Showing papers in "The Economic Journal in 2006"

Institutions and the Resource Curse

Abstract: Countries rich in natural resources constitute both growth losers and growth winners. We claim that the main reason for these diverging experiences is differences in the quality of institutions. More natural resources push aggregate income down, when institutions are grabber friendly, while more resources raise income, when institutions are producer friendly. We test this theory building on Sachs and Warner's influential works on the resource curse. Our main hypothesis – that institutions are decisive for the resource curse – is confirmed. Our results contrast the claims of Sachs and Warner that institutions do not play a role.

Estimating Trade Restrictiveness Indices

Abstract: The objective of this paper is to provide indicators of trade restrictiveness that include both measures of tariff and nontariff barriers for 91 developing and industrial countries. For each country, the authors estimate three trade restrictiveness indices. The first one summarizes the degree of trade distortions that each country imposes on itself through its own trade policies. The second one focuses on the trade distortions imposed by each country on its import bundle. The last index focuses on market access and summarizes the trade distortions imposed by the rest of the world on each country's export bundle. All indices are estimated for the broad aggregates of manufacturing and agriculture products. Results suggest that poor countries (and those with the highest poverty headcount) tend to be more restrictive, but they also face the highest trade barriers on their export bundle. This is partly explained by the fact that agriculture protection is generally larger than manufacturing protection. Nontariff barriers contribute more than 70 percent on average to world protection, underlying their importance for any study on trade protection.

Financial performance and outreach: a global analysis of leading microbanks*

Abstract: Microfinance contracts have proven able to secure high rates of loan repayment in the face of limited liability and information asymmetries, but high repayment rates have not translated easily into profits for most microbanks. Profitability, though, is at the heart of the promise that microfinance can deliver poverty reduction while not relying on ongoing subsidy. The authors examine why this promise remains unmet for most institutions. Using a data set with unusually high quality financial information on 124 institutions in 49 countries, they explore the patterns of profitability, loan repayment, and cost reduction. The authors find that institutional design and orientation matter substantially. Lenders that do not use group-based methods to overcome incentive problems experience weaker portfolio quality and lower profit rates when interest rates are raised substantially. For these individual-based lenders, one key to achieving profitability is investing more heavily in staff costs-a finding consistent with the economics of information but contrary to the conventional wisdom that profitability is largely a function of minimizing cost.

Social Networks and Technology Adoption in Northern Mozambique

Abstract: Despite their potentially strong impact on poverty, agricultural innovations are often adopted slowly. Using a unique household dataset on sunflower adoption in Mozambique, we analyse whether and how individual adoption decisions depend upon the choices of others in the same social networks. Since farmers anticipate that they will share information with others, we expect farmers to be more likely to adopt when they know many other adopters. Dynamic considerations, however, suggest that farmers who know many adopters might strategically delay adoption to free-ride on the information gathered by others. We present empirical evidence that shows that the relationship between the probability of adoption and the number of known adopters is shaped as an inverse-U. In line with information sharing, the network effect is stronger for farmers who report discussing agriculture with others. The data contains information which is needed to ameliorate the identification issues that commonly arise in this context. In particular social networks are precisely identified, and in addition we can control for village heterogeneity and endogenous group formation.

Does Educational Tracking Affect Performance and Inequality? Differences-in-Differences Evidence across Countries

Abstract: Even though some countries track students into differing-ability schools by age 10, others keep their entire secondary-school system comprehensive. To estimate the effects of such institutional differences in the face of country heterogeneity, we employ an international differences-in-differences approach. We identify tracking effects by comparing differences in outcome between primary and secondary school across tracked and non-tracked systems. Six international student assessments provide eight pairs of achievement contrasts for between 18 and 26 cross-country comparisons. The results suggest that early tracking increases educational inequality. While less clear, there is also a tendency for early tracking to reduce mean performance. Therefore, there does not appear to be any equity-efficiency trade-off.

