Costs of financial instability, household-sector balance sheets and consumption

Extant work on costs of financial instability focuses on fiscal costs and declines in aggregate GDP following banking crises. We estimate effects of banking and currency crises on consumption in 19 OECD countries, showing consumption plays an important role in the adjustment following a crisis, and effects are not captured solely by the impact of crises on standard consumption determinants, income and wealth. Additional effects, attributable to factors such as time-varying confidence, uncertainty and credit rationing, are aggravated by high and rising leverage, despite financial liberalisation easing liquidity constraints. High leverage implies that banking crises taking place now could have greater incidence than in the past.     

Mass-Elite Equilibrium of Federal Constitutional Legitimacy

William Riker ((1964) Federalism: Origin, Operation, Significance. Boston: Little Brown) stressed the problem of the contested nature of federal institutions and argued that federations existed amidst the ongoing challenge to their rules, that federal institutions were being continuously endogenously produced in the interaction of political parties rather than serving as self-enforceable constraints on the political process. As parties changed, so did federalism, and eventually the balance was bound to shift to either one or the other extreme as far as the degree of centralization was concerned. An alternative approach to essentially the same problem of federal instability was to conceptualize the underlying game differently, as a game of coordination, so that institutions would be accepted as constraints and would therefore be self-enforceable because they allow the players to avoid the chaos and successfully converge to an outcome with payoffs exceeding their reservation values (Hardin, 1989, Ordeshook, 1992). The third proposed solution, consociationalism, emphasizes the elite effort to overcome the conflictual nature of the institutional choice (Lijphart, 1977). Here, as in the coordination argument, the hope is that one could create incentives for politicians to view the existing rules as advantageous and to avoid redistribution by means of the institutional revision. Yet, just like the coordination argument, it is based on an implicit assumption that politicians are more easily motivated to act “cooperatively” than are their constituencies. The missing step in the literature is the mechanism by which this more or less “cooperative” behavior of elected politicians could be sustainable in the environment of popular accountability. An essential component in building the theory of institutional design is to show the possibility in a democracy of elected politicians cooperating on institutional matters even when each of their constituencies would prefer to adjust the constitutional terms to its own advantage. Elite “cooperativeness” must be sustainable even in the presence of outside challengers promising to stay closer to the constituent preferences. Here, I present a model of mass-elite equilibrium of constitutional legitimacy, which demonstrates the possibility to motivate the incumbents to sustain the institutional stability while at the same time protecting them from electoral defeat. I also discuss the difficulties and limitations that such a solution faces, in particular, in plural societies. JEL classification: H77, D02 In working on this paper, I have benefited from the discussions with Mikhail Filippov, Peter Ordeshook, Charles Kromkowski, Carol Mershon, and from the comments of the participants of the conference on ‘‘Micro-Foundations of Federal Institutional Stability’’ at the MicroIncentives Research Center at Duke University, Durham, NC, April 30–May 1, 2004, and of the Lansing Lee proseminar at the University of Virginia. The responsibility for the many remaining flaws is solely mine.     

Volatility in the knowledge economy

Summary. We seek to explain the economic volatility of the last 6 years, in particular the rapid expansion and contraction of the knowledge sectors. Our hypothesis is that these sectors amplify the business cycle due to their increasing returns to scale, growing faster than others in an upswing and contracting faster in a downswing. To test this hypothesis we postulate a general equilibrium model with two sectors: one with increasing returns that are external to the firm and endogenously determined - the knowledge sector - and the other with constant returns to scale. We introduce a new measure of volatility of output, a real beta, and derive a resolving equation, from which we prove that the increasing return sectors exhibit more volatility then other sectors. We validate the main results on US macro economic data of real GDP by industry (2-3 digits SIC codes) of the 1977-2001 period, and provide policy conclusions.Received: 18 March 2002, Revised: 16 February 2004, JEL Classification Numbers: D5, D58, E10, L50, L52, O38, O51.Correspondence to: Graciela Chichilnisky     

A Time to Scatter Stones,and a Time to Gather Them: The Annual Cycle in Hedge Fund Risk Taking

Analyzing a sample of hedge fund daily returns from Bloomberg, we find a seasonal pattern in their risk taking. During earlier months of a year, poorly performing funds reduce risk. The reduction is stronger for funds with higher management fees, shorter redemption periods, and recently deteriorating performance, consistent with a managerial aversion to early fund liquidation. Toward the end of a year, poorly performing funds gamble for resurrection by increasing risk. It is largely achieved by increasing exposure to market factors, and can be linked to stronger indirect managerial incentives during the second half of a year.     

