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Abstract : Using spectral regression and exact maximum likelihood methods, we test for long memory dynamics in the traded goods prices for the G7 countries, as measured in their import and export price indices. Significant and robust evidence of fractional dynamics with long memory features is found in both import and export price inflation rates.
Abstract : The theory of trade reform typically is based on a passive government budget constraint, in which changes in tariff revenue are costlessly offset by lump sum transfers. This paper offers a general framework for trade reform when the government budget constraint is active, such that tariff revenue cuts must be offset by public good decreases or other tax increases. The trade reform and public finance literatures are integrated to develop some useful and simple new expressions characterizing welfare improving trade reform. The expressions are operational with Computable General Equilibrium models. The theoretical analysis and an application to Korean data in 1963 cast doubt of the desirability of tariff cuts in convex competitive economies with active government budget constraints.
Abstract : We construct an agency model in which the planner (agent) makes project starting and termination decisions on behalf of the state (principal) to reflect the practice of socialist economies. The model shows that asymmetric information between the state and the planner regarding the quality of projects started leads to the persistence of unprofitable projects in most cases. Since in the model it is assumed that the state's objective is to maximize economic profit and the state has full power to dictate and enforce the optimal contract, the finding of the model has the implication that hardening budget constraints in socialist economies is difficult even under an "ideal" setting when these economies are free of social considerations and political frictions.
346. Chris Canavan and Mariano Tommasi (UCLA and Universidad de San Andres), "Visibility and Credibility in the Political Economy of Reform" (6/96: 224 Kb, Adobe Acrobat format)
Abstract: We investigate the interplay between government credibility and the visibility of policy-making, using the choice of a nominal anchor as an important example of how governments control visibility. We show that visibility has an important influence on how governments acquire credibility, and for this reason is a variable that governments use strategically. Policy-makers with stronger commitment to reform opt for more visible policies (e.g., an exchange-rate anchor) whereas policy-makers who cannot carry through with serious reform opt for noisier signals (e.g., a money anchor). Our logic is that greater visibility makes it easier for the public to learn the government's preferences, and only policy-makers committed to reform want this to happen. Among other things, our analysis provides a rationale for the prevalence of temporary exchange-rate targets in inflation-stabilization programs.
Abstract : This paper analyzes a model with many homogeneous agents, whose effort can be allocated to two tasks. One task produces a public good that is an important input for the production of the final output. The other task only affects the agent's own output. We show that, when the public input and the private input are complementary, the principal should offer a fixed-wage contract to some agents and a revenue-sharing contract to the remaining agents. Furthermore, we show that, when the ex ante contracts are subject to ex post renegotiation, agents with the fixed-wage contract should not own any asset, whereas agents with the revenue-sharing contract should own the physical asset in which the private input is embedded. Meanwhile, the principal should retain residual rights of control over the public good. This paper offers an explanation of the co-existence of company-owned units and franchised units in a franchise company. It adopts and extends important features from both the multi-task theory of the firm and the incomplete-contract theory of the firm.
344. Chongen Bai, David D. Li (University of Michigan) and Yijiang Wang (University of Minnesota), "Why Is the Productivity Analysis Misleading for Gauging State Enterprise Performance?" (4/96: 492 Kb, Adobe Acrobat format)
Abstract :A large literature has documented impressive productivity growth in China's state enterprises during the reform. The evidence has been used to support the view that China's enterprise reform has been successful. We cast doubt on this view by arguing that productivity is not a reliable measure of state enterprise performance. A model is used to show that when firms are not profit maximizers, higher productivity may actually lead to greater allocative distortion, lower profits and lower economic efficiency. There is evidence this may be the case for many Chinese state enterprises during the reform.
343. H. Lorne Carmichael (Queen's University) and W. Bentley MacLeod, "Territorial Bargaining" (8/96: 363 Kb, Adobe Acrobat format)
Abstract: We examine an evolutionary model of preferences in a society where resources are finite. Agents who develop better strategies for bargaining and trading will grow to dominate the population. We show that successful agents will have preferences that exhibit the "endowment effect". The social institution of private property emerges spontaneously. Agents decisions will be subject to "framing" effect, and we are able to make some predictions as to the frames that will be salient in given situations. The model makes a clear distinction between individual welfare and revealed preferences. Nonetheless, it may still be possible to recover information about individual welfare from behavioral data.
