Government Ownership of Banks, Institutions and Economic Growth *
(file size: 187K, last updated: 09/2010)
We put forward a modern version of the ‘developmental’ view of government-owned banks which shows that the combination of information asymmetries and weak institutions creates scope for such banks to play a growth-promoting role. We present new cross-country evidence consistent with our theoretical predictions. Specifically, we show that during 1995–2007 government ownership of banks has been robustly associated with higher long run growth rates. Moreover, we show that previous results suggesting that government ownership of banks is associated with lower long run growth rates are not robust to conditioning on more ‘fundamental’ determinants of economic growth.
Tiebout, local school finance and the ineffciency of head taxes
(file size: 252K, last updated: 05/2010)
The literature on local public (school) finance has shown that the use of local head taxes to finance schools leads to an effcient allocation of households and pupils to districts (Tiebout, 1956; Hamilton, 1975; Calabrese et al., 2009). This paper revises this well established result, using a two-community model with a housing market that adds two layers of realism to the analysis: not every household receives direct benefits from schools (e.g. some do not have children at school age) and communities are vertically differentiated, in the sense that one of them is exogenously preferred to the other by every household. In such context, head taxation leads to an ineffcient allocation of house-holds to districts, even if local governments set local spending levels effciently given their population. The ineffciency emerges because too many intermediate income "in-school" households reside in the rich district in equilibrium. Income taxation is ineffcient as well but, in a counter-intuitive result, it may cause smaller effciency losses than a lump-sum tax.
Goverment, Openness and Finance: Past and Present
(file size: 206K, last updated: 10/2010)
We explore the role of government in the nexus of finance and trade starting from the earliest days of organised finance in England and then broadening the analysis to 84 countries from 1960 to 2004. For 18th century England, we find that the government expenditures and international trade did have a positive long-run effect on financial development when measured as the value of private loans made by the Bank of England. For the wider panel of countries and more recent data, we find that government expenditures and trade have positive effects on financial development for countries that are in the mid-ranges of economic development as measured by their per capita incomes, but have little effect for poor countries and strongly negative effects for the wealthiest ones.
Pollution Abatement as a Source of Stabilisation and Long-Run Growth
(file size: 298K, last updated: 10/2010)
In a two-period overlapping generations model with production, we consider the damaging impact of environmental degradation on health and, consequently, life expectancy. The government’s involvement on policies of environmental preservation proves crucial for both the economy’s short-term dynamics and its long-term prospects. Particularly, an active policy of pollution abatement emerges as an important engine of long-run economic growth. Furthermore, by eliminating the occurrence of limit cycles, pollution abatement is also a powerful source of stabilisation.
On the Joint Dynamics of Pollution
and Capital Accumulation*
(file size: 321K, last updated: 10/2010)
The current paper offers a new explanation on the emergence of threshold effects and multiple equilibria, for which the high (low) income equilibrium is associated with high (low) environmental quality. This new explanation rests on endogenous technological choice in the presence of environmental taxation – an idea whose foundations find strong support from existing empirical evidence. Thus, the interactions between environmental policy and technology choice, within a Framework that accounts for the health effects of pollution, can explain some of the observed differences in income, life expectancy and environmental quality among countries.
An economic model of contagion in interbank lending markets
(file size: 328K, last updated: 12/2010)
This paper considers the stability of a financial system in which heterogenous banks interact through a lending market. We analyse a discrete time model in which households and banks are located on a circular city. Households present banks with risky investment opportunities, which banks fund through deposits and interbank borrowing. In the event of bankruptcy, a bank defaults on its interbank loans potentially resulting in contagion and losses for other banks. Through simulation we examine the vulnerability of the financial system to systemic events, demonstrating the non-linear relationship between market concentration, shock severity and bankruptcies. The role and effect of regulatory actions such as reserve requirements, minimum bank capitalisation and constraints on the size of borrowing relationships, are considered in limiting these effects.
Endogenous Fertility in a Growth Model with Public and Private Health Expenditures
(file size: 295K, last updated: 11/2010)
We build an overlapping generations model with endogenous fertility choices as well as public and private expenditures on health. We find that the complementary effect of public health services on private health expenditures can provide an additional explanation behind a salient feature of demographic transition; that is, the fertility decline along the process of economic growth.
Fertility Choices, Human Capital Accumulation, and Endogenous Volatility
(file size: 301K, last updated: 11/2010)
In a three-period overlapping generations model, I show that different combinations of preference and technological parameters can lead to different patterns on the joint evolution of human capital and (endogenous) fertility choices. These patterns may include threshold effects and multiple equilibria as well as endogenous fluctuations. In the latter case, fertility is procyclical. Contrary to existing analyses, endogenous economic fluctuations emerge only when the substitution effects (rather than the income effects) dominate. I also show that the elasticity of intertemporal substitution may be an additional factor determining whether the economy can sustain a positive growth rate in the long-run.
