Showing papers in "Journal of Political Economy in 1998"
[...]
TL;DR: In this article, the authors examined legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries and found that common-law countries generally have the strongest, and French civil law countries the weakest, legal protections of investors, with German- and Scandinavian-civil law countries located in the middle.
Abstract: This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common-law countries generally have the strongest, and Frenchcivil-law countries the weakest, legal protections of investors, with German- and Scandinavian-civil-law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.
13,984 citations
TL;DR: There exists a positive correlation between an economy's exposure to international trade and the size of its government as mentioned in this paper, and the correlation holds for most measures of government spending, in low and high income samples, and is robust to the inclusion of a wide range of controls.
Abstract: There exists a positive correlation between an economy's exposure to international trade and the size of its government. The correlation holds for most measures of government spending, in low‐as well as high‐income samples, and is robust to the inclusion of a wide range of controls. One explanation is that government spending plays a risk‐reducing role in economies exposed to a significant amount of external risk. The Paper provides a range of evidence consistent with this hypothesis. In particular, the relationship between openness and government size is strongest when terms‐of‐trade risk is highest.
2,369 citations
TL;DR: In this paper, a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity is used to analyze how movements in the distribution of income and wealth affect the macroeconomy.
Abstract: How do movements in the distribution of income and wealth affect the macroeconomy? We analyze this question using a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity. Our main finding is that, in the stationary stochastic equilibrium, the behavior of the macroeconomic aggregates can be almost perfectly described using only the mean of the wealth distribution. This result is robust to substantial changes in both parameter values and model specification. Our benchmark model, whose only difference from the representative‐agent framework is the existence of uninsurable idiosyncratic risk, displays far less cross‐sectional dispersion and skewness in wealth than U.S. data. However, an extension that relies on a small amount of heterogeneity in thrift does succeed in replicating the key features of the wealth data. Furthermore, this extension features aggregate time series that depart significantly from permanent income behavior.
2,205 citations
TL;DR: In this article, the impact of participation, by gender, in the Grameen Bank and two other group-based micro credit programs in Bangladesh on labor supply, schooling, household expenditure, and assets is estimated.
Abstract: This paper estimates the impact of participation, by gender, in the Grameen Bank and two other group-based micro credit programs in Bangladesh on labor supply, schooling, household expenditure, and assets. The empirical method uses a quasi-experimental survey design to correct for the bias from unobserved individual and village-level heterogeneity. We find that program credit has a larger effect on the behavior of poor households in Bangladesh when women are the program participants. For example, annual household consumption expenditure increases 18 taka for every 100 additional taka borrowed by women from these credit programs, compared with 11 taka for men.
1,745 citations
TL;DR: In this paper, the authors address the question: Do claims on private assets provide sufficient liquidity for an efficient functioning of the productive sector? Or does the state have a role in creating liquidity and regulating it either through adjustments in the stock of government securities or by other means?
Abstract: This paper addresses a basic, yet unresolved, question: Do claims on private assets provide sufficient liquidity for an efficient functioning of the productive sector? Or does the state have a role in creating liquidity and regulating it either through adjustments in the stock of government securities or by other means? In our model, firms can meet future liquidity needs in three ways: by issuing new claims, by obtaining a credit line from a financial intermediary, and by holding claims on other firms. When there is no aggregateuncertainty, we show that these instruments are sufficient for implementing the socially optimal (second‐best) contract between investors and firms. However, the implementation may require an intermediary to coordinate the use of scarce liquidity, in which case contracts with the intermediary impose both a maximum leverage ratio and a liquidity constraint on firms. When there is only aggregate uncertainty, the private sector cannot satisfy its own liquidity needs. The government ca...
1,254 citations
TL;DR: In this paper, the authors investigated whether the much-heralded fall in the cost of abating SO2, compared to original estimates, can be attributed to allowance trading and demonstrated that, for plants that use low-sulfur coal to reduce SO2 emissions, technical change and the fall in prices of low sulfur coal have lowered marginal abatement cost curves by over 50 percent since 1985.
Abstract: Title IV of the 1990 Clean Air Act Amendments (CAAA) established a market for transferable sulfur dioxide (SO2) emission allowances among electric utilities. This market offers firms facing high marginal abatement costs the opportunity to purchase the right to emit SO2 from firms with lower costs, and this is expected to yield cost savings compared to a command‐and‐control approach to environmental regulation. This paper uses econometrically estimated marginal abatement cost functions for power plants affected by Title IV of the CAAA to evaluate the performance of the SO2 allowance market. Specifically, we investigate whether the much‐heralded fall in the cost of abating SO2, compared to original estimates, can be attributed to allowance trading. We demonstrate that, for plants that use low‐sulfur coal to reduce SO2 emissions, technical change and the fall in prices of low‐sulfur coal have lowered marginal abatement cost curves by over 50 percent since 1985. The flexibility to take advantage of these chan...
