nep-knm New Economics Papers
on Knowledge Management and Knowledge Economy
Issue of 2006‒09‒16
fifty-six papers chosen by
Martin Spraggon Hernandez
Universite du Quebec en Outaouais

  1. Rational Ignorance and Voting Behavior By Cesar Martinelli
  2. Nash Equilibrium as an Expression of Self-Referential Reasoning By Perea Andrés
  3. Weighted Approval Voting By Jordi Masso³; Marc Vorsatz
  4. The effect of transformations on the approximation of univariate (convex) functions with applications to pareto curves By Siem,A.Y.D.; Hertog,D. den; Hoffmann,A.L.
  5. Trade First and Trade Fast: A Duration Analysis of Recovery from Currency Crisis By Saubhik Deb
  6. Geometry of Financial Markets - Towards Information Theory Model of Markets By Edward W. Piotrowski; Jan Sladkowski
  7. How Far Ahead Do People Plan? By John Hey; Julia Knoll
  8. Judgment aggregation on restricted domains By Dietrich Franz; List Christian
  9. The Logic of Appropriability: From Schumpeter to Arrow to Teece By Sidney Winter
  10. A Matter of Opinion : How Ecological and Neoclassical Environmental Economists Think about Sustainability and Economics By Lydia Illge; Reimund Schwarze
  11. Social Welfare Functions that Satisfy Pareto, Anonymity, and Neutrality: Countable Many Alternatives By Donald E. Campbell; Jerry S. Kelly
  12. Designing Non-Parametric Estimates and Tests for Means By Karl H. Schlag
  13. PERFORMANCE PAY AND WAGE INEQUALITY By Thomas Lemieux; W. Bentley Macleod; Daniel Parent
  14. Brain drain and distance to frontier By Maria,Corrado di; Stryszowski,Piotr
  15. Optimal portfolio choice with annuitization By Koijen,Ralph S.J.; Nijman,Theo E.; Werker,Bas J.M.
  16. Labor Market Institutions: Curse or Blessing? By Carsten Ochsen; Heinz Welsch
  17. Worker satisfaction and perceived fairness: result of a survey in public, and non-profit organizations By Ermanno Tortia
  18. Collusion when the Number of Firms is Large By Luca Colombo; Michele Grillo
  19. The Distribution of Total Work in the EU and US By Michael C. Burda; Daniel S. Hamermesh; Philippe Weil
  20. Diversification at financial institutions and systemic crises By Wagner,Wolf
  21. On the Practice of Bayesian Inference in Basic Economic Time Series Models using Gibbs Sampling By Michiel D. de Pooter; René Segers; Herman K. van Dijk
  22. Changes in the Federal Reserve's Inflation Target: Causes and Consequences By Peter N. Ireland
  23. Does aggregate relative risk aversion change countercyclically over time? evidence from the stock market By Hui Guo; Zijun Wang; Jian Yang
  24. Outsourcing, Offshoring, and Productivity Measurement in Manufacturing By Susan Houseman
  25. The Forward Market in Emerging Currencies: Less Biased Than in Major Currencies By Jeffrey Frankel; Jumana Poonawala
  26. International Share Ownership, Profit Shift and Protectionism. By T.Huw Edwards
  27. Investment-specific technological change, skill accumulation, and wage inequality By Hui He; Zheng Liu
  28. Unemployment Insurance in Europe: Unemployment Duration and Subsequent Employment Stability By Konstantinos Tatsiramos
  29. Collusion and Durability By Dan Sasaki; Roland Strausz
  30. Immigration and Outsourcing: A General Equilibrium Analysis By Subhayu Bandyopadhyay; Howard Wall
  31. Are Monetary Rules and Reforms Complements or Substitutes? A Panel Analysis for the World versus OECD Countries By Ansgar Belke; Bernhard Herz; Lukas Vogel
  32. Unemployment Fluctuations With Staggered Nash Wage Bargaining By Mark Gertler; Antonella Trigari
  33. Specification tests of asset pricing models using excess returns By Raymond Kan; Cesare Robotti
  34. Political and Institutional Determinants of the Cyclicality of Fiscal Policy: Evidence from the OECD and Latin America By Nuno Venes
  35. Has globalization increased inequality? By Axel Dreher; Noel Gaston
  36. Energy price shocks and the macroeconomy: the role of consumer durables By Rajeev Dhawan; Karsten Jeske
  37. Fast estimation methods for time series models in state-space form. By Alfredo Gª Hiernaux; Miguel Jerez; José Casals
  38. A General Representation Theorem for Integrated Vector Autoregressive Processes By Massimo Franchi
  39. Urban density and the rate of invention By Gerald Carlino; Satyajit Chatterjee; Robert Hunt
  40. A Behavioral Model for Participation Games with Negative Feedback By Pietro Dindo; Jan Tuinstra
  41. Why Does Ethnic Diversity Undermine Public Goods Provision? An Experimental Approach By James Habyarimana; Macartan Humphreys; Daniel N. Posner; Jeremy Weinstein
  42. A recursive core for partition function form games By Kóczy László Á
  43. Product Market Integration, Comparative Advantages and Labour Market Performance By Andersen, Torben M.; Skaksen , Jan Rose
  44. Pareto-Improving Bequest Taxation By Volker Grossmann; Panu Poutvaara
  45. Analyzing cost efficient production behavior under economies of scope : a nonparametric methodology By Cherchye,Laurens; De Rock,Bram; Vermeulen,Frederic
  46. The Returns to Currency Speculation By Craig Burnside; Martin Eichenbaum; Isaac Kleshchelski; Sergio Rebelo
  47. Correlated Equilibrium and the Pricing of Public Goods. By Joseph M. Ostroy; Joon Song
  48. Income and happiness: Evidence, explanation and economic implications By Andrew E. Clark; Paul Frijters; Michael A. Shields
  49. Expansionary fiscal consolidations in Europe: new evidence By António Afonso
  50. The Cost of Banking Regulation By Luigi Guiso; Paola Sapienza; Luigi Zingales
  51. The Jack-of-All-Trades Entrepreneur: Innate Talent or Acquired Skill? By Olmo Silva
  52. The Puzzle of Altruism Reconsidered: Biological Theories of Altruism and One-Shot Altruism By Shultziner, Doron; Dattner, Arnon
  53. Monetary policy with model uncertainty: distribution forecast targeting By Svensson, Lars E.O.; Williams, Noah
  54. The long-run Fisher effect: can it be tested? By Mark J. Jensen
  55. Overbidding in Independant Private-Values Auctions and Misperception of Probabilities By Olivier Armantier; Nicolas Treich
  56. Mergers and CEO power By Felipe Balmaceda

  1. By: Cesar Martinelli (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))
    Abstract: We model a two-alternative election in which voters may acquire information about which is the best alternative for all voters. Voters differ in their cost of acquiring information. We show that as the number of voters increases, the fraction of voters who acquire information declines to zero. However, if the support of the cost distribution is not bounded away from zero, there is an equilibrium with some information acquisition for arbitrarily large electorates. This equilibrium dominates in terms of welfare any equilibrium without information acquisition--even though generally there is too little information acquisition with respect to an optimal strategy profile.
