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Showing papers in "Research Papers in Economics in 2005"


Report SeriesDOI
TL;DR: In this paper, the authors present a handbook for constructing and using composite indicators for policy makers, academics, the media and other interested parties, which is concerned with those which compare and rank country performance in areas such as industrial competitiveness, sustainable development, globalisation and innovation.
Abstract: This Handbook aims to provide a guide for constructing and using composite indicators for policy makers, academics, the media and other interested parties. While there are several types of composite indicators, this Handbook is concerned with those which compare and rank country performance in areas such as industrial competitiveness, sustainable development, globalisation and innovation. The Handbook aims to contribute to a better understanding of the complexity of composite indicators and to an improvement of the techniques currently used to build them. In particular, it contains a set of technical guidelines that can help constructors of composite indicators to improve the quality of their outputs. It has been prepared jointly by the OECD (the Statistics Directorate and the Directorate for Science, Technology and Industry) and the Applied Statistics and Econometrics Unit of the Joint Research Centre of the European Commission in Ispra, Italy. Primary authors from the JRC are Michela Nardo, Michaela Saisana, Andrea Saltelli and Stefano Tarantola. Primary authors from the OECD are Anders Hoffmann and Enrico Giovannini. Editorial assistance was provided by Candice Stevens, Gunseli Baygan and Karsten Olsen. The research is partly funded by the European Commission, Research Directorate, under the project KEI (Knowledge Economy Indicators), Contract FP6 No. 502529. In the OECD context, the work has benefitted from a grant from the Danish government. The views expressed are those of the authors and should not be regarded as stating an official position of either the European Commission or the OECD.

2,892 citations


Posted Content
TL;DR: In this paper, the authors present theoretical models for three variants of such markets: a monopoly platform, a model of competing platforms where each agent must choose to join a single platform, and a case of "competing bottlenecks", where one group wishes to join all platforms.
Abstract: There are many examples of markets involving two groups of agents who need to interact via 'platforms', and where one group's benefit from joining a platform depends on the number of agents from the other group who join the same platform. This paper presents theoretical models for three variants of such markets: a monopoly platform; a model of competing platforms where each agent must choose to join a single platform; and a model of 'competing bottlenecks', where one group wishes to join all platforms. The main determinants of equilibrium prices are (i) the relative sizes of the cross-group externalities, (ii) whether fees are levied on a lump-sum or per-transaction basis, and (iii) whether a group joins just one platform or joins all platforms.

2,326 citations


Posted Content
TL;DR: In this article, the authors develop a monopolistically competitive model of trade with firm heterogeneity in terms of productivity differences and endogenous differences in the "toughness" of competition across markets.
Abstract: We develop a monopolistically competitive model of trade with firm heterogeneity—in terms of productivity differences—and endogenous differences in the "toughness" of competition across markets—in terms of the number and average productivity of competing firms. We analyse how these features vary across markets of different size that are not perfectly integrated through trade; we then study the effects of different trade liberalization policies. In our model, market size and trade affect the toughness of competition, which then feeds back into the selection of heterogeneous producers and exporters in that market. Aggregate productivity and average mark-ups thus respond to both the size of a market and the extent of its integration through trade (larger, more integrated markets exhibit higher productivity and lower mark-ups). Our model remains highly tractable, even when extended to a general framework with multiple asymmetric countries integrated to different extents through asymmetric trade costs. We believe this provides a useful modelling framework that is particularly well suited to the analysis of trade and regional integration policy scenarios in an environment with heterogeneous firms and endogenous mark-ups.

2,259 citations


Posted Content
TL;DR: In this article, the authors examined the effect of bank-specific, industry-specific and macroeconomic determinants of bank profitability, using an empirical framework that incorporates the traditional Structure-Conduct-Performance (SCP) hypothesis.
Abstract: The aim of this study is to examine the effect of bank-specific, industry-specific and macroeconomic determinants of bank profitability, using an empirical framework that incorporates the traditional Structure-Conduct-Performance (SCP) hypothesis. To account for profit persistence, we apply a GMM technique to a panel of Greek banks that covers the period 1985-2001. The estimation results show that profitability persists to a moderate extent, indicating that departures from perfectly competitive market structures may not be that large. All bank-specific determinants, with the exception of size, affect bank profitability significantly in the anticipated way. However, no evidence is found in support of the SCP hypothesis. Finally, the business cycle has a positive, albeit asymmetric effect on bank profitability, being significant only in the upper phase of the cycle.

