Showing papers in "Research Papers in Economics in 2008"

Finite Mixture Models

Abstract: Finite mixture models provide a natural way of modeling continuous or discrete outcomes that are observed from populations consisting of a finite number of homogeneous subpopulations. Applications of finite mixture models are abundant in the social and behavioral sciences, biological and environmental sciences, engineering and finance. Such models have a natural representation of heterogeneity in a finite, usually small, number of latent classes, each of which may be regarded as a type. More generally, the finite mixture model can be shown to approximate any unknown distribution under suitable regularity conditions. The Stata package -fmm- implements a maximum likelihood estimator for a class of finite mixture models. In this talk, I will begin by introducing finite mixture models using a number of examples and discuss issues of estimation, testing and model selection. I will then describe estimation using fmm, calculations of predictions, marginal effects, and posterior class probabilities, and illustrate these using examples from econometrics and finance.

Bond pricing and the term structure of interest rates: a new methodology for contingent claims valuation

Abstract: This paper presents a unifying theory for valuing contingent claims under a stochastic term structure of interest rates. The methodology, based on the equivalent martingale measure technique, takes as given an initial forward rate curve and a family of potential stochastic processes for its subsequent movements. A no arbitrage condition restricts this family of processes yielding valuation formulae for interest rate sensitive contingent claims which do not explicitly depend on the market prices of risk. Examples are provided to illustrate the key results.

Estimating Trade Flows: Trading Partners and Trading Volumes

Abstract: We develop a simple model of international trade with heterogeneous firms that is consistent with a number of stylized features of the data In particular, the model predicts positive as well as zero trade flows across pairs of countries, and it allows the number of exporting firms to vary across destination countries As a result, the impact of trade frictions on trade flows can be decomposed into the intensive and extensive margins, where the former refers to the trade volume per exporter and the latter refers to the number of exporters This model yields a generalized gravity equation that accounts for the self-selection of firms into export markets and their impact on trade volumes We then develop a two-stage estimation procedure that uses an equation for selection into trade partners in the first stage and a trade flow equation in the second We implement this procedure parametrically, semiparametrically, and nonparametrically, showing that in all three cases the estimated effects of trade frictions are similar Importantly, our method provides estimates of the intensive and extensive margins of trade We show that traditional estimates are biased and that most of the bias is due not to selection but rather due to the omission of the extensive margin Moreover, the effect of the number of exporting firms varies across country pairs according to their characteristics This variation is large and particularly so for trade between developed and less developed countries and between pairs of less developed countries

Relative Income, Happiness and Utility: An Explanation for the Easterlin Paradox and Other Puzzles

Abstract: The well-known Easterlin paradox points out that average happiness has remained constant over time despite sharp rises in GNP per head. At the same time, a micro literature has typically found positive correlations between individual income and individual measures of subjective well-being. This paper suggests that these two findings are consistent with the presence of relative income terms in the utility function. Income may be evaluated relative to others (social comparison) or to oneself in the past (habituation). We review the evidence on relative income from the subjective well-being literature. We also discuss the relation (or not) between happiness and utility, and discuss some nonhappiness research (behavioral, experimental, neurological) related to income comparisons. We last consider how relative income in the utility function can affect economic models of behavior in the domains of consumption, investment, economic growth, savings, taxation, labor supply, wages, and migration.

The role of cognitive skills in economic development

Abstract: The role of improved schooling, a central part of most development strategies, has become controversial because expansion of school attainment has not guaranteed improved economic conditions. This paper reviews the role of cognitive skills in promoting economic well-being, with a particular focus on the role of school quality and quantity. It concludes that there is strong evidence that the cognitive skills of the population – rather than mere school attainment – are powerfully related to individual earnings, to the distribution of income, and to economic growth. New empirical results show the importance of both minimal and high level skills, the complementarity of skills and quality of economic institutions, and robustness of the relationship between skills and growth. International comparisons incorporating expanded data on cognitive skills reveal much larger skill deficits in developing countries than generally derived from just school enrollment and attainment. The magnitude of change needed makes clear that closing the economic gap with developed countries will require major structural changes in schooling institutions.

