New Economics Papers
on Financial Markets
Issue of 2005‒08‒20
seventeen papers chosen by

  1. Partner Selection Criteria in Strategic Alliances: When to Ally with Weak Partners By Mikkel Lucas Overby
  2. Firm Assets and Investments in Open Source Software Product By Andrea Fosfuri; Marco S Giarratana; Alessandra Luzzi
  3. Construcción de un "Ïndice de Percepción de Riesgo" de los Mercados Financieros Globales By Luis Fernando Melo Velandia; Juan Mauricio ramírez; Mario Andrés Ramos
  4. The Cyclical Behavior of External Indebtedness: The Case of Foreign and Domestic Banks in Colombia By Daniel Esteban Osorio Rodíguez; Mauricio Avella Gómez
  5. Trade rules for uncleared markets By Kibris, Ozgur; Kucuksenel, Serkan
  6. Effects of Stock Market Fluctuations on the Adequacy of Retirement Wealth Accumulation By Eric M. Engen; William G. Gale; Cori E. Uccello
  7. Employer Matching and 401(k) Saving: Evidence from the Health and Retirement Study By Gary V. Engelhardt; Anil Kumar
  8. The Impact of Aging on Financial Markets and the Economy: A Survey By Barry P. Bosworth; Ralph C. Bryant; Gary Burtless
  9. Why Don't Americans Save? By Barry Bosworth
  10. How Do Pensions Affect Actual and Expected Retirement Ages? By Alicia H. Munnell; Robert K. Triest; Natalia A. Jivan
  11. An Update on Pension Data By Alicia H. Munnell; James G. Lee; Kevin B. Meme
  12. Improving 401(k) Investment Performance By William G. Gale; J.Mark Iwry; Alicia H. Munnell; Richard H. Thaler
  13. Yikes! How to Think About Risk? By Alicia H. Munnell; Steven A. Sass; Mauricio Soto
  14. Is Private Long-Term Care Insurance the Answer? By Richard w. Johnson; Cori Uccello
  15. Are the Social Security Trust Funds Meaningful? By Alicia H. Munnell
  16. Chilean Pension Reform: the Good, the Bad, and the In Between By Mauricio Soto
  17. National Versus Regional Financing and Management of Unemployment and Related Benefits: The Case of Canada By David Gray

  1. By: Mikkel Lucas Overby
    Abstract: In many emergent markets, cross-industry alliances are necessary to develop and market new products and services. The resource-based view suggests that firms form alliances to access or acquire valuable, rare, non-imitable and non-substitutable resources, and that such access determines the level of profits. Hence, firms confronted with the choice between partners with strong versus partners with weak resource endowments should choose the former. We contest this view and argue that firms benefit from allying with weak partners at certain times. In essence, we suggest that partner selection involves assessing the relative importance of strong resource endowments and aligned strategic aspirations over time. By adopting an evolutionary approach, we show that appropriate partner selection criteria are dynamic and may involve allying with weak partners in the initial exploratory stage, with weak and/or strong partners in the development stage and with strong partners in the maturity stage. Our findings suggest that the resource-based understanding of strategic alliances should be extended to include a more profound role for a partner firm’s strategic aspiration.
    Keywords: Strategic alliances; partner selection; resources; aspirations
    JEL: L14 L86
    Date: 2005
  2. By: Andrea Fosfuri; Marco S Giarratana; Alessandra Luzzi
    Abstract: Open source software (OSS) has recently emerged as a new way to organize innovation and product development in the software industry. This paper investigates the factors that explain the investment of profit-oriented firms in OSS products. Drawing on the resource-based theory of the firm, we focus on the role played by pre-OSS firm assets both upstream and downstream, in the software and the hardware dimensions, to explain the rate of product introduction in OSS. Using a self-assembled database of firms that have announced releases of OSS products during the period 1995-2003, we find that the intensity of product introduction can be explained by a strong position in software technology and downstream market presence in hardware. Firms with consolidated market presence in proprietary software and strong technological competences in hardware are more reluctant to shift to the new paradigm. The evidence is stronger for operating systems than for applications. The fear of cannibalization, the crucial role of absorptive capacity, and complementarities between hardware and software are plausible explanations behind our findings.
