Tests of Financial Intermediation and Banking Reform in China

We develop tests of financial intermediation by national banking systems based on the expectation that, in commercial systems, financial intermediation should not be overly influenced by policy variables; should be greater in richer, faster growing industrial areas; and should direct funds to the best projects regardless of where deposits originate. Using Chinese provincial data from 1991 to 1997, we test whether financial reforms in the mid-1990s increased efficient intermediation by different financial institutions. We find that the importance of policy lending by state banks did not fall during the recent period and that lending by financial institutions did not respond to economic fundamentals. J. Comp. Econ., December 2001, 29(4), pp. 608–644. University of Michigan, Ann Arbor, Michigan 48109; and Department of Government, Dartmouth College, Hanover, New Hampshire 03755. © 2001 Elsevier ScienceJournal of Economic Literature Classification Numbers: G21, O16, O53, P34.     

Efficiency Wages and Work Incentives in Urban and Rural China

This paper examines incentive-wage effects for production and for managerial/technical workers in both urban and rural Chinese nonagricultural enterprises. We report strong evidence of productivity-enhancing wage behavior among enterprises in all ownership categories. There is also evidence that firms paying higher efficiency wages experience less shirking among their employees. We find that the profit-maximizing potential of incentive-wage setting is not fully exploited, although there is weak evidence that joint ventures come closer to profit-maximizing behavior at this margin of wage/employment behavior than do collectives or state-owned enterprises. J. Comp. Econ., December 2001, 29(4), pp. 645–662. The Ohio State University, 1945 North High St., Columbus, OH 43210 and University of Hawaii at Manoa, Honolulu, Hawaii 96822. © 2001 Elsevier ScienceJournal of Economic Literature Classification Numbers: P23, J31, O15.     

Does a Switch of Budget Regimes Affect Investment and Managerial Discretion of State-Owned Enterprises? Evidence from Italian Firms

We investigate the investment decisions of Italian state-owned enterprises (SOEs) across budget constraint regimes and carry out a natural experiment that exploits a regime switch in 1987. Drawing on the theory of capital market imperfections, we apply an empirical framework for investment analysis to a panel of manufacturing SOEs in competitive industries. We identify parallels between SOEs and widely held, quoted companies afflicted by agency problems, managerial discretion, and overinvestment. We argue that, in the case of SOEs, the soft budget regime increases managerial discretion, facilitates collusion with vote-seeking politicians, and results in wasteful investment. Consistent with our predictions, we find that the regime switch disciplines SOE's investment behavior. Following a hardening of the budget constraint, managers lose discretion to indulge in collusion and overinvestment. J. Comp. Econ., June 2002 30(4), pp. 787–811. London School of Economics and Political Science, Houghton Street, London WC2A 2AE, United Kingdom; and CERIS–CNR, Institute for Economic Research on Firms and Growth, National Research Council, Via Avogadro, 8, 10121 Turin, Italy. © 2002 Association for Comparative Economic Studies. Published by Elsevier Science (USA). All rights reserved.Journal of Economic Literature Classification Numbers: E32, G31, G32, L32, M40.     

Sovereign default: Which shocks matter?

This paper analyses a small open economy that wants to borrow from abroad, cannot commit to repay debt but faces costs if it decides to default. The model generates analytical expressions for the impact of shocks on the incentive compatible level of debt. Debt reduction generated by severe output shocks is no more than a couple of percentage points. In contrast, shocks to world interest rates can substantially affect the incentive compatible level of debt.     

Spurious regressions driven by excessive volatility

This paper shows that the excessive volatility results in spurious regressions. The spuriousness can be driven by persistency in the error variances unlike the conventional spurious regressions that are generated by the persistency in the level of regression errors.     

On spatial equilibria in a social interaction model

Social interactions are at the essence of societies and explain the gathering of individuals in villages, agglomerations, or cities. We study the emergence of multiple agglomerations as resulting from the interplay between spatial interaction externalities and competition in the land market. We show that the geography of the spatial economy affects significantly the properties of spatial equilibria. In particular, when agents locate on an open land strip (line segment), a single city emerges in equilibrium. In contrast, when the spatial economy extends along a closed land strip (circumference), multiple equilibria with odd numbers of cities arise. Spatial equilibrium configurations involve a high degree of spatial symmetry in terms of city size and location, and can be Pareto-ranked.     

