2007 Seminars

8 February

Douglas A Irwin, Dartmouth College, New Hampshire, USA

A Trade Restrictiveness Index for the United States

1 March

John Kennan

The Effect of Expected Income on Individual Migration (joint work with James R. Walker)

The paper develops a tractable econometric model of optimal migration, focusing on expected income as the main economic influence on migration. The model improves on previous work in two respects: it covers optimal sequences of location decisions (rather than a single once-for-all choice), and it allows for many alternative location choices. The model is estimated using panel data from the NLSY on white males with a high school education. Our main conclusion is that interstate migration decisions are influenced to a substantial extent by income prospects. The results suggest that the link between income and migration decisions is driven both by geographic differences in mean wages and by a tendency to move in search of a better locational match when the income realization in the current location is unfavorable.

8 March

Alessandro Cigno, Universita di Firenze and Visiting Academic

Scholarships or Student Loans? The Analytics of University Student Support

13 March

Mamoru Kaneko, University of Tsukuba and Visiting Academic

Small and Partial Views derived from Limited Experiences (with Jeff Kline)

22 March

Jeffrey Kline, Bond University

Lost in translation: honest misunderstandings and ex post disputes

We give a formal treatment of optimal risk sharing contracts in the face of ambiguity. The central idea is that boundedly rational individuals do not have access to a language su?ciently rich to describe all possible states of nature. The ambiguity in a contract arises from contractual clauses that are interpreted by the parties in different ways. The cost of ambiguity is represented in terms of dispute costs. Taking the potential for dispute into account, we find that risk averse agents may forgo potential gains from risk sharing and choose in complete contracts instead.

29 March

Holger Sieg, Carnegie-Mellon University, USA

A Flexible Approach to Estimating Production Functions When Output Prices and Quantities are Unobserved

If prices differ for the same good, the value of output is not necessarily a good measure of the quantity of output. Estimation of production functions is challenging if quantities and prices of output are not separately observed by the econometrician. This paper provides a new flexible approach for estimating production functions which treats quantity and prices for output as latent variables. To illustrate the usefulness of the techniques we consider two applications. The first application focuses on new housing construction. The empirical analysis is based on a comprehensive database of recently built properties in Allegheny County, Pennsylvania. The second application focuses on the car repair service industry and is based on a unique survey conducted by the leading magazine that covers this industry. We find that the new methods proposed in this paper work well in these applications and provide reasonable estimates for the underlying production functions.

5 April

Robert Veszteg, Universidad de Navarra

Minority vs. Majority: An Experimental Study of Standardized Bids

Due to its simplicity the plurality voting system is frequently used to choose a common representative or project. Nevertheless it may fail to provide a socially efficient decision as a majority can outvote any minority even if the majority?s gain does not compensate the loss suffered by the minority. In this paper we propose and study a simple voting rule that allows voters to reveal more information about their preferences over the candidates. According to the standardized bids system voters report a bid for all the available projects. Standardization ensures the existence of equilibrium, and delivers incentives to overcome the problem of positive and negative exaggeration. Our experimental results show that the standardized bids system performed well in the laboratory as it chose the efficient project in almost three quarters of the cases, and induced truthful reports of project rankings in approximately 90% of the cases. For a reference, we also present experimental results for the plurality voting system.

17 April

Volker Böhm, Bielefeld University, Germany

Risk, Factor Substitution, and Asset Market Integration

This paper investigates the effects of asset market integration on the inequality of nations. The standard OLG economy with a neoclassical technology is extended to include a random exogenous technology (Lucas' tree) whose ownership can be traded in the form of paper assets. A world with two such economies is considered which differ only in their initial capital stocks. If asset demand is sufficiently inelastic, the poor country may spend more income in purchasing paper assets than the rich country. In this case, an integration of asset markets alone can prevent capital stocks in the two countries from converging to the same level in the long run, i. e. symmetry breaking occurs. However, if capital and labor are highly substitutable, capital converges to a symmetric steady state.

19 April

Elliott Fan, Australian National University

Health Status, Wealth, and Portfolio Choice: Causality or Heterogeneity?

This paper explores the causal links between health and household assets holding and portfolio choices, using a unique longitudinal data set to control for unobserved individual characteristics that may drive the correlations. Our analysis compares the estimates from panel-data methods and the OLS results. The OLS results first present a strong cross-sectional correlation between health and various types of assets, as well as between health and risky assets share. These correlations are highly robust to different health measures and remain evident when we instead use lagged health status. In contrast, after individual heterogeneity is controlled for, the health effect virtually disappears for all asset classes, highlighting the dominating role of heterogeneity on the cross-sectional health-wealth nexus. The impact of heterogeneity on the health-portfolio correlation, however, is relatively limited, as the correlation remains strong in the fixed-effects model, at least for two health indexes used in the analyses. Finally, further examinations suggest that our results cannot be reconciled by measurement errors - a common threat to strategies that compares the OLS method and the fixed-effects method.

