Showing papers by "Kiel Institute for the World Economy published in 2008"

Does US Aid Buy UN General Assembly Votes? A Disaggregated Analysis

Abstract: Using panel data for 143 countries over the period 1973–2002, this paper empirically analyzes the influence of US aid on voting patterns in the UN General Assembly. We use disaggregated aid data to account for the fact that various forms of aid may differ in their ability to induce political support by recipients. We obtain strong evidence that US aid buys voting compliance in the Assembly. More specifically, our results suggest that general budget support and grants are the major aid categories by which recipients have been induced to vote in line with the United States. When replicating the analysis for other G7 donors, no comparable patterns emerge.

Third-generation prospect theory

Abstract: We present a new theory of decision under uncertainty: third-generation prospect theory (PT3). This retains the predictive power of previous versions of prospect theory, but extends that theory by allowing reference points to be uncertain while decision weights are specified in a rank-dependent way. We show that PT3 preferences respect a state-conditional form of stochastic dominance. The theory predicts the observed tendency for willingness-to-accept valuations of lotteries to be greater than willingness-to-pay valuations. When PT3 is made operational by using simple functional forms with parameter values derived from existing experimental evidence, it predicts observed patterns of the preference reversal phenomenon.

Firm Size and Innovation in European Manufacturing

Abstract: The paper investigates the differences between small, medium-sized and large firms regarding their perfor- mance in the introduction of new products and processes. After a review of the relevant literature, two models are proposed and tested in search for different business strategies and innovation inputs connected to product and process innovations. The empirical analysis uses innovation survey (CIS 2) data at the industry level for 22 manufacturing sectors, broken down in three firm size classes, for eight European countries. Special attention is devoted to tackling the issues of possible endoge- neity of the regressors and of unobserved sectoral heterogene- ity. The results - strengthening the findings of previous studies - show that product and process innovations, though having some complementarities, are associated to different innovative inputs and strategies pursued by firms. Systematic differences also emerge between the behaviour of large firms and SMEs.

Stochastic behavioral asset pricing models and the stylized facts

Abstract: High-frequency financial data are characterized by a set of ubiquitous statistical properties that prevail with surprising uniformity. While these 'stylized facts' have been well-known for decades, attempts at their behavioral explanation have remained scarce. However, recently a new branch of simple stochastic models of interacting traders have been proposed that share many of the salient features of empirical data. These models draw some of their inspiration from the broader current of behavioural finance. However, their design is closer in spirit to models of multi-particle interaction in physics than to traditional asset-pricing models. This reflects a basic insight in the natural sciences that similar regularities like those observed in financial markets (denoted as 'scaling laws' in physics) can often be explained via the microscopic interactions of the constituent parts of a complex system. Since these emergent properties should be independent of the microscopic details of the system, this viewpoint advocates negligence of the details of the determination of individuals' market behavior and instead focuses on the study of a few plausible rules of behavior and the emergence of macroscopic statistical regularities in a market with a large ensemble of traders. This chapter will review the philosophy of this new approach, its various implementations, and its contribution to an explanation of the stylized facts in finance.

Does aid for education educate children? : evidence from panel data

Abstract: Most of the aid effectiveness literature has focused on the potential growth effects of aggregate aid, with inconclusive results. Considering that donors have repeatedly stressed the multidimensionality of their objectives, a more disaggregated view on aid effectiveness is warranted. The impact of aid on education is analyzed empirically for almost 100 countries over 1970-2004. The effectiveness of sector-specific aid is assessed within the framework of social production functions. The Millennium Development Goals (MDG) related to education, particularly the goal of achieving universal primary school enrollment, is considered as outcome variables. The analysis suggests that higher per capita aid for education significantly increases primary school enrollment, while increased domestic government spending on education does not. This result is robust to the method of estimation, the use of instruments to control for the endogeneity of aid, and the set of control variables included in the estimations.

