Working Papers

Authors: Elaine Tan

Jun 2002

This paper proposes that one function of the open fields was to reduce the transaction costs of cow-keeping by lowering commoners costs of bulling. At enclosure, cow-keeping fell among small owners who, unlike large farmers, had difficulty obtaining bulling services and were not substantial enough to own both the bull and the cow; they were therefore worse off with enclosures. The minimum acreage required to restore cow keepers to their pre-enclosure economic position indicates that even commoners who were given some land at settlement lost out with the change in property rights.

Reference: 046

Individual View

Authors: Simon GB Cowan, Simon Cowan

May 2002

The regulator of a natural monopoly that sets a two-part tariff and whose marginal cost is stochastic will generally want the price to vary less than marginal cost when the lump-sum charge in the tariff is fixed. A trade-off exists between efficient pricing and an optimal allocation of risk. Pricing at marginal cost is only optimal when the consumer`s marginal utility is independent of the price. When marginal utility increases with the price the mark-up falls monotonically as marginal cost rises. The lump-sum element of the tariff should exceed the fixed cost when demand is inelastic and equals the fixed cost only with unit elasticity. The model may also be applied to optimal commodity taxation.

JEL Codes: L51, D42, H21

Keywords: price risk, regulation, Ramsey pricing

Reference: 102

Authors: Natalia Mora Sitja

May 2002

This paper examines labours organisation and labours reward in Catalonia before the first Industrial Revolution. Using new quantitative evidence on urban wages, it first shows that agricultural and urban real wages did not decrease during the last five decades of the pre-industrial period, despite increasing commodity prices. Secondly, it performs an econometric test that shows that wage responses reflected a condition of labour market integration, with occupational and spatial mobility. New data on the characteristics of immigration in Barcelona have been assembled to reinforce previous findings, and to provide new information on the push factors that inclined labourers to migrate. The papers aim is both to test issues long discussed in the literature on labour markets (taking Catalonia as the case study), and to provide new data that may help future research.

Reference: 045

Individual View

Authors: David Bevan

May 2002

Probably the most enduring result in the theory of optimum income taxation is that, for a sufficiently thin upper tail to the skill distribution, the marginal tax rate should fall rather than rise with income. This paper shows that this result is highly sensitive to a very strong informational assumption, namely that earnings exactly reflect a worker`s contribution to output. While the formal structure of the optimum problem is altered only slightly when earnings are allowed to be less than perfectly correlated with productivity, the shape of the optimum schedule is very sensitive to this relaxation. For high but imperfect correlation, optimum schedules look rather like those traditionally chosen by governments, with the marginal rate rising over high incomes and possibly U-shaped over the whole distribution.

JEL Codes: H21, D82

Keywords: income taxation

Reference: 101

Individual View

Authors: William Wilhelm, Alexander Ljungqvist

Apr 2002

IPO initial returns reached astronomical levels during 1999-2000. We show that the regime shift in initial returns and other elements of pricing behavior can be at least partially accounted for by a variety of marked changes in pre-IPO ownership structure and insider selling behavior over the period, which reduced key decision-makers` incentives to control underpricing. After controlling for these changes, the difference in underpricing between 1999-2000 and the preceding three years is much reduced. Our results suggest that it was firm characteristics that were unique during the dot-com bubble and that pricing behavior followed from incentives created by these characteristics.

Reference: 2002-FE-07

Authors: David P. Myatt

Mar 2002

Reference: 94

This paper analyses multivariate high frequency financial data using realised covariation. We provide a new asymptotic distribution theory for standard methods such as regression, correlation analysis and covariance. It will be based on a fixed interval of time (e.g. a day or week), allowing the number of high frequency returns during this period to go to infinity. Our analysis allows us to study how high frequency correlations, regressions and covariances change through time. In particular we provide confidence intervals for each of these quantities.

Keywords: Power Variation, Realised correlation, Realised covolatility, Realised regression, Realised variance, semimartingales, Covolatility

Reference: 2002-FE-03

Authors: Margaret Stevens

Mar 2002

Although a number of different models have been suggested for the process that brings workers and firms together in the labour market, none of these performs well in empirical studies of the aggregate matching function. Empirically, the most successful functional form is Cobb-Douglas, for which there are no microfoundations in the existing literature. I present a new model for the matching process, based on a `telephone line` Poisson queuing process. This implies a CES matching function, approximately Cobb-Douglas when marginal search costs are approximately constant. The model provides an interpretation for empirical evidence, and insight into the theoretical efficiency conditions for matching models.