26 April

Dan Friedman, University of California, Santa Cruz

Cheating in Markets: A Laboratory Experiment (co authors A Cassar, P H Schneider).

1 May

James Mirrlees, University of Cambridge

Contracts with Satisficers

3 May

Ian Walker, University of Warwick

Do Dads matter? Or is it just their money that matters? Unpicking the effects of separation on educational outcomes.

The widely held view that separation has adverse effects on children has been the basis of important policy interventions. While a small number of analyses have been concerned with selection into divorce, no studies have attempted to separate out the effects of one parent (mostly the father) leaving, from the effects of that parent's money leaving, on the outcomes for the child. This paper is concerned with early school leaving and educational attainment and their relationship to parental separation, and parental incomes.

While we find that parental separation has strong effects on these outcomes this result seems not to be robust to adding additional control variables. In particular, we find that when we include income our results then indicate that father's departure appears to be unimportant for early school leaving and academic achievement, while income is significant. This suggests that income may have been an important unobservable, that is correlated with separation and the outcome variables, in earlier research. Indeed, this finding also seems to be true in our instrumental variables analysis - although the effect of income is slightly weakened.

10 May

Stephan Schott, Carleton University, Canada

Regulatory Coordination and Optimal Taxation of Polluters in Imperfect Markets

The paper derives the optimal use of Pigovian taxes, ad valorem taxes and lumpsum entry fees/subsidies for polluting firms in imperfect markets, and evaluates the informational requirements and implications for regulatory independence with blockaded and endogenous entry. The literature suggests the use of either secondbest Pigovian taxes or firm-specific ad valorem taxes that also control externalities when polluting firms engage in imperfect competition. This paper shows that the combination of firm-specific ad valorem taxes and firstbest Pigovian taxes is clearly preferred to the other instruments when entry is blockaded, because they are less complex, require the least amount of information and require no regulatory coordination. Firm-specific ad valorem taxes are shown to be insufficient instruments when firms can engage in abatement activity as well as output control. We only deviate from the first-best Pigovian tax if firms behave strategically toward the regulator and marginal damages are not constant. Endogenous entry requires regulatory coordination of at least a lump-sum entry fee/subsidy that corrects for a suboptimal number of firms. We still choose the first-best Pigovian tax with entry, and an optimal ad valorem tax that is a function of price determined by the zero-profit condition and the optimal lump-sum fee/subsidy. DRAFT - PLEASE ONLY QUOTE AFTER CONSULTING WITH AUTHOR

17 May

Philip McCalman, University of California, Santa Cruz

International Trade and Industrial Dynamics

This paper develops a model of international trade and industrial evolution. Evolution is driven by the endogenous technology choices of firms, which generates a rich industrial environment that includes the possibility of a dramatic shakeout. The likelihood, magnitude and timing of this shakeout are characterized and are shown to depend not only on the size of the innovation but also on the structure of production costs. In this setting, trade liberalization is shown to reduce the likelihood of a shakeout, resulting in a more stable industrial structure. However, when shakeouts arise in global markets, the distribution of firm exits can vary widely across countries. Furthermore, conditions exist where a shakeout occurs in a closed economy but not in an open economy. Evidence is presented that is consistent with the prediction that more internationally integrated sectors are less likely to experience a shakeout.

24 May

Nilss Olekalns, University of Melbourne

Sign and Phase Asymmetry: Economic Activity and the Stock Market

In this paper, we examine how new information impacts on asset returns and economic activity, and whether this reaction is correlated with the business cycle. We develop metrics to quantify the economic and statistical significance of these interactions based upon stochastic simulations from an estimated, multivariate, nonlinear model. We find strong evidence that the sign and time of arrival of an innovation are important determinants of the short and long-run dynamic response of the system.

31 May

Hari Govindan, Department of Economics, The University of Iowa

On Forward Induction

We examine Hillas and Kohlberg's conjecture that invariance to the addition of payoff-redundant strategies implies that a backward induction outcome survives deletion of strategies that are inferior replies to all equilibria with the same outcome. That is, invariance and backward induction imply forward induction. Although it suffices in simple games to interpret backward induction as a subgame-perfect or sequential equilibrium, to obtain general theorems we use a quasi-perfect equilibrium, viz. a sequential equilibrium in strategies that are admissible continuations from each information set. Using this version of backward induction, we prove the Hillas-Kohlberg conjecture for two-player extensive-form games with perfect recall. We also prove an analogous theorem for general games by interpreting backward induction as a proper equilibrium, since a proper equilibrium is equivalent to a quasi-perfect equilibrium of each extensive form with the same normal form, provided beliefs are justified by perturbations invariant to inessential transformations of the extensive form. For a two-player game we prove that if a set of equilibria includes a proper equilibrium of every game with the same reduced normal form then it satisfies forward induction, i.e. it includes a proper equilibrium of the game after deleting strategies that are inferior replies to all equilibria in the set. We invoke slightly stronger versions of invariance and properness to handle nonlinearities in an N-player game.