Well-Being, Social Capital and Public Policy: What's New?*

Abstract: This article summarises recent empirical research on the determinants of subjective well-being. Results from national and international samples suggest that measures of social capital, including especially the corollary measures of specific and general trust, have substantial effects on well-being beyond those flowing through economic channels. Cross-national samples (supported by parallel analysis of suicide data) show large well-being effects from the quality of government. Finally, using well-being data to estimate the income-equivalents non-financial aspects of the workplace produces numbers so large as to suggest the existence of unexploited opportunities to improve both employee satisfaction and enterprise efficiency.

Decentralisation and accountability in infrastructure delivery in developing countries

Abstract: Many developing countries are experimenting with decentralisation of public service delivery to elected local governments instead of bureaucrats appointed by a central government. We study the resulting implications in a theoretical model in which the central government is uninformed about local need and unable to monitor service allocations. Bureaucrats charge bribes for services as monopoly providers, resulting in underprovision of services, especially for the poor. Local governments are directly responsive to their citizens needs but may be subject to capture by elites. Effects of decentralisation on service volumes, efficiency and equity are analysed under different financing arrangements for local governments. The theme of the 2004 World Development Report is summarised by its opening paragraph: Too often, services fail poor people ‐ in access, in quantity, in quality. But the fact that there are strong examples where services do work means governments and citizens can do better. How? By putting poor people at the center of service provision: by enabling them to monitor and discipline service providers, by amplifying their voice in policymaking, and by strengthening the incentives for providers to serve the poor. Problems of accountability associated with traditional modes of delivery involving centralised bureaucracies include cost padding, service diversion, limited responsiveness to local needs, limited access and high prices charged especially to the poor. 1 Many developing countries have thus begun to experiment with initiatives to increase accountability of service providers by providing greater control rights to citizen groups. These include decentralisation of service delivery to local governments, community participation, direct transfers to households and contracting out delivery to private providers and NGOs. The programmes include a wide range of infrastructure services (water, sanitation, electricity, telecommunications, roads) and social services (education, health and welfare programmes). Countries where such trends have gathered

Gender and Say: a Model of Household Behaviour with Endogenously Determined Balance of Power*

Abstract: The evidence that the same total income can lead a household to choose different consumption vectors, depending on who brings in how much of the income, has led to an effort to replace the standard unitary model of the household with the ‘collective model’, which recognizes that the husband and the wife may have different preferences and depending on the balance of power between them the household may choose differently. One weakness of this new literature is that it fails to recognize that the household’s choice could in turn influence the balance of power. Once this two-way relation between choice and power is recognized we are forced to confront some new questions concerning how to model the household. This paper tries to answer these by defining a ‘household equilibrium’, examining its game-theoretic properties and drawing out its testable implications. It is shown, for instance, that once we allow for dynamic interaction a household can exhibit inefficient behavior, and that (for a certain class of parameters) children will be less likely to work in a household where power is evenly balanced, than one in which all power is concentrated in the hands of either the father or the mother. The paper also draws out the implications for female labor supply.

Exchange Rates and Monetary Policy in Emerging Market Economies

Abstract: This paper investigates the effects of exchange rate regimes and alternative monetary policy rules for an emerging market economy that is subject to a volatile external environment in the form of shocks to world interest rates and the terms of trade. In particular, we highlight the impact of financial frictions and the degree of exchange rate pass through in determining the relative performance of alternative regimes in stabilizing the economy in the face of external shocks. Our results are quite sharp. When exchange rate pass-through is high, a policy of non-traded goods inflation targeting does best in stabilizing the economy, and is better in welfare terms. When exchange rate pass-through is low, however, a policy of strict CPI inflation targeting is better. In all cases, a fixed exchange rate is undesirable. In addition, financial frictions have no implications for the ranking of alternative policy rules.