JEL Codes: J41

Keywords: search, matching function

Reference: 95

Individual View

Authors: Alan Beggs

Mar 2002

This paper examines the convergence of payoffs and strategies in Erev and Roth`s model of reinforcement learning. When all players use this rule it eliminates iteratively dominated strategies and in two-person constant-sum games average payoffs converge to the value of the game. Strategies converge in constant-sum games with unique equilibria if they are pure or in 2

JEL Codes: C72, D83

Keywords: reinforcement learning, games

Reference: 96

Authors: David P. Myatt, Chris Wallace

Mar 2002

Equilibrium selection in coordination games has generated a large literature. Kandori, Mailath and Rob (1993) and Young (1993) studied dynamic models of aggregate behaviour in which agents choose best responses to observations of population play. Crucially, infrequent mistakes (`mutations`) allow agents to take actions contrary to current trends and prevent initial configurations from determining long run play. An alternative approach is offered here: Harsanyian trembles are added to agents` payoffs so that with some probability it is optimal to act against the flow of play. The long run distribution of population behaviour is characterised - modes correspond to stable Bayesian Nash equilibria. Allowing the variance of payoff trembles to vanish, via a purification process, a single equilibrium is played almost always in the long run. Kandori et al and Young show that the number of contrarian actions required to escape an equilibrium determines selection; here, the likelihood that such actions are taken is of equal importance.

JEL Codes: C72, C73

Keywords: adaptive dynamics, payoff idiosyncrasy, evolution, equilibrium selection

Reference: 89

Individual View

Authors: Kamakshya Trivedi

Mar 2002

This paper examines the long-run (steady-state) relationship between levels of educational human capital and levels of income for the 15 major states of India between 1965 and 1992. The relationship is estimated using the Pooled Mean Groups (PMG) technique; which produces common long-run coefficients but allows heterogeneity of the short-run adjustment parameters, and is well-suited to approximately square panels. The results suggest that levels of educational human capital, proxied by secondary school enrollment rates, have a robust positive impact on steady-state levels of income. This is true for male and female education, and the regressions also suggest that states which have larger gender-gaps in education have lower steady-state incomes. The estimated relationship is robust to the inclusion of alternative measures, added controls, and variation in the degree of state coverage.

JEL Codes: O11, O53, I29

Keywords: growth, India, education, panel data

Reference: 97

Individual View

Authors: Avner Offer

Mar 2002

The public sector allocates 40 percent of expenditure in Britain. Why do affluent consumers acquire so much welfare outside the market? If choice is affected by myopic bias, optimisation is costly, consumer choice is fallible, and collective consumption provides a commitment device. For a century after 1870, collective investment gave superior payoffs, and collective consumption grew faster than the economy. Public/private standoffs were resolved against entrepreneurs. By the 1970s, prudential saturation set in, as public investment soared. Rising incomes, new goods, and falling prices shifted consumer preferences towards market provision, and crowded out the public sector. This shift supported investor capture of government, privatisation and de-regulation. Consumer expenditure increased, while prudential investment declined sharply. In consequence, Victorian-style public/private standoffs have emerged again, with prudential crises in pensions, education, health, communications, and transport. These will need to be resolved once again by means of political competition.

Reference: 044

Individual View

Authors: David P. Myatt, Chris Wallace

Mar 2002

A strategy revision process in symmetric normal form games is proposed. Following Kandori, Mailath, and Rob (1993), members of a population periodically revise their strategy choice, and choose a myopic best response to currently observed play. Their payoffs are perturbed by normally distributed Harsanyian (1973) trembles, so that strategies are chosen according to multinomial probit probabilities. As the variance of payoffs is allowed to vanish, the graph theoretic methods of the earlier literature continue to apply. The distributional assumption enables a convenient closed form characterisation for the weights of the rooted trees. An illustration of the approach is offered, via a consideration of the role of dominated strategies in equilibrium selection.

JEL Codes: C72, C73

Keywords: multinational probit, stochastic evolution, idiosyncrasy, dominated strategies

Reference: 90

Individual View

Authors: Gerardo A. Guerra

Mar 2002

Through an experiment this study investigates the effects that verification has on honest traders. This paper demonstrates that by reducing the scope for trust verification can have a negative effect on the behaviour of honest individuals. Specifically, the analysis shows that trustworthy agents are willing to punish or seek compensation from those that deprive them of trust opportunities through the use of verification. Regulatory implications are discussed.

