Showing papers in "The Scandinavian Journal of Economics in 2004"
TL;DR: In this article, the links between income, sexual behavior and reported happiness were studied using recent data on a sample of 16,000 adult Americans, and they found that sexual activity entered strongly positively in happiness equations.
Abstract: The links between income, sexual behavior and reported happiness are studied using recent data on a sample of 16,000 adult Americans. The paper finds that sexual activity enters strongly positively in happiness equations. Higher income does not buy more sex or more sexual partners. Married people have more sex than those who are single, divorced, widowed or separated. The happiness-maximizing number of sexual partners in the previous year is calculated to be 1. Highly educated females tend to have fewer sexual partners. Homosexuality has no statistically significant effect on happiness.
368 citations
TL;DR: The key insight for economics is that the brain is composed of multiple systems which interact as mentioned in this paper, and controlled systems (executive function) interrupt automatic ones, which opens up the "black box" of the brain, much as organizational economics opened up the theory of the firm.
Abstract: Neuroeconomics uses knowledge about brain mechanisms to inform economic theory. It opens up the ‘‘black box’’ of the brain, much as organizational economics opened up the theory of the firm. Neuroscientists use many tools—including brain imaging, behavior of patients with brain damage, animal behavior and recording single neuron activity. The key insight for economics is that the brain is composed of multiple systems which interact. Controlled systems (‘‘executive function’’) interrupt automatic ones. Brain evidence complicates standard assumptions about basic preference, to include homeostasis and other kinds of state-dependence, and shows emotional activation in ambiguous choice and strategic interaction.
262 citations
TL;DR: In this article, the authors revives an earlier proposal in Prelec (1989) that the key property is PrattArrow convexity of the log of the discount function, which corresponds to decreasing impatience (DI) at the level of preferences.
Abstract: Despite recent interest in hyperbolic discounting, there has been little discussion of exactly what property of time preferences is instantiated by hyperbolic or quasi-hyperbolic functional forms. The paper revives an earlier proposal in Prelec (1989) that the key property is PrattArrow convexity of the log of the discount function, which corresponds to decreasing impatience (DI) at the level of preferences. DI provides a natural criterion for assessing the severity of departure from stationarity in that greater DI is equivalent to more choices of dominated options in two-stage decision problems, as well as greater convexity of the log of the discount function. Inefficient choices may arise as intentional precommitments, or as unintended reversals of preference by "naive" agents.
179 citations
TL;DR: In this paper, the authors report on a two-task principal-agent experiment in which only one task is contractible and the principal can either offer a piece-rate contract or a (voluntary) bonus to the agent.
Abstract: This paper reports on a two-task principal–agent experiment in which only one task is contractible. The principal can either offer a piece-rate contract or a (voluntary) bonus to the agent. Bonus contracts strongly outperform piece-rate contracts. Many principals reward high effort on both tasks with substantial bonuses. Agents anticipate this and provide high effort on both tasks. In contrast, almost all agents with a piece-rate contract focus on the first task and disregard the second. Principals understand this and predominantly offer bonus contracts. This behavior contradicts the self-interest theory but is consistent with theories of fairness.
162 citations
TL;DR: In this article, it was shown that the voting record of the Monetary Policy Committee of the Bank of England helps predict future policy rate changes, which is robust to the inclusion of market participants' expectations as measured by the slope of the term structure of money market rates and interest rate futures.
Abstract: It is shown that the voting record of the Monetary Policy Committee of the Bank of England helps predict future policy rate changes. This result is robust to the inclusion of market participants’ expectations as measured by the slope of the term structure of money market rates and interest rate futures. Moreover, expectations seem to adjust to the information contained in the voting record, which suggests that publishing the minutes of MPC meetings increases the transparency of monetary policy.
160 citations
TL;DR: For example, the authors found that countries with individual rather than joint taxation and support families through child care facilities rather than child payments are likely to have higher female labour supply and higher fertility.
Abstract: Historically, there is clear evidence of an inverse relationship between female labour supply and fertility. However, the relationship across countries is now positive. Countries like Germany and Italy, with the lowest fertility, also have the lowest female participation rates. This paper analyses the extent to which this can be explained by public policy, in particular taxation and the system of child support. The results suggest that countries which have individual rather than joint taxation, and which support families through child care facilities rather than child payments, are likely to have both higher female labour supply and higher fertility.
146 citations
TL;DR: In this article, the authors show that more stringent capital adequacy requirements lead banks to set stricter acceptance criteria, and that increased competition in the banking industry leads to riskier bank behaviour.
