the program. We conclude that, although the program has been globally effective, it has been insufficiently proposed to the displaced workers who would have benefited the most from it. Keywords: evaluation, re-employment program, displaced workers, unemployment duration, dependent competing risks model JEL: C41 J24 J64 J68 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1513&r=all 88. Trade and Child Labor: A General Equilibrium Analysis Bandyopadhyay, Subhayu (West Virginia University and IZA Bonn) Bandyopadhyay, Sudeshna C. (West Virginia University) This paper augments the existing literature on trade and child labor by exploring the effects of terms of trade changes in the context of a three good general equilibrium model, where one of the goods is a non-traded good. We find that under quasi-linear preferences the effect of the terms of trade on child labor depends critically on the pattern of substitutability (or complementarity) in the excess demand functions between the export good and the nontraded good. We extend the analysis to the case of homothetic preferences and find that the basic result is somewhat modified in a context where the marginal utility of income is affected by the terms of trade. We also extend the analysis to the case where factors move freely between the three goods as in a Heckscher-Ohlin type framework. Finally, we show that a balanced budget policy of taxing the education of skilled families and subsidizing the education of unskilled families must reduce child labor without any impact on aggregate welfare. Keywords: child labor, non-traded goods, substitutability or complementarity, terms of trade JEL: F1 O19 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1514&r=all 89. The Excess Demand for Subsidized Child Care in Germany Wrohlich, Katharina (DIW Berlin and IZA Bonn) The extension of subsidized child care is currently on top of the political agenda in Germany. In this paper the excess demand for subsidized child care slots is estimated using a partial observability model in the style of Abowd and Farber (1982). The results show that more than 50 percent of children aged 0-3 are queuing for child care slots, whereas only 10 percent of children aged 4-6 years are queuing. For children in the younger age group who have working mothers, about 255,000 child care slots are missing. This number comes close to the government’s plan to expand subsidized child care by 230,000 slots. Keywords: child care, excess demand, partial observability model JEL: J13 C35 D12 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1515&r=all 90. Regionalism in West Africa: Do Polar Countries Reap the Benefits? A Role for Migration Konseiga, Adama (Center for Development Research (ZEF) and IZA Bonn) In the present globalization era an increasing attention is paid to the ambiguous relationship between international migration, brain drain, and economic growth, but few papers analyzed the growth impact of skilled migration. The paper filled the research gap by building the first dataset on brain drain from seven countries of the western African Union (WAEMU) and highlighted the size of the brain loss toward Cote d’Ivoire and France. Burkina Faso shows a more severe brain drain to Cote d’Ivoire compare to other similar sahelian countries whereas the reverse holds when considering the destination France. The subsequent empirical strategy consists in comparing the growth performance of an economy without migration to the counterpart economy. The regional growth convergence analysis shows higher convergence rate once the brain circulation is accounted for. However, the effect of brain gain holds only for countries with migration outside WAEMU toward an industrialized country (France) and failed when migration, as is the case for Burkina Faso, flows into Cote d’Ivoire the polar economy of the Union. Therefore, migration can be used as a powerful force working toward income convergence between capital-rich and capital-poor countries. Keywords: economic growth, brain drain, human capital formation, measurement error, panel estimation JEL: E13 F22 J24 C23 O15 C82 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1516&r=all 91. Intergenerational Mobility: Trends Across the Earnings Distribution Bratberg, Espen (University of Bergen) Nilsen, Oivind A. (Norwegian School of Economics and Business Administration and IZA Bonn) Vaage, Kjell (University of Bergen) The analysis, based on register data for Norwegian cohorts born 1950, 1955, and 1960, shows that the intergenerational earnings mobility is high. Using quantile regression, mobility is found to be lower at the lower end of the earnings distribution than at the upper end. The findings also indicate that mobility increases over time and that the increase seems to be somewhat higher for lower earnings. Finally, we find that the increase in earnings mobility over time has been larger for women than for men. Keywords: intergenerational mobility, time trends, quantile regression JEL: J62 C23 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1517&r=all 92. Job Loss: Bridging the Research and Policy Discussion Lynch, Lisa M. (Tufts University and IZA Bonn) In this paper I discuss a structural problem facing the United States with respect to our policy responses in the context of trade and technological change and their impact on workers. Both trade and technological change have put enormous pressure on the U.S. economy to raise the skill level of the workforce. But the supply of skilled workers in the U.S. is just not keeping pace with the changes in demand due to technology and trade. Fixing this crisis requires us to understand both the skill quality of workers entering into the labor market and the nature of the stock of skills of workers already in the job market. This paper summarizes our knowledge on where workers get skills training and the returns to this training – both private and public. It then discusses how the academic research has informed the policy process and provides some suggestions on how academic economists can get involved in the policy debate to influence the direction of policy. Keywords: human capital JEL: J2 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1518&r=all 93. Peer Effects and Textbooks in Primary Education: Evidence from Francophone Sub-Saharan Africa Frolich, Markus (University College London, IFAU Uppsala and IZA Bonn) Michaelowa, Katharina (HWWA) As opposed to many other school inputs, textbooks have frequently been demonstrated to significantly foster student achievement. Using the rich data set provided by the 'Program on the Analysis of Education Systems' (PASEC) for five francophone, sub-Saharan African countries, this paper goes beyond the estimation of direct effects of textbooks on students' learning and focuses on peer effects resulting from textbooks owned by students' classmates. Applying and extending nonparametric estimation methods from the treatment evaluation literature we separate the direct effect of textbooks from their peer effect. The latter clearly dominates but depends upon the initial level of textbook availability. Keywords: primary education, student achievement, evaluation, nonparametric estimation JEL: C14 C21 O15 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1519&r=all 94. Rational Fear of Floating: A Simple Model of Exchange Rates and Income Distribution Hans Keiding (Institute of Economics, University of Copenhagen) Mette J. Knudsen (Institute of Economics, University of Copenhagen) We consider a simple two-country model, where each country produces a consumption good from a single input. Production takes time, and the model is considered over two consecutive periods. There are three categories of economic agents, namely factor owners, entrepreneurs, and financial intermediaries. The latter offers credits to entrepreneurs and are funded by sale internationally transferable bonds. We assume that the national credit markets are monopolistic but that other markets are competitive. Exchange rate policy is introduced in two different ways, either as a market intervention by a government, sustained by intervention in the commodity market, and, more realistically, as a policy commitment by the monetary authorities, which in equilibrium is taken into consideration by the financial intermediary. The results of the simple model show that an increase in the value of the domestic currency from an equilibrium position will in most cases decrease aggregate welfare of the country, but it will improve welfare of the financial intermediaries. Thus, in the simple framework of our model, a specific sector – and one with a considerable influence on policy choices – stands to gain from this exchange rate policy. Keywords: fear of floating; income distribution; financial intermediaries JEL: F41 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:kud:kuiedp:0503&r=all 95. Improper priors with well defined Bayes Factors Rodney W. Strachan Herman K. van Dijk While some improper priors have attractive properties, it is generally claimed that Bartlett's paradox implies that using improper priors for the parameters in alternative models results in Bayes factors that are not well defined, thus preventing model comparison in this case. In this paper we demonstrate, using well understood principles underlying what is already common practice, that this latter result is not generally true and so expand the class of priors that may be used for computing posterior odds to two classes of improper priors: the shrink age prior; and a prior based upon a nesting argument. Using a new representation of the issue of undefined Bayes factors, we develop classes of improper priors from which well defined Bayes factors result. However, as the use of such priors is not free of problems, we include discussion on the issues with using such priors for model comparison. Keywords: Improper prior; Bayes factor; marginal likelihood; shrinkage prior; measure Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:lec:leecon:05/4&r=all 96. Household Debt and Financial Assets: Evidence from Great Britain, Germany and the United States Sarah Brown Karl Taylor We explore the determinants of debt and financial asset accumulation at the household level using survey data for Great Britain, Germany and the United States (US). Given that debt and assets are both components of a household's financial portfolio, we explore the degree of inter-dependence between households' assets and liabilities by jointly modelling these two aspects of the portfolio. Indeed, our empirical findings for both countries support a high degree of inter-dependence between debt and asset holding. Furthermore, the nature of this inter-dependence varies across income ranges and age groups with the weakest correlation between financial assets and debt being found for the lowest income groups in Great Britain, suggesting that such groups may be particularly vulnerable to adverse financial shocks. Evidence supporting inter-dependence between assets and debt no longer remains, however, once we focus on debtors which suggests that households in debt may potentially face difficulties following adverse changes in their financial situation. Keywords: Debt; Financial Assets; Household Financial Portfolio; Random Effects; Tobit Estimator JEL: D14 G11 H31 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:lec:leecon:05/5&r=all 97. Why Are Ethnically Divided Countries Poor? Benjamin Bridgman URL: http://d.repec.org/n?u=RePEc:lsu:lsuwpp:2003-11&r=all 98. Capital-Skill complementarity? Evidence from a Panel of Countries Chris Papageorgiou John Duffy Fidel Perez-Sebastian URL: http://d.repec.org/n?u=RePEc:lsu:lsuwpp:2003-12&r=all 99. Can Transition Dynamics Explain the International Output Data? Chris Papageorgiou Fidel Perez-Sebastian URL: http://d.repec.org/n?u=RePEc:lsu:lsuwpp:2003-13&r=all 100. Energy Prices and the Expansion of World Trade Benjamin Bridgman URL: http://d.repec.org/n?u=RePEc:lsu:lsuwpp:2003-14&r=all 101. An Empirical Analysis of U.S. Aggregate Portfolio Allocations Michel Normandin Pascal St-Amour This paper analyzes the important time variation in U.S. aggregate portfolio allocations. To do so, we first use flexible descriptions of preferences and investment opportunities to derive optimal decision rules that nest tactical, myopic, and strategic portofolio allocations. We then compare these rules to the data through formal statistical analysis. Our main results reveal that i) purely tactical and myopic investment behaviors are unambiguously rejected, ii) strategic portfolio allocations are strongly supported, and iii) the Fama-French factors best explain empirical portfolios shares. Keywords: Dynamic Hedging, Risk Aversion, Inter-temporal Substitution, Time-Varying Investment Opportunity Set JEL: G11 Date: 2005 URL: http://d.repec.org/n?u=RePEc:lvl:lacicr:0503&r=all 102. On Representative Social Capital Charles Bellemare Sabine Kroger This paper analyzes data for a random sample drawn from the Dutch population who reveal their capacity to provide and sustain social capital by their propensity to invest and reward investments by means of an economic experiment. We have three main results. First, we find that heterogeneity in behavior is characterized by several asymmetries -- men, the young and elderly, and low educated individuals invest relatively less, but reward significantly more investments. Second, higher expected levels of investments have a positive and significant effect on the level of investments themselves, corroborating the presence of social norms. Third, we compare our results with a laboratory experiment conducted with a student sample. We find that the student sample provides a lower bound of the population level of social capital. Keywords: Social Capital Investments, Social Norms, Experiment, Representative Sample JEL: Z13 C90 C10 D39 Date: 2005 URL: http://d.repec.org/n?u=RePEc:lvl:lacicr:0504&r=all 103. Norm Enforcement: Anger, Indignation or Reciprocity? Jeffrey Carpenter Peter Hans Matthews The enforcement of social norms often requires that unaffected third parties sanction offenders. Given the renewed interest of economists in norms, the literature on third party punishment is surprisingly thin, however. In this paper, we report on the results of an experiment designed to evaluate two distinct explanations for this phenomenon, indignation and group reciprocity. We find evidence in favor of both, with the caveat that the incidence of indignation-driven sanctions is perhaps smaller than earlier studies have hinted. Furthermore, our results suggest that second parties use sanctions to promote conformism while third parties intervene primarily to promote efficiency. Keywords: experiment, voluntary contribution mechanism, norm, third party punishment, reciprocity, indignation JEL: C79 C91 C92 D64 H41 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:mdl:mdlpap:0503&r=all 104. Wild and Crazy Ideas: In Memory of Ken Koford David Colander Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:mdl:mdlpap:0504&r=all 105. A less effective monetary transmission in the wake of EMU? Evidence from lending rates pass-through Gianluca Di Lorenzo Giuseppe Marotta A new approach to search for structural breaks in the retail lending rates pass-through in the wake of EMU is proposed and implemented for Italy and Portugal. The econometric exercise shows that breakpoints cluster in the second semester 1999 and that the pass-through on short term lending is, in contrast with earlier research, sizeably lower in the post-break period. The recently proposed distinction between monetary policy and cost-of- funds approaches in the passthrough analysis does not yield different breakpoints. These results challenge the widely held view that EMU has in its wake enhanced the effectiveness of monetary transmission via the banking sector and made it more uniform across countries, because of rising and converging PTs. A strengthened relationship lending could at least partly explain the reduced passthrough in the Italian case. Keywords: Interest rates; Monetary policy; European Monetary Union; Relationship lending; Cointegration analysis; Structural breaks JEL: E43 E52 E58 F36 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:mod:modena:0503&r=all 106. Private Benefits of Control, Ownership, and the Cross- Listing Decision Craig Doidge G. Andrew Karolyi Karl V. Lins Darius P. Miller Rene M. Stulz This paper investigates how a foreign firm%u2019s decision to cross-list its shares in the U.S. is related to the concentration of the ownership of its cash flow rights and of its control rights. Theory has proposed that when private benefits are high, controlling shareholders are less likely to choose to list their firm%u2019s shares in the U.S. because the higher standards for transparency and disclosure, as well as the increased monitoring associated with such listings, limit their ability to extract private benefits. We offer evidence that confirms this hypothesis using data on more than 4,000 firms from 31 countries. Using logistic regression analysis, we show that the control rights held by controlling shareholders, as well as the difference between their control rights and their cash flow rights are significantly and negatively related to the existence of a U.S. listing. In addition, we employ duration analysis using a Cox proportional-hazard model to show that the probability of listing in a given year from 1995 to 2001, conditional on not yet having listed, is significantly lower for firms whose managers have high levels of control and for firms whose controlling shareholder owns more control rights than cash flow rights. JEL: G15 G34 K00 P51 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11162&r=all 107. Estimating Life-Cycle Parameters from Consumption Behavior at Retirement John Laitner Dan Silverman Using pseudo-panel data, we estimate the structural