Working Papers

Authors: David Gill,Victoria Prowse, Michael Vlassopoulos

Jul 2013

We use an online real-effort experiment to investigate how bonus-based pay and worker productivity interact with workplace cheating.  Firms often use bonus-based compensation plans, such as group bonuses and firm-wide profit sharing, that induce considerable uncertainty in how much workers are paid.  Exposing workers to a compensation scheme based on random bonuses makes them cheat more but has no effect on their productivity.  We also find that more productive workers behave more dishonestly.  These results are consistent with workers' cheating behavior responding to the perceived fairness of their employer's compensation scheme.

JEL Codes: C91, J33

Keywords: Bonus, compensation, cheating dishonesty, lying, employee crime, productivity, slider task, real effort, experiment

Reference: 666

Individual View

Authors: Pierre-Louis Vezina, Lorenzo Rotunno

Jul 2013

We show that the US in-bond system of imports may be used by firms to illegally avoid trade barriers, a practice known as in-bond diversion.  Digging into official Chinese and Mexican trade statistics, we uncover traces of US quota-hopping in-bond diversion by Chinese exports of textiles and apparel.  This is because the illicit scheme involves declaring Chinese exports bound for Mexico but diverting them to the US market while in transit, thus creating a gap between Chinese and Mexican reports.  Using the phaseout and removal of US quotas at the end of the Multifibre Agreement as a policy experiment, as well as variation in quota bindingness across products, we show that quota-bound products were associated with larger trade gaps which shrunk following the quota removals.  We also find that quotas were associated with larger shares of US imports aimed for transit warehouses, confirming the use of the in-bond system for illegal quota hopping.

JEL Codes: F13, O17, O19

Keywords: Textile and apparel, illegal trade, trade barriers

Reference: 664

Individual View

Authors: Jerry Tsai

Jul 2013

This paper offers an explanation for the properties of the nominal term structure of interest rates and time-varying bond risk premia based on a model with rare consumption disaster risk.  In the model, expected inflation follows a mean reverting process but is also subject to possible large (positive) shocks when consumption disasters occur.  The possibility of jumps in inflation increases nominal yields and the yield spread, while time-variation in the inflation jump probability drives time-varying bond risk premia.  Predictability regressions offer independent evidence for the model's ability to generate realistic implications for both the stock and bond markets.

JEL Codes: G12

Keywords: Term structure of interest rates, rare disasters

Reference: 665

Individual View

Authors: John Thanassoulis

Jul 2013

This paper analyses the real economy effects of firms having some shareholders with a short investment horizon on their shareholder register.  Short-term shareholders cause management to be concerned with the path of the share price as well as its ultimate value.  Such shareholders in an economy lead to bubbles in the prices of key inputs, to the misallocation of firms to risky business models, and to increased costs of capital.  For individual firms short-term shareholders induce the Board to reduce deferred incentives in CEO pay prompting CEO myopia and reduced investments in the long-run capabilities of the firm.

JEL Codes: G12, G34, L21, L25

Keywords: Investor time-horrizons, bubbles, CEO compensation, cost of capital, short-termism, bonuses, shareholder register

Reference: 663

Individual View

Authors: Vitaliy Oryshchenko, Richard J. Smith

Jul 2013

If additional information about the distribution of a random variable is available in the form of moment conditions, a weighted kernel density estimate reflecting the extra information can be constructed by replacing the uniform weights with the generalised empirical likelihood probabilities.  It is shown that the resultant density estimator provides an improved approximation to the moment constraints.  Moreover, a reduction in variance is achieved due to the systematic use of the extra moment information.

JEL Codes: C14

Keywords: Weighted kernel density estimation, moment conditions, higher-order expansions, normal mixtures

Reference: 662

Individual View

Authors: Mark Armstrong, Jidong Zhou

Jun 2013

A seller wishes to prevent the discovery of rival offers by its prospective customers.  We study sales techniques which serve this purpose by making it harder for a customer to return to buy later after a search for alternatives.  These include making an exploding offer, offering a "buy-now" discount, or requiring payment of a deposit in order to buy later.  It is unilaterally profitable for a seller to deter search under mild conditions, but sellers can suffer when all do so.  In a monopoly setting where the buyer has an uncertain outside option, the optimal selling mechanism features both buy-now discounts and deposit contracts.  When a seller cannot commit to its policy, it exploits the inference that those consumers who try to buy later have no good alternative.  In many cases the outcome then involves exploding offers, so that no consumers return to buy after search.

