nep-inv New Economics Papers
on Investment
Issue of 2023‒11‒13
eleven papers chosen by
Daniela Cialfi, Università degli Studi di Teramo

  1. An Analysis of the Impact of Minimum Wages on Firm Dynamics (Japanese) By FUKAO Kyoji; KIM YoungGak; KWON Hyeog Ug
  2. Effective Land Ownership, Female Empowerment, and Food Security: Evidence from Peru By Schling, Maja; Pazos, Nicolás
  3. Minimum Wages in the Presence of Wage and Non-Wage Sectors in India: An Exploratory Analysis of the Non-Farm Sector By Mohit Sharma; Brinda Viswanathan
  4. Individual welfare analysis: A tale of consumption, time use and preference heterogeneity By Tim Obermeier
  5. Are Senior Entrepreneurs Happier than Who? The Role of Income and Health By Fritsch, Michael; Sorgner, Alina; Wyrwich, Michael
  6. Austria. No reason to hold back in wage negotiations? By Kevin Guillas-Cavan
  7. Optimal Sub-Saharan and European trade policy response to the use of the food weapon by Russia: do regional taste variations count? By Yacine Ouahioune
  8. Disentangling the Roles of Growth Uncertainty, Discounting, and the Climate Beta on the Social Cost of Carbon By Prest, Brian C.
  9. Partial ownership, financial constraint, and FDI By Ito, Tadashi; Ryan, Michael; Tanaka, Ayumu
  10. An In-Depth Examination of Requirements for Disclosure Risk Assessment By Ron S. Jarmin; John M. Abowd; Robert Ashmead; Ryan Cumings-Menon; Nathan Goldschlag; Michael B. Hawes; Sallie Ann Keller; Daniel Kifer; Philip Leclerc; Jerome P. Reiter; Rolando A. Rodr\'iguez; Ian Schmutte; Victoria A. Velkoff; Pavel Zhuravlev
  11. Efficient option pricing in the rough Heston model using weak simulation schemes By Christian Bayer; Simon Breneis

  1. By: FUKAO Kyoji; KIM YoungGak; KWON Hyeog Ug
    Abstract: The recent minimum wage increase may have a cleansing effect by raising labor costs and causing inefficient firms to exit, while it may encourage firm dynamics by stimulating the entry and growth of more productive firms due to the reduced competition caused by the exit of firms. In addition to previous studies that have focused on manufacturing establishments and firms, this study analyzes the impact of minimum wage increases on industrial dynamics including entry and exit of firms and establishments and employment changes in a market economy that includes mainly non-manufacturing industries by utilizing data from Economic Census for Business Frame and Economic Census for Business Activity of the Ministry of Economy, Trade and Industry and the Ministry of Internal Affairs and Communications. The main findings from the analysis are as follows. (1)Minimum wage increases are positively related to increases in labor productivity and TFP of firms, but this positive relationship is limited to firms and prefectures with higher productivity and wages. (2) Japanese firms responded to minimum wage increases in 2011-2015 by reducing capital and regular employees and significantly increasing temporary employees. The total number of employees was not affected, but temporary employees replaced regular employees. The decrease in regular employees was more pronounced in firms with lower average wages and total factor productivity. (3) Although this reduced the capital-labor ratio of firms, firms increased TFP supposedly by introducing IT technology such as e-commerce, with labor productivity increased. (4) Raising the minimum wage is positively associated with encouraging firms to exit.
    Date: 2023–10
  2. By: Schling, Maja; Pazos, Nicolás
    Abstract: This paper examines the effect of women's effective land ownership on female empowerment and household food security in the context of Peruvian family farming. Using an instrumental variable approach, we explore whether self-declared informal ownership of plots provides women with increased bargaining power, empowering them to participate more actively in productive decision-making that leads to improved crop diversity and food security. While our results do not find significant effects of informal land ownership on women's empowerment, we do find that owning land significantly decreases the daily time dedicated to agricultural work, possibly freeing up time for the woman to engage in other activities. Results also show that female land ownership significantly increases the level of crop diversity and improves the households probability of being food secure by 20 percentage points. This suggests that equal access to land, even without formal title, plays an important role in improving household welfare among smallholder family farmers.
    Keywords: Gender empowerment;food security;land property rights;Peru;Latin America
    JEL: C26 O12 O13 Q15 Q18
    Date: 2021–12
  3. By: Mohit Sharma (Ph.D. Scholar, Madras School of Economics, Chennai); Brinda Viswanathan (Professor & Dean Research, Madras School of Economics, Chennai)
    Abstract: The Indian labour market is characterized by large informality and self-employment. While most of the literature in developing nations on minimum wages has focused on the impact of minimum wages on wages and the employment of the ‘wage earners’, this leaves out a large proportion of the self-employed workforce (non-wage earners). Using the novel data on minimum wages and with the availability of earnings data for self-employed workers in the recent Periodic Labour Force Survey (PLFS) rounds 2017-18, 2018-19, and 2019-20, this study attempts to explore the role of minimum wages on the earnings of all categories of workers including self-employed in the non-farm sector. We find that for unskilled and semi-skilled workers who have studied up to secondary education, higher levels of minimum wages reduce the earning gap between regular, own-account, and casual workers. This might indicate the “lighthouse effect”, where both casual and own-account workers (primarily engaged in informal activities) use minimum wages as a numeraire to carry out earnings negotiations. It has also been found that a higher level of minimum wage reduces the earnings disparity between males and females.
    Keywords: Minimum wage, Informality, Self-employment, Lighthouse effect, India
    JEL: J21 J23 J30 J31 J46 J50
  4. By: Tim Obermeier
    Abstract: How accurately does household income reflect the well-being of the individuals living within the household? Looking at household income does not take unequal consumption sharing within families, the value of time use (leisure and housework) and preference heterogeneity into account. I build a model of family decision-making and the marriage market which jointly captures these aspects and estimate the model based on British time use data. I use the estimated model to study poverty and inequality based on the individual-level Money-Metric Welfare Index (MMWI). The main result is that only 59% of individuals who are poor in terms of the MMWI ('welfare-poor') are also income-poor, suggesting that the conventional focus on income misses a substantial fraction of the welfare-poor. I find that accounting for unobserved preference heterogeneity is an important factor in assessing individual welfare. From an aggregate perspective, inequality within families accounts for 18% of overall welfare inequality, and heterogeneity in economies of scale across households account for 23% of welfare inequality. Finally, to illustrate the policy relevance of individual welfare measures, I study how minimum wage increases affect welfare-poverty in this framework.
    Keywords: individual welfare, preference heterogeneity, inequality, marriage market, intra-household inequality, minimum wage
    Date: 2023–10–23
  5. By: Fritsch, Michael (University of Jena); Sorgner, Alina (John Cabot University); Wyrwich, Michael (University of Groningen)
    Abstract: We propose an extension of the standard occupational choice model to analyze the life satisfaction of senior entrepreneurs as compared to paid employees and particularly retirees in Germany. The analysis identifies income and health status as main factors that shape the relationship between occupational status and life satisfaction. Senior entrepreneurs enjoy higher levels of life satisfaction than retirees and senior paid employees. This higher life satisfaction is mainly due to their higher income. Physical and mental health play a crucial role in determining both an individual's occupational status and their overall life satisfaction. We find that senior self-employed report to be healthier compared to other groups of elderly individuals. However, when controlling for health, retirees exhibit an even higher level of life satisfaction compared to their self-employed counterparts. Heterogeneity analysis of various types of senior entrepreneurs and senior paid employees confirms this general pattern. In addition, we find some evidence indicating that senior entrepreneurs may compromise their leisure time, a main asset of retired individuals. Implications for research, policy, and practitioners are discussed.
    Keywords: senior entrepreneurship, health conditions, well‐being, life satisfaction, age
    JEL: L26 I31 J10 D91
    Date: 2023–10
  6. By: Kevin Guillas-Cavan (IRES - Institut de recherches économiques et sociales)
    Abstract: At a time of almost full employment and flight of precarious labour to Germany, fuelled by a dramatic increase in that country's minimum wage, Austrian unions are issuing heightened demands to address price hikes. In response, bosses are arguing for the significant assistance measures implemented by the government to be deducted from the demands, and that energy and food price inflation be excluded... but are backing down in some sectors in the face of worker mobilization.
    Abstract: Dans un contexte de quasi-plein emploi et de fuite de la main-d'œuvre précaire vers l'Allemagne, attisée par la forte augmentation du salaire minimum dans ce pays, les syndicats autrichiens formulent des revendications élevées pour faire face à la flambée des prix. Face à eux, le patronat plaide pour qu'ils retranchent de leurs revendications les aides importantes mises en place par le gouvernement et qu'ils excluent de l'inflation les prix de l'énergie et de l'alimentation… mais recule dans certains secteurs face à la mobilisation des travailleurs.
    Keywords: Austria, Trade unionism, Wage, Collective bargaining, Autriche, Syndicalisme, Salaire, Négociation collective
    Date: 2022–12
  7. By: Yacine Ouahioune
    Abstract: Short-term trade restrictions amidst world geopolitical crises have greatly contributed to recent global surges in staple prices. Non-cooperative trade policies such as exports bans in 2022 fed into debates about the relationship between food security and trade: although trade is essential to ensure sufficient supply in net-importing countries, it also makes them more vulnerable to external supply shocks. This essay thus examines the mechanisms at play in the diffusion of supply shocks through trade networks, in order to draw conclusions relevant to short-term trade policies protecting food security. It focuses on optimal responses of Sub-Saharan Africa and the European Union to policy shocks happening in Ukraine and Russia. Building on mainstream trade theory, it accounts for worldwide trade and consumption patterns to design ad hoc trade policies for short-term resilience. To do so, I design a three-regions, three-goods microfounded model of trade in which food preferences vary across regions. This model illustrates the point that net importing regions are affected by the demand from other parts of the world with similar preferences. In the face of a price shock, the model implies that trade restrictions in a large importing region may benefit consumers in other importing regions, through both price and substitution channels. I then test my results in a general equilibrium model and simulate a shock on wheat and grain exports from Russia and Ukraine in the Global Trade Analysis Project’s model (GTAP). In this setting, Sub Saharan countries are affected by the higher world price and by the demand of European consumers, which competes with demand from domestic African consumers. I show that, in this context, European import tariffs have the potential to improve welfare in Africa’s food importing countries.
    Keywords: cascading effects , Sub-Saharan Africa , Food security , trade policy , European Union , regional tastes
    Date: 2023
  8. By: Prest, Brian C. (Resources for the Future)
    Abstract: Getting the discount rate right is essential for estimating the social cost of carbon (SCC). Changing the discount rate from 3 to 2 percent—a change approximately consistent with recently proposed updates to federal guidance (OMB 2023a, b)—can more than double the SCC (see, e.g., Rennert et al. 2022; Barrage and Nordhaus 2023). Further, when estimating the SCC, it is common to adjust discount rates to account for uncertainty in future consumption growth and its covariance with uncertain climate impacts (or, alternatively, climate impacts’ covariance with market returns), often called the “climate beta” (Gollier 2014; Dietz et al. 2018). Yet disagreement remains as to whether this adjustment should result in a higher or lower discount rate, largely due to disagreement about the magnitude and sign of the climate beta (see, e.g., Groom et al. 2022; Drupp et al. 2023; Lemoine 2021; Dietz et al. 2018). While major integrated assessment models (IAMs) like William Nordhaus’s DICE model feature a positive climate beta and therefore employ a higher discount rate (Barrage and Nordhaus 2023), others have argued for a negative beta, implying lower discount rates (e.g., Howard and Schwartz 2022; Lemoine 2021). This debate has major consequences for estimates of the SCC, wherein a positive risk adjustment to the discount rate (positive beta) is commonly presumed to correspond to a lower SCC (e.g., Barrage and Nordhaus 2023), whereas a negative risk adjustment to the discount rate (negative beta) is presumed to correspond to a higher one (e.g., Howard 2023).This paper demonstrates that those presumptions are generally incorrect because they consider only one side of the ledger—how uncertainty affects discount rates—while ignoring the offsetting effect of how the same uncertainty affects the value of the object being discounted: expected marginal damages from an incremental ton of carbon dioxide (CO2) emissions. In short, this paper shows that uncertainty in future consumption growth generally increases the SCC, except in one edge case where the effect is zero. This result arises because with a nonzero climate beta, uncertainty in economic growth affects not only the variance but also the expected value of climate impacts, and amid persistent growth uncertainty, this effect is particularly large for impacts occurring far in the future. As I show in this paper, this effect on expected values easily dominates the effect on the discount rate. This result implies that using risk-adjusted discount rates to discount expected climate impacts without accounting for growth uncertainty’s effect on those same expected impacts will yield highly biased estimates of the SCC. In models with a positive beta, this bias leads to substantial underestimates of the SCC, whereas in models with a negative beta, the bias leads to substantial overestimates.Despite this result, the economic literature and applied analysis both give disproportionate and often exclusive attention to risk adjustments to the discount rate, with little or no attention to corresponding adjustments to the expected values being discounted. Indeed, it is common in cost-benefit analysis to calculate costs and benefits in a deterministic model, but then apply risk-adjusted discount rates to those deterministic values based on the idea that those costs and benefits are, in reality, uncertain with some risk profile. This approach is correct only if the deterministically modeled costs and benefits are representative of expected values embodying the same uncertainties that motivate risk adjustments in discount