parameters of a life--cycle consumption model with discrete labor supply choice. A focus of our analysis is the abrupt drop in consumption upon retirement for a typical household. The literature sometimes refers to the drop, which in the U.S. Consumer Expenditure Survey we estimate to be approximately 16%, as the "retirement-- consumption puzzle." Although a downward step in consumption at retirement contradicts predictions from life--cycle models with additively separable consumption and leisure, or with continuous work-hour options, a consumption jump is consistent with a setup having nonseparable preferences over consumption and leisure and requiring discrete work choices. This paper specifies a life-- cycle model with these latter two elements, and it uses the empirical magnitude of the drop in consumption at retirement to provide an advantageous method of identifying structural parameters --- most importantly, the intertemporal elasticity of substitution. JEL: E21 D11 D12 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11163&r=all 108. Technology, Monopoly, and the Decline of the Viatical Settlements Industry Neeraj Sood Abby Alpert Jay Bhattacharya The viatical settlement industry provides an opportunity for terminally-ill consumers, typically HIV patients, to exploit a previously untapped source of equity in existing life insurance contracts to finance consumption and medical expenses. The 1996 introduction and dissemination of effecive anti-HIV medication reduced AIDS mortality, but also reduced viatical settlement prices, even holding fixed changes in life expectancy. Using Freedom of Information Act requests to state insurance regulatory agencies, we have assembled a unique dataset of over twelve thousand viatical transactions from firms licensed in states that regulate viatical settlement markets. We distinguish two explanations for falling prices---an increase in market power, and a change in market expectations about the likelihood of further improvements in HIV care. We find that both explanations have contributed to diminishing settlement prices over the last decade, but increased market power has been the more important driver in the most recent years. Our estimates imply that the increase in market power of firms reduced the value of life insurance holdings of HIV persons by about $1.0 billion. JEL: I1 L1 O3 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11164&r=all 109. Productivity Spillovers, Terms of Trade and the "Home Market Effect" Giancarlo Corsetti Philippe Martin Paolo A. Pesenti This paper analyzes 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. JEL: F41 F32 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11165&r=all 110. Stocks, Bonds, Money Markets and Exchange Rates: Measuring International Financial Transmission Michael Ehrmann Marcel Fratzscher Roberto Rigobon The paper presents a framework for analyzing the degree of financial transmission between money, bond and equity markets and exchange rates within and between the United States and the euro area. We find that asset prices react strongest to other domestic asset price shocks, and that there are also substantial international spillovers, both within and across asset classes. The results underline the dominance of US markets as the main driver of global financial markets: US financial markets explain, on average, more than 25% of movements in euro area financial markets, whereas euro area markets account only for about 8% of US asset price changes. The international propagation of shocks is strengthened in times of recession, and has most likely changed in recent years: prior to EMU, the paper finds smaller international spillovers. JEL: E44 F3 C5 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11166&r=all 111. Monetary Policy with Judgment: Forecast Targeting Lars E.O. Svensson "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 U. S. 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 complicated 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. JEL: E42 E52 E58 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11167&r=all 112. What is the Impact of Software Patent Shifts?: Evidence from Lotus v. Borland Josh Lerner Feng Zhu Economists have debated the extent to which strengthening patent protection spurs or detracts from technological innovation. In this paper, we examine the reduction of software copyright protection in the Lotus v. Borland decision. If patent and copyright protections are substitutes, then weakening of one form of protection should be associated with an increasing reliance on the other. We find that the firms affected by the diminution of copyright protection disproportionately accelerated their patenting in subsequent years. But little evidence can be found for harmful effects: in fact, the increased reliance on patents is correlated with some positive outcomes for firms. JEL: O3 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11168&r=all 113. Explaining Returns with Cash-Flow Proxies Peter Hecht Tuomo Vuolteenaho Stock returns are correlated with contemporaneous earnings growth, dividend growth, future real activity, and other cash- flow proxies. The correlation between cash-flow proxies and stock returns may arise from association of cash-flow proxies with one- period expected returns, cash-flow news, and/or expected-return news. We use Campbell's (1991) return decomposition to measure the relative importance of these three effects in regressions of returns on cash-flow proxies. In some of the popular specifications, variables that are motivated as proxies for cash- flow news also track a nontrivial proportion of one-period expected returns and expected-return news. As a result, the R2 from a regression of returns on cash-flow proxies may overstate or understate the importance of cash-flow news as a source of return variance. JEL: E44 G10 G12 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11169&r=all 114. Capital Controls, Sudden Stops and Current Account Reversals Sebastian Edwards In this paper I use a broad multi-country data set to analyze the relationship between restrictions to capital mobility and external crises. The analysis focuses on two manifestations of external crises: (a) sudden stops of capital inflows; and (b) current account reversals. I deal with two important policy- related issues: First, does the extent of capital mobility affect countries%u2019 degree of vulnerability to external crises; and second, does the extent of capital mobility determine the depth of external crises %uF818 as measured by the decline in growth %u2013 once the crises occur? Overall, my results cast some doubts on the assertion that increased capital mobility has caused heightened macroeconomic vulnerabilities. I find no systematic evidence suggesting that countries with higher capital mobility tend to have a higher incidence of crises, or tend to face a higher probability of having a crisis, than countries with lower mobility. My results do suggest, however, that once a crisis occurs, countries with higher capital mobility may face a higher cost, in terms of growth decline. JEL: F30 F32 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11170&r=all 115. Forms of Democracy, Policy and Economic Development Torsten Persson 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. JEL: F43 H11 O57 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11171&r=all 116. Measurement and Explanation of the Intensity of Co- publication in Scientific Research: An Analysis at the Laboratory Level Jacques Mairesse Laure Turner In order to study networks of collaboration between researchers, we propose a simple measure of the intensity of collaboration, which can be easily interpreted in terms of relative probability and directly aggregated at the laboratory level. We use this measure to characterize the relations of collaboration, as defined in terms of co-publication, between the physicists the French %u201CCentre National de la Recherche Scientifique%u201D ( CNRS), in the field of condensed-matter, between 1992 and 1997, and to investigate how they vary with regards to various factors: mainly the geographical distance between laboratories, but also their specialization and size, their productivity and the quality of their publications, and their international openness. We find that the average intensity of co-publication within laboratories is about 40 times higher than the intensity between laboratories but within towns, and 100 times higher than the intensity between laboratories and between towns. Yet, geographical distance does not have a significant impact, or a very weak one, on the existence and intensity of co-publication of researchers located in different towns. We also find that the productivity laboratories, their size and proximity in specialization profiles are significant factors of collaboration. JEL: D29 O39 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11172&r=all 117. Financial Crises, 1880-1913: The Role of Foreign Currency Debt Michael Bordo Christopher Meissner What is the role of foreign currency debt in precipitating financial crises? In this paper we assemble data for nearly 30 countries between 1880 and 1913 and examine debt crises, currency crises, banking crises and twin crises. We pay special attention to the role of foreign currency and gold clause debt, currency mismatches and debt intolerance. We find fairly robust evidence that more foreign currency debt leads to a higher chance of having a debt crisis or a banking crisis. However, a key finding is that countries with noticeably different backgrounds, and strong institutions such as Australia, Canada, New Zealand, Norway, and the US deftly managed their exposure to hard currency debt, generally avoided having too many crises and never had severe financial meltdowns. Moreover, a strong reserve position matched up to hard currency liabilities seems to be correlated with a lower likelihood of a debt crisis, currency crisis or a banking crisis. This strengthens the evidence for the hypothesis that foreign currency debt is dangerous when mis-managed. We also see that countries with previous default histories seem prone to debt crises even at seemingly low debt to revenue ratios. Finally we discuss the robustness of these results to local idiosyncrasies and the implications from this representative historical sample. JEL: F33 F34 N20 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11173&r=all 118. Cost-Effective Policies to Reduce Vehicle Emissions Don Fullerton Li Gan This paper uses an estimated demand system that accounts for heterogeneity to calculate and compare the lost consumer surplus from a higher tax on gasoline, a tax on distance, or a subsidy for buying a newer car. We introduce a view of cost-effectiveness that compares policies instead of technologies. Each tax might induce some consumers to drive less, some to switch from two vehicles to one, and some to buy a car instead of an SUV. Our model captures these behaviors. For each rate of tax, we simulate the changes in all such choices and how the new choices affect emissions. We also calculate the equivalent variation and subtract tax revenue to get deadweight loss. Finally, we take the added deadweight loss over the additional abatement as the social marginal cost of abatement, and we plot this curve for several different tax policies. JEL: H2 Q5 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11174&r=all 119. The Barrier Model of Productivity Growth: South Africa Torfinn Harding (Statistics Norway and Department of Economics, Norwegian University of Science and Technology) Jorn Rattso (Department of Economics, Norwegian University of Science and Technology) 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: 2005-02-16 URL: http://d.repec.org/n?u=RePEc:nst:samfok:4805&r=all 120. Productivity Growth in Backward Economies and the Role of Barriers to Technology Adoption Hildegunn Ekroll Stokke (Department of Economics, Norwegian University of Science and Technology) We offer a barrier model of growth with a broader understanding of the sources of productivity growth. Organizational change is suggested as an alternative to innovation and technology adoption. Domestic and international barriers (related to the level of human capital and the trade share) determine the timing and pace of technological catch-up, and as opposed to the catchingup hypothesis backward economies may get stuck in a poverty trap. Growth in lagging economies is not driven by adoption of foreign technology due to inappropriateness. The large technological distance forces the economy to rely more on own productivity improvements through organizational change. Trade liberalization in backward economies does not give the expected boost to productivity growth, because of low capability to take advantage of the frontier technology. Economies can escape the poverty trap by reducing trade barriers, but the benefits from an open economy is highest in middle-income economies, which have both the potential and capability to adopt foreign technology. Keywords: Ramsey-model; sources of growth; trade barriers; poverty trap JEL: O3 O4 Date: 2005-02-16 URL: http://d.repec.org/n?u=RePEc:nst:samfok:4905&r=all 121. A model of Equilibrium Exchange Rates for the New Zealand and Australian dollar Simon Wren-Lewis (Reserve Bank of New Zealand) This paper extends the `Five Area Bilateral Equilibrium Exchange Rate' (FABEER) model used in Wren-Lewis (2003) to include New Zealand and Australia. This model calculates medium term exchange rates conditional on assumptions for `sustainable' current accounts. The model suggests that the equilibrium value of both currencies has been declining over the last ten years and that both currencies were near fair value (on average) during 2002. Equilibrium values against the US dollar are estimated to be around 0.50 (New Zealand) and 0.59 (Australia), although these estimates are sensitive to the assumed equilibrium values for variables like commodity prices and the current account. JEL: E17 E61 F31 Date: 2004-08 URL: http://d.repec.org/n?u=RePEc:nzb:nzbdps:2004/07&r=all 122. Examining finite-sample problems in the application of cointegration tests for long-run bilateral exchange rates Angela Huang (Reserve Bank of New Zealand) Numerous empirical studies investigate whether exchange rates are related to `economic fundamentals' in the long-run and find a range of relationships through cointegration analysis. We report similar cointegrating relationships for the value of the New Zealand dollar relative to the US dollar (NZD/USD) and for the value of the New Zealand dollar relative to the Australian dollar NZD/AUD). These include determinants such as commodity prices, 90-day interest rate differentials, and inflation and growth differentials. However, Godbout and van Norden (1997) demonstrate that finite-sample problems may have affected the conclusions of such cointegration studies. Through a simple Monte Carlo study, we consider whether the cointegration coefficients can reasonably be interpreted as `long-run' elasticities of the exchange rate to changes in fundamental variables. The simulation results suggest that given a relatively short span of data it is possible for cointegration analysis to indicate that a long-run relationship has been found when in fact there is only a cyclical relationship. Therefore caution is advised when interpreting the empirical results and making policy assessments about the nature of exchange movements relative to its broad trend. JEL: F31 C15 C22 Date: 2004-10 URL: http://d.repec.org/n?u=RePEc:nzb:nzbdps:2004/08&r=all 123. Social Protection and Chronic Poverty: Portugal and the Southern European Welfare Regime Leonor Vasconcelos Ferreira (Faculdade de Economia, Universidade do Porto and CEMAPRE / ISEG-UTL) This paper aims to assess the extent to which social policies address chronic poverty in south European Union countries and particularly in Portugal. The Southern European welfare regime ( Leibfried, 1993; Ferrera, 1996; Bonoli, 1997; Matsaganis et al, 2003), which includes Greece, Italy, Portugal and Spain, has been seen as less developed and less generous in covering social risks. Despite different country profiles, in what Portugal present some distinctive features, South European countries also exhibit several target inefficiencies that make social policies much less successful in tackling extreme and chronic poverty. Possible explanations of that fact may rest in institutional factors, such as the central role of family and the less accountability of the state, the high tolerance of inequality and poverty, and, in broader terms, in attitudes toward inequality and poverty embedded in social and political practices. Keywords: Chronic Poverty; Social Policy; Portugal; Southern European Welfare Regime JEL: D31 I32 I38 P52 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:por:fepwps:168&r=all 124. The importance in the papers' impact of the number of pages and of co-authors - an empirical estimation with data from top ranking economic journals Pedro Cosme Costa Vieira (Faculdade de Economia do Porto) On a regular basis the scientific output of academic people has to be evaluated, e.g. to decide tenure. A very important item in this evaluation is the published papers’ quality that tends to be approximated by its impact in the literature. As the measure of this impact requires a long-term analysis, thus it is used as its estimator the journal average impact where each paper is published. But some papers have a single author while others have several and some papers have one or two pages while others have more than fifty. In this work I validate the conjecture that these two variables have a significant and positive effect in papers’ future impact, i.e. in papers quality. Nonetheless, I quantify that this two variables jointly considered merely explain 2.8% of papers’ impact variability. Keywords: Scientific Skill, Co-authorship, Papers’ impact JEL: J24 J31 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:por:fepwps:169&r=all 125. Labor market time and home production: A new test for collective models of intra- household allocation Francois Bourguignon (World Bank, washington and Delta, Paris) Maria Concetta Chiuri (University of Bari, CHILD and CSEF) The allocation of time is a crucial decision that influences many aspects of household welfare, above all consumption, income level and home production. This paper presents a new methodology to estimate woman domestic productivity using a French time use survey, at least whenever the recursivity property for constrained utility maximization with home production applies. It provides empirical evidence not rejecting a collective model of household decision making over working time, as the sum of time spent in domestic production and market labor time. Our results show also that female domestic productivity is a relevant variable explaining intra-household distribution of resources. Keywords: Collective models, home production, time- use JEL: D13 J22 Date: 2005-03-01 URL: http://d.repec.org/n?u=RePEc:sef:csefwp:131&r=all 126. "On the Role of Tax-Subsidy Scheme in Money Search Models" Kazuya Kamiya (Faculty of Economics, University of Tokyo) Takashi Shimizu (Faculty of Economics, Kansai University) This paper investigates the role of policy in money search models with divisible money. Recently, real indeterminacy of stationary equilibria has been found in both specific and general search models with divisible money. Thus if we assume the divisibility of money, it would be quite difficult to make accurate predictions of the effects of simple monetary policies. Instead, we show that some tax-subsidy schemes select a determinate efficient equilibrium. In other words, for a given efficient equilibrium and for any real number ? > 0, a certain tax-subsidy scheme induces a locally determinate equilibrium within the ? -neighborhood of the given equilibrium. Moreover, the size of the tax-subsidy can be arbitrarily small. Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:tky:fseres:2005cf323&r=all 127. Global Climate Policy in a Post-Kyoto World Georg Muller-Furstenberger Gunter Stephan Obviously, there are different views on how successful the Kyoto process was in establishing interna-tional cooperation in greenhouse gas abatement. But independent of that, the question is urgent: What might happen after 2012? Will there be a new initiative for an internationally coordinated climate policy or does the world fall back into a regime of non-cooperative abatement policies? This paper analyses costs and benefits of three different post-Kyoto policy options: On the one hand there is PARETO which is the nickname for the pareto-efficient internationalization of the external effects of global cli-mate change through international trade in carbon rights on the one hand. And there is CAP as well as INTAG on the other. Both are unilateral climate policies. CAP denotes a scenario where regions aim for reducing domestic carbon emissions by a certain percentage annually. INTAG is a short cut for intensity targeting which is the US’ most preferred climate policy option. It refers to the same abate-ment policy, however by means of technological progress only Keywords: Climate policy; intensity targeting; R&D investments; Integrated Assessment JEL: O33 Q38 Q43 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:ube:dpvwib:dp0502&r=all 128. Cultural Variation in the Theory of the Firm Donald W. Katzner (University of Massachusetts Amherst) This paper presents a model of the firm that includes the possibility of firm and employee-on-the-job decision making based on alternatives to profit and utility maximization. Such alternatives are relevant and significant when explaining firm activity in cultural environments in which self interest is not considered to be a primary force driving human behavior. Three types of firms are defined and their properties compared: the Western firm, the Japanese firm, and the clan. The third is a combination of the first two. JEL Categories: D21, Z19 Keywords: Culture, firm, decision making Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:ums:papers:2005-07&r=all 129. Convergence of Income Among Provinces in Canada – An Application of GMM Estimation Mukesh Ralhan (Department of Economics, University of Victoria) Ajit Dayanandan (Department of Economics, University of Northern B.C.) This paper tests for unconditional and conditional income convergence among provinces in Canada during the period 1981-2001. We apply the first-differenced GMM estimation technique to the dynamic Solow growth model and compare the results with the other panel data approaches such as fixed and random effects. The method used in this paper accounts for not only province-specific initial technology levels but also for the heterogeneity of the technological progress rate between the ‘richer’ and ‘not so richer’ provinces of Canada. One of the findings of the paper is that the Canadian provinces do not share a common technology progress rate and a homogeneous production function. The findings of the study suggest a convergence rate of around 6% to 6.5% p.a. whereas the previous studies using OLS and other techniques reported a convergence rate of around 1.05 % for per capita GDP and 2.89% p.a. for personal disposable income among Canadian provinces. Keywords: Provincial convergence, Canada, Panel data, GMM JEL: C14 H4 O40 O41 O53 Date: 2005-03-10 URL: http://d.repec.org/n?u=RePEc:vic:vicewp:0502&r=all 130. IMPORTING HIGH-RISK CAPITAL AND REVEALING HIDDEN COMPARATIVE ADVANTAGES Tamir Agmon The comparative advantage of a country is determined by its factor intensity. In many cases factors of production can be accumulated over time and thus effect a change in the comparative advantage of a given country. The changes in the accumulation of factors can be a policy decision, or it can arise from other economic developments. The change in the comparative advantage of Israel in the last decade of the 20th century where the country has become a center for innovative new technology was affected by the globalization of the US capital market and the ability of Israeli companies and service organization to build an informational infrastructure that has made it possible to import high-risk specific sector capital to Israel. Importing this type of capital has completed the already existing human capital and makes a potential, hidden, advantage into a business reality. The Israeli experience is evidence to the contribution of international capital movements to economic growth of a small country. It also shows the relations between the international finance model of capital movements and the development economics case for the changing pattern of the comparative advantages of small countries, and the contribution of the capital markets to the process. Keywords: International capital movements, globalization of capital markets, and comparativea dvantage of small countries Date: 2004-11-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2004-724&r=all 131. INTERNATIONAL BUSINESS AND DEVELOPMENT ECONOMICS: A WINNING COMBINATION Generating a World’s View based on Buckley and Casson and Hirschman’s Books Tamir Agmon Much of the discussion in economics is concerned with growth. Economic growth can be discussed and measured in terms of a national state. It can be also discussed and measured in terms of a corporation, (often using the term value rather than growth). Development Economics is concerned with growth of countries run by governments; International Business is concerned with the behavior and the value of multinational enterprises run by management. This paper is about the interface between the two. The vehicle used in this paper to explore the interface is a comparative analysis between two very influential books; “The Strategy of Development” by Hirschman, (1958), and the “Future of the Multinational Enterprise” by Buckley and Casson, (1976). The main argument of the paper is that Development Economics and International Business do approach a very similar issue, but they do it from two different dimensions perpendicular to each other. Looking at the whole picture, (the matrix as a whole rather than along the two separate vectors), gives the observer a more meaningful picture. This is done in the paper through a critical comparison of the two texts focusing on the two dimensions on internalization, growth and internalization, investment choices and strategies, and multinational enterprises and the dynamics of development. Keywords: Development Strategy, International Business Theory JEL: F23 Date: 2004-11-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2004-725&r=all 132. The Politics of Institutional Learning and Creation: Bank Crises and Supervision in East Central Europe Gerald A. McDermott This article examines the political conditions shaping the creation of new institutional capabilities. It analyzes bank sector reforms in the 1990s in three leading postcommunist democracies – Hungary, Poland, and the Czech Republic. It shows how different political approaches to economic transformation can facilitate or hinder the ability of relevant public and private actors to experiment and learn their new roles. With its emphasis on insulating power and rapidly implementing self-enforcing economic incentives, the “depoliticization” approach creates few changes in bank behavior and, indeed impedes investment in new capabilities at the bank and supervisory levels. The “deliberative restructuring” approach fostered innovative, costeffective monitoring structures for recapitalization, a strong supervisory system, and a stable, expanding banking sector. Keywords: Institutional change, transition economies, bank crises, bank supervision, learn JEL: G28 F02 P26 K23 Date: 2004-11-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2004-726&r=all 133. Explaining Patterns of Corruption in the Russian Regions Phyllis Dininio Robert W. Orttung Corruption is one of the key problems facing the Russian state as it seeks to evolve out of its socialist past. Naturally, regional patterns of corruption exist across a country as large and diverse as the Russian Federation. To explain these variations, we analyze 2002 data from Transparency International and the Information for Democracy Foundation that provides the first effort to measure differences in incidence of corruption across 40 Russian regions. We find that corruption in Russia primarily is a structural problem, and not one related to its institutions. Within each region, the amount of corruption increases as the size of the regional economy grows, the per capita income decreases, and the population decreases. Russian policymakers can therefore work to reduce corruption by encouraging economic development outside of the key centers of Moscow and St. Petersburg. Because the data show that voter turnout also lowers corruption, policymakers can also fight corruption by fostering more political accountability in elections. Keywords: Corruption, Russia JEL: D73 Date: 2004-11-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2004-727&r=all 134. INSTITUTIONAL DISTANCE AND INTERNATIONAL BUSINESS STRATEGIES IN EMERGING ECONOMIES DELIA IONASCU KLAUS E. MEYER SAUL ESTRIN The concept of ‘distance’ has been used by international business scholars to explain variations in international business strategies and operations across countries. The more distant a host country is from the organizational centre of a multinational enterprise (MNE), the more it has to manage cultural, regulatory and cognitive differences, and to develop appropriate entry strategies, organizational forms, and internal procedures to accommodate these differences. Scholarly research has focused on the concept of psychic distance, which has been narrowed down in empirical work to indices based on Hofstede’s work on culture. However, these measures capture only very partially the dimensions of distance of concern to international business. In this paper, we show how the broader theoretical concept of institutional distance, which incorporates normative, regulatory and cognitive aspects, affects entry strategies. Specifically, our theoretical arguments suggest that the impact of distance varies with different aspects of the concept of institutional distance, and that this impact interacts with both the investor’s experience and with the relative importance of the pertinent operation for the investing MNE. Using a unique dataset of foreign direct investment in emerging economies that incorporates multi-host as well as multi-home countries, we find empirical support for our propositions, and provide an explanation for apparently inconsistent results in the previous literature. Date: 2004-11-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2004-728&r=all 135. The Effects of Transition and Political Instability On Foreign Direct Investment Inflows: Central Europe and the Balkans Josef C. Brada Ali M. Kutan Taner M. Yigit This paper examines the effect of transition and of political instability on FDI flows to the transition economies of Central Europe, the Baltics and the Balkans. We find that FDI to transition economies unaffected by conflict and political instability exceed those that would be expected for comparable West European countries. Success with stabilization and reform tends to increase FDI inflows. In the case of Balkan counties, conflict and instability have reduced FDI inflows below what one would expect for comparable West European countries, and reform and stabilization failures have further reduced FDI to the region. Thus the economic costs of instability in the Balkans have been quite high. Keywords: foreign direct investment, transition, political instability, political risk JEL: F21 F23 P52 Date: 2004-11-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2004-729&r=all 136. Reform, FDI and Economic Growth: Tale of the Tortoise and the Hare Bruno Merlevede Koen Schoors Our main interest is the impact of the choice of the speed of economic reform on economic growth. We estimate a system of 3 equations where economic growth, economic reform and FDI are jointly determined. We find that new reforms affect economic growth negatively but attract FDI, whereas the level of past reform leads to higher growth. This means that the immediate adjustment cost of new reforms is counterbalanced by an immediate increase in FDI inflows and higher growth in the future through a higher level of past reform. Reform reversals contribute to lower growth. We use the model to simulate the impact of big bang reform and gradualist reform on economic growth. This is only meaningful in the presence of reform reversals, which requires aggregate uncertainty about the appropriate reform path. Using the coefficients from the empirical model we find that even relatively small ex ante reversal probabilities suffice to tilt the balance in favour of gradualism. This could be reinforced by the shortsightedness of policymakers, but may be moderated by voter myopia. Keywords: policy reform, gradualism, big bang, FDI, economic growth JEL: O57 P21 P26 P27 Date: 2004-11-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2004-730&r=all 137. IMPACT OF REGULATED PRICE ADJUSTMENTS ON PRICE VARIABILITY IN A VERY LOW INFLATION TRANSITION ECONOMY: CASE OF ARMENIA Aghassi Mkrtchyan The impact of macroeconomic management (monetary policy) and administrative price adjustments on price variability in a low inflation economy characterized by relatively frequent administrative price adjustments is examined. Fluctuations of market determined prices, prices of agricultural goods in particular, are linked to the lack of synchronization between administrative price changes and monetary policy. If monetary policy does not account for expected changes in administrative prices, demand in “free” goods markets will shift causing fluctuation of prices for agricultural goods, because the supply of these goods is highly inelastic in Armenia. The findings contribute to a better understanding of agricultural price variability during 1998-2002. The impact of macroeconomic policy and structural adjustments on income distribution and rural poverty incidence are also examined. This research has immediate policy implications since Armenia will undergo major upward price adjustments for goods and services with regulated prices, which may have a negative impact on income distribution if aggregate demand management is unchanged. Keywords: Inflation, price variability, regulated prices JEL: E31 E61 Date: 2004-11-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2004-731&r=all 138. Measuring the Institutional Change of the Monetary Regime in a Political Economy Perspective (Groups of interest and monetary variables during the Currency Board introduction in Bulgaria) Nikolay Nenovsky Yorgos Rizopoulos The paper explores the possibilities to measure the institutional change in the monetary field. A political economy theoretical framework is built up, where the change of the monetary regime is analyzed as the outcome of the debtors - creditors interactions. In this perspective, the value of some traditional monetary variables during the period before and after the introduction of the Currency Board in Bulgaria, in 1997, reveals the main actors' evolving relative positions. Keywords: institutional change, monetary regime, Currency Board, transition, Bulgar JEL: E42 E52 O10 P30 Date: 2004-12-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2004-732&r=all 139. Businessman Candidates: Special-Interest Politics in Weakly Institutionalized Environments Scott Gehlbach Konstantin Sonin 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, elections, citizen candidates, institutions, political economy JEL: D72 P16 P26 N40 Date: 2004-12-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2004-733&r=all 140. Foreign Investment, Corporate Ownership, and Development: Are Firms in Emerging Markets Catching Up to the World Standard? Klara Sabirianova Jan Svejnar Katherine Terrell 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 behavior. 