JEL Codes: D18, D83, L13, L80

Keywords: Consumer search, sales techniques, price discrimination, sequential search

Reference: 661

Individual View

Authors: Christine Greenhalgh

Jun 2013

This paper begins by surveying recent economic studies of the relationships between technology transfer, intellectual property, innovation and diffusion in emerging countries.  It applies this literature to the Indian case.  India  is a potentially useful case study for several reasons.  India has recently been experiencing rapid growth and has several high technology sectors staffed by an absolutely large and highly educated middle class.  At the same time an even larger share of its very big population is still working in low productivity agriculture and many of these people are living in extreme poverty.

To reduce poverty and improve agricultural productivity India will need to create jobs in labour intensive production and distribution sectors to employ its vast army of unskillled workers.  The second part of the paper outlines how industry structure and innovative performance have been progressing in India following the economic reforms of the early 90s and the changes to intellectual property law occasioned by the TRIPS agreement and membership of the World Trade Organisation.

In the third section the focus turns to recent science, technology and innovation policy in India.  A study of the country's potential for innovation by the World Bank in 2007 argued that India must proceed on two fronts.  In addition to considering how India's growth prospects can be enhanced by world leading innovations, this volume placed great emphasis on inclusive innovation.  This may involve mainly the diffusion and absorption of existing knowledge, but is designed to improve the lot of the poor.  The World Bank report proposed a number of new policy directions aimed at speeding up innovation and technology diffusion in India.  We attempt to record what changes have been made to innovation policy, foreign direct investment policy and diffusion policy in India in recent years and assess whether these are likely to be effective.

JEL Codes: O2, O3

Keywords: Innovation, intellectual property, science policy, innovation policy, TRIPS

Reference: 660

Individual View

Authors: Christine Greenhalgh, Philipp Schautschick

Jun 2013

This paper surveys empirical studies employing trade mark data that exist in the economic literature to date.  Section 1) documents the use of trade marks by firms in several advanced countries including Australia, the United Kingdom and the United States, 2) reviews different attempts to gauge the function of a trade mark as indicator of innovation and product differentiation, and 3) provides an overview of the association of trade marks with dimensions of firm performance and productivity.  Sections 4) and 5) give accounts of studies that focus on the social costs and value of trade marks, namely their importance for firm survival, their impact on demand, and firms' incentives to innovate but also to raise rivals' costs.  Section 6) covers first endeavours to investigate the interplay between different types of intellectual property rights, while 7) briefly concludes.

JEL Codes: O33, O34

Keywords: Intellectual property, trade marks, empirical studies

Reference: 659

Individual View

Authors: Avner Offer

Jun 2013

Banking in the UK was stable for more than a century after 1866.  Financial institutions were differentiated according to function.  The core banks did not engage in maturity transformation, but in managing a payments system for business.  Real estate was a potential source of instability due to high credit elasticity of demand and to long maturities, but credit was successfully rationed by building societies, who relied on the funds that their savers had actually withdrawn from consumption.  After 1945, credit rationing came under pressure from consumers and housebuyers.  Incremental liberalisations after 1971 released a tide of credit which created a property windfall economy.  Borrowers and lenders both prospered until the system collapsed under its own weight in 2007.

Reference: Number 116

Individual View

Authors: Robert Allen

Jun 2013

This article responds to Professor Jane Humphries' critique of my assessment of the high wage economy of eighteenth century Britain and its importance for explaining the Industrial Revolution.  New Evidence is presented to show that women and children participated in the high wage economy.  It is also shown that the high wage economy provides a good explanation of why the Industrial Revolution happened in the eighteenth century by showing that increases of women's wages around 1700 greatly increased the profitability of using spinning machinery.  The relationship between the high wage economy of the eighteenth century and the inequality and poverty in Britain in the nineteenth century is explored.

