---------------------------------------------------------------------------- NEP: New Economics Papers All new papers ---------------------------------------------------------------------------- Edited by: Marco Novarese http://ideas.repec.org/e/pno2.html Universita del Piemonte Orientale Date: 2005-05-23 Papers: 503 This document is in the public domain, feel free to circulate it. +++++++++++++++++++++++++++++++++++++++++++++++++++ + Access to full-text contents may be restricted. + +++++++++++++++++++++++++++++++++++++++++++++++++++ 1. Monopoly, asymmetric information, and optimal environmental taxation Manel Antelo (Universidad de Santiago de Compostela) This paper aims to examine optimal environmental taxation in an incomplete-information two-period model in which a monopolistic firm produces and pollutes. It is assumed that the polluting firm is privately informed about its costs of production, and the policymaker, which can only infer the firm's costs from observing the output produced in the first period, has the chance to set environmental taxes to affect emissions; the emitter of pollution may then choose a non-optimal level of production in such a period in order to manipulate the policymaker's beliefs concerning its costs. If the policymaker values environmental quality sufficiently, the low-cost polluter has an incentive to misrepresent itself as a high-cost firm in order to secure a low environmental tax in the second period. This leads the high-cost polluting firm to produce, in the first period, an output level that is not higher than output which would be optimal if only short-term considerations were taken into account. The optimal environmental tax rate in the first period, when the firm's output is a signal of its cost, is then lower than or equal to what it would be if the firm's output was not a signal of firm's costs. The expected emissions in the former context are also lower than or equal to those in the latter case. By contrast, when the policymaker's valuation of the environment is sufficiently low, the environmental tax is negative (a subsidy per unit of pollutant emitted) in both the signaling and non- signaling contexts and no less in the former context than in the latter. Keywords: Environmental tax and subsidy policy, monopolistic polluting firm, vertical asymmetric information, signaling and non-signaling JEL: D62 D82 L13 Date: 2005 URL: http://d.repec.org/n?u=RePEc:cea:doctra:e2005_08&r=all 2. La SAMEA y la eficiencia economica y ambiental en Espana Gaspar J. Llanes Diaz- Salazar (Univesidad Pablo de Olavide) Manuel Alejandro Cardenete (Univesidad Pablo de Olavide) Carmen Rodriguez Morilla (Univesidad de Sevilla) This paper aims to show the utility of the so-called Social Accounting Matrix and Environmental Accounts (SAMEA) for economic and environmental efficiency analysis. The article use the SAMEA for Spain in 2000, applied to the water resource and to greenhouses gases emissions. The estimation has been made from official data of the INE. This matrix is used like central core of a multisectorial model of the economic and environmental performance, and is calculated, what have been called "domestics multipliers SAMEA" and their decomposition into characteristic, direct, indirect and induced effects. These multipliers show some of the valuation economic and environmental efficiency. Also, is made an application of these multipliers that allows to appreciate that there is no causal interrelation between the sectors with a higher economic backward linkages and higher environmental deterioration backward linkages. Keywords: Input-Output Models; Evaluation of Environmental Effects; Air Pollution; Environmental Accounting JEL: C68 Q51 Q52 Q56 Date: 2005 URL: http://d.repec.org/n?u=RePEc:cea:doctra:e2005_09&r=all 3. Real Exchange Rate Misalignments and Economic Performance Alvaro Aguirre Cesar Calderon El presente trabajo se enmarca en un APT (Ross, 1976a) de la vertiente de Variables Macroeconomicas, que tiene la ventaja (en comparacion con Analisis Factorial) de permitir la interpretacion economica de los factores y los premios por riesgo factoriales. Similar a Burmeister y McElroy (1988), consideramos cuatro factores macroeconomicos medidos y un factor no observado; la presencia de factores no observados es una generalizacion del trabajo previo de Chen, Roll y Ross (1986). Partiendo del modelo de factores, la Teoria de Precios por Arbitraje (APT) impone restricciones, las que son comprobadas empiricamente en el periodo 1990-2003. Ademas, el Modelo de Valoracion de Activos de Capital (CAPM) esta anidado en el APT, lo que permite someter a prueba el modelo CAPM. Nuestros resultados son: (a) la restriccion del APT no es rechazada por los datos, (b) las sorpresas en la tasa de crecimiento del Indice Mensual de Actividad Economica (IMACEC), en el precio del cobre y en el precio del petroleo aparecen como factores con premios por riesgo estadisticamente distintos a cero en los retornos accionarios chilenos; mientras que las sorpresa en inflacion no aparecen preciadas en la muestra, y (c) el modelo CAPM es fuertemente rechazado por los datos, en favor del APT. Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:chb:bcchwp:316&r=all 4. Institutions, Economic Policies and Growth: Lessons From the Chilean Experience Vittorio Corbo Leonardo Hernandez Fernando Parro A pesar del esfuerzo de reformas de las decadas pasadas, el desempeno economico y social de los paises de America Latina durante los noventa fue bastante pobre. La excepcion fue Chile, que crecio a tasas promedio de 7% durante la mayor parte de la decada y redujo significativamente su tasa de pobreza. Este trabajo intenta explicar esta notable diferencia. Siguiendo la literatura mas reciente, que destaca el rol que juegan las instituciones y politicas en el crecimiento economico, argumentamos que el mejor desempeno de Chile se debio a que las reformas implementadas fueron mucho mas profundas y abarcaron mas areas que aquellas implementadas en otros paises de America Latina. Durante este proceso Chile termino con fundamentos economicos mas solidos y, aun mas importante, con mejores instituciones, lo que le permitio enfrentar de mejor manera los shocks adversos en los noventa. Basados en un modelo econometrico de corte transversal estimado para el periodo 1960- 2000, argumentamos que el mejor desempeno de Chile vis-a-vis al resto de la region puede ser explicado en partes iguales por las mejores instituciones y politicas del pais (en contraste, el mejor desempeno de Asia del Este es explicado principalmente por mejores politicas). Adicionalmente, estimamos que America Latina puede aumentar su tasa de crecimiento anual del producto per capita un 1,6%, en promedio, si tuviera la calidad de instituciones de Chile. Por otro lado, si el promedio de los paises de America Latina tuviera politicas (desarrollo financiero y sobrevaluacion cambiaria) similares a Chile, la tasa de crecimiento anual del producto per capita aumentaria en un 1,0%, en promedio. Concluimos que, para lograr tasas de crecimiento mas altas, los paises de America Latina deben avanzar en sus procesos de reformas y poner mas enfasis en el desarrollo y fortalecimiento de sus instituciones, las cuales, como muestra la experiencia de Chile, pueden ser modificadas ( aunque lentamente). Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:chb:bcchwp:317&r=all 5. Financial Frictions and Real Devaluations Alvaro Aguirre Cesar Calderon In this paper I study the effects of real exchange rate devaluations on output performance using a sample of large devaluation episodes for a group of emerging and developed countries. I find that balance sheet effects, captured by the interaction between the real exchange rate devaluation and the level of external indebtedness of the country, have a significant and negative impact on output. Nevertheless, there is also evidence of a positive effect of the real devaluation associated to the traditional expansionary effect. For countries with large foreign-denominated external debt, the combined effect of the real exchange rate depreciation is likely to generate significant output losses in the short-run. However, in the medium term, the expansionary effect of the real devaluation tends to dominate the balance sheet effect, which implies a positive effect on output in the medium term. Finally, countries with deeper financial market experience lower output losses following a devaluation. Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:chb:bcchwp:318&r=all 6. Money as an indicator for inflation and output in Chile - not anymore? Tobias Broer This paper identifies the information content of monetary aggregates for output and inflation in Chile, using a large set of reduced-form statistics and regression specifications. Unlike almost all previous studies on money in Chile, we compare 10 traditional and new definitions of money, rather than just looking at the customary definition M1A. Also, given the changes in the financial system and disinflation in Chile over the last 20 years, as well as contrasting growth rates of GDP and narrow money in recent times, we report recursive estimations for all our statistics to highlight parameter constancy. While there seems to be a strong and often one-to-one association between money growth and inflation on average over the whole sample as indicated by Nelson (2003) type regressions, the relation drops strongly during the last 10 years, and thus seems much lower in times of low inflation. Also, an increase in nominal money growth never causes acceleration of inflation in a Granger sense. However, we do find a significant and positive impact of deviations from (an estimated or HP-filtered) equilibrium level of money holdings on inflation, as indicated by error-correction and Pstar models. But the deviations from a simple estimated equilibrium are very large for both broad money aggregates and M1A at the end of the sample, casting some doubt on the stability of their demand relation. Accordingly, cointegration tests for the existence of a stable demand for money function over the whole sample are somewhat inconclusive. We find a strong Granger causality relationship between money and output, which however vanishes once we control for the effect of past inflation and changes in the monetary policy rate. Also, the information in lags of M1A for GDP drops strongly towards the end of the sample. More generally, M1A does not seem to merit its role as the money sum par excellence in Chile, being inferior in information content for example to Notes and Coin, or a broad money sum excluding bonds (M7 minus Central Bank documents). Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:chb:bcchwp:319&r=all 7. The Wage Curve in Chile Pablo Garcia Paulina Granados This paper analyses the relationship between an individual’s wage and unemployment in her region and industrial sector —the Wage Curve— in Chile from the 1990s onwards. It uses a host of national survey evidence, including the CASEN (Encuesta de Caracterizacion Socieconomica Nacional) and ESI (Encuesta Suplementaria de Ingreso) surveys. The evidence clearly points to the existence of a Wage Curve in Chile. The coefficient that relates individual wage with local unemployment rate is –0.04, and –0.13 in the case of the sectoral unemployment rate, both similar to those found in studies for other economies. Moreover, after 1999 the responsiveness of wages to local/sectoral unemployment rates seems to have increased. Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:chb:bcchwp:320&r=all 8. L’economie indienne : changements structurels et perspectives a long-terme Sophie Chauvin Francoise Lemoine L’economie indienne connait depuis un quart de siecle une acceleration de sa croissance et des changements structurels lents mais tangibles. A cote de secteurs traditionnels toujours dominants, les secteurs nouveaux connaissent un essor rapide. La croissance s’accompagne de tensions, liees a la montee des inegalites et du chomage, au sous-emploi, et d’une aggravation des deficits publics qui pesent sur la politique economique. Les scenarios a long terme sur les perpectives de rattrapage de l’economie indienne ont evolue ces dernieres annees d’un relatif pessimisme a l’optimisme, et les plus recents soulignent les marges de croissance importantes dont elle dispose. L’Inde se profile comme une puissance economique qui dans vingt-cinq ans aura le poids qu’a actuellement la Chine dans l’economie mondiale. Keywords: Inde; croissance; politique economique; rattrapage JEL: O53 O57 O47 O10 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cii:cepidt:2005-04&r=all 9. Institutional Determinants of Foreign Direct Investment Agnes Benassy-Quere Maylis Coupet Thierry Mayer In this paper, we contribute to the literature on the determinants of FDI in developing countries and re-evaluate the role of the quality of institutions on FDI. We use a newly available database, with unprecedented detail on institutions of a set of 52 countries, and compare the results with matched variables from more familiar datasets. The paper controls for the correlation between institutions and GDP per capita of the host country, and also accounts for potential endogeneity of institutions. Finally, we evaluate whether proximity of institutions between the host and the origin country raises bilateral FDI. Keywords: FDI; gravity model; institutions; developing countries; relocation JEL: F23 R3 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cii:cepidt:2005-05&r=all 10. Les conflits de localisation : le syndrome NIMBY Nicolas Marchetti
Depuis les annees 1970-1980, les reactions d’opposition a la localisation d’equipements dangereux ou generateurs de nuisances se sont diversifiees, intensifiees et structurees au point de devenir un probleme capital pour la societe.
Forge aux Etats-Unis et analyse comme un veritable syndrome affectant nos democraties, l’acronyme NIMBY caracterise de plus en plus frequemment ces conflits de localisation. Il decoule d’une metaphore qui parle d’elle-meme: « Not in my backyard ! », en francais: « Pas dans ma cour ! » Cet acronyme est cense traduire l’attitude d’opposition d’une population locale vis-a-vis d’un projet lorsque celui-ci est susceptible d’entrainer certaines nuisances ou modifications, reelles ou supposees, du cadre de vie. En Europe, l’intensification des conflits de localisation est plus recente et l’appellation NIMBY entre peu a peu dans le langage courant.
Longtemps circonscrites aux projets d’implantation d’equipements consideres comme tres polluants ou tres risques, les reactions d’opposition se sont generalisees et affectent a present un nombre considerable de projets publics comme prives : parcs eoliens, decharges, incinerateurs, stations d’epuration et, plus recemment, les projets de prisons, de centres d’aide ou d’accueil destines aux publics desherites : demandeurs d’asile, toxicomanes... Les exemples de conflits NIMBY au Quebec sont nombreux : localisation d’un port methanier a Beaumont, implantation d’une compostiere geante dans la municipalite regionale de comte de Roussillon, construction d’un parc eolien dans le nord du Quebec.
Les risques lies a la multiplication des conflits NIMBY sont nombreux. En matiere d’environnement, les victoires des militants NIMBY « ici » peuvent toujours provoquer ou aggraver les problemes « ailleurs ». En matiere d’equipement ou de services, du fait qu’elle contribue a retarder une constante et necessaire adequation entre l’offre et la demande, la multiplication des manifestations du syndrome NIMBY peut entrainer un sous- equipement chronique de certains espaces. Enfin, en matiere d’amenagement du territoire, les situations de blocage dues a ce syndrome peuvent etre a l’origine de phenomenes de relegation spatiale.
Ce Rapport bourgogne presente une vue
d’ensemble du syndrome NIMBY et des mecanismes proposes par
les economistes pour le surmonter. Concernant ce dernier aspect,
du point de vue de l’auteur, les procedures centralisees
doivent etre abandonnees car elles ne laissent qu’une place
trop limitee a la participation du citoyen. Elles doivent etre
remplacees par des procedures faisant appel au marche.
Differents mecanismes theoriques peuvent alors etre
envisages : la negociation, les encheres, les assurances ou
encore les loteries. Ces mecanismes s’averent, sous certaines
hypotheses, relativement efficaces. Il convient cependant de les
manipuler avec precaution car ils peuvent, dans certains cas,
deboucher sur des resultats difficilement applicables.
L’auteur s’inquiete egalement du fait que les travaux sur
le sujet sont rarement pluridisciplinaires.
Date: 2005-05-01
URL: http://d.repec.org/n?u=RePEc:cir:cirbur:2005rb-05&r=all
11. L’economie du logiciel libre et ouvert
Recommandations en vue d’une politique gouvernementale
a l’egard du logiciel libre (open source software)
Marcel Boyer
Jacques Robert
Ce texte vise a circonscrire les fondements d’une
politique gouvernementale a l’egard du logiciel libre et
ouvert (open source software). Nous caracterisons brievement
l’ampleur du phenomene du logiciel libre et nous en analysons
les avantages et inconvenients pour le gouvernement tant comme
moteur du developpement economique que comme grand utilisateur
de technologies d’information et de communications. Nous
concluons par un ensemble de recommandations a l’intention du
gouvernement, tant de nature « politique economique et
industrielle » que de nature « grand utilisateur » face au
developpement du logiciel libre et ouvert.
Keywords: , logiciel libre, propriete intellectuelle, code
source libre, code source ouvert, systeme
d’exploitation libre, licence GPL, licence BSD,
innovation, effet d’arborescence
Date: 2005-05-01
URL: http://d.repec.org/n?u=RePEc:cir:cirpro:2005rp-05&r=all
12. Architecture gouvernementale ouverte:
Evolution des
normes, des standards de consortium et des logiciels libres
Francois Coallier
Robert Gerin-Lajoie
Cette etude, realisee pour le Conseil du tresor du Quebec, a pour objectifs de presenter, dans un contexte d’architecture d’entreprise, les recents developpements dans l’evolution des normes et standards par les differents acteurs du milieu, les consortiums industriels et les comites de normalisation internationaux en s’arrimant avec les logiciels ouverts.
Pour pouvoir atteindre ses objectifs de services aupres des citoyens et de la societe, le gouvernement du Quebec doit integrer ses systemes informatiques en vue de realiser une architecture ouverte orientee service.
Une telle integration necessite, a l’instar de plusieurs gouvernements et de la Communaute europeenne, l’elaboration d’un cadre d’interoperabilite, soit un ensemble structure de normes, standards, specifications et politiques permettant a des systemes informatiques d’interoperer.
Il est donc recommande que le gouvernement du Quebec:
Keywords: Monopoly regulation; incentive regulation; revenue cap regulation Date: 2005-05-17 URL: http://d.repec.org/n?u=RePEc:hhb:gunwba:2005_408&r=all 267. Swedish Premium Pension Funds: Attributes and Performance Jern, Benny (Swedish School of Economics and Business Administration) This study investigates the relationship between fund attributes and performance. The focus is on funds available in the Swedish Premium Pension system (PPM-funds). The aim has been to investigate whether administration fees, manager tenure or past performance are of importance for pension savers when they pick their PPM-funds. The results indicate that high fees are a disadvantage to pension savers investing in bond funds but not to those investing in stock funds. Manager tenure has no relationship with performance. There is evidence of performance persistency in most of the investigated fund categories. Keywords: Mutual funds; Sweden; Premium pension; PPM; Attributes and performance Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:hhb:hanken:0509&r=all 268. Entry into Local Retail Food Markets in Sweden: A Real- Options Approach Daunfeldt, Sven-Olov (The Swedish Research Institute of Trade (HUI)) Orth, Matilda (Department of Economics, School of Economics and Commercial Law, Goteborg University) Rudholm, Niklas (Department of Economics, Umea University) A real-options approach was used, incorporating uncertainty and irreversibility of investments, to study the number of stores entering the Swedish retail food market during the period 1994- 2002. It was found that uncertainty affected the entry-decision. Entry was less frequent in highly concentrated local retail food- markets characterized by a high degree of uncertainty, whereas higher profit opportunities seem to have increased the probability of entry.
Keywords: Real options; uncertainty; retail food; entry; negative binomial regression JEL: L13 L81 Date: 2005-05-17 URL: http://d.repec.org/n?u=RePEc:hhs:gunwpe:0170&r=all 269. Simulating the Future Pension Wealth and Retirement Saving in Sweden Rostberg, Anna (Uppsala University) Andersson, Bjorn (Sveriges Riksbank) Lindh, Thomas (Institute for Futures Studies) In this paper the wealth consequences of the Swedish pension system in the transition from a defined benefit to notional defined contribution system are simulated with almost exact institutional detail, using life cycle profiles estimated from detailed longitudinal micro data. Projected wealth, including different types of pension wealth, are computed and compared between cohorts, gender, wealth deciles and occupational categories. Consistent saving rates and replacement rates allowing consumption to stay constant after retirement are computed. Two different macroeconomic scenarios are considered, one using stylised values for growth, inflation etc. and another using demographically based forecasts. Some conclusions are that the cohorts born in the 1940s are relatively favoured, and so are the wealthiest deciles. Stylised macro assumptions yield more optimistic wealth projections than those corresponding to demographically based projections. Keywords: Future Pension Wealth; Retirement Saving in Sweden JEL: G23 H55 J14 Date: 2004-09 URL: http://d.repec.org/n?u=RePEc:hhs:ifswps:2005_006&r=all 270. How Does Financial Liberalization affect Economic Growth? Bonfiglioli, Alessandra (Institute for International Economic Studies, Stockholm University) This paper assesses the effects of international financial liberalization and banking crises on investments and productivity in a sample of 93 countries (at its largest) observed between 1975 and 1999. I provide empirical evidence that financial liberalization spurs productivity growth and marginally affects capital accumulation. Banking crises depress both investments and TFP. Both levels and growth rates of productivity respond to financial liberalization and banking crises. The paper also presents evidence of conditional convergence in productivity across countries. However, the speed of convergence is unaffected by financial liberalization. These results are robust to a number of econometric specifications. Keywords: Capital account liberalization; equity market liberalization; financial development; banking crises; growth; productivity; investments; convergence JEL: C23 F43 G15 O40 Date: 2005-05-10 URL: http://d.repec.org/n?u=RePEc:hhs:iiessp:0736&r=all 271. Equities and Inequality Bonfiglioli, Alessandra (Institute for International Economic Studies, Stockholm University) This paper studies the relationship between investor protection, the development of financial markets and income inequality. In the presence of market frictions, investor protection promotes financial development by raising confidence and reducing the costs of external financing. Developed financial systems spread risk among financiers and firms, allocating them to the agents bearing them best. Therefore, financial development plays the twofold role of encouraging agents to undertake risky enterprises and providing them with insurance. By increasing the number of risky projects, it raises income inequality. By extending insurance to more agents, it reduces it. As a result, the relationship between financial development and income inequality is hump-shaped. Empirical evidence from a cross-section of sixty- nine countries, as well as a panel of fifty-two countries over the period 1976-2000, supports the predictions of the model. Keywords: Income inequality; financial development; capital market frictions; investor protection; instrumental variables; dynamic panel data JEL: D31 E44 G30 O15 O16 Date: 2005-05-11 URL: http://d.repec.org/n?u=RePEc:hhs:iiessp:0737&r=all 272. Factor Supplies and the Direction of Technical Change Svaleryd, Helena (The Research Institute of Industrial Economics) Vlachos, Jonas (The Research Institute of Industrial Economics) In this paper, we empirically address the hypothesis that there is a relationship between the supply of human capital and the rate and direction of skill-biased technical change (SBTC). Using country- and industry-level data on OECD countries, we find R&D to be positively related to the supply of human capital. There is, however, no indication that this translates into higher rates of SBTC, when SBTC is measured as changes in the wage bill share of skilled labor. Interestingly, both R&D and the rate of SBTC seem to be relatively high in low-skill industries in countries where the supply of human capital is relatively high. Keywords: Skilled-biased Technical Change; Supply of Human Capital JEL: J32 O31 Date: 2005-05-12 URL: http://d.repec.org/n?u=RePEc:hhs:iuiwop:0640&r=all 273. Assymetric Effects of Corruption on FDI: Evidence from Swedish Multinational Firms Hakkala, Katariina (The Research Institute of Industrial Economics) Norback, Pehr-Johan (The Research Institute of Industrial Economics) Svaleryd, Helena (The Research Institute of Industrial Economics) We examine the effect of corruption on foreign direct investments. Our model shows that corruption may have different effects on investments aimed at selling to a local market, in comparison to investments aimed at selling from the corrupt market. Using Swedish firm-level data, we find that affiliate local sales decrease with corruption, while affiliate exports increase. Finally, corruption has a negative effect on the probability that a foreign firm will invest in a country. These results are consistent with theory when bribing reduces production costs and local firms have an advantage in bribing vis a vis foreign firms. Keywords: FDI; Corruption; Multinational Firm JEL: D73 F21 F23 Date: 2005-05-12 URL: http://d.repec.org/n?u=RePEc:hhs:iuiwop:0641&r=all 274. Peers and Culture Saez-Marti, Maria (The Research Institute of Industrial Economics) Sjogren, Anna (The Research Institute of Industrial Economics) We analyze the evolution of cultural traits when parents purposefully invest resources in order to socialize their children to the cultural traits that maximize child lifetime utility. We assume that children are not passive in their adoption of traits from peers. Instead they are guided by an evaluation of the merit of traits. We show that such evaluation is likely to render this process of "oblique transmission" biased. We then show that when transmission of traits from society is biased or frequency dependent, cultural diversity is sustainable even when all parents strive to transmit the same trait. We also show that demand for cultural pluralism on the part of parent does not guarantee cultural diversity. Keywords: Peer Groups; Cultural Transmission; Cultural Diversity; Oblique Transmission JEL: D10 I20 J13 Date: 2005-05-12 URL: http://d.repec.org/n?u=RePEc:hhs:iuiwop:0642&r=all 275. Are Objective, Official Measures of Disability Reliable? Johansson, Per (Institute for Labour Market Policy Evaluation (IFAU)) Skedinger, Per (The Research Institute of Industrial Economics) The issue considered in this study is whether objective, official reports on disability status are reliable. While there is a rather large literature on the reliability of self-reported disability, evidence regarding objective data is scant. It seems to be a widely held view among researchers that, since individuals out of work are inclined to respond towards poor health, it would be best to have official data provided by the relevant administrative bodies. But we argue that such administrative data should be regarded with some suspicion, since the administrators also may have incentives to misreport. The empirical evidence, based on a large sample of Swedish jobseekers, suggests systematic misreporting by the Public Employment Service of objective, official disability measures due to incentives to exaggerate disability. Keywords: Work Disability; Classification Error; Public Employment Service JEL: I12 J28 J68 Date: 2005-05-16 URL: http://d.repec.org/n?u=RePEc:hhs:iuiwop:0643&r=all 276. A framework for understanding inflation - with or without money Bengtsson, Ingemar (Department of Economics, Lund University) This paper presents a model that pictures how inflation is determined in a decentralized market process where prices are set in both simultaneous and sequential contracts. Price setting is seen as a coordination game between the price setters of sequential contracts. An important property of the model is that inflation thus can be explained without any reference to the quantity of money.Following up the finding that inflation is determined in a coordination game, it is subsequently claimed that whenever inflation does not follow a random path, people do seem to follow some rule of thumb when predicting future price levels. In the last section of the paper, it is finally claimed that this rule is best understood as a focal point, and furthermore that the central banks provides the focal point for inflation in the western world today. Central banks could thus be shown to be able to influence inflation rates, although the quantity of money plays no part in this process. Keywords: Central Banking; Focal Points; Inflation; Monetary Policy; Money; Quantity Theory JEL: C70 E31 E42 E43 E44 E51 E52 E58 Date: 2005-05-16 URL: http://d.repec.org/n?u=RePEc:hhs:lunewp:2005_028&r=all 277. Transaction Costs, Money and Units of Account Bengtsson, Ingemar (Department of Economics, Lund University) In the paper, an analogy with length measurement is applied in order to explore the nature of the unit for value measurement, i. e. the unit of account. As the meter is defined as the length traveled by light in vacuum during 1/299 792 458 of a second, the unit of account krona is defined as the purchasing power of the medium of exchange krona. However, one should be cautious when drawing conclusions from this analogy. Our unit of account is defined in our medium of exchange, but it is meaningful only because we can observe prices on real goods expressed in it. As it would be pointless to define the meter as the length traveled by light in vacuum during 1/299 792 458 of a second if we could not compare this length with anything else, it would be pointless to define our unit of account in something that is not priced. In the paper it is explained how different payment techniques help to overcome transaction costs in the market. In particular, following Alchian (1977), it is argued that to reap the full benefit from the use of payment techniques, it has to be combined with the use of both a unit of account and specialist middlemen. The use of payment techniques helps to reduce costs due to sequential payment, but to reduce costs due to sequential quality evaluation, you need unit of account as well as reputable middlemen. Keywords: Medium of Exchange; Money; Payment Techniques; Quantity Theory; Transaction Costs; Unit of Account JEL: B52 D23 E31 E41 E42 E51 Date: 2005-05-16 URL: http://d.repec.org/n?u=RePEc:hhs:lunewp:2005_029&r=all 278. The Fear of Exclusion: Individual Effort when Group Formation is Endogenous Brekke, Kjell Arne (Ragnar Frisch Centre for Economic Research) Nyborg, Karine (Ragnar Frisch Centre for Economic Research) Rege, Mari (Department of Economics, Case Western Reserve University) To secure their membership in a popular group, individuals may contribute more to the group’s local public good than they would if group formation were exogenous. Those in the most unpopular group do not have this incentive to contribute to their group. Substantial differences in individual efforts levels between groups may be the result. A principal may prefer either exogenous or endogenous group formation, depending on whether an increase in contributions to the local public good coincides with the principal’s interests. We analyze two examples: Social interaction in schools, and multiple-task teamwork. Keywords: Local public goods; opportunity costs; popularity; multiple-task principalagent analysis. JEL: C72 D11 D23 L24 Z13 Date: 2005-04-21 URL: http://d.repec.org/n?u=RePEc:hhs:osloec:2005_009&r=all 279. Downward Nominal Wage Rigidity in the OECD Holden, Steinar (Dept. of Economics, University of Oslo) Wulfsberg, Fredrik (Norges Bank) This paper explores the existence of downward nominal wage rigidity (DNWR) in 19 OECD countries, over the period 1973–1999, using data for hourly nominal wages at industry level. Based on a novel nonparametric statistical method, which allows for country and year specific variation in both the median and the dispersion of industry wage changes, we reject the hypothesis of no DNWR. The fraction of wage cuts prevented due to DNWR has fallen over time, from 70 percent in the 1970s to 11 percent in the late 1990s, but the number of industries affected by DNWR has increased. DNWR is more prevalent when inflation is high, unemployment is low, union density is high and employment protection legislation is strict. Keywords: Downward nominal wage rigidity; OECD; employment protection legislation; wage setting JEL: C14 C15 E31 Date: 2005-03-01 URL: http://d.repec.org/n?u=RePEc:hhs:osloec:2005_010&r=all 280. Identifying the Interdependence between US Monetary Policy and the Stock Market Bjornland, Hilde C. (Dept. of Economics, University of Oslo) Leitemo, Kai (Norwegian School of Management) We estimate the interdependence between US monetary policy and the S&P 500 using structural VAR methodology. A solution is proposed to the simultaneity problem of identifying monetary and stock price shocks by using a combination of short-run and long- run restrictions that maintains the qualitative properties of a monetary policy shock found in the established literature (CEE 1999). We find great interdependence between interest rate setting and stock prices. Stock prices immediately fall by 1.5 percent due to a monetary policy shock that raises the federal funds rate by ten basis points. A stock price shock increasing stock prices by one percent leads to an increase in the interest rate of five basis points. Stock price shocks are orthogonal to the information set in the VAR model and can be interpreted as non-fundamental shocks. We attribute a major part of the surge in stock prices at the end of the 1990s to these non-fundamental shocks. Keywords: VAR; monetary policy; asset prices; identification JEL: E43 E52 E61 Date: 2005-05-15 URL: http://d.repec.org/n?u=RePEc:hhs:osloec:2005_012&r=all 281. A new equity condition for infinite utility streams and the possibility of being Paretian Asheim, Geir B. (Dept. of Economics, University of Oslo) Tungodden, Bertil (Department of Economics, Norwegian School of Economics and Business Administration) We investigate the properties of a new equity condition, "Hammond Equity for the Future" (HEF), capturing the following ethical intuition: A sacrifice by the present generation leading to a uniform gain for all future generations cannot lead to a less desirable utility stream if the present remains better off than the future. Since HEF is a weak condition when compared to other consequentialist equity conditions, it is of interest to establish whether it to a greater extent can be combined with Paretian conditions. We show that this is not the case: HEF is not compatible with the "Strong Pareto" condition when social preferences are upper semi-continuous in the sup norm topology. If we impose that the social preferences are complete, transitive and continuous in the sup norm topology, and satisfy an "Independent future" condition, then HEF cannot even be combined with the "Weak Pareto" condition. Keywords: Intergenerational equity; Pareto condition JEL: D63 D71 Q01 Date: 2005-04-21 URL: http://d.repec.org/n?u=RePEc:hhs:osloec:2005_008&r=all 282. An analytical model of required returns to equity under taxation with imperfect loss offset Lund, Diderik (Dept. of Economics, University of Oslo) Lund (2002a) showed in a CAPM-type model how tax depreciation schedules affect required expected returns after taxes. Even without leverage higher tax rates implied lower betas when tax deductions were risk free. Here they are risky, and marginal investment is taxed together with inframarginal in an analytical model of decreasing returns. With imperfect loss offset tax claims are analogous to call options. The beta of equity is still decreasing in the tax rate, but increasing in the underlying volatility. The results are important if market data are used to infer required expected returns, and in discussions of tax design. Keywords: Corporate tax; depreciation; imperfect loss offset; cost of capital; uncertainty JEL: F23 G31 H25 Date: 2005-05-15 URL: http://d.repec.org/n?u=RePEc:hhs:osloec:2005_013&r=all 283. Exploring Interactions between Real Activity and the Financial Stance Jacobson, Tor (Research Department, Central Bank of Sweden) Linde, Jesper (Research Department, Central Bank of Sweden) Roszbach, Kasper (Research Department, Central Bank of Sweden) In this paper we empirically study interactions between real activity and the financial stance. Using aggregate data we examine a number of candidate measures of the financial stance of the economy. We find strong evidence for substantial spillover effects on aggregate activity from our preferred measure. Given this result, we use a large micro data-set for corporate firms to develop a macro-micro model of the interaction between the financial and real economy. This approach implies that the impulse responses of a given aggregate shock will depend on the portfolio structure of firms at any given point in time. Keywords: Default-risk models; Business Cycles; Financial Stability; Price stability; Financial and real economy interaction JEL: C41 G21 G33 G38 Date: 2005-04-01 URL: http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0184&r=all 284. Job-search Assistance Using the Internet - Evidence from a Swedish Randomised Experiment Hagglund, Pathric (Swedish Institute for Social Research) This paper reports the experience from a randomised experiment offering voluntary job search assistance on the Internet to job seekers at Swedish public employment offices. Among those applying for participation, youth, highly educated and people living in big city areas were overrepresented. The evidence suggests that common difficulties inherent in the experimental approach, such as ethical concerns, bureaucratic behaviour and randomisation bias, have been circumvented. However, due to the voluntariness, the programme suffers from compliance problems in terms of both no-shows and drop-outs. The experimental intent-to- treat impact estimate fail to reject the hypothesis of a zero programme effect. Finally, a methodological comparison suggests that standard nonexperimental
techniques succeed in reproducing the nonbiased experimental results. Keywords: Internet job search; policy evaluation; social experiment JEL: C93 J64 Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:hhs:sofiwp:2005_003&r=all 285. Comparing Supply Function Equilibria of Pay-as-Bid and Uniform-Price Auctions Holmberg, Par (Department of Economics) This paper derives a Supply Function Equilibrium (SFE) of a pay- as-bid auction, also called discriminatory auction. Such an auction is used in the balancing market for electric power in Britain. For some probability distributions of demand a pure- strategy equilibrium does not exist. If demand follows an inverse polynomial probability distribution, SFE always exists. Assuming this probability distribution, the pay-as-bid procurement auction is compared to a SFE of a uniform-price procurement auction, the auction form of most electric power markets. The demand-weighted average price is found to be equal or lower in the pay-as-bid procurement auction. Keywords: Supply function equilibrium; pay-as-bid auction; uniform-price auction; discriminatory auction; oligopoly; capacity constraint; wholesale electricity market JEL: C62 D43 D44 L11 L13 L94 Date: 2005-05-16 URL: http://d.repec.org/n?u=RePEc:hhs:uunewp:2005_017&r=all 286. Testable restrictions of general equilibrium in production economies Andres Carvajal (Yale University and Royal Holloway, University of London) This note shows that the testability result obtained by Brown and Matzkin (1996) for an exchange economy survives the introduction of standard, aggregate production, even without the observation of production levels. Date: 2005-01 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:hol:holodi:0501&r=all 287. Clustering of Trading Activity in the DAX Index Options Market Alexander K. Koch (Department of Economics, Royal Holloway, University of London) Zdravetz Lazarov (Bonn Graduate School of Economics, University of Bonn) A common contention is that more liquid financial contracts draw trading volume from contracts for which they are close substitutes. This paper tests this hypothesis by analyzing clustering of trading activity in DAX index options. Contracts with identical maturities cluster around particular classes of strike prices. For example, options with strikes ending on 50 are less traded than options with strikes ending on 00. The degree of substitution between options with neighboring strikes depends on the strike price grid and options’ characteristics. Our empirical analysis finds a positive relation between clustering and substitutiability between option contracts, providing support to the initial hypothesis. Keywords: Clustering, Incidental Truncation, Index Options, Volume. JEL: C24 G10 Date: 2005-03 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:hol:holodi:0502&r=all 288. Aligning Ambition and Incentives Alexander K. Koch (Department of Economics, Royal Holloway, University of London) Eloic Peyrache (HEC School of Management, Paris) In many economic situations several principals contract with the same agents sequentially. Asymmetric learning about agents’ abilities provides the first principal with an informational advantage and has profound implications for the design of incentive contracts. We show that the principal always strategically distorts information revelation to future principals about the ability of her agents. The second main result is that she can limit her search for optimal incentive schemes to the class of relative performance contracts that cannot be replicated by contracts based on individual performance only. This provides a new rationale for the optimality of such compensation schemes. Keywords: relative performance contracts, reputation, asymmetric learning. JEL: D82 J33 L14 Date: 2005-03 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:hol:holodi:0503&r=all 289. A Theory of Bicameralism Giovanni Facchini (University of Illinois, Department of Economics) Cecilia Testa (Department of Economics, Royal Holloway, University of London) We model the role of a parliament’s structure in shaping the accountability of elected representatives. In a setting in which lawmakers interact with a lobby through a bargaining process and with voters by means of elections, we show that only a single legislative body who can make take it or leave it offers to the lobby can be held unambiguously accountable to voters. Whenever the pressure group enjoys some bargaining power, two chambers might instead provide better discipline, depending on the rules governing their interaction, and in particular the allocation of the decision powers among them. We show that bicameralism with restricted amendment rights provides the best incentives, while unrestricted amendment rights result in a status quo bias. Furthermore, by adding complexity of the legislative process, the presence of a second chamber might lead to an undesirable outcome, i.e. a decline in the legislator’s bargaining power vis `a vis the lobby and a reduction in his accountability. Arguments suggesting that bicameralism is a panacea against the abuse of power by elected legislators should therefore be taken with due caution. Keywords: Lobbying, bargaining, elections, accountability, bicameralism. JEL: D72 C78 Date: 2005-03 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:hol:holodi:0504&r=all 290. Behaviour in a Two-Stage Public Goods Experiment Massimo Finocchiaro Castro (Royal Holloway, University of London; and DEMQ, University of Catania) In a two-stage public goods experiment, we study the effect that subjects’ possibility of contributing to a public good in the first stage of the game has on the voluntary contributions to the second public good. Our results show that subjects do not follow either the Nash strategy or the Pareto efficient strategy and that they perceive the two public goods as substitutes. Keywords: public goods, experiments, voluntary provision. JEL: A13 H41 C92 Date: 2005-05 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:hol:holodi:0505&r=all 291. Cultural Goods and Laboratory Experiments Massimo Finocchiaro Castro (Royal Holloway, University of London; and DEMQ, University of Catania) In a two-stage public goods experiment, we study the framing effect due to the adoption of a cultural context. Our results show a slight increase in the allocations of subjects’ endowments to the cultural good when the cultural context is implemented in the laboratory. In particular, in one treatment, the framing effect has a strong impact in the last two periods only. Keywords: cultural education, cultural good, framing, experiments, voluntary provision. JEL: A13 H41 C92 Z10 Date: 2005-05 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:hol:holodi:0506&r=all 292. Transitions to Retirement: A Review Jeff Borland (Department of Economics, The University of Melbourne) This paper presents a conceptual framework for thinking about issues associated with the transition to retirement by older workers, and then reviews available Australian and international empirical evidence and literature on this topic. Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:iae:iaewps:wp2005n03&r=all 293. The Effects on Firm Profits of the Stock of Intellectual Property Rights William E. Griffiths (Centre for Microeconometrics, Department of Economics, The University of Melbourne) Paul H. Jensen (Melbourne Institute of Applied Economic and Social Research, and Intellectual Property Research Institute of Australia, The University of Melbourne) Elizabeth Webster (Melbourne Institute of Applied Economic and Social Research, and Intellectual Property Research Institute of Australia, The University of Melbourne) The effects of innovation on firm performance is conventionally analysed using R&D or patent applications as measures for innovation capital and market value as the measure of firm performance. We argue that such studies fall short in three important respects. First, the proxies used for innovation capital are flows not stocks as the theory suggests. Secondly, while they are derived from the theory of intangible capital, their estimations ignore other important intangible capital such as organisational and marketing capital; and thirdly, by using market value, the studies heroically assume that stock markets work efficiently. In this paper, we develop a model of the effects of intangible capital, including, but not limiting to, innovation capital, on firm profits, using new measures for the former. Our results indicate that profits vary, ceteris paribus, according to the type of IP rights held by the firm, the age of the firm, the size of the firm, and the lifespan of the IP right. Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:iae:iaewps:wp2005n04&r=all 294. Patent Application Outcomes across the Trilateral Patent Offices Paul H. Jensen (Melbourne Institute of Applied Economic and Social Research, and Intellectual Property Research Institute of Australia, The University of Melbourne) Alfons Palangkaraya (Melbourne Institute of Applied Economic and Social Research, and Intellectual Property Research Institute of Australia, The University of Melbourne) Elizabeth Webster (Melbourne Institute of Applied Economic and Social Research, and Intellectual Property Research Institute of Australia, The University of Melbourne) While most developed countries apply the same criteria to determine whether an invention is eligible to be protected by a patent, there are substantial procedural differences in the way in which different patent offices examine a patent application. This means that a patent application may be granted in one jurisdiction but rejected in others, which raises welfare concerns about the ability of patents to provide an ex ante incentive for investment. In this article, we analyze whether there are systematic differences in patent application outcomes across the trilateral patent offices. In order to determine how much “disharmony” exists, we examine whether the patent offices make consistent decisions for a given invention using a dataset of 70,000 patent applications that have been granted in the US and submitted in Japan and Europe and have a single, common priority application. Specifically, we model the patent application outcomes using a multinomial logit to see how the decisions made by the patent offices vary across different patent characteristics such as technology area, non-obviousness of the invention and priority country. Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:iae:iaewps:wp2005n05&r=all 295. Estimating pension wealth of ELSA respondents James Banks (Institute for Fiscal Studies and University College London) Carl Emmerson (Institute for Fiscal Studies) Gemma Tetlow (Institute for Fiscal Studies) This paper explains the methodology used for calculating pension wealth for all individuals in the first wave of the English Longitudinal Study of Ageing (ELSA). We focus on the pension wealth of individuals aged between 50 and the state pension age. Both state and private pension wealth has been calculated and each has been calculated both on the basis of immediate retirement in 2002 and on the basis of retirement at the state pension age. Sensitivity analysis of our assumptions is also presented, which shows that the distribution of pension wealth is sensitive to our assumptions about the discount rate and contracting out histories but insensitive to assumptions about future earnings growth, future annuity rates and future asset returns. Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:05/09&r=all 296. Radio Frequency Identification Tagging as a Mechanism of Creating a Viable Producer’s Brand in the Cattle Industry Mennecke, Brian Townsend, Anthony This manuscript reports on a project to examine the feasibility of extensive radio frequency identification (RFID) tagging to determine product provenance in the meat production industry. The investigators examined existing technologies and meat production processes as well as emerging technologies in RFID tagging to assess the potential of RFID technologies for provenance assurance. While RFID technologies hold tremendous promise for traceability, the current state of the technology and production process creates challenges for effectively creating full traceability. However, RFID holds tremendous potential for improving processing throughput, which will help make RFID-based traceability more attractive for adoption by meat processors. Date: 2005-05-16 URL: http://d.repec.org/n?u=RePEc:isu:genres:12359&r=all 297. World Interest Rate, Business Cycles, and Financial Intermediation in Small Open Economies Oviedo, P. Marcelo The consensus about the ability of the standard open-economy neoclassical growth model to account for interest-rate driven business cycles has changed over time: whereas early research concluded that business cycles are neutral to interest-rate shocks, more recent investigations suggest that these shocks can explain a large extent of the business cycles of a small open economy when firms borrow to pay for their labor cost before cashing their sales. The first goal of this paper is to show that the recently found effectiveness of interest-rate shocks to cause business cycles rests more on the statistical properties of the shocks than on the working-capital constraint; in particular, recent results are only valid when the level and volatility of the interest rate are high and when the interest rate is negatively correlated with total factor productivity. The paper also shows that interest-rate shocks cannot be the sole driving force of business cycles even when the canonical model is augmented to include a working-capital constraint. The second goal of the paper is to quantitatively explore the dynamic properties of the neoclassical growth model extended to include financial intermediation. It is shown that the extended model with external effects in financial intermediation can match the negative correlation between GDP and a domestic borrowing-lending spread in emerging countries if the economy is subject to productivity shocks but not when the model is subject to both productivity and interest-rate shocks. JEL: F3 Date: 2005-05-17 URL: http://d.repec.org/n?u=RePEc:isu:genres:12360&r=all 298. International Migration: A Panel Data Analysis of Economic and Non-Economic Determinants Anna Maria Mayda (Georgetown University and IZA Bonn) In this paper I empirically investigate economic and non- economic determinants of migration inflows into fourteen OECD countries by country of origin, between 1980 and 1995. The annual panel data set used makes it possible to exploit both the time- series and crosscountry variation in immigrant inflows. I focus on both supply and demand determinants of migration patterns and find results broadly consistent with the theoretical predictions of a standard international-migration model. Both first and second moments of the income distribution in the destination and origin countries shape international migration movements. In particular, I find evidence of robust and significant pull effects, that is the positive impact on immigrant inflows of improvements in the mean income opportunities in the host country. Inequality in the origin and destination economies affects the size of migration rates as predicted by Borjas (1987) selection model. Finally, among the non-economic determinants, I investigate the impact on emigration rates of geographical, cultural, and demographic factors as well as the role played by changes in destination countries’ migration policies. Keywords: international migration, push and pull factors, network effects JEL: F22 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1590&r=all 299. Is Marriage Poisonous? Are Relationships Taxing? An Analysis of the Male Marital Wage Differential in Denmark Nabanita Datta Gupta (Danish National Institute of Social Research, CIM and IZA Bonn) Nina Smith (Aarhus School of Business, CIM and IZA Bonn) Leslie S. Stratton (Virginia Commonwealth University, CIM and IZA Bonn) The word for ‘married’ in Danish is the same as the word for ‘poison’. The word for 'sweetheart' in Danish is the same as the word for 'tax'. In this paper we expand upon the literature documenting a significant marital wage premium for men in the United States to see if a similar differential exists for married men in Denmark - or if the homonyms have perhaps less of a double meaning. Unlike most other research in this area, our study is based on a large panel sample with complete relationship histories, consisting of about 35,000 young Danish men observed before and after their first marriage or cohabitation during the years 1984-2001. Since the majority of young Danes cohabit before they marry, if they ever marry, cohabitation is allowed for as a separate state. Pooled OLS estimates indicate a marital wage premium of 4-5%, which drops to 2% after controlling for selectivity. The cohabitation premium is found to be of the same size as the marital wage premium. Our results indicate that a part of the marriage or cohabitation premium is not due to marriage or cohabitation itself, but to fatherhood. When information on becoming a father and years spent in fatherhood is added to the empirical model, the results show that fathers receive a ‘fatherhood’ premium during their first few years as fathers and that the initial marital wage premium is reduced. Keywords: marriage premium, cohabitation, fatherhood JEL: J12 J31 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1591&r=all 300. Economic Integration, Market Power and Technological Change Tapio Palokangas (University of Helsinki, HECER and IZA Bonn) We examine a common market which expands by integrating new regions. Capitalists are strategically interdependent through the goods market and they improve their productivity through R&D. Production and R&D employ unionized workers. The purpose of integration is to maximize a weighed average of workers’ and capitalists’ utilities. The main findings are as follows. Integration benefits capitalists more than workers. If labour unions are strong enough, then the common market can expand indefinitely. Otherwise, there is an upper limit for integration. This is the higher, the higher producer market power or the stronger the capitalists’ political influence. Keywords: economic integration, market power, endogenous growth JEL: F15 J50 O40 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1592&r=all 301. Piecework versus Timework in British Wartime Engineering Robert A. Hart (University of Stirling and IZA Bonn) The British engineering industry experienced extreme production and employment pressures during the rearmament period that preceded the Second World War and in the early war years. Did it react by placing a greater emphasis on incentive-compatible payment methods? This paper examines the relative employment and wage effects on pieceworkers and timeworkers. Empirical work is based on detailed firm-level payroll data produced by the Engineering Employers Federation covering the period 1935 to 1942. The paper investigates the effects of war on piecework and timework in relation to (a) labour market arguments concerning substitution between payment methods, (b) piece rate/time rate adjustments to changes in product demand, (c) relative changes in employment and hours, and (d) relative changes in hourly and weekly pay. Keywords: piecework, timework, British engineering, World War II JEL: J31 J33 N34 N44 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1593&r=all 302. Food Insecurity and Insufficiency at Low Levels of Food Expenditures Craig Gundersen (Iowa State University) David C. Ribar (George Washington University and IZA Bonn) This study uses data from the December 2003 Food Security Supplement of the CPS to compare the food insufficiency and insecurity measures with objective measures of food expenditures and objective and subjective measures of food needs. The study examines the general relationships between these variables and finds that reports of food hardships are positively associated with food expenditures and negatively associated with needs. The study goes on to examine reports of food hardships at low very levels of food expenditures, where we conjecture that most people should experience food problems. When expenditures are scaled by an objective measure of needs, there is no point along the expenditure distribution where more than half of the survey respondents report experiencing being food insufficient or insecure. However, when expenditures are scaled by a subjective threshold, we observe near-universal reporting of food problems at low levels of expenditures. The findings indicate that the food insufficiency and insecurity measures each incorporate a large subjective component, which limits the usefulness of the measures for comparing the extent of food hardships across populations or over time or evaluating the effects of assistance programs. Keywords: food insecurity, food insufficiency, expenditures, non- parametric regression JEL: I3 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1594&r=all 303. Social Pressure Influences Decisions of Individuals: Evidence from the Behavior of Football Referees Thomas J. Dohmen (IZA Bonn) Analyzing the neutrality of referees during twelve German premier league (1st Bundesliga) football seasons, this paper documents evidence that social forces influence agents’ preferences and decisions. Those, who are appointed to be impartial, tend to favor the home team as they systematically award more injury time in close matches when the home team is behind. Referees also tend to favor the home team in decisions to award goals and penalty kicks. The composition of the crowd affects the size and the direction of the bias. The intensity of social pressure as measured by the crowd’s proximity to the field determines how strongly referees’ decisions are influenced. Not all agents are, however, affected to the same degree by social pressure. Keywords: favoritism, principal-agent relationship, personnel economics JEL: J00 M50 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1595&r=all 304. Labour Use and Its Adjustment in Indian Manufacturing Industries Amit K. Bhandari (University of Kalyani) Almas Heshmati (MTT Economic Research, Seoul National University and IZA Bonn) This study provides an empirical investigation of the adjustment process of labour in Indian manufacturing industries, which evolved through structural transformation in the era of globalization. The analysis is based on a dynamic model applied to a panel of 22 two-digit manufacturing industries for the time period of 22 years covering 1980/81 to 2001/02. We assume that as competition increases industries adjust their employment to a desired level which is both industry and time specific. The results indicate that the manufacturing sector has shown a considerable dynamism in adjusting its workforce. The long run labour demand responds greatest to the output, followed by capital and least by wages. It is observed that Indian manufacturing is not inefficient in labour use as modest speed of adjustment has led employment size closer to the optimal level. Keywords: labour use, employment, adjustment, globalization, manufacturing, India JEL: C23 J23 L60 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1596&r=all 305. Time Discounting and the Body Mass Index Lex Borghans (ROA, University of Maastricht and IZA Bonn) Bart H. H. Golsteyn (ROA, University of Maastricht) In many Western countries, the relative weight of people - measured by the Body Mass Index (BMI) - has increased substantially in recent years, leading to an increasing incidence of overweight and related health problems. As with many forms of risky behavior, it is plausible that overweight is related to the individual discount rate. Increases in credit card debts, the rise in gambling and the development of a more hedonic life style, suggest that the average discount rate has increased over time. This increase may have been the cause of the increase in BMI. Applying a large set of indicators for the individual discount rate, this paper analyzes whether changes in time discounting can account for differences in body mass between individuals at a given point in time and whether changes in the average individual discount rate can explain the remarkable increase in BMI experienced in recent years. We find some evidence for a link between time discounting and differences in BMI between people, but this relationship depends strongly on the choice of the proxy for the discount rate. Giving our hypothesis the best chance, we analyze the development of the time discounting proxies that are most strongly related to BMI. We find no evidence for a change of these proxies over time. Our main conclusion therefore is that overweight might be related to the way people discount future health benefits, but the increase in BMI has to be explained by shifts in other parameters that determine the intertemporal decisions regarding the trade-off of current and future health and satisfaction. Keywords: body mass index (BMI), risky behavior, time discounting JEL: I1 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1597&r=all 306. The Determinants of Return Intentions of Turkish Students and Professionals Residing Abroad: An Empirical Investigation Nil Demet Gungor (Middle East Technical University) Aysit Tansel (Middle East Technical University and IZA Bonn) The study estimates an empirical model of return intentions using a dataset compiled from an internet survey of Turkish professionals and Turkish students residing abroad. In the migration literature, wage differentials are often cited as an important factor explaining skilled migration. The findings of the study suggest, however, that other factors are also important in explaining the non-return of Turkish professionals. Economic instability in Turkey is found to be an important push factor, while work experience in Turkey also increases non-return. In the student sample, higher salaries offered in the host country and lifestyle preferences, including a more organized environment in the host country, increase the probability of notreturning. For both groups, the analysis also points to the importance of prior intentions and the role of the family in the decision to return to Turkey or stay overseas. Keywords: skilled migration, brain drain, return intentions, higher education, Turkey JEL: F20 F22 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1598&r=all 307. Brain Gain: Claims about Its Size and Impact on Welfare and Growth Are Greatly Exaggerated Maurice Schiff (World Bank and IZA Bonn) Based on static partial equilibrium analysis, the "new brain drain" literature argues that, by raising the return to education, a brain drain generates a brain gain that is, under certain conditions, larger than the brain drain itself, and that such a net brain gain results in an increase in welfare and growth due to education’s positive externalities. This paper, on the other hand, argues that these claims are exaggerated. In the static case, and based on both partial and general equilibrium considerations, the paper shows that i) the size of the brain gain is smaller than suggested in that literature; ii) the impact on welfare and growth is smaller as well (for any brain gain size) iii) a positive brain gain is likely to result in a smaller human capital gain and may even have a negative impact on the stock of human capital; iv) an increase in the stock of human capital may have a negative impact on welfare and growth; and v) in a dynamic framework, the paper shows that the brain drain is unambiguously larger than the brain gain, i.e., that the steady state is characterized by a net brain loss. Keywords: brain gain size, welfare, growth, exaggerated claims JEL: D61 D62 F22 H20 H41 I12 J61 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1599&r=all 308. Migration, Co-ordination Failures and EU Enlargement Tito Boeri (Bocconi University Milan, IGIER and IZA Bonn) Herbert Brucker (DIW Berlin, Aarhus School of Business and IZA Bonn) European migration policies are characterised by a fundamental paradox: they are getting tighter and tighter just while public opinion is becoming more favourable to migrants and the immobility of European citizens expands the scope for spatial arbitrage, accruing the benefits, of immigration. In this paper we consider two possible explanations for this puzzle. At first, based on a computable general equilibrium model, we evaluate whether migration to "rigid labour markets" a-la European involves cost, which are neglected by economic theory. Our results suggest that the economic benefits from international migration are, at a GDP gain of 0.2-0.3% at a migration of 1% of the labour force, but that natives in the receiving countries may lose out especially when generous unemployment benefits are provided to the migrants. Then, we evaluate effects of co- ordination failures in the setting of national migration policies, documenting that a race-to-the-top in migration restrictions has indeed occurred in the case of the Eastern Enlargement of the EU and has involved significant diversion of migration from more restrictive to less restrictive countries. Finally we discuss two potential ways to invert the trend towards stricter barriers to migration, namely i) restricting access to welfare and ii) adopting an EU-wide migration policy. Keywords: migration, enlargement, welfare door JEL: J61 F16 F2 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1600&r=all 309. Happiness and the Human Development Index: The Paradox of Australia David G. Blanchflower (Dartmouth College and IZA Bonn) Andrew J. Oswald (University of Warwick, Harvard University and IZA Bonn) According to the well-being measure known as the U.N. Human Development Index, Australia now ranks 3rd in the world and higher than all other English-speaking nations. This paper questions that assessment. It reviews work on the economics of happiness, considers implications for policymakers, and explores where Australia lies in international subjective well-being rankings. Using new data on approximately 50,000 randomly sampled individuals from 35 nations, the paper shows that Australians have some of the lowest levels of job satisfaction in the world. Moreover, among the sub-sample of English-speaking nations, where a common language should help subjective measures to be reliable, Australia performs poorly on a range of happiness indicators. The paper discusses this paradox. Our purpose is not to reject HDI methods, but rather to argue that much remains to be understood in this area. Keywords: well-being, happiness, HDI, macroeconomics JEL: E6 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1601&r=all 310. When and How to Create a Job: The Survival of New Jobs in Austrian Firms Rene Boheim (University of Linz and IZA Bonn) Alfred Stiglbauer (Austrian National Bank) Rudolf Winter-Ebmer (University of Linz, Institute for Advanced Studies Vienna, CEPR and IZA Bonn) While the volatility of job creations has been studied extensively, the survival chances of new jobs are less researched. The question when and how to expand a firm is of importance, both from the firms and from a macro perspective. Adjustment cost theories and arguments about option values of investment in firm expansion make predictions about the timing, sequencing and form of firm expansions. When we analyze 21 years of job creation in Austria, we find that the survival of new jobs (and of new firms) depends upon the state of the business cycle at the time of job creation, on the number of jobs created, and on firm age. Jobs in new firms last longer than new jobs in continuing firms. Keywords: job creation, business cycle, reallocation, persistence JEL: J23 J63 E24 E32 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1602&r=all 311. Opening the Black Box of Intra-Household Decision-Making: Theory and Non-Parametric Empirical Tests of General Collective Consumption Models Laurens Cherchye (University of Leuven and FWO-Vlaanderen) Bram De Rock (University of Leuven) Frederic Vermeulen (Tilburg University, CentER and IZA Bonn) We non-parametrically test a general collective consumption model with public consumption and externalities inside the household. We further propose a novel approach to model special cases of the general collective model. These special cases include alternative restrictions on the 'sharing rule' that applies to each household, and which defines the distribution of the household budget over the household members. A limiting case is the unitary model. Our application uses data from the Russia Longitudinal Monitoring Survey (RLMS); the panel structure of this data set allows non-parametric testing of the behavioral models without relying on preference homogeneity assumptions across similar individuals. This application includes test results but also a power analysis for different specifications of the collective consumption model. Our main findings are that the most general collective model, together with a large class of special but still fairly general cases, cannot be rejected by the data, while other, restricted, versions of the general model, including the unitary alternative, are rejected. Since these tests are entirely nonparametric, this provides strong evidence in favor of models focusing on intra-household decision-making. Keywords: collective household models, intra-household allocation, revealed preferences, non-parametric analysis JEL: D11 D12 C14 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1603&r=all 312. "An Eye for an Eye, a Tooth for a Tooth." A Study of Political Violence and Counter-insurgency in Egypt David Fielding Anja Shortland This paper analyses a newly collected time-series database measuring the dimensions of violent political conflict in Egypt. Attention is focused on the interaction between politically motivated attacks by Islamists and the counter-insurgency measures used by the Egyptian government. The intensity of security force activities responds immediately to all kinds of Islamist violence, regardless of the target of the attack. However, there are significant asymmetries in the way that the different forms of Islamist violence respond to the different security force activities. Keywords: Egypt, Islamist violence; counter-insurgency; political rights; civil liberties Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:lec:leecon:05/11&r=all 313. The Political Economy of Financial Liberalisation Sourafel Girma Anja Shortland Political economy theories of financial development argue that in countries where a narrow elite controls political decisions, financial development may be deliberately obstructed to deny access to finance to potential competitors. This paper empirically examines whether the level of liberalisation of the banking system, the stock market and capital account depend on regime characteristics, using panel data from 26 countries from 1973 - 1999. Our results show that it is predominantly fully democratic regimes that have liberalised financial systems. Countries that are not fully democratic have a lower probability of having liberal banking systems and capital accounts and this probability decreases with increasing democratisation. This suggests that the attractiveness of using financial levers to allocate funds in the economy increases with the amount of competition the government faces. Keywords: Financial Repression; Liberalisation;Politics JEL: O16 D78 D72 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:lec:leecon:05/12&r=all 314. Experiments and Economic Development: Lessons from Field Labs in the Developing World Juan Camilo Cardenas Jeffrey P. Carpenter Along with the traditional primitives of economic development ( material preferences, technology, and endowments), there is a growing interest in exploring how psychological and sociological factores (e.g., bounded rationality, norms, or social preferences) also influence economic decisions, the evolution of institutions, and outcomes. Simultaneously, a vast literature has arisen arguing that economic experiments are important tools in identifying and quantifying the role of institutions, socialnorms and preferences on behavior and outcomes. Reflecting on our experience conducting experiments in the field over more than five years, we survey the growing literature at the intersection of these two research areas. Our review has four components. In the introduction we set the stage identifying a set of behavioral factors that seem to be central for understanding growth and economic development./ We then divide the existing literature in two piles: standard experiments conducted in the field and on how to econometrically identify sociological factors in experimental data. We conclude by suggesting topics for future research. Keywords: experimental economics, behavioral economics, institutions, social preferences, poverty, development JEL: C9 O1 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:mdl:mdlpap:0505&r=all 315. Intelligenza e Coscienza. L’IA tra Searle e Dennett: sviluppi del l’Intelligenza Artificiale Matteo FINI Paola MILANI This work is focused on Artificial Intelligence and the complex d iscussion about the possibilities of creating a machine thinking as man does. Through this analysis, it emerges that the chances of success of IA program change according to the different theori es about mind which were faced in the last years. In this sense, a big part of the matter depends on the meaning attributed to so me mental elements as counsciousness and intentionality: who thin ks that they can be reduced to physical processes, is usually agr ee with the aims of IA and optimist about results. Instead, who doesn’t believe that mental elements can be reduced to physical o nes is sceptical about IA studies and the possible outcome. In t he last part of the article, the argument is the principal themes of IA, starting from the first programs arriving to neural netwo rks and genetic algorithms; in spite of successes that were reach ed, it seems we are still far from reproducing the human mind in all its components. For this reason, recently, some scientists em phasize the importance to support IA with another subject: the Ar tificial Counsciousness, AC. Keywords: Artificial Intelligence, counsciousness, intentionality, neural networks, genetic algorithms, Artificial Counsciousness. URL: http://d.repec.org/n?u=RePEc:mil:wpdepa:2005-10&r=all 316. 25 Years of IIF Time Series Forecasting: A Selective Review Jan G. De Gooijer Rob J. Hyndman We review the past 25 years of time series research that has been published in journals managed by the International Institute of Forecasters (Journal of Forecasting 1982-1985; International Journal of Forecasting 1985-2005). During this period, over one third of all papers published in these journals concerned time series forecasting. We also review highly influential works on time series forecasting that have been published elsewhere during this period. Enormous progress has been made in many areas, but we find that there are a large number of topics in need of further development. We conclude with comments on possible future research directions in this field. Keywords: Accuracy measures; ARCH model; ARIMA model; Combining; Count data; Densities; Exponential smoothing; Kalman Filter; Long memory; Multivariate; Neural nets; Nonlinearity; Prediction intervals; Regime switching models; Robustness; Seasonality; State space; Structural models; Transfer function; Univariate; VAR. JEL: C53 C22 C32 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:msh:ebswps:2005-12&r=all 317. Another Look at Measures of Forecast Accuracy Rob J. Hyndman Anne B. Koehler We discuss and compare measures of accuracy of univariate time series forecasts. The methods used in the M-competition and the M3-competition, and many of the measures recommended by previous authors on this topic, are found to be inadequate, and many of them are degenerate in commonly occurring situations. Instead, we propose that the mean absolute scaled error become the standard measure for comparing forecast accuracy across multiple time series. Keywords: Forecast accuracy, Forecast evaluation, Forecast error measures, M-competition, Mean absolute scaled error. JEL: C53 C52 C22 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:msh:ebswps:2005-13&r=all 318. Faith-Based Charity and Crowd Out during the Great Depression Jonathan Gruber Daniel M. Hungerman Interest in religious organizations as providers of social services has increased dramatically in recent years. Churches in the U.S. were a crucial provider of social services through the early part of the twentieth century, but their role shrank dramatically with the expansion in government spending under the New Deal. In this paper, we investigate the extent to which the New Deal crowded out church charitable spending in the 1930s. We do so using a new nationwide data set of charitable spending for six large Christian denominations, matched to data on local New Deal spending. We instrument for New Deal spending using measures of the political strength of a state's congressional delegation, and confirm our findings using a different instrument based on institutional constraints on state relief spending. With both instruments we find that higher government spending leads to lower church charitable activity. Crowd-out was small as a share of total New Deal spending (3%), but large as a share of church spending: our estimates suggest that church spending fell by 30% in response to the New Deal, and that government relief spending can explain virtually all of the decline in charitable church activity observed between 1933 and 1939. JEL: H3 N4 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11332&r=all 319. Banker Fees and Acquisition Premia for Targets in Cash Tender Offers: Challenges to the Popular Wisdom on Banker Conflicts Charles W. Calomiris Donna M. Hitscherich We analyze data on fees paid to investment bankers and acquisition premia paid for targets in cash tender offers. Our results are broadly consistent with the predictions of a benign view of the role of investment banks in advising acquisition targets. Fees to investment banks are correlated with attributes of transactions and target firms in ways that make sense if banks are being paid for processing information. The more contingent ( and, therefore, risky) the fees, the higher they tend to be, all else held constant. Variation in acquisition premia also can be explained by fundamental deal attributes. Contrary to the jaundiced view of fairness opinions, greater fixity of fees is not associated with higher acquisition premia, and there is no evidence that investment banks are suborned by acquirors with whom they have had a prior banking relationship. JEL: G24 G28 G34 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11333&r=all 320. An Empirical Analysis of 'Acting White' Roland G. Fryer, Jr. Paul Torelli There is a debate among social scientists regarding the existence of a peer externality commonly referred to as 'acting white.' Using a newly available data set (the National Longitudinal Study of Adolescent Health), which allows one to construct an objective measure of a student's popularity, we demonstrate that there are large racial differences in the relationship between popularity and academic achievement; our ( albeit narrow) definition of 'acting white.' The effect is intensified among high achievers and in schools with more interracial contact, but non-existent among students in predominantly black schools or private schools. The patterns in the data appear most consistent with a two-audience signaling model in which investments in education are thought to be indicative of an individual's opportunity costs of peer group loyalty. Other models we consider, such as self-sabotage among black youth or the presence of an oppositional culture, all contradict the data in important ways. JEL: J0 I2 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11334&r=all 321. Is China's FDI Coming at the Expense of Other Countries? Barry Eichengreen Hui Tong We analyze how China's emergence as a destination for foreign direct investment is affecting the ability of other countries to attract FDI. We do so using an approach that accounts for the endogeneity of China's FDI. The impact turns out to vary by region. China's rapid growth and attractions as a destination for FDI also encourages FDI flows to other Asian countries, as if producers in these economies belong to a common supply chain. There is also evidence of FDI diversion from OECD recipients. We interpret this in terms of FDI motivated by the desire to produce close to the market where the final sale takes place. For whatever reason -- limits on their ability to raise finance for investment in multiple markets or limits on their ability to control operations in diverse locations -- firms more inclined to invest in China for this reason are corresponding less inclined to invest in the OECD. A detailed analysis of Japanese foreign direct investment outflows disaggregated by sector further supports these conclusions. JEL: F0 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11335&r=all 322. Sterling's Past, Dollar's Future: Historical Perspectives on Reserve Currency Competition Barry Eichengreen This paper provides an historical perspective on reserve currency competition and on the prospects of the dollar as an international currency. It questions the conventional wisdom that competition for reserve-currency status is a winner-take-all game, showing that several currencies have often shared this role in the past and arguing that innovations in financial markets make it even more likely that they will do so in the future. It suggests that the dollar and the euro are likely to share this position for the foreseeable future. Hopes that the yuan could become a major international currency 20 or even 40 years from now are highly premature. JEL: F0 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11336&r=all 323. Adolescent Drinking and High School Dropout Pinka Chatterji Jeff DeSimone This paper estimates the effect of binge and frequent drinking by adolescents on subsequent high school dropout using data from the National Longitudinal Survey of Youth 1979 Young Adults. We estimate an instrumental variables model with an indicator of any past month alcohol use, which is by definition correlated with heavy drinking but should have minimal additional impact on educational outcomes, as the identifying instrument, and also control for a rich set of potentially confounding variables, including maternal characteristics and dropout risk factors measured before and during adolescence. In comparison, OLS provides conservative estimates of the causal impact of heavy drinking on dropping out, implying that binge or frequent drinking among 15 %uF81816 year old students lowers the probability of having graduated or being enrolled in high school four years later by at least 11 percent. Overidentification tests using two measures of maternal youthful alcohol use as additional instruments support our identification strategy. JEL: I12 I21 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11337&r=all 324. The Wage Curve Reloaded David G. Blanchflower Andrew J. Oswald This paper provides evidence for the existence of a wage curve -- a micro-econometric association between the level of pay and the local unemployment rate -- in modern U.S. data. Consistent with recent evidence from more than 40 other countries, the wage curve in the United States has a long-run elasticity of approximately %uF8180.1. In line with the paper%u2019%u2019s theoretical framework: (i) wages are higher in states with more generous unemployment benefits, (ii) the perceived probability of job- finding is lower in states with higher unemployment, and (iii) employees are less happy in states that have higher unemployment. We conclude that it is reasonable to view the wage curve as an empirical law of economics. JEL: J3 E2 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11338&r=all 325. Trade Responses to Geographic Frictions: A Decomposition Using Micro-Data Russell Hillberry David Hummels A large literature has shown that geographic frictions reduce trade, but has not clarified precisely why. We provide insights into why such frictions matter by examining which parts of trade these frictions reduce most. Using data that tracks manufacturers' shipments within the United States on an exceptionally fine grid, we find that the pattern of shipments is extremely localized. Shipments within 5-digit zip codes, which have a median radius of just 4 miles, are 3 times larger than shipments outside the zip code. We decompose aggregate shipments into extensive and intensive margins, and show that distance and other frictions reduce aggregate trade values primarily by reducing the number of commodities shipped and the number of establishments shipping. We consider two broad reasons for these facts and conclude that trade in intermediate goods is the most likely explanation for highly localized shipments and the dominant role of the extensive margin. In addition, we find no evidence of state-level home bias when distances are measured precisely and trade is observed over a very fine grid. JEL: F1 R3 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11339&r=all 326. New-Keynesian Macroeconomics and the Term Structure Geert Bekaert Seonghoon Cho Antonio Moreno This article complements the structural New-Keynesian macro framework with a no-arbitrage affine term structure model. Whereas our methodology is general, we focus on an extended macro- model with an unobservable time-varying inflation target and the natural rate of output which are filtered from macro and term structure data. We obtain large and significant estimates of the Phillips curve and real interest rate response parameters. Our model also delivers strong contemporaneous responses of the entire term structure to various macroeconomic shocks. The inflation target dominates the variation in the "level factor" whereas the monetary policy shocks dominate the variation in the "slope and curvature factors". JEL: E4 E5 G2 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11340&r=all 327. The Simple Geometry of Transmission and Stabilization in Closed and Open Economies Giancarlo Corsetti Paolo Pesenti This paper provides an introduction to the recent literature on macroeconomic stabilization in closed and open economies. We present a stylized theoretical framework, and illustrate its main properties with the help of an intuitive graphical apparatus. Among the issues we discuss: optimal monetary policy and the welfare gains from macroeconomic stabilization; international transmission of real and monetary shocks and the role of exchange rate pass-through; the design of optimal exchange rate regimes and monetary coordination among interdependent economies. JEL: E31 E52 F42 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11341&r=all 328. The Effects of Living Wage Laws: Evidence from Failed and Derailed Living Wage Campaigns Scott Adams David Neumark Living wage campaigns have succeeded in about 100 jurisdictions in the United States but have also been unsuccessful in numerous cities. These unsuccessful campaigns provide a better control group or counterfactual for estimating the effects of living wage laws than the broader set of all cities without a law, and also permit the separate estimation of the effects of living wage laws and living wage campaigns. We find that living wage laws raise wages of low-wage workers but reduce employment among the least- skilled, especially when the laws cover business assistance recipients or are accompanied by similar laws in nearby cities. JEL: J38 J58 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11342&r=all 329. Gender, Body Mass and Economic Status Dalton Conley Rebecca Glauber Previous research on the effect of body mass on economic outcomes has used a variety of methods to mitigate endogeneity bias. We extend this research by using an older sample of U.S. individuals from the PSID. This sample allows us to examine age- gender interactive effects. Through sibling-random and fixed effects models, we find that a one percent increase in a woman's body mass results in a .6 percentage point decrease in her family income and a .4 percentage point decrease in her occupational prestige measured 13 to 15 years later. Body mass is also associated with a reduction in a woman's likelihood of marriage, her spouse's occupational prestige, and her spouse's earnings. However, consistent with past research, men experience no negative effects of body mass on economic outcomes. Age splits show that it is among younger adults where BMI effects are most robust, lending support to the interpretation that it is BMI causing occupational outcomes and not the reverse. JEL: I0 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11343&r=all 330. The Worldwide Economic Impact of the Revolutionary and Napoleonic Wars Kevin H. O'Rourke The paper provides a comparative history of the economic impact of the Revolutionary and Napoleonic Wars. By focussing on the relative price evidence, it is possible to show that the conflict had major economic effects around the world. Britain's control of the seas meant that it was much less affected than other nations, such as France and the United States. Explicit welfare calculations are provided for four countries, Britain, France, Sweden and the United States. Welfare losses were largest in the US, where they were of the order of 5-6% per annum; by contrast, they lay between 3-4% per annum in France, and between 1.7-1.8% per annum in Britain. On the other hand, the conflict helped pave the way for the more liberal international economic environment of the long 19th century. JEL: F1 N7 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11344&r=all 331. Adjustment in Property Spce Markets: Estimates from the Stockholm Office Market Peter Englund Ake Gunnelin Patric H. Hendershott Bo Soderberg We analyze the joint dynamics of property space markets using an error-correction model, where rent and vacancies adjust to deviations from equilibrium rent and vacancies. The analysis is based on a new lease rent series for the Stockholm office rental market for the time-period 1977 %uF8182002 constructed by standard hedonic methods applied to a data-set of some 2,400 individual leases. Simulations illustrate the separate roles of rent and vacancy rate movements in the adjustment process. We calculate the natural vacancy rate assuming a trending equilibrium. Property markets may be slow to adjust because tenants are constrained by long-term leases and may be slow to adjust to current rents for other reasons. This gives rise to %u201Chidden vacancies%u201D (the difference between space occupancy and demand at the current lease rate). Using our market rent series and the lease-length distribution, we estimate a time series on the average rent on existing leases. We find that most of the variation in hidden vacancies is explained by the difference between demand at current and average rent. JEL: R1 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11345&r=all 332. What Remains from the Volcker Experiment? Benjamin M. Friedman Under conventional representations of economic policymaking, any innovation is either (1) a change in the objectives that policymakers are seeking to achieve, (2) a change in the choice of policy instrument, or (3) a change in the way auxiliary aspects of economic activity are used to steer policy in the context of time lags. Most public discussion of the 1979 Volcker experiment at the time, and likewise most of the subsequent academic literature, emphasized either the role of quantitative targets for money growth (3) or the use of an open market operating procedure based on a reserves quantity rather than a short-term interest rate (2). With time, however, neither has survived as part of U.S. monetary policymaking. What remains is the question of whether 1979 brought a new, greater weight on the Federal Reserve%u2019s objective of price stability vis-a-vis its objective of output growth and high employment (1). That is certainly one interpretation of the historical record. But the historical evidence is also consistent with the view that the 1970s were exceptional, rather than that the experience since 1979 has differed from what went before as a whole. JEL: E52 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11346&r=all 333. School Quality, Neighborhoods and Housing Prices: The Impacts of school Desegregation Thomas J. Kane Douglas O. Staiger Stephanie K. Riegg We study the relationship between school characteristics and housing prices in Mecklenburg County, North Carolina between 1994 and 2001. During this period, the school district was operating under a court-imposed desegregation order and redrew a number of school boundaries. We use two different sources of variation to disentangle the effect of schools and other neighborhood characteristics: differences in housing prices along assignment zone boundaries and changes in housing prices following the change in school assignments. We find systematic differences in house prices along school boundaries, although the impact of schools is only one-quarter as large as the naive cross-sectional estimates would imply. Moreover, house prices seem to react to changes in school assignments. Part of the impact of school assignments is mediated by subsequent changes in the characteristics of the population living in the school zone. JEL: J0 R0 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11347&r=all 334. The Determinants of Faculty Patenting Behavior: Demographics or Opportunities? Pierre Azoulay Waverly Ding Toby Stuart We examine the individual, contextual, and institutional determinants of faculty patenting behavior in a panel dataset spanning the careers of 3,884 academic life scientists. Using a combination of discrete time hazard rate models and fixed effects logistic models, we find that patenting events are preceded by a flurry of publications, even holding constant time-invariant scientific talent and the latent patentability of a scientist's research. Moreover, the magnitude of the effect of this flurry is influenced by context --- such as the presence of coauthors who patent and the patent stock of the scientist's university. Whereas previous research emphasized that academic patenters are more accomplished on average than their non-patenting counterparts, our findings suggest that patenting behavior is also a function of scientific opportunities. This result has important implications for the public policy debate surrounding academic patenting. JEL: O31 O32 O33 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11348&r=all 335. Volatility and Growth: Credit Constraints and Productivity- Enhancing Investment Philippe Aghion George-Marios Angeletos Abhijit Banerjee Kalina Manova We examine how credit constraints affect the cyclical behavior of productivity-enhancing investment and thereby volatility and growth. We first develop a simple growth model where firms engage in two types of investment: a short-term one and a long-term productivity-enhancing one. Because it takes longer to complete, long-term investment has a relatively less procyclical return but also a higher liquidity risk. Under complete financial markets, long-term investment is countercyclical, thus mitigating volatility. But when firms face tight credit constraints, long- term investment turns procyclical, thus amplifying volatility. Tighter credit therefore leads to both higher aggregate volatility and lower mean growth for a given total investment rate. We next confront the model with a panel of countries over the period 1960-2000 and find that a lower degree of financial development predicts a higher sensitivity of both the composition of investment and mean growth to exogenous shocks, as well as a stronger negative effect of volatility on growth. JEL: E22 E32 O16 O30 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11349&r=all 336. Venture Capital as Human Resource Management Antonio Geldson de Carvalho Charles W. Calomiris Joao Amaro de Matos Venture capitalists add value to portfolio firms by obtaining and transferring information about senior managers across firms over time. Information transfer occurs on a significant scale and takes place both among a single venture capitalist%u2019s portfolio firms and between different venture capitalists%u2019 firms via a network of venture capitalists, which venture capitalists use to locate and relocate managers. Cross-sectional differences are associated with differences in the intensity with which venture capitalists network. The observable factors relevant in explaining the intensity with which venture capitalists network include: 1) the value of the information transmitted through the network, 2) the riskiness of the activities of portfolio firms, 3) the size of the venture capital fund, 4) the degree of difficulty in enticing executives to manage portfolio firms, and 5) the reputation of the venture capitalist for successfully recycling managers. These factors reflect costs and benefits to venture capitalists of participating in the network. JEL: G14 G24 J23 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11350&r=all 337. Monopoly-Creating Bank Consolidation? The Merger of Fleet and BankBoston Charles W. Calomiris Thanavut Pornrojnangkool The merger of Fleet and BankBoston in September 1999 resulted in a regional New England lending market in which only one large, universal bank remained. We explore the extent to which that merger resulted in monopoly rents for the combined entity in some niches within the regional loan market. For small- and medium- sized middle-market borrowers, prior to the merger, Fleet and BankBoston charged unusually low loan interest rates, reflecting their ability to realize economies of scope and scale. After the merger, those cost savings were no longer passed on to medium- sized middle-market borrowers, which resulted in an increase in the average interest rate credit spreads to those borrowers of roughly one percent. Small-sized middle-market borrowers (which continued to enjoy the advantage of loan market competition from remaining small banks) maintained their low spreads. Our results suggest that it may be desirable for regulators to consider the concentration in lending markets in addition to deposit markets when evaluating mergers and structuring appropriate divestiture requirements. JEL: G21 L13 D43 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11351&r=all 338. Studying Texts: A Gemara of the Israel Economy Michael W. Klein This paper reviews six English-language books on the economy of Israel. Each book was written or edited by Israelis, and each is from a different decade. The earliest book, Don Patinkin%u2019s The Israel Economy: The First Decade, was written in the late 1950s, and the most recent volume, The Israeli Economy, 1985 - 1998: From Government Intervention to Market Economics (edited by Avi Ben-Bassat), was published in 2002. While each book considers the Israeli economy at a different stage of its development, five common themes appear: (i) the relevant comparison group for considering the Israeli economy, (ii) the challenges of immigration, integration and inequality, (iii) the appropriate roles of the government and markets, (iv) openness and dependence, and (v) inflation, crisis, and stabilization. Overall, the chronology of economic views presented in these books corresponds to an increasing acceptance of the role of markets and an increasing desire for open trade in goods and assets. JEL: N0 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11352&r=all 339. International Borrowing and Macroeconomic Performance in Argentina Kathryn M.E. Dominguez Linda L. Tesar This paper provides an overview of the major economic events in Argentina from the adoption of the convertibility plan in 1991 to the collapse of the exchange rate regime in 2001. We focus on the relationship between the credibility of the currency board and capital flows, and the inescapable link between fiscal and monetary policy. Argentina inadvertently entered into a vicious circle with financial markets -- one in which it felt compelled to raise the exit costs from the currency board in order to maintain the regime%u2019s credibility. As exit costs mounted, financial markets became increasingly concerned about the dire implications of a devaluation, which in turn, compelled the government to raise exit costs further. In the late 1990s, when Argentina went into recession, it required some sort of stimulus - either a loosening of monetary policy (i.e. a devaluation) or fiscal stimulus. But either way spelled disaster. The added pressure of capital outflow, first by international investors and then the withdrawal of deposits from the Argentine banking system, eventually tipped the scales. JEL: O54 F3 F21 F42 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11353&r=all 340. The Sources of the Productivity Rebound and the Manufacturing Employment Puzzle William Nordhaus Productivity has rebounded in the last decade while manufacturing employment has declined sharply. The present study uses data on industrial output and employment to examine the sources of these trends. It finds that the productivity rebound since 1995 has been widespread, with approximately two-fifths of the productivity rebound occurring in New Economy industries. Moreover, after suffering a slowdown in the 1970s, productivity growth since 1995 has been at the rapid pace of the earlier 1948- 73 period. Finally, the study investigates the relationship between employment and productivity growth. If finds that the relevant elasticities indicate that more rapid productivity growth leads to increased rather than decreased employment in manufacturing. The results here suggest that productivity is not to be feared - at least not in manufacturing, where the largest recent employment declines have occurred. This shows up most sharply for the most recent period, since 1998. Overall, higher productivity has led to lower prices, expanding demand, and to higher employment, but the partial effects of rapid domestic productivity growth have been more than offset by more rapid productivity growth and price declines from foreign competitors. JEL: O4 E1 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11354&r=all 341. Contracts and the Division of Labor Daron Acemoglu Pol Antras Elhanan Helpman We present a tractable framework for the analysis of the relationship between contract incompleteness, technological complementarities and the division of labor. In the model economy, a firm decides the division of labor and contracts with its worker-suppliers on a subset of activities they have to perform. Worker-suppliers choose their investment levels in the remaining activities anticipating the ex post bargaining equilibrium. We show that greater contract incompleteness reduces both the division of labor and the equilibrium level of productivity given the division of labor. The impact of contract incompleteness is greater when the tasks performed by different workers are more complementary. We also discuss the effect of imperfect credit markets on the division of labor and productivity, and study the choice between the employment relationship versus an organizational form relying on outside contracting. Finally, we derive the implications of our framework for productivity differences and comparative advantage across countries. JEL: D2 J2 L2 O3 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11356&r=all 342. A Proposed Method for Monitoring U.S. Population Health: Linking Symptoms, Impairments, Chronic Conditions, and Health Ratings Susan T. Stewart Rebecca M. Woodward David M. Cutler We propose a method of quantifying non-fatal health that details the mechanisms through which chronic conditions affect health. Self-rated health status and time-tradeoff ratings of current health are regressed on impairments and symptoms from the Quality of Well-Being Scale, using OLS regression and ordered probit. This yields estimates of their effects analogous to disutility weights but not based on counterfactual scenarios, and accounts for complex non-additive relationships. Data are from 1420 adults age 45-89 in the Beaver Dam Health Outcomes Study. Chronic condition weights and summary measures of health are derived, laying the groundwork for a detailed national summary measure of health. JEL: I10 I12 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11358&r=all 343. Age and Great Invention Benjamin F. Jones Great achievements in knowledge are produced by older innovators today than they were a century ago. Using data on Nobel Prize winners and great inventors, I find that the age at which noted innovations are produced has increased by approximately 6 years over the 20th Century. This trend is consistent with a shift in the life-cycle productivity of great minds. It is also consistent with an aging workforce. The paper employs a semi-parametric maximum likelihood model to (1) test between these competing explanations and (2) locate any specific shifts in life-cycle productivity. The productivity explanation receives considerable support. I find that innovators are much less productive at younger ages, beginning to produce major ideas 8 years later at the end of the 20th Century than they did at the beginning. Furthermore, the later start to the career is not compensated for by increasing productivity beyond early middle age. I show that these distinct shifts for knowledge-based careers are consistent with a knowledge-based theory, where the accumulation of knowledge across generations leads innovators to seek more education over time. More generally, the results show that individual innovators are productive over a narrowing span of their life cycle, a trend that reduces -- other things equal -- the aggregate output of innovators. This drop in productivity is particularly acute if innovators' raw ability is greatest when young. JEL: O3 O4 J2 I2 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11359&r=all 344. The Burden of Knowledge and the 'Death of the Renaissance Man': Is Innovation Getting Harder? Benjamin F. Jones This paper investigates, theoretically and empirically, a possibly fundamental aspect of technological progress. If knowledge accumulates as technology progresses, then successive generations of innovators may face an increasing educational burden. Innovators can compensate in their education by seeking narrower expertise, but narrowing expertise will reduce their individual capacities, with implications for the organization of innovative activity - a greater reliance on teamwork - and negative implications for growth. I develop a formal model of this "knowledge burden mechanism" and derive six testable predictions for innovators. Over time, educational attainment will rise while increased specialization and teamwork follow from a sufficiently rapid increase in the burden of knowledge. In cross-section, the model predicts that specialization and teamwork will be greater in deeper areas of knowledge while, surprisingly, educational attainment will not vary across fields. I test these six predictions using a micro-data set of individual inventors and find evidence consistent with each prediction. The model thus provides a parsimonious explanation for a range of empirical patterns of inventive activity. Upward trends in academic collaboration and lengthening doctorates, which have been noted in other research, can also be explained by the model, as can much-debated trends relating productivity growth and patent output to aggregate inventive effort. The knowledge burden mechanism suggests that the nature of innovation is changing, with negative implications for long-run economic growth. JEL: O3 O4 J2 I2 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11360&r=all 345. Optimism and Economic Choice Manju Puri David Robinson This paper presents some of the first large-scale survey evidence linking optimism to major economic choices. We create a novel measure of optimism using the Survey of Consumer Finance by comparing a person's self-reported life expectancy to that implied by statistical tables. Optimists are more likely to believe that future economic conditions will improve. Self- employed respondents are more optimistic than regular wage earners. In general, more optimistic people work harder and anticipate longer age-adjusted work careers. They are more likely to remarry, conditional on divorce. In addition, they tilt their investment portfolios more toward individual stocks. JEL: G1 D1 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11361&r=all 346. Speculative Trading and Stock Prices: Evidence from Chinese A-B Share Premia Jianping Mei Jose Scheinkman Wei Xiong The market dynamics of technology stocks in the late nineties has stimulated a growing body of theories that analyze the joint effects of short-sales constraints and heterogeneous beliefs on stock prices and trading volume. This paper examines implications of these theories using a unique data sample from China, a market with stringent short-sales constraints and perfectly segmented dual-class shares. The identical rights of the dual-class shares allow us to control for stock fundamentals. We find that trading caused by investors' speculative motive can help explain a significant fraction of the price difference between the dual- class shares. JEL: G0 G1 F3 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11362&r=all 347. Bank Credit Cycles Gary Gorton Ping He Private information about prospective borrowers produced by a bank can affect rival lenders due to a "winner%u2019s curse" effect. Strategic interaction between banks with respect to the intensity of costly information production results in endogenous credit cycles, periodic "credit crunches." Empirical tests are constructed based on parameterizing public information about relative bank performance that is at the root of banks%u2019 beliefs about rival banks%u2019 behavior. Consistent with the theory, we find that the relative performance of rival banks has predictive power for subsequent lending in the credit card market, where we can identify the main competitors. At the macroeconomic level, we show that the relative bank performance of commercial and industrial loans is an autonomous source of macroeconomic fluctuations. We also find that the relative bank performance is a priced risk factor for both banks and nonfinancial firms. The factor-coefficients for non-financial firms are decreasing with size. JEL: E3 G2 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11363&r=all 348. Eat or Be Eaten: A Theory of Mergers and Merger Waves Gary Gorton Matthias Kahl Richard Rosen In this paper, we present a model of defensive mergers and merger waves. We argue that mergers and merger waves can occur when managers prefer that their firms remain independent rather than be acquired. We assume that managers can reduce their chance of being acquired by acquiring another firm and hence increasing the size of their own firm. We show that if managers value private benefits of control sufficiently, they may engage in unprofitable defensive acquisitions. A technological or regulatory change that makes acquisitions profitable in some future states of the world can induce a preemptive wave of unprofitable, defensive acquisitions. The timing of mergers, the identity of acquirers and targets, and the profitability of acquisitions depend on the size of the private benefits of control, managerial equity ownership, the likelihood of a regime shift that makes some mergers profitable, and the distribution of firm sizes within an industry. JEL: G3 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11364&r=all 349. The International Exposure of U.S. Banks Linda S. Goldberg This paper documents the changing international exposures of U.S. bank balance sheets since the mid-1980s. U.S. banks have foreign positions heavily concentrated in Europe, with more volatile flows to other regions of the world. In recent years some cross- border claims on Latin American countries have declined, while claims extended locally by the branches and subsidiaries of U.S. banks have grown. The foreign exposures of larger U.S. banks tend to be less volatile than claims of smaller banks, and locally- issued claims tend to be more stable than cross-border flows. Business cycle variables have mixed influence on U.S. bank cross- border and local claims. The cross-border claims of U.S. banks on European customers tend to be procyclical. By contrast, locally generated and cross border claims on Latin American customers of U.S. banks are not robustly related to either U.S. or country- specific business cycle variables. U.S. banks do not appear to be strong conduits for transmitting U.S. cycles to these smaller markets, and may instead serve a positive role in stabilizing the amplitude of foreign country cycles. JEL: F3 G2 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11365&r=all 350. International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence Joshua Aizenman Jaewoo Lee This paper tests the importance of precautionary and mercantilist motives in accounting for the hoarding of international reserves by developing countries, and provides a model that quantifies the welfare gains from optimal management of international reserves. While the variables associated with the mercantilist motive are statistically significant, their economic importance in accounting for reserve hoarding is close to zero and is dwarfed by other variables. Overall, the empirical results are in line with the precautionary demand. The effects of financial crises have been localized, increasing reserve hoarding in the aftermath of crises mostly in countries located in the affected region, but not in other regions. We also investigate the micro foundation of precautionary demand, extending Diamond and Dybvig (1983)'s model to an open, emerging market economy where banks finance long-term projects with short-term deposits. We identify circumstances that lead to large precautionary demand for international reserves, providing self-insurance against the adverse output effects of sudden stop and capital flight shocks. This would be the case if premature liquidation of long-term projects is costly, and the economy is de-facto integrated with the global financial system, hence sudden stops and capital flight may reduce deposits sharply. We show that the welfare gain from the optimal management of international reserves is of a first-order magnitude, reducing the welfare cost of liquidity shocks from a first-order to a second-order magnitude. JEL: F15 F31 F43 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11366&r=all 351. Asset Float and Speculative Bubbles Harrison Hong Jose Scheinkman Wei Xiong We model the relationship between asset float (tradeable shares) and speculative bubbles. Investors trade a stock with limited float because of insider lock-ups. They have heterogeneous beliefs due to overconfidence and face short-sales constraints. A bubble arises as price overweighs optimists' beliefs and investors anticipate the option to resell to those with even higher valuations. The bubble's size depends on float as investors anticipate an increase in float with lock-up expirations and speculate over the degree of insider selling. Consistent with the internet experience, the bubble, turnover and volatility decrease with float and prices drop on the lock-up expiration date. JEL: G0 G1 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11367&r=all 352. Ageing, welfare services and municipalities in Finland Jens Lundsgaard With population ageing setting in sooner and more forcefully than in other OECD countries, Finland needs to get its fiscal priorities right quickly. That will require considerable reform as public spending currently expands vigorously. While GDP growth has slowed from the exceptionally rapid pace of the late 1990s, public consumption has continued to grow fast, as new obligations by central government and popular demand led municipalities to expand service provision. After some consolidation in 2003, local government spending has accelerated again and the deficit has widened to ? per cent of GDP in 2004 for the municipalities considered as a whole – despite still larger transfers from central government. At the same time, the tax burden is high, especially on labour. Ensuring the sustainability of public finances over the long term, while maintaining the essential parts of the welfare society will only be possible by i) raising the effectiveness of public spending, ii) reforming the financing of municipalities to encourage better control of spending and limit future rises in municipal income taxation and iii) rebalancing the mix between public and private provision and funding of services. This working paper discusses ways in which progress could be made on such a policy agenda. It relates to the 2004 OECD Economic Survey of Finland (www.oecd. org/eco/surveys/finland) updating the Survey’s analysis by incorporating data for 2004 and recent developments.
Vieillissement, services sociaux et collectivites locales en Finlande
Avec une population qui vieillit plus rapidement et plus fortement que dans les autres pays de l’OCDE, la Finlande se trouve dans l’obligation d’ajuster rapidement ses priorites budgetaires. Il faudra pour cela des reformes considerables, car l’expansion des depenses publiques est actuellement tres forte. Bien que la croissance du PIB se soit ralentie par rapport a son rythme exceptionnellement rapide du debut des annees 90, la consommation publique a continue a progresser rapidement, les nouvelles obligations imposees par l’administration centrale et par la pression des usagers ayant amene les municipalites a accroitre leur offre de services publics. Apres une certaine stabilisation en 2003, les depenses des collectivites locales se sont a nouveau accelerees et le deficit a ete porte a ? pour cent du PIB en 2004 pour les municipalites considerees dans leur ensemble – malgre le versement de transferts encore plus importants par l’administration centrale. Quant a la charge fiscale, elle reste elevee, surtout celle qui pese sur la main d’?uvre. Il ne sera possible d’assurer la stabilisation a long terme des finances publiques tout en maintenant les elements essentiels de la protection sociale qu’a condition i) d’ameliorer l’efficacite des depenses publiques, ii) de reformer le financement des communes pour les inciter a mieux controler leurs depenses et limiter les augmentations futures de l’impot municipal sur le revenu et iii) de reequilibrer le partage entre le secteur public et le secteur prive dans l’offre et dans le financement des services publics. Ce document de travail examine les moyens de progresser dans la realisation de ce programme. Il se refere a l’Etude economique de 2004 de l’OCDE sur la Finlande (www.oecd. org/eco/surveys/finland) et met a jour les analyses effectuees dans cette etude en y inserant des donnees pour 2004 et en prenant en compte l’evolution recente. Keywords: Fiscal policy; fiscal federalism; local governments; property tax; income tax; public sector efficiency; welfare services; contracting out; vouchers; ageing; pensions; Finland JEL: H2 H4 H5 H7 L3 Date: 2005-05-10 URL: http://d.repec.org/n?u=RePEc:oed:oecdec:428&r=all 353. The Employment Effects of the October 2003 Increase in the National Minimum Wage Richard Dickens (Queen Mary, University of London) Mirko Draca (Centre for Economic Performance, London School of Economics) Initial research on the employment impact of the introduction of the National Minimum Wage has shown no evidence of any significant employment loss (Stewart, 2002, 2003, 2004). Against this background the NMW was raised substantially in October 2003 from ?4.20 to ?4.50 and again in October 2004 to ?4.85. These are quite large increases in the NMW and they have been predicted to raise the wages for a substantial proportion of employees in the UK. Some concerns have been raised in the business community about the size of these increases, with some large employers claiming that for the first time the NMW will affect their pay structures. In this report we examine the impact of the October 2003 increase in the NMW on employment. We use a methodology first proposed by Linneman (1982) and used more recently by Stewart (2003, 2004) to examine the introduction of the minimum wage. This essentially examines individual transitions out of employment, comparing a group of workers directly affected by the NMW with a similar but unaffected group. Keywords: Minimum wages, Employment transitions, Wages. JEL: J31 J63 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp532&r=all 354. Variable Selection using Non-Standard Optimisation of Information Criteria George Kapetanios (Queen Mary, University of London) The question of variable selection in a regression model is a major open research topic in econometrics. Traditionally two broad classes of methods have been used. One is sequential testing and the other is information criteria. The advent of large datasets used by institutions such as central banks has exacerbated this model selection problem. This paper provides a new solution in the context of information criteria. The solution rests on the judicious selection of a subset of models for consideration using nonstandard optimisation algorithms for information criterion minimisation. In particular, simulated annealing and genetic algorithms are considered. Both a Monte Carlo study and an empirical forecasting application to UK CPI infation suggest that the new methods are worthy of further consideration. Keywords: Simulated Annealing, Genetic Algorithms, Information criteria, Model selection, Forecasting, Inflation. JEL: C11 C15 C53 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp533&r=all 355. Choosing the Optimal Set of Instruments from Large Instrument Sets George Kapetanios (Queen Mary, University of London) It is well known that instrumental variables (IV) estimation is sensitive to the choice of instruments both in small samples and asymptotically. Recently, Donald and Newey (2001) suggested a simple method for choosing the instrument set. The method involves minimising the approximate mean square error (MSE) of a given IV estimator where the MSE is obtained using refined asymptotic theory. An issue with the work of Donald and Newey ( 2001) is the fact that when considering large sets of valid instruments, it is not clear how to order the instruments in order to choose which ones ought to be included in the estimation. The present paper provides a possible solution to the problem using nonstandard optimisation algorithms. The properties of the algorithms are discussed. A Monte Carlo study illustrates the potential of the new method. Keywords: Instrumental Variables, MSE, Simulated Annealing, Genetic Algorithms. JEL: C12 C15 C23 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp534&r=all 356. Cluster Analysis of Panel Datasets using Non-Standard Optimisation of Information Criteria George Kapetanios (Queen Mary, University of London) Panel datasets have been increasingly used in economics to analyse complex economic phenomena. One of the attractions of panel datasets is the ability to use an extended dataset to obtain information about parameters of interest which are assumed to have common values across panel units. However, the assumption of poolability has not been studied extensively beyond tests that determine whether a given dataset is poolable. We propose an information criterion method that enables the distinction of a set of series into a set of poolable series for which the hypothesis of a common parameter subvector cannot be reject and a set of series for which the poolability hypothesis fails. The method can be extended to analyse datasets with multiple clusters of series with similar characteristics. We discuss the theoretical properties of the method and investigate its small sample performance in a Monte Carlo study. Keywords: Panel datasets, Poolability, Information criteria, Genetic Algorithm, Simulated Annealing. JEL: C12 C15 C23 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp535&r=all 357. Alternative Approaches to Estimation and Inference in Large Multifactor Panels: Small Sample Results with an Application to Modelling of Asset Returns George Kapetanios (Queen Mary, University of London) M. Hashem Pesaran (Cambridge University and USC) This paper considers alternative approaches to the analysis of large panel data models in the presence of error cross section dependence. A popular method for modelling such dependence uses a factor error structure. Such models raise new problems for estimation and inference. This paper compares two alternative methods for carrying out estimation and inference in panels with a multifactor error structure. One uses the correlated common effects estimator that proxies the unobserved factors by cross section averages of the observed variables as suggested by Pesaran (2004), and the other uses principal components following the work of Stock and Watson (2002). The paper develops the principal component method and provides small sample evidence on the comparative properties of these estimators by means of extensive Monte Carlo experiments. An empirical application to company returns provides an illustration of the alternative estimation procedures. Keywords: Cross section dependence, Large panels, Principal components, Common correlated effects, Return equations. JEL: C12 C13 C33 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp536&r=all 358. Nonlinear Modelling of Autoregressive Structural Breaks in a US Diffusion Index Dataset George Kapetanios (Queen Mary, University of London) Elias Tzavalis (Queen Mary, University of London) This paper applies a new model of structural breaks developed by Kapetanios and Tzavalis (2004) to investigate if there exist structural changes in the mean reversion parameter of US macroeconomic series. Ignoring such type of breaks may lead to spurious evidence of unit roots in the autoregressive parameters of economic series. Our model specifies that both the timing and size of breaks are stochastic. We apply the model to a variety of macroeconomic and finance series from the US. Keywords: Structural breaks, State space model, Nonlinearity. JEL: E32 C13 C22 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp537&r=all 359. Forecasting Financial Crises and Contagion in Asia Using Dynamic Factor Analysis Andrea Cipollini (Queen Mary, University of London) George Kapetanios (Queen Mary, University of London) In this paper we compare the performance of a regional indicator of vulnerability in predicting, out of sample, the crisis events affecting the South East Asian region during the 1997-98 period. A Dynamic Factor method was used to retrieve the vulnerability indicator and stochastic simulation is used to produce probability forecasts. The empirical findings suggest evidence of financial contagion. Keywords: Financial contagion, Dynamic factor model. JEL: C32 C51 F34 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp538&r=all 360. Tests for Deterministic Parametric Structural Change in Regression Models George Kapetanios (Queen Mary, University of London) The problem of structural change justifiably attracts considerable attention in econometrics. A number of different paradigms have been adopted ranging from structural breaks which are sudden and rare to time-varying coefficient models which exhibit structural change more frequently and continuously. This paper is concerned with parametric econometric models whose coefficients change deterministically and smoothly over time. In particular we provide and discuss tests for the null hypothesis of no structural change versus the alternative hypothesis of smooth deterministic structural change. We provide asymptotic tests for this null hypothesis. However, the finite sample performance of these tests is not good as they overreject significantly. To address this problem we propose and justify bootstrap based tests. These tests perform well in an extensive Monte Carlo study. Keywords: Structural change, Non-stationarity, Deterministic time-variation. JEL: C10 C14 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp539&r=all 361. Estimating Deterministically Time-Varying Variances in Regression Models George Kapetanios (Queen Mary, University of London) The problem of structural change justifiably attracts considerable attention in econometrics. A number of different paradigms have been adopted ranging from structural breaks which are sudden and rare to time varying coefficient models which exhibit structural change more frequently and continuously. This paper is concerned with parametric econometric models whose coefficients change deterministically and smoothly over time. In particular we provide a new estimator for unconditional time varying variances in regression models. A small Monte Carlo study indicates that the method works reasonably well for moderately large sample sizes. Keywords: Structural change, Non-stationarity, Deterministic time-variation. JEL: C10 C14 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp540&r=all 362. Statistical Tests of the Rank of a Matrix and Their Applications in Econometric Modelling Gonzalo Camba-Mendez (European Central Bank) George Kapetanios (Queen Mary, University of London) Testing the rank of a matrix of estimated parameters is key in a large variety of econometric modelling scenarios. This paper describes general methods to test for the rank of a matrix, and provides details on a variety of modelling scenarios in the econometrics literature where these tests are required. Keywords: Multiple time series, Model specification, Tests of rank. JEL: C12 C15 C32 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp541&r=all 363. ACE Models of Endogenous Interactions Nicolaas J. Vriend (Queen Mary, University of London) Various approaches used in Agent-based Computational Economics ( ACE) to model endogenously determined interactions between agents are discussed. This concerns models in which agents not only ( learn how to) play some (market or other) game, but also (learn to) decide with whom to do that (or not). Keywords: Endogenous interaction, Agent-based Computational Economics (ACE). JEL: C6 C7 D1 D2 D3 D4 D5 D6 D8 L1 M3 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp542&r=all 364. China?s emergence in the global economy and Brazil Marcelo de Paiva Abreu (Department of Economics PUC-Rio) This paper focuses on the impact of China’s emergence on Brazil trade and investment flows and also on the policies and initiatives taken by the Brazilian public and private sectors seeking to meet the challenge raised by it. Based on this evidence alternative scenarios of future developments concerning China and its impact on Brazil will be outlined and Brazilian policies considered. The paper is divided into four sections. The first section describes the effects of China’s expanded role in the world economy on trade and investment flows from a Brazilian perspective. Section 2 examines the complementarity between trade and outward investment flows for Brazil and China. Diversion of foreign direct investment from Brazil to China is briefly considered. The third section focuses on Brazilian policies and China.The conclusive section centers on future developments concerning the Chinese economy and how they may effect Brazil and considers policy suggestions to complement what has already been done to face the challenges and exploit opportunities raised by China’s increasing role in the world economy. Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:rio:texdis:491&r=all 365. The Brazilian economy, 1980-1994 Marcelo de Paiva Abreu (Department of Economics PUC-Rio) This paper on the Brazilian Economy is the draft of a chapter to be included in volume IX of the Cambridge History of Latin America, edited by Leslie Bethell . The 1929-1980 period has been covered by the material circulated in Texto para Discussao 0433, November 2000. A third chapter on the period after 1994 will conclude the sequence. Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:rio:texdis:492&r=all 366. Which "industrial policies" are meaningful for Latin America? Marcelo de Paiva Abreu (Department of Economics PUC-Rio) This paper’s main concern is to assess which "industrial policies" would be meaningful for Latin America nowadays. The first section considers definitions of "industrial policies" and their nature in the past. The second section centers on national growth experiences that may serve as paradigms for LAC economies. Section 3 is on economies which are growth paradigms and on their relevant policies. Section 4 is on present multilateral constraints on "industrial policies", especially in the case of subsidies and trade-related investment measures, as these have been considerably tightened as a result of the Uruguay Round of multilateral trade negotiations. The following section analyses the link between macroeconomics and "industrial policies" both in relation to limitations imposed by macroeconomic instability on industrial policy and to how growth depends on the cost of investment on both micro and macroeconomic factors. Section 6 analyses industrial policy alternatives. The paper concludes with section 7 which is on policy recommendations seeking to improve criteria to pick winners where market failures are especially costly. Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:rio:texdis:493&r=all 367. The FTAA and the political economy of protection in Brazil and the US Marcelo de Paiva Abreu (Department of Economics PUC-Rio) This paper is divided in nine sections. A short introduction puts the subject matter in perspective in the context of the FTAA negotiations. Section 1 deals with obstacles to a successful conclusion of the FTAA both in Mercosur - especially in Brazil. The following section considers briefly how notions about reciprocity and balance of concessions have been applied in multilateral negotiations and how they may be adjusted in the case of negotiations involving free trade areas. The following two triads of sections refer to the United States (sections 3, 4 and 5) and Brazil (sections 6, 7 and 8). Sections 3 and 6 analyze in both economies how protectionist interests are distributed from the point of view of sectors affected and of their location ( states and, for the United States, congressional districts). The relative importance of export interests by state is gauged in sections 4 and 7. The relative net balance of protectionist and export interests is evaluated in sections 5 and 8 under different assumptions in an effort to cope with the limitations of the measures used. Section 9 concludes. Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:rio:texdis:494&r=all 368. The Modigliani-Miller Theorems: A Cornerstone of Finance Marco Pagano (Universita di Napoli "Federico II", CSEF and CEPR) The Modigliani-Miller (MM) theorems are a cornerstone of finance for two reasons. The first is substantive and it stems from their nature of “irrelevance propositions”: by providing a crystal- clear benchmark case where capital structure and dividend policy do not affect firm value, by implication these propositions help us understand when these decisions may affect the value of firms, and why. Indeed, the entire subsequent development of corporate finance can be described essentially as exploring the consequences of relaxing the MM assumptions. The second reason for the seminal importance of MM is methodological: by relying on an arbitrage argument, they set a precedent not only within the realm of corporate finance but also (and even more importantly) within that of asset pricing. Keywords: Modigliani-Miller theorem, capital structure, leverage, dividend policy Date: 2005-05-01 URL: http://d.repec.org/n?u=RePEc:sef:csefwp:139&r=all 369. The Life-Cycle Hypothesis, Fiscal Policy, and Social Security Tullio Jappelli (Universita di Salerno, CSEF and CEPR) The paper reviews some of the most important results of the Life Cycle Hypothesis for understanding individual and aggregate saving behaviour. It then turns to the implications for fiscal policy and social security, highlighting Modigliani’s seminal contributions. Over time competing theories have emerged, and some empirical findings are difficult to reconcile with LCH; chiefly aspects of inertia, myopia, and irrational behaviour documented by the recent behavioural literature. But the LCH is still the benchmark model to think about individual saving decisions, the aggregate evidence and policy issues. Date: 2005-05-01 URL: http://d.repec.org/n?u=RePEc:sef:csefwp:140&r=all 370. "Productivity Convergence at the Firm Level" Kiyohiko G. Nishimura (Policy Board, Bank of Japan) Takanobu Nakajima (Faculty of Business and Commerce, Keio University) Kozo Kiyota (Faculty of Business Administration, Yokohama National University) Productivity convergence among countries has been investigated extensively with mixed results. This paper extends the analysis to the firm level to shed light on the debate of convergence or non-convergence. We find productivity convergence among firms widely in Japan, in both manufacturing industries and non- manufacturing ones. We obtain these results taking explicit account of exiting firms as a source of selection biases. The convergence rate is much faster among firms than countries. We also find that there are substantial differences among industries in the convergence speed. IT industries that heavily rely on technological progress show faster rates of convergence. Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:tky:fseres:2005cf341&r=all 371. "Modeling Credit Risk: A Structural Approach with Long-term and Short-term Debts" (in Japanese) Ryoichi Ikeda (Graduate School of Economics, University of Tokyo) Takao Kobayashi (Faculty of Economics, University of Tokyo) Akihiko Takahashi (Faculty of Economics, University of Tokyo) This paper proposes a structural model to price credit risk of firms with short-term and long-term debts. This enables one to distinguish between default probabilities in the short run and in the long run, and to identify how the composition of debts affects credit risk. We endogenize the banks' decision to bankrupt or save firms in insolvency, and analyze the influence of the governance structure on credit risk valuation. Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:tky:jseres:2005cj131&r=all 372. Nuevos instrumentos de politica ambiental Joan Pasqual Rocabert (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona) El proposito de este papel es describir los principales instrumentos economicos que pueden utilizarse en la politica medio ambiental. Se examinan criticamente las soluciones clasicas, sin olvidar las espurias. Se introduce el tiempo en el analisis, se examina la importancia de la tasa de descuento en el calculo economico y se presenta el concepto de economias de duracion, para estudiar el conflicto entre los intereses individuales y el social y generar propuestas de solucion. Se presta especial atencion al conflicto entre los intereses de las generaciones presentes y las futuras, apuntando algunas vias para solventarlo. Keywords: externalidades, bienes publicos, medio ambiente, desarrollo sostenible,generaciones futuras JEL: H23 H41 H43 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:uab:wprdea:wpdea0510&r=all 373. Endogenous Institutions and the Dynamics of Corruption Esther Bruegger While empirical studies which analyze large cross section country data find that corruption lowers investment and thereby economic growth, this result cannot be established for certain subsamples of countries. We argue that one reason for these mixed findings may be that a country's corruption and growth rates are tightly linked as variables of a dynamic process which can have several equilibria or have different sets of equilibria. In order to understand the circumstances in which a country converges towards a certain equilibrium, we model the individual decisions to invest and corrupt as an evolutionary game. In this model the quality of government institutions is an endogenous variable, depending on the corruption rate, the population income, and the type of institutions; the quality of institutions itself then determines the future incentives to corrupt. The comprehension of these feedback effects allows us to study the role of the type of institutions for the dynamics of corruption. We present the equilibria for different types of institutions and discuss the resulting dynamics. The results suggest that cross country studies may significantly underestimate the impact of corruption on growth for certain countries. Depending on how the quality of institutions depends on corruption and income, corruption can either lower growth, suppress it entirely, or be positively correlated with growth in some special situations Keywords: Corruption; Institutions; Feedback Effects; Evolutionary Game JEL: C73 D73 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:ube:dpvwib:dp0504&r=all 374. Replicator Dynamics with Frequency Dependent Stage Games Esther Bruegger We analyze evolutionary games with replicator dynamics that have frequency dependent stage games. In such an evolutionary game, the payoffs of a strategy at any point in time are functions of the strategy shares given by the players' strategy choices at that time. This framework is suited to model feedback effects between population variables and individual incentives, indirect network effects, and behavior under social norms. We show that the replicator dynamics with frequency dependent stage games is well behaved, i.e. has unique solutions and is simplex invariant for all initial strategy states. Moreover, we present an extension of Liapunov's Theorem that facilitates the analysis of evolutionary equilibria for frequency dependent evolutionary games Keywords: Replicator Dynamics; Frequency Dependent; State Dependent; Evolutionary Games; Liapunov JEL: C73 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:ube:dpvwib:dp0505&r=all 375. Children of international migrants in Indonesia, Thailand, and the Philippines: a review of evidence and policies John Bryant This paper considers three groups of children affected by international migration: (i) children left behind by international labour migrants from the Philippines, Indonesia, and Thailand; (ii) children of Thai nationals in Japan; and (iii) children brought along by irregular migrants in Malaysia and Thailand. Based on the limited data available from published sources, the paper constructs preliminary estimates of numbers of children involved. It then synthesizes available evidence on problems and opportunities faced by the children, and on policies towards them. [...more] JEL: F22 Date: 2005 URL: http://d.repec.org/n?u=RePEc:ucf:inwopa:inwopa05/32&r=all 376. Shadow Profit Maximization and a Generalized Measure of Inefficiency Subhash C. Ray (University of Connecticut) Determining the profit maximizing input-output bundle of a firm requires data on prices. This paper shows how endogenously determined shadow prices can be used in place of actual prices to obtain the optimal input-output bundle where the firm.s shadow profit is maximized. This approach amounts to an application of the Weak Axiom of Profit Maximization (WAPM) formulated by Varian 1984) based on shadow prices rather than actual prices. At these prices the shadow profit of a firm is zero. Thus, the maximum profit that could have been attained at some other input-output bundle is a measure of the inefficiency of the firm. Because the benchmark input-output bundle is always an observed bundle from the data, it can be determined without having to solve any elaborate programming problem. An empirical application to U.S. airlines data illustrates the proposed methodology. Keywords: DEA, Shadow Prices, Non-radial Efficiency JEL: C61 D21 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:uct:uconnp:2005-14&r=all 377. Minimum Quality Standards in Baseball and the Paradoxical Disappearance of the .400 Hitter Thomas J. Miceli (University of Connecticut) This paper argues (following Gould, 2003) that the disappearance of the .400 hitter in major league baseball is due, not to a decrease in ability at the top end of the talent distribution, but to better methods of screening out players at the low end of the distribution. The argument is related to the economic literature on minimum quality standards in markets with imperfect information. Keywords: Minimum quality standards, .400 hitters JEL: D82 L83 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:uct:uconnp:2005-15&r=all 378. Financial Dollarisation: Evaluating The Consequences Eduardo Levy Yeyati Financial dollarisation, defined as the holding by residents of foreign currency assets and liabilities, has been placed at the forefront of the policy debate in developing economies. The reasons include its alleged influence on the conduct of monetary policy and, most prominently, the deleterious impact of exchange rate depreciations on the solvency of dollar debtors (the balance sheet effect). However, the vast analytical literature on these issues contrasts with the scarcity of empirical work to support or refute these implications. This paper contributes to fill this gap. Using a new updated database, the paper revisits the evidence on the determinants of financial dollarisation, and tests whether the impact on monetary and financial stability, and economic performance predicted by the theory is verified in the data. It finds that financially dollarised economies display a more unstable demand for money, a greater propensity to suffer banking crises after a depreciation of the local currency, and slower and more volatile output growth, without significant gains in terms of domestic financial depth. In this light, the case for an active de-dollarisation policy is discussed. Date: 2005 URL: http://d.repec.org/n?u=RePEc:udt:wpbsdt:findollarisation&r=all 379. Efficienza di Costo e Profitto nel Sistema Bancario Italiano (1994-2000). Rilevanza degli Aspetti Istituzionali, Geografici e Dimensionali nella Dinamica Evolutiva Luca Giordano Antonio Lopes Il sistema bancario italiano e' stato interessato da un profondo processo di ristrutturazione a partire dagli anni novanta. Gli esiti della liberalizzazione del settore e del conseguente fenomeno di concentrazione sono tuttora non completamente indagati. Questo lavoro utilizza tecniche econometriche di costruzione di frontiere stocastiche al fine di misurare l'evoluzione dell'efficienza di costo e di profitto delle banche italiane negli anni 1994-2000. I risultati mostrano un significativo processo di convergenza verso la frontiera efficiente per quanto riguarda i prodotti ed una sostanziale invarianza nel tempo per quanto riguarda l'efficienza di costo. Si osserva anche il permanere di significativi differenziali di efficienza tra banche localizzate in diverse aree geografiche e una dinamica dell'efficienza di costo e profitto che per le banche Popolari e Cooperative si discosta in modo marcato da quelle Spa. Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:ufg:qdsems:11-2005&r=all 380. Determinazione di strategie nello sfruttamento di una risorsa rinnovabile Marta Elena Biancardi In this paper we propose a static model describing the commercial exploitation of a common property renewable resource by a population of agents. Players can cooperate or compete; cooperators maximize the utility of their group while defectors maximize their own profit. The model provide for one utility function which can be used for every kind of player. Agents aren't assumed to be divided into the two groups from the beginning; by solving the static game we obtained the best response function of i-th player without making other agents positions. Then, the Nash equilibria we calculated point out how different strategies - all the players cooperate, all the players compete or players can be divided into cooperators and defectors - can coexist. In any case we have analyzed, it's possible to observe how the total harvest depend on renewable resource stock, and how it influences agents' positions. Keywords Resource Exploitation, Game Theory Date: 2004-09 URL: http://d.repec.org/n?u=RePEc:ufg:qdsems:09-2004&r=all 381. Currency Derivatives under a Minimal Market Model with Random Scaling David Heath (School of Finance and Economics, University of Technology, Sydney) Eckhard Platen (School of Finance and Economics, University of Technology, Sydney) This paper uses an alternative, parsimonious stochastic volatility model to describe the dynamics of a currency market for the pricing and hedging of derivatives. Time transformed squared Bessel processes are the basic driving factors of the minimal market model. The time transformation is characterized by a random scaling, which provides for realistic exchange rate dynamics. The pricing of standard European options is studied. In particular, it is shown that the model produces implied volatility surfaces that are typically observed in real markets. Keywords: currency derivatives; stochastic volatility; random scaling; minimal market model JEL: G10 G13 D52 Date: 2005-03-01 URL: http://d.repec.org/n?u=RePEc:uts:rpaper:154&r=all 382. Benford’s Law and Naturally Occurring Prices in Certain ebaY Auctions David E. Giles (Department of Economics, University of Victoria) We show that certain the winning bids for certain ebaY auctions obey Benford’s Law. One implication of this is that it is unlikely that these bids are subject to collusion among bidders, or “shilling” on the part of sellers. Parenthetically, we also show that numbers from the naturally occurring Fibonacci and Lucas sequences also obey Benford’s Law. Keywords: Benford’s Law, auction prices, football, Kuiper test, Watson test JEL: C12 C14 C16 D44 Date: 2005-05-17 URL: http://d.repec.org/n?u=RePEc:vic:vicewp:0505&r=all 383. Foreign Exchange Interventions in Croatia and Turkey: Should We Give a Damn? Balazs Egert Maroje Lang This paper studies the impact of daily official foreign exchange interventions on the exchange rates of two EU candidate countries, namely Croatia and Turkey for the periods from 1996 to 2004 and from 2001 to 2004, respectively. Using the event study methodology and a variety of GARCH models reveals that both the Croatian and the Turkish central banks were in a position to influence, to some extent, the level of the exchange rate during the period studied. This lends support to the view that foreign exchange intervention may be effective to a limited extent in emerging market economies. Keywords: central bank intervention, foreign exchange intervention, official interventions, foreign exchange market, effectiveness, exchange rate volatility, emerging economies, transition economies JEL: F31 Date: 2005-03-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-755&r=all 384. Barter, Credit, and Welfare: A theoretical inquiry into the barter phenomenon in Russia Jose Noguera Susan J. Linz This paper develops a model to investigate the welfare implications of barter in Russia and other transition economies during the 1990s. We argue that barter is a welfare-improving phenomenon that acts as a defense mechanism against monetary instability. When firms react to tighter credit markets by switching to barter, the risk they face diminishes, allowing for a higher level of production. Keywords: Barter, welfare, Russia, money, credit, payment system, interest rate JEL: E0 E6 P20 P21 P23 P26 Date: 2005-03-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-757&r=all 385. Attitudes and Performance: An Analysis of Russian Workers Susan J. Linz Anastasia Semykina This paper investigates the relationship between locus of control and performance among Russian employees, using survey data collected at 28 workplaces in 2002 in Taganrog and at 47 workplaces in 2003 in Ekaterinburg. We develop a measure that allows us to categorize the Russian employees participating in our survey as exhibiting an internal or external locus of control. We then assess the extent to which there are significant differences between “internals” and “externals” in work- related attitudes that may affect performance. In particular, we focus on (1) attitudes about outcomes associated with hard work, ( 2) level of job satisfaction, (3) expectation of receiving a desired reward, and (4) loyalty to and involvement with one’s organization. In each case we identify where gender and generational differences emerge. Our main objective is to determine whether Russian employees who exhibit an internal locus of control perform better than employees with an external locus of control. Our performance measures include earnings, expected promotions, and assessments of the quantity and quality of work in comparison to others at the same organization doing a similar job. Controlling for a variety of worker characteristics, we find that (1) individuals who exhibit an internal locus of control perform better, but this result is not always statistically significant; (2) even among “internals,” women earn significantly less than men and have a much lower expectation of promotion; (3) even among “internals,” experience with unemployment has a negative influence on performance. Keywords: locus of control, Russia, motivation, performance, gender JEL: P23 J24 Date: 2005-03-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-758&r=all 386. Resolution, Recovery and Survival: The Evolution of Payment Disputes in Post-Socialist Europe William Pyle What determines the mechanism chosen to resolve a commercial dispute? To what degree does the aggrieved recover damages? And does the relationship survive in the aftermath? The answers to these questions affect expectations as to the costs of transacting and, thereby, the development of markets. But they have received almost no attention in the economic literature on the post-socialist transition. This article exploits a rich survey of small and medium-sized manufacturing enterprises in three post-socialist countries to explain behavioral responses to an inter-firm payment dispute. Particular attention is given to how the evolution of disputes is sensitive to both the geographic distance between trade partners and membership in a business association. Keywords: commercial dispute, business association, transition JEL: D23 D74 K40 K41 P37 Date: 2005-03-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-761&r=all 387. State Regulations, Job Search and Wage Bargaining: A Study in the Economics of the Informal Sector Maxim Bouev This paper analyses the emergence of the informal economy in the environment characterised by non-competitive labour markets with wage bargaining. We develop a simple extension of the standard search model a la Pissarides (2000) with formal and informal sectors to show how a government’s auditing of informal firms and barriers to firms’ entry erected in the formal sector by corrupt bureaucracy can make for stable coexistence of formal and informal jobs in the long term. In equilibrium, wage differentials for homogeneous and risk-neutral workers emerge because different types of jobs have different lifetimes and/or have different creation costs. The former are explained by the auditing activities of the government that in the simple set-up destroy informal matches, while keeping formal jobs intact; the latter are due to varying capital costs, or costs associated with red tape and bureaucratic extortion (bribing). Search frictions introduce rent sharing between firms and workers in both formal and informal sectors. This has an important implication for policy making. In particular, we show that if ceteris paribus a firms’ bargaining position vis-a-vis workers is stronger in the formal rather than in the informal sector, governments can afford to appropriate a larger part of a productive match surplus e.g. by levying higher taxes), without endangering the qualitative outcome in the long run. Rent sharing also implies that both formal and informal sector employees may receive wages above marginal product. We investigate efficiency properties of an equilibrium with formal and informal jobs and discuss the role of the government in creating and eliminating such inefficiencies partially arising from a version of the hold-up problem (Grout, 1984). Some lessons are drawn for normative analyses of policies aimed at reduction of informality in set-ups with non-competitive labour markets. In particular, the conditions are given under which a reduction in size of the informal sector is likely to be detrimental for economic welfare. Keywords: informal economy, regulations, wage bargaining, labour markets, search models JEL: E24 H26 J31 J41 J42 J64 O17 Date: 2005-04-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-764&r=all 388. Do Regional Integration Agreements Increase Business-Cycle Convergence? Evidence From APEC and NAFTA Viviana Fernandez Ali M. Kutan Using monthly industrial sector data from January 1971 to March 2004, we test for business cycles convergence among the major APEC members: Japan, South Korea, Malaysia, Mexico, USA, and Canada. In addition, we examine the synchronization of business cycles among Australia, Japan, and South Korea, based on the quarterly data for the 1957-2003 period, as well as among the different economic sectors of the NAFTA countries from January 1970 through March 2004. We apply different techniques to identify business cycles. In particular, we propose a new trend- cycle decomposition method based on wavelet analysis. The results show that convergence of business cycles of Asia-Pacific countries is far from complete, but joining the APEC has increased the mean correlation of industrial production cycles of the member economies. On the other hand, although some economic sectors of the NAFTA countries already exhibited some degree of business cycle co-movement even during pre-NAFTA period, the volatility of pair-wise correlation of business cycles declined during NAFTA. In addition, we conclude that, in general, the transmission of business cycles is relatively slow, and, consequently, business cycles appear to be asynchronous. Keywords: business-cycles convergence, wavelets, APEC, NAFTA JEL: B41 E32 Date: 2005-04-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-765&r=all 389. Formation of social capital in Central and Eastern Europe: Understanding the gap vis-a-vis developed countries Jan Fidrmuc Klarita Gerxhani Recent Eurobarometer survey data are used to document and explain the stock of social capital in 27 European countries. Social capital in Central and Eastern Europe – measured by civic participation and access to social networks – lags behind that in Western European countries. Using regression analysis of determinants of individual stock of social capital, we find that this gap persists when we account for individual characteristics and endowments of respondents but disappears completely after we control for aggregate measures of economic development and quality of institutions. Informal institutions such as prevalence of corruption appear particularly important. Keywords: social capital, institutions, capitalism, transition JEL: Z13 P37 O57 O17 Date: 2005-04-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-766&r=all 390. Labor Mobility during Transition: Evidence from the Czech Republic Jan Fidrmuc In this paper, I analyze the development of inter-regional mobility in the Czech Republic during the transition from central planning to a market economy. I show that the intensity of migration is low and even has fallen during the transition regional disparities in unemployment rates and earnings have increased. More importantly, labor mobility is little effective in facilitating labormarket adjustment to employment shocks. Using aggregate inter-regional migration data and survey data on past and prospective migration and the willingness to move. I find that economic factor play little role in explaining migration patterns. There is, nonetheless, some tentative evidence of the greater importance of economic considerations in explaining future migration intentions and the willingness to move. Thus, while at present migration appears more of a social or demographic rather than economic phenomenon, its economic role may strengthen in the future. Keywords: Migration, Mobility, Labor-market Adjustment, Regional Shocks, Survey data. JEL: F22 J61 P23 Date: 2005-04-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-767&r=all 391. Testing for inflation convergence between the Euro Zone and its CEE partners Imed Drine Christophe Rault We investigate inflation convergence between the Euro Zone and its CEE partners using panel data methods that incorporate structural shifts. We find strong rejections of the unit root hypothesis, and therefore evidence of PPP, in the East-European countries for the 1995:1 to 2000:4 period. Keywords: Purchasing power parity, inflation convergence, developing country, panel unit-root tests allowing structural breaks JEL: E31 F0 F31 C15 Date: 2005-04-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-768&r=all 392. Equilibrium Exchange Rates in Central and Eastern Europe: A Meta-Regression Analysis Balazs Egert Laszlo Halpern This paper analyses the ever-growing literature on equilibrium exchange rates in the new EU member states of Central and Eastern Europe in a quantitative manner using meta-regression analysis. The results indicate that the real misalignments reported in the literature are systematically influenced, inter alia, by the underlying theoretical concepts (Balassa-Samuelson effect, Behavioural Equilibrium Exchange Rate, Fundamental Equilibrium Exchange Rate) and by the econometric estimation methods. The important implication of these findings is that a systematic analysis is needed in terms of both alternative economic and econometric specifications to assess equilibrium exchange rates. Keywords: equilibrium exchange rate, Balassa-Samuelson effect, meta-analysis JEL: C15 E31 F31 O11 P17 Date: 2005-05-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-769&r=all 393. Equilibrium Exchange Rates in Southeastern Europe, Russia, Ukraine and Turkey: Healthy or (Dutch) Diseased? Balazs Egert This paper investigates the equilibrium exchange rates of three Southeastern European countries (Bulgaria, Croatia and Romania), of two CIS economies (Russia and Ukraine) and of Turkey. A systematic approach in terms of different time horizons at which the equilibrium exchange rate is assessed is conducted, combined with a careful analysis of country-specific factors. For Russia, a first look is taken at the Dutch Disease phenomenon as a possible driving force behind equilibrium exchange rates. A unified framework including productivity and net foreign assets completed with a set control variables such as openness, public debt and public expenditures is used to compute total real misalignment bands. Keywords: Balassa-Samuelson, Dutch Disease, Bulgaria, Croatia, Romania, Russia, Ukraine, Turkey JEL: E31 O11 P17 Date: 2005-05-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-770&r=all 394. Non-Linear Exchange Rate Dynamics in Target Zones: A Bumpy Road Towards A Honeymoon Some Evidence from the ERM, ERM2 and Selected New EU Member States Jesus Crespo-Cuaresma Balazs Egert Ronald MacDonald This study investigates exchange rate movements in the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS) and in the Exchange Rate Mechanism II (ERM-II). On the basis of Bessec ( 2003), we set up a three-regime self-exciting threshold autoregressive model (SETAR) with a non-stationary central band and explicit modelling of the conditional variance. This modelling framework is employed to model daily DM-based and median currency-based bilateral exchange rates of countries participating in the original ERM and also for exchange rates of the Czech Republic, Hungary, Poland and Slovakia from 1999 to 2004. Our results confirm the presence of strong non-linearities and asymmetries in the ERM period, which, however, seem to differ across countries and diminish during the last stage of the run-up to the euro. Important non-linear adjustments are also detected for Denmark in ERM-2 and for our group of four CEE economies. Keywords: target zone, ERM, non-linearity, SETAR. JEL: F31 G15 O10 Date: 2005-05-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-771&r=all 395. Organized Labor and Restructuring: Coal Mines in the Czech Republic and Romania Jan Bruha Delia Ionascu Byeongju Jeong We examine the role of organized labor in the restructuring experience of two coal mining regions in the 1990’s: Ostrava in the Czech Republic and the Jiu Valley region in Romania. Under similar external circumstances, the Ostrava region undertook gradual restructuring from early on whereas in Jiu Valley there was no restructuring until 1997, followed by massive layoffs over two years. We conduct a quantitative exercise that accounts for the mine productivity, the labor market conditions, and the constraints in compensating the laid-off miners. We show that the delay in restructuring in Jiu Valley was inefficient: gradual restructuring with compensation would have benefited both the miners and the government. The proximate reason for the delay was the Jiu Valley miners’ action against restructuring. We interpret their action in part as a behavioral pattern under a perceived threat to their livelihood. This accords with their history of militancy in contrast to Ostravian miners. Keywords: organized labor; restructuring; coal; transition; welfare JEL: O17 J50 P31 R11 Date: 2005-05-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-773&r=all 396. Output, Capital, and Labor in the Short, and Long-Run Daniel Levy (Bar-Ilan University) Using a new series of capital stock and frequency domain analysis, this paper provides new empirical evidence on the relative importance of capital and labor in the determination of output in the short and long- run. Contrary to the common practice in the traditional growth accounting literature of assigning weights of 0.3 and 0.7 to capital and labor inputs respectively, the evidence presented here suggests that capital is a far more important factor than labor for determination of output at and near the zero frequency band. Furthermore, I show that the zero-frequency labor elasticity of output may well be close to zero, or even zero. Additional findings reported here support the traditional accelerator model of investment as a good description of the long-run investment process. Keywords: Growth Accounting, Capital Investment, Output Fluctuation, Employment, Business Cycles and Aggregate Fluctuation, Frequency Domain Analysis, Spectrum and Cross-Spectrum, Coherence, Phase Shift, Gain, Zero- Frequency, Capital and Labor Elasticity of Output, Short-Run, Long- Run, Capital's and Labor's Share in Output, Accelerator Model of Investment JEL: O47 E22 E24 E32 Date: 2005-05-15 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpdc:0505012&r=all 397. Singing all the Way to the Bank: The Case for Economic Development through Music in Cape Verde Samer Saab (International Monetary Fund) There has been an increasing awareness within the developed world that the cultural industries may play an important role in economic development. The fact that most of the commercial cultural industries have relatively low distribution costs, and that the gains from the mass production of a ‘hit’ recording can be substantial, have alerted policy makers to the possibility of a more dispersed location pattern; one that possibly need not concentrate at the core. Moreover, there is acknowledgement that all countries have a potential cultural heritage elements of which might be translated into cultural industries products; in fact, in a market place where novelty is king, new ideas and novel formulations are likely to be at the leading edge. Put simply, the cultural industries have been shown to be net positive contributors to economic growth; the cultural industries are not necessarily rooted in one place, production can move to the talent and visa versa; both can still have access to a market. Nations and regions that are able to make a contribution to cultural industries production may reap considerable local benefits. Cape Verde's prosperity resides in the intellectual capacity of its people; and Cape Verde’s history has many examples of how challenge and adversity can be transformed into hope and opportunity. Cesaria Evora put Cape Verde on the map for many people to listen to and enjoy: this has been welcomed news. The even better news is that Cape Verde has a seemingly never- ending source of talented singers and performers waiting to be discovered and promoted on the international scene, just like Brazil with its young soccer players. This paper will try to show how the development of a vibrant and active music industry in Cape Verde can provide this country with a medium for long term economic growth and development. It uses a few case studies to illustrate this point: Senegal, Austin, and Jamaica. Finally, it provides a way forward for what should be the key elements of a strategy that Cape Verdeans should develop to brand and build a globally competitive Cape Verdean Music industry. Keywords: Cape Verde, Economic Development, Music JEL: O P Date: 2005-05-17 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpdc:0505013&r=all 398. Application of Method of System Potential in Analysis of Economic System Evolution (english version). Grigorii Pushnoi (International Bogdanov Institute) The mathematical formulation of new System Method based on ideas of “system potential” and “conditions of its realization” is given. Cyclical dynamics of “efficiency of work” of a complex adaptive system follows from this Method. These cycles have the properties like to the properties of typical business cycles. It is proposed to identify these evolution cycles of complex adaptive systems as applied to economic system with business cycles. Keywords: business cycle, catastrophe jump, economic potential, complex adaptive system JEL: O P Date: 2005-05-21 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpdc:0505014&r=all 399. Periodic Properties of Interpolated Time Series Hashem Dezhbakhsh (Emory University) Daniel Levy (Bar-Ilan University) Although linearly interpolated series are often used in economics, little has been done to examine the effects of interpolation on time series properties and on statistical inference. We show that linear interpolation of a trend tationary series superimposes a ‘periodic’ structure on the moments of the series. Using conventional time series methods to make inference about the interpolated series may therefore be invalid. Also, the interpolated series may exhibit more shock persistence than the original trend stationary series. Keywords: Linear Interpolation, Trend-Stationary Series, Shock Persistence, Periodic Properties of Time Series JEL: C10 C22 C82 E37 Date: 2005-05-15 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpem:0505004&r=all 400. On Tail Index Estimation Using Dependent, Heterogenous Data Jonathan B. Hill (Florida International University) In this paper we analyze the asymptotic properties of the popularly used distribution tail estimator by B. Hill (1975), for heavy-tailed heterogenous, dependent processes. We prove the Hill estimator is weakly consistent for functionals of mixingales and L0-approximable processes with regularly varying tails, covering ARMA, GARCH, and many IGARCH and FIGARCH processes. Moreover, for functionals of processes near-epoch- dependent on a mixing process, we prove a Gaussian distribution limit exists. In this case, as opposed to all existing prior results in the literature, we do not require the asymptotic variance of the Hill estimator to be bounded, and we develop a Newey-West kernel estimator of the variance. We expedite the theory by defining 'extremal mixingale' and 'extremal NED' properties to hold exclusively in the extreme distribution tails, disbanding with dependence restrictions in the non- extremal support, and prove a broad class of linear processes are extremal NED. We demonstrate that for greater degrees of serial dependence more tail information is required in order to ensure asymptotic normality, both in theory and practice. Keywords: Hill estimator; regular variation; infinite variance; near epoch dependence; mixingales JEL: C1 C2 C3 C4 C5 C8 Date: 2005-05-20 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpem:0505005&r=all 401. Active versus Passive Sample Attrition: The Health and Retirement Study Honggao Cao (University of Michigan) Daniel H. Hill (University of Michigan) This paper investigates sample attrition in the Health and Retirement Study (HRS). We compare attrition behavior in two of the HRS cohorts: original HRS cohort and AHEAD cohort. We distinguish attrition due to death (passive attrition) from attrition due to other causes (active attrition), examining potential effects of different attrition modes on the representativeness of the remaining samples. This distinction is justified based on a specification test on a multinomial logistic regression model. Among other results from the study are differences between passive and active attritors in a set of demographic, economic, and health measures, and a finding that active attrition occurring in the HRS is perhaps not selective and, thus, is statistically ignorable. Keywords: active attrition, passive attrition, sample attrition, HRS JEL: C1 C2 C3 C4 C5 C8 Date: 2005-05-21 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpem:0505006&r=all 402. Simulating a Multiproduct Barter Exchange Economy Daniel Levy (Bar-Ilan University) Mark Bergen (University of Minnesota) We describe a multiproduct barter trading experiment in which students exchange real goods in an open market based on their own personal preference. The experiment is designed for simulating a pure exchange market in order to demonstrate the role of money and its functions in real economies by showing the limitations and inefficiencies of the traditional barter economy. In addition, the simulation is very effective in highlighting some of the key features that an object that serves as money needs to possess in order to function as an efficient medium of exchange, unit of account, and store of value. Keywords: Roles of Money, Functions of Money, Barter, Exchange Economy, Medium of Exchange, Store of Value, Unit of Account, Experiment, Efficient and Inefficient Medium of Exchange, Types of Money, Fiat Money, Commodity Money, Features of Money, Homogeneity, Divisibility, Durability, Storability, Portability, Scarcity, Efficiency versus Equity, Information Cost JEL: A22 C90 C91 C92 E40 E41 E42 Date: 2005-05-15 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpex:0505002&r=all 403. CORPORATE CREDIT RISK MODELING: QUANTITATIVE RATING SYSTEM AND PROBABILITY OF DEFAULT ESTIMATION Joao Fernandes (Banco BPI) The literature on corporate credit risk modeling for privately- held firms is scarce. Although firms with unlisted equity or debt represent a significant fraction of the corporate sector worldwide, research in this area has been hampered by the unavailability of public data. This study is an empirical application of credit scoring and rating techniques applied to the corporate historical database of one of the major Portuguese banks. Several alternative scoring methodologies are presented, thoroughly validated and statistically compared. In addition, two distinct strategies for grouping the individual scores into rating classes are developed. Finally, the regulatory capital requirements under the New Basel Capital Accord are calculated for a simulated portfolio, and compared to the capital requirements under the current capital accord. Keywords: Credit Scoring, Credit Rating, Private Firms, Discriminatory Power, Basel Capital Accord, Capital Requirements JEL: C13 C14 G21 G28 Date: 2005-05-13 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0505013&r=all 404. Modelo Cost-Of-Carry: Mispricing, Retornos e Volatilidades do Indice PSI-20 e dos Futuros PSI-20 Manuela Magalhaes Carlos carvalhosa Perante a evidencia de um mispricing entre o preco do contracto de Futuros PSI-20 e o preco teorico do Futuro PSI-20, modelizado segundo a teoria do cost-of-carry, procedemos a analise da dinamica da rentabilidade e da volatilidade entre o indice PSI-20 e o Futuro PSI-20. A evidencia empirica mostra que existe interdependencia entre os retornos dos dois mercados, no curto prazo. No que concerne a volatilidade, transmissao que se verifica, no curto prazo, e dentro do proprio mercado, nao se verificando volatilidade cruzada. A volatilidade dos mercados decorre, tambem, da sazonalidade intraday. Keywords: Contracto Futuro, Mispricing, Cost-of-carry JEL: G Date: 2005-05-17 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0505014&r=all 405. The Financing of Higher Education – A Broader View P Nair (ICFAI University) Deepak Kumar (ICFAI University Press) The article talks about the development of higher education in India and addresses possible means of financing it. The current educational system in the country is discussed and the concentration by the State on higher and technical education is looked at. The article further says that the financing of Higher Education in the country by the State, is a drain on its exchequer and that more methods have to be found out to move the financial obligations outside the State coffers. The experience of other countries is looked at briefly, and parameters are looked at, which need to be concentrated on to get results. For money to flow to this sector, it is very important also, to look at providing adequate legislative protection to these self- financed universities, which attract funds from sponsors, financing agencies and corporates. The need for adaptability to the job market and the synchronization between job creation and higher education has been explained in detail. Various development models are hinted at with concentration on specific parameters, but the article stops short of getting into very definitive models itself, due to the still complicated setup, as regards the status of private educational institutions in India. Once the ground rules are clearly laid down, it may become possible to develop several models, which may be accepted by the financial agencies, for funding higher education in India. Keywords: Higher education ,India JEL: G Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0505015&r=all 406. Roles of the Banking Sector in Indian Agriculture -A Paradigm Shift Deepak Kumar (ICFAI University Press) A changing environment and government policies are forcing banks to lend more to the agricultural sector. Both private and public banks are now involving themselves in a lot of agri-based lending activities.Besides financing traditional activities, banks are also involved in training and setting up consultancies, agri clinics, the export and marketing of agricultural produce, etc. The tie up of HDFC with NAFED and SBI with Cargill India will see a new revolution in the agricultural sector in India. Keywords: Banking Sector ,Indian Agriculture JEL: G Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0505016&r=all 407. Inequity Aversion May Increase Inequity in Majoritarian Bargaining Maria Montero (University of Nottingham) Inequity aversion models have been used to explain equitable payoff divisions in bargaining games. I show that inequity aversion can actually increase the asymmetry of payoff division inside the coalition that forms in majoritarian bargaining games. Keywords: noncooperative bargaining, majority games, inequity aversion JEL: C78 Date: 2005-05-20 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpga:0505007&r=all 408. Optimal growth path in an OLG economy without time- preference assumptions : main results Mohamed Mabrouk (Ecole Superieure de Statistique et d'Analyse de l'Information de Tunis) The aim is to characterize optimal growth paths in an OLG economy where capital accumulation is achieved through bequests, without using the assumption of time preference theory on a social level, because such an assumption, that leads to use a discounted infinite horizon sum, introduce necessarily inequality between the different generations of the society. I investigated two optimality concepts: Pareto-optimality and consensual optimality. I considered the case without technical change. I found that all steady-state optimal growth paths converge necessarily to a level of capital where the marginal gain from a decrease of bequest is equal to the marginal loss from a similar decrease of heritage. With the use of an intergenerational altruistic utility, I showed that spontaneous equilibrium cannot be an optimal growth path unless generations feel (asymptotically) for their heirs as they feel for themselves. Keywords: optimal growth, OLG economy, time-preference assumption, Pareto-optimality, egalitarianism, golden rule JEL: C6 D5 D9 Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpge:0505004&r=all 409. Does Inequality Cause Trade Cycle G. Moheyuddin (GC Univeristy, Lahore) Trade cycle means the cyclical fluctuations in aggregate economic activity. Different theories have presented to explain the causes of Trade Cycle. In which different causes of it discussed but one of the major cause of it is usually ignored i.e. the Inequality. Inequality and Trade Cycle are closely related. Inequality in income distribution is one of the major causes of the trade cycle. Inequality may cause the trade cycle and also speedup the intensity of the different phases of trade cycle, caused by some other factors.This Paper studies the role of Inequality in the different phases of trade cycle one by one and then “The Measure to Control the Trade Cycles' Note: This is an initail idea I am interested in further reserch in topic for my PhD dissertation. Keywords: Inequelity, Business Cycle, Income Distribution, Trade Cycle, economic fluctuations JEL: C6 D5 D9 Date: 2005-05-21 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpge:0505005&r=all 410. Beans as a Medium of Exchange Harold Fried (Union College) Daniel Levy (Bar-Ilan University) This note describes an experiment, which is an extension of the experiment proposed by Levy and Bergen (1993). The experiment is designed to simulate an environment where something that is very similar to fiat money (i.e., is homogenous, durable, portable, storable, divisible, has no intrinsic value of its own, etc.) will be accepted in market transactions and thus will have a “value.” This is accomplished through an implementation of a taxation mechanism in the spirit of legal restriction theory of monetary economics. Keywords: Roles of Money, Functions of Money, Barter, Exchange Economy, Medium of Exchange, Store of Value, Unit of Account, Experiment, Efficient and Inefficient Medium of Exchange, Types of Money, Fiat Money, Commodity Money, Features of Money, Homogeneity, Divisibility, Durability, Storability, Portability, Scarcity, Efficiency versus Equity, Information Cost JEL: A22 C90 C91 C92 E40 E41 E42 Date: 2005-05-15 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpgt:0505001&r=all 411. Who Are Schooled in Urban Pakistan? Rana Ejaz Ali Khan (Islamia University Bahawalpur. Pakistan) Karamat Ali (Bahauddin Zakarya University Multan. Pakistan) Pakistan is severely disadvantaged by its failure to achieve higher levels of human development. Low enrolment thirty years ago is reflected in the lower educational level of today’s labor force, lower productivity and lower adaptation of technology. Even today less than half of the school-age children are going to school. Some common but many of them disputed perceptions about lower school-enrolment rate, at the household level are that the younger age children, younger in their brothers and sisters, male children, and the children from educated parents; high-income households; smaller households; wealthy households are more likely to be in school. We have analyzed these determinants for urban Pakistani children and framed some policy recommendations. Keywords: Schooling, Education, Gender, Poverty, Children, JEL: I Date: 2005-05-20 URL: http://d.repec.org/n?u=RePEc:wpa:wuwphe:0505003&r=all 412. Investment-Saving Comovement under Endogenous Fiscal Policy Daniel Levy (Bar-Ilan University) I expand Feldstein’s (1983) model by including flexible exchange rate and by introducing endogenous fiscal policy. Using this model, I demonstrate how a positive investment-saving correlation can arise in a world with endogenous fiscal policy. I show that this correlation does not depend on capital mobility and therefore is compatible with any degree of capital mobility. This implies that the observed investment- saving comovement is not necessarily due to imperfect capital mobility. The model has a testable implication: it predicts a lack of Granger causality from private saving to private investment. Empirical examination of this prediction indicates that U.S. time series data is compatible with the hypothesis of endogenous fiscal policy during a flexible exchange rate period, but not during a fixed exchange rate period. Keywords: Feldstein-Horioka Puzzle, Investment, Saving, Capital Mobility, Endogenous Fiscal Policy JEL: F41 E62 H39 Date: 2005-05-15 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpif:0505008&r=all 413. FOREIGN EXCHANGE INTERVENTION AND THE POLITICAL BUSINESS CYCLE: A PANEL DATA ANALYSIS Axel Dreher (Thurgau Institute of Economics & University of Konstanz) Roland Vaubel (University of Mannheim) By combining expansionary open market operations with sales of foreign exchange, the central bank can expand the monetary base without depreciating the exchange rate. Thus, if there is a monetary political business cycle, sales of foreign exchange are especially likely before elections. Our panel data analysis for up to 158 countries in 1975-2001 supports this hypothesis. Foreign exchange reserves relative to trend GDP depend negatively on the pre-election index regardless of the exchange rate system. The relationship is significant and robust irrespective of the type of electoral variable, the choice of control variables and the estimation technique. Keywords: Foreign exchange interventions, political business cycles JEL: F31 E58 Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpif:0505009&r=all 414. Purchasing power parity: an empirical study of three EMU countries Antonio Portugal Duarte (Faculty of Economics - University of Coimbra & Group for Monetary & Financial Studies - GEMF) We apply Purchasing Power Parity (PPP) theory to the analysis of long- run equilibrium in the foreign exchange market. We study the case of Portugal vis-a-vis Germany and Spain, and the case of Spain vis-a-vis Germany, in the period 1960-1990. The empirical analysis was based on unit-root testing (using ADF tests) and Johansen’s methodology for the study of co- integration. We worked with linear long-run relationships based exclusively on PPP, as well as with long-run relations that also allowed for the effect of interest rates. In a situation in which PPP does not hold, one could think that on account of some “natural reason” agents believe that, as time goes by, the dominant currency, which is also the reference currency of the EMS (the German Mark), will appreciate. We concluded, on the contrary, that the weaker currencies were the ones that with the passing of time appreciated in real terms. The fact that PPP theory was applied to two southern European countries deserves a special mention, because it may serve as an example for other countries that come to be in a position similar to that of Portugal and Spain before their adhered to the European Union. Keywords: Purchasing Power Parity, Unit Roots, EMU, Economic Integration and Co-integration JEL: F31 F41 C32 G15 C51 Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpif:0505010&r=all 415. Can Domestic Institutions Explain Exchange Rate Regime Choice? The Political Economy of Monetary Institutions Reconsidered Beth Simmons (Harvard University) Jens Hainmueller (Harvard University) Recent articles in International Organization and elsewhere have explored the role of domestic institutions in shaping exchange rate regime choice. These articles use some variation on the information reported by governments to the International Monetary Fund as their dependent variable. Even more recently, new data have become available that reflect actual (de facto) rather than declaratory (de jure) policies with respect to exchange rate regimes. The findings of the domestic institutionalists are significantly weakened, and in some cases reversed, when this more appropriate measure is used to test their claims. These tests cast doubt on whether a domestic institutional focus is the most fruitful way to study exchange rate regimes. Keywords: Exchange rate choiche, Political Economy of Monetary Institutions JEL: F3 F4 Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpif:0505011&r=all 416. Trade Balance and Exchange-Rate for a Small Open Economy during the EMS: The Hellenic Case 1983:1-1995:12 Stamatopoulos Theodoros (TEI of Crete, University of Piraeus, Greece & CEFI/Mediterranean University of Aix-Marseille II, France.) We are interested on assessing the effectiveness of the Bank of Greece (BoG) exchange rate policy, to achieve the objective of adjusting balance of payments des-equilibrium, during the period 1983:1-1995:12. The traditional theory of the balance of payments adjustment process through exchange rate changes is used for this purpose. We found evidence, first, about the doubtful effectiveness of this policy due to the marginal verification of the critical elasticities condition; second, about the success of the exchange rate policy in the short-run, since the monthly data of bilateral exchange rates (USD, DEM, ITL, FRF, GBP, JPY) of the Hellenic Drachma (GRD) Granger cause the respective trade balances; third, about the significant co-movement in the series which in the long-run, are driven by the same stochastic trend. We are much aware of the tentative nature of these conclusions. However, our findings suggest that the loss of the exchange rate policy was costly in the case of Hellas because an efficient policy sacrificed by the BoG to the European Central Bank (ECB). Keywords: Optimum Currency Area, EMS, EMU, Traditional Adjustment Process for Merchandise Payments, Granger Causality, Integration and Co- integration Analysis JEL: F32 F36 F41 E58 C32 Date: 2005-05-20 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpif:0505012&r=all 417. Prices and Exchange Rate of Hellenic Drachma (GRD), during 1981- Stamatopoulos Theodoros (TEI of Crete, University of Piraeus, Greece & CEFI/Mediterranean University of Aix-Marseille II, France.) The paper presents empirical results on an import prices equation to the case of the small open Hellenic economy, during her course to the European Monetary Union, in the 1980s until mid- 1990s. The analysis employs cointegration theory to examine the long-run co-movements of prices, effective exchange rate of GRD and unit labour cost of the European countries, which export to Greece. Innovation accounting is also used so as to detect the dynamics of the data set. We found slight evidence to support long run equilibrium, however, it was only the Hellenic inflation rate, which was adjusting to the deviations from this. The fragile stability of the system is confirmed by the impulse response functions examination where the exchange rate of the GRD do not converge to its long-run values, even after a 3 years period from the one unit-shock in various innovations. The determinant role of the growth rate of the unit labour cost and therefore of European countries’ prices to the exchange rate of GRD, to the Hellenic inflation rate, and less to the growth rate of the import prices is (1) justified by its high proportion to their variance decomposition and (2) became apparent approximately after 9 months. The latter seems to amount to the “contract-period” in the Magee’s terminology. Keywords: Trade Balance Adjustment through exchange rate policies; European Monetary Integration; Unit Root Tests; Co-integration Analysis; Innovation Accounting JEL: F3 F4 Date: 2005-05-20 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpif:0505013&r=all 418. Capital account liberalization and exchange rate regime choice, what scope for flexibility in tunisia ? Ben Ali Mohamed Sami (CADRE, Universite de Lille, France) The monetary crises of the Nineties which shook the capital market of several countries highlight the incompatibility of the intermediary exchange rate regimes with the high volatility of international capital account mobility induced by the financial globalisation. Certain economists suggested that a greater flexibility would be necessary to prevent the speculative attacks. Others on the contrary, assert the merits of the rigid fixed exchange regimes. The adoption by Tunisia of structural reform of its economy in a context of gradual opening since 1986 had allowed in January 1993 the instauration of the convertibility of its current account. The total convertibility of the Tunisian dinar which is already at an advanced stage remains a top priority in the immediate future like finality of a more close integration and opening of the Tunisian economy to the world economy. So the total liberalization of the exchange in Tunisia poses the problematic of the prospective choice of its exchange rate regime. We analyze within the framework of this research, the various alternatives which could prove to be optimal. The option of the flexibility is particularly considered. Keywords: Exchange rate regimes, Tunisia. JEL: F3 F4 Date: 2005-05-21 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpif:0505014&r=all 419. Price Adjustment at Multiproduct Retailers Daniel Levy (Bar-Ilan University) Shantanu Dutta (University of Southern California) Mark Bergen (University of Minnesota) Robert Venable (Robert W. Baird, Co.) We empirically study the price adjustment process at multiproduct retail stores. We use a unique store level data set for five large supermarket and one drugstore chains in the U.S., to document the exact process required to change prices. Our data set allows us to study this process in great detail, describing the exact procedure, stages, and steps undertaken during the price change process. We also discuss various aspects of the microeconomic environment in which the price adjustment decisions are made, factors affecting the price adjustment decisions, and firm-level implications of price adjustment decisions. Specifically, we examine the effects of the complexity of the price change process on the stores’ pricing strategy. We also study how the steps involved in the price change process, combined with the laws governing the retail price setting and adjustment, along with the competitive market structure of the retail grocery industry, influence the frequency of price changes. We also examine how the mistakes that occur in the price change process influence the actions taken by these multiproduct retailers. In particular, we study how these mistakes can make the stores vulnerable to civil law suits and penalties, and also damage their reputation. We also show how the mistakes can lead to stock outs or unwanted inventory accumulations. Finally, we discuss how retail stores try to minimize these negative effects of the price change mistakes. Keywords: Cost of Price Adjustment, Price Adjustment Process, Menu Cost, Posted Prices, Multiproduct Retailer, Price rigidity, Sticky Prices, Frequency of Price Changes, Time Dependent Pricing, Retail Supermarket and Drugstore Chains JEL: E31 E12 E50 G13 G14 L11 L15 L16 M21 M31 Q11 Q13 Date: 2005-05-15 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpio:0505005&r=all 420. Determinants of Profit in the Broadcasting Industry | Evidence from Japanese Micro Data| Norihiro KASUGA (Faculty of Economics, Nagasaki University) Manabu Shishikura (Institute for Information & Communications Policy) The operating areas of each terrestrial broadcasting station in Japan are geographically divided by a licensing system and form oligopolies in each of their respective markets. These institutional constraints define the market structure, and as a result, affect the business performance of the broadcasting industry. The primary purpose for regulation is based on the gMedia Ownership Rule,h a rule designed for preserving gplurality, h gdiversityh and hlocalismh of stations. Similar rules exist in many countries, but benchmarks differ. To this end, if the regulative authority introduced a new regulation framework, it might be useful to improve the financial foundation of the licensed stations, thus preserving the original purpose of the rule. With the rapid progress of digital technology and the increasingly diversified selection of media types, the government needs to urgently review Japanfs old regulations with the aim of giving more freedom in the operation of terrestrial stations and so promote voluntary restructuring. Based on the above viewpoints, we implemented an econometric analysis with respect to factors that affect on the business performance (especially on profit) of each station. We focus on the terrestrial broadcasting industry because it plays a central role in the Japanese broadcasting system. As a result, we ascertained the following points. (1) Structural parameters: market share of each station has a positive correlation with profit, although market concentration appears to have no correlation. (2) Geographical parameters: the number of households per station and the income per household have positive correlations. (3) Business parameters: the aired ratio of self-produced TV programs has a positive correlation with revenue, although it has a negative correlation with profit. It is said that geographical environment is quite important for business performance in the broadcasting industry. This hypothesis is strongly supported by our results. Therefore deregulation and subsequent voluntary rearrangement may reinforce the operating basis of each station. Keywords: Terrestrial Broadcasting Station, Determinants of profit, Principle of Media Ownership Rule, Audience Share, Oligopoly JEL: D43 L13 L82 Date: 2005-05-17 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpio:0505006&r=all 421. The Economics of Privacy Kai-Lung Hui (National University of Singapore) I.P.L. Png (National University of Singapore) In this chapter, we review economic analyses of privacy. We begin by scrutinizing the “free market” argument against privacy regulation, and highlight why it may not work well for personal information because welfare may be non-monotone in the quantity of information, there may be excessive incentives to collect information that has no social value, and cross-market externalities may arise from the exploitation of information. We then discuss research on property rights and suggest some challenges in determining their optimal allocation. We conclude by summarizing the insights provided by recent empirical research and highlighting directions for future research in the economics of privacy. JEL: L Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpio:0505007&r=all 422. HAS EXCHANGE RATE VARIABILITY AFFECTED TROPICAL NON- TRADITIONAL David Kihangire (Bank of Uganda) David Potts (University of Bradford) Prof. Sam Cameron (University of Bradford) This study examines the effects of exchange rate variability on Uganda’s flowers exports during 1994-2001 by testing the central hypothesis that following the floating exchange rate regime, ‘Uganda’s exports of tropical flowers are negatively and significantly correlated with exchange rate variability.’ The absence of pure I(0) or I(1) in the data, and lack of endogeneity and simultaneous bias problems invites us to apply ARDL approach to cointegration and OLS. The results suggest that although Uganda’s flower exports are negatively correlated with exchange rate variability, the measured effects are insignificant. Keywords: Exchange rate variability, flowers exports, Uganda, dependent- economy JEL: F1 F2 Date: 2005-05-14 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpit:0505010&r=all 423. Learning to Love Globalization? Education and Individual Attitudes Toward International Trade Jens Hainmueller (Harvard University) Michael J. Hiscox (Harvard University) Recent studies of public attitudes toward trade have converged upon one central finding: support for trade restrictions is highest among respondents with the lowest levels of education. This has been interpreted as strong support for the Stolper- Samuelson theorem, the classic economic treatment of the income effects of trade which predicts that trade openness benefits those owning factors of production with which their economy is relatively well endowed (those with skills in the advanced economies) while hurting others (low skilled workers). We re- examine the available survey data, showing that the impact of education on attitudes toward trade is almost identical among respondents in the active labor force and those who are not (even those who are retired). We also find that, while individuals with college-level educations are far more likely to favor trade openness than others, other types of education have no significant effects on attitudes, and some actually reduce the support for trade, even though they clearly contribute to skill acquisition. Combined, these results strongly suggest that the effects of education on individual trade preferences are not primarily a product of distributional concerns linked to job skills. We suggest that exposure to economic ideas and information among college-educated individuals plays a key role in shaping attitudes toward trade and globalization. This is not to say that distributional issues are not important in shaping attitudes toward trade – just that they are not clearly manifest in the simple, broad association between education levels and support for free trade. Keywords: International Trade, Trade Preferences, Stolper- Samuelson, Education Effects JEL: F1 F2 Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpit:0505011&r=all 424. THE EFFECTS OF EXCHANGE RATE VARIABILITY ON EXPORTS: EVIDENCE FROM UGANDA (1988 – 2001) David Kihangire (Phd) Using monthly data, this study investigates the effects of exchange rate variability on Uganda’s aggregate export growth under the floating exchange rate policy regime (1994-2001), benchmarked on the fixed exchange rate regime (1988-1993). The main research question it posits is: “What is the effect of exchange rate variability on Uganda’s exports?” Premised on risk-aversion, the study tests the main hypothesis that ‘Uganda’s exports are negatively and significantly correlated with exchange rate variability.’ Due to lack of pure I(0) or I( 1) for all the series, and absence of endogeneity and simultaneous bias problems between export supply and export demand, the ARDL approach to cointegration and OLS are applied in the study. The results suggest support for the research hypothesis. The policy implication is that intervention targeting the minimisation of excessive volatility in the real effective exchange rate under the floating regime may contribute to supporting export sector growth, economic growth, and overall external macroeconomic stability in Uganda. Keywords: Uganda, Exports, Exchange Rate Variability JEL: F1 F2 Date: 2005-05-21 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpit:0505013&r=all 425. Does a Slump Really Make You Thinner? Finnish Micro-level Evidence 1978-2002 Petri Bockerman (Labour Institute for Economic Research) Edvard Johansson (The Research Institute of the Finnish Economy) Satu Helakorpi (National Public Health Institute) Ritva Prattala (National Public Health Institute) Erkki Vartiainen Antti Uutela (National Public Health Institute) This paper explores the relationship between obesity and economic conditions in Finland, using individual microdata from 1978 to 2002. The results reveal that an improvement in regional economic conditions measured by the employment-to-population ratio produces a decrease in obesity over the period of investigation, other things being equal. This effect arises from the decline in the height-adjusted weight of people who are deeply overweight, (BMI>35). In addition, the effect is strongest for the people in later middle age (aged 45-65). The incidence of obesity is unrelated to the regional growth rate. All in all, the Finnish evidence presented does not support the conclusions reported for the USA, according to which temporary economic slowdowns are good for health. In contrast, at least overweight increases during slumps. Keywords: overweight, business cycles, health JEL: E32 I12 R11 Date: 2005-05-13 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpla:0505011&r=all 426. Is Variation in Hours of Work Driven by Supply or Demand? Evidence from Finnish Manufacturing Industries Petri Bockerman (Labour Institute for Economic Research) Markus Jantti (Abo Akademi) This paper uses panel data from 1989 to 1995 on blue-collar workers in Finnish manufacturing industries and their establishments to assess the extent to which hours of work are affected by individual or establishment characteristics - observed as well as unobserved. We argue that recent research on working hours has focused almost exclusively on the supply of labor, but that insights into the extent to which hours variation is driven not by supply but by demand will affect the likelihood that supply-side policies will succeed. Our estimates suggest that both individual and establishment characteristics matter, but that establishment level effects account for the bulk of the variation in hours. Keywords: labour supply, labour demand, employment JEL: H2 J21 J22 J23 Date: 2005-05-13 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpla:0505012&r=all 427. Trabalho Infantil-Aplicacao do Modelo Multinomial Manuela Magalhaes As criancas fazem parte da vida economica das sociedades. A evidencia historica mostra que o contributo das criancas para o rendimento das familias e consistentemente significativo. O trabalho infantil e, ainda nos dias de hoje, um fenomeno expressivo, quer nas sociedades menos desenvolvidas, quer nas mais desenvolvidas. Este estudo analisa os factores determinantes na decisao das familias, relativamente a afectacao do tempo das criancas entre a escola; a escola e o trabalho, o trabalho ou o lazer. O modelo logit multinomial e o modelo utilizado para identificar as caracteristicas pessoais, familiares, locais e sazonais que influenciam a decisao das familias Ukranianas. Os resultados mostram que todos estes factores sao considerados pelas familias nas suas decisoes. Assim, politicas que promovam o desenvolvimento economico, a reducao do agregado familiar e alternativas a escola no terceiro trimestre, podem contribuir significativamente para a reducao do trabalho infantil na Ukrania Keywords: Trabalho Infantil, Logit Multinomial JEL: J Date: 2005-05-14 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpla:0505013&r=all 428. “Dynamic Effects of Migrant Remittances on Growth: An Econometric Model with an Application to Mediterranean Countries”. Discussion Paper, No. 74, KEPE, Athens, 2002. NICHOLAS GLYTSOS This paper builds a Keynesian type econometric model with a dynamic perspective and a sound theoretical basis, for investigating the impact of remittances on consumption, investment, imports and output. It estimates short and long-run multiplier effects of exogenous shocks of remittances, with data from five Mediterranean countries. The analysis reveals a uniform country performance of instability and uncertainty, with great temporal and inter-country fluctuations of remittance effects. The findings point to different inter-country priorities of remittance spending and to an asymmetric impact of remittance changes, in the sense that the good done to growth by rising remittances is not as great as the bad done by falling remittances. Keywords: Keywords: Migration, Remittances, Growth, Dynamic Model, Mediterranean Countries JEL: F22 O11 O19 Date: 2005-05-14 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpla:0505014&r=all 429. OLD AGE POVERTY IN THE INDIAN STATES: WHAT THE HOUSEHOLD DATA CAN SAY? Sarmistha Pal (Brunel University) Robert Palacios (World Bank) In the absence of any official measures of old age poverty, this paper uses National Sample Survey household-level data to investigate the extent and nature of living standards and incidence of poverty among elderly in sixteen major states in India. We construct both individual and household-level poverty indices for the elderly and examine the sensitivity of these poverty indices to different equivalence scales and size economies in consumption. In general, these adjusted estimates indicate that households with elderly members have lower incidence of poverty in all of the states, albeit to different degrees. Part of the explanation appears to be related to differences in dependency ratios in households with and without elderly, where a significant percentage of elderly, especially men, continue to work well past the age of sixty. The favourable effect of the presence of elderly on household living standards and incidence of poverty is however weakened once we control for dependency ratio, among other things, with significant inter- state variation noted in our sample. Keywords: Old age poverty, Living standards, Poverty indices, Equivalence scale, Size economies in consumption, Social protection of the elderly, Inter-state disparity in India. JEL: J Date: 2005-05-17 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpla:0505015&r=all 430. A Model of Remittance Determination Applied to Middle East and North Africa Countries NICHOLAS GLYTSOS (CENTER OF PLANNING & ECONOMIC RESEARC, ATHENS, GREECE) The objective is to construct and estimate a model of remittance determination which reflects individual behaviour of the migrant and his family, treating remittances as an endogenous variable in the migration system. Behind this model is found the idea of the relative bargaining power, inherent in the implicit contract theory, which determines priorities for present or future consumption of remittances. The model has two purposes: estimate the relative significance of behavioural and macroeconomic variables in remittance determination, and interpret, in a feedback manner, the results with respect to the theoretical postulates. All countries concerned are found to demonstrate unstable and volatile income expectations, with implications to remitting behaviour, and to present-future priorities. Keywords: Model, Migration, Remittances, Determinants, MENA JEL: J Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpla:0505016&r=all 431. Work Disability is a Pain in the *****, Especially in England, The Netherlands, and the United States James Banks (Institute for Fiscal Studies & University College, London) Arie Kapteyn (RAND Corporation) James P. Smith (RAND Corporation) Arthur van Soest (RAND Corporation & Tilburg University) This paper investigates the role of pain in determining self- reported work disability in the US, the UK, and The Netherlands. Even if identical questions are asked, cross-country differences in reported work disability remain substantial. In the US and The Netherlands, respondent evaluations of work limitations of hypothetical persons described in pain vignettes are used to identify the extent to which differences in self-reports between countries or socio-economic groups are due to systematic variation in the response scales. Keywords: Work limiting disability, Vignettes, Reporting bias JEL: J Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpla:0505017&r=all 432. Unraveling the SES-Health Connection James P. Smith (RAND Corporation) While a debate rages on about competing reasons why SES may affect health, there is little recognition that the so-called reverse causation from health to economic status may be pretty fundamental as well. Even if the direction of causation is that SES mainly affects health, what dimensions of SES actually matter—the financial aspects such as income or wealth or non- financial dimensions like education? Finally, is there a life course component to the health gradient so that we may be mislead in trying to answer these questions by only looking at people of a certain age—say those past 50. This paper, which is divided into four sections, provides my answers to these questions. The first section examines the issue of reverse causation or whether a new health event has a significant impact on four dimensions of SES—out-of-pocket medical expenses, labor supply, household income, and household wealth. The next section switches the perspective by asking whether the so-called direct causation from SES to health really matters all that much. If the answer is yes and it will be, a sub-theme in this section concerns which dimensions of SES—income, wealth, or education—matter for individual health. Since the answer to that question turns out to be education, Section 3 deals with the very much more difficult issue of why education matters so much. The evidence in these first three sections relies on data for people above age 50. In the final section of the paper, I test the robustness of my answers to these basic questions of the meaning of the SES-health gradient using data that span the entire life-course. JEL: J Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpla:0505018&r=all 433. Electricity Bill Act'2003 P Nair (ICFAI University) Deepak Kumar (ICFAI University Press) The Electricity Bill, 2003 passed by Parliament promises to usher in sweeping changes. The Bill seeks to provide a legal framework for enabling reforms and restructuring of the power sector. It simplifies administrative procedures by integrating the Indian Electricity Act, 1910, the Electricity (Supply) Act, 1948 and the Electricity Regulatory Commissions Act, 1998 into a single Act. The Bill has become an Act now after the Presidential assent and notification by the Ministry of Power on June 10, 2003. The Electricity Act, 2003 is based on the principles of promoting competition, protecting consumers’ interests and providing power to all. The Act has freed the generation of electricity from licensing, and has liberalized the captive power policy. Moreover, it provides open access to transmission and distribution network, and has laidout the stringent penalties for power theft. The new legislation can usher in paradigm shifts in the power sector. Competition will be possible not just in generation,but also in every facet of the sector including distribution. Moreover, private sector investment will be facilitated by greater transparency that will come about. The Bill is a consolidation of the laws relating to generation, transmission, distribution, trading and use of electricity and facilitates all measures that are conducive for the development of the sector. Keywords: Electricity , Bill , JEL: K Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwple:0505005&r=all 434. The Indo-US Summit Partnership in Building India’s Infrastructure—A Summary of Events P Nair (ICFAI University) Deepak Kumar (ICFAI University Press) Keywords: Infrastructure , India -US JEL: K Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwple:0505006&r=all 435. Analysis of Power Sector in India: A Structural Perspective Deepak Kumar (ICFAI University Press) J P Singh (BHU) Niranjan Swain (ICFAI) The inhibitors to growth in power sector were many—small and big but the main roadblock in the growth path was Government Policy, which made it difficult or rather impossible for a private player to enter. This further aggravated the problem that Indian entrepreneurs didn’t have enough knowledge and experience in developing power projects. To worsen the scenario, the SEBs and other Government Agencies became financially weak to propel any future expansion or growth in the sector. Electricity Act, 2003 was a major step in solving the above underlying problems of the power sector. A whole new system was evolved where private players were invited to be an active participant. The system demanded financial, political and other infrastructural growth—with major requirement in roads and communication. Some of the bold steps taken in the Act were moving generation and distribution out of ‘License Raj’ regime, opening access to national grid and demolishing the ‘Single Buyer’ model. The failure of the huge federal structure and the changing global scenario have forced Government to think of ways to revive this fundamental infrastructure sector. Two of the avenues that government can count on for future growth of this sector is “Midgets or Small Power Plants” and “CDM—Clean Development Mechanism” . Keywords: Power Sector , India JEL: K Date: 2005-05-20 URL: http://d.repec.org/n?u=RePEc:wpa:wuwple:0505008&r=all 436. Consumption Dynamics under Information Processing Constraints Yulei Luo (Princeton University) This paper studies consumption dynamics and welfare losses under information processing constraints (it is also called 'rational inattention' (RI) in Sims (2003)) in the permanent income hypothesis (PIH) model. It is shown that incorporating RI into the otherwise standard PIH model can substantially affect the intertemporal allocation of consumption, which makes the models better explain the data in some important aspects. Specifically, the main contributions of this paper are: first, we propose a tractable analytical approach to solve the multivariate state PIH model with RI and show that consumption reacts to the shocks to wealth gradually and with delay; second, after aggregating, we show that incorporating RI into the model can help resolve the excess sensitivity puzzle and the excess smoothness in; third, we also find that the utility costs due to RI are very trivial, which can rationalize a key assumption in Sims (2003) that consumers only devote low channel capacity in observing and processing information; fourth, we investigate which factors determine optimal channel capacity endogeneously; finally, we compare our RI model with the standard internal habit formation model and the Campbell-Mankiw's rule-of-thumb model. JEL: C61 D81 Date: 2005-05-13 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpma:0505011&r=all 437. The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains Daniel Levy (Bar-Ilan University) Mark Bergen (University of Minnesota) Shantanu Dutta (University of Sourthern California) Robert Venable (Robert W. Baird, Co.) We use store-level data to document the exact process of changing prices and to directly measure menu costs at five multi- store supermarket chains. We show that changing prices in these establishments is a complex process, requiring dozens of steps and a nontrivial amount of resources. The menu costs average $105, 887/year per store, comprising 0.70% of revenues, 35.2% of net margins, and $0.52/price change. These menu costs may be forming a barrier to price changes. Specifically, (1) a supermarket chain facing higher menu costs (due to item pricing laws which require a separate price tag on each item) changes prices 2 1/2 times less frequently than the other four chains; (2) within this chain, the prices of products exempt from the law are changed over three times more frequently than the products subject to the law. Keywords: Menu Cost, Posted Prices, Multiproduct Retailer, Price Rigidity, Sticky Prices, Rigid Prices, Cost of Price Adjustment, New Keynesian Economics, Time Dependent Pricing JEL: E12 E31 E50 G13 G14 L11 L15 L16 M21 M31 Q11 Q13 Date: 2005-05-15 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpma:0505012&r=all 438. Beyond the Cost of Price Adjustment: Investments in Pricing Capital Mark Zbaracki (The Wharton) Mark Bergen (University of Minnesota) Shantanu Dutta (University of Sourthern California) Daniel Levy (Bar-Ilan University) Mark Ritson (London Business School) The literature on costs of price adjustment has long argued that changing prices is a complex and costly process. In fact, some authors have suggested that we should think of firms’ price- setting activities as “producing” prices, similar to the way firms use production processes to produce goods and services. In this paper we explore one natural extension of this view, that besides observing costs of price adjustment, we should also expect to see firm-level investments in capital expenditures into these “pricing” production processes. We coin the term “pricing capital” for these investments, and suggest that they can improve the efficiency of the “pricing production” activities by both reducing the costs of adjusting prices, and improving the effectiveness of price adjustments in future periods. Using two types of data sources, we find compelling evidence of the existence as well as the importance of pricing capital in firms. The existence of firm-level “pricing capital” has the potential of fundamentally altering the way we think about pricing and price adjustment in many areas of economics. It suggests looking toward the “pricing capital” to decipher the likely degree and causes of price rigidity and its variation across price setters, markets, and industries. Moreover, “pricing capital” introduces a new, higher-level, pricing decision made by individual firms. Decisions to invest in pricing capital compete with traditional capital investment decisions that have long been studied in economics, such as capital investments in plant, equipment, and R&D. Furthermore, since pricing capital is a choice variable, it implies that costs of price adjustment often used in models of price rigidity are endogenous. As such, pricing capital offers new insights into the micro-foundations of the costs of price adjustment. The most provocative implication of the new theory of pricing, however, is that the allocative efficiency of the price system itself may be determined endogenously by individual price setters who choose whether and how much to invest in pricing capital. Keywords: Cost of Price Adjustment, Menu Cost, Managerial and Customer Costs of Price Adjustment, Pricing Capital, Pricing Production Process (PPP), Price Rigidity, Sticky Prices, Rigid Prices, Microfoundations of the Costs of Price Adjustment, Allocative Efficiency, Price System, Endogenous Price Adjustment Cost JEL: E31 D21 D4 L11 L16 L22 Date: 2005-05-15 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpma:0505013&r=all 439. The Three Capitals of Pricing – Human, Systems and Social Capital Mark Ritson (London Business School) Mark Zbaracki (The Wharton) Shantanu Dutta (University of Sourthern California) Daniel Levy (Bar-Ilan University) Mark Bergen (University of Minnesota) In this paper we explore the possibility, heretofore unexplored in the marketing literature, that firms “invest funds” in their pricing processes. This builds on some of the recent economic work on the costs of price adjustment. To do this we undertook a two-year, cross- disciplinary, ethnographic study on the nature of investments made by senior managers to enhance the effectiveness of the pricing processes within their firms. We discovered at least three distinct types of investments that managers at these firms made to price more effectively, which we term as the three capitals of pricing - human capital, systems capital and social capital. Our evidence suggests that pricing is really about managing both prices and investments in the pricing capital used to set and adjust those prices. The existence of these three forms of pricing capital provides a new perspective on pricing strategy, suggesting that firms compete on prices simultaneously in three different ways within their organizations. First, they compete on whether to invest in pricing capital versus or other areas of capital investment, such as plant, equipment, etc. Second, they decide what form of pricing capital to invest in – human, systems or social. Third, they set and adjust prices constrained by the existing pricing capital they have in place at the time of their pricing actions. We discuss the implications of these three forms of pricing capital and these new perspectives on pricing for the marketing, economics and strategy literature. Keywords: Cost of Price Adjustment, Menu Cost, Managerial and Customer Costs of Price Adjustment, Pricing Capital, Pricing Production Process (PPP), Price Rigidity, Sticky Prices, Rigid Prices, Microfoundations of the Costs of Price Adjustment, Allocative Efficiency, Price System, Endogenous Price Adjustment Cost, Pricing, Human Capital, Systems Capital, Social Capital, Resource Based View of the Firm, Ethnography JEL: A22 C90 C91 C92 E40 E41 E42 Date: 2005-05-15 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpma:0505014&r=all 440. The Price Puzzle and Indeterminacy Efrem Castelnuovo (University of Padua) Paolo Surico (Bank of England & University of Bari) This paper re-examines the empirical evidence on the price puzzle and proposes a new theoretical interpretation. Using structural VARs that consistently with the theory include the output gap as a measure of real activity, we find that the positive response of price to a monetary policy shock is historically limited to the sub-samples associated with a ‘weak’ central bank response to inflation. These sub-samples correspond to the pre-Volcker period for the US and the pre- inflation targeting regime for the UK. Then, using a micro- founded New-Keynesian model of the US economy, this paper shows that a structural VAR on the simulated data is capable of reproducing the price puzzle only when monetary policy is ‘passive’ and hence multiple equilibria arise. The omission of a variable capturing the high persistence of inflation expectations under indeterminacy is found to bias the impulse response functions of the structural VAR relative to the structural model. This bias appears to account for most of the price puzzle observed in actual data. Keywords: Price puzzle, New-Keynesian Model, Taylor principle, Indeterminacy, SVAR. JEL: C32 C52 E52 Date: 2005-05-16 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpma:0505015&r=all 441. Development Power and Its Power Model: The Analytic Approach for Continuous Motivity of Economic Growth Feng Dai (Zhengzhou Information Engineering University) Ying Wang (Zhengzhou Information Engineering University) Zifu Qin (Zhengzhou Information Engineering University) Based on the Partial Distribution [F. Dai, 2001] and the theory of Development Power [F. Dai, 2004], this paper discusses the power model of relation between development power (DP) and productivity. The power model also supports the hypothesis [F. Dai, 2005] that there are three kinds of energy states in economy, i.e. normal state, strong state and super state, and DP is the continuous motivity to economic growth. By the power model of DP, we could interpret in analytic way that the diffusion of DP and the diversifications of economic development also might be occurred after the super state. Finally, the conclusions in this paper are researched in the empirical way, the results indicate the power model is better than the exponential model of DP in many cases, and we could get the inimitable outcomes in describing the macroeconomic process by the power model of DP. Keywords: Development Power (DP), Partial Distribution, power model, macroeconomic analysis JEL: E Date: 2005-05-16 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpma:0505016&r=all 442. Comment on 'Chaotic Monetary Dynamics with Confidence' William Barnett (University of Kansas) This paper is a comment on Serletis and Shintani, 'Chaotic Monetary Dynamics with Confidence,' which is to appear in a special issue of the Journal of Macroeconomics on chaos in economics. The Editor of the special issue invited comments from discussants of all papers in the special issue, with the comments to be published in the special issue. This invited comment is to appear in the special issue along with Serletis and Shintani's paper. Keywords: chaos bifurcation Divisia money aggregation JEL: C14 C22 E37 E32 Date: 2005-05-20 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpma:0505017&r=all 443. How the gold standard functioned in Portugal: an analysis of some macroeconomic aspects Antonio Portugal Duarte (Faculty of Economics - University of Coimbra & Group for Monetary & Financial Studies - GEMF) Joao Sousa Andrade (Faculty of Economics - University of Coimbra & Group for Monetary & Financial Studies - GEMF) This paper studies the Gold Standard in Portugal. It was the first country in Europe to join Great Britain in 1854. The principle of free gold convertibility was abandoned in 1891. For the purposes of a macroeconomic study, we also extended the analysis up to 1913. Our study points out the mistake of comparing different systems with the same indicators. Examination of demand, supply and monetary shocks in the context of a VAR model confirm the idea that the principles of classical economics are appropriate for the Gold Standard in Portugal. Keywords: Gold Standard, Macroeconomic Stability, Convertibility, Portugal, VAR and Unit Roots JEL: B10 C32 E42 E58 F31 F33 N23 Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpmh:0505002&r=all 444. Social ties within school classes –- the roles of gender, ethnicity, and having older siblings Adriaan R. Soetevent (University of Amsterdam) Peter Kooreman (University of Groningen) In this paper we identify the lines along which social