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. Keywords: efficiency, productivity, economic development, foreign direct investment, ownership, convergence, frontier, Czech Republic, Russia, Washington Consensus. JEL: C33 D20 G32 L20 Date: 2005-01-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-734&r=all 141. Dictators and Their Viziers: Agency Problems in Dictatorships Georgy Egorov Konstantin Sonin The possibility of treason by a close associate has been a nightmare of most dictators throughout history. Better informed viziers are also better able to discriminate among potential plotters, and this makes them more risky subordinates for the dictator. To avoid this, dictators, especially which are weak and vulnerable, sacri.ce the competence of their agents, hiring mediocre but loyal subordinates. One reason why democracies generally witness more talented people in the government is the dictator.s inability to commit to the optimal (less than the capital) punishment for those who unsuccessfully plotted to remove him from power. Furthermore, any use of incentive schemes by a dictator is limited by the fact that rewards are conditional on dictator.s own willingness to keep his promises, while punishments are conditional on dictator.s own survival. We model a principalagent game between a dictator and his (probably, few) viziers both in static and dynamic perspectives. The dynamic model allows us to focus on the succession problem the insecure dictators face. Keywords: dictatorship, formal political theory, principal-agent theory, institutions JEL: D72 P16 Date: 2005-01-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-735&r=all 142. From a currency board to the euro: Public attitudes toward unilateral euroization in Bulgaria Neven T. Valev Bulgaria has operated a currency board since 1997. It is expected to join the EU in 2007 and the EMU thereafter. This paper uses survey data to analyze public attitudes toward adoption of the euro in advance of EMU membership. Bulgarians are equally split in support for and opposition to euroization. The reasons to support euroization include the eliminated risk of currency devaluation and the perception that the euro is already widely used in the economy. The opposition derives from people’s attachment to the national currency and from concerns about the conversion costs involved in a switch to the euro. Keywords: Euroization; Dollarization; Euro; Survey Data; Bulgaria; Currency Boards JEL: P2 F3 Date: 2005-01-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-736&r=all 143. Passive Creditors Koen Schoors Konstantin Sonin 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 in 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 phenomenons 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: creditor passivity, bankruptcy, arrears, bad loans, bank closure JEL: G21 G28 G33 P5 Date: 2005-01-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-737&r=all 144. The Marketing Structure in Agribusiness during the Transition in Bulgaria Steve Murray Yordan Staykov, Valentin Katzerov Bulgaria is moving toward a food processing and marketing system which resembles that of Western Europe and the U.S. Large grocery chains from Germany, Austrai and Turkey are building supermarkets and hypermarkets in Bulgaria’s larger cities. However, income in Bulgaria remains much lower than in Western Europe and most Bulgarian consumers cannot afford to shop in the new stores yet. Neighborhood markets, which serve average Bulgarians, are expanding their product selections and remain the primary shopping venue. Food processing plants in Bulgaria are being upgraded to meet EU standards. Farmers are getting more efficient as land is consolidated. On the whole, the agriculture and agribusiness sectors in Bulgaria are improving. Keywords: Bulgaria, food marketing, transition JEL: O52 P23 Q13 Date: 2005-01-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-738&r=all 145. Not Separate, Not Equal: Poverty and Inequality in Post- Apartheid South Africa Johannes G. Hoogeveen Berk Ozler As South Africa conducts a review of the first ten years of its new democracy, the question remains as to whether the economic inequalities of the apartheid era are beginning to fade. Using new, comparable consumption aggregates for 1995 and 2000, this paper finds that real per capita household expenditures declined for those at the bottom end of the expenditure distribution during this period of low GDP growth. As a result, poverty, especially extreme poverty, increased. Inequality also increased, mainly due to a jump in inequality among the African population. Even among subgroups of the population that experienced healthy consumption growth, such as the Coloureds, the rate of poverty reduction was low because the distributional shifts were not pro- poor. Keywords: Poverty, Inequality, South Africa JEL: D63 I32 Date: 2005-01-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-739&r=all 146. Autopsy on an Empire: Understanding Mortality in Russia and the Former Soviet Union Elizabeth Brainerd David M. Cutler 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: health, mortality, Russia, Eastern Europe JEL: I12 J10 P36 Date: 2005-01-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-740&r=all 147. DO INSIDER TRADING LAWS MATTER? SOME PRELIMINARY COMPARATIVE EVIDENCE Laura Nyantung Beny Despite the longstanding insider trading debate, there is little empirical research on insider trading laws, especially in a comparative context. The article attempts to fill that gap. I find that countries with more prohibitive insider trading laws have more diffuse equity ownership, more accurate stock prices, and more liquid stock markets. These findings are generally robust to controlling for measures of disclosure and enforceability and suggest that formal insider trading laws ( especially their deterrent components) matter to stock market development. The article suggests further avenues of empirical research on the specific mechanisms through which insider trading laws might matter and the political economy of their adoption. Keywords: Insider trading law, Market efficiency, Ownership structure, Law and finance, Comparative capital markets JEL: K22 G14 G15 G18 G32 Date: 2005-01-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-741&r=all 148. How Does Law Affect Finance? An Empirical Examination of Tunneling in an Emerging Market Vladimir Atanasov Conrad S. Ciccotello Stanley B. Gyoshev This paper documents that law affects finance in emerging markets through the methods used by controlling shareholders to “tunnel” wealth out of the firm. We find that Bulgarian securities law enabled financial tunneling via dilution and freeze-out tender offers. During the period 1999- 2001, about two- thirds of the 1,040 firms on the Bulgarian Stock Exchange were delisted. Freeze-out tender offers for minority shares averaged about 25% of the shares’ intrinsic value. Bulgarian securities law changes in 2002 made financial tunneling more costly for controlling shareholders. Subsequent increases in stock market valuations and liquidity suggest that controlling shareholders have shifted from financial tunneling to less value-destroying methods, such as transfer pricing, to extract wealth from firms. Keywords: Tunneling, freeze-out, controlling shareholders, appraisal rights, preemptive rights JEL: G34 K22 Date: 2005-01-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-742&r=all 149. Inflation Targeting, Between Rhetoric and Reality. The Case of Transition Economies Daniel Daianu Laurian Lungu The paper examines the inflation targeting regime in the context of transition economies. Recent years have witnessed an increasing number of central banks in these countries moving towards the implementation of inflation targeting regimes. However, the success of such a regime depends largely on the degree to which certain general requirements are met. As experience in a number of transition economies has shown so far, targeting inflation is not an easy task. The ongoing restructuring process in these economies makes the inflation forecasting process more difficult and introduces an additional source of uncertainty in the system. By unequivocally choosing inflation as a nominal anchor the central banks could face potential dilemmas if, for example, exchange rate appreciated too much under the pressure of massive capital inflows. The paper presents the broad framework in which inflation targeting could operate efficiently and attempts to assess the extent to which such a regime, when applied to transition economies, could fit into this framework. Keywords: Inflation Targeting, Eastern Europe JEL: E52 E60 Date: 2005-01-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-743&r=all 150. How Transition Paths Differ: Enterprise Performance in Russia and China Sumon Bhaumik Saul Estrin 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 labor) 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: 2005-01-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-744&r=all 151. Quality of Institutions, Credit Markets and Bankruptcy Christa Hainz The number of firm bankruptcies is surprisingly low in economies with poor institutions. We study a model of bank-firm relationship and show that the bank’s decision to liquidate bad firms has two opposing effects. First, the bank receives a payoff if a firm is liquidated. Second, it loses the rent from incumbent customers that is due to its informational advantage. We show that institutions must improve significantly in order to yield a stable equilibrium in which the optimal number of firms is liquidated. There is also a range where improving institutions may decrease the number of bad firms liquidated. Keywords: Credit markets, institutions, bank competition, information sharing, bankruptcy, relationship banking. JEL: G21 G33 K10 Date: 2005-02-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-745&r=all 152. Trade Creation and Diversion Effects of Europe’s Regional Liberalization Agreements Yener Kandogan After a short background on recent developments in gravity modelling and liberalization agreements in Europe, this paper measures the trade creation and diversion effects of major European agreements based on the results of a correctly specified triple-indexed gravity model with bilateral fixed effects. For each agreement and partner country, welfare implications are discussed in sectors of different factor intensities with emphasis on the role of similarity in income or relative factor endowments between partners, as well as the date and the reciprocity of the agreement. This is followed by a description of the characteristics of the non-partner countries that are affected by these agreements in each sector. Keywords: Gravity Model, Fixed Effects JEL: F14 F15 Date: 2005-01-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-746&r=all 153. Consolidation, Scale Economies and Technological Change in Japanese Banking Solomon Tadesse The paper examines the technological structure of the Japanese banking sector before the onset of the banking crisis and structural reforms of the 90s in order to shade light on the logic of the recent trend to consolidation in the industry. While diseconomies of scale are shown to be pervasive in the large banks, defying the rationale for consolidation, the paper presents evidence of an underlying technological progress that operates to significantly increase the industry’s efficient minimum size, generating economies at larger banks, thus justifying the ongoing trend in consolidation. The results suggest that, to the extent that consumers can benefit from lower costs of bank production, policies that promote a more concentrated banking structure might be consistent with public interest. Keywords: Scale Economies; Technical Change; Banking JEL: G21 D24 O3 Date: 2005-02-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-747&r=all 154. Banking Fragility and Disclosure: International Evidence Solomon Tadesse Motivated by recent public policy debates on the role of market discipline in banking stability, I examine the impact of greater bank disclosure in mitigating the likelihood of systemic banking crisis. In a cross sectional study of banking systems across 49 countries in the 90s, I find that banking crises are less likely in countries with financial reporting regimes characterized by (i) comprehensive disclosure (ii) informative disclosure, (iii) timely disclosure and (iv) more stringent auditing. Keywords: Banking Crisis, Disclosure, Transparency, Audit Stringency JEL: G21 G28 Date: 2005-02-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-748&r=all 155. Financial Development and Technology Solomon Tadesse Research in development economics reveals that the bulk of cross- country differences in economic growth is attributable to differences in productivity. By some accounts, productivity contributes to more than 60 percent of countries’ growth in per capita GDP. I examine a particular channel through which financial development could explain cross-country and crossindustry differences in realized productivity. I argue that financial development induces technological innovations – a major stimulus of productivity - through facilitating capital mobilization and risk sharing. In a panel of industries across thirty eight countries, I find that financial development explains the cross-country differences in industry rates of technological progress, rates of real cost reduction and rates of productivity growth. I find that the effect of financial development on productivity and technological progress is heterogeneous across industrial sectors that differ in their needs for financing innovation. In particular, industries whose younger firms depend more on external finance realize faster rate of technological change in countries with more developed banking sector. Keywords: Financial Development, Productivity Growth, Technological Progress, Innovation JEL: G1 G21 G32 E44 O14 O31 O34 O4 Date: 2005-02-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-749&r=all 156. Retained State Shareholding in Chinese PLCs: Does Government Ownership Reduce Corporate Value? Lihui Tian Saul Estrin The role of government shareholding in corporate performance is central to an understanding of China’s newly privatized large firms. In this paper, we analyze 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: government shareholding, corporate governance, China. JEL: G32 G34 G15 L33 Date: 2005-02-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-750&r=all 157. SOFTWARE ENTREPRENEURSHIP: KNOWLEDGE NETWORKS AND PERFORMANCE OF SOFTWARE VENTURES IN CHINA AND RUSSIA BAT BATJARGAL This study examines the impact of entrepreneurs’ network structure and knowledge homogeneity/heterogeneity of their network members on product development, and revenue growth of software ventures in China and Russia. The empirical data are composed of structured interviews with 159 software entrepreneurs in Beijing and Moscow. The study found that structural holes and knowledge heterogeneity affect positively product diversity in interactive ways. The study also found that knowledge homogeneity accelerates product development. Product development speed enhances revenue growth in the long term. However, the combination of speed with dense and homogeneous networks harms revenue growth over time. The effects of structural holes and knowledge heterogeneity on product diversity and revenue growth over time are more salient in Russia due to the unique institutional, social, and cultural conditions present in the country. Keywords: networks, knowledge, entrepreneurs, software, China, Russia. JEL: M13 D85 L14 L25 P27 Date: 2005-02-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-751&r=all 158. Network Triads: Transitivity, Referral and Venture Capital Decisions in China and Russia BAT BATJARGAL This article examines effects of dyadic ties and interpersonal trust on referrals and investment decisions of venture capitalists in the Chinese and Russian contexts. The study uses the postulate of transitivity of social network theory as a conceptual framework. The findings reveal that referee-venture capitalist tie, referee-entrepreneur tie, and interpersonal trust between referee and venture capitalist have positive effects on referrals and investment decisions of venture capitalists. The institutional, social and cultural differences between China and Russia have minimal effects on referrals. Interpersonal trust has positive effects on investment decisions in Russia. Keywords: Transitivity, triads, referral, venture capital, China, Russi JEL: G24 D85 M13 P27 Date: 2005-02-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-752&r=all 159. Internet Entrepreneurship: Networks and Performance of Internet Ventures In China BAT BATJARGAL This article examines the contingent value of entrepreneurs' networks to survival likelihood of Internet ventures, and the dynamics of entrepreneurs' networks over time. The empirical data are composed of the longitudinal surveys of 94 Internet ventures in Beijing, China. The study found the positive and the negative contingent effects of structural holes on the survival likelihood of new firms. The study found that networking skills of entrepreneurs are associated positively with the changes in networks over time. Improved social skills lead to greater firm legitimacy. Keywords: Structural holes, human capital, Internet, entrepreneurship, China JEL: M13 D85 L14 L25 P27 Date: 2005-02-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-753&r=all 160. Targeting Relative Inflation Forecast as Monetary Policy