Which Democracies Pay Higher Wages?*
(file size: 482K, last updated: 11/2010)
The labor share of income varies markedly across the set of democracies. A model of the political process, situated in a simple macroeconomic environment is analyzed in which the cause of this variation is linked to di erences in the form of democracy - in particular the adoption of a presidential or parliamentary system. Presidential regimes are associated with lower taxation but lower wages. Robust evidence for the negative impact of a presidential system on the labor share is obtained using a Bayesian Model Averaging approach. Evidence is also provided that this is due to lower taxation.
Contagion and risk-sharing on the inter-bank market
(file size: 270KB, last updated: 03/2013)
Increasing inter-bank lending has an ambiguous impact on financial stability. Using a computational model with endogenous bank behavior and interest rates we identify the conditions under which inter-bank lending promotes stability through risk sharing or provides a channel through which failures may spread. In response to large economy-wide shocks, more inter-bank lending relationships worsen systemic events. For smaller shocks the opposite effect is observed. As such no inter-bank market structure maximizes stability under all conditions. In contrast, deposit insurance costs are always reduced under greater numbers of inter-bank lending relationships. A range of regulations are considered to increase system stability.
Band-Limited Stochastic Processes in Discrete and Continuous Time
(file size: 193K, last updated: 01/2011)
A theory of band-limited linear stochastic processes is described and it is related to the familiar theory of ARMA models in discrete time. By ignoring the limitation on the frequencies of the forcing function, in the process of fitting a conventional ARMA model, one is liable to derive estimates that are severely biased. If the maximum frequency in the sampled data is less than the Nyquist value, then the underlying continuous function can be reconstituted by sinc function or Fourier interpolation. The estimation biases can be avoided by re-sampling the continuous process at a rate corresponding to the maximum frequency of the forcing function. Then, there is a direct correspondence between the parameters of the band-limited ARMA model and those of an equivalent continuous-time process.
Alternative Methods of Seasonal Adjustment
(file size: 194K, last updated: 01/2011)
Alternative methods for the seasonal adjustment of economic data are described that operate in the time domain and in the frequency domain. The time-domain method, which employs a classical comb
filter, mimics the effects of the model-based procedures of the SEATS–TRAMO and STAMP programs. The frequency-domain method eliminates the sinusoidal elements of which, in the judgement of the user, the seasonal component is composed. It is proposed that, in some circumstances, seasonal adjustment is best achieved by eliminating all elements in excess of the frequency that marks the upper limit of the trend-cycle component of the data. It is argued that the choice of the method seasonal adjustment is liable to affect the determination of the turning points of the business cycle.
Statistical Signal Extraction and Filtering: Notes for the Ercim Tutorial
(file size: 221K, last updated: 12/2010)
These notes have been written to accompany a tutorial seession held at the London School of Economics as a prelude to the ERCIM conference of December 2010.
The Discrete–Continuous Correspondence for Frequency-Limited Arma Models and the Hazards of Oversampling
(file size: 156K, last updated: 01/2011)
Discrete-time ARMA processes can be placed in a one-to-one correspondence with a set of continuous-time processes that are bounded in frequency by the Nyquist value of π radians per sample period. It is well known that, if data are sampled from a continuous process of which the maximum frequency exceeds the Nyquist value, then there will be a problem of aliasing. However, if the sampling is too rapid, then other problems will arise that will cause the ARMA estimates to be severely biased. The paper reveals the nature of these problems and it shows how they may be overcome. It is argued that the estimation of macroeconomic processes may be compromised by a failure to take account of their limits in frequency.
(file size: 178K, last updated: 01/2011)
In statistical time-series analysis, signal processing and control engineering, a transfer function is a mathematical relationship between a numerical input to a dynamic system and the resulting output. The theory of transfer functions describes how the input/output relationship is affected by the structure of the transfer function. The theory of the transfer functions of linear time-invariant (LTI) systems has
been available for many years. It was developed originally in connection with electrical and mechanical systems described in continuous time. The basic theory can be attributed largely to Oliver Heaviside (1850–1925)  . With the advent of digital signal processing, the emphasis has shifted to discretetime representations. These are also appropriate to problems in statistical time-series analysis, where the data are in the form of sequences of stochastic values sampled at regular intervals.
Cognitive abilities and behavior in
(file size: 268K, last updated: 01/2011)
This paper investigates the relation between cognitive abilities and
behavior in strategic-form games with the help of a novel experiment.