    JEL: D72
    Date: 2005–10
  2. By: Perea Andrés (METEOR)
    Abstract: Within a formal epistemic model for simultaneous-move games, we present the following conditions: (1) belief in the opponents'' rationality (BOR), stating that a player should believe that every opponent chooses an optimal strategy, (2) self-referential beliefs (SRB), stating that a player believes that his opponents hold correct beliefs about his own beliefs, (3) projective beliefs (PB), stating that i believes that j''s belief about k''s choice is the same as i''s belief about k''s choice, and (4) conditionally independent beliefs (CIB), stating that a player believes that opponents'' types choose their strategies independently. We show that, if a player satisfies BOR, SRB and CIB, and believes that every opponent satisfies BOR, SRB, PB and CIB, then he will choose a Nash equilibrium strategy (that is, a strategy that is optimal in some Nash equilibrium). We thus provide a set of sufficient conditions for Nash equilibrium strategy choice. We also show that none of these seven conditions can be dropped.
    Keywords: mathematical economics;
    Date: 2006
  3. By: Jordi Masso³; Marc Vorsatz
    Abstract: To allow society to treat unequal alternatives distinctly we propose a natural extension of Approval Voting by relaxing the assumption of neutrality. According to this extension, every alternative receives ex-ante a non-negative and finite weight. These weights may differ across alternatives. Given the voting decisions of every individual (individuals are allowed to vote for, or approve of, as many alternatives as they wish to), society elects all alternatives for which the product of total number of votes times exogenous weight is maximal. Our main result is an axiomatic characterization of this voting procedure.
    Keywords: Approval Voting, Neutrality
    JEL: D71
    Date: 2006–09–04
  4. By: Siem,A.Y.D.; Hertog,D. den; Hoffmann,A.L. (Tilburg University, Center for Economic Research)
    Abstract: In the literature, methods for the construction of piecewise linear upper and lower bounds for the approximation of univariate convex functions have been proposed. We study the effect of the use of increasing convex or increasing concave transformations on the approximation of univariate (convex) functions. In this paper, we show that these transformations can be used to construct upper and lower bounds for nonconvex functions. Moreover, we show that by using such transformations of the input variable or the output variable, we obtain tighter upper and lower bounds for the approximation of convex functions than without these approximations. We show that these transformations can be applied to the approximation of a (convex) Pareto curve that is associated with a (convex) bi-objective optimization problem.
    Keywords: approximation theory;convexity;convex/concave transformation;Pareto curve
    JEL: C60
    Date: 2006
  5. By: Saubhik Deb (Department of Economics)
    Abstract: Over the last three decades, durations of recovery of output from contractionary currency crises have shown much variation both within and across countries. Using a dataset comprising of both developing and industrial countries, this paper examines the importance of economic fundamentals, international trade and liberalized capital account in determining the speed of recovery from such crises. We found that poor macroeconomic fundamentals and capital account liberalization have no significant effect on duration of recovery. However, all trade related variables were found to be significant. Our results indicate the preeminence of export led recovery.
    Keywords: Currency Crisis, Output Recovery, Duration Analysis
    JEL: F30 F41 C41
    Date: 2006–04–06
  6. By: Edward W. Piotrowski; Jan Sladkowski
    Abstract: Most of parameters used to describe states and dynamics of financial market depend on proportions of the appropriate variables rather than on their actual values. Therefore, projective geometry seems to be the correct language to describe the theater of financial activities. We suppose that the object of interest of agents, called here baskets, form a vector space over the reals. A portfolio is defined as an equivalence class of baskets containing assets in the same proportions. Therefore portfolios form a projective space. Cross ratios, being invariants of projective maps, form key structures in the proposed model. Quotation with respect to an asset X (i.e. in units of X) are given by linear maps. Among various types of metrics that have financial interpretation, the min-max metrics on the space of quotations can be introduced. This metrics has an interesting interpretation in terms of rates of return. It can be generalized so that to incorporate a new numerical parameter (called temperature) that describes agent's lack of knowledge about the state of the market. In a dual way, a metrics on the space of market quotation is defined. In addition, one can define an interesting metric structure on the space of portfolios/quotation that is invariant with respect to hyperbolic (Lorentz) symmetries of the space of portfolios. The introduced formalism opens new interesting and possibly fruitful fields of research.
  7. By: John Hey; Julia Knoll
    Abstract: We report on a simple experiment which enables us to infer how far people plan ahead when taking decisions in a dynamic risky context. Usually economic theory assumes that people plan right to the end of the planning horizon. We find that this is true for a little over half of the subjects in the experiment, while a little under one half seem not to plan ahead at all.
    Keywords: Planning, dominance, myopia, naivety, sophistication
    JEL: D80 C80
    Date: 2006–08
  8. By: Dietrich Franz; List Christian (METEOR)
    Abstract: We show that, when a group takes independent majority votes on interconnected propositions, the outcome is consistent once the profile of individual judgment sets respects appropriate structural conditions. We introduce several such conditions on profiles, based on ordering the propositions or ordering the individuals, and we clarify the relations between these conditions. By restricting the conditions to appropriate subagendas, we obtain local conditions that are less demanding but still guarantee consistent majority judgments. By applying the conditions to agendas representing preference aggregation problems, we show parallels of some conditions to existing social-choice-theoretic conditions, specifically to order restriction and intermediateness, restricted to triples of alternatives in the case of our local conditions.
    Keywords: mathematical economics;
    Date: 2006
  9. By: Sidney Winter
    Abstract: This note expounds the abstract fundamentals of the appropriability problem, re-assessing insights from three classic contributions – those of Schumpeter, Arrow and Teece. Whereas the first two contributions were explicitly concerned with the implications of appropriability for society at large, Teece’s main concern was with practical questions of business strategy and economic organization. This note argues that, his practical concerns notwithstanding, Teece contributed, en passant but fundamentally, to the clarification of basic questions that previous authors had addressed less comprehensively and less satisfactorily. Specifically, his analysis of the innovator’s access to complementary assets, undertaken from a contracting perspective, can be seen as filling a significant gap in the previous theoretical discussion of appropriability.
    Keywords: Appropriability, Innovation, Complementary assets, Patents, Intellectual property.
    Date: 2006–09–11
  10. By: Lydia Illge; Reimund Schwarze
    Abstract: The differing paradigms of ecological and neoclassical environmental economics have been described in various articles and books and are also embedded in different institutional settings. However, we cannot take for granted that the paradigm debates described in the literatu-re are actually mirrored in exactly the same way in the perceptions and opinions of researchers looking at sustainability from an economic perspective. This paper presents empirical results from a German case study on how economists and others involved in economic sustainability research from different schools of thought think about the issues of sustainability and economics, how they group around these issues, how they feel about the current scientific divide, and what they expect to be future topics of sustainability research. Knowing that sustainability research is highly and still increasingly internationally intertwined, and assuming that the opinions of German economic sustainability researchers do not dramatically differ from those in other countries, we think that these results will be of interest to the inter-national scientific community [...]
