Showing papers by "London School of Economics and Political Science published in 2001"

Looking into the Black Box: A Survey of the Matching Function

Abstract: This paper surveys the microfoundations, empirical evidence, and estimation issues underlying the aggregate matching function. There is no consensus yet on microfoundations but one is emerging on estimation. An aggregate, constant returns, Cobb-Douglas matching function with hires as a function of vacancies and unemployment has been successfully estimated for several countries. Recent work has utilized disaggregated data to go beyond aggregate estimates, with many refinements and suggestions for future research. The paper discusses spatial aggregation issues, and implications of on-the-job search and of the timing of stocks and flows for estimated matching functions.

Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve

Abstract: This paper examines a model of dynamic price adjustment based on the assumption that information disseminates slowly throughout the population. Compared to the commonly used sticky-price model, this sticky-information model displays three, related properties that are more consistent with accepted views about the effects of monetary policy. First, disinflations are always contractionary (although announced disinflations are less contractionary than surprise ones). Second, monetary policy shocks have their maximum impact on inflation with a substantial delay. Third, the change in inflation is positively correlated with the level of economic activity.

Preferences over Inflation and Unemployment: Evidence from Surveys of Happiness

Abstract: Modern macroeconomics textbooks rest upon the assumption of a social welfare function defined on inflation, p, and unemployment, U. However, no formal evidence for the existence of such a function has been presented in the literature. Although an optimal policy rule cannot be chosen unless the parameters of the presumed W(p, U) function are known, that has not prevented its use in a large theoretical literature in macroeconomics. This paper has two aims. The first is to show that citizens care about these two variables. We present evidence that inflation and unemployment belong in a well-being function. The second is to calculate the costs of inflation in terms of unemployment. We measure the relative size of the weights attached to these variables in social well-being. Policy implications emerge. Economists have often puzzled over the costs of inflation. Survey evidence presented in Robert J. Shiller (1997) shows that, when asked how they feel about inflation, individuals report a number of unconventional costs, like exploitation, national prestige, and loss of morale. Skeptics wonder. One textbook concludes: “we shall see that standard characterizations of the policy maker’s objective function put more weight on the costs of inflation than is suggested by our understanding of the effects of inflation; in doing so, they probably reflect political realities and the heavy political costs of high inflation” (Blanchard and Fischer, 1989 pp. 567–68). Since reducing inflation is often costly, in terms of extra unemployment, some observers have argued that the industrial democracies’ concern with nominal price stability is excessive—and have urged different monetary policies. This paper proposes a new approach. It examines how survey respondents’ reports of their well-being vary as levels of unemployment and inflation vary. Because the survey responses are available across time and countries, we are able to quantify how self-reported well-being alters with unemployment and inflation rates. Only a few economists have looked at patterns in subjective happiness and life satisfaction. Richard Easterlin (1974) helped to begin the literature. Later contributions include David Morawetz et al. (1977), Robert H. Frank (1985), Ronald Inglehart (1990), Yew-Kwang Ng (1996), Andrew J. Oswald (1997), and Liliana Winkelmann and Rainer Winkelmann (1998). More recently Ng (1997) discusses the measurability of happiness, and Daniel Kahneman et al. (1997) provide an axiomatic defense of experienced utility, and propose applications to economics. Our paper also borders on work in the psychology literature; see, for example, Edward Diener (1984), William Pavot et al. (1991), and David Myers (1993). Section I describes the main data source and the estimation strategy. This relies on a regressionadjusted measure of well-being in a particular year and country—the level not explained by individual personal characteristics. This residual macroeconomic well-being measure is the paper’s focus. * Di Tella: Harvard Business School, Morgan Hall, Soldiers Field, Boston, MA 02163; MacCulloch: STICERD, London School of Economics, London WC2A 2AE, England; Oswald: Department of Economics, University of Warwick, Coventry CV4 7AL, England. For helpful discussions, we thank George Akerlof, Danny Blanchflower, Andrew Clark, Ben Friedman, Duncan Gallie, Sebastian Galiani, Ed Glaeser, Berndt Hayo, Daniel Kahneman, Guillermo Mondino, Steve Nickell, Julio Rotemberg, Hyun Shin, John Whalley, three referees, and seminar participants at Oxford University, Harvard Business School, and the NBER Behavioral Macro Conference in 1998. The third author is grateful to the Leverhulme Trust and the Economic and Social Research Council for research support. 1 See, for example, Olivier Blanchard and Stanley Fischer (1989), Michael Burda and Charles Wyplosz (1993), and Robert E. Hall and John Taylor (1997). Early influential papers include Robert J. Barro and David Gordon (1983). 2 N. Gregory Mankiw (1997) describes the question “How costly is inflation?” as one of the four major unsolved problems of macroeconomics. 3 A recent contribution to this debate in the United States is Paul Krugman’s piece, “Stable Prices and Fast Growth: Just Say No,” The Economist, August 31, 1996.