1,112 citations
TL;DR: This article examined the statistical model used to establish the empirical regularity and the intuitive behavioral interpretation often used to rationalize it, and showed that the implicit economic model assumes myopia and that the intuitive interpretive model is identified only by imposing arbitrary distributional assumptions onto the data.
Abstract: This paper examines an empirical regularity found in many societies: that family influences on the probability of transiting from one grade level to the next diminish at higher levels of education. We examine the statistical model used to establish the empirical regularity and the intuitive behavioral interpretation often used to rationalize it. We show that the implicit economic model assumes myopia. The intuitive interpretive model is identified only by imposing arbitrary distributional assumptions onto the data. We produce an alternative choice‐theoretic model with fewer parameters that rationalizes the same data and is not based on arbitrary distributional assumptions.
1,079 citations
TL;DR: The authors modifies models of endogenous innovation to allow for the possibility that a rise in the profitability of innovative activity could lead to an increased variety of differentiated solutions to similar problems, which is at odds with the postwar experience of the OECD, where the growth of the market has indeed led to increased R&D effort that, however, has been translated into stagnat or declining growth rates.
Abstract: An increase in the size (scale) of an economy increases the total quantity of rents that can be captured by successful innovators, which, in equilibrium, should lead to a rise in innovative activity. Conventional wisdom and the theoretical predictions of models of endogenous innovation suggest that this increased research effort should lead to more rapid growth. As noted by Charles Jones, this prediction is at odds with the postwar experience of the OECD, where the growth of the market has indeed led to an increased R & D effort that, however, has been translated into stagnat or declining growth rates. Drawing on the remarkable insights of the museum curator Seabury C. Gilfillan, this paper modifies models of endogenous innovation to allow for the possibility that a rise in the profitability of innovative activity could lead to an increased variety of differentiated solutions to similar problems. An increased variety of technologies (e.g., an increase in the number and types of contraceptives) will increa...
561 citations
TL;DR: This article found that, on average, there is a large, abrupt increase in manufacturing activity when one crosses a state border from an antibusiness state into a pro-business state.
Abstract: This paper provides new evidence that state policies play a role in the location of industry. The paper classifies a state as probusiness if it has a right-to-work law and antibusiness if it does not. The paper finds that, on average, there is a large, abrupt increase in manufacturing activity when one crosses a state border from an antibusiness state into a probusiness state.
557 citations
TL;DR: The authors show that, at constant per capita total expenditure, the per capita demand for food decreases with household size and that it does so most in the poorest countries, where substitution should be the least.
Abstract: Household scale economies are plausibly attributed to shared household public goods that make larger households better off at the same level of per capita resources. Larger households should therefore have higher per capita consumption of private goods, such as food, provided that they do not substitute too much toward the effectively cheaper public goods. The evidence shows exactly the opposite. Data from rich and poor countries indicate that, at constant per capita total expenditure, the per capita demand for food decreases with household size and that it does so most in the poorest countries, where substitution should be the least.
521 citations
TL;DR: In this article, the authors develop a small country model in which factors are sector-specific in the short run but mobile in the long run, and show that in this setting a government may be worse off in the political equilibrium than under commitment to free trade, and hence it may value a trade agreement.
Abstract: An argument often heard in favor of trade agreements is that, by committing to free trade, a government can credibly distance itself from domestic lobbies, But several existing models of endogenous protection suggest that governments have no interest in foreclosing interest group pressures since governments derive rents from the political process. We develop a small‐country model in which factors are sector‐specific in the short run but mobile in the long run. We show that in this setting a government may be worse off in the political equilibrium than under commitment to free trade, and hence it may value a trade agreement.
TL;DR: In this article, price-taking firms may offer advance-purchase discounts when both individual and aggregate consumer demand is uncertain and firms set prices before demand is known, and consumers with relatively more certain demands and with relatively lower valuations have an incentive to buy in advance the presence of other consumers with higher valuations.
Abstract: When both individual and aggregate consumer demand is uncertain and firms set prices before demand is known, price‐taking firms may offer advance‐purchase discounts. Consumers with relatively more certain demands and with relatively lower valuations have an incentive to buy in advance the presence of other consumers with higher valuations and more uncertain aggregate demand increases the price they expect to pay in the spot market. Advance‐purchase sales are made to low‐valuation customers, as predicted by traditional models of second‐degree price discrimination, without assuming that firms have market power.