    Date: 2006
  11. By: Donald E. Campbell (Department of Economics, College of William and Mary); Jerry S. Kelly (Department of Economics, Syracuse University)
    Abstract: For a finite number of alternatives, in the presence of Pareto, non-dictatorship, full domain, and transitivity, an extremely weak independence condition is incompatible with each of anonymity and neutrality (Campbell and Kelly [2006]). This paper explores how those results are affected when there are countably many alternatives.
    Keywords: Pareto, anonymity, neutrality
    JEL: D70 D71
    Date: 2006–09–11
  12. By: Karl H. Schlag
    Abstract: We show how to derive nonparametric estimates from results for Bernoulli distributions, provided the means are the only parameters of interest. The only information is that the support of each random variable is contained in a known bounded set. Examples include presenting minimax risk properties of the sample mean and a minimax regret estimate for costly treatment. With the same method we are able to design nonparametric exact statistical inference tests for means using existing uniformly most powerful (unbiased) tests for Bernoulli distributions. These tests are parameter most powerful in the sense that there is no alternative test with the same size that yields higher power over any set of alternatives that only depends on the means. As examples we present for the ?first time an exact unbiased nonparametric test for a single mean and for the equality of two means (both for independent samples and for paired experiments). We also show how to improve performance of Hannan consistent rules.
    Keywords: exact, distribution-free, nonparametric inference, binomial average, finite sample theory, Hannan consistency, universal consistent
    JEL: C12 C44 C14
    Date: 2006
  13. By: Thomas Lemieux; W. Bentley Macleod; Daniel Parent
    Abstract: An increasing fraction of jobs in the U.S. labor market explicitly pay workers for their performance using a bonus, a commission, or a piece rate. In this paper, we look at the effect of the growing incidence of performance pay on wage inequality. The basic premise of the paper is that performance pay jobs have a more "competitive" pay structure that rewards productivity differences more than other jobs. Consistent with this view, we show that compensation in performance pay jobs is more closely tied to both measured (by the econometrician) and unmeasured productive characteristics of workers. We conclude that the growing incidence of performance pay accounts for 25 percent of the growth in male wage inequality between the late 1970s and the early 1990s.
    JEL: D3 J31 J33
    Date: 2006–08
  14. By: Maria,Corrado di; Stryszowski,Piotr (Tilburg University, Center for Economic Research)
    Abstract: In this paper we investigate the effects of emigration on growth in developing countries. We present a model in which productivity increases either through imitation or innovation, and both activities use the same types of human capital as inputs, albeit with different intensities. Heterogenous agents accumulate human capital responding to economic incentives, and might be able to emigrate. When no migration of skilled workers is allowed, backwards countries converge to the technological frontier. The possibility of migration, however, distorts the optimal accumulation of human capital and slows down, or even hinders, development. This effect is stronger the farther away a developing country is from the technological frontier. Thus, technologically backward countries are more likely to suffer from a negative brain drain effect. Among these countries, those which implement appropriate policies, subsidizing the accumulation of the most useful type of human capital, improve their growth performance. They converge faster, and possibly to a higher productivity level than countries where such policies are neglected.
    Keywords: Education;Migration;Human capital;Economic growth
    JEL: I28 F22 J24 O40
    Date: 2006
  15. By: Koijen,Ralph S.J.; Nijman,Theo E.; Werker,Bas J.M. (Tilburg University, Center for Economic Research)
    Abstract: We study the optimal consumption and portfolio choice problem over an individual's life-cycle taking into account annuity risk at retirement. Optimally, the investor allocates wealth at retirement to nominal, inflation-linked, and variable annuities and conditions this choice on the state of the economy. We also consider the case in which there are, either for behavioral or institutional reasons, limitations in the types of annuities that are available at retirement. Subsequently, we determine how the investor optimally anticipates annuitization before retirement. We find that i) using information on term structure variables and risk premia significantly improves the optimal annuity choice, ii) restricting the annuity menu to nominal or inflation-linked annuities is costly for both conservative and more aggressive investors, and iii) adjustments in the optimal investment strategy before retirement induced by the annuity demand due to inflation risk and time-varying risk premia are economically significant. This holds as well for sub-optimal annuity choices. The adjustment to hedge real interest rate risk is negligible. We estimate that the welfare costs of not taking these three factors into account at retirement are 9% for an individual with an average risk aversion ( = 5). Not hedging annuity risk before retirement causes an additional welfare costs between 1% and 13%, depending on the annuitization strategy implemented at retirement.
    Keywords: optimal life-cycle portfolio choice;annuity risk
    JEL: D91 G0 G11 G23
    Date: 2006
  16. By: Carsten Ochsen (University of Rostock); Heinz Welsch (University of Oldenburg)
    Abstract: Previous literature has identified considerable non-pecuniary costs to macroeconomic fluctuation and uncertainty. The present paper investigates whether and to what extent labor market institutions can mitigate those costs. We study how life satisfaction of European citizens is affected by employment protection and the level and duration of unemployment benefit payments. We differentiate between direct effects (at given macroeconomic conditions) and total effects (including the feedback through the institutions? effect on macroeconomic outcomes). We find that the total effect of employment protection is positive, whereas the total effect of benefit duration is negative. The direct and indirect effects of a higher benefit level nearly neutralize each other.
    Keywords: unemployment benefit; employment protection; macroeconomic uncertainty; cost-benefit analysis; life satisfaction; happiness
    JEL: J30 E24 E60 D71 I31
    Date: 2006
  17. By: Ermanno Tortia
    Abstract: Exploiting a unique data set concerning a sample of 228 social service organizations, and on 2066 workers, the paper seeks to demonstrate that workers’ satisfaction with the job and loyalty to the organization are crucially influenced by fairness concerns. Worker well-being is increased by a higher degree of perceived fairness, and the effect is highest for procedural fairness. By sorting the organizations into public and nonprofits, the former are found to be at a disadvantage in regard to both satisfaction and perceived fairness. Nonprofits show the highest scores on most items and the gap is highest in the realm of procedural fairness.
    Date: 2006
  18. By: Luca Colombo; Michele Grillo
    Abstract: In antitrust analysis it is generally agreed that a small number of firms operating in the industry is an essential precondition for collusive behavior to be sustainable. However, the Italian Competition Authority (AGCM) challenged this view in the recent case RCA (2000), when an information exchange among forty-four firms in the car insurance market was assessed as having an anticompetitive object. The AGCM’s basic argument was that an information exchange facilitates collusion because it changes the market environment in such a way as to relax the incentive compatibility constraint for collusion, thus circumventing the decrease in the critical discount factor when the number of firms in the industry increases. In this paper we model collusive behavior in a “dispersed” oligopoly. We prove that, when the technology exhibits decreasing returns to scale, collusion can always be sustained, regardless of the number of firms, provided the marginal cost function is sufficiently steep. Moreover, we show how an information exchange can sustain collusive behavior when the number of firms is “large” independently of the assumptions on technology.
