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Abstract: The macroeconomic evidence on the short-term impact of exchange rates on exports and prices is notoriously weak. In this paper I examine the micro-foundations of this disconnect by looking at firm export and price setting decisions in response to exchange rate fluctuations and changing credit conditions. A unique German firm survey dataset allows me to study the impact of the EUR/USD exchange rate during the years 2003-2010. Its information on pricing and export expectations at the firm-level enables me to measure the instantaneous response of a firm to changing financial constraints and exchange rates, which avoids endogeneity issues. I find that primarily large firms cause the exchange rate "puzzles" in aggregate data. The exchange rate disconnect disappears for financially constrained firms. For these firms, the pass-through rate of exchange rate changes to the prices is more than twice the rate of unconstrained firms. Similarly, their exports are about twice as sensitive to exchange rate fluctuations. Credit therefore affects not only exports via trade finance, but also international relative prices by constraining the scope of feasible pricing policies. The effect of borrowing constraints is particularly strong during the recent financial crisis.
787. Chiu Yu Ko, "Menu Auctions with Non-Transferable Utilities and Budget Constraints" (10/2011: PDF)
Abstract: This paper extends Bernheim and Whinston's (1986) menu auction model under transferable utilities to a framework with non-transferable utilities and budget constraints. Under appropriate definitions of equilibria, it is shown that every truthful Nash equilibrium (TNE) is a coalition-proof Nash equilibrium (CPNE) and that the set of TNE payoffs and the set of CPNE payoffs are equivalent, as in a transferable utility framework. The existence of a CPNE is assured in contrast with the possible non-existence of Nash equilibrium under the definition by Dixit, Grossman, and Helpman (1997). Moreover, the set of CPNE payoffs is equivalent to the bidder-optimal weak core.
786. Daniel Kim (RAND Corporation), Christopher F Baum, Michael Ganz (Abt Bio-Pharma Solutions, Inc.), S.V. Subramanian (Harvard School of Public Health), and Ichiro Kawachi (Harvard School of Public Health), "The contextual effects of social capital on health: A cross-national instrumental variable analysis" (10/2011: PDF; published, Social Science & Medicine, 73:12, 1689-1697, 2011)
Abstract: Past observational studies of the associations of area-level/contextual social capital with health have revealed conflicting findings. However, interpreting this rapidly growing literature is difficult because estimates using conventional regression are prone to major sources of bias including residual confounding and reverse causation. Instrumental variable (IV) analysis can reduce such bias. Using data on up to 167,344 adults in 64 nations in the European and World Values Surveys and applying IV and ordinary least squares (OLS) regression, we estimated the contextual effects of country-level social trust on individual self-rated health. We further explored whether these associations varied by gender and individual levels of trust. Using OLS regression, we found higher average country-level trust to be associated with better self-rated health in both women (beta=0.051, 95% confidence interval 0.011 to 0.091, P=0.01) and men (beta=0.038, 0.0002 to 0.077, P=0.049). IV analysis yielded qualitatively similar results, although the estimates were more than double in size (in women, using country population density and corruption as instruments: beta=0.119, 0.028 to 0.209, P=0.005; in men: beta=0.115, 0.025 to 0.204, P=0.01). The estimated health effects of raising the percentage of a country's population that trusts others by 10 percentage points were at least as large as the estimated health effects of an individual developing trust in others. These findings were robust to alternative model specifications and instruments. Conventional regression and to a lesser extent IV analysis suggested that these associations are more salient in women and in women reporting social trust. In a large cross-national study, our findings, including those using instrumental variables, support the presence of beneficial effects of higher country-level trust on self-rated health. Past findings for contextual social capital using traditional regression may have underestimated the true associations. Given the close linkages between self-rated health and all-cause mortality, the public health gains from raising social capital within countries may be large.
785. Murat Kurt (University of Pittsburgh), Mark S. Roberts (University of Pittsburgh), Andrew J. Schaefer (University of Pittsburgh), and M. Utku Ünver, "Valuing Prearranged Paired Kidney Exchanges: A Stochastic Game Approach" (10/2011: PDF)
Abstract: End-stage renal disease (ESRD) is the ninth-leading cause of death in the U.S. Transplantation is the most viable renal replacement therapy for ESRD patients, but there is a severe disparity between the demand for kidneys for transplantation and the supply. This shortage is further complicated by incompatibilities in blood-type and antigen matching between patient-donor pairs. Paired kidney exchange (PKE), a cross-exchange of kidneys among incompatible patient-donor pairs, overcomes many difficulties in matching patients with incompatible donors. In a typical PKE, transplantation surgeries take place simultaneously so that no donor may renege after her intended recipient receives the kidney. Therefore, in a PKE, the occurrence of a transplantation requires compatibility among the pairs' willingnesses to exchange. We consider an arbitrary number of autonomous patients with probabilistically evolving health statuses in a prearranged PKE, and model their transplant timing decisions as a discrete-time non-zero-sum noncooperative stochastic game. We explore necessary and sufficient conditions for patients' decisions to be a stationary-perfect equilibrium, and formulate a mixed-integer linear programming representation of equilibrium constraints, which provides a characterization of the socially optimal stationary-perfect equilibria. We carefully calibrate our model using a large scale nationally representative clinical data, and empirically confirm that randomized strategies, which are less consistent with clinical practice and rationality of the patients, do not yield a significant social welfare gain over pure strategies. We also quantify the social welfare loss due to patient autonomy and demonstrate that maximizing the number of transplants may be undesirable. Our results highlight the importance of the timing of an exchange and the disease severity on matching patient-donor pairs.
784. Tayfun Sönmez and Parag A. Pathak (MIT), "School Admissions Reform in Chicago and England: Comparing Mechanisms by their Vulnerability to Manipulation" (01/2011; PDF)
Abstract: In Fall 2009, officials from Chicago Public Schools changed their assignment mechanism for coveted spots at selective college preparatory high schools midstream. After asking about 14,000 applicants to submit their preferences for schools under one mechanism, the district asked them to re-submit their preferences under a new mechanism. Officials were concerned that "high-scoring kids were being rejected simply because of the order in which they listed their college prep preferences" under the abandoned mechanism. What is somewhat puzzling is that the new mechanism is also manipulable. This paper introduces a method to compare mechanisms based on their vulnerability to manipulation. Under our notion, the old mechanism is more manipulable than the new Chicago mechanism. Indeed, the old Chicago mechanism is at least as manipulable as any other plausible mechanism. A number of similar transitions between mechanisms took place in England after the widely popular Boston mechanism was ruled illegal in 2007. Our approach provides support for these and other recent policy changes involving matching mechanisms.
