Working Papers

Authors: Marcel Fafchamps, Jackline Wahba, University of Southampton

Dec 2004

Using detailed survey data from Nepal, this paper examines the determinants of child labor with a special emphasis on urban proximity. We find that children residing in or near urban centers attend school more and work less in total but are more likely to be involved in wage work or in a small business. The larger the urban center, the stronger the effect is. Urban proximity is found to reduce the workload of children and improve school attendance up to 3 hours of travel time from the city. In areas of commercialized agriculture located 5 to 8 hours from the city, children do more farm work. Children unrelated or loosely related to the household head work more, especially in market work and household chores, and are less likely to attend school. This is especially true of child servants, a small group who appear particularly at risk.

JEL Codes: J13, O15, O18

Keywords: Child Labor, Geographical Isolation, Altruism, Education

Reference: 213

Individual View

Authors: Guillaume Chevillon

Dec 2004

To forecast at several, say h, periods into the future, a modeller faces two techniques: iterating one-step ahead forecasts (the IMS technique) or directly modeling the relation betwen observations separated by an h-period interval and using it for forecasting (DMS forecasting). It is known that structural breaks, unit-root non-stationarity and residual autocorrelation benefit DMS accuracy in finite samples, all of which occuring when modelling the South African GDP over the last thirty years. This paper analyzes the forecasting properties of the model developed by Aron and Muellbauer (2002) and compares with them that of 30 derived or competing models. We find that the GDP of South Africa is best forecast, 4 quarters ahead, using the technique developed by these authors and its variants as derived in the present paper. Rankings of other models vary over time and it is difficult to recommend one of them as a rule in this exercise.

Reference: 21

Authors: Marcel Fafchamps

Dec 2004

The purpose of this paper is to reflect, from an economist`s point of view, on the methodological issues raised by the study of social capital. This term has been used in many different ways to cover a broad range of phenomena (Durlauf & Fafchamps 2002). Perhaps it is best seen as a way of federating research programs in various social sciences, If so, the quest for an all-encompasing definition may be futile or even counter-productive, because different disciplines need to appropriate the term differently depending on how it fits in their paradigm. What is important is that the phrase social capital facilitates the exchange of ideas across disciplines.

JEL Codes: O10, O20

Keywords: Trust, Leadership, Public Goods, Social Capital

Reference: 214

Individual View

Authors: Marcel Fafchamps, Flore Gubert, DIAL, Research Unit or IRD

Dec 2004

Using data from the Philippines, this paper seeks to understand how households in the study area apparently manage to avoid falling in a debt trap in spite of frequent borrowing. Findings suggest this is achieved via three institutional features. First, most informal debt carries no interest. As we show in the conceptual section, charging zero interest makes a debt trap impossible. Second, for all debts, repayment is postponed in case of borrower`s difficulty; this is the only insurance feature of debt repayment. Third, while debt principal is seldom forgiven or reduced, interest-bearing debt does not carry additional interest if debt repayment is delayed. This prevents interest charges from accumulating and debt from snowballing.

JEL Codes: O16, O17, G20

Keywords: Debt Repayment, Informal Credit, Risk Sharing, Labor Bonding

Reference: 215

Individual View

Authors: Marcel Fafchamps, Forhad Shilpi, The World Bank

Dec 2004

Using detailed geographical and household survey data from Nepal, this article investigates the relationship between isolation and subjective welfare. This is achieved by examining how distance to markets and proximity to large urban centers affect responses to questions about income and consumption adequacy. Controlling for migration, results show that isolation significantly reduce subjective assessments of income and consumption adequacy. Part of this effect can be attributed to lower access to public goods and to a reduction in the variety of consumption items. Compensating variation estimates suggest that the subjective cost of isolation is large. We also find strong evidence that Nepalese households cannot relocate costlessly out of their village of origin.