Model Selection and Model Averaging

Abstract: Given a data set, you can fit thousands of models at the push of a button, but how do you choose the best? With so many candidate models, overfitting is a real danger. Is the monkey who typed Hamlet actually a good writer? Choosing a model is central to all statistical work with data. We have seen rapid advances in model fitting and in the theoretical understanding of model selection, yet this book is the first to synthesize research and practice from this active field. Model choice criteria are explained, discussed and compared, including the AIC, BIC, DIC and FIC. The uncertainties involved with model selection are tackled, with discussions of frequentist and Bayesian methods; model averaging schemes are presented. Real-data examples are complemented by derivations providing deeper insight into the methodology, and instructive exercises build familiarity with the methods. The companion website features Data sets and R code.

An econometric study of CO2 emissions, energy consumption, income and foreign trade in Turkey

Abstract: This study attempts to examine empirically dynamic causal relationships between carbon emissions, energy consumption, income, and foreign trade in the case of Turkey using the time series data for the period 1960-2005 This research tests the interrelationship between the variables using the bounds testing to cointegration procedure The bounds test results indicate that there exist two forms of long-run relationships between the variables In the case of first form of long-relationship, carbon emissions are determined by energy consumption, income and foreign trade In the case of second long-run relationship, income is determined by carbon emissions, energy consumption and foreign trade An augmented form of Granger causality analysis is conducted amongst the variables The long-run relationship of CO2 emissions, energy consumption, income and foreign trade equation is also checked for the parameter stability The empirical results suggest that income is the most significant variable in explaining the carbon emissions in Turkey which is followed by energy consumption and foreign trade Moreover, there exists a stable carbon emissions function The results also provide important policy recommendations

The measurement of productive efficiency and productivity growth

Abstract: 1. Efficiency and Productivity 2. The Econometric Approach To Efficiency Analysis 3. DEA - The Mathematical Programming Approach to Efficiency Analysis 4. Statistical Inference in Nonparametric Frontier Models: Recent Developments and Perspectives 5. Efficiency and Productivity: Malmquist and More

Firm Organization, Industrial Structure, and Technological Innovation

Abstract: The formal and informal structures of firms and their external linkages have an important bearing on the rate and direction of innovation. This paper explores the properties of different types of firms with respect to the generation of new technology. Various archetypes are recognized and an effort is made to match organization structure to the type of innovation. The framework is relevant to technology and competition policy as it broadens the framework economists use to identify environments that assist innovation.

Default risk and income fluctuations in emerging economies

Abstract: Recent sovereign defaults in emerging countries are accompanied by interest rate spikes and deep recessions. This paper develops a small open economy model to study default risk and its interaction with output, consumption, and foreign debt. Default probabilities and interest rates depend on incentives for repayment. Default occurs in equilibrium because asset markets are incomplete. The model predicts that default incentives and interest rates are higher in recessions, as observed in the data. The reason is that in a recession, a risk averse borrower finds it more costly to repay non-contingent debt and is more likely to default. In a quantitative exercise the model matches various features of the business cycle in Argentina such as: high volatility of interest rates, higher volatility of consumption relative to output, a negative correlation of interest rates and output and a negative correlation of the trade balance and output. The model can also predict the recent default episode in Argentina.

Planning and financial literacy: How do women fare?

Abstract: Many older US households have done little or no planning for retirement, and there is a substantial population that seems to undersave for retirement. Of particular concern is the relative position of older women, who are more vulnerable to old-age poverty due to their longer longevity. This paper uses data from a special module we devised on planning and financial literacy in the 2004 Health and Retirement Study. It shows that women display much lower levels of financial literacy than the older population as a whole. In addition, women who are less financially literate are also less likely to plan for retirement and be successful planners. These findings have important implications for policy and for programs aimed at fostering financial security at older ages.