Happiness and public policy: a challenge to the profession

Abstract: The theory behind public economics needs radical reform. It fails to explain the recent history of human welfare and it ignores some of the key findings of modern psychology. Indeed these two failings are intimately linked: it is because the theory ignores psychology that it is unable to explain the facts. The fact is that, despite massive increases in purchasing power, people in the West are no happier than they were fifty years ago. We know this from population surveys and other supporting evidence which I shall review. The most obvious explanations come from three standard findings of the new psychology of happiness. 1 First, a person’s happiness is negatively affected by the incomes of others (a negative externality). Second, a person’s happiness adapts quite rapidly to higher levels of income (a phenomenon of addiction). And third, our tastes are not given ‐ the happiness we get from what we have is largely culturally determined. These findings provide a challenge to the theory and conclusions of public economics, as set out for example in Atkinson and Stiglitz (1980). The challenge to public economics is to incorporate the findings of modern psychology while retaining the rigour of the cost‐benefit framework which is the strength and glory of our subject. 2 In what follows I shall first review the measurement of happiness. Then I shall take the three findings that I discussed one by one, and pursue the policy implications of each of them. I shall end with some overall reflections.

Robust multidimensional poverty comparisons

Abstract: We demonstrate how to make poverty comparisons using multidimensional indicators of well-being, showing in particular how to check whether the comparisons are robust to aggregation procedures and to the choice of multidimensional poverty lines. In contrast to earlier work, our methodology applies equally well to what can be defined as ”union”, ”intersection” or ”intermediate” approaches to dealing with multidimensional indicators of well-being. To make this procedure of some practical usefulness, the paper also derives the sampling distribution of various multidimensional poverty estimators, including estimators of the ”critical” poverty frontiers outside which multidimensional poverty comparisons can no longer be deemed ethically robust. The results are illustrated using data from a number of developing countries.

Company Dividends and Ownership Structure: Evidence from UK Panel Data*

Abstract: This study investigates the relationship between dividends and ownership structure for a panel of 330 large quoted UK firms. Controlling for unobserved firm-specific effects, results indicate a negative relationship between dividends and ownership concentration. Ownership composition also matters, with a positive relationship observed for shareholding by insurance companies, and a negative one for individuals. These results are consistent with agency models in which dividends substitute for poor monitoring by a firm's shareholders but can also be explained by the presence of powerful principals who are able to impose their preferred payout policy upon firms.

Product market reforms, labour market institutions and unemployment

Abstract: We analyze the impact of product market competition on unemployment and wages, and how this depends on labour market institutions. We use differential changes in regulations across OECD countries over the 1980s and 1990s to identify the effects of competition. We find that increased product market competition reduces unemployment, and that it does so more in countries with labour market institutions that increase worker bargaining power. The theoretical intuition is that both firms with market power and unions with bargaining power are constrained in their behaviour by the elasticity of demand in the product market. We also find that the effect of increased competition on real wages is beneficial to workers, but less so when they have high bargaining power. Intuitively, real wages increase through a drop in the general price level, but workers with bargaining power lose out somewhat from a reduction in the rents that they had previously captured.

Intergenerational Mobility and Marital Sorting

Abstract: We use data from the German Socio-Economic Panel and the British Household Panel Survey to estimate the extent of intergenerational economic mobility in a framework that highlights the role played by assortative mating. We find that assortative mating plays an important role. On average about 40-50% of the covariance between parents and own permanent family income can be attributed to the person to whom one is married. This effect is driven by strong spouse correlations in human capital, which are larger in Germany than Britain. © 2006 The Authors. Journal compilation © Royal Economic Society 2006.

Are homeowners really more unemployed

Abstract: This article investigates the effects of homeownership on labour mobility and unemployment duration. We distinguish between finding employment locally or being geographically mobile. We find that homeownership hampers the propensity to move for job reasons, but improves the chances of finding local jobs, which is in accordance with the predictions from our theoretical model. The overall hazard rate into employment is higher for homeowners, such that there is a negative correlation between homeownership and unemployment duration. Our empirical findings thus contradict the so-called Oswald hypothesis, even if support is found for the main mechanism behind the hypothesis, namely that homeownership hampers mobility.