The double EMG distribution and trade elasticities

Using Brazilian export data that, unlike many trade data sets, have a full record of small export sales, this paper reconsiders trade elasticities and the welfare gains from trade. Using the Brazilian data, this paper provides novel evidence on the properties of the distributions of log‐export sales and shows that the double exponentially modified Gaussian (EMG) distribution parsimoniously captures these properties. Using the double EMG distribution in a standard monopolistic competition model of trade, this paper demonstrates that data truncation, which is prevalent in many data sets, leads to an upward bias in measuring the partial elasticity of trade with respect to variable trade costs. This bias subsequently leads to the underestimation of the gains from trade by 1% to 9% depending on the extent of data truncation, a range that is commensurate with typical economic growth and large booms.     

Do investors actually value sustainability? New evidence from investor reactions to the Dow Jones Sustainability Index (DJSI)

Research Summary: Research exploring investor reactions to sustainability has substantial empirical limitations, which we address with a large‐scale longitudinal financial event study of the first global sustainability index, DJSI World. We examine investor reactions to firms from 27 countries over 17 years that are added, deleted, or continue on the index. We find that once relevant controls and comparisons to observationally equivalent firms beyond the index are included, DJSI events have only limited significance and/or materiality. Nonetheless, investors' valuation of sustainability around the world has evolved over time, involving diminishing reactions to U.S. firms and increasing benefits, particularly of continuation on the index, over time. The study highlights the importance of careful analysis and longitudinal global samples in making inferences about the financial effects of social performance. Managerial Summary: The debate about how investors perceive corporate social responsibility (CSR) predates Milton Friedman's famous statement that the only social responsibility of business is to increase profits. Although extensive research has studied whether sustainability contributes to financial performance, we have yet to understand whether investors believe it pays off. This financial event study of reactions to the addition, continuation, and deletion from DJSI World, the first global sustainability index, shows that investors care little about DJSI announcements. Nonetheless, there is some evidence that global assessments of sustainability are converging and that investors may increasingly be valuing continuation on the DJSI, suggesting that firms may gain at least limited benefits from reliable sustainability activities.     

Situating the wildlife spectacle: ecofeminism,representation, and polar bear tourism

This paper presents a critical investigation of power relations circulating in promotional materials associated with polar bear tourism in Churchill, Manitoba, Canada. Drawing on precepts of ecofeminism, critical discourse analysis, and the content of cultural texts (websites, souvenirs) produced by tourism operators, businesses, and crown corporations, the study interprets how representations of polar bears re-inscribe regimes of truth that marginalize non-human animal others and are complicit with patriarchal ideologies. Focus in our analysis is placed first, on illustrating the portrayal of “performing spectacle bears” – a socially constructed subjectivity designed to serve the desires of wildlife tourism producers and consumers – and, second, on diagnosing the privileged discourses that work to maintain and normalize this construction, along with the interspecies dynamics they support. In effect, the paper sheds light on the complex and recurrent effects of anthropocentric and instrumentalist orientations in tourism, including their contingency upon masculine systems of value and rationality. The paper also points out the potential of ecofeminist ethics of care for enhancing interspecies relationships in sustainable tourism.     

WHOLESALE PRICES AND COURNOT‐BERTRAND COMPETITION

This note considers the competing vertical structures framework with Cournot‐Bertrand competition downstream. It shows that the equilibrium wholesale price paid by a Cournot (Bertrand)‐type retailer is above (below) marginal costs of a corresponding manufacturer. This result contrasts with the one under pure competition downstream (i.e., Cournot or Bertrand), where the wholesale price is set below (above) marginal costs in case of a Cournot (Bertrand) game at the retail level.     

Sustainable Purchasing in Food Retailing: Interorganizational Relationship Management to Green Product Supply

Stakeholders’ demands for product sustainability redefine the focus of corporate purchasing strategies from the traditional concern with financial performance to considerations of ‘triple bottom line’ viability. This adds to the complexity of managing interorganizational relationships and poses a question regarding corporate ability to effectively leverage suppliers over environmental and social performance of supplied goods. Since it is not clear what type of purchasing relationship is more favorable for greening a product supply, the current paper aims to investigate how food retailers manage their relationships with suppliers in order to influence the environmental and social performance of procured goods and improve the availability of sustainably produced supply. The research is based on two case studies of Swedish supermarkets and supplementary semi‐structured interviews with Swedish, British and Danish supermarkets. The results of the study contribute to the existing body of academic knowledge in the field of sustainable supply chain management by developing a typology of sustainable purchasing relationships with detailed insights into the nature of collaborative practices, structure of incentives, sustainability ambition, and approaches to verification of compliance. The study has also revealed the dependence of sustainable purchasing relationships on the characteristics of the procurement context, namely the presence of well‐established sustainability certification schemes, perceived by purchaser's situation with availability of sustainability certified supply and purchaser's interpretation of the state of power dependence in relationships with suppliers. Copyright © 2015 John Wiley & Sons, Ltd and ERP Environment