Showing papers in "International Economic Review in 2006"
TL;DR: In this paper, the authors test for asymmetry in a model of the dependence between the Deutsche mark and the yen, in the sense that a different degree of correlation is exhibited during joint appreciations against the U.S. dollar versus during joint depreciations.
Abstract: We test for asymmetry in a model of the dependence between the Deutsche mark and the yen, in the sense that a different degree of correlation is exhibited during joint appreciations against the U.S. dollar versus during joint depreciations. We consider an extension of the theory of copulas to allow for conditioning variables, and employ it to construct flexible models of the conditional dependence structure of these exchange rates. We find evidence that the mark‐dollar and yen‐dollar exchange rates are more correlated when they are depreciating against the dollar than when they are appreciating.
1,666 citations
TL;DR: In this article, the authors consider a search-theoretic model of monetary exchange, where agents bargain over both the amount of money and the quantity of goods to be exchanged in bilateral meetings.
Abstract: This article considers a search-theoretic model of monetary exchange. Agents bargain over both the amount of money and the quantity of goods to be exchanged in bilateral meetings, determining endogenously the distributions of money and of prices. I show that money is neutral if changes in the money supply are accomplished via proportional transfers. However, within the class of lump-sum transfers, an increase of the rate of monetary expansion tends to decrease the dispersion of wealth and prices and to improve welfare when inflation is low; but when inflation is high enough, the opposite effects occur.
292 citations
TL;DR: This paper presented a model economy where workforce heterogeneity stems from idiosyncratic productivity shocks and found that the aggregate labor-supply elasticity of such an economy is around 1, greater than a typical micro estimate.
Abstract: At the aggregate level, the labor-supply elasticity depends on the reservation-wage distribution. We present a model economy where workforce heterogeneity stems from idiosyncratic productivity shocks. The model economy exhibits the cross-sectional earnings and wealth distributions that are comparable to those in the micro data. We find that the aggregate labor-supply elasticity of such an economy is around 1, greater than a typical micro estimate.
282 citations
TL;DR: In this paper, the authors study a setting with many countries and explore the effects of asymmetries across countries and political economy considerations on the incentives to form trade agreements, finding that, in symmetric settings, bilateralism is consistent with global free trade.
Abstract: We study a setting with many countries; in each country there are firms that can sell in the domestic as well as foreign markets. Countries can sign bilateral free-trade agreements that lower import tariffs and thereby facilitate trade. We allow a country to sign any number of bilateral free-trade agreements. A profile of free-trade agreements defines the trading regime. Our principal finding is that, in symmetric settings, bilateralism is consistent with global free trade. We also explore the effects of asymmetries across countries and political economy considerations on the incentives to form trade agreements.
209 citations
TL;DR: In this paper, the authors investigate the effect of counseling and monitoring on the individual transition rate to employment in a job search model with two search channels and endogenous search effort, and combine their empirical results with the results from their theoretical analysis and the existing empirical literature, to establish a comprehensive analysis of the effectiveness of these policies.
Abstract: We investigate the effect of counseling and monitoring on the individual transition rate to employment. We theoretically analyze these policies in a job search model with two search channels and endogenous search effort. In the empirical analysis we use unique administrative and survey data concerning a social experiment with full randomization and compliance. The results do not provide evidence that counseling and monitoring affect the exit rate to work. Monitoring causes a shift from informal to formal job search. We combine our empirical results with the results from our theoretical analysis and the existing empirical literature, to establish a comprehensive analysis of the effectiveness of these policies.
194 citations
TL;DR: In this article, a sequential model of employment, marriage, and abuse is presented, showing that abuse is the primary factor in the decision to divorce and witnessing violence as a child is a strong predictor of becoming an abusive spouse.
Abstract: Using unique, representative data on domestic violence, we document several stylized facts on abuse: the average characteristics of abused wives and abusive husbands are markedly dierent than the characteristics of individuals in non-violent marriages, the vast majority of violent marriages end in divorce, and employment rates are lower for women who experience abuse We then construct a sequential model of employment, marriage and abuse The results indicate abuse is the primary factor in the decision to divorce and witnessing violence as a child is a strong predictor of becoming an abusive spouse Policy experiments suggest men are more responsive to policies designed to increase the costs of abuse than women are to policies reducing the cost of leaving violent marriages and policies designed to reduce the inter-generational eects of domestic violence may be promising strategies for preventing abuse
168 citations
TL;DR: The authors showed that the approach used by traditional life cycle models to account for uncertain survival corresponds to a strong assumption of risk neutrality with respect to length of life, which leads to a more general formulation of lifetime utility in which time discounting is directly related to preferences over length of lifetime.
