Working Papers

Authors: Stefan Dercon, Daniel Ayalew, The World Bank,Madhur Gautam, The World Bank

May 2005

This paper provides evidence from one of the poorest countries of the world that the institutions of property rights matter for efficiency, investment and growth. With all land state-owned, the threat of land redistribution never appears far off the agenda. Land rental and leasing have been made legal, but transfer rights remain restricted and the perception of continuing tenure insecurity remains quite strong. Using a unique panel data set, this study investigates whether transfer rights and tenure insecurity affect household investment decisions, focusing on trees and shrubs. The panel data estimates suggest that limited perceive transfer rights, and the threat of expropriation, negatively affects the long-term investment in Ethiopian agriculture, contributing to the low returns from land and perpetuating low growth and poverty.

JEL Codes: O17, O13, Q15

Keywords: Property Rights, Investment, Agriculture, Ethiopia, Africa

Reference: GPRG-WPS-021

Authors: David Clark, University of Manchester,David Hulme, University of Manchester

May 2005

In recent decades there have been considerable steps forward in terms of understanding poverty. This paper identifies three `meta dimensions` of poverty, which relate to: (1) depth and severity; (2) breadth and multidimensionality; and (3) time and duration. The advances that have been made in terms of conceptualising, measuring and analysing poverty in each of these areas are briefly considered. It is shown that the third and final `meta-dimension` - time and duration - has been neglected until relatively recently. It is argued that time, and in particular, duration is an important analytical component for understanding the experience of poverty and the processes that create and reduce poverty. The final part of the paper suggests a way of integrating time into a unified framework for understanding poverty, which can deal with the depth, breadth and duration of poverty. This involves extending Qizilbash`s poverty and vagueness methodology to include duration.

Authors: Michela Cella

Apr 2005

We study a model of informed principal with private values where the principal is risk neutral and the agent is risk averse. We show that the principal, regardless of her type, gains by not revealing her type to the agent through the contract offer. The equilibrium allocation transfers some ex-ante risk from one type of agent to the other. Despite the increase in the principal`s surplus, allocative efficiency does not necessarily improve.

JEL Codes: C72, D23, D82

Keywords: Contract, Adverse Selection, Informed Principal, Risk Aversion

Reference: 234

Individual View

It is commonly claimed that the South African labor market is unusually inflexible owing to the strength of the unions and the system of centralized collective bargaining. One aspect of labor market inflexibility concerns the responsiveness of wages to local unemployment. Examining this spatial relationship, we find that the elasticity of wages to local unemployment rates in South Africa is -0.1, similar to that found in other countries, including the US and the UK. This is striking because South Africa has a national unemployment rate of over 30%. We find that the wage curve elasticity persists over a much wider range of unemployment rates than in OECD countries, implying that unemployment in South Africa can have a large impact on wages.

JEL Codes: J30, J60

Keywords: Wages, Unemployment, Wage Curve, South Africa

Reference: GPRG-WPS-015

Authors: David P. Myatt

Apr 2005

In an asymmetric war of attrition the players` prize valuations are drawn from different distributions. A stochastic strength ordering, based upon relative hazard rates, is used to rank these distributions. The stochastically stronger player is perceived to be strong ex ante, even though her realized valuation may be lower ex post. Since the classic war of attrition exhibits multiple equilibria, the game is perturbed; for instance, by imposing an arbitrarily large time limit, or allowing for the arbitrarily small probability of players that are restricted to fighting forever. In the unique equilibrium of the perturbed game, a stochastically weaker player almost always instantly exits at the beginning, even though her valuation may be higher.

