Showing papers in "Research Papers in Economics in 1998"

Corporate Ownership Around the World

Abstract: We present data on ownership structures of large corporations in 27 wealthy economies, making an effort to identify ultimate controlling shareholders of these firms. We find that except in economies with very good shareholder protection, relatively few of these firms are widely-held, in contrast to the Berle and Means image of ownership of the modern corporation. Rather, these firms are typically controlled by families or the State. Equity control by financial institutions or other widely-held corporations is less common. The controlling shareholders typically have the power over firms significantly in excess of their cash flow rights, primarily through the use of pyramids and participation in management. The results suggest that the principal agency problem in large corporations around the world is that of restricting expropriation of minority shareholders by the controlling shareholders, rather than that of restricting empire building by professional managers unaccountable to shareholders.

Computation and Analysis of Multiple Structural-Change Models

Abstract: In a recent paper, Bai and Perron (1998) considered theoretical issues related to the limiting distribution of estimators and test statistics in the linear model with multiple structural changes. In this companion paper, we consider practical issues for the empirical applications of the procedures. We first address the problem of estimation of the break dates and present an efficient algorithm to obtain global minimizers of the sum of squared residuals. This algorithm is based on the principle of dynamic programming and requires at most least-squares operations of order O(T 2) for any number of breaks. Our method can be applied to both pure and partial structural-change models. Secondly, we consider the problem of forming confidence intervals for the break dates under various hypotheses about the structure of the data and the errors across segments. Third, we address the issue of testing for structural changes under very general conditions on the data and the errors. Fourth, we address the issue of estimating the number of breaks. We present simulation results pertaining to the behavior of the estimators and tests in finite samples. Finally, a few empirical applications are presented to illustrate the usefulness of the procedures. All methods discussed are implemented in a GAUSS program available upon request for non-profit academic use.

The Search for R&D Spillovers

Abstract: R&D spillovers are, potentially, a major source of endogenous growth in various recent "New Growth Theory" models. This paper reviews the basic model of R&D spillovers and then focuses on the empirical evidence for their existence and magnitude. It reviews the older empirical literature with special attention to the econometric difficulties of actually coming up with convincing evidence on this topic. Taken individually,, many of the studies are flawed and subject to a variety of reservations, but the overall impression remains that R&D spillovers are both prevalent and important.

Bad News Travels Slowly: Size, Analyst Coverage and the Profitability of Momentum Strategies

Abstract: A number of theories have been proposed to explain the medium-term momentum in stock returns identified by Jegadeesh and Titman (1993). We test one such theory--based on the gradual-information-diffusion model of Hong and Stein (1997)--and establish three key results. First, once one moves past the very smallest stocks (where thin market-making capacity appears to be an issue) the profitability of momentum strategies declines sharply with firm size. Second, holding size fixed, momentum strategies work particularly well among stocks which have low analyst coverage. Finally, there is a strong asymmetry: the effect of analyst coverage is much more pronounced for stocks that are past losers than for stocks that are past winners. These findings are consistent with the hypothesis that firm-specific information only gradually across the investing public.

Job Creation and Destruction

Abstract: Job Creation and Destruction is the culmination of a long, ongoing research program at the Center for Economic Studies. Using the most complete plant- level data source currently available--the Longitudinal Research Data constructed by the Census Bureau--it focuses on the U.S. manufacturing sector from 1972 to 1988 and develops a statistical portrait of the microeconomic adjustments to the many economic events that affect businesses and workers. The picture that emerges is one of large, persistent, and highly concentrated gross job flows, with job destruction dominating the cyclical feaures of net job flows. The authors describe in detail those characteristics that destroy and create jobs over time (including industry of origin, wage payments, international trade exposure, factor intensity, size, age, and productivity performance), while also providing a broader measure of the process that will be directly relevant to macroeconomists and policymakers.

The Financial Accelerator in a Quantitative Business Cycle Framework

Abstract: This chapter develops a dynamic general equilibrium model that is intended to help clarify the role of credit market frictions in business fluctuations, from both a qualitative and a quantitative standpoint. The model is a synthesis of the leading approaches in the literature. In particular, the framework exhibits a "financial accelerator", in that endogenous developments in credit markets work to amplify and propagate shocks to the macroeconomy. In addition, we add several features to the model that are designed to enhance the empirical relevance. First, we incorporate money and price stickiness, which allows us to study how credit market frictions may influence the transmission of monetary policy. In addition, we allow for lags in investment which enables the model to generate both hump-shaped output dynamics and a lead-lag relation between asset prices and investment, as is consistent with the data. Finally, we allow for heterogeneity among firms to capture the fact that borrowers have differential access to capital markets. Under reasonable parametrizations of the model, the financial accelerator has a significant influence on business cycle dynamics.

