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Nuffield Economic Working Papers

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Authors: F. Banu Demir

Oct 2019

I present a trade model featuring North-South differences in demand for quality and in quality of task supply.  The model explains a number of stylised facts: Southern firms charge higher factory-gate prices for their products in rich than in poor, and in distant than in near markets.  The model predicts that firms vary the quality of their products across  markets by changing, between varieties, the fractions of low and high-quality tasks.  This mechanism for quality differentiation introduces a new margin to trade: the extensive margin of intermediate imports.  Extension of the model to general equilibrium with heterogeneous firms shows that even under low fixed and zero variable trade costs, only the more productive Southern firms export to the rich Northern market.  Compared to their domestic market, they charge higher prices in the North, with the most productive ones earning higher revenues.

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Authors: David P. Myatt, Chris Wallace

Oct 2019

Collective action problems arise in a variety of situations. The economic theory of public good provision raises a number of important questions. Who contributes to the public good, and who free rides? How might a social planner exploit the interdependence of decision-making to encourage contributions? Under what conditions will such actions result in public good provision? Using a simple game theoretic framework and recent results from the study of equilibrium selection, this paper attempts to answer some of these questions. Under reasonable assumptions of asymmetry and less than complete information, the more efficient agent will contribute. Contributions can be elicited by `integrating` the production process when agents are sufficiently emph{optimistic} about the success of the project. When this is not the case, the social planner may be better off `separating` the project so that individual contributions are independent of each other.

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Authors: Florian Ploeckl

Oct 2019

Information technology, like the telephone, influences market access; this paper answers the question about a reverse effect, does market access affect information technology, in particular its adoption?  Using the introduction of the telephone in Bavaria, I demonstrate with a rank, order and stock effects diffusion model how market access affects the diffusion of local telephone exchanges over towns as well as the rate of adoption of telelphone lines within towns.  The results of a duration analysis show that market access speeds up the diffusion, a spatial correlation specification demonstrates that this is not just a geographic effect.  The rate of adoption within towns is also affected by the adoption of lines in other towns, the results indicate that about 4% of all lines are due to the ability to call outside your local exchange network.  Market access is therefore shown to impact the adoption of technology.

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Governance is becoming increasingly important in development and poverty reduction policies. However, the forms and methods by which it is to be incorporated into donor programs are only emerging at present. In this paper, we contrast two very different approaches - the White House led Millennium Challenge Account (MCA) and DFID`s Drivers of Change (DOC) Approach - to analysing governance, and compare their theoretical underpinnings. A key factor explaining why these different approaches have been adopted is that for the USA, global poverty reduction is a footnote to its foreign policy and national security agenda, whereas in the UK, global poverty reduction engages both the national political leadership and the civil society. In the conclusion, the paper suggests that enduring contradictions confronted by all donors complicate the treatment of governance in empirically nuanced terms (as DOC attempts to do) while privileging a more universalistic approach like the MCA.

Authors: Valerie Lechene, Jerome Adda, University College London and IFS

Oct 2019

This paper proposes a joint model of tobacco consumption and mortality over the life-cycle. The decision to smoke is a trade off between current utility derived from smoking and a mortality risk increasing with age. Individuals with a longer potential life expectancy have more incentive to cut back on smoking and thus self select out of smoking. Using detailed data on mortality, morbidity and smoking we are able to identify this selection effect. We empirically evaluate its importance in explaining heterogeneity in smoking behaviour among adults. We find that heterogeneity in potential life expectancy explains part of the heterogeneity in smoking behaviour, even when conditioning on sex, education and occupation and information on other risky behaviour. When we embed heterogeneous potential life expectancies within a rational addiction model of smoking, we find that the model is able to match the life cycle profiles of smoking.

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Authors: Tim Willems

Oct 2019

This paper analyzes secessions through the lens of representative democratic institutions and considers the incentives of partisan political parties to support independence movements.  It points out that, if anything, separatists should expect to receive support from exactly the "unlike-minded" political party - the reason being that this party might see a break-up as an opportunity to reshape the electorate towards its own preferences.  By doing so, a party could increase its future probability of being elected, while it is also able to shift the entire political spectrum towards its own partisan ideal.  The model is able to explain much of what is currently going on in the debate on Scottish independence, while it can also be applied to issues of political integration (the European Union) and territorial conflicts (think of Ukraine and Russia in relation to Crimea, as well as the situation in Israel).

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Authors: Tony Syme

Oct 2019

Unemployment in the 1930s was low in France by international standards, nevertheless there was a virulent drive to expel immigrant workers as a means of limiting domestic unemployment. This involved not only the repatriation of the foreign chômeur, but also legislation to displace the foreign worker from his workplace. This paper extends the current debate over the effectiveness of this strategy with the use of two archival datasets. The inability of the State to reach its immigrant employment targets is confirmed, but it is suggested that it was not that unemployed Frenchmen were not willing to take the unattractive jobs that immigrants held, but that employers were unwilling to substitute their foreign workers with their French unemployed equivalents that undermined this repatriation drive. One implication is that the repatriation of foreign workers that did take place compromised the economic recovery that would begin in 1936.