JEL Codes: D44, D72, D74, D81, E63, L11

Keywords: war of attrition, exit, rent seeking, auctions, stochastic dominance, games of timing, bargaining, voluntary provision of public goods, macroeconomics stabilization, adoption of technological standards

Reference: 160

Individual View

Authors: Anke Hoeffler, Paul Collier

Apr 2005

Reference: GPRG-WPS-016

For over a quarter century anthropometric historians have struggled to identify and measure the numerous factors that affect adult stature, which depends upon diet, disease and physical activity from conception to maturity. I simplify this complex problem by assessing nutritional status in a particular year using synthetic longitudinal data created from measurements of children born in the same year but measured at adjacent ages, which are abundantly available from 28,000 slave manifests housed at the National Archives. I link this evidence with annual measures of economic conditions and new measures of the disease environment to test hypotheses of slave owner behavior. Height-by-age profiles furnish clear evidence that owners substantially managed slave health. The short-term evidence shows that weather affected growth via exposure to pathogens and that owners modified net nutrition in response to sustained price signals.

Reference: 058

Individual View

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

Apr 2005

We present a general Cournot model in which each firm may sell multiple quality-differentiated products. We use an upgrades approach, working not with the actual products, but instead with upgrades from one quality to the next. The properties of single-product Cournot models carry over to the supply of upgrades, but not necessarily to the supply of complete products. A firm`s product line is determined by the properties of demand, its costs, and competitor characteristics. For symmetric firms, these determinants reduce to returns to quality and changes in demand elasticity as quality increases. For asymmetric firms whose (potentially endogenous) technological capabilities are defined by their maximum feasible qualities, gaps in product lines are determined precisely by the capabilities of lesser rivals. Strategic commitment to product lines prior to quantity competition is considered. Incentives to so commit are markedly different from those under price-setting models.

JEL Codes: D4, L1

Keywords: multiproduct quality competition, multiproduct oligopoly, brands, Cournot competition, price discrimination, product lines

Reference: 145

Individual View

Authors: David P. Myatt, Chris Wallace

Apr 2005

A public good is produced if and only if a team of m or more volunteers contribute to it. An equilibrium-selection problem leads to the questions: will collective action succeed? If so, who will participate in the team? The paper studies the evolution of collective action: as part of a strategy-revision process, updating players choose quantal responses to existing play. With symmetric players, success depends upon the cost of contribution, the benefit from provision, and the critical team-size m; the relative variability of costs and benefits, and their correlation, are also critical. When players differ, successful teams consist of either the most efficient contributors, or those with the most idiosyncratic preferences. The addition of a single bad apple (for instance, an individual whose costs are particularly variable) to a population in which a successful team operates may result in destabilisation: over time, the bad apple might supplant an existing contributor, prompting a collapse.

JEL Codes: C72, C73, H41.

Keywords: Collective Action, Evolution, Teams, Equilibrium Selection, Exponential Cost, Rooted Trees.

Reference: 190

Individual View

Authors: Alan Beggs

Apr 2005

This paper considers a simple adaptive learning rule in Bayesian games where players employ threshold strategies. Global convergence results are given for supermodular games and potentital games.

JEL Codes: C72, D83

Keywords: Bayesian Games, Learning, Binary Actions, Passive Stochastic Approximation

Reference: 232

Authors: Michela Cella

Apr 2005

In this paper we study the delegation of a production process in a three-tier hierarchy. The principal contracts directly only with the supplier that produces the first input leaving him in charge of the contract for the production of the second input. We allow the principal to costlessly monitor the communication between the agents at the subcontracting stage in an attempt to save on informational rents and improve productive efficiency. We show that, if the contractor is free to choose the type of subcontract, he must be given additional incentives to acquire information about the subcontractor which will then be the object of the monitoring. The monitoring is therefore much less effective then when the principal can force the contractor into choosing her preferred subcontract.

JEL Codes: D20, D82, L22, L51

Keywords: Adverse Selection, Hierarchies, Delegation, Monitoring

Reference: 233

Individual View

Authors: Valerie Lechene,Ian Preston, University College London and Institute for Fiscal Studies

Mar 2005

We study noncooperative models with two agents and several voluntarily contributed public goods. We focus on interior equilibria in which neither agent is bound by non negativity constraints, establishing the conditions for existence and uniqueness of the equilibrium. While adding-up and homogneity hold, negativity and symmetry properties are generally violated. We derive the counterpart to the Slutsky matrix, and show that it can be decomposed into the sum of a symmetric and negative semidefinite matrix and another the rank of which never exceeds the number of public goods plus one. Under separability of the public goods the deviation from symmetry is at most rank two.

