Working Papers

Authors: Marcel Fafchamps, Susan Lund

Apr 2000

Using detailed data on gifts, loans, and asset sales, this paper investigates how rural Filipino households deal with income and expenditure shocks. We find that shocks have a strong effect on gifts and informal loans, but little effect on sales of livestock and grain. Mutual insurance does not appear to take place at the village level; rather, households receive help primarily through networks of friends and relatives. Certain shocks are better insured than others. The evidence is consistent with models of quasi-credit where risk is shared within tightly knit networks through flexible, zero interest informal loans combined with pure transfers.

JEL Codes: O12, Q12

Keywords: risk sharing, informal credit, insurance, gifts, consumption smoothing

Reference: 10

Individual View

Authors: Tim Jenkinson, William Wilhelm, Alexander Ljungqvist

Apr 2000

By 1999, close to 80% of non-U.S. IPOs were marketed using bookbuilding methods. We study whether the recent introduction of this technology by U.S. banks and their inclusion in non-U.S. IPO syndicates has promoted efficiency in primary equity markets. We analyze both direct and indirect costs (associated with underpricing) using a unique dataset containing information on 2,051 initial public offerings in 61 non-U.S. markets during the period 1992-1999. The direct costs of bookbuilding are typically twice as large as direct costs for fixed-price offers. However, bookbuilding leads to substantially less underpricing. This benefit is more pronounced when the target market includes U.S. investors, when U.S. listing is sought and when U.S. banks are part of the syndicate.

JEL Codes: G32

Keywords: Initial public offerings, bookbuilding, underwriting spreads

Reference: 2000-FE-04

Authors: David Hendry, Hans-Martin Krolzig

Mar 2000

Disputes about econometric methodology partly reflect a lack of evidence on alternative approaches. We reconsider econometric model selection from a computer-automation perspective, focusing on general-to-specific reductions, embodied in PcGets. Starting from a general congruent model, standard testing procedures eliminate statistically-insignificant variables, with diagnostic tests checking the validity of reductions, ensuring a congruent final selection. Since jointly selecting and diagnostic testing has eluded theoretical analysis, we study modelling strategies by simulation. The Monte Carlo experiments show that PcGets recovers the DGP specification from a general model with size and power close to commencing from the DGP itself.

JEL Codes: C51, C22

Keywords: econometric methodology, model selection, encompassing, data mining, Monte Carlo experiments, money demand, consumption function

Reference: 3

Authors: David Hendry, Michael P. Clements

Mar 2000

Although difference-stationary (DS) and trend-stationary (TS) processes have been subject to considerable analysis, there are no direct comparisons for each being the data-generation process (DGP). We examine incorrect choice between these models for forecasting for both known and estimated parameters. Three sets of Monte Carlo simulations illustrate the analysis, to evaluate the biases in conventional standard errors when each model is mis-specified, compute the relative mean-square forecast errors of the two models for both DGPs, and investigate autocorrelated errors, so both models can better approximate the converse GDP. The outcomes are surprisingly different from established results.

JEL Codes: C32, C53

Keywords: difference stationary, trend stationary, forecastability

Reference: 5

Authors: Michel Habib, Alexander Ljungqvist

Mar 2000

We examine the relation between firm value and managerial incentives in a sample of 1,487 U.S. firms in 1992-1997, for which the separation of ownership and control is complete. Unlike previous studies, we employ a measure of relative performance which compares a firm’s actual Tobin’s Q to the Q of a hypothetical fully-efficientfirm having the same inputs and characteristics as the original firm. We find that the Q of the average firm in our sample is around 10% lower than its Q, equivalent to a $1,340 million reduction in its potential market value. We investigate what causes firms to fail to reach their Q and find that our firms are more efficient, the higher are CEO stockholdings and optionholdings and the more sensitive are CEO options to firm risk. We also show that boards respond to inefficiency by subsequently strengthening incentives or replacing inefficient CEOs.