The design allows us first to measure the cognitive abilities of sub-
jects without confound and then to evaluate their impact on behavior in strategic-from games. We find that subjects with better cognitive abilities show more sophisticated behavior and make better use of
information on cognitive abilities and preferences of opponents. Although we do not find evidence for Nash behavior, observed behavior is remarkably sophisticated, as almost 80% of subjects behave near
optimal and outperform Nash behavior with respect to expected pay-offs.
Finance and Growth in Africa: The Broken Link
(file size: 940K, last updated: 01/2011)
Utilizing the latest panel cointegration methods we provide new empirical evidence from 18 countries that suggests that the link between finance and growth in Sub-Saharan Africa is ‘broken’. Specifically, our findings suggest that banking system development in this region follows economic growth. They also indicate that there is no link between bank credit and economic growth.
On the utility representation of asymmetric single-peaked preferences*
(file size: 219.42K, last updated: 07/2011)
The symmetry of single-peaked preferences is a widely used assumption. When the space of alternatives has a meaningful metric, such restriction is only justified for its analytical convenience. This paper analyzes how to deal with asymmetric preferences in a tractable way. First, we introduce two types of asymmetric preferences (shortfall and excess avoidance), provide sufficient conditions for preferences to be of one type or the other and a coefficient that measures the degree of asymmetry. Second, we define the family of generalized distance-metric utility functions that represents any asymmetric preferences maintaining analytical tractability and we compare it to previous proposals.
Why Do African Banks Lend so Little?
(file size: 258K, last updated: 03/2011)
We put forward a plausible explanation of African financial under-development in the form of a bad credit market equilibrium. Utilising an appropriately modified IO model of banking, we show that the root of the problem could be unchecked moral hazard (strategic loan defaults) or adverse selection (a lack of good projects). Applying a dynamic panel estimator to a large sample of African banks, we show that loan defaults are a major factor inhibiting bank lending when the quality of regulation is poor. We also find that once a threshold level of regulatory quality has been reached, improvements in the default rate or regulatory quality do not matter, providing support for our theoretical predictions.
Probability Matching and Reinforcement Learning*
(file size: 161K, last updated: 03/2011)
Probability matching occurs when an action is chosen with a frequency equivalent to the probability of that action being the best choice. This sub-optimal behavior has been reported repeatedly by psychologist and experimental economist. We provide an evolutionary foundation for this phenomenon by showing that learning by reinforcement can lead to probability matching and, if learning occurs suffciently slowly, probability matching does not only occur in choice frequencies but also in choice probabilities. Our results are completed by proving that there exists no quasi-linear reinforcement learning speci cation such that behavior is optimal for all environments where counterfactuals are observed.
The Debate about the Revived Bretton-Woods Regime: A Survey and Extension of the Literature*
(file size: 245K, last updated: 03/2011)
This paper surveys the literature dealing with the thesis put forward by Dooley, Folkerts-Landau and Garber (DFG) that the present constellation of global exchange-rate arrangements constitutes a revived Bretton-Woods regime. DFG also argue that the revived regime will be sustainable, despite its large global imbalances. While much of the literature generated by DFG’s thesis points to specific differences between the earlier regime and revived regime that render the latter unstable, we argue that an underlying similarity between the two regimes renders the revived regime unstable. Specifically, to the extent that the present system constitutes a revived Bretton-Woods system, it is vulnerable to the same set of destabilizing forces -- including asset price bubbles and global financial crises -- that marked the latter years of the earlier regime, leading to its breakdown. We extend the Markov switching model to examine the relation between global liquidity and commodity prices. We find evidence of commodity-price bubbles in both the latter stages of the earlier Bretton-Woods regime and the revived regime.
Generalized Cointegration: A New Concept with an Application to Health Expenditure and Health Outcomes
(file size: 197K, last updated: 03/2011)
We propose a new generalization of the concept of cointegration that allows for the possibility that a set of variables are involved in an unknown nonlinear relationship. Although these variables may be unit-root non-stationary, there exists a nonlinear combination of them that takes account of such non-stationarity. We then introduce an estimation technique that allows us to test for the presence of this generalized cointegration in the absence of knowledge as to the true nonlinear functional form and the full set of regressors. We outline the basic stages of the technique and discuss how the issue of unit-root non-stationarity and cointegration affects each stage of the estimation procedure. We then apply this technique to the relationship between health expenditure and health outcomes, which is an important but controversial issue. A number of studies have found very little or no relationship between the level of health expenditure and outcomes. In econometric terms, if there is such a relationship then there should exist a cointegrating relationship between these two variables and possibly many others. The problem that arises is that we may be either unable to measure these other variables or that we do not know about them, in which case we may incorrectly find no relationship between health expenditures and outcomes. We then apply the concept of generalized cointegration; we obtain a highly significant relationship between health expenditure and health outcomes.