Abstract: This article makes explicit the links between preferences over lotteries on length of life and intertemporal choice. It shows that the approach used by traditional life cycle models to account for uncertain survival corresponds to a strong assumption of risk neutrality with respect to length of life. Relaxing such an assumption leads us to develop a more general formulation of lifetime utility in which time discounting is directly related to preferences over length of life. Exponential and hyperbolic discounting are found to result, in a first approximation, from constant and hyperbolic risk aversion with respect to length of life.
151 citations
TL;DR: In this article, an economic model of nonmarital cohabitation, marriage, and divorce was developed and estimated using longitudinal data from a sample of female high school seniors from the United States.
Abstract: The objective of this research is to further our understanding of how and why individuals enter and leave coresidential relationships. We develop and estimate an economic model of nonmarital cohabitation, marriage, and divorce that is consistent with current data on the formation and dissolution of relationships. Jovanovic's (Journal of Political Economy 87 (1979), 972-90) theoretical matching model is extended to help explain household formation and dissolution behavior. Implications of the model reveal what factors influence the decision to start a relationship, what form this relationship will take, and the relative stability of the various types of unions. The structural parameters of the model are estimated using longitudinal data from a sample of female high school seniors from the United States. New numerical methods are developed to reduce computational costs associated with estimation. The empirical results have interesting interpretations given the structural model. They show that a significant cause of cohabitation is the need to learn about potential partners and to hedge against future bad shocks. The estimated parameters are used to conduct several comparative dynamic experiments. For example, we show that policy experiments changing the cost of divorce have little effect on relationship choices.
149 citations
TL;DR: In this article, the authors focus on two distinct facets of globalization: decrease in the trade costs of goods and the decline of communication costs between headquarters and production facilities, and find that when the unskilled have about the same wage in two regions, decrease of these costs fosters the agglomeration of plants in the core accommodating headquarters.
Abstract: This article focuses on two distinct facets of globalization: decrease in the trade costs of goods and the decline of communication costs between headquarters and production facilities. When the unskilled have about the same wage in two regions, decrease of these costs fosters the agglomeration of plants in the core accommodating headquarters. When the wage gap is significant, process of integration eventually triggers the relocation of plants into the periphery. When this process of relocation is driven by falling communication costs, the welfare of all workers in the core falls whereas that in the periphery rises.
120 citations
TL;DR: In this paper, the authors use the neoclassical growth framework to model international capital flows in a world with exogenous demographic change and find that the model explains a small but significant fraction of capital flows between OECD countries, in particular after 1985.
Abstract: We use the neoclassical growth framework to model international capital flows in a world with exogenous demographic change. We compare model implications and actual current account data and find that the model explains a small but significant fraction of capital flows between OECD countries, in particular after 1985. 1. INTRODUCTION According to the life-cycle theory, consumption as a fraction of income varies with age. Taking this argument one step further, a country’s savings rate depends on the age structure of its population. This direct link between demographics and savings, investment, and capital flows has been addressed in a number of papers. Fair and Dominguez (1991) find mixed evidence for this story using quarterly U.S. data, whereas Higgins and Williamson (1997), Higgins (1998), and Lane and Milesi-Ferretti (2001) find strong support for the story using lower-frequency data for a large number of countries. In this article, we use another approach to examine the same link from demographics to savings, investment, and international capital flows. Rather than directly testing for correlations between a country’s age structure and these macroeconomic variables, we use a standard neoclassical model that is consistent with the life-cycle theory. We calibrate this model with population data and projections for a large number of countries, and examine if the data generated by the model can explain real-world capital flows. In addition to controlling for the domestic age structure, this approach allows us to control for a changing demographic structure in the world economy. In the coming decades, most developed countries will face aging populations and smaller fractions of prime-age workers in the population. Theory and the empirical results found by, for example, Higgins (1998) then predict that current account balances will fall. It is not possible, however, that all countries simultaneously run current
112 citations
TL;DR: In this article, a structural model of education choices and wage determination is proposed and empirically implemented to quantitatively evaluate the contributions of productivity enhancement and ability signaling in the college wage premium.
