Showing papers by "CEMFI published in 2001"

Panel data models: some recent developments*

Abstract: This chapter focuses on two of the developments in panel data econometrics since the Handbook chapter by Chamberlain (1984). The first objective of this chapter is to provide a review of linear panel data models with predetermined variables. We discuss the implications of assuming that explanatory variables are predetermined as opposed to strictly exogenous in dynamic structural equations with unobserved heterogeneity. We compare the identification from moment conditions in each case, and the implications of alternative feedback schemes for the time series properties of the errors. We next consider autoregressive error component models under various auxiliary assumptions. There is a trade-off between robustness and efficiency since assumptions of stationary initial conditions or time series homoskedasticity can be very informative, but estimators are not robust to their violation. We also discuss the identification problems that arise in models with predetermined variables and multiple effects. Concerning inference in linear models with predetermined variables, we discuss the form of optimal instruments, and the sampling properties of GMM and LIML-analogue estimators drawing on Monte Carlo results and asymptotic approximations. A number of identification results for limited dependent variable models with fixed effects and strictly exogenous variables are available in the literature, as well as some results on consistent and asymptotically normal estimation of such models. There are also some results available for models of this type including lags of the dependent variable, although even less is known for nonlinear dynamic models. Reviewing the recent work on discrete choice and selectivity models with fixed effects is the second objective of this chapter. A feature of parametric limited dependent variable models is their fragility to auxiliary distributional assumptions. This situation prompted the development of a large literature dealing with semiparametric alternatives (reviewed in Powell, 1994’s chapter). The work that we review in the second part of the chapter is thus at the intersection of the panel data literature and that on cross-sectional semiparametric limited dependent variable models.

Job bust, baby bust?: Evidence from Spain

Abstract: The unemployment rate in Spain has been exceptionally high for more than two decades by now. During the same period the fertility rate dropped dramatically reaching the lowest level in the world. In this study we look for evidence of a link between the `unemployment crisis’ and the `fertility crisis’ in Spain. We examine the factors that affect individuals’ ages at marriage and childbirth, focusing on the effects ofmaleemployment status. Our results show that spells of non-employment have a strong negative effect on the hazard of marriage. We also find negative (but smaller) effects of part-time or temporal employment on the hazard of marriage. The estimated direct effects of joblessness and part-time work on birth hazards conditional on marriage are smaller and/or not significant for most birth intervals and sample groups. Simulations based on the estimated models confirm the potential for large ‘delaying’ effects of joblessness on marriage. However, the delaying effect is not so large in simulations which control for the actual incidence of non-employment in the sample.

The Distribution of Earnings in Spain during the 1980s: The Effects of Skill, Unemployment, and Union Power

Abstract: In this Paper we analyse changes in the conditional distributions of male earnings in Spain during the 1980s. We use a large new database of records on individual workers and firms from the Spanish Social Security system for the period 1980-1987. The data set is an unbalanced panel subject to censoring due to top and bottom coding. We analyse the behaviour of returns to skill and experience, across sectors and over time. We also study how these returns have been affected over the period by a host of aggregate and sector-specific factors, including unemployment rates and the sectoral coverage of trade union collective agreements.

Learning About Migration Decisions from the Migrants: Using Complementary Datasets to Model Intra-Regional Migrations in Spain

Abstract: We investigate the determinants of the remarkable increase in intra-regional migrations since the 1980's in Spain, using a large administrative micro dataset on migrants. Conditional migration probabilities are identified by comparing the migrants? joint distribution of characteristics to the corresponding distribution from the Spanish Labour Force Survey. The proportion of employment in the service industry, unemployment, house prices and education all have an important positive effect on the individual probabilities of intra-regional migration.

Managerial Compensation and the Market Reaction to Bank Loans

Abstract: This Paper considers why a manager would choose to submit himself to the discipline of bank monitoring. This issue is analysed within the context of a model where the manager enjoys private benefits, which can be restricted by the monitor, and is optimally compensated by shareholders. Within this setting, we find that managers will submit to monitoring when they receive favourable private information. This result is consistent with event study evidence that suggests that the market has a favourable view of financing choices that increase monitoring.

Last Bank Standing: What Do I Gain if You Fail?

Abstract: Banks are highly leveraged institutions, potentially attracted to speculative lending even without deposit insurance. A counterbalancing incentive to lend prudently is the risk of loss of charter value, which depends on future rents. We show in a dynamic model that current concentration does not reduce speculative lending, and may in fact increase it. In contrast, a policy of temporary increases in market concentration after a bank failure, by promoting a takeover of failed banks by a solvent institution, is very effective. By making speculative lending decisions strategic substitutes, it grants bankers an incentive to remain solvent. Subsequent entry policy fine-tunes the trade-off between the social costs of reduced competition and the gain in stability.