The Forward Rate Premium Puzzle: A Resolution*
(file size: 262K, last updated: 03/2011)
Empirical studies report that there is a negative relationship between the spot difference and forward premium. This result violates the forward rate unbiasedness theory. Using standard regression we found that recent samples give mixed results with both positive and negative coefficients. One possibility is that the negative coefficients could arise due to the non-linearities in the series and misspecification. To overcome these problems we employed a relatively novel technique. As an alternative to the standard regression we used a time-varying coefficient technique. This methodology estimates bias-free coefficients and thus should provide better estimates of the link between spot and forward rates. The findings of the time-varying coefficient model strongly support the forward rate unbiasedness hypothesis. All the parameters are very close to unity and significant. At the same time our results do not violate the efficient market theory.
The Nonexistence of Instrumental Variables
(file size: 93K, last updated: 03/2011)
The method of instrumental variables (IV) and the generalized method of moments (GMM) has become a central technique in health economics as a method to help to disentangle the complex question of causality. However the application of these techniques require data on a sufficient number of instrumental variables which are both independent and relevant. We argue that in general such instruments cannot exist. This is a reason for the widespread finding of weak instruments.
The Greek financial crisis: growing imbalances and sovereign spreads
(file size: 228K, last updated: 03/2011)
We discuss the origins of the Greek financial crisis as manifested in the growing fiscal and current-account deficits since euro-area entry in 2001. We then provide an investigation of spreads on Greek relative to German long-term government debt. Using monthly data over the period 2000 to 2010, we estimate a cointegrating relationship between spreads and their long-term fundamental determinants, and compare the spreads predicted by this estimated relationship with actual spreads. We find periods of both undershooting and overshooting of spreads compared to what is predicted by the economic fundamentals.
The peer group effect and the optimality
properties of head and income taxes
(file size: 233K, last updated: 04/2011)
This paper studies a Tiebout model with two school districts, housing markets and peer effects to re-evaluate the optimality properties of the allocation of households to districts induced by head and income taxes. The main novel results reveal that head taxes are not superior to income taxes and that the indirect redistribution implied by income taxation is not necessarily at odds with location optimality or associated to welfare losses. Many combinations of head taxes differentiated by household type can sustain the optimal outcome as an equilibrium. While this may not be possible using differentiated income taxes, a combination of non-differentiated ones and differentiated head taxes levied on the residents of the rich district can lead to the optimal outcome and effect significant local redistribution. In turn, non-differentiated head taxes are suboptimal (unless optimality requires one of the districts to be type-homogeneous) and a combination of uniform income taxes and head taxes levied on the rich district's population can do as well as them. Moreover, non-differentiated income taxes may generate smaller welfare losses than their lump-sum counterpart, a result which clashes with the benefit view of head taxes.
The ECB's New Multi-Country Model for the Euro area: NMCM - with Boundedly Rational Learning Expectations*
(file size: 804K, last updated: 04/2011)
Rational expectations has been the dominant way to model expectations, but the literature has quickly moved to a more realistic assumption of boundedly rational learning where agents are assumed to use only a limited set of information to form their expectations. A standard assumption is that agents form expectations by using the correctly specified reduced form model of the economy, the minimal state variable solution (MSV), but they do not know the parameters. However, with medium-sized and large models the closed-form MSV solutions are difficult to attain given the large number of variables that could be included. Therefore, agents base expectations on a misspecified MSV solution. In contrast, we assume agents know the deep parameters of their own optimising frameworks. However, they are not assumed to know the structure nor the parameterisation of the rest of the economy, nor do they know the stochastic processes generating shocks hitting the economy. In addition, agents are assumed to know that the changes (or the growth rates) of fundament variables can be modelled as stationary ARMA(p,q) processes, the exact form of which is not, however, known by agents. This approach avoids the complexities of dealing with a potential vast multitude of alternative mis-specified MSVs. Using a new Multi-country Euro area Model with Boundedly Estimated Rationality we show this approach is compatible with the same limited information assumption that was used in deriving and estimating the behavioral equations of di¤erent optimizing agents. We find that there are strong di¤erences in the adjustment path to the shocks to the economy when agent form expectations using our learning approach compared to expectations formed under the assumption of strong rationality. Furthermore, we find that some variation in expansionary fiscal policy in periods of downturns compared to boom periods.
