Working Papers

Authors: Avner Offer

Sep 2005

Automobile depreciation rates and dealer markups in the United States and Britain during the 1950s and 1960s provide evidence on the effect of asymmetric information on market structures. Initial depreciation was not exceptional, and trade was not disabled. `Lemon` effects were evident in some periods but not others. Depreciation and markups increased with mechanical and styling uncertainty. Adverse selection kicked in as cars aged: high selling costs caused dealers to withdraw from trading older cars. Despite their lower quality, British makes depreciated less, probably due to different novelty signals and longer styling cycles.

Reference: 060

Individual View

Authors: Sabrina Di Addario, Eleonora Patacchini, University of Rome La Sapienza

Aug 2005

We analyze empirically the impact of urban agglomeration on Italian wages. Using micro-data from the Bank of Italy`s Survey of Household Income and Wealth for the years 1995, 1998, 2000 and 2002 on more than 22,000 employees distributed to 242 randomly drawn local labor markets (30 percent of the total), we test whether the structure of wages varies with urban scale. We find that every additional 100 employees per square kilometer (100,000 inhabitants) in the local labor market raises earnings by 0.4-0.6 percent (0.1 percent) and that employees working in large cities earn, on average, 2-3 percent higher wages than those in the rest of the economy. The application of spatial data analysis techniques enables us to state that this effect is present only in the large cities surrounded by low-populated areas. We also find that urbanization does not affect returns to experience and that it reduces returns to education and to tenure with current firm, while providing a premium to managers, worker supervisors, and office workers.

JEL Codes: R12, J31

Keywords: Wage Differentials, Urbanization, Agglomeration Externalities, Population Clustering, Spatial Autocorrelation

Reference: 243

Individual View

Authors: Alberto Behar

Aug 2005

Commentators claim that a shortage of skills in South Africa is constraining output and that a rise in skill supply would benefit less skilled occupations. This assumes or implies skilled and unskilled labour are complements. Hicks Elasticities of Complementarity and elasticities of factor price are estimated between capital and five occupations. The results show that skilled/artisanal and unskilled labour are complements while semi-skilled and unskilled labour are substitutes. These results allow for imperfectly elastic product demand, rigid wages and inference on highly non-linear elasticities. Aggregated estimates suggest More skilled labour complements Less skilled labour.

JEL Codes: J23, J31

Keywords: Hicks Elasticity of Complementarity, South Africa, Training, Skill

Reference: 244

Individual View

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

Jul 2005

We consider a principal-agent problem where the principal wishes to be endorsed by a sequence of agents, but cannot truthfully reveal type. In the standard herding model, the agents learn from each other`s decisions, which can lead to cascades on a given decision when later agents` private information is swamped. We augment the standard model to allow the principal to subject herself to a test designed to provide public information about her type. She must decide how tough a test to attempt from a continuum of test types, which involves trading off the higher probability of passing an easier test against the greater impact from passing a tougher test. We find that the principal will always choose to be tested, and will prefer a tough test to a neutral or easy one.

JEL Codes: D82, 83

Keywords: Bayesian Updating, Endorsements, Herding, Sequential Decision-Making, Tests

Reference: 242

Individual View

Authors: David A. Clark, University of Manchester,Mozaffar Qizilbash, University of East Anglia

Jul 2005

This paper applies a framework which addresses the vagueness of poverty. The `core poor` are those who are unambiguously poor. In applying the framework we use Sen`s capability approach and results from a recent survey. These results suggest that some South Africans set tough standards for someone to qualify as poor. Even by these standards, our lower bound estimate of core poverty is higher than existing estimates of the `most deprived` and `ultra-poor`. This result is sensitive to the criteria used in applying the framework, though other results are more robust. While there is evidence that respondents adapted to their living conditions, it was not merely those who were deprived in specific dimensions who endorsed very low cut-offs in those dimensions.

