Showing papers in "Research Papers in Economics in 2003"

Altruistic Punishment in Humans

Abstract: Human cooperation is an evolutionary puzzle. Unlike other creatures, people frequently cooperate with genetically unrelated strangers, often in large groups, with people they will never meet again, and when reputation gains are small or absent. These patterns of cooperation cannot be explained by the nepotistic motives associated with the evolutionary theory of kin selection and the sel®sh motives associated with signalling theory or the theory of reciprocal altruism. Here we show experimentally that the altruistic punishment of defectors is a key motive for the explanation of cooperation. Altruistic punishment means that individuals punish, although the punishment is costly for them and yields no material gain. We show that cooperation ¯ourishes if altruistic punishment is possible, and breaks down if it is ruled out. The evidence indicates that negative emotions towards defectors are the proximate mechanism behind altruistic punishment. These results suggest that future study of the evolution of human cooperation should include a strong focus on explaining altruistic punishment.

Buzz: Face-to-Face Contact and the Urban Economy

Abstract: This paper argues that existing models of urban concentrations are incomplete unless grounded in the most fundamental aspect of proximity; face-to-face contact. Face-to-face contact has four main features; it is an efficient communication technology; it can help solve incentive problems; it can facilitate socialization and learning; and it provides psychological motivation. We discuss each of these features in turn, and develop formal economic models of two of them. Face-to-face is particularly important in environments where information is imperfect, rapidly changing, and not easily codified, key features of many creative activities.

Evolution of Networks: From Biological Nets to the Internet and WWW

Abstract: Only recently did mankind realise that it resides in a world of networks. The Internet and World Wide Web are changing our life. Our physical existence is based on various biological networks. We have recently learned that the term "network" turns out to be a central notion in our time, and the consequent explosion of interest in networks is a social and cultural phenomenon. The principles of the complex organization and evolution of networks, natural and artificial, are the topic of this book, which is written by physicists and is addressed to all involved researchers and students. The aim of the text is to understand networks and the basic principles of their structural organization and evolution. The ideas are presented in a clear and a pedagogical way, with minimal mathematics, so even students without a deep knowledge of mathematics and statistical physics will be able to rely on this as a reference. Special attention is given to real networks, both natural and artifical. Collected empirical data and numerous real applications of existing theories are discussed in detail, as well as the topical problems of communication networks. Available in OSO: http://www.oxfordscholarship.com/oso/public/content/physics/9780198515906/toc.html

Location and the multinational enterprise: a neglected factor?

Abstract: In this seminal book, a distinguished group of experts pinpoint and rigorously analyse central topics in international business research. This volume will become a major reference tool for understanding the economics of multinational enterprise. The emphasis throughout is on a new dynamic research agenda, for theory, for empirical research and for public policy.

Technology Transfer by Multinational Firms: The Resource Cost of Transferring Technological Know-How

Abstract: The following sections are included:IntroductionTechnology Transfer and the Production of KnowledgeThe SampleDefinition of Technology Transfer CostsTransfer Costs: Data and HypothesesThe Level of Transfer CostsTechnology/Transferor CharacteristicsTransferee and Host Country CharacteristicsDeterminants of the Cost of International Technology Transfer: Tests and ResultsThe ModelStatistical Tests: Phase IStatistical Tests: Phase IIDefferences between International and Domestic Technology TransferConclusionReferences

Government matters III: governance indicators for 1996-2002

Abstract: The authors present estimates of six dimensions of governance covering 199 countries and territories for four time periods: 1996, 1998, 2000, and 2002. These indicators are based on several hundred individual variables measuring perceptions of governance, drawn from 25 separate data sources constructed by 18 different organizations. The authors assign these individual measures of governance to categories capturing key dimensions of governance and use an unobserved components model to construct six aggregate governance indicators in each of the four periods. They present the point estimates of the dimensions of governance as well as the margins of errors for each country for the four periods. The governance indicators reported here are an update and expansion of previous research work on indicators initiated in 1998 (Kaufmann, Kraay, and Zoido-Lobat 1999a,b and 2002). The authors also address various methodological issues, including the interpretation and use of the data given the estimated margins of errors.