JEL Codes: O18, R20

Keywords: Geographical Isolation, Subjective Well-Being, Migration

Reference: 216

Individual View

Authors: John Knight,Linda Yueh

Dec 2004

In China urban residents have traditionally been protected against labour market competition from rural-urban migrants. Over the period of urban economic reform, rural-urban migration was allowed to increase in order to fill the employment gap as growth of labour demand outstripped that of the resident labour force in urban areas. However, as reforms gained pace and controls were lifted, it is plausible that migrants and urban residents increasingly competed. The paper examines whether the relationship is one of complementarity in a still segmented labour market or of substitutability in an increasingly competitive labour market. It uses attitudinal responses from two urban surveys and a panel data set covering the 30 provinces over the period 1994-2000. We obtain very different results from cross-section, random effects and fixed effects panel estimates, raising interesting methodological issues. The findings are consistent with the presence of continued labour market segmentation but suggest also that competition between the two groups may be increasing.

JEL Codes: J30, J40

Keywords: Labour Markets, Wages, China

Reference: 217

We consider kernel-based estimators of integrated variances in the presence of independent market microstructure effects. We derive the bias and variance properties for all regular kernel-based estimators and derive a lower bound for their asymptotic variance. Further we show that the subsample-based estimator is closely related to a Bartlett-type kernel estimator. The small difference between the two estimators due to end effects, turns out to be key for the consistency of the subsampling estimator. This observation leads us to a modified class of kernel-based estimators, which are also consistent. We study the efficiency of our new kernel-based procedure. We show that optimal modified kernel-based estimator converges to the integrated variance at rate m1/4, where m is the number of intraday returns.

JEL Codes: C13, C22

Keywords: Quadratic Variation, Market Microstructure Noise, Integrated Variance, Kernel-Based Realized Variance, Realized Variance, Realized Volatility

Reference: 2004-FE-20

Keywords: Central Limit Theorem, Quadratic Variation, Bipower Variation

Reference: 2004-FE-21

Authors: Neil Shephard, Ole E. Barndorff-Nielsen, Department of Mathematical Sciences, University of Aarhus

Nov 2004

In this brief note we review some of our recent results on the use of high frequency financial data to estimate objects like integrated variance in stochastic volatility models. Interesting issues include multipower variation, jumps and market microstructure effects.

Reference: 2004-FE-22

Authors: David P. Myatt, Justin P. Johnson, Johnson Graduate School of Management, Cornell University

Nov 2004

We propose a framework for analyzing transformations of demand. Such transformations frequently stem from changes in the dispersion of consumers` valuations, which lead to rotations of the demand curve. In a wide variety of settings, profits are a U-shaped function of dispersion. A high level of dispersion is complemented by a niche posture, and low dispersion is complemented by a mass-market posture. We investigate numerous applications of our framework, including product design; advertising, marketing and sales advice; and the construction of quality-differentiated product lines. We also suggest a new taxonomy of advertising, distinguishing between hype, which shifts demand, and real information, which rotates demand.

JEL Codes: D21, D42, D83, L15, M31, M37

Keywords: Monopoly, Uncertainty, Dispersion, Advertising, Marketing, Product Design, Product Lines, Price Discrimination

Reference: 185

Individual View

Authors: Nicholas Dimsdale, N.H. Horsewood, A. van Riel

Nov 2004

This paper contributes to the debate on the causes of unemployment in interwar Germany. It applies the Layard-Nickell model of the labour market to interwar Germany, using a new quarterly data set. The basic model is extended to capture the effects of the tariff wage under the Weimar Republic and the Nazis. The estimated equations suggest that demand shocks, combined with nominal inertia in the labour market, were important in explaining unemployment. In addition real wage pressures due to the political processes of wage determination were a major influence on unemployment. Negative demand shocks appear to have been initially domestic and to have started before the impact of the World Depression. Both negative developments on the demand side of the economy and pressures coming from the supply side raised unemployment in the slump. In the recovery the wage policies of the Nazis and the revival of demand both contributed to the fall in unemployment. The mutual reinforcement of these factors may help to explain the severity of the interwar cycle in Germany. It also serves to emphasize the close connection between political and economic processes in this important episode in macroeconomic history.