JEL Codes: C72, C78, C90, D18, D82, L86

Keywords: verification, trust, ultimatum bargaining, experiments

Reference: 98

Individual View

Authors: Daniel John Zizzo

Mar 2002

This paper presents the results of an experiment where people can reduce (`burn`) other subjects` money at a cost to their own, with the decisions of one of them (randomly chosen after all decisions are made) getting implemented to determine final winnings. Almost 50% of the subjects engage in money burning, eliminating some 23% of the earnings of the other subjects. The price elasticity of burning is estimated, and found to be less than one up to a lower boundary price of about 0.22. Three subjects out of four appear rank egalitarian, providing support to theories of interdependent preferences that predict that agents care about how money is divided among other agents. Relatively poor and disadvantaged agents burn at least as much as the others. Overall, money burning appears a genuine phenomenon, mirroring the institutional realities of some transition and underdeveloped economies where `the evil eye` can induce behaviour closely resembling money burning, and which may hinder economic growth. Some implications for developed countries are also discussed.

JEL Codes: C91, D11

Keywords: consumer choice, money burning, envy, egalitarianism

Reference: 91

Individual View

Authors: Gerardo A. Guerra, Daniel John Zizzo

Mar 2002

Trust responsiveness is the tendency to fulfill trust because you believe that it has been placed on you. The experiment presented in this paper uses two simple trust games to measure directly or indirectly the robustness of trust responsiveness in three conditions: when beliefs are elicited and a summary of these beliefs is transmitted; when beliefs are elicited but not transmitted, when beliefs are not elicited. Insofar as we can tell, trust responsiveness is robust to our belief manipulations: this strengthens the case for the real-world significance of trust responsiveness. Shame provides a possible explanation for unexpected trusters` choices.

JEL Codes: C72, C91, Z13

Keywords: trust, trust responsiveness, belief elicitation, shame

Reference: 99

Individual View

Authors: Andrew Glyn, Robert Rowthorn, Faculty of Economics and Politics, Cambridge University

Mar 2002

It is widely believed that regional labour markets in the USA are highly flexible, so that employment shocks have only transitory effects on joblessness since induced migration quickly offsets much of the initial impact. However time-series analysis of the response to shocks is very sensitive to errors of measurement in labour market data, and such errors are large in some widely used series which depend on household surveys of limited size. Adjusting for the likelihood magnitude of such errors with some novel statistical approaches, and using a range of data sources, we show that the responsiveness of employment rates to shocks has been rather weak in the USA over the past 30 years, though probably stronger in the 1950s and 1960s. This suggests that flexible regional adjustment is not a major factor behind the contemporary success of monetary union in the USA.

JEL Codes: C1, J6, N9, R1

Keywords: regional employment, convergence, measurement errors, regional adjustment

Reference: 92

Individual View

Authors: Simon GB Cowan, Simon Cowan

Mar 2002

The paper assesses the welfare effects of different ways of allocating input price risk between a regulated utility, consumers and speculators in a futures market. A risk-averse utility setting a fixed retail price requires a price that exceeds expected marginal cost, unless an efficient futures market is available. The firm bears no risk when input price risk is transferred to consumers, but consumers may not like price risk. When a futures market is available to consumers marginal cost pricing is always preferable to a fixed retail price. The policy conclusion is that marginal cost pricing should be combined with the development of futures markets in which consumers can hedge.

JEL Codes: D11, D42, D80, L51.

Keywords: price risk, utility regulation, futures markets

Reference: 100

Authors: Daniel John Zizzo

Mar 2002

The conjunction fallacy occurs whenever probability compounds are thought of as more likely than its component probabilities alone. In the experiment we present, subjects chose between simple and compound lotteries after some practice. Depending on the condition, they were given more or less information about the nature of probability compounds. The conjunction fallacy was surprisingly robust. There was, however, a puzzling dissociation between probability compounding in words and in practice: verbal ranking responses were sensitive, but actual choices entirely insensitive, to the amount of verbal instructions being provided. This might reflect a dichotomy between implicit and explicit knowledge.

