The Sri Lankan Unemployment Problem Revisited

High unemployment in Sri Lanka has been attributed to unrealistic expectations, to queuing for public sector jobs, and to stringent job security regulations. However, the empirical evidence supporting these explanations is weak. This paper analyzes individual records from the 1995 Labor Force Survey, and time series for wages in the formal and informal sectors of the economy. The paper rejects the unrealistic‐expectations hypothesis by comparing the impact of education on the actual wages of those who have a job and on the lowest acceptable wages of the unemployed. But it finds substantial rents associated with jobs in the public sector, and in activities protected by high tariffs or covered by job security regulations. A time‐series analysis of the impact of unemployment on wage increases across sectors suggests that many among the unemployed are waiting for “good” job openings, but are not interested in readily available “bad” jobs.     

MODEL UNCERTAINTY AND ITS IMPACT ON THE PRICING OF DERIVATIVE INSTRUMENTS

Uncertainty on the choice of an option pricing model can lead to "model risk" in the valuation of portfolios of options. After discussing some properties which a quantitative measure of model uncertainty should verify in order to be useful and relevant in the context of risk management of derivative instruments, we introduce a quantitative framework for measuring model uncertainty in the context of derivative pricing. Two methods are proposed: the first method is based on a coherent risk measure compatible with market prices of derivatives, while the second method is based on a convex risk measure. Our measures of model risk lead to a premium for model uncertainty which is comparable to other risk measures and compatible with observations of market prices of a set of benchmark derivatives. Finally, we discuss some implications for the management of "model risk."     

RUNNING FOR THE EXIT: DISTRESSED SELLING AND ENDOGENOUS CORRELATION IN FINANCIAL MARKETS

We propose a simple multiperiod model of price impact from trading in a market with multiple assets, which illustrates how feedback effects due to distressed selling and short selling lead to endogenous correlations between asset classes. We show that distressed selling by investors exiting a fund and short selling of the fund’s positions by traders may have nonnegligible impact on the realized correlations between returns of assets held by the fund. These feedback effects may lead to positive realized correlations between fundamentally uncorrelated assets, as well as an increase in correlations across all asset classes and in the fund’s volatility which is exacerbated in scenarios in which the fund undergoes large losses. By studying the diffusion limit of our discrete time model, we obtain analytical expressions for the realized covariance and show that the realized covariance may be decomposed as the sum of a fundamental covariance and a liquidity‐dependent “excess” covariance. Finally, we examine the impact of these feedback effects on the volatility of other funds. Our results provide insight into the nature of spikes in correlation associated with the failure or liquidation of large funds.     

MULTICOLLINEARITY AND CONSUMER DEMAND ELASTICITIES*

Multicollinearity is a common problem in the estimation of consumer demand models and the elasticities. While straight forward application of classical least squares often yields models with good predictive power, this apparently occurs for reasons other than the accuracy of the estimates of the parameters. The implications of multicollinearty in two-stage and three-stage least squares are discussed, with examples from Brookings Quarterly Agricultural Submodel of the United States. A comparison is made of alternative estimators of the parameters of consumer demand functions. The article points to difficulties raised by using a priori coefficients for one variable (eg. income elasticity) as a means of developing an accurate estimate of another coefficient (eg. price elasticity), and indicates evidence of multicollinearity depressing estimated consumer price elasticities. LA COLLINEARITE ET DES ELASTICITES DE LA DEMANDS DE CONSUMMATION - La collinéarité est un problème common de l'estimation des modèles de demande en consummation et des élasticités. Quoique l'application directe de la méthode classique de “moindre carré”, permet souvent d‘êlaborer des modèles ayant beaucoup de prediction, ceci semble-t-il être en function de d'autres facteurs que de l'exactitude des évaluations des paramètres. Les effets de la cottinéarité dans les estimations moindre carré de deux et trois étapes sont évahtés avec des exemples tires du “Brookings Quarterly Agricultural Submodel” des Etats-Unis. Différentes méthodes d'estimation de la fonction de la demande en consummation sont comparées. L'article fait état des difficultés que soulève l'emploi de coefficient a priori pour une variable (ex. l’êlasticité du revenue) comme moyen de développer un estimé précis d'un autre coefficient (ex. l‘élasticité de prix), et apporte de l'evidence sur l'effet attendant de la collinéarité sur les estimés d’élasticité de prix.     