JEL Codes: D11, C72

Keywords: Nash Equilibrum, Intra-household Allocation, Slutsky Symmetry

Reference: 226

Individual View

Authors: Pablo Astorga, Ame R. Bergés, Valpy Fitzgerald

Mar 2005

Using a new database for the whole 1900-2000 period, this paper estimates the relative contribution of endogenous and exogenous factors in GDP and productivity growth in each of the six larger Latin American economies with multivariate annual models, and complements these with a single aggregate model using panel data by decade to test for convergence within the region and with the US. Our method is innovative as it includes external economic shocks as well as endogenous growth variables. The main findings are: (i) that investment contributed most to growth during the middle of the century when the region was relatively closed to the world economy and state was proactive; (ii) that the six main economies did converge considerably over the century due to improvements in resource allocation, advances in health and education and increased investment effort; (iii) that these improvements were not, however, enough to produce convergence between Latin America and US; and (iv) that terms of trade volatility, trade and interest rate shocks were a major obstacle to both sustained economic growth and catching up.

JEL Codes: I31, O47, N16

Keywords: Economic History, Economic Growth, Latin America

Reference: 057

Individual View

Authors: Sujit Kapadia

Mar 2005

In countries with credible inflation targeting, it seems plausible to suggest that instead of forming a rational expectation, some firms (inflation-targeters) might simply expect future inflation to always equal its target. This paper analyses the implications of this for optimal monetary policy in a standard new-Keynesian model. Under discretion, we show that if shocks have any persistence, inflation is more stable, loss is reduced, and the optimal policy frontier is improved as the proportion of inflation-targeters increases. Considering the commitment case, we show that the benefits of commitment are diminished (stabilisation bias is reduced) in the presence of inflation-targeters, but overall loss is still reduced relative to the rational expectations benchmark for plausible parameter values and mild persistence in the shock. Taken together, these results formally illustrate how policies which encourage expectations anchoring may be beneficial for the economy.

JEL Codes: E52, E58, E31, E32, D84

Keywords: Inflation Targeting, Monetary Policy, Expectations, Stabilisation Bias

Reference: 227

Individual View

Authors: Alan Beggs, Kathryn Graddy

Mar 2005

This paper tests for reference dependence, using data from Impressionist and Contemporary Art auctions. We distinguish reference dependence based on rule of thumb learning from reference dependence based on rational learning. Furthermore, we distinguish pure reference dependence from effects due to loss aversion. Thus, we use actual market data to test essential characteristics of Kahneman and Tversky`s Prospect Theory. The main methodological innovations of this paper are firstly, that reference dependence can be identified separately from loss aversion. Secondly, we introduce a consistent non-linear estimator to deal with measurement errors problems involved in testing for loss aversion. In this dataset, we find strong reference dependence but no loss aversion.

JEL Codes: D81, D44, L82

Keywords: Reference Dependence, Loss Aversion, Prospect Theory, Art, Auctions

Reference: 228

Authors: Cesar Calvo, Stefan Dercon

Mar 2005

Standard poverty analysis makes statements about deprivation after the veil of uncertainty has been lifted. This implies that there is no meaningful role for risk as part of an assessment of potentially low states of well-being. In this paper, we introduce a concept of vulnerability, as a threat of poverty, with downside risk at its core. More specifically, we define a vulnerability measure as an assessment of the magnitude of the threat of poverty, measured ex-ante, before uncertainty is resolved. We describe the welfare-economic foundations for desirable properties of a vulnerability measure and assess to what extent some measures used in empirical work abide by them. We also present two families of measures that are fully consistent with our axiomatic approach.