    Keywords: Collusion, Industry structure, Facilitating practices
    JEL: L41 L13 L11 K21
    Date: 2006–03
  19. By: Michael C. Burda (Humboldt University of Berlin, CEPR and IZA Bonn); Daniel S. Hamermesh (University of Texas at Austin, NBER and IZA Bonn); Philippe Weil (Université Libre de Bruxelles (ECARES), Institut d’Études Politiques de Paris, CEPR and NBER)
    Abstract: Using two time-diary data sets each for Germany, Italy the Netherlands and the U.S. from 1985-2003, we demonstrate that Americans work more than Europeans: 1) in the market; 2) in total (market and home production)-- there is no one-for-one tradeoff across countries in total work; 3) at unusual times of the day and on weekends. In addition, gender differences in total work within a given country are significantly smaller than variation across countries and time. We conclude that some of the transatlantic differences could reflect inferior equilibria that are generated by social norms and externalities. While an important outlet for total work, home production by females appears very sensitive to tax rates in the G-7 countries. We adapt the theory of home production to account for fixed costs of market work and adduce evidence that they, in contrast to other relative costs, vary significantly across countries.
    Keywords: time use, gender inequality, household production, hours of work
    JEL: J22 E24 D13
    Date: 2006–08
  20. By: Wagner,Wolf (Tilburg University, Center for Economic Research)
    Abstract: We show that the diversification of risks at financial institutions has unwelcome effects by increasing the likelihood of systems crises. As a result, complete diversification is not warranted adn the optimal degree of diversification is arbitrarily low. We also identify externalities that cause financial institutions to diversify beyond diversification may thus have reduced welfare.
    Keywords: diversification;financial consolidation;conglomeration;securitization;system risk
    JEL: G21 G28
    Date: 2006
  21. By: Michiel D. de Pooter (Faculty of Economics, Erasmus Universiteit Rotterdam); René Segers (Faculty of Economics, Erasmus Universiteit Rotterdam); Herman K. van Dijk (Faculty of Economics, Erasmus Universiteit Rotterdam)
    Abstract: Several lessons learned from a Bayesian analysis of basic economic time series models by means of the Gibbs sampling algorithm are presented. Models include the Cochrane-Orcutt model for serial correlation, the Koyck distributed lag model, the Unit Root model, the Instrumental Variables model and as Hierarchical Linear Mixed Models, the State-Space model and the Panel Data model. We discuss issues involved when drawing Bayesian inference on regression parameters and variance components, in particular when some parameter have substantial posterior probability near the boundary of the parameter region, and show that one should carefully scan the shape of the posterior density function. Analytical, graphical and empirical results are used along the way.
    Keywords: Gibbs sampler; MCMC; serial correlation; non-stationarity; reduced rank models; state-space models; random effects panel data models
    JEL: C11 C15 C22 C23 C30
    Date: 2006–08–31
  22. By: Peter N. Ireland
    Abstract: This paper estimates a New Keynesian model to draw inferences about the behavior of the Federal Reserve's unobserved inflation target. The results indicate that the target rose from 1 1/4 percent in 1959 to over 8 percent in the mid-to-late 1970s before falling back below 2 1/2 percent in 2004. The results also provide some support for the hypothesis that over the entire postwar period, Federal Reserve policy has systematically translated short-run price pressures set off by supply-side shocks into more persistent movements in inflation itself, although considerable uncertainty remains about the true source of shifts in the inflation target.
    JEL: E31 E32 E52
    Date: 2006–08
  23. By: Hui Guo; Zijun Wang; Jian Yang
    Abstract: Using a semiparametric estimation technique, we show that the risk-return tradeoff and the Sharpe ratio of the stock market increases monotonically with the consumption wealth ratio (CAY) across time. While early studies have commonly interpreted such a finding as evidence of the countercyclical variation in aggregate relative risk aversion (RRA), we argue that it mainly reflects changes in investment opportunities for two reasons. First, we fail to reject the null hypothesis of constant RRA after controlling for CAY as a proxy for the hedge against changes in the investment opportunity set. Second, by contrast with habit formation models but consistent with ICAPM, we find that loadings on the conditional stock market variance scaled by CAY are negatively priced in the cross-sectional regressions. For illustration, we replicate the countercyclical stock market risk-return tradeoff using simulated data from Guo's (2004) limited stock market participation model, in which RRA is constant and CAY is a proxy for shareholders' liquidity conditions.
    Keywords: Capital assets pricing model ; Stock market
    Date: 2006
  24. By: Susan Houseman (W.E. Upjohn Institute for Employment Research)
    Abstract: Because of gaps in existing surveys and methodological problems with the computation of productivity measures, outsourcing and offshoring result in an overstatement of labor productivity and multifactor productivity growth in manufacturing. Although it is impossible to fully characterize the size of the bias, I present several pieces of evidence indicating that it is large. Any overstatement of productivity in manufacturing, which has been a driver of productivity in the American economy, may have important implications for aggregate productivity measurement, particularly to the extent that the bias arises from offshoring activities. These findings may help explain why recent high growth in labor productivity has not been associated with widespread wage gains but rather with an increase in capital's share of GDP: labor productivity growth in manufacturing, and most likely in the aggregate economy, are overstated, and the very factors that have led to the overstatement - outsourcing and offshoring - depress wages. The effects of outsourcing and offshoring on manufacturing and aggregate productivity measurement, I argue, warrant further study, and productivity measures should be interpreted with caution.
    Keywords: offshoring, productivity, manufacturing, outsourcing, measurement, houseman
    JEL: D24 D33 O47 J24
    Date: 2006–09
  25. By: Jeffrey Frankel; Jumana Poonawala
    Abstract: Many studies have replicated the finding that the forward rate is a biased predictor of the future change in the spot exchange rate. Usually the forward discount actually points in the wrong direction. But virtually all those studies apply to advanced economies and major currencies. We apply the same tests to a sample of 14 emerging market currencies. We find a smaller bias than for advanced country currencies. The coefficient is on average positive, i.e., the forward discount at least points in the right direction. It is never significantly less than zero. To us this suggests that a time-varying exchange risk premium may not be the explanation for traditional findings of bias. The reasoning is that emerging markets are probably riskier; yet we find that the bias in their forward rates is smaller. Emerging market currencies probably have more easily-identified trends of depreciation than currencies of advanced countries.