Framework for Adopting the Euro Lucjan T. Orlowski This study proposes relative inflation forecast targeting as an operational framework of monetary policy for adopting the euro by the EU new Member States. This strategy assumes containing differentials between the domestic and the eurozone inflation forecasts as an operational target. A model prescribing the RIFT framework is presented along with a set of appropriate policy indicator variables and instrument rules. The proposed framework advances the strategy based on relatively strict inflation targeting that is currently pursued by some NMS. Several ARCHclass tests in various functional forms are employed for providing preliminary empirical evidence on convergence of inflation differentials relative to the euro area for Poland, Czech Republic and Hungary. Keywords: Inflation targeting; Monetary convergence; Euro adoption; EU new Member States. JEL: E42 E52 E61 F36 P24 Date: 2005-02-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-754&r=all 161. Spending Health Care Dollars Wisely: Can Cost-Effectiveness Analysis Help? 16th Annual Herbert Lourie Memorial Lecture on Health Policy Milton C. Weinstein (Department of Health Policy and Management, Harvard School of Public Health) Are we getting the most health improvement possible for our money. In other words, are all the things that we do in medicine really worth it? That is where cost-effectiveness comes in. As a nation, we have been unwilling, at least publicly, to look explicitly at the value, in terms of improved health outcome, that we get for our health care dollars. With advances in medical technology putting unsustainable pressure on health care costs, our historical reluctance to measure value for health care may have to change. I start this brief by describing cost- effectiveness analysis as a method of determining the value, measured in Quality-Adjusted Life Years, of medical technologies as they are applied to treat, diagnose, or prevent various conditions. Based on this information, I then argue that some highly beneficial, low-cost procedures are significantly underutilized, and that other medical technologies may be overutilized based on the amount of health benefit they yield in relation to their cost. Next, I give examples from current research, my own and that of colleagues, illustrating how cost- effectiveness analysis can be used to guide the use of new diagnostic testing technologies (such as DNA or RNA typing of infectious agents or identification of genomic or proteinomic markers in cancer patients). JEL: I12 I18 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:max:cprpbr:30&r=all 162. The Effect of Income Taxation on Consumption and Labor Supply James P. Ziliak Thomas J. Kniesner (Center for Policy Research, Maxwell School, Syracuse University) We estimate the incentive effects of income taxation in a life- cycle model of consumption and labor supply that relaxes the standard assumption of strong separability within periods. Our model permits identification of both within-period preference parameters and life-cycle preference parameters such as the inter- temporal substitution elasticity. Results indicate that consumption and hours worked are direct complements in utility, and both increase with an increase in the after-tax share and with a compensated increase in the net wage. The compensated net wage elasticity is about 0.3, nearly double the standard estimates for men in the United States that ignore within-period non-separability between consumption and hours and rely on linear preferences. Given our estimated inter-temporal elasticity of substitution of about -0.96, the Frisch specific substitution elasticities of consumption and labor supply with respect to the after-tax wage are about 0.1 and 0.5, indicating significant inter-temporal smoothing of utility. Depending on consumption measure, static estimates of the marginal welfare cost of revenue- neutral taxation are 6-20 percent, which is about half the estimated welfare cost when additivity between consumption and leisure is incorrectly imposed. [Revised November 2004] JEL: J22 H20 Date: 2003-04 URL: http://d.repec.org/n?u=RePEc:max:cprwps:54&r=all 163. Does Whole-School Reform Boost Student Performance? The Case of New York City Robert Bifulco (Center for Policy Research, Maxwell School, Syracuse University) William Duncombe (Center for Policy Research, Maxwell School, Syracuse University) John Yinger (Center for Policy Research, Maxwell School, Syracuse University) Thousands of schools around the country have implemented whole- school reform programs to boost student performance. This paper uses quasi-experimental methods to estimate the impact of whole- school reform on students' reading performance in New York City, where various reform programs were adopted in dozens of troubled elementary schools in the mid-1990s. This paper complements studies based on random assignment by examining a broad-based reform effort and explicitly accounting for implementation quality. Two popular reform programs--the School Development and Success for All--do not significantly increase reading scores but might have if they had been fully implemented. The More Effective Schools program does boost reading scores, particularly for the poorest students, but only when program "trainers" remain in the school and the students are native English speakers. JEL: I21 Date: 2003-09 URL: http://d.repec.org/n?u=RePEc:max:cprwps:55&r=all 164. Geography, Industrial Organization, and Agglomeration Stuart S. Rosenthal (Center for Policy Research, Maxwell School, Syracuse University) William C. Strange This paper makes two contributions to the empirical literature on agglomeration economies. First, the paper uses a unique and rich database in conjunction with mapping software to measure the geographic extent of agglomerative externalities. Previous papers have been forced to assume that agglomeration economies are club goods that operate at a metropolitan scale. Second, the paper tests for the existence of organizational agglomeration economies of the kind studied qualitatively by Saxenian (1994). This is a potentially important source of increasing returns that previous empirical work has not considered. Results indicate that localization economies attenuate rapidly and that industrial organization affects the benefits of agglomeration. Date: 2003-04 URL: http://d.repec.org/n?u=RePEc:max:cprwps:56&r=all 165. Agglomeration, Labor Supply, and the Urban Rat Race Stuart S. Rosenthal (Center for Policy Research, Maxwell School, Syracuse University) William C. Strange This paper establishes the existence of a previously overlooked relationship between agglomeration and hours worked. Among non- professionals, hours worked decrease with the density of workers in the same occupation. Among professionals, a positive relationship is found. This relationship is twice as strong for the young as for the middle-aged. Moreover, young professional hours worked are shown to be especially sensitive to the presence of rivals. We show that these patterns are consistent with the selection of hard workers into cities and the high productivity of agglomerated labor. The behavior of young professionals is also consistent with the presence of keen rivalry in larger markets, a kind of urban rat race. This evidence of a rat race is nearly unique in the literature. JEL: J24 J44 J61 Date: 2003-09 URL: http://d.repec.org/n?u=RePEc:max:cprwps:57&r=all 166. Social Interaction and the Health Insurance Choices of the Elderly Eldar Beiseitov (Department of Economics, Maxwell School, Syracuse University) Jeffrey D. Kubik (Center for Policy Research, Maxwell School, Syracuse University) John R. Moran (Center for Policy Research, Maxwell School, Syracuse University) Using data from the 1998 wave of the Health and Retirement Study, we examine the effect of social interactions on the health insurance choices of the elderly. We find that having more social interactions, as measured by contacts with friends and neighbors, reduces the likelihood of enrolling in a Medicare managed care plan relative to purchasing a medigap policy or having coverage through Medicare alone. Our estimates indicate that social networks are an important determinant of the health insurance choices of the elderly and provide suggestive evidence that "word- of-mouth" information sharing may have played a role in the preference of some seniors for traditional indemnity insurance over managed care. JEL: I11 J14 Date: 2004-05 URL: http://d.repec.org/n?u=RePEc:max:cprwps:58&r=all 167. Maternal Employment and Adolescent Self-Care Leonard M. Lopoo (Center for Policy Research, Maxwell School, Syracuse University) Mounting evidence shows that self-care produces deleterious consequences for adolescents in the U.S. Since desscriptive evidence suggests that maternal employment is the primary explanation for adolescent self-care, maternal employment, it is frequently argued, is harming children. Heretofore, very little empirical research has actually investigated the impact of maternal employment on adolescent self-care, however, calling into question this assertion. This paper aims to fill this gap. The author uses the National Education Longitudinal Survey of 1988 supplemented by the National Longitudinal Survey of Youth- 1979 to estimate the relationship between maternal employment and adolescent self-care. Unlike prior research, the author employs a variety of fixed effects models to account for omitted variables that may be related to maternal employment and adolescent self- care. Findings suggest that the adolescents of mothers who work full-time spend an additional 43 minutes per week in self-care compared to the adolescents of mothers who work part-time. Further, a standard deviation increase in the number of weeks a mother works during the year increases the probability that her child will be unsupervised by 27 percent. These effects are not constant across socio-economic groups: affluent families have strong effects, while the relationship is more tenuous among low- income families. This finding has important implications for pro- work social welfare policies in the United States. JEL: J12 J13 J22 Date: 2004-03 URL: http://d.repec.org/n?u=RePEc:max:cprwps:59&r=all 168. How Much More Does a Disadvantaged Student Cost? William D. Duncombe (Center for Policy Research, Maxwell School, Syracuse University) John Yinger (Center for Policy Research, Maxwell School, Syracuse University) This paper provides a guide to statistically based methods for estimating the extra costs of educating disadvantaged students, shows how these methods are related, and compares state aid programs that account for these costs in different ways. We show how pupil weights, which are included in many state programs, can be estimated from an education cost equation, which many scholars use to obtain an education cost index, and we devise a method to estimate pupil weights directly. Using data from New York, we show that the distribution of state aid is similar with statistically based pupil weights and an educational cost index. Finally, we show that large, urban school districts with a high concentration of disadvantaged students would receive far more aid (and rich suburban districts would receive far less aid) if statistically based pupil weights were used instead of the ad hoc weights in existing state aid programs. JEL: C15 H52 I22 I28 Date: 2004-07 URL: http://d.repec.org/n?u=RePEc:max:cprwps:60&r=all 169. Taxes, Deadweight Loss and Intertemporal Female Labor Supply: Evidence from Panel Data Anil Kumar (Center for Policy Research, Maxwell School, Syracuse University) Very few existing studies have estimated female labor supply elasticities using a U.S. panel data set, although cross- sectional studies abound. Also, most existing studies have done so in a static framework. I make an attempt to fill the gap in this literature by estimating a lifecycle-consistent specification with taxes, in a limited dependent variable framework, on a panel of married females from the PSID. Both parametric random effects and semiparametric fixed effects methods are applied. I find evidence of larger substitution effects than found in female labor supply literature with taxes, suggesting considerable distortionary effects from income taxation. The uncompensated wage elasticity is estimated at 1.4, which is comparable to estimates found in other labor supply studies with taxes. The income effect in a lifecycle-consistent specification is negative and very small. The estimate of compensated elasticity for females in the sample is 1.4 using random effects estimator and 1.35 using semiparametric fixed effect estimator. I estimate exact deadweight loss from taxes and find that deadweight loss from a 20% increase in the marginal tax rate is about 30% of tax revenue collected, evaluated at the sample mean. The deadweight loss from taxation of wife's labor income from 1980-1987, for a median household, is estimated to be 57% of tax revenue as opposed to 49% for a switch to a revenue- neutral proportional tax system. Finally, the intertemporal preference parameters are estimated using GMM. JEL: C14 C23 J22 Date: 2004-06 URL: http://d.repec.org/n?u=RePEc:max:cprwps:61&r=all 170. School Finance, Equivalent Educational Expenditure, and Income Distribution: Equal Dollars or Equal Chances for Success? Kathryn Wilson Kristina Lambright (Center for Policy Research, Maxwell School, Syracuse University) Timothy M. Smeeding (Center for Policy Research, Maxwell School, Syracuse University) This paper breaks new ground in the debate on school finance and equality of per pupil school expenditures. We are able to allocate expenditures per pupil at the *individual* student and family income level. This allows us to examine both student and school district characteristics and to assess several measures of equality of expenditure across the income distribution of parents and by funding sources. We find a surprising degree of equality in the actual amounts expended per child in low- vs. high-income families. But adjusting for student needs to reach equivalent education expenditures results in much greater inequality over the income distribution. Policy implications for school finance and increased equality of eduational opportunity are drawn in closing. JEL: I22 O15 Date: 2004-08 URL: http://d.repec.org/n?u=RePEc:max:cprwps:62&r=all 171. Welfare State Expenditures and the Distribution of Child Opportunities Irwin Garfinkel Lee Rainwater Timothy M. Smeeding (Center for Policy Research, Maxwell School, Syracuse University) This paper estimates the redistributive effects of welfare state expenditures on social and economic disparities in the economic well-being of citizens in ten nations. Data from the Organization for Economic Cooperation and Development (OECD) and other sources for cash and non-cash social welfare benefits (health and education benefits from third parties) are used to describe differences in the size and nature of welfare states and their distributional effects. The OECD data are combined with micro data on household incomes from the Luxembourg Income Study (LIS) both to estimate the redistributive effects of the expenditures and taxes and to construct measures of the differences in the relative standard of living among the population at various points in the income distributions of their countries. Estimates are provided for country populations as a while and for three mutually exclusive groups: all persons; non-aged persons living with children; non-aged without children at home; and the elderly. These measures may be thought of as capturing the degree to which welfare states at the end of the 20th and dawn of the 21st century provide for the developmental needs and capabilities of their populations in terms of cash, access to health care, and educational opportunity. The results indicate a wide range of differences in levels of economic resources and support, within as well as between, nations and groups. The degree to which children have fair and equal opportunity chances; the degree to which the population has access to quality health care; and the population groups who are most called upon (most taxed) to provide these benefits are all investigated here. Non-cash benefits are particularly important for low-income Americans, especially elders and children and their families, and should not be taken for granted by analysts of the welfare state. Counting in-kind benefits at government cost substantially reduces across- national differences in market and cash disposable incomes, but does not eliminate them. The results are very sensitive to how in- kind benefits are measured and valued. [Revised October 2004] JEL: I18 I28 J13 O57 Date: 2004-06 URL: http://d.repec.org/n?u=RePEc:max:cprwps:63&r=all 172. Duration Data from the National Long-Term Care Survey: Foundation for a Dynamic Multiple-Indicator Model of ADL Dependency James N. Laditka Douglas A. Wolf (Center for Policy Research, Maxwell School, Syracuse University) This report describes preparation of data from the National Long- Term Care Survey (NLTCS) fur use in a dynamic multiple-indicator model of dependency in Activities of Daily Living (ADLs). The data set descrdibed makes use of all functional status information available across four NLTCS waves for six ADLs, including information from screening interviews, detailed interviews in the community, and institutional interviews. Importantly, it also captures all available information elicited from respondents about the *duration* of any impairment in these ADLs. The data was prepared as described in this report to enable the calculation of improved estimates of the probabilities that an older individual will transition from one functional status state to another in any of six ADLs. These probabilities can then be used to improve estimates of active life expectancy. JEL: I12 J14 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:max:cprwps:65&r=all 173. On the Measurement of Job Risk in Hedonic Wage Models Dan A. Black (Center for Policy Research, Maxwell School, Syracuse University) Thomas Kniesner (Center for Policy Research, Maxwell School, Syracuse University) We examine the incidence, form, and research consequences of measurement error in measure of fatal injury risk in U.S. workplaces using both BLS and NIOSH data. We find evidence of substantial measurement errors in the fatal risk researchers attach to individual workers when estimating the implicit price of risk and the value of a statistical life. We first examine possible classical attenuation bias in the fatality risk coefficient. However, because we also find non-classical measurement error that differs across multiple risk measures and is not independent of other regressors, more complex statistical procedures than a standard instrumental variables estimator need to be applied to obtain statistically improved estimates of wage- fatality risk tradeoffs. A revised version of this paper appears in *The Journal of Risk and Uncertainty,* Volume 27(3). JEL: J28 J31 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:max:cprwps:66&r=all 174. Easing the Fiscal Restraints: New Revenue Tools in the City of Toronto Act Enid Slack (Director, Institute on Municipal Finance and Governance, Munk Centre for International Studies) This paper show that there is a mismatch between the expenditure responsibilities that the City of Toronto is required to undertake and the revenue tools available to it. Toronto relies mainly on property taxes, user fees, and intergovernmental transfers to finance a wide range of services. In the absence of a realignment of service responsibilities (in particular, uploading social services and social housing to the provincial level), the paper makes the case for a mix of taxes at the local level. A mix of taxes, particularly taxes that grow with the economy, would give the city more flexibility to respond to local conditions such as changes in the economy, evolving demographics, and expenditure needs. A mix of taxes would be more effective than the property at linking the costs and benefits of services when people commute to work from one jurisdiction to another. Although the city should piggyback onto existing provincial taxes to minimize administrative costs, it is argued that it should set its own tax rates to ensure autonomy, accountability, and predictability of revenues. Keywords: urban finance, local taxation JEL: H71 URL: http://d.repec.org/n?u=RePEc:ttp:itpwps:0507&r=all 175. Redistribution via Taxation: The Limited Role of the Personal Income Tax in Developing Countries Richard M. Bird (International Tax Program, Rotman School of Management, University of Toronto) Eric M. Zolt (University of California, Los Angeles) In developed countries, the income tax, especially the personal income tax, has long been viewed as the primary instrument for redistributing income and wealth. This article examines whether it makes sense for developing countries to rely on the income tax for redistributive purposes. We put forth three propositions. First, the personal income tax has done little to reduce inequality in many developing countries. This failure is not surprising given that in many countries personal income taxes are neither comprehensive nor very progressive - they often amount to little more than withholding taxes on labor income in the formal sector. Moreover, the personal income tax plays such a small role in the tax systems of developing countries that it would be unrealistic to believe that this tax could have a meaningful impact on distribution. Second, it is not costless to pretend to have a progressive personal income tax system. Tax systems generate real administrative, compliance, economic efficiency and political costs. The costs associated with badly designed and badly administered personal income tax systems likely exceed the costs associated with other taxes. There are opportunity costs as well. Third, given the ineffectiveness of the personal income tax, if countries want to use the fiscal system to reduce poverty or reduce inequality, alternative approaches merit consideration. Countries need to make better use of their expenditure programs in targeting resources to the poor. Given the dominance of taxes on consumption in the tax structure of developing countries, the distributional consequences of consumption taxes are of far greater importance than those of the personal income tax. Countries can also make greater use of benefit taxation and in particular fiscal decentralization may allow for better matching of those who benefit and those who pay for government activity. Finally, countries can consider alternatives to taxing income other than the current comprehensive income approach. Keywords: redistribution, progressivity, developing countries, tax policy, personal income tax, benefit taxation JEL: H22 H24 O15 O17 O23 URL: http://d.repec.org/n?u=RePEc:ttp:itpwps:0508&r=all 176. Market inflation seasonality management Nabyl Belgrade (CERMSEM et CDC IXIS-CM,R&D) In this paper, we examine various methods in discrete time to extract and estimate the seasonality component of the CPI curve. One estimated, we show how to include this effect in the construction of the forward CPI curve. We then explain how to link it to a continuous time market model. Last but not least, we study the consistency between the various estimation methods, based on the cycle theory. Keywords: Historical & forward CPI curve; decomposition scheme; trend; regular & irregular cycle; replication Date: 2004-06 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:b04051&r=all 177. An extension of the trade restrictiveness index to large economies Sami Dakhlia (C&BA et CERMSEM) Akram Temimi (C&BA) The Trade Restrictiveness Index (TRI) introduced by Anderson and Neary (1994) provided the first theoretically satisfying measure of a country's tariff structure by overcoming the problem of ad hoc specification of indexing weights and the related index number problem. We observe, however, that the TRI may not be unique when countries are large. As a remedy, we propose a simple extension. Keywords: Trade Restrictiveness Index; index number; tariffs JEL: C68 D58 D78 F17 Date: 2004-06 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:b04053&r=all 178. The role of R&D technology in asymmetric research joint ventures Sami Dakhlia (C&BA et CERMSEM) Flavio M. Menezes (EPGE/FGV) Akram Temimi (C&BA) We characterize asymmetric equilibria in two-stage process innovation games and show that they are prevalent in the different models of R&D technology considered in the literature. This leads to a reassessment of the potential benefits of research cooperative agreements. Indeed, cooperation in R&D may be accompanied by high concentration in the product market. We show that while such an increase may be profitable, it may be socially inefficient. Keywords: Research and development; research joint ventures; process innovation games JEL: D43 L1 O32 Date: 2004-06 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:b04054&r=all 179. A note on duplication of R&D and R&D subsidies Sami Dakhlia (C&BA et CERMSEM) Flavio M. Menezes (EPGE/FGV) Akram Temimi (C&BA) We show that the presumed incompatibility of uncoordinated R&D and competition is not fudamental, but hinges on the nature of R&D spillovers. As a consequence, R&D subsidies may be more effective than previously thought. Keywords: Research and development; subsidies; process innovation games JEL: D43 L1 O32 Date: 2004-06 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:b04055&r=all 180. No-arbitrage condition and existence of equilibrium with dividends Cuong Le Van (CERMSEM) Nguyen Ba Minh (Hanoi University of Commerce) In this paper, we first give an elementary proof of existence of equilibrium with dividends in an economy with possibly satiated consumers. We then introduce a non-arbitrage condition and show that it is equivalent to the existence of equilibrium with dividends. Keywords: Equilibrium with dividends; Walras equilibrium; satiation points; no-arbitrage condition JEL: C62 D51 Date: 2004-06 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:b04058&r=all 181. Parametric continuity of stationary distributions John Stachurski (CORE) Cuong Le Van (CERMSEM) The paper gives conditions under which stationary distributions of Markov models depend continuously on the parameters. It extends a well-known parametric continuity theorem for compact state space to the unbounded setting of standard econometrics and time series analysis. Applications to several theoretical and estimation problems are outlined. Keywords: Stationary distribution; parametric continuity; Markov process; Solow-Phelps golden rule; Foias operator; V norm-like function; Feller property JEL: O41 Date: 2004-06 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:b04059&r=all 182. The determination of the equilibrium exchange rate in a simple general equilibrium model Cuong Le Van (CERMSEM) Cecile Couharde (CEPN) Thai Bao Luong (CEPN) In this article, we develop an analytical general equilibrium model of the equilibrium exchange rate. This theoretical framework allows us to identify the relevant set of variables which determinate the equilibrium exchange rate and to explore how theses variables influence the trajectory of the equilibrium exchange rate. Keywords: Equilibrium exchange rate, purchasing power parity; Balassa-Samuelson effect; general equilibrium model JEL: D51 F41 F31 Date: 2004-05 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:b04060&r=all 183. Equivalent conditions for irreducibility of discrete time Markov chains Cuong Le Van (CERMSEM) John Stachurski (CORE) We consider discrete time Markov chains on general state space. It is shown that a certain property referred to here as nondecomposability is equivalent to irreducibility and that a Markov chain with invariant distribution is irreducible if and only if the invariant distribution is unique and assigns positive probability to all absorbing sets. Keywords: Discrete time Markov chains; invariant distribution; nondecomposability; irreducibility; absorbing set JEL: O41 Date: 2004-06 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:b04061&r=all 184. Existence of solutions in continuous-time optimal growth models Hippolyte d'Albis (EUREQua) Pascal Gourdel (CERMSEM) Cuong Le Van (CERMSEM) This paper studies the existence of solutions in continuous time optimization problems. It provides a theorem whose conditions can be easily checked in most models of the optimal growth theory including those with increasing return and multi-sector economies. Keywords: Existence of solutions; optimization; continuous time; optimal growth JEL: C61 D91 E13 Date: 2004-06 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:b04063&r=all 185. Fixed-point-like theorems on subspaces Philippe Bich (CEREMADE) Bernard Cornet (CERMSEM) In this paper, we prove a fixed-point-like theorem for multi- valued mappings defined on the finite Cartesian product of Grassmannian manifolds and convex sets. Our result generalizes two different kinds of theorems : the fixed-point-like theorem by Hirsh, Magill, Mas-Colell (1990) or Husseiny, Lasry, Magill (1990) and the fixed-point theorem by Gale, Mas-Colell (1975) (which generalizes Kakutani's theorem (1941)). Keywords: Fixed-point; Grassmannian manifold; degree theory Date: 2004-06 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:b04064&r=all 186. Competitive Bargaining Equilibria Julio Davila (CERMSEM et University Pennsylvania) Jan Eeckhout (University Pennsylvania) We propose a simple bargaining procedure, the equilibrium of which converges to the Walrasian allocation as the agents become increasingly patient. We thus establish that the competitive outcome obtains even if agents have market power and are not price-takers. Moreover, where in other bargaining protocols the final outcome depends on bargaining power or relative impatience, the outcome here is determinate and depends only on preferences and endowments. This procedure has therefore important implications for policy applications compared to standard bargaining rules. Keywords: Alternating-offers bargaining; Walrasian equilibrium; price-setting; quantity constraints JEL: C60 C71 D41 D51 Date: 2004-04 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:b04067&r=all 187. Error structures and parameter estimation Nicolas Bouleau (CERMICS - Ecole Nationale des Ponts & Chaussees) Christophe Chorro (CERMSEM et CERMICS) This article proposes and studies a link between statistics and the theory of Dirichlet forms used to compute errors. The error calculus based on Dirichlet forms is an extension of classical Gauss' approach to error propagation. The aim of this paper is to derive error structures from measurements. The links with Fisher's information lay the foundations of a strong connection with experiment. Here we show that this connection behaves well towards changes of variables and is related to the theory of asymptotic statistics. Finally the study of products permits to lay the premise of an infinite dimensional empirical error calculus Keywords: Error; sensitivity; Dirichlet forms; squared field operator; Cramer-Rao inequality; Fischer information Date: 2004-07 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:b04079&r=all 188. On an extension of the Hilbertian central limit theorem to Dirichlet forms Christophe Chorro (CERMSEM et CERMICS) In a recent paper, Bouleau provides a new tool, based on the language of Dirichlet forms, to study the errors propagation and reinforce the historical approach of Gauss. As the classical central limit theorem is a theoric justification of the employment of normal laws in statistics, the aim of this article is to underline the importance of certain classes of error structures by asymptotic arguments. Thus, we extend the notions of independence and convergence in distribution for random variables in order to prove a refinement of the hilbertian central limit theorem that highlights the fundamental role of the error structures of the Ornstein-Ulhenbeck type Keywords: Error; sensitivity; Dirichlet forms; squared field operator; vectorial domain; central limit theorem Date: 2004-07 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:b04080&r=all 189. Transfer rate rules and core selections in NTU games Vincent Iehle (CERMSEM) Different kinds of asymmetries between players can occur in core allocations, in that case the stability of the concept is questioned. One remedy consists in selecting robust core allocations. We review, in this note, results that all select core allocations in NTU games with different concepts of robustness. Within a unified approach, we deduce the existence of allocations in : the partnered core, the social stable core, the core intersected with average prekernel, the weak inner core. We use a recent contribution of Bonnisseau and Iehle (2003) that states the existence of core allocations whit a transfer rate rule equilibrium under a dependent balancedness assumption. It shall turn out to be manipulable tools for selecting the core. Keywords: Cooperative games, dependent balancedness, core selections in NTU games JEL: C60 C71 Date: 2004-10 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:b04093&r=all 190. The determinants of occupational choice in Colombia : an empirical analysis Guillaume Destre (TEAM) Valentine Henrard (TEAM) This economic study focuses on the determinants of self- employment / wage-work choice using a large sample of Colombian men. The econometric model is based on simultaneous determination of the choice of employment status and potential earnings, it accounts for self-selectivity. Our major findings are : (1) relative potential earnings are the main determinant of occupational choice. (2) Unlike previous studies of self- employment choice, we find a negative selection bias into self- employment. It suggests that in Colombia the decision of becoming independent might be constrained. (3) The differences in potential earnings between the two sectors are mostly due to unobserved factors. Keywords: Self-employment; occupational choice; labour markets; Colombia JEL: J23 J24 O12 Date: 2004-05 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:bla04065&r=all 191. Regional convergence, trade liberalization and agglomeration of activities : an analysis of NAFTA and MERCOSUR cases Nicole Madariaga (TEAM) Sylvie Montout (TEAM) Patrice Ollivaud (OECD) This study examines the theoretical and empirical link between trade integration, the density of activities and per capita income convergence within NAFTA members during the 1980-2000 period and within MERCOSUR partners from 1985 to 2000. We first build a two countries framework based on economic geography theory to explore this link. We introduce differences in wage levels between a rich and a poor region. We find that trade liberalization may have a positive impact on per capita income convergence if countries have initially similar wages and transaction costs are low. Second, the empirical approach refers to two different convergence concepts : homogenization and catch- up. We also determine activities' concentration trends within each trade agreement according to different measures of agglomeration. Afterwards, we use these measures to introduce an agglomeration variable in conditional convergence regressions. The analysis of the sigma and absolute beta-convergence concludes to a divergence between the two NAFTA partners. On the contrary, we observe a process of convergence in the MERCOSUR between 1985 and 2000 even if this process appears to slow down after 1991. Our conditional estimates also show that agglomeration plays a significant and positive role in growth after the implementation of treaties. Keywords: Growth; regional convergence; economic geography; trade integration JEL: F43 R11 R12 O40 Date: 2004-04 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:bla04069&r=all 192. R&D and M&A : Are cross-border M&A different ? An investigation on OECD countries Olivier Bertrand (TEAM) Pluvia Zuniga (TEAM) This paper investigates the incidence of national and cross- border M&A on industrial R&D investment in OECD countries over the period 1990-1999. We use generalized method of moments (GMM) estimation techniques for dynamic panel data and control for market-related and technological determinants of R&D production. Our findings show that the last M&A wave contributed to expand domestic R&D activities, especially in high-technology intensive industries. However, further evidence suggests that cross-border M&A (particularly outward M&A), and not domestic ones, have stimulated more significantly R&D spending. This result gives evidence that anti-competition effects are more likely to affect negatively R&D activities with a domestic M&A. Reversely, efficiency gains might be higher in a cross-border operation, encouraging merging firms to raise their R&D investments. Keywords: M&A; Industrial restructuring; R&D, technology JEL: O30 L10 F23 Date: 2004-07 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:bla04072&r=all 193. Technology Transfer through Backward Linkages : The Case of the Spanish Manufacturing Industry Liza Jabbour (TEAM) Jean-Louis Mucchielli (TEAM) The aim of this paper is to examine technology transfer through backward linkages between multinational entreprises and local suppliers. This issue is of great interest for several reasons. First of all, the new theory of economic growth suggests that technological innovations are becoming an increasingly important contributor to economic growth. Secondly, an obvious policy issue for governments is whether or not incentives should be offered to multinational firms in order to attract them. The econometric analysis presented here is based on a firm level database from Spain for the period 1990-2000. We use the Olley and Pakes method to estimate the total factor productivity of the firms and measure the effect of downstream FDI on local firm productivity and find positive evidence on the existence of technology transfer through backward linkages. Our results show strong evidence on technology spillovers through backward linkages, especially in the case of export-oriented affiliates and fully- owned affiliates. Keywords: Technology spillovers; Backward linkages; foreign direct investment JEL: F23 Date: 2004-07 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:bla04073&r=all 194. Core labour standards and economic growth Remi Bazillier (TEAM) The paper focuses on the impact of international core labour standards on economic growth. In a first step, we build a novel indicator, using correspondence analysis. The paper focuses on the four core labour standards recognized in the 1998 ILO Declaration on Fundamental Principles and Rights at Work. Our two models (modelling of the steady-state-per capita income and modelling of the transition of per-capita income to its steady state value) are estimated for a large panel of countries (108) and, then, only for developing countries, for the period 1960 - 1996. We use the Two Stage Least Square Method, to correct for potential problems of endogeneity. For the first model, we find that countries with higher labour standards have a higher steady- state level, all things being equal. Labour standards have positive and robust effects on per-capita income both for the world and developing countries. In the second model, the effects are non-linear. The effects of labour standards are positive and significant but are stronger for countries with medium or good labour standards. Overall, a good compliance with fundamental rights of workers has a positive effect on the long-term income and long-term growth. Thus, the development of core labour standards should be one of the goals of the development strategies. Keywords: Economic growth; labour standards; economic development JEL: J80 J83 O11 Date: 2004-03 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:bla04088&r=all 195. Framing under risk : Endogenizing the Reference Point and Separating Cognition and Decision Raphael Giraud (EUREQua/TEAM) We aim at improving the classical explanation of the framing effect phenomenon, based on Prospect Theory by, first, making the reference point shifting that generates the phenomenon endogenous, and second, providing a theory of risky choice framing that accounts for the fundamental intuition that framing effects do not come from cognitive limitations of the subjects. We introduce a normative equivalence relation on the set of lottery prizes that models different descriptions and axiomatizing a preference functional of the Expected Lottery-Dependent Utilit type. We first show that the framing effect relates to the indeterminacy of preferences over the space of prizes, modeled by a set of von Neumann-Morgenstern utility functions interpreted as states of mind or reference points. Second, we show that it is possible to identify the precise effect of the reference point shifting by disentangling the perception of the prizes of a lottery from the reaction to its description. The framing phenomenon is thus explained by an endogenous reference point shifting that stems from the feelings that arise in the spirit of the decision maker as a consequence of a variation in the description, in line with psychological explanations of other kinds of framing. Keywords: Framing effects; descriptions; states of mind; reference point shifting; lottery-dependent expected utility; partial orders JEL: D81 D00 A12 Date: 2004-09 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:bla04090&r=all 196. Funeral Costs, Saving Behaviour and HIV/AIDS Sandra Freire (TEAM) The purpose of the paper is to highlight that funeral costs matter in households' decisions. In particular they do matter in the understanding of the impact of HIV/AIDS on households' wealth in developing countries. Nevertheless the magnitude of the implications on households through the channel of funerals depends deeply on funeral social norms and on individual characteristics. Four funeral motives household models are drawn in order to understand the complex relationship between households' wellbeing, funreals and HIV/AIDS. They differ in the existence of funeral social norms and in two specific funeral motives, joy of proper funeral or altruistic funeral motive. A preliminary analysis of the Centre for Health Systems Research & Development survey on socioeconomic impact of HIV/AIDS in South Africa illustrates first that funeral costs alter the long term behaviour of households. Then it suggests that HIV/AIDS changes the funeral behaviour in particular by lowering life expectancies. A relative funeral social norm rather than an absolute on influences the magnitude of funeral expenses. Finally, households appear to behave according to the joy of proper funeral motive rather than the altruistic funeral motive. Keywords: HIV/AIDS, saving behaviour; household, decision theory; optimal control; funerals JEL: D11 D91 I12 J26 Date: 2004-10 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:bla04092&r=all 197. On the role of inequalities and public education expenditures in human capital investment : a theoretical approach Mohamed Ben Mimoun (TEAM) We show in this paper that greater inequality in the distribution of wealth implies lower investment in higher education levels and lower aggregate income. Liquidity constraints and indivisibility in human capital investment result in the long-run in multiple equilibria with poverty traps. Although the heterogeneity in individual abilities allows economic mobility is not full : poor individuals with low abilities remain poor forever. The effect of the fiscal redistribution on the level of human capital investment is ambiguous unless for higher levels of income inequality where this effect is positive. Education funding policies however, are shown to be more efficient in enhancing human capital investment and rising interclass and intergenerational economic mobility. Keywords: Wealth inequality; human capital; economic mobility; fiscal redistribution; public education expenditures JEL: H52 I21 I22 I28 O15 Date: 2004-11 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:bla04094&r=all 198. Innovation, learning and productivity improvement in developing countries : a dynamic model of technological adoption and industry evolution Asma Raies (TEAM) This paper develops ans analyses a dynamic model, which combines both the adoption and the industry evolution theories. We model the decision of adoption, learning entry and exit of firms. These decisions depend on the interaction of technology characteristics effectiveness, machinery and information costs...) and other economic indicators (firm's size, technology capability, competition concentration, returns of scale,...). We use the model's theoretical results to analyze simultaneously the effects on the structure and the average efficiency of the industry and to develop a framework for understanding the public policy action necessary to enhance adoption and average productivity. Keywords: Technological adoption, learning, efficiency, entry and exit, industrial dynamics, evolution, developing countries JEL: L1 L11 L22 L25 O3 O31 O33 Date: 2004-12 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:bla04112&r=all 199. Individual action, institutions and social change : an approach in terms of convention Bernard Enjolras (Institute for social research et MATISSE) This anthology consists of a collection of articles that address two common questions : how institutions emerge from individual actions and how individual actions are shaped by institutions ? What unifies these contributions is the search of a theoretical explanation that overcomes the shortcomings of the rational choice explanations of social institutions. The approach developed here deals with two methodological problems that are pervasive in social sciences : that of the relationship between agency and structures and that of role of rationality and norms in explaining individual social behavior. Individuals are seen to be acting according to "conventions" that structure their interaction and that are cognitive and interpretative schemes that allow them to understand social reality and to give meaning to their actions. In addition individuals do not act either rationally or normatively but are conceived as acting within a "conventional" context that gives meaning to their action but also constrains them. They are supposed to be moved both by normative considerations and by self-interest that can conflict. Keywords: Convention, norm; rationality; collective action; agency; structure; social action; institution; governance; social change; community; nonprofit organizations; institutions JEL: C72 D70 H42 L3 L31 L32 L50 Date: 2004-06 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:r04052&r=all 200. Coping with imprecise information : a decision theoretic approach Thibault Gajdos (CREST) Jean-Marc Tallon (EUREQua) Jean-Christophe Vergnaud (EUREQua) We provide a model of decision making under uncertainty in which the decision maker reacts to imprecision of the available data. Data is represented by a set of probability distributions. We axiomatize a decision criterion of the maxmin expected utility type, in which the revealed set of priors explicitly depends on the available data. We then characterize notions of comparative aversion to imprecision of the data as well as traditional notions of risk aversion. Interestingly, the study of comparative aversion to imprecision can be done independently of the utility function, which embeds risk attitudes. We also give a more specific result, in which the functional representing the decision maker's preferences is the convex combination of the minimum expected utility with respect to the available data and expected utility with respect to a subjective probability distribution, interpreted as a reference prior. This particular form is shown to be equivalent to some form of constant aversion to imprecision. We finally provide examples of applications first to unanimity rankings of imprecision and risk and then to optimal risk sharing arrangements. Keywords: Imprecision; ambiguity; uncertainty; decision; multiple priors JEL: D81 Date: 2004-05 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:v04056&r=all 201. Natural resources and the wealth of nations in a globalized world economy Matteo Cervellati (Universitat Pompeu et Universita di Bologna) Piergiuseppe Fortunato (EUREQua et Universita di Bologna) We study the long run relationship between natural resources abundance and wealth of countries producing diffetentiated products sold in the international market. When the price (terms of trade) of national products depend on the human capital used to produce them, natural resources may lead to inferior long run production. This is the case if natural resources are neither irrelevant nor focal for the production possibilities of the economy. Keywords: Natural resources; globalization; human capital JEL: O13 O42 F43 Date: 2004-06 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:v04068&r=all 202. "Hot Air" and Market Power in International Emission Trading Florent Pratlong (ERASME et EUREQua) Denise Van Regemorter (CES - Katholieke Universiteit Leuven) Paul Zagame (ERASME et EUREQua) In respect to GHG emission reduction targets set in the Kyoto Protocol in 1997, a emission quotas trading system will be implemented among the Annex-1 participating countries to lower the mitigation costs of the international cooperation on climate change issue. Nonetheless, in the way the market was designed, the States of the Former Soviet Union and Eastern Europe are likely to become large sellers of carbon as a result of the drop in emissions level due to economic downturn, referring to "Hot Air". Indeed, these countries may exert substantially a dominant position in the international permits market since the US had decided to withdraw from the Kyoto Protocol. This paper aims to develop a better understanding of the consequence of "Hot Air" in the international carbon emission trading, using some policy variants simulated with the computable general equilibrium GEM-E3 World model. The present analyse focuses particularly on the measures of "Hot Air" and the implications of potential market power in the emission trading market. Under various scenario options, the exercise of market power lead to a misallocation of abatement effort accross the remaining Annex-1 countries as a consequence of permits price and welfare effets. Keywords: Emission trading; market power; MECG JEL: D43 D58 Q48 Date: 2004-07 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:v04074&r=all 203. Is innovation persistent at the firm Level . An econometric examination comparing the propensity score and regression methods Emmanuel Duguet (Universite de Bretagne et EUREQua) Stephanie Monjon (EUREQua) At the macroeconomic level, the persistence of technological change allows sustainable growth. But do the innovations come from the same set of firms or from a continous renewal of innovators ? On this point, the assumptions underlying the endogenous growth models differ and innovation persistence at the macroeconomic level can be supported by different firm-level behavioral assumptions. The aim of this article is threefold. Firstly, we evaluate a measure of the degree of innovation persistence at the firm level. Secondly, we analyze the factors underpinning the innovation persistence by testing the theoretical explanations that have been proposed in the literature. Lastly, we examine the robustness of the standard econometric methods used in innovation economics. We show that the persistence of innovation is strong at the firm level and that the right theoretical modeling depends on the size of the firm. While the smallfirms reveals strong learning-by-doing effects in the production of innovation, the persistence of innovation in the large firms relies on the persistence of formal research and development investments. Keywords: Community innovation surveys; creative destruction; innovation; learning-by-doing; matching; persistence; propensity score; research and development JEL: C14 O31 O32 Date: 2004-07 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:v04075&r=all 204. The effect of precommitment and past-experience on insurance choices : an experimental study Thomas Papon (EUREQua) This paper reports results from an experimental study that investigates insurance behaviors in low-probability high-loss risk situations. This study reveals that insurance behaviors may depend on the individual prior experience towards risk. It may also depend on the duration of the commitment period, namely the period during which individuals commit themselves to maintain the same insurance decision. Non-additive decision models such as Dual Theory and Cumulative Prospect Theory seem to have a higher descriptive power than Expected Utility Theory when explaining subjects' behaviors. This paper presents a direct experimental test of the prediction of Myopic Prospect Theory relative to insurance demand. This study is also designed to test the significance of gambler's fallacy and availability bias in the insurance decision process. These theoretical concepts help to understand many behaviors commonly observed in reality but which remain unexplained within the E.U framework. In particular, this paper provides new explanations about the puzzling fact that people usually fail to obtain insurance against disaster-type risks such as natural disasters, even when premiums are close to actuarially fair levels. According to our experimental results, the deficiency of insurance demand for natural