A survey of behavioral finance

Abstract: Behavioral finance argues that some financial phenomena can plausibly be understood using models in which some agents are not fully rational. The field has two building blocks: limits to arbitrage, which argues that it can be difficult for rational traders to undo the dislocations caused by less rational traders; and psychology, which catalogues the kinds of deviations from full rationality we might expect to see. We discuss these two topics, and then present a number of behavioral finance applications: to the aggregate stock market, to the cross-section of average returns, to individual trading behavior, and to corporate finance. We close by assessing progress in the field and speculating about its future course.

Institutional Change in Toque Ville: Nouvelle Cuisine as an Identity Movement in French Gastronomy

Abstract: A challenge facing cultural-frame institutionalism is to explain how existing institutional logics and role identities are replaced by new logics and role identities. This article depicts identity movements that strive to expand individual autonomy as motors of institutional change. It proposes that the sociopolitical legitimacy of activists, extent of theorization of new roles, prior defections by peers to the new logic, and gains to prior defectors act as identity-discrepant cues that induce actors to abandon traditional logics and role identities for new logics and role identities. A study of how the nouvelle cuisine movement in France led elite chefs to abandon classical cuisine during the period starting from 1970 and ending in 1997 provides wide-ranging support for these arguments. Implications for research on institutional change, social movements, and social identity are outlined

Microfinance and poverty - evidence using panel data from Bangladesh

Abstract: Micro-finance supports mainly informal activities that often have low market demand. It may be thus hypothesized that the aggregate poverty impact of micro-finance in an economy with low economic growth is modest or nonexistent. The observed borrower-level poverty impact is then a result of income redistribution or short-run income generation. The author addresses these questions using household level panel data from Bangladesh. The findings confirm that micro-finance benefits the poorest and has sustained impact in reducing poverty among program participants. It also has positive spillover impact, reducing poverty at the village level. But the effect is more pronounced in reducing extreme rather than moderate poverty.

Social indicators: the EU and social inclusion

Abstract: Social indicators are an important tool for evaluating a country's level of social development and for assessing the impact of policy. Such indicators are already in use in investigating poverty and social exclusion in several European countries and have begun to play a significant role in advancing the social dimension of the EU as a whole. The purpose of this book is to make a scientific contribution to the development of social indicators for the purposes of European policy‐making. It considers the principles underlying the construction of policy‐relevant indicators, the definition of indicators, and the issues that arise in their implementation, including that of the statistical data required. It seeks to bring together theoretical and methodological methods in the measurement of poverty/social exclusion with the empirical practice of social policy. The experience of member states is reviewed, including an assessment of the National Action Plans on Social Inclusion submitted for the first time in June 2001 by the 15 EU governments. The key areas covered by the book are poverty, including its intensity and persistence, income inequality, non‐monetary deprivation, low educational attainment, unemployment, joblessness, poor health, poor housing and homelessness, functional illiteracy and innumeracy, and restricted social participation. In each case, the book assesses the strengths and weaknesses of different indicators relevant to social inclusion in the EU, and makes recommendations for the indicators to be employed. The book is based on a report prepared at the request of the Belgian government, as part of the Belgian presidency of the Council of the EU in the second half of 2001, and presented at a conference on ‘Indicators for Social Inclusion: Making Common EU Objectives Work’ held at Antwerp on 14–15 Sept 2001.

Tests of conditional predictive ability

Abstract: We argue that the current framework for predictive ability testing (e.g.,West, 1996) is not necessarily useful for real-time forecast selection, i.e., for assessing which of two competing forecasting methods will perform better in the future. We propose an alternative framework for out-of-sample comparison of predictive ability which delivers more practically relevant conclusions. Our approach is based on inference about conditional expectations of forecasts and forecast errors rather than the unconditional expectations that are the focus of the existing literature. We capture important determinants of forecast performance that are neglected in the existing literature by evaluating what we call the forecasting method (the model and the parameter estimation procedure), rather than just the forecasting model. Compared to previous approaches, our tests are valid under more general data assumptions (heterogeneity rather than stationarity) and estimation methods, and they can handle comparison of both nested and non-nested models, which is not currently possible. To illustrate the usefulness of the proposed tests, we compare the forecast performance of three leading parameter-reduction methods for macroeconomic forecasting using a large number of predictors: a sequential model selection approach, the "diffusion indexes" approach of Stock and Watson (2002), and the use of Bayesian shrinkage estimators.