FDI Promotion through Bilateral Investment Treaties More Than a Bit

Abstract: Policymakers in developing countries have increasingly pinned their hopes on bilateral investment treaties (BITs) in order to improve their chances in the worldwide competition for foreign direct investment (FDI). However, the effectiveness of BITs in inducing higher FDI inflows is still open to debate. It is in several ways that we attempt to clarify the inconclusive empirical findings of earlier studies. We cover a much larger sample of host and source countries by drawing on a previously unpublished dataset on bilateral FDI flows. Furthermore, we account for unilateral FDI liberalization, in order not to overestimate the effect of BITs, as well as for the potential endogeneity of BITs. Employing a gravity-type model and various model specifications, including an instrumental variable approach, we find that BITs do promote FDI flows to developing countries. In addition, BITs are likely to act as a substitute for unilateral capital account liberalization.

R&D and exporting: A comparison of British and Irish firms

Abstract: This paper investigates the two-way relationship between R&D and export activity. In particular, we concern ourselves with the question whether R&D stimulates exports and, perhaps more importantly, whether export activity leads to increasing innovative activity in terms of R&D (learning-by-exporting). We use two unique firm level databases for Great Britain and the Republic of Ireland and compare the results for these two countries. We find that previous exporting experience enhances the innovative capability of Irish firms. Conversely, no strong learning-by-exporting effects are found for British firms. Arguably part of the differences between Ireland and Britain are attributable to different, cross-country exporting patterns where Irish firms have a greater interface with OECD markets.

Risk Aversion in Cumulative Prospect Theory

Abstract: This paper characterizes the conditions for strong risk aversion and second-order stochastic dominance for cumulative prospect theory. Strong risk aversion implies a convex weighting function for gains and a concave one for losses. It does not necessarily imply a concave utility function. The latter does follow if the weighting functions are continuous. By investigating the exact relationship between loss aversion and strong risk aversion, a natural index for the degree of loss aversion is derived.

Carbon leakage revisited: unilateral climate policy with directed technical change

Abstract: Using a stylized theoretical model, we argue that current economic analyses of climate policy tend to over-estimate the degree of carbon leakage, as they abstract from the effects of induced technological change. We analyse carbon leakage in a two-country model with directed technical change, where only one of the countries enforces an exogenous cap on emissions. Climate policy induces changes in relative prices, that cause carbon leakage through a terms-of-trade effect. However, these changes in relative prices also affect the incentives to innovate in different sectors. This leads to a counterbalancing induced-technology effect, which always reduces carbon leakage. We therefore conclude that the leakage rates reported in the literature may be too high, as these estimates neglect the effect of price changes on the incentives to innovate.

Disproportionality Measures of Concentration, Specialization, and Localization

Abstract: This article extends the methodological toolbox of measures of regional concentration of industries and industrial specialization of regions. It first defines disproportionality measures of concentration and specialization and proposes a taxonomy of these measures. This taxonomy is based on three characteristic features of any disproportionality measure. It helps researchers define the measure that fits their research purpose and data best. The article then generalizes this taxonomy to cover disproportionality measures of economic localization that evaluate specialization and concentration simultaneously and spatial disproportionality measures that deal with the checkerboard problem and the modifiable areal unit problem.

Two views on institutions and development: the grand transition vs the primacy of institutions

Abstract: This essay is written to contrast two basic views on the link between institutional development and long run economic growth: the Grand Transition (GT) view and the Primacy of Institutions (PoI) view. Both GT and PoI have old and strong theoretical roots, and both originate from Nobel Prize winners: Simon Kuznets and Douglass North. When presented in sensible soft versions, both views describe similar links between institutional and economic development. Their differences may be more a matter of emphasis than substance. Thus, the reader may with some justice accuse us of setting up a race between two straw men. Both views start from the observation that low income and high income economies, over time and across countries, differ in every aspect of development: political and economic institutions, family structure, education, health, crime rates, etc. Economic growth as such is a major part of the process of development, and it is the easiest part of the process to measure. The typical path of income for a country has long linear sections, and it thus appears almost

Services, Offshoring and Wages: Evidence from Micro Data

Abstract: This paper investigates the effects of services offshoring on wages using individual level data combined with industry information on offshoring. Our results show that services offshoring affects the real wage of low and medium skilled individuals negatively. By contrast, skilled workers benefit from services offshoring in terms of higher real wages. Hence, offshoring has contributed to a widening of the wage gap between skilled and less skilled workers. This result is obtained while controlling for individual and sectoral observed and unobserved heterogeneity. In particular, our empirical model also controls for the impact of technological change and offshoring of materials.