1,929 citations


Posted Content
TL;DR: A century after the publication of Max Weber's The Protestant Ethic and the "Spirit" of Capitalism, a major new work examines network-based organization, employee autonomy and post-Fordist horizontal work structures.
Abstract: A century after the publication of Max Weber's The Protestant Ethic and the "Spirit" of Capitalism, a major new work examines network-based organization, employee autonomy and post-Fordist horizontal work structures.

1,718 citations


Posted Content
TL;DR: The authors construct an index of the "income level of a country's exports," document its properties, and show that it predicts subsequent economic growth, and demonstrate this proposition formally and adduce some empirical support.
Abstract: When local cost discovery generates knowledge spillovers, specialization patterns become partly indeterminate and the mix of goods that a country produces may have important implications for economic growth. We demonstrate this proposition formally and adduce some empirical support for it. We construct an index of the "income level of a country's exports," document its properties, and show that it predicts subsequent economic growth.

1,660 citations


Posted Content
TL;DR: In this article, the role of family characteristics in corporate decision making and the consequences of these decisions on firm performance was investigated, and it was shown that a departing CEO's family characteristics have a strong predictive power in explaining CEO succession decisions: family CEOs are more frequently selected the larger the size of the family, the higher ratio of male children and when the departing CEOs had only had one spouse.
Abstract: This paper uses a unique dataset from Denmark to investigate (1) the role of family characteristics in corporate decision making, and (2) the consequences of these decisions on firm performance. We focus on the decision to appoint either a family or an external chief executive officer (CEO). We show that a departing CEO’s family characteristics have a strong predictive power in explaining CEO succession decisions: family CEOs are more frequently selected the larger the size of the family, the higher the ratio of male children and when the departing CEOs had only had one spouse. We then analyze the impact of family successions on performance. We overcome endogeneity and omitted variables problems of previous papers in the literature by using the gender of a departing CEO’s first-born child as an instrumental variable (IV) for family successions. This is a plausible IV as male first-child family firms are more likely to pass on control to a family CEO than female first-child firms, but the gender of the first child is unlikely to affect firms’ performance. We find that family successions have a dramatic negative causal impact on firm performance: profitability on assets falls by at least 6 percentage points around CEO transitions. These estimates are significantly larger than those obtained using ordinary least squares. Finally, our findings demonstrate that professional non-family CEOs provide extremely valuable services to the organizations they work for.

1,041 citations


Posted Content
TL;DR: It is suggested that distinct neural circuits linked to anticipatory affect promote different types of financial choices and indicate that excessive activation of these circuits may lead to investing mistakes.
Abstract: Investors systematically deviate from rationality when making financial decisions, yet the mechanisms responsible for these deviations have not been identified. Using event-related fMRI, we examined whether anticipatory neural activity would predict optimal and suboptimal choices in a financial decision-making task. We characterized two types of deviations from the optimal investment strategy of a rational risk- neutral agent as risk-seeking mistakes and risk-aversion mistakes. Nucleus accumbens activation preceded risky choices as well as risk- seeking mistakes, while anterior insula activation preceded riskless choices as well as risk-aversion mistakes. These findings suggest that distinct neural circuits linked to anticipatory affect promote different types of financial choices, and indicate that excessive activation of these circuits may lead to investing mistakes. Thus, consideration of anticipatory neural mechanisms may add predictive power to the rational actor model of economic decision-making.

