Working Papers

Authors: Alan Beggs

Oct 2000

This paper studies the extent to which diffusion approximations provide a reliable guide to equilibrium selection results in finite games. It is shown that they do for a class of finite games with weak learning provided that limits are taken in a certain order. The paper also shows that making mutation rates small does not in general select a unique equilibrium but making selection strong does.

JEL Codes: C73, C72.

Keywords: equilibrium selection, diffusion approximation, evolutionary game theory, risk dominance

Reference: 33

Authors: M. Asghar ZaidiKlaas de Vos, CentER Applied Research and CentER, Tilburg University

Oct 2000

Most recent studies on poverty and inequality in developed countries focus on income. In contrast, this paper presents trends in consumption-based poverty and inequality in nine member countries of the European Union. During the 1980s, both poverty and inequality increased in Italy, France, the United Kingdom, Germany and Belgium, while decreases in both poverty and inequality are observed for Spain and Portugal. In Greece only inequality increased. For most countries for which income-based results are available, these move in the same direction as the consumption-based results. However, this sensitivity analysis yields considerable differences in the ranking of countries and the magnitude of the changes.

JEL Codes: I32, D31

Keywords: poverty, inequality, European Union

Reference: 35

Authors: Gordon  Menzies

Oct 2000

We review two proposals for debt forgiveness; the Highly Indebted Poor Country Initiative (HIPC) and the Jubilee 2000 Coalition Initiative (J2K). We then consider the workhorse model of debt forgiveness (Krugman 1988). We show that the workhorse model solution is a sub-optimal contract, where the incentive parameter is set without regard to the cost of effort. A fully-optimal debt-overhang contract is derived, with an incentive parameter greater than the marginal social benefit of extra effort. The so-named Hyper-Incentive Contract eliminates the effects of moral hazard arising from hidden effort, and provides a fuller rationale for case-by-case debt-overhang contracts.

JEL Codes: F34, F35.

Keywords: debt overhang, debt forgiveness, optimal contracts, moral hazard

Reference: 37

Individual View

Authors: Ernesto Dal Bo

Oct 2000

We show how an outside party offering incentives to voters can manipulate at no cost collective decisions made through voting. Under influence, these decisions can become inefficient. Therefore, the market for policies may be more likely to fail than the markets for goods, because (democratic) politics involves influence and collective decisions to a greater extent than markets for goods do. We develop and use a model to analyze different incentive schemes, credibility situations, and payoff and information structures. We discuss implications for the efficiency of democracy, voting, lobbying, committee decision making, and legislatures.

JEL Codes: D72, D71, D78

Keywords: voting, lobbying, democracy, committees, capture, corruption

Reference: 39

Individual View

Authors: Stefan De Wachter, Sebastian Galiani, Universidad Torcuato Di Tella, Argentina

Oct 2000

This paper considers the practical problem of distributing a fixed budget for poverty alleviation to a population whose poverty status is not directly observable. Some information on the relationship between poverty status and a number of observable and verifiable characteristics is assumed to be available in the form of a household survey. The solution we propose differs from other academic work in that it explicitly accounts for administrative constraints on the shape of the transfer function and is computationally more straightforward. It improves on the techniques that are commonly used in practice by taking both the concavity of the social welfare function and the entire conditional distribution of poverty status into account, and by endogenously determining the optimal transfer levels. Although the superiority of our allocation rule over other techniques is tautological, we explore the magnitude of the improvement in an artificial dataset. Finally, we provide an intuitive discussion of the defects of currently operational methods.