Infrastructure, Geographical Disadvantage, Transport Costs, and Trade

Abstract: The authors use different data sets to investigate the dependence of transport costs on geography and infrastructure. Infrastructure is an important determinant of transport costs, especially for landlocked countries. Analysis of bilateral trade data confirms the importance of infrastructure and gives an estimate of the elasticity of trade flows with respect to the trade cost factor of around-3. A deterioration of infrastructure from the median to the 75th percentile raises transport costs by 12 percentage points and reduces trade volumes by 28 percent. Analysis of African trade flows indicates that their relatively low level is largely due to poor infrastructure.

Negotiating a Market, Performing Theory: The Historical Sociology of a Financial Derivatives Exchange

Abstract: This analysis of the origins and development of a key financial derivatives market, the Chicago Board Options Exchange, suggests that social interaction in such markets generates trust, permits solution of collective action problems, and affects pricing. The growing cognitive complexity of option trading implies that the unaided human being cannot be homo economicus: material means of calculation have become constitutive of economic action, and economic theory has become performative. The empirical history of option pricing falls into three distinct periods, and the paper postulates that "cultural memory" of the 1987 crash explains the pattern of pricing in the most recent period.

Nursery Cities: Urban Diversity, Process Innovation, and the Life Cycle of Products

Abstract: A simple model of process innovation is proposed, where firms learn about their idealproduction processby making prototypes. We build around this a dynamic general equilibrium model, and derive conditions under which diversified and spe- cialised cities coexist. New products are developed in diversified cities, trying processes borrowed from different activities. On finding their ideal process, firms switch to mass-production and relocate to specialised cities with lower costs. When in equilib- rium, this configuration welfare-dominates those with only di- versified or only specialised cities. We find strong evidence of this relocation pattern in establishment relocations across French employment areas 1993-1996.

Equilibrium and Welfare in Markets with Financially Constrained Arbitrageurs

Abstract: We propose a multi-period model in which competitive arbitrageurs exploit discrepancies between the prices of two identical risky assets, traded in segmented markets. Arbitrageurs need to collateralize separately their positions in each asset, and this implies a financial constraint limiting positions as a function of wealth. In our model, arbitrage activity benefits all investors because arbitrageurs supply liquidity to the market. However, arbitrageurs may fail to take a socially optimal level of risk, in the sense that a change in their positions may make all investors better off. We characterize conditions under which arbitrageurs take too much or too little risk.

The Regulation of Entry

Abstract: We present new data on the regulation of entry of start-up firms in 75 countries. The data set contains information on the number of procedures, official time, and official cost that a start-up must bear before it can operate legally. The official costs of entry are extremely high in most countries. Countries with heavier regulation of entry have higher corruption and larger unofficial economies, but not better quality of public or private goods. Countries with more democratic and limited governments have fewer entry regulations. The evidence is inconsistent with Pigouvian (helping hand) theories of benevolent regulation, but support the (grabbing hand) view that entry regulation benefits politicians and bureaucrats.

Causality Tests for Cross-Country Panels: a New Look at FDI and Economic Growth in Developing Countries

Abstract: The remarkable increase in FDI flows to developing countries over the last decade has focused attention on whether this source of financing enhances overall economic growth We use a mixed fixed and random (MFR) panel data estimation method to allow for cross country heterogeneity in the causal relationship between FDI and growth and contrast our findings with those from traditional approaches We find that the relationship between investment, both foreign and domestic, and economic growth in developing countries is highly heterogeneous and that estimation methods which assume homogeneity across countries can yield misleading results Our results suggest there is some evidence that the efficacy of FDI in raising future growth rates, although heterogeneous across countries, is higher in more open economies

Decentring Regulation: Understanding the Role of Regulation and Self-Regulation in a ‘Post-Regulatory’ World

