nep-sea New Economics Papers
on South East Asia
Issue of 2014‒12‒29
twenty-two papers chosen by
Kavita Iyengar
Asian Development Bank

  1. Basic Principles on Establishing a Regional Settlement Intermediary and Next Steps Forward: Cross-border Settlement Infrastructure Forum By Asian Development Bank (ADB); ; ;
  2. Myanmar: Electricityy in Myanmar: Negotiating Nation Building, A Path to Unity and Progress By David Dapice
  3. Managing Development and Public Policy: A Personal View By Cobbe, Jim
  4. Trade Policy Challenges in a Small, Open, Fragile, Postconflict Economy: Cambodia By Hill, Hal; Menon, Jayant
  5. Beyond the Headcount: Examining the Dynamics and Patterns of Multidimensional Poverty in Indonesia. By Sumarto, Sudarno; de Silva, Indunil
  6. Corporate Governance Country Assessment : Vietnam By World Bank
  7. Roads, labor markets, and human capital : evidence from rural Indonesia By Yamauchi, Futoshi
  8. Innovative Policy of Regional Development in Decentralized Indonesia By Ermy Ardhyanti; Hasrul Hanif
  9. Fiscal Policy and Equity in Advanced Economies: Lessons for Asia By Gemma Estrada; James Angresano; Jo Thori Lind; Niku Määttänen; William McBride; Donghyun Park; Motohiro Sato; Karin Svanborg-Sjövall
  10. Exploring Diversification Benefits in Asia-Pacific Equity Markets By Mensah, Jones Odei; Premaratne, Gamini
  11. Segmentation and informality in Vietnam: A survey of the literature By Cling, Jean-Pierre; Razafindrakoto, Mireille; Roubaud, François
  12. Causal linkages between electricity consumption and GDP in Thailand: evidence from the bounds test By Jiranyakul, Komain
  13. Correlations across Asia-Pacific bond markets and the impact of capital flow measures By Pornpinun Chantapacdepong; Ilhyock Shim
  14. Economic Analysis of Illegal Settlements in Flood Prone Areas in Palangkaraya City in Indonesia - A General Equilibrium Approach - By Yuzuru Miyata; Hiroyuki Shibusawa; Indrawan Permana
  15. A Connectivity-Driven Development Strategy for Nepal : From a Landlocked to a Land-Linked State By Pradumna B. Rana; Binod Karmacharya
  16. Extended Families and Child Well-being By Daniel LaFave; Duncan Thomas
  17. Dependence patterns among Banking Sectors in Asia: A Copula Approach By Mensah, Jones Odei; Premaratne, Gamini
  18. ASEAN Commercial Policy: A Rare Case of Outward-Looking Regional Integration By Hill, Hal; Menon, Jayant
  19. Model-Independent Pricing of Asian Options via Optimal Martingale Transport By Florian Stebegg
  20. Sustaining India – China Bilateral Trade: An Analysis of India’s Rising Trade deficit with China. By Sunitha Raju
  21. Estimates of Fundamental Equilibrium Exchange Rates, November 2014 By William R. Cline
  22. Optimal influence under observational learning By Nikolas Tsakas

  1. By: Asian Development Bank (ADB); (Office of Regional Economic Integration, ADB); ;
    Abstract: This report summarizes the results of discussions among ASEAN+3 central bank and central securities depository officers who voluntarily participated in the Cross-border Settlement Infrastructure Forum (CSIF). ASEAN+3 finance ministers and central bank governors endorsed the establishment of the CSIF under the Asian Bond Markets Initiative in May 2013 to facilitate discussions on the improvement of cross-border bond and cash settlement infrastructures in the region, including the possibility of establishing a regional settlement intermediary. This report shows the three regional settlement intermediary models analyzed by the CSIF members and suggests next steps moving forward.