A sceptic's comment on the study of economics

Abstract: A survey was carried out among two groups of undergraduate economics students and four groups of students in mathematics, law, philosophy and business administration. The main survey question involved a conflict between profit maximisation and the welfare of the workers who would be fired to achieve it. Significant differences were found between the choices of the groups. The results were reinforced by a survey conducted among readers of an Israeli business newspaper and PhD students of Harvard. It is argued that the overly mathematical methods used to teach economics encourage students to lean towards profit maximisation.

Alimony Rights and Intrahousehold Allocation of Resources: Evidence from Brazil

Abstract: Can family policy affect well-being of individuals without altering the resources available to their families? This article examines the extension of alimony rights and obligations to cohabiting couples in Brazil. For women in intact relationships, alimony rights upon dissolution should improve outside options, strengthening their negotiating positions, and increasing their influence over intrahousehold allocation of resources. Robust econometric evidence indicates that more decision power in the hands of women impacts hours worked by female adults and investments in the education of children. This suggests that family policy and models of family decision making should take intrahousehold heterogeneity of preferences into account.

Mistake #37: The Effect of Previously Encountered Prices on Current Housing Demand*

Abstract: Based on contrast effects studies from psychology, we predicted that movers arriving from more expensive cities would rent pricier apartments than those arriving from cheaper cities. We also predicted that as people stayed in their new city they would get used to the new prices and would readjust their housing expenditures countering the initial impact of previous prices. We found support for both predictions in a sample of 928 movers from the PSID. Alternative explanations based on unobserved wealth and taste, and on imperfect information are ruled out.

Paycheque Receipt and the Timing of Consumption

Abstract: This article examines the consumption response to monthly paycheque receipt. Since the amount and arrival date of paycheques are known in advance, the receipt of a paycheque does not coincide with the receipt of new information. Under the basic rational expectations Life-Cycle/Permanent Income Hypothesis, household consumption should not respond to paycheque arrival. Using data from the UK's Family Expenditure Survey, this article finds that household consumption is excessively sensitive to paycheque receipt. The results cannot be explained by any underlying monthly expenditure fluctuations common to all households. The presence of liquidity constraints as measured by wealth and age can account for the excess sensitivity results.

New technologies, organisation and age: firm‐level evidence*

Abstract: We investigate the relationships between new technologies, innovative workplace practices and the age structure of the workforce in a sample of French firms. We find evidence that the wage-bill share of older workers is lower in innovative firms and that the opposite holds for younger workers. This age bias affects both men and women. It is also evidenced within occupational groups. More detailed analysis of employment inflows and outflows shows that new technologies essentially affect older workers through reduced hiring opportunities. In contrast, organisational innovations mainly affect their probability of exit, which decreases much less than for younger workers following reorganisation.

Paying for Primary Schools: Admission Constraints, School Popularity or Congestion?*

Abstract: School quality is capitalised in house prices if access to schools is rationed by residential location. We generate empirical predictions from three different theoretical approaches linking house prices to school performance, distance to school and capacity. These are respectively based upon admission constraints, school popularity and congestion effects. We find that test-score-based school performance significantly increases property prices, but only the best one in ten schools generate higher than average prices close by, and that prices are higher close to popular, over-capacity schools. We conclude that the empirical evidence is more in line with the school popularity model.

Aid, Governance and Private Foreign Investment: Some Puzzling Findings for the 1990s*

Abstract: Does official aid pave the road for private foreign investment or does it suffocate private initiative by diverting resources towards unproductive activities? We explore this question using panel data covering a large number of developing and emerging economies during the 1990s. Controlling for countries' institutional environment, we find that, evaluated at the mean, the marginal effect of aid on private foreign investment is close to zero. Surprisingly, however, the effect is strictly positive for countries in which private agents face a substantial regulatory burden. This result is robust across a wide range of specifications, samples and estimation methods.