342. W. Bentley MacLeod, "Complexity, Contract and the Employment Relationship" (6/96: 396 Kb, Adobe Acrobat format)
Abstract: This paper introduces a model of contract incompleteness and bounded rationality based on the multi-tasking model of Holmstrom and Milgrom (1991). It is shown that the trade-off between the use of an employment relationship versus and explicit state contingent contract depends on number of tasks or complexity of the services provided by the individual.
341. Donald Cox, Bruce E. Hansen, and Emmanuel Jimenez (World Bank), "How Responsive are Private Transfers to Income? Evidence from a Laissez-Faire Economy" (rev. 12/1999: 204 Kb, Adobe Acrobat format. ).
Abstract : In recent years there has been rapidly growing interest in the implications of altruistic preferences for economic behavior. Undoubtedly most of this interest is fueled by altruism's often pivotal role in economic models and policy issues. Yet there is also an emerging consensus that empirical evidence for altruistic preferences--as specified in the seminal models of Becker and Barro--is lacking, at least for the United States. The failure to find strong evidence for altruism flies in the face of what seems to be an eminently commonsensical proposition about behavior.
A possible reason for the lack of evidence for altruism in a developed country like the United States is that its substantial public transfers may have already crowded out private ones to a large extent, rendering the remaining small samples uninformative about altruism. In this paper we focus on a country with extremely limited public income redistribution, the Philippines. We examine a model that nests the Becker-Barro model of altruism and predicts that the relationship between private transfers and pre-private-transfer income will be non-linear, taking the form of a spline. We estimate this model by non-linear least squares, treating the threshold (knot point) as an unknown parameter, using recently developed econometric techniques. This allows a rigorous econometric test of the altruism hypothesis. We find that private transfers are widespread, highly responsive to household economic status and conform to patterns implied by altruistic utility interdependence. In particular, among the poorest households, we estimate that decreases in pre-private-transfer income would prompt large increases in private transfers.
Our findings have significant policy implications, because they imply that attempts to improve the status of the poor could be thwarted by private responses. Some of the gains from public transfers would be shared with richer households whose burden of support for their less fortunate kin is eased. So the problems that altruistic preferences create for public income redistribution, first pointed out by Becker and Barro over 20 years ago, do indeed matter empirically.
340. Thomas Lemieux (Université de Montréal) and W. Bentley MacLeod, "Supply Side Hysteresis: The Case of the Canadian Unemployment Insurance System" (3/96: 265 Kb, Adobe Acrobat format).
Abstract: This paper presents results from a 1971 natural experiment carried out by the Canadian government on the unemployment insurance system. At that time they dramatically increased the generosity of the system. We find that the propensity to collect UI increases with a first time exposure to the system. Hence as more individuals experience unemployment, their lifetime use of the system increases. This supply side hysteresis effect may explain why unemployment has steadily increased over the 1972-1992 period, even though the generosity of unemployment insurance did not.
339. W. Bentley MacLeod and James Malcomson (University of Southampton), "Motivation and Markets" (3/96: 831 Kb, Adobe Acrobat format)
Abstract: In standard shirking models of efficiency wages, workers are motivated only by high wages. Yet 23% of young US workers report receiving some form of performance pay. This paper extends the efficiency wage framework using the theory of self-enforcing agreements to allow for performance pay in the form of bonuses. The result is a simple model of wage formation that helps explain a number of apparently unrelated phenomena in labor markets. First, in efficient markets performance pay is preferred to an efficiency wage when the cost of having a job vacant is low and qualified workers are in short supply. Second, more capital intensive industries offer higher pay than less capital intensive industries, as observed in studies of inter-industry wages differentials. Third, sustaining an efficient outcome requires a social convention similar to the notion of a fair wage, although the outcome itself is determined by fundamentals and not by exogenously imposed notions of what is fair. Finally, a two-sector version of the model makes some predictions about the relationships between turnover and wages and between wages, growth and unemployment.