    JEL: F0 F15 F31
    Date: 2006–08
  26. By: T.Huw Edwards (Dept of Economics, Loughborough University)
    Abstract: This paper examines the implications of increasing globalisation of stock market ownership on the economics of protection. Current data on European stock exchanges indicate that over 30 per cent of the stock market is foreign-owned in most cases, a large increase on a couple of decades ago.This degree of foreign share-ownership is likely to change qualitatively the nature of the response of governments to FDI and support for 'domestic' firms. In particular, two worked examples, based upon duopoly theory, suggest that the level of foreign share-ownership is sufficient to render protection unattractive.
    Keywords: Trade, Oligopoly, Capital Ownership.
    JEL: F10 F12
    Date: 2006–08
  27. By: Hui He; Zheng Liu
    Abstract: Wage inequality between education groups in the United States has increased substantially since the early 1980s. The relative quantity of college-educated workers has also increased dramatically in the postwar period. This paper presents a unified framework where the dynamics of both skill accumulation and wage inequality arise as an equilibrium outcome driven by measured investment-specific technological change. Working through capital-skill complementarity and endogenous skill accumulation, the model is able to account for much of the observed changes in the relative quantity of skilled workers. The model also does well in replicating the observed rise in wage inequality since the early 1980s. Based on the calibrated model, we examine the quantitative effects of some hypothetical tax-policy reforms on skill formation, inequality, and welfare.
    Keywords: Wages
    Date: 2006
  28. By: Konstantinos Tatsiramos (IZA Bonn)
    Abstract: The empirical literature on unemployment insurance has focused on its direct effect on unemployment duration, while the potential indirect effect on employment stability through a more efficient matching process, as the unemployed can search for a longer period, has attracted much less attention. In the European context this is surprising as reform proposals of the unemployment insurance system aiming at reducing high European unemployment rates should consider both effects. This paper provides evidence on the effect of unemployment benefits on unemployment and employment duration in Europe, using individual data from the European Community Household Panel for eight countries. Country specific estimates based on a multivariate discrete proportional hazard model, controlling for observed and unobserved individual heterogeneity, suggest that even if receiving benefits has a direct negative effect increasing the duration of unemployment spells, there is also a positive indirect effect of benefits on subsequent employment duration. This indirect effect is pronounced in countries with relatively generous benefit systems, and for recipients who have remained unemployed for at least six months. In terms of the magnitude of the effect, recipients remain employed on average two to four months longer than non-recipients. This represents a ten to twenty per cent increase relative to the average employment duration, compensating for the additional time spent in unemployment. These findings are in line with theories suggesting a matching effect of unemployment insurance.
    Keywords: unemployment insurance, unemployment duration, employment stability
    JEL: J64 J65 C41
    Date: 2006–08
  29. By: Dan Sasaki (University of Tokyo, Institute of Social Science); Roland Strausz (Free University of Berlin, Department of Economics)
    Abstract: We make the observation that cartels which produce goods with lower durability are easier to sustain implicitly. This observation generates the following results: 1) implicit cartels have an incentive to produce goods with an inefficiently low level of durability; 2) a monopoly or explicit cartel is welfare superior to an implicit cartel; 3) welfare is non--monotonic in the number of firms; 4) a regulator may demand inefficiently high levels of durability to prevent collusion.
  30. By: Subhayu Bandyopadhyay (Department of Economics, West Virginia University and IZA, Bonn); Howard Wall (Federal Reserve Bank of St. Louis)
    Abstract: This paper analyzes the issues of immigration and outsourcing in a general-equilibrium model of international factor mobility. In our mode, legal immigration is controled through a quota, while outsourcing is determined both by the firms (in response to market conditions) and through policy-imposed barriers. A loosening of the immigration quota reduces outsourcing, enriches capitalists, leads to lossing for native workers, and raises national income. If the nation targets an exogenously determined immigration level, the second-best outsourcing tax can be either positive or negative. If in addition to the immigration target there is a wage target (arising out of income distribution concerns), an outsourcing subsidy is required. The analysis is extended to consider illigal immigration and enforcement policy. A higher legal immigration quota will lead to more illegal immigration if skilled and unskilled labor are complements in production. If the two kinds of labor are complements (substitutes), netional income increases (decreases) monotonically with the level of legal immigration.
    Date: 2005
  31. By: Ansgar Belke (University of Hohenheim); Bernhard Herz (University of Bayreuth); Lukas Vogel (University of Bayreuth)
    Abstract: This paper investigates the relationship between the exchange rate regime and the degree of structural reforms using panel data techniques. We look at a broad sample of countries (the “world sample”) and also an OECD sample. Our main findings suggest that adopting a fixed exchange rate rule is positively correlated with the degree of overall structural reforms and the trade component. The paper also highlights the fact that considering a heterogeneous panel of countries as opposed to a limited does not matter for this results.
    Date: 2006–06–07
  32. By: Mark Gertler; Antonella Trigari
    Abstract: A number of authors have recently emphasized that the conventional model of unemployment dynamics due to Mortensen and Pissarides has difficulty accounting for the relatively volatile behavior of labor market activity over the business cycle. We address this issue by modifying the MP framework to allow for staggered multiperiod wage contracting. What emerges is a tractable relation for wage dynamics that is a natural generalization of the period-by-period Nash bargaining outcome in the conventional formulation. An interesting side-product is the emergence of spillover effects of average wages on the bargaining process. We then show that a reasonable calibration of the model can account well for the cyclical behavior of wages and labor market activity observed in the data. The spillover effects turn out to be important in this respect.
    JEL: E24 E32 J23 J3
    Date: 2006–08
  33. By: Raymond Kan; Cesare Robotti
    Abstract: We discuss the impact of different formulations of asset pricing models on the outcome of specification tests that are performed using excess returns. It is generally believed that when only excess returns are used for testing asset pricing models, the mean of the stochastic discount factor (SDF) does not matter. We show that the mean of the candidate SDF is only irrelevant when the model is correct. When the model is misspecified, the mean of the SDF can be a very important determinant of the specification test statistic, and it also heavily influences the relative rankings of competing asset pricing models. We point out that the popular way of specifying the SDF as a linear function of the factors is problematic because the specification test statistic is not invariant to an affine transformation of the factors and the SDFs of competing models can have very different means. In contrast, an alternative specification that defines the SDF as a linear function of the de-meaned factors is free from these two problems and is more appropriate for model comparison. In addition, we suggest that a modification of the traditional Hansen-Jagannathan distance (HJ distance) is needed when only excess returns are used. The modified HJ distance uses the inverse of the covariance matrix (instead of the second moment matrix) of excess returns as the weighting matrix to aggregate pricing errors. We provide asymptotic distributions of the modified HJ distance and of the traditional HJ distance based on the de-meaned SDF under the correctly specified model and the misspecified models. Finally, we propose a simple methodology for computing the standard errors of the estimated SDF parameters that are robust to model misspecification.
