Collateral constraints and the amplification mechanism

Kiyotaki and Moore (J. Polit. Economy 105 (1997) 211) have offered a theory for how common shocks to credit-constrained firms are amplified through changes in collateral values and transmitted as fluctuations in output. I clarify and extend their model by showing that their collateral amplification mechanism is not robust to the introduction of markets that allow these firms to hedge against common shocks. A theory of incomplete hedging is proposed in which the supply of hedging available in the economy is constrained by the aggregate value of collateral. I illustrate how the constraint reinstates amplification effects and discuss empirical implications of this new mechanism.     

Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development

We estimate the respective contributions of institutions, geography, and trade in determining income levels around the world, using recently developed instrumental variables for institutions and trade. Our results indicate that the quality of institutions trumps everything else. Once institutions are controlled for, conventional measures of geography have at best weak direct effects on incomes, although they have a strong indirect effect by influencing the quality of institutions. Similarly, once institutions are controlled for, trade is almost always insignificant, and often enters the income equation with the wrong (i.e., negative) sign. We relate our results to recent literature, and where differences exist, trace their origins to choices on samples, specification, and instrumentation.     

Interlocked Village Markets and Trader Idiosyncrasy in Rural India

The role of traders and traditional exchange institutions has received little attention in empirical research on rural markets in developing countries. We use detailed data on transactions in a village commodity market in India and identify two observed anomalies: first, the repeal of the law of one price, and second, a trader‐idiosyncratic effect, namely that large volumes are sold to a trader who does not offer the best price. Econometric analysis demonstrates that trader idiosyncrasy can largely be explained by reciprocity motives in interlocked village markets. Reciprocity leads to market inefficiencies and can result in unexpected supply responses.     

Pricing Term Insurance in the Presence of a Family History of Breast or Ovarian Cancer

Abstract

We estimate the increased mortality and term life insurance costs for women who have a family history of breast or ovarian cancer. Using data from the medical literature on age-specific and family history-specific incidence rates, we develop double-decrement models to evaluate the actuarial impact of breast cancer and ovarian cancer in the family. We also calculate the increased mortality and term insurance costs for women who test positive for the BRCA1 or BRCA2 gene mutation. We find that the type of affected relative and her age at onset of the disease are key underwriting factors. We find substantial mortality increases (up to 100%) for women with two relatives with cancer and women with a first-degree relative who developed cancer at an early age. Mortality increases for women with the BRCA gene mutation reach 150%. While some females with a family history of cancer can be accepted at standard rates, others may need to be quoted substandard rates, depending on the underwriting policy of the company. Females with the gene mutation can possibly be accepted at a rate that incorporates a severe mortality surcharge.     

Can absence make a team grow stronger?

Some projects have such diverse requirements that they need a variety of specialists to work on them. But often the best-qualified specialists are scattered around the globe, perhaps at several companies. Remarkably, an extensive benchmarking study reveals, it isn't necessary to bring team members together to get their best work. In fact, they can be even more productive if they stay separated and do all their collaborating virtually. The scores of successful virtual teams the authors examined didn't have many of the psychological and practical obstacles that plagued their more traditional, face-to-face counterparts. Team members felt freer to contribute--especially outside their established areas of expertise. The fact that such groups could not assemble easily actually made their projects go faster, as people did not wait for meetings to make decisions, and individuals, in the comfort of their own offices, had full access to their files and the complementary knowledge of their local colleagues. Reaping those advantages, though, demanded shrewd management of a virtual team's work processes and social dynamics. Rather than depend on videoconferencing or e-mail, which could be unwieldy or exclusionary, successful virtual teams made extensive use of sophisticated online team rooms, where everyone could easily see the state of the work in progress, talk about the work in ongoing threaded discussions, and be reminded of decisions, rationales, and commitments. Differences were most effectively hashed out in tele-conferences, which team leaders also used to foster group identity and solidarity. When carefully managed in this way, the clash of perspectives led not to acrimony but, rather, to fundamental solutions, turning distance and diversity into competitive advantage.     

Do foreign companies earn more and distribute more than domestic companies in India？

There is a prevalent opinion in the corporate arena that the foreign companies are earning more but are less concerned with reinvesting their earnings in the foreign countries in which they operate and are more concerned in profit appropriations for quick repatriation of their investments by way of declaring high dividend payments. As compared to the foreign companies, domestic companies in India are relatively more concerned for reinvesting their profits and help to trigger the capital accumulation and industrial growth. This practice of comparatively paying higher dividend by foreign companies in India, if proved, supports the view that foreign companies are least concerned with the industrial growth of the country in which they operate. Hence the analyses of the dividend payments and the retained earnings of foreign and domestic firms assume economic importance. Considering the above hypothesis and the importance of the study, this paper made an attempt to empirically test the opinion and bring out any significant differences in the profitability and dividend payments between the two groups often pharmaceutical companies operating in India for the period of last 20 years.     

Preferential Trading and Real Wages

Following the Stolper–Samuelson type of logic, the general impression is that freeing up trade, whether preferentially as in the North American Free Trade Agreement (NAFTA) or on a nondiscriminatory basis as in the Uruguay Round, must lower real wages in one set of countries and raise them in the other set of countries. An increase in the real wage in all countries as a result of freeing up of trade either relies on gains via an improvement in the terms of trade or requires special assumptions such as increasing returns, complete specialization or asymmetries in production technology. This paper shows that even within a standard three-country, three-good, small-union model, preferential trade liberalization can lead to increased real wages in both partner countries without necessarily relying on terms-of-trade improvements, increasing returns, complete specialization, or asymmetries in production technology.     

Aid, Dutch disease, and manufacturing growth

We examine the effects of aid on the growth of manufacturing, using a methodology that exploits the variation within countries and across manufacturing sectors, and corrects for possible reverse causality. We find that aid inflows have systematic adverse effects on a country's competitiveness, as reflected in the lower relative growth rate of exportable industries. We provide some evidence suggesting that the channel for these effects is the real exchange rate appreciation caused by aid inflows. We conjecture that this may explain, in part, why it is hard to find robust evidence that foreign aid helps countries grow.