Corruption,competition and democracy

This paper presents a model of the interaction between corrupt government officials and industrial firms to show that corruption is antithetical to competition. It is hypothesized that a government agent that controls access to a formal market has a self-interest in demanding a bribe payment that serves to limit the number of firms. This corrupt official will also be subject to a detection technology that is a function of the amount of the bribe payment and the number of firms that pay it. Under quite normal assumptions about the shape of the graph of the detection function, multiple equilibria can arise where one equilibrium is characterized by high corruption and low competition, and another is characterized by low corruption and high competition. Some suggestive empirical evidence is presented that supports the main hypothesis that competition and corruption are negatively related.     

Country size and the rule of law: Resuscitating Montesquieu

In this paper, we demonstrate that there is a robust negative relationship between the size of country territory and a measure of the rule of law for a large cross-section of countries. We outline a framework featuring two main reasons for this regularity; firstly that institutional quality often has the character of a local public good that is imperfectly spread across space from the core of the country to the hinterland, and secondly that a large territory usually is accompanied by valuable rents and a lack of openness that both tend to distort property rights institutions. Our empirical analysis further shows some evidence that whether the capital is centrally or peripherally located within the country matters for the average level of rule of law.     

Critical Realism as a Basis for Economic Methodology: A critique

This paper considers the claim that critical realism provides a convincing critique of mainstream economics and offers a sound methodological basis for an alternative approach. It argues that critical realism presents a tendentious definition of positivism and a characterisation of mainstream economics that is misleading, and that it misrepresents the nature and purpose of the work of Hume and modern Humean philosophers. It also argues that critical realism's bold ontological claims lack epistemological support. The paper concludes that critical realism does not provide a compelling basis for economic methodology.     

The network structure of economic output

Much of the analysis of economic growth has focused on the study of aggregate output. Here, we deviate from this tradition and look instead at the structure of output embodied in the network connecting countries to the products that they export. We characterize this network using four structural features: the negative relationship between the diversification of a country and the average ubiquity of its exports, and the non-normal distributions for product ubiquity, country diversification and product co-export. We model the structure of the network by assuming that products require a large number of non-tradable inputs, or capabilities, and that countries differ in the completeness of the set of capabilities they have. We solve the model assuming that the probability that a country has a capability and that a product requires a capability are constant and calibrate it to the data to find that it accounts well for all of the network features except for the heterogeneity in the distribution of country diversification. In the light of the model, this is evidence of a large heterogeneity in the distribution of capabilities across countries. Finally, we show that the model implies that the increase in diversification that is expected from the accumulation of a small number of capabilities is small for countries that have a few of them and large for those with many. This implies that the forces that help drive divergence in product diversity increase with the complexity of the global economy when capabilities travel poorly.     

Comment on the Kannai-Peleg impossibility theorem for extending orders

Recent work by Y. Kannai and B. Peleg shows that two appealing axioms for extending a linear order on a set of six or more elements to a weak order on the family of non-empty subsets of that set are mutually incompatible. This comment shows that a modest restriction of their monotonicity axiom is compatible for extension with a generalization of their other axiom provided that the linear order on the basic set is a well ordering.     

A Documentary Theory of States and Their Existence as Quasi-Abstract Entities

This article is concerned with the existence of states as a matter of fact, and it approaches that subject within the context of the ontology of social reality as a whole. It argues, first, that states do not have a place in the traditional Platonist duality of the concrete and the abstract. Second, that states belong to a third category – the quasi-abstract – that has received philosophical attention with a recently emerging theory of documentality. Documentality, derived from Austin’s theory of performative utterances, claims that documents acts can bring quasi-abstract objects, such as states into being. Third and finally, it argues that the existence of quasi-abstract states should not be rejected on the basis of the Principle of Parsimony, because geopolitical theories that recognise the existence of quasi-abstract states will have greater explanatory power than theories that deny their existence.     

Reasoning about knowledge of unawareness

Awareness has been shown to be a useful addition to standard epistemic logic. However, standard propositional logics for knowledge and awareness cannot express the fact that an agent knows that there are facts of which he is unaware without there being an explicit fact that the agent knows he is unaware of. We extend Fagin and Halpern's logic of general awareness to a logic that allows quantification over variables, so that there is a formula in the language that says “an agent explicitly knows that there exists a fact of which he is unaware.” Moreover, that formula can be true without the agent explicitly knowing that he is unaware of any particular formula. We provide a sound and complete axiomatization of the logic. Finally, we show that the validity problem for the logic is recursively enumerable, but not decidable.     

Why is free education so popular? A political economy explanation

This paper analyzes the political support for different funding regimes of education in a one‐person, one‐vote democracy. We focus the analysis on four systems that have had a preponderant presence in the political debate on education: a private system, a public system that delivers the same resources to each student (universal‐free education), a public system that intends to equalize results, and a public system that aims to maximize the output of the economy. We show that a system of universal free education is the Condorcet winner. The level of income inequality and the degree to which income distribution is skewed to the right are key factors behind this conclusion. We also show that the voting outcome of public versus private funding for education depends crucially on the type of public funding under consideration.     

