INTEREST GROUPS,DEMOCRACY, AND POLICY VOLATILITY

Democratic polities appear to produce more stable policy than do autocracies. In this paper, we explore a potential source of the policy stability observed in democracies: special‐interest groups. We find that interest groups are associated with greater stability in some measures of policy and that groups mediate the stabilizing impact of democracy on policy. We also find that the impact of interest groups on policy volatility depends on the degree of polarization in a society. (JEL P16, O43, D7)     

Self-enforcing international environmental agreements with a stock pollutant

In this paper the stability of an International Environmental Agreement (IEA) among N identical countries that emit a pollutant are studied using a two-stage game. In the first stage each country decides noncooperatively whether or not to join an IEA, and in the second stage signatories jointly against nonsignatories determine their emissions in a dynamic setting defined in continuous time. A numerical simulation shows that a bilateral coalition is the unique self-enforcing IEA independently of the gains coming from cooperation and the kind of strategies played by the agents (open-loop or feedback strategies). We have also studied the effects of a minimum participation clause finding that for this case a self-enforcing IEA just consists of the number of countries established in the clause.JEL Classification: C73, D62, Q28 Corresponding author : Santiago J. RubioThis paper is based on chapter four of Begoña Casinos Ph. Dissertation. Financial support from the Instituto Valenciano de Investigaciones Económicas, the Ministerio de Ciencia y Tecnología under grant BEC2000-1432 and Fundación BBVAis gratefully acknowledged. We also appreciate the helpful comments of three anonymous referees, whose suggestions improved the paper. Regarding any remaining inadequacies, the usual caveat applies.     

Transfers in a polarized country: bridging the gap between efficiency and stability

We consider a political economy model of country whose citizens have heterogeneous preferences for a national policy and some regions may contemplate a threat of secession. The country is efficient if its breakup into smaller countries leads to an aggregate utility loss. We show that in an efficient country whose citizens' preferences exhibit a high degree of polarization, a threat of secession cannot be eliminated without inter-regional transfers. We also demonstrate that if majority voting is used to determine the redistribution schemes within the country, then a high degree of polarization yields the full-compensation scheme as the unique political equilibrium.     

INCOME INEQUALITY,MEDIA FRAGMENTATION,AND INCREASED POLITICAL POLARIZATION

The increasing polarization of congressional voting has been linked to legislators' inability to reach consensus on many pressing economic issues. We examine two potential factors driving polarization: greater income inequality and the increasingly fragmented state of American media. Using cointegration techniques, we find evidence indicating that media fragmentation has played a more important role than inequality. Periods of rising media fragmentation are followed by increased polarization. If recent patterns of media structure and income inequality persist, a polarized policymaking environment will likely continue to impede efforts to address major challenges, such as the long‐run fiscal imbalances facing the United States. (JEL D72, D31)     

GLOBAL BUSINESS CYCLES: CONVERGENCE OR DECOUPLING?*

We analyze the evolution of the degree of global cyclical interdependence over the period 1960–2008. Using a dynamic factor model, we decompose macroeconomic fluctuations in output, consumption, and investment into a global factor, factors specific to country groups, and country‐specific factors. We find that during 1985–2008, there is some convergence of business cycle fluctuations among industrial economies and among emerging market economies. Surprisingly, there is a concomitant decline in the relative importance of the global factor. We conclude that there is evidence of business cycle convergence within each of these two groups of countries but divergence (or decoupling) between them.     

Rigid labour markets with trade and capital mobility: theory and evidence

Abstract We develop a multi‐country model with imperfect labour markets to study the effect of labour market frictions on bilateral trade flows. We use a framework that allows for goods trade and capital mobility and show that labour market imperfections exert opposite effects in the absence of capital mobility (the short run) and its presence (the long run), respectively. In the short run, a higher degree of labour market rigidity decreases the value of total trade, but increases the share of intra‐industry trade for a country that is larger than its trading partner. The reverse effects are observed when capital is allowed to cross country borders. Using data on unemployment and income distribution for 23 OECD countries, we compute the central parameter in our theoretical model that describes the degree of labour market rigidity. We use this new empirical concept to provide evidence for our theoretical findings by means of reduced‐form regressions as well as simulation results of a calibrated general equilibrium model.     

TIME UNDER AUTOCRATIC RULE AND ECONOMIC GROWTH

We investigate how the length of time a country's regime was autocratic between 1920 and 2000 is correlated with economic growth and per capita income. We find that the longer a country was within an autocracy, the lower is the country's economic performance, even after controlling for other factors. We also find the length of time a country is not autocratic is positively related to growth and income. We claim this evidence is consistent with the thesis that one reason why some countries have had difficulty adjusting to life after autocracy is that the human and social capital necessary to make markets “work” eroded under autocratic regimes and take time to develop afterward. (JEL O17, O43, P0)     

DOES POPULATION AGEING PROMOTE FASTER ECONOMIC GROWTH?

