Showing papers in "Economica in 1998"

Why Are the Unemployed So Unhappy? Evidence from Panel Data

Abstract: This paper tests for the importance of non-pecuniary costs of unemployment using a longitudinal data-set on life-satisfaction of working-age men in Germany. We show that unemployment has a large detrimental effect on satisfaction after individual specific fixed effects are controlled for. The non-pecuniary effect is much larger than the effect that stems from the associated loss of income.

What’s Mine is Yours? The Influence of Male and Female Incomes on Patterns of Household Expenditure

Abstract: This paper uses microdata from the 1992 Statistics Canada Family Expenditure Survey to provide evidence that male and female incomes do not always exert identical influences on household expenditures. The novelty of the paper lies in its demonstration that, while incomes may be pooled for some categories of consumption (e.g. housing), the income pooling hypothesis must be rejected for others. We also go beyond simply rejecting the pooling hypothesis to ask how male versus female income is used. Our results stress the on-going importance of traditional gender roles. For example, we find that expenditures on child care increase only with women’s incomes_higher male income is not associated with higher expenditure on child care even when both spouses are full-time, full-year paid workers.

Why Have Some Indian States Done Better than Others at Reducing Rural Poverty

Abstract: The unevenness of the rise in rural living standards in the various states of India since the 1950s allowed the authors to study the causes of poverty. They modeled the evolution of average consumption and various poverty measures using pooled state-level data for 1957-91. They found that poverty was reduced by higher agricultural yields, above-trend growth in nonfarm output, and lower inflation rates. But these factors only partly explain relative success and failure in reducing poverty. Initial conditions also mattered. States that started the period with better infrastructure and human resources - with more intense irrigation, greater literacy, and lower infant mortality rates - had significantly greater long-term rates of consumption growth and poverty reduction. By and large, the same variables that promoted growth in average consumption also helped reduce poverty. The effects on poverty measures were partly redistributive in nature. After controlling for inflation, the authors found that some of the factors that helped reduce absolute poverty also improved distribution, and none of the factors that reduced absolute poverty had adverse impacts on distribution. In other words, there was no sign of tradeoffs between growth and pro-poor distribution.

A Theory of Growth, Financial Development and Trade

Abstract: This paper presents an analysis of the joint determination of real and financial development. Privately informed designers obtain external finance for their research projects through incentive-compatible loan contracts. Contracts are enforced through costly monitoring activity which lenders may either undertake themselves, or delegate to a financial intermediary. The analysis establishes a positive, two-way causal relationship between growth and financial development. In addition, using a multi-country version of the model, it is shown how both financial and trade liberalization can accelerate the development of intermediation; only trade liberalization has a direct positive effect on growth, however.

Testing Different Stochastic Specificationsof Risky Choice

Abstract: The Harless–Camerer (HC), Hey–Orme (HO) and random preference (RP) models of stochastic variation in choice under uncertainty are compared. Implications of these models, including some that are independent of the deterministic theory with which they are combined, are tested in an experiment in which participants respond to decision problems twice. The HC model generally performs poorly; the HO model predicts more violations of dominance than are observed; while the RP model fails to account for those few violations which do occur. Additional regularities are observed which are inconsistent with all three models when combined with expected utility theory.

Primary Schooling, Cognitive Skills and Wages in South Africa

Abstract: Using a fairly rich data set from South Africa, the paper finds that, despite the sobriquet 'gutter education', the African schooling systems help to create cognitive skills, and these skills are a determinant of wage levels. Various robust estimators are used but the influential outlier problem does not turn out to be serious. Computational skills appear to be more important than comprehension skills in influencing wages. The African primary schooling system was an extremely poor generator of computational skill, the seven-year course raising the computational test score by 13%, if that. A policy implication is that productivity could be raised by certain near-costless reallocations of resources in favour of mathematical learning.

Collective Bargaining and the Interindustry Wage Structure: International Evidence

Abstract: This paper studies collective bargaining and industry wage levels using microdata and quantile regression techniques for the United States, Britain, West Germany, Austria, Sweden and Norway for the 1980s. The United States has higher industry wage differentials and union wage effects than other countries, with particularly large impacts at the bottom of the distribution. European wage structures are more compressed at the bottom for both nonunion and union workers relative to the United States, with larger differences for nonunion workers. These findings suggest more coordination, contract extension and spillover to nonunion workers, and more binding industry wage floors outside the United States.

