Showing papers in "The Economic Journal in 1998"

The Endogenity of the Optimum Currency Area Criteria

Abstract: A country' suitability for entry into a currency union depends on a number of economic conditions. These include, inter alia, the intensity of trade with other potential members of the currency union, and the extent to which domestic business cycles are correlated with those of the other countries. But international trade patterns and international business cycle correlations are endogenous. This paper develops and investigates the relationship between the two phenomena. Using thirty years of data for twenty industrialised countries, we uncover a strong and striking empirical finding: countries with closer trade links tend to have more tightly correlated business cycles.

Openness, productivity and growth: what do we really know?*

Abstract: Comparative data for 93 countries are used to analyse the robustness of the relationship between openness and total factor productivity growth. Nine indexes of trade policy are used to investigate whether the evidence supports the view that total factor productivity growth is faster in more open economies. The results are robust to the use of openness indicator, estimation technique, time period and functional form, and suggest that more open countries experienced faster productivity growth. Although the use of instrumental variables help dealing with endogeneity, issues related to causality remain somewhat open, and require time series analyses to be adequately addressed. Old controversies die slowly. For over a century social analysts have debated the connection between trade policy and economic performance. While according to liberal economists freer trade results in faster growth, some analysts have argued that protectionism may help economic performance. This controversy continues today, even as the world is experiencing an unprecedented period of trade liberalisation, and in spite of numerous empirical studies that claim to have found a positive effect of openness on growth. The most prominent trade liberalisation sceptics include Krugman (1994) and Rodrik (1995), who have argued that the effect of openness on growth is, at best, very tenuous, and at worst, doubtful. Two issues have been at the core of these controversies: first, until recently theoretical models had been unable to link trade policy to faster equilibrium growth. And second, the empirical literature on the subject has been affected by serious data problems.1 During the last decade, however, the 'new' theories of growth pioneered by Romer (1986) and Lucas (1988) have provided persuasive intellectual support for the proposition that openness affects growth positively. Romer (1992), Grossman and Helpman (1991) and Barro and Sala-i-Martin (1995), among others, have argued that countries that are more open to the rest of the world have a greater ability to absorb technological advances generated in leading nations. Barro and Sala-i-Martin (1995, Ch. 8), for example, consider a twocountries world (one advanced and one developing), differentiated inputs, and no capital mobility. Innovation takes place in the advanced (or leading) nation, while the poorer (or follower) country confines itself to imitating the new techniques. The equilibrium rate of growth in the poorer country depends on the cost of imitation, and on its initial stock of knowledge. If the costs of imitation are lower than the cost of innovation, the poorer country will

Are Women Less Selfish Than Men?: Evidence From Dictator Experiments

Abstract: Research in social sciences other than economics indicates substan tial differences in behaviour between men and women. The general conclusion drawn from this work is that women will be more socially-orientated (selfless), and men more individually-orientated (selfish). This paper reports the results of a double-anonymous dictator experiment designed to permit the emergence of basic gender differences in economic behaviour. Our results are intended to provide a baseline for further research. We find that women, on average, donate twice as much as men to their anonymous partners when any factors that might confound cooperation are eliminated