JEL Codes: C91, D81, D83

Keywords: conjunction fallacy, heuristics, probability compounding, implicit knowledge, explicit knowledge

Reference: 88

Authors: David P. Myatt

Mar 2002

Reference: 93

Authors: Alexander Guembel, Itay Goldstein

Feb 2002

We provide evidence that firms attempting IPOs condition offer terms and the decision whether to carry through with an offering on the experience of their primary market contemporaries. Moreover, while initial returns and IPO volume are positively correlated in the aggregate, the correlation is negative among contemporaneous offerings subject to a common valuation factor. Our findings are consistent with investment banks implicitly bundling offerings subject to a common valuation factor to achieve more equitable internalization of information production costs and thereby preventing coordination failures in primary equity markets.

JEL Codes: D62, D82, D84, G14

Keywords: Manipulation, speculation, market efficiency, production externalities.

Reference: 2002-FE-02

Authors: Alan Morrison, Lucy White

Feb 2002

We analyse a general equilibrium model in which there is both adverse selection of and moral hazard by banks. The regulator has several tools at her disposal to combat these problems. She can audit banks to learn their type prior to giving them a licence, she can audit them ex post to learn the success probability of their projects, and she can impose capital adequacy requirements. When the regulator has a strong reputation for ex ante auditing she uses capital requirements to combat moral hazard problems. For less competent regulators, capital requirements substitute for ex ante auditing ability. In this case the banking system exhibits multiple equilibria so that crises of confidence in the banking system can occur. Contrary to conventional wisdom, the appropriate response to a crisis of confidence may be to tighten capital requirements to improve the quality of surviving banks.

Reference: 2002-FE-05

Authors: Gerardo A. Guerra

Feb 2002

Ultimatum games have been extensively used in experimental studies. By studying the consequences that restrictions shared by ultimatum games have in subject`s behaviour, this paper argues that some results are falsified by design constraints. This paper also presets a taxonomy of certification, and provides experimental evidence supporting the commonly observed use of rankings in certificates, as well as the restriction of awareness by certifiers to increase revenue. Regulatory implications are discussed.

JEL Codes: C72, C78, C90, D18, D63, D82, L15, L86

Keywords: ultimatum, bargaining, experiments, certification, asymmetric information

Reference: 87

Individual View

Authors: Tony Atkinson

Jan 2002

Abstract: In 1909 the United Kingdom Government introduced “super-tax”, which was an additional income tax levied on top incomes. This provided information on the distribution of total incomes that had not previously been available on a regular basis, since under the ordinary income tax, the authorities did not know the total income of individuals, which could be the subject of several separate assessments. Super-tax remained in existence until 1972, by which time other income tax sources (the Survey of Personal Incomes) were in place to allow the series to be continued. The aim of this paper is to examine what can be said from the published super-tax statistics about the evolution of top incomes in the United Kingdom. The paper spells out the limitations of the super-tax information, and the problems in establishing control totals for total population and total income, but argues that it provides a unique source of evidence about the distribution of top incomes covering virtually the whole of the twentieth century. The resulting picture, if blurred in places, allows us to draw broad conclusions about developments over the twentieth century. There is no longer the extent of inequality to be found before the First World War, with the Upper Ten Thousand receiving nearly a tenth of total income. The magnitude of the change may be need to be qualified in the light of fiscal re-arrangement, but there have been distinct periods of equalisation, notably during the two world wars, from 1946–1957 and from 1965–1972. But there is no steady trend. There have been plateaux. Since 1979, we have seen a reversal, with shares of the top income groups returning to their position of fifty years earlier. The equalisation of the post-war period has been lost.

Reference: 043

Individual View

Authors: James Malcomson, James W. Maw, University of Swansea Wales,Barry McCormick, University of Southampton

Jan 2002

Workers will not pay for general on-the-job training if contracts are not enforceable. Firms may if there are mobility frictions. Private information about worker productivities, however, prevents workers who quit receiving their marginal products elsewhere. Their new employers then receive external benefits from their training. In this paper, training firms increase profits by offering apprenticeships which commit firms to high wages for those trainees retained on completion. At these high wages, only good workers are retained. This signals their productivity and reduces the external benefits if they subsequently quit. Regulation of apprenticeship length (a historically important feature) enhances efficiency. Appropriate subsidies enhance it further.

This paper is now published at the reference given below, however the unpublished appendices are available to be downloaded.

JEL Codes: J24, J38

Keywords: contract enforceability, apprenticeships, regulation

Reference: 86


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