Abstract: This article addresses three basic analytical questions: what is 'decentring regulation', what is 'self regulation' and how does it fit in the decentring analysis, and what meaning is given to 'regulation' to allow it analytically to be 'decentred' - how do we know 'decentred regulation' when we see it? Decentring is a term which is often used to encompass a number of notions, and has both positive and normative dimensions. It is used to express the observation that governments do not, and proposition that they should not, have a monopoly on regulation and that regulation is occurring within and between other social actors: there is 'regulation in many rooms'. Decentring is also part of the globalisation debate on the one hand, and of the debate on the developments of mezzo-levels of government (regionalism, devolution, federalism) on the other. Decentring is also used in a positive sense to describe the consequence of a particular analysis of social systems, in which politics and administration are, like law or economics, are described as being self referentially closed sub-systems of society, incapable of observing other systems except through their own distorted lenses; decentring is thus the removal of government and administration from the conceptual centre of society. Finally, developing from these observations (and mixing metaphors), decentring can be used, positively and normatively, to express 'de-apexing': the removal of the state from the conceptual hierarchy of state-society, and the move to a heterarchical relationship in which the roles of governors and governed are both shifting and ill-defined. The themes of 'decentring' are reflected in a changed understanding of regulation. In that changed understanding, self regulation plays a particular role both in practical policy debates and in more conceptual discussions. The role ascribed to self regulation, however, differs quite fundamentally in those debates. For some self regulation is the solution to the limits of 'centred' regulation; for others it is the challenge that has to be addressed: regulation of self regulation is the new challenge. The prescription is for governments to regulate self regulation in a 'post regulatory' way. But what conception of 'regulation' is thereby entailed? The article deconstructs the notion of 'regulation' and attempts to build an understanding of 'regulation' that can withstand 'decentring'.

Cross-Country Technology Diffusion: The Case of Computers

Abstract: We use data on imports of computer equipment for a large sample of countries between 1 970 and 1990 to investigate the determinants of computer-technology adoption. We find strong evidence that computer adoption is associated with higher levels of human capital and with manufacturing trade openness vis-a-vis the OECD. We also find evidence that computer adoption is enhanced by high investment rates, good property rights protection, and a small share of agriculture in GDP. Finally, there is some evidence that adoption is reduced by a large share of government in GDP, and increased by a large share of manufacturing. After controlling for the above-mentioned variables, we do not find an independent role for the English- (or European-) language skills of the population.

Bowling Together: Online Public Engagement in Policy Deliberation

Abstract: Rosa Borge Bravo Resum En aquesta ressenya s’analitza un informe pioner sobre instruments i estratègies per al desenvolupament de la participació i la deliberació política en línia, elaborat per Coleman i Gøtze, dos prestigiosos especialistes en democràcia electrònica. Constitueix un estudi ben fonamentat en els àmbits tant teòric com empíric. L’objectiu dels autors és analitzar les possibilitats tecnològiques que ofereix Internet per a superar els models unidireccionals de relació amb els representants polítics i per a desenvolupar un model de participació basat en eines deliberatives. Per a portar-ho a terme, en primer lloc, reflexionen sobre els perills i les dificultats de la implicació ciutadana, seguint la petja de diversos autors clàssics de la teoria de la democràcia i confrontant les reticències comunament exposades per autoritats i polítics. Posteriorment, examinen i avaluen les diferents tecnologies de connexió que es desenvolupen a Internet i que poden servir per a la deliberació política. Finalment, descriuen diverses experiències de participació i deliberació en línia en l’elaboració de polítiques públiques que s’han desenvolupat en diferents països. Si bé els autors mostren un ampli coneixement de les tecnologies de connexió, s’hi troba a faltar una avaluació i una comparació més sistemàtiques dels mètodes deliberatius en línia existents. En realitat, els autors no han volgut abordar la delicada qüestió de valorar les experiències reals i, per tant, tot el desenvolupament analític anterior queda mancat d’una aplicació clara centrada en aquestes experiències.

Coordination Risk and the Price of Debt

Abstract: Creditors of a distressed borrower face a coordination problem. Even if the fundamentals are sound, fear of premature foreclosure by others may lead to pre-emptive action, undermining the project. Recognition of this problem lies behind corporate bankruptcy provisions across the world, and it has been identified as a culprit in international financial crises, but has received scant attention from the literature on debt pricing. The apparent multiplicity of equilibria is a barrier to development of this issue in asset pricing, but this multiplicity is only apparent. Without common knowledge of fundamentals, the incidence of failure is uniquely determined provided that private information is precise enough. This affords a way to price the coordination failure. There are two further conclusions. First, coordination is more difficult to sustain when fundamentals deteriorate. Thus, when fundamentals deteriorate, the onset of crisis can be very swift. Second, "transparency" -- in the sense of greater provision of information to the market -- does not generally mitigate the coordination problem. Transparency is not a panacea.

Is Time-Discounting Hyperbolic or Subadditive?