Introduction to Territory, Authority, Rights: From Medieval to Global Assemblages

Abstract: Where does the nation-state end and globalization begin? In Territory, Authority, Rights , one of the world's leading authorities on globalization shows how the national state made today's global era possible. Saskia Sassen argues that even while globalization is best understood as "denationalization," it continues to be shaped, channeled, and enabled by institutions and networks originally developed with nations in mind, such as the rule of law and respect for private authority. This process of state making produced some of the capabilities enabling the global era. The difference is that these capabilities have become part of new organizing logics: actors other than nation-states deploy them for new purposes. Sassen builds her case by examining how three components of any society in any age--territory, authority, and rights--have changed in themselves and in their interrelationships across three major historical "assemblages": the medieval, the national, and the global. The book consists of three parts. The first, "Assembling the National," traces the emergence of territoriality in the Middle Ages and considers monarchical divinity as a precursor to sovereign secular authority. The second part, "Disassembling the National," analyzes economic, legal, technological, and political conditions and projects that are shaping new organizing logics. The third part, "Assemblages of a Global Digital Age," examines particular intersections of the new digital technologies with territory, authority, and rights. Sweeping in scope, rich in detail, and highly readable, Territory, Authority, Rights is a definitive new statement on globalization that will resonate throughout the social sciences.

Panel data econometrics in R: The plm package

Abstract: Panel data econometrics is obviously one of the main fields in the profession, but most of the models used are difficult to estimate with R. plm is a package for R which intends to make the estimation of linear panel models straightforward. plm provides functions to estimate a wide variety of models and to make (robust) inference.

An Agenda for a Reformed Cohesion Policy A place-based approach to meeting European Union challenges and expectations

Abstract: EU regional policy is an investment policy. It supports job creation, competitiveness, economic growth, improved quality of life and sustainable development. These investments support the delivery of the Europe 2020 strategy. The present paper analysis two strategically different options of EU regional policy: place-neutral versus place-based policies for economic development. Our results suggest that in many EU regions the place-neutral policies may no be the best policy response to facing new challenges posed by deeper economic integration and globalisation.

Managing Intellectual Capital: LICENSING AND CROSS-LICENSING IN SEMICONDUCTORS AND ELECTRONICS

Abstract: The following sections are included:The Licensing LegacyBackground-The Formation of RCAAT&T's Cross-Licensing PracticesCross-Licensing in the Computer Industry-IBMImpact of Consent Decrees on Industry DevelopmentLicensing Practice at a Semiconductor Company-Texas Instruments35Licensing ObjectivesTypes of Cross-Licenses“ Proud List” Royalty Valuation ProcessStrategic ConsiderationsImpact of TI's Licensing StrategyIP Management and Cross-licensing in an Electronics Company-Hewlett-Packard52Innovation StrategyLicensing ObjectivesIP ManagementManaging Intellectual Capital in the Electronics IndustryContrasting IP Management ObjectivesChanging IP Modes in the Semiconductor IndustryInitial Growth PhaseIncreased Global CompetitionInnovation LeadershipLessons for Innovation ManagementUsing IP to Support Core BusinessImportance of Developing a Valuable Patent PortfolioConcentrate R&D Where the Firm Is StrongestPolicy IssuesConclusionNotes

Determining the number of factors in approximate factor models with global and group-specific factors

Abstract: For an approximate factor model, in a static representation, with a common component comprising global factors and factors specific to groups of variables, the consistency of the principal components estimator is discussed. An extension of the well known Bai and Ng criteria is proposed for determining the number of global and group-specific factors. The consistency of the suggested criteria is established and the small sample properties are assessed through Monte Carlo simulations. As an empirical illustration, the proposed criteria is applied to estimate the number of global and country-specific macroeconomic factors for the major euro area countries.

The Logic of Appropriateness

Abstract: The logic of appropriateness is a perspective that sees human action as driven by rules of appropriate or exemplary behavior, organized into institutions Rules are followed because they are seen as natural, rightful, expected, and legitimate Actors seek to fulfill the obligations encapsulated in a role, an identity, a membership in a political community or group, and the ethos, practices and expectations of its institutions Embedded in a social collectivity, they do what they see as appropriate for themselves in a specific type of situation The paper is divided into five parts First, we sketch the basic ideas of rule-based action Second, we describe some characteristics of contemporary democratic settings Third, we attend to the relations between rules and action, the elements of slippage in executing rules Fourth, we examine the dynamics of rules and standards of appropriateness And, fifth, we discuss a possible reconciliation of different logics of action, as part of a future research agenda for students of democratic politics and policy making

