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Abstract: Several widely used tests for a changing mean exhibit nonmonotonic power in finite samples due to "incorrect" estimation of nuisance parameters under the alternative. In this paper, we study the issue of nonmonotonic power in testing for changing mean. We investigate the asymptotic power properties of the tests using a new framework where alternatives are characterized as having "large" changes. The asymptotic analysis provides a theoretical explanation to the power problem. Modified tests that have monotonic power against a wide range of alternatives of structural change are proposed. Instead of estimating the nuisance parameters based on ordinary least squares residuals, the proposed tests use modified estimators based on nonparametric regression residuals. It is shown that tests based on the modified long-run variance estimator provide an improved rate of divergence of the tests under the alternative of a change in mean. Tests for structural breaks based on such an estimator are able to remain consistent while still retaining the same asymptotic distribution under the null hypothesis of constant mean.
708. Zhijie Xiao, "Quantile Cointegrating Regression" (01/2009: PDF)
Abstract: Quantile regression has important applications in risk management, portfolio optimization, and asset pricing. The current paper studies estimation, inference and financial applications of quantile regression with cointegrated time series. In addition, a new cointegration model with varying coefficients is proposed. In the proposed model, the value of cointegrating coefficients may be affected by the shocks and thus may vary over the innovation quantile. The proposed model may be viewed as a stochastic cointegration model which includes the conventional cointegration model as a special case. It also provides a useful complement to cointegration models with (G)ARCH effects. Asymptotic properties of the proposed model and limiting distribution of the cointegrating regression quantiles are derived. In the presence of endogenous regressors, fully-modified quantile regression estimators and augmented quantile cointegrating regression are proposed to remove the second order bias and nuisance parameters. Regression Wald test are constructed based on the fully modified quantile regression estimators. An empirical application to stock index data highlights the potential of the proposed method.
707. Yingying Dong and Arthur Lewbel, "Nonparametric Identification of a Binary Random Factor in Cross Section Data" (06/2009: PDF)
Abstract: Suppose V and U are two independent mean zero random variables, where V has an asymmetric distribution with two mass points and U has a symmetric distribution. We show that the distributions of V and U are nonparametrically identified just from observing the sum V+U, and provide a rate root n estimator. We apply these results to the world income distribution to measure the extent of convergence over time, where the values V can take on correspond to country types, i.e., wealthy versus poor countries. We also extend our results to include covariates X, showing that we can nonparametrically identify and estimate cross section regression models of the form Y=g(X,D*)+U, where D* is an unobserved binary regressor.
706. Eyal Dvir and Ken Rogoff (Harvard University), "The Three Epochs of Oil" (04/2009: PDF)
Abstract: We test for changes in price behavior in the longest crude oil price series available (1861-2008). We find strong evidence for changes in persistence and in volatility of price across three well defined periods. We argue that historically, the real price of oil has tended to be highly persistent and volatile whenever rapid industrialization in a major world economy coincided with uncertainty regarding access to supply. We present a modified commodity storage model that fully incorporates demand, and further can accommodate both transitory and permanent shocks. We show that the role of storage when demand is subject to persistent growth shocks is speculative, instead of its classic mitigating role. This result helps to account for the increased volatility of oil price we observe in these periods.
705. Christopher F Baum, Mustafa Caglayan (University of Sheffield) and Oleksandr Talavera (Robert Gordon University), "Parliamentary Election Cycles and the Turkish Banking Sector" (03/2009: PDF)
Abstract: This paper analyzes the effects of parliamentary election cycles on the Turkish banking system. Using annual bank-level data representing all banks in Turkey during 1963-2005, we find that there are meaningful differences in the structure of assets, liabilities and financial performance across different stages of the parliamentary election cycle. However, we find that government-owned banks operate similarly to both domestic and foreign-owned private sector banks before, during and after elections. Our estimates also show that government-owned banks underperform their domestic and foreign-owned private sector counterparts.
704. Eugene Choo (University of Calgary), Shannon Seitz and Aloysius Siow (University of Toronto), "The Collective Marriage Matching Model: Identification, Estimation and Testing" (08/2008)
Abstract: We develop and estimate an empirical collective model with endogenous marriage formation, participation, and family labor supply. Intra-household transfers arise endogenously as the transfers that clear the marriage market. The intra-household allocation can be recovered from observations on marriage decisions. Introducing the marriage market in the collective model allows us to independently estimate transfers from labor supplies and from marriage decisions. We esti- mate a semi-parametric version of our model using 2000 US Census data. Estimates of the model using marriage data are much more consistent with the theoretical predictions than estimates derived from labor supply.
703. James E. Anderson, "Commercial Policy in a Predatory World" (05/2008)
Abstract: Predation---extortion or theft---imposes significant endogenous costs on trade, with rich implications for trade policy. The model of this paper shows that the response of trade to liberalization depends on the strength of enforcement against predators. Efficient commercial policy may either tax or subsidize trade. The Mercantilist predilection for trade monopoly and for subsidy has a rationale. Insecurity induces an international externality alternative that of the standard terms of trade effect. Tolerance or intolerance of smuggling can be rational depending on the weakness or strength of enforcement, illustrated by the switch from the former to the latter by Britain in regard to its North American colonies.
702. James E. Anderson, "Consistent Trade Policy Aggregation" (02/2008; forthcoming, International Economic Review)
Abstract: Much empirical work requires the aggregation of policies. This paper provides methods of policy aggregation that are consistent with two common objectives of empirical work. One is to preserve real income. The other is to preserve the real volume of activity in one or more parts of the economy. Trade policy aggregation is an acute example of the aggregation problem with thousands of highly dispersed trade barriers to be aggregated. An application to India shows that the standard atheoretic method of aggregation is seriously misleading compared to the consistent method.