JEL Codes: H2, C4

Keywords: targeting, discriminant analysis, poverty

Reference: 41

Individual View

Authors: Alexander Guembel

Sep 2000

This paper explores the welfare implications of a securities transaction tax when informed traders act under short-term objectives. The model presented features speculators who can trade on information of differing time horizons, trade by fully rational uninformed agents, endogenous asset prices and profit maximising firms that can use information contained in stock prices to improve their investment decision. The only value enhancing investment available to firms requires a long-term investment. Therefore investment efficiency can only be improved if stock prices contain long-term information. It is shown that when informed traders act under short-term objectives, a subsidy on short-term trade can improve welfare. This is because trade by short-term informed speculators exerts a positive externality over the profitability of long-term informed trade. A subsidy on short-term trade thus increases the amount of trade on long-term information in equilibrium. As a result stock prices contain more long-term information, which improves investment efficiency. The model takes full account of the effect of a tax on market liquidity and welfare for all market participants.

JEL Codes: G14, G18, D60, D82

Keywords: investment efficiency, short-termism, securities transaction tax, liquidity, welfare

Reference: 2000-FE-05

Authors: Paolo Mauro, Nathan Sussman, Yishay Yafeh

Sep 2000

This paper analyzes yield spreads on sovereign debt issued by emerging markets using modern data from the 1990s and newly-collected historical data on debt traded in London during 1870–1913, a previous â€

Reference: 2001-FE-03

Authors: Alasdair  Crockett

Aug 2000

In the sociology of religion of the past thirty years or so, one can identify three major approaches to the relation of religion and modernity: secularization theory, the Stark-Bainbridge rational choice theory, and the Finke-Stark “supply-side” theory. In this paper, I study churchgoing rates in England in 1851 to examine which of these three theoretical approaches appears the most valid. Victorian England provides a compelling case study. Not only are the data very good (uniquely so in the case of Britain), but also England in 1851 takes us back to one of the original locales of urban-industrial development. My conclusion is that both “supply-side” (of religion) and “secularization” processes were influencing English churchgoing rates in 1851. However, the former were much more limited and transient in their effect, being restricted to isolated rural areas. In the more urban places, where most people lived, secularization processes were operating. There are parallels between this “duality” of process operating in rural and urban England in 1851 and the fact that churchgoing appears to have increased during the nineteenth century up to that point, but declined, unabated, thereafter.

Reference: 036

Individual View

Authors: Colin Mayer, Julian Franks

Aug 2000

In a study of the ownership of German corporations, we find a strong relation between board turnover and corporate performance, little association of concentrations of ownership with managerial disciplining and only limited evidence that pyramid structures can be used for control purposes. The static relation of ownership to control in Germany is therefore similar to the UK and US. However, there are marked differences in the dynamic relation transfers of ownership. There is an active market in share blocks giving rise to changes in control but the gains are limited and accrue solely to the holders of large blocks, not to minority investors. We provide evidence of low overall benefits to control changes and the exploitation of private benefits of control.

JEL Codes: G32, G34

Keywords: Ownership, control, board turnover, pyramiding, bank control, takeovers

Reference: 2001-FE-11

Authors: Marcel Fafchamps, Takashi Kurosaki, Institute of Economic Research, Hitotsubashi University, Japan

Jul 2000

This paper tests the efficiency of insurance markets in the Pakistan Punjab by examining how crop choices are affected by the presence of price and yield risk. We estimate reduced-form and structural models of crop choices. Although we cannot reject the hypothesis that village members efficiently share risk among themselves, production choices are shown to depend on risk. Existing risk sharing and self-insurance mechanisms thus imperfectly protect Punjab farmers against village-level shocks. Results also indicate that households respond to consumption price risk, thereby suggesting that empirical and theoretical work on risk should avoid putting an exclusive emphasis on yield and output price risk.

JEL Codes: O12, Q12

Keywords: risk, agricultural development, household models, insurance markets, structural estimation

Reference: 12

Individual View

Authors: Carol Scott Leonard, Leonid Borodkin, Lomonossov State University, Moscow, Russia

Jul 2000

This study provides statistical evidence that Russian rural/urban wages diverged substantially during the industrialization of Russia in the late nineteenth century. However, over time both the variation declined and integration somewhat increased as rural labour responded to new opportunities. The patterns were moderately clear for nominal wages. This study supports Paul Gregory`s conclusion that relative advances in the productivity of land in agriculture were accompanied by far greater mobility of labour than is commonly thought in view of the constraints of Russia`s rural institutions.

