Working Papers

Authors: Roberto Bonfatti

Aug 2012

I construct a trade model of empire, and use it to interpret some of the key patterns in the history of European imperialism.  I begin from the observation that trade was a key source of wealth for the colonies, and trade restrictions a key tool of extraction for colonial powers.  But the value of this tool must be seen in relation to the value of colonial trade, and to the extent of international competition for it.  The model interprets the colonial empires that emerged in the 16th-18th century as a set of political institutions designed to appropriate the value of colonial trade to the mother country, at a time in which colonial trade was both valuable and highly competed for.  It explains the fluctuations in the fortunes of empire in the 19th and early 20th century with the rise of a clear industrial leader, Britain, and her subsequent decline.  Finally, it attributes the fall of colonial empires to a secular fall in the importance of colonial trade, relative to trade between the industrial countries.  I provide detailed historical evidence in support of these predictions.  The model also has predictions for the impact of empire-building on trade relations between the imperial powers.  These are consistent with the apparent inverse relation between European imperial expansion and globalization.

JEL Codes: F1, F5, N4

Keywords: Imperialism, Preferential trade agreements, Intra-industry trade, Hegemonic stability

Reference: 618

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Authors: Nikolay Aleksandrov, Raphael Espinoza, Lajos Gyurko

Aug 2012

We study the optimal oil extraction strategy and the value of an oil eld using a multiple real option approach. The numerical method is exible enough to solve a model with several state variables, to discuss the effect of risk aversion, and to take into account uncertainty in the size of reserves. Optimal extraction in the baseline model is found to be volatile. If the oil producer is risk averse, production is more stable, but spare capacity is much higher than what is typically observed. We show that decisions are very sensitive to expectations on the equilibrium oil price using a mean reverting model of the oil price where the equilibrium price is also a random variable. Oil production was cut during the 2008-2009 crisis, and we nd that the cut in production was larger for OPEC, for countries facing a lower discount rate, as predicted by the model, and for countries with government finances less dependent on oil revenues. However, the net present value of a country's oil reserves would be increased signi cantly (by 100 percent, in the most extreme case) if production was cut completely when prices fall below the country's threshold price. If several producers were to adopt such strategies, world oil prices would be higher but more stable.

JEL Codes: C61 ; Q30 ; Q43

Keywords: Oil production ; Real Options ; Capacity Expansion ; Equilibrium Price of Oil; OPEC

Reference: 92

Individual View

Authors: Avner Offer

Aug 2012

Western governments typically pay out some 30 percent of GDP for social purposes.  This is financed by taxation on a pay-as-you-go (PAYGO) basis.  How efficient are these transfers, and can market or other mechanisms do it better?  The problem arises since no individual stands alone.  During the life cycle there are several periods of unavoidable dependency, in which there is no earning and little to bargain with: motherhood, infancy, childhood, education, illness, disability, unemployment, old age.  The problem is how to transfer resources from 'producers' to 'dependants' over the life cycle.  The market solution is for individuals to accumulate financial assets and to transfer them over the life cycle by means of long-term contracts with financial intermediaries.

Reference: 103

Individual View

Authors: Avner Offer

Aug 2012

Bad ethics can make for bad economic outcome.  Bad ethics are defined hedonically as the infliction of pain on others for private advantage.  The infliction of pain is often justified by 'Just World Theories', which state that everyone gets what they deserve.  Market liberalism (and its theoretical underpinning in neoclassical economics) is one theory of this kind.  As an example, the micro and macro underperformance of the American health system c. 1970-2010 is explained in terms of the shift in policy norms from the fiduciary norm "first do no harm" to the neo-liberal market norm of "let the buyer beware" (caveat emptor) since the 1970s.