338. H. Lorne Carmichael (Queen's University) and W. Bentley MacLeod, "Gift Giving and the Evolution of Cooperation" (1/96: 317 Kb, Adobe Acrobat format)
Abstract: Gift giving is a practice common to many societies. In an evolutionary model the social custom of giving gifts at the beginning of a relationship can lead to trust and cooperation. The evolutionary approach makes predictions about the character of the goods that can be used as gifts. For example, gift goods may have little use value even at low levels of consumption. Although the gifts themselves are useless, the institution is not.
337. Oivind Anti Nilsen (Norwegian Research Centre in Organization and Management) and Fabio Schiantarelli, "Zeroes and Lumps in Investment: Empirical Evidence on Irreversibilities and Non-Convexities" (rev.11/2000: 276 Kb, Adobe Acrobat format)
Abstract : The objective of this paper is to identify and discuss the main stylized facts about the type and degree of non-smoothness of capital adjustment. Using Norwegian micro data, we investigate the frequency of periods of zero investment as well as the lumpiness of investment both at the plant and firm level, and at different level of aggregation across capital goods. We also discuss how the importance of zero investment episodes and lumpiness varies between small and large plants or firms. Finally we estimate a discrete hazard model, controlling for unobserved heterogeneity, to determine the probability of having an episode of high investment, conditional on the length of the interval from the last high investment episode, and discuss the implications of the empirical evidence for the shape of the adjustment cost function.
336. W. Bentley MacLeod, "Decision, Contract and Emotion: Some Economics for a Complex and Confusing World" (6/96: 373 Kb, Adobe Acrobat format)
Abstract : This essay illustrates that if Savage's small world assumption is relaxed, one can construct a theory of bounded rationality that incorporates some of the insights from recent work in cognitive psychology. The theory can be used to explain why contracts are incomplete and the existence of endowment effects in exchange.
335. Christopher F. Baum and Meral Karasulu (Bogazici University), "Modelling Federal Reserve Discount Policy" (rev. 10/96: 93 Kb, Adobe Acrobat format; published, Computational Economics, 11:53-70, 1998)
Abstract : We employ threshold cointegration methodology to model the policy problem solved by the Federal Reserve System in their manipulation of the discount rate under a reserves target operating procedure utilized since October 1979. The infrequent and discrete adjustments that characterize movements in the discount rate instrument vis-a-vis the Federal Funds rate do not lend themselves to a linear cointegration framework. The inherently nonlinear relationship arising from the Fed's self-imposed constraints on discontinuously changing the discount rate is satisfactorily modelled as an instance of threshold cointegration between the discount rate and the Federal Funds rate.
334. John Barkoulas and Christopher F. Baum, "Fractional Dynamics in Japanese Financial Time Series" (rev. 7/97: 89 Kb, Adobe Acrobat format; published in Pacific-Basin Finance Journal, 6:1-2, 115-124)
Abstract : Using the spectral regression and Gaussian semiparametric methods of estimating the long-memory parameter, we test for fractional dynamic behavior in a number of important Japanese financial time series: spot exchange rates, forward exchange rates, stock prices, currency forward premia, Euroyen deposit rates, and the Euroyen term premium. Stochastic long memory is established as a feature of the currency forward premia, Euroyen deposit rates, and Euroyen term premium series. The martingale model cannot be rejected for the spot, forward, and stock price series.
333. Christopher F. Baum, John Barkoulas and Mustafa Caglayan, "Persistence in International Inflation Rates" (rev. 04/98: 149 Kb, Adobe Acrobat format; published in Southern Economic Journal, 65:4 (1999), 900-913)
Abstract : We test for fractional dynamics in CPI-based inflation rates for twenty-seven countries and WPI-based inflation rates for twenty-two countries. The fractional differencing parameter is estimated using semiparametric and approximate maximum likelihood methods. Significant evidence of fractional dynamics with long-memory features is found in both CPI- and WPI-based inflation rates for industrial as well as developing countries. Implications of the findings are considered and sources of long memory are hypothesized.