Reference: Number 115

Individual View

Authors: David Hendry, Jurgen A. Doornik, Felix Pretis

Jun 2013

Using an extension of general-to-specific modelling, based on the recent developments of impulse-indicator saturation (IIS), we consider selecting significant step indicators from a saturating set to capture location shifts.  The approximate non-centrality of the test is derived for a variety of shifts using a 'split-half' analysis, the simplest specialization of a multiple-block search algorithm.  Monte Carlo simulations confirm the accuracy of the nominal significance levels under the null, and show rejections when location shifts occur, improving in non-null rejection frequency compared to the corresponding IIS-based and to Chow (1960) tests.

JEL Codes: C51, C22

Keywords: General-so-specific, step-indicator saturation, test power, location shifts, model section, Autometrics

Reference: 658

Individual View

Authors: Javier Fernandez-Macho

Jun 2013

This paper examines a test for the null of cointegration in a multivariate system based on the discrepancy between the OLS estimator of the full set of n cointegrating relationships in the n + k system and the OLS estimator of the corresponding relationships among first differences without making specific assumptions about the short-run dynamics of the multivariate data generating process.  It is shown that the proposed test statistics are asymptotically distributed as standard chi-square with n + k degrees of freedom and are not affected by the inclusion of deterministic terms or dynamic regressors, thus offering a simple way of testing for cointegration under the null without the need of special tables.  Small sample critical values for these statistics are tabulated using Monte Carlo simulation and it is shown that these non residual-based tests exhibit appropriate size and good power even for quite general error dynamics.  In fact, simulation results suggest that they perform quite reasonably when compared to other tests of the null of cointegration.

JEL Codes: C22, C12

Keywords: Brownian motion, cointegration, econometric methods, integrated process, multivariate analysis, time series models, unit root

Reference: 657

Individual View

Authors: Ferdinand Rauch

May 2013

This paper shows that Zipf's Law for cities can emerge as a property of a clustering process.  If initially uniformly distributed people chose their location based on a specific gravity equation as found in trade studies, they will form cities that follow Zipf's Law in expected value.  This view of cities as spatial agglomerations is supported empirically by the observation that larger cities are surrounded by larger hinterland areas and larger countryside populations.

JEL Codes: R12

Keywords: Zipf's Law for cities, distribution of city sizes

Reference: 656

Individual View

Authors: Margaret Meyer, Bruno Strulovici

May 2013

Abstract

Given two sets of random variables, how can one determine whether the former variables are more interdependent than the latter? This question is of major importance to economists, for example, in comparing how various policies affect systemic risk or income inequality. Moreover, correlation is ill-suited to this task as it is typically not justified by any economic objective.

Economists' interest in interdependence often stems from complementarities (or substitutabilities) in the environment they analyze. This paper studies interdependence using supermodular objective functions: these functions treat their variables as complements, and their expectation increases as the realizations of the variables become more aligned.

The supermodular ordering has a linear structure, which we exploit to obtain tractable characterizations and methods for comparing multivariate distributions, and extend when objective functions are also monotonic or symmetric. We also provide suffcient conditions for comparing random variables generated by common and idiosyncratic shocks or by heterogeneous lotteries, and illustrate our methods with several applications.

Revised August 2015

JEL Codes: D63, D81, G11, G22

Keywords: Interdependence, Supermodularity, Correlation, Copula, Mixture, Majorization, Tournament

Reference: 655

Individual View

Authors: Jennifer Castle,David Hendry

May 2013

We consider model selection for non-linear dynamic equations with more candidate variables than observations, based on a general class of non-linear-in-the-variables functions, addressing possible location shifts by impulse-indicator saturation.  After an automatic search delivers a simplified congruent terminal model, an encompassing test can be implemented against an investigator's preferred non-linear function.  When that is non-linear in the parameters, such as a threshold model, the overall approach can only be semi-automatic.  The method is applied to re-analyze an empirical model of real wages in the UK over 1860-2004, updated and extended to 2005-2011 for forecast evaluation.

JEL Codes: C51, C22

Keywords: Non-linear models, location shifts, model selection, autometrics, impulse-indicator saturation

Reference: 654

Individual View

Authors: H Peyton Young, H.H. Nax, M.N. Burton-Chellew, S.A. Westor

Apr 2013

Many interactive environments can be represented as games, but they are so large and complex that individual players are in the dark about others' actions and the payoff structure.  This paper analyzes learning behavior in such 'black box' environments, where players' only source of information is their own history of actions taken and payoffs received.  Specifically we study voluntary contributions games.  We identify two robust features of the players' learning dynamics: search volatility and trend-following.  These features are clearly present when players have no information about the game; but also when players have full informaiton.  Convergence to Nash equilibrium occurs at about the same rate in both situations.

JEL Codes: C70, C73, C91, D83, H41

Keywords: learning, information, public goods games

Reference: 653

Individual View

Authors: Simon GB Cowan

Apr 2013

The welfare and output effects of monopoly third-degree price discrimination are analyzed when inverse demand functions are parallel.  Welfare is higher with discrimination than with a uniform price when demand functions are derived from the logistic distribution, and from a more general class of distributions.  The sufficient condition in Varian (1985) for a welfare increase holds for these demand functions.  Total output is higher with discrimination for a large set of demand functions including those derived from strictly log-concave distributions with increasing cost pass-through, such as the normal, logistic and extreme value, and standard log-convex demands.

JEL Codes: D42, L12, L13

Keywords: Third-degree price discrimination, monopoly, social welfare, output

Reference: 652

Individual View

Authors: C. Knick Harley

Apr 2013

Modern economic growth first emerged in Britain about the time of the Industrial Revolution, with its cotton textile factories, urban industrialization and export orientated industrialization.  A period of economic growth, industrial diversification and export orientation preceded the Industrial Revolution.  This export orientation revolved around an Americanization of British trade for which the slave colonies of the Caribbean were central.  The Eric Williams' explored the extent to which this export economy based on West Indian slavery contributed to the coming of the Industrial Revolution.  His claim that profits from the slave trade were crucial to the Industrial Revolution has not stood up to criticial evaluation.  Nonetheless, modern speculations regarding endogenous growth plausibly postulate that manufacturing, urbanization, and a powerful merchant class all have a favourable impact for growth.  These hypotheses need careful consideration.

What set the British colonial empire aside from its rivals was not the quality of its sugar colonies but the involvement of the temperate colonies on the North American mainland.  Unlike the slave colonies created to exploit staple exports, English emigrants to the northern mainland sought to establish independent settlement.  These colonies lacked staple products and residents financed imports by exploited opportunities the empire provided providing for shipping and merchanising and compensating for the lack of European market for the timber or temperate agricultural products by exporting to the sugar colonies which, in turn, concentrated on the export staple.  The British Empire was unique and its development provided an important and growing diversified and relatively wealthy market for British manufactured goods that all other empires lacked.  Although the mainland colonies financed their imports of British manufactured goods by intergrading into the slave-based British Atlantic, it seems likely that in the absence of opportunities in the slave colonies the mainland colonies would have imported similar amounts of British manufactured goods.

Reference: Number 113

Individual View

Authors: Alexandre de Corniere, Greg Taylor

Mar 2013

Competition authorities all over the world worry that integration between search engines (mainly Google) and publishers could lead to abuses of dominant position.  In particular, one concern is that of own-content bias, meaning that Google would bias its rankings in favor of the publishers it owns or has an interest in, to the detriment of competitors and users.  In order to investigate this issue, we develop a theoretical framework in which the search engine (i) allocates users across publishers, and (ii) competes with publishers to attract advertisers.  We show that the search engine is biased against publishers that display many ads - even without integration.  Although integration may lead to own-content bias, it can also reduce bias by increasing the value of a marginal consumer to the search engine.  Integration also has a positive effect on users by reducing the nuisance costs due to excessive advertising.  Its net effect is therefore ambiguous in general, and we provide sufficient conditions for it to be desirable or not.