Reference: 2000-FE-03

Authors: Kevin Roberts

Mar 2000

This paper develops a formula for the optimal nonlinear income tax, the terms of which are familiar from the theory of linear income taxation. The development uses the idea of a perturbation of the optimal schedule and is based upon as assumption of differentiability. It is also shown that the introduction of non-differentiability, implying bunching of taxpayers, may be desirable and, in this case, the optimal schedule may be difficult to determine. The analysis can be applied to nonlinear tax reform.

JEL Codes: H21, H31

Keywords: nonlinear taxation, income taxation, bunching, tax reform

Reference: 6

Individual View

Authors: Howard Smith

Mar 2000

This paper develops an asymmetric price setting oligopoly model of store opening and closure decisions in the UK supermarket industry which is estimated using a survey of consumer choices and a dataset of store characteristics. The model is used to examine the strategic local entry and exit behaviour of the firms and the social efficiency of stores numbers and store characteristics. It is found that firms use store openings to pre-empt rival competition and there is a degree of local clustering. A welfare analysis of store characteristics and store numbers shows that most existing stores and some hypothetical extra stores are welfare enhancing at the margin. Location is not optimal but location inefficiencies are small and firms have incentives to relocate in socially preferred directions. Recent trends in store characteristics - larger stores and more stores openings by large firms - are welfare improving.

JEL Codes: L1, L8, L13

Reference: 7

Individual View

Authors: Liam Brunt

Feb 2000

Between 1700 and 1850, English grain yields were substantially higher than those attained in other countries. It is widely believed that yields were constrained by the availability of nitrogen, and that supplies of nitrogen were effectively limited to animal dung produced on the farm. This paper presents the first systematic analysis of off-farm sources of nitrogen, such as urban and industrial waste. We show that the use of off-farm nitrogen was both widespread and intensive by 1700, contrary to the received wisdom. We further argue that there was only modest growth in the use of off-farm nitrogen up to 1850. We explain this pattern of use of off-farm nitrogen by supply and demand factors. We use a new method of estimation to show that the overall impact was to raise wheat yields by a constant 20 per cent throughout the period.

JEL Codes: N5, Q1, Q2

Keywords: agriculture, renewable resources, extractive industries

Reference: 035

Individual View

Authors: Avner Offer

Jan 2000

GDP per head is not only an economic indicator, but is widely used as a welfare indicator. This use not well founded in economic theory. The paper compares income per head with a three groups of alternative indicators: extended national accounts, social indicators, and indicators of subjective well-being. All of these methods indicate a decline in the welfare productivity of GDP goods over time.

Reference: 034

Individual View

Authors: Christopher Adam,David Bevan

Jan 2000

It has been argued that the institutions of the CFA Franc zone may have reduced inflation but that they also induced misalignment of the real exchange rate and that this is the explanation for their dismal revenue performance. This paper uses a panel of 22 countries in sub-Saharan Africa to estimate revenue performance over the period from 1980 to 1996. It finds that the poor cumulative relative revenue performance of the franc zone countries is mainly attributable to differences in environmental and structural factors, and that different responses to changes in the equilibrium real exchange rate, but that the misalignment of the real exchange rate also played a part.

JEL Codes: O11, O23

Keywords: revenue productivity, exchange rate regimes, Africa, panel data

Reference: 9

Authors: Dimitrios P Tsomocos

Jan 2000

This paper first extends the canonical General Equilibrium with Incomplete Markets (GEI) model with money and default to allow for competitive banking and financial instability. Second, it introduces capital requirements for the banking sector to assess the short and medium term macroeconomic consequences of the proposed New Basel Accord. Monetary Equilibria with Commercial Banks and Default (MECBD) exist and financial instability and default emerge as equilibrium phenomena. A non-trivial quantity theory of money is derived and the term structure of interest rates incorporates both the `expectations` and the `liquidity preference` hypotheses. Thus, monetary, fiscal and regulatory policies necessarily generate real effects. Non-neutrality relies upon the real and nominal determinacy of MECBD. A version of the liquidity trap holds and the Diamond-Dybvig (1983) result is a special case. Finally, because of the presence of capital requirements for banks, a trade off exists between regulatory policy and efficiency. The model provides a useful analytical device for policy analysis of situations in which crisis prevention and management become necessary to reduce the risks and costs of financial instability.

