Mathematical utility theory and the representability of demand by continuous homogeneous functions

The resort to utility-theoretical issues will permit us to propose a constructive procedure for deriving a homogeneous of degree one continuous function that gives raise to a primitive demand function under suitably mild conditions. This constitutes the first self-contained and elementary proof of a necessary and sufficient condition for an integrability problem to have a solution by continuous (subjective utility) functions.The work of José C. R. Alcantud has been supported by FEDER and Ministerio de Educación y Ciencia under the Research Project SEJ2005-0304/ECON, and by Consejería de Educación (Junta de Castilla y León) under the Research Project SA098A05. Carlos R. Palmero acknowledges financial support by FEDER and Ministerio de Educación y Ciencia under the Research Project SEJ2005-08709/ECON, and by Consejería de Educación (Junta de Castilla y León) under the Research Project VA017B05.     

A market game approach to differential information economies

In this paper we recast a differential information economy as a strategic game in which players propose net trades and prices. Pure strategy Nash equilibria are strong and determine both consumption plans and commodity prices that coincide with the Walrasian Expectations equilibria of the underlying economy. The authors acknowledge support by research grants BEC2003-09067-C04-01 (Ministerio de Educación y Ciencia and FEDER), PGIDT04XIC30001PN (Xunta de Galicia) and SA070A05 (Junta de Castilla y León). JP Torres-Martínez is also grateful to CNPq-Brazil and University of Vigo for financial support. We are indebted to N.C. Yannelis for helpful comments and insights.     

An empirical investigation of the effect of borrowing constraints on Spanish consumption

Abstract. This work analyses the relevance of borrowing constraints on the intertemporal behaviour of Spanish non-durable consumption. We estimate Euler equations with cohort data extracted from the “Encuesta Continua de Presupuestos Familiares” (ECPF) for the period 1985–1993. The results are robust to the use of different estimators to eliminate fixed individual effects, to different specifications of the model, to the effect of uncertainty and to the presence of habits in consumption. Our results allow us to conclude that non-durable consumption of a considerable fraction of the Spanish population is affected by borrowing constraints. At the same time, and in accordance with similar results for other countries, we confirm that borrowing constraints are especially important for the young. The author acknowledges the grant received from the Conselleria de Cultura, Educación y Ciencia de la Generalitat Valènciana, as part of its grant's programme for stays in foreign universities and the financial support by DGICYT grants SEC99-0820 and SEC 2002-00667. The author also acknowledges the hospitality of the Department of Economics at University College London (UCL) and of the Departamento de Análisis Económico de la Universidad Nacional de Educación a Distancia. This work has been presented in the XXV Simposio de Análisis Económico, held in Bellaterra (Spain) in December 2000. Finally, the author acknowledges comments by J. E. Boscá and two anonymous referees that have contributed to improving the final version of the paper.     

Labour segregation and immigrant and native-born wage distributions in Spain: an analysis using matched employer–employee data

This article carries out an empirical examination of the origin of the differences between immigrant and native-born wage structures in the Spanish labour market. Special attention is given in the analysis to the role played by occupational and workplace segregation of immigrants. Legal immigrants from developing countries exhibit lower mean wages and a more compressed wage structure than native-born workers. By contrast, immigrants from developed countries display higher mean wages and a more dispersed wage structure. The main empirical finding is that the disparities in the wage distributions for the native-born and both groups of immigrants are largely explained by their different observed characteristics, with a particularly important influence in this context of workplace and, specially, occupational segregation. Hipólito Simón, Esteban Sanromá and Raúl Ramos wish to thank the support received from the Ministerio de Fomento and the Ministerio de Educación y Ciencia through the projects T 75/2006 (Plan Nacional de Investigación, Desarrollo e Innovación Científica), SEJ2004-05860/ECON and SEJ2005-04348/ECON, respectively. A previous version of this paper was published as an IVIE Working Paper (WP-EC 2007-03).     

Strategic complementarities and social transfers: how do PROGRESA payments impact nonbeneficiaries?