701. James E. Anderson, "Terrorism, Trade and Public Policy" (12/2008)
Abstract: Are bigger markets safer? How should government policy respond to terrorist threats? Trade draws potential terrorists and economic predators into productive activity, but trade also draws terrorist attacks. Larger trade reduces the risk of terrorist attack when the wage elasticity is high, associated with low ratios of predators to prey and high wages; but it may increase the risk of terrorist attack when the wage elasticity is low, associated with high ratios of predators to prey. Anti-terrorist trade policy should always promote trade in simultaneous play. Government first mover advantage and inelastic wage may imply trade restriction. Tolerance of smuggling may improve security. Better enforcement should ordinarily be provided for bigger, inherently safer and higher wage markets.
700. James E. Anderson, "Gravity, Productivity and the Pattern of Production and Trade" (12/2008)
Abstract: The aggregated incidence of bilateral trade costs is derived from the gravity model. Incidence is equivalent to a TFP penalty. Sectoral and national differences in TFP have sharp implications for the equilibrium pattern of production and trade in a specific factors model of production. Unskilled labor is intersectorally mobile. Skilled labor acquires sector specific skills. Productivity shocks cause incidence shock that induce ex post inefficient allocation of skilled labor. Below (above) average TFP sectors produce less and have below (above) average skill premia. Ex ante efficient allocation is lower in sectors with riskier TFP incidence, despite risk neutrality.
699. James E. Anderson, "Globalization and Income Distribution: A Specific Factors Continuum" (12/2008)
Abstract: Does globalization widen inequality or increase income risk? Globalization amplifies the effect of idiosyncratic relative productivity shocks. But wider markets reduce the effect of economy-wide supply shocks on world prices. Both forces are at work in the specific factors continuum model of this paper. Ex post equilibrium exhibits positive (negative) premia for export (import-competing) sector specific factors. Globalization widens inequality in North and South. Globalization increases personal income risk from idiosyncratic productivity shocks, but reduces aggregate shock risk acting on the factoral terms of trade. Both forces have their greatest impact on the poorest and least impact for the richest trading sectors, while the distribution in nontraded sectors is unaffected.
698. James E. Anderson and Yoto Yotov (Drexel University), "The Changing Incidence of Geography" (12/2008)
Abstract: Neglected properties of the structural gravity model offer a theoretically consistent method to calculate the incidence of estimated trade costs, disaggregated by commodity and region, and re-aggregated into forms useful for economic geography. For Canada's provinces, 1992-2003, incidence is on average some five times higher for sellers than for buyers. Sellers' incidence falls over time due to specialization, despite constant gravity coefficients. This previously unrecognized globalizing force drives big reductions in 'constructed home bias', the disproportionate share of local trade; and large but varying gains in real GDP. Aggregation biases gravity coefficients downward.
697. Robert Moffitt (Johns Hopkins University) and Peter Gottschalk, "Trends in the Transitory Variance of Male Earnings in the U.S., 1970-2004" (12/2008)
Abstract: We estimate the trend in the transitory variance of male earnings in the U.S. using the Michigan Panel Study of Income Dynamics from 1970 to 2004. Using both an error components model as well as simpler but more approximate methods, we find that the transitory variance increased substantially in the 1980’s and then remained at this new higher level through 2004 We also find a strong cyclical component to the transitory variance. Its increase accounts for between 30 and 65 percent of the total rise in cross-sectional variance, depending on the time period. The cross-sectional variance has recently increased but this reflects a rise in the variance of the permanent component, not the transitory component. Increases in transitory variance occurred for less educated in the early 1980s and for more educated workers in the later 1980s and early 1990s.
696. Peter Gottschalk, Erika McEntarfer (U.S. Treasury) and Robert Moffitt (Johns Hopkins University), "Trends in the Transitory Variance of Male Earnings in the U.S., 1991-2003: Preliminary Evidence from LEHD data" (12/2008)
Abstract: We estimate the trend in the transitory variance of male earnings in the U.S. from 1991 to 2005 using an administrative data set of Unemployment Insurance wage reports, the Longitudinal Employer-Employer Dynamics data set (LEHD), and compare the findings to those of Moffitt and Gottschalk (2008) obtained from the Michigan Panel Study of Income Dynamics (PSID). Despite substantial differences between the LEHD and the PSID in the levels of cross- sectional variances of male earnings, the changes over time in transitory variances obtained from estimating two of the models in Moffitt and Gottschalk are quite similar in the two data sets. Specifically, over the 1991-2003 period, transitory variances fell slightly, and then rose slightly, returning in 2003 to the same approximate level they had obtained in 1991. Overall, the analysis of the LEHD data confirms the findings based on the PSID that the transitory variance did not show a trend net of cycle over this period.
695. Christopher F Baum and Mustafa Caglayan (University of Sheffield), "The Volatility of International Trade Flows and Exchange Rate Uncertainty" (11/2008: 248 Kb, PDF)
Abstract: Empirical evidence obtained from data covering Eurozone countries, other industrialized countries, and newly industrialized countries (NICs) over 1980–2006 shows that exchange rate uncertainty has a consistent positive and significant effect on the volatility of bilateral trade flows. A one standard deviation increase in exchange rate uncertainty leads to an eight per cent increase in trade volatility. These effects differ markedly for trade flows between industrialized countries and NICs, and are not mitigated by the presence of the Eurozone. Contrary to earlier findings, our results also suggest that exchange rate uncertainty does not affect the volume of trade flows of either industrialized countries or NICs.
694. Arthur Lewbel and Krishna Pendakur (Simon Fraser University), "Tricks With Hicks: The EASI Demand System" (05/2008: 158 Kb, PDF)
Abstract: The structural consumer demand methods used to estimate the parameters of collective household models are typically either very restrictive and easy to implement or very general and difficult to estimate. In this paper, we provide a middle ground. We adapt the very general framework of Browning, Chiappori and Lewbel (2007) by adding a simple restriction that recasts the empirical model from a highly nonlinear demand system with price variation to a slightly nonlinear Engel curve system. Our restriction has an interpretation in terms of the behaviour of household scale economies and is testable. Our method identifies the levels of (not just changes in) household resource shares, and a variant of equivalence scales called indifference scales. We apply our methodology to Canadian expenditure data.