783. Tayfun Sönmez, "Bidding for Army Career Specialties: Improving the ROTC Branching Mechanism" (09/2011; PDF)
Abstract: Motivated by historically low retention rates of graduates at USMA and ROTC, the Army recently introduced branch-for-service incentives programs where cadets could bid an additional three years of active duty service obligation to obtain higher priority for their desired career specialties. The full potential of this highly innovative program is not utilized, due to the ROTC's choice of a poorly behaved cadet-branch matching mechanism. Not only does the ROTC mechanism effectively block the access of a large fraction of moderately high-skilled cadets to key career branches, but it is also highly vulnerable to preference manipulation and encourages effort reduction, potentially compromising human capital accumulation of the Army. Building on recent advances in matching markets, we propose a design that eliminates each of these deficiencies and also benefits the Army by mitigating several policy problems that the Army has identified. In contrast to the ROTC mechanism, our design utilizes market principles more elaborately, and it can be interpreted as a hybrid between a market mechanism and a priority-based allocation mechanism.
782. Tayfun Sönmez and Tobias B. Switzer (USAF), "Matching with (Branch-of-Choice) Contracts at United States Military Academy" (05/2011; PDF)
Abstract: Branch selection is a key decision in a cadet's military career. Cadets at USMA can increase their branch priorities at a fraction of slots by extending their service agreement. This real-life matching problem fills an important gap in market design literature. Although priorities fail a key substitutes condition, the agent-optimal stable mechanism is well-defined, and in contrast to the current USMA mechanism it is fair, stable, and strategy-proof. Adoption of this mechanism benefits cadets and the Army. This new application shows that matching with contracts model is practically relevant beyond traditional domains that satisfy the substitutes condition.
781. Tayfun Sönmez and M. Utku Ünver, "Altruistically Unbalanced Kidney Exchange" (10/2011: PDF)
Abstract: Although a pilot national live-donor kidney exchange program was recently launched in the US, the kidney shortage is increasing faster than ever. A new solution paradigm is able to incorporate compatible pairs in exchange. In this paper, we consider an exchange framework that has both compatible and in- compatible pairs, and patients are indifferent over compatible pairs. Only two-way exchanges are permitted due to institutional constraints. We explore the structure of Pareto-efficient matchings in this framework. The mathematical structure of this model turns out to be quite novel. We show that under Pareto-efficient matchings, the same number of patients receive transplants, and it is possible to construct Pareto-efficient matchings that match the same incompatible pairs while matching the least number of compatible pairs. We extend the celebrated Gallai-Edmonds Decomposition in the combinatorial optimization literature to our new framework. We also conduct comparative static exercises on how this decomposition changes as new compatible pairs join the pool.
780. James E. Anderson and Yoto V. Yotov (Drexel University), " Terms of Trade and Global Efficiency Effects of Free Trade Agreements, 1990-2002" (09/2011; PDF)
Abstract: This paper infers the terms of trade effects of Free Trade Agreements (FTAs) with the structural gravity model. Using panel data methods to resolve two way causality between trade and FTAs, we estimate direct FTA effects on bilateral trade volume in 2 digit manufacturing goods from 1990-2002. We deduce the terms of trade changes implied by these volume effects for 40 countries plus a rest-of-the-world aggregate. Some gain over 10%, some lose less than 0.2%. Overall, using a novel measure of the change in iceberg melting, global efficiency rises 0.62%.
779. Anthony Creane (Michigan State University), Chiu Yu Ko (Boston College) and Hideo Konishi, "Choosing a Licensee from Heterogeneous Rivals" (09/2011, PDF)
Abstract: We examine a firm that can license its production technology to a rival when firms are heterogeneous in production costs. We show that a complete technology transfer from one firm to another always increases joint profit under weakly concave demand when at least three firms remain in the industry. A jointly profitable transfer may reduce social welfare, although a jointly profitable transfer from the most efficient firm always increases welfare. We also consider two auction games under complete information: a standard first-price auction and a menu auction by Bernheim and Whinston (1986). With natural refinement of equilibria, we show that the resulting licensees are ordered by degree of efficiency: menu auction, simple auction, and joint-profit maximizing licensees, in (weakly) descending order.
778. Anthony Hannagan (Boston College) and Hideo Konishi, "Inverse Elasticity Rule in a Production Efficiency Problem" (08/2011, PDF)
Abstract: Diamond and Mirrlees (1971) and Dasgupta and Stiglitz (1972) show that production efficiency is achieved under the optimal commodity tax when profit income is zero. Here, we consider the simplest possible model to analyze production efficiency in the presence of profit income: a tax reform problem in an economy with a representative consumer, two goods, and two firms with decreasing returns to scale technologies. We show that differentiating a uniform producer tax according to the inverse elasticity rule, while keeping government revenue constant, reduces additional distortions caused by the presence of profit income and improves social welfare.
777. Hideo Konishi, "Entrepreneurial Land Developers: Local Externalities and Mixed Housing Developments" (08/2011, PDF)
Abstract: Housing developments (condos and suburban developments) are not necessarily homogeneous. Developers provide different types of units with various sizes and other characteristics catering to different types of customers. In this paper, we allow local consumption externalities within each development: some consumers would be happy to pay high prices for the most prestigious units in the development, while some are happy to have modest units as long as the prices are low. We consider land developers who seek the optimal mix of units in developments to maximize their profits. We show that there exists an equilibrium, and that every equilibrium is Pareto efficient as long as consumers and developers are optimistic in a certain sense. We provide examples in which mixed developments are more profitable to the developers. We relate this work to widely used hedonic pricing model by Rosen (1974), and to an equilibrium concept under asymmetric information by Rothschild and Stiglitz (1976).
776. Hideo Konishi and Ryusuke Shinohara (Shinshu University), "Voluntary Participation and the Provision of Public Goods in Large Finite Economies" (08/2011, PDF)
Abstract: We consider a public good provision game with voluntary participation. Agents participating in the game provide a public good and pay the fees according to a mechanism (allocation rule), while nonparticipants can free-ride on the participants. We examine how the equilibrium public good provision level is affected by enlarging the population of an economy. We introduce a condition for an allocation rule, the asymptotic uniform continuity in replication (AUCR), which requires that small changes in the population must yield only small changes in the public good provision and which is satisfied by many mechanisms. We show that under AUCR, the equilibrium level of the public good converges to zero as the economy is replicated in the sense of Milleron (1972).