JEL Codes: N14, E24, E32

Keywords: Great Depression, Germany, Real Wages, Unemployment

Reference: 056

Individual View

Authors: Thomas Norman

Oct 2004

This paper models the indirect evolution of the preferences of a population of fully rational agents repeatedly matched to play a symmetric 2 x 2 game in biological fitnesses. Each agent is biased in favor of one of the strategies, and receives a noisy signal of his and his opponent`s bias. With sufficiently accurate signals, the resulting global game selects a unique outcome, allowing preference biases to be shaped by the replicator dynamics. Stability analysis in this setting requires the extension of recent techniques for evolution on infinite strategy spaces, introducing new setwise stability concepts. In coordination games, the interval of preference biases supporting the Pareto-dominant equilibrium is Lyapunov stable and weakly attracting, by virtue of constituting a strongly uninvadable set. In Prisoners` Dilemmas that satisfy Kandori and Rob`s (Games and Economic Behavior 22, 1998, 30-60) marginal bandwagon property, meanwhile, an interval of biases supporting efficient cooperation is a neutrally uninvadable set, and thus Lyapunov stable.

JEL Codes: C70, C72

Keywords: Evolution, Preferences, Global Games, Replicator Dynamics, Continuous Strategy Space, Evolutionary Stability

Reference: 207

Individual View

Authors: John Thanassoulis

Oct 2004

This paper analyses how competition over rebates for customer loyalty across product lines affects firms` pricing and consumers generally. If buyers incur firm specific costs or have shop specific tastes then competitive loyalty discounts lower consumer surplus overall and raise profits - the same is true of competitive volume discounts. Competition without these discounts causes all prices to be kept low as larger customers are targetted; with discounts the prices for heavy users drop, but more is extracted from small users. The consumer surplus result is reversed if the differentiation between components as opposed to firms is key. Price discrimination is shown not to be the driving force behind the equilibrium prices - sellers price to steal customers from their rivals. The implications for diverse industries from professional services to cars and supermarkets are explored.

JEL Codes: L11, L21, L41, C65, C72

Keywords: Bundling, Loyalty Rebates, Volume Discounts, Competitive Price Discrimination, Collusion

Reference: 208

Authors: Victoria Prowse

Oct 2004

A multivariate extension of the standard labour suppy model is presented. In the multivariate time allocation model leisure is disaggregated into a number of non market activities including sports, volunteer work and home production. Using data from the 2000 UK Time Use Survey, a linear expenditure system is estimated, allowing corner solutions in the time allocated to market work and non market activities. The effects of children, age, gender and education are largely as expected. The unusually high wage elasticities are attributed to a combination of the functional form of the linear expenditure and the treatment of the zero observations.

JEL Codes: C15, C34, J22

Keywords: Time Use, Labour Supply, Corner Solutions, Simulation Inference

Reference: 209

Individual View

Authors: Emilia Del Bono

Sep 2004

This paper investigates the effect of earnings and employment opportunities on pre-marital fertility. Using data from a sample of British women born in 1970, we estimate an independent competing risk harzard model of fertility and cohabitation decisions. Our results show that individual earnings opportunities are negatively related to pre-marital fertility but do not affect union formation. Local male unemployment, on the contrary, is a positive determinant of single motherhood and a negative factor in cohabitation decisions. The latter result is consistent with the Wilson hypothesis as it shows the existence of a direct effect of male joblessness on co-residential relationships.

JEL Codes: J13, J12, C41

Keywords: Fertility, Marriage, Competing Risks Harzard Models

Reference: 202

Individual View

Functional Signal plus Noise (FSN) time series models are introduced for the econometric analysis of the dynamics of a large cross-section of prices in which contemporaneous observations are functionally related. A semiparametric FSN model is developed in which a smooth, cubic spline signal function is used to approximate the price curve data. Estimation may then be performed using quasi-maximum likelihood methods based on the Kalman filter. The model is used to provide one of the first studies of the dynamics of the bid and ask curves of an electronic limit order book and enables the comprehensive measurement of the dynamic determinants of traders` execution costs. It is found that the differences between the bid and ask curves and their intercepts (i.e. the immediate price impacts of market orders) are well described by covariance stationary processes. The in-sample, 1-step ahead point predictions for these curves perform well and motivate the development of parametric FSN models that take into account the monotonicity of the price curves and can be used to form predictive distributions.