Abstract: Subadditive time discounting means that discounting over a delay is greater when the delay is divided into subintervals than when it is left undivided. This may produce the most important result usually attributed to hyperbolic discounting: declining impatience, or the inverse relationship between the discount rate and the magnitude of the delay. Three choice experiments were conducted to test for subadditive discounting, and to determine whether it is sufficient to explain declining impatience. All three experiments showed strong evidence of subadditive discounting, but there was no evidence of declining impatience. I conclude by questioning whether hyperbolic discounting is a plausible account of time preference.

The open method as a new mode of governance: the case of soft economic policy co-ordination

Abstract: Taking economic co-ordination in EMU as a starting point, this article explores the development of the open method of co-ordination, addressing whether it is a new form of governance from two related perspectives. First, to what extent can the method be effectively applied outside the scope of economic policy? Second, will it lead to policy transfer to the EU and hence act only as a transitional mode of governance? Identified at the Lisbon European Council, the method codified practices such as benchmarking, target-setting and peer review developed in the Luxembourg, Cardiff and Cologne processes. The method offers a new approach to governance of the EU as a heterarchical, decentred and dynamic process. It supports and radicalizes the principle of subsidiarity; offers an alternative to the treaty rules on enhanced co-operation; and addresses some of the legitimacy issues inherent in the EU. In EMU, the method arose out of a specific policy framework with a common monetary policy complemented by the coordination of national economic policies. The recent recommendation issued against Ireland is the first example of the operation of the method in EMU and shows how debate can be stimulated and how different and arguably equally valid perspectives defended. The particular experience of EMU with a sound money, sound finance paradigm, a long history of project-building by key elites and the central role of the European Council suggest similar conditions are required for the effective application of the method in other policy spheres. The context within which the method has operated to date is contingent and could change either over time or between policy fields. If so, the very openness of the method may serve to reconfigure the boundaries of competence between the Member States and the Union, after all.

The significance of context in information systems and organizational change

Abstract: . This paper argues that it is of crucial importance that information systems (IS) research and practice associates technology innovation with the context within which it is embedded. It identifies three principles to be followed in order to address the contextual processes involved in IS implementation: first, technology innovation should be considered in relation to socio-organizational change; second, analysis should consider not only the local organizational, but also the national and international context; and third, analysis should consider both the technical/rational decisions and actions involved in the innovation process and the cultural, social and cognitive forces of such a process. These principles are demonstrated with the analysis of a case study of organizational reform in Cyprus.

The Value Spread

Abstract: We decompose the cross-sectional variance of firms' book-to-market ratios using both a long U.S. panel and a shorter international panel. In contrast to typical aggregate time-series results, transitory cross-sectional variation in expected 15-year stock returns causes only a relatively small fraction (20%) of the total cross-sectional variance. The remaining dispersion can be explained by expected 15-year profitability and persistence of valuation levels. Furthermore, this fraction appears stable across time and across types of stocks. We also show that the expected return on value-minus-growth strategies is atypically high at times when the value spread (the difference between the book-to-market ratio of a typical value stock and a typical growth stock) is wide.

Government Versus Private Ownership of Public Goods

Abstract: There has been a dramatic change in the division of responsibility between the state and the private sector for the delivery of public goods and services in recent years with an increasing trend toward contracting out to the private sector and “public-private partnerships.” This paper analyzes how ownership matters in public good provision. We show that if contracts are incomplete then the ownership of a public good should lie with a party that values the benefits generated by it relatively more. This is true regardless of whether this party is also the key investor, or other aspects of the technology.

Advantageous Selection in Insurance Markets

Abstract: This article reverses the standard conclusion that asymmetric information plus competition results in insufficient insurance provision. Risk-tolerant individuals take few precautions and are disinclined to insure, but they are drawn into a pooling equilibrium by the low premiums created by the presence of safer, more risk-averse types. Taxing insurance drives out the reckless clients, allowing a strict Pareto gain. This result depends on administrative costs in processing claims and issuing policies, as does the novel finding of a pure-strategy, partial-pooling, subgame-perfect Nash equilibrium in the insurance market. Copyright 2001 by the RAND Corporation.

Using qualitative methods to elicit young people's perspectives on their environments: some ideas for community health initiatives

Abstract: This paper describes qualitative methods used in a research project for the former Health Education Authority, exploring Putnam's concept of 'social capital' in relation to children and young people's well-being and health. Putnam's conceptualization of social capital consists of the following features: trust, reciprocal support, civic engagement, community identity and social networks, and the premise is that levels of social capital in a community have an important effect on people's well-being. Research was carried out with 102 children aged between 12 and 15 in two relatively deprived parts of a town in southeast England. The paper describes the research setting, methods, consent process and ethical issues that arose. It explores how the methods generated different forms of interconnected data, giving rise to a number of health/well-being-related themes. The paper concludes that using a range of methods, including visual methods, has helped to explore quality of life issues for children that are usually neglected in studies of young people's health-related behaviours.