JEL Codes: L1, L4, L86

Keywords: Search engine, integration, advertising

Reference: 651

Individual View

Authors: Alexandre de Corniere, Romain De Nijs

Mar 2013

An online platform makes a profit by auctioning an advertising slot that appears whenever a consumer visits its website.  Several firms compete in the auction, and consumers differ in their preferences.  Prior to the auction, the platform gathers data which is statistically correlated with consumers' tastes for products.  We study the implications of the platform's decision to allow potential advertisers to access the data about consumers' characteristics before they bid.  On top of the familiar trade-off between rent extraction and efficiency, we identify a new trade-off: the disclosure of information leads to a better matching between firms and consumers, but results in a higher equilibrum price on the product market.  We find that the equilbrium price is an increasing function of the number of firms.  As the number of firms becomes large, it is always profitable for the platform to disclose the information, but this need not be efficient, because of the distortion caused by the higher prices.  When the quality of the match represents vertical shifts in the demand function, we provide conditions under which disclosure is optimal.

JEL Codes: D4

Keywords: Online advertising, privacy, information disclosure, auctions

Reference: 650

Individual View

Authors: Alexandre de Corniere

Mar 2013

Search engines enable advertisers to target consumers based on the query they have entered.  In a framework with horizontal product differentiation, imperfect product information and in which consumers incur search costs, I study a game in which advertisers have to choose a price and a set of relevant keywords.  The targeting mechanism brings about three kinds of efficiency gains, namely lower search costs, better matching, and more intense product market price-competition.  A monopolistic search engine charges advertisers too high a price, and has incentives to provide a suboptimal matching quality.  Competition among search engines eliminates the latter distortion, but exacerbates the former.

JEL Codes: D43, D83, L13, M37

Keywords: Search engine, targeted advertising, consumer search

Reference: 649

Individual View

Authors: Marta Troya-Martinez

Mar 2013

This paper uses a vertical relational contract between two firms to explore the implications of trade credit when the ability to repay is not observed by the supplier.  Trade credit limits the supplier's possibilities to punish the cashless downstream firms and termination may be used in equilibrium.  We find that the supplier always sells too little despite having enough instruments to fix the double marginalization problem.  The downward distortion in the quantity results from the need to make the contract self-enforced and/or to tackle the asymmetric information problem.  The distortion remains even as the firms become arbitrarily patient and a larger discount factor does not necessarily translate into a larger welfare.  We show that the optimal contract resembles a simple debt contract: if the fixed repayment is met, the contract continues to the next period.  Otherwise, the manufacturer asks for the highest possible repayment and terminates for a number of periods.  The toughness of the termination policy decreases with the repayment.

JEL Codes: C73, D82, L14

Keywords: Relational contracts, trade credit, imperfect monitoring

Reference: 648

Individual View

Authors: Tim Willems

Mar 2013

In an environment where voters face an inference problem on the competence level of policy makers, this paper shows how subjecting these policy makers to reelection can reduce the degree of policy experimentation to the benefit of the status quo.  This may be a reason why some notable policy experiments were implemented by non-accountable regimes (cf. Chile and China).  Whether experimentation in representative democracies is suboptimally low, depends on society's degree of risk aversion relative to that of the decision maker.  If the level of experimentation is suboptimal, taking decisions by direct democracy, or electing risk-loving politicians could improve welfare.  Interestingly, risk-lovers also seem to be overrepresented among Presidents of various countries.

JEL Codes: D72, D83

Keywords: Policy experimentation, learning, political economy, reform, status quo bias, career concerns

Reference: 647

Individual View

Authors: S.D.Smith, Martin Forster

Feb 2013

This study estimates agency's impact on the efficiency of sugar plantations on St. Vincent and the Grenadines during the early 19th century.  Using a panel data set covering the years 1814-1829, a series of stochastic frontier models are estimated to investigate whether estates employing agents were more technically efficient than those managed by the owners themselves.  Multiple imputation methods are used to deal with missing data problems.  There is no evidence, in any of the models estimated, to suggest that estates under agency were less efficient than those that were directed by their owners.  Estimates from a number of models suggest that agent-operated estates were more efficient.

Reference: Number 112

Individual View

Authors: C. Knick Harley

Feb 2013

Modern economic growth

Reference: Number 111

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