Keywords: Poverty, Vagueness, Capability, Perceptions of the Poor, Multi-dimensionality, Africa, South Africa

Reference: GPRG-WPS-026

NGOs have been lauded both for being political entrepreneurs - facilitators of transformative politics - and also development agents - implementers of participatory development. However, not many believe that NGOs can successfully combine both these roles. This view arises from a larger cynicism of the development machinery that constantly strives to exclude `politics`. In India too, NGO-state relationships affirm that politically confontationist NGOs have frequently been oppressed. This article presents a case study of an NGO in a central Indian state that, over an entire decade, was able to combine development work regarded as legitmate by the state with practices resisting state action in development. It demonstrates that the `depoliticisation` of development is not always a successful state project with predictable consequences. Moreover, the NGO`s seemingly dual stance was itself unreal, as resistance and acquiescence were interwoven with one another in subtle ways. The article rejects familiar binaries deployed to study NGOs, i.e. of state-civil society or mainstream-alternative development, and focuses instead on key junctures in the NGO`s life history. It concludes that NGOs, operating within appropriate policital conditions can be both political entrepreneurs and development agents, and indeed, this synthesis holds the key to their power.

Reference: GPRG-WPS-024

Authors: Federico Varese

Jul 2005

What are the conditions conducive to long-term transplantation of mafia groups in new territories? This paper systematically reviews a number of factors that facilitate such an outcome, including: migration from territories with high mafia density; the policy of forcing criminals to resettle outside their region of origin; the existence of mafia wars; two different systems of recruitment into mafia families (merit- and kin-based recruitment); the level of interpersonal trust in the new territory; and the demand for criminal protection. The paper then explores two attempts at transplantation by members of the Calabria-based mafia group `Ndrangheta to the town of Bardonecchia (Piedmont region) and to Verona (Veneto region). While the former case was successful, the latter failed. The paper concludes that features of the local economy - the presence of significant sectors of the economy unprotected by the state and a local rather than export orientation - generate a demand for criminal protection, especially protection against competition, and a demand for services of dispute settlement. Successful transplantation occurs in the presence of such a demand. Generalized migration or forced resettlement of mafiosi are not sufficient to predict transplantation. The paper shows that a high level of interpersonal trust among local law-abiding residents is not sufficient to hinder mafia transplantation, contrary to established theories of social capital and trust.

Reference: 059

Individual View

Authors: Monazza AslamGeeta Kingdon

Jul 2005

Pakistan has very large gender gaps in educational outcomes. While this suggests that girls may receive lower educational expenditure allocations than boys within households, this has never convincingly been tested. This paper investigates whether the intra-household allocation of educational expenditure in Pakistan favour males over females. It also explores two different explanations for the failure of the extant `Engel curve` studies to detect gender-differentiated treatment in education even where gender bias is strongly expected. Using individual level data from the latest household survey from Pakistan, we estimate Engel curves and Hurdle models to address these questions. We posit two potential channels of gender bias: bias in the decision whether to enrol/keep both sons and daughters in school, and bias in the decision of education expenditure conditional on keeping both sons and daughters. In junior and secondary school ages, evidence points to significant pro-male biases in both the enrolment decision as well as the decision of how much to spend conditional on enrolment. However, in the primary school age-group, only the former channel of bias applies. Household fixed effects estimation suggests that the observed strong gender difference in education expenditure is a within rather than an across household phenomenon.

JEL Codes: I21, J16, J71

Keywords: Gender Bias, Educational Expenditure, Engel Curve, Hurdle Model, Pakistan

Reference: GPRG-WPS-025

Authors: Jennifer Chapman, University of Manchester,Valerie Miller, University of Manchester,Adriano Campolina Soares, University of Manchester,John Samual, University of Manchester

Jul 2005

This paper was written for the 2005 conference, Winners and Losers from Rights-based Approaches to Development, and draws from the authors` field experience of working with a range of NGOs that incorporate rights into their development activities. In particular it uses case study material from ActionAid International (AAI), an NGO that has been undertaking a shift in its strategies and operations over the last 5 years in order to integrate a rights-based perspective into its work. The paper explores both the benefits and challenges that this approach can bring when focused on strengthening the voice and power of marginalised sectors of society.