Explaining International and Intertemporal Variations in Income Inequality

Abstract: This paper explores the propositions that, income inequality is relatively stable within countries; and that it varies significantly among countries. A new and expanded data set provides broad support for both propositions. Drawing on a political economy and capital market imperfection arguments to explain the intertemporal and international variation in inequality, the empirical analysis shows that the predicted variables associated with the first argument (a measure of civil liberties and the initial level of secondary schooling) and the second argument (a measure of financial depth and the initial distribution of land) are indeed important determinants of inequality. This paper explores two propositions regarding income inequality. They are: first, income inequality is relatively stable within countries; and second, it varies significantly across countries.' To illustrate, note that the Gini coefficient in India remained almost constant for forty years (1951-92) with mean 32.6 and standard deviation 2.0.2 In contrast, the variation in Gini coefficients across countries is large: 61.9 in Honduras in 1968 compared with 17.8 in Bulgaria in 1976. If substantiated, these propositions have potentially significant implications for poverty. The significance of the first is obvious - barring any fundamental socio-political change, poverty reduction will depend crucially on the rate of economic growth. Given this, the significance of the second is that in inegalitarian economies the poor will enjoy a smaller share of any national increment in income than in more egalitarian ones. Drawing on a new and expanded data set on inequality (Deininger and Squire, 1996a), the first of the paper's three sections conducts standard statistical tests of the two propositions. The sample comprises 573 observations on the most common measure of inequality - the Gini coefficient - for 49 developed and developing countries covering the period 1947-94. The results broadly confirm our two propositions. Specifically, analysis of variance (ANOVA) shows that about 90% of the total variance in the Gini coefficients

Large Cash Transfers to the Elderly in South Africa

Abstract: We examine the social pension in South Africa, where large cash sums-about twice the median per capita income of African households-are paid to people qualified by age but irrespective of previous contributions. We present the history of the scheme and use a 1993 nationally representative survey to investigate the redistributive consequences of the transfers, documenting who receive the pensions, their levels of living, and those of their families. We also look at behavioural effects, particularly the effects of the cash receipts on the allocation of income to food, schooling, transfers, and savings. In South Africa, a large 'social pension'-about twice the median per capita income of African households-is paid in cash to people qualified by age irrespective of previous contributions. We present the history of the scheme and explain how such large transfers could come about in an economy in which the recipients were not only politically weak, but without any political representation whatsoever. We then use a 1993 nationally representative survey to investigate the redistributive consequences of the transfers, documenting who receive the pensions, their levels of living, and those of their families. We also look at behavioural effects, particularly the effects of the cash receipts on the allocation of income to food, schooling, transfers, and savings. The pressing policy issue for South Africans is whether it makes sense to target seven billion rand (nearly $2 billion) of social expenditure through the current pension schemes. Our analysis contributes to the discussion by documenting the redistributive and behavioural effects of the transfers. We find that, at least as far as immediate incidence is concerned, and without allowance for behavioural effects, the social pension is an effective tool of redistribution, and that the households it reaches are predominantly poor. Because so many of the elderly among South Africa's African population live with children, the social pension is also effective in putting money into house

Property Rights, Corruption and the Allocation of Talent: a General Equilibrium Approach

Abstract: We consider an economy where contracts are necessary to encourage investments. Contract enforcement requires that a fraction of the agents work in the public sector and do not accept bribes. We find that: (1) It may be optimal to allow some corruption and not enforce property rights fully. (2) Less developed economies may choose lower levels of property right enforcement and more corruption. (3) There may exist a 'free-lunch' such that over a certain range it is possible simultaneously to reduce corruption, increase investment, and achieve a better allocation of talent. Bureaucratic corruption is widespread in many societies. Casual empiricism and case studies suggest that corruption distorts the allocation of resources, and discourages investment and the creation of new firms (e.g. Mydral, 1968, DeSoto, 1989). Cross-country studies also find that countries with high corruption or long bureaucratic delays suffer lower growth (e.g. Mauro, 1996; Sartre, 1997). It is therefore tempting to conclude that government policies and bureaucratic corruption are at least partly responsible for the lack of development or slow growth of many economies (e.g. Shleifer and Vishny, 1993). Nevertheless, governments and bureaucracies do not exist only to seek rents. They perform a number of useful functions, including provision of public goods, correction of market failures, and redistribution. Without understanding why the state exists, it is difficult to assess why corruption arises, what its consequences are, and whether and how it should be prevented. In this paper, we analyse how the employees of the state (bureaucrats) can misuse their power to enforce property rights. The protection of property rights is commonly viewed as one of the most important roles of the state by political philosophers as diverse as David Hume, Karl Marx and Robert Nozick, while a number of social scientists including North and Thomas (1973) and Rosenberg and Bridzell (1989) emphasise the importance of secure property rights in the development of western societies. For the state to have a role in enforcing property rights, some contractual problems must exist between private parties. In our economy, these contractual problems are between entrepreneurs. In particular, production requires two agents, and one of the entrepreneurs needs to undertake an investment, but the returns accrue to the other one. This can be thought as a partnership with the first agent as an upstream supplier providing an input of variable