Designing Monetary Policy when Unemployment Persists

Abstract: This paper investigates how unemployment persistence affects the optimal delegation of monetary policy to an independent central banker (CB). Two opposing forces are shown to be at work: with more persistence, the government’s incentive to stabilize the economy is greater; but (if the CB is forward-looking) its incentive to create inflation surprises is also greater. We show that, owing to the second effect, the government may wish not to delegate at all, unlike the case where there is no persistence. In the event that the government does delegate, the paper identifies conditions under which either effect dominates in the government’s choice of conservatism of the CB. We compare delegation to discretion and precommitment, using a diagrammatic approach that may be of independent interest. We also present some preliminary empirical evidence on the cross-country relationship between unemployment persistence and inflation that appears consistent with the model’s predictions.

Empirical Tests of Efficiency Wage Models

Abstract: Two-digit manufacturing industry-level production functions are used to test efficiency wage propositions. Conclusive tests require functional forms which allow differences in elasticities of substitution between observable human capital, wage premia and other inputs. Results demonstrate that unexplained industry wage premia and higher unemployment rates raise productivity. Wage premia and the human capital wage component cannot be aggregated into a single human capital index. Nevertheless, 88% of the productivity effect associated with industry wages can be tied to observable human capital in the industry, with only 12% associated with the wage premium.

Private Income Transfers and Market Incentives

Abstract: The paper introduces labour supply considerations and labour earnings uncertainty into a parent–child framework in the presence of ‘merit goods’. I investigate the implications of various parental bequest rules on the effort decisions of the offspring, where the parent cannot perfectly observe her child’s market activities. The asymmetry in information and preferences gives rise to a moral hazard problem, and as a result the parent may not fully insure her child because the source of risk is not entirely exogenous. In this case, optimal parental transfers are shown to be state-contingent. Moreover, the child’s effort is higher in the case with a merit good and parental transfers than in the case without a merit good. Goods are not only economic commodities but vehicles and instruments for realities of another order: influence, power, sympathy, status, emotion; and the skillful game of exchange consists of a complex totality of maneuvers, conscious or unconscious, in order to gain security and to fortify one’s self against risks incurred through alliances and rivalry. Levi-Strauss, The Principle of Reciprocity

Are Real Wages and Unemployment Related

Abstract: In this paper we propose an alternative method for investigating the sources behind the behaviour of real wages and unemployment. The model we study is a certain cointegrated VAR, a so-called common trends model, which has become increasingly popular in the empirical growth/business cycle literature. This model leads us to emphasize the distinction between long-run and short-run relations. Using quarterly Swedish data (1965-90), we find only weak evidence of a short-run relation between real wages and unemployment as reported in traditional single-equation error correction models. There is even less evidence of a long-run relation.

A Decade of Tax and Benefit Reforms in Sweden: Effects on Labour Supply, Welfare and Inequality

Abstract: Sweden has experienced a sequence of tax and benefit reforms during the last decade. In this paper we evaluate these reforms from labour supply, welfare and inequality points of view. We depart from a household labour supply model. Simulation of the model reveals that tax and benefit reforms have led to a considerable reduction of the excess burden. Regarding social welfare and inequality, we show that the results depend to a large extent on the income inequality measure and the measure of social welfare, as well as the income concept (household disposable income or money metric utility).

Testing Alternative Explanations of Cyclical Choices

Abstract: In two previously reported experiments, Loomes, Starmer and Sugden have found that choices are systematically non-transitive, following a pattern of ‘cycling asymmetry’ predicted by regret theory. However, there are other potential explanations for these observations. This paper reports four experiments designed to discriminate between alternative explanations. There are three main findings. First, when the original experiments are replicated, the same cycling asymmetry is found. Second, this pattern is not the result of event-splitting effects. Third, both the frequency and the asymmetry of cycles are greater when choice problems are presented in act/event matrices than when the options are described separately.