    Keywords: Product introduction; open source software; absorptive capacity
    JEL: L86
    Date: 2005
  3. By: Luis Fernando Melo Velandia; Juan Mauricio ramírez; Mario Andrés Ramos
    Abstract: En este documento se construye un Indice de Percepción de Riesgo de los inversionistas institucionales en los mercados industrializados. Este índice se estima con base en un modelo de análisis factorial dinámico, que explora las tendencias comunes de las volatilidades de los retornos de una canasta de bonos, acciones y monedas de economías desarrolladas para el periodo comprendido entre enero de 1990 y marzo de 2005. Se encuentra que en la mayoría de episodios críticos el índice aumenta, reflejando un incremento en el riesgo percibido por los inversionistas. Adicionalmente, se encuentra que muchos de los deterioros fuertes del riesgo país (medidos por incrementos en el EMBI+) están asociados con aumentos en este índice. La explicación es que la percepción de riesgo afecta las decisiones de inversión de los inversionistas institucionales en bonos de países emergentes y en general en activos riesgosos.
    Keywords: ïndice de Percepción de riesgo, EMB+, análisis factorial dinámico
    JEL: G15 C32 C51
  4. By: Daniel Esteban Osorio Rodíguez; Mauricio Avella Gómez
    Abstract: In this paper we try to elucidate the relationship between foreign and domestic banks external indebtedness and the business cycle in Colombia. After a brief review of related literature, we characterize the historical behavior of banking external indebtedness in Colombia, and perform statistical and econometric calculations on the aforementioned relationship.
    Keywords: Banking external indebtedness,business cycle, cross correlations,dynamic panel data models
    JEL: G2 N26 F34
  5. By: Kibris, Ozgur; Kucuksenel, Serkan
    Keywords: market disequilibrium, trade rule, efficiency, strategy proofness, Anonymity, no-envy, renegotiation proofness, voluntary trade
    Date: 2005–08
  6. By: Eric M. Engen (American Enterprise Institute); William G. Gale (The Brookings Institution); Cori E. Uccello (Urban Institute)
    Abstract: This paper examines the relation between fluctuations in the aggregate value of equities and the adequacy of households’ saving for retirement. We find that many and perhaps most households appear to be saving adequate amounts for retirement, but almost no link between stock values and the adequacy of retirement saving. Historical variation in equity values and ownership correlates poorly with historical variation in the adequacy of saving. Even a simulated 40 percent decline in stocks has little effect on the adequacy of saving. The results occur because equities are concentrated among households with significant amounts of other wealth.
    Keywords: retirement, saving, stocks, equities
    JEL: D91
    Date: 2004–05
  7. By: Gary V. Engelhardt (Syracuse University); Anil Kumar (Center for Policy Research)
    Abstract: Employer matching of employee 401(k) contributions can provide a powerful incentive to save for retirement. We examine the effect of matching on 401(k) saving accounting for non-linearities in the intertemporal budget set. We use detailed administrative contribution, earnings, and pension plan data from the Health and Retirement Study and estimate that the elasticity of contributions with respect to matching is 0.15-0.27 overall, with sixty percent of this effect on the participation margin and the remaining forty percent on the intensive margin. The estimated after-tax cross-price elasticity of 401(k) contributions with respect to IRA saving is -0.60, which suggests 401(k)s and IRAs are substitutes in tax-deferred saving. We find no evidence of endogenous worker sorting based on the discount rate to plans that offer matching.
    Keywords: 401(k), saving, employer matching
    JEL: D91 J33 J26
    Date: 2004–05
  8. By: Barry P. Bosworth (The Brookings Institution); Ralph C. Bryant (The Brookings Institution); Gary Burtless (The Brookings Institution)
    Abstract: All major industrial countries will experience significant population aging over the next several decades. In both academic circles and the business press it is widely believed that population aging will have important effects on financial markets because of its expected impact on saving rates and the demand for investment funds. This paper reviews the literature on the macroeconomic and asset market effects of population aging, focusing on four related issues: (a) The impact of population age structure on aggregate household saving; (b) The effect of population aging on investment demand; (c) Evidence on the influence of population age structure on financial market asset prices and returns; and (d) Effects of globalization on our interpretation of the impact of demographic change.