Abstract: This article proposes and empirically implements a structural model of education choices and wage determination to quantitatively evaluate the contributions of productivity enhancement and ability signaling in the college wage premium. The model is estimated under various distributional parameterizations using 1990 U.S. Census 5% Public Use Micro Sample. Under these parameterizations, I find that college education enhances attendees’ productivity by about 40%, and productivity enhancement accounts for close to two-thirds of the college wage premium.
TL;DR: In this article, the authors model a labor market where employed workers search on the job and firms direct workers' search using wage offers and employment probabilities, and show that low-wage applicants are relatively more sensitive to employment probability than to wage and thus forgo the opportunity to apply for a high wage, with a lower chance of success.
Abstract: We model a labor market where employed workers search on the job and firms direct workers' search using wage offers and employment probabilities. Applicants observe all offers and face a trade-off between wage and employment probability. There is wage dispersion among workers, even though all workers and jobs are homogeneous. Equilibrium wages form a ladder, as workers optimally choose to climb the ladder one rung at a time. This is because low-wage applicants are relatively more sensitive to employment probability than to wage and thus forgo the opportunity to apply for a high wage, with a lower chance of success.
TL;DR: In this paper, the authors consider various labor market policies that might be used to compensate those who lose from freer trade and find the policy that compensates each group of losers at the lowest cost to the economy.
Abstract: Liberalization harms some groups while generating aggregate benefits. We consider various labor market policies that might be used to compensate those who lose from freer trade. Our goal is to find the policy that compensates each group of losers at the lowest cost to the economy. We argue that wage subsidies should be used to compensate those who bear the adjustment costs triggered by liberalization whereas employment subsidies should be used to compensate those who remain trapped in the previously protected sector. Our analysis indicates that the cost of compensation is low, provided that the right policy is used.
TL;DR: In this paper, the authors consider an economic geography model of a new genre: all firms and workers are mobile and their agglomeration within a city generates rising urban costs through competition on a land market.
Abstract: We consider an economic geography model of a new genre: all firms and workers are mobile and their agglomeration within a city generates rising urban costs through competition on a land market. When commuting costs are low (high), the industry tends to be agglomerated (dispersed). With two sectors, the same tendencies prevail for extreme commuting cost values, but richer patterns arise for intermediate values. When one good is perfectly mobile, the corresponding industry is partially dispersed and the other industry is agglomerated, thus showing regional specialization. When one sector supplies a nontradeable consumption good, this sector is more agglomerated than the other. The corresponding equilibrium involves an urban hierarchy: a larger array of varieties of each good is produced within the same city.
TL;DR: In an infinitely repeated tariff game between three countries engaged in intraindustry trade under oligopoly as mentioned in this paper, the central result is that when countries are symmetric, a free trade agreement (FTA) undermines multilateral tariff cooperation by adversely affecting the cooperation incentive of the nonmember whereas a customs union (CU) does so via its effect on the cooperation incentives of members.
Abstract: Are preferential trade agreements (PTAs) building or stumbling blocks for multilateral trade liberalization? I address this question in an infinitely repeated tariff game between three countries engaged in intraindustry trade under oligopoly. The central result is that when countries are symmetric, a free trade agreement (FTA) undermines multilateral tariff cooperation by adversely affecting the cooperation incentive of the nonmember whereas a customs union (CU) does so via its effect on the cooperation incentives of members. However, when countries are asymmetric with respect to either market size or cost, there exist circumstances where PTAs facilitate multilateral tariff cooperation.
TL;DR: In this article, the authors developed a quantitative theory of fertility and labor market participation de-cisions in order to investigate the role of labor market frictions to understand the positive association between fertility and employment among O.C.D. countries.