Biogeographical conditions, the transition to agriculture and long-run growth

We use new data on the timing of the transition to agriculture, developed by Putterman and Trainor (2006), to test the theory of Diamond (1997) and Olsson and Hibbs (2005) that an earlier transition is reflected in higher incomes today. Our results confirm the theory, even after controlling for institutional quality and other geographical factors. The date of transition is correlated with prehistoric biogeography (the availability of wild grasses and large domesticable animal species). The factors conducive to high per capita incomes today are good institutions, an early transition to agriculture, access to the sea and a low incidence of fatal malaria. Geographical influences have been at work in all of these proximate determinants of per capita income.     

The robustness of robust implementation

We show that a mechanism that robustly implements optimal outcomes in a one-dimensional supermodular environment continues to robustly implement ε-optimal outcomes in all close-by environments. Robust implementation of ε-optimal outcomes is thus robust to small perturbations of the environment. This is in contrast to ex-post implementation which is not robust in this sense as only trivial social choice functions are ex-post implementable in generic environments.     

Premium auctions and risk preferences

In a premium auction, the seller offers some “payback”, called premium, to a set of high bidders at the end of the auction. This paper investigates how the performance of such premium tactics is related to the bidders? risk preferences. We analyze a two-stage English premium auction model with symmetric interdependent values, in which the bidders may be risk averse or risk preferring. Upon establishing the existence and uniqueness of a symmetric equilibrium, we show that the premium causes the expected revenue to increase in the bidders? risk tolerance. A “net-premium effect” is key to this result.     

Are there dual labor markets in Chile?: empirical evidence

In this paper we use a switching regression method to test the hypothesis that segmentation in the Chilean labor market exists. The results support the labor segmentation hypothesis and consequently they contradict those of Corbo and Stelcner (1983). The explanation for this is that we do not make any a priori definition of the population, as Corbo and Stelcner do. In fact, our results show that any a priori definition of the sample will lead to rejecting the segmentation hypothesis.     

The implications for an open economy of partisan political business cycles: Theory and evidence

This paper develops and tests the predictions of two open economy models in which partisan effects are present, a small-country-one-good model of exchange rate determination and a model that assumes the two countries each specialize in the production of one good. From these models, we can obtain predictions for the behaviour of the terms of trade, the current account, and real and nominal exchange rates. The predictions are tested empirically using panel data from 14 OECD countries and the results provide support for the theoretical predictions that systematic partisan effects are present in current accounts, real exchange rates, and the terms of trade.     

Rents, military elites, and political democracy

In autocratic regimes the military elite is in a position to extract rents, because without the support of the military the government is in general not able to sustain itself. In this paper, we empirically confirm the negative relation between transfers to the military and the degree of democracy for developing countries. We use an instrumental variable approach to account for the simultaneity that arises since the degree of democracy is itself a function of transfers to the military.     

Evolutionary selection of ‘chivalrous’ conventions in coordination games without common expectations

We study an evolutionary game-theoretic model where players have to choose within a predetermined set of mixed strategies in a coordination game. Players are of two different kinds, male and female. No common expectations assumption is made; players tend therefore to adopt the strategy that yields larger than average expected payoffs for their kind. In this framework, every stable stationary point of the population dynamics can be interpreted as the emergence of a particular convention. A classification of the possible conventions is provided; conditions for their emergence are determined.     

On the credibility of harassment in the insider—outsider model

In a well-known version of the insider-outsider model, the decision by outsiders not to underbid follows from the threats made by insiders to harass new entrants, thereby raising the entrants' disutility of work. It has been argued, however, that the harassment threat is not credible, at least in the one-period case. In the current paper we explore this claim, concluding that the existence of a social convention, together with associated social pressure effects, provides a possible explanation of the credibility of the harassment threat. Moreover, we suggest that such a convention is likