ALPHABETICAL LIST (FIRST NAMED AUTHOR) OF PAPERS BEING PRESENTED AT THE CONFERENCE   A-G  

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(Last updated 8th March 2002)

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Author(s)

Institute(s)

Title of Paper

Abstract

Aidt, Toke; Jayasri Dutta

University of Cambridge; University of Brimingham

Policy compromises: corruption and regulation in a dynamic democracy

This paper evaluates the extent of regulation in a democracy with political corruption. Elected politicians can restrict entry of firms in exchange for bribes from entrepreneurs. Full liberalization implies free entry and allocative efficiency and is supported by a majority of voters. Voters reelect politicians based on observed performance. We study Markov-perfect equilibria of the resulting game, and demonstrate that voters agree to tolerate some corruption and inefficient regulation in political equilibrium. Efficient policies can be promoted by productivity growth. Political corruption entails excessive stabilization of aggregate fluctuations.

Keywords: Corruption, performance voting, economic growth.

JEL classification: D72; K42; O41.

Aikman, David Llewelyn

University of Warwick

Financial Stress and Liquidity Traps

Motivated by the bubble-collapse cycle witnessed in Japanese asset prices since the late 1980s, this paper examines how a financial crisis influences the power of monetary policy. We construct a simple macroeconomic model based on the microfoundations of Holmstrom and Tirole (1997) to analyse the effect of three types of financial stress on the nature of the equilibrium: a credit crunch; an adverse collateral shock; and a monitoring cost shock. Perhaps surprisingly, we find that the power of monetary policy is, if anything, heightened in a credit crunch; higher monitoring costs however work in the opposite direction, suggesting a need for more aggressive stabilisation policy in the face of financial shocks.

JEL classification: E0;E2;E3;E4;E5

Keywords: Liquidity trap; Japan; credit constraints; banking

Alessie, Rob; Stefan Hochguertel; Arthur van Soest

Free University Amsterdam; European University Institute; Tilburg University

Ownership of Stocks and Mutual Funds: A Panel Data Analysis

In many industrial countries, ownership rates of risky assets have risen substantially over the past decade. This trend has potentially wide–ranging implications for the intertemporal and cross–sectional allocation of risk, and for the macro economy, establishing the need for understanding ownership dynamics at the micro level. This paper offers one of the first such analyses using representative panel survey data. We focus on the two main types of risky financial assets, mutual funds and individual stocks. We extend existing univariate dynamic binary choice models to the multivariate case and take account of interactions between the two types of assets. The models are estimated on data from the 1993–1998 waves of the Dutch CentER Savings Survey. We find that both unobserved heterogeneity and state dependence play a large role for both types of assets. Most of the positive relation between ownership of mutual funds in one period and ownership of individual stocks in the next period or vice versa, is explained by unobserved heterogeneity: if we account for correlation between the household specific effects in the two binary choice equations, we find a negative effect of lagged ownership of stocks on the ownership of mutual funds. These findings can be explained by adjustment costs that make it optimal to stick to one type of asset.

JEL Codes: C33, C35, D12, D91.

Key Words: household portfolio choice, panel data.

al-Nowaihi, Ali; Livio Stracca

University of Leicester

Non-standard central bank loss functions, skewed risks, and the certainty equivalence principle

This paper sets out to investigate the role of additive uncertainty under plausible non-standard central bank loss functions over future inflation. Building on a substantial body of evidence in the economic psychology literature, this paper postulates (i) period-by-period loss functions that are non-convex, i.e. displaying diminishing or non-increasing sensitivity to losses, and (ii) non-linear weighing of probabilities, hence departing from the expected utility paradigm. In addition, a simple and plausible form of non-time separability of the central bank's inter-temporal loss function is also considered in the analysis. The main conclusion of the study is that if the additive uncertainty is caused by a non-Normal distributed additive shock, for instance if the probability distribution of the shock is skewed, then with these departures from the quadratic function the principle of certainty equivalence does not hold. Thus, it appears that with additive uncertainty of the non-Normal type the assumption of a quadratic loss function for the central banker may not be as innocuous as it is commonly regarded. Conversely, non-time separability of the central bank inter-temporal loss function as studied in this paper does not determine per se any departure from certainty equivalence. Moreover, no evidence is found of an optimal policy gradualism as a response to increased additive uncertainty even under the non-standard loss functions considered in this paper.

Keywords: Monetary policy, non-quadratic loss functions, economic psychology, certainty equivalence

JEL codes: E52, E58

Amable, Bruno; Jean-Bernard Chatelain; Kirsten RALF

The American University of Paris

Credit Rationing, Profit Accumulation and Economic Growth

This paper studies how credit rationing affects endogenous growth when capital and debt are related to the firm's internal net worth, taken as collateral. The accumulation of firm's net worth determines the growth rate of capital and the growth rate of the economy. The relation between growth and interest rate is then negative without requiring convex adjustment costs on investment.

JEL classification number: O16.

Keywords: Endogenous Growth, Investment, Credit Rationing.

Anderberg, Dan

University of Stirling

An Equilibrium Analysis of Marriage, Divorce and Risk-Sharing

This paper considers marriage, divorce and reciprocity-based cooperation by couples in the form of sharing of earnings-risk. While risk sharing is one benefit to marriage it is also limited by divorce risk. With search in the marriage market there may be multiple equilibria differing not only in family formation and dissolution patterns but also in the role of marriage in providing informal insurance. Publicly provided earnings-insurance, despite potential equilibrium multiplicity, is shown to affect family formation and financial cooperation monotonically.

Keywords: Marriage, Divorce, Risk-Sharing

JEL Classification: J12, D11, D83, H30

Andrianova, Svetlana

Loughborough University

On Corruption and Institutions in Decentralised Economies

This paper studies opportunistic behaviour in a model of decentralised economic exchange and inadequate institutional framework of formal contract enforcement. It is shown that (i) when the number of cheating traders is sufficiently large, inadequate institutions result in a loss of decentralised trading contracts which suggests yet another explanation of the output fall puzzle of the recent transition experience; (ii) while being necessary for the attainment of a Pareto optimal outcome, an adequate institutional framework may not be sufficient if traders perceive it as inadequate; and (iii) in the presence of adequate institutional framework, even if enforcers are corrupt contractual breach is deterred when enforcers enjoy strong bargaining power.

Keywords: Formal contract enforcement, corruption, transition economies.

JEL: C70, D82, K42

Arabsheibani, G. Reza; Alan Marin; Jonathan Wadsworth

University of Wales Aberystwyth; London School of Economics; Royal Hollway and CEP

Gays' Pay in the UK

This paper attempts, for the first time for the UK, to analyse the earnings of homosexuals and test for the possible existence of sexual orientation discrimination. Homosexuals are identified as individuals living with "same sex partners". Using twenty quarters of the LFS, we identify 630 homosexuals. Decomposition analysis indicates that although gays earn more than non-gays they are still discriminated against. However, looking at gay men and lesbians separately we find that it is homosexual men who are subject to discrimination and therefore are likely to benefit from legislation that has to be in place in the UK by the end of 2003.

JEL Classification:  J15, J16, J31, J71.

KEYWORDS:  Earnings,  Sexual Orientation, Gender, Discrimination.

Arulampalam, W., Robin A. Naylor and Jeremy P. Smith

University of Warwick

Effects of in-class variation and student rank on the probability of withdrawal: cross-section and time-series analysis for UK university students

From individual-level data for nine entire cohorts of undergraduate students in the 'old' universities in the UK, we estimate the probability that an individual will drop out of university during their first-year. We examine the 1984-85 to 1992-93 cohorts of students enrolling full-time for a three or four-year course, and focus on the sensitivity of the probability of withdrawal to the individual's prior qualifications relative to those of the other students in their university course. We show not only that weaker students are more likely to withdraw but also that the extent of variation in prior qualifications within the student's university degree course exerts an influence on the individual's probability of withdrawal in a way that varies with the individual's own in-class rank.

JEL Classification: J24, I2

KEYWORDS: Student Withdrawal, Prior Qualifications, Rank and Heterogeneity.

Ascari, Guido

University of Pavia

Staggered Price and Trend Inflation:Some Nuisances

Most of the papers in the sticky-price literature are based on a log-linearisation around the zero inflation steady state, a simplifying but counterfactual assumption. This paper shows that when trend inflation is considered, both\ the long-run and the short run properties of time dependent staggered price models change dramatically. It follows that the results obtained by models log-linearised around a zero inflation steady state might be misleading.

JEL Classification:  E24, E32

Keywords:  inflation, staggered price/wages

Aslanidis, Nektarios; Denise R. Osborn; Marianne Sensier

University of Manchester

Smooth Transition Regression Models in UK Stock Returns

This paper models UK stock market returns in a smooth transition regression (STR) framework.  We employ a variety of financial and macroeconomic series that are assumed to influence UK stock returns, namely GDP, interest rates, inflation, money supply and US stock prices.  We estimate STR models where the linearity hypothesis is strongly rejected for at least one transition variable.  These non-linear models describe the in-sample movements of the stock returns series better than the corresponding linear model.  Moreover, the US stock market appears to play an important role in determining the UK stock market returns regime.

Keywords: smooth transition models, forecasting, UK stock returns.

JEL Class: E44, E47

Bakhshi, Hasan; Ben Martin; Tony Yates

Bank of England

How uncertain are the welfare costs of inflation?