    Keywords: aging, saving, investment
    JEL: E21
    Date: 2004–10
  9. By: Barry Bosworth (The Brookings Institution)
    Abstract: This paper provides an examination of the decline in the household saving rate over the past two decades from both the macroeconomic and microeconomic perspectives. Between 1980-84 and 2000-04 private saving fell more than 8 percentage points of U.S. GDP. At the aggregate level, about 40 percent of the fall in the household saving rate occurred within contractual retirement accounts, that is, within employer-sponsored and individual retirement plans. Moreover, much of the drop in discretionary saving occurred before the sharp rise in equity and home values in the late 1990s. The paper examines the potential scope of a number of other explanations for the fall in aggregate saving, such as the drop in inflation, increased capital gains on wealth, and alternative treatments of consumer durables as investment. Lower rates of inflation do emerge as a possible cause of the drop in measured saving, but the other factors do not seem consistent with the observed timing of the decline. The microeconomic section explores the feasibility of using information from successive Surveys of Consumer Finances (SCF) to follow the wealth accumulation of specific age cohorts over the period of most dramatic change in aggregate saving. For many components of wealth, the surveys are very similar to the corresponding aggregates of the flow of funds accounts (FFAs), but there are important discrepancies for corporate equities that become particularly large for the 2001 survey. The discrepancies in the nominal wealth are magnified when the two estimates are adjusted for capital gains, yielding substantially different estimates of household saving. The paper reports on some efforts to benchmark the SCF to the FFAs, using the distributional information of the SCF to provide an added dimension to the FFA data. The resulting microeconomic data indicate a widespread drop in saving that cannot be associated with any specific group of households.
    Keywords: household, saving, retirement, inflation
    JEL: E2 J26
    Date: 2004–11
  10. By: Alicia H. Munnell (Center for Retirement Research at Boston College); Robert K. Triest (Federal Reserve Bank of Boston); Natalia A. Jivan (Center for Retirement Research at Boston College)
    Abstract: This paper uses the first six waves of the Health and Retirement Study to investigate the impact of pensions on expected retirement age, on the probability of being retired in each wave given employment in the previous wave, and on the probability of retiring earlier than planned. Pension coverage per se and the type of pension are important in each case. Pension wealth reduces the expected retirement age by 0.6 year, and the incentives in defined benefit plans lower the expected age by another 1.1 years. Pension wealth increases the probability of retiring in a given wave, and pension accruals reduce the probability. Other characteristics of defined benefit plans, as measured by the pension dummy, further raise the probability of being retired. Finally, with regard to the probability of retiring earlier than planned, a change in defined contribution wealth increases the probability, but pension coverage per se reduces it. That is, those with pensions tend to be more accurate planners than those without.
    Keywords: retirement, pension, defined benefit, defined contribution
    JEL: J26 D91
    Date: 2004–11
  11. By: Alicia H. Munnell (Center for Retirement Research at Boston College); James G. Lee (Center for Retirement Research at Boston College); Kevin B. Meme (Center for Retirement Research at Boston College)
    Abstract: This brief focuses on trends over the past two decades in employer-sponsored pension coverage. It explores who is covered by a pension plan and who is not, how much retirees receive in pension income, and how pension coverage and receipt have changed over time. This brief updates our previous work on this topic.