    Keywords: adb, asian development bank, asdb, asia, pacific, poverty asia, banking systems, financial policy, regional planning, ASEAN+3, brunei, china, hong kong, indonesia, japan, korea, laos, malaysia, philippines, regional settlement intermediary, ASEAN+3 central banks, central securities depository
    Date: 2014–05
  2. By: David Dapice
    Abstract: Electricity is a fundamental input to every modern economy. Electricity consumption per capita in Myanmar is among the lowest in Asia and had been growing very slowly since the 1980's. It gently grew from 45kWh per capita in 1987 to 99 kWh in 2008, a 3.8 percent annual growth rate. However, since 2008, the production of electricity has jumped very quickly. This 50 percent jump in three years is about 15 percent per year, far higher than in the past. The CSO does not report any increase in installed capacity since 2009/10, so the existing system is being worked much more intensively. This creates problems, such as the risk of sudden outages from failures in generators. Indeed, there has been an increase in blackouts in the Yangon and Mandalay areas in the last year in spite of higher output - and even during the wet season. With increases in tourism, exports and overall economic activity, electricity demand will continue to soar. Even with 2011-12 output, estimated consumption in Myanmar is only about 160 kWh per capita, compared to 2009 consumption of over 250 kWh per capita in Bangladesh and nearly 600 in Indonesia. Vietnam had over 1000 kWh per capita in 2011.
  3. By: Cobbe, Jim
    Abstract: A brief and very personal overview of some important issues in the management of development, with particular attention to Indonesia and education.
    Keywords: Development; Indonesia; Equity; Sustainable; Education.
    JEL: O1 O15 O2 O20
    Date: 2014–11–20
  4. By: Hill, Hal (Australian National University); Menon, Jayant (Asian Development Bank)
    Abstract: This paper analyzes the World Trade Organization’s (WTO) Trade Policy Review: Cambodia, the first completed for the country. The report highlights Cambodia’s rapid economic growth after one of the world’s worst genocides in the 20th century. This growth has been underpinned by open trade and investment policies in the context of dynamic neighborhood growth effects. The trade regime is mainly tariff-based, with modest inter-sectoral variations in rates. Cambodia has limited trade policy space. It is a signatory to the 10-nation ASEAN Free Trade Agreement, soon to become the ASEAN Economic Community. Moreover, given its long and porous borders with the much larger, dynamic economies of Thailand and Viet Nam, any major cross-border price differences will quickly result in informal trade with these economies, and the People’s Republic of China nearby. Most of the country’s trade policy challenges are “behind-the-border” issues, a legacy of a generation of civil war and conflict. These include weak bureaucratic capacity, high levels of corruption, poor infrastructure, and limited human capital.
    Keywords: Cambodia; trade policy; ASEAN; globalization; weak institutions
    JEL: F14 O53
    Date: 2014–10–01
  5. By: Sumarto, Sudarno; de Silva, Indunil
    Abstract: The aim of this study was twofold. First, despite the vast amount of empirical studies on income poverty in Indonesia, very few studies have examined multidimensional household welfare deprivations. We attempted to fill this gap by utilizing for the first time the annually conducted National Socioeconomic Survey by Statistics Indonesia (BPS), and the Alkire and Foster (2007; 2011) methodology to investigate the degree and dynamics of multidimensional household welfare deprivations in Indonesia for the 2004 and 2013 time periods. Second, we explore whether there are differing patterns of change for consumption poverty and multidimensional poverty at both the household and regional level. We investigate the magnitude of overlap between consumption and multidimensional poverty, and explore whether the multidimensionally deprived households are necessarily income poor or not and vice versa. In particular we scrutinize whether the question of who is poor has many different answers. This paper is innovative in that it changes the focus from the conventional unidimensional perspective of poverty, centered on income or expenditure to a much broader multidimensional approach. Our results revealed the overlap between consumption poverty and multidimensional poverty to be extremely weak. Our findings broaden the targeting space for poverty reduction, suggesting that poverty reduction programs should provide different kinds of assistance to the poor in different dimensions of poverty. Results clearly demonstrate the question of who is poor to have many different answers. So overall, the findings from the study underscore the need to use both monetary and multidimensional poverty indices as complements to understand the extent, diversity and dynamics of household welfare in Indonesia. Thus placing policy analytics on fundamentally important capability deprivations, rather than only on a convenient proxy such as income or consumption, will not only help to better comprehend poverty and deprivation – but also to combat them.
    Keywords: Multidimensional poverty measurement, multiple deprivations, human development, capability approach, counting approach.
    JEL: D63 I32
    Date: 2014–12–11
  6. By: World Bank
    Keywords: Governance - National Governance Finance and Financial Sector Development - Debt Markets Finance and Financial Sector Development - Mutual Funds Private Sector Development - Emerging Markets Law and Development - Corporate Law
    Date: 2013–08
  7. By: Yamauchi, Futoshi
    Abstract: This paper uses household panel data from rural Indonesia to examine the impact of road quality on labor supply and wages. First, road projects are found to increase transportation speed. Second, the empirical results from intra-village variations of household endowments and labor market behavior show that an increase in transportation speed raised wages in nonagricultural and agricultural employment, and was associated with a decline in working time in agricultural employment, for households whose members are relatively educated. The findings support potential complementarity between road quality and education.