693. Francis X. Diebold (Pennsylvania) and Georg Strasser, "On the Correlation Structure of Microstructure Noise in Theory and Practice" (10/2008: 701 Kb, PDF)
Abstract: We argue for incorporating the financial economics of market microstructure into the financial econometrics of asset return volatility estimation. In particular, we use market microstructure theory to derive the cross-correlation function between latent returns and market microstructure noise, which feature prominently in the recent volatility literature. The cross-correlation at zero displacement is typically negative, and cross-correlations at nonzero displacements are positive and decay geometrically. If market makers are sufficiently risk averse, however, the cross-correlation pattern is inverted. Our results are useful for assessing the validity of the frequently-assumed independence of latent price and microstructure noise, for explaining observed crosscorrelation patterns, for predicting as-yet undiscovered patterns, and for making informed conjectures as to improved volatility estimation methods.
692. Karim Chalak and Halbert White (University of California-San Diego), "An Extended Class of Instrumental Variables for the Estimation of Causal Effects" (11/2007: 776 Kb, PDF)
Abstract: This paper examines the ways in which structural systems can yield observed variables, other than the cause or treatment of interest, that can play an instrumental role in identifying and estimating causal effects. We focus speciÖcally on the ways in which structures determine exclusion restrictions and conditional exogeneity relations that act to ensure identification. We show that by carefully specifying the structural equations and by extending the standard notion of instrumental variables, one can identify and estimate causal effects in the endogenous regressor case for a broad range of economically relevant structures. Some of these have not previously been recognized. Our results there create new opportunities for identifying and estimating causal effects in non-experimental situations. Our results for more familiar structures provide new insights. For example, we extend results of Angrist, Imbens, and Rubin (1996) by taking into account an important distinction between cases where Z is an observed exogenous instrument and those where it is a proxy for an unobserved exogenous instrument. A main message emerging from our analysis is the central importance of sufficiently specifying the causal relations governing the unobservables, as these play a crucial role in creating obstacles or opportunities for identification. Because our results exhaust the possibilities for identification, we ensure that there are no other opportunities for identification based on exclusion restrictions and conditional independence relations still to be discovered. To accomplish this characterization, we introduce notions of conditioning and conditional extended instrumental variables (EIVs). These are not proper instruments, as they are endogenous. They nevertheless permit identification and estimation of causal effects. We analyze methods using these EIVs either singly or jointly.
691. Xiaohong Chen (Yale University), Roger Koenker (University of Illinois at Urbana-Champaign) and Zhijie Xiao, "Copula-Based Nonlinear Quantile Autoregression" (10/2008, PDF)
Abstract: Parametric copulas are shown to be attractive devices for specifying quantile autoregressive models for nonlinear time-series. Estimation of local, quantile-specific copula-based time series models offers some salient advantages over classical global parametric approaches. Consistency and asymptotic normality of the proposed quantile estimators are established under mild conditions, allowing for global misspecification of parametric copulas and marginals, and without assuming any mixing rate condition. These results lead to a general framework for inference and model specification testing of extreme conditional value-at-risk for financial time series data.
690. Christopher F Baum, Dorothea Schäfer (DIW Berlin) and Oleksandr Talavera (Aberdeen Business School), "The Impact of Financial Structure on Firms' Financial Constraints: A Cross-Country Analysis" (rev. 02/2009, PDF)
Abstract: We estimate firms' cash flow sensitivity of cash to empirically test how the financial system's structure and activity level influence their financial constraints. For this purpose we merge Almeida et al. (2004), a path-breaking new design for evaluating a firm's financial constraints, with Levine (2002), who paved the way for comparative analysis of financial systems around the world. We conjecture that a country's financial system, both in terms of its structure and its level of development, influences the cash flow sensitivity of cash of constrained firms but leaves unconstrained firms unaffected. We test our hypothesis with a large international sample of 80,000 firm-years from 1989 to 2006. Our findings reveal that both the structure of the financial system and its level of development matter. Bank-based financial systems provide the constrained firms with easier access to external financing.
689. Karim Chalak and Halbert White (University of California-San Diego), "Independence and Conditional Independence in Causal Systems" (09/2008: 568 Kb, PDF)
Abstract: We study the interrelations between (conditional) independence and causal relations in settable systems. We provide definitions in terms of functional dependence for direct, indirect, and total causality as well as for (indirect) causality via and exclusive of a set of variables. We then provide necessary and su¢ cient causal and stochastic conditions for (conditional) dependence among random vectors of interest in settable systems. Immediate corollaries ensure the validity of Reichenbach's principle of common cause and its informative extension, the conditional Reichenbach principle of common cause. We relate our results to notions of d-separation and D-separation in the artificial intelligence literature.
688. Christopher F Baum, Atreya Chakraborty (University of Massachusetts-Boston) and Boyan Liu (Beihang University), "The Impact of Macroeconomic Uncertainty on Firms' Changes in Financial Leverage" (08/2008: 131 Kb, PDF)
Abstract: We investigate the relationship between a firm’s measures of corporate governance, macroeconomic uncertainty and changes in leverage. Recent research highlights the role of governance in financing decisions. Previous research also indicates that macroeconomic uncertainty affects a firm’s ability to borrow. In this paper we investigate how both these channels of influence affects firms' financing decisions. Our findings show that macroeconomic uncertainty has an important role to play, both by itself and in interaction with a measure of corporate governance.