Reference: 102

Individual View

Authors: Avner Offer

Aug 2012

Adam Smith rejected Mandeville's invisible-hand doctrine of 'private vices, public benefits'.  In The Theory of Moral Sentiments his model of the 'impartial spectator' is driven not by sympathy for other people, but by their approbation.  Approbation needs to be authenticated, and in Smith's model authentication relies on innate virtue, which is unrealistic.  An alternative model of 'regard' is applied, which makes use of signalling and is more pragmatic.  Modern versions of the invisible hand in rational choice theory and neo-liberalism are shown to be radical departures from the ethical legacy of Enlightenment and utilitarian economics, and are inconsistent with Adam Smith's own position.

Reference: 101

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Authors: Kevin Hjortshøj O'Rourke, Agustin S. Benetrix Jeffrey G. Williamson

Jul 2012

This paper documents industrial output growth around the poor periphery (Latin America, the European periphery, the Middle East and North Africa, Asia, and sub-Saharan Africa) between 1870 and 2007.  We provide answers to the following questions.  When and where did rapid industrial growth begin in the periphery?  When and where did peripheral growth rates exceed those in the industrial core?  When was the high-point of peripheral industrial growth?  When and where did it become widespread?  When was the high-point of peripheral convergence on the core?  How variable was the growth experience between countries?  And how persistent was peripheral industrial growth?

JEL Codes: F1, N7, O2

Keywords: Third World industrialization, History

Reference: 617

Individual View

Authors: Donna Harris, Klaus Abbink

Jul 2012

We study in-group favouritism and out-group discrimination in a multiplayer dictator game.  An allocator divides a large sum of money among three groups of 20 recipients each and Self.  Allocations to groups are divided equally among the group members.  The three groups are supporters of the two rival political movements in Thailand (“yellow shirts” versus “red shirts”) and political neutral subjects.  A control treatment with artificial groups (“group A”, “group B”, and “non-affiliated”) is also conducted.  We find that allocators strongly favour their own group and discriminate against supporters of the rival party.  Despite a strong anti-corruption stance of the yellow-shirt movement members of both political groups are indistinguishable in both favouritism and discrimination.  Allocators tend to be rather selfish: on average 45% of the pie is given to Self, despite the large number of recipients.

JEL Codes: D70, D71, D73, D74

Keywords: In-group favouritism, Out-group discrimination, Corruption, In-group, Out-group, Political conflict, Experimental design

Reference: 616

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Authors: Rozana Himaz, Harsha Aturupane

Jul 2012

This study employs the pseudo-panel approach to estimate returns to education among income earners in Sri Lanka.  Pseudo-panel data are constructed from nine repreated cross-sections of Sri Lanka

JEL Codes: I00, I20, I25, C23

Keywords: Sri Lanka, Education, Returns, Pseudo panels, Synthetic cohorts

Reference: 615

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Authors: Mark Henstridge, John Page

Jun 2012

This paper seeks to de-mystify the opportunities and challenges of oil in Uganda: not much oil revenue will arrive for at least a decade; it will then climb to 3-9 percent of GDP for about 20 years. It will not transform Uganda, but can be beneficial or disruptive. To manage a modest boom, policy needs to focus on growth and competitiveness now. Careful choices on spending and the quality of public investment are essential. Institutional and regulatory reform, infrastructure, skills and specialist knowledge can strengthen the investment climate. A strategy for economic diversification focused on agriculture, ‘investing to invest’, and connecting to the coast is also needed.

Reference: 90

Individual View

Authors: Debopam Bhattacharya

Jun 2012

In real-life, individuals are often assigned to binary treatments according to existing treatment protocols.  Such protocols, when designed with “taste-based” motives, would be productively inefficient in that the expected returns to treatment for the marginal treatment recipient would vary across covariates and be larger for discriminated groups.  This cannot be directly tested if assignment is based on more covariates than the researcher observes, because then the marginal treatment recipient is not identified.  We present (i) a partial identification approach to detecting such inefficiency which is robust to selection on unobservables and (ii) a novel way of point-identifying the necessary counterfactual distributions by combining observational datasets with experimental estimates.  These methods can also be used to (partially) infer risk-preferences which may rationalize the observed treatment allocations.  Specifically, existing healthcare datasets can be analzyed with the proposed tools to test the allocational efficiency of medical treatments.  Using our methodology on data from the Coronary Artery Surgery Study in the US, which combined experimental and observational components, we find that after controlling for age, smokers in the observational dataset had to overcome a higher threshold of expected survival relative to non-smokers in order to qualify for surgery.  Our methods are applicable when individuals cannot alter their potential treatment outcomes in response to the treatment regime, unlike in the case of law enforcement.