TL;DR: This paper used a cointegration approach to preference parameter estimation with generalized method of moments to take these effects into account, and showed that their estimates for the intertemporal elasticity of substitution are positive and significantly different from zero, even when time aggregation is taken into account.
Abstract: In estimating, the intertemporal elasticity of substitution, Hall finds that, when one takes account of time aggregation, point estimates are small and not significantly different from zero. He concludes that the clasticity is unlikely to be much above 0.1 and may well be zero. Applying improved inference methods to an economic model similar to Hall's, Hansen and Singleton show that there is considerably less precision in the estimation. We argue that the model used by these authors is misspecified because the intratemporal substitution between nondurable consumption goods and durable consumption goods is ignored. We use a two‐step procedure that combines a cointegration approach to preference parameter estimation with generalized method of moments to take these effects into account. Our estimates for the intertemporal elasticity of substitution are positive and significantly different from zero, even when time aggregation is taken into account.
TL;DR: The authors show that the data are at least as consistent with risk aversion as they are with risk loving when one explicitly considers the skewness of bet returns, and they conclude that bettors are risk lovers.
Abstract: Studies of horse race betting have empirically established a long shot anomaly; that is, low‐probabiliy, high‐variance bets (long shots) provide low mean returns and high‐probability, lowvariance bets provide relatively high mean returns. Because bettors willingly accept low‐return, high‐variance bets, researchers conclude that bettors are risk lovers. In this study, we show that the data are at least as consistent with risk aversion as they are with risk loving when one explicitly considers the skewness of bet returns. Because the variance and skewness of bet returns are highly correlated, bettors may appear to prefer variance when it is skewness that they crave.
TL;DR: In this paper, a model of demand for quality-related attributes of child care: group size, staff/child ratio, and provider training is estimated jointly with equations for mode, expenditure on and hours of care, and the mother's labor supply.
Abstract: We estimate a model of demand for quality‐related attributes of child care: group size, staff/child ratio, and provider training. The model is estimated jointly with equations for mode, expenditure on and hours of care, and the mother's labor supply. The results show that a lower price of child care in a particular mode leads to substitution toward that mode and an increase in the use of paid child care. A decrease in the price of care causes an increase in hours of care demanded and a decrease in the demand for qualityrelated attributes. Income effects on demand for quality are small.
TL;DR: In this article, the authors provide a theoretical basis for fund-raisers and seeds to charity, and show that sometimes only a small amount of seed money can grow into a substantial charity.
Abstract: Private providers of public goods, such as charities, invariably enlist fund-raisers to organize and collect contributions. Common in charitable fund-raising is seed money, either from a government grant or from a group of ‘‘leadership givers,’’ that launches the fund drive and generates additional gifts. This paper provides a theoretical basis for fund-raisers and seeds to charity. The primary assumption is that there is a range of increasing returns at low levels of provision of the public good. It is shown that fund-raisers have a natural and important role, and that sometimes only a small amount of seed money can grow into a substantial charity.
TL;DR: The authors found that changes in relative punishments can account for 60 percent of the difference in the proportion of juvenile violent crime between adults and children in the last two decades, and that juvenile offenders are at least as responsive to criminal sanctions as adults.
Abstract: Over the last two decades juvenile violent crime has grown almost twice as quickly as that of adults. This paper finds that changes in relative punishments can account for 60 percent of that differential. Juvenile offenders are at least as responsive to criminal sanctions as adults. Sharp drops in crime at the age of majority suggest that deterrence (and not merely incapacitation) plays an important role. There does not, however, appear to be a strong relationship between the punitiveness of the juvenile justice system that a cohort faces and the extent of criminal involvement for that cohort later in life. Language: en
TL;DR: In this paper, the authors show that post-takeover moral hazard by the acquirer and free-riding by the target shareholders lead the former to acquire as few sharcs as necessary to gain control.
Abstract: Posttakeover moral hazard by the acquirer and free‐riding by the target shareholders lead the former to acquire as few sharcs as necessary to gain control. As moral hazard is most severe under such low ownership concentration, inefficiencies arise in successful takeovers. Moreover, share supply is shown to be upward‐sloping. Rules promoting ownership concentration limit both agency costs and the occurrence of takeovers. Furthermore, higher takeover premia induced by competition translate into higher ownership concen‐tration and are thus beneficial. Finally, one share‐one vote and simple majority are generally not optimal, and socially optimal rules need not emerge through private contracting.