Reference: GPRG-WPS-027

Authors: Michael Edwards, Ford Foundation, Florida

Jul 2005

In 1991, David Hulme and I found ourselves in a bar at the University of Hull enjoying a post-conference beer. The conversation turned to a mutual interest of ours - the role and impact of NGOs in development - and after a few more pints we hit on the idea that eventually became the first `Manchester Conference` on the theme of `scaling-up`, later to be summarized in a book called `Making a Difference: NGOs and Development in a Changing World` (Edwards and Hulme, 1992). Fifteen years on, the NGO universe has been substantially transformed, with rates of growth in scale and profile that once would have been unthinkable. Yet still the nagging questions remain. Despite the increasing size and sophistication of the development NGO sector, have NGOs really `made a difference` in the ways the first Manchester Conference intended, or have the reforms that animated the NGO community during the 1990s now run out of steam?

Reference: GPRG-WPS-028

Authors: Anthony Bebbington, University of Manchester,Armando Bararientos, University of Manchester

Jul 2005

The Millennium Development Goals have placed poverty reduction at the top of donor organisations` list of priorities. Failure to achieve the MDGs will no doubt place the spotlight on their financial commitments to poverty reduction, but effective poverty reduction relies as much on knowledge of poverty and poverty reduction and the kinds of knowledge that emerge from, and inform, the activities of donor organisations. The paper considers this issue in the context of Indonesia. It examines the main parameters of knowledge generation for poverty reduction in the country office of a donor organisation. It finds that organisational, environmental, intellectual and experiential factors have significance in this context.

Reference: GPRG-WPS-023

Financial assets` quoted prices normally change through frequent revisions, or jumps. For markets where quotes are almost always revised by the minimum price tick, this paper proposes a new estimator of Quadratic Variation which is robust to microstructure effects. It compares the number of alternations, where quotes are revised back to their previous price, to the number of other jumps. Many markets exhibit a lack of autocorrelation in their quotes` alternation pattern. Under quite general no leverage assumptions, whenever this is so the proposed statistic is consistent as the intensity of jumps increases without bound. After an empirical implementation, some useful corollaries of this are given.

JEL Codes: C10, C22, C80

Keywords: Realized Volatility, Realized Variance, Quadratic Variation, Market Microstructure, High-Frequency Data, Pure Jump Process

Reference: 2005-FE-05

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

Jun 2005

In this paper we provide a systematic study of the robustness of probability limits and central limit theory for realised multipower variation when we add finite activity and infinite activity jump processes to an underlying Brownian semimartingale.

Keywords: Bipower Variation, Infinite Activity, Multipower Variation, Power Variation, Quadratic Variation, Semimartingales, Stochastic Volatility

Reference: 2005-FE-06

Authors: Colin Mayer, Zsuzsanna Fluck, Department of Finance, Michigan State University

Jun 2005

This paper investigates the governance structure choices of firms when there is competition between legal systems. We study the impact of the allocation of control over choice of governance and reincorporation on firms` technologies and technological specialization of countries in the context of a model of the firm in which there are agency conflicts between shareholders and managers. We show that the allocation of control over firms` reincorporation decisions determines the corporate governance choice ex ante and the outcome of the competition between legal regimes ex post. When managers have control over reincorporation then competitive deregulation and runs to the bottom ensue. When shareholders have partial or full control then there is diversity in governance structures. Runs to the bottom are not necessarily socially undesirable but they have a feedback effect on firms` choices of technologies that may make the party in control worse off ex ante. We show that it is impossible for any country to achieve social welfare maximization of its existing and new enterprises. With competition between legal regimes, start-up and mature companies incorporate in different jurisdictions even when reincorporation is correctly anticipated.

JEL Codes: G34, K22

Keywords: Corporate Governance, Shareholder Protection, Technology Choice

Reference: 2005-FE-07

Authors: David P. Myatt, Torun Dewan, Department of Government, London School of Economics

Jun 2005

Empirical evidence suggests that a Prime Minister can benefit from firing ministers who are involved in political scandals. We explore a model in which a minister`s exposure to scandals is positvely related to his policy activism, so that a Prime Minister may wish to protect him from resignation calls. We find that protection can sometimes work against the objective of encouraging activism: it makes a minister`s position more valuable to him and hence can encourage him to sit tight by moderating his activities. On the other hand, an exogenous increase in exposure to scandals may lead a minister to live for today by pursuing controversial policy innovations. The Prime Minister`s ability to protect ministers from resignation calls is limited by her short-term incentive to fire. She may, however, enhance her credibility by building a collective reputation with the wider membership of her cabinet; we show that heterogeneity of cabinet membership can play an important role.