JEL Codes: C31, J15, I12

Keywords: Efficient resource allocation, Taste-based discrimination, Healthcare, Treatment assignment, Data combination, Partial identification

Reference: 609

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Authors: Heinrich H. Nax, Bary S.R. Pradelski

Jun 2012

We study evolutionary dynamics in assignment games where many agents interact anonymously at virtually no cost.  The process is decentralized, very little information is available and trade takes place at many different prices simultaneously.  We propose a completely uncoupled learning process that selects a subset of the core of the game with a natural equity interpretation.  This happens even though agents have no knowledge of other agents' strategies, payoffs, or the structure of the game, and there is no central authority with such knowledge either.  In our model, agents randomly encounter other agents, make bids and offers for potential partnerships and match if the partnerships are profitable.  Equity is favored by our dynamics beause it is more stable, not because of any ex ante fairness criterion.

JEL Codes: C71, C73, C78, D83

Keywords: assignment games, cooperative games, core, equity, evolutionary game theory, learning, matching markets, stochastic stability

Reference: 607

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Authors: Debopam Bhattacharya,Shin Kanaya,Margaret Stevens

Jun 2012

High-profile universities often face public criticism for undermining academic merit and promoting social elitism/engineering through their admissions-process. In this paper, we develop an empirical test for whether access to selective universities is meritocratic. We assume that students who are better-qualified on standard observable indicators would on average, but not necessarily with certainty, appear academically stronger to admission-tutors based on characteristics observable to them but not us. This assumption can be used to reveal information about the sign and magnitude of differences in admission standards across demographic groups which are robust to omitted characteristics. Using admissions-data from a selective British university, we provide empirical support for our identifying assumptions and then apply our analysis to show that males and private school applicants face higher admission-standards, although application success-rates are equal across gender and school-type. Our methods are potentially useful for testing outcome-based fairness of other binary treatment decisions, such as mortgage approval, where eventual outcomes are observed for those who were treated.

JEL Codes: C13, C14, I20, J15

Keywords: University admissions, affirmative action, economic efficiency, marginal admit, unobserved heterogeneity, threshold-crossing model, conditional stochastic dominance, partial identification

Reference: 608

Individual View

Authors: Ronan C. Lyons, Marie Hyland, Sean Lyonso

Jun 2012

Following the transposition of the EU Energy Performance of Buildings Directive into Irish law, all properties offered for sale or to let in Ireland are obliged to have an energy efficiency rating.  This paper analyses the effect of energy efficiency ratings on the sale and rental prices of properties in the Republic of Ireland.  Using the Heckman selection technique we model the decision to advertise the energy efficiency rating of a property and the effect of energy efficiency ratings on property values.  Our results show that energy efficiency has a positive effect on both the sales and rental prices of properties, and that the effect is significantly stronger in the sales segment of the property market.  We also analyse the effect of energy efficiency across different market conditions and we find that the effect of the energy rating is stronger where market conditions are worse.

JEL Codes: Q51, R31, Q58

Keywords: Domestic building energy ratings, Hedonic valuation, Ireland

Reference: 614

Individual View

Authors: John Feddersen

Jun 2012

The literature on carbon leakage has not yet benefitted from many of the insights of the ‘New Economic Geography

JEL Codes: F18, Q56

Keywords: Carbon leakage, Environmental regulation, International environmental agreements, International trade, Pollution haven

Reference: 613

Individual View

Authors: Torfinn Harding,Beata Javorcik

Jun 2012

Information asymmetries constitute a significant obstacle to capital flows across international borders, and in particular to flows of foreign investment (FDI) to emerging markets.  Many governments aim to reduce information barriers by emerging in investment promotion activities.  Despite potentially large benefits of FDI and popularity of investment promotion intermediaries (IPIs), relatively little is known about their effectiveness.  This study uses data collected through the Global Investment Promotion Benchmarking (GIPB) exercise to examine whether higher quality of IPI services translates into higher FDI inflows.  The analysis, based on information on 156 countries, suggests that countries with IPIs able to handle investor inquiries in a more professional manner and IPIs possessing higher quality Web sites tend to attract greater volume of FDI.  These results are robust to using sector-level data and instrumental variable approach.

JEL Codes: F21, F23, H11

Keywords: Foreign direct investment, Investment promotion, Emerging markets, Information asymmetries, Red tape, Performance of public institutions

Reference: 612

Individual View

Authors: Neil Shephard, Arnaud Doucet

Jun 2012

Likelihood based estimation of the parameters of state space models can be carried out via a particle filter.  In this paper we show how to make valid inference on such parameters when the model is incorrect.  In particular we develop a simulation strategy for computing sandwich covariance matrices which can be used for asymptotic likelihood based inference.  These methods are illustrated on some simulated data.

JEL Codes: C11, C15, C53, C58

Keywords: Quasi-likelihood, Particle filter, Sandwich matrix, Sequential Monte Carlo

Reference: 606

Individual View

Authors: Andrew Mell

Jun 2012

Internet commerce has made it easier to compare prices and shop online.  However, it has also exposed consumers to a new kind of crime in the form of the electronic theft of payment details.  However the skills required to successfully intercept payment data differ from the skills required to use that information for one

JEL Codes: K42, D02, D82, Z18

Keywords: Reputation, Illicit trade, Illegal behavior and the enforement of law

Reference: 611

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Authors: Neil Shephard, Ole E. Barndorff-Nielsen

Jun 2012

This is a draft Chapter from a book by the authors on “Levy Driven Volatility Models”.

JEL Codes: C22, C63, G10

Reference: 610

Individual View

May 2012

On the occasion of the hundredth issue of the Discussion Papers, this special number contains reflections on the past and future of economic and social history at Oxford and in general.  Five scholars, who have been associated with the subject at Oxford, contribute with personal reflections on this topic.  Two introductory studies survey the record of the Discussion Papers and the history of the discipline at Oxford, focussing on the organisation of the teaching at the undergraduate and graduate levels and on the research lineages initiated by the faculty in post since the war.

Reference: 100

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Authors: Rick Van der Ploeg, Ton S. van den Bremer

May 2012

Three funds are necessary to manage an oil windfall: intergenerational, liquidity and investment funds. The optimal liquidity fund is bigger if the windfall lasts longer and oil price volatility, prudence and the GDP share of oil rents are high and productivity growth is low. We apply our theory to the windfalls of Norway, Iraq and Ghana. The optimal size of Ghana’s liquidity fund is tiny even with high prudence. Norway’s liquidity fund is bigger than Ghana’s. Iraq’s liquidity fund is colossal relative to its intergenerational fund. Only with capital scarcity, part of the windfall should be used for investing to invest. We illustrate how this can speed up the process of development in Ghana despite domestic absorption constraints.

JEL Codes: E21, E22, D91, Q32

Keywords: oil price volatility, sovereign wealth, intergenerational fund, liquidity fund, precautionary buffers, public investment, inefficiency, economic development, Norway, Iraq, Ghana

Reference: 85

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Authors: Rabah Arezki, Mustapha K. Nabli

May 2012

This paper takes stock of the economic performance of resource rich countries in the Middle East and North Africa (MENA) over the past forty years. While those countries have maintained high levels of income per capita, they have performed poorly when going beyond the assessment based on standard income level measures. Resource rich countries in MENA have experienced relatively low and non inclusive economic growth as well as high levels of macroeconomic volatility. Important improvements in health and education have taken place but the quality of the provision of public goods and services remains an important source of concerns. Looking forward we argue that the success of economic reforms in MENA rests on the ability of those countries to invest boldly in building inclusive institutions as well as high levels of human capacity in public administrations.