ties between high school teenagers are primarily formed. To this end, we introduce interaction weights between pupils in the same school class that are a function of exogenous individual background characteristics, like gender, ethnicity, and having older siblings. The resulting model with endogenous interactions and school specific fixed effects is estimated using data from the Dutch National School Youth Survey (NSYS), a survey in which in principle all students in a sampled class are interviewed. By combining the 1992, 1996, 1999 and 2001 NSYS data, we are able identify trends in social relationships of teenagers. We find that the roles that gender and ethnicity play in how teenagers interact varies strongly across different types of behavior. For example, going out shows strong within-ethnicity interactions, while expenditures on cell phone and on clothing exhibit mainly between-girls interactions. Having older siblings has a minor effect on within school class social interactions. There is weak evidence of decreased ethnic segregation within school classes during the decade considered. Keywords: teenage behavior, social interactions, segregation, time use, expenditures JEL: D12 Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpmi:0505004&r=all 445. Power Law Tails in the Italian Personal Income Distribution Fabio Clementi (Department of Public Economics, University of Rome 'La Sapienza') Mauro Gallegati (Department of Economics, Universita Politecnica delle Marche) We investigate the shape of the Italian personal income distribution using microdata from the Survey on Household Income and Wealth, made publicly available by the Bank of Italy for the years 1977-2002. We find that the upper tail of the distribution is consistent with a Pareto power-law type distribution, while the rest follows a two-parameter lognormal distribution. The results of our analysis show a shift of the distribution and a change of the indexes specifying it over time. As regards the first issue, we test the hypothesis that the evolution of both gross domestic product and personal income is governed by similar mechanisms, pointing to the existence of correlation between these quantities. The fluctuations of the shape of income distribution are instead quantified by establishing some links with the business cycle phases experienced by the Italian economy over the years covered by our dataset. Keywords: Personal income; Pareto law; Lognormal distribution; Income growth rate; Business cycle JEL: D1 D2 D3 D4 Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpmi:0505005&r=all 446. Pareto's Law of Income Distribution: Evidence for Grermany, the United Kingdom, and the United States Fabio Clementi (Department of Public Economics, University of Rome 'La Sapienza') Mauro Gallegati (Department of Economics, Universita Politecnica delle Marche) We analyze three sets of income data: the US Panel Study of Income Dynamics (PSID), the British Household Panel Survey (BHPS), and the German Socio-Economic Panel (GSOEP). It is shown that the empirical income distribution is consistent with a two- parameter lognormal function for the low-middle income group ( 97\%-99\% of the population), and with a Pareto or power law function for the high income group (1\%- 3\% of the population). This mixture of two qualitatively different analytical distributions seems stable over the years covered by our data sets, although their parameters significantly change in time. It is also found that the probability density of income growth rates almost has the form of an exponential function. Keywords: Personal income; Lognormal distribution; Pareto's law; Income growth rate JEL: D1 D2 D3 D4 Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpmi:0505006&r=all 447. Capital Stock Depreciation, Tax Rules, and Composition of Aggregate Investment Daniel Levy (Bar-Ilan University) I estimate time varying aggregate capital stock depreciation rates for the post-war U.S. economy using capital-investment evolution equation along with the data on the annual net capital stock and corresponding quarterly gross investment series. I estimate depreciation rates of consumer durable goods, producer durable goods, and nonresidential business structures. The estimation results suggest that the three depreciation rate series have been behaving very differently over time. In particular, I find that over time the implied depreciation rate of nonresidential business structures has remained stable, the implied depreciation rate of consumer durable goods has been steadily declining, while the implied depreciation rate of producer durable goods has been increasing, especially during the last 10–15 years. These findings are interpreted in terms of the changes in the composition of the aggregate nonresidential business fixed and producer durable good capital stocks. In addition, I discuss the implications of the changes introduced during the 1980s in rules and regulations governing a depreciation accounting for tax purposes, and their effect on the estimates of capital depreciation rates derived in this paper. The main argument the paper makes is that technological progress may be leading to accelerated depreciation of producer durable goods and equipment since newer and more advanced technology makes older equipment obsolete. The empirical evidence reported in this paper supports this argument. Keywords: Time Varying Depreciation Rate, Capital Stock, Consumer Durable Goods, Producer Durable Goods, Business Structures, Technological Progress JEL: E22 C82 Date: 2005-05-15 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpot:0505007&r=all 448. Estimates of the Aggregate Quarterly Capital Stock for the Post- War U.S. Economy Daniel Levy (Bar-Ilan University) Haiwei Chen (Westminster College) We construct quarterly aggregate gross and net capital stock series for the post-war U.S. economy using annual capital stock, capital depreciation, and capital discard figures along with quarterly investment series. We construct nominal and real measures of all three categories in the aggregate capital stock: consumer durable goods, producer durable goods, and business structures. In constructing the nominal series we take into account the changes in capital goods’ prices. The series are constructed using four different methods. Using time- and frequency domain techniques, we compare the constructed series and characterize their short-run, business cycle, and long-run cyclical properties. We find that the constructed series exhibit very different cyclical and shock persistence dynamics. Practical implications are discussed. Keywords: Capital Stock, Consumer Durable Goods, Producer Durable Goods, Business Structures, Capital Depreciation and Discard, Capital Goods Prices, Frequency Domain, Cyclical Behavior, Linear Interpolation, Numerical Iteration JEL: E22 C82 E32 Date: 2005-05-15 Date: 2005-05-16 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpot:0505008&r=all 449. Genuine Dissaving and Optimal Growth Simone Valente (ETH Zurich - Institute of Economic Research) Green accounting theories have shown that negative genuine savings at some point in time imply unsustainability. Consequently, recent studies advocate the use of the genuine savings measure for empirical testing: a negative index implies sustainability be rejected. This criterion is not forward-looking: positive current genuine savings do not rule out ’genuine dissaving’ in the future. This paper derives a one-to-one relationship between the sign of longrun genuine savings and the limiting sustainability condition in the capital-resource model: if the sum of the rates of resource regeneration and augmentation exceeds (falls short of) the discount rate, long-run genuine savings are positive (negative). Testing this limiting condition allows to reveal whether current genuine savings are delivering a false message. Keywords: Genuine Saving, Green Accounting, Renewable Resources, Sustainable Development, Technological Progress. JEL: O47 D90 Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpot:0505009&r=all 450. Liquidity Constraint and Household Portfolio in Japan Norihiro KASUGA (Faculty of Economics, Nagasaki University) Katsumi Matsuura (Department of Economics, Hiroshima University) In this paper, we analyze the financial asset selection behavior of Japanese households. Especially, we focus on whether or not liquidity constraint decreases the amount of a householdfs risky assets. To investigate this, we first empirically examine which types of household suffer from liquidity constraint. Then, based on the probability obtained from this first stage, we use the Tobit model to estimate the risky asset ratio (=risky asset/total financial asset), and examine the relationship between liquidity constraint and household portfolio. Our results show that the more households suffer from liquidity constraint, the less the households hold risky assets. This is consistent with previous empirical research on Italian households, implemented by Guiso et al.(1996). Our research suggests that the Japanese post-war financial system, which has provided money primarily to the industrial sector rather than the household sector (e.g. consumer loans), might lower the amount of risky assets held by Japanese households. Keywords: risky asset ratio, liquidity constraint, household portfolio, saving rate JEL: D12 E2 Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpot:0505010&r=all 451. Nutritional Aspects of Poverty among Casual Labourer Households in Shillong (India) SK Mishra (Department of Economics, North Eastern Hill University, Shillong India) JW Lyngskor (Department of Economics, North Eastern Hill University, Shillong India) In this paper we report our findings as to the extent of poverty among the casual labourers of Shillong, the capital city of Meghalaya, India. Two views of poverty have been considered; first at the per capita (per month) income level and the second at the nutritional level. Nutritional level has been defined in terms of calorie, carbohydrate, protein and fat intakes of the casual labourer households. We find that income elasticites of calorie availability and carbohydrate availability move close to each other. Income elasticities of protein are always higher than carbohydrate (and calorie). Elasticities of fat are initially larger than others, but with an increase in per capita income they slide down others. At small income levels relatively high- fat-low-protein articles are consumed while with an increase in income relatively low- fat-high-protein articles are consumed. The contribution of carbohydrates to calorie intake decreases with an increase in per capita income. Our findings do not corroborate Behrman and Deolalikar (1987), who showed that the income elasticity of calorie intake was quite low, and not significantly different from zero in statistical terms. If the income elasticity were close to zero, its implication is that improvement in the income of the poor will have little impact on the extent of malnutrition. Then the developmental policies intended to improve nutrition will have to use policy instruments which attack malnutrition directly rather than relying simply on raising income. But that is not the case as shown by our study. However, our findings support Strauss and Thomas (1990), Ravallion (1990). Bouis and Haddad (1992), and Subramanian and Deaton (1996), who find that income elasticities of energy component of food, although small, are yet significantly different from and much larger than zero. Subramanian and Deaton ( 1996), based on the National Sample Survey data, estimated the expenditure elasticity of calorie intake to lie in the range of 0. 3-0.5 and in any case statistically different from zero. In our study, we find that income elasticities of calorie availability ( to casual labourers in Shillong) are close to 0.4, which corroborate Subramanian and Deaton. We also find that not only calories, but other nutritional ingredients of food such as carbohydrate, protein and fat availabilities (intakes) also have income elasticities significantly larger than zero and, therefore, raising income to Rs. 800 (per capita per month) or so we may overcome the mal-nutrition problem among the poor. Keywords: Poverty, Shillong, Meghalaya, India, Nutritional intakes, carbohydrate, protein, fat, calorie, income elasticity, malnutrition JEL: I12 I31 I32 Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpot:0505011&r=all 452. Poverty, Dietary Imbalance and Sickness among Casual Labourer Households in Shillong (India) SK Mishra (Dept. of Economics, NEHU, Shillong) JW Lyngskor (Department of Economics, North Eastern Hill University, Shillong India) The objective of this study is to bring out the case of poverty, undernourishment and health conditions of casual labourers in Shillong, the capital city of Meghalaya, India. A large section of the unskilled labourers work as casual workers. Casual labourers are those workers who work for a very short duration ( for a few hours, a day or at most a few days under a single contract) for an employer, and who are (usually) paid for their labour either at the end of the contract or at the end of a day. Casual workers are often unskilled or semi-skilled; they usually do not own any other factors of production (such as land, capital or implements needed to perform the job) except their labour power. Casual labourers earn their livelihood by selling their labour power and often regenerate their labour power by 'investing', so to say, a very large part of their wage earning on food articles. Thus, in case of a casual labourer, the dichotomy of consumption and investment collapses into a single category. Due to low level of consumption, casual labourers are often poor performers - their efficiency is low. The market forces often impose on them the vicious circle of inefficiency - low wage rates - deficient consumption - inefficiency. The study is based on the primary data collected from 125 casual labourer households with 688 family members. Overall, it is found that casual labourer households in Shillong are poor; their per capita income (per month) is Rs. 516.6 on an average and they spend a meager amount (Rs. 252.9 only or 48.95 percent of income) on food articles yielding energy. Some 38.4 percent of these households are below poverty line (fixed at Rs. 396 per capita per month). Poorer households have larger family size. Consequently, some 46. 5 percent persons in the sample households are below poverty line. The mean energy intake of these households is slightly less than 1600 calories per person per day. The average energy intake among the BPL households is a meager 1307.66 calories per person per day. Only 19 households have calorie intake larger than 2000, and of them only 14 get more than 2200 calories. Of 125 households, the majority (93) have no milk consumption. Overall, carbohydrates supply 76.5 percent of the energy intake and the contribution of proteins to the calorie intake is ranging between 9.55 and 10.64 percent across different income and food habit groups with the mean value of 10.16 percent. Irrespective of the per capita income group that they belong to, the casual labourer households, without a single exception, eat diets deficient in proteins far below the prescribed norms. Of the total number of 688 persons in 125 households, 72 (10.47 percent) are found chronically sick. Among the 72 sick persons, 56 (77.78 percent) are in the BPL income group, 34 (47.22 percent) are children in 0- 14 years age group, and 23 (31.94 percent) are adult women. Among the sick, the overwhelming majority indicates nutritional deficiency. Children and women are hit most hard by the dietary imbalance in food. Logit analysis on incidence of sickness suggests that the probability of a person being sick is very high 0.5 or more) in the extremely poor households. The probability of finding a sick person at about per capita income of Rs. 600 per month is 0.10 and it declines sharply with an increase in income. Keywords: Poverty, malnutrition, nutrition, deficiency disease, Shillong, Meghalaya, India, primary data, calorie, carbohydrate, protein, fat, logit analysis JEL: I12 I31 I32 Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpot:0505012&r=all 453. Educated Preferences: Explaining Attitudes Toward Immigration in Europe Jens Hainmueller (Harvard University) Michael J. Hiscox (Harvard University) Recent studies of individual attitudes toward immigration emphasize concerns about labor market competition as a potent source of anti- immigrant sentiment, in particular among less- educated or less-skilled citizens who fear being forced to compete for jobs with low-skilled immigrants willing to work for much lower wages. We examine new data on attitudes toward immigration available from the 2003 European Social Survey. In contrast to predictions based upon conventional arguments about labor market competition, which anticipate that individuals will oppose immigration of workers with similar skills to their own, but support immigration of workers with different skill levels, we find that people with higher levels of education and occupational skills are more likely to favor immigration regardless of the skill attributes of the immigrants in question. Across Europe, higher education and higher skills mean more support for all types of immigrants. These relationships are almost identical among individuals in the labor force (i.e., those competing for jobs) and those not in the labor force. Contrary to the conventional wisdom, then, the connection between the education or skill levels of individuals and views about immigration appears to have very little, if anything, to do with fears about labor market competition. This finding is consistent with extensive economic research showing that the income and employment effects of immigration in European economies are actually very small. We find that a large component of the effect of education on attitudes toward immigrants can be accounted for by differences among individuals in cultural values and beliefs. More educated respondents are significantly less racist and place greater value on cultural diversity; they are also more likely to believe that immigration generates benefits for the host economy as a whole. Together, these factors account for around 65% of the estimated effect of education on support for immigration. Keywords: Immigration Preferences, Immigration Attitudes, Trade Preferences, Factor-Proportion Model, Education Effects, Skill Effects JEL: F22 J61 P16 Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpot:0505013&r=all 454. Estate Taxes and Charitable Bequests: Evidence from Two Tax Regimes David Joulfaian (Government of the United States, Department of the Treasury) Much of the literature on the effects of estate taxation on charitable bequests has relied on cross sectional data, reflecting the uniqueness of death. Few have explored longitudinal data to exploit exogenous variations in tax regimes. The latter, however, continue to be susceptible to omitted variable as well as measurement error biases attributable to changes in the treatment of spousal bequests and frequent changes in tax regimes. This paper explores the effects of the estate tax on charitable bequests using administrative data from two tax regimes where earlier biases are minimized. The deductibility of charitable bequests is found to have significant implications for giving. However, the effects of estate tax repeal are much smaller. These findings are sensitive to expectations of the tax regime in effect at time of death. Keywords: Bequests, Taxes, Charitable Giving JEL: D19 H24 H31 Date: 2005-05-14 URL: http://d.repec.org/n?u=RePEc:wpa:wuwppe:0505004&r=all 455. The Role of Endogenous Skill Choice in an Aging Economy Christian Jaag (IFF-HSG) This chapter analyzes the effects of an aging population on individual skill choices and the production structure by means of a dynamic general equilibrium model with overlapping generations and probabilistic aging. The model allows for capital-skill complementarity, which strongly affects the outcomes in a small open economy setting vs. a closed (or equivalently worldwide) economy. In an open economy with a fixed real interest rate, the necessary increase in the contribution rate discourages labor supply and depresses GDP. With a variable real interest rate, however, capital usage increases and - by the capital- skill complementarity - also employment of high skilled labor. The mobilization of highly productive labor gives a boost to GDP. Hence, the often cited adverse effects of aging are mitigated and can be overcome when taking into account a more realistic production structure. Keywords: Aging, Human Capital, Demographics, Education, Capital- Skill Complementarity, Life-Cycle JEL: D58 D91 H55 J24 Date: 2005-05-17 URL: http://d.repec.org/n?u=RePEc:wpa:wuwppe:0505005&r=all 456. Is Lebanon’s Debt Sustainable? A Closer Look at Lebanon’s Debt Dynamics Samer Saab (International Monetary Fund) 1. Lebanon has one of the highest public debt stocks (relative to GDP) in the world, currently at over 185 percent of 2003 GDP. Economic policy continues to be dominated by chronic imbalances in government finances which have seen the budget deficit average over 17 percent of GDP over the past five years. 2. Recent data suggests that there are tentative signs of a certain reversal in direction of the overall debt-to-GDP ratio in Lebanon. The most recent IMF projections notes that lower financing costs and higher revenue and spending restraint have improved debt dynamics. However, in the absence of additional fiscal adjustment, and in an environment of rising interest rates, debt dynamics would again become unstable in the medium-to-long term. 3. Progress with many of the fiscal measures the government agreed to undertake in the context of Paris II has been poor, partly as a result of political bickering and the easing of the immediate pressure on the budget, sapping the reform programme of its urgency. Recent political developments ( the de facto sacking of Prime Minister Hariri after a bitter power struggle with President Lahoud and the passing of a critical resolution at the UN Security Council condemning the handling of the issue) only add to the uncertainty that the reform train will pick up steam anytime soon . 4. IMF previous medium-term projections of debt-to- GDP ratios for Lebanon in the Article IV context have been systematically over-optimistic and off-target. Projections done in 1994, 1996, 1997, 1999, and 2001 projected a conversion point in the debt-to-GDP curve within 2 to 3 years of the projection date. None of these conversion points materialized. The aim of this paper is to offer an alternative medium- term projection of the debt ratio, while trying to refine the judgment on variables and assumptions that enter into the projection. More specifically, more emphasis will be given to political and social factors that often through Lebanon’s history hindered or dwarfed any reform momentum. Consistent with a Debt Sustainability Analysis framework, a set of assumptions on public debt, primary balance, revenue and expenditure structure and trend, gross financing, and interest rate and growth dynamics will be formulated. The analysis will be complemented with a look at a reduced set of vulnerability indicators for public sector debt sustainability. Keywords: Debt sustainability, Lebanon, Political economy JEL: D6 D7 H Date: 2005-05-17 URL: http://d.repec.org/n?u=RePEc:wpa:wuwppe:0505006&r=all 457. Judgment aggregation in general logics Franz Dietrich (University of Konstanz, Germany) Within social choice theory, the new field of judgment aggregation aims to merge many individual sets of judgments on logically interconnected propositions into a single collective set of judgments on these propositions. Commonly, judgment aggregation is studied using standard propositional logic, with a limited expressive power and a problematic representation of conditional statements ('if P then Q') as material conditionals. In this methodological paper, I present a generalised model, in which most realistic decision problems can be represented. The model is not restricted to a particular logic but is open to several logics, including standard propositional logic, predicate calculi, modal logics and conditional logics. To illustrate the model, I prove an impossibility theorem, which generalises earlier results. Keywords: judgement aggregation, discursive dilemma, modelling methodology, formal logics, impossibility theorem JEL: D6 D7 H Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwppe:0505007&r=all 458. Intergenerational Transfers, Lifetime Welfare and Resource Preservation Simone Valente (ETH Zurich - Institute of Economic Research) This paper studies the welfare properties of distortionary transfers in a life-cycle growth model where natural capital is private property. The main result is that, under credible pre- commitment, each newborn generation prefers positive taxes- subsidies to laissez-faire conditions when the resource share in production is sufficiently high. By increasing the degree of natural preservation, resource-saving policies raise welfare of all generations except that of the first resource owner, who suffers a deadweight loss due to taxation of the initial stock. If the first owner renounces part of his claims over initial endowments, all successive generations support resource-saving policies for purely selfish reasons. Keywords: Distortionary Taxation, Intergenerational Transfers, Overlapping Generations, Renewable Resources, Sustainability. JEL: H30 Q20 Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwppe:0505008&r=all 459. Incumbency Effects in German and British Elections: A Quasi- Experimental Approach Jens Hainmueller (Harvard University) Holger Lutz Kern (Cornell University) Following the recent turn towards quasi-experimental approaches in the US literature on the incumbency advantage (Lee, 2001; Lee, forthcoming), we employ a Regression Discontinuity Design (RDD) to identify the causal effects of party incumbency in British and German post-World War II elections. The RDD framework exploits the randomized variation in incumbency status that occurs when a district race is close. Based on the assumption that parties do not exert perfect control over their observed vote shares, incumbents that barely won a race should be similar in their distribution of observed and unobserved confounders to non- incumbents that barely lost. This provides us with a naturally occurring counterfactual exploitable for causal inference under a weaker set of assumptions than conventional regression designs commonly used in the incumbency literature. In both British and German federal elections, we find that party incumbency has a signifcant positive impact on vote shares and the probability of winning in marginal districts, the sub- population of interest for which incumbency advantage is likely to make a difference. This stands in contrast to previous more ambiguous findings. Keywords: incumbency advantage, quasi-experiment, Germany, Great Britain, elections, causal inference JEL: D6 D7 H Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwppe:0505009&r=all 460. Does Geography Play a Role in Domestic Takeovers? Theory and Finnish Micro-level Evidence Petri Bockerman (Labour Institute for Economic Research) Eero Lehto (Labour Institute for Economic Research) This paper explores domestic mergers and acquisitions (M&As) from the regional perspective. The Finnish firm-level evidence reveals that geographical closeness matters a lot for M&As within a single country. Thus, a great number of domestic M&As occur within narrowly defined regions. Interestingly, domestic M&As reinforce the core-periphery dimension. The results from matched firm-level data show that the strong ability by an acquiring company to monitor the target (measured by the knowledge embodied in human capital) is able to support M&As that occur across distant locations. Keywords: mergers, acquisitions, monitoring, agglomeration JEL: G34 R12 Date: 2005-05-13 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpur:0505002&r=all 461. Towards the Development of a Definitive Infrastructure Policy in P Nair (ICFAI University) Deepak Kumar (ICFAI University Press) The Government of AP , India , needs to rethink its Infrastructure strategy in the light of current state priority. Unless these are in line with state priorities, the strategies will not work and will perpetually be at cross purposes. The current direction taken by the state appears to point towards the development of rural infrastructure,such as irrigation facility and linkages. The paper attempts to assess the need for these linkages and evolve broad policies to be implemented by these strategies. Keywords: Infrastructure Policy JEL: R Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpur:0505005&r=all 462. Mumbai Urban Transport Project—Development and Challenges P Nair (ICFAI University) Deepak Kumar (ICFAI University Press) The Suburban Railway system in Mumbai is perhaps the most complex, densely loaded and intensively utilized system in the world. Due to the magnitude of the project and the need for continuous assistance and involvement of the Government of Maharashtra, a separate corporation, the Mumbai Railway Vikas Corporation (MRVC) was set up jointly between the Ministry of Railways and the Government of Maharashtra. MRVC has made substantial improvements in the Mumbai suburban railway system since its inception, but it has to go a long way. This paper discusses the developments and the challenges of MRVC and a brief description of suburban systems of different Indian metro cities has also been presented. Keywords: Urban Transport Project JEL: R Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpur:0505006&r=all 463. Vallarpadam Container Terminal Project: Enabling Port Infrastructure N Janardhan Rao (ICFAI University Press) Deepak Kumar (ICFAI University Press) Vallarpadam Container Terminal Project (VCTP) will be a unique one in infrastructure to boost the containerization in India. The establishment of VCTP will help in bringing larger ships to India and therefore will decrease the dependence on foreign ports. Keywords: Vallarpadam Container Terminal Project JEL: R Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpur:0505007&r=all 464. Online Data Management System for On-farm Trials Deepak Kumar (ICFAI University Press) AP Maurya (Baak of Maharasthra , India) The online data management system for on-farm trials (WebFarm) is a prototype software to customize recording of on-farm trials under the Indian Agricultural Statistics Research Institute, New Delhi. The prototype WebFarm is a three-layered design. Client Side is the Interface Layer, implemented in HTML and JavaScript. Server Side is the Application Layer connecting the client side layer and the database and is implemented in Java Server Pages. Database layer is implemented using Microsoft Access 2000. The developed WebFarm can be implemented as a network-based system with a server, so that information is available online. WebFarm runs on any node of the Internet through a browser. Security features are provided in such a way that only the administrator can access the database. It has facilities for browsing and searching the information and online help for smooth navigation. There is a provision for interacting with the System Administrator through e-mail. This will reduce the delay in receiving the data. Further, IASRI can distribute the work, like—checking of schedules, coding of data and converting data to electronic form to various centers conducting on-farm trials. As a result, they can be directly used for statistical analysis. Keywords: Online Data Management System JEL: R Date: 2005-05-20 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpur:0505008&r=all 465. The relationship between stock prices, house prices and consumption in OECD Ludwig, Alexander (Mannheim Research Institute for the Economics of Aging (MEA) and Sonderforschungsbereich 504) Slok, Torsten (OECD) This paper analyzes the relationship between stock prices, house prices and consumption using data for 16 OECD countries. The panel data analysis suggests that the long-run responsiveness of consumption to permanent changes in stock prices is higher for countries with a market-based financial system than for countries with a bank-based financial system. Splitting the sample into the 1980s and 1990s further shows an increased sensitivity in the 1990's of consumption to permanent changes in stock prices for both countries with bank-based financial systems as well as countries with market-based financial systems. The relationship between changes in consumption and changes in house prices is positive for the second sample period across all specifications and financial systems. Date: 2004-03-04 URL: http://d.repec.org/n?u=RePEc:xrs:sfbmaa:04-12&r=all 466. Bank Capital, Liquidity and Systemic Risk Eichberger, Jurgen (Sonderforschungsbereich 504) Summer, Martin (Oesterreichische Nationalbank) We analyze the impact of capital adequacy regulation on bank insolvency and aggregate investment. We develop a model of the banking system that is characterized by the interaction of many heterogeneous banks with the real sector, interbank credit relations as a consequence of bank liquidity management and an insolvency mechanism. This allows us to study the impact of capital adequacy regulation on systemic risk. In particular we can analyze the impact of regulation on contagious defaults arising from mutual credit relations. We show that the impact of capital adequacy on systemic stability is ambiguous and that systemic risk might actually increase as a consequence of imposing capital constraints on banks. Furthermore we analyze the indirect consequences of capital adequacy regulation that are transmitted to the real economy by their impact on equilibrium interbank rates and thus the opportunity costs of liquidity within the banking system. Date: 2004-11-24 URL: http://d.repec.org/n?u=RePEc:xrs:sfbmaa:04-45&r=all 467. Preference for Diversification with Similarity Considerations Guerdjikova, Ani (Cornell University) The paper studies the connection between the form of the similarity function of a decision-maker and his willingness to diversify. It is shown that preference for diversification obtain for both high and low aspiration levels if the similarity function is convex in the Euclidean distance. However, a decision- maker with a concave similarity function and relatively high aspiration level will fail to choose diversified acts, even if his utility function is concave. Date: 2004-11-24 URL: http://d.repec.org/n?u=RePEc:xrs:sfbmaa:04-48&r=all 468. Allocating Resources within a Big City School District: New York City after Campaign for Fiscal Equity v. New York Ross Rubenstein (Center for Policy Research, Maxwell School of Citizenship and Public Affairs, Syracuse University, Syracuse, NY) Lawrence Miller (Maxwell School of Citizenship and Public Affairs, Syracuse University, Syracuse, NY) In this brief we take a closer look at the mechanisms used to distribute resources across public schools. We first present what we know about the current distribution of educational resources within New York City and other large city districts. Then we discuss current efforts to promote greater equity in the distribution of resources and improve student performance. We conclude with lessons and policy implications for New York State as it implements the CFE decision in New York City. These findings also apply toother large districts in the state, such as Buffalo, Rochester, Syracuse, and Albany. Our focus in this brief is on vertical equity--ensuring that schools serving students with different levels of need receive appropriately different levels of resources--rather than adequacy. But the two concepts are closely related. If we ensure that students with a variety of needs have ample resources to achieve agreed upon educational goals, we will achieve both school-level adequacy and vertical equity. Keywords: intradistrict resource allocation; interdistrict resource allocation; vertical equity; across-school disparities; school-based funding; weighted student funding. JEL: I22 I28 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:max:cprpbr:31&r=all 469. The Y2K scare: causes, costs and cures John Quiggin (Department of Economics, University of Queensland) The worldwide scare over the 'Y2K bug result in the expenditure of hundreds of billions of dollars on Y2K compliance and conversion policies. Most of this can be seen, in retrospect, to have been unproductive or, at least, misdirected. In this paper, the technological and institutional factors leading to the adoption of these policies are considered, along with suggestions as to how such policy failures could be avoided in future. Keywords: Y2K, moral panics JEL: H89 Date: 2004-02 URL: http://d.repec.org/n?u=RePEc:rsm:pubpol:p04_1&r=all 470. Economic evaluation of the proposed Free Trade Agreement between Australia and the United States John Quiggin (Department of Economics, University of Queensland) This paper is a critical evaluation of the proposed Free Trade Agreement between Australia and the United States Keywords: FTA, PBS JEL: F13 H40 Date: 2004-04 URL: http://d.repec.org/n?u=RePEc:rsm:pubpol:p04_2&r=all 471. Asset Price Instability and Policy Responses: The Legacy of Liberalisation Stephen Bell (University