Trade policy substitution: theory and evidence

Review of World Economics - With the help of a political economy model, we show that the extent of ‘trade policy substitution’—namely, substitution of tariffs with non-tariff...     

Does competition foster trust? The role of tournament incentives

Members of organizations are often called upon to trust others and to reciprocate trust while at the same time competing for bonuses or promotions. We suggest that competition affects trust not only within dyads including direct competitors, but also between individuals who do not compete against each other. We test this idea in a trust game where trustors and trustees are rewarded based either on their absolute performance or on how well they do relative to players from other dyads. In Experiment 1, we show that competition among trustors significantly increases trust. Competition among trustees decreases trustworthiness, but trustors do not anticipate this effect. In Experiment 2, we additionally show that the increase in trust under competition is caused by a combination of increased risk taking and lower sensitivity to non-financial concerns specific to trust interactions. Our results suggest that tournament incentives might have a “blinding effect” on considerations such as betrayal and inequality aversion.     

USING DISCOUNTED CASH FLOW ANALYSIS IN AN INTERNATIONAL SETTING: A SURVEY OF ISSUES IN MODELING THE COST OF CAPITAL

Based on the results of a recent survey of University of Chicago Graduate School of Business alumni, the authors of this article suggest that prevailing corporate practice in valuing overseas investments reflects a flawed understanding of finance theory. Although the survey finds that almost all respondents use the discounted cash flow (DCF) method in some fashion or another, there is significant variation both in the application of DCF and in the weighting that different groups assign to DCF in dealing with segmented markets. Of greater interest, the survey also shows that, as the complexity and uncertainty involved in valuation tasks increases, practitioners appear to place greater reliance on heuristics, or conventional rules of thumb. And in relying on heuristics as perceived risk increases, the authors warn, “people tend to become less consistent, less systematic, and less rigorous in the methods they use to measure and evaluate risk.” Also of interest to the authors, many practitioners doing international valuations appear to be unwitting adherents to a “multi-factor” asset pricing model. For, in addition to traditional market factor proxies, they tend to incorporate country-specific risks, such as political and sovereign risk, into the discount rate. The authors attribute this practice to the implicit (and generally mistaken) assumption that there is a significant relationship between systematic risk and the degree of foreign market segmentation. Following presentation of their survey results, the authors explore several important issues surrounding international cost of capital. Perhaps most important is the degree of market “segmentation” and how it affects the pricing model (whether a global or a local version of the CAPM, for example) used to calculate the cost of capital. The article provides a framework to help practitioners decide which pricing model is appropriate for valuing a given investment. Moreover, since the cost of capital affects EVA-type measures of operating performance that are often used in performance evaluation schemes, the framework also can be used to guide senior management in thinking about the proper hurdle rates for their overseas business units.     

Simulating World Trade in the Decades Ahead: Driving Forces and Policy Implications

Notwithstanding the current slowdown, the geography and composition of international trade are changing fast. We link a macroeconomic growth model and sectoral computable general equilibrium framework in order to project the world economy forward to the year 2035 and assess to what extent current trends in trade are expected to continue. Constructing fully traceable scenarios based on assumptions grounded in the literature, we are also able to isolate the relative impact of key economic drivers. We find that the stakes for developing countries are particularly high: the emergence of new players in the world economy, intensification of South–South trade and diversification into skill‐intensive activities may continue only in a dynamic economic and open trade environment. Current trends towards increased regionalisation may be reversed, with multilateral trade relationships gaining in importance. Hypothetical mega‐regionals could slow down, but not frustrate the prevalence of multilateralism. Continuing technological progress is likely to have the biggest impact on future economic developments around the globe. Population dynamics are influential as well: for some countries, upskilling will be crucial; for others, labour shortages may be addressed through migration. Several developing countries would benefit from increased capital mobility; others will only diversify into dynamic sectors, when trade costs are further reduced.     

Does it Take More Than Ideals? How Counter-Ideal Value Congruence Shapes Employees’ Trust in the Organization

Research on value congruence rests on the assumption that values denote desirable behaviors and ideals that employees and organizations strive to approach. In the present study, we develop and test the argument that a more complete understanding of value congruence can be achieved by considering a second type of congruence based on employees’ and organizations’ counter-ideal values (i.e., what both seek to avoid). We examined this proposition in a time-lagged study of 672 employees from various occupational and organizational backgrounds. We used difference scores as well as polynomial regression and response surface analyses to test our hypotheses. Consistent with our hypotheses, results reveal that counter-ideal value congruence has unique relations to employees’ trust in the organization that go beyond the effects of ideal value congruence. We discuss theoretical and practical implications of this expanded perspective on value congruence.     

Private irrigation investment in Colombia: effects of violence,macroeconomic policy,and environmental conditions

This paper identifies and estimates the effects of several determinant, on private investment in irrigation in Colombia. It attempts to quantify macroeconomic policy, environment, and violence variables that have been identified in previous studies as significantly affecting investment, in agriculture in genera., and in irrigation in particular. Variables such as violence, climate, and governmental price credit policies are used to explain changes in private investment in irrigation across regions and over time. Violence negatively affects private investment. Climate affects the investment such that in regions with favorable climate condition, investment in irrigation is less attractive, and appropriate government crop-price and credit policies promote investment in irrigation.     

Perspectives for Global Trade and the International Trading System

The authors review current developments in international trade and its prospects for the future arguing that despite the recent slowdown, trade remains an important driver of economic growth and development. Scepticism towards further trade opening needs to be addressed, notably via appropriate domestic adjustment policies. One challenge to advancing further global economic integration lays in the rapid transformation of trade itself and the nature of remaining barriers. The authors highlight new models of trade cooperation that can help to make progress at the global level, while accommodating countries’ diverse interests and levels of development.     

Shaken,Not Stirred: The Impact of Disasters on International Trade

This paper examines the impact of major disasters on import and export flows using a gravity model (170 countries, 1962–2004). As a conservative estimate, an additional disaster reduces imports on average by 0.2% and exports by 0.1%. Despite the apparent persistence of bilateral trade volumes, we find that the driving forces determining the impact of disastrous events are the level of democracy and the geographical size of the affected country. The less democratic and the smaller a country the greater is its loss due to a catastrophe. In autocracies, exports and imports are significantly reduced. Had Togo been struck by a major disaster in 2000, it would have lost 6.2% of its imports and 3.7% of its exports. While democratic countries' exports suffer identical decreases, imports increase.