Hyperbolic discounting and the Phillips curve

Abstract: Using a standard dynamic general equilibrium model, we show that the interaction of staggered nominal contracts with hyperbolic discounting leads to inflation having significant long-run effects on real variables.

Learning by Exporting: Does It Matter Where One Learns? Evidence from Colombian Manufacturing Firms

Abstract: Learning‐by‐exporting proponents argue that exporting increases firm‐level productivity by exposing producers to new technologies or through product quality upgrading. This study is based on the observation that the technological superiority and severity of product quality requirements are not the same in all export markets. If learning occurs through the acquisition of new knowledge, exporting to less developed markets should not generate as much productivity growth as exporting to advanced countries. Using firm‐level data from Colombia, I demonstrate that exporting to advanced countries generates the highest productivity premium and that the ability to benefit from exporting in general and exporting to advanced markets in particular increases monotonically as one moves along the conditional productivity distribution.

Greenhouse gas mitigation in developing countries through technology transfer?: a survey of empirical evidence

Abstract: While greenhouse gas (GHG) emissions are projected to rise primarily in the developing countries, the potential for developing new GHG mitigation technologies exists primarily in the industrialized countries. It is thus important, not only for predictions about future emission paths but also for climate change mitigation policies, to understand how the international diffusion of such technologies takes place and how it affects the energy infrastructure and GHG emissions in developing countries. This paper provides an overview of the channels through which these technologies diffuse and focuses on the empirical evidence pertaining to the effects these technologies have on GHG emissions in developing countries.

Is NGO Aid Not So Different After All? Comparing the Allocation of Swiss Aid by Private and Official Donors

Abstract: Being closer to the poor, NGOs are widely believed to provide better targeted aid than state agencies. But empirical evidence is largely lacking. We contribute to closing this gap by drawing on an exceptionally detailed Swiss database that covers different forms of NGO aid and several official aid benchmarks. The differentiated Tobit estimations account for both altruistic and selfish aid motivations. It turns out that it depends on the source of NGO funding as well as the choice of the official benchmark whether or not NGOs provide better targeted aid. In contrast to widespread belief, however, the allocation of self-financed NGO aid reveals striking similarities to the allocation of official Swiss development aid.

Telling the Truth May Not Pay Off: An Empirical Study of Centralised University Admissions in Germany

Abstract: We investigate the matching algorithm used by the German central clearinghouse for university admissions (ZVS) in medicine and related subjects. This mechanism consists of three procedures based on final grades from school ("Abiturbestenverfahren", "Auswahlverfahren der Hochschulen") and on waiting time ("Wartezeitverfahren"). While these procedures differ in the criteria applied for admission they all make use of priority matching. In priority matching schemes, it is not a dominant strategy for students to submit their true preferences. Thus, strategic behaviour is expected. Using the full data set of applicants, we are able to detect some amount of strategic behaviour which can lead to inefficient matching. Alternative ways to organize the market are briefly discussed.

An experimental investigation of violations of transitivity in choice under uncertainty

Abstract: Several models of decision-making imply systematic violations of transitivity of preference. Our experiments explored whether people show patterns of intransitivity predicted by regret theory and majority rule. To distinguish “true” violations from those produced by “error,” a model was fit in which each choice can have a different error rate and each person can have a different pattern of true preferences that need not be transitive. Error rate for a choice is estimated from preference reversals between repeated presentations of that same choice. Our results showed that very few people repeated intransitive patterns. We can retain the hypothesis that transitivity best describes the data of the vast majority of participants.