Abstract: We develop a quantitative theory of fertility and labor market participation de- cisions in order to investigate the role of labor market frictions to understand the positive association between fertility and employment among O.E.C.D. countries. We Þnd that unemployment induces females to postpone and space births which, in turn, reduces the total fertility rate. Moreover, diferences in female labor outcomes across the U.S. and Spain can account for the low fertility rate in Spain relative to the U.S.. We also Þnd that labor market frictions (low probability of Þnding a job) determine how employment and fertility are associated across economies. In particular, fertility and employment are positively associated across economies with low employment ratios (low probability of Þnding a job). On the other hand, fertility and employment are negatively associated across economies with a high probability of Þnding a job.
TL;DR: In this article, a generalized partial adjustment model is proposed to aggregate the actions of heterogeneous producers facing fixed adjustment costs, which can be applied in general equilibrium settings with persistent idiosyncratic shocks without forfeiting the convenient use of linear solutions.
Abstract: Econometric partial adjustment models perform relatively well at the aggregate level; however, many kinds of microeconomic behavior involve discrete and occasional choices. Analyzing the classic employment adjustment problem, we show how a generalized partial adjustment model tractably accommodates both observations by aggregating the actions of heterogeneous producers facing fixed adjustment costs. Aggregate disturbances cause changes in establishment-level target employment and in the measure of establishments actively adjusting to their target, whereas aggregate responses exhibit partial adjustment. Our framework also can be applied in general equilibrium settings with persistent idiosyncratic shocks without forfeiting the convenient use of linear solution methods.
TL;DR: In this article, the influence of relative wealth on fairness considerations is analyzed in an ultimatum game experiment in which participants receive large and widely unequal initial endowments. And the estimation results suggest that rich subjects become more selfish, whereas poor subjects, influenced only by their own experience, learn to tolerate this behavior.
Abstract: The influence of relative wealth on fairness considerations is analyzed in an ultimatum game experiment in which participants receive large and widely unequal initial endowments. Subjects initially demonstrate a concern for fairness. With time however, behavior becomes at odds with both subgame perfection and fairness. Evidence of learning is detected for both proposers and receivers in the estimation of a structural reinforcement learning model. The estimation results suggest that, guided by foregone best responses and an acquired sense of deservingness, rich subjects become more selfish, whereas poor subjects, influenced only by their own experience, learn to tolerate this behavior. Copyright 2006 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.
TL;DR: In this paper, the authors construct a new class of kernel by exponentiating conventional kernels and use them in the long run variance estimation with and without smoothing, and establish different asymptotic approximations to the sampling distribution of the proposed estimator.
Abstract: Author(s): Phillips, Peter C.B.; Sun, Yixiao; Jin, Sainan | Abstract: In this paper, we construct a new class of kernel by exponentiating conventional kernels and use them in the long run variance estimation with and without smoothing. Depending on whether the exponent is allowed to grow with the sample size, we establish different asymptotic approximations to the sampling distribution of the proposed estimator. When the exponent is passed to infinity with the sample size, the new estimator is consistent and shown to be asymptotically normal. When the exponent is fixed, the new estimator is inconsistent and has a nonstandard limiting distribution. It is shown via Monte Carlo experiments that, when the chosen exponent is small in practical applications, the nonstandard limit theory provides better approximations to the finite sampling distributions of the spectral density estimator and the associated test statistic in regression settings.
TL;DR: The authors examined the relationship between wealth accumulation and job search dynamics and found that borrowing constraints are tight and reinforce the influence of wealth on job acceptance decisions, namely that more initial wealth and access to larger amounts of credit increase wages and unemployment duration.
Abstract: This article examines the relationship between wealth accumulation and job search dynamics. It proposes a model in which risk-averse individuals search for jobs, save, and borrow to smooth their consumption. One motivation for accumulating wealth is to finance voluntary quits in order to search for better jobs. Using data on men from the National Longitudinal Survey (1979 cohort), I estimate the individual's dynamic decision problem. The results show that borrowing constraints are tight and reinforce the influence of wealth on job acceptance decisions, namely that more initial wealth and access to larger amounts of credit increase wages and unemployment duration.
TL;DR: In this article, the authors examine how greenhouse-gas emission controls affect a country's industrial and trade structures, and present an open economy model that has both Ricardian and Heckscher-Ohlin features.