Characterizing Selection Bias Using Experimental Data

Abstract: This paper develops and applies semiparametric econometric methods to estimate the form of selection bias that arises from using nonexperimental comparison groups to evaluate social programs and to test the identifying assumptions that justify three widely-used classes of estimators and our extensions of them: (a) the method of matching; (b) the classical econometric selection model which represents the bias solely as a function of the probability of participation; and (c) the method of difference-in-differences. Using data from an experiment on a prototypical social program combined with unusually rich data from a nonexperimental comparison group, we reject the assumptions justifying matching and our extensions of that method but find evidence in support of the index-sufficient selection bias model and the assumptions that justify application of a conditional semiparametric version of the method of difference-in-difference. Fa comparable people and to appropriately weight participants and nonparticipants a sources of selection bias as conveniently measured. We present a rigorous defin bias and find that in our data it is a small component of conventially meausred it is still substantial when compared with experimentally-estimated program impa matching participants to comparison group members in the same labor market, givi same questionnaire, and making sure they have comparable characteristics substan the performance of any econometric program evaluation estimator. We show how t analysis to estimate the impact of treatment on the treated using ordinary obser

Where Did all the Growth Go? External Shocks, Social Conflict and Growth Collapses

Abstract: This paper argues that domestic social conflicts are a key to understanding why growth rates lack persistence and why so many countries have experienced a growth collapse after the mid-1970s It emphasizes, in particular, the manner in which social conflicts interact with external shocks on the one hand, and the domestic institutions of conflict-management on the other Econometric evidence provides support for this hypothesis Countries that experienced the sharpest drops in growth after 1975 were those with divided societies (as measured by indicators of inequality, ethnic fragmentation etc) and with weak institutions of conflict management (proxied by indicators of the quality of governmental institutions, rule of law, democratic rights, and social safety nets)

Research, Innovation, and Productivity: An Econometric Analysis at the Firm Level

Abstract: This paper studies the links between productivity, innovation and research at th level. We introduce three new features: (i) A structural model that explains pro by innovation output, and innovation output by research investment; (ii) New dat manufacturing firms, including the number of European patents and the percentage sales, as well as firm-level demand pull and technology push indicators; (iii) E which correct for selectivity and simultaneity biases and take into account the features of the available data: only a small proportion of firms engage in resea apply for patents; productivity, innovation and research are endogenously determ investment and capital are truncated variables, patents are count data and innov We find that using the more widespread methods, and the more usual data and mode may lead to sensibly different estimates. We find in particular that simultaneit with selectivity, and that both sources of biases must be taken into account tog results are consistent with many of the stylized facts of the empirical literatu of engaging in research (R&D) for a firm increases with its size (number of empl share and diversification, and with the demand pull and technology push indicato capital intensity) of a firm engaged in research increases with the same variabl research capital being strictly proportional to size). The firm innovation outpu patent numbers or innovative sales, rises with its research effort and with the indicators, either directly or indirectly through their effects on research. Fin correlates positively with an higher innovation output, even when controlling fo the skill composition of labor as well as for physical capital intensity.

Specification Analysis of Affine Term Structure Models

Abstract: In this paper, we explore the features of affine term structure models that are empirically important for explaining the joint distribution of yields on short and long-term interest rate swaps. We begin by showing that the family of N-factor affine models can be classified into N+1 non-nested sub-families of models. For each sub-family, we derive a maximal model with the property that every admissible member of this family is equivalent to or a nested special case of our maximal model. Second, using our classification scheme and maximal models, we show that many of the three-factor models in the literature impose potentially strong over-identifying restrictions on the joint distribution of short- and long-term rates. Third, we compute simulated method-of-moments estimates for several members of one of the four branches of three-factor models, and test the over-identifying restrictions implied by these models. We conclude that many of the extant affine models in the literature fail to describe important features of the distribution of long- and short- term rates. The source of the model misspecification is shown to be overly strong restrictions on the correlations among the state variables. Relaxing these restrictions leads to a model that passes several goodness-of-fit tests over our sample period.