JEL Codes: O12, I3, D36

Keywords: Poverty, Risk, Vulnerability, Welfare Axioms

Reference: 229

Individual View

Authors: Maciej Firla-Cuchra

Mar 2005

We investigate determinants of launch spreads in European securitization transactions over the last decade. First, we develop a simple, reduced-form pricing model for all issues across different transaction types and test it. We document the critical importance of credit ratings without refinements as the key pricing factors for structured finance securities at launch. Next, we show that other price determinants, such as placement characteristics, are consistently significant in their impact on spreads and delineate the opposing effects of liquidity and market segmentation. Finally, we show that other factors that might directly affect investors` payoffs, such as creditors` rights, exhibit consistent relationships to launch spreads beyond the credit rating. Hence, we conjecture that credit rating agencies systematically differ from investors in their assessment of certain issues` and markets` characteristics.

JEL Codes: G14, G15, G32

Keywords: Securitisations, Credit Ratings, Structured Finance, Bond Markets, Asset Pricing, Liquidity

Reference: 230

Individual View

Authors: David P. Myatt, Chris Wallace

Mar 2005

In a collective-action game a player`s payoff is the sum of (i) a private component that depends only on that player`s action, and (ii) a public component, common to all players and dependent upon all actions. A classic application is the private provision of a public good. Play evolves: strategy revisions are made according to a multinomial-logit choice rule. Long-run behaviour is determined by a potential function, which incorporates the private (not social) benefits of activity. Behaviour may be influenced only by reducing public-good output (an application of a free-disposal property). When welfare is the expected time average of aggregate payoffs, it is socially optimal to either leave production well alone, or damage it as much as possible. This often takes the form of a production target, where all output is discarded unless some threshold is reached, potentially generating an equilibrium-selection problem. When the evolution of play approximates a best-reply process, the optimal threshold corresponds to the output level that an individual who pays all private costs but enjoys only private benefits would be just willing to provide.

JEL Codes: C72, C73, H41

Keywords: Public Goods, Potential Games, Evolution, Quantal Response, Equilibrium Selection, Thresholds

Reference: 231

Individual View

In this paper data from a school survey in India is used to ask whether there is evidence for the payment of performance related pay and whether such pay structures do impact on student achievement. It is shown that - after controlling for student ability, parental background and the resources available - private schools get significantly better academic results by relating pay to achievement; government schools do not. We discuss possible interpretations of this result.

JEL Codes: I21

Keywords: Teacher Salaries, Efficiency, Productivity, Economic Development

Reference: GPRG-WPS-014

Authors: John Thanassoulis

Mar 2005

Why do people stall while bargaining? Why are people keen to conclude a deal quickly, only to subsequently allow delay before the pie is realised? We propose that the reason is not fully explained by discount rates in combination with agents being engaged in a signalling equilibrium with asymmetric information. Rather we propose that stalling is explained by the fact that agents are worried about a rival coming to bargain for the pie and creating a bidding war - this encourages speedy agreement. The stalling arises when the beliefs as to how likely a rival is to come along differ as each agent waits for the other to update their beliefs and be more accommodating. The stalling region is shown to grow the thicker the market and the lower the discount rate. Thus, we give some predictive power to the new corpus of work on bargaining with uncommon priors.

JEL Codes: C78, C73, D83

Keywords: Bargaining, Delay, Optimal Stalling, Learning, Uncommon Priors

Reference: 224

Authors: Alan Morrison, Xavier Freixas, Universitat Pomeu Fabra and CEPRGyongyi Loranth, Judge Institute of Management, University of Cambridge and CEPR