JEL Codes: D52, E4, E5, G1, G2

Keywords: Financial instability, competitive banking, capital requirements, Basel accord, regulation, incomplete markets, default, non-neutrality, Gains-to-Trade

Reference: 2003-FE-08

Authors: Michel Habib, Alexander Ljungqvist

Dec 1999

We model underpricing as being endogenous to the wealth loss minimization problem encountered in a stock market flotation. The benefits of reducing underpricing depend on the entrepreneur`s participation in the offering, via the secondary shares he sells, as well as the magnitude of the dilution he suffers on his retained shares, which increases in the number of newly issued shares. However, reducing underpricing is costly. Therefore, it is not surprising that there is positive underpricing in equilibrium, as entrepreneurs trade off the costs and benefits of lower underpricing. Using two large data sets of US IPOs, we find support for the comparative statics predictions of our model, in particular those which distinguish our model from existing work. We also find support for the prediction that equilibrium wealth losses are unrelated to the level of underpricing-reduction costs and the quality of underwriter, which indicates that entrepreneurs choose such variables optimally. Non-monetary considerations such as private benefits of control appear not to be taken into account by the entrepreneur. Our empirical results are robust to a number of economic and econometric considerations.

JEL Codes: G32

Keywords: Initial public offerings, underpricing, wealth losses

Reference: 1999-FE-03

Authors: William Wilhelm, Alexander Ljungqvist

Nov 1999

Non-U.S. firms frequently pay a substantial premium to have a U.S. bank lead their initial public offering of equity, even when the issuing firm is not seeking a listing on a U.S. exchange. We provide evidence that this decision reflects an expectation that U.S. banks deliver a higher quality bundle of underwriting services. Specifically, a non-U.S. issuing firm that includes a U.S. bank in its underwriting syndicate can expect to have its offering underpriced by 17.7 percentage points less than had it not included a U.S. bank in the syndicate. Failure to account for the endogeneity of the decision to hire a U.S. bank vastly understates the magnitude of the effect. This finding has direct implications for the claim that U.S. bank spreads for domestic IPOs are above competitive levels.

JEL Codes: G32

Keywords: Initial public offerings, investment banking, underwriting spreads

Reference: 1999-FE-11

Authors: Paul David, Gavin Wright

Oct 1999

A marked acceleration of total factor productivity (TFP) growth in U.S. manufacturing followed World War I. This development contributed substantially to the absolute and relative rise of the domestic economys aggregate TFP residual, which is observed when the growth accounts for the first quarter of the twentieth century are compared with those for the second half of the nineteenth century. Two visions of the dynamics of productivity growth are germane to an understanding of these developments. One emphasizes the role of forces affecting broad sections of the economy, through spillovers of knowledge and the diffusion of general purpose technologies (GPTs). The second view considers that possible sources of productivity increase are multiple and idiosyncratic. Setting aside possible measurement errors, the latter approach regards sectoral and economy-wide surges of TFP growth to be simply the result of aggregating over many essentially independent underlying cost reductions, some of which carried more weight than others. Although there is room for both views in an analysis of the sources of the industrial TFP acceleration during the 1920s, we find the evidence more compelling in support of the first approach. The proximate source of the TFP surge lay in the switch from declining or stable capital productivity to a rising output-capital ratio, which occurred at this time in many branches of manufacturing, and which was not accompanied by slowed growth in labor productivity. The 1920s saw critical advances in the electrification of industry, the diffusion of a GPT that brought significant fixed capital-savings. But the same era also witnessed profound transformations in the American industrial labor market, following the stoppage of mass immigration from Europe; rising real wages provided strong impetus to changes in workforce recruitment and management practices that were underway in some branches of the economy before the War. The productivity surge reflected the confluence of these two forces.