687. Shlomo Nael (Hebrew University) and Uzi Segal, "The Talmud On Transitivity" (05/2008: 156 Kb, PDF)
Abstract: Transitivity is a fundamental axiom in Economics that appears in consumer theory, decision under uncertainty, and social choice theory. While the appeal of transitivity is obvious, observed choices sometimes contradict it. This paper shows that treatments of violations of transitivity al- ready appear in the rabbinic literature, starting with the Mishnah and the Talmud (1st–5th c CE). This literature offers several solutions that are similar to those used in the modern economic literature, as well as some other solutions that may be adopted in modern situations. We analyze several examples. One where nontransitive relations are acceptable; one where a violation of transitivity leads to problems with extended choice functions; and a third where a nontransitive cycle is deliberately created (to enhance justice).
686. Christopher F Baum, Mustafa Caglayan (University of Sheffield) and Oleksandr Talavera (Robert Gordon University), "On the Investment Sensitivity of Debt under Uncertainty" (06/2008: 108 Kb, PDF)
Abstract: We investigate the impact of debt on a panel of U.S. manufacturing firms' capital investment behavior as the underlying firm-specific and macroeconomic uncertainty changes. Our estimates show that the influence of leverage on capital investment may be stimulating or mitigating depending on the effects of uncertainty.
685. Hideo Konishi, Carsten Kowalczyk (Tufts University) and Tomas Sjöström (Rutgers University), "Global Free Trade is in the Core of a Customs Union Game" (06/2008: 188 Kb, PDF; forthcoming, Review of International Economics)
Abstract: This paper shows nonemptiness of the core of a customs union game with a status quo equilibrium with tariffs by employing an appropriate notion of the core as in Kowalczyk and Sjöström (1994, Economica). Specifically, we find that if customs unions may have no effects on non-member countries as in Ohyama (1972, Keio Economic Studies) and Kemp and Wan (1976, Journal of International Economics) then a subset of countries forming such a customs union does not block global free trade when accompanied by so-called Grinols transfers (Grinols, 1981, Journal of International Economics).
684. Michael Giandrea (U.S. Bureau of Labor Statistics), Kevin Cahill (The Analysis Group) and Joseph F. Quinn, "Self-Employment Transitions among Older American Workers with Career Jobs " (04/2008: 121 Kb, PDF)
Abstract: What role does self-employment play in the retirement process? Older Americans are staying in the labor force longer than prior trends would have predicted and many change jobs later in life. These job transitions are often within the same occupation or across occupations within wage- and-salary employment. The transition can also be out of wage-and-salary work and into self employment. Indeed, national statistics show that self employment becomes more prevalent with age, partly because self employment provides older workers with opportunities not found in traditional wage-and-salary jobs, such as flexibility in hours worked and independence. This paper analyzes transitions into and out of self employment among older workers who have had career jobs. We utilize the Health and Retirement Study, a nationally-representative dataset of older Americans, to investigate the prevalence of self employment among older workers who made a job transition later in life and to explore the factors that determine the choice of wage- and-salary employment or self employment. We find that post-career transitions into and out of self employment are common and that health status, career occupation, and financial variables are important determinants of these transitions. As older Americans and the country as a whole face financial strains in retirement income in the years ahead, self employment may be a vital part of the pro-work solution.
683. Zvi Safra (Tel Aviv University) and Uzi Segal, "Calibration Results for Betweenness Functionals" (5/2008: 148 Kb, PDF)
Abstract: A reasonable level of risk aversion with respect to small gambles leads to a high, and absurd, level of risk aversion with respect to large gambles. This was demonstrated by Rabin for expected utility theory. Later, Safra and Segal extended this result by showing that similar arguments apply to almost all non-expected utility theories, provided they are Gateaux differentiable. In this paper we drop the differentiability assumption and by restricting attention to betweenness theories we show that much weaker conditions are sufficient for the derivation of similar calibration results.
682. Zvi Safra (Tel Aviv University) and Uzi Segal, "Calibration Results for Non-Expected Utility Theories" (5/2008: 216 Kb, PDF; forthcoming, Econometrica)
Abstract: Rabin proved that a low level of risk aversion with respect to small gambles leads to a high, and absurd, level of risk aversion with respect to large gambles. Rabin’s arguments strongly depend on expected utility theory, but we show that similar arguments apply to general non-expected utility theories.
681. Taiji Furusawa (Hitotsubashi University) and Hideo Konishi, "Contributing or Free-Riding? A Theory of Endogenous Lobby Formation" (2/2008: 493 Kb, PDF)
Abstract: We consider a two-stage public goods provision game: In the first stage, players simultaneously decide if they will join a contribution group or not. In the second stage, players in the contribution group simultaneously offer contribution schemes in order to influence the government's choice on the level of provision of public goods. Using perfectly coalition-proof Nash equilibrium (Bernheim, Peleg and Whinston, 1987 JET), we show that the set of equilibrium outcomes is equivalent to an "intuitive" hybrid solution concept, the free-riding-proof core, which is always nonempty but does not necessarily achieve global efficiency. It is not necessarily true that an equilibrium lobby group is formed by the players with highest willingness-to-pay, nor is it a consecutive group with respect to their willingnesses-to-pay. We also show that the equilibrium level of public goods provision shrinks to zero as the economy is replicated.
680. Susanne Schennach (University of Chicago), Halbert White (University of California-San Diego) and Karim Chalak, "Estimating average marginal effects in nonseparable structural systems" (12/2007: 536 Kb, PDF)
Abstract: We provide nonparametric estimators of derivative ratio-based average marginal effects of an endogenous cause, X, on a response of interest, Y, for a system of recursive structural equations. The system need not exhibit linearity, separability, or monotonicity. Our estimators are local indirect least squares estimators analogous to those of Heckman and Vytlacil (1999, 2001) who treat a latent index model involving a binary X: We treat the traditional case of an observed exogenous instrument (OXI) and the case where one observes error-laden proxies for an unobserved exogenous instrument (PXI). For PXI, we develop and apply new results for estimating densities and expectations conditional on mismeasured variables. For both OXI and PXI, we use infinite order flat-top kernels to obtain uniformly convergent and asymptotically normal nonparametric estimators of instrument-conditioned effects, as well as root-n consistent and asymptotically normal estimators of average effects.