980 citations


Posted ContentDOI
TL;DR: A comprehensive survey of the economic analysis of advertising can be found in this article, with a focus on positive and normative theories of monopoly advertising, price and non-price advertising, theories of advertising and product quality, and theories that explore the potential role for advertising in deterring entry.
Abstract: This chapter offers a comprehensive survey of the economic analysis of advertising. A first objective is to organize the literature in a manner that clarifies what is known. A second objective is to clarify how this knowledge has been obtained. The chapter begins with a discussion of the key initial writings that are associated with the persuasive, informative and complementary views of advertising. Next, work that characterizes empirical regularities between advertising and other variables is considered. Much of this work is conducted at the inter-industry level but important industry studies are also discussed. The chapter then offers several sections that summarize formal economic theories of advertising. In particular, respective sections are devoted to positive and normative theories of monopoly advertising, theories of price and non-price advertising, theories of advertising and product quality, and theories that explore the potential role for advertising in deterring entry. At this point, the chapter considers the empirical support for the formal economic theories of advertising. A summary is provided of empirical work that evaluates the predictions of recent theories of advertising, including work that specifies and estimates explicitly structural models of firm and consumer conduct. This work is characterized by the use of industry (or brand) and even household-level data. The chapter then considers work on endogenous and exogenous sunk cost industries. At a methodological level, this work is integrative in nature: it develops new theory that delivers a few robust predictions, and it then explores the empirical relevance of these predictions at both inter-industry and industry levels. Finally, the chapter considers new directions and other topics. Here, recent work on advertising and media markets is discussed, and research on behavioral economics and neuroeconomics is also featured. A final section offers some concluding thoughts.

924 citations


Posted Content
TL;DR: This paper developed a general framework showing that technology and product market spillovers have testable implications for a range of performance indicators, and exploited these using distinct measures of a firm's position in the technology space and the product market space.
Abstract: Support for many R&D and technology policies relies on empirical evidence that R&D ‘spills over’ between firms. But there are two countervailing R&D spillovers: positive effects from technology spillovers and negative effects from business stealing by product market rivals. We develop a general framework showing that technology and product market spillovers have testable implications for a range of performance indicators, and exploit these using distinct measures of a firm’s position in technology space and product market space. We show using panel data on US firms between 1981 and 2001 that both technology and product market spillovers operate, but that net social returns are several times larger than private returns. The spillover effects are also revealed when we analyze three high-tech sectors in detail - pharmaceuticals, computer hardware and telecommunication equipment. Using the model we evaluate three R&D subsidy policies and show that the typical focus of support for small and medium firms may be misplaced.

905 citations


Posted Content
TL;DR: In this paper, a review of methods related to estimation and inference about break dates for single equations with or without restrictions, with extensions to multi-equations systems where allowance is also made for changes in the variability of the shocks, tests for structural changes including tests for a single or multiple changes and tests valid with unit root or trending regressors, and tests for changes of the trend function of a series that can be integrated or trend-stationary.
Abstract: This chapter is concerned with methodological issues related to estimation, testing and computation in the context of structural changes in the linear models. A central theme of the review is the interplay between structural change and unit root and on methods to distinguish between the two. The topics covered are: methods related to estimation and inference about break dates for single equations with or without restrictions, with extensions to multi-equations systems where allowance is also made for changes in the variability of the shocks; tests for structural changes including tests for a single or multiple changes and tests valid with unit root or trending regressors, and tests for changes in the trend function of a series that can be integrated or trendstationary; testing for a unit root versus trend-stationarity in the presence of structural changes in the trend function; testing for cointegration in the presence of structural changes; and issues related to long memory and level shifts. Our focus is on the conceptual issues about the frameworks adopted and the assumptions imposed as they relate to potential applicability. We also highlight the potential problems that can occur with methods that are commonly used and recent work that has been done to overcome them.

Posted Content
TL;DR: This article found evidence of a large negative discontinuity at the OEO cutoff in mortality rates for children ages 5-9 from causes that could be affected by Head Start, but not for other mortality causes or birth cohorts.
Abstract: This paper exploits a new source of variation in Head Start funding to identify the programs effects on health and schooling In 1965 the Office of Economic Opportunity (OEO) provided technical assistance to the 300 poorest counties in the US to develop Head Start funding proposals The result was a large and lasting discontinuity in Head Start funding rates at the OEO cutoff for grant-writing assistance, but no discontinuity in other forms of federal social spending We find evidence of a large negative discontinuity at the OEO cutoff in mortality rates for children ages 5-9 from causes that could be affected by Head Start, but not for other mortality causes or birth cohorts that should not be affected by the program We also find suggestive evidence for a positive effect of Head Start on educational attainment in both the 1990 Census, concentrated among those cohorts born late enough to have been exposed to the program, and among respondents in the National Education Longitudinal Study of 1988