The Oxford handbook of public policy

Abstract: PART 1. INTRODUCTION PART II. INSTITUTIONAL AND HISTORICAL BACKGROUND PART III. MODES OF POLICY ANALYSIS PART IV. PRODUCING PUBLIC POLICY PART V. INSTRUMENTS OF POLICY PART VI. CONSTRAINTS ON PUBLIC POLICY PART VII. POLICY INTERVENTION: STYLES AND RATIONALES PART VIII. COMMENDING AND EVALUATING PUBLIC POLICIES IX. PUBLIC POLICY, OLD AND NEW

Understanding farmers perceptions and adaptations to climate change and variability: The case of the Limpopo Basin farmers South Africa

Abstract: "Climate change is expected to have serious environmental, economic, and social impacts on South Africa In particular, rural farmers, whose livelihoods depend on the use of natural resources, are likely to bear the brunt of adverse impacts The extent to which these impacts are felt depends in large part on the extent of adaptation in response to climate change Adaptation is widely recognized as a vital component of any policy response to climate change Without adaptation, climate change would be detrimental to the agricultural sector, but with adaptation, vulnerability can be significantly reduced This brief is based on a study that examines farmers' perceptions of climate change and analyzes their adaptation responses to climate change and variability using household survey data from the Limpopo River Basin in South Africa" from text

Elaborating the “New Institutionalism”

Abstract: To sketch an institutional approach, this paper elaborates ideas presented over 20 years ago in The New Institutionalism: Organizational Factors in Political Life (March and Olsen 1984). Institutionalism, as that term is used here, connotes a general approach to the study of political institutions, a set of theoretical ideas and hypotheses concerning the relations between institutional characteristics and political agency, performance and change. Institutionalism emphasizes the endogenous nature and social construction of political institutions. Institutions are not simply equilibrium contracts among self-seeking, calculating individual actors or arenas for contending social forces. They are collections of structures, rules and standard operating procedures that have a partly autonomous role in political life. The paper ends with raising some research questions at the frontier of institutional studies.

Corporate Governance, Product Market Competition, and Equity Prices

Abstract: This paper examines the hypothesis that firms in competitive industries should benefit relatively less from good governance, while firms in non-competitive industries--where lack of competitive pressure fails to enforce discipline on managers--should benefit relatively more. Whether we look at the effects of governance on long-horizon stock returns, firm value, or operating performance, we consistently find the same pattern: The effect is monotonic in the degree of competition, it is small and insignificant in competitive industries, and it is large and significant in non-competitive industries. By implication, the effect of governance (in non-competitive industries) reported in this paper is stronger than what has been previously reported in Gompers, Ishii, and Metrick (2003, "GIM") and subsequent work, who document the average effect across all industries. For instance, GIM’s hedge portfolio - provided it only includes firms in non-competitive industries -earns a monthly alpha of 1.47%, which is twice as large as the alpha reported in GIM. The alpha remains large and significant even if the sample period is extended until 2006. We also revisit the argument that investors in the 1990s anticipated the effect of governance, implying that the alpha earned by GIM’s hedge portfolio is likely due to an omitted risk factor. We find that while investors were indeed not surprised on average, they underestimated the effect of governance in non-competitive industries, the very industries in which governance has a significant effect in the first place.

Summary of "Expanding credit access: using randomized supply decisions to estimate the impacts"

Abstract: Expanding access to commercial credit is a key ingredient of financial development strategies. There is less consensus on whether expanding access to consumer credit helps borrowers, particularly when loans are extended at high interest rates. Popular skepticism about "unproductive," "usurious" lending is fueled by research highlighting behavioral biases that may induce overborrowing. We estimate the impacts of expanding access to consumer credit at a 200% annual percentage rate (APR) using a field experiment and follow-up data collection. The randomly assigned marginal loans produced significant net benefits for borrowers across a wide range of outcomes. There is also some evidence that the loans were profitable.

Socioeconomic Differences in Reading Trajectories: The Contribution of Family, Neighborhood, and School Contexts

Abstract: In the present study, the authors use the Early Childhood Longitudinal Study, Kindergarten Cohort of 1998-1999, to examine the extent to which family, school, and neighborhood factors account for the impact of socioeconomic status (SES) on children's early reading.