775. Fabio Ghironi and Sanjay K. Chugh (University of Maryland), "Optimal Fiscal Policy with Endogenous Product Variety" (08/2011, PDF)
Abstract: We study Ramsey-optimal fiscal policy in an economy in which product varieties are the result of forward-looking investment decisions by firms. There are two main results. First, depending on the particular form of variety aggregation in preferences, firms' dividend payments may be either subsidized or taxed in the long run. This policy balances monopoly incentives for product creation with consumers' welfare benefit of product variety. In the most empirically relevant form of variety aggregation, socially efficient outcomes entail a substantial tax on dividend income, removing the incentive for over-accumulation of capital, which takes the form of variety. Second, optimal policy induces dramatically smaller, but efficient, fluctuations of both capital and labor markets than in a calibrated exogenous policy. Decentralization requires zero intertemporal distortions and constant static distortions over the cycle. The results relate to Ramsey theory, which we show by developing welfare-relevant concepts of efficiency that take into account product creation.
774. Susanto Basu and Brent Bundick, "Uncertainty Shocks in a Model of Effective Demand" (09/2011, PDF)
Abstract: This paper examines the role of uncertainty shocks in a one-sector, representative-agent dy- namic stochastic general-equilibrium model. When prices are flexible, uncertainty shocks are not capable of producing business-cycle comovements among key macro variables. With countercyclical markups through sticky prices, however, uncertainty shocks can generate fluctuations that are consistent with business cycles. Monetary policy usually plays a key role in offsetting the negative impact of uncertainty shocks. If the central bank is constrained by the zero lower bound, then mon- etary policy can no longer perform its usual stabilizing function and higher uncertainty has even more negative effects on the economy. Calibrating the size of uncertainty shocks using fluctuations in the VIX, we find that increased uncertainty about the future may indeed have played a significant role in worsening the Great Recession, which is consistent with statements by policymakers, economists, and the financial press.
773. Ariel Rubinstein (University of Tel Aviv) and Uzi Segal, "On the Likelihood of Cyclic Comparisons" (04/2011, PDF)
Abstract: We investigate the procedure of "random sampling" where the alternatives are random variables. When comparing any two alternatives, the decision maker samples each of the alternatives once and ranks them according to the comparison between the two realizations. Our main result is that when applied to three alternatives, the procedure yields a cycle with a probability bounded above by 8/27. Bounds are also obtained for other related procedures.
772. Peter Ireland, "The Macroeconomic Effects on Interest on Reserves" (02/2011, PDF)
Abstract: This paper uses a New Keynesian model with banks and deposits, calibrated to match the US economy, to study the macroeconomic effects of policies that pay interest on reserves. While their effects on output and inflation are small, these policies require important adjustments in the way that the monetary authority manages the supply of reserves, as liquidity effects vanish and households' portfolio shifts increase banks' demand for reserves when short-term interest rates rise. Money and monetary policy remain linked in the long run, however, since policy actions that change the price level must change the supply of reserves proportionately.
771. Marvin Kraus, "Road Pricing with Optimal Mass Transit" (01/2011, PDF)
Abstract: This paper asks the question, "How should the level of mass transit service be adjusted when road pricing is introduced for a substitute auto mode?" The reference point for the introduction of road pricing is second-best optimization in transit. Because this involves below- marginal-cost pricing in transit, it is efficient for road pricing to be accompanied by an increase in the transit fare and a reduction in service. This runs counter to the usual view of using the toll revenue generated by road pricing to provide a higher level of transit service.
770. Barak Medina (Hebrew University), Shlomo Naeh (Hebrew University) and Uzi Segal, "Ranking Ranking Rules" (01/2011, PDF)
Abstract: Transitivity is a fundamental requirement for consistency. Legal systems, especially when composed over time and by different agencies, may encounter non-transitive cycles. This paper discusses a new solution to such cycles, namely setting the hierarchy of the relevant rules or preferences. The hierarchy determines the sequence of applying the rules or preferences, and thus enables avoiding non-transitive cycles. The paper provides a formal generalization of this solution, and demonstrates its possible implementation to anti-discrimination laws. It is also shown that this solution can be traced to the Rabbinic literature, starting with the Mishnah and the Talmud (1st?5th c CE).
769. Joseph M. Ostroy (UCLA) and Uzi Segal, "No Externalities: A Characterization of Efficiency and Incentive Compatibility with Public Goods" (09/2010, PDF)
Abstract: We show that efficient anonymous incentive compatible (dominant strategy) mechanisms for public goods eliminate externalities, i.e., each individual is unable to change the welfare of anyone else. The characterization is used to derive existence and non-existence results for models with a finite number of individuals and to explain existence results in the continuum. A similar characterization and conclusions are demonstrated for private goods in [7]. However, unlike private goods, elimination of externalities with public goods implies that individuals cannot change the outcome. Hence, such mechanisms provide only weak incentives for truth-telling.
768. Alon Harel (Hebrew University) and Uzi Segal, "The Case for Discrimination" (01/2011, PDF)
Abstract: This paper defends the use of asymmetric norms which grant gre- ater privileges to minorities than to majorities. The norms we discuss include norms facilitating the establishment or prohibition of minority- only or majority-only institutions, neighborhoods, or associations. While traditionally the primary arguments favoring minorities? privileges have been based on considerations of fairness or justice, we show that there are simple environments where asymmetric norms would maximize aggregate sum of individual utilities. A utilitarian may therefore support the establishment of black colleges or Hassidic only neighborhoods while at the same time oppose exclusion of blacks or Jews from white or Christian neighborhoods.
767. Aline Bütikofer (University of Bern), Arthur Lewbel and Shannon Seitz, "Health and Retirement Effects in a Collective Consumption Model of Older Households" (rev. 01/2011, PDF)
Abstract: Using data on elderly individuals and couples, we estimate a collective model of household consumption of a variety of goods, showing how resources are shared between husband and wife, and how this allocation is affected by retirement and health status. We identify the extent to which shared consumption of some goods by elderly married couples reduces their costs of living relative to living alone. We also identify the fraction of household resources consumed by wives versus husbands, taking this jointness of some consumption into account. The results are relevant for household bargaining models and for a variety of welfare calculations.