The article examines local economy effects of social transfers by focusing on food consumption and asset holdings of noneligible households in rural Mexico following the introduction of Programa de Educación, Salud y Alimentación (PROGRESA) in 1997. The quasi experimental nature of the evaluation data collected for the purposes of evaluating the impact of PROGRESA enables comparison of welfare indicators among noneligible households in treatment areas and control areas. The analysis finds that noneligible households in treatment areas show significantly higher levels of food consumption and asset holdings following the introduction of PROGRESA, compared to noneligible households in control areas. These results are interpreted to suggest that transfers in poor rural areas in Mexico enable agents to interact more strategically such that nonbeneficiaries, as well as beneficiaries, reap consumption and production advantages.     

Valuation and Management of Fishing Resources Under Price Uncertainty

The traditional expected-net-present-value methods cannot properly capture the management flexibility and strategic value aspects of a fishery, and may understate its value. Instead, this paper develops a Real Options model to conceptualize and evaluate fishery exploitation flexibility. Specifically, general models to value the opportunity to either exploit or invest in a fishery are presented. They suffice to determine not only these values, but also the optimal policy for opening, closing, delaying and setting its harvest rate. The sustainable case in which the harvest rate equals the natural net growth function is also considered. Concerning the exploitation decision, it is found that, as could be expected, the higher the resource price the higher the value of this opportunity in both models (general and sustainable). However, the resource stock affects both models differently. As to the investment opportunity, its value is always lower than the exploitation opportunity because of investment costs. Finally, numerical simulations are run in order to illustrate the nature of the solution. Sensitivity analysis concerning the influence of the tax rate, convenience yield, risk-free interest rate and price volatility on the value of the fishery is also reported. Earlier versions of this paper have benefited from conference participants at the Young Economists Conference 2000 (Oxford University), Tenth Biennial Conference of the International Institute of Fisheries Economics and Trade (Oregon State University), XXV Simposio de Análisis Económico (Universidad Autónoma de Barcelona, Spain) and Seminar at the Dpt. Fundamentos del Análisis Económico (Universidad del País Vasco, Spain). We especially thank Prof. Ian Bateman and two anonymous referees whose insightful comments have enabled us to eliminate several errors and to improve the presentation. Murillas gratefully acknowledges doctoral fellowship from Ministerio de Educación y Ciencia (AP96), and financial support from the Xunta de Galicia (PGIDT01PXI30004PR) and from the Ministerio de Ciencia y Teconología (SEC 2001-3700). The usual disclaimer applies.     

The optimality of the Common Fisheries Policy: the Northern Stock of Hake

We evaluate the management of the Northern Stock of Hake during 1986-2001. A stochastic bioeconomic model is calibrated to match the main features of this fishing ground. We show how catches, biomass stock and profits would have been if the optimal Common Fisheries Policy (CFP) consistent with the target biomass implied by the Fischler's Recovery Plan had been implemented. The main findings are: i) an optimal CFP would have generated profits of more than 667 millions euros, ii) if side-payments are allowed (implemented by ITQ's, for example) these profits increase 26%. JEL Classification: Q22, Q28 We thank two anonymous referees whose comments and suggestions have substantially improved the paper, and to Javier Pereiro from Instituto Oceanográfico de Vigo for making available part of data available to us. Financial support from the Instituto de Estudios Económicos de Galicia, Pedro Barrie de la Maza, FEDER, Ministerio de Ciencia y Tecnología, SEC2002-4318-C02-01 (José María Da-Rocha), CICYT 1393-12254/2000 and SEC2003-02510/ECO (María José Gutiérrez), Fundación BBVA 1/BBVA 00044.321-15466/2002 (María José Gutiérrez) and from Universidad del País Vasco, 9/UPV00035.321-13511/2001 (María José Gutiérrez) is gratefully acknowledged.     