Abstract: In a dynamic framework, commercial banks compete for customers by setting acceptance criteria for granting loans, while taking into account regulatory requirements. By easing its acceptance criteria a bank faces a trade-off between attracting more demand for loans, thus making higher per-period profits, and deterioration in the quality of its loan portfolio, thus tolerating a higher risk of failure. Our main results state that more stringent capital adequacy requirements lead banks to set stricter acceptance criteria, and that increased competition in the banking industry leads to riskier bank behaviour. It is shown that risk-adjusted regulation is effective. In an extension of our basic model, we show that it may be beneficial for a bank to hold more equity than prescribed by the regulator, even though issuing equity is more expensive than attracting deposits.
137 citations
TL;DR: The authors found that neglecting the sector dimension tends to understate the effect of birth-related interruptions in both sectors and the combined effect of a large depreciation effect and no recovery means that females in the non-family friendly sector are punished severely after childbirth.
Abstract: A segregation of the labour market into a family-friendly and a non-family friendly sector has the effect that women self-select into the sectors depending on institutional constraints, preferences for family-friendly working conditions and expected wage differences. We find that neglecting the sector dimension tends to understate the effect of birth-related interruptions in both sectors. The combined effect of a large depreciation effect and no recovery means that females in the non-family friendly sector (e.g. private sector) are punished severely after childbirth. In the family friendly sector (e.g. public sector), we find complete catch up.
122 citations
TL;DR: This article found that earnings of immigrants from non-OECD countries exhibit greater sensitivity to local unemployment than do earnings of natives, and the empirical analysis further revealed that standard methods of estimation-which fail to consider differential immigrant and native responsiveness-understate earnings growth and overstate cohort differentials among nonOECD immigrants.
Abstract: Failure to account for differences between immigrants and natives in their responsiveness to changes in macroeconomic conditions may bias estimates of assimilation effects on immigrant earnings. Using Norwegian register data from 1980 to 1996, we first establish that earnings of immigrants from non-OECD countries exhibit greater sensitivity to local unemployment than do earnings of natives. The empirical analysis further reveals that standard methods of estimation-which fail to consider differential immigrant and native responsiveness-understate earnings growth and overstate cohort differentials among non-OECD immigrants. These biases are attributable to trends in macroeconomic conditions over the sample period.
119 citations
TL;DR: In this paper, the authors introduce a social comparison model where people choose their reference standards to serve motives of self-improvement and self-enhancement, and the model predicts that reference standards increase in individuals' abilities and that people thus tend to compare themselves to similar others.
Abstract: A growing economic literature stresses the importance of relative comparisons, e.g., for savings and consumption or happiness. In this literature it is usually assumed that reference standards against which people compare themselves are exogenously given. In contrast, findings from social psychology suggest that people play an active role in determining their reference standards. We introduce a social comparison model where people choose their reference standards to serve motives of self-improvement and self-enhancement. The model predicts that reference standards increase in individuals’ abilities and that people thus tend to compare themselves to similar others. The results of a questionnaire study confirm the prediction of the model.
118 citations
TL;DR: The authors examined the effects of social comparison in ultimatum bargaining and found that people dislike income disparity between themselves and their referents, consistent with people's dislike for deviations from the norm of equity but inconsistent with fairness theories.
Abstract: Experiments are used to examine the effects of social comparisons in ultimatum bargaining. We inform responders about the average offer before they decide whether to accept or reject their specific offer. This significantly increases offers and offer-specific rejection probabilities. For comparison, we consider another change in informational conditions: telling responders the total pie is $30—ex ante it was either $15 or $30—affects offers and rejection probabilities roughly as much. Our results are consistent with people’s dislike for deviations from the norm of equity but inconsistent with fairness theories, where people dislike income disparity between themselves and their referents.
TL;DR: In this paper, the determinants of absence for blue-collar workers using a sample of German manufacturing establishments are estimated using a proxy for team production, and the estimates reveal that firms with teams have lower absence rates, as do smaller establishments.
Abstract: We argue that firms with interdependent worker productivity, team production, have a higher cost of absence and, as a consequence, spend additional resources on monitoring absence. As a result, firms with team production should have lower absence rates. We estimate the determinants of absence for blue-collar workers using a sample of German manufacturing establishments. Workplace teams are used as a proxy for team production. The estimates reveal that firms with teams have lower absence rates, as do smaller establishments. The size effect, however, is unique to establishments with teams, which fits prior theoretical work that has not been previously tested.
TL;DR: In this article, the authors argue that if the bargaining procedure is relatively symmetric, it typically admits multiple perfect equilibria, some of which give the investor a high enough pay off to sustain investment.