JEL Codes: N13, N33, O14

Keywords: Russian economic history, rural-urban wage gap, labour history, industrialization

Reference: 14

Individual View

Authors: Terry O'Shaughnessy

Jul 2000

This paper examines the redistributional function of queues. A system in which subsidies and queues are used to allocate goods may appear attractive to policy makers who are concerned about equity since the resource used in queuing (time) is generally allocated more equally than, say, human or physical capital. Thus a subsidy-queue mechanism performs a role similar to that performed by a tax-benefit system. Both mechanisms, however, bring with them efficiency losses, which the paper compares. It is shown that the subsidy-queue mechanism may appear superior if the trade-off between efficiency and equity is viewed in terms of consumption and the distribution of consumption. On the other hand, if the equity-efficiency trade-off is properly formulated in terms of utility and the distribution of utility the tax-based redistributional mechanism is superior.

JEL Codes: D60, H20

Keywords: redistribution, queues, subsidies, tax-benefit system.

Reference: 18

Individual View

Authors: Marcel Fafchamps, Agnes R. Quisumbing, International Food Policy Research Institute, U.S.A.

Jul 2000

Using detailed data from rural Pakistan, this paper investigates whether human capital, learning by doing, gender, and one`s status within the family - heretoforth family status - affect the division of labor within households. Results suggest the presence of returns to individual specialization in all farm, non-farm, and home based activities. The intrahousehold division of labor is influenced by comparative advantage based on human capital and by long-lasting returns to learning by doing, but we also find evidence of a separate effect of gender and family status. Households seem to operate as hierarchies with sexually segregated spheres of activity. The head of household and his or her spouse provide most of the labor within their respective spheres of influence; other members work less. When present in the household, daughters-in-law work systematically harder than daughters of comparable age, build, and education. Other findings of interest are that there are increasing returns to scale in most household chores, that larger households work more off farm, and that better educated individuals enjoy more leisure.

JEL Codes: O1, J2.

Keywords: economics of the family, social norms, labor

Reference: 11

Individual View

Authors: Carol Scott Leonard

Jul 2000

This paper argues that rural opposition to land reform in transition Russia is a consequence of individually rational decisions by members of former state and collective farms about whether to support further land reform, or preserve the status quo, collective farming. Evidence from survey data shows that despite the government`s efforts to promote a land market and independent farming in the 1990s, preferences in 1996 still favoured the largely unreformed status quo. The observed retention of collective farming is so widespread as to block both the development of a land market and restructuring. The visible consequence of stalemated reform has been persistent agricultural output decline and widespread bankruptcy of large farm entities, without any significant rise of independent farming. This paper formalises a dynamic argument for rational opposition to land reform, given the existence of uncertainty about the costs that individual cultivators will incur. It turns out that the consequences of initial decisions could have decisive impact on rejection of reform later on. The paper discusses further, the relevance of the historical parallel during the post-Emancipation and Stolypin eras when peasant communes resisted enclosures and restructuring of rights to land. Opposition, seemingly irrational, recurred and lasted throughout the reform era. It can be seen that opposition to reform at that time, too, was individually rational, given incomplete property rights reform; the state also bears responsible in contemporary and historical times for policies that tended to help preserve the status-quo. The state failed to improve the unclear property rights which dampened reform incentives early on in the reform process both historically and in the rural transition environment.

JEL Codes: N44, N54, O1, D7

Keywords: Russian land reform, economic history, status-quo preference in uncertainty, development, property rights

Reference: 13

Individual View

Authors: Richard Mash

Jul 2000

In a monetary policy model incorporating partial persistence in inflation it is shown that inflation bias is reduced and the response to shocks improved if the policy maker has a discount rate lower than its true social value. Thus a patient central banker is shown to be a third mechanism for offsetting time inconsistency problems in addition to Rogoff`s conservative central banker and the principal-agent approach of Walsh. The paper also analyses outcomes under the latter regimes and the optimal rule, finding important differences from the results of earlier literature that excludes inflation persistence.