679. Richard W. Tresch and Andrei Zlate, "Explorations into the Production of State Government Services: Education, Welfare and Hospitals" (12/2007: 3 Mb, PDF)
Abstract: This paper explores the production characteristics of three important U.S. state government services--public higher education, public welfare, and state psychiatric hospitals—during the last half of the twentieth century. We estimate translog cost functions for the three services and find that their production attributes are similar in a number of respects. First, production exhibits substantial economies of scale; unexploited scale economies are so severe that the average state operates on the negative portion of its marginal cost curve. Second, the analysis of technical change indicates that public education, welfare, and hospitals are affected by severe technical regression in all states, in both the long run and short run. Third, production of all three services is overcapitalized in most states; the provision of these services is not long-run efficient. Finally, we show that the Baumol-Oates cost disease of lagging productivity growth is rampant in all three services; only the short-run productivity growth in education matches the performance of the private sector, as technical regression is more than offset by the productivity-enhancing scale effect of increased enrollments.
Abstract: Consider an observed binary regressor D and an unobserved binary variable D*, both of which affect some other variable Y. This paper considers nonparametric identification and estimation of the effect of D on Y, conditioning on D*=0. For example, suppose Y is a person's wage, the unobserved D* indicates if the person has been to college, and the observed D indicates whether the individual claims to have been to college. This paper then identifies and estimates the difference in average wages between those who falsely claim college experience versus those who tell the truth about not having college. We estimate this average effect of lying to be about 6% to 20%. Nonparametric identification without observing D* is obtained either by observing a variable V that is roughly analogous to an instrument for ordinary measurement error, or by imposing restrictions on model error moments.
677. Anthony Creane (Michigan State University) and Hideo Konishi, "The Unilateral Incentives for Technology Transfers: Predation (and Deterrence) by Proxy" (rev. 06/2008: 280 Kb, PDF; previously circulated as "The Unilateral Incentives for Technology Transfers: Predation by Proxy")
Abstract: In 1984 GM and Toyota began the joint production of automobiles to much controversy over its anti-competitive effects. The argument for the joint production was the considerable efficiency gains GM would obtain. Since then, the anti-trust controversy has died, but a question remains: why would the most efficient manufacturer (Toyota) transfer to its largest rival the knowledge to transform itself into a very efficient rival? We examine when such transfers could be unilaterally profitable, finding that it can serve as a credible way to make the market more competitive, forcing high cost firms to exit (or preventing future entry). This is not without a cost to Toyota since such a transfer also makes the remaining rivals more efficient. Despite this, we find a sufficient (but not necessary) condition for it to be profitable to predate "by proxy": the market satisfies an entry equilibrium condition. Further, we find that it is then optimal to predate on every firm that is vulnerable and so a market with many firms can become a duopoly. Profitable predation implies higher prices, to the detriment of consumers. Yet the improved production efficiency outweighs this loss, resulting enhanced social welfare. In contrast, profitable non-predatory joint production (or technology transfers) may reduce welfare. Paradoxically, the potential for predation could encourage entry ex ante.
676. Xiaohong Chen (Yale University), Yingyao Hu (Johns Hopkins University) and Arthur Lewbel, " Nonparametric Identification and Estimation of Nonclassical Errors-in-Variables Models Without Additional Information" (08/2007: 276 Kb, PDF)
Abstract: This paper considers identification and estimation of a nonparametric regression model with an unobserved discrete covariate. The sample consists of a dependent variable and a set of covariates, one of which is discrete and arbitrarily correlates with the unobserved covariate. The observed discrete covariate has the same support as the unobserved covariate, and can be interpreted as a proxy or mismeasure of the unobserved one, but with a nonclassical measurement error that has an unknown distribution. We obtain nonparametric identification of the model given monotonicity of the regression function and a rank condition that is directly testable given the data. Our identification strategy does not require additional sample information, such as instrumental variables or a secondary sample. We then estimate the model via the method of sieve maximum likelihood, and provide root-n asymptotic normality and semiparametric efficiency of smooth functionals of interest. Two small simulations are presented to illustrate the identification and the estimation results.
675. Xiaohong Chen (Yale University), Yingyao Hu (Johns Hopkins University) and Arthur Lewbel, " Nonparametric Identification of Regression Models Containing a Misclassified Dichotomous Regressor Without Instruments" (07/2007: 132 Kb, PDF)
Abstract: This note considers nonparametric identification of a general nonlinear regression model with a dichotomous regressor subject to misclassification error. The available sample information consists of a dependent variable and a set of regressors, one of which is binary and error-ridden with misclassification error that has unknown distribution. Our identification strategy does not parameterize any regression or distribution functions, and does not require additional sample information such as instrumental variables, repeated measurements, or an auxiliary sample. Our main identifying assumption is that the regression model error has zero conditional third moment. The results include a closed-form solution for the unknown distributions and the regression function.
674. Susanne Schennach (University of Chicago), Yingyao Hu (Johns Hopkins University) and Arthur Lewbel, "Nonparametric identification of the classical errors-in-variables model without side information" (07/2007: 277 Kb, PDF)
Abstract: This note establishes that the fully nonparametric classical errors-in-variables model is identifiable from data on the regressor and the dependent variable alone, unless the specification is a member of a very specific parametric family. This family includes the linear specification with normally distributed variables as a special case. This result relies on standard primitive regularity conditions taking the form of smoothness and monotonicity of the regression function and nonvanishing characteristic functions of the disturbances.
673. James E. Anderson, "Economic Integration and the Civilizing Commerce Hypothesis" (09/2005: 189 Kb, PDF)
Abstract: Economic integration lowers one form of trade costs, tariffs, and stimulates changes in other trade costs. This paper offers a model in which integration may raise or lower the important trade cost associated with insecurity. The model can help to explain the varied experience with integration and it points to the usefulness of combining enforcement policy integration with trade policy integration.