    Date: 2006
  34. By: Nuno Venes
    Abstract: In this paper, we analyse the role of political and institutional variables on the cyclical patterns of central government expenditure and revenue. Working with a sample of 38 OECD and Latin-American countries in 1960-2003, we find that higher levels of income inequality are associated with stronger expenditure procyclicality, and that better institutions do not seem to mitigate this effect. IMF interventions are, in general, statistically insignificant in explaining the cyclical behaviour of expenditure, as well as the degree of development of financial systems. On the revenue side, income inequality leads to less procyclical policies. In general, political and institutional variables explain the cyclicality of government expenditure better than that of revenue.
    Keywords: Fiscal policy; cyclicality; political and institutional determinants; OECD; Latin America
    JEL: E62 H61
  35. By: Axel Dreher (Department of Management, Technology, and Economics, ETH Zurich); Noel Gaston (Faculty of Business, Bond University, Queensland)
    Abstract: There has been no shortage of theories which purport to explain why globalisation may have, adverse, insignificant or even beneficial effects on income and earnings inequality. Surprisingly, the empirical realities remain an almost complete mystery. In this paper we use data on industrial wage inequality, household income inequality as well as measures of the economic, social and political dimensions of globalisation to examine this controversial issue. We find that the economic dimension of globalisation, and – less robustly – political integration, have exacerbated wage inequality in developed countries. In contrast, the impact of globalisation on both income and earnings inequality in less-developed countries has been negligible.
    Keywords: Income and earnings inequality; globalisation; democracy; panel regressions.
    JEL: F02 D30 O57 C82
    Date: 2006–06
  36. By: Rajeev Dhawan; Karsten Jeske
    Abstract: So far, the literature on dynamic stochastic general equilibrium models with energy price shocks uses energy on the production side only. In these models, energy shocks are responsible for only a negligible share of output fluctuations. We study the robustness of this finding by explicitly modeling private consumption of energy at the household level in addition to energy use at the firm level to account for total energy use in the economy. Additionally, we distinguish between investment in consumer durables and investment in capital goods. The model economy is calibrated to match total energy use and durable goods consumption as observed in the U.S. data. Simulation results indicate that, despite higher total energy use, this economy has an even smaller proportion of output fluctuations attributable to energy price shocks. Productivity shocks continue to be the primary force behind business cycle fluctuations. The driving force behind our results is that the household now has the flexibility to rebalance its investment portfolio. Specifically, the energy price hike is absorbed by reducing durable goods investment more than investment in capital goods, thereby cushioning the hit to future production at the expense of current consumption. Hence, our model better matches the consumption volatility observed in the data.
    Date: 2006
  37. By: Alfredo Gª Hiernaux (Universidad Complutense de Madrid. Facultad de CC. Económicas y Empresariales. Dpto. Fundamentos del An´alisis Económico II.); Miguel Jerez (Universidad Complutense de Madrid. Facultad de CC. Económicas y Empresariales. Dpto. Fundamentos del An´alisis Económico II.); José Casals (Universidad Complutense de Madrid. Facultad de CC. Económicas y Empresariales. Dpto. Fundamentos del An´alisis Económico II)
    Abstract: We propose two fast, stable and consistent methods to estimate time series models expressed in their equivalent state-space form. They are useful both, to obtain adequate initial conditions for a maximum-likelihood iteration, or to provide final estimates when maximum-likelihood is considered inadequate or costly. The state-space foundation of these procedures implies that they can estimate any linear fixed-coefficients model, such as ARIMA, VARMAX or structural time series models. The computational and finitesample performance of both methods is very good, as a simulation exercise shows.
    Date: 2005
  38. By: Massimo Franchi (Department of Economics, University of Copenhagen)
    Abstract: We study the algebraic structure of an I(d) vector autoregressive process, where d is restricted to be an integer. This is useful to characterize its polynomial cointegrating relations and its moving average representation, that is to prove a version of the Granger representation theorem valid for I(d) vector autoregressive processes.
    Keywords: vector autoregressive processes; unit roots; Granger representation theorem; cointegration
    JEL: C32
    Date: 2006–08
  39. By: Gerald Carlino; Satyajit Chatterjee; Robert Hunt
    Abstract: Economists, beginning with Alfred Marshall, have studied the significance of cities in the production and exploitation of information externalities that, today, we call knowledge spillovers. This paper presents robust evidence of those effects. We show that patent intensity—the per capita invention rate—is positively related to the density of employment in the highly urbanized portion of MAs. All else equal, a city with twice the employment density (jobs per square mile) of another city will exhibit a patent intensity (patents per capita) that is 20 percent higher. Patent intensity is maximized at an employment density of about 2,200 jobs per square mile. A city with a more competitive market structure or one that is not too large (a population less than 1 million) will also have a higher patent intensity. These findings confirm the widely held view that the nation’s densest locations play an important role in creating the flow of ideas that generate innovation and growth. ; Supersedes Working Paper No. 04-16
    Date: 2006
  40. By: Pietro Dindo (Faculty of Economics and Business, Universiteit van Amsterdam); Jan Tuinstra (Faculty of Economics and Business, Universiteit van Amsterdam)
    Abstract: We study participation games with negative feedback, i.e. games where players choose either to participate in a certain project or not and where the payoff for participating decreases in the number of participating players. We use the replicator dynamics to model the competition between different behavioral rules that specify how to play the game in a repeated setting. This results in an analytically tractable model which is able to describe the type of behavior found in the experimental and computational literature. We find that an increase in the number of players destabilizes the unique symmetric mixed strategy Nash equilibrium. The time series of perpetually fluctuating participation rates typically exhibits linear autocorrelation structure and underparticipation. We investigate whether this time series structure can be exploited, and we relate underparticipation to the payoff structure of the participation game.
    Keywords: participation games; evolutionary game theory; nonlinear dynamics
    JEL: C72 C73
    Date: 2006–08–25
  41. By: James Habyarimana (Georgetown University and IZA Bonn); Macartan Humphreys (Columbia University); Daniel N. Posner (University of California, Los Angeles); Jeremy Weinstein (Stanford University)
    Abstract: A large and growing literature links high levels of ethnic diversity to low levels of public goods provision. Yet while the empirical connection between ethnic heterogeneity and the underprovision of public goods is widely accepted, there is little consensus on the specific mechanisms through which this relationship operates. To gain analytic leverage on the question of why ethnicity matters, we identify three families of mechanisms – what we term preference, technology, and strategy mechanisms. Our empirical strategy is to identify and run a series of experimental games that permit us to examine these mechanisms in isolation and then to compare the importance of ethnicity in each. Results from experimental games conducted with a random sample of 300 subjects in Kampala’s slums reveal that successful collective action among homogenous ethnic communities in urban Uganda is attributable to the existence of norms and institutions that facilitate the sanctioning of non-contributors. We find no evidence for a commonality of tastes within ethnic groups, for greater degrees of altruism toward co-ethnics, or for an impact of shared ethnicity on the productivity of teams.
