Managerial Skills Acquisition and the Theory of Economic Development

Why don't all countries converge rapidly to the use of most efficient or best practice technologies? Micro level studies suggest managerial skills play a key role in the adoption of modern technologies. In this paper we model the interactive process between on-the-job managerial skill acquisition and the adoption of modern technology. We use the model to illustrate why some countries develop managerial skills quickly and adopt best practice technologies, while others stay backwards. The model also explains why managers will not migrate from rich countries to poor countries, as would be needed to generate convergence. Finally we show why standard growth accounting exercises will incorrectly attribute a large proportion of managerial skills' contribution to total factor productivity and we quantify the importance of this bias.     

Organizational Cultures of Corruption

Systematic differences in the incidence of corruption between countries can be explained by models of coordination failure that suggest that corruption can only be reduced by a “big push” across an entire economy. However, there is significant evidence that corruption is often sustained as an organizational culture, and can be combated with targeted effort in individual organizations one at a time. In this paper, we propose a model that reconciles these two theories of corruption. We explore a model of corruption with two principal elements. First, agents suffer a moral cost if their corruption behavior diverges from the level they perceive to be the social norm; second, the perception of the norm is imperfect; it gives more weight to the behavior of colleagues with whom the agent interacts regularly. This leads to the possibility that different organizations within the same country may stabilize at widely different levels of corruption. Furthermore, the level of corruption in an organization is persistent, implying that some organizations may have established internal “cultures” of corruption. The organizational foci are determined primarily by the opportunities and (moral) costs of corruption. Depending on the values of these parameters, the degree of corruption across departments may be relatively uniform or widely dispersed. These results also explain another surprising empirical observation: that in different countries similar government departments such as tax and education rank very differently relative to each other in the extent to which they are corrupt. This is difficult to explain in incentive‐based models if similar departments face similar incentives in different countries.     

Why We Should Leave the ERM

The 'liverpool Six'have called again on the government to leave the Exchange Rate Mechanism and return to monetarism with flexible exchange rates. Our reason is simple. Monetary conditions here have been tightened more than dangerously by the need to support the pound within the ERM, just as in late 1987 and early 1988 they were loosened excessively by the need to hold the pound down in the attempted 'shadow' phase of the ERM. The has repeatedly undermined monetary stability, and has caused first renewed inflation and now severe and protracted recession. It has also tended to produce sterling overvaluation and so chronic balance of payments difficulties; to correct these, recession will need to be prolonged. In the havoc it has wreaked, it risks fuelling demands for a return to the government intervention of he past. As a source of counter inflationary discipline it is therefore flawed. We advocate a return to monetary targeting under floating rates. This would in the short term permit interest rates to fall sharply to stimulate recovery in money supply growth and hence the economy; the exchange rate would fall to a properly valued level, removing the threat to our balance of payments. In the longer term this policy shift would recreate a framework of counter-inflation discipline in which there could still be reasonable domestic responses to cyclical and other UK shocks.     

Sovereign to Corporate Risk Spillovers

The first Greek bailout on April 11, 2010 triggered a significant reevaluation of sovereign credit risk across Europe. We exploit this event to examine the transmission of sovereign to corporate credit risk. A 10% increase in sovereign credit risk raises corporate credit risk on average by 1.1% after the bailout. The evidence is suggestive of risk spillovers from sovereign to corporate credit risk through a financial and a fiscal channel, as the effects are more pronounced for firms that are bank or government dependent. We find no support for indirect risk transmission through a deterioration of macroeconomic fundamentals.     

Are Progressive Income Taxes Stabilizing?

We assess the stabilizing effect of progressive income taxes in a monetary economy with constant returns to scale. It is shown that tax progressivity reduces, in parameter space, the likelihood of local indeterminacy, sunspots and cycles. However, considering plausibly low levels of tax progressivity does not ensure saddle‐point stability and preserves as robust the occurrence of sunspot equilibria and endogenous cycles. It turns out that increasing progressivity, through its impact on after‐tax income, makes labor supply more inelastic. However, even when large, tax progressivity does not neutralize the effects of expected inflation on current labor supply which may lead to expectation‐driven business fluctuations.