672. James E. Anderson, "Does Trade Foster Contract Enforcement?" (07/2007: 261 Kb, PDF)
Abstract: Contract enforcement is probabilistic, but the probability depends on rules and processes. A stimulus to trade may induce traders to alter rules or processes to improve enforcement. In the model of this paper, such a positive knock-on effect occurs when the elasticity of supply of traders is sufficiently high. Negative knock-on is possible when the elasticity is low. Enforcement strategies in competing markets are complements (substitutes) if the supply of traders is sufficiently elastic (inelastic). The model provides a useful structure of endogenous enforcement that gives promise of explaining patterns of institutional development.
671. Erich Battistin (University of Padova), Richard Blundell (University College London) and Arthur Lewbel, "Why is Consumption More Log Normal Than Income? Gibrat's Law Revisited" (07/2007: 577 Kb, PDF)
Abstract: Significant departures from log normality are observed in income data, in violation of Gibrat's law. We identify a new empirical regularity, which is that the distribution of consumption expenditures across households is, within cohorts, closer to log normal than the distribution of income. We explain these empirical results by showing that the logic of Gibrat's law applies not to total income, but to permanent income and to maginal utility. These findings have important implications for welfare and inequality measurement, aggregation, and econometric model analysis.
Abstract:Are today's youngest retirees following in the footsteps of their older peers with respect to gradual retirement? Recent evidence from the Health and Retirement Study (HRS) suggests that most older Americans with full-time career jobs later in life transitioned to another job prior to complete labor force withdrawal. This paper explores the retirement patterns of a younger cohort of individuals from the HRS known as the "War Babies." These survey respondents were born between 1942 and 1947 and were 57 to 62 years of age at the time of their fourth bi-annual HRS interview in 2004. We compare the War Babies to an older cohort of HRS respondents and find that, for the most part, the War Babies have followed the gradual-retirement trends of their slightly older predecessors. Traditional one-time, permanent retirements appear to be fading, a sign that the impact of changes in the retirement income landscape since the 1980s continues to unfold.
669. Arthur Lewbel, "Shape Invariant Demand Functions" (rev. 11/2008; 150 Kb, PDF)
Abstract: Shape invariance is a property of demand functions that is convenient for semiparametric demand modelling. All known shape invariant demands are derived from utility functions that, up to monotonic transformation, are called IB/ESE (independent of base - equivalence scale exact) utility functions, because they yield IB/ESE equivalence scales, which are widely used in welfare calculations. This paper provides a counterexample, i.e., a shape invariant demand system that is not derived from a transform of IB/ESE utility. A general theorem is then provided that characterizes all shape invariant demand systems. The usual practice of equating shape invariance with the IB/ESE utility class is shown to be not quite right, but it can be made valid by testing for the small class of exceptions noted here. In particular, all the exceptions have rank two, so any rank three or higher shape invariant system must be derived from transforms of IB/ESE utility.
668. Stefan Hoderlein (Universität Mannheim) and Arthur Lewbel, "Price Dimension Reduction in Demand Systems With Many Goods" (rev. 11/2008; 210 Kb, PDF)
Abstract: Estimation of demand systems with many goods is empirically difficult because demand functions depend, flexibly and usually nonlinearly, on the prices of all goods. The standard solution is to impose strong, empirically questionable behavioral restrictions on price elasticities via separability. This paper proposes an alternative based on applying statistical dimension reduction methods to the price vector, and deriving the resulting restrictions on demand functions that remain due to Slutsky symmetry and other implications of utility maximization. The results permit estimation of the effects of income and of prices of some goods on the demand functions for every good without imposing any separability. We illustrate the results by reporting estimates of the effects of gasoline prices on the demands for many goods.
667. Christopher F Baum, Mark E. Schaffer (Heriot-Watt University) and Steven Stillman (Motu Economic and Public Policy Research), "Enhanced routines for instrumental variables/GMM estimation and testing" (09/2007; 410 Kb, PDF; published, Stata Journal, 7:4, 465-506, 2007)
Abstract: We extend our 2003 paper on instrumental variables (IV) and GMM estimation and testing and describe enhanced routines that address HAC standard errors, weak instruments, LIML and k-class estimation, tests for endogeneity and RESET and autocorrelation tests for IV estimates.
666. Eren Inci, "Occupational Choice and the Quality of Entrepreneurs" (05/2007: 747 Kb, PDF)
Abstract: This paper focuses on the quality of entrepreneurs when individuals, who differ in terms of entrepreneurial ability and wealth, choose between entrepreneurship and wage-earning. A loan is required to become an entrepreneur. Four wealth classes form endogenously. Banks' inability to identify the ability of individuals leads them to offer pooling contracts to the poor and the lower-middle classes. Regardless of ability, all poor class individuals become workers and all lower-middle class individuals become entrepreneurs. Banks are able to offer separating contracts to the upper-middle and the rich classes. High-ability individuals in these wealth classes become entrepreneurs and their low-ability counterparts become workers. Equilibrium contracts may entail cross-subsidies within or between occupations. In some economies, a small success tax on entrepreneurs used to subsidize workers can increase the average quality of entrepreneurs and welfare by changing the thresholds of the wealth classes. In some others a reverse policy is required. Since the aggregate level of investment is fixed, the reason for these policies is not under- or overinvestment by entrepreneurs, as it often is in previous literature.
665. Richard Arnott and John Rowse (University of Calgary), "Downtown Parking in Auto City" (04/2007: 241 Kb, PDF)
Abstract: This paper develops and calibrates a model of downtown parking in a city without mass transit, and applies it to investigate downtown parking policy. There is curbside and garage parking and traffic congestion. Spatial competition between private parking garages determines the equilibrium garage parking fee and spacing between parking garages. Curbside parking is priced below its social opportunity cost. Cruising for parking adjusts to equalize the full prices of on- and off-street parking, and contributes to traffic congestion. The central result is that raising curbside parking fees appears to be a very attractive policy since it generates efficiency gains that may be several times as large as the increased revenues raised.