Optimal accident compensation schemes

This paper considers the way in which accident compensation is offered as insurance against personal injury due to accidents. We begin by setting up a simple microeconomic model in which accident compensation schemes can be studied. Using this model, the accident compensation scheme that maximizes the expected utility of the insured for a given expected outlay of the scheme (that is, for a budget constraint for the insurer) is characterized. We show that, in order for the optimal schedule of indemnities to be increasing (more severe accidents lead to greater compensation) then, contrary to what has been assumed in the literature, the marginal utility of wealth must be decreasing in health. In particular, if the marginal utility of wealth is non-decreasing in health, then an optimal indemnity schedule cannot provide full compensation, in the sense that utility in each state is a constant. Financial support from Secretaría de Estado de Universidades e Investigación del Ministerio de Educación y Ciencia is gratefully acknowledged by F. J. Vázquez.     

The Consumption/Wealth and Book/Market Ratios in a Dynamic Asset Pricing Contex

This paper addresses new insights into the predictability of financial returns. In particular, we analyze two aspects of the controversial forecasting literature. On the one hand, we demonstrate a positive and contemporaneous link between aggregate book/market and consumption/wealth ratios. On the other hand, we show that real estate and human capital, as the present value of all future salaries, are key components of the consumption/wealth ratio in Spain. Specifically, we find that the cointegrating residuals of consumption, asset holdings, real estate holdings, and our measure of human capital provide a better forecast of future returns than does the standard proxy of the consumption/wealth ratio. This result is important because it clarifies the importance of country-specific components of wealth for cases in which the consumption/wealth ratio is employed as an instrument in conditional asset pricing models.Belén Nieto: Financial support from the Ministerio de Ciencia y Tecnología grant SEJ2005-09372 is gratefully acknowledged.Rosa Rodríguez: Financial support from the Ministerio de Ciencia y Tecnología grant SEC2003-06457 is gratefully acknowledged.     

Corrigendum to “On randomized matching mechanisms” [Economic Theory 8(1996)377–381]

Ma (in Econ. Theory 8, 377–381, 1996) studied the random order mechanism, a matching mechanism suggested by Roth and Vande Vate (Econometrica 58, 1475–1480, 1990) for marriage markets. By means of an example he showed that the random order mechanism does not always reach all stable matchings. Although Ma's (1996) result is true, we show that the probability distribution he presented – and therefore the proof of his Claim 2 – is not correct. The mistake in the calculations by Ma (1996) is due to the fact that even though the example looks very symmetric, some of the calculations are not as “symmetric.” We thank two anonymous referees for their helpful comments. B. Klaus’s and F. Klijn’s research was supported by Ramón y Cajal contracts of the Spanish Ministerio de Ciencia y Tecnología. The work of the authors was also partially supported through the Spanish Plan Nacional I+D+I (BEC2002-02130 and SEJ2005-01690) and the Generalitat de Catalunya (SGR2005-00626 and the Barcelona Economics Program of CREA).     

Environmental regulation: choice of instruments under imperfect compliance

Compliance is an important issue in environmental regulation. We discuss some of the key elements of the problem and analyze a situation where emissions are not random and firms are risk-neutral. We study the firm’s decision on emissions and compliance when the environmental regulation is based on standards and the enforcement agency audits the firm with a certain probability. We compare total emissions when environmental regulation is based on different instruments: standards, taxes, and tradable permits. We show that when compliance is an issue, environmental taxes are superior to the other instruments, and we analyze the (static) efficiency of the solution. This paper originated from the AEE/REE presidential address for the XXX Simposio de Análisis Económico (Murcia 2005). It builds on the research project on optimal enforcement in environmental problems done in collaboration with David Pérez-Castrillo. I would like to thank David Pérez-Castrillo and Pau Olivella for their useful comments. I gratefully acknowledge the financial support from the Ministerio de Ciencia y Tecnología (BEC2003-01132) and the Generalitat de Catalunya (Barcelona Economics - CREA and 2005SGR-00836).     