JEL Codes: C14, C32, C33, C51, G12

Keywords: Functional Time Series, Bid and Ask Curves, Liquidity, Electronic Limit Order Book, Cubic Spline, State Space Form, Kalman Filter, Quasi-Maximum Likelihood

Reference: 2004-FE-19

Authors: Kathryn Graddy, Orley Ashenfelter, Princeton University

Sep 2004

The Sotheby`s/Christie`s price-fixing scandal that ended in the public trial of Alfred Taubman provides a unique window on a number of key economic and antitrust policy issues related to the use of the auction system. The trial provided detailed evidence as to how the price fixing worked, and the economic conditions under which it was started and began to fall apart. The outcome of the case also provides evidence on the novel auction process used to choose the lead counsel for the civil settlement. Finally, though buyers received the bulk of the damages, a straightforward application of the economic theory of auctions shows that it is unlikely that successful buyers as a group were injured.

JEL Codes: D44, K21, L41

Keywords: Auctions, Price-Fixing, Cartels, Antitrust, Commissions

Reference: 203

Individual View

Authors: Pablo Casas-Arce, Santhi Hejeebu, Cornell College

Sep 2004

We reconsider the job design theory of Holmstrom and Milgrom (1991), to include career concerns considerations. When reputations are considered, discretion may play a more integral part of the incentive scheme. It can be a useful instrument to enhance incentives and prevent the adverse selection of low ability agents. We then show that these synergies are useful in explaining the employment of U.S. faculty members and the employment of agents in the English East India Company, an historically important firm.

JEL Codes: J33, J41, L14, M52, M54

Keywords: Job Design, Multitasking, Career Concerns

Reference: 204

Individual View

Authors: Dimitrios P Tsomocos, Xavier Freixas, Universitat Pompeu Fabra and CEPR

Sep 2004

The aim of this paper is to examine the pros and cons of book and fair value accounting from the perspective of the theory of banking. We consider the implications of the two accounting methods in an overlapping generations environment. As observed by Allen and Gale (1997), in an overlapping generation model, banks have a role as intergenerational connectors as they allow for intertemporal smoothing. Our main result is that when dividends depend on profits, book value ex ante dominates fair value, as it provides better intertemporal smoothing. This is in contrast with the standard view that states that, fair value yields a better allocation as it reflects the real opportunity cost of assets. Banking regulation play an important role by providing the right incentives for banks to smooth intertemporal consumption whereas market discipline improves intratemporal efficiency.

Reference: 2004-FE-13

Authors: Simon GB Cowan, Simon Cowan

Sep 2004

The welfare effects of third-degree price discrimination are known to be negative when demand functions are linear, marginal cost is constant and all markets are served. This paper shows that discrimination lowers welfare for a more general class of demand functions. Demand varies across markets with additive and multiplicative shift factors. Total welfare (defined as consumer surplus plus profits) with discrimination is lower than with uniform pricing when the density function of consumer valuations satisfies a weak version of concavity that encompasses logconcavity. Most standard demand functions including linear, quadratic, probit, logit, exponential and iso-elastic ones, satisfy this assumption, which is also a weak sufficient condition for existence.

JEL Codes: D42, L12, L13

Keywords: Price Discrimination, Monopoly

Reference: 205

Authors: Alan Morrison, William J. Wilhelm, Jr., McIntire School of Commerce, University of Virginia

Sep 2004

Until 1970, the New York Stock Exchange prohibited public incorporation of member firms. After the rules were relaxed to allow joint stock firm membership, investment-banking concerns organized as partnerships or closely-held private corporations went public in waves, with Goldman Sachs (1999) the last of the bulge bracket banks to float. In this paper we ask why the Investment Banks chose to float after 1970, and why they did so in waves. Our explanation extends previous work which examined the role of partnerships in fostering the formation of human capital (Morrison and Wilhelm, 2003). We examine in this context the effect of technological innovations which serve to replace or to undermine the role of the human capitalist and hence we provide a technological theory of the partnership`s going-public decision. We support our theory with a new dataset of investment bank partnership statistics.

