Globalization, rent protection institutions, and going alone in freeing trade

We construct a two-country North-South Product-cycle model of trade with endogenous growth and trade barriers. We remove the scale effects on growth by incorporating rent protection activities by Northern incumbents. We examine the effects of two forms of globalization - an expansion of the relative size of the South and unilateral trade liberalization by either country. We find that the location of rent protection institutions and the sectoral trade structure determine whether or not globalization raises steady-state economic growth. We demonstrate that for accelerating worldwide economic growth, contrary to conventional wisdom, unilateral Northern trade liberalization is preferable to bilateral trade liberalization.     

Contests where there is variation in the marginal productivity of effort

Summary. We provide a characterization of participants' behavior in a contest or tournament where the marginal productivity of effort varies across contestants and individual productivity is private information. We then consider the optimal design of such a contest. We first analyze contestant behavior for the usual type of contest, where the highest output wins. Abilities need not be independently distributed. We demonstrate that there is a unique symmetric equilibrium output function, that output is increasing in ability, and that marginal effort is increasing in ability, while effort decreases when the cost of effort increases. Next we consider the case where the highest output need not win, with independently distributed abilities. We analyze the contest designer's decisions in choosing contest rules optimal from her perspective. We show that the output produced, probability of winning, and contest designer's expected revenue are generally increasing in contestants' ability. We examine the relationship between the marginal cost of producing output and marginal utility per dollar of the net award for winning. Received: July 30, 1998; revised version: August 7, 2000     

The effect of the liberalization of the Chinese stock market on returns

We examine the short-term effects of the liberalization of the Chinese stock market on returns. We find a positive and significant abnormal return associated with the announcement of the liberalization of the Shanghai Stock Exchange. Exploiting features of the reform, we are able to compare stocks directly and indirectly affected by the liberalization. We find that all stock prices reflect this announcement premium equally, suggesting that the premium does not reflect an increase in expected liquidity. We further find that observed liquidity, as measured by volume and price impact, did not increase following the liberalization. We conclude that the observed premium reflects a diversification benefit for Chinese investors.     

Information technology investment and firm performance in US retail trade

We examine the relationship between investments in information technology (IT) and retail firm performance. We use untapped firm and establishment micro data from the Censuses of Retail Trade and the Assets and Expenditures Survey. We show that large firms account for most retail IT investment, employment, and establishment growth. We find evidence of a significant relationship between IT investment intensity and productivity growth.     

Economic depression in the world

We create a dataset of country experience with economic depression around the world. We define a depression episode as a period of cumulative decline in per capita output of 20% or more lasting at least four years. We find depressions are surprisingly common. We describe their incidence and onset over decades, regions, and levels of development. We identify economic, political, financial, and cultural variables that are associated with depressions. Probit analysis reveals that the probability of entering or exiting a depression is influenced by domestic and international shocks.     

A two-country dynamic Heckscher–Ohlin model with physical and human capital accumulation

We study a two-country endogenous growth model in which the long-run growth is propelled by the accumulation of physical and human capital. We show that in the integrated world economy, there exists a unique and locally saddlepoint stable balanced growth equilibrium. We also show that the incorporation of adjustment costs in the process of human capital accumulation leads to a lower long-run growth rate. We then show that, in the 2-country world economy with international trade, balanced growth is possible. Finally, we present a dynamic Heckscher–Ohlin theorem concerning the pattern of international trade. We appreciate the constructive comments from an anonymous referee which have improved this paper significantly. We acknowledge also with gratitude the valuable comments of Hideyuki Adachi, Kosuke Aoki, Daniel Bernhofen, Eric Bond, Koichi Futagami, Ronald Jones, Tamotsu Nakamura and Raymond Riezman on earlier versions. We appreciate also the beneficial comments from the participants of the GEP conference on New Directions in International Trade Theory held in the University of Nottingham and of the Adachi OB Workshop in Kobe University.     