    Keywords: Transport Economics Policy&Planning,Roads&Highways,Housing&Human Habitats,Labor Policies,Road Safety
    Date: 2014–12–01
  8. By: Ermy Ardhyanti; Hasrul Hanif
    Abstract: ABSTRACT Innovative Policy of Regional Development in Decentralized Indonesia: Local Content Policy in Extractive Industries Governance, at District of Bojonegoro, Province of East Java, Indonesia Ermy Ardhyanti & Hasrul Hanif Key word: local content policy, decentralisation, Governance of extractive industry Classification system: O2 This paper aims to explain about how process of implementation of innovative policy introduced by a local government after Indonesian government introducing the excessive decentralisation since early 2000. Furthermore, this paper describe various problems and opportunities for implementing local content policy that enhance the social benefits of local economic development at Bojonegoro, one of resource abundance districts, after discovering and exploitation the oil and gas reserves. This paper actually put emphasizes on to what extent local government enhance local content policy that contributing for social benefit in decentralised political arrangement? The finding shows that there is the tension between central government and local government then emerges in implementation of local content policy. The central government identified this new policy will perhaps be burden of optimization of oil and gas production. Hence, it will threaten achievement of national targets. The converse came from local government when they think that they have strong authority to arrange oil and gas production activities. Furthermore, they cannot ignore or delay this policy due to social conflict management and minimising environmental damages and risks. There are also some lesson-learnt that can be reflected in implementation of local content policy in Bojonegoro, Indonesia. First, Local economy is not the central government domain. The authority transfer to local government in economic sector need to be expanded since economic activity in rich resources region usually is the domain of the major business group that has the capital and capability. This innovation aims to intervene the economic activity process so it could favour the region. Second, capacity building is needed. When local business groups involving within the joint operation model (partnership between local and non local businessmen) is expected, it should be more than sharing of capital. It also needs capacity building of local business group through transfer of knowledge, skill and capital. Third, It needs to increase of PDRB in service sector by localizing the flow of money in the region. In2011, Bojonegoro's PDRB at market price with oil and gas reached 25.110 Trillion. The challenge is to make the flow of money stays inside region of Bojonegoro.
    Keywords: local content policy; decentralisation; Governance of extractive industry
    JEL: O2
    Date: 2014–11
  9. By: Gemma Estrada; James Angresano; Jo Thori Lind; Niku Määttänen; William McBride; Donghyun Park; Motohiro Sato; Karin Svanborg-Sjövall
    Abstract: Advanced economies have a longer history of leveraging fiscal policy to address inequality relative to developing Asia. We examine the country experiences of the Nordic countries, France, Japan, and the US, to draw lessons for developing Asia in its relatively new quest to use fiscal policy to promote inclusive growth. Those experiences suggest that fiscal policy can indeed be an effective tool for inclusive growth as long as it does not compromise fiscal sustainability or economic growth.
    Date: 2014
  10. By: Mensah, Jones Odei; Premaratne, Gamini
    Abstract: This paper examines the benefits of regionally and globally diversified portfolios from the perspective of investors holding domestic-only portfolios from different Asia-Pacific countries. Three groups of regional portfolio are constructed, with sorting based on relative strength ranking technique of Levy (1967). The step-down spanning technique is employed to uncover evidence that the global minimum-variance portfolio of a local investor can be improved by investing regionally or globally, but the evidence that the tangency portfolio can be improved is weak in all cases. The results also show an increase in Sharpe ratio when the investor invests regionally or globally but this benefit declines under the assumption of short-selling. The paper concludes that there are gains in diversifying globally but higher gains are realized by investing regionally.