Rational choice and the taxation of sin

The traditional literature on sumptuary taxation indicates that these taxes are the results of a majority of individuals imposing their moral code upon consumers of goods that are thought to be undesirable. Undoubtedly, this explanation is not trivial, and accounts for the existence of some of the present sumptuary taxes. This paper has developed a choice model of sumptuary taxes based on a wealth-maximization assumption that illustrates the possibility that an individual could approve of an excise tax on a good that he consumes.     

Foundational explorations for a normative theory of political economy

I set out an individualistic and pragmatic choice framework for a normative theory of political economy, and argue that, given pluralism with respect to individual ends, a consensus on any political or economic institution presupposes that it is perceived to serve as a public means to private ends. Concerning the crucial question of the distribution of the benefits that political and economic cooperation can make possible, I argue that the various models typically employed—those pertaining to competitive market interaction, decision making under uncertainty, bargaining theory, and social choice theory—fail to provide for a stable consensus, i.e., one that is resistant to non-compliance and renegotiation. Since, however, such instabilities are mutually disadvantageous, these approaches fail to establish how rational individuals can capture all the gains that cooperation makes possible. Appealing to a modified version of the social-psychological construction that Rawls introduces in chapter 8 ofA Theory of Justice I argue that stability is a function of a perceived sense of mutual concern. I conclude by arguing that Rawls own egalitarian/efficiency principle gives natural expression to such a concern, and thus can serve as the object of a stable consensus.     

Purchasing power parity over two centuries: trends and nonlinearity

In two recent contributions Lothian and Taylor, and Cuddington and Liang, produced empirical evidence that annual data for the dollar-sterling real exchange rate spanning two centuries exhibited a non-linear deterministic trend. This trend could be proxying Harrod-Balassa-Samuelson effects. Lothian and Taylor showed that a linear stationary autoregressive mode, which embodied a cubic trend, implied much faster mean reversion of the real exchange rate to shocks than a model that excluded the trend. This article shows that both non-linearity and a deterministic trend can be allowed for in a theoretically appealing manner and that the fitted models provide a parsimonious explanation of both the dollar-sterling and franc-sterling real exchange rates over the two centuries of data. Generalized impulse response function analysis of the models demonstrates that the speed of adjustment to shocks can be even faster when trends are considered.     

Local Import Competition in a Lumpy Country

This paper examines the effects of a fall in the price of an imported good in a region of a country that is specialized in producing that good. The context is a “lumpy country” model in which factors are unable to move between locations, although in this case I assume that only labor is immobile, and that the other factor, capital, is perfectly mobile between regions. With mobile capital, the lumpy-country equilibrium can be anywhere in the factor-price equalization set, but my focus is on a region that initially produces only one good, on the border of that set. When the price of that good falls due to import competition, it would be possible for both factors to reallocate partially into production of the other good, but I assume instead that some capital simply leaves the region, so that it continues to produce only the same good that it did before. The result of this is a fall in the real wage of labor, just as under Stolper-Samuelson assumptions. I then look at production also of a non-traded good, and find that the same import competition that cheapened the traded good also cheapens the nontraded good. The result is that the region shrinks, losing capital and producing less of both goods unless the substitution in favor of the nontraded good expands its consumption out of a smaller income.     

Irreversibility,mean reversion,and investment timing

This paper examines the effect of irreversibility on investment under mean reversion. We develop a continuous-time model wherein a risk-neutral firm is endowed with a perpetual option to invest in a project at any time by incurring a fixed investment cost at that instant. The project, once undertaken, generates a stream of cash flows that are governed by a mean-reverting stochastic process. The firm is then allowed to liquidate its project at any time to partially recover the fixed investment cost. The recovery rate of the fixed investment cost inversely gauges the degree of irreversibility of investment. Using a real options approach, we derive an analytical solution to the value of the firm that is analogous with an American compound option. We show that greater irreversibility of investment induces the firm to raise its investment trigger, thereby deferring the undertaking of the project. We further show that greater irreversibility of investment has a detrimental effect that makes the firm less valuable.     

Evidence for the ineffectiveness of debt rescheduling as a policy instrument

Where an economy cannot meet its external debt service obligations, it is forced to appeal to creditors for rescheduling of the debt. As such, rescheduling is evidence of a country's incapacity to carry a debt burden. This article explores factors that explain the probability of a country requiring debt rescheduling in a panel framework. The current literature is extended by modelling a dynamic random effects panel probit, in order to identify a presence of state dependence after controlling for country heterogeneity. We find clear evidence of state dependence when a 2-year lag of the dependent variable is allowed for, suggesting that overall, the fact that a country has experienced a rescheduling arrangement in the past does indeed make them more likely to experience further rescheduling. The article stresses that in order to draw the appropriate policy conclusions from this finding, one must understand that the debt rescheduling variable is itself a policy response variable. The fact that further rescheduling is often required within 2 years of a previous action suggests that rescheduling as it took place in the 1980s and 1990s was an inadequate response that often did little to help countries move beyond their current debt crisis.     