Corruption, Fertility, and Human Capital
(file size: 476K, last updated: 04/2011)
We build an overlapping generations model in which reproductive households face a child quantity/child quality trade-off and bureaucrats are delegated with the task of delivering public services that support the accumulation of human capital. By integrating the theoretical analyses of endogenous growth, corruption and fertility choices, we offer a novel mechanism on the driving forces behind demographic transition. In particular, we attribute it to the endogenous change in the incidence of bureaucratic corruption that occurs at different stages of an economy's transition towards higher economic development.
Fractional integration and the volatility of UK interest rates
(file size: 1.15MB, last updated: 05/2011)
Using fractional integration and GARCH modeling techniques, this paper investigates the dynamic properties of UK interest rates. We find evidence that, contrary to previous studies for the US and Canada, short rates are more nonstationary compared to longer rates. Further, differences in conditional volatility exist between rates of different maturities. We posit that the dynamics of interest rates may be both maturity-specific and country-specific and any a priori generalizing assumptions may be misleading.
Finance is Good for the Poor but it Depends Where You Live
(file size: 206.45K, last updated: 09/2011)
This article examines whether or not the incomes of the poor systematically grow with average incomes, and whether financial development enhances the incomes of the poorest quintile. Following the methodology of Dollar & Kraay (2002), I find once extending Dollar & Kraay's data their findings are robust and economic growth is important to poverty reduction universally. However in comparison to other authors work I find financial development aids the incomes of the poor in certain regions, whilst it may be detrimental in others adding a further contribution to the literature on financial development and poverty.
A Theoretical Analysis of Public Funding for Research
(file size: 409.05KB, last updated: 06/2011)
This paper studies government funding for scientific research. Funds
must be distributed among different research institutions and allocated
between basic and applied research. Informational constraints prevent
less productive institutions to be given any government funding. In order
to internalise the beneficial effects of research, the government requires the most productive institutions to carry out more applied research than they would like. Funding for basic research is used by the government to induce more productive institutions to carry out more applied research
than they would like.
Why use ROSCAs when you can use banks? Theory, and evidence from Ethiopia
(file size: 556.21KB, last updated: 06/2011)
Much of the existing literature on the use of informal credit arrangements such as ROSCAs (Rotating and Credit Saving Associations) theorises the use of such institutions as arising from market failures in the development of formal saving and credit mechanisms. As economic development proceeds, formal institutions might therefore be expected to displace ROSCAs. We show, using household data for Ethiopia, that in fact use of formal institutions and ROSCAs can co-exist, even in the same household. We examine usage of both formal and informal institutions across the household income gradient, and provide a theoretical model consistent with these empirical facts.
Evaluating tax evasion in the European Union: a case study of the prevalence and character of‘'envelope wage’ payments
(file size: 547.80KB, last updated: 06/2011)
In the current climate of economic crisis, European governments are trying to raise revenue via various means such as fighting tax evasion. This paper evaluates a form of tax evasion in Europe that has so far received little attention. This is the illegitimate wage practice used by legitimate businesses whereby they pay their formal employees two separate wages, an official wage that is declared to the state for tax and social security purposes and an unofficial ‘envelope’ wage which is not declared and allows employers to avoid paying their full social insurance and tax liabilities. Examining a data-base composed of 26,659 face-to-face interviews conducted in the 27 member states of the European Union, using unordered and ordered discrete models as well as interval regression, we provide evidence of the factors that significantly impact on the propensity to receive envelope wages and the amounts received. We control for relevant socio-economic and other characteristics of individuals in our estimations. There is an interesting geographical variation in the incidence of ‘envelope wages’ in Europe. Most workers receiving envelope wages are concentrated in South-Easter and East-Central Europe while few of them are found in Nordic Countries and Continental Europe including the UK and Ireland. Arguably, this is a reflection of heterogeneity in social norms, attitudes towards the state and income inequality across countries. Our estimates corroborate this geographical heterogeneity and identify other significant correlates affecting the probability of participating in ‘under-declared’ activity, namely gender, age, sector of employment, firm size, occupation and household income. We also find perception variables about the scale of evasion to be significant predictors of the probability of evasion.
On Kronecker Products, Tensor Products And Matrix Differential Calculus
(file size: 328.25KB, last updated: 07/2011)
The algebra of the Kronecker products of matrices is recapitulated using a notation that reveals the tensor structures of the matrices. It is claimed that many of the difficulties that are encountered in working with the algebra can be alleviated by paying close attention to the indices that are concealed
beneath the conventional matrix notation. The vectorisation operations and the commutation transformations that are common in multivariate statistical analysis alter the positional relationship of the matrix elements. These elements correspond to numbers that are liable to be stored in contiguous memory cells of a computer, which should remain undisturbed. It is suggested that, in the absence of an adequate index notation that enables the manipulations to be performed without disturbing the data,
even the most clear-headed of computer programmers is liable to perform wholly unnecessary and time-wasting operations that shift data between memory cells.