Posted Content
TL;DR: In this article, a global model linking individual country vector error-correcting models in which the domestic variables are related to the country-specific variables as an approximate solution to a global common factor model is presented.
Abstract: This paper presents a global model linking individual country vector error-correcting models in which the domestic variables are related to the country-specific variables as an approximate solution to a global common factor model. This global VAR is estimated for 26 countries, the euro area being treated as a single economy. This paper proposes two important extensions of previous research (see Pesaran, Schuermann and Weiner, 2004). First, it provides a theoretical framework where the GVAR is derived as an approximation to a global unobserved common factor model. Also using average pair-wise cross-section error correlations, the GVAR approach is shown to be quite effective in dealing with the common factor interdependencies and international comovements of business cycles. Second, in addition to generalised impulse response functions, we propose an identification scheme to derive structural impulse responses. We focus on identification of shocks to the US economy, particularly the monetary policy shocks, and consider the time profiles of their effects on the euro area. To this end we include the US model as the first country model and consider alternative orderings of the US variables. Further to the US monetary policy shock, we also consider oil price, US equity and US real output shocks.

Posted Content
TL;DR: In this article, the authors used panel data for a large number of countries and found that economic contractions are not followed by offsetting fast recoveries, and long-term growth is negatively linked to volatility.
Abstract: Using panel data for a large number of countries, we find that economic contractions are not followed by offsetting fast recoveries. Trend output lost is not regained, on average. Wars, crises, and other negative shocks lead to absolute divergence and lower long-run growth, whereas we find absolute convergence in expansions. The output costs of political and financial crises are permanent on average, and long-term growth is negatively linked to volatility. These results also imply that panel data studies can help identify the sources of growth and that economic models should be capable of explaining growth and fluctuations within the same framework.

Posted Content
TL;DR: The current consensus is that efficiency is at least as important as capital in explaining income differences as mentioned in this paper, and the basic methods that lead to this consensus are surveyed and explored in a recent survey.
Abstract: Why are some countries so much richer than others? Development Accounting is a first-pass attempt at organizing the answer around two proximate determinants: factors of production and efficiency. It answers the question "how much of the cross-country income variance can be attributed to differences in (physical and human) capital, and how much to differences in the efficiency with which capital is used?" Hence, it does for the cross-section what growth accounting does in the time series. The current consensus is that efficiency is at least as important as capital in explaining income differences. I survey the data and the basic methods that lead to this consensus, and explore several extensions. I argue that some of these extensions may lead to a reconsideration of the evidence.

Posted Content
TL;DR: This article examined the effects of aid on growth in cross-sectional and panel data after correcting for the bias that aid typically goes to poorer countries, or to countries after poor performance, and found little robust evidence of a positive (or negative) relationship between aid inflows into a country and its economic growth.
Abstract: We examine the effects of aid on growth--in cross-sectional and panel data--after correcting for the bias that aid typically goes to poorer countries, or to countries after poor performance. Even after this correction, we find little robust evidence of a positive (or negative) relationship between aid inflows into a country and its economic growth. We also find no evidence that aid works better in better policy or geographical environments, or that certain forms of aid work better than others. Our findings, which relate to the past, do not imply that aid cannot be beneficial in the future. But they do suggest that for aid to be effective in the future, the aid apparatus will have to be rethought. Our findings raise the question: what aspects of aid offset what ought to be the indisputable growth enhancing effects of resource transfers? Thus, our findings support efforts under way at national and international levels to understand and improve aid effectiveness.

Posted Content
TL;DR: In this article, a Bayesian consumer who is uncertain about the quality of an information source will infer that the source is of higher quality when its reports conform to the consumer's prior expectations.
Abstract: A Bayesian consumer who is uncertain about the quality of an information source will infer that the source is of higher quality when its reports conform to the consumer's prior expectations. We use this fact to build a model of media bias in which firms slant their reports toward the prior beliefs of their customers in order to build a reputation for quality. Bias emerges in our model even though it can make all market participants worse off. The model predicts that bias will be less severe when consumers receive independent evidence on the true state of the world, and that competition between independently owned news outlets can reduce bias. We present a variety of empirical evidence consistent with these predictions.