Long-term Persistence

Abstract: Is social capital long lasting? Does it affect long term economic performance? To answer these questions we test Putnam’s conjecture that today marked differences in social capital between the North and South of Italy were due to the culture of independence fostered by the free city-states experience in the North of Italy at the turn of the first millennium. We show that the medieval experience of independence has an impact on social capital within the North, even when we instrument for the probability of becoming a city-state with historical factors (such as the Etruscan origin of the city and the presence of a bishop in year 1,000). More importantly, we show that the difference in social capital among towns that in the Middle Ages had the characteristics to become independent and towns that did not exists only in the North (where most of these towns became independent) and not in the South (where the power of the Norman kingdom prevented them from doing so). Our difference in difference estimates suggest that at least 50% of the North-South gap in social capital is due to the lack of a free city-state experience in the South.

Which CEO Characteristics and Abilities Matter

Abstract: We study the characteristics and abilities of CEO candidates for companies involved in buyout (LBO) and venture capital (VC) transactions and relate them to hiring decisions, investment decisions, and company performance. Candidates are assessed on more than thirty individual abilities. The abilities are highly correlated; a factor analysis suggests there are two primary factors with intuitive characterizations -- one for general ability and one that contrasts team-related, interpersonal skills with execution skills. Both LBO and VC firms are more likely to hire and invest in CEOs with greater general abilities, both execution- and team-related. Success, however, is more strongly related to execution skills than to team-related skills. Success is, at best, only marginally related to incumbency, holding observable talent and ability constant.

Analyzing Health Equity Using Household Survey Data: A Guide to Techniques and Their Implementation

Abstract: This book shows how to implement a variety of analytic tools that allow health equity - along different dimensions and in different spheres - to be quantified Questions that the techniques can help provide answers for include the following: Have gaps in health outcomes between the poor and the better-off grown in specific countries or in the developing world as a whole? Are they larger in one country than in another? Are health sector subsidies more equally distributed in some countries than in others? Is health care utilization equitably distributed in the sense that people in equal need receive similar amounts of health care irrespective of their income? Are health care payments more progressive in one health care financing system than in another? What are catastrophic payments? How can they be measured? How far do health care payments impoverish households? This volume has a simple aim: to provide researchers and analysts with a step-by-step practical guide to the measurement of a variety of aspects of health equity Each chapter includes worked examples and computer code The authors hope that these guides, and the easy-to-implement computer routines contained in them, will stimulate yet more analysis in the field of health equity, especially in developing countries They hope this, in turn, will lead to more comprehensive monitoring of trends in health equity, a better understanding of the causes of these inequities, more extensive evaluation of the impacts of development programs on health equity, and more effective policies and programs to reduce inequities in the health sector

International R&D Spillovers and Institutions

Abstract: The empirical analysis in "International R&D Spillovers" (Coe and Helpman, 1995) is first revisited by applying modern panel cointegration estimation techniques to an expanded data set that we have constructed for the purpose of this study The new estimates confirm the key results reported in Coe and Helpman about the impact of domestic and foreign R&D capital stocks on TFP In addition, we show that domestic and foreign R&D capital stocks have measurable impacts on TFP even after controlling for the impact of human capital Furthermore, we extend the analysis to include institutional variables, such as legal origin and patent protection, in order to allow for parameter heterogeneity based on a country’s institutional characteristics The results suggest that institutional differences are important determinants of total factor productivity and that they impact the degree of R&D spillovers

A novel pricing method for european options based on fourier-cosine series expansions

Abstract: Here we develop an option pricing method for European options based on the Fourier-cosine series, and call it the COS method. The key insight is in the close relation of the characteristic function with the series coefficients of the Fourier-cosine expansion of the density function. In most cases, the convergence rate of the COS method is exponential and the computational complexity is linear. Its range of application covers different underlying dynamics, including L\'evy processes and Heston stochastic volatility model, and various types of option contracts. We will present the method and its applications in two separate parts. The first one is this paper, where we deal with European options in particular. In a follow-up paper we will present its application to options with early-exercise features.