Abstract: Most literature on the hold{up problem starts from the assumption that ex post bargaining outcomes are insensitive to prior investment costs. We argue that this approach is unsatisfactory. If the bargaining procedure is relatively symmetric, it typically admits multiple perfect equilibria, some of which give the investor a high enough payofi to sustain e‐cient investment. Even if the bargaining procedure is asymmetric and rigged against the investor, there may be investment if agents are driven by moral concerns or if communication creates commitment. Laboratory experiments indicate that communication is necessary and su‐cient for agents to coordinate on e‐cient outcomes when the bargaining game is symmetric. When the bargaining game is rigged against the investor, the hold{up problem is mitigated, but not eliminated, by moral behavior. Communication is quite credible, and we flnd that promises are more believable than threats.
TL;DR: In this article, the authors analyze the welfare properties of the competitive equilibrium in a capital accumulation model where individual preferences are subject to both habit formation and consumption spillovers, and characterize optimal tax policies aimed at restoring efficient decentralized paths.
Abstract: We analyze the welfare properties of the competitive equilibrium in a capital accumulation model where individual preferences are subject to both habit formation and consumption spillovers. Using an additive specification for preferences, according to which the argument in the utility function is a linear combination of present and past values of own consumption and consumption spillovers, we analyze the circumstances under which these spillovers are a source of inefficiency. It is shown that consumption externalities have to interact with habits in order to generate an inefficient dynamic equilibrium. Finally, we characterize optimal tax policies aimed at restoring efficient decentralized paths.
TL;DR: In this paper, the authors specify a dynamic model in which agents adjust their decisions toward higher payoffs, subject to normal error, and this process generates a probability distribution of players' decisions that evolves over time according to the Fokker-Planck equation.
Abstract: We specify a dynamic model in which agents adjust their decisions toward higher payoffs, subject to normal error. This process generates a probability distribution of players' decisions that evolves over time according to the Fokker-Planck equation. The dynamic process is stable for all potential games, a class of payoff structures that includes several widely studied games. In equilibrium, the distributions that determine expected payoffs correspond to the distributions that arise from the logit function applied to those expected payoffs. This "logit equilibrium" forms a stochastic generalization of the Nash equilibrium and provides a possible explanation of anomalous laboratory data.
TL;DR: In this article, a substantial body of empirical literature provides evidence of overreaction in markets and two hypotheses are consistent with this observation: the hot-hand hypothesis and the recency hypothesis.
Abstract: A substantial body of empirical literature provides evidence of overreaction in markets. Past losers outperform past winners in stock markets as well as in sports markets. Two hypotheses are consistent with this observation. The recency hypothesis states that traders overweight recent information; they are too optimistic about winners and too pessimistic about losers. According to the hot-hand hypothesis, traders try to discover trends in the past record of a firm or a team, and thereby overestimate the autocorrelation in the series. An experimental design allows us to distinguish between these hypotheses. The evidence is consistent with the hot-hand hypothesis.
TL;DR: In this paper, the authors study the profitability incentives for merger and the endogenous industry structure in a strategic trade policy environment and show that merger can be profitable and welfare enhancing, even though it would not be profitable in a laissez-faire economy.
Abstract: We study the profitability incentives for merger and the endogenous industry structure in a strategic trade policy environment. Merger changes the strategic trade policy equlilibrium. We show that merger can be profitable and welfare enhancing, even though it would not be profitable in a laissez-faire economy. A key element is a change in the governments’ incentives to give subsidies to their local firms. National merger induces more strategic trade policy, whereas international merger does not.
TL;DR: In this article, the optimal nonlinear labor income taxation in an economy with union wage setting and endogenous hours of work is studied. And the authors show that the optimal degree of progression of the labor income tax depends on the extent to which the government can influence the wage rate via tax policy as well as on its ability to redistribute income across individuals.
Abstract: This paper concerns optimal nonlinear labor income taxation in an economy with union wage setting and endogenous hours of work. The purpose is to study the determinants of tax progression. We show that the optimal degree of progression of the labor income tax depends on the extent to which the government can influence the wage rate via tax policy as well as on its ability to redistribute income across individuals. In addition, the argument for progressive labor income taxation depends on whether hours of work are chosen by the employed themselves or the union.
TL;DR: The authors examined the ability of the expansionary fiscal contraction (EFC) hypothesis to explain the performance of OECD economies during fiscal crises and found limited evidence in its favour: if public consumption is reduced in response to a fiscal crisis (as defined by a high level of debt), private consumption does seem to increase.