664. Christopher F Baum, James G. Bohn (UHY Advisors) and Atreya Chakraborty (University of Massachusetts-Boston), "Securities Fraud Class Actions and Corporate Governance: New Evidence on the Role of Merit" (rev. 01/2008: 440 Kb, PDF)
Abstract: We examine the relationship between outcomes of securities fraud class action lawsuits and board turnover rates. Our results indicate that the outcome of a class action is a good indicator of the underlying, unobservable merit of the action. Consistent with the merit hypothesis, board turnover rates are higher in the period following the filing of a lawsuit that is ultimately settled than one that is dismissed. Turnover propensities are more sensitive to outcome for CEOs and for individuals named as defendants in the lawsuits. Turnover rates of both inside and outside directors are higher when external equity ownership is more concentrated.
663. Giuseppe Fiori, Giuseppe Nicoletti (OECD), Stefano Scarpetta (OECD) and Fabio Schiantarelli, "Employment Outcomes and the Interaction Between Product and Labor Market Deregulation: Are They Substitutes or Complements?" (rev. 08/2008: 310 Kb, PDF)
Abstract: This paper provides a systematic empirical investigation of the effect of product market liberalization on employment when there are interactions between policies and institutions in product and labor markets. Using panel data for OECD countries over the period 1980-2002, we present evidence that product market deregulation is more effective at the margin when labor market regulation is high. Moreover, there is evidence in our sample that product market deregulation promotes labor market deregulation. We show that these results are mostly consistent with the basic predictions of a standard bargaining model (e.g. Blanchard and Giavazzi (2003)), once one allows for a full specification of the fall back position of the unions.
662. Peter N. Ireland, "On the Welfare Cost of Inflation and the Recent Behavior of Money Demand" (04/2007: 256 Kb, PDF)
Abstract: Post-1980 U.S. data trace out a stable long-run money demand relationship of Cagan's semi-log form between the M1-income ratio and the nominal interest rate, with an interest semi-elasticity of 1.79. Integrating under this money demand curve yields estimates of the welfare cost of modest departures from Friedman's zero nominal interest rate rule for the optimum quantity of money that are quite small. The results suggest that the Federal Reserve's current policy, which generates low but still positive rates of inflation, provides an adequate approximation in welfare terms to the alternative of moving all the way to the Friedman rule.
661. Richard Arnott and Elizaveta Shevyakhova, "Tenancy Rent Control and Credible Commitment in Maintenance" (04/2007: 612 Kb, PDF)
Abstract: Under tenancy rent control, rents are regulated within a tenancy but not between tenancies. This paper investigates the effects of tenancy rent control on housing quality, maintenance, and rehabilitation. Since the discounted revenue received over a fixed-duration tenancy depends only on the starting rent, intuitively the landlord has an incentive to spruce up the unit between tenancies in order to 'show' it well, but little incentive to maintain the unit well during the tenancy. The paper formalizes this intuition, and presents numerical examples illustrating the efficiency loss from this effect.
660. Richard Arnott, "Congestion Tolling with Agglomeration Externalities" (03/2007: 244 Kb, PDF)
Abstract: Consider an urban economy with two types of externalities, negative traffic congestion externalities and positive agglomeration externalities deriving from non-market interaction. Suppose that urban travel can be tolled, that non-market interaction cannot be subsidized, and that non-market interaction is stimulated by a reduction in travel costs. Then the optimal toll is below the congestion externality cost. This paper explores this line of reasoning.
659. Matteo Iacoviello and Stefano Neri (Banca D'Italia), "Housing Market Spillovers: Evidence from an Estimated DSGE Model" (rev. 01/2008: 447 Kb, PDF)
Abstract: Using U.S. data and Bayesian methods, we quantify the contribution of the housing market to business fluctuations. The estimated model, which contains nominal and real rigidities and collateral constraints, is used to address two questions. First, what shocks drive the housing market? We find that the upward trend in real housing prices of the last 40 years can be explained by slow technological progress in the housing sector. Over the business cycle instead, housing demand and housing technology shocks account for roughly one-quarter each of the volatility of housing investment and housing prices. Monetary factors account for about 20 percent, but they played a major role in the housing market cycle at the turn of the century. Second, do fluctuations in the housing market propagate to other forms of expenditure? We find that the spillovers from the housing market to the broader economy are non-negligible, concentrated on consumption rather than business investment, and they have become more important over time, to the extent that financial innovation has increased the marginal availability of funds for credit-constrained agents.
658. Matteo Iacoviello, Fabio Schiantarelli and Scott Schuh (Federal Reserve Bank of Boston), "Input and Output Inventories in General Equilibrium" (rev. 11/2007: 533 Kb, PDF)
Abstract: We build and estimate a two-sector (goods and services) dynamic general equilibrium model with two types of inventories: finished goods (output) inventories yield utility services while materials (input) inventories facilitate the production of goods. The model, which contains neutral and inventory-specific technology shocks and preference shocks, is estimated by Bayesian methods. The estimated model replicates the volatility and cyclicality of inventory investment and inventory-target ratios. When estimated over subperiods, the results suggest that changes in the volatility of inventory shocks, or in structural parameters associated with inventories, play a minor role in the reduction of the volatility of output.
657. Christopher F Baum, Mustafa Caglayan (University of Sheffield), Dorothea Schäfer (DIW Berlin) and Oleksandr Talavera (DIW Berlin), "Political Patronage in Ukranian Banking" (rev. 02/2008: 133 Kb, PDF; published, Economics of Transition, 16(3), 2008, 537-557; earlier version published (in German) as "Ukrainische Banken: Politische Patronage von Bedeutung", Wochenbericht Nr. 23/2007, DIW Berlin, pp. 367-371.)