Edgeworth and Walras equilibria of an arbitrage-free exchange economy

Summary. In this paper, we first give a direct proof of the existence of Edgeworth equilibria for exchange economies with consumption sets which are (possibly) unbounded below. The key assumption is that the individually rational utility set is compact. It is worth noticing that the statement of this result and its proof do not depend on the dimension or the particular structure of the commodity space. In a second part of the paper, we give conditions under which Edgeworth allocations can be decentralized by continuous prices in a finite dimensional and in an infinite dimensional setting. We then show how these results apply to some finance models.Received: 15 April 2002, Revised: 25 February 2003, JEL Classification Numbers: C62, D58, G12. Correspondence to: Monique FlorenzanoThis paper was presented at seminars of the Economic Departments of Brown University, The Johns Hopkins University, The University of Alabama, Purdue University and at the Centro de Modelamiento Matematico de la Universidad de Chile at Santiago. The paper has benefitted of the comments of these diverse audiences. Part of this work was done while the authors were visiting respectively Brown University and the Centro de Modelamiento Matematico. We thank them for their hospitality.     

Income measurement and comparisons

The purpose of this paper is to provide a way for better measuring a country's global income when official statistics fail to account for the existence of a thriving underground, or black economy. Another purpose of this research is to discuss adequate ways to perform international comparisons of income, and income per head, and to correct for depreciation. Besides the general interest of this problem, there are two more specific reasons behind this work. First, the allocation of development funds by international agencies (for example, the structural funds in the European monetary system) are conditioned on this measure. Second, the measurement of unemployment may be totally distorted by failing to account for the hidden economy. This paper has benefitted from comments by the participants at the Forty-Seventh International Atlantic Economic Conference, Vienna, Austria, March 16–23, 1999, and especially Michael Pickhardt. Financial support is acknowledged from the Dirección General de Ciencia y Tecnología, under project SEC 98-1112, and the Junta Castilla y León, under project SA 29/99. Comments by the participants at the 1997 Applied Econometrics Association conference on public deficits are also acknowledged. The authors are solely responsible for any remaining errors.     

Term structure and the estimated monetary policy rule in the Eurozone

In this paper we estimate a standard version of the New Keynesian Monetary (NKM) model augmented with term structure in order to analyze two issues. First, we analyze the effect of introducing an explicit term structure channel in the NKM model on the estimated parameter values of the model, with special emphasis on the interest rate smoothing parameter using data for the Eurozone. Second, we study the ability of the model to reproduce some stylized facts such as highly persistent dynamics, the weak comovement between economic activity and inflation, and the positive, strong comovement between interest rates observed in actual Eurozone data. The Sect. 3 implemented is a classical structural method based on the indirect inference principle. We are grateful to Eduardo Ley, two anonymous referees and seminar participants at the XXXI Simposio de Análisis Económico (Oviedo, Spain) and Bank of Spain for their useful comments. Financial support from Ministerio de Ciencia y Tecnología and Universidad del País Vasco (Spain) and Fundación Séneca through projects SEJ2004-04811/ECON, 9/UPV00035.321-13511/2001 and I02937/PHCS/05, respectively, is gratefully acknowledged. The first author also thanks Fundación Ramón Areces for financial support.     

Simultaneity between strategic variables: Production,innovation, and product differentiation

This paper aims to analyze the existence of simultaneous effects among the variables production, product differentiation, and innovation. Microeconomic data from a sample of 2,160 firms are used as a base. Empirical results show that a positive correlation exists from innovation to product differentiation, thus showing that it is in the process of production itself, through technical improvements, where product differentiation is determined. On the other hand, no positive effect exists from product differentiation to innovation, i.e., once technical improvements have been established, firms exchange the barriers to entry created by brand image for the real barriers established by innovation itself. Lastly, the importance of the firm size in explaining the other endogenous variables analyzed is confirmed. This paper has received financial support from the Valencian Institut of Economic Research (IVIE). The study was carried out within the framework of research program SEC94-1357 of the Comisón Interministerial de Ciencia y Tecnología (CICYT).     

Equilibrium with nonconvex technologies

Summary We provide an elementary proof of the existence of equilibrium in a general equilibrium model allowing for non-convex production sets. It is shown that when firms follow upper hemicontinuous and convex-valued pricing rules with bounded losses, a price vector and an allocation exist, such that all agents are in equilibrium and all markets clear.The existence result presented in this paper is a particular case of that one in Bonnisseau & Cornet (1988, Th. 2.1). In this respect our contribution consists of presenting an alternative proof which turns-out to be simpler and more intuitive.Thanks are due to Carmen Herrero and two anonymous referees for very helpful comments. Financial support from theDirection General de Investigación Cientiflca y Ténica, under project PS89–0066, is gratefully acknowledged.     