Abstract: We examine the ability of the expansionary fiscal contraction (EFC) hypothesis to explain the performance of OECD economies during fiscal crises. We find some limited evidence in its favour: if public consumption is reduced in response to a fiscal crisis (as defined by a high level of debt), private consumption does seem to increase. However, the size of the effect is smaller than that typically found in other studies. Furthermore, the increase in private consumption is usually not sufficient to offset the direct effect of a reduction in public consumption on output—fiscal contractions are not literally expansionary.
TL;DR: In this article, Granger's concept of cointegration facilitated the merging in a unified framework of economic theory about equilibrium relationships with dynamic econometric models of short-run behaviour.
Abstract: Clive Granger developed the econometric foundations for analysing and modelling non-stationary macroeconomic time series, forging an approach that has become the dominant paradigm in empirical macroeconomic research. Based on a critique of potential "nonsense regressions" in applied econometric models of non-stationary data, Granger's concept of cointegration facilitated the merging in a unified framework of economic theory about equilibrium relationships with dynamic econometric models of short-run behaviour. This provided a remarkable leap forward in the empirical analysis of macroeconomic relationships, and in testing macroeconomic theories, extending to non-stationary macroeconomic time series the formulation by Nobel Laureate Trygve Haavelmo of an economy as a system of simultaneous stochastic relationships. Major policy institutions around the world on a day-to-day basis now use empirical econometric models in which cointegrated relations determine the long-run outcomes. His research has spawned an industry, veritably "opening a door" to powerful ideas and procedures that many have followed, and helped to extend, ever since. There are in excess of 2,800 citations to his joint paper on cointegration with Robert Engle, who shared the 2003 Prize. In recognition of his achievements in developing methods of analysing economic time series with common trends (cointegration), Clive Granger was awarded The Sveriges Riksbank Prize in Economic Science in Memory of Alfred Nobel in October 2003. This article is a complement to Frank Diebold's fine appreciation of Engle's contributions, where volatility and "factor" models, including common trends, are addressed.
TL;DR: In this article, a representative agent economy with a depletable resource stock, polluting emissions and productive capital is used to contrast environmental policy which internalises externalised environmental values, with sustainability policy, which achieves some form of intergenerational equity.
Abstract: A theoretical, representative-agent economy with a depletable resource stock, polluting emissions and productive capital is used to contrast environmental policy, which internalises externalised environmental values, with sustainability policy, which achieves some form of intergenerational equity. The obvious environmental policy comprises an emissions tax and a resource stock subsidy, each equal to the respective external cost or benefit. Sustainability policy comprises an incentive affecting the choice between consumption and investment, and can be a consumption tax, capital subsidy or investment subsidy, or a combination thereof. Environmental policy can reduce the strength of the sustainability policy needed. More specialised results are derived in a small open economy with no environmental effects on utility.
TL;DR: In this paper, the authors derived testable implications concerning the long-run co-movements of real exchange rates, relative labor productivity, the trade balance and terms of trade.
Abstract: The model derived in this paper yields testable implications concerning the long-run co-movements of real exchange rates, relative labor productivity, the trade balance and terms of trade. Countries with relatively higher output growth, trade deficits or improved terms of trade are found to have more appreciated real exchange rates, with the main channel of transmission working through the relative price of nontraded goods. Exogenous terms-of-trade shocks are found to be the most important determinant of long-run movements in the real exchange rate for Denmark and Norway, while demand shocks account for most of the long-run variance in the real exchange rate for Finland and Sweden.
TL;DR: In this paper, the authors focus on the theory and application of cointegration and dynamic volatility models and their role in financial econometrics, and discuss much more extensively Engle's volatility models.
Abstract: work is a fine example of best-practice applied time-series econometrics: he identifies important dynamic economic phenomena, formulates precise and interesting questions about those phenomena, constructs sophisticated yet simple econometric models for measurement and testing, and consistently obtains results of widespread substantive interest in the scientific, policy, and financial communities. Although many of Engle’s contributions are fundamental, I will focus largely on the two most important: the theory and application of cointegration, and the theory and application of dynamic volatility models. Moreover, I will discuss much more extensively Engle’s volatility models and their role in financial econometrics, for several reasons. First, Engle’s Nobel citation was explicitly “for methods of analyzing economic time series with time-varying volatility (ARCH),” whereas Granger’s was for “for methods of analyzing economic time series with common trends (cointegration).” Second, the credit for
TL;DR: The authors found that small establishments rely less on pecuniary incentives, and have a significantly more hostile attitude towards incentive schemes based on competition and relative rewards; large units are more vulnerable to mechanisms of efficiency wages, effects that remain even after controlling for differences in monitoring ability.