Global Games: Theory and Applications

Abstract: Many economic problems are naturally modeled as a game of incomplete information, where a player’s payoff depends on his own action, the actions of others, and some unknown economic fundamentals. For example, many accounts of currency attacks, bank runs, and liquidity crises give a central role to players’ uncertainty about other players’ actions. Because other players’ actions in such situations are motivated by their beliefs, the decision maker must take account of the beliefs held by other players. We know from the classic contribution of Harsanyi (1967–1968) that rational behavior in such environments not only depends on economic agents’ beliefs about economic fundamentals, but also depends on beliefs of higher-order – i.e., players’ beliefs about other players’ beliefs, players’ beliefs about other players’ beliefs about other players’ beliefs, and so on. Indeed, Mertens and Zamir (1985) have shown how one can give a complete description of the “type” of a player in an incomplete information game in terms of a full hierarchy of beliefs at all levels. In principle, optimal strategic behavior should be analyzed in the space of all possible infinite hierarchies of beliefs; however, such analysis is highly complex for players and analysts alike and is likely to prove intractable in general. It is therefore useful to identify strategic environments with incomplete information that are rich enough to capture the important role of higher-order beliefs in economic settings, but simple enough to allow tractable analysis. Global games, first studied by Carlsson and van Damme (1993a), represent one such environment. Uncertain economic fundamentals are summarized by a state θ and each player observes a different signal of the state with a small amount of noise. Assuming that the noise technology is common knowledge among the players, each player’s signal generates beliefs about fundamentals, beliefs about other players’ beliefs about fundamentals, and so on. Our purpose in this paper is to describe how such models work, how global game reasoning can be applied to economic problems, and how this analysis relates to more general analysis of higher-order beliefs in strategic settings.

Economic Growth, 2nd Edition

Abstract: This graduate level text on economic growth surveys neoclassical and more recent growth theories, stressing their empirical implications and the relation of theory to data and evidence. The authors have undertaken a major revision for the long-awaited second edition of this widely used text, the first modern textbook devoted to growth theory. The book has been expanded in many areas and incorporates the latest research. After an introductory discussion of economic growth, the book examines neoclassical growth theories, from Solow-Swan in the 1950s and Cass-Koopmans in the 1960s to more recent refinements; this is followed by a discussion of extensions to the model, with expanded treatment in this edition of heterogenity of households. The book then turns to endogenous growth theory, discussing, among other topics, models of endogenous technological progress (with an expanded discussion in this edition of the role of outside competition in the growth process), technological diffusion, and an endogenous determination of labor supply and population. The authors then explain the essentials of growth accounting and apply this framework to endogenous growth models. The final chapters cover empirical analysis of regions and empirical evidence on economic growth for a broad panel of countries from 1960 to 2000. The updated treatment of cross-country growth regressions for this edition uses the new Summers-Heston data set on world income distribution compiled through 2000.

Exporting Raises Productivity in Sub-Saharan African Manufacturing Plants

Abstract: Proponents of trade liberalization argue that it will force firms to produce closer to the production possibility frontier and that the frontier will move out faster. In particular, plants that export will achieve a higher productivity level. However intuitive the argument, empirical evidence is meager. This hypothesis is examined by calculating the effect of export status on productivity for a panel of manufacturing plants in nine African countries. The results indicate that exporters in these countries are more productive, replicating a similar finding for developed countries. More importantly, exporters increase their productivity advantage after entry into the export market. While the first finding can be explained by selection---only the most productive firms engage in exporting---the latter cannot. The results are robust when unobserved productivity differences and self-selection into the export market are controlled for using different econometric methods. Scale economies are shown to be an important channel for the productivity advance. Credit constraints and contract enforcement problems prevent plants that only produce for the domestic market to fully exploit scale economies.

