Working Papers

Authors: James Forder

Oct 2000

Measures of central banks` independence and central banks` accountability which are based on an interpretation of their statutes provide, in themselves, no guidance for the assessment of legislative proposals. In the effectiveness of monetary policy, the crucial considerations relate to how central banks and other policymakers behave. The pattern of incentives is not determined by the statutes, which may be wholly irrelevant, and therefore one cannot discover the effectiveness of policy by inspecting the statutes. On the other hand, an assessment of the democratic acceptability of an arrangement requires a normative argument. Depending on that argument, statutory characteristics may be the crucial ones, but for the assessment to be worthwhile, the argument must be explicit.

JEL Codes: C80, E58

Keywords: central bank independence, measurement problems, political accountability

Reference: 23

Individual View

Authors: Mary Gregory, Adriaan S. Kalwij, Department of Economics, University of Oxford.

Oct 2000

Around 40% of the male workforce regularly works 8 to 9 hours a week of paid overtime. This paper investigates the determinants of overtime hours in Britain over the period 1975-1999. For this purpose a panel data Tobit model is estimated using the very large panel of employees from the National Earnings Survey Dataset. The empirical results show that changes in the job-mix across the economy, from high to low overtime jobs rather than within-job changes in the use of overtime, account for most of the apparent decline in the extent of overtime working over the 1990s. Within jobs, the GDP cycle has a significant impact on overtime work, while labour market conditions, represented by the unemployment rate, do not. The elasticity of total working hours with respect to wages is found to be close to zero and with respect to contractual hours close to unity. Furthermore the results show that the decline of unionisation has not altered the use of overtime.

JEL Codes: C23, C33, C44, J00

Keywords: overtime work, contractual hours, panel data Tobit model.

Reference: 27

Individual View

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: Sujoy Mukerji, Jean-Marc Tallon, CNRS-EUREQua, Université Paris I

Oct 2000

If agent`s (subjective) beliefs are ambiguous then the beliefs may not be represented by a unique probability distribution in the standard Bayesian fashion but instead by a set of probabilities. Roughly put, an ambiguity averse decision maker evaluates an act by the minimum expected value that may be associated with it. Inspite of wide and long-standing support among economists for indexation of loan contracts there has been relatively little use of indexation, except in situations of extremely high inflation. The object of this paper is to provide a (theoretical) explanation for this puzzling phenomenon based on the hypothesis that economic agents are ambiguity averse. The present paper considers a competitive general equilibrium model of goods, money and bond markets populated by agents with Choquet expected utility preferences, where both nominal and indexed bonds are available for trade and prices of all goods and bonds are determined endogenously. We obtain conditions which promote an endogenous cessation of trade in indexed bonds: i.e., conditions under which there is no trade in indexed bonds in any equilibrium; only nominal bonds are traded.

JEL Codes: D8, D23

Keywords: Choquet expected utility, ambiguity aversion, Knightian uncertainty, contracts, indexed bonds, indexation

Reference: 28

Individual View

Authors: Howard Smith, Simon Latcovich

Oct 2000

This paper evaluates alternative strategic models of competition and market structure in online retailing, and makes comparisons with traditional retailing. Online consumers are less concerned than traditional consumers about spatial characteristics and more concerned about hidden quality characteristics. Online retailers rely more on advertising than traditional retailers do, to inform consumers and to signal hidden quality attributes. Price competition may be imperfect, because of vertical product differentiation, incomplete consumer awareness, and perfect information exchange between retailers. Advertising and revenue data for the online book market reveal that consumers respond to advertising rather than low prices. As the market increases, advertising costs escalate and there is no new entry. Advertising to sales ratios and market concentration ratios are much higher than for traditional retailers. Using price and demand information for individual books over a number of weeks, we find counter-cyclical and cross-sectional price variation inconsistent with perfect price competition.

JEL Codes: L13, L15, L81

Keywords: advertising, books, e-commerce, endogenous sunk costs, Internet, market structure, price discrimination, price dispersion, retailing

Reference: 36

Individual View

Authors: Kirsten Bindemann

Oct 2000

This study examines the response of oil contracts to extreme price movements. The chosen contract form is a Production-Sharing Agreement (PSA) which is the oil industry`s equivalent of sharecropping and one of the most commonly used contractual agreements. We show that only the two significant price increases in the 1970s and only the price falls in the early 1980s and the early 1990s triggered a response in the terms offered by PSAs.

JEL Codes: L14, L71, Q4

Keywords: prices, petroleum, contracts

Reference: 29

Individual View

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: Qaisar Farooq Akram, Research Department, Norges Bank.

Oct 2000

Despite the emerging consensus on the validity of purchasing power parity (PPP) between trading countries in the long run, empirical evidence in favour of the PPP theory is scarce in data predominantly exposed to real shocks. This paper tests for PPP between Norway and its trading partners using quarterly observations from the post Bretton Woods period, in which the Norwegian economy has been exposed to numerous real shocks as repeated revaluation of oil and gas resources through new discoveries and price fluctuations. The paper undertakes an extensive examination of the behaviour of the Norwegian real and nominal exchange rates and shows that it is remarkably consistent with the PPP theory. Moreover, convergence towards the equilibrium level appears relatively fast, which is partly ascribed to the Norwegian government`s competitiveness preserving policies and the system of centralised wage bargaining.