The New Regionalism

Abstract: Once again, regionalism is afoot. Twin late-1980s announcements, by the United States and Canada of negotiations for a free-trade area, and by the EU of an attempt to complete its internal market, ignited a conflagration of regional integration. Well over a hundred regional arrangements, involving most nations, now exist. Deja vu: the 1950s and 1960s had likewise witnessed many ‘old regionalism’ initiatives. Except for Western Europe, these in the end amounted to little, however, and efforts for preferential trade became quiescent, until the dramatic advent of the ‘new regionalism’.

A Model of Crises in Emerging Markets

Abstract: This paper presents a perfect foresight model of speculative attacks on emerging markets. Credit constrained governments are assumed to have two objectives: to accumulate liquid assets in order to self-insure against shocks to national consumption and to insure poorly regulated domestic financial markets. This policy regime generates endogenous fiscal deficits defined to include the growth of contingent liabilities. The model sets out a sequence of yield differentials consistent with capital inflows followed by anticipated speculative attacks. The model suggests that a common shock generated capital inflows to emerging markets in Asia and Latin America after 1989.

Mortality as an indicator of economic success and failure.

Abstract: Quality of life depends on various physical and social conditions such as the epidemiological environment in which a person lives. The availability of health care and the nature of medical insurance--public as well as private--are among the important influences on life and death. So are other social services including basic education and the orderliness of urban living and the access to modern medical knowledge in rural communities. The statistics on mortality draw our attention to all these policy issues. Mortality information can throw light also on the nature of social inequalities including gender bias and racial disparities. (EXCERPT)

Network Interconnection in Telecommunications

Abstract: This paper discusses industries such as telecommunications where firms each have their own customers and must interconnect with other firms to provide a comprehensive service. Two scenarios are considered: (i) the case of a symmetric, unregulated industry, and (ii) the case of an industry with a dominant, regulated incumbent. In the first, provided there is sufficient product differentiation, it is shown that firms agree to set interconnection charges above associated costs in order to obtain the joint profit-maximising outcome. In the second a formula for the welfare-maximizing interconnection charge is derived. Relations with the ‘efficient component pricing rule’ are discussed

Unemployment: Questions and Some Answers

Abstract: In more or less every country in the OECD, unemployment was lower in the decades following the second world war than in any other period of comparable length, either before or since. For example, in Britain unemployment has exceeded 5% in every peacetime decade from 1850 onwards except for the 1950s and 1960s. Alternatively, as we can see in Table 1 (p. 779), average unemployment in the 1980s and 90s is higher, generally much higher, than in the 1960s in every country considered. Why this is so is one of the questions which underlies this paper. A second question, which is also illustrated in the unemployment numbers presented in Table 1 (p. 779), concerns the causes of the enormous variation in unemployment rates across the OECD countries? As we shall see, these are difficult questions. The first, in particular, is one for which we do not have a complete answer. By this, I do not mean that we do not have theories which are broadly consistent with these numbers. In fact, we have theories consistent with more or less any numbers. What we lack is a satisfactory empirical explanation of the time series pattern of OECD unemployment. In what follows, we remain focused on these two questions, first considering the theoretical background and then looking at some possible answers. We finish with some speculative conjectures on the first question.