Strictness of Environmental Policy and Investment in Abatement
(file size: 252.99KB, last updated: 07/2011)
In this paper we model an oligopoly where firms invest in abatement technologies and emissions are taxed by the government. We show that a stricter environmental policy does not necessarily lead to an increase in firms' R & D investment into cleaner production methods. In fact, the emission-to-output ratio may be a U-shaped function of the environmental damage parameter. This result holds both when the government can commit and in the social optimum. When the government cannot commit, this relationship is ambiguous except in markets with few firms. Our results further suggest that if the emission-to-output ratio is decreasing throughout, output is a U-shaped function of the environmental damage.
Loan Defaults in Africa
(file size: 57.33KB, last updated: 08/2011)
African financial deepening is beset by a high rate of loan defaults, which encourages banks to hold liquid assets instead of lending. We put forward a novel theoretical model that captures the salient features of African credit markets which shows that equilibrium with high loan defaults and low lending can arise when contract enforcement institutions are weak, investment opportunities are relatively scarce and information imperfections abound. We provide evidence using a panel of 110 banks from 29 African countries which corroborates our theoretical predictions.
Competitive Charitable Giving and Optimal
Public Policy with Multiple Equilibria
(file size: 432.28KB, last updated: 08/2011)
Consider a large number of small individuals contributing to a charity or to a public good. We study the properties of a competitive equilibrium in giving and allow for multiple equilibria. Our proposed condition, aggregate strategic complementarity, is a necessary condition for multiple equilibria. Consider two equilibria with low (L) and high (H) levels of giving. Comparative statics at L could be perverse (subsidies reduce giving) while those at H could be normal (subsidies induce giving), which rules out the use of incentives at L. We demonstrate how public policy, in the form of temporary direct government grants to charity can engineer a move from L to H. We use a welfare analysis to determine the optimal mix of private and public contributions to charity. Our paper contributes to the broader and more fundamental question of using public policy to engineer moves between multiple equilibria.
Mind the Gap: What Gap? A Detailed Picture of the Immigrant-Native Earnings Gap in the UK using Longitudinal Data between 1978 and 2006
(file size: 379.63KB, last updated: 10/2011)
Using the underexplored, sizeable and long Lifetime Labour Market Database (LLMDB) we estimated the
immigrant-native earnings gap across the entire earnings distribution, across continents of nationality and across
cohorts of arrival in the UK between 1978 and 2006. We exploited the longitudinal nature of our data to separate
the effect of observed and unobserved individual characteristics on earnings. This helped us to prevent selectivity
biases such as cohort bias and survivor bias, which have been long standing unresolved identification issues in
the literature. In keeping with the limited existing UK literature, we found a clear and wide dividing line between
whites and non-whites in simple comparable models. However, in our more complete models we found a much
narrower and subtler dividing line. This confirms the importance of accounting for unobservable individual
characteristics, which is an important contribution of this paper. It also suggests that the labour market primarily
rewards individual characteristics other than immigration status. We also found that the lowest paid immigrants,
whom are disproportionately non-white, suffer an earnings penalty in the labour market, whereas higher paid
immigrants, whom are disproportionately white, do not. Finally, we found less favourable earning gaps for cohorts that witnessed proportionately larger non-white and lower paid white immigration.
Immigrant Economic Assimilation: Evidence from UK Longitudinal Data between 1978 and 2006
(file size: 351.21KB, last updated: 10/2011)
We exploit a large and long longitudinal dataset to estimate the immigrant-native earnings gap at entry and over
time for the UK between 1978 and 2006. That is, we attempt to separately estimate cohort and assimilation
effects. We also estimate the associated immigrant earnings growth rate and immigrant-native earnings convergence rate. Our estimates suggest that immigrants from more recent cohorts fare better than earlier ones at entry. Furthermore, the earnings of immigrants from more recent cohorts catch up faster with natives' earnings. While the convergence took over 30 years for those entering in the post-war, it only took half as long for those entering in the early 2000s. This earnings growth is fastest in the first 10 years, and it considerably slows down after 30 years.
Friends’ Networks and Job Finding Rates
(file size: 328.43KB, last updated: 09/2011)
Social interactions are believed to have important consequences for labor market outcomes. Yet the growing literature has been forced to rely on indirect definitions of a network. We present what we believe to be the first evidence that is able to use direct information on the role of close friends. In doing so, we address issues of correlated effects with instrumental variables and panel data. Our estimates suggest that there are large effects from friendship networks, which persist even after controlling for family networks. One additional employed friend increases a person’s job finding probability by approximately 13 percent. This is a result of endogenous social interactions. By testing among alternative mechanisms, our study provides the first evidence that network effects seem to be due to information transmission rather than to social norms or leisure complementarities.