JEL Codes: C22, C32, C51, E31, E58, F41, J51

Keywords: PPP, real exchange rate, oil prices, Dutch disease, centralised wage bargaining, exchange rate policy, cointegration

Reference: 30

Individual View

Authors: Paul Oslington, Deakin University, Australia

Oct 2000

This paper considers linkages between national labour markets in a global economy, extending the existing analyses to the empirically important case where factor price equalization does not hold. Removing the assumption of factor price equalization allows the divergent wage experience as well as unemployment experience of Europe and America to be explained. Europe`s minimum wage forces it out of the labour intensive industry, leaving it specialised in the skill intensive industry, and with a lower return to skill than America. Under these conditions the entry of labour intensive NICs into world markets pushes down American wages and alters its economic structure (which were unchanged under factor price equalization), and reduces European unemployment (which increased under factor price equalization).

JEL Codes: F11, E24

Keywords: integrated equilibrium, factor price equalization, inequality, unemployment

Reference: 38

Individual View

Authors: Qaisar Farooq Akram, Research Department, Norges Bank

Oct 2000

Major changes in the Norwegian exchange rate have often coincided with large fluctuations in the price of crude oil. Previous empirical studies have however suggested a weak and ambiguous relation between the oil price and the exchange rate. In contrast to these studies, this paper explores the possibility of a non-linear relation between oil prices and the exchange rate. An examination of daily observations reveals a negative relation between the oil price and the nominal value of the currency. The strength of this relation depends on whether the oil price is below, inside or above the range of 14-20 US dollars a barrel. Moreover, it depends on whether the oil price is displaying a falling or rising trend. The relation is relatively strong when oil prices are below 14 dollars and are falling. These non-linear effects are tested and quantified within equilibrium correcting models of the exchange rate, derived on monthly and quarterly data to control for the influence of other macroeconomic variables. The models with non-linear oil price effects outperform similar models with linear oil price effects. The latter models grossly underestimate the exchange rate response to oil price changes in a state of low oil prices. The paper undertakes an extensive evaluation of the derived models to demonstrate the robustness of the results.

JEL Codes: C51, E44, E52, F31

Keywords: currency crises, exchange rate, oil price, non-linear econometric models

Reference: 31

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: Cyril  Lin

Oct 2000

China has sought to improve enterprise performance not through privatisation as in other transition economies, but through corporatisation as means of improving corporate governance. Actual governance practices of corporatised Chinese firms are however seriously defective, characterized by excessive power of CEO`s, insider control and collusion, lack of safeguards for minority shareholders and weak transparency. These shortcomings are attributable to factors such as cultural and political traditions, uncompetitiveness of markets, poor legal enforcement, weak debt and equity markets, but above all to continued state dominance in ownership and control of the corporate sector and listed companies. Corporatisation, nevertheless, has created a regime conducive to implementing measures for improving corporate governance.

JEL Codes: G3, G32, P31, O53

Keywords: Chinese economy, corporate governance, SOEs reform, transition

Reference: 20

Individual View

Authors: Arie Kapteyn, CentER, Tilburg University; Adriaan Kalwij, Department of Economics, University of Oxford and Asghar Zaidi, Department of Economics, University of Oxford.

Oct 2000

Worksharing is considered by many as a promising public policy to reduce unemployment. In this paper we present a review of the most pertinent theoretical and empirical contributions to the literature on worksharing. In addition, we also provide new empirical evidence on this issue, by a cross country analysis exploiting aggregate data for 13 OECD countries. The conclusions of the literature survey are indecisive. Conclusions about the efficacy of worksharing as an employment enhancing policy tool depend heavily on the setting in which the analysis takes place. Our empirical analysis does not find any evidence for the proposition that worksharing would promote employment or reduce unemployment. In an appendix we present an overview of recent public policy experience of European Countries with respect to different forms of worksharing. Also here the evidence is mixed.

JEL Codes: C33, E24, J2, J3

Keywords: employment, hours of work, panel data

Reference: 32

Individual View

Authors: Daniel John Zizzo

Oct 2000

Three experiments on utility interdependence are discussed. Subjects receive money by betting and possibly by arbitrary assignments. They can then pay to reduce and, possibly, redistribute the steal money; in one case, only the decisions of a randomly determined dictator are implemented. The behavior of 80% of burners and redistributors was rank egalitarian. However, arbitrarily advantaged and disadvantaged subjects developed conflicting views of desert: arbitrarily disadvantaged subjects targeted arbitrarily assigned money; arbitrarily advantaged subjects did not care about how money was gained, and, if stealing was allowed, were twice as aggressive against earned money than against money assigned arbitrarily.

JEL Codes: C72, C91

Keywords: interdependent preferences, fairness, desert, egalitarianism, ideology

Reference: 40

Individual View

In this paper we use agency theory to study the active role of the chief executive in the formulation of corporate strategy. Unlike traditional applications of agency theory, we allow the agent (CEO) to play a role in defining the parameters of the agency problem. We argue that CEOs will have an incentive to propose difficult, ambitious strategies for their corporations. The effect arises because in equilibrium, the agent may be overcompensated in the sense that the participation constraint is not binding in determining his compensation. The agent can exploit this by proposing ambitious corporate strategies, thereby influencing the parameters of the constraints in the agency problem. The principal (the owners of the company) can mitigate this by precommitting to pay high compensation regardless of the manager`s chosen strategy, but may optimally prefer not to do so.

JEL Codes: G30, G34, J33, D82

Keywords: agency theory, executive compensation, free-cash-flow theory, strategic complexity

Reference: 2000-FE-06

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: 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: 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: 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: 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: 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: 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: 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

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