The Dynamics of European Inflation Expectations

Abstract: We investigate the relevance of the Carroll’s sticky information model of inflation expectations for four major European economies (France, Germany, Italy and the United Kingdom). Using survey data on household and expert inflation expectations we argue that the model adequately captures the dynamics of household inflation expectations. We estimate two alternative parametrizations of the sticky information model which differ in the stationarity assumptions about the underlying series. Our baseline stationary estimation suggests that the average frequency of information updating for the European households is roughly once in 18 months. The vector error-correction model implies households update information about once a year.

Delineating metropolitan areas using land prices

Abstract: This paper proposes an approach to delineating metropolitan areas that is more general than the standard approaches in three respects: First, it uses the fraction of land prices attributable to economies of urban agglomeration instead of using com- muting intensities as an indicator of economic integration between metropolitan centers and their hinterlands. Second, it identifies metropolitan centers endogenously instead of determining them exogenously. And third, it takes metropolitan subcenters explicitly into account. An empirical illustration is used to show that the approach tends to de- lineate fewer but larger metropolitan areas in densely populated regions, and smaller metropolitan areas in sparsely populated regions. 1. MOTIVATION Metropolitan areas play an important role as subjects of regional eco- nomic policy, urban planning, and economic analysis in various countries. The metropolitan statistical areas (MSA) in the U.S. or the functional urban regions (FUR) in Western Europe are prominent examples. Metropolitan areas are usu- ally defined as sets of consecutive local administrative areas that comprise at least one larger core city and the adjacent administrative areas that have a high degree of social and economic integration with that core city (e.g., USCB, 2006). In virtually all delineations of metropolitan areas, the commuting inten- sity between a local administrative area and a core city is used as the indicator for the degree of economic integration. The U.S. MSAs, for example, comprise at least one core city with a population of 50,000 or more as well as any adjacent counties from where at least 25 percent of the employed residents commute to the core city's county (OMB, 2000). Similarly, the Western European FURs com- prise at least one core "urbanized area" with 20,000 or more jobs as well as any adjacent NUTS3 regions from where more workers commute to that core than to any other core (Cheshire and Hay, 1989). See Karlsson and Olsson (2006) for a recent survey of the various commuting-based delineation concepts.

Sticky Information Phillips Curves: European Evidence

Abstract: We estimate the sticky information Phillips curve model of Mankiw and Reis (2002) using survey expectations of professional forecasters from four major European economies. Our estimates imply that in∞ation expectations in France, Germany and the United Kingdom are updated about once a year, in Italy about once each six months.

Foreign direct investment in post-reform India: Likely to work wonders for regional development?

Abstract: We make use of a new and detailed database on FDI approvals since the early 1990s to address two major issues related to FDI and regional development in India in the post-reform period. First, we analyze the location choices of foreign investors. The evidence indicates that the concentration of FDI in a few relatively advanced regions may have prevented FDI effects from spreading across the Indian economy. Second, we evaluate whether the link between FDI and economic growth has become stronger in the aftermath of reforms. Various categories of FDI are indeed positively correlated with per-capita income growth across Indian states. However, it is only for the richer states that FDI appears to be associated with higher growth. FDI is thus likely to increase regional income disparity in India. ; We make use of a new and detailed database on FDI approvals since the early 1990s to address two major issues related to FDI and regional development in India in the post-reform period. First, we analyze the location choices of foreign investors. The evidence indicates that the concentration of FDI in a few relatively advanced regions may have prevented FDI effects from spreading across the Indian economy. Second, we evaluate whether the link between FDI and economic growth has become stronger in the aftermath of reforms. Various categories of FDI are indeed positively correlated with per-capita income growth across Indian states. However, it is only for the richer states that FDI appears to be associated with higher growth. FDI is thus likely to increase regional income disparity in India. ; Direktinvestition; Regionale Entwicklung; Standortwahl; Regionale DisparitA¤t; SchA¤tzung; Indien; FDI approvals , sub-categories of FDI , location choice , economic growth , regional divergence;