Book ChapterDOI
TL;DR: In this article, the authors compare models that use normal and log-normal distributions for coefficients with models using these distributions for WTP (called models in WTP space), and find that the models in preference space fit the data better but provide less reasonable distributions of WTP than the models of preference space.
Abstract: In models with unobserved taste heterogeneity, distributional assumptions can be placed in two ways: (1) by specifying the distribution of coefficients in the utility function and deriving the distribution of willingness to pay (WTP), or (2) by specifying the distribution of WTP and deriving the distribution of coefficients. In general the two approaches are equivalent, in that any mutually compatible distributions for coefficients and WTP can be represented in either way. However, in practice, convenient distributions, such as normal or log-normal, are usually specified, and these convenient distributions have different implications when placed on WTP’s than on coefficients. We compare models that use normal and log-normal distributions for coefficients (called models in preference space) with models using these distributions for WTP (called models in WTP space). We find that the models in preference space fit the data better but provide less reasonable distributions of WTP than the models in WTP space. Our findings suggests that further work is needed to identify distributions that either fit better when applied in WTP space or imply more reasonable distributions of WTP when applied in preference space.

Posted Content
TL;DR: The theory of international environmental agreements (IEAs) has been studied extensively as discussed by the authors, and the main questions that the literature on this topic have tried to answer, discusses different methodological approaches that have been used, and shows how these approaches relate to one another.
Abstract: This chapter presents the theory of international environmental agreements (IEAs). It explains what treaties do (or should do); when and why they succeed or fail; and whether they can be designed better. It focuses on the main questions that the literature on this topic has tried to answer, discusses the different methodological approaches that have been used, and shows how these approaches relate to one another. The chapter pays greatest attention to the constraint of self-enforcement and to the institutional aspects of IEAs. Topics discussed include: the relationship between international environmental cooperation problems and other cooperation problems; the problems IEAs are meant to address; the non-cooperative and full cooperative benchmarks; IEAs as stage games; the empirical implications of the theory; alternative equilibrium concepts; minimum participation in a treaty; pollution abatement as a strategic substitute and as a strategic complement; the difference between compliance and participation enforcement; IEAs as repeated games; the trade-off between the depth and breadth of cooperation; the distributive and strategic roles of side payments; issue linkage; trade leakage; and enforcement relying on trade restrictions. The chapter also shows how the theory can illuminate real problems, including acid rain, ozone depletion, and global climate change. The chapter concludes with suggestions for future research.

Posted Content
TL;DR: The authors surveys recent experimental and field evidence on the impact of concerns for fairness, reciprocity and altruism on economic decision-making and reviews some new theoretical attempts to model the observed behavior.
Abstract: This paper surveys recent experimental and field evidence on the impact of concerns for fairness, reciprocity and altruism on economic decision making. It also reviews some new theoretical attempts to model the observed behavior.

Journal Article
TL;DR: The ILO was founded for social justice, a mandate expressed today in terms of decent work as a global goal, for all who work, whether in formal or informal contexts.
Abstract: The ILO was founded for social justice, a mandate expressed today in terms of decent work as a global goal, for all who work, whether in formal or informal contexts. In June 2002, the delegates to the International Labour Conference from governments, workers’ and employers’ organizations adopted a resolution incorporating conclusions on decent work and the informal economy. The four components of decent work – opportunities for employment and income, respect for rights at work, social protection and stronger social dialogue – form the backbone of the ILO’s approach to the informal economy. These elements can also be seen through a development lens, and necessarily feature a strong gender dimension. To make the action foreseen by the ILC conclusions more easily operational in a cross-disciplinary way, the issues they address can be cast in terms of macro policy, governance, enhancement of productivity, markets and employment, social protection/addressing vulnerabilities, and representation and voice. All play key roles in poverty reduction. Moreover, recognizing the importance of measuring progress towards decent work, developments in relation to indicators are briefly described. This paper includes annexes reproducing the ILC conclusions along with two relevant resolutions adopted by the International Conference of Labour Statisticians and a list of ILO websites that address various aspects of decent work and the informal economy.