What brand extensions need to fully benefit from their parental heritage

It is well established that consumer acceptance of a brand extension depends on how strongly it fits with its parental origins. Less appreciated is how this acceptance also depends on the mental association created in consumers’ minds between the extension and its parent brand. Our investigation considers the gateway role played by this association’s mental accessibility in allowing extensions to fully benefit from their parental heritage. Six studies examine the effect of reinstating an extension’s association with its parent brand on extension evaluations. When reinstatement enhances the parental association’s accessibility, it strengthens the parent brand’s influence, leading to more or less favorable extension evaluations contingent upon the extension’s fit with its parental origins. These reinstatement effects carry important implications for brand-extension managers and researchers.     

Hot spots regulation and environmental justice

This paper analyzes whether regulating “hot spots” of toxic air pollution by increasing the spatial resolution of regulation could address environmental justice (EJ) concerns. To examine this question, this paper develops a decision model of a regulator choosing emission controls within a net cost minimizing framework. An empirical application of the model using air toxic emission data for Escambia and Santa Rosa Counties in Florida estimates the emission standards and spatial distribution of risks at a coarse and a finer spatial resolutions. Implications for EJ are analyzed by combining the simulated spatial risk distributions at the two resolutions with the demographic data. Results indicate that different measures of EJ point to different conclusions regarding the question of whether finer resolution regulation alleviates EJ concerns. The paper concludes with a discussion of the implications for EJ policy.     

Agency Problems and Commitment in Delegated Bargaining

In the context of (one-sided) delegated bargaining, we analyze how a principal (a seller) should design the delegation contract in order to provide proper incentives for her delegate (an intermediary) and gain strategic advantage against a third party (a buyer). We consider situations in which there are both moral hazard and adverse selection problems in the delegation relationship and where the seller tries to gain strategic advantage by imposing a minimum price above which she pays the delegate a commission. It is shown that incentives and commitment are substitutes. A low-type agent is given less discretion in dealing with the buyer and weaker incentives, while a high-type agent is given more discretion and stronger incentives .     

The Gender Implications of Public Sector Downsizing: The Reform Program of Vietnam

Using data from Vietnam, this article describes several typesof analysis that could be conducted before launching a majordownsizing operation to identify possible gender effects. Itdraws several conclusions about Vietnam's downsizing reforms.First, although women's prospects of obtaining salaried jobsfollowing displacement from state-owned enterprise worsenedas a result of recent reforms, they are likely to improve inthe near future. Second, reforms are associated with a sharpdecline in the gender gap in earnings, both in and outside thestate sector. Third, overstaffing is greatest in sectors inwhich most employees are men, such as construction, mining,and transportation; it is much less prevalent in sectors inwhich women dominate the work force, such as footwear, textiles,and garments. Fourth, training and assistance programs currentlyin place to help redundant workers reveal no evidence of stronggender bias. Fifth, severance packages based on a multiple ofearnings are more favorable to men, whereas lump-sum packagesfavor women.      

Wage misalignment in CFA countries: were labour market policies to blame?

Wage rigidity, stemming from highly distortive labour marketpolicies, is a natural candidate to explain the overvaluationof the CFA franc after the adverse external shocks of the 1980s.This paper uses a variety of data sources to assess wage rigidityin CFA countries until the 1994 devaluation, and to analysewhether it was due to labour market policies. The paper showsthat wages were high in CFA countries, compared with both wagesin similar countries and the labour earnings of similar individualswithin the same countries. It also shows that wages were rigidin real terms, in the sense of following closely the fluctuationsof government wages and consumer prices, but it finds no evidenceof nominal wage rigidity, though. From an international perspective,minimum wages were not high enough to account for the observedwage misalignment. Moreover, their adjustment over time washighly responsive to real shocks. Private sector unions, inturn, seemed more instrumental in achieving wage moderationthan wage drift. Their members usually had lower wages thansimilar, non-unionised workers, which probably reflects the'subordinate' nature of the labour movement. The most likelycandidates to explain wage misalignment and real rigidity inCFA countries in the 1980s and early 1990s are therefore governmentpay policies and (possibly) limited competition in product markets.