JEL Codes: C70, D20, H10

Keywords: Ministerial Resignations, Reputation, Relational Contracts, Multi-Market Contract, Protection, Incentives

Reference: 237

Individual View

In this paper we provide an asymptotic analysis of generalised bipower measures of the variation of price processes in financial economics. These measures encompass the usual quadratic variation, power variation and bipower variations which have been highlighted in recent years in financial econometrics. The analysis is carried out under some rather general Brownian semimartingale assumptions, which allow for standard leverage effects.

Keywords: Bipower Variation, Power Variation, Quadratic Variation, Semimartingales, Stochastic Volatility

Reference: 2005-FE-09

Authors: Andrea Patacconi

Jun 2005

This paper studies the optimal allocation of coordination responsibilities in organizations where duplication of effort is a serious concern. The planner`s objective is to minimize a weighted average of the wage bill and the cost of delay. The paper provides conditions under which, in balanced hierarches, communication effort is increasing and the span of control is decreasing as one travels up the hierarchy, with equalities holding if wages are negligible relative to the weight attached to the cost of delay. The analysis suggests that concerns for fast decision-making may be key in explaining the recent trend towards empowerment in firms. Several variants of the basic model are studied, including one focusing on communicative skills and another in which, as urgency increases, the optimal span of control increases and the hierarchy flattens. Evidence supporting these results is discussed.

JEL Codes: D21, L23

Keywords: Coordination, Hierarchy, Duplication, Delay, Information Processing

Reference: 238

Individual View

Authors: Robert C. Allen

Jun 2005

The paper reviews the macroeconomic data describing the British economy during the industrial revolution and shows that they contain a story of dramatically increasing inequality between 1800 and 1840: GDP per worker rose 37%, real wages stagnated, and the profit rate doubled. The share of profits in national income expanded at the expense of labour and land. A Cambridge-Cambridge model of economic growth and income distribution is developed to explain these trends. An aggregate production function explains the distribution of income (as in Cambridge, MA), while a savings function in which savings depended on property income (as in Cambridge, England) governs accumulation. Simulations with the model show that technical progress was the prime mover behind the industrial revolution. Capital accumulation was a necessary complement. The surge in inequality was intrinsic to the growth process. Technical change increased the demand for capital and raised the profit rate and capital`s share. The rise in profits, in turn, sustained the industrial revolution by financing the necessary capital accumulation.

JEL Codes: D63, N13, O41, O47, O52

Keywords: British Industrial Revolution, Kuznets Curve, Inequality, Savings, Investment

Reference: 239

Individual View

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

Jun 2005

We will review the econometrics of non-parametric estimation of the components of the variation of asset prices. This very active literature has been stimulated by the recent advent of complete records of transaction prices, quote data and order books. In our view the interaction of the new data sources with new econometric methodology is leading to a paradigm shift in one of the most important areas in econometrics: volatility measurement, modelling and forecasting. We will describe this new paradigm which draws together econometrics with arbitrage free financial economics theory. Perhaps the two most influential papers in this area have been Andersen, Bollerslev, Diebold and Labys (2001) and Barndorff-Nielsen and Shephard (2002), but many other papers have made important contributions. This work is likely to have deep impacts on the econometrics of asset allocation and risk management. One of our observations will be that inferences based on these methods, computed from observed market prices and so under the physical measure, are also valid as inferences under all equivalent measures. This puts this subject also at the heart of the econometrics of derivative pricing. One of the most challenging problems in this context is dealing with various forms of market frictions, which obscure the efficient price from the econometrician. Here we will characterise four types of statistical models of frictions and discuss how econometricians have been attempting to overcome them.

JEL Codes: C14, C22

Keywords: Quadratic Variation, Volatility, Realised Volatility

Reference: 240

Authors: Diana Mitlin, University of Manchester,Sheela Patel, SPARC, India.

Jun 2005

February 2005: There have been terrible demolitions in Mumbai these last weeks and they continue even as we write. It has been a parallel and paradoxical event to the Tsunami and has produced the same devastation, but it is definitely man-made. There have been people`s tribunals, protest meetings and many angry middle-class Indian and international activists e-mailing each other and everyone, asking pointed questions of SPARC, NSDF and Mahila Milan: what are you doing about this? It is a good question in the twentieth year of SPARC`s partnership with people`s organisations.