    Keywords: ethnic diversity, collective action, public goods, field experiments
    JEL: D71 H41 J15 O10 Z13
    Date: 2006–08
  42. By: Kóczy László Á (METEOR)
    Abstract: We present a new solution to partition function form games that is novel in at least two ways. Firstly, the solution exploits the consistency of the partition function form, namely that the response to a deviation is established as the same solution applied to the residual game, itself a partition function form game. This consistency allows us to model residual behaviour in a natural, intuitive way. Secondly, we consider a pair of solutions as the extrema of an interval for set inclusion. Taking the whole interval rather than just one of the extremes enables us to include or exclude outcomes with certainty.
    Keywords: microeconomics ;
    Date: 2006
  43. By: Andersen, Torben M. (Department of Economics, Copenhagen Business School); Skaksen , Jan Rose (Department of Economics, Copenhagen Business School)
    Abstract: In this paper, we set up a two-country general equilibrium model where trade unions have wage bargaining power. We show that a decrease in trade distortions inducing further product market integration gives rise to specialization gains as well as a labour market reform effect. The implications of the specialization gains are similar to an increase in labour productivity, whereas the labour market reform effect is similar to an increase in the degree of competition in the labour market. Wages, employment and welfare increase as a result of further product market integration. It is interesting to note that the labour market reform effect of product market integration is achieved despite an increase in the wage level.
    Keywords: Trade frictions; wage formation; employment; welfare
    JEL: F15 J30 J50
    Date: 2006–09–07
  44. By: Volker Grossmann (University of Fribourg, CESifo and IZA Bonn); Panu Poutvaara (University of Helsinki, CESifo and IZA Bonn)
    Abstract: Altruistic parents may transfer resources to their offspring by providing education, and by leaving bequests. We show that in the presence of wage taxation, a small bequest tax may improve efficiency in an overlapping-generations framework with only intended bequests, by enhancing incentives of parents to invest in their children’s education. This result holds even if the wage tax rate is held constant when introducing bequest taxation. We also calculate an optimal mix of wage and bequest taxes with alternative parameter combinations. In all cases, the optimal wage tax rate is clearly higher than the optimal bequest tax rate, but the latter is generally positive when the required government revenue in the economy is sufficiently high.
    Keywords: bequest taxation, bequests, education, Pareto improvement
    JEL: H21 H31 D64 I21
    Date: 2006–08
  45. By: Cherchye,Laurens; De Rock,Bram; Vermeulen,Frederic (Tilburg University, Center for Economic Research)
    Abstract: In designing a production model for firms that generate multiple outputs, we take as a starting point that such multi-output production refers to economies of scope, which in turn originate from joint input use and input externalities. We provide a nonparametric characterization of cost efficient behavior under these conditions, and subsequently institute necessary and sufficient conditions for data consistency with such efficient behavior that only include observed firm demand and supply data. We illustrate our methodology by examining the cost efficiency of research programs in Economics and Business Management faculties of Dutch universities. This application shows that the proposed methodology may entail robust conclusions regarding cost efficiency differences between universities within specific specialization areas, even when using shadow prices to evaluate the different inputs.
    Keywords: production behavior;multi-product firms;input externalities;joint input use; economies of scope;nonparametric tests
    JEL: C12 C14 D21 P32 Q12
    Date: 2006
  46. By: Craig Burnside; Martin Eichenbaum; Isaac Kleshchelski; Sergio Rebelo
    Abstract: Currencies that are at a forward premium tend to depreciate. This `forward-premium puzzle' represents an egregious deviation from uncovered interest parity. We document the properties of returns to currency speculation strategies that exploit this anomaly. The first strategy, known as the carry trade, is widely used by practitioners. This strategy involves selling currencies forward that are at a forward premium and buying currencies forward that are at a forward discount. The second strategy relies on a particular regression to forecast the payoff to selling currencies forward. We show that these strategies yield high Sharpe ratios which are not a compensation for risk. However, these Sharpe ratios do not represent unexploited profit opportunities. In the presence of microstructure frictions, spot and forward exchange rates move against traders as they increase their positions. The resulting `price pressure' drives a wedge between average and marginal Sharpe ratios. We argue that marginal Sharpe ratios are zero even though average Sharpe ratios are positive.
    JEL: E24 F31 G15
    Date: 2006–08
  47. By: Joseph M. Ostroy; Joon Song
    Abstract: Lindahl equilibrium is an application of price-taking behavior to achieve efficiency in the allocation of public goods. Such an equilibrium requires individuals to be strategically naive, i.e., Lindahl equilibrium is not incentive compatible. Correlated equilibrium is defined precisely to take account of strategic behavior and incentive compatibility. Using the duality theory of linear programming, we show that these two seemingly disparate notions can be combined to give a public goods, Lindahl pricing characterization of efficient correlated equilibria. We also show that monopoly theory can be used to characterize inefficient correlated equilibria.
    Date: 2006–09–07
  48. By: Andrew E. Clark; Paul Frijters; Michael A. Shields
    Abstract: There is now a great deal of micro-econometric evidence, both cross-section and panel, showing that income is positively correlated with well-being. Yet the famous Easterlin paradox shows essentially no change in average happiness at the country level, despite spectacular rises in per capita GDP. We argue that survey well-being questions are indeed good proxy measures of utility, and resolve the Easterlin paradox by appealing to income comparisons: these can be to others (social comparisons) or to oneself in the past (habituation). We review a substantial amount of econometric, experimental and neurological literature consistent with comparisons, and then spell out the implications for a wide range of economic issues.
    Date: 2006
  49. By: António Afonso
    Abstract: In order to assess the existence of expansionary fiscal consolidations in Europe, panel data models for private consumption are estimated for the EU15 countries, using annual data over the period 1970–2005. Three alternative approaches to determine fiscal episodes are used, and the level of government indebtedness is also taken into account. The results show some evidence in favour of the existence of expansionary fiscal consolidations, for a few budgetary spending items (general government final consumption, social transfers, and taxes), depending on the specification and on the time span used. On the other hand, the possibility of asymmetric effects of fiscal episodes does not seem to be corroborated by the results.
    Keywords: fiscal policy; expansionary fiscal consolidations; non-Keynesian effects; panel data models; European Union.
    JEL: C23 E21 E62
  50. By: Luigi Guiso; Paola Sapienza; Luigi Zingales
    Abstract: We use exogenous variation in the degree of restrictions to bank competition across Italian provinces to study both the effects of bank regulation and the impact of deregulation. We find that where entry was more restricted the cost of credit was higher and - contrary to expectations- access to credit lower. The only benefit of these restrictions was a lower proportion of bad loans. Liberalization brings a reduction in rates spreads and an increased access to credit at a cost of an increase in bad loans. In provinces where restrictions to bank competition were most severe, the proportion of bad loans after deregulation raises above the level present in more competitive markets, suggesting that the pre-existing conditions severely impact the effect of liberalizations.
