A regime-switching term structure model with observable state variables

The paper proposes in a regime-shift framework, an arbitrage-free term structure model based on the target and Fed Funds Rates. Empirical observations suggest that a three-state regime-shift environment associated with FOMC monetary actions is justified. Then, a closed-form solution for zero-coupon bonds is derived where regime-shift risk is priced. The solution is flexible enough to incorporate additional state variables.     

Teaching tax principles and policy: comparing the single textbook and wider reading approaches

This study set out to test the relative merits and desirability of teaching tax principles and policy based either on a single textbook, or by using the more traditional UK social science method of wider reading and a more individualistic approach to learning. The method employed was to teach taxation using the two approaches on two parallel public finance courses and to assess the outcomes in the form of student course essays and examination answers together with a questionnaire survey of students' opinion. The balance of advantage appeared to lie with the single textbook approach.     

Misallocation and financial market frictions: Some direct evidence from the dispersion in borrowing costs

Financial frictions distort the allocation of resources among productive units—all else equal, firms whose financing choices are affected by such frictions face higher borrowing costs than firms with ready access to capital markets. As a result, input choices may differ systematically across firms in ways that are unrelated to their productive efficiency. We propose an accounting framework that allows us to assess empirically the magnitude of the loss in aggregate resources due to such misallocation. To a second-order approximation, the framework requires only information on the dispersion in borrowing costs across firms, which we measure—for a subset of U.S. manufacturing firms—directly from the interest rate spreads on their outstanding publicly-traded debt. Given the observed dispersion in borrowing costs, our approximation method implies a relatively modest loss in efficiency due to resource misallocation—on the order of 1 to 2 percent of measured total factor productivity (TFP). In our framework, the correlation between firm size and borrowing costs has no bearing on TFP losses under the assumption that financial distortions and firm-level efficiency are jointly log-normally distributed. To take into account the effect of covariation between firm size and borrowing costs, we consider a more general framework, which dispenses with the assumption of log-normality and which implies somewhat higher estimates of the resource losses—about 3.5 percent of measured TFP. Counterfactual experiments indicate that dispersion in borrowing costs must be an order of magnitude higher than that observed in the U.S. financial data, in order for misallocation—arising from financial distortions—to account for a significant fraction of measured TFP differentials across countries.     

The influence of empathy in complaint handling: Evidence of gratitudinal and transactional routes to loyalty

While most studies on complaint handling are focused on performance outcomes, analysis of the processes that reinforce relationship quality is lacking. Building on the relationship marketing theory of reciprocal behaviours, this research proposes and tests a model of the effects of empathy as a particular relationship recovery investment. Addressing for the first time the role of gratitude in a complaint-handling context, this model assumes that both gratitude and transactional satisfaction mediate the influence of empathy on consumers' trust and commitment. Data from a cross-industry survey of phone and online complaints confirmed the proposed model.     

THE INEQUALITY OF EMPLOYMENT AND SELF-EMPLOYMENT INCOMES: A DECOMPOSITION ANALYSIS FOR THE U.K.

U.K. employment and self-employment income inequality are analysed over 1979–94/95. Robust inequality decompositions reveal occupation to be a relatively important and hitherto neglected determinant of earnings inequality. In contrast, self-employment income inequality is harder to explain, although occupation is also the most important single factor in the mid-1990s. The paper also provides a novel implementation of a decomposition of changes in Kolm's inequality index.     

Little England's Missed Opportunity

Can Britain benefit from immigration from Hong Kong? William McGurn and Julian Simon, drawing on experience from America, argue that Britain has much to gain from migrants from Hong Kong.     

Consumer willingness to pay for genetically modified food in Kenya

Genetically modified (GM) crops are popular in many regions of the world, but their deployment in Africa is hindered by safety concerns and regulatory issues, although the continent is in dire need of boosting its food production. Although consumers' acceptance of GM food has been analyzed in many continents, no such studies have been conducted in Africa. Therefore, a survey of 604 consumers was conducted in Nairobi, Kenya, in 2003, to gauge consumers' awareness of GM crops, their willingness to pay (WTP) for GM food, and the factors that influence their WTP. Consumers' knowledge of GM crops was limited and only 38% of the 604 respondents were aware of GM crops. People in higher education and income groups were more aware than others. Regardless, people were generally appreciative of the technology, and a large majority (68%) would be willing to buy GM maize meal at the same price as their favorite brand. Consumers were, however, concerned about possible side effects, especially on the environment and biodiversity. WTP was estimated using a double‐bounded dichotomous choice model, and the mean WTP was found to be 13.8% higher than the average price of non‐GM maize meal. Perceptions of health risk, and ethical and equity concerns had a negative influence on the likelihood of purchasing GM maize meal, whereas trust in government to ensure food quality had a positive influence on WTP. People with at least some secondary education and those in the high‐income category were more likely to purchase GM maize meal at the same price. The study concludes that, because awareness is still low, appropriate communications are needed to involve the consumer in the debate. Consumers' acceptance in this study was high, but the research needs to be expanded to rural areas, where most consumers live, and other survey methods need to be explored.     

Contracts and competition: an introduction

Changes in public policy and corporate strategy have enhancedthe role of contracts as mechanisms of economic governance.The understanding that norms, standards and other forms of regulatorymechanism can affect the structure of incentives and the qualityof contractual outcomes has helped to stimulate a wider debateconcerning institutions and economic performance. Among thethemes explored in this Special Issue, which draws on the UKESRC's Contracts and Competition Programme, are the need forinterdisciplinary analysis of economic organisation; the linkbetween contracts and trust; and the complex relationship betweeninstitutional forms and economic outcomes.