An extension of the Becker proposition to
non-expected utility theory
(file size: 507.59KB, last updated: 09/2011)
In a seminal paper, Becker (1968) showed that the most efficient way to deter crime is to impose the severest possible penalty (to maintain adequate deterrence) with the lowest possible probability (to economize on costs of enforcement). We shall call this the Becker proposition (BP). The BP is derived under the assumptions of expected utility theory (EU). However, EU is heavily rejected by the evidence. A range of non-expected utility theories have been proposed to explain the evidence. The two leading alternatives to EU are rank dependent utility (RDU) and cumulative prospect theory (CP). The main contributions of this paper are: (1) We formalize the BP in a more satisfactory manner. (2) We show that the BP holds under RDU and CP. (3) We give a formal behavioral approach to crime and punishment that could have applicability to a wide range of problems in the economics of crime.
Hyperbolic Punishment Function
(file size: 331.20KB, last updated: 09/2011)
All models in Law and Economics use punishment functions (PF) that incorporates a trade-off between probability of detection, p, and punishment, F. Suppose society wishes to minimize the total costs of enforcement and damages from crime, T (p; F). For a given p, an optimal punishment function (OPF) determines an F that minimizes T(p; F). A popular and tractable PF is the hyperbolic punishment function (HPF). We show that the HPF is an OPF for a large class of total cost functions. Furthermore, the HPF is an upper (lower) bound for an even larger class of punishment functions. If the HPF cannot (can) deter crime then none (all) of the PF's for which the HPF is an upper (lower) bound can deter crime. Thus, if one can demonstrate that a particular policy is ineffective (effective) under the HPF, there is no need to even compute the OPF. Our results should underpin an even greater use of the HPF. We give illustrations from mainstream and behavioral economics.
Strategic monetary and fiscal policy interaction in a liquidity trap
(file size: 330.54KB, last updated: 09/2011)
Given the recent experience, there is growing interest in the liquidity trap; which occurs when the nominal interest rate reaches its zero lower bound. Using the Dixit-Lambertini (2003) framework of strategic policy interaction between the Treasury and the Central Bank, we find that the optimal institutional response to the possibility of a liquidity trap has two main components. First, an optimal inflation target is given to the Central Bank. Second, the Treasury, who retains control over fiscal policy and acts as a Stackelberg leader, is given optimal output and inflation targets. This solution achieves the optimal rational expectations pre-commitment solution. This result holds true for a range of specifications about the Treasury's behavior. However, when there is the possibility of a liquidity trap, if monetary policy is delegated to an independent central bank with an optimal inflation target, but the Treasury retains discretion over fiscal policy, then the outcome can be a very poor one.
Goods Versus Characteristics:
Dimension Reduction and Revealed Preference
(file size: 525.59KB, last updated: 12/2011)
This paper compares the goods and characteristics models of the consumer within a non-parametric revealed preference framework. Of primary interest is to make a comparison on the basis of predictive success that takes into account dimension reduction. This allows us to nonparametrically identify the model which best fits the data. We implement these procedures on household panel data from the UK milk market. The primary result is that the better fit of the characteristics model is entirely attributable to dimension reduction.
Sources and Legitimacy of Financial Liberalization
(file size: 367.24KB, last updated: 09/2011)
This article seeks to clarify how we understand domestic and international sources of globalization and specifically how we explain financial liberalization across countries. The article also develops our understanding of the underlying legitimacy of financial liberalization. We debate e.g. Abiad and Mody (2005) and others who have found political factors to have little impact on financial openness. Using the same data undergirding such conclusions we argue, in contrast, that even a slight broadening of the political variables employed in the model and much closer attention to “input” and “output” aspects of the political legitimacy of financial liberalization over time reveal a more central role for politics in shaping liberalization. Input legitimacy involves the representation of stakeholders in initial and ongoing decisions to liberalize, while “output” legitimacy concerns liberalization's distributional consequences and management thereof over time. Several empirical measures of domestic-national and international political factors plausibly influence such aspects of legitimacy and are found to play a significant role in shaping liberalization, suggesting legitimation politics to be more important to financial openness than existing studies have typically acknowledged.
Growth and Demographic Change: Do Environmental Factors Matter?
(file size: 280.03KB, last updated: 09/2011)
We incorporate health-damaging pollution into a three period overlapping generations model in which life expectancy, fertility and economic growth are all endogenous. We show that environmental factors can cause significant changes to the economy’s demographics. In particular, the entrepreneurial choice of less polluting production processes, induced by environmental policy, can account for such demographic changes as higher longevity and lower fertility rates.