332. Christopher F. Baum and Clifford F. Thies (Shenandoah University), "Q, Cash Flow and Investment: An Econometric Critique" (revised 8/97: 182 Kb, Adobe Acrobat format; published, Review of Quantitative Finance and Accounting)
Abstract : The effects of measurement and specification error on estimates of the Q and cash flow model of investment are investigated. Two sources of error are considered: expensing of R&D expenditures and failing to identify that component of cash flow which relaxes financing constraints. We apply random-effects and instrumental variables estimators to a model that addresses these sources of error. We find that: (1) the capitalization of R&D strengthens the explanatory power of the model; (2) expected and unexpected components of cash flow have different effects; and (3) the effects of Q are much more evident in firms facing low costs of external finance.
331. David A. Belsley, "A Small-Sample Correction for Testing for gth-Order Serial Correlation with Artificial Regressions" (5/96: 256 Kb, Adobe Acrobat format; published in Computational Economics, 10, 197-229)
Abstract : Monte Carlo experiments establish that the usual "t-statistic" used for testing for first-order serial correlation with artificial regressions is far from being distributed as a Student's t in small samples. Rather, it is badly biased in both mean and variance and results in grossly misleading tests of hypotheses when treated as a Student's t. Simply computed corrections for the mean and variance are derived, however, which are shown to lead to a transformed statistic producing acceptable tests. The test procedure is detailed and exemplar code provided.
330. Donald Cox, James Fetzer and Emmanuel Jiminez, "Private Safety Nets through Inter-Household Transfers: The Case of Viet Nam" (5/96: 101 Kb, Adobe Acrobat format)
Abstract: This paper uses the Viet Nam Living Standards Survey (VNLSS) to provide a snapshot of private transfer activity. We investigate private transfer patterns along a variety of dimensions, such as age, household resources, demographic make-up of the household and characteristics of the region of residence. We find that private transfers are substantial and widespread in Viet Nam, and their patterns suggest that they sometimes function like means-tested public transfers. They are targeted to vulnerable groups such as low-income households or those stricken with illness, for example. But they are also disproportionately given to the well-educated. A substantial fraction of elderly households receive private transfers, suggesting that they function in part as old-age support.
Abstract: How can parents secure old-age support in the form of care, attention or financial transfers from their children? We explore the enforcement of implicit intergenerational agreements from a fresh angle by studying the possibility that the child's conduct is conditioned by the parents' example. Parents can take advantage of this learning potential by making transfers to their own parents when children are present to observe such transfers. Parents who desire old-age support have an incentive to behave appropriately. The idea that the parents' behavior is aimed at inculcating desirable behavior in their children generates testable hypotheses about transfers that we investigate using household survey microdata. The demonstration-effect approach also has implications for such diverse phenomena as population aging and the labor market participation of women.
Abstract: Can Eastern European families most severely impoverished during the transition to capitalism rely on private family safety nets? This question is likely critical for the transition's success, but little is known about family networks in Eastern Europe. We analyze newly available Polish household surveys, conducted both before and after Poland's economic transition, which measure private inter-household transfers. Such transfers are large and widespread in Poland, and in many ways they appear to function like means-tested public transfers. They flow from high to low-income households and are targeted to young couples, large families and those experiencing illness. Private transfer patterns also suggest that they are responsive to liquidity constraints. Our results from 1987 data indicate that private transfers could fill a non-trivial portion of the income gap left by unemployment. But we also find evidence from 1992 data that family networks weakened somewhat after the transition.
Abstract: This paper tests for the motives for private income transfers. We consider two motives: altruism and exchange. The question of private-transfer motives is important because such motivation can influence the effects of public income transfers on the distribution of income. Using a household survey for Peru, we find that transfer amounts received increase with recipient pre-transfer income, which contradicts a key prediction of the strong form of the altruism hypothesis but is consistent with exchange. We also find that capital market imperfections are likely to be an important cause of private transfers, and that social security benefits "crowd out" the incidence of private transfers.