Mar 2005

We investigate the optimal regulation of financial conglomerates which combine a bank and a non-bank financial institution. The conglomerate`s risk-taking incentives depend upon the level of market discipline it faces, which in turn is determined by the conglomerate`s liability structure. We examine optimal capital requirements for standalone institutions, for integrated financial conglomerates, and for financial conglomerates that are structured as holding companies. For a given risk profile, integrated conglomerates have a lower probability of failure than either their standalone or decentralised equivalent. However, when risk profiles are endogenously selected conglomeration may extend the reach of the deposit insurance safety net and hence provide incentives for increased risk-taking. As a result, integrated conglomerates may optimally attract higher capital requirements. In contrast, decentralised conglomerates are able to hold assets in the socially most efficient place. Their optimal capital requirements encourage this. Hence, the practice of regulatory arbitrage, or of transfering assets from one balance sheet to another, is welfare-increasing. We discuss the policy implications of our finding in the context not only of the present debate on the regulation of financial conglomerates but also in the light of existing US bank holding company regulation.

JEL Codes: G21, G22, G28

Keywords: Financial Conglomerate, Capital Regulation, Regulatory Arbitrage

Reference: 2005-FE-03

Authors: Maciej Firla-Cuchra, Tim Jenkinson

Mar 2005

Securitisations usually involve creating multiple tranches of a single issue with different characteristics, placed on the market as separate securities. Various theoretical explanations have been advanced to explain such tranching. This paper provides the first systematic testing of such theories using a proprietary database of over 5000 separate tranches in European securitisations raising a total of $1 trillion. We find support for asymmetric information and market segmentation explanations for tranching and present evidence on how such different rationales influence the structuring process in practice. We also investigate the impact of tranching on the price of securities issued. For those issues where our model predicts a higher optimal number of tranches, we find that additional uniquely-rated tranches are associated with higher prices for the issue as a whole.

JEL Codes: G14, G15, G32

Keywords: Securitisations, Structured Finance, Bond Markets, Asymmetric Information, Liquidity, Segmentation

Reference: 225

Individual View

Authors: Maciej Firla-CuchraTim Jenkinson

Mar 2005

Securitisations usually involve creating multiple tranches of a single issue with different characteristics, placed on the market as separate securities. Various theoretical explanations have been advanced to explain such tranching. This paper provides the first systematic testing of such theories using a proprietary database of over 5000 separate tranches in European securitisations raising a total of $1 trillion. We find support for asymmetric information and market segmentation explanations for tranching and present evidence on how such different rationales influence the structuring process in practice. We also investigate the impact of tranching on the price of securities issued. For those issues where our model predicts a higher optimal number of tranches, we find that additional uniquely-rated tranches are associated with higher prices for the issue as a whole.

JEL Codes: G14, G15, G32

Reference: 2005-FE-04

Authors: Andrea Patacconi, Florian Ederer, MIT

Feb 2005

This paper argues that the prevalence of compensation systems which reward winners without explicitly identifying losers can be rationalized by workers` concern for relative payoffs. If the workers` participation constraints are binding, the firm must compensate its employees for the disutility that they may derive from low status. It follows that profit-maximizing employers may be particularly reluctant to penalize or give poor performance evaluation to employees. The theory also sheds light on many other puzzling features of incentive schemes in practice, such as small salary premia, rat races, job title proliferation, the gender wage gap, the gender/happiness paradox and the widespread use of tournaments as a sorting device.

JEL Codes: J31, J41

Keywords: Reference-Dependent Preferences, Status, Ambition, Expectations, Tournaments

Reference: 222

Individual View

Many variables have been proposed by past studies as significant determinants of corruption. This paper asks if their estimated impact on corruption is robust to alteration of the information set. A Global Sensitivity Analysis, based on the Leamer`s Extreme-Bounds Analysis give a clear answer: five variables are robustly related to corruption. Corruption is lower in richer countries, where democratic institutions have been preserved for a long continuous period, and the population is mainly Protestant. Corruption is instead higher where political instabiity is a major problem. Finally, a country`s colonial heritage appears to be a significant determinant of present corruption.

JEL Codes: D72, D73, H11

Keywords: Corruption, Determinants, Sensitivity, Robustness, Extreme-Bounds

Reference: GPRG-WPS-012

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