of Queensland) John Quiggin (Department of Economics, University of Queensland) The debate about the dynamics and potential policy responses to asset inflation has intensified in recent years. Some analysts, notably Borio and Lowe, have called for 'subtle' changes to existing monetary targeting frameworks to try to deal with the problems of asset inflation and have attempted to developed indicators of financial vulnerability to aid this process. In contrast, this paper argues that the uncertainties involved in understanding financial market developments and their potential impact on the real economy are likely to remain too high to embolden policy makers. The political and institutional risks associated with policy errors are also significant. The fundamental premise that a liberalised financial system is based on 'efficient' market allocation cannot be overlooked. The corollary is that any serious attempt to stabilize financial market outcomes must involve at least a partial reversal of deregulation. JEL: G18 Date: 2004-06 URL: http://d.repec.org/n?u=RePEc:rsm:pubpol:p04_3&r=all 472. Local Economic Development: Theory and the Ontario Experience Almos T. Tassonyi (Ontario Ministry of Finance, Strategic Policy Unit, Property Tax Policy Branch) Subnational governments are faced with increased pressure to initiate policies to further local economic development. This paper traces the changes in the theory and practice of local development initiatives in North America. The paper uses Ontario and its municipal sector as a case study of the transition from an emphasis on physical accommodation to the current emphasis on broader amenities. Keywords: Regional development policy, subsidies JEL: R11 H25 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:ttp:itpwps:0511&r=all 473. An Economic Anatomy of Culture: Attitudes and Behaviour in Inter- and Intra-National Ultimatum Game Experiments Swee Hoon Chuah (Nottingham University Business School) Robert Hoffmann (Nottingham University Business School) Martin Jones (Department of Economic Studies, University of Dundee) Geoffrey Williams (Nottingham University Business School) The processes by which culture influences economic variables need to be exposed in order for the concept to be a useful tool for prediction and policy formulation. We investigate the attitudes and experimental behaviour of Malaysian and UK subjects to shed light on the nature of culture and the mechanisms by which it aects economic behaviour. Attitudinal dimensions of culture which significantly influence experimental game play are identified. This approach is offered towards a method to suitably quantify culture for economic analysis. Keywords: culture, ultimatum game, attitudes, world values survey, experiments JEL: C72 C91 D64 Date: 2005-05-14 URL: http://d.repec.org/n?u=RePEc:nub:occpap:13&r=all 474. Evaluating the Role of Brown vs. Board of Education in School Equalization, Desegregation, and the Income of African Americans Orley Ashenfelter (Department of Economics, Princeton University) William J. Collins (Department of Economics, Vanderbilt University) Albert Yoon (School of Law, Northwestern University) In this paper we study the long-term labor market implications of school resource equalization before Brown and school desegregation after Brown. For cohorts born in the South in the 1920s and 1930s, we find that racial disparities in measurable school characteristics had a substantial influence on black males? earnings and educational attainment measured in 1970, albeit one that was smaller in the later cohorts. When we examine the income of male workers in 1990, we find that southern-born blacks who finished their schooling just before effective desegregation occurred in the South fared poorly compared to southern-born blacks who followed behind them in school by just a few years. Keywords: Discrimination, schooling, South, NAACP JEL: J7 I28 N32 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:van:wpaper:0515&r=all 475. Changing wage structure and education in Vietnam 1993-1998: The roles of demand Amy Y.C. Liu This paper examines the changes in relative earnings of workers with different education levels during Vietnam’s transition. It is found that females enjoy a higher return to education than males do in 1998, reversing the situation observed five years ago. A large fall in the returns to vocational training for males, amid the rapid growth in the representation of better-educated females in the private sector where education is valued higher could be responsible for what have occurred. A direct assessment of the role of demand using a simple demand and supply framework developed by Katz-Murphy (1992) is undertaken. The result suggests an increase in the relative demand for better-educated workers appears to play an important role in explaining the earnings differentials between workers of different education groups. Education reform to better suit the needs of the post- reform emerging market, on-the-job training for workers, as well as equal access to education are some policy options that hold thekey to reduce wage inequality between different education groups. JEL: I21 J31 P2 Date: 2005 URL: http://d.repec.org/n?u=RePEc:idc:wpaper:idec05-4&r=all 476. Sunk Investments Lead to Unpredictable Prices George Mailath (Department of Economics, University of Pennsylvania) Andrew Postlewaite (Department of Economics, University of Pennsylvania) Larry Samuelson (Department of Economics, University of Wisconsin-Madison) We study transactions that require investments before trading in a competitive market, when forward contracts fixing the transaction price are absent. We show that, despite the market being perfectly competitive and subject to arbitrarily little uncertainty, the inability to jointly determine investment levels and prices may make it impossible for buyers and sellers to predict the prices at which they will trade, leading to inefficient levels of investment and trade. Keywords: General equilibrium, sunspots, incomplete markets JEL: D50 D51 D91 Date: 2003-06-03 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-014&r=all 477. How good is the Exponential Function discounting Formula? An Experimental Study Uri Benzion (The Technion-Israel Institute of Technology and Department of Economics, Ben-Gurion University) Yochanan Shachmurove (Department of Economics, University of Pennsylvania and City College of the City University of New York) Joseph Yagil (The Graduate School of Business, Haifa University and Columbia University) This paper estimates the degree of the exponential-function misvaluation, its variation with given product price level, and its expected growth rate. The paper examines whether other mathematical functions, such as linear, quadratic and cubic functions, conform to the discounting and compounding processes of individual decision makers. Using subjects familiar with the exponential function discounting formula, this study finds that individuals undervalue the compound interest discounting formula given by the exponential function and overvalue the simple interest discounting formula given by the linear function. These findings can be attributed to the overreaction, overconfidence, mental accounting and narrow-framing behaviors discussed in psychology. Keywords: Exponential Discount Function; Experimental Subjective Discount Rates; Linear, Quadratic and Cubic Functions; overreaction, overconfidence, mental accounting and narrow-framing behavior; Economic Psychology. JEL: D90 G00 Date: 2003-06-01 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-015&r=all 478. Imperfect Monitoring and Impermanent Reputations Martin W. Cripps (Olin School of Business, Washington University in St. Louis) George J. Mailath (Department of Economics, University of Pennsylvania) Larry Samuelson (Department of Economics, University of Wisconsin-Madison) We study the long-run sustainability of reputations in games with imperfect public monitoring. It is impossible to maintain a permanent reputation for playing a strategy that does not play an equilibrium of the game without uncertainty about types. Thus, a player cannot indefinitely sustain a reputation for non-credible behavior in the presence of imperfect monitoring. Keywords: Reputation, Imperfect Monitoring, Repeated Games JEL: C70 C78 Date: 2002-07-30 Date: 2003-05-30 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-016&r=all 479. Financial Markets of the Middle East and North Africa: The Past and Present Yochanan Shachmurove (Department of Economics, University of Pennsylvania, and City College of the City University of New York) The recent political developments in the Middle East have prompted increased scrutiny of the economies of the nations lying in this region. Over the past few months, the financial markets of Middle East and North Africa (MENA) have been affected by the speculations that existed before the war in Iraq as well as its subsequent repercussions. Factors such as lagging domestic, political reforms, government interference, and inflexible monetary and fiscal policies remain obstacles to privatization, globalization, and foreign investment in MENA economies. As the economies enter the post-war recovery phase, reform of financial markets seems necessary to accelerate economic growth. Keywords: Middle East and North African (MENA) Emerging Financial Markets; Bahrain, Egypt, Israel, Jordan, Kuwait, Lebanon, Morocco, Oman, Tunisia, Turkey; Foreign Direct Investment; Globalization and Growth; Iraq War; Gulf War; Macroeconomic and Financial Indicators JEL: E0 E1 F3 F4 G1 N2 O4 O5 Date: 2003-06-01 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-017&r=all 480. Business Strategy, Human Capital, and Managerial Incentives George J. Mailath (Department of Economics, University of Pennsylvania) Volker Nocke (Department of Economics, University of Pennsylvania) Andrew Postlewaite (Department of Economics, University of Pennsylvania) We posit that the value of a manager’s human capital depends on the firm’s business strategy. The resulting interaction between business strategy and managerial incentives affects the organization of business activities, both the internal organization of the firm and the determination of firm boundaries. We illustrate the impact of this interaction on firm boundaries in a dynamic agency model. There may be disadvantages in merging two firms even when such a merger allows the internalization of externalities between the two firms. Merging, by making unprofitable certain decisions, increases the cost of inducing managerial effort. This incentive cost is a natural consequence of the manager’s business-strategy -specific human capital. Keywords: Human capital, managerial incentives, firm boundaries, firm organization JEL: D23 L14 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-018&r=all 481. A Gap for Me: Entrepreneurs and Entry Volker Nocke (Department of Economics, University of Pennsylvania) We present a theory of entrepreneurial entry and exit decisions. Knowing their own managerial talent, entrepreneurs decide which market to enter, where markets differ in size. We obtain a striking sorting result: each entrant in a large market is more efficient than any entrepreneur in a smaller market. The result obtains since competition is endogenously more intense in larger markets. The sorting and price competition effects imply that the number of entrants (and hence product variety) may actually be smaller in larger markets. In the stochastic dynamic extension of the model, we show that the churning rate of entrepreneurs is higher in larger markets. Keywords: entrepreneurship, entry, exit, firm turnover, industry dynamics JEL: L11 L13 M13 Date: 2003-06-30 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-019&r=all 482. South Africa’s International Competitiveness: A Product Level Analysis Mitchell Kellman (Department of Economics, The City College of City University of New York) Trevor Roxo (Department of Business Management, University of Transkei, South Africa) Yochanan Shachmurove (Department of Economics, University of Pennsylvania) As South Africa emerges from its Apartheid period, the evolution of its international trade is vital to the growth of the economy. This paper evaluates South Africa’s trade performance in three essential markets, namely United States, Europe and Japan. It examines the nation’s flexibility in the face of fluctuations in relative exchange rates in its markets. Using the Constant Market Share (CMS) model of international trade and the “Rising Stars” model, the particular areas of industrial structure in which South Africa is positioned to succeed are identified on the market as well as the product levels. Keywords: Apartheid; South Africa; Southern African Development Community (SADC); United States, Japan, European Union; International Competitiveness; Entrepreneurship; Exchange Rate Responsiveness; Constant Market Share ( CMS) model JEL: F1 F4 Date: 2003-07-01 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-020&r=all 483. Contemporaneous Perfect Epsilon-Equilibria George Mailath (Department of Economics, University of Pennsylvania) Andrew Postlewaite (Department of Economics, University of Pennsylvania) Larry Samuelson (Department of Economics, University of Wisconsin-Madison) We examine contemporaneous perfect epsilon-equilibria, in which a player’s actions after every history, evaluated at the point of deviation from the equilibrium, must be within epsilon of a best response. This concept implies, but is stronger than, Radner’s ex ante perfect epsilon-equilibrium. A strategy profile is a contemporaneous perfect epsilon-equilibrium of a game if it is a subgame perfect equilibrium in a perturbed game with nearly the same payoffs, with the converse holding for pure equilibria. Keywords: Epsilon equilibrium, ex ante payoff, multistage game, subgame perfect equilibrium JEL: C70 C72 C73 Date: 2003-08-15 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-021&r=all 484. Using a Social Experiment to Validate a Dynamic Behavioral Model of Child Schooling and Fertility: Assessing the Impact of a School Subsidy Program in Mexico Petra Todd (Department of Economics, University of Pennsylvania) Kenneth I. Wolpin (Department of Economics, University of Pennsylvania) This paper studies the performance of a methodology that can be used to evaluate the impact of new policies that radically depart from existing ones. It uses data gathered from a randomized schooling subsidy experiment in Mexico (i) to estimate and validate a dynamic behavioral model of parental decisions about fertility and child schooling, (ii) to forecast long-term program impacts that extend beyond the life of the experiment, and (iii) to assess the impact of a variety of counterfactual policies. The behavioral model is estimated using data on families in the randomized-out control group and in the treatment group prior to the experiment, both of which did not receive any subsidy. Child wages provide a valuable source of variation in the data for identifying subsidy effects. Using the estimated model, we predict the effects of school subsidies according to the schedule that was implemented under the Mexican PROGRESA program Keywords: schooling, child labor, fertility, structural estimation, social experiments JEL: J1 J2 Date: 2002-04-01 Date: 2003-09-01 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-022&r=all 485. The Macroeconomy and the Yield Curve: A Nonstructural Analysis Francis X. Diebold (Department of Economics, University of Pennsylvania and NBER) Glenn D. Rudebusch (Economic Research, Federal Reserve Bank of San Francisco) S. Boragan Aruoba (Department of Economics, University of Maryland) We estimate a model with latent factors that summarize the yield curve (namely, level, slope, and curvature) as well as observable macroeconomic variables (real activity, inflation, and the stance of monetary policy). Our goal is to provide a characterization of the dynamic interactions between the macroeconomy and the yield curve. We find strong evidence of the effects of macro variables on future movements in the yield curve and much weaker evidence for a reverse influence. We also relate our results to a traditional macroeconomic approach based on the expectations hypothesis. Keywords: Yield curve, term structure, interest rates, macroeconomic fundamentals, factor model, statespace model JEL: G1 E4 C5 Date: 2003-10-21 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-024&r=all 486. Some Like it Smooth, and Some Like it Rough: Untangling Continuous and Jump Components in Measuring, Modeling, and Forecasting Asset Return Volatility Torben G. Andersen (Kellogg School of Management, Northwestern University and NBER) Tim Bollerslev (Department of Economics, Duke University and NBER) Francis X. Diebold (Department of Economics, University of Pennsylvania and NBER) A rapidly growing literature has documented important improvements in volatility measurement and forecasting performance through the use of realized volatilities constructed from high frequency returns coupled with relatively simple reduced-form time series modeling procedures. Building on recent theoretical results from Barndorff-Nielsen and Shephard (2003c,d) for related bi-power variation measures involving the sum of high- frequency absolute returns, the present paper provides a practical framework for non-parametrically measuring the jump component in realized volatility measurements. Exploiting these ideas for a decade of high-frequency five-minute returns for the DM/$ exchange rate, the S&P500 market index, and the 30-year U.S. Treasury bond yield, we find the jump component of the price process to be distinctly less persistent than the continuous sample path component. Explicitly including the jump measure as an additional explanatory variable in an easy-to implement reduced form model for realized volatility results in highly significant jump coefficient estimates at the daily, weekly and quarterly forecast horizons. Keywords: Continuous-time methods; jumps; quadratic variation; realized volatility; bi-power variation; high-frequency data; volatility forecasting; HAR-RV model JEL: C1 G1 Date: 2003-02-01 Date: 2003-09-01 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-025&r=all 487. Should Courts Always Enforce What Contracting Parties Write? Luca Anderlini (Department of Economics, Georgetown University) Leonardo Felli (London School of Economics, Department of Economics, CESifo (Center for Economic Studies and Ifo Institute for Economic Research), Centre for Economic Policy Research (CEPR)) Andrew Postlewaite (Department of Economics, University of Pennsylvania) We find an economic rationale for the common sense answer to the question in our title — courts should not always enforce what the contracting parties write. We describe and analyze a contractual environment that allows a role for an active court. An active court can improve on the outcome that the parties would achieve without it. The institutional role of the court is to maximize the parties’ welfare under a veil of ignorance. We study a buyer-seller model with asymmetric information and ex- ante investments, in which some contingencies cannot be contracted on. The court must decide when to uphold a contract and when to void it. The parties know their private information at the time of contracting, and this drives a wedge between ex- ante and interim-efficient contracts. In particular, some types pool in equilibrium. By voiding some contracts that the pooling types would like the court to enforce, the court is able to induce them to separate, and hence to improve ex-ante welfare. Keywords: Optimal Courts, Informational Externalities, Ex-ante Welfare JEL: C79 D74 D89 K40 L14 Date: 2003-11-01 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-026&r=all 488. Core Convergence with Asymmetric Information Richard McLean (Department of Economics, Rutgers University) Andrew Postlewaite (Department of Economics, University of Pennsylvania) We analyze the ex ante incentive compatible core for replicated private information economies. We show that any allocation in the core when the economy is replicated sufficiently often is approximately Walrasian for the associated Arrow-Debreu economy. Keywords: Core, Asymmetric Information, Incentive Compatibility, Exchange Economy JEL: C71 D82 D51 Date: 2003-11-01 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-027&r=all 489. Crime, Inequality, and Unemployment, Second Version Kenneth Burdett (Department of Economics, University of Pennsylvania) Ricardo Lagos (New York University) Randall Wright (Department of Economics, University of Pennsylvania) There is much discussion of the relationships between crime, inequality, and unemployment. We construct a model where all three are endogenous. We find that introducing crime into otherwise standard models of labor markets has several interesting implications. For example, it can lead to wage inequality among homogeneous workers. Also, it can generate multiple equilibria in natural but previously unexplored ways; hence two identical neighborhoods can end up with different levels of crime, inequality, and unemployment. We discuss the effects of anti-crime policies like changing jail sentences, as well as more traditional labor market policies like changing unemployment insurance. Keywords: Crime, Inequality, Unemployment, Search JEL: D83 J64 Date: 2002-05-03 Date: 2003-09-01 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-029&r=all 490. An On-the-Job Search Model of Crime, Inequality, and Unemployment Kenneth Burdett (Department of Economics, University of Pennsylvania) Ricardo Lagos (Department of Economics, New York University) Randall Wright (Department of Economics, University of Pennsylvania) We extend simple search-theoretic models of crime, unemployment and inequality to incorporate on-the-job search. This is valuable because, although the simple models can be used to illustrate some important points concerning the economics of crime, on-the- job search models are more relevant empirically as well as more interesting in terms of the types of equilibria they generate. We characterize crime decisions, unemployment, and the equilibrium wage distribution. We use quantitative methods to illustrate key results, including a multiplicity of equilibria with different unemployment and crime rates, and to discuss the effects of changes in labor market and anti-crime policies. Keywords: Crime, Inequality, Unemployment, Search, Turnov JEL: D83 J31 Date: 2003-09-04 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-030&r=all 491. Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium Guillaume Rocheteau (Department of Research,Federal Reserve Bank of Cleveland) Randall Wright (Department of Economics, University of Pennsylvania) We compare three pricing mechanisms for monetary economies: bargaining (search equilibrium); price taking (competitive equilibrium); and price posting (competitive search equilibrium). We do this in a framework that, in addition to considering different mechanisms, extends existing work on the microfoundations of money by allowing a general matching technology and endogenous entry. We study how the nature of equilibrium and effects of policy depend on the mechanism. Under bargaining, trades and entry are both inefficient, and inflation implies a first-order welfare loss. Under price taking, the Friedman rule solves the first inefficiency but not the second, and inflation can actually improve welfare. Under posting, the Friedman rule implies first best, and inflation reduces welfare but the effect is second order. Keywords: Money, Search JEL: D83 E31 Date: 2003-09-01 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-031&r=all 492. Inflation and Welfare in Models with Trading Frictions Guillaume Rocheteau (Department of Research,Federal Reserve Bank of Cleveland) Randall Wright (Department of Economics, University of Pennsylvania) We study the effects of inflation in models with various trading frictions. The framework is related to recent search-based monetary theory, in that trade takes place periodically in centralized and decentralized markets, but we consider three alternative mechanisms for price formation: bargaining, price taking, and posting. Both the value of money per transaction and market composition are endogenous, allowing us to characterize intensive and extensive margin effects. In the calibrated model, under posting the cost of inflation is similar to previous estimates, around 1% of consumption. Under bargaining, it is considerably bigger, between 3% and 5%. Under price taking, the cost of inflation depends on parameters, but tends to be between the bargaining and posting models. In some cases, moderate inflation may increase output or welfare. Keywords: Money, Search, Frictions, Inflation JEL: D83 E31 Date: 2003-11-12 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-032&r=all 493. Do Vertical Mergers Facilitate Upstream Collusion? Volker Nocke (Department of Economics, University of Pennsylvania) Lucy White (Finance, Harvard Business School) In this paper we investigate the impact of vertical mergers on upstream firms’ ability to sustain collusion. We show in a number of models that the net effect of vertical integration is to facilitate collusion. Several effects arise. When upstream offers are secret, vertical mergers facilitate collusion through the operation of an outlets effect: Cheating unintegrated firms can no longer profitably sell to the downstream affiliates of their integrated rivals. Vertical integration also facilitates collusion through a reaction effect: the vertically integrated firm’s ‘contract’ with its downstream affiliate can be more flexible and thus allows a swifter reaction in punishing defectors. Offsetting these two effects is a possible punishment effect which arises if the integrated structure is able to make more profits in the punishment phase than a disintegrated structure. Keywords: vertical mergers, collusion JEL: L13 L42 Date: 2003-11-17 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-033&r=all 494. TRIPS, externalities, trade agreements, hostages Wilfred J. Ethier (Department of Economics, University of Pennsylvania) This paper makes several basic points relating to the economics of Intellectual Property Rights, the TRIPS Agreement, and the World Trade Organization dispute settlement process. Keywords: TRIPS, externalities, trade agreements, hostages JEL: F10 F13 Date: 2003-11-21 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-034&r=all 495. Trade Agreements Based on Political Externalities, Second Version Wilfred J. Ethier (Department of Economics, University of Pennsylvania) During the past half century, multilateral trade liberalization has reduced tariffs to historically low levels. The Received Theory of multilateral trade agreements, based solely on terms-of- trade externalities between national governments, offers an explanation that has become the conventional wisdom among international trade theorists. But this explanation displays two puzzles that render it inconsistent with actual trade policy and actual trade agreements. This paper introduces inter-governmental political externalities into a model with terms-of-trade externalities. It delivers results consistent with what we actually observe, and thus resolves the puzzles, if and only if political externalities dominate terms-of-trade externalities. Keywords: Political externalities, trade agreements, reciprocity, the Received Theory, the Terms-of-Trade Puzzle, the Anti-Trade-Bias Puzzle JEL: F02 F13 Date: 2002-11-23 Date: 2003-11-30 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-035&r=all 496. The Effect of Adolescent Experience on Labor Market Outcomes: The Case of Height Nicola Persico (Department of Economics, University of Pennsylvania) Andrew Postlewaite (Department of Economics, University of Pennsylvania) Dan Silverman (Department of Economics, University of Michigan, Ann Arbor) Taller workers receive a wage premium, and the disparity in wages is similar in magnitude to the race and gender gaps. We exploit the variation in an individual’s height over time to explore the ways in which height affects wages. Specifically, we show that for white males the effect of adult height is essentially eliminated when adolescent height is taken into account. We find that participation in high school sports and clubs, and to a lesser extent schooling, are channels through which teen height affects adult wages. The benefits of being a taller teen seem to accrue equally across income classes and also across broad occupation categories, suggesting that the benefits of teen height do not result from occupational sorting. Because height is heritable and because tall adults tend to have children with each other, the benefits of teen height tend to be perpetuated across generations. Finally, we use our estimates of the teen height premium to perform a simple calculation of the monetary benefits of a newly approved treatment for children that increases height. Keywords: Confidence, Optimism, Behavioral Economics JEL: D81 D83 Date: 2003-12-03 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-036&r=all 497. The Effects of Constitutions on Coalition Governments in Parliamentary Democracies Daniel Diermeier (Kellogg School of Management,Northwestern University) Hulya Eraslan (Finance, Wharton School, University of Pennsylvania) Antonio Merlo (Department of Economics, University of Pennsylvania) In this article we present an overview of our recent research on the effects of constitutions on coalition governments in parliamentary democracies. Our approach is based on the solution and estimation of a multilateral bargaining model which we use to investigate the consequences of constitutional features of parliamentary democracy for the formation and stability of coalition governments. Keywords: Political Stability, Coalition Governments, Constitutional Design JEL: D72 H19 C73 Date: 2003-12-01 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-037&r=all 498. The political economy of job protection and income redistribution. Bruno Amable Donatella Gatti This paper presents a model allowing to analyze voting, welfare institutions and economic performance. We consider a political economy framework with three classes of agents: entrepreneurs, employed workers and unemployed workers. Agents vote on alternative institutional options: the degree of labour market flexibility and the intensity of redistribution. We show that the welfare state configuration depends on the nature of the political system - majoritarian, coalition, twoparty. Because internationalization reduces the possibility for national government to e.ectively tax profits, the existing political coalition is fragilized by the process of globalization. The model generates results concerning the macroeconomic equilibrium employment level. Hence we can assess the effects of internationalization on macroeconomic performance. The impact of internalization depends on the nature of the political system ( majoritarian versus coalition government) and on the institutional configuration (positive flexibility versus positive redistribution). Date: 2005 URL: http://d.repec.org/n?u=RePEc:pse:psecon:2005-12&r=all 499. Relative Economic Decline and Unrealized Demographic Opportunity in the Philippines Christopher Edmonds (Economics Study Area, East-West Center) Manabu Fujimura (Economics Department, Aoyama Gakuin University, Tokyo) The paper examines the long-run relationship between demographic and macroeconomic development trends in the Philippines, and compares trends observed in that country to trends in eight regional neighbors in East and Southeast Asia. The Philippines stands out from these countries in that available data suggests the country has completed its demographic transition to a much lesser extent than comparison countries. Analysis of trends shows that the Philippine economy has lost ground to the country's neighbors over the past 50 years, and that its unfulfilled demographic transition has played a key role in explaining the country's relative economic decline. The paper reviews established economic theory and a few simple counter-factual simulations to explain and support this conclusion. The authors also consider the relationship between demographic trends and associated economic developments, and the political situation in the country. Despite discouraging findings regarding the Philippines' relative economic decline, the paper notes the country's more favorable performance in social development vis-a- vis its neighbors. The paper ends on an optimistic note, pointing to: recent economic reforms, the unrealized potential of a 'demographic dividend,' rising demand and use of modern family planning among Philippine households, and the favorable long run outlook for Philippine Overseas Contract Workers, as causes for optimism regarding future demographic change and the country's economic prospects. JEL: J13 J18 N35 O15 D13 E66 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:ewc:wpaper:wp77&r=all 500. SINGAPORE'S BEVERIDGE CURVE: A Comparative Study of the Unemployment and Vacancy Relationship for Selected East Asian Countries Edward Teo (Ministry of Manpower, Singapore) Shandre M. Thangavelu (Department of Economics, National University of Singapore) Elizabeth Quah (Ministry of Manpower, Singapore) This paper explores the relationship between unemployment (U) and job vacancies (V) in the Singapore labour market. Empirical analysis using the framework of the UV Curve (also known as the Beveridge Curve) indicates that Singapore’s labour market appears to have improved in its matching efficiency as compared to other East-Asian countries. However, detailed study of Beveridge Curve for the Singapore economy reveals that it has become more inelastic since the Asian crisis, thereby suggesting that the labour market is less responsive in recent years. This might suggest the possibility that employers are now more cautious and selective in their employment decisions. URL: http://d.repec.org/n?u=RePEc:sca:scaewp:0508&r=all 501. A Strong Invariance Principle for Associated Random Fields R.M. Balan (Department of Mathematics and Statistics, University of Ottawa,) (Department of Mathematics, Nanjing University) In this paper we generalize Yu’s strong invariance principle for associated sequences to the multi-parameter case, under the assumption that the covariance coefficient u(n) decays exponentially as n -> (infinity symbol). The main tools will be the Berkes-Morrow multi-parameter blocking technique, the Csorgo-Revesz quantile transform method and the Bulinski rate of convergence in the CLT for associated random fields. Keywords: strong invariance principle; associated random fields; blocking technique; quantile transform. JEL: C10 C40 Date: 2003-10-14 URL: http://d.repec.org/n?u=RePEc:pqs:wpaper:0172005&r=all 502. Path properties of (N;d)-Gaussian random fields Yong-Kab Choi (Department of Mathematics, Gyeongsang National University and School of Mathematics and Statistics, Carleton University) In this paper, we investigate several sample path properties on the increments of (N,d)-Gaussian random fields and also we obtain the law of iterated logarithm for the Gaussian random field, via estimating upper and lower bounds of large deviation probabilities on suprema of the (N,d)- Gaussian random fields. Keywords: Gaussian random field, quasi-increasing, regularly varying function, large deviation probability. JEL: C10 C40 Date: 2004-04-01 URL: http://d.repec.org/n?u=RePEc:pqs:wpaper:0192005&r=all 503. Has human capital accounted for regional economic growth in italy? a panel analysis on the 1980-2001 period. Eliana Baici (SEMEQ Department - Faculty of Economics - University of Eastern Piedmont) Giorgia Casalone (SEMEQ Department - Faculty of Economics - University of Eastern Piedmont) Since Solow’s (1957) contribution, human capital has a central role in the debate on economic growth as a leading long period development factor. If from a theoretical point of view the role of human capital on economic growth both directly and throughout its use in R&D activities is fully accepted, from an empirical perspective the results are much more controversial, strictly depending on the quality of data. A recent analysis by Aghion and Cohen (2004) put in evidence that high-level human capital has a positive effect on economic performance only if a country is close to the technological frontier: countries that are far from this frontier, specialised in traditional sectors, can growth, almost in the short run, even exploiting medium-level human capital. This analysis lead to consider the link between human capital and growth with a greater detail, trying to disclose the effect of different human capitals in a country, such as Italy, traditionally oriented toward a low/medium technology production. Using, beyond the usual proxies of human capital, some measures of its quality and of its interrelation with R&D sector, we would like to give a new contribution to the analysis of regional growth in Italy in the period 1980-2001. The panel approach, here adopted, allows us to take account of the temporal variability and to check for omitted variable specific for regions and persistent over time. Keywords: human capital, labour productivity, regional growth, panel estimations JEL: C23 J24 O40 R11 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:upo:upopwp:101&r=all