rates, but analysts typically do not seem to consider this in practice.For example, recently proposed revisions to Circulars A-4 and A-94 (OMB 2023a, b) dedicate entire sections to accounting for effects of uncertainty and risk aversion, but those discussions focus principally on risk adjustments to discount rates. There is no mention of how those same uncertainties may similarly affect expected values. This is also true of Nordhaus’s (2023) critique of the US Environmental Protection Agency’s treatment of risk and uncertainty in the discount rate (EPA 2022). The only study I am aware of that acknowledges the effect of growth uncertainty on expected values is that of Ni and Maurice (2021), who note that uncertainty affects the growth rate of expected impacts in a manner governed by the beta; nonetheless, they focus on the discount rate. In general, the common inattention in the literature to growth uncertainty’s effect on expected values has likely contributed to its widespread omission in applied analysis.To derive these results, this paper begins by defining risk-adjusted and certainty-equivalent (also sometimes referred to risk-free) discount rates in the consumption capital asset pricing model, illustrates various conceptual features of those rates, derives analytical expressions for them under certain structural assumptions, and shows how key parameters affect the levels and trajectories of each discount rate. While many of the expressions derived herein are not completely new to the literature (e.g., related expressions are derived in Weitzman 1998; Gollier 2014; and Dietz et al. 2018), this paper synthesizes key insights from across the literature to illuminate the drivers of the term structures of risk-free and risk-adjusted discount rates and their implications for the SCC. Further, it shows the certainty-equivalent and risk-adjusted rates implied by the Greenhouse Gas Impact Valuation Estimator (GIVE; Rennert et al. 2022), demonstrating that GIVE’s relatively high central estimate of the SCC at $185 per ton of carbon dioxide is nonetheless consistent with a risk-adjusted discount rate that rises over time, with a risk premium reaching 2.7 percent by the end of its time horizon (2300).
    Date: 2023–10–23
  9. By: Ito, Tadashi; Ryan, Michael; Tanaka, Ayumu (Aoyama Gakuin University)
    Abstract: Using matched firm-bank-FDI data over the period 1989–2016, this study explores how a firm's financial constraints affect its choice of foreign affiliate ownership structure. Importantly, it tests the hypothesis that parent firms with banks as their largest shareholders hold lower ownership shares in their foreign subsidiaries, in part due to typical bank risk-averse behavior. The empirical analysis confirms that foreign subsidiary ownership ratios are negatively associated with parent firms’ debt ratios. Moreover, this study finds evidence that greater bank ownership of the investing parent leads to lower foreign affiliate ownership shares. However, this result is not robust to two specifications: "crisis times" when bank lending is greatly restricted to all borrowers, and a follow-the-customer relationship where the bank already has an overseas subsidiary in the host country.
    Date: 2023–10–14
  10. By: Ron S. Jarmin; John M. Abowd; Robert Ashmead; Ryan Cumings-Menon; Nathan Goldschlag; Michael B. Hawes; Sallie Ann Keller; Daniel Kifer; Philip Leclerc; Jerome P. Reiter; Rolando A. Rodr\'iguez; Ian Schmutte; Victoria A. Velkoff; Pavel Zhuravlev
    Abstract: The use of formal privacy to protect the confidentiality of responses in the 2020 Decennial Census of Population and Housing has triggered renewed interest and debate over how to measure the disclosure risks and societal benefits of the published data products. Following long-established precedent in economics and statistics, we argue that any proposal for quantifying disclosure risk should be based on pre-specified, objective criteria. Such criteria should be used to compare methodologies to identify those with the most desirable properties. We illustrate this approach, using simple desiderata, to evaluate the absolute disclosure risk framework, the counterfactual framework underlying differential privacy, and prior-to-posterior comparisons. We conclude that satisfying all the desiderata is impossible, but counterfactual comparisons satisfy the most while absolute disclosure risk satisfies the fewest. Furthermore, we explain that many of the criticisms levied against differential privacy would be levied against any technology that is not equivalent to direct, unrestricted access to confidential data. Thus, more research is needed, but in the near-term, the counterfactual approach appears best-suited for privacy-utility analysis.
    Date: 2023–10
  11. By: Christian Bayer; Simon Breneis
    Abstract: We provide an efficient and accurate simulation scheme for the rough Heston model in the standard ($H>0$) as well as the hyper-rough regime ($H > -1/2$). The scheme is based on low-dimensional Markovian approximations of the rough Heston process derived in [Bayer and Breneis, arXiv:2309.07023], and provides weak approximation to the rough Heston process. Numerical experiments show that the new scheme exhibits second order weak convergence, while the computational cost increases linear with respect to the number of time steps. In comparison, existing schemes based on discretization of the underlying stochastic Volterra integrals such as Gatheral's HQE scheme show a quadratic dependence of the computational cost. Extensive numerical tests for standard and path-dependent European options and Bermudan options show the method's accuracy and efficiency.
    Date: 2023–10

This nep-inv issue is ©2023 by Daniela Cialfi. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.