766. Georg Strasser, "The Efficiency of the Global Markets for Final Goods and Productive Capabilities" (rev. 01/2012, PDF)
Abstract: Slow mean reversion of real exchange rates is commonly considered a result of border frictions that remain despite integration of financial and goods markets. This paper shows that even if border frictions decline, a contemporaneous decline in output shock variance can in fact slow down mean reversion. It proposes a new method of estimating border cost from time-series data only, without relying on within-country variation. Applying this method to the real exchange rate of final goods and a novel measure of the real exchange rate for productive capabilities, such as technology and know-how, gives very differential border cost estimates. During the years 1974?2008, a relocation reduces productive capability by 22% for the average country pair, whereas final goods by only 15%. The real exchange rate for final goods takes more than two years to revert to purchasing power parity, more than twice as long as productive capabilities.
765. Fabio Ghironi and Viktors Stebunovs (Board of Governors of the Federal Reserve System), "The Domestic and International Effects of Interstate U.S. Banking" (12/2010, PDF)
Abstract: This paper studies the domestic and international effects of the transition to an interstate banking system implemented by the U.S. since the late 1970s in a dynamic, stochastic, general equilibrium model with endogenous producer entry. Interstate banking reduces the degree of local monopoly power of financial intermediaries. We show that the an economy that implements this form of deregulation experiences increased producer entry, real exchange rate appreciation, and a current account deficit. The rest of the world experiences a long-run increase in GDP and consumption. Less monopoly power in financial intermediation results in less volatile business creation, reduced markup countercyclicality, and weaker substitution effects in labor supply in response to productivity shocks. Bank market integration thus contributes to a moderation of firm-level and aggregate output volatility. In turn, trade and financial ties between the two countries in our model allow also the foreign economy to enjoy lower GDP volatility in most scenarios we consider. The results of the model are consistent with features of the U.S. and international business cycle after the U.S. began its transition to interstate banking.
764. Christopher F Baum, Mark E Schaffer (Heriot-Watt University) and Steven Stillman (University of Waikato), "Using Stata for Applied Research: Reviewing its Capabilities" (12/2010, PDF; published, Journal of Economic Surveys, 2011, 25:2, 380-394)
Abstract: We review the Stata statistical package and evaluate its suitability for applied research.
763. Peter Ireland, "Theology, Economics, and Economic Development" (11/2010: PDF)
Abstract: Although theologians and economists communicate their ideas to different professional audiences in different ways, we agree on many basic points. We agree, for instance, that all too often, a large gap appears between "what is" and "what should be." We agree, more specifically, that unregulated markets lead to undesirable and perhaps even disastrous environmental degradation. And we view with great suspicion government policies that redistribute wealth perversely, away from the needy and towards the affluent. But while economists share theologians' concerns about the problems that economic development brings, we can also point to benefits that come with rising income levels.
762. Alev Atak (Queen Mary), Oliver Linton (London School of Economics) and Zhijie Xiao, "A Semiparametric Panel Model for unbalanced data with Application to Climate Change in the United Kingdom" (09/2010: PDF)
Abstract: This paper is concerned with developing a semiparametric panel model to explain the trend in UK temperatures and other weather outcomes over the last century. We work with the monthly averaged maximum and minimum temperatures observed at the twenty six Meteorological Office stations. The data is an unbalanced panel. We allow the trend to evolve in a nonparametric way so that we obtain a fuller picture of the evolution of common temperature in the medium timescale. Profile likelihood estimators (PLE) are proposed and their statistical properties are studied. The proposed PLE has improved asymptotic property comparing the the sequential two-step estimators. Finally, forecasting based on the proposed model is studied.
761. Zongwu Cai (University of North Carolina at Charlotte) and Zhijie Xiao, "Semiparametric Quantile Regression Estimation in Dynamic Models with Partially Varying Coefficients" (11/2010: PDF)
Abstract: We study quantile regression estimation for dynamic models with partially varying coefficients so that the values of some coefficients may be functions of informative covariates. Estimation of both parametric and nonparametric functional coefficients are proposed. In particular, we propose a three stage semiparametric procedure. Both consistency and asymptotic normality of the proposed estimators are derived. We demonstrate that the parametric estimators are root-n consistent and the estimation of the functional coefficients is oracle. In addition, efficiency of parameter estimation is discussed and a simple efficient estimator is proposed. A simple and easily implemented test for the hypothesis of varying-coefficient is proposed. A Monte Carlo experiment is conducted to evaluate the performance of the proposed estimators.
760. Harold Petersen, "The Roots of the Financial Collapse: Going Way, Way Back" (09/2010: PDF)
Abstract: The paper is based on a talk given in April 2010. It traces the roots of the recent financial crisis from development of the limited liability corporation, to separation of ownership from control, tax incentives for debt financing, investment bankers moving to the corporate form, government backstopping the lenders, and the failure of the quants. Finally, it considers the Minsky hypothesis, under which financial markets are inherently unstable.
759. Yingying Dong (California State University, Fullerton) and Arthur Lewbel, "Regression Discontinuity Marginal Threshold Treatment Effects" (rev. 10/2010; PDF)
Abstract: In regression discontinuity models, where the probability of treatment jumps discretely when a running variable crosses a threshold, an average treatment effect can be nonparametrically identied. We show that the derivative of this treatment effect with respect to the threshold is also nonparametrically identified and easily estimated, in both sharp and fuzzy designs. This marginal threshold treatment effect (MTTE) may be used to estimate the impact on treatment effects of small changes in the threshold. We use it to show how raising the age of Medicare eligibility would change the probability of take up of various types of health insurance.
758. Geoffrey Dunbar (Simon Fraser University), Arthur Lewbel and Krishna Pendakur (Simon Fraser University), "Children's Resources in Collective Households: Identification, Estimation and an Application to Child Poverty in Malawi" (rev. 11/2010; PDF)
Abstract: The share of household resources devoted to children is hard to identify, because consumption is measured at the household level, and goods can be shared. Using semiparametric restrictions on individual preferences within a collective model, we identify how total household resources are divided up among household members, by observing how each family member?s expenditures on a single private good like clothing varies with income and family size. Using data from Malawi we show how resources devoted to wives and children vary by family size and structure, and we find that standard poverty indices understate the incidence of child poverty.
757. Arthur Lewbel and Oliver Linton (London School of Economics), "Nonparametric Euler Equation Identification and Estimation" (06/2010; PDF)
Abstract: We consider nonparametric identification and estimation of consumption based asset pricing Euler equations. This entails estimation of pricing kernels or equivalently marginal utility functions up to scale. The standard way of writing these Euler pricing equations yields Fredholm integral equations of the first kind, resulting in the ill posed inverse problem. We show that these equations can be written in a form that equals, (or with habits, resembles) Fredholm integral equations of the second kind, having well posed rather than ill posed inverses. We allow durables, habits, or both to affect utility. We show how to extend the usual method of solving Fredholm integral equations of the second kind to allow for the presence of habits. Using these results, we show with few low level assumptions that marginal utility functions and pricing kernels are locally nonparametrically identified, and we give conditions for finite set and point identification of these functions. Unlike the case of ill posed inverse problems, the limiting distribution theory for our nonparametric estimators should be relatively standard.