Posted Content
TL;DR: In this paper, the authors propose a theoretical framework that helps to deal with markets without suspending their calculative properties, and apply this definition to three constitutive elements of markets: economic goods, economic agents and economic exchanges.
Abstract: How to address empirically the calculative character of markets without dissolving it? In our paper, we propose a theoretical framework that helps to deal with markets without suspending their calculative properties. In the first section, we construct a broad definition of calculation, grounded on the anthropology of science and techniques. In the next sections, we apply this definition to three constitutive elements of markets: economic goods, economic agents and economic exchanges. First, we examine the question of the calculability of goods: in order to be calculated, goods must be calculable. In the following section, we introduce the notion of calculative distributed agencies to understand how these calculable goods are actually calculated. Thirdly, we consider the rules and material devices that organize the encounter between (and aggregation of) individual supplies and demands, i.e. the specific organizations that allow for a calculated exchange and a market output. Those three elements define concrete markets as collective organized devices that calculate compromises on the values of goods. In each, we encounter different versions of our broad definition of calculation, which we illustrate with examples, mainly taken from the fields of financial markets and mass retail.

Posted Content
TL;DR: The authors assesses the relationship between the impact of corruption on growth and investment and the quality of governance in a sample of 63 to 71 countries between 1970 and 1998 and find that corruption has a negative impact on growth independently from its impact on investment.
Abstract: This paper assesses the relationship between the impact of corruption on growth and investment and the quality of governance in a sample of 63 to 71 countries between 1970 and 1998. Like previous studies, we find a negative effect of corruption on both growth and investment. Unlike previous studies, we find that corruption has a negative impact on growth independently from its impact on investment. These impacts are, however, different depending on the quality of governance. They tend to worsen when indicators of the quality of governance deteriorate. This supports the “sand the wheels” view on corruption and contradicts the “grease the wheels” view, which postulates that corruption may help compensate bad governance.

Posted Content
TL;DR: In this article, the authors found strong empirical support of a positive, although quite lagged, relationship between rapid credit growth and loan losses, and provided empirical evidence of more lenient credit terms during boom periods, both in terms of screening of borrowers and in collateral requirements.
Abstract: This paper finds strong empirical support of a positive, although quite lagged, relationship between rapid credit growth and loan losses. Moreover, it contains empirical evidence of more lenient credit terms during boom periods, both in terms of screening of borrowers and in collateral requirements. Therefore, we confirm the predictions from theoretical models based on disaster myopia, herd behaviour institutional memory and agency problems between banks' managers and shareholders regarding the incentives of the former to engage in too expansionary credit policies during lending booms. The paper also develops a prudential tool, based on loan loss provisions, for banking regulators in order to cope with the former problem.

Posted Content
TL;DR: In this paper, the authors investigate the effects of U.S. monetary policy on asset prices using a high-frequency event-study analysis and find that two factors are required: a current federal funds rate target and a future path of policy.
Abstract: We investigate the effects of U.S. monetary policy on asset prices using a high-frequency event-study analysis. We test whether these effects are adequately captured by a single factor-changes in the federal funds rate target - and find that they are not. Instead, we find that two factors are required. These factors have a structural interpretation as a "current federal funds rate target" factor and a "future path of policy" factor, with the latter closely associated with Federal Open Market Committee statements.We measure the effects of these two factors on bond yields and stock prices using a new intraday data set going back to 1990. According to our estimates, both monetary policy actions and statements have important but differing effects on asset prices, with statements having a much greater impact on longer-term Treasury yields.

Posted Content
TL;DR: In this article, a multivariate model, identifying monetary policy and allowing for simultaneity and regime switching in coefficients and variances, is confronted with US data since 1959 and the best fit is with a version that allows time variation in structural disturbance variances only.
Abstract: A multivariate model, identifying monetary policy and allowing for simultaneity and regime switching in coefficients and variances, is confronted with US data since 1959. The best fit is with a version that allows time variation in structural disturbance variances only. Among versions that allow for changes in equation coefficients also, the best fit is for a one that allows coefficients to change only in the monetary policy rule. That version allows switching among three main regimes and one rarely and briefly occurring regime. The three main regimes correspond roughly to periods when most observers believe that monetary policy actually differed, but the differences among regimes are not large enough to account for the rise, then decline, in inflation of the 70?s and 80?s. In versions that insist on changes in the policy rule, the estimates imply monetary targeting was central in the early 80?s, but also important sporadically in the 70?s.