Abstract: Do incentives differ between large and small organizations? Results from a representative survey of compensation managers are used to shed light on the issues. I find that (i) small establishments rely less on pecuniary incentives, and have a significantly more hostile attitude towards incentive schemes based on competition and relative rewards; (ii) large units are more vulnerable to mechanisms of efficiency wages, effects that remain even after controlling for differences in monitoring ability; (iii) large units are more prone to indicate that negative reciprocity is important, and that their employees care about relative pay. I argue that these findings fit with behavioral stories of incentives and motivation, in particular those stressing group interaction effects, inequity aversion and gift exchange.
TL;DR: In this article, an optimal tax framework is considered in which part of the population can take advantage of investment in higher education, and it is shown that social welfare can sometimes be increased by supplementing linear income taxes with a subsidy to material investment.
Abstract: An optimal taxation framework is considered in which part of the population can take advantage of investment in higher education. It is shown that social welfare can sometimes be increased by supplementing linear income taxes with a subsidy to material investment in higher education, but that social welfare can never be increased by supplementing a nonlinear income tax with such a subsidy.
TL;DR: In this article, a framework for analyzing national income accounting using a revealed welfare approach that is sufficiently general to cover, both the standard discounted utilitarian and maximin criteria as special cases, was developed.
Abstract: A framework is developed for analyzing national income accounting using a revealed welfare approach that is sufficiently general to cover, both the standard discounted utilitarian and maximin criteria as special cases. We show that the basic welfare properties of comprehensive national income accounting, previously ascribed only to the discounted utilitarian case, extend to this more general framework. In particular, under a wider range of circumstances, it holds that real NNP growth (or, equivalently, a positive value of net investments) indicates welfare improvement. We illustrate the applicability of our approach in the Dasgupta–Heal–Solow model of capital accumulation and resource depletion.
TL;DR: In this paper, the authors examined the long-run relationship between the real effective exchange rate and its fundamental determinants, and derived a real effective equilibrium exchange rate for the Swedish krona.
Abstract: This study examines the long-run relationship between the real effective exchange rate and its fundamental determinants, and derives a real effective equilibrium exchange rate for the Swedish krona. Our results indicate that the krona was severely overvalued in late 1992, when the fixed exchange rate regime was abandoned. By the end of 2000 the krona was undervalued by approximately 5 percent, given the prevailing economic conditions. Arithmetic examples of suitable SEK/EUR conversion rates are calculated under various assumptions to provide a guideline if Sweden were to adopt the euro in the future.
TL;DR: In this article, the authors analyse the question of optimal taxation in a dual economy, when the policy-maker is concerned about the distribution of labour income, and show that the optimal policy is a combination of investment subsidies and progressive income taxation.
Abstract: We analyse the question of optimal taxation in a dual economy, when the policy-maker is concerned about the distribution of labour income. Income inequality is caused by the presence of sunk capital investments, which creates a "good jobs" sector due to the capture of quasi-rents by trade unions. With strong unions and high planner preference for income equality, the optimal policy is a combination of investment subsidies and progressive income taxation. If unions are weaker, the policy-maker may instead choose to tax investment.
TL;DR: In this paper, the authors introduce a taxonomy of alternative systems of international capital-income taxation and characterize the choice of tax rates and information exchange and show that there exists a second equilibrium with an efficient level of public-good provision as well as complete and voluntary information exchange between national tax authorities.
Abstract: Information sharing between governments is examined in an optimal-taxation framework. We introduce a taxonomy of alternative systems of international capital-income taxation and characterize the choice of tax rates and information exchange. The model reproduces the conclusion found in earlier literature that integration of international caopital markets may lead to the under-provision of publicly provided goods. However, in contrast to previous results in the literature, under-provision occurs due to inefficiently coordinated expectations. We show that there exists a second equilibrium with an efficient level of public-good provision as well as complete and voluntary information exchange between national tax authorities.
TL;DR: In this paper, the authors explore the efficacy of price and quantity controls in a dynamic setup in which the decisions of some agents are irreversible and show that taking into account the fact that agents’ decisions may be irreversible does not lead to policy implications significantly different from those reached in a simpler model in which irreversibility is ignored.
Abstract: We explore the efficacy of price and quantity controls in a dynamic setup in which the decisions of some agents are irreversible. The assumption of irreversibility is shown to improve the performance of a tax relative to that of a system of tradable quotas and significantly alter the equilibrium behavior of agents. We nevertheless conclude that taking into account the fact that agents’ decisions may be irreversible does not lead to policy implications significantly different from those reached in a simpler model in which irreversibility is ignored.