756. Juan Carlos Escanciano (Indiana University), David Jacho-Chávez (Indiana University) and Arthur Lewbel, "Uniform Convergence for Semiparametric Two Step Estimators and Tests" (rev. 03/2011; PDF; previously circulated as "Identification and Estimation of Semiparametric Two Step Models")
Abstract: Let g0(X) be a function of some observable vector X that is identified and can be nonparametrically estimated. This paper provides new results on the identification and estimation of the function F and the vector ?0 whenE(Y|X)=F[X??0,g0(X)]. Many models fit this framework, including latent index models with an endogenous regressor, and nonlinear models with sample selection. Our identification results show that identification based on functional form, without exclusions or instruments, extends to this semiparametric model. On estimation we provide a new uniform convergence result that allows for random weighting and data dependent bandwidths and trimming. We include Monte Carlo simulations and an empirical application.
755. Sokbae Lee (University College London) and Arthur Lewbel, "Nonparametric Identification of Accelerated Failure Time Competing Risks Models" (06/2010; PDF)
Abstract: We provide new conditions for identification of accelerated failure time competing risks models. These include Roy models and some auction models. In our set up, unknown regression functions and the joint survivor function of latent disturbance terms are all nonparametric. We show that this model is identified given covariates that are independent of latent errors, provided that a certain rank condition is satisfied. We present a simple example in which our rank condition for identification is verified. Our identification strategy does not depend on identification at infinity or near zero, and it does not require exclusion assumptions. Given our identification, we show estimation can be accomplished using sieves.
754. Scott Fulford, "What credit card puzzle? Precaution, variable debt limits, and what we can learn from the small debts of poor people" (06/2010; PDF)
Abstract: Many people in the United States have both a revolving credit card balance on which they pay a high rate of interest, and have liquid checking or savings accounts on which they earn little interest. Why would so many people throw so much money away? This paper shows that it may not be much of a puzzle: if credit limits may change unexpectedly, that creates a reason for people to hold on to cash or savings as consumption insurance against the times when they have a high benefit from consump- tion but cannot borrow. I show that this approach can explain the credit card puzzle with low probabilities of losing access to credit for a wide range of preferences. The approach in this paper offers a novel channel for how financial uncertainty can affect real decisions: if the probability of losing access to credit increases, consumers will in- crease saving and decrease consumption to add to their insurance, even without "real" shocks to income.
753. Scott Fulford, "If financial development matters, then how? National banks in the United States 1870-1900" (rev. 06/2011; PDF)
Abstract: How does banking affect development, and does banking affect all sectors equally, or change the structure of the economy? Since banking tends to grow with the rest of the economy, these questions are difficult to answer. This paper examines the growth of the national banking system from 1870-1900 during an important period in the financial and economic development of the United States. I create a new data set on individual banks and place them geographically. Minimum capital requirements lim- ited the expansion of banks, and I use these requirements to identify the effects of additional banking. Banking was very important: the opening of a bank with the minimum capital increased total production by 12% for counties close to the dividing line between getting a bank and not. Both manufacturing and farming benefited, sug- gesting that the commercial, as opposed to investment, activities of banks were very important. Banks increased the inequality in farm size after a decade, largely through the expansion of larger farms, but had no affect on yields. Although the literature on banking often focuses on investment, commercial banking, either through direct currency creation or bills of exchange to facilitate the movement of goods, appears to be an important part of banking activities during development.
752. Stefan Hoderlein and Hajo Holzmann (University of Karlsruhe), "Demand Analysis as an Ill-Posed Inverse Problem with Semiparametric Specification" (08/2008; PDF)
Abstract: In this paper we are concerned with analyzing the behavior of a semiparametric estimator which corrects for endogeneity in a nonparametric regression by assuming mean independence of residuals from instruments only. Because it is common in many applications, we focus on the case where endogenous regressors and additional instruments are jointly normal, conditional on exogenous regressors. This leads to a severely ill-posed inverse problem. In this setup, we show first how to test for conditional normality. More importantly, we then establish how to exploit this knowledge when constructing an estimator, and we derive results characterizing the large sample behavior of such an estimator. In addition, in a Monte Carlo experiment we analyze the finite sample behavior of the proposed estimator. Our application comes from consumer demand. We obtain new and interesting findings that highlight both the advantages, and the difficulties of an approach which leads to ill-posed inverse problems. Finally, we discuss the somewhat problematic relationship between nonparametric instrumental variable models, and the recently emphasized issue of unobserved heterogeneity in structural models.
751. Stefan Hoderlein, "Developments in Nonparametric Demand Analysis: Heterogeneity and Nonparametrics" (12/2008; PDF)
Abstract: This paper discusses new development in nonparametric econometric approaches related to empirical modeling of demand decisons. It shows how diverse recent approaches are, and what new modeling options arise in practice. We review work on nonparametric identification using nonseparable functions, semi-and nonparametric estimation approaches involving inverse problems, and nonparametric testing approaches. We focus on classical consumer demand systems with continuous quantities, and do not consider approaches that involve discrete consumption decisions as are common in empirical industrial organization. Our intention is to give a subjective account on the usefulness of these various methods for applications in the field.
750. Stefan Hoderlein and Joachim Winter (University of Munich), "Structural Measurement Errors in Nonseparable Models" (06/2009; PDF)
Abstract: This paper considers measurement error from a new perspective. In surveys, response errors are often caused by the fact that respondents recall past events and quantities imperfectly. We explore the consequences of recall errors for such key econometric issues as the identification of marginal effects or economic restrictions in structural models. Our identification approach is entirely nonparametric, using Matzkin-type nonseparable models that nest a large class of potential structural models. We establish that measurement errors due to poor recall are generally likely to exhibit nonstandard behavior, in particular be nonclassical and differential, and we provide means to deal with this situation. Moreover, our findings suggest that conventional wisdom about measurement errors may be misleading in many economic applications. For instance, under certain conditions left-hand side recall errors will be problematic even in the linear model, and quantiles will be less robust than means. Finally, we apply the main concepts put forward in this paper to real world data, and find evidence that underscores the importance of focusing on individual response behavior.
749. Berthold R. Haag (HypoVereinsbank), Stefan Hoderlein and Sonya Mihaleva (Brown University), "Testing Homogeneity in Demand Systems Nonparametrically: Theory and Evidence" (09/2009; PDF)
Abstract: Homogeneity of degree zero has often been rejected in empirical studies that employ parametric models. This paper proposes a test for homogeneity that does not depend on the correct specification of the functional form of the empirical model. The test statistic we propose is based on kernel regression and extends nonparametric specification tests to systems of equations with weakly dependent data. We discuss a number of practically important issues and further extensions. In particular, we focus on a novel bootstrap version of the test statistic. Moreover, we show that the same test also allows to assess the validity of functional form assumptions. When we apply the test to British household data, we find homogeneity generally well accepted. In contrast, we reject homogeneity with a standard almost ideal parametric demand system. Using our test for functional form we obtain however that it it precisely this functional form assumption which is rejected. Our findings indicate that the rejections of homogeneity obtained thus far are due to misspecification of the functional form and not due to incorrectness of the homogeneity assumption.
748. Stefan Hoderlein, "How Many Consumers are Rational?" (06/2009; PDF)
Abstract: Rationality places strong restrictions on individual consumer behavior. This paper is concerned with assessing the validity of the integrability constraints imposed by standard utility maximization, arising in classical consumer demand analysis. More specifically, we characterize the testable implications of negative semidefiniteness and symmetry of the Slutsky matrix across a heterogeneous population without assuming anything on the functional form of individual preferences. In the same spirit, homogeneity of degree zero is being considered. Our approach employs nonseparable models and is centered around a conditional independence assumption, which is sufficiently general to allow for endogenous regressors. It is the only substantial assumption a researcher has to specify in this model, and has to be evaluated with particular care. Finally, we apply all concepts to British household data: We show that rationality is an acceptable description for large parts of the population, regardless of whether we test on single or composite households.
747. Stefan Hoderlein, "Endogenous Semiparametric Binary Choice Models with Heteroscedasticity" (06/2009; PDF)
Abstract: In this paper we consider endogenous regressors in the binary choice model under a weak median exclusion restriction, but without further specification of the distribution of the unobserved random components. Our reduced form specification with heteroscedastic residuals covers various heterogeneous structural binary choice models. As a particularly relevant example of a structural model where no semiparametric estimator has of yet been analyzed, we consider the binary random utility model with endogenous regressors and heterogeneous parameters. We employ a control function IV assumption to establish identification of a slope parameter beta by the mean ratio of derivatives of two functions of the instruments. We propose an estimator based on direct sample counterparts, and discuss the large sample behavior of this estimator. In particular, we show root-n consistency and derive the asymptotic distribution. In the same framework, we propose tests for heteroscedasticity, overidentification and endogeneity. We analyze the small sample performance through a simulation study. An application of the model to discrete choice demand data concludes this paper.
746. Stefan Hoderlein and Halbert White (University of California-San Diego), "Nonparametric Identification in Nonseparable Panel Data Models with Generalized Fixed Effects" (07/2009; PDF)
Abstract: This paper is concerned with extending the familiar notion of fixed effects to nonlinear setups with infinite dimensional unobservables like preferences. The main result is that a generalized version of differencing identifies local average structural derivatives (LASDs) in very general nonseparable models, while allowing for arbitrary dependence between the persistent unobservables and the regressors of interest even if there are only two time periods. These quantities specialize to well known objects like the slope coefficient in the semiparametric panel data binary choice model with fixed effects. We extend the basic framework to include dynamics in the regressors and time trends, and show how distributional effects as well as average effects are identified. In addition, we show how to handle endogeneity in the transitory component. Finally, we adapt our results to the semiparametric binary choice model with correlated coefficients, and establish that average structural marginal probabilities are identified. We conclude this paper by applying the last result to a real world data example. Using the PSID, we analyze the way in which the lending restrictions for mortgages eased between 2000 and 2004.
745. Stefan Hoderlein and Jörg Stoye (New York University), "Revealed Preferences in a Heterogeneous Population" (08/2009; PDF)
Abstract: This paper explores the empirical content of the weak axiom of revealed preference (WARP) for repeated cross-sectional data or for panel data where individuals experience preference shocks. Specifically, in a heterogeneous population, think of the fraction of consumers violating WARP as the parameter of interest. This parameter depends on the joint distribution of choices over different budget sets. Repeated cross-sections do not reveal this distribution but only its marginals. Thus, the parameter is not point identified but can be bounded. We frame this as a copula problem and use copula techniques to analyze it. The bounds, as well as some nonparametric refinements of them, correspond to intuitive behavioral assumptions in the two goods case. With three or more goods, these intuitions break down, and plausible assumptions can have counterintuitive implications. Inference on the bounds is an application of partial identification through moment inequalities. We implement our analysis with the British Family Expenditure Survey (FES) data. Upper bounds are fre- quently positive but lower bounds not significantly so, hence FES data are consistent with WARP in a heterogeneous population.
744. Halbert White (University of California-San Diego), Karim Chalak and Xun Lu (Hong Kong University of Science and Technology), "Linking Granger Causality and the Pearl Causal Model with Settable Systems" (08/2010; PDF)
Abstract: The causal notions embodied in the concept of Granger causality have been argued to belong to a different category than those of Judea Pearl's Causal Model, and so far their relation has remained obscure. Here, we demonstrate that these concepts are in fact closely linked by showing how each relates to straightforward notions of direct causality embodied in settable systems, an extension and refinement of the Pearl Causal Model designed to accommodate optimization, equilibrium, and learning. We then provide straightforward practical methods to test for direct causality using tests for Granger causality.
743. Joseph F. Quinn, "Work and Retirement: How and When Older Americans Leave the Labor Force" (06/2010: PDF)
742. Onur Kesten (Carnegie Mellon University), Morimitsu Kurino (Maastricht University) and M. Utku Ünver, "Fair and Efficient Assignment via the Probabilistic Serial Mechanism" (rev. 05/2011: PDF)
Abstract: This paper studies the problem of assigning a set of indivisible objects to a set of agents when monetary transfers are not allowed. We offer two characterizations of the prominent lottery assignment mechanism called the probabilistic serial. We show that it is the only mechanism satisfying non-wastefulness and ordinal fairness. Our second result shows that a direct ordinal mechanism satisfies ordinal efficiency, envy-freeness, and upper invariance if and only if it is the probabilistic serial.