Why the apple doesn't fall far: understanding intergenerational transmission of human capital

Abstract: Parents with higher education levels have children with higher education levels. Is this because parental education actually changes the outcomes of children, suggesting an important spillover of education policies, or is it merely that more able individuals who have higher education also have more able children? This Paper proposes to answer this question by using a unique dataset from Norway. Using the reform of the education system that was implemented in different municipalities at different times in the 1960s as an instrument for parental education, we find little evidence of a causal relationship between parents’ education and children’s education, despite significant OLS relationships. We find 2SLS estimates that are consistently lower than the OLS estimates with the only statistically significant effect being a positive relationship between mother's education and son's education. These findings suggest that the high correlations between parent’s and children’s education are due primarily to family characteristics and inherited ability and not education spillovers.

The Theory of Economic Growth

Abstract: The Theory of Economic Growth compares the main theories of growth from Adam Smith to the present day in order to isolate their logical structures, theoretical domains and methodological underpinnings. The book provides original solutions to theoretical questions still debated in contemporary literature and points out new directions for further research.

Monetary and Non-Monetary Punishment in the Voluntary Contributions Mechanism

Abstract: A demand for behavioral norms arises when members of a group have individual incentives to take actions that reduce the group's overall welfare (James S. Coleman, 1990). Norms require enforcement with a system of sanctions that penalize deviations from acceptable behavior (George C. Homans, 1961). Formal sanctions include fines or restrictions implemented by a legal system or private individuals that impose costs of money and time on the offender. However, informal sanctions such as peer pressure, gossip, or social ostracism might in some cases also be effective deterrents, and expressions of social acceptance might be effective in encouraging group-oriented behavior (Peter M. Blau, 1964). Indeed, the fact that expressions of approval and disapproval are commonly observed in human interaction suggests that they must influence the behavior of at least some individuals. In recognition of the importance of informal sanctions, economists have integrated phenomena such as peer pressure (Eugene Kandel and Edward P. Lazear, 1992; John M. Barron and Kathy Paulson-Gjerde, 1997), and the avoidance of social disapproval (George A. Akerlof, 1980; Heinz Hollander, 1990; Assar Lindbeck et al., 1999) into theoretical models. Social pressures are thought to be a major factor behind high voter participation (Carol-Jean Uhlaner, 1989; Stephen Knack, 1992) and compliance with the law (Tom R. Tyler, 1990).

Rice production in water-scarce environments

Abstract: Rice production in Asia needs to increase to feed a growing population. Though a complete assessment of the level of water scarcity in Asian rice production is still lacking, there are signs that declining quality of water and declining availability of water resources are threatening the sustainability of the irrigated rice-based production system. Drought is one of the main constraints for high yield in rain-fed rice. Exploring ways to produce more rice with less water is essential for food security and sustaining environmental health in Asia. This chapter reviews the International Rice Research Institute (IRRI)’s integrated approach, using genetics, breeding and integrated resource management to increase rice yield and to reduce water demand for rice production. Water-saving irrigation, such as saturated-soil culture and alternate wetting and drying, can drastically cut down the unproductive water outflows and increase water productivity. However, these technologies mostly lead to some yield decline in the current lowland rice varieties. Other new approaches are being researched to increase water productivity without sacrifice in yield. These include the incorporation of the C4 photosynthetic pathway into rice to increase rice yield per unit water transpired, the use of molecular biotechnology to enhance drought-stress tolerance and the development of ‘aerobic rice’, to achieve high and sustainable yields in non-flooded soil. Through the adoption of water-saving irrigation technologies, rice land will shift away from being continuously anaerobic to being partly or even completely aerobic. These shifts will have profound changes in water conservation, soil organic-matter turnover, nutrient dynamics, carbon sequestration, soil productivity, weed ecology and greenhouse-gas emissions. Whereas some of these changes can be perceived as positive, e.g. water conservation and decreased methane emission, some are perceived as negative, e.g. release of nitrous oxide from the soil and decline in soil organic matter. The challenge will be to develop effective integrated natural-resource-management interventions, which allow profitable rice cultivation with increased soil aeration, while maintaining the productivity, environmental services and sustainability of rice-based ecosystems.

