DISENTANGLING THE EFFECTS OF POLITICAL FRAGMENTATION ON VOTER TURNOUT: THE FLEMISH MUNICIPAL ELECTIONS

Political fragmentation has been shown to be an important determinant of electoral turnout. We introduce an empirical approach that allows disentangling the impact of two dimensions of such fragmentation: the number of parties and the size inequalities between those parties. This is important as it allows us to assess the size, significance, and direction of the individual effects of each element – an aspect disregarded in previous research. Our empirical analysis of the 2000 Flemish municipal elections shows that a higher number of parties competing in the election lowers turnout. The size inequalities between the parties exert a positive – though insignificant – influence on voter participation.     

The World Price of Foreign Exchange Risk

Departures from purchasing power parity imply that different countries have different prices for goods when a common numeraire is used. Stochastic changes in exchange rates are associated with changes in these prices and constitute additional sources of risk in asset pricing models. This article investigates whether exchange rate risks are priced in international asset markets using a conditional approach that allows for time variation in the rewards for exchange rate risk. The results for equities and currencies of the world's four largest equity markets support the existence of foreign exchange risk premia.     

International Asset Pricing and Portfolio Diversification with Time-Varying Risk

We test the conditional capital asset pricing model (CAPM) for the world's eight largest equity markets using a parsimonious generalized autoregressive conditional heteroskedasticity (GARCH) parameterization. Our methodology can be applied simultaneously to many assets and, at the same time, accommodate general dynamics of the conditional moments. The evidence supports most of the pricing restrictions of the model, but some of the variation in risk-adjusted excess returns remains predictable during periods of high interest rates. Our estimates indicate that, although severe market declines are contagious, the expected gains from international diversification for a U.S. investor average 2.11 percent per year and have not significantly declined over the last two decades.     

Debating the Multifunctionality of Agriculture: From Trade Negotiations to Development Policies by the South

The process of economic liberalization that began in the late 1980s has had profound repercussions on the situation of agriculture in developing countries. Market instability, aggravated competition and asymmetry between agents linked to the emergence of big transnational companies have led to greater economic risks for farmers and disparities between countries and within every national situation. In such a context, the emergence of a debate in Europe on the multifunctional character of agriculture and on its economic, social and environmental roles may seem a far cry from the concrete situations of the countries of the South, which have no resources to pay for the other functions of their agriculture. Moreover, this difficulty is intensified by the fact that the debate has been placed within the context of the WTO negotiations, which has led to the pro- and anti-multifunctionality groups taking up a more radical stance. Nevertheless, the multifunctional view of agriculture does appear to be a plausible approach. It offers the possibility of going beyond the questions concerning productivity and market competitiveness towards establishing a debate in terms of strategies for sustainable development, in which the place and roles of agriculture can be thought out. Multifunctionality, founded on objectives negotiated at the local level, does seem to present an opportunity for numerous countries of the South to pursue their public policies on a new basis.     

Tax Evasion,Investment Shocks,and the Consumption Puzzle: A DSGE Analysis with Financial Frictions

Recent studies identify Marginal Efficiency of Investment (MEI) shocks as important drivers of the business cycle. However, Dynamic Stochastic General Equilibrium (DSGE) models struggle to explain macroeconomic comovements between consumption and the key real variables after a MEI shock. Moreover, engaging in tax evasion practices is often an answer to financial constraints, which have been recognized as important determinants of cyclical fluctuations as well. We use a medium-scale New Keynesian DSGE model, that combines tax evasion with financial frictions, to simulate a MEI shock. We show that entrepreneurial tax evasion can solve the comovement problem to a fair extent.     

ESTIMATING THE INNOVATION FUNCTION FROM PATENT NUMBERS: GMM ON COUNT PANEL DATA

The purpose of this paper is to estimate the patent equation, an empirical counterpart to the ‘knowledge-production function’. Innovation output is measured through the number of European patent applications and the input by research capital, in a panel of French manufacturing firms. Estimating the innovation function raises specific issues related to count data. Using the framework of models with multiplicative errors, we explore and test for various specifications: correlated fixed effects, serial correlations, and weak exogeneity. We also present a first extension to lagged dependent variables. © 1997 John Wiley & Sons, Ltd.     

Credit Availability and Capital Crunch: On the Role of the Heterogeneity of the Banking System

We analyze the impact of a credit crunch on aggregate investment via the heterogeneous structure of the banking system. We develop a model of endogenous credit allocation in which investors and two banks differ according to their level of capital and monitoring technology. In a context of moral hazard problem, we show that banks' cost advantage in the monitoring of small businesses must be compared to their relative amount of capital in order to explain firms' optimal choice of financing, the credit allocation in the economy and the asymmetric impact of a credit crunch on aggregate investment. A shock of the same magnitude on the two banks level of capital may have a different effect on total investment. We stress that the credit crunch is maximum when the shock hits the bank specialized in the financing of small businesses and when this bank is also the less capitalized. This result is supported by recent empirical studies ( Hancock and Wilcox 1998 ).     

Price Formation and Equilibrium Liquidity in Fragmented and Centralized Markets

This paper compares centralized and fragmented markets, such as floor and telephone markets. Risk-averse agents compete for one market order. In centralized markets, these agents are market makers or limit order traders. They are assumed to observe the quotes of their competitors. In fragmented markets they are dealers. They can only assess the positions of their competitors. We analyze differences in bidding strategies reflecting differences in market structures. The equilibrium number of dealers is shown to be increasing in the frequency of trades and the volatility of the value of the asset. The expected spread is shown to be equal in both markets, ceteris paribus. But the spread is more volatile in centralized than in fragmented markets.     

Trading and Manipulation Around Seasoned Equity Offerings

We investigate the potential for manipulation due to the interaction between secondary market trading prior to a seasoned equity offering (SO) and the pricing of the offering. Informed traders acting strategically may attempt to manipulate offering prices by selling shares prior to the SO, and profit subsequently from lower prices in the offering. The model predicts increased selling prior to a SO, leading to increases in the market maker's inventory and temporary price decreases. Further, since manipulation conceals information, the ratio of temporary to permanent components of the price movements is predicted to increase.