The Microeconomic Analysis of the External Costs of Road Accidents

Abstract: A disaggregated model of the marginal external costs of road accidents imposed by different road users is developed. The model explicitly specifies the adjustment of road users to increases in accident risks imposed by additional road use and is used to estimate the marginal external costs of road accidents. The results, under certain assumptions, are up to 50% less than those obtained using the methods of previous studies. However, the adjustment to the increased risks of accidents leads to other costs, such as congestion and reduced pedestrian mobility. These costs should be included in a comprehensive analysis.

Risk, Optimal Government Finance and Monetary Policies in a Growing Economy

Abstract: Optimal tax and monetary policies in a stochastic monetary growth model are investigated. Our findings are of three general types. First, both capital income taxes and monetary growth are shown to influence the economy through effective risk-adjusted measures, expressed as a linear function of their respective means and variances. Second, two stochastic neutrality results relating to money and bonds, the two nominal assets in the economy, are identified. Third, optimal policy rules relating to taxes, bond finance and money creation are characterized. An essential component of optimal financial policy is a risk-adjusted balanced budget.

Efficient Ways to Finance Human Capital Investments

Abstract: Standard theory predicts that if wages are determined by bargaining workers underinvest in human capital, as they bear all the investment costs yet receive only a share less than one of the return. I show that this result depends on the way the investments are financed. I introduce contingent loans, which do not accumulate interest if the borrower is unemployed. When the investments are financed by such loans, the interest payments are regarded as a (negative) part of the surplus the agents bargain over. As a result, a worker pays the same share of the interest as he receives of the return.

The Relative Burden of Monopoly on Households with Different Incomes

Abstract: This paper examines the relative burden of monopoly, measured as the (static) loss of con- sumers' surplus for different household income levels. Australian Household Expenditure Survey data are used to generate demand elasticities for 14 commodity groups and to obtain estimates of the relative welfare loss for households with different income levels. The welfare loss associated with monopoly power is found to be higher for low-income households (such as households that depend on government pensions and benefits for their principal source of income) compared with high-income households. The results provide an indication that, what- ever the size of the absolute welfare loss arising from monopoly, there may be a substantial effect on the distribution of welfare. This paper examines the relationship between the level of household income and the burden of monopoly. While there have been numerous studies of the aggregate welfare losses associated with monopoly, the relationship between welfare loss and household income has not previously been examined. The approach taken in this paper involves combining the static net consumers' loss method of assessing the cost of nmonopoly with a method of linking demand elasticities to income levels. Welfare loss is aggregated over commodity groups for households at different income levels and the loss of consumers' surplus is then compared with households in other income groups. The reason for emphasizing the relative measure of welfare loss is that a number of problematic assumptions are made in the course of the analysis. They are made explicit at each point in the argument and impart some bias into the absolute measure of welfare loss for any income group. However, it is suggested that the bias is similar for all income groups, so that the measures of relative welfare loss presented in the paper are not affected. Section I begins by discussing the standard method of identifying the static welfare loss associated with monopoly and shows that, under certain assump- tions, this loss is inversely proportional to the own-price elasticity of demand. The section then shows how this result can be used to investigate the relation- ship between welfare loss and household income. Section II uses data from the Australian Household Expenditure Survey and shows how, in the absence of direct evidence on the price elasticities of demand, cross-sectional information on the composition of household expenditure can be used to generate a set of estimates of the relative welfare loss for households with different levels of

Modelling Business Cycle Nonlinearity in Conditional Mean and Conditional Variance: Some International and Sectoral Evidence

Abstract: This paper tests for the presence of output mean and variance nonlinearities in international industrial production and UK and US sectoral production growth rates using ARMAGQARCH, bilinear (BL) and joint BL-GQARCH models. ARMA-GQARCH models confirm the presence of asymmetric variance effects in Italian, UK and US industrial production and in all sectors other than US nondurables, and such that the conditional variance of output is increased following negative shocks. BL models are identified for German, Italian and US industrial production and US manufacturing, while BL-GQARCH models of joint nonlinearity in both conditional mean and conditional variance are also found to hold for US industrial production and manufacturing. Moreover, with the exception of Italy, all BL and BL-QARCH models provide superior out-of-sample mean forecasts relative to forecasts from both naive models and models of the ARMA-GQARCH class.