Motivation, agency, and public policy : of knights and knaves, pawns and queens

Abstract: Preface 1. Introduction: Motivation, Agency, and Public Policy PART I: THEORY: FROM KNAVE TO KNIGHT 2. Knights and Knaves in the Public Sector: What do we Mean and What do we Know? 3. Motivation and the Public Context 4. Knight and Knave: A Theory of Public Service Motivation PART II: FROM PAWN TO QUEEN 5. Agency and Public Services 6. Agency and Public Finance PART III: POLICY 7. Health Care 8. School Education 9. A Demogrant 10. Partnership Savings 11. Hypothecation Epilogue: Doux Commerce Publique

The Generalized Dynamic Factor Model: One-Sided Estimation and Forecasting

Abstract: This Paper proposes a new forecasting method that exploits information from a large panel of time series. The method is based on the generalized dynamic factor model proposed in Forni, Hallin, Lippi, and Reichlin (2000), and takes advantage of the information on the dynamic covariance structure of the whole panel. We first use our previous method to obtain an estimation for the covariance matrices of common and idiosyncratic components. The generalized eigenvectors of this couple of matrices are then used to derive a consistent estimate of the optimal forecast, which is constructed as a linear combination of present and past observations only (one-sided filter). This two-step approach solves the end-of-sample problems caused by two-sided filtering (as in our previous work), while retaining the advantages of an estimator based on dynamic information. Both simulation results and an empirical illustration on the forecast of the Euro area industrial production and inflation, based on a panel of 447 monthly time series show very encouraging results.

The Unbound Prometheus

Abstract: For over thirty years David S. Landes's The Unbound Prometheus has offered an unrivalled history of industrial revolution and economic development in Europe. Now, in this updated edition, the author reframes and reasserts his original arguments in the light of debates about globalisation and comparative economic growth. The book begins with a classic account of the characteristics, progress, and political, economic and social implications of the Industrial Revolution in Britain, France and Germany. Professor Landes here raises the much-debated question: why was Europe the first to industrialise? He then charts the economic history of the twentieth-century: the effect of the First World War in accelerating the dissolution of the old international economy; the economic crisis of 1929–32; Europe's recovery and unprecedented economic growth following the Second World War. He concludes that only by continuous industrial revolution can Europe and the world sustain itself in the years ahead.

The Economics of Exchange Rates

Abstract: In the last few decades exchange rate economics has seen a number of developments, with substantial contributions to both the theory and empirics of exchange rate determination. Important developments in econometrics and the increasingly large availability of high-quality data have also been responsible for stimulating the large amount of empirical work on exchange rates in this period. Nonetheless, while our understanding of exchange rates has significantly improved, a number of challenges and open questions remain in the exchange rate debate, enhanced by events including the launch of the Euro and the large number of recent currency crises. This volume provides a selective coverage of the literature on exchange rates, focusing on developments from within the last fifteen years. Clear explanations of theories are offered, alongside an appraisal of the literature and suggestions for further research and analysis.