JEL Codes: E52, E58, C61

Keywords: monetary policy, time inconsistency, inflation persistence

Reference: 15

Individual View

Authors: Terry O'Shaughnessy

Jul 2000

Trade unions have been successful in compressing the wage distribution but not in influencing the share of national income going to labour. This paper claims that a compressed wage distribution provides insurance in the same way that the tax and benefit system does and thus may be welfare-improving. Moreover, a union-based wage compression system may be better than a conventional tax-benefit system in providing such insurance and may well complement the operation of the latter. Models of wage compression and of taxes and benefits are evaluated and then combined in a single model. The wage compression system works well for the least skilled but the tax-benefit approach is better if average utility is being maximized. In the combined model the two mechanisms complement one another. Equity-efficiency trade-offs in the combined system mostly dominate those obtained from each mechanism acting on its own. A key factor is the willingness of skilled workers to defect from a wage compression agreement. Encouraging defection may appeal to policy-makers (labour markets are more flexible) but the benefits of a compressed wage distribution may be lost, placing stress on welfare state institutions and undermining the insurance function that the combined wage-compression/tax-benefit system delivers relatively efficiently.

JEL Codes: H23, J51

Keywords: trade unions, distribution, tax-benefit system

Reference: 17

Individual View

Authors: Justin Smith

Jul 2000

It is common to model costs of carrying out strategies in games in relation to the complexity, in some sense, of the strategies. We show a particularly general definition of complexity for this purpose, one that subsumes many alternatives as special cases. We explore how this definition can be used and developed, and illustrate with applications to the analysis of two player finite repeated games.

JEL Codes: C72, C79

Keywords: Kolmogorov, complexity, strategic complexity, bounded rationality, limited rationality

Reference: 19

Authors: Christopher Mark Davis, Christopher Davis

Jun 2000

The Soviet Union was able to develop a large military-industrial complex and become the world

JEL Codes: H56, H57, N44, P27, P31

Keywords: Soviet Union, USSR, Russia, defence economics, defence sector, military-industrial complex, defence expenditure, defence budget, defence burden, arms race, armed forces, logistics, defence industry, military RDT&E, arms trade, national security, conversio

Reference: 8

Authors: Paul Klemperer

May 2000

This is a preliminary draft of an Invited Symposium paper for the World Congress of the Econometric Society to be held in Seattle in August 2000. We discuss the strong connections between auction theory and standard economic theory, and argue that auction-theoretic tools and intuitions can provide useful arguments and insights in a broad range of mainstream economic settings that do not, at first sight, look like auctions. We also discuss some more obvious applications, especially to industrial organization.

JEL Codes: D44, L13, D43

Keywords: auctions, bidding, auction theory, private values, common values, mechanism design, litigation, stock markets, queues, financial crashes, brand loyalty, War of Attrition, Bertrand, perfect competition, E-commerce, spectrum auctions, treasury auctions, ele

Reference: 1

Individual View

Authors: David Hendry

May 2000

UK inflation varied greatly over 1865-1990, in response to many policy and exchange-rate regimes, two world wars and oil crises, and major legislative, and technological changes. It is modelled as responding to excess demands from all sectors of the economy: goods and services, factors of production, money, financial assets, foreign exchange, and government deficits, using indicator variables and commodity prices for special factors. Equilibrium-correction terms are developed for each of these. Variables representative of most theories of inflation mattered empirically over the sample, yielding an electric model which refutes any ‘single cause

JEL Codes: F43, E3

Keywords: inflation, dynamic modelling, cointegration, structural breaks

Reference: 2

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, Jurgen Doornik

Apr 2000

Existing methods of reconstructing historical Euro-zone data by aggregation of the individual countries

JEL Codes: C43, C82

Keywords: European Monetary Union, data aggregation, Divisia approach

Reference: 4

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: 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: 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

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