TL;DR: The authors developed generalized method-of-moments tests for the rationality of earnings per share forecasts made by individual stock analysts, and found that the hypothesis of rationality was not satisfied as long as they take into account two complications: (1) the correlation in a given period of analysts' forecast errors in predicting earnings for firms in the same industry and (2) discretionary asset write-downs, which affect earnings but are intentionally ignored by analysts when they make earnings forecasts.
Abstract: This paper develops generalized method‐of‐moments tests for the rationality of earnings per share forecasts made by individual stock analysts. We fail to reject the hypothesis of rationality as long as we take into account two complications: (1) the correlation in a given period of analysts' forecast errors in predicting earnings for firms in the same industry and (2) discretionary asset write‐downs, which affect earnings but are intentionally ignored by analysts when they make earnings forecasts. Our results challenge earlier work by De Bondt and Thaler and by Abarbanell and Bernard that found irrationality in analysts' forecasts.
TL;DR: The authors describes the stylized facts of much recent regional integration and develops an alternative model, suggesting that regional integration, far from threatening multilateral liberalism, may in fact be a direct consequence of the success of past multilateralism and an added guarantee for its survival.
Abstract: Recent regional initiatives have been addressed from a Vinerian perspective of trade creation and trade diversion. This is true of both policy‐oriented economists, who tend to be critical of the initiatives, and theorists, who have added dynamic and gametheoretic elements to the Vinerian structure. This paper describes the stylized facts of much recent regional integration and develops an alternative model. The analysis suggests that regional integration, far from threatening multilateral liberalism, may in fact be a direct consequence of the success of past multilateralism and an added guarantee for its survival.
TL;DR: The authors investigate the possibility that limited participation in asset markets, and the stock market in particular, might explain the lack of correspondence between the sample moments of the intertemporal marginal rate of substitution and asset returns in U.K. data.
Abstract: We investigate the possibility that limited participation in asset markets, and the stock market in particular, might explain the lack of correspondence between the sample moments of the intertemporal marginal rate of substitution and asset returns in U.K. data. We estimate ownership probabilities to separate “likely” shareholders from nonshareholders, enabling us to control for changing composition effects as well as selection into the group. We then construct estimates of the IMRS for each of these different groups and consider their time‐series properties. We find that the consumption growth of shareholders is more volatile than that of nonshareholders and more highly correlated with excess returns to shares. In particular, one cannot reject the predictions of the consumption capital asset pricing model for the group of households predicted to own both assets. This is in contrast to the failure of the model when estimated on data for all households.
TL;DR: This article examined the extent to which households offset pension wealth with reductions in other wealth, and found that the effect of pensions on wealth vary significantly across households, and that the estimates that do not correct for the biases generate little offset between pensions and other wealth.
Abstract: This paper examines the extent to which households offset pension wealth with reductions in other wealth. Systematic econometric biases imply that the estimated offsets in previous empirical studies are smaller than the true offset and may even have the wrong sign. New empirical estimates that do not correct for the biases generate little offset between pensions and other wealth. Estimates that correct for the biases show substantially more offset (a smaller impact of pensions on overall saving) than in most previous studies. The estimates also indicate that the effects of pensions on wealth vary significantly across households.
TL;DR: In contrast to the Nash equilibrium, the comparative statics of the logit equilibrium are intuitive: rent dissipation increases with the number of players and the bid cost, which is observed in laboratory experiments as discussed by the authors.
Abstract: The winner‐take‐all nature of all‐pay auctions makes the outcome sensitive to decision errors, which we introduce with a logit formulation. The equilibrium bid distribution is a fixed point: the belief distributions that determine expected payoffs equal the choice distributions determined by expected payoffs. We prove existence, uniqueness, and symmetry properties. In contrast to the Nash equilibrium, the comparative statics of the logit equilibrium are intuitive: rent dissipation increases with the number of players and the bid cost. Overdissipation of rents is impossible under full rationality but is observed in laboratory experiments. Our model predicts this property.
TL;DR: The authors developed a general equilibrium model with putty-clay technology, investment irreversibility, and variable capacity utilization, showing that low short-run capital-labor substitutability induces the puttyclay effect of a tight link between changes in capacity and movements in employment and output.
Abstract: This paper develops a general equilibrium model with putty‐clay technology, investment irreversibility, and variable capacity utilization. Low short‐run capital‐labor substitutability induces the putty‐clay effect of a tight link between changes in capacity and movements in employment and output. Permanent shocks to technology or factor prices generate a hump‐shaped response of hours, persistence in output growth, and positive comovement in the forecastable components of output and hours. Capacity constraints result in asymmetric responses to large shocks with recessions deeper than expansions. Estimation of a two‐sector model supports a significant role for putty‐clay capital in explaining business cycle and medium‐run dynamics.