28 June

Arthur Robson, Simon Fraser University Canada

Evolution of Time Preference Under Aggregate Uncertainty

10 July

William Thomson, University of Rochester

Borrowing-Proofness

19 July

Harry Paarsch, University of Iowa

Semiparametric Estimation in Models of First-Price, Sealed-Bid Auctions with Affiliation

26 July

Luis Cabral, Leonard Stern School of Business, New York University

Dynamic Price Competition with Network Effects

8 August

Roger Farmer, University of California, Los Angeles

Old-Keynesian Economics

16 August

Lyndon Moore, Victoria University, Wellington

Dividend Policies in an Unregulated Market: The London Stock Exchange 1900-05

21 August

Leon Berkelmans , Harvard University

Generally General Equilibrium: Imperfect Common Knowledge and the New Keynesian Model

The literature on imperfect information and the business cycle has enjoyed a revival of late, but models using imperfect common knowledge have proven hard to solve. This paper uses a simple technique that solves a very general class of models where agents observe endogenous variables. Inclusion of multiple shocks in the model has important effects, resulting from confusion over which aggregate shock has occurred. Among other things, this offers a new explanation for the 'price puzzle' and allows for the theoretical possibility that increased price flexibility can lead to increased monetary non-neutrality.

23 August

Thomas Lubik, Federal Reserve Richmond

The Lucas Critique and the Stability of Empirical Models

30 August

Catherine de Fontenay, University of Melbourne

Bilateral Bargaining with Externalities

6 September

Ronald Ratti, University of Missouri

Bank Concentration and Financial Constraints on Firm-Level Investment in Europe

13 September

Stanley Cho, University of NSW

Accounting for Lifecyle Wealth Accumulation: The Role of Housing Institution

This paper constructs a quantitative general equilibrium lifecycle model with uninsurable labor income to account for the differences in the pattern of wealth accumulation across two countries, Korea and the United States. The model incorporates the differences in the housing market institution in the two countries, namely, the mortgage market and the rental market. As a focal point of the model, housing plays multiple roles for households: collateral as well as a source of service flows. The results from the calibrated model can quantitatively explain some empirical findings on the profile of wealth and homeownership in the aggregate as well as over the life cycle. The mortgage market can account for around 60 percent of the differences in the aggregate homeownership ratios in the two countries as well as 23 percent of the differences in the asset portfolio composition. However, the difference in the rental market does not play large role in accounting for the differences in wealth accumulation and homeownership patterns.

18 September

Sumon Majumdar, Queen's University, Canada

The Leader as Catalyst: On Leadership and the Mechanics of Institutional Change

23 October

Ravi Kanbur, Cornell University

Globalization, Growth and Distribution: Framing the Questions

In the last two decades, across a range of countries high growth rates have reduced poverty but have been accompanied by rising inequality. This paper is motivated by this stylized fact, and by the strong distributional concerns that persist among populations and policy makers alike, despite the poverty reduction observed in official statistics where growth has been sufficiently high. This seeming disconnect frames the questions posed in this paper. Why the disconnect, and what to do about it? It is argued that official poverty statistics may be missing key elements of the ground level reality of distributional evolution, of which rising inequality may be an indirect indicator. Heterogeneity of population means that there may be significant numbers of poor losers from technical change, economic reform and global integration, even when overall measured poverty falls. In terms of actions, attention is drawn to the role of safety nets as generalized compensation mechanisms, to address the ethical and political economy dimensions of such a pattern of distributional evolution. Addressing structural inequalities is also a long term answer with payoffs in terms of equitable growth. In terms of future analysis, diminishing returns have set in to the inequality-growth cross-country regressions literature. Further work to help policy makers should focus on (i) new information to illuminate the disconnect, (ii) analysis and assessment of safety nets as generalized compensation mechanisms, and (iii) addressing specific forms of structural inequality related to assets, gender, and social groupings like caste or ethnicity.

1 November

Jan Van Ours, Tilburg University

To help unemployed find jobs quickly; experimental evidence from a mandatory activation program

8 November

Creina Day, Australian National University

15 November

Ian King, University of Melbourne

22 November

Steve Callander, Kellogg School of Management, Northwestern University

A Theory of Policy Expertise

This paper presents a new theory of policy expertise. In contrast to existing theories, I define expertise as direct knowledge of the policy process itself. Thus, expertise represents an understanding of how policies are transformed into outcomes, and does not reduce to the possession of a single piece of information (as in standard models), resonating more closely with how expertise is commonly understood. To establish the usefulness of the theory, I apply it to the well-studied problem of delegation and show that it provides a solution to the commitment problem of legislative-bureaucratic policy making. The theory also provides a measure of issue complexity, and predicts that only complex issues are delegated, consistent with empirical observation. The theory also opens up many further questions and applications, several of which are considered here.

13 December

Rob Fairlie, University of California, Santa Cruz

Mexican-American Entrepreneurship