Brazil's state debt crisis: lessons learned

Abstract: This note summarizes the chronology of the state debt crisis and the efforts by the Brazilian government to resolve it. It also describes the World Banks efforts to assist in this process through state level adjustment loans. It concludes with lessons. A technical appendix, detailing the loan conditionahty and disbursement mechanism used in the adjustment loans, is attached.

Changes in the Distribution of Housing Wealth in Great Britain, 1985‐91

Abstract: during which time sizeable real capital gains accrued to owner-occupiers, particularly those who were already owner-occupiers at the start of this period. The paper constructs housing wealth estimates disaggregated by household from the 1985 GHS and 1991 BHPS Wave 1 in order to explain the distributional consequences of the housing market experience. The paper finds that there has been a modest increase in housing wealth inequality, but one that is more pronounced for gross housing wealth compared with equity. This growth has been offset by the growth in owner-occupation and the benefits of the council house right-to-buy scheme.

An Econometric Model of Farm Tenures in Fifteenth‐Century Florence

Abstract: We estimate a discrete-choice model of farm tenures in fifteenth-century Florence, using data in the form of an unbalanced panel, with individual farms nested within landlords' total property holdings. The probabilities of wage, rental and sharecropping tenures are estimated, allowing for landlord-specific random effects. Specification tests are used to validate the model. Our results emphasize the role of long-lived fixed assets (vines), vulnerable to damage by short-term over-production, as a factor favouring sharecropping (which 'taxes' over-production). However, we find evidence against theories emphasizing high monitoring costs as an influence favouring rental contracts.

Optimal Law Enforcement and Imperfect Information when Wealth Varies among Individuals

Abstract: There is a belief that imperfect information about the probability of punishment and severity of punishment weakens deterrence. We assess this belief concerning two specific implications: non-optimal deterrence and severity of punishment. We conclude that it may well be the case that the introduction of imperfect information entails a more severe punishment when wealth varies among individuals. This last explanation was introduced by Polinsky and Shavell (1991). They show that, if the wealth of individuals varies, as is obviously realistic, the opti- mal fine is less than the wealth of the highest-wealth individuals and may be less than the wealth of most individuals. In other words, the optimal fine is such that only relatively low-wealth individuals pay everything they have; all other individuals pay a fine that is less than their wealth.2 To understand Polinsky and Shavell's (1991) note, consider why the argu- ment associated with Becker cannot be applied when wealth varies. Suppose that the fine is less than the wealth of the highest-wealth individuals. If the fine is raised and the probability of detection is lowered, it is true that those who can pay the higher fine are deterred to the same extent. However, those who cannot pay the higher fine are deterred less. As a consequence, it generally is not optimal to raise the fine to the highest possible level. This paper extends the optimal law enforcement literature by introducing imperfect information in Polinsky and Shavell's model in two different ways: imperfect observation of the probability of apprehension, and imperfect obser- vation of individuals' wealth. The first type of uncertainty is uncertainty on the individuals' side, while the second type is uncertainty on the enforcement agency's side.

Sunk Costs and the Inefficiency of Relationship‐Specific Investment

Abstract: It is well known that relationship-specific investment will be inefficient when the parties are unable to write (binding) long-term contracts In this note I exploit some of the recent developments in strategic bargaining theory in order to explore the relationship between the degree of inefficiency in the level of such relationship-specific investment and the degree of sunkness in the cost of investment One result obtained is that the underinvestment result is not sensitive to the degree of sunkness in the cost of investment Another result is that each player may actually overinvest when the cost of investment is not sunk

Risk Aversion, Foreign Exchange Speculation and Gambler’s Ruin

Abstract: The apparent persistence of unexploited opportunities for expected profits in foreign exchange markets suggests highly risk-averse market participants. Financial institutions put tight limits on the foreign-exchange positions they may have at risk at any time, despite beliefs that the odds are favourable that the positions will be profitable. This ‘safety-first’ practice is consistent with keeping the probability of ruin low enough to be of no practical concern. The setting of a very low probability of ruin for prudential reasons provides a rationale for traders behaving as if they have a degree of risk aversion that might otherwise seem implausibly high.