Estimation of a Dynamic Auction Game

Abstract: This paper proposes an estimation method for a repeated auction game under the presence of capacity contraints The estimation strategy is computationally simple as it does not require solving for the equilibrium of the game It uses a two stage approach In the first stage the distribution of bids conditional on state variables is estimated using data on bids, bidder characteristics and contract characteristics In the second stage, an expression of the expected sum of future profits based on the distribution of bids is obtained, and costs are inferred based on the first order condition of optimal bids We apply the estimation method to repeated highway construction procurement auctions in the state of California between May 1996 and May 1999 In this market, previously won uncompleted contracts reduce the probability of winning further contracts We quantify the effect of intertemporal constraints on bidders' costs and on bids Due to the intertemporal effect and also to bidder asymmetry, the auction can be inefficient Based on the estimates of costs, we quantify efficiency losses

Environmental Problems in an Urbanizing World: Finding Solutions in Cities in Africa, Asia and Latin America

Abstract: Cities can provide health safe and stimulating environments for their inhabitants without imposing unsustainable demands on natural resources ecosystems and global cycles. A successful city in this sense is one that meets multiple goals. Such goals include: healthy living and working environments for the inhabitants; water supply provision for sanitation rubbish collection and disposal drains paved roads and footpaths and other forms of infrastructure and services that are essential for health (and important for a prosperous economic base) available to all; an ecologically sustainable relationship between the demands of consumers and businesses and the resources waste sinks and ecosystems on which they draw. (excerpt)

A Corporate Balance Sheet Approach to Currency Crises

Abstract: This Paper presents a general equilibrium currency crisis model of the 'third generation', in which the possibility of currency crises is driven by the interplay between private firms' credit-constraints and nominal price rigidities. Despite our emphasis on microfoundations, the model remains sufficiently simple that the policy analysis can be conducted graphically. The analysis hinges on four main features: i) ex post deviations from purchasing power parity; ii) credit constraints a la Bernanke-Gertler; iii) foreign currency borrowing by domestic firms; iv) a competitive banking sector lending to firms and holding reserves and a monetary policy conducted either through open market operations or short-term lending facilities. We first show that with a positive likelihood of a currency crisis, firms may indeed find it optimal to borrow in foreign currency, following Chamon (2001). Second, we derive sufficient conditions for the existence of a sunspot equilibrium with currency crises. Third, we show that a reduction in the monetary base through restrictive open market operations is more likely to eliminate the possibility of currency crises if at the same time the central bank does not impose excessive constraints on short-term lending facilities.

Is Inflation Always and Everywhere a Monetary Phenomenon

Abstract: Using a sample of about 160 countries over the last thirty years we test for the quantity theory relationship between money and inflation When analysing the full sample of countries we find a strong positive relation between the long-run inflation and money growth rate The relation is not, however, proportional The strong link between inflation and money growth is almost wholly due to the presence of high (or hyper-) inflation countries in the sample The relationship between inflation and money growth for low inflation countries (on average less than 10% per annum over the last 30 years) is weak We find that the long-run average inflation and country-specific factors have a significant influence on the strength of the relationship We also confirm that money growth and output growth are orthogonal in the long-run; ie higher growth rates of money do not lead to higher growth rates of output

The rise of cohabitation and childbearing outside marriage in western Europe

Abstract: In many western European nations there have been dramatic recent rises in unmarried cohabitation and having children outside marriage. Here we examine the extent and depth of these changes across nations. Our analysis includes an examination of type of first partnership, duration of cohabiting unions, characteristics of cohabitants, and dissolution risks of different types of unions. We also examine the partnership context within which children are born, the extent to which children born to cohabiting parents see the marriage of their parents, as well as the variation in dissolution probabilities associated with different partnership histories. The analysis shows that there is not one but several European perspectives on the rise of cohabitation and non-marital childbearing.

Are Investors Moonstruck? - Lunar Phases and Stock Returns

Abstract: This paper investigates the relation between lunar phases and stock market returns of 48 countries. The findings indicate that stock returns are lower on the days around a full moon than on the days around a new moon. The magnitude of the return difference is 3% to 5% per annum based on analyses of two global portfolios: one equal-weighted and the other value-weighted. The return difference is not due to changes in stock market volatility or trading volumes. The data show that the lunar effect is not explained away by announcements of macroeconomic indicators, nor is it driven by major global shocks. Moreover, the lunar effect is independent of other calendar-related anomalies such as the January effect, the day-of-week effect, the calendar month effect, and the holiday effect (including lunar holidays).