The Economics of Foreign Direct Investment Incentives

Abstract: The attitude towards inward foreign direct investment (FDI) has changed considerably over the last couple of decades, as most countries have liberalised their policies to attract investment from foreign multinational corporations (MNCs). On the expectation that foreign MNCs will raise employment, exports or tax revenue, or that some of the knowledge brought by the foreign companies may spill over to the host country’s domestic firms, governments across the world have lowered various entry barriers and opened up new sectors to foreign investment. An increasing number of host governments also provide various forms of investment incentives to encourage foreign-owned companies to invest in their jurisdiction.1 These include fiscal incentives such as tax holidays and lower taxes for foreign investors, financial incentives such as grants and preferential loans to MNCs, as well as measures such as market preferences, infrastructure and sometimes even monopoly rights.2

The WTO Promotes Trade, Strongly But Unevenly

Abstract: This paper furnishes robust evidence that the WTO has had a powerful and positive impact on trade, amounting to about 120% of additional world trade (or US$8 trillion in 2003 alone). The impact has, however, been uneven. This, in many ways, is consistent with theoretical models of the GATT/WTO. The theory suggests that the impact of a country’s membership in the GATT/WTO depends on what the country does with its membership, with whom it negotiates, and which products the negotiation covers. Using a properly specified gravity model, we find evidence consistent with these predictions. First, industrial countries that participated more actively than developing countries in reciprocal trade negotiations witnessed a large increase in trade. Second, bilateral trade was greater when both partners undertook liberalization than when only one partner did. Third, sectors that did not witness liberalization did not see an increase in trade.

Menu Costs and Phillips Curves

Abstract: This paper develops a model of a monetary economy in which individual firms are subject to idiosyncratic productivity shocks as well as general inflation. Sellers can change price only by incurring a real menu cost.' We calibrate this cost and the variance and autocorrelation of the idiosyncratic shock using a new U.S. data set of individual prices due to Klenow and Kryvtsov. The prediction of the calibrated model for the effects of high inflation on the frequency of price changes accords well with the Israeli evidence obtained by Lach and Tsiddon. The model is also used to conduct numerical experiments on the economy's response to credible and incredible disinflations and other shocks. In none of the simulations we conducted did monetary shocks induce large or persistent real responses.

Corporate Governance and Market Valuation in China

Abstract: This paper studies the relationship between the governance mechanisms and the market valuation of publicly listed firms in China empirically. We construct measures for corporate governance mechanisms and measures of market valuation for all publicly listed firms on the two stock markets in China by using data from the firm???s annual reports. We then investigate how the market-valuation variables are affected by the corporate governance variables while controlling for a number of factors commonly considered in market valuation analysis. A corporate governance index is also constructed to summarize the information contained in the corporate governance variables. The index is found to have statistically and economically significant effect on market valuation. The analysis indicates that investors pay a significant premium for well-governed firms in China, benefiting firms that improve their governance mechanisms.

Growth and Shocks: evidence from rural Ethiopia

Abstract: Using panel data from villages in rural Ethiopia, the paper studies the determinants of consumption growth (1989-97), based on a microgrowth model, controlling for heterogeneity. Consumption grew substantially, but with diverse experiences across villages and individuals. A key focus is on whether shocks affect growth. Rainfall shocks have a substantial impact on consumption growth, and its impact presists for many years. There also appears to be a significant, persistent growth impact from the largescale famine in the 1980s, as well as substantial externalities from the presence of road infrastructure. The findings related to the persistent effects of rainfall shocks and the famine crisis imply that welfare losses due to the lack of insurance and protection measures are well beyond the welfare cost of short term consumption fluctuations.

A Survey of Models of Network Formation: Stability and Efficiency

Abstract: I survey the recent literature on the formation of networks. I provide definitions of network games, a number of examples of models from the literature, and discuss some of what is known about the (in)compatibility of overall societal welfare with individual incentives to form and sever links.

Composite Indicators of Country Performance: A Critical Assessment

Abstract: Composite indicators are synthetic indices of individual indicators and are increasingly being used to rank countries in various performance and policy areas. Using composites, countries have been compared with regard to their competitiveness, innovative abilities, degree of globalisation and environmental sustainability. Composite indicators are useful in their ability to integrate large amounts of information into easily understood formats and are valued as a communication and political tool. However, the construction of composites suffers from many methodological difficulties, with the result that they can be misleading and easily manipulated. This paper reviews the steps in constructing composite indicators and their inherent weaknesses. A detailed statistical example is given in a case study. The paper also offers suggestions on how to improve the transparency and use of composite indicators for analytical and policy purposes ...