Stable Multilateral Trade Agreements

Abstract: We analyse multilateral tariff negotiations as a game in coalition form. In a model with three identical countries that produce and trade an homogeneous commodity, and where countries’ aggregated welfare can weight differently their different components, we analyse how changes in the countries’ objective affects the stability of coalitions. In other words, we characterize what tariff-agreements, if any, are stable (i.e. lie in the core).

Monetary Integration, Uncertainty and the Role of Money Finance

Abstract: This paper considers the positive theory of monetary integration in a general equilibrium monetary model. A role for money finance is presented which optimally reduces consumption variability when asset markets are incomplete. Importantly, this role is independent of the aggregate money stock and so does not restrict inflation policy.

Defense Spending in a Neo-Ricardian World

Abstract: This paper shows that Ricardian equivalence no longer holds once we recognize that govern- ment acts as an intermediary between generations in the provision of national defence. Conse- quently, the level of public debt is positively related to defence spending since this component of government expenditures insures the transferability of bequests, as well as protecting savings. It is shown that defence spending has an adverse effect on both national saving and the saving rate that has not been considered in the economic growth literature. More gener- ally, the paper emphasizes that in developing a positive theory of taxation, the composition of government spending plays an integral role. The separation of government expenditures from the methods used to finance them has been an extremely useful assumption employed in economics. It has allowed economists to analyse a series of problems which would be much more difficult to study if individual taxpayers were assumed to perceive a link between the tax structure and the expenditure structure of an economy. Hettich and Winer (1988), for example, following this tradition, develop a positive theory of a tax system. This separation has been used most frequently and fruitfully to address the important question, Do fiscal deficits matter? More specifically, does the way that government finances its expenditures, between taxing and issuing public debt, matter in terms of their impact on the real economy? Barro (1974) employed an overlapping-generations model with altruism to show that if individuals are not bequest-constrained then government bonds are not perceived as net wealth. The recipients of government transfers financed by bonds realize that their descendants will have to finance the debt through higher taxes, and so they offset the increase in public debt by increas- ing the size of the bequest to their children by the same amount. The effect is that interest rates, wages and the level of output of the economy are unaltered. This result, usually referred to as the Ricardian equivalence theorem, presented a challenge to the profession to find circumstances under which it would not hold and when, therefore, financing government spending with debt would

Risk and Revelation: Changing the Value of Information

Abstract: A different approach is introduced to determine the value of an information-sharing agreement: the measure of risk aversion/loving. This approach reveals the relationship between information-sharing models and the risk literature. It also allows uncertainty regarding the slope of a firm’s own demand function to be examined which previous work eschews. The results suggest that the incentive to reveal information is more prevalent than previously thought: firms prefer to commit to reveal private valued information in both quantity and price competition. This differs from previous work where the incentive to commit depended on the type of competition.

Innovation Races, Strategic Externalities and Endogenous Growth

Abstract: I expound a tractable model of an infinite-horizon multi-sector economy where endogenous growth in the aggregate results from innovation races which go on in each and every sector. I identify five externalities that have strategic implications: the ‘contemporaneous real income’, the ‘lagged real income’, the ‘aggregate demand’, the ‘Shleifer’ and the ‘competition’ effects. I prove that multiple stationary equilibria can exist and lead to different rates of growth, and show that, in any stationary equilibrium, the rate of growth is constant. Finally, I prove that the rate of growth may be higher or lower than social welfare warrants.

Financiamiento Para las Micro y Pequeñas Empresas: Algunas Líneas de Acción

Abstract: El presente articulo se basa en un documento mas extenso: “The Promotion of Small and MicroEnterprises: A Source Book” preparado para el Banco Interamericano de Desarrollo (BID) y la Fundacion para el Desarrollo Sostenible (FUNDES), como Relatorio de la Conferencia Internacional “Credito para la pequena y la microempresa”, realizada en Washington D.C. en Junio, 1994. Los autores agradecen los comentarios de Douglas Graham y Claudio Gonzalez Vega (The Ohio State University), Carlos Cuevas (Banco Mundial), Mark Flaming (BID), y Markus Reichmuth (FUNDES). Por supuesto, todo error u omision es de nuestra entera responsabilidad. Muchas de las ideas planteadas en este articulo emergieron a inicios de la presente decada, y su difusion esta aun en proceso.