Can divergent demographic trends account for differences in per capita output across countries? We address this question by offering evidence that the process of population ageing is positively and significantly related to cross‐country economic performance. We define and estimate the effect of demographic change in two ways. First, a growing cohort of working age persons (15–64) as a share of the total population is found to have a large positive effect on GDP per capita. Second, an increase in the number of prime age persons (35–54) relative to the younger working age population (15–34) is found to have a positive but curvilinear effect with respect to per capita GDP. We find that changes in per capita GDP peak when the ratio of the prime‐to‐younger age population reaches an optimum of prime age workers for every younger aged worker. Beyond or below this optimal ratio, per capita output is lowered.     

On the Growth and Welfare Effects of Defense R&D

In the United States, defense R&D share of GDP has decreased significantly since 1960. To analyze the implications on growth and welfare, we develop an R&D‐based growth model that features the commonly discussed crowding‐out and spillover effects of defense R&D on civilian R&D. The model also captures the effects of defense technology on (a) national security resembling consumption‐type public goods and (b) aggregate productivity via the spin‐off effect resembling productive public goods. In this framework, economic growth is driven by market‐based civilian R&D as in standard R&D‐based growth models and government‐financed public goods (i.e., defense R&D) as in Barro (1990). We find that defense R&D has an inverted‐U effect on growth, and the growth‐maximizing level of defense R&D is increasing in the spillover and spin‐off effects. As for the welfare‐maximizing level of defense R&D, it is increasing in the security‐enhancing effect of defense technology, and there exists a critical degree of this security‐enhancing effect below (above) which the welfare‐maximizing level is below (above) the growth‐maximizing level.     

A matching analysis of why some firms in peripheral regions undertake R&D whereas others do not

Many studies have established the importance of investment in R&D to facilitate innovation and consequently improve firm productivity. Firms decide whether or not to undertake R&D depending on a range of factors such as market orientation, business objectives, competitive advantages and absorptive capacity. This paper studies the factors that influence this decision in peripheral locations; and for firms that do not undertake R&D, we analyse the reasons for not doing so. The research is based on data from a survey of some 250 matched firms operating in Northern Ireland, about half undertaking R&D and half not. Northern Ireland is an interesting case study because it exhibits a low level of investment in R&D despite the public subsidies and policy initiatives that have existed over the last 30 years. For firms that undertake R&D, our results mostly confirm the findings of others while for firms that do not undertake R&D the results point to a capabilities-gap rather than a resource-gap as the fundamental problem. Policy conclusions are drawn as to what might be done to boost both the amount of R&D undertaken and the number of firms engaged in R&D in peripheral regions.     

The Stability of Hedonic Coalition Structures

We consider the partitioning of a society into coalitions in purely hedonic settings, i.e., where each player's payoff is completely determined by the identity of other members of her coalition. We first discuss how hedonic and nonhedonic settings differ and some sufficient conditions for the existence of core stable coalition partitions in hedonic settings. We then focus on a weaker stability condition: individual stability, where no player can benefit from moving to another coalition while not hurting the members of that new coalition. We show that if coalitions can be ordered according to some characteristic over which players have single-peaked preferences, or where players have symmetric and additively separable preferences, then there exists an individually stable coalition partition. Examples show that without these conditions, individually stable coalition partitions may not exist. We also discuss some other stability concepts, and the incompatibility of stability with other normative properties. Journal of Economic Literature Classification Numbers: C71, A14, D20.     

Doctoral Origins of Contributors to the American Economic Review, 1960-72

Professor Sun concludes that publishing performance, adjusted for differences in the number of Ph.D.'s granted, is not a function of the quality of graduate schools. Larger institutions appear to have an advantage by turning out a larger number of Ph.D.'s, but no correlation was found when the number of contributors to the AER from a school was compared with the rating of its graduate programs.

Economics departments may hope to improve their rating in doctoral programs by producing more Ph.D.'s and encouraging them to contribute to the AER, Professor Sun concludes.     

Partial International Coordination in the Great Fish War

This study extends the great fish war model of Levhari and Mirman [Levhari, D. and Mirman, L. (1980) Bell Journal of Economics 11: 322–344] by incorporating a multiple country context into the model and investigates the existence of a partial coordination Nash equilibrium. First, findings of this paper suggest that a partial coordination scheme is sustainable only in limited cases. Any coalition that has more than two member countries cannot be sustained. Second, the existence and the number of coordinating countries depend critically on the magnitude of the biological and preference parameters. Finally, if the coalition is assumed to be a dominant player, there always exist one or two welfare-improving sustainable coalitions and the size of the sustainable coalitions depends on the parameters of the problem.     