This paper quantifies some of the general equilibrium costs of inflation for the UK using a shopping-time model.  It tests whether money balances tend to a finite number as nominal interest rates tend to zero, and explores how uncertainties about the shape of the money demand curve translate into uncertainties about these welfare costs of inflation.  A key uncertainty is the existence of a satiation point for money balances.  We show that without observations at nominal interest rates close to zero, the power of satiation tests can be low.

JEL classification:  E41, E52

Keywords:  Shoeleather costs of inflation, satiation of money demand.

Banerjee, Anindya; Massimiliano Marcellino; Chiara Osbat

EUI; Bocconi University; EUI

Testing for PPP: Should We Use Panel Methods?

A common finding in the empirical literature on the validity of purchasing power parity (PPP) is that it holds when tested for in panel data, but not in univariate (i.e. country specific) analysis. The usual explanation for this mis-match is that panel tests for unit roots and cointegration are more powerful than their univariate counterparts. In this paper we suggest an alternative ex-planation for the mismatch. More generally, we warn against the use of panel methods for testing for unit roots in macroeconomic time series. Existing panel methods assume that cross-unit cointegrating or long-run relationships, that tie the units of the panel together, are not present. However, using empirical examples on PPP for a panel of OECD countries, we show that this assumption is very likely to be violated. Simulations of the properties of panel unit root tests in the presence of long-run cross-unit relationships are then presented to demonstrate the serious cost of assuming away such relationships. The empirical size of the tests is substantially higher than the nominal level, so that the null hypothesis of a unit root is rejected very often, even if correct.

J.E.L. Classification: C23, C33, F31

Keywords: PPP, unit root, panel, cointegration, cross-unit dependence

Barankay, Iwan

University of Warwick

Referendums, citizens' initiatives, and the quality of public goods: Theory and evidence form Swiss Cantons

What makes governments more responsive and how can we create incentives for them to improve the quality of the public good provided by them? This paper tries to give theoretical and empirical insights into this question, that became salient issues as the role of the qualtiy of governance has been recognised, by particulary looking at what the role of direct democratic institutions could play. We present a model with three parties that are elected via proportional representation. Parties need to form coalitions in order to be able to implement policy. Citizens endogenously decide whether to launch a referendum or a citizens' initiatives. By looking at the cost of this process to the citizens we show that when the direct democratic instituions are more open the legislator may increase his effort to provide the public good. We also find that as the cost goes to zero the medain voter preferred outcome will always be implemented. We test this results empirically by looking at the experience of Swiss Cantons that used such institutions extensively. By looking at infant mortality rates and an index of fatal traffic accidents, proxying the quality of the health sector and infrastructure, we find some empirical support that, after controlling for other factors more openness leads to better public goods. The role of religious and linguistic fractionalization is dicussed, too.

Keywords: Citizens' inititatives, referendums, proportional representation, quality of public goods, infant mortality, infrastructure.

JEL:  D72, H41, I18, I31.

Barrell, Ray; Dawn Holland; Nigel Pain

National Institute of Economic and Social Research

An Econometric Macro-model of Transition: Policy Choices in the Pre-Accession Period

This paper analyses current policy choices facing the candidate countries for EU accession using newly developed econometric macromodels of Poland, Hungary, the Czech Republic, Slovenia and Estonia. The models allow for endogenous growth, and they have been incorporated into an existing global econometric model (NiGEM). This allows long-term projections to be made consistently with expected developments in other economies and allows full feedbacks with the rest of the world so that we can understand impacts on existing EU members as well as the candidate countries. This paper has several novel features, in that we use modern panel data techniques on short time series data in order to construct models of a number of economies. In constructing the models, we have taken special care to consider the roles of openness and foreign investment on productivity and growth. Different policies toward growth and the enhancement of technology transfer are analysed using the models, and policy advice on the accession and integration are made.

JEL Classifications: C51, C52, C53, E60, P27

Key words: accession, macro-model, panel data, transition

Bartling, Bjoern; Andreas Park

University of Munich; University of Cambridge

Aftermarket Short Covering and the Pricing of IPOs

Investment banks legally pursue supposedly price stabilising activities in the aftermarket of IPOs. We model the offering procedure as a signalling game and analyse how the possibility of potentially profitable trading in the aftermarket influences the investment bank's pricing decision. Banks maximise the sum of both the gross spread of the offer revenue and profits from aftermarket trading. They therefore have an incentive to distort the offer price by strategically using aftermarket short covering and exercise of the overallotment option. This results either in informational inefficiencies or exacerbated underpricing, and redistribution of wealth mainly in favour of investment banks.

JEL Classification: G14, G24, G28.

Keywords: Initial Public Offering, Mispricing, Regulation, Signalling.

Bayindir-Upmann, Thorsten; Frank Stähler

University of Bielefeld; University of Kiel

Market Entry Regulation and International Competition

As a part of their competition policies governments decide whether to allow for free market entry of firms or to regulate market access. We analyze a model where governments (ab)use these policy decisions for strategic reasons in an international setting. Multiple equilibria of this game emerge; and if the cost difference between domestic and foreign firms is 'significant', all equilibria induce the same allocation, where production exclusively takes place in the cost-efficient country. Moreover, these equilibria are Pareto efficient if this cost difference is 'substantial'. Only if cost differences are 'insignificant', may production take place in both countries.

Keywords: intergovernmental competition, competition policy, entry regulation, free market entry, international trade

JEL Classification: D43, F12, L11, L51

Beissinger, Thomas

University of Regensburg and IZA, Bonn

The Impact of Labor Market Reforms on Capital Flows, Wages and Unemployment

The paper contributes to the globalization debate by scrutinizing the international spillover effects which are provoked if a single country reduces the generosity of the unemployment compensation system or weakens labor union power. For this purpose a two-country model with imperfect competition in goods and labor markets and perfect competition in capital markets is developed. It is demonstrated that the comparative-static results depend on the degree of capital mobility, the degree of competition in the goods market and the institutional setup of the unemployment compensation system. Furthermore, it is shown that the impact of country-specific labor market reforms on households in other countries depends on whether the household's main income source consists of wage income or capital income and profits.

Keywords: Globalization, Capital Mobility, Unemployment, Wage Bargaining, Monopolistic Competition

JEL classification: E24, F41, J51

Benigno, Gianluca; Christoph Thoenissen

London School of Economics; Bank of England

Equilibrium Exchange Rates and Supply Side Performance

This paper develops a two country, optimising, sticky price model of real exchange rate determination in the ‘new open macroeconomics' tradition which allows several different forms of deviation from Purchasing Power Parity (PPP), both along the adjustment path and in the steady state. The model has a rich structure, and is designed to provide a flexible tool for policy analysis. Unlike most other papers in the literature, both of the key components of the real exchange rate -- the relative price of non-tradables, and the terms of trade -- are made endogenous, allowing a more complete analysis of the impact of structural shocks. To illustrate one possible application, the model is calibrated to match key elements of the UK and euro area economies, and used to examine the extent to which possible improvements in the UK's relative supply side performance might account for the sharp and persistent appreciation in sterling since 1996. The results are not supportive of this hypothesis. In the model, improvements in productivity, goods market and labour market competitiveness are all associated with a depreciation in both the spot and the equilibrium real sterling exchange rates. Two potential supply-side sources of an equilibrium appreciation -- a productivity improvement biased towards traded goods (Balassa-Samuelson effect), and an anticipated future productivity rise -- are considered; however each is insufficient to account for a long run equilibrium appreciation; the latter may account for an initial appreciation of the real exchange rate. We conclude by considering further mechanisms which could affect our results.

JEL Classification: E52, F41.

Keywords: Real Exchange Rates, PPP, Monopolistic Competition.

Benito, Andrew; Garry Young

Bank of England

Financial Pressure and Balance Sheet Adjustment by UK Firms

This paper examines the financial policies and balance sheet adjustment of companies. Using a large panel of UK firms, we estimate models for dividends, new equity issuance and investment, relating them to debt adjustment. The results suggest that while dividends are sticky in the short run, they are an important means of balance sheet adjustment in the long run. Other evidence supports the idea that companies actively target their balance sheet by variation in dividends, new equity issues and investment.

Benito, Andrew; Garry Young

Bank of England

Hard Times or Greatr Expectations?: Dividend Omissions and Dividend Cuts by UK Firms

This paper uncovers an increasing proportion of quoted UK companies omitting cash dividends. Using a large panel of quoted UK companies, we estimate models for the incidence of dividend omissions and cuts as functions of financial characteristics including cash flow, leverage, investment opportunities, investment and company size. These variables account for most of the increase in omission since 1995. There is relatively little evidence to link this to the major tax reform of 1997 that abolished tax refunds on dividend income payable to tax exempt institutions. Significant persistence effects indicate companies are slow to adjust their balance sheets through dividends.

Key words: Dividends; financial pressure; discrete panel data.

JEL Classification: G35, C23, E52

Bennett, John; Elisabetta Iossa

Brunel University

Building and Managing Facilities for Public Services

We model public-private partnerships in building and managing facilities for the provision of public services. In particular, we analyze both the desirability of bundling the building and management operations, and the optimal allocation of ownership between the public sector and private firms. When a positive externality exists across stages of production, bundling is always optimal; but unbundling tends to be preferred when the externality is negative. Whether public ownership is preferred to private ownership depends on the extent of the externality, the market value of the facility and the effect of the firms' investments on social benefits.

JEL Classification: H11

Keywords: public-private partnership, integration versus separation and incomplete contracts

Bennett, Matthew

University of Warwick

Dual Regulation or Duelling Regulators? The Welfare Impacts of Overlapping Regulatory Regimes:

Previous literature has examined the impact of a single regulatory constraint on the final product. However, an industry such as electricity requires two network inputs from naturally monopolistic industries i.e. gas transmission and electricity transmission. This paper models the impact of such dual regulation schemes finding: Firstly, the result of previous literature that tightening regulation increases prices to higher cost consumers may be reversed.  Secondly, dual input regulation creates distortions if regulators do not explicitly co-operate. Where regulators place some weight on their respective sector’s consumer surplus, these differing agendas lead to competition in regulatory strictness resulting in a significant sub optimal welfare outcome relative to a joint regulatory body.

Key Words: regulation, electricity, welfare, location.

Bertola, Giuseppe; Stefan Hochguertel; Winfried Koeniger (YE)

E.U.I. Fiesole; Universita di Torino; IZA Bonn

Dealer Pricing of Consumer Credit

Interest rates on consumer lending are lower when funds are tied to purchase of a durable good than when they are made available on an unconditional basis. Further, dealers often choose to bear the financial cost of their customers' credit purchases. This paper interprets this phenomenon in terms of monopolistic price discrimination. We characterize consumers' intertemporal consumption decisions and the dealer's pricing incentives when the consumers' unconditional lending and borrowing rate as well as the internal rate of return of the durable purchase differ. Our empirical analysis offers considerable support for the assumptions and implications of our theoretical perspective.

JEL-Classification: D10, D42, G2

Key Words:: Price discrimination, Financila market development, Liquidity constraints

Bhalotra, Sonia

University of Bristol

Parent Altruism

This paper offers a method for testing altruism and applies this to investigate whether parents of young children in rural Pakistan are altruistic. The estimated "altruism coefficient" (defined in the paper) indicates the degree of altruism. Parent altruism is of evident interest in designing welfare programmes. Indeed, we show that parent altruism implies positive effects of parental income on child outcomes. Thus the effectiveness of income transfer programmes targeted at child poverty is conditional on the degree of parent altruism. The prediction of the altruistic model that is tested is that the demand for child goods is increasing in adult consumption, prices constant. M-demands provide the natural estimation framework. The test is conducted for a number of items of adult consumption. For all but tobacco the data decisively reject the null of selfishness. This result is robust to replacing child clothing with child schooling or child labour. We argue that the aberrant behaviour of tobacco may be understood in terms of its addictive properties. We also suggest that the results are consistent with fathers being less altruistic than mothers, tobacco being a predominantly male good.

JEL codes: C2 I2 O1 R2

Keywords: altruism, m-demands, intra-household allocation, child labour, consumption

Bhaskar, V.; Bishnupriya Gupta; Mushtaq Khan

University of Essex; University of Warwick; School of Oriental and African Studies, London

Privatization, Yardstick Competition and Employment Dynamics: Evidence from Bangladesh

We analyze the dynamics of public and private sector employment, using the natural experiment provided by the partial privatization of the Bangladeshi jute industry. A differences-in-differences approach allows us to infer ownership effects. Although the public sector had substantial excess employment of workers initially, this excess was substantially eroded by the end of the period we study. This finding is consistent with the idea that the central authorities, which were increasingly financially constrained, used yardstick competition to reduce public sector managerial rents. The extent of such erosion differs between white-collar and manual worker categories, with excess employment persisting only in the former.

Keywords: privatization, yardstick competition, excess employment.

JEL Classification Nos: L32 (Public Enterprises), L33 (Privatization).

Bhattacharje,e A.; C.Higson; S.Holly; P.Kattuman

Reserve Bank of India; London Business School; University of Cambridge

Macro Economic Instability and Business Exit: Determinants of Failures and Acquisitions of Large UK Firms

Figs.

Using data over a thirty-four year span on UK quoted firms, this paper seeks to identify the factors that increase the likelihood of exit of firms. Firms may disappear through the mutually precluding events of failures and acquisitions. We use a competing-risks hazard model to determine characteristics leading to each outcome. Hazard models make efficient use of the data on the timing of these alternative outcomes and we exploit this to focus attention on how the conditional hazards change over the business cycle. We find that the volatility in the macro environment has a role in determining, in different ways, the hazard of firms going bankrupt or being acquired.

Key words: Bankruptcy, Acquisitions, Macro-economic Instability, Competing Risks, Cox Proportional Hazards Model

JEL classification:  E32, D21, C41, L16

Biscarri, Javier Gómez; Fernando Pérez de Gracia

IESE Business School; University of Navarra

Bulls and Bears: Lessons from some European Countries

This paper analyzes the recent behavior of stock markets in four European countries. More specifically, we describe the bull and bear phases of those markets, comparing some of their features across countries and with the US. We also comment on the degree of concordance of stock market phases across countries. We find that cycles in European countries have become substantially more concordant in recent years, a result that was to be expected given the increased integration of the European financial markets, but that the degree of concordance is not high.

JEL Classification: C41, G1

Keywords: stock market, bull, bear, concordance of cycles, Europe

Bishop, John H.; Ludger Woessmann

Cornell University; Kiel Institute of World Economics

Institutional Effects in a Simple Model of Educational Production

The paper presents a model of educational production which tries to make sense of recent evidence on effects of institutional arrangements on student performance. In a simple principal-agent framework, students choose their learning effort to maximize their net benefits, while the government chooses educational spending to maximize its net benefits. In the jointly determined equilibrium, schooling quality is shown to depend on several institutionally determined parameters. The impact on student performance of institutions such as central examinations, centralization versus school autonomy, teachers' influence, parental influence, and competition from private schools is analyzed. Furthermore, the model can rationalize why positive resource effects may be lacking in educational production.

JEL Classification: I20, L32, H52

Keywords: educational production, principal-agent model, institutions of the education system

Blake, Andrew P.

National Institute of Economic and Social Research

A 'Timeless Perspective' on Optimality in Forward-Looking Rational Expectations Models

This paper discusses the 'timeless perspective' optimisation concept with reference to a much-studied forward-looking rational expectations model. We establish that this policy, as usually described, is not always superior to a time consistent alternative on the basis of the stochastic equilibrium. We derive an alternative 'timelessly optimal' rule which is globally optimal with respect to the unconditional variance and is therefore more supportable as a time consistent equilibrium.

JEL classifications: E52, E58, C61

Keywords: Monetary Policy, Optimality, Time Consistency, Timeless Perspective

Blanden, Jo; Alissa Goodman; Paul Gregg; Stephen Machin

University College London and L.S.E.; Institute for Fiscal Studies; University of Bristol and L.S.E.

Changes in Intergenerational Mobility in Britain

This paper compares and contrasts estimates of the extent of intergenerational income mobility over time in Britain.  Estimates based on two British birth cohorts show that mobility appears to have fallen in a cross-cohort comparison of people who grew up in the 1960s and 1970s (the 1958 birth cohort) as compared to a cohort who grew up in the 1970s and 1980s (the 1970 birth cohort).  The sensitivity of labour market earnings to parental income rises, thereby showing less intergenerational mobility for the more recent cohort.  This supports theoretical notions that the widening wage and income distribution that occurred from the late 1970s onwards slowed down the extent of mobility up or down the distribution across generations.

Keywords:  Intergenerational Mobility, Earnings, Family Income, Education.

JEL Codes:  J62, I2, D31

Bloch, Carter

University of Aarhus

Capital Flows and Crisis: the Role of Credit Market Imperfections

This paper builds a model of emerging market crises in which firms are credit constrained and the monetary authorities are limited in their access to foreign currency. The effects of these constraints and their interaction are analyzed in a small open economy that is subject to external shocks and in which capital flows derive out of international investors' lending decisions to firms. \ A crisis can occur both directly from a shock, or due to a change in market perceptions. \ The economy, however, is only affected by a change in market perceptions and thus vulnerable to a slowdown in inflows of foreign currency when it has high levels of foreign debt and low holdings of international reserves.

JEL Classification: F31, F32, F34

Keywords:  credit market imperfections, currency crisis, foreign currency debt

Boinet, Virginie

Brunel University

How to avoid self-fulfilling crises

Obstfeld (1994) shows that, for the same level of economic fundamentals, it may be optimal for a government either to devalue or to maintain the peg. Multiple equilibria occur: it is the phenomenon of self-fulfilling crisis. To avoid this kind of crisis, this article offers a new proposal: a partial delegation of exchange rate policy to a more inflation-averse central banker. It shows that if the government continues to decide whether to maintain the peg while the central banker chooses the magnitude of any realignment, lower inflationary expectations will lead to the existence of only one equilibrium.

JEL classification: E52, F41

Keywords: Currency crisis; Multiple equilibria; Credibility; Monetary delegation

Bratti, Massimiliano

Universita degli Studi di Ancona, Italy

Labour Force Participation and Marital Fertility of Italian Women: The Role of Education

This paper uses data from the 1993 Survey of Household Income and Wealth of the Bank of Italy in order to estimate a reduced form purist model of female marital fertility and labour force participation.  In particular, we focus our attention on the effect of formal education on both fertility and labour force participation behaviour. Our estimates show a U-shaped pattern of fertility by education and that highly educated women postpone fertility and have a higher labour market attachment. Furthermore, cultural factors related to the gender role model prevailing in a family are of central importance.

JEL Class.: J13, J22

Keywords: education, fertility, labour force participation, women

Broer, Tobias

Bank of England

Emerging Market Lending: Is Moral Hazard Endogenous?

This paper looks at the effect of moral hazard, resulting from information asymmetries in financial markets, on growth in financially open developing countries. We show that if domestic entrepreneurs can gamble with foreign creditors' money, borrowing under standard debt contracts is constrained by a No-Gambling Condition similar to that of Hellmann, Murdock, and Stiglitz (2000). However, this incentive constraint is endogenous in the development process: growth increases entrepreneurs' own capital at risk, thus reducing gambling incentives, but it decreases profitability of capital investment, which has the opposite effect. General equilibrium under moral hazard shows a unique and stable steady state, but involves at least temporary rationing of profitable projects and possibly capital flight from developing countries.

JEL: F43, O16, D82

Keywords: Moral Hazard, Asymmetric Information, Open Economy Growth, International Finance

Brunt, Liam; Edmund Cannon

St John’s College; University of Bristol

Do Banks Improve Financial Market Integration?

Using a large panel of weekly wheat prices, we infer the annual rate of return on capital in each county in England and Wales in the period 1770-1820. Throughout this period markets were efficient in the sense that weekly returns were serially uncorrelated. We show that the interest rate differential between London and each county can be explained by the density of bank coverage in that county.  The explosion in provincial banking in England and Wales during the industrial revolution significantly reduced regional differentials in interest rates. This is direct evidence that financial intermediation determines the degree of market integration.

JEL CLASSIFICATION  O16, N13, G21

KEYWORDS  Banks, Financial Integration, Industrial Revolution  

Bulkley, George; Richard D.F. Harris; Renata Herrerias

University of Exeter

Stock Returns Following Profit Warnings: A Test of Models of Behavioural Finance.

Models in behavioural finance have been developed to explain apparent anomalies in stock returns. A property common to a number of these models is that agents under react in the short run to public signals about future earnings. This contrasts sharply with the popular informal belief that stock prices overreact to news. A behavioural model also predicts returns reversals over longer horizons. We examine stock returns following profit warnings to test which, if any, of these hypotheses stands up to scrutiny on a new data set which was generated by a process which corresponds closely to that assumed in the behavioural models.

JEL classification: G14

KEYWORDS: Event studies, Profit Warnings, Behavioural Finance, Abnormal Returns

Campos, Nauro F.; Aurelijus Dabusinskas

University of Newcastle, CEPR, London and Davidson Institute at the University of Michigan; CERGE-EI, Charles University, Prague.

So Many Rocket Scientists, So Few Marketing Clerks: Occupational Mobility in Times of Rapid Technological Change

The transition from centrally planned to market economy involves a process of occupational change that has been largely neglected in the literature. This paper investigates the magnitude and determinants of this process using data from the Estonian Labour Force Survey. We find that almost 50 percent of wage earners changed occupations between 1989 and 1995 and that job tenure is the main determinant of occupational mobility. Our results also show the remarkable speed with which the market mechanism takes root: the returns to current and alternative occupations play, over these few years, increasingly meaningful roles in explaining occupational change.

Keywords: Occupational Mobility, Human Capital, Transition Economies.

JEL classification: J62, J63, J64, J23, C41, H53.

Carmignani, Fabrizio; Anton Muscatelli; Patrizio Tirelli

Universita' Milano-Bicocca; University of Glasgow; Universita' Milano-Bicocca

Who’s Afraid of the Big Bad Central Bank? Union-Firm-Central Bank Interactions and Inflation in a Monetary Union

Existing models of union-firm-central bank interaction focus on the impact which the central bank has on union behaviour in setting wages. This paper considers an alternative explanation for wage moderation, based on firm-specific factors, whereby the probability of bankruptcy and exit disciplines firms and unions. The exit of firms is a source of employment fluctuation that the union tries to stabilize. We also show that the formation of a monetary union in this model increases the probability of firm exit and may further moderate union wage demands for any given degree of central bank conservativeness.

JEL Classification: E50, E58, J50, J51

keywords: central bank behaviour; union bargaining; monetary policy; bankruptcy risk; monetary unions

Cerda, Rodrigo

The University of Chicago and Pontificia Universidad Catolica de Chile

The economic foundations of demographic transition

The paper develops a general equilibrium model where population sources, such as fertility and mortality rates, are chosen variables. It is shown that the evolution of population over time depends on income and relative prices of mortality and fertility rates. Initially as a country develops, countries should face a period with increasing fertility and higher population growth rates but later fertility and population growth rate should decrease as their relative prices increase. It is also shown that multiple equilibria may arise. An equilibrium with low levels of asset will have lower per capita income, but larger fertility, mortality and population growth rates.

JEL Classification: H51, J10, J11, J13, O12.

Keywords: demographic transition, economic development, government expenditure.

Cerný, Ales

Imperial College

Generalized Sharpe Ratios and Asset Pricing in Incomplete Markets

This paper draws on the seminal article of Cochrane and Saa-Requejo (2000) who pioneered the calculation of option price bounds based on the absence of arbitrage and high Sharpe Ratios. Our contribution is threefold: We base the equilibrium restrictions on an arbitrary utility function, obtaining the C&S-R analysis as a special case with truncated quadratic utility. Secondly, we restate the discount factor restrictions in terms of Generalised Sharpe Ratios suitable for practical applications. Last but not least, we demonstrate that for Itô processes C&S-R price bounds are invariant to the choice of the utility function, and that in the limit they tend to a unique price determined by the minimal martingale measure.

JEL classification code: G12, D40

Keywords: arbitrage, good deal, incomplete market, certainty equivalent, reward-for-risk measure, Generalized Sharpe Ratio, optimal portfolio, duality and martingale methods, minimal martingale measure

Cerrato, Mario

London Guildhall University

The Cross Sectional Dependence Puzzle

The analysis of unit roots and cointegration in panel data is becoming a growing research area. A number of issues have been raised in the literature (see Phillips and Moon 1999 and 2000, Banerjee 2000, Maddala and Wu 1999). The aim of the present paper is to contribute to the issue of cross sectional dependence in non-stationary panel data. We review some of the most recent econometric techniques proposed by the literature to dealing with cross sectional dependence and notice a sort of puzzle. We extend the bootstrap methodology proposed by Maddala and Wu (1999) and apply the resulting test to test for PPP. We find no evidence favouring PPP. Finally, we use Monte Carlo simulation to analyse the size distortion of the bootstrap test presented in this paper. The proposed test presents size distortion only when T = 100.

JEL Classification: F31, C23, C52

Keywords: Cross Sectional Dependence; Panel Unit Root Test; Purchasing Power Parity

Chamberlin, Graeme; Stephen Hall; Brian Henry

University of Oxford; Imperial College

Bargaining Models and Identifying the Wage Equation

It is commonly asserted that the standard wage equation derived from bargaining theory cannot be identified. Here, it is argued that the case for this alleged failure rests on an outmoded definition of identification. Newer concepts based on non-stationarities, cointegration and reduced rank are appropriate. An empirical example applying these concepts shows that the standard model can be derived and that far from being underidentified, it is actually overidentified.

JEL Classification: C30 C70 J30

Keywords: Cointegration, Identification, Bargaining, Wage Determination

Chari, Anusha; Peter Blair Henry

University of Michigan; Stanford University and NBER

Capital Account Liberalization, Risk Sharing and Asset Prices

In the month that the capital account is liberalized, all publicly traded firms experience a 7 percent stock price revaluation.  Firms whose shares become eligible for purchase by foreigners experience and additional revaluation that is directly proportional to their firm specific reduction in aggregate risk -- the covariance of the typical firm's stock return with the local market is on average 30 times larger than its covariance with the world market.  The statistical significance of this proportionality persists after controlling for the firm-specific effects of liberalization on expected future profits in this sample of of 411 firms from 11 countries.  These findings suggest that capital account liberalization facilitates risk sharing.

Keywords:   capital account liberalization, international asset pricing, risk sharing, investment, emerging markets

JEL Classification: E44, F3, F4, G12, G15, G18

Chatelain, Jean-Bernard; André Tiomo

Banque de France

Investment, the Cost of Capital, and Monetary Policy in the Nineties in France: A Panel Data Investigation

Using a large panel of 6,946 French manufacturing firms, this paper investigates the effect of monetary policy on investment from 1990 to 1999 through the cost-of-capital and the cash-flow channels. We compare several specifications of neo-classical demand for capital, taking into account transitory dynamics. The user cost of capital has a significant negative elasticity with respect to capital using traditional Within estimates, or as long as cash-flow is not added to the regression when using Generalised Method of Moments estimates. Asymmetries of effect of monetary policy are evaluated for different groups of firms which differ in terms of informational asymmetries.When dummy variables related to firms which are more sensitive to cash-flow are added in the model, the user cost elasticity is significant again.

JEL Classification: C23, D21, D92.

Key Words: Investment, Monetary Policy, Generalised Method of Moments, Cost of Capital.

Chen, Yu-Fu; Gylfi Zoega

University of Dundee; Birkbeck College

Exchange-Rate Volatility as Employment Protection

Two issues; the liberalisation of labour markets and monetary unification, have taken centre stage in policy debates on the future of the European Union. We show that both have the effect of raising capital mobility as well as labour-market flexibility. The reduction of exchange-rate fluctuations reduces the cost of both entering a market - by setting up companies and hiring new employees - as well as exiting by dismantling existing capital structures and firing employees. Thus the adoption of a single currency has effects very similar to the removal of employment-protection legislation and other direct restrictions on hiring and firing. The distinction between structural reforms in the labour market and monetary reforms may for this reason not be very helpful in finding the keys to higher employment growth in Europe. However, exchange-rate volatility is more harmful for the entry of new firms, particularly promising, high-risk ventures.

JEL: E32, J23, J24, J54

Keywords: Exchange-rate volatility, firing costs, labour-market flexibility1

Chevalier, Arnaud

London School of Economics

Just Like Daddy: The occupational choice of UK Graduates

This paper examines occupational choices made by two cohorts of UK graduates.  About 10% of graduates are in the same occupation as their father 6 or 11 years after graduation.  Males graduating from medicine or agricultural studies are more likely to be follower but the main observable determinants of the decision to follow appears to be father's occupation and education.  Following in one father's footsteps leads to a pay premium ranging from 5% to 8% for men but none for women.  As this pay premium increases with labour market experience, we conclude that it stems from intergenerational transmission of human capital rather than pure nepotism.

Key Words: Occupational choice, Human capital

JEL code: J24, J31, J62

Chisik, Richard; Ronald B. Davies

Florida International University; University of Oregon

Asymmetric FDI and Tax-Treaty Bargaining: Theory and Evidence

Tax treaties are often viewed as a mechanism for eliminating tax competition, however this approach ignores the need for bargaining over the treaty’s terms.  This paper focuses on how bargaining can affect the withholding taxes set under the treaty.  In a simple framework, we develop hypotheses about patterns in treaty tax rates.  A key determinant for these patterns is the relative size of bilateral foreign direct investment (FDI) activity.  In plausible situations, more asymmetric countries will negotiate treaties with higher tax rates. This theory is then tested using 1997 data from U.S. bilateral tax treaties.  Overall, the data supports the prediction that greater asymmetric FDI activity increases the negotiated tax rates.

JEL Classification: F23, H25, K34.

Key Words: Foreign Direct Investment, Tax Treaties, Multinational Corporations, Bargaining, Withholding Taxes.

Choudhary,  Muhammad Ali

University of Surrey

Mark-ups and Market-Share Uncertainty: Theory and Evidence

The Phelps and Winter (1970) customer-market model predicts that firms will charge lower than the static monopoly mark-up because monopolistic pricing policy is moderated by the potential effect of high prices on the market-share.  This paper extends Phelps and Winter (1970) to incorporate stochastic market- share evolution and shows that mark-ups could potentially exceed static monopoly mark-ups therefore reversing the original Phelps and Winter (1970) result.  We also present valuable empirical evidence on British industries and show that market-share uncertainty and mark-ups are positively correlated.  This can potentially explain the pension puzzle of 1988 where one observed both high mark-ups and high profitability.  The paper also empirically shows that financial market indcies proxing for customer-value are linked with price mark-ups.

Keywords: Mark-ups, Market-Share, Uncertainty, Customer-Value

JEL: D43 D80 L11

Chowdhury, Shyamal K

University of Bonn

Access to Information, Transaction Costs and Marketing Choice of Rural Households between Middlemen and Direct Buyers in Bangladesh

This paper assesses the impact of information cost and other transaction costs on rural producers' discrete choice between selling to middlemen and direct buyers, and continuous choice of selling intensity to middlemen and direct buyers. Using transaction costs economics as an analytical framework to decompose the different origins of transaction costs, the paper empirically investigates the impact of transaction costs on farm households' marketing behaviour in the context of Bangladesh. Empirical findings of this paper suggest that access to information in the form of access to telephone and other form of transaction costs play a significant role in producers' marketing behaviour. For information cost, a unit change in distance to telephone increases the probability of choosing direct buyer over middlemen by more than 4 percent and sales to direct buyer by more than 8 percent.  

Clarida, Richard H.; Mark P. Taylor

Columbia University and NBER; University of Warwick and Centre for Economic Policy Research

Nonlinear Permanent -Temporary Decompositions in Macroeconomics and Finance

Figs:  1, 2, 3, 4

We suggest a method of decomposing univariate and multivariate nonlinear processes into their permanent and temporary components, extending the analysis of Beveridge and Nelson (1981) and Stock and Watson (1987). We provide an application in the univariate nonlinear case to recent work on nonlinearities in the US business cycle, and in the multivariate nonlinear case to recent work on asymmetric nonlinear adjustment in the US term structure of interest rates.

JEL Classifications :  C22, C32, E32, E43.

Keywords:  nonlinearity, decomposition, business cycle, interest rate term structure.

Clark, Damon; René Fahr

Nuffield College; IZA; University of Bonn

The Promise of Workplace Training for Non-College-Bound Youth: Theory and Evidence from German Apprenticeship

This paper assesses the potential of `workplace training' with reference to German Apprenticeship. When occupational matching is important, we derive conditions under which firms provide `optimal' training packages. Since the German system broadly meets these conditions, we evaluate the effectiveness of apprenticeship using a large administrative dataset. We find returns to apprenticeship for even the lowest ability school-leavers comparable to standard estimates of the return to school, and show that training is transferable across a wide range of occupations. We conclude that the positive experience with German Apprenticeship Training may guide the design of similar policies in other countries.

JEL-classification: C29, J24, J31, J62

Keywords: German Apprenticeship Training; Human Capital; Occupational Mobility; Wages.

Corrado, Luisa; Marcus Miller; Lei Zhang

University of Rome Tor Vergata; University of Warwick

Exchange rate monitoring bands: theory and practice

Recent empirical research has found evidence of hybrid dynamics for the real exchange rate. While there is a random walk near equilibrium, for real  exchange rates some distance from equilibrium there is mean-reversion which increases with the degree of misalignment. An interesting question is whether this nonlinear mean-reversion is policy-induced. John Williamson (1998), for example, has proposed a ``monitoring band'' in which there is no intervention near equilibrium but there is substantial intervention triggered by exchange rate deviations outside a preset band. In this paper we develop a theoretical model for a stylised monitoring band to see whether it can generate patterns of nonlinear mean-reversion akin to those reported in empirical research.

Creel, Jérôme; Hervé Le Bihan

OFCE, Research Dpt, Banque de France

Using structural balance data to test the fiscal theory of the price level: an application to France and the USA

The fiscal theory of the price level has recently received important attention as an alternative theory of price determination. Empirical tests of the FTPL have been rare, and have undergone forceful criticism by Cochrane (1998) based on ''observational equivalence'' arguments. This papers proposes two extensions to the empirics of the FTPL. First, we apply the methodology initiated by Canzoneri, Cumby and Diba (2001) to French data. Second, we use US and French structural balance data, in order to overcome Cochrane's critique. Our conclusion is that for neither country the data support a FTPL interpretation.

Keywords: Fiscal theory of the price level, fiscal policy, monetary policy, VAR

JEL classification: E17, E63, H63

da Silva Lopes, Artur C. B.

ISEG-UTL and CEMAPRE

The Order of Integration for Quarterly Macroeconomic Time series: a Simple Testing Strategy

Besides introducing a simple and intuitive definition for the order of integration of quarterly time series, this paper also presents a simple testing strategy to determine that order for the case of macroeconomic data. A simulation study shows that much more attention should be devoted to the practical issue of selecting the maximum admissible order of integration. In fact, it is shown that when that order is too high, one may get (spurious) evidence for an excessive number of unit roots, resulting in an overdifferenced series.

Keywords: unit roots; seasonality; DF tests; HEGY tests

JEL classification: C22, C52

De Santis, Roberto A; Frank Stahler

European Central Bank; University of Kiel

Endogenous Market Structures and the Gains from Foreign Direct Investment

This paper discusses the gains from liberalizing foreign direct investment (FDI) in a two country setting with endogenous market structures. Two different scenarios are investigated. In the first scenario, headquarters are run in the domestic country only and the FDI regime is compared to the intersectoral trade case. If multinational and national firms coexist, market concentration occurs and FDI is welfare improving for the foreign country, but welfare declining for the domestic country. In the second scenario, headquarters are run in both countries and the FDI regime is compared to the intraindustry trade case. This regime switch leads to mutual welfare gains, irrespective of market structure effects.

JEL- Classification: F12, F15

Keywords: FDI, Multinational enterprises, Imperfect competition, Welfare.

Deadman, Derek; Ziggy MacDonald

University of Leicester

Offenders as Victims of Crime? An Investigation into the Relationship Between Criminal Behaviour and Victimisation

In this paper we consider the association between victimisation and offending behaviour using data from the Youth Lifestyles Survey. We consider the impact of violent, non-violent and persistent offending on the probability of being a victim of violent and non-violent crime and find a positive association between these using univariate probit estimates. However, taking into account the endogenous nature of offending and victimisation via a bivariate probit model, we find that univariate estimates understate the association. We suggest that policy recommendations should only be based on the bivariate analysis of the association between offending and victimisation.

JEL Classification:  K42

Keywords: Victims of Crime, Offenders, Bivariate Probit

Delfino, Doriana; Peter Simmons

University of York

Infectious Disease Control by Vaccines Giving Full or Partial Immunity

We use a simple Lotka-Volterra model of the disease transmission process to analyse the dynamic population structure in two scenarios. Firstly a vaccine is available\ on the market at a constant price through time. Secondly, the vaccine is publicly provided. The vaccine works either by giving partial or full immunity to the disease. We analyse market provision for vaccines providing partial immunity and public provision of both types of vaccine. In the case of market provision we find that there may be multiple stationary states and instability. This is in contrast with earlier results under full immunity. In the publicly provided scenario we find that in the partial immunity case a procyclical policy is desirable but for the full immunity case a countercyclical policy is preferable. This is robust to alternative specifications of the basic Lotka-Volterra system.

JEL: D9, I1, O2

Keywords: infectious disease, vaccination policy, dynamic analysis

Delfino, María Eugenia

University of Warwick

Consolidation and competition. The case of the Argentine banking industry

The Argentine banking industry has experienced increasing consolidation during the last decade. On the one hand, it can be argued that this has resulted from cost economies, perhaps associated with technical change. But on the other, it can also be argued that increased concentration in this industry may allow the exploitation of market power in the input (deposits) and output (loans) markets. These issues are addressed in this study using bank-level data for Argentine retail banks over the period 1993-2000 to estimate a cost-function based model incorporating deposits- and loans-market pricing behaviour. The results provide evidence of market power in both the market for loans and deposits and also the presence of significant cost economies, which vary over time. The findings also show an increase in consumers’ surplus and banks’ profits over the period but suggest the potential for additional benefits to consumers from a reduction of market power or a further expansion of bank activity level.

JEL CLASSIFICATION: L10, G21, C33, D60.

KEYWORDS: banking industry, market power, cost economies, welfare analysis.

Dercon, Stefan; Pramila Krishnan

CSAE; Jesus College

Informal insurance, public transfers and consumption smoothing

In developing countries, public programs in the form of food aid distribution are often meant to protect vulnerable households from consumption downturns by providing a safety net. Few studies have evaluated the impact of these programs. Furthermore, households often use a variety of informal mechanisms to cope with risk. We look into the extent to which food aid helps to smooth consumption by reducing the impact of negative shocks, controlling for program placement effects and informal risk-sharing. Using panel data from Ethiopia, we find that despite poor targeting, the programs reduce some of the vulnerability to common shocks via intra-village risk sharing.

JEL CODES D91, I38, O17

Devicienti, Francesco

LABORatorio Riccardo Revelli

Estimating Poverty Persistence in Britain

This paper uses longitudinal data from the BHPS, waves 1-8, to document low-income dynamics and persistence for individuals living in Britain in the 1990s. Poverty exit and re-entry rates are estimated and the resulting distribution of time spent in poverty is calculated, both in single and in multiple-spells frameworks. Following Stevens (1999), I estimate a multiple-spell model of transitions in and out of poverty, controlling for observed and correlated unobserved individual heterogeneity and for a potential initial condition problem. Both hazard rate and components-of-variance models are used to predict the number of years in poverty for various subgroups of the populations.

JEL classification: D1, D31, I32

Keywords: poverty persistence, hazard models, multiple spells, unobserved heterogeneity, variance-components models.

Dijkstra, Bouwe

University of Nottingham

Samaritan vs rotten kid: Another look

We set up a two-stage game with sequential moves by one altruistic agent and n selfish agents. The rotten kid theorem states that the altruist can only reach her first best when the selfish agents move before the altruist. The Samaritan's dilemma, on the other hand, states that the altruist can only reach her first best when she moves before the selfish agents. We find that in general, the altruist can reach her first best when she moves first, if and only if a selfish agent's action marginally only affects his own payoff. The altruist can reach her first best when she moves last if and only if there is just one commodity involved. When the altruist cannot reach her first best when she moves last, the outcome is not Pareto efficient either.

JEL Classification: D64

 Keywords: Altruism, rotten kid theorem, Samaritan's dilemma

Dijkstra, Bouwe R.

University of Nottingham

Samaritan vs rotten kid: Another look

We set up a two-stage game with sequential moves by one altruistic agent and n selfish agents. The rotten kid theorem states that the altruist can only reach her first best when the selfish agents move before the altruist. The Samaritan's dilemma, on the other hand, states that the altruist can only reach her first best when she moves before the selfish agents. We find that in general, the altruist can reach her first best when she moves first, if and only if a selfish agent's action marginally only affects his own payoff. The altruist can reach her first best when she moves last if and only if there is just one commodity involved. When the altruist cannot reach her first best when she moves last, the outcome is not Pareto efficient either.

  JEL Classification: D64

 Keywords: Altruism, rotten kid theorem, Samaritan's dilemma

Disney, Richard; Andrew Henley; David Jevons

University of Nottingham;and Institute for Fiscal Studies; University of Wales Aberystwyth; Oxford Economic Research Associates (OXERA)

House Price Shocks, Negative Equity and Household Consumption in the UK in the 1990s

We examine the impact of housing capital gains on savings behaviour during the 1990s British housing market cycle using microdata from the British Household Panel Survey and county-level house price data. We condition the models on household real financial capital gains using Family Resources Survey data. We find a marginal propensity to consume out of housing wealth of between 0.01 and 0.03, depending on specification.  Among our novel findings are asymmetric behaviour between periods of house price rises and falls, with stronger consumption response during periods of house price increases, and a disproportionate impact on saving if the household has negative housing equity.

Keywords: Saving, Housing wealth, House prices, Negative equity

JEL Classification: D91, E21, R31

Doukas, John A.; Phillip J. McKnight; Christos Pantzalis

Stern School of Business; Cardiff Business School; University of South Florida

Security Analysis, Agency Costs, and UK Firm Characteristics

This paper assesses the monitoring power of security analysts from the manager-shareholder conflict perspective. Using a sample of UK firms tracked by security analysts, our evidence supports the view that security analysis acts as a monitoring mechanism in reducing agency costs. We also find that security analysts are more effective in reducing agency costs for smaller and more focused firms rather than larger and more diversified firms suggesting that for larger and more complex firms security analysis is less effective. The UK findings suggest that the monitoring role of security analysts is not restricted to the U.S. capital market environment.

Key words: Security Analysis; Analyst Coverage; Agency Costs; Firm Value.

JEL classifications: G24, G34

Driver, Ciaran; Paul Temple; Giovanni Urga

Imperial College Management School; University of Surrey; City University Business School

Profitability, Capacity, and Uncertainty: A Robust Model of UK Manufacturing Investment

This paper uses a model of capital investment that ascribes a theoretical role to profitability and uncertainty in determining the capital-output ratio. Empirical implementation uses quarterly data from UK manufacturing over a thirty-year period, and unique co-integrating relationships are obtained for two asset classes: buildings and plant and machinery. The corresponding dynamic equations are also well specified. Non-nested testing shows that the performance of the estimated investment models ranks similarly to the performance of predictions from direct investment intentions.

Keywords: Uncertainty, Investment, Profitability, Manufacturing UK, Time Series Models.

J.E.L. Classification Number: D80, E22, L60, C22.

Du, Julan

The Chinese University of Hong Kong

Government-Business Relationship and International Corporate Finance

This paper shows both theoretically and empirically the importance of bureaucratic quality in shaping the pattern of corporate finance in different countries. It argues that firm management under corrupt and interventionist governments is particularly powerful in expropriating outside investors because they can threaten to withdraw their government relationship specific human capital that is central to firm survival and growth. The prevalence of concentrated ownership, relative reliance on bank financing and bank ownership of firms under corrupt and interventionist governments are various means of overcoming the management expropriation. This paper also proposes a new synthesis of the legal and political theories: a broad-based legal approach.

Keywords: Financial structure, large shareholders, government quality, broad-based legal approach.

JEL Classification Number: G30, K22, H11, P51.

Duguet, Emmanuel; Stéphanie Monjon

University of Bretagne; University Paris 1

Creative Destruction and Innovative Core: Is Innovation Persistent at the Firm Level? An empirical reexamination from CIS data comparing the propensity score and regression methods

At the macroeconomic level, the persistence of innovation allows sustainable growth. But does growth come from the same set of firms or originate always from different innovators? On this point, the assumptions of endogenous growth models differ and innovation persistence at the macroeconomic level can be supported by different firm-level behavioural assumptions. The aim of this article is twofold. First, we evaluate the empirical pertinence of the different views of the dynamics of the innovative process by estimating the degree of innovation persistence at the firm level. Secondly, we explore the determinants of innovation persistence by testing the empirical implications of three theoretical models. We show that the innovation persistence is essential at the firm level and that the origin of the persistence depends on the size of the firm.

JEL Classification: C14, O31, O32.

Keywords: Community Innovation Surveys, Creative destruction, Innovation, Learning-by-doing, Matching, Persistence, Propensity score, Research and development.

Egginton, Donald; Andreas Pick; Shaun P. Vahey

Daiwa Institute of Research Europe; University of Cambridge

“Keep It Real!'': A Real-time UK Macro Data Set

In this paper, we present a real-time macro data set for the UK. Each variable has many different vintages---reflecting the revisions that occur in real time. Our aim is to provide a resource that allows researchers to assess the robustness of their results to data revisions. We illustrate the importance of this issue by analysing the impact of real-time data on UK inflation forecasts.

Keywords: Data revisions, real-time data, inflation forecasts

JEL Codes: C8, E37, E52

Fattouh, Bassam; Pasquale Scaramozzino; Laurence Hariss

CeFiMS, SOAS

Capital structure in South Korea: A Quantile Regression Approach

This paper analyzes capital structure in South Korea from 1991 until 1999. The paper makes use of quantile regression methods to explore the changing distribution of debt-capital ratios across firms and over time. We find clear evidence of heterogeneity in the capital structure of firms. There is also strong evidence of heterogeneity in the determinants of capital structure choice. The size of the firm and its rate of growth have a positive impact on debt at low values of the debt ratios, but a negative impact at high values of the ratios. By contrast, the proportion of net fixed assets has a negligible impact at low values of the debt ratios, but a significantly positive impact at medium or high values of the ratios. The observed non-linearities in the determinants of capital structure are consistent with an agency cost theory of capital structure, and with both a non-negativity constraint and an upper bound on debt.

Key words: Capital structure, Quantile regression method, South Korea.

JEL Classification: G32, O53.

Fedderke, Johannes

ERSA, University of the Witwatersrand

Technology, Human Capital and Growth: evidence from a middle income country case study applying dynamic heterogeneous panel analysis

This paper examines whether endogenous growth processes can be found in middle income country contexts. Estimation proceeds by means of dynamic heterogeneous panel analysis. Empirical evidence finds in favour of both knowledge spill-over effects, and of positive impacts on total factor productivity growth by Schumpeterian innovative activity. A crucial finding is that spill-over effects emerge from investment in human rather than physical capital, and that the quality dimension in human capital investment is vital in generating innovation.

KEYWORDS: endogenous growth, knowledge spill-overs, Schumpeterian innovation, human capital investment.

JEL Classification: O31, O32, O33, O41, O47.

Fennema, Julian A.

CERT, Heriot-Watt University

An Alternative Estimation Framework for Firm-Level Capital Investment

This paper derives and implements Tobit estimation frameworks based on the Abel and Eberly (1998) investment model. We find evidence that a model of investment using rates of capacity utilisation is superior to a standard accelerator model. We apply this framework to a cross-section of firms in Poland, Romania and Spain in order to estimate the incidence of financing constraints.

JEL classification: G31, P34

Keywords: investment, capacity utilisation, transition, financing constraints

Fernandes, Pedro

Europe Economics

A study into loyalty-inducing programmes which do not induce loyalty

Motivated by the lack of evidence showing that loyalty programmes are successful in inducing switching costs, this paper offers an alternative rationale for their ubiquity. In a setting where two duopolists compete over price and over the value of a discount to hand to repeat-buyers, it is shown that though customers do not become locked-in, the firms will nevertheless find it in their interest to reward repeat buyers.  Doing so weakens the competitive aggressiveness of its rivals.  It is shown that prices, the discount offered by the firms and firms' profits are all increasing with the share of the frequent consumers.

JEL classification: L13, L40, D43

Keywords: loyalty-programmes, switching costs

Ferri, Giovanni; Li-Gang Liu

University of Bari, Italy; Asian Development Bank Institute, Tokyo

Do Global Credit Rating Agencies Think Globally? The Information Content of Firm Ratings around the World

What is the information content of firm ratings? We disentangle the relative contribution to firms? ratings of sovereign risks and individual firms? performance indicators, reportedly employed by rating agencies. We reach three conclusions. First, sovereign risks? contribution is disproportionately greater in developing countries vis-à-vis developed countries. Second, even controlling for the ?country ceiling effect??private ratings being constrained by their sovereign?s rating?firm ratings? information content is much smaller in developing countries. Third, cross-country indicators of information quality help explain but do not solve the puzzle entirely. Thus, global rating agencies do not (yet) think globally.

JEL Classification: G2, G3

Key Words: Credit Risk, Sovereign Risk, Credit Ratings

Fertig, Angela R.

Princeton University

Trends in Intergenerational Earnings Mobility

This paper examines trends in intergenerational earnings mobility by estimating ordinary least squares, quantile regression, and transition matrix coefficients using five cohorts from the Panel Study of Income Dynamics, observed between 1968 and 1993. The results indicate that mobility increased for sons with respect to fathers and  remained constant for sons and daughters with respect to mothers. Moreover, the findings from the father-son sample suggest that the difference between the mobility levels of the rich and the poor narrowed over this period.  The estimated pattern of changing mobility is consistent with an increasing rate of regression to the mean.

JEL Codes:  J62

Keywords:  intergenerational earnings mobility

Foellmi, Reto; Josef Zweimüller

University of Zurich

Heterogeneous Mark-ups, Demand Composition, and the Inequality-Growth Relation

We explore the relationship between inequality and demand structure in an endogenous growth model where consumers expand consumption along a hierarchy of needs. This enables us to study the impact of inequality on demand for innovative products, on their prices, and hence on research incentives.  As a result, changes in inequality affect the aggregate price structure and there may be market exclusion of the poor. With exclusion, higher inequality tends to increase growth because the profit share increases. However, higher inequality due to a bigger group of poor people may reduce growth. Instead, if the innovators always sell to all, inequality has an unambiguously negative impact on growth.

Key words: inequality, growth, demand composition, price distortion.

JEL classification: O15, O31, L16

Fontagne, Lionel; Daniel Mirza

University of Paris1 and CNRS, France

International Trade and Rent Sharing in Developed and Developing countries.

In this paper, we derive then test a theoretical equation, based on rent sharing theories, linking industry wages to openness variables. This relation has three main features: 1/ it can be easily confronted to the data. 2/ it allows for both impacts of import and export variables to be properly considered  in a same testable wage equation. 3/ it stresses explicitly the role of imperfect market structures of goods and labor, as well as their interaction, when studying wages' response to openness. We construct a dataset that provides together trade, activity and labor related data for around 29 industries and 65 countries between 1981 and 1997. We find, for OECD countries, that an increase in export as well as domestic market shares is associated with growth in wages in roughly half of the industries. Among developing countries, Mediterranean followed by Latin American countries, are those where such phenomenon of rent-sharing can be observed. This does not seem to be the case in Asia however.

JEL Classification: F1,L1 et J3

Keywords:  Trade, Wages, Rent sharing, Oligopoly

Galvão, Ana Beatriz C.

European University Institute

Structural Breaks and Non-Linearities for Predicting the Probability of US Recessions using the Spread

This paper proposes a structural break threshold model (SBT) to the dynamic relationship between US output growth and the spread between long- and short-term interest rates. This model is able to account for non-linearities, parameter changes and the reduction of the variability of output growth. The SBT model gives better in-sample predictions of the probability of US recessions during 1955-1999 than models with only non-linearity or structural breaks. The presence of a structural break affects the timing and the size of predictions of the probability of recession for 2001.

Key words: predictions of event probabilities, threshold models, structural breaks, recessions;

JEL: C32, E32

Ganelli, Giovanni

University of Warwick and Trinity College Dublin

Fiscal Policy Rules in an Overlapping Generations Model with Endogenous Labour

Supply

A fiscal policy rule in which taxation is a function of existing government debt (a ''wealth-tax'') is usually believed to be effective in providing stability. Using a discrete-time version of Blanchard's overlapping generations model, extended to include money and an endogenous labour supply we show that, contrary to the intuition, a wealth tax might not be enough to ensure the existence of a unique, well defined, saddle-path equilibrium. We suggest that a government willing to run a positive and sustainable level of debt could use an alternative financing rule, imposing an additional tax component, that is a function of the difference between the real interest rate and the tax rate on wealth.

JEL. Classification:\ E62, H63

Keywords: Fiscal Policy Rules, Wealth Tax, Overlapping Generations.

Ganguli, Subhadra

University of California Riverside

Returns to Scale and Environmental Regulation in Duopoly

Tables

I study the effects of an ambient charge on the total pollution generated in a duopolistic industry. Two models are studied in a game-theoretic framework under alternative assumptions about returns to scale. Simulation techniques have been used to examine the outcome of the charge. In both the models it has been shown that for certain values of the demand and cost parameters of the models the ambient charge increases total pollution from the industry. The ``perverse'' results in the models are due to the strategic interaction between the firms under different technologies.

Keywords: Ambient charge, duopoly, returns to scale, environmental regulation, simulation.

JEL Classification: C-7, D-43, Q28

Gardner, Jonathan; Andrew Oswald

University of Warwick

Does Money Buy Happiness?  A Longitudinal Study Using Data on Windfalls.

The most fundamental idea in economics is that money makes people happy. This paper constructs a test.  It studies longitudinal information on the psychological health and reported happiness of approximately 9,000 randomly chosen people.  In the spirit of a natural experiment, the paper shows that those in the panel who receive windfalls -- by winning lottery money or receiving an inheritance -- have higher mental wellbeing in the following year.  A windfall of 50,000 pounds (approximately 75,000 US dollars) is associated with a rise in wellbeing of between 0.1 and 0.3 standard deviations.  Approximately one million pounds (1.5 million dollars), therefore, would be needed to move someone from close to the bottom of a happiness frequency distribution to close to the top.  Whether these happiness gains wear off over time remains an open question.