    JEL: E0 G0
    Date: 2006–08
  51. By: Olmo Silva (CEP, London School of Economics and IZA Bonn)
    Abstract: Cross-sectional tests of the Jack-of-All-Trades theory of entrepreneurship invariably conclude that accumulation of balanced skill-mix across different fields of expertise stimulates entrepreneurship. Yet, none of these considers individual unobservable characteristics which may simultaneously determine skill accumulation and occupational choice. Using panel techniques to control for this, I show that gathering expertise across various subjects does not increase the chances of becoming entrepreneur.
    Keywords: entrepreneurship, occupational choice, skills
    JEL: M13 J23 J24
    Date: 2006–08
  52. By: Shultziner, Doron (Politics & International Relations Department, Oxford University); Dattner, Arnon (Department of Zoology, Tel Aviv University)
    Abstract: This paper critically examines the state of the literature in evolutionary biology regarding theories of altruistic behavior. The shared theoretical problems of Kin-selection and Group-selection are examined. Theoretical and severe methodological problems of Reciprocal Altruism theory are also discussed. We offer new conceptual clarifications of the Handicap Principle theory regarding costs and benefits to both the donor and the recipient of an altruistic act. We also summarize supportive empirical studies which demonstrate how Handicap Principle theory easily explains altruistic behavior on a different logic than the one employed by other theories of altruistic behavior. Finally, we discuss the phenomenon of one-shot altruism in order to evaluate, and distinguish between, the predictive and explanatory power of different theories of altruistic behavior.
    Keywords: altruism; altruistic behavior; theories of altruism; handicap principle; reciprocity; reciprocal altruism; group selection; kin selection; one-shot altruism
    JEL: A12 Z00
    Date: 2006–09–06
  53. By: Svensson, Lars E.O.; Williams, Noah
    Abstract: We examine optimal and other monetary policies in a linear-quadratic setup with a relatively general form of model uncertainty, so-called Markov jump-linear-quadratic systems extended to include forward-looking variables. The form of model uncertainty our framework encompasses includes : simple i.i.d. model deviations; serially correlated model deviations; estimable regimeswitching models; more complex structural uncertainty about very different models, for instance, backward- and forward-looking models; time-varying central-bank judgment about the state of model uncertainty; and so forth. We provide an algorithm for finding the optimal policy as well as solutions for arbitrary policy functions. This allows us to compute and plot consistent distribution forecasts–fan charts–of target variables and instruments. Our methods hence extend certainty equivalence and “mean forecast targeting” to more general certainty non-equivalence and “distribution forecast targeting.”
    Keywords: Optimal policy, multiplicative uncertainty
    JEL: E42 E52 E58
    Date: 2005
  54. By: Mark J. Jensen
    Abstract: Empirical support for the long-run Fisher effect, a hypothesis that a permanent change in inflation leads to an equal change in the nominal interest rate, has been hard to come by. This paper provides a plausible explanation of why past studies have been unable to find support for the long-run Fisher effect. This paper argues that the necessary permanent change to the inflation rate following a monetary shock has not occurred in the industrialized countries of Australia, Austria, Belgium, Canada, Denmark, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Norway, Sweden, Switzerland, the United Kingdom, and the United States. Instead, this paper shows that inflation in these countries follows a mean-reverting, fractionally integrated, long-memory process, not the nonstationary inflation process that is integrated of order one or larger found in previous studies of the Fisher effect. Applying a bivariate maximum likelihood estimator to a fractionally integrated model of inflation and the nominal interest rate, the inflation rate in all seventeen countries is found to be a highly persistent, fractionally integrated process with a positive differencing parameter significantly less than one. Hence, in the long run, inflation in these countries will be unaffected by a monetary shock, and a test of the long-run Fisher effect will be invalid and uninformative as to the truthfulness of the long-run Fisher effect hypothesis.
    Date: 2006
  55. By: Olivier Armantier; Nicolas Treich
    Abstract: We conduct an experiment to test whether probability misperception may be a possible alternative to risk aversion to explain overbidding in independent first-price private-values auctions. The experimental outcomes indicate that subjects underestimate their probability of winning the auction, and indeed overbid. Yet, when provided with feed-back on the precision of their predictions, subjects learn first to predict their probability of winning correctly, and second to curb-down significantly overbidding. The structural estimation of different behavioral models suggests that i) subjects are heterogenous with respect to risk preferences and probability perceptions, ii) subjects tend to best-respond to their stated beliefs, and iii) although necessary to explain fully behavior, risk aversion appears to play a lesser role than previously believed. Finally, our experimental findings are shown to be consistent with a standard theoretical auction model combining risk aversion and misperception of probabilities. <P>Nous menons une expérience pour évaluer si le fait qu'un sujet évalue mal ses probabilités de gagner peut être une hypothèse alternative à l’aversion au risque pour expliquer les surenchères lors d'enchères indépendantes privées au premier prix. Les résultats expérimentaux montrent, en effet, que les sujets sous-estiment leurs probabilités de gagner l'enchère et ont tendance à surenchérir. Cependant, lorsqu'on leur présente plus de précisions sur leurs prédictions, les sujets apprennent d'abord à prédire correctement leurs probabilités de gagner, puis à limiter considérablement la surenchère. L'estimation de différents modèles du comportement suggère que i) les sujets sont hétérogènes par rapport à leurs préférences du risque et leurs perceptions des probabilités, ii) les sujets choisissent leur meilleure réponse conditionnellement aux croyances qu’ils révèlent, et iii) bien que nécessaire pour expliquer pleinement le comportement des sujets, l'aversion au risque semble jouer un rôle moins important que prévu. Finalement, nos résultats expérimentaux sont consistants avec un modèle théorique d'enchères standard qui combine l'aversion au risque et la mauvaise perception des probabilités.
    Keywords: auctions, misperception of probabilities, overbidding, risk-aversion, aversion au risque, enchères, mauvaise perception des probabilités, surenchère
    JEL: C70 C92 D44 D81
    Date: 2006–08–01
  56. By: Felipe Balmaceda
    Abstract: In this paper a simple model of mergers in which synergies, private benefits and CEO power play a crucial role is proposed. A merger is modeled as a bargaining process between the acquiring and target board with the gains from a merger divided according to Rubinstein’s alternating-offer game with inside options. Boards consider both firm value and CEOs’ payoff. when deciding whether or not to merge. The more powerful CEOs are, the more board members consider the consequences of a merger on CEOs’ payoffs. The model determines the optimal firm scope and yields predictions that are consistent with several empirical regularities about mergers such as: (i) inefficient mergers take place when acquiring CEOs are powerful and units are not related; (ii) target shareholders are better-o. after a merger, acquiring shareholders are sometimes worse-off., and combined value is positive; and (iii) in the presence of credit constraints, acquiring firms are more likely to merge with low-productivity firms and with firms in which CEOs are less powerful.
    Date: 2006

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