Cash Incentives and Unhealthy Food Consumption
(file size: 267.23KB, last updated: 01/2012)
The costs associated with unhealthy food consumption are not only paid by those suffering from overweight but by all members of society in terms of higher costs for social security systems. With this in mind, we study the effectiveness of a tax, a subsidy and cash incentives in reducing unhealthy food consumption. Using an inter-temporal rational choice model with habit, we calibrate and simulate the effect of those policies to US and UK data. Our findings suggest that cash incentives may be the most effective policy in reducing unhealthy food consumption yet it can be the most costly one. Taxes are relatively ineffective in reducing unhealthy food consumption. Subsidies have the best balance between effectiveness and monetary benefits to the society.
Public Banks and the
Productivity of Capital
(file size: 140.56KB, last updated: 10/2011)
Weak institutions are shown to create scope for public banks to play a growth-promoting role, even if such banks are less efficient than private banks.
Emission Taxes and the Adoption of Cleaner Technologies: The Case of Environmentally Conscious Consumers
(file size: 627.35KB, last updated: 11/2011)
We model a market with environmentally conscious consumers and a duopoly in which firms consider the adoption of a clean technology. We show that as pollution increases, consumers shift more resources to the environmental activities, thereby affecting negatively the demand faced by the duopoly. This effect generates incentives for firms to adopt the clean technology even in the absence of emissions taxes. When such taxes are considered, our results indicate that the benefit of adopting the clean technology is initially increasing and then decreasing in the emission tax. The range of values for which the emission tax increases this benefit becomes narrower when the consumers' environmental awareness is stronger.
Prices and social behavior: A study of adult smoking in Canadian Aboriginal communities
(file size: 471KB, last updated: 12/2012)
This paper provides the first estimates of tobacco price elasticity for adults in Canada's Aboriginal communities, distinguishing between two price effects: the direct effect, reflecting individual reaction to a price change, and the indirect effect, whereby price influences the individual by changing community smoking behavior. Estimates suggest a 10 percent increase in price decreases daily smoking by 0.75 percentage points (1.7 percent), occasional smoking by 1.39 percentage points (9.3 percent) and average smoking intensity by 0.15 cigarettes per day (2.9 percent). Further, the indirect effect doubles the response to a change in tobacco prices over the direct effect alone.
(file size: 425.96KB, last updated: 11/2011)
This paper studies entry in a market where firms compete in shopping hours and prices. I show that an incumbent firm is able to choose its opening hours strategically to deter entry of a new firm. The potential effects of entry deterrence on social welfare depends on the degree of product differentiation. Entry deterrence increases social welfare when product differentiation is low, while it reduces social welfare when product differentiation is high. In terms of policy, the result of this model suggests that shopping hours deregulation is not always welfare enhancing.
Automatic Grade Promotion and Student Performance: Evidence from Brazil
(file size: 417.74KB, last updated: 11/2011)
This paper examines the effect of the introduction of automatic grade promotion on student performance in 1,993 public primary schools in the Brazilian state of Minas Gerais. A difference-in-difference approach that exploits variation over time in the adoption of the policy allows the identification of the treatment effect of automatic promotion. I find a negative and significant effect of about 6% of a standard deviation. Under plausible identifying assumptions the estimates can be interpreted as the disincentive effect on student effort associated with the introduction of automatic promotion.
Efficient Aggregation of Panel Qualitative Survey Data
(file size: 344.78KB, last updated: 12/2011)
Qualitative business survey data are used widely to provide indicators of economic activity ahead of the publication of official data. Traditional indicators exploit only aggregate survey information, namely the proportions of respondents who report "up” and “down”. This paper examines disaggregate or firm-level survey responses. It considers how the responses of the individual firms should be quantified and combined if the aim is to produce an early indication of official output data. Having linked firms’ categorical responses to official data using ordered discretechoice models, the paper proposes a statistically efficient means of combining the disparate estimates of aggregate output growth which can be constructed from the responses of individual firms. An application to firm-level survey data from the Confederation of British Industry shows that the proposed indicator can provide early estimates of output growth more accurately than traditional indicators.
(file size: 359.22KB, last updated: 12/2011)
We generalise and extend the work of Inarra and Laruelle (2011) by studying two person symmetric evolutionary games with two strategies, a heterogeneous population with two possible types of individuals and incomplete information. Comparing such games with their classic homogeneous version with complete information found in the literature, we show that for the class of anti-coordination games the only evolutionarily stable strategy vanishes. Instead, we find infinite neutrally stable strategies. We also model the evolutionary process using two different replicator dynamics setups, each with a different inheritance rule, and we show that both lead to the same results with respect to stability.