Trading Preferentially: Theory and Policy

Abstract: The best kind of economic theory has almost always reflected policy concerns, while informing policy in turn. This is particularly so when it comes to the theory of international trade, going back to Adam Smith's discovery of the demerits of mercantilism and his invention of economic science, both in The Wealth of Nations. The theory of preferential trading is no exception. The original burst of creative theorising about Preferential Trade Agreements (PTAs), associated with what Bhagwati (1991) has called the First Regionalism', is well known to have come from Jacob Viner's (1950) work on what he called the 'customs union issue' and was a result of his having been commissioned by the Carnegie Endowment to examine the appropriate design of the world trading system with the end of the Second World War. In turn, the impending formation of the Common Market, leading to the Treaty of Rome in 1957, played a role in the further development of the theory at the hands of James Meade (1955), Richard Lipsey (1958) and others.2 The recent burst of theorising about PTAs is also a reflection of the new policy questions raised by the fact that the United States abandoned in the early 1980s its policy of avoiding PTAs, even though sanctioned by Article 24 of the GATT, and concentrating exclusively on multilateral trade negotiations

Residential Mobility, Housing Equity and the Labour Market

Abstract: Henley, A. G. (1998). Residential Mobility, Housing Equity and the Labour Market. Economic Journal, 108 (447), 414-427

Why Trade Liberalisation is Good for Growth

Abstract: There are three titles that might have been assigned for this paper: 1) Why Is Growth so Rapid with Outer-Oriented Trade Strategies?; 2) Do Countries with Outer-Oriented Trade Strategies Grow Faster? and 3) the one actually assigned. They are not the same. Of the three, the first is probably the most difficult to answer. The second is a factual question, and the empirical demonstration is straightforward (Sachs and Warner, 1995). The third, by focussing on trade liberalisation, implies that developing countries have highly restrictive trade regimes and thus asks if a move away from those regimes is good for growth. It is far easier to show why, especially over time, liberalising a restrictive trade regime is conducive to more rapid growth than it is to show why outer oriented trade strategies have been so highly successful. Trade strategies and development strategies are closely related, and it is useful to start by defining a few terms. An import-substitution (IS) industrialisation strategy was adopted by most developing countries in the years following the Second World War. In most cases those countries were then predominantly agricultural and exporters of primary commodities. The belief then was that rapid industrialisation was the essential (if not the sole) feature of economic growth and that only by domestically producing goods then imported could developing countries industrialise.1 Under IS, it was intended to provide protection to new industries during their developmental period until they could compete with their counterparts in industrialised countries. In practice, the IS strategy pulled most new resources into import-competing activites (with a number of negative consequences discussed later) and one result was that export earnings grew less rapidly than the demand for foreign exchange and usually less rapidly even than real GDP. An almost universal policy response was then to impose restrictive import licensing in response to 'foreign exchange shortage'. The stated reasons for this were the need to 'conserve scarce foreign exchange' for 'essential' developmental needs. The outcome was, of course, a restrictive trade regime. For reasons to be discussed below, as IS strategies continued, trade regimes increased in restrictiveness and growth slowed. Hence, to discuss trade liberalisation is to address the removal (or at least reduction) of incentives for IS industrialisation. And, because again to be discussed below growth spurred under an IS industrialisation strategy slows

Public Investment, Congestion, and Private Capital Accumulation

Abstract: This paper analyses the impact of public investment on the dynamics of private capital formation in an intertemporal optimising market-clearing framework. The key feature characterising the analysis is that the public good is treated as a durable capital good, subject to congestion. We show how in the presence of congestion the effect of government investment on private capital formation involves a tradeoff between the degree of substitution between private and public capital in production and the degree of congestion. Both lump-sum and distortionary tax financing are considered, with this tradeoff being tightened in the latter case

Modelling Labour Market Adjustment to Trade Liberalisation in an Industrialising Economy