disasters may be due to the lack of individual prior experience towards such risks as well as the relatively short commitment period of insurance policies (usually one fiscal year) compared with the empirical frequency of major natural hazards (centennial and even more). Keywords: Insurance demand; Low-probability high-consequence risks; heuristics and bias in risk perception; experimental methodology; Cumulative Prospect Theory; Dual Theory JEL: C90 C91 D1 D81 D84 G22 M31 Date: 2004-09 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:v04083&r=all 205. Hiring discrimination : a field experiment in the French financial sector Pascale Petit (EUREQua) Using correspondence testing, we investigate whether gender access gap in job interviews is due to different effects of present or future family responsibilities on expected productivity of male and female job applicants or if it is due to a taste for discrimination. We have sent job applications of three pairs of candidates to the same job advertisements in the French financial sector. Using three pairs of applicants, we compare the effect on the gender access gap to job interviews of a high probability of maternity/paternity (1) ; high family responsibilities (2) ; neither risk of maternity or family responsibility (3). Within each pair, the applicants' characteristics are similar except for their gender. We find significant discrimination against women with a high probability of maternity for highly qualified administrative jobs. In the other cases, unequal treatment between genders is not significant. So, controling for female probability of maternity, we find no significant unequal treatment between genders. We conclude that female employment suffers more from their probability of maternity (and their anticipated career interruptions) than family responsibilities alone. So, statistical discrimination due to female probability of maternity exists on the French labor market. An appropriate economic policy may correct it by reducing firms' cost due to maternity leave. Keywords: Field experiment; hiring discrimination JEL: J16 J71 J82 Date: 2004-07 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:v04086&r=all 206. Reference-dependent preferences : rationality, mechanism and welfare implications Raphael Giraud (EUREQua/TEAM) In this paper, we ask three questions about reference-dependent preferences (RDP) : to what extent can they be said to be irrational ? What is the mechanism that underlies reference dependence ? How to design welfare improving policies when preferences are reference-dependent ? As to the first question, we characterize three notions of rationality to assess the rationality of RDP and show that there is a sense in which they are rational. As to the second, we show that the effect of a shifting reference point is two-sided : first modifying the relevant criteria for choice and second modifying the desirability of an option. As to the third question we define a welfare ordering based on the comparison of the strength of the status quo bias and show how to relate it to the representation of preferences. Keywords: Reference-dependent preferences; status quo; rationality; welfare ordering; reference point shifting; implicit criteria; partial orders JEL: D81 D00 A12 Date: 2004-09 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:v04087&r=all 207. Does patenting increase the private incentives to innovate ? A microeconometric analysis Emmanuel Duguet (EPEE et EUREQua) Claire Lelarge (Division "Marches & Strategies d'Entreprise") This paper examines whether patenting increases the private incentives to innovate in manufacturing. To study this issue, we build a model in which the value of an innovation depends both on the type of innovation implemented (product, process) and on the existence of a patent protection or not. We obtain a three- equation model that links the values of product and process innovations to the value of patent protection. This model and the feature of the data imply the estimation of a censored trivariate Probit model. We reach two main conclusions. First, the value of patent rights increases the incentives to innovate in products but not in processes and, conversely, the value of product innovations only - and not the one of process innovations - increases the incentives to patent. Second, we find that the distributions of product innovations and of patent values are skewed contrary to the values of process innovations. A significant share of the skewness in product values would come from the efficiency differences of intellectual property rights between the different activities. Keywords: Innovation, patent, GHK simulator, system of limited dependent variables, asymptotic least squares JEL: C15 C35 L60 O31 O34 Date: 2004-09 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:v04096&r=all 208. Risk Perceptions, Voluntary Contributions and Environmental Policy Johanna Etner (GAINS et EUREQua) Meglena Jeleva (LEN-C3E et EUREQua) Pierre-Andre Jouvet (GAINS et GREQAM) This article study the impact of risk perception on environmental policy. The environmental quality is uncertain and can be improved by voluntary contributions. We introduce then an heterogeneity in individuals' risk perceptions. In this context, the social optimum can be decentralized by tax financed government subsidies to private provision. We distinguish the case of a government who represents perfectly agents' preferences from the case of a government with its own risk preferences. In the two cases, we show that neutrality still holds. Keywords: Risk perception; pessimism; optimism; environmental quality JEL: D89 D69 H23 Date: 2004-10 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:v04097&r=all 209. How to deal with partially analyzed acts ? A proposal Jean-Yves Jaffray (LIP6 -Universite Paris 6) Meglena Jeleva (LEN-C3E et EUREQua) In some situations, a decision is best represented by an incompletely analyzed act : conditionally to a given event A, the consequences of the decision on sub-events are perfectly known and uncertainty becomes probabilizable, whereas the plausibility of this event itself remains vague and the decision outcome on the complementary event A exposant c is imprecisely known. In thisframework, we study an axiomatic decision model and prove a representation theorem. Resulting decision criteria aggregate partialevaluations consisting in : i) the conditional expected utilityassociated with the analyzed part of the decision ; and ii) the bestand worst consequences of its non-analyzed part. The representationtheorem is consistent with a wide variety of decision criteria whichallows for expressing various degrees of knowledge on (A, A exposant c)and various types of attitude towards ambiguity and uncertainty.This diversity is taken into account by specific models already existingin the literature. We take advantage of that fact and propose someparticular forms of our model incorporating these models as sub-modelsand moreover expressing various types of beliefs concerning the relativeplausibility of the analyzed and the non-analyzed events ranging fromprobabilities to complete ignorance that include capacities. Keywords: Decision making under uncertainty; partially analyzed decisions JEL: D81 Date: 2004-10 URL: http://d.repec.org/n?u=RePEc:mse:wpsorb:v04098&r=all 210. Volatility Forecasting Torben G. Andersen (Kellogg School of Management, Northwestern University) Tim Bollerslev (Department of Economics, Duke University) Peter F. Christoffersen (Faculty of Management, McGill University) Francis X. Diebold (Department of Economics, University of Pennsylvania) Volatility has been one of the most active and successful areas of research in time series econometrics and economic forecasting in recent decades. This chapter provides a selective survey of the most important theoretical developments and empirical insights to emerge from this burgeoning literature, with a distinct focus on forecasting applications. Volatility is inherently latent, and Section 1 begins with a brief intuitive account of various key volatility concepts. Section 2 then discusses a series of different economic situations in which volatility plays a crucial role, ranging from the use of volatility forecasts in portfolio allocation to density forecasting in risk management. Sections 3, 4 and 5 present a variety of alternative procedures for univariate volatility modeling and forecasting based on the GARCH, stochastic volatility and realized volatility paradigms, respectively. Section 6 extends the discussion to the multivariate problem of forecasting conditional covariances and correlations, and Section 7 discusses volatility forecast evaluation methods in both univariate and multivariate cases. Section 8 concludes briefly. JEL: C10 C53 G1 Date: 2005-02-22 URL: http://d.repec.org/n?u=RePEc:pen:papers:05-011&r=all 211. Elasticity of Substitution between Capital and Labor and its applications to growth and development Samuel de Abreu Pessoa (Graduate School of Economics, Fundacao Getulio Vargas) Silvia Matos Pessoa (Department of Economics, University of Pennsylvania) Rafael Rob (Department of Economics, University of Pennslyvania) This paper estimates the elasticity of substitution of an aggregate production function. The estimating equation is derived from the steady state of a neoclassical growth model. The data comes from the PWT in which different countries face different relative prices of the investment good and exhibit different investment-output ratios. Then, taking advantage of this variation we estimate the long-run elasticity of substitution. Using various estimation techniques, we find that the elasticity of substitution is 0.7, which is lower than the elasticity, 1, that is traditionally used in macro-development exercises. We show that this lower elasticity reinforces the power of the neoclassical model to explain income differences across countries as coming from differential distortions. Keywords: Demand for Investment, Dynamic Panel Data, Elasticity of Substitution JEL: D24 D33 E25 Date: 2005-03-04 URL: http://d.repec.org/n?u=RePEc:pen:papers:05-012&r=all 212. About the Right Weight of the Social Welfare Function when Needs Differ. Alain Trannoy (Ehess, Greqam-Idep) When equivalence scales are used to compute the well-being of individuals, two possible weighting methods of the different household types have been proposed, the first one resorts to the family size and the second to the equivalence scale itself. The latter is criticized on the ground that it does not respect an anonymity axiom. We show that this criticism vanishes in the standard microeconomic setting. Keywords: social welfare, equivalence scale, weights, anonymity, indirect utility function JEL: D63 I3 D13 Date: 2003-04 URL: http://d.repec.org/n?u=RePEc:iep:wpidep:0304&r=all 213. Does endogenous formation of jurisdictions lead to wealth stratification ? Nicolas Gravel (IDEP-GREQAM and Universite de la Mediterranee) Sylvie Thoron (GREQAM and Universite de Toulon) This paper examines the validity of the “folk” intuition that endogenous formation of jurisdictions is likely to create stratification of households according to their wealth. More specifically, we examine a simple model of jurisdiction formation, close in spirit to that of Whestoff ([27]), in which a continuum of unequally wealthy households endowed with the same preferences for one public good and one private good make a location decision in a finite set. Households who choose the same location form a jurisdiction. Within each jurisdiction, the public good is financed by a proportional wealth tax whose rate is decided by a social choice mechanism. The only assumption imposed on the mechanism is to select the most preferred tax rate of one member of the jurisdiction. We define a jurisdiction structure to be stable if it gives to no household any incentive to move away from its jurisdiction. We raise the question of whether stable jurisdiction structures will be stratified in the precise sense that if two households belong to one jurisdiction, then so do all households with intermediate wealth. We provide a necessary and, if households preferences satisfy an additional regularity property, sufficient condition on the households preferences that guarantees that any stable jurisdictions structure involves stratification in this sense. The condition is that the household’s most preferred tax rate must be a strictly monotonic function of its wealth. Date: 2003-05 URL: http://d.repec.org/n?u=RePEc:iep:wpidep:0306&r=all 214. Second-Best Optimal Taxation of Capital and Labor in a Developing Economy Cecilia Garcia Penalosa (CNRS, GREQAM and IDEP) Stephen J. Turnovsky (University of Washington) This paper examines how the tax burden in a developing economy should be distributed between capital income and labor income. We study a two-sector model, where the traditional sector is "informal" and consequently cannot be taxed by the government. In this set up, we find that the optimal (second-best) tax structure in order to raise a certain amount of revenue requires to tax capital income at least as much as labor income, and possibly more. Keywords: endogenous growth, optimal taxation, informal sector, developing economies. JEL: E62 O17 O23 Date: 2003-05 URL: http://d.repec.org/n?u=RePEc:iep:wpidep:0307&r=all 215. Appraising diversity with an ordinal notion of similarity: an Axiomatic approach Sebastian Bervoets (IDEP-GREQAM) Nicolas Gravel (IDEP-GREQAM) This paper provides an axiomatic characterization of two rules for comparing alternative sets of objects on the basis of the diversity that they oer. The framework considered assumes a ?nite universe of objects and an a priorigiven ordinal quadernary relation that compares alternative pairs of objects on the basis of their ordinal dissimilarity. Very few properties of this quadernary relation are assumed (beside completeness, transitivity and a very natural form of symmetry). The two rules that we characterize are the maxi max criterion and the lexi-max criterion. The maxi max criterion considers that a set is more diverse than another if and only if the two objects that are the most dissimilar in the former are weakly as dissimilar as the two most dis- similar objects in the later. The lexi-max criterion is de?ned as usual as the lexicographic extension of the maximax criterion. Date: 2003-05 URL: http://d.repec.org/n?u=RePEc:iep:wpidep:0308&r=all 216. Proportional Income Taxation and Effective Progressivity Udo Ebert (Institut fur Volkswirtschaftslehre, Carl von Ossietzky Universitat Oldenburg) Patrick Moyes (CNRS, IDEP and GRAPE, Universite Montesquieu Bordeaux IV) When incomes are exogenously given, a progressive tax structure reduces inequality in the sensethat the Lorenz curve of after tax incomes is nowhere below that of before tax incomes whatever the circumstances as it was shown by U. Jakobsson (Journal of Public Economics 5 (1976), 161-168) The relevance of this standard result is however seriously limited since real-world incomes are determined by the working decisions of the agents in the economy. The paper aims at investigating the implications for e_ective progression of relaxing the assumption of exogenous incomes when individuals have the same preferences but di_erent talents. We _rst extend the standard result to the case where agents' working decisions are fully taken into account and we conclude that it is generally impossible to disentangle the respective contributions to inequality reduction of the tax schedule and agents' preferences. We next demonstrate that an elasticity of labour supply which is non-decreasing in productivities is both necessary and su_cient for a proportional tax schedule to result in less unequally distributed incomes. Journal of Economic Literature Keywords: Endogenous incomes, Labour supply, Redistribution, Taxation, Inequality, Progressivity JEL: H23 H24 D63 Date: 2003-09 URL: http://d.repec.org/n?u=RePEc:iep:wpidep:0309&r=all 217. Social Welfare, Priority to the Worst-Off And the Dimensions of Individual Well-Being Marc Fleurbaey When well-being is one-dimensional, the key ethical issue for the definition of social welfare is the degree of inequality aversion, which can be discussed with variants of the Pigou- Dalton transfer principle. When it is measured in terms of primary goods, functionings or capa-bilities, individual well- being is fundamentally multi-dimensional. It is then important to take account of individual preferences over the diferent dimensions. This has interesting consequences for the definition of social welfare. This chapter shows how the axiomatic techniques of social choice can then be used to justify particular social welfare functions and derive suitable criteria for the assessment of reforms of the Welfare State and consequences of globalization. Date: 2003-11 URL: http://d.repec.org/n?u=RePEc:iep:wpidep:0312&r=all 218. On sustainable Pay As You Go systems. Gabrielle Demange An unfunded Social Security system faces the major risk, sometimes referred to as "political risk", that future generations modify or even suppress the contributions. 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 new born generation. The analysis is conducted in an overlapping generations economy that is subject to macro-economic 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. Date: 2005 URL: http://d.repec.org/n?u=RePEc:pse:psecon:2005-05&r=all 219. Free choice of unfunded systems: a first assessment. Gabrielle Demange The first pillars of social security systems widely differ across European countries both in the contribution rate and intra- generational redistribution. What would be the impact of these differences if EU citizens had free access to all systems? This paper aims to highlight some basic features of this question in a very simple two countries model. Date: 2005 URL: http://d.repec.org/n?u=RePEc:pse:psecon:2005-06&r=all