Versioning of information goods under the threat of piracy

The present study investigates the effects of piracy on the quality decisions of a firm that produces two versions of an information good: that is, one version for a consumer with a high willingness to pay and a second version for a consumer with a low willingness to pay. On the assumption that there is no quality difference between the original and the illegal copy and that the cost of the copy is constant across users, we show that the presence of piracy induces the firm to choose a lower level of quality of the former and a higher level of quality of the latter relative to decisions made in the absence of piracy. We also discuss policy implications concerning the socially optimal level of copyright protection.     

Separating the Wheat from the Chaff: FMS, Flexibility and Socio-organizational Constraints

In contrast to arguments that flexible manufacturing systems (FMS) are highly versatile configurations that are only prevented from machining a wide range of parts by extrinsic constraints, this article contends that FMS are a genre of configurations that combine flexibility and intrinsic constraints in a variety of permutations, depending on a user's intended objectives. Empirical evidence is used to identify the factors that shape the levels of constraint in particular FMS and to identify instances where intrinsic constraints impede performance. Suggestions are made for initiatives to facilitate the continued use of FMS with the highest levels of intrinsic constraints that have hitherto hindered performance when the FMS users' manufacturing needs changed. Occupational structures that promote a polarization between staff with engineering knowledge and those responsible for defining general strategic objectives are suggested as a potential obstacle to such initiatives.     

High school experiences,the gender wage gap,and the selection of occupation

Using within-high-school variation and controlling for a measure of cognitive ability, this article finds that high-school leadership experiences explain a significant portion of the residual gender wage gap and selection into management occupations. Our results imply that high-school leadership could build non-cognitive, productive skills that are rewarded years later in the labour market and that explain a portion of the systematic difference in pay between men and women. Alternatively, high-school leadership could be a proxy variable for personality characteristics that differ between men and women and that drive higher pay and becoming a manager. Because high-school leadership experiences are exogenous to direct labour market experiences, our results leave less room for direct labour market discrimination as a driver of the gender wage gap and occupation selection.     

INFLATION TARGETERS IN PRACTICE: A LUCKY LOT?

Some observers have attributed the success of inflation targeters in reducing inflation to the global disinflation of the 1990s. As a result, inflation targeting countries have been considered to be a lucky lot. One key policyimplication of that is that if the international environment becomes again hostile to low inflation in the future, inflation targeting will prove to have been a mere fad. This article views inflation targeting not just as a rule but as a framework for the conduct of monetary policy, and it argues that currently available analyses of the experience of inflation targeting countries have serious weaknesses. One weakness is that those studies have not taken into account that regime changes may alter the quantitative and qualitative interaction among small, open economies and the rest of the world. Another weakness is that those studies have not recognized that the extraction of common trends and cycles is contingent on the nature of the monetary policy regime. It is likely that inflation targeting frameworks may imply a new beneficial trend in monetary policy making. This suggests that if the international environment becomes again hostile to low inflation in the future, an inflation targeting framework may become a viable alternative to a central bank that remains committed to price stability.     

Gaus,Hayek, and the place of civil religion in a free society

In The Order of Public Reason, Gerald Gaus uses Hayekian insights to give a contractarian justification for the specific social rules the rules that comprise the social order of a free people. But in doing so, Gaus inadvertently endorses a kind of skepticism about our ability to justify the institutions that comprise our social order as a whole. The disadvantage of a political theory so pervasively skeptical is that, while contractors can arrive at a series of specific solutions to their social problems, they have no way to assure themselves that their moral nature and their moral practices as a whole are sufficiently sound that the rules they endorse are genuinely morally binding. I argue that this problem can be solved in political practice through the adoption of a civil religion. Civil religions provide narratives and social practices that assure members of free orders that their regimes are good or justified on the whole. In this way, we can introduce the idea of civil religion into contractarian political theory as a social technology for sustaining a free social order.     

Policy Rules for Exploitation of Renewable Resources: A Macroeconomic Perspective

A fundamental problem for an economy based on a common property resource is the absence of a market to trade the resource. This implies that private costs will be below social costs. This paper investigates possible government interventions that correct for such distortions in a neoclassical growth model with a production externality in harvesting. The model predicts that the welfare of the representative household increases considerably when a Piguovian tax is implemented. The policy that replicates the command optimum is highly complex and changes over time. On the other hand, a large share of the maximum welfare increase is internalized by introducing a constant quantity tax, suggesting that the potential of such policies is high.