Abstract: This paper investigates labour market responses to trade liberalisation in an industrialising country. Short and long run responses of employment and wages are examined using a specific factor trade model, which underpins the empirical work. Employment and wage equations are estimated using dynamic panel techniques for importable and exportable sectors in Mauritius and for a period covering both the pre- and post-liberalisation regimes. The empirical testing finds some support for the theoretical predictions of differential responses between sectors. Increases in female participation, however, appear to have dampened the adjustment burdens of liberalisation on importables. There is relatively little evidence available about the effects of trade-induced shifts in the composition of demand on inter-industry employment and wage levels in developing countries. Analyses' of the factor content of imports and exports suggest that a shift from import substitution (IS) to export promotion (EP) policies will typically, in the case of a developing country, expand the more labour-intensive industries, increase labour demand overall and drive up real wages in the long run. But trade liberalisation and increased foreign competition may not only affect the composition of the tradeables goods sector (i.e. the distribution between importables and exportables), they may also affect both the efficiency with which all firms use factors (including labour) and the distribution of output within a sector between more and less efficient firms. Thus the net long-run effects of trade liberalisation on employment will depend upon the balance of structural and efficiency effects, which cannot be identified from analyses of the composition of trade alone. Further we must also recognise that the short- and long-run effects of trade liberalisation on employment and wages may diverge; the divergence depending on the degree of factor mobility and the competitiveness of labour markets. The aim of this paper is to model labour market adjustment to trade liberalisation in an industrialisingz country. It will do so using panel data evidence for Mauritius, an economy that has undergone significant trade liberalisation and transformation during the 1980s. Indeed Mauritius is viewed simultaneously as a successful liberaliser and an economy with extensive government intervention in the labour market. It provides a valuable test base

On measuring literacy

Abstract: The authors present a new approach to evaluating the level of effective literacy in a region or country, one that takes into account the presence in a household of a literate person. They characterize the approach and give an empirical illustration of its use. They designed the new measures of literacy because traditional measures of the literacy rate (R) ignore how the presence of literate person in the household affects literacy. They contend that literate household members generate a positive externality -- a kind of public good - for illiterate members. They believe their new measures will be superior to R in predicting or explaining other achievements that depend on literacy. They expect the rate of diffusion of a new technology for farming, for example, to be more closely linked to the effective literacy rate than to the usual literacy rate. If an agricultural extension worker leaves behind a brochure explaining how to plant and care for high-yielding varieties, an illiterate person who lives in a household with at least one literate member has access to that public good; an isolated illiterate - whose household has not literate members - may not have. Similarly, if the presence ( or absence) of one literate household member increases the chance of a child becoming literate, so the effective literacy rate should be a better predictor of future generations' literacy rate should be a better predictor of future generations' literacy levels. Some changes in policy emphasis might be expected if the new effective literacy measures are used. There might be a shift, for example, toward ensuring a better distribution of literacy across households or toward addressing more seriously the problem of female illiteracy. More work is needed to determine if a child in a household with a higher percentage of literate adults has more frequent access to literacy skills.

How Much Income Mobility is There in Britain

Abstract: Using the first four waves of the British Household Panel Survey (1991–4) and a variety of methods, we show that there is much mobility in household net income from one year to the next in Britain. However most income changes from one year to the next are not very large, and when incomes are longitudinally averaged so that transitory variations are smoothed out, substantial ‘permanent’ income differences are revealed. There is some evidence of greater mobility for those in the tails of the income distribution relative to the middle, and for elderly persons compared to non-elderly persons