JEL Codes: D74, D63, F32, Q33

Keywords: Natural resources; volatility; inclusive growth; Middle East and North Africa

Reference: 86

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Authors: Rick Van der Ploeg, Steven Poelhekke

May 2012

We test for pollution haven effects in outward foreign direct investment (FDI) for different sectors using a comprehensive and exhaustive dataset for outward FDI from the Netherlands, one of the most environmentally stringent countries and a major source of global FDI. Our evidence suggests that in the sectors natural resources extraction and refining, construction, retail, food processing, beverages and tobacco, and utilities, a less stringent environmental policy in the host country significantly attracts FDI. What is important for these pollution haven effects is not only regulation but also enforcement of environmental policy. In contrast to earlier results, it is not only footloose industries that display pollution haven effects, but also the traditional pollution-intensive industries. But for the sectors machines, electronics and automotive and transportation and communication a more stringent and better enforced environmental policy attracts more FDI as this may help their reputation for sustainable management and CSR. These sectors display green haven effects. These findings have important implications for the sector distribution of FDI in destination countries.

JEL Codes: F18, F23, F13, Q50

Keywords: pollution haven, green haven, FDI, environmental policy, regulation, enforcement, strategic effects, footloose industries, CSR

Reference: 87

Individual View

Africa is well endowed with potential for hydro and solar power, but its other endowments – shortages of capital, skills, and governance capacity – make most of the green options relatively expensive, while its abundance of hydro-carbons makes fossil fuels relatively cheap. Current power shortages make expansion of power capacity a priority. Africa’s endowments, and the consequent scarcities and relative prices, are not immutable and can be changed to bring opportunity costs in Africa closer to those in the rest of the world. The international community can support by increasing Africa’s supply of the scarce factors of capital, skills, and governance.

JEL Codes: Q54, Q5, Q40, 055

Keywords: Africa, climate change, energy, renewable, leapfrog, latecomer

Reference: 89

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Authors: Paul Segal

May 2012

This paper analyses the e¤ect of a resource discovery on an open economy with endogenous directed technical change. Technical progress depends on entrepreneurs who produce (or adopt) technology, and endogenously choose which sector to operate in. The static e¤ect of a resource discovery is deindustrialization and a rise in non-resource factor incomes, as in standard trade theory. Dynamically, the "brain drain" of entrepreneurs into the resource sector may exacerbate the de-industrialization over time, but if the discovery is not su¢ ciently large then it leads to temporarily lower growth in non-resource factor incomes, which are lower in the long run than without the discovery. In this case non-resource owners are made worse o¤ by the discovery. Second best trade or investment policies that direct entrepreneurs away from the resource sector may be used to raise long-run non-resource income, at a cost to GDP.

JEL Codes: D33; F11; F43; O13; O31; O41; Q33

Keywords: economic growth; Dutch disease; natural resource wealth; directed technical change; distribution of income

Reference: 88

Individual View

Authors: Mark Armstrong, Yongmin Chen

May 2012

This paper investigates discount pricing, the common marketing practice whereby a price is listed as a discount from an earlier, or regular, price.  We discuss two reasons why a discounted price - as opposed to a mearly low price - can make a rational consumer more willing to purchase the item.  First, the information that the product was initially sold at a high price can indicate the product is high quality.  Second, a discounted price can signal that the product is an unusual bargain, and there is little point searching for lower prices.  We also discuss a behavioral model in which consumers have an intrinsic preference for paying a below-average price.  Here, a seller has an incentive to offer different prices to identical consumers, so that a proportion of its consumers enjoy a bargain.  We discuss in each framework when a seller has an incentive to offer false discounts, in which the reference price is exaggerated.

JEL Codes: D03, D18, D83, M3

Keywords: Reference dependence, Price discounts, Sales tactics, False advertising

Reference: 605

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