Reference: 033

Individual View

Authors: Alexander Guembel

Oct 1999

In this paper we address the question as to why fund managers may trade on short-term information in a financial market that offers more profitable trading on long-term information. We consider a setting in which a fund manager`s ability is unknown and an investor uses performance observations to learn about this ability. We show that an investor learns less efficiently about the ability of a fund manager when he trades on long-term information compared to trading on short-term information. This is the case, because the information on which a manager bases his trades is less precise the longer the information horizon, and thus performance observations contain more noise. Moreover, under trading on long-term information, performance observations become available after a short period only if the manager unwinds his position early. Such performance observations, however, are generally contaminated with additional noise, because unwinding prices only reveal underlying asset value imperfectly. When the informational efficiency of short-term prices increases, this effect becomes less pronounced, because a long-term trader who unwinds his position after a short time can convey an increasing amount of information concerning his ability to the investor. At the same time, trading on short-term information becomes less profitable, and therefore the investor`s incentive to induce short-term trading weakened. Nevertheless, we show that short-term trading may be induced even when prices fully reveal short-term information.

JEL Codes: D82, D83, G14, G23

Keywords: Managerial ability, learning, delegated portfolio management, short-termism, price efficiency

Reference: 1999-FE-10

Authors: Colin Mayer

Oct 1999

Reference: 1999-FE-06

Authors: Paul David, Gavin Wright

Sep 1999

The phenomenon of recurring prolonged swings in the total factor productivity (TFP) growth rate is approached in this paper by examining a particular episode in earlier twentieth century economic history. A marked acceleration of productivity growth in U.S. manufacturing occurred after World War I, and was the main driver of the absolute and relative rise of the private domestic economy’s TFP residual. This discontinuity reflected the elaboration and adoption of a new factory regime based upon the electric dynamo, a general purpose technology (GPT) that brought significant fixed-capital savings while simultaneously raising labor productivity in a wide array of manufacturing operations. But, rather than offering a purely technological explanation of the productivity surge of the 1920s, a more complex conceptualization of the dynamics of GPT diffusion is proposed. This highlights both the generic and the differentiating aspects of U.S. industrial electrification in comparison with that of the contemporary UK. Explicit historical contextualization of the GPT concept also sheds further light on the puzzling late twentieth century productivity slowdown, and it points to some contemporary portents of a future phase of more rapid total factor productivity growth.

Reference: 031

Individual View

Authors: Liam Brunt

Sep 1999

The Industrial Revolution in England was characterised by early and rapid labour release from agriculture to industry. This was facilitated by rising levels of labour productivity in agriculture which permitted labour to be released without excessive upward pressure on food prices. New technology played a central role in raising agricultural productivity but the importance of particular innovations remains controversial. In this paper we develop an arbitrage model of crop rotation which enables us to estimate the impact of crop rotation on wheat yields, requiring only the yields and prices of crops to be known. We apply this technique to eighteenth century English agriculture to assess the importance of two new crops in raising the yield of wheat (the primary agricultural output). Contrary to the received wisdom, we show that turnips substantially pushed up wheat yields but clover pushed down wheat yields. We confirm this result by comparing our estimates to both experimental data and production function estimates. Further detailed analysis facilitated by the new model enables us to explain this surprising result in terms of management practices pursued by farmers.

Reference: 032

Individual View

Authors: Colin Mayer, Wendy Carlin

Aug 1999

This paper evaluates relations between industrial activity and the structure of countries

JEL Codes: E2, G3, O4

Keywords: financial systems, ownership, legal form, growth, investment

Reference: 1999-FE-09

Authors: Tim Jenkinson, Alexander Ljungqvist

Aug 1999

This paper uses clinical evidence to show how the German system of corporate control and governance is both more active and more hostile than has previously been suggested. It provides a complete breakdown of ownership and takeover defence patterns in German listed companies and finds highly fragmented (but not dispersed) ownership in non-majority controlled firms. We document how the accumulation of hostile stakes can be used to gain control of target companies given these ownership patterns. The paper also suggests an important role for banks in helping predators accumulate, and avoid the disclosure of, large stakes.