Contracting for health services with unmonitored quality

Abstract: In both the NHS and Medicare, recent emphasis has been on contracts with payment based only on the ntumber of patients treated. It is shown that, withouit direct monitoring of quality or effort to reduce costs, stuch contracts are efficient only when it is efficient to treat all patients wanting treatment. It may not be when treatment costs are insured or stibsidised. Such contracts can then be improved by incltuding payments for the number of patients wanting treatment, as well as for the number actually treated. Even then, the otutcome will not generally be efficient if quality is multi-dimensional. In purchasing health services, government agencies, insurers and health maintenance organisations (HMOs) want to keep costs down without inducing providers of services to skimp on quality. By quality, we mean any aspect of service that benefits patients, whether during the process of treatment or in the health outcome after treatment. Typically, neither the provider's effort to reduce costs, nor the quality of service, is easily described in a way that makes specification in a contract straightforward, so the provider must be induced to supply both effort and quality. Contracting is thus what Holmstrom and Milgrom (1991) term a multitask agency problem. In both the British National Health Service (NHS) and US Medicare, recent emphasis has been on using contracts with payment based only on the number of patients treated (price-quantity schedules) for each specified medical condition and not on such additional information as the actual cost of treatment. Under Medicare, payment is (with certain exceptions) a fixed price per patient in each diagnosis related group (DRG). In the NHS, purchasers are encouraged to use fixed price contracts (known as cost per case contracts) or contracts with payment a non-linear function of the number of patients treated (cost and volume or sophisticated block contracts). National Audit Office (1995) summarises

Rethinking Deviations From Uncovered Interest Parity: the Role of Covariance Risk and Noise

Abstract: We examine the ability of the standard intertemporal asset pricing model and a model of noise trading to explain why the forward foreign exchange premium predicts the future currency depreciation with the 'wrong' sign. We find that the intertemporal asset pricing model is unable to predict risk premia with the correct sign to be consistent with the data. The noisetrader model, while highly stylised, receives fragmentary support from empirical research on survey expectations. This paper investigates the theoretical basis of an asset pricing anomaly in international finance known as the forward premium bias. That is, the empirical finding that the forward premium helps to predict the future percentage rate of currency depreciation but not with the sign implied by uncovered interest parity.' As a corollary to the forward premium bias, Fama (1984) demonstrates that the deviation from uncovered interest parity, which we denote by pt, is negatively correlated with and is more volatile than the rationally expected rate of depreciation. These empirical findings have long posed a challenge to international economic theory. In this paper, we explore two very different approaches to explaining this puzzle: the standard representative-agent intertemporal asset pricing model and a model of noise trading. Our analysis of the intertemporal asset pricing model employs quarterly data for the United States, Great Britain, Germany, and Japan extending from

Trade Reform, Adjustment and Growth: What Does the Evidence Tell Us?

Abstract: The contrast between the growth performance of East Asia at one extreme and sub-Saharan Africa at the other is a striking one. Much has been written about the contrast, especially in relation to the former. The reason for the interest is obvious: if there are elements of the East Asian experience which can be reproduced elsewhere then let us identify and replicate. One such common factor which a number of analysts believe they have identified is openness to international trade. More specifically, the growth of exports and the growth of GDP appear to be highly correlated (even if causality is sometimes in doubt) and on average, through time, countries with a more open trade orientation appear to do better. This proposition has underpinned an extraordinary wave of unilateral trade reform in developing countries. In the last twenty years over 90 countries have initiated some kind of reform or another. Some have been voluntary. Most, however, have been initiated by both Bretton Woods institutions but especially the World Bank under its Structural Adjustment Programme (SAP). Since 1980 a substantial proportion of total Bank lending has come through this window. Typically, any such loans are conditional on policy reform and in general trade policy reform figures prominently.1 Although there are political economy considerations which are relevant to the emphasis on trade policy reforms (such as the relative ease of monitoring change in that domain compared with others), the basic economic rationale is straightforward: if there appears to be a long term association between performance and openness and if an economy is presently relatively closed, then liberalisation is a necessary bridge to becoming more open. One can finesse the rationale in various ways but fundamentally that is what it comes down to. Has it worked? Has liberalisation of the World Bank inspired (or some might say required) variety proved to be a successful bridge? In other words has it led to growth? The reasons why it should or will not have been carefully presented by Dornbusch (1992) and Rodrik (1992, 1998) as well as Krueger and Taylor in this Controversy. Our concern here is not about the theory but the evidence. Overall is the evidence supportive of liberalisation providing a growth enhancing stimulus or not? In Section 1 we begin by setting out a series of