JEL Codes: G24, G32, J24, J41, L14, L22

Keywords: Partnership, Human Capital, Collective Reputation, Investment Bank, Going-Public Decision

Reference: 2004-FE-14

Authors: David Gill, Daniel Sgroi, Churchill College and Department of Applied Economics, University of Cambridge

Sep 2004

This paper considers the impact of reviewers on sales of products of quality unknown to consumers. Sales occur simultaneously after consideration by a reviewer with a known level of bias. Consumers observe the reviewer`s decision and a private signal. We find that: (a) with flexible prices and signals that are not too revealing the reviewer most biased against the product is best for profits; (b) with flexible prices and very revealing private signals the reviewer most biased in favour is optimal; (c) with fixed prices then a reviewer biased against, but close to unibased, is optimal.

JEL Codes: D82, D83, L15

Keywords: Private Information, Reviewers, Bias, Simultaneous Sales, Marketing

Reference: 206

Individual View

Authors: Dimitrios P Tsomocos, Gael Giraud, CNRS, Universite Paris-1

Sep 2004

We define a non-tatonnement dynamics in continuous-time for pure-exchange economies with outside and inside fiat money. Traders are myopic, face a cash-in-advance constraint, and play dominant strategies in a short-run monetary strategic market game involving the limit-price mechanism. The profits of the Bank are redistributed to its private share-holders, but they can use them to pay their own debts only in the next period. Provided there is enough inside money, monetary trade curves converge towards Pareto optimal allocations; money has a positive value along each trade curve, except on the optimal rest-point where it becomes a veil while trades vanish. Moreoever, generically, given initial conditions, there is a piecewise globally unique trade-and-price curve not only in real, but also in nominal variables. Finally, money is locally neutral in the short-run and non-neutral in the long-run.

Reference: 2004-FE-15

Authors: Neil Shephard, Yashurio Omori, Faculty of Economics,University of Tokyo,Siddhartha Chib, Olin School of Business, Washington University,Jouchi Nakajima, Faculty of Economics, University of Tokyo

Sep 2004

Kim, Shephard, and Chib (1998) provided a Bayesian analysis of stochastic volatility models based on a fast and reliable Markov chain Monte Carlo (MCMC) algorithm. Their method rules out the leverage effect, which is known to be important in applications. Despite this, their basic method has been extensively used in the financial economics literature and more recently in macroeconometrics. In this paper we show how the basic approach can be extended in a novel way to stochastic volatility models with leverage without altering the essence of the original approach. Several illustrative examples are provided.

Keywords: Leverage Effect, Markov Chain Monte Carlo, Mixture Sampler, Stochastic Volatility, Stock Returns

Reference: 2004-FE-16

Authors: Neil Shephard, Siddhartha Chib, Olin School of Business, Washington University,Michael K. Pitt, Department of Economics, University of Warwick

Sep 2004

This paper provides methods for carrying out likelihood based inference for diffusion driven models, for example discretely observed multivariate diffusions, continuous time stochastic volatility models and counting process models. The diffusions can potentially be non-stationary. Although our methods are sampling based, making use of Markov chain Monte Carlo methods to sample the posterior distribution of the relevant unknowns, our general strategies and details are different from previous work along these lines. The methods we develop are simple to implement and simulation efficient. Importantly, unlike previous methods, the performance of our technique is not worsened, in fact it improves, as the degree of latent augmentation is increased to reduce the bias of the Euler approximation. In addition, our method is not subject to a degeneracy that afflicts previous techniques when the degree of latent augmentation is increased. We also discuss issues of model choice, model checking and filtering. The techniques and ideas are applied to both simulated and real data.

Keywords: Bayes Estimation, Brownian Bridge, Non-linear Diffusion, Euler Approximation, Markov Chain Monte Carlo, Metropolis-Hastings Algorithm, Missing Data, Simulation, Stochastic Differential Equation

Reference: 2004-FE-17

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