Labor market institutions and economic performance

Abstract: Barely a day goes by without some expert telling us how the continental European economies are about to disintegrate unless their labour markets become more flexible Basically, we are told, Europe has the wrong sort of labour market institutions for the modern global economy These outdated institutions both raise unemployment and lower growth rates The truth of propositions such as these depends on which labour market institutions really are bad for unemployment and growth, and which are not Our purpose in this paper is to set out what we know about this question Our conclusions indicate that the labour market institutions on which policy should be focused are unions and social security systems Encouraging product market competition is a key policy to eliminate the negative effects of unions For social security the key policies are benefit reform linked to active labour market policies to move people from welfare to work By comparison, time spent worrying about strict labour market regulations, employment protection and minimum wages is probably time largely wasted

On crises, contagion, and confusion

Abstract: Since the Tequila crisis of 1994-95, the Asian flu of 1997, and the Russian virus of 1998, economists have been busy producing research on the subject of contagion. Yet, few studies have examined empirically through which channels the disturbances are transmitted if there are, indeed, fundamental reasons for the spillovers we observe. We attempt to fill this gap by analyzing how both trade links and the largely ignored financial sector links influence the pattern of fundamentals-based contagion. We examine the role of international bank lending, the potential for cross-market hedging, and bilateral and third-party trade in the propagation of crises.

Beyond Becker: Training in Imperfect Labor Markets

Abstract: In this paper, we survey non-competitive theories of training. With competitive labor markets, firms never pay for investments in general training, whereas when labor markets are imperfect, firm-sponsored training arises as an equilibrium phenomenon. We discuss a variety of evidence which support the predictions of non-competitive theories, and we draw some tentative policy conclusions from these models.

Policy rules for inflation targeting

Abstract: Policy rules that are consistent with inflation targeting are examined in a small macroeconometric model of the US economy. We compare the properties and outcomes of explicit "instrument rules" as well as "targeting rules." The latter, which imply implicit instrument rules, may be closer to actual operating procedures of inflation-targeting central banks. We find that inflation forecasts are central for good policy rules under inflation targeting. Some simple instrumental and targeting rules do remarkably well relative to the optimal rule; others, including some that are often used as representing inflation targeting, do less well.

The Political Economy of Dictatorship

Abstract: Although much of the world still lives today, as always, under dictatorship, the behaviour of these regimes and of their leaders often appears irrational and mysterious. In The Political Economy of Dictatorship, Ronald Wintrobe uses rational choice theory to model dictatorships: their strategies for accumulating power, the constraints on their behavior, and why they are often more popular than is commonly accepted. The book explores both the politics and the economics of dictatorships, and the interaction between them. The questions addressed include: What determines the repressiveness of a regime? Can political authoritarianism be 'good' for the economy? After the fall, who should be held responsible for crimes against human rights? The book contains many applications, including chapters on Nazi Germany, Soviet Communism, South Africa under apartheid, the ancient Roman Empire and Pinochet's Chile. It also provides a guide to the policies which should be followed by the democracies towards dictatorships.

On Theories Explaining the Success of the Gravity Equation

Abstract: Examining the accuracy of the monopolistic competition theory's predictions for import volumes, we assess whether this theory accounts for the empirical success of the gravity equation Since certain factor-endowment based theories have the same prediction for import volumes, we employ resampling techniques to address this model identification problem We use extraneous information on the allocation of factor endowments in a given sample to identify which model is driving trade flows We find that the accuracy of the monopolistic competition theory's prediction improves in samples where the factor endowment allocations generate a higher share of differentiated goods trade By an analogous criterion, the Heckscher-Ohlin models make a much less accurate prediction We conclude that the monopolistic competition theory is more likely to account for the gravity equation's success, especially in explaining trade among industrial nations

Common Factors in Prices, Order Flows and Liquidity

Abstract: How important are cross-stock common factors in the price discovery/liquidity provision process in equity markets? We investigate two aspects of this question for the thirty Dow stocks. First, using principal components and canonical correlation analyses we find that both returns and order flows are characterized by common factors. Commonality in the order flows explains roughly half of the commonality in returns. Second, we examine variation and common covariation in various liquidity proxies and market depth (trade impact) coefficients. Liquidity proxies such as the bid-ask spread and bid-ask quote sizes exhibit time variation which helps explain time variation in trade impacts. The common factors in these liquidity proxies are relatively small, however.