JEL Codes: G32

Keywords: corporate governance, block trades, takeovers, banks, Germany

Reference: 1999-FE-02

Authors: Colin Mayer, Wendy Carlin

Jul 1999

This paper examines the relation between financial, corporate and legal systems, and economic performance in different countries. It reviews international comparisons that undertake detailed analyses of individual, developed countries and studies that use large, cross-country data banks, including developing countries. While the former do not provide evidence of a clear relation between different types of systems and economic performance, the latter report a strong association of financial development with economic growth. A recent theoretical literature offers a way of reconciling these two sets of studies. It points to a relation between financial/ corporate systems and types of activity with some systems favouring high risk, short-term investments and others promoting long-term, relatively low risk investments. These theories also suggest that systems may be related to stages of economic development. The paper summarizes a first empirical study that reports an association between financial/corporate systems, types of activity and stages of economic development. The paper concludes that these relationships have important implications for the design of regulation and legal systems in different countries.

JEL Codes: E2, G3, O4

Keywords: financial systems, corporate control, growth, investment

Reference: 1999-FE-08

Authors: Liam Brunt

Jun 1999

Wheat was the single most important product of the British economy during the Industrial Revolution, being both the largest component of national income and the primary determinant of caloric intake. This paper offers new estimates of annual wheat production during industrialisation. Whereas other researchers infer wheat production indirectly from demand equations, we estimate production directly from output equations. Our estimates are based on a new time series model of wheat yields, encompassing both environmental and technological variables. We trace the impact of war and population growth on wheat yields, mediated through changes in the economic incentives for wheat cultivation. We test the accuracy of our new wheat output series by modelling the market price of wheat in England between 1700 and 1825.

Reference: 029

Individual View

Authors: Matthew Braham

Jun 1999

Volunteering by young adults for working in Third World countries on development projects emerged in Britain the late 1950s. Three decades later, the countrys largest volunteering sending agency, Voluntary Service Overseas, had sent more than 21,000 people abroad. The most common explanation for the emergence and growth of what is a small social movement is the affluence-value change theory, or Post-Materialism, which predicts that variations in the growth of the movement should vary positively with changes in wealth. This paper tests this prediction with a simple econometric model, and finds that this does not appear to be the case.

Reference: 030

Individual View

Lower underpricing amongst venture-backed IPOs has been attributed to a certification role for venture capitalists. We argue that differences in underpricing per se are uninformative and possibly misleading when not controlling for differences in entrepreneurs` incentives to control underpricing. Using 1980s and 1990s data, we show that entrepreneurs’ wealth losses, a more suitable measure than underpricing, are unaffected by the presence of venture backers. Thus, we find no evidence of venture certification as far as IPO pricing is concerned. We also find possible evidence of a conflict of interest between venture backers and entrepreneurs which could explain why more prestigious underwriters in the 1990s are associated with higher underpricing.

JEL Codes: G32

Keywords: initial public offerings, underpricing, intermediation, certification, venture capital

Reference: 1999-FE-04

Authors: Antonia Taddei

Apr 1999

London clubs provided a means of establishing gentlemanly status and of making useful connections. Their number and membership was large. The paper begins with a quantitative overview of gentlemens clubs in London in the late nineteenth century using information contained in contemporary almanacs. The number of clubs and club members were characterised by two periods of intense growth, most significantly during 1860 to 1900, when total membership rose fourfold. This expansion, which exceeded that of the middle-class, was stimulated by the extension of democracy and the general political mobilisation during the Irish crisis in the 1880s. Political clubs became the largest type of club, and their characteristics and importance are examined in detail. A random sample of 200 individuals in Whos Who sheds light on the frequency of club membership among the elite. The growth of clubland was exhausted by the end of the century, in part because clubs devalued their own worth as a signal of gentlemanliness.

Reference: 028

Individual View


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