Patent Litigation when Innovation is Cumulative

Abstract: This paper studies the effect of litigation as a way to enforce patents when firms hold private information. A structure to the legal system is provided, allowing a better understanding of the settlement and litigation decisions taken by entrepreneurs. The model is broadly consistent with recent empirical evidence. We show that the optimal license consists of a fixed fee and no royalties and that in some cases too much protection might be detrimental to the patentholder. We finally compare different legal systems and their effect on innovation and litigation.

Why Did the Banks Overbid? An Empirical Model of the Fixed Rate Tenders of the European Central Bank

Abstract: This paper tests two hypotheses for the overbidding behavior of the banks in the fixed rate tenders conducted by the European Central Bank (ECB) from January 1999 until June 2000. One hypothesis attributes the overbidding to the expectations of a future tightening of monetary policy, while the other attributes it to the liquidity allotment decisions of the ECB. The model is estimated with individual bidding data of the Spanish banks, and also with aggregate bidding data of all Spanish banks and all banks in the euro area. The empirical results provide support for the second hypothesis.

A model of takeovers of foreign banks

Abstract: This paper investigates the determinants of the takeover of a foreign bank by a domestic bank whereby the former becomes a branch of the latter. Each bank is initially supervised by a national agency that cares about closure costs and deposit insurance payouts, and may decide the early closure of the bank on the basis of supervisory information. Under the principle of home country control, the takeover moves responsibility for both the supervision of the foreign bank and the insurance of the foreign deposits to the domestic agency. It is shown that the takeover is more likely to happen if the foreign bank is small (relative to the foreign banking market) and its investments are risky (relative to those of the domestic bank). Moreover, the takeover is in general welfare improving for both countries.

Sargan's Instrumental Variable Estimation and GMM

Abstract: This paper surveys J. D. Sargan's work on instrumental variable estimation and its connections with the generalized method of moments. I first present the modelling context in which Sargan motivated instrumental variable estimation. Then I review the theory of instrumental variable estimation as developed in Sargan (1958). I discuss his approach to efficiency, his minimax estimator, tests of over- and under-identification, and his later work on the finite sample properties of IV estimators. Next, Sargan's approach to modelling IV equations with serial correlation is discussed and compared to the GMM approach. Finally I describe Sargan's (1959) results for non-linear in parameters IV models.

Spot Market Competition with Stranded Costs in the Spanish Electricity Industry

Abstract: In this paper we have developed a model which analyzes price competition in the deregulated Spanish electriciy market. This model is the first to take explicitly into account the mechanism designed in the recent Spanish electricity law for settling stranded costs payments. We show that stranded costs recovery and efficient competition are not necessarily incompatible. The settlement mechanism for stranded costs currently prevailing in Spain leads unambiguously to lower prices; it actually acts as a countervailing force to market power and high prices in these markets. Whether equilibrium prices are higher or lower than marginal cost depends both on the distribution of total stranded cost payments among industry participants and on the exact rules used to define the entitlements.

Stranded Costs: An Overview

Abstract: The purpose of this article is to review the major results in the literature regarding stranded costs. Despite the starting differences in the areas of research included in the paper, they have one characteristic in common: all recognize that during the last decades, the treatment of stranded costs has been one of the most critical and controversial regulatory issue facing infrastructure industries, specially electric utilities, and regulatory agencies. To this end I attempt to describe the stranded-cost problem, its magnitude and the main arguments for and against recovery. I also seek to provide guidance about welfare implications and efficient recovery of stranded costs.

Cournot Competition with Stranded Costs

Abstract: Recovery of stranded costs is perhaps the most litigious issue encountering regulators in promoting competition in United States and European utility industries. We build a dynamic model of Cournot competition which takes into account a particular regulatory mechanism regularly employed in United States and also in Spain for settling stranded costs payments, the competitive transition charges (CTC). Our results establish the conditions under which we are able to show that efficient competition and stranded costs recovery are not necessarily incompatible. Mechanism design is the key element in welfare analysis outcomes. Under ideal conditions we can prove that SCR payments can be used as a versatile regulatory tool to encourage competition and achieve allocative efficiency. On the contrary we also demonstrate that an unappropriated design of the SCR mechanism may deliver productive inefficiency in the market and delay or prevent desired new competition.