Money in an estimated business cycle model of the euro area

Abstract: This article examines the role of money in a small-scale dynamic general equilibrium model of the euro zone estimated by maximum likelihood The model allows for both intertemporal and intratemporal non-separability in preferences We find, first, that real balances do not affect the marginal utility of consumption Second, money demand shocks mainly help to forecast real balances while real shocks explain the bulk of price, output and interest rates fluctuations Third, the calculation of the natural rate of interest reveals that the evolution of the interest rate is mostly accounted for by the real sources of fluctuations

The Theory of Human Capital Revisited: on the Interaction of General and Specific Investments*

Abstract: Human capital theory distinguishes between training in general-usage and firm-specific skills. Becker (1964) argues that employers will only invest in specific training, not general training, when labour markets are competitive. The article reconsiders Becker's theory. Using essentially his framework, we show that there exists an incentive complementarity between employer-sponsored general and specific training: the possibility to provide specific training leads the employer to invest in general human capital. Conversely, the latter reduces the hold-up problem that arises with firm-specific training. We also consider the desirability of institutionalised training programmes and the virtues of breach penalties, and discuss some empirical facts that could be explained by the theory.

A Theory of Consumer Boycotts under Symmetric Information and Imperfect Competition

Abstract: This article models strategic interactions between non-identical duopolistic firms and a public interest/environmental organisation (EO) that promotes ‘green’ production practices by threatening consumer boycotts against ‘brown’ producers. The article describes when boycotts are deterred by prior firm commitments to be ‘green’ and, also when a boycott arises in equilibrium, despite symmetric information. When a boycott arises, it is either a small persistent boycott against the ‘small firm’ in the industry, or a large transitory boycott against the ‘large firm’ in the industry that prompts the target firm to accede to the boycott demands quickly.

Is there a Threat Effect of Labour Market Programmes? A Study of ALMP in the Danish UI System*

Abstract: This article focuses on unemployed individuals’ reaction to compulsory labour market programmes prior to participation. In Denmark, after having received UI benefits for a given period of time, continued benefits are made conditional on participation in a labour market programme. I estimate individuals’ reaction to compulsory programmes using legislative changes in the duration of benefits period as identification. I find that compulsory programmes do indeed motivate individuals to find employment prior to participation. The effect is large and is even comparable in size to the effect of benefits exhaustion found in studies of American UI systems.

The Efficacy of Choice Threats Within School Accountability Systems: Results from Legislatively Induced Experiments

Abstract: Targeted stigma and school voucher threats under a revised 2002 Florida accountability law have positive impacts on school performance as measured by the test score gains of their students. In contrast, stigma and public school choice threats under the US federal accountability law, No Child Left Behind, do not have similar effects in Florida. Estimation relies upon individual-level data and is based upon regression analyses that exploit discontinuities within the accountability regimes. Choice threats embedded within accountability regimes can moderate educational inequalities by boosting achievement at the lowest-performing schools, but policy design is crucial.

Wages, Mobility and Firm Performance: Advantages and Insights from Using Matched Worker–Firm Data*

Abstract: To illustrate the wide applicability of longitudinal matched employer-employee data, we study the simultaneous determination of worker mobility and wage rates using an econometric model that allows for both individual and firm-level heterogeneity. The model is estimated using longitudinally linked employer–employee data from France. Structural results for mobility show remarkable heterogeneity with both positive and negative duration dependence present in a significant proportion of firms. The average structural returns to seniority are essentially zero, but this result masks enormous heterogeneity with positive seniority returns found in low starting-wage firms.

Scale effects in markets with search

Abstract: Estimates of aggregate matching functions may miss important scale effects in frictional labour markets because of the reactions of job seekers to scale. We estimate a semi-structural model of search and matching on a British sample of unemployed people, testing for scale effects on the probability of receiving an offer and on the distribution of wage offers. We find them only in wage offers but we also find that reservation wages rise to deliver higher post-unemployment wages but not faster matches. So aggregate matching functions should be unaffected by scale but wage equations should be showing them.