The Evolution of Inflation and Unemployment: Explaining the Roaring Nineties ∗

Abstract: This paper argues that there is a nonzero inflation-unemployment tradeoff in the long-run due to frictional growth, a phenomenon that encapsulates the interplay of nominal staggering and money growth. The existence of a downward-sloping long-run Phillips curve suggests the development of a holistic framework that can jointly explain the evolution of inflation and unemployment. Hence, we estimate an interactive dynamics model for the US that includes wage-price setting and labour market equations. We then evaluate the inflation-unemployment tradeoff and assess the impact of productivity, money growth, budget deficit, and trade deficit on the unemployment and inflation trajectories during the nineties.

The Economic Impact of More Sustainable Water Use in Agriculture: A Computable General Equilibrium Analysis

Abstract: Summary Agriculture is the largest consumer of freshwater resources – around 70 percent of all freshwater withdrawals are used for food production. These agricultural products are traded internationally. A full understanding of water use is, therefore, impossible without understanding the international market for food and related products, such as textiles. Based on the global general equilibrium model GTAP-W, we offer a method for investigating the role of green (rain) and blue (irrigation) water resources in agriculture and within the context of international trade. We use future projections of allowable water withdrawals for surface water and groundwater to define two alternative water management scenarios. The first scenario explores a deterioration of current trends and policies in the water sector (water crisis scenario). The second scenario assumes an improvement in policies and trends in the water sector and eliminates groundwater overdraft world-wide, increasing water allocation for the environment (sustainable water use scenario). In both scenarios, welfare gains or losses are not only associated with changes in agricultural water consumption. Under the water crisis scenario, welfare not only rises for regions where water consumption increases (China, South East Asia and the USA). Welfare gains are considerable for Japan and South Korea, Southeast Asia and Western Europe as well. These regions benefit from higher levels of irrigated production and lower food prices. Alternatively, under the sustainable water use scenario, welfare losses not only affect regions where overdrafting is occurring. Welfare decreases in other regions as well. These results indicate that, for water use, there is a clear trade-off between economic welfare and environmental sustainability.

Seasonal Migration and Networks - Evidence on Moldova's Labour Exodus

Abstract: Seasonal migration is an ever more important phenomenon worldwide, but has received little attention in empirical research. This paper investigates the choice of seasonal versus longer-term migration on a household level. We use data from Moldova, a country that is witnessing a massive emigration shock. Surprisingly, neither children nor marital status appear to influence the decision to leave seasonally or for longer periods. This suggests high social and emotional costs of emigration. We also find that existing local networks of seasonal migrants are unrelated to permanent migration choice. Generally, networks appear to have a stronger influence on migration probabilities in urban settings.

Carbon Emissions and Economic Growth: Homogeneous Causality in Heterogeneous Panels

Abstract: This paper introduces the concept of homogeneous non-causality in heterogeneous panels. This concept is used to examine a panel of data for evidence of a causal relationship between GDP and carbon emissions. The technique is compared to the standard test for homogeneous non-causality in homogeneous panels and heterogeneous non-causality in heterogeneous panels. In North America, Asia and Oceania the homogeneous non-causality hypothesis that CO2 emissions does not Granger cause GDP cannot be rejected if heterogeneity is allowed for in the data-generating process. In North America the homogeneous non-causality hypothesis that GDP does not cause CO2 emissions cannot be rejected either.

Inward FDI, Value Added and Employment in US States: A Panel Cointegration Approach*

Abstract: This study investigates the long-run relationships between inward FDI and economic outcomes in terms of value added and employment at the level of US states. Johansen's (1988) cointegration technique and Toda and Yamamoto's (1995) Granger causality tests are applied to data for the period of 1977 to 2001. We find cointegration as well as two-directional causality between FDI and outcome variables. This holds for both measures of FDI (stocks and employment in foreign affiliates) and independently of whether we consider the states' overall economy or their manufacturing sector.