Minimum cost spanning tree problems with groups

We study minimum cost spanning tree problems with groups. We assume that agents are located in different villages, cities, etc. The groups are the agents of the same village. We introduce a rule for dividing the cost of connecting all agents to the source among the agents taking into account the group structure. We characterize this rule with several desirable properties. We prove that this rule coincides with the Owen value of the TU game associated with the irreducible matrix.     

Confidence in Keynes and Hayek: Reply to Burczak

We agree with Burczak's identification of the crucial issues. We disagree with his interpretation of them. We expand our defense of the claim that Keynes was a rationalist. We introduce the "horizon principle" to critize Keynes' dichotomy between short-term and long-term expectations. We question the statistical simile guiding some Post Keynesian dsiscussions of uncertainty. We point to the role of evolution in shaping conventions that fit the economic environment in a world with novel events. We think the evidence favors our view over Burczak's. Finally, we put in a plea for framing the issues in a way that facilitates empirical testing.     

Evidence disclosure and verifiability

We explore the notion of “verifiability” by analyzing a simple model of evidence production in contractual relationships with complete information. We characterize implementability in terms of the existence and form of “hard evidence.” We provide results on maximal and minimal evidence production that are, respectively, necessary and sufficient for implementation. We briefly discuss the relevance of our results to actual legal institutions.     

The design of monetary and fiscal policy: A global perspective

We study the emergence of multiple equilibria in models with capital and bonds under various monetary and fiscal policies. We show that the presence of capital is indeed another independent source of local and global multiplicities, even under active policies that yield local determinacy. We also show how a very similar mechanism generates multiplicities in models with bonds and distortionary taxation. We then explore the design of monetary policies that avoid multiple equilibria. We show that interest rate policies that respond to the output gap, while potentially a source of significant inefficiencies, may be effective in preventing multiple equilibria and costly oscillatory equilibrium dynamics.     

Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts

We compare the characteristics of real-world financial contracts to their counterparts in financial contracting theory. We do so by studying the actual contracts between venture capitalists (VCs) and entrepreneurs. The distinguishing characteristic of VC financings is that they allow VCs to separately allocate cash flow rights, board rights, voting rights, liquidation rights, and other control rights. We describe and measure these rights. We then interpret our results in relation to existing financial contracting theories. We also describe the interrelation and the evolution across financing rounds of the different rights.     

Police-Monitored Cameras and Crime*

We study the effects of police monitoring on crime. We exploit detailed information on the location and date of installation of police-monitored surveillance cameras, coupled with data at the street-segment level on all reported crimes in the city of Montevideo, Uruguay. We find that the introduction of police-monitored surveillance cameras reduces crime by about 20 percent in monitored areas relative to a pure control group located outside the city. We also explore potential displacement effects, and we do not find evidence of such effects.     

Mixed Duopoly with Product Differentiation: Sequential Choice of Location

We investigate the sequential choice of location in a mixed duopoly, where a welfare–maximising public firm competes against a profit–maximising private firm. We examine the desirable role of the public firm in a mixed market. We also consider the effect of price regulation. We find that the public firm should become the follower (leader) if a price regulation is (is not) imposed. We also find that neither price regulation nor privatisation of the public firm improves welfare.     

Imperfect public choice

We model imperfect governments with public choices that are sequential, myopic and not free of error. We first use this framework to explore governmental incremental budgeting. We argue that a model of bounded rationality is required to capture the empirical reality of incremental budgeting. We then provide a model that integrates bounds errors and systematic errors. We argue that the empirical evidence is that bounds errors and systematic errors are inextricably intertwined—some level of bounded rationality is required for systematic errors to emerge. We use this to explore political information lobbying. A testable hypothesis is that lobbyists will focus efforts on policy-makers of low ability. We show that choosing leaders with high ability, that is Madison's wisdom to discern, is important, especially when policy decisions concern dangerous products (rifles) or dangerous environments (pandemics).     