Abstract: This paper empirically investigates the link between political patronage and bank performance for Ukraine during 2003Q3-2005Q2. We find significant differences between politically affiliated and non-affiliated banks. The data suggest that affiliated banks have significantly lower interest margins. The gap between affiliated banks' and non-affiliated banks' capitalization ratios, is narrowing over time. Parliamentary deputies might use financial institutions to achieve political goals which reduces their banks' performance.
656. Margarita Sapozhnikov, "Mergers and Government Policy" (11/2006: 280 Kb, PDF)
Abstract: It has long been thought that government antitrust policy has an effect on aggregate merger and acquisition activity, but the empirical support for this hypothesis has been weak and inconsistent. This paper uses a new empirical specification and a new dataset on mergers and acquisitions to provide support for this conjecture. Regression analysis shows that government policy has a significant influence on mergers and that the nature of the effects depends on the type of merger. Fitting the time series into a two-state Markov switching model shows that conglomerate and horizontal time series follow different dynamics for the last half century, which is most likely caused by the dissimilar treatment of the two types of merger by the government. Only the conglomerate merger and acquisition time series is well described by a two-state Markov switching model. In contrast, the horizontal time series has a break in the early 1980s that may be attributed to the dramatic change in government policy.
655. Hideo Konishi, "Tiebout's Tale in Spatial Economies: Entrepreneurship, Self-Selection, and Efficiency" (rev. 01/2008: 270 Kb, PDF; published, Regional Science and Urban Economics, 2008, 38:461-471)
Abstract: This paper establishes the existence and efficiency of equilibrium in a local public goods economy with spatial structures by formalizing Hamilton's (1975 Urban Studies) elaboration of Tiebout's (1956 JPE) tale. We use a well-known equilibrium concept from Rothschild and Stiglitz (1976, QJE) in a market with asymmetric information, and show that Hamilton's zoning policy plays an essential role in proving existence and efficiency of equilibrium. We use an idealized large economy following Ellickson, Grodal, Scotchmer and Zame (1999, Econometrica) and Allouch, Conley and Wooders (2004). Our theorem is directly applicable to the existence and efficiency of a discrete approximation of mono- or multi-centric city equilibrium in urban economics with commuting time costs even if we allow existence of multiple qualities of (collective) residences, when externalities due to traffic congestion are not present.
654. Hideo Konishi and Margarita Sapozhnikov, "Decentralized Matching Markets with Endogenous Salaries" (rev. 01/2008: 264 Kb, PDF; published, Games and Economic Behavior, 2008, 64:193-218)
Abstract: In a Shapley-Shubik assignment problem with a supermodular output matrix, we consider games in which each firm makes a take-it-or-leave-it salary offer to one applicant, and a match is made only when the offer is accepted by her. We consider both one-shot and multistage games. In either game, we show that there can be many equilibrium salary vectors which are higher or lower than the minimal competitive salary vector. If we exclude artificial equilibria, applicants' equilibrium salary vectors are bounded above by the minimal competitive salary vector, while firms' equilibrium payoff vectors are bounded below by the payoff vector under the minimal competitive salary vector. This suggests that adopting the minimal competitive salary vector as the equilibrium outcome in decentralized markets does not have a strong justification.
653. Bariş K. Yörük, "How Responsive are Charitable Donors to Requests to Give?" (10/2006: 520 Kb, PDF)
Abstract: People tend to contribute to a charity only when they are asked to. Although this so-called 'power of asking' is a well-known technique among fundraisers, the existing literature does not pay much attention to the role of donation requests in charitable giving. We estimate the causal effects of charitable solicitations on both the propensity to give and the amount of charitable contributions using a unique data set, which was designed to measure the giving behavior in the United States. In order to address the endogeneity of the donation requests due to non-random solicitation of charitable donors, we link this data set to IRS data on charitable organizations and the 2000 Census and propose identifying instruments. After controlling for the endogeneity, we find that people are both more likely to contribute to a charity and also donate more when they are asked to. This effect is robust under different specifications and with different sets of instruments and is much larger compared with the estimates of univariate models. Furthermore, we argue that some identifiable characteristics of individuals are associated with the higher probability of being solicited. In particular, we find some evidence that income, age, education, and race play significant roles in explaining the selection of potential charitable donors.
652. David Jacho-Chavez (Indiana University), Arthur Lewbel and Oliver Linton (London School of Economics), "Identification and Nonparametric Estimation of a Transformed Additively Separable Model" (rev. 11/2008: 3.3 Mb, PDF)
Abstract: Let r(x,z) be a function that, along with its derivatives, can be consistently estimated nonparametrically. This paper discusses identification and consistent estimation of the unknown functions H, M, G and F, where r(x, z) = H[M (x, z)] and M(x,z) = G(x) + F(z). An estimation algorithm is proposed for each of the model's unknown components when r(x, z) represents a conditional mean function. The resulting estimators use marginal integration, and are shown to have a limiting Normal distribution with a faster rate of convergence than unrestricted nonparametric alternatives. Their small sample performance is studied in a Monte Carlo experiment. We empirically apply our results to nonparametrically estimate and test generalized homothetic production functions in four industries within the Chinese economy.
651. Arthur Lewbel and Krishna Pendakur (Simon Fraser University), "Tricks With Hicks: The EASI Demand System " (rev. 11/2008: 2.2 Mb, PDF)
Abstract: We invent Implicit Marshallian Demands, a new type of demand function that combines desirable features of Hicksian and Marshallian demand functions. We propose and estimate the Exact Affine Stone Index (EASI) Implicit Marshallian Demand system. Like the Almost Ideal Demand (AID) system, EASI budget shares are linear in parameters given real expenditures. However, unlike the AID, EASI demands can have any rank and its Engel curves can be polynomials or splines of any order in real expenditures. EASI error terms equal random utility parameters to account for unobserved preference heterogeneity. EASI demand functions can be estimated using ordinary GMM, and, like AID, an approximate EASI model can be estimated by linear regression.
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