Posted Content
TL;DR: Both types of diversity provided information-processing benefits that outweighed the limitations associated with social categorization processes and national diversity had curvilinear relationships with the range, depth, and integration of information use.
Abstract: Educational and national diversity are proposed to influence work teams' information use differently, with educational diversity mainly enhancing information use and national diversity invoking social categorization, thus hindering information use. As expected, increasing educational diversity positively influenced the range and depth of information use for all except the most diverse teams we studied, but negatively influenced information integration. In contrast to our expectations, national diversity had curvilinear relationships with the range, depth, and integration of information use. Both types of diversity provided information-processing benefits that outweighed the limitations associated with social categorization processes.

Posted Content
TL;DR: In this article, the authors model the demand-pressure effect on prices when options cannot be perfectly hedged and show that demand pressure in one option contract increases its price by an amount proportional to the variance of the unhedgeable part of the option.
Abstract: We model the demand-pressure effect on prices when options cannot be perfectly hedged The model shows that demand pressure in one option contract increases its price by an amount proportional to the variance of the unhedgeable part of the option Similarly, the demand pressure increases the price of any other option by an amount proportional to the covariance of their unhedgeable parts Empirically, we identify aggregate positions of dealers and end users using a unique dataset, and show that demand-pressure effects contribute to well-known option-pricing puzzles Indeed, time-series tests show that demand helps explain the overall expensiveness and skew patterns of both index options and single-stock options

Posted Content
TL;DR: In this article, the effect of social interactions among neighbors on labor market outcomes is investigated using Census data that characterize residential and employment locations down to the city block, and whether individuals residing in the same block are more likely to work together than those in nearby blocks.
Abstract: We use a novel dataset and research design to empirically detect the effect of social interactions among neighbors on labor market outcomes. Specifically, using Census data that characterize residential and employment locations down to the city block, we examine whether individuals residing in the same block are more likely to work together than those in nearby blocks. We find evidence of significant social interactions operating at the block level: residing on the same versus nearby blocks increases the probability of working together by over 33 percent. The results also indicate that this referral effect is stronger when individuals are similar in sociodemographic characteristics (e.g., both have children of similar ages) and when at least one individual is well attached to the labor market. These findings are robust across various specifications intended to address concerns related to sorting and reverse causation. Further, having determined the characteristics of a pair of individuals that lead to an especially strong referral effect, we provide evidence that the increased availability of neighborhood referrals has a significant impact on a wide range of labor market outcomes including employment and wages.

Posted Content
TL;DR: In this article, the importance of mercantilist and precautionary motives in accounting for the hoarding of international reserves by developing countries, and a model that quantifies the welfare gains from optimal management of international reserve is provided.
Abstract: This paper tests the importance of precautionary and mercantilist motives in accounting for the hoarding of international reserves by developing countries, and provides a model that quantifies the welfare gains from optimal management of international reserves. While the variables associated with the mercantilist motive are statistically significant, their economic importance in accounting for reserve hoarding is close to zero and is dwarfed by other variables. Overall, the empirical results are in line with the precautionary demand. The effects of financial crises have been localized, increasing reserve hoarding in the aftermath of crises mostly in countries located in the affected region, but not in other regions. We also investigate the micro foundation of precautionary demand, extending Diamond and Dybvig (1983)’s model to an open, emerging market economy where banks finance long-term projects with short-term deposits. We identify circumstances that lead to large precautionary demand for international reserves, providing self-insurance against the adverse output effects of sudden stop and capital flight shocks. This would be the case if premature liquidation of long-term projects is costly, and the economy is de-facto integrated with the global financial system, hence sudden stops and capital flight may reduce deposits sharply. We show that the welfare gain from the optimal management of international reserves is of a first-order magnitude, reducing the welfare cost of liquidity shocks from a first-order to a second-order magnitude.