The New UK Monetary Arrangements: A View From the Literature

Abstract: This paper considers the likely operating characteristics of the new UK monetary arrangements introduced in May 1997. The paper first argues that the time inconsistency of policy is not an issue provided the Bank of England is properly independent. However, the current inflation remit from the Chancellor to the Bank specifies a numerical target for the inflation rate, but does not specify how quickly deviations from the target are to be corrected. It is thus an incomplete contract, and there is a danger that the Bank may choose to stabilise inflation at the cost of excessively volatile movements in output, or vice versa. We estimate the optimal policy frontier for the UK economy and show that in practice it is close to rectangular. Consequently all the Bank needs to assume is that the government's preferences are ‘reasonable’ in order to know approximately where to locate on this frontier; the incompleteness of the remit therefore need not be a cause for concern.

Economic Policy and Special Interest Politics

Abstract: A great deal of research has been done on the boundary between economics and political science in the last five to ten years. This research in 'political economics' spans many subfields, such as macroeconomics, trade, public finance, regulation, rational choice politics, and game theory. A common denominator has been to study structural models of the political process: agents behave rationally within well-specified economic and political institutions, where the policymaking process is formulated as an extensive form game. Methodologically, much progress has been made relative to traditional approaches, which were often based on inconsistent or irrational political and economic behaviour, relying on non-derived influence functions, political support functions, or vote functions. Yet, the modem work has largely developed separately in each subfield, without much contact with other subfields. And each of the resulting literatures tends to focus on a distinct, but partial, aspect of the political process. In this lecture, I shall argue that even though the progress to date has been substantial, we can gain a better understanding of policymaking in democracies by combining the insights from different strands of thinking. On some economic policy issues the conflicting views, both among citizens and politicians, basically reduce to a single left-to-right dimension. Examples may include the politics of inflation vs. unemployment, capital taxation, or the size of government. We can think about policy issues, within this domain of 'general interest politics', as being resolved via traditional Downsian electoral competition, at least to a first approximation. But the economic policy process also allows narrow interest groups ample opportunities to concentrate benefits to their own group at the expense of the population as a whole. The resulting policy conflict is generically multi-dimensional; resolving it by voting alone would thus result in Condorcet cycles. We therefore need to go beyond the simplest electoral models to understand policy determination within this domain of 'special interest politics'. This lecture deals with special interest politics. To make my point about fruitful analytical arbitrage, I will stick to the same underlying policy example throughout: this will be a simple model of a society where the government uses

Beer and the tie: did divestiture of brewer- owned public houses lead to higher beer prices?*

Abstract: In 1989, the United Kingdom Monopolies and Mergers Commission (MMC) recommended measures that eventually led brewers to divest themselves of 14,000 public houses. The MMC claimed that their recommendations would lower retail prices and increase consumer choice. Since that time, however, retail prices have risen. This paper contains an econometric analysis of the transition period. The analysis is based on a model of the relationship between retail price and retail-organisational form that emphasises how exclusive-dealing clauses and strategic factors interact. In 1989, in an important decision, the United Kingdom Monopolies and Mergers Commission (MMC) recommended measures that eventually led brewers to divest themselves of 14,000 public houses. The MMC claimed that their recommendations would lower retail prices and increase consumer choice. There is considerable doubt, however, that their objectives were achieved. Indeed, since the time that the recommendations were implemented, retail prices have risen. It is not clear, however, if prices would have increased in the absence of divestiture. One goal of my research is to provide an answer to this question. The MMC's recommendations created an exceptional opportunity to assess the effects that different contractual arrangements have on retail prices. Indeed, one would like to investigate this relationship ceteris paribus. Unfortunately, however, the choice of vertical-market structure is normally endogenous, and it is impossible to condition on all of the factors that affect the contracting decision. In the UK beer industry, in contrast, the Government ordered changes in the type and terms of the contracts under which national brewers could operate their licensed premises. Increased separation between brewer and publican, therefore, was not due to changes in economic conditions. Moreover, some premises - the 'free' houses that were not owned by a brewer - were not affected by the Beer Orders. The existence of a control group facilitates the analysis by strengthening the conclusions that one can draw. In recent years, economists have moved away from simple theories of vertical