    Keywords: Asia-Pacific Region; Sectoral diversification benefits; Relative Strength Ranking; Mean-Variance Spanning
    JEL: C10 F3 G11 G15
    Date: 2014–10
  11. By: Cling, Jean-Pierre; Razafindrakoto, Mireille; Roubaud, François
    Abstract: Labour market segmentation is usually defined as the division of the labour markets into separate submarkets or segments, distinguished by different characteristics and behavioural rules (incomes, contracts, etc.). The economic debate on the segmentation issue has been focusing in developed countries, and especially in Europe, on contractual segmentation and dualism. However, in developing countries such as Vietnam which is the focus of this study, wage work is marginal and the approach to labour market segmentation is necessarily slightly different. Indeed, most workers are engaged in the informal economy and many of them are self-employed in their own household business. Starting with an analysis of the main characteristics of the national labour market, this paper presents a survey of the literature on informality and labour market segmentation in Vietnam (section 2). Section 3 describes the institutional background related to firm registration and social protection in Vietnam, and analyses the reasons for informality in relationship with the institutional framework. Section 4 describes the reforms being put in place and employment strategies related to the informal economy. Policy recommendations are proposed in the last section.
    Keywords: Informel; marché du travail; Informality; Labour market; segmentation; Vietnam;
    JEL: J24 J31 O17
    Date: 2014–11
  12. By: Jiranyakul, Komain
    Abstract: This paper investigates the causal relationship between electricity consumption and real GDP by applying the bounds testing for cointegration in a multivariate framework. The error correction mechanism is employed to detect causal relationship in the presence of cointegration among three variables. Empirical results for Thailand during 2001Q1 and 2014Q2 suggest that there is long-run unidirectional causality between electricity consumption and real GDP. The source of causation in the long run is found by the significance of the error correction terms in the Wald F-test. In the short run, bidirectional causal relationship between electricity consumption and economic growth is observed. The findings give implications for electricity efficiency and alternative energy sources in the long run.
    Keywords: Causality, electricity consumption, economic growth
    JEL: C32 Q43
    Date: 2014–11
  13. By: Pornpinun Chantapacdepong; Ilhyock Shim
    Abstract: Using a novel database on capital flow measures in Asia over 2004-2013, we investigate the impact of bond inflow measures on the cross-market correlations of weekly bond fund flows and of daily bond returns in 12 Asia-Pacific economies, after controlling for global, regional and local factors. We find that a bond inflow measure taken by a country tends to increase the correlation of bond flows into the country with those into other countries in the region. In particular, a country's policy actions to loosen (ie increase) bond inflows significantly increase bond flow correlations, but policy actions to tighten (ie decrease) bond inflows have no significant impact. We also find that bond inflow measures increase bond return correlations in the long run. These results can be explained by the signalling hypothesis, under which global investors expect that when a country takes a bond inflow measure other countries to take similar actions, so that they increase or decrease their investment in the region at the same time.
    Keywords: Bond flow, bond return, cross-market correlation, capital flow measure
    Date: 2014–12
  14. By: Yuzuru Miyata; Hiroyuki Shibusawa; Indrawan Permana
    Abstract: Since initially steaming from von Thünen`s work (1826), bid-rent approach has been rigorously applied to analyze land use configuration. Alonso (1964), Muth (1969), Beckman (1973), Solow (1973), and Fujita (1989) are among the scientists who greatly contributed to forward von Thünen`s theory into complexities in urban context.. Particularly Fujita (1989) has showed solution of a utility optimizing problem to define the bid-rent function which gives the maximum ability of households to pay land under a fixed utility and at distance from the Central Business District (CBD). The bid rent concept provides richer analysis of the locational choice of households in the city. Our study considered a small-medium city in a developing country located in tropics where a massive deforestation and river flood significantly jeopardize some areas in the city. It is Palangkaraya city in Central Kalimantan province, Indonesia. There are two types of land classified in the city. One is called normal land where the river flood is not able to inundate while another one is namely flood prone areas. The flood prone areas are occupied by settlements which are mostly illegal. Here illegal settlement refers to those kinds of settlements which were built on parcels with no legal clearance on land ownership including those which were constructed without building permission (Kapoor &Blanc, 2008). This paper aims to analyze a configuration of the residential land use pattern in Palangkaraya city in Indonesia applying bid-rent approach which incorporated the expected flood damage rate (EFDR) on household assets. The EFDR is employed to predict the damage by the river flood since flood occurrences are stochastic and such appropriate data on flood occurrences is not available. Previously Permana and Miyata (2009) showed a partial equilib-rium urban economic model, introducing the EFDR. However we realize that the partial equilibrium model slightly lack of reality since income is assumed to be exogenously given. Hence we develop a general equilibrium model taking into account firms in the Central Business District (CBD), and by incorporating the expected damage rate on household`s asset, the new bid rent function and bid max lot size function are obtained. Applying the general equilibrium modeling approach, one can derive the conclusion that the bid rents by low income households get higher than those by high income households in flood prone areas. This is the contrary conclusion being highlighted as compared with that in the traditional urban economics.