Technology, Transfer and Spillovers: Does Local Participation With Multinationals Matter?

Abstract: This paper examines the effects on technology transfer and spillovers deriving from ownership sharing of foreign multinational affiliates More specifically, we try to answer two questions, using unpublished Indonesian micro data Firstly, do establishments with minority and majority ownership differ in terms of productivity levels? Secondly, does the degree of spillover differ with the degree of ownership in the FDI? Our results show that foreign establishments have comparable high levels of labor productivity and that domestic establishments benefit from spillovers However, the degree of foreign ownership does neither affect the level of labor productivity in foreign establishments, nor the degree of spillovers

A rational expectations model of financial contagion

Abstract: We develop a multiple asset rational expectations model of asset prices to study the determinants of financial market contagion, and to provide an explanation for the pattern of contagion during the Asian financial crisis. Our findings show that the pattern and severity of financial contagion depends on the size of markets' sensitivities to common macroeconomic risk factors. The amount of information asymmetry within a financial market also increases its susceptibility to contagion. We focus on contagion through the cross-market hedging of macroeconomic risks. Through this channel, idiosyncratic shocks in one market are transmitted to others. Interestingly, contagion can occur between markets that have no macroeconomic risks in common. In addition, contagion occurs in the absence of any news, and before the macroeconomic risk factors are realized. Because contagion occurs through hedging, the pattern of contagion is strongly influenced by the presence or absence of derivatives markets for unbundling and hedging the macroeconomic risks. Errors in market participants' beliefs about dynamic hedging activity influence the pattern of contagion and, in some cases, strongly magnify the size of the contagious price responses.

The New Empirics of Economic Growth

Abstract: We provide an overview of recent empirical research on patterns of cross-country growth. The new empirical regularities considered differ from earlier ones, e.g., the well-known Kaldor stylized facts. The new research no longer makes production function accounting a central part of the analysis. Instead, attention shifts more directly to questions like, Why do some countries grow faster than others? It is this changed focus that, in our view, has motivated going beyond the neoclassical growth model.

Democracy and Decentralisation in South Asia and West Africa

Abstract: This book is an in-depth empirical study of four Asian and African attempts to create democratic, decentralised local governments in the late 1980s and 1990s. The case studies of Ghana, Cote d'Ivoire, Karnataka (India) and Bangladesh focus upon the enhancement of participation; accountability between people, politicians and bureaucrats; and, most importantly, on whether governmental performance actually improved in comparison with previous forms of administration. The book is systematically comparative, and based upon extensive popular surveys and local field work. It makes an important contribution to current debates in the development literature on whether 'good governance' and decentralisation can provide more responsive and effective services for the mass of the population - the poor and disadvantaged who live in the rural areas.

The rise of the western world

Abstract: The rise of the western world was the ascendency of a relatively backward part of the world to world hegemony between the tenth and the eighteenth centuries. Its realization involved fundamental economic, political and military changes. The focus of this short essay must of necessity concentrate on the economic issues although the political developments cannot, and should not, be overlooked.1

Statistical Inference for Stochastic Dominance and for the Measurement of Poverty and Inequality

Abstract: We derive the asymptotic sampling distribution of various estimators frequently used to order distributions in terms of poverty, welfare and inequality. This includes estimators of most of the poverty indices currently in use, as well as estimators of the curves used to infer stochastic dominance of any order. These curves can be used to determine whether poverty, inequality or social welfare is greater in one distribution than in another for general classes of indices. We also derive the sampling distribution of the maximal poverty lines (or income censoring thresholds) up to which we may confidently assert that poverty or social welfare is greater in one distribution than in another. The sampling distribution of convenient estimators for dual approaches to the measurement of poverty is also established. The statistical results are established for deterministic or stochastic poverty lines as well as for paired or independent samples of incomes. Our results are briefly illustrated using data for 6 countries drawn from the Luxembourg Income Study data bases.

Openness, Country Size and Government

Abstract: This paper shows that smaller countries have a larger share of public consumption in GDP, and are also more open to trade. These empirical observations are consistent with recent theoretical models explaining country formation and break up, and may account for the observed positive empirical relationship between trade openness and government size.