Authors: Valerie Lechene, Martin Browning, University of Copenhagen

Oct 2019

Several models of intra-household decision making have been suggested in the literature. One important dichotomy is between non-cooperative and cooperative models (including specific models of bargaining). The other important distinction is between models that allow for caring and those that do not. We present a framework that includes all suggested models and variants as special cases. We derive the theoretical predictions of these models for the relationship between expenditures on goods and the intra-household distribution of income. We estimate and test between these relationships using Canadian household expenditure data. We conclude that there is evidence that both husbands and wives care for each other in the sense that with an unequal distribution of incomes the high income partner behaves as a `Becker dictator` and there is local income pooling. We further find that for about half of the households in our sample (those with mor

Authors: Michela Cella

Oct 2019

In this paper we analyze a simple two-sided adverse selection model with one principal and one agent. They are both risk neutral and have private information about their type. We also assume that the private information of the principal is correlated with the one of the agent. The main result of the paper is that the principal can extract a larger share of the surplus from the agent than in the case where her information is public. The principal can design such a contract because she exploits the fact that her type is an informative signal on the agent`s one. We fully characterize the equilibrium of the principal agent game in which different types of principal offer the same menu of contracts that leave the agent uninformed about the principal`s type. This gives more freedom to the principal when setting the transfers because the agent`s constraints need to hold only at an interim stage. The principal gains from a peculiarity of the co

Authors: Edoardo Gallo

Oct 2019

This paper presents a bargaining model between individuals belonging to different groups where the equilibrium outcome depends on the communication network within each group.  Belonging to a group gives an informational advantage: connections help to gather information about past transactions and this information can be used to make more accurate demands in future bargaining rounds.  In the long-term there is a unique stochastically stable equilibruim which depends on the peripheral or least connected individuals in each group.  Comparative statistics shows that a denser and more homogeneous network allows members of a group to obtain a better deal.  An empirical analysis of the observed price differential between Asian and white buyers in New York's Fulton fish market is consistent with these predictions.  An extension explores an alternative set-up where buyers and sellers belong to the same communication network:

Authors: John Knight, Sai Ding and Alessandra Guariglia

Oct 2019

This paper addresses the hotly-debated question: do Chinese firms overinvest?  A firm-level dataset of 100,000 firms over the period of 2000-07 is employed for this purpose.  We initially calculate measures of investment efficiency, which is typically negatively associated with overinvestment.  Despite wide disparities across various ownership groups, industries and regions, we find that corporate investment in China has become increasingly efficient over time.  However, based on direct measures of overinvestment that we subsequently calculate, we find evidence of overinvestment for all types of firms, even in the most efficient and most profitable private sector.  We find that the free cash flow hypothesis provides a good explanation for China's overinvestment, especially for the private sector, while in the sector, overinvestment is attributable to the poor screening and monitoring of enterprises by banks.

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Authors: Tim Jenkinson, Leonie Bell, Department of Economics, University of Oxford.

Oct 2019

This paper examines the impact of a major change in dividend taxation introduced in the UK in July 1997. The reform was structured in such a way that the immediate impact fell almost entirely on the largest investor class in the UK, namely pension funds. We analyse the behaviour of share prices around the ex-dividend day both before and after the reform to test clientele effects and the impact of taxation on the valuation of companies. We find strong clientele effects in the UK, which are consistent with the distortions introduced by the tax system (before the reform dividend income was tax-advantaged in the UK). We also find significant changes in the valuation of dividend income after the reform, in particular for high-yielding companies. These results provide strong support for the hypothesis that taxation affects the valuation of companies, and that pension funds were the effective marginal investors for high-yielding companies.

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Authors: Florian Ploeckl

Oct 2019

Urbanization has been extensively used as a proxy for economic activity.  The urban status of settlements is usually determined by an ad hoc population size household.  This paper proposes a new threshold, taking into account the effect of local agricultural endowments.  The new population threshold is a population size, such that for smaller settlements these endowments influence their size, while for larger they do not.  This results in an endogeneous, data based threshold.  The idea is practically shown for Saxony in the 19th century.  The relevance of a different classification is demonstrated in four particular examples, the development of urbanization over time, Gibrat's law, the impact of geography on town locations and the spatial relationship between towns and villages.  The resulst demonstrate that the underlying classification scheme matters for the conclusions drawn from urban data.

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Authors: Mark Armstrong,John Vickers

Oct 2019

We present a tractable class of multiproduct monopoly models that involve a generalized form of homothetic preferences. This class includes CES, linear and logit demand. Within the class, profit-maximizing quantities are proportional to efficient quantities. We discuss cost-passthrough, including cases where optimal prices do not depend on other products’costs. We show how the analysis can be extended to Cournot oligopoly. Finally, we discuss optimal monopoly regulation when the firm has private information about its vector of marginal costs, and show that if the probability distribution over costs satisfies an independence property, then optimal regulation leaves relative price decisions to the firm.

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