    Keywords: illegal settlements; flood prone area; Palangkaraya City;
    JEL: O18 Q54 Q56 R13
    Date: 2014–11
  15. By: Pradumna B. Rana (Asian Development Bank Institute (ADBI)); Binod Karmacharya
    Abstract: Nepal’s lackluster economic performance during the post-conflict period (that is, after November 2006) has been driven by remittances from the export of labor services and the improved performance of the agricultural sector, which is still very much weather dependent. The authors make the case for a connectivity-driven development strategy for the country. They argue that improved connectivity within Nepal and cross-border connectivity with its neighbors in South Asia, the Association of Southeast Asian Nations (ASEAN), and the People’s Republic of China (PRC) that are converting Nepal from a landlocked into a land-linked state, could be important “engines of growth†for the country. It is argued that such a development strategy is not a new one for Nepal as in the past the country was strategically located on the Southwestern Silk Road (SSR). A number of factors have revived the case for making Nepal a land-linked state in Asia. Nepal has adopted a multi-track approach to promoting regional cooperation and integration in connectivity with its neighbors. But a lot more needs to be done, especially in the context of the difficult political situation in the country, and donors have an important role to play in this regard. Ten priority projects to convert Nepal into a land-linked state are identified, but a detailed impact analysis of these projects is beyond the scope of this paper.
    Keywords: Nepal, connectivity, land-locked, land-linked, connectivity-driven, Development Strategy
    JEL: F15
    Date: 2014–09
  16. By: Daniel LaFave; Duncan Thomas
    Abstract: Whereas studies have established the intra-household distribution of resources affects allocation decisions, little is known about how these decisions are affected by the distribution of resources among co-resident and non co-resident extended family members. Drawing on theoretical models of collective decision-making, we use extremely rich data from Indonesia to establish that child health- and education-related human capital outcomes are affected by resources of extended family members who co-reside with the child and those who are not co-resident. Extended family members are not completely altruistic but their allocation decisions are apparently co-ordinated in a way that is consistent with Pareto efficiency.
    JEL: D1 I0 J13
    Date: 2014–11
  17. By: Mensah, Jones Odei; Premaratne, Gamini
    Abstract: The bitter experience of the subprime crisis of 2007, the Global Financial crisis of 2008, and the extremely slow and painful ensuing recovery, has raised systemic risk to the center stage of global economic discourses. The crisis has brought home the urgent need for a thorough assessment of the dependence and interaction between banking sectors, from which most of the trouble began. This study investigates patterns and trends in absolute and tail dependence over time using daily returns for banking sectors from 12 Asian economies during the period 2000-2012. Static and time-varying Copula models, Gaussian copula, Symmetrized Joe-Clayton copulas, are employed to study the tail co-movements among the selected markets. The paper assumes a skew-t distribution for the innovation process of the marginal models. The results of the marginal models suggest strong volatility persistence in all twelve markets. There is high persistence in the absolute dependence of among market pairs. The evidence from the empirical analysis suggests that the cross-sectional average copula correlations generally remain at moderate levels with slight upward trend for all twelve markets. Correlation among the banking sectors of the advanced Asian markets economies are generally higher compared with the Emerging markets economies. The tail dependence is asymmetric across most of the market pairs; tail dependence at the lower side of the joint distributions is mostly higher than tail dependence at the upper side of the joint distributions. The results show that tail dependence is not upward trending for most of the pairs examined. However, the tail co-movements show significant spikes in response to financial stress in the global economy, which implies that there could be joint crashes in the regional banking system during extreme negative events. The fact that the region has not been the epicenter for most of the crisis periods covered in this study, yet responds significantly, makes it necessary for adoption of policies that maximize resilience to shocks. The study concludes that time-varying copulas are best suited for modeling the dependence structure of the Asian banking sector indices compared with static copula.