Garratt, Anthony; Kevin Lee; M Hashem Pesaran; Yongcheol Shin

University of Cambridge; University of Leicester; Trinity College, Cambridge; University of Edinburgh

Forecast Uncertainties In Macroeconometric Modelling: An Application to the UK Economy

This paper argues that probability forecasts convey information on the uncertainties that surround macro-economic forecasts in a straightforward manner which is preferable to other alternatives, including the use of confidence intervals. Point and probability forecasts obtained using a small macro-econometric model, are presented and evaluated using recursive forecasts generated from the model over the period 1999q1-2000q1. Out of sample probability forecasts of inflation and output growth are also provided over the period 2001q2-2003q1, and their implications discussed in relation to the Bank of England's inflation target and the need to avoid recessions, both as separate events and jointly. It is also shown how the probability forecasts can be used to provide insights on the inter-relationship of output growth and inflation at different horizons.

JEL Classifications: C32, C53, E17

Keywords: Probability Forecasting, Long Run Structural VARs,

Macroeconometric Modelling, Forecast Evaluation, Probability Forecasts of Inflation and Output Growth

Gatti, Donatella

University of Paris X – Nanterre

European Integration and Employment. The need for fiscal policies coordination

To investigate the consequences of European markets integration, this paper develops a neo-keynesian model where fiscal policies affect firms' market power and employment. Stronger product market competition is shown to reduce the marginal ability of governments to improve employment through public consumption. As competition crowds out fiscal spending, the positive impact of markets integration on employment is weakened. Moreover, in a context where national goods' demand becomes ''global'', the marginal benefit for each national fiscal authority of increasing public consumption is lower than the marginal benefit for the community. This result stresses one source of coordination failure within EMU.

JEL Classification System: E24, F02, F42, J41

Key-words: product market integration, fiscal policy, coordination, equilibrium employment

Gente, Karine

CEDERS, Université de la Méditerranée

How does the world interest rate affect the real exchange rate?

This paper develops a two goods overlapping generations model (OLG) of a semi-small open economy. Due to the OLG structure, the world interest rate and the domestic rate of time preference need not to be equal. Consequently, this setting represents the minimal real framework to study the effects of a world interest rate shock on the real exchange rate (RER).We show that both medium and long-run effects of a positive interest rate shock depend on the net financial position of the domestic country vis-à-vis the rest of the world. The path of the RER is non monotonic (undershooting) in the case of a creditor country, while the RER simply appreciates in a debtor country.

Classification JEL :D91, F31, F41.

Key-words : Real exchange rate, overlapping generations, world interest rate shock.

Ghidoni, Michele

University College London

Determinants of young Europeans' decision to leave the parental household

I estimated a dynamic model of departure of young people from the parental home using ECHP, BHPS, GSOEP and found that the large differences in household structure across Europe can partly be explained by income and labour market characteristics: for Southern males economic circumstances are important: current income and employment status affect departure, while potential earnings do not, and higher family income discourages departures more than in the North. Southerners’ low departure rates seem to be the result of limited labour market opportunities. A model with multiple destinations is shown to be significantly better than a dichotomous one.

Keywords: Family structure, Household formation, Labour supply.

JEL-Code: J12 (Family structure), J22 (Time allocation and Labor Supply), C3.

Ghosal, Vivek

Georgia Institute of Technology

Impact of Uncertainty and Sunk Costs on Firm Survival and Industry Dynamics

In theory, uncertainty and sunk costs can influence industry dynamics through the option value and financing constraints channels. Empirical evaluation of these models in the context of industry dynamics are, however, at a nascent stage. Our empirical analysis, covering 267 U.S. manufacturing industries over a 30-year period, reveals that greater uncertainty (i) decreases the number of small firms and establishments in high sunk cost industries, (ii) has virtually no impact on larger establishments, (iii) results in a less skewed size distribution of firms and establishments in high sunk cost industries and (iv) marginally increases industry output concentration. Addressing the recent literature, we also control for technological change and our estimates show that technical progress decreases the number of small firms and establishments in an industry. While past studies have emphasized technological change as a key driver of industry dynamics, our results indicate that uncertainty and sunk costs play a crucial role. Our findings could be useful for the study of firm survival, models of creative destruction, evolution of firm size distribution, mergers and acquisitions and competition policy.

JEL: L11, D80, O30, G10, L40.

Keywords: Uncertainty, sunk costs, technological change, industry dynamics, firm size distribution, creative destruction, option value, financing constraints.

Girma, Sourafel; Steve Thompson; Peter Wright

University of Nottingham; University of Leicester

Merger Activity and Executive Pay

This paper examines the impact of mergers and acquisitions on the remuneration of the CEOs in a large unbalanced panel of UK firms, over the period 1981-1996. We find significant and substantial executive pay increases in excess of those generated by the growth in firm size consequent upon the merger. This is consistent with the view that mergers reveal information about the quality of management that is useful to the firm's remuneration committee. However, executive pay is nine times more sensitive to internal growth than to growth as a result of acquisition. Furthermore, there is some evidence that hostile transactions generate smaller pay effects than friendly deals, probably because they are followed, at some remove, by size-reducing divestments. When mergers are distinguished by their impact on shareholder wealth we find that CEOs engaging in 'bad' (ie wealth-reducing) acquisitions experience significantly lower remuneration than their counterparts whose deals meet with market approval. This result suggests that shareholder-principals have at least some success in penalising managers for unwarranted empire-building mergers.

Goodhart, Charles; Boris Hofmann

London School of Economics; University of Bonn

Asset Prices and the Conduct of Monetary Policy

In simple backward-looking structural models of the economy the optimal monetary policy rule is given by a Taylor-type interest rate rule, with the interest rate being a function of current and lagged inflation rates and the current and lagged output gap. Such a rule is optimal because current and past inflation rates and output gaps are sufficient statistics for future inflation and demand conditions, which are targeted by the central bank. We show that future demand conditions and CPI inflation in the G7 countries are also determined by the exchange rate and property and share prices. Taking the UK as an example we discuss the implications of this finding for the conduct of monetary policy and show that disregarding asset price movements leads to a sub-optimal outcome for the economy in terms of inflation and output gap variability. This result not only obtains because the information contained in asset prices about future demand conditions is ignored, but also because their omission from the model introduces considerable biases, so that monetary policy would be based on a mis-specified model of the economy.  We also show how a Financial Conditions Index (FCI), a weighted average of the short-term real interest rate, the real exchange rate, real property and real share prices can be derived based on the estimated models.  The derived FCI appears to be a useful predictor of future CPI inflation.

Görg, Holger; Eric Strobl

University of Nottingham; University College Dublin

“Footloose" Multinationals?

This paper examines whether multinational companies are more footloose than their domestic counterparts in the host country, using data for the Irish manufacturing sector.  First, we investigate whether plant survival rates differ between multinationals and indigenous plants.  Second, we analyse whether employment is more unstable in multinationals.  As regards to the first aspect we find that multinationals are more likely to exit the market than indigenous plants when controlling for other plant and industry specific characteristics.  In terms of employment persistence we find that new jobs generated in MNCs appear to be more persistent than jobs generated in indigenous plants.  In contrast, they are not any more or less likely to reverse employment reductions, all other things being equal.

JEL Classification: F23, J63

Keywords: multinational companies, employment stability, survival, job persistence

Gottschalk. Sylvia D.

National Institute of Economic and Social Research

Market Size and Geographical Advantage

This paper examines the geographical distribution of firms whithin integrating countries, when regions differ in market sizes and in location with respect to a foreign manufacturing core. We found that geographical proximity of a poor region to the core allows the latter's manufacturing industry to expand when trade costs are very low. However, at intermediate trade costs, regional market size is a stronger determinant of the location of industries. Firms are less likely to locate in small regions close to larger cores than in large peripheral regions. Proximity may expose local industries to increased competition from imports and lead firms to leave the region. Regional policies which finance infrastructure in a small region and increases its accessability can thus be detrimental to local industries without a strong local consumer market. The distribution of welfare gains from trade varies according to consumers' geographical location. Consumers located in a poor region but close to a manufacturing core may experience higher welfare gains than consumers located in the peripheral region.

Keywords: Trade integration, industrial location, regional policies.

JEL classification: F12, F15, R12

Graham, Bryan S.; Jonathan Temple

Harvard University; University of Bristol

Rich Nations, Poor Nations: How much can multiple equilibria explain?

The idea that income differences between rich and poor nations arise through multiple equilibria or 'poverty traps' is as intuitive as it is difficult to verify. In this paper, we explore the empirical relevance of such models. We calibrate a simple two sector model for 127 countries, and use the results to analyze the international prevalence of poverty traps and their consequences for productivity. We also examine the possible effects of multiplicity on the world distribution of income, and identify events in the data that may correspond to equilibrium switching.

JEL CLASSIFICATION: O11

KEYWORDS:  multiple equilibria, poverty traps, world income distribution

Granger, Clive W.J.; Gawon Yoon

University of California; Pusan National University

Hidden Cointegration

Possibly hitherto unnoticed cointegrating relationships among integrated components of data series are identified. If the components are cointegrated, the data are said to have hidden cointegration. The implication of hidden cointegration on modeling data series themselves is discussed through what we call crouching error correction models. We show that hidden cointegration is a simple example of nonlinear cointegration. Economic examples are provided with U.S. short-term and long-term interest rates and output and unemployment, for which no evidence of standard cointegration is found.

KEY WORDS: Hidden cointegration; Crouching error correction models; Shocks; Interest rates; Hysteresis of unemployment

JEL classification: C32; E43; E24

University of Hull

JEL: L94

Keywords: Electricity, contract markets, retail competition.