Abstract: To examine how greenhouse-gas emission controls affect a country's industrial and trade structures, this article presents an open economy model that has both Ricardian and Heckscher–Ohlin features. We specifically compare emission quotas, emission taxes, and emission standards. The patterns of production and trade critically hinge on those policy tools. It is shown that a domestic emission control may lead to carbon leakage and may not reduce the world emissions, and that emission standards may work as a “hidden” production subsidy toward an emission-intensive industry.
TL;DR: In this article, a model is developed that employs recent developments in the literature on search models of money to capture the distributional effects of monetary policy in a tractable way, and both deterministic and stochastic versions of the model are studied.
Abstract: A model is developed that employs recent developments in the literature on search models of money to capture the distributional effects of monetary policy in a tractable way. Deterministic and stochastic versions of the model are studied. Money is not neutral, and these nonneutralities persist, whether or not the change in the money supply is anticipated or unanticipated. At the optimum, monetary policy is geared to correcting distortions in the search sector of the economy, while correcting for the persistent effects of past monetary policy actions. There is no consensus among macroeconomists concerning the role of monetary policy in the short run. However, an influential idea is that limited participation in financial markets is an important mechanism behind the short-run macroeconomic effects of central bank actions. That is, there is a component of economic activity that is centralized and interconnected. This economic activity involves financial transactions among banks and other financial intermediaries and the agents who hold the assets and liabilities of these financial intermediaries. When the central bank injects outside money into the economy, or withdraws it, the economic agents who are immediately affected by the monetary injection or withdrawal are the participants in these centralized transactions. Other economic agents, who are engaged in more decentralized and less interconnected transactions, will not be affected directly by the first-round effects of central bank actions. Thus, there will be a distributional effect of monetary injections and withdrawals, as first captured in heterogeneous agent models by Grossman and Weiss (1983) and Rotemberg (1984). This distributional effect will matter in interesting ways for the price level, nominal interest rates, aggregate output, foreign exchange rates, and the distribution of consumption across the population. The Grossman‐Weiss and Rotemberg models are not analytically tractable, because of the difficulty in tracking the distribution of wealth over time. However, Lucas (1990), Fuerst (1992), and Alvarez and Atkeson (1997), among others,
TL;DR: In this article, the effects of varying the number of bidders in uniform-price auctions were investigated, and it was shown that demand reduction remains even in the asymptotic limit, although truthful bidding yields profits very close to those of equilibrium play.
Abstract: Recent auction theory and experimental results document strategic demand reduction by bidders in uniform-price auctions. The present article extends this area of research to consider the effects of varying the number of bidders. Our theoretical model predicts that demand reduction should decrease with an increase in the number of bidders. Considerable demand reduction remains even in the asymptotic limit, although truthful bidding yields profits very close to those of equilibrium play. We experimentally confirm several of our predictions by examining bidding behavior of subjects in an actual marketplace, auctioning dozens of sportscards using both uniform-price and Vickrey auction formats.
TL;DR: The concept of a local trigger strategy equilibrium (LTSE) is introduced to describe a stationary sequential equilibrium in which, for any realization of discount factors, each individual conditions his cooperation on the cooperation of at least one "acceptable" group of neighbors.
Abstract: This article examines optimal social linkage when each individual’s repeated interaction with each of his neighbors creates spillovers. Each individual’s discount factor is randomly determined. A planner chooses a local interaction network or neighborhood design before the discount factors are realized. Each individual then plays a repeated Prisoner’s Dilemma game with his neighbors. A local trigger strategy equilibrium (LTSE) describes an equilibrium in which each individual conditions his cooperation on the cooperation of at least one “acceptable” group of neighbors. Our main results demonstrate a basic trade-off in the design problem between suboptimal punishment and social conflict. Potentially suboptimal punishment arises in designs with local interactions since in this case monitoring is imperfect. Owing to the heterogeneity of discount factors, however, greater social conflict may arise in more connected networks. When individuals’ discount factors are known to the planner, the optimal design exhibits a cooperative “core” and an uncooperative “fringe.” “Uncooperative” (impatient) types are connected to cooperative ones who tolerate their free riding so that social conflict is kept to a minimum. By contrast, when the planner knows only the ex ante distribution over individual discount factors, then in some cases the optimal design partitions individuals into maximally connected cliques (e.g., cul-de-sacs), whereas in other cases incomplete graphs with small overlap (e.g., grids) are possible.