    Keywords: Asia Banking Sector; DCC Correlation; Dynamic Copula; Asymmetric dependence
    JEL: C14 F36 G10
    Date: 2014–10
  18. By: Hill, Hal (Arndt-Corden Department of Economics); Menon, Jayant (Asian Development Bank)
    Abstract: ASEAN has significant achievements to its credit. It is a durable and effective functioning entity, more so than any other regional organization in the developing world. For a region characterized by great diversity and a history of conflict, ASEAN has played a role in delivering relative peace and stability in the region, which has in turn facilitated rapid economic development. Yet ASEAN has not progressed very far in terms of becoming a formal economic entity. But its own brand of market-driven and institution-light regionalism has served it well. The ASEAN-6 countries have undertaken several waves of multilateralizing preferences, ensuring global connectedness. Looking forward, hopefully the new members will follow suit, and this approach towards open regionalism will be preserved with the move to an ASEAN Economic Community.
    Keywords: ASEAN; open regionalism; multilateralization of preferences; FTA
    JEL: F13 F14 F17
    Date: 2014–11–01
  19. By: Florian Stebegg
    Abstract: In this article we discuss the problem of calculating optimal model-independent (robust) bounds for the price of Asian options with discrete and continuous averaging. We will give geometric characterisations of the maximising and the minimising pricing model for certain types of Asian options in discrete and continuous time. In discrete time the problem is reduced to finding the optimal martingale transport for the cost function $|x+y|$. In the continuous time case we consider the cases with one and two given marginals. We describe the maximising models in both of these cases as well as the minimising model in the one-marginal case and relate the two-marginals case to the discrete time problem with two marginals.
    Date: 2014–12
  20. By: Sunitha Raju (Indian Institute of Foreign Trade, Kolkata, India)
    Abstract: This paper evaluates India’s export opportunities to China as well as market access constraints faced by Indian firms in China at the disaggregated product level. Our main conclusions include: By 2015, it is expected that average wages in China would rise by 80% thereby loosing competitiveness in labour intensive industries particularly when compared to other South East Asian countries. These developments provide new opportunities to India to diversify and increase value-added exports to China. 30 products at HS 4 digit have been identified with potential export opportunities for India. Of these, 7 products are globally export competitive. Most of these identified products are value added intermediaries. In addition to these, there are a number of products where India’s share in China’s imports is less than 1%. Most of these products fall under Electrical Machinery (85), Machinery (84), Optical equipment (90), Plastics (39) and Organic Chemicals (29). As far as market access is concerned, Tariff does not seem to emerge as a major constraint for most products except for agricultural products. In addition to tariff, each product is subjected to a number of NTBs that cover Import licensing and Inspection, Registration of environmental management, labeling requirements etc. In addition to these, agricultural products are subjected to Food safety law, Quarantine measures, Food additive standards, MRL standards etc.
    Keywords: India, China, Export potential, Market access.
    JEL: F14
    Date: 2014–07
  21. By: William R. Cline (Peterson Institute for International Economics)
    Abstract: This semiannual review finds that most of the major international currencies, including the US dollar, euro, Japanese yen, UK pound sterling, and Chinese renminbi, remain close to their fundamental equilibrium exchange rates (FEERs). The new estimates find this result despite numerous significant exchange rate movements associated with increased volatility in international financial markets at the beginning of the fourth quarter of 2014, and despite a major reduction in the price of oil. The principal cases of exchange rate misalignment continue to be the undervalued currencies of Singapore, Taiwan, and to a lesser extent Sweden and Switzerland, and the overvalued currencies of Turkey, New Zealand, South Africa, and to a lesser extent Australia and Brazil. Even so, the medium-term current account deficit for the United States is already at the outer limit in the FEERs methodology (3 percent of GDP), and if the combination of intensified quantitative easing in Japan and the euro area with the end to quantitative easing in the United States were to cause sizable further appreciation of the dollar, an excessive US imbalance could begin to emerge.
    Date: 2014–11
  22. By: Nikolas Tsakas (Singapore University of Technology and Design and Universidad Carlos III de Madrid)
    Abstract: We study a problem of optimal influence in a society where agents learn from their neighbors. We consider a firm that seeks to maximize the diffusion of a new product whose quality is ex–ante uncertain, to a market where consumers are able to compare the qualities of two alternative products as soon as they observe both of them. The firm can seed the product to a subset of the population and our goal is to find which is the optimal subset to target. We provide a necessary and sufficient condition that fully characterizes the optimal targeting strategy for any network structure. The key parameter in this condition is the agents’ decay centrality, which is a measure that takes into account how close an agent is to others, but in a way that very distant agents are weighted less than closer ones.
    Keywords: Social Networks, Targeting, Diffusion, Observational Learning.
    JEL: D83 D85 H23 M37
    Date: 2014–11

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