TL;DR: In this paper, an incentive contracting approach is used to characterize optimal contracts when insured individuals possess private information about their losses and are able to misrepresent permanently their loss magnitudes by engaging in the falsification of claims.
Abstract: An incentive contracting approach is used to characterize optimal contracts when insured individuals possess private information about their losses and are able to misrepresent permanently their loss magnitudes by engaging in the falsification of claims. We demonstrate that efficient agreements necessarily induce some falsification but that the extent of such claims inflation is mitigated partially by an indemnification schedule that overcompensates small losses while overpaying larger ones. The differential costs of generating insurance claims through falsification provide an avenue by which the heterogencous insureds can credibly signal their underlying losses and are exploited in an optimal contract to implement loss‐contingent insurance payments.
TL;DR: In this article, the authors analyzed the savings and longevity impacts of mortality-contingent claims, defined here as income measures, such as annuities and life insurance, under which earned income is contingent on the length of one's life.
Abstract: This paper analyzes the savings and longevity impacts of mortality‐contingent claims, defined here as income measures, such as annuities and life insurance, under which earned income is contingent on the length of one's life. The postwar increase in mandatory annuity and life insurance programs, as well as the rapid increase in the life expectancy of older ages, motivates a better understanding of the incentive effects that mortality‐contingent claims have on longevity‐related behavior. We claim that these incentives in often alter the standard conclusions obtained about old‐age support when mortality is treated exogenously. In particular, we argue that annuities involve moral hazard effects that increase longevity and, among other things, introduce a positive interaction between public programs for health care and income support for the elderly‐programs that have grown enormously in developed countries
TL;DR: The notion of property tax capitalization was first formally developed and tested by Oates (1969) as discussed by the authors, which is said to occur when, after one controls for all other housing characteristics (structure, neighborhood, and public services), differences in housing prices exactly equal the present value of variations in expected tax liabilities.
Abstract: The notion of property tax capitalization was first formally developed and tested by Oates (1969). Full capitalization is said to occur when, after one controls for all other housing characteristics (structure, neighborhood, and public services), differences in housing prices exactly equal the present value of variations in expected tax liabilities. The large volume of empirical literature that followed Oates’s study largely documents that property values are negatively affected by future property tax liabilities but fails to reach a consensus regarding the ‘‘extent’’ of such capitalization. For example, Wales and Wiens (1974), Chinloy (1978), and
TL;DR: In the long run, institutions may evolve to alleviate the problem by balancing appropriation as discussed by the authors, and technology choice will also be affected, with the appropriated factor partially "excluding" the other from production to reduce appropriation.
Abstract: Specific quasi rents arise in a variety of economic relationships and are exposed to opportunism unless fully protected by contract. Rent appropriation has important macroeconomic consequences. Resources are underutilized, factor markets are segmented, production suffers from technological “sclerosis,” job creation and destruction are unbalanced, recessions are excessively sharp, and expansions run into bottlenecks. While, depending on the shock, expansions may require reinforcement or stabilization, recessions should typically be softened. In the long run, institutions may evolve to alleviate the problem by balancing appropriation. Technology choice will also be affected, with the appropriated factor partially “excluding” the other from production to reduce appropriation.
TL;DR: In this article, empirical observations on the comovements of currency velocity, inflation, and the relative size of the credit services sector are motivated by empirical observations of the relationship between currency velocity and inflation.
Abstract: This paper is motivated by empirical observations on the comovements of currency velocity, inflation, and the relative size of the credit services sector. We document these comovements and incorporate into a monetary growth model a credit services sector that provides services that help people economize on money. Our model makes two new contributions. First, we show that direct evidence on the appropriately defined credit service sector for the United States is consistent with the welfare cost measured using an estimated money demand schedule. Second, we provide estimates of the welfare cost of inflation that have some new features.
TL;DR: In this article, $500 and $1,000 bets were made, then canceled, at horse racing tracks and the net effects of these costless temporary bets give clues about how market participants react to information large bets might contain.
Abstract: To test whether naturally occurring markets can be strategically manipulated, $500 and $1,000 bets were made, then canceled, at horse racing tracks. The net effects of these costless temporary bets give clues about how market participants react to information large bets might contain. The bets moved odds on horses visibly (compared to matched‐pair control horses with similar prebet odds) and had a slight tendency to draw money toward the horse that was temporarily bet, but the net effect was close to zero and statistically insignificant. The results suggest that some bettors inferred information from bets and others did not, and their reactions roughly canceled out.