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TL;DR: This article developed a dynamic theory of luxury consumption, particularly emphasizing the causal effect that pursuit of luxury goods has on wealth accumulation, and defined a quasi-luxury as a good whose marginal rate of substitution is increasing in a utility index.
Abstract: I develop a dynamic theory of luxury consumption, particularly emphasizing the causal effect that pursuit of luxury goods has on wealth accumulation. A quasi-luxury is defined as a good whose marginal rate of substitution is increasing in a utility index. Under certain conditions, it is indeed a luxury good. When current wealth holding falls short of (exceeds) long-run needs, luxury consumption is postponed more (less) easily than necessity consumption, due to a lower (higher) time preference for luxury and/or a higher intertemporal elasticity of substitution thereof. Preferences for quasi-luxuries lead to a higher steady-state value of wealth or capital.
TL;DR: In this paper, the authors study an economy with private and public sectors in which workers invest in imperfectly observable skills that are important to the private sector but not to the public sector.
Abstract: We study an economy with private and public sectors in which workers invest in imperfectly observable skills that are important to the private sector but not to the public sector. Government regulation allows native majority workers to be employed in the public sector with positive probability while excluding the minority from it. We show that even when the public sector offers the highest wage rate, it is still possible that the discriminated group is, on average, economically more successful. The widening Chinese/Malay wage gap in Malaysia since the adoption of its New Economic Policy in 1970 supports our model.
TL;DR: In this paper, the authors analyze the welfare properties of the equilibrium path of a growth model where both habits and consumption externalities affect the utility of consumers and highlight the crucial role played by complementarities between externalities and habits in order to generate an inefficient dynamic equilibrium.
Abstract: We analyze the welfare properties of the equilibrium path of a growth model where both habits and consumption externalities affect the utility of consumers. Our analysis highlights the crucial role played by complementarities between externalities and habits in order to generate an infficient dynamic equilibrium. In particular, we show that the competitive equilibrium is inefficient when consumption externalities and habit adjusted consumption are not perfect substitutes.
TL;DR: The authors construct a dynamic directed search model with identical workers where firms can create high or low-productivity jobs and are uncoordinated in their offers to workers, calibrated to the U.S. economy.
Abstract: How much of residual wage dispersion can be explained by an absence of coordination among firms ? To answer, we construct a dynamic directed search model with identical workers where firms can create high- or low-productivity jobs and are uncoordinated in their offers to workers, calibrated to the U.S. economy. Workers can exploit ex post opportunities once approached by firms, and can conduct on-the-job search. The stationary equilibrium wage distribution is hump-shaped, skewed significantly to the right, and, with baseline parameters, generates residual dispersion statistics 75-90% of those found empirically. However, the model underestimates the average duration of unemployment.
TL;DR: In this paper, a principal faces an agent with private information who is either honest or dishonest, and a partial ethics screening may allow for taking advantage of the potential honesty of the agent, even if honesty is unlikely.
Abstract: A principal faces an agent with private information who is either honest or dishonest. Honesty involves revealing private information truthfully if the probability that the equilibrium allocation chosen by an agent who lies is small enough. Even the slightest intolerance for lying prevents full ethics screening whereby the agent is given proper incentives if dishonest and zero rent if honest. Still, some partial ethics screening may allow for taking advantage of the potential honesty of the agent, even if honesty is unlikely. If intolerance for lying is strong, the standard approach that assumes a fully opportunistic agent is robust.
TL;DR: In this paper, the authors propose a transaction cost theory of total factor productivity (TFP), which assumes that workers' marginal disutility of effort, organizational costs and rents is a function of transaction costs.
Abstract: We propose a transactions cost theory of total factor productivity (TFP). In a world with asymmetric information and transactions costs, productivity must be induced by incentive schemes. Labor contracts trade off marginal benefits and costs of effort. The latter include, in addition to the workers' marginal disutility of effort, organizational costs and rents. As the economy grows, contracts change endogenously, inducing higher effort and productivity. Transactions costs are also affected by societal characteristics that determine the power of incentives. Differences in these characteristics may explain cross-economy productivity differences. Numerical experiments demonstrate the model's consistency with time-series and cross-country observations.