741. Scott Fulford, "The effects of financial development in the short and long run" (rev. 05/2011; PDF)
Abstract: Although many think of extending financial access as a means of reducing poverty, empirical studies have produced contradictory results. One problem that many studies share is that they cover only a short time frame and do not examine dynamic effects. I show that allowing effects to differ over time is crucial to understanding changes in access to credit when precautionary motives are important. While the introduction of credit initially creates a boom in consumption and reduces poverty, in the long term credit reduces mean consumption because access to credit reduces the steady state stock of wealth. Using consistent consumption data that cover a much longer time period than most studies, my empirical findings show that increased access to bank branches in rural India increased consumption initially, but consumption later fell, although the long term effect was still slightly positive.
740. Alessandro Barattieri, Susanto Basu and Peter Gottschalk, "Some Evidence on the Importance of Sticky Wages" (06/2010; PDF)
Abstract: Nominal wage stickiness is an important component of recent medium-scale structural macroeconomic models, but to date there has been little microeconomic evidence supporting the as- sumption of sluggish nominal wage adjustment. We present evidence on the frequency of nominal wage adjustment using data from the Survey of Income and Program Participation (SIPP) for the period 1996-1999. The SIPP provides high-frequency information on wages, employment and demographic characteristics for a large and representative sample of the US population. The main results of the analysis are as follows. 1) After correcting for measurement error, wages appear to be very sticky. In the average quarter, the probability that an individual will experience a nominal wage change is between 5 and 18 percent, depending on the samples and assumptions used. 2) The frequency of wage adjustment does not display significant seasonal patterns. 3) There is little heterogeneity in the frequency of wage adjustment across industries and occupations 4) The hazard of a nominal wage change first increases and then decreases, with a peak at 12 months. 5) The probability of a wage change is positively correlated with the unemployment rate and with the consumer price inflation rate.
739. Francis M. McLaughlin, "John Rogers Commons: Are His Insights Important in Teaching Modern Labor Economics?" (06/2010; PDF)
Abstract: John Commons' influence in American labor economics was eclipsed after World War II by a resurgent neoclassical labor economics that gradually relegated Commons' institutional orientation to the periphery of economic discourse. A common opinion is that the work of institutional economists in the Commons tradition was largely descriptive and lacked theoretical content. Commons, however, regarded his Institutional Economics as a work of economic theory. This paper contains a description of the theoretical core of Institutional Economics and an evaluation of it from the perspective of its potential usefulness in the teaching of modern labor economics. Part I describes the theoretical perspective of neoclassical economic theory in order to clarify the institutional perspective by contrast. Part II describes Commons? alternative perspective. Part III presents the conclusions derived from this comparison of the two alternative perspectives.
738. Karim Chalak, "Identification of Local Treatment Effects Using a Proxy for an Instrument" (05/2010; PDF)
Abstract: The method of indirect least squares (ILS) using a proxy for a discrete instrument is shown to identify a weighted average of local treatment effects. The weights are nonnegative if and only if the proxy is intensity preserving for the instrument. A similar result holds for instrumental variables (IV) methods such as two stage least squares. Thus, one should carefully interpret estimates for causal effects obtained via ILS or IV using an error-laden proxy of an instrument, a proxy for an instrument with missing or imputed observations, or a binary proxy for a multivalued instrument. Favorably, the proxy need not satisfy all the assumptions required for the instrument. Specifically, an individual's proxy can depend on others' instrument and the proxy need not affect the treatment nor be exogenous. In special cases such as with binary instrument, ILS using any suitable proxy for an instrument identifies local average treatment effects.
737. Onur Kesten (Carnegie Mellon University) and M. Utku Ünver, "A Theory of School-Choice Lotteries" (rev. 06/2010: PDF)
Abstract: A new centralized mechanism was introduced in New York City and Boston to assign students to public schools in district school-choice programs. This mechanism was advocated for its superior fairness property, besides others, over the mechanisms it replaced. In this paper, we introduce a new framework for investigating school-choice matching problems and two ex-ante notions of fairness in lottery design, strong ex-ante stability and ex-ante stability. This frame- work generalizes known one-to-many two-sided and one-sided matching models. We first show that the new NYC/Boston mechanism fails to satisfy these fairness properties. We then propose two new mechanisms, the fractional deferred-acceptance mechanism, which is ordinally Pareto dominant within the class of strongly ex-ante stable mechanisms, and the fractional deferred- acceptance and trading mechanism, which satisfies equal treatment of equals and constrained ordinal Pareto efficiency within the class of ex-ante stable mechanisms.
736. Michael Belongia (University of Mississippi) and Peter Ireland, "The Barnett Critique After Three Decades: A New Keynesian Analysis" (05/2010; PDF)
Abstract: This paper extends a New Keynesian model to include roles for currency and deposits as competing sources of liquidity services demanded by households. It shows that, both qualitatively and quantitatively, the Barnett critique applies: While a Divisia aggregate of monetary services tracks the true monetary aggregate almost perfectly, a simple-sum measure often behaves quite differently. The model also shows that movements in both quantity and price indices for monetary services correlate strongly with movements in output following a variety of real and nominal shocks. Finally, the analysis characterizes the optimal monetary policy response to shocks that originate in an explicitly-modeled financial sector.
735. Peter Ireland, "A New Keynesian Perspective on the Great Recession" (04/2010; PDF)
Abstract: With an estimated New Keynesian model, this paper compares the "great recession" of 2007-09 to its two immediate predecessors in 1990-91 and 2001. The model attributes all three downturns to a similar mix of aggregate demand and supply disturbances. The most recent series of adverse shocks lasted longer and became more severe, however, prolonging and deepening the great recession. In addition, the zero lower bound on the nominal interest rate prevented monetary policy from stabilizing the US economy as it had previously; counterfactual simulations suggest that without this constraint, output would have recovered sooner and more quickly in 2009.
734. Halbert White (University of California-San Diego) and Karim Chalak, "Identifying Structural Effects in Nonseparable Systems Using Covariates" (08/2008; PDF)
Abstract: This paper demonstrates the extensive scope of an alternative to standard instrumental variables methods, namely covariate-based methods, for identifying and estimating effects of interest in general structural systems. As we show, commonly used econometric methods, specifically parametric, semi-parametric, and nonparametric extremum or moment-based methods, can all exploit covariates to estimate well-identifi?ed structural effects. The systems we consider are general, in that they need not impose linearity, separability, or monotonicity restrictions on the structural relations. We consider effects of multiple causes; these may be binary, categorical, or continuous. For continuous causes, we examine both marginal and non-marginal effects. We analyze effects on aspects of the response distribution generally, deO?ned by explicit or implicit moments or as optimizers (e.g., quantiles). Key for identification is a specific conditional exogeneity relation. We examine what happens in its absence and find that identification generally fails. Nevertheless, local and near identification results hold in its absence, as we show.