    Keywords: pension, employer-sponsored
    JEL: J26 J33 H55
    Date: 2004–07
  12. By: William G. Gale (The Brookings Institution); J.Mark Iwry (The Brookings Institution); Alicia H. Munnell (Center for Retirement Research at Boston College); Richard H. Thaler (University of Chicago)
    Abstract: Public policies toward private pensions reflect a fundamental tension between free choice and paternalism. When people act in their own best interest without harming others, government intervention is unwarranted. But a key motivation for public policies to subsidize retirement saving in the first place is the belief that, without such subsidies, people would fail to act in their own best interest in making saving and investment choices. A striking example of this tension relates to employees’ freedom to choose how their 401(k) accounts are invested. Self-direction of investments is a common feature of 401(k) plans, but it is not working as well as it could. Employees frequently fail to diversify their investments or rebalance portfolios over time. One of the most dramatic failures is that workers often overinvest in their employer’s stock. These errors can prove costly, as demonstrated by the plight of Enron employees. Overinvested in employer stock, they lost not only their jobs but much of their retirement savings. But even when the plan sponsor does not collapse, poor investment choices impose unnecessary risk on workers, threaten the level and security of retirement income, and reduce the public policy benefits from 401(k) tax subsidies. Given the prevalence of 401(k) plans, workers’ widespread inability to make appropriate investment choices is a first-order concern. This brief summarizes the key conclusions discussed at the June forum on the nature and sources of the underlying problem and potential solutions. Emerging evidence shows that default choices can strongly influence — and, from the perspective of economic decision making, improve — participation and contribution behavior in 401(k)s. A similar approach for asset allocation and investment options, while still preserving employees’ option to self-direct their accounts if they so choose, could be one solution to poor asset allocation choices. Even without establishing such a default, conference participants generally agreed that encouraging employers to promote diversification (for example, by reducing concentrations in employer stock, allowing 401(k) participants access to diversified mutual funds and/or making available independent investment expertise and management) could substantially improve 401(k) asset allocation. Plan sponsors that offer certain qualifying investment arrangements could receive a measure of safe harbor fiduciary protection. These types of solutions deal simultaneously with the frequently poor investment choices made in 401(k)s and the specific problem of overconcentration in employer stock.
    Keywords: private pensions, 401(k), investment
    JEL: D91 J26 J33
    Date: 2004–12
  13. By: Alicia H. Munnell (Center for Retirement Research at Boston College); Steven A. Sass (Center for Retirement Research at Boston College); Mauricio Soto (Center for Retirement Research at Boston College)
    Abstract: The same issue keeps reappearing. How to deal with the risk associated with equity investments when evaluating the financial health of retirement systems? Some experts argue that retirement plans holding equities can make smaller funding contributions than those invested primarily in bonds. After all, stocks yield 7 percent, after inflation, and bonds only 3 percent. Nonsense, say others. The higher expected returns on equities reflect their greater risk. Any serious financial evaluation of retirement arrangements must “risk-adjust” these returns. After accounting for risk, the contribution needed today to fund future pension obligations is the same regardless of whether the fund is invested in equities or bonds. Is it possible to reconcile these two views? How should individuals, governments, and employers account for the expected additional returns from equity investment in pension funds? How should they account for the additional risk? Finally, and perhaps most importantly, how does this relate to the debate about creating private accounts with equity investments for Social Security? To sort out these difficult questions, this brief does three things. First, it describes how equities have performed over the last 75 years. Second, it explains how economists, accountants, and actuaries handle the high returns/high risks associated with equities in the real world. Finally, it explores the implications of the risk discussion for evaluating Social Security reform proposals. The conclusion is that the treatment of the high returns/high risks associated with equity investment depends on the extent to which the entity can manage the risk and the purpose of the calculation. In the case of Social Security reform proposals, evaluations tht focus solely on the expected return to equities, without adjusting for risk, overstate the contribution of private accounts to retirement income security.
    Keywords: investment, equity, stocks, bonds, retirement, risk
    JEL: E22 D91 H55
    Date: 2005–01
  14. By: Richard w. Johnson (Urban Institute); Cori Uccello (Urban Institute)
    Abstract: As the population ages, more Americans than ever before will need long-term care. The cost of providing services is already straining government and family budgets, and costs are expected to soar in a few decades when the Baby Boomers begin to reach their 80s. One option often touted as a possible solution to the looming crisis is to promote private insurance coverage of long-term care needs. This brief describes private long-term care insurance and some of the advantages and limitations of coverage. Despite ongoing efforts to promote private long-term care insurance, widespread coverage faces a number of important hurdles, including affordability, uncertainty about future premium increases, and the disincentives created by the Medicaid safety net.