Trade Liberalisation in Developing Economies: Modest Benefits but Problems with Productivity Growth, Macro Prices, and Income Distribution

Abstract: Microeconomically, the case for liberalisation is dubious under increasing returns to scale and when firms can invest directly in productivity enhancement. Distributional effects of commercial policy changes can be regressive and large, but the ‘rents’ they generate can serve as a basis for effective policy intervention contingent on firms' performance. Macroeconomically, the case of liberalisation rests on Say's Law, which is not always enforced. Recent combined current and capital market liberalisations have been associated with strong exchange rates and high interest rates and output and productivity growth have positive mutual feedbacks which liberalisation may well suppress.

Natural‐rate Theory and OECD Unemployment

Abstract: Our mission is to examine from the perspective of the intertemporal-equilibrium models of endogenous natural-rate theory the huge swings in unemployment among the OECD countries in recent times. We first look at the huge rise in jobless rates between the early 1970s and the early 1990s throughout the OECD: in the United States a rise from about 51 per cent to 7 per cent, Canada from about 6 to 10,Japan from 11 to 21, Italy from 31 to about 71, the United Kingdom from about 33 to about 9, France from about 23 to about 10, and West Germany from 4 to 5$;.1 We then look at the developing recovery of the general unemployment rate, most notably in the United Kingdom and the United States, amid a generally continued elevation of jobless rates among the less educated. We see the mid-1990s surge of unemployment in Germany, France and Italy as another story. There are other, older perspectives, of course. Keynesians interpreted events in the 1970s and in the 1980s as signs of effective-demand and effective-supply shocks (Feldstein, 1986; Fitoussi and Phelps, 1986; Malinvaud, 1985; Pissarides, 1990). But if the natural rate was unchanged they had to explain why the subsequent disinflation was short-lived (why inflation even turned up in the late 1980s or early 1990s) despite high unemployment. Lacking an endogenous natural rate, Keynesians could explain the durability of the slump only by positing either a permanent expectational disequilibrium or hysteresis, i.e. non-ergodicity (as in Phelps, 1972) or a degree of persistence so great as to be empirically indistinguishable from hysteresis. As the slump ran on, the expectational possibility wore thin. So they were down to hysteresis. Hicks (1974) launched a break with the Keynesian-monetarist perspective in the 1980s with his appeal to real frictions or rigidities. If wage-setting mechanisms make the real wage, v, sticky (in the sense of Lerner), hence predetermined in the short run, the unemployment rate, u, will rise in the short run in response to a shock contracting the 'demand wage,' i.e., a downward shift of the labour-demand schedule in the 1 u, v plane (Bruno and Sachs, 1985). Another landmark was a bargaining model with the property that its natural unemployment rate rose in response to several much-discussed shocks such as higher taxes and an energy shock reducing labour productivity (Layard and

Intergenerational Redistribution with Short‐lived Governments

Abstract: We study the politics of intergenerational redistribution in an overlapping generations model with short-lived governments. The successive governments—who care about the welfare of the currently living generations and possibly about campaign contributions—are unable to pre-commit the future course of redistributive taxation. In a stationary politico-economic equilibrium, the intergenerational transfer in each period depends on the current value of the state variable and all expectations about future political outcomes are fulfilled. We find that there exist multiple stationary equilibria in many political settings. Steady-state welfare is often lower than it would be in the absence of redistributive politics.