Post-earnings announcement drift: Spanish evidence

This paper analyses whether earnings announcements in the Spanish stock market are followed in subsequent months by a return drift in the same direction as the earnings surprise. Two alternative earnings surprise measures are used and they both provide strong post-earnings announcement drifts. In order to find an explanation for this anomaly we first make several unconditional adjustments, which include the CAPM, the Fama–French (J Financ Econ 33:3–56, 1993) three-factor model, a liquidity factor, controlling portfolios by size and book-to-market ratio, and controlling for the momentum effect. Second, we make a conditional analysis following two different approaches: (i) studying the relation with the business cycle and (ii) studying whether this phenomenon can be explained through a conditional version of the CAPM and the Fama-French model. None of these adjustments are able to satisfactorily capture the Spanish post-earnings announcement drift. A final analysis offers some slight evidence in favour of the limits-to-arbitrage explanation. A previous version of this paper is available in the Working Paper Series of FUNCAS (no. 221, 2005), who we thank for their collaboration in the research diffusion in Spain. We also acknowledge the financial support of the Ministerio de Ciencia y Tecnología (SEJ2005-09372/ECON), Conselleria d’Empresa, Universitat i Ciència (GV06/196) and University of Alicante (GRJ06-03). This version has benefited from interesting comments made by Gonzalo Rubio, Belén Nieto, Natividad Blasco, Renata Herrerías and Carina Sponholtz, as well as by various anonymous referees. Any remaining errors are the sole responsibility of the authors.     

Quasi-linear preferences in the macroeconomy: Indeterminacy,heterogeneity and the representative consumer

We use aggregation theory to investigate the link between one-consumer and multi-consumer economies under a quasi-linear class of preferences. Our study is carried out in the context of the neoclassical growth model. The quasi-linear preferences considered are additive in consumption and leisure and linear in leisure. We first show that in a homogeneous agents economy, the individual hours worked are not uniquely determined. We then demonstrate that the indeterminacy can be resolved by introducing heterogeneity. For example, idiosyncratic shocks to productivities or imperfect substitutability of labor restore the uniqueness of equilibrium. As a special case, our analysis includes the indivisible labor model by Hansen (1985).JEL Classification: C73, D90, E21We are grateful to Morten Ravn for his guidance. We have benefited from the comments of an anonymous referee, Jordi Caballé, Finn Kydland, Franck Portier, Michael Reiter, Xavier Sala-i-Martin, William Schworm and Andrew Scott. Any remaining errors are ours. This research was supported by the Instituto Valenciano de Investigaciones Económicas and the Ministerio de Ciencia y Tecnología de España, the Ramón y Cajal program, and BEC 2001-0535.     

Equilibrium theory with asymmetric information and infinitely many states

Radner (Econometrica 36, 31–58 1968) proved existence of a competitive equilibrium for differential information economies with finitely many states. We extend this result to economies with infinitely many states of nature. Each agent observes a public and a private signal. The publicly observed signal may take infinitely many values but, in order to get existence, we assume that private signals only take finitely many values. Actually, there is no hope to get a general existence result since Podczeck et al. (Vienna University Working Papers 2008) already proposed non-existence results. We would like to thank a referee and the Associate Editor for valuable suggestions and remarks. The actual version of the paper has benefited from their comments. This work commenced while V.F. Martins-da-Rocha and P.K. Monteiro were visiting RGEA. Carlos Hervés Beloso acknowledges support from BEC2003-09067-C04-01 (Ministerio de Ciencia y Tecnología and FEDER) and PGIDT04XIC30001PN (Xunta de Galicia). V.F. Martins-da-Rocha acknowledges partial financial support from PRONEX. P.K. Monteiro acknowledges the financial support of CNPq/Edital Universal 02/2006.