    Keywords: baby boomers, long-term care, insurance, aging
    JEL: J14
    Date: 2005–03
  15. By: Alicia H. Munnell (Center for Retirement Research at Boston College)
    Abstract: Social Security traditionally has operated on a pay-as-you-go basis — that is, current taxes pay for current benefits. The 1977 and 1983 Amendments to the Social Security Act provided for a temporary departure from this approach — with the buildup of a significant trust fund. Currently the Social Security trust funds hold $1.7 trillion in special Treasury bonds. The question is whether this buildup of assets has been economically meaningful. Has it increased national saving and investment and thereby created additional future income? In some sense this may seem like an antiquated question since 2016 is the last year when annual cash surpluses are expected to contribute to fund balances. But, in fact, the question is still very relevant because any attempt to restore solvency will likely again produce large surpluses for several decades. This brief explores the effectiveness of building up assets in the Social Security trust funds. It first describes the economic rationale for such a buildup. It then looks at the debate about whether the accumulation of assets in the trust funds since 1983 has increased national saving. The final section explores ways that could make the accumulation of assets more effective — changing the budget treatment, restricting trust funds' investment in Treasury debt, and, finally, personal accounts.
    Keywords: social security, trust fund, national saving
    JEL: H55
    Date: 2005–05
  16. By: Mauricio Soto (Center for Retirement Research at Boston College)
    Abstract: In 1980, the Chilean pension system was in crisis. It was paying more in benefits than it was receiving in contributions, and the projected actuarial imbalance was greater than the country's Gross Domestic Product. The prescribed solution was to radically transform the traditional pay-as-you-go structure to a system based on personal retirement accounts. The Box on page two describes the main features of the current system. Nearly 25 years after the reform, it is possible to assess the Chilean experience.
    Keywords: Chile, pension system
    JEL: H55 P5
    Date: 2005–06
  17. By: David Gray
    Abstract: <P>Decentralization looms large in any analysis of Canadian economic and social policy. This trend has been especially pronounced in the area of unemployment insurance (UI) and social assistance (SA) programmes. Provinces now manage SA programmes and retain 100% of any cost savings that they achieve, while the Federal government maintains full responsibility for the passive component of UI. Under a series of provincial-federal Labour Market Development Agreements, since 1997 most of Canada's provinces have taken over administrative responsibility for the employment benefit and support measures (EBSMs) targeted on UI beneficiaries. A number of articles have examined the implications for provincial SA systems of restrictive measures in the UI programme. This paper examines the possibility that provinces may shift actual and potential SA clients onto the insurance system (now called employment insurance, EI). It concludes that within the context of EBSMs, any cost-shifting of this ...</P> <P>La décentralisation figure en tête de toute analyse de la politique économique et sociale canadienne. Cette tendance n'est nulle part plus prononcée que dans le domaine des programmes d'assurance-chômage (AC) et d'aide sociale. Les provinces maintenant gèrent les programmes d'aide sociale et récupèrent 100% de toute économie obtenue, alors que le gouvernement fédéral conserve la pleine responsabilité pour le volet passif de l'AC. Aux termes d'une série d'Ententes sur le développement du marché du travail (EDMT), depuis 1997 la plupart des provinces canadiennes ont la responsabilité de gestion pour les Prestations d'emploi et mesures de soutien (PEMS) ciblées sur les allocataires de l'AC. Il existe quelques études portant sur les conséquences des mesures restrictives appliquées au programme d'AC pour les programmes provinciaux d'aide sociale. Cet article étudie la possibilité que les provinces fassent basculer sur le système d'assurance (nommé maintenant l'assurance-emploi, AE) les ...</P>
    JEL: J64 J65 J68
    Date: 2003–09–19

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