ETHNIC DIVERSITY AND TRUST

Using data from U.S. states, I investigate the relationship between ethnic diversity and trust. I find a negative relationship between ethnic polarization and trust and a U‐shaped relationship between ethnic fractionalization and trust. According to my estimations, (a) going from an ethnic polarization index (PI) of 0 to an ethnic PI of 1 decreases trust by almost 12% points; and (b) trust is minimized when the ethnic fractionalization index is equal to 0.34. (JEL D74, J15, Z13)     

An Elementary Approach to Approximate Equilibria with Infinitely Many Commodities

We prove the existence of approximate equilibria in a finite exchange economy with a countably infinite number of commodities and nonconvex preferences, when every trader has an excess demand set that is finitely spannable, i.e., that could be covered by a union of its convex subsets in finitely many steps. We show that the bound on the norm of the per capita aggregate excess demand is reciprocally related to the square root of the population. Extensions are also made to the case where countably many commodities are indivisible. The proofs are elementary. Journal of Economic Literature Classification Numbers: D50, C62, D52.     

Public deficits and economic growth

Considering an integrated area, this paper deals with the balance between the positive effects in the degree of economic cohesion resulting from R&D subsidies, temporarily granted from an imitator and less developed country, and the external negative effects arising from the eventual creation of excessive public deficits.We propose and numerically solve a model of a monetary union between two countries, one being innovator and the other imitator. Results suggest the pertinence of allowing for a temporary differentiation of fiscal discipline rules in favour of the less developed country. R&D subsidies granted by this country seem to lead to an easier catching-up without producing important negative external effects, also as not hurting severely the conditions for long-run sustainability of public accounts.     

THE DETERMINANTS OF PRIVATE CAPITAL FLOWS IN EMERGING ECONOMIES: THE ROLE OF THE FED'S UNCONVENTIONAL MONETARY POLICY

Previous studies on the effect of the Fed's Unconventional Monetary Policy on capital flows in Emerging Economies have not been conclusive. I analyze if the effect of these policies on capital flows is heterogeneous between countries. This approach could be the smoking gun in this debate as I attempt to find evidence of a specific mechanism by which Unconventional Monetary Policy could affect the pattern of capital flows in Emerging Economies. The results suggest that Unconventional Monetary Policy has a significant effect on capital flows which depends on the type of measure adopted and the degree of financial exposure of each country to the United States. (JEL C23, E52, E58, F21, F32)     

Incentive Mechanism Design for Production Economies with Both Private and Public Ownerships

In this paper we deal with the problem of incentive mechanism design which yields efficient allocations for general mixed ownership economies when preferences, individual endowments, and coalition patterns among individuals are unknown to the planner. We do so by doubly implementing the proportional solution for economies with any number of private sector and public sector commodities and any number of individuals as well as the coexistence of privately and publicly owned firms with general convex production possibility sets. Furthermore, the mechanisms work not only for three or more agents, but also for two-agent economies. Journal of Economic Literature Classification Numbers: C72, D61, D71, D82.     

Composition of International Assets and the Long‐run Current Account

We document the role of capital gains and losses for the current account that a country can sustain along a balanced growth path. While it is well know that growth allows a country to run a current account deficit and still keep its external debt stable as a share of GDP, the sensitivity of the current account to the composition of external assets and liabilities has received little attention. We show that this composition matters because several assets, such as equity or FDI, earn substantial capital gains that are not reflected in the current account. A country that is a net creditor in such assets can then sustain a larger current account deficit. Using a broad sample, we show that this aspect substantially tilts estimates of the long‐run current account towards a deficit among industrialized economies, with the opposite situation for emerging markets. We also show that industrialized economies are likely to benefit from predictable capital gains in the future.     

Pareto improving financial innovation in incomplete markets

Summary. In this paper we develop a differential technique for investigating the welfare effects of financial innovation in incomplete markets. Utilizing this technique, and after parametrizing the standard competitive, pure-exchange economy by both endowments and utility functions, we establish the following (weakly) generic property: Let S be the number of states, I be the number of assets and H be the number of households, and consider a particular financial equilibrium. Then, provided that the degree of market incompleteness is sufficiently larger than the extent of household heterogeneity, S−I≥2H−1 [resp. S−I≥H+1], there is an open set of single assets [resp. pairs of assets] whose introduction can make every household better off (and, symmetrically, an open set of single assets [resp. pairs of assets] whose introduction can make them all worse off ). We also devise a very simple nonparametric procedure for reducing extensive household heterogeneity to manageable size, a procedure which not only makes our restrictions on market incompleteness more palatable, but could also prove to be quite useful in other applications involving smooth analysis. Received: August 14, 1995; revised version: April 14, 1997