733. Halbert White (University of California-San Diego) and Karim Chalak, "Testing a Conditional Form of Exogeneity" (03/2010; PDF)
Abstract: We give two new approaches to testing a conditional form of exogeneity. This condition ensures unconfoundedness and identification of effects of interest in structural systems. As these approaches do not rely on the absence of causal effects of treatment under the null, they complement earlier methods of Rosenbaum (1987) and Heckman and Hotz (1989).
732. James E. Anderson, "The Incidence of Gravity" (01/2010; forthcoming in The Gravity Model in International Trade: Advances and Applications, Steven Brakman and Peter Bergeijk, eds.)
Abstract: The high trade costs inferred from gravity are rarely used in the wide class of trade models. Two related problems explain this omission of a key explanatory variable. First, national seller and buyer responses to trade costs depend on their incidence rather than on the full cost. Second, the high dimensionality of bilateral trade costs requires aggregation for most practical uses in interpretation or standard trade modeling. This paper provides an intuitive description of a resolution to the aggregation and incidence problems. For each product, it is as if each province or country sells to a world market containing all buyers and buys from from that market containing all sellers, the incidence of aggregated bilateral trade costs being divided between sellers and buyers according to their location. Measures of incidence described here give intuitive insight into the consequences of geography, illustrated with results from Anderson and Yotov (2008). The integration of the incidence measures with standard general equilibrium structure opens the way to richer applied general equilibrium models and better empirical work on the origins of comparative advantage.
731. James E. Anderson and Will Martin (World Bank), "Costs of Taxation and Benefits of Public Goods with Multiple Taxes and Goods" (01/2010; forthcoming, Journal of Public Economic Theory)
Abstract: The fact that raising taxes can increase taxed labor supply through income effects is frequently used to justify greater public good provision than indicated by traditional, compensated analyses. We develop a model including multiple public goods and taxes and derive consistent measures of the marginal benefit of public goods and their marginal social cost inclusive of tax distortions using both compensated and uncompensated measures of the Marginal Cost of Funds (MCF). Our analysis confirms that the desirability of tax financed public projects is independent of whether compensated or uncompensated methods are used. The main innovation shows that the costs or benefits of providing particular public goods should be adjusted by a simple, benefit multiplier not previously seen in the literature if an uncompensated MCF is used.
730. Oleg Badunenko (DIW Berlin), Christopher F Baum and Dorothea Schäfer (DIW Berlin), "Does the tenure of Private Equity investment improve the performance of European firms?" (03/2010, PDF)
Abstract: The paper investigates whether the presence and tenure of Private Equity (PE) investment in European companies improves their performance. Previous studies documented the unambiguous merit of a buyout during the 1980s and 1990s for listed firms in the US and UK markets. This study analyzes such influences in both listed and unlisted European firms during 2002-2007. Our analysis suggests that short-term PE investments have, on average, a detrimental effect on firm performance. The performance of a firm that has PE backing is lower than that of a firm without PE backing in the first year of PE investment. Such an effect disappears if PE investments remain in the firm for an uninterrupted six-year term.
729. Fuhito Kojima (Stanford University) and M. Utku Ünver, "The 'Boston' School Choice Mechanism" (rev. 10/2011: PDF)
Abstract: The Boston mechanism is a popular student-placement mechanism in school-choice programs around the world. We provide two characterizations of the Boston mechanism. We introduce a new axiom, respect of preference rankings. A mechanism is the Boston mechanism for some priority if and only if it respects preference rankings and satisfies consistency, resource monotonicity, and an auxiliary invariance property. In environments where each type of object has exactly one unit, as in house allocation, a characterization is given by respect of preference rankings, individual rationality, population monotonicity, and the auxiliary invariance property.
728. Susanto Basu, Luigi Pascali, Fabio Schiantarelli and Luis Serven (World Bank), "Productivity, Welfare and Reallocation: Theory and Firm Level Evidence" (rev. 06/2010: PDF)
Abstract: We prove that the change in welfare of a representative consumer is summarized by the current and expected future values of the standard Solow productivity residual. The equivalence holds if the representative household maximizes utility while taking prices parametrically. This result justifies TFP as the right summary measure of welfare (even in situations where it does not properly measure technology) and makes it possible to calculate the contributions of disaggregated units (industries or firms) to aggregate welfare using readily available TFP data. Based on this finding, we compute firm and industry contributions to welfare for a set of European OECD countries (Belgium, France, Great Britain, Italy, Spain), using industry-level (EU-KLEMS) and firm-level (Amadeus) data. After adding further assumptions about technology and market structure (firms minimize costs and face common factor prices), we show that welfare change can be decomposed into three components that reject respectively technical change, aggregate distortions and allocative efficiency. Then, using theoretically appropriate firm-level data, we assess the importance of each of these components as sources of welfare improvement in the same set of European countries.
727. Luigi Pascali, "Contract Incompleteness, Globalization and Vertical Structure: an Empirical Analysis" (11/2009: PDF)
Abstract: This paper studies the effects of international openness and contracting institutions on vertical integration. It first derives a number of predictions regarding the interactions between trade barriers, contracting costs, technology intensity, and the extent of vertical integration from a simple model with incomplete contracts. Then it investigates these predictions using a new dataset of over 14000 firms from 45 developing countries. Consistent with theory, the effect of technology intensity of domestic producers on their likelihood to vertically integrate is decreasing in the quality of domestic contracting institutions and in international openness. Contract enforcing costs are particularly high in developing countries and their effects on the vertical structure of technological intensive firms may have significant welfare costs. If improving domestic contracting institutions is not feasible an equivalent solution is to increase openness to international trade. This would discipline domestic suppliers reducing the need for vertical integration.
726. Christopher F Baum, Atreya Chakraborty (University of Massachusetts-Boston), Liyan Han (Beihang University) and Boyan Liu (Beihang University), "The Effects of Uncertainty and Corporate Governance on Firms' Demand for Liquidity" (11/2009: PDF; published, Applied Economics, 2012, 44:4, 515-525)
Abstract: We find that U.S. corporations' demand for liquidity is sensitive to two important factors: uncertainty facing the firm and the quality of corporate governance. Following prior research, we find that both factors have important influences on firms' cash holdings. Our results also indicate that the interactions between uncertainty and governance measures are significant. From a policy perspective, these new findings indicate both governance and the nature of uncertainty may play an important role in managing liquidity risks. Policy recommendations may not only be limited to changes in financial policy but may also include changes in corporate governance.
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