Testing the integrability of consumer demand functions: Federal Republic of Germany, 1950–1973

The purpose of this paper is to implement a new econometric methodology for testing the theory of consumer behavior. We begin by fitting systems of indirect and direct demand functions without requiring integrability. We then impose restrictions on the parameters of these functions implied by integrability. We test restrictions corresponding to homogeneity, summability, symmetry, nonnegativity, and monotonicity of systems of demand functions. We formulate tests based on two-sided critical intervals for restrictions that take the form of equalities. We employ tests based on one-sided critical intervals for restrictions that take the form of inequalities. We present empirical results for tests of integrability for German time series data on personal consumption expenditures for the period 1950–1973.     

Where are we in the political economy of reform?

We review the experiences of developing countries with market-oriented reforms, using the tools of modern political economy. We impose intellectual discipline by requiring that actors behave rationally using available information and that basic economic relationships such as budget constraints be accounted for. We attempt to integrate two approaches, one based on dynamic games played by interest groups, with one that focus on limited information and the dynamics of learning.

We describe the “starting point” as the set of “old” policies and we attempt to explain the dynamics (political, economic and informational) that lead to reform (section II). We analyze strategies for reformers subject to political constraints (section Ш). We evaluate the aggregate and distributional costs of reforms, emphasizing the importance of looking at the right counterfactuals (section IV).

We conclude by pointing to the challenges ahead: the second-stage institutional reforms necessary to take off from underdevelopment.     

Capital control reconsidered: financialisation and economic policy

We consider capital controls and their impact on selected countries, providing a critique of IMF policy. We show how the warning signs of the 1970s were ignored and the consequences became apparent during the ensuing period of neoliberal hegemony. We contend that promoting increased capital mobility is counterproductive as it reduces macroeconomic ‘policy space’. We introduce a development of the international policy ‘trilemma’ in the form of a variant of the idea of the ‘quadrilemma’. We suggest that, in most cases, the key policy driving economic growth is fiscal policy but it may be that its unconstrained use (and that of monetary policy) is not possible either under fixed exchange rates or when free capital mobility exists; a nation may face a ‘demi-quadrilemma’. We contend that, in practice, a country can only adopt ‘two from four’; if it chooses to retain free use of monetary and fiscal policy, it must sacrifice both fixed exchange rates and capital mobility. We advocate the rejection of fixed exchange rates and free capital mobility allowing the retention of requisite monetary and fiscal policy space, and that a multinational approach to the capital control policy would effectively contribute to a growth and development strategy.     

Nonparametric identification of regression models containing a misclassified dichotomous regressor without instruments

We observe a dependent variable and some regressors, including a mismeasured binary regressor. We provide identification of the nonparametric regression model containing this misclassified dichotomous regressor. We obtain identification without parameterizations or instruments, by assuming the model error isn't skewed.     

ESTIMATION WITH CENSORED REGRESSORS: BASIC ISSUES*

We study issues that arise for estimation of a linear model when a regressor is censored. We discuss the efficiency losses from dropping censored observations, and illustrate the losses for bound censoring. We show that the common practice of introducing a dummy variable to “correct for” censoring does not correct bias or improve estimation. We show how censored observations generally have zero semiparametric information, and we discuss implications for estimation. We derive the likelihood function for a parametric model of mixed bound‐independent censoring, and apply that model to the estimation of wealth effects on consumption.     

Global apparel production and sweatshop labour: can raising retail prices finance living wages?

This paper provides some empirical evidence on issues raisedby the global anti-sweatshop movement. We first consider therelationship between wage and employment growth, finding noconsistent trade-off between them. We then measure the shareof labour costs in the production of garments in the US andMexico. We find that the retail price increases necessary toabsorb the costs of raising wages substantially are small, wellwithin the range of price increases that polls suggest US consumersare willing to pay. We close by considering some implicationsof these results.