Fractional) Beta Convergence

Abstract: Unit roots in output, an exponential 2% rate of convergence and no change in the underlying dynamics of output seem to be three stylized facts that cannot go together. This paper extends the Solow-Swan growth model allowing for cross-sectional heterogeneity. In this framework, aggregate shocks might vanish at a hyperbolic rather than at an exponential rate. This implies that the level of output can exhibit long memory and that standard tests fail to reject the null of a unit root despite mean reversion. Exploiting secular time series properties of GDP, we conclude that traditional approaches to test for uniform (conditional and unconditional) convergence suit first step approximation. We show both theoretically and empirically how the uniform 2% rate of convergence repeatedly found in the empirical literature is the outcome of an underlying parameter of fractional integration strictly between (1)/(2) and 1. This is consistent with both time series and cross-sectional evidence recently produced. Keyword(s): Growth model; Convergence; Long memory; Aggregation

Discrete Choices with Panel Data

Abstract: This paper reviews the existing approaches to deal with panel data binary choice models with individual effects. Their relative strengths and weaknesses are discussed. Much theoretical and empirical research is needed in this area, and the paper points to several aspects that deserve further investigation. In particular, I illustrate the usefulness of asymptotic arguments in providing both approximately unbiased moment conditions, and approximations to sampling distributions for panels of different sample sizes.

Mean-Variance Portfolio Allocation with a Value at Risk Constraint

Abstract: In this paper, I first provide a unifying approach to Mean-Variance analysis and Value at Risk, which highlights their similarities and differences. Then I use it to explain how fund managers can take investment decisions within the well-known Mean-Variance allocation framework that satisfy the VaR restrictions imposed on them by regulators. I do so by introducing a new type of line to the usual mean - standard deviation diagram, called IsoVaR, which represents all the portfolios that share the same VaR for a fixed probability level. Finally, I analyse the "shadow cost" of a VaR constraint.

A Quantitative Analysis of Swedish Fertility Dynamics: 1751-1990

Abstract: This paper analyzes the relationship between age-specific fertility, mortality and real wages in Sweden during the demographic transition. We take an overlapping generations model of life cycle fertility and fit it to actual Swedish time-series data over the past two and a half centuries. The model fits the data well, accurately portraying the total fertility decline from more than four children per female before the mid-19th century to about two children today. About 80% of this decline was in fertility that occurred at female ages over 30. The fitted model implies that reductions in child mortality over this period is the most important factor explaining the fertility decline, while increases in the real wage can explain only less than one-third of the decline in fertility. However, their combined effect was considerably larger than a simple summing up would predict. The fertility decline was magnified as well by the combination of increasing real wages and rising adult survival rates. In addition, we find that a model that is estimated based only on pre-transition data would actually overstate the subsequent fertility decline.

Employment and Output Adjustment in the OECD: A Disaggregate Analysis of the Role of Job Security Provisions

Abstract: Job security provisions are frequently cited as inhibiting the functioning of labour markets in Europe. However, as with many forms of non-price regulation, it is difficult to assess how tightly these regulations bind and influence labour market outcomes. We use an industry-country panel of OECD countries over 20 years to estimate adjustment paths for employment and output conditional on wages, the capital stock and exchange rates. We find that job security provisions are correlated with the speed of adjustment of employment and output (restrictive legislation slowing adjustment down), and that controlling for industry effects is important in isolating this effect.

Last Bank Standing: What Do I Gain if You Fail?

Abstract: Banks are highly leveraged institutions, potentially attracted to speculative lending even without deposit insurance. A counterbalancing incentive to lend prudently is the risk of loss of charter value, which depends on future rents. We show in a dynamic model that current concentration does not reduce speculative lending, and may in fact increase it. In contrast, a policy of temporary increases in market concentration after a bank failure, by promoting a takeover of failed banks by a solvent institution, is very effective. By making speculative lending decisions strategic substitutes, it grants bankers an incentive to remain solvent. Subsequent entry policy fine-tunes the trade-off between the social costs of reduced competition and the gain in stability.

Why Did the Banks Overbid? An Empirical Model of the Fixed Rate Tenders of the European Central Bank

Abstract: This paper tests two hypotheses for the overbidding behavior of the banks in the fixed rate tenders conducted by the European Central Bank (ECB) from January 1999 until June 2000. One hypothesis attributes the overbidding to the expectations of a future tightening of monetary policy, while the other attributes it to the liquidity allotment decisions of the ECB. The model is estimated with individual bidding data of the Spanish banks, and also with aggregate bidding data of all Spanish banks and all banks in the euro area. The empirical results provide support for the second hypothesis.