Reference: GPRG-WPS-022

Authors: John C. Bluedorn

Jun 2005

Hurricanes in the Caribbean and Central America represent a natural experiment to test the intertemporal approach to current account determination. The intertemporal approach allows for the possibility of intertemporal trade, via international borrowing. Previous tests of intertemporal current account (ICA) models have typically relied upon the identification of shocks in a VAR framework with which to trace the current account response. Hurricane shocks represent exactly the kind of temporary, country-specific shock required by the theory, allowing for the intertemporal current account response to be estimated without recourse to a VAR shock decomposition. Using data on the economic damages attributable to a hurricane, I estimate the economy`s response to a hurricane-induced capital shock within a fixed effects panel model. The current account response qualitatively conforms to the S-shaped response predicted by the theory, indicating that countries are engaging in intertemporal trade. However, the exact timing and magnitude of the response differs from a standard ICA model`s smooth behavior. A hurricane which destroys capital valued at one year`s GDP pushes the current account over GDP into deficit by 5 percentage points initially. 3-8 years after such a hurricane, the current account over GDP moves into surplus at 2.7 percentage points.

JEL Codes: F320, F410

Keywords: Hurricanes, Natural Experiment, Current Account Dynamics

Reference: 241

Individual View

Authors: Sabrina Di Addario

May 2005

I analyze empirically the effects of both urban and industrial agglomeration on men`s and women`s search behavior and on the efficiency of matching. The analysis is based on the Italian Labor Force Survey micro-data, which covers 520 randomly drawn Local Labor Market Areas (66 per cent of the total) over the four quarters of 2002. I compute transition probabilities from non-employment to employment by jointly estimating the probability of searching and the probability of finding a job conditional on having searched, and I test whether these are affected by urbanization, industry localization, labor pooling and family network quality. In general, the main results indicate that urbanization and labor pooling raise job seekers` chances of finding employment (conditional on having searched), while industry localization and family network quality increase only men`s. Moreover, neither urban nor industrial agglomeration affect non-employed indvidiual`s search behavior; although men with thicker family networks search more intensively.

JEL Codes: J64, R00, J60

Keywords: Labour Market Transitions, Search Intensity, Urbanization, Industrial Localization

Reference: 235

Individual View

Authors: Kevin Roberts

May 2005

An intertemporal voting model is examined where, at each date, there is a pairwise majority vote between the existing chosen state and some other state, chosen randomly. Intertemporal voting simplifies the strategic issues and the agenda setting is as unrestricted as possible. The possibility of cycles is examined, both in the intertemporal extension to the Condorcet paradox and in more general examples. The set of possibilities is rich, as is demonstrated by an exhaustive study of a three person, three state world. Equilibrium in pure strategies may fail to exist but a weakening of the equilibrium concept to admit probabilistic voting allows a general existence result to be proved. The analysis leads to the development of a dominant state which extends the notion of a Condorcet winner.

JEL Codes: C73, D72, D78

Keywords: Condorcet Paradox, Condorcet Winner, Majority Voting, Intertemporal Voting, Strategic Voting

Reference: 236

Individual View

Authors: Pieter Serneels, Abigail Barr, Magnus Lindelow

May 2005

Geographical imbalances in the health workforce have been a consistent feature of nearly all health systems, and especially in developing countries. In this paper we investigate the willingness to work in a rural area among final year nursing and medical students in Ethiopia. Analyzing data obtained from contingent valuation questions, we find that household consumption and the student`s motivation to help the poor, which is our proxy for intrinsic motivation, are the main determinants of willingness to work in a rural area. We investigate who is willing to help the poor and find that women are significantly more likely than men. Other variables, including a rich set of psycho-social characteristics, are not significant. Finally, we carry out some simulations on how much it would cost to make the entire cohort of starting nurses and doctors choose to take up a rural post.

JEL Codes: D1, J22, J64

Keywords: Health Care Delivery, Health Workers, Labour Supply, Public Service

Reference: GPRG-WPS-018

Authors: John Gledhill, University of Manchester

May 2005

Reference: GPRG-WPS-019

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