Offshore Hedge Funds: Survival and Performance 1989-1995

Abstract: We examine the performance of the off-shore hedge fund industry over the period 1989 through 1995 using a database that includes both defunct and currently operating funds. The industry is characterized by high attrition rates of funds, low covariance with the U.S. stock market, evidence consistent with positive risk-adjusted returns over the time, and little evidence of differential manager skill.

Social justice in the age of identity politics: redistribution, recognition, participation

Abstract: In der aktuellen Debatte erscheinen Forderungen nach sozialer Gerechtigkeit in zwei Typen aufgespalten: Forderungen nach Umverteilung von Ressourcen und Forderungen nach Anerkennung kultureller Verschiedenheit. Diese beiden Typen von Forderungen werden zunehmend gegeneinander polarisiert. Entsprechend sollen wir wahlen zwischen Klassenpolitik und Identitatspolitik, sozialer Demokratie und Multikulturalismus, Umverteilung und Anerkennung. Es handelt sich dabei jedoch um falsche Gegensatze. Gerechtigkeit erfordert heute beides: Umverteilung und Anerkennung. Eines allein ist unzureichend. Wenn man diese These akzeptiert, wird die Frage zentral, wie beide Forderungen zu vereinbaren sind. Ich vertrete den Standpunkt, das die emanzipatorischen Aspekte der beiden Paradigmata in einem umfassenden Rahmen integriert werden mussen. In diesem Beitrag werden zwei Dimensionen dieses Vorhabens behandelt. Als erstes schlage ich auf der Ebene der Moralphilosophie eine ubergreifende Konzeption von Gerechtigkeit vor, die sowohl vertretbare Forderungen nach sozialer Gleichheit umfast als auch vertretbare Forderungen nach Anerkennung von Differenz. Als zweites schlage ich auf der Ebene von Gesellschaftstheorie einen Ansatz vor, der den komplexen Beziehungen zwischen Interesse und Identitat, Okonomie und Kultur sowie Klasse und Status in der heutigen globalisierten, kapitalistischen Gesellschaft Rechnung tragt.

Financial market contagion in the Asian crisis

Abstract: This paper tests for evidence of contagion between the financial markets of Thailand, Malaysia, Indonesia, Korea, and the Philippines. Cross-country correlations among currencies and sovereign spreads are found to increase significantly during the crisis period, whereas the equity market correlations offer mixed evidence. A set of dummy variables using daily news is constructed to capture the impact of own-country and cross-border news on the markets. After controlling for own-country news and other fundamentals, the paper shows evidence of cross-border contagion in the currency and equity markets.

Does Microfinance Really Help the Poor? New Evidence from Flagship Programs in Bangladesh

Abstract: The microfinance movement has built on innovations in financial intermediation that reduce the costs and risks of lending to poor households. Replications of the movement's flagship, the Grameen Bank of Bangladesh, have now spread around the world. While programs aim to bring social and economic benefits to clients, few attempts have been made to quantify benefits rigorously. This paper draws on a new cross-sectional survey of nearly 1800 households, some of which are served by the Grameen Bank and two similar programs, and some of which have no access to programs. Households that are eligible to borrow and have access to the programs do not have notably higher consumption levels than control households, and, for the most part, their children are no more likely to be in school. Men also tend to work harder, and women less. More favorably, relative to controls, households eligible for programs have substantially (and significantly) lower variation in consumption and labor supply across seasons. The most important potential impacts are thus associated with the reduction of vulnerability, not of poverty per se. The consumption-smoothing appears to be driven largely by income-smoothing, not by borrowing and lending. The evaluation holds lessons for studies of other programs in low-income countries. While it is common to use fixed effects estimators to control for unobservable variables correlated with the placement of programs, using fixed effects estimators can exacerbate biases when, as here, programs target their programs to specific populations within larger communities.

Sticky price models of the business cycle: can the contract multiplier solve the persistence problem?

Abstract: We construct a quantitative equilibrium model with price setting and use it to ask whether with staggered price setting monetary shocks can generate business cycle fluctuations. These fluctuations include persistent output fluctuations along with the other defining features of business cycles, like volatile investment and smooth consumption. We assume that prices are exogenously sticky for a short period of time. Persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices very much when they can do so. We find that for a wide range of parameter values the amount of endogenous stickiness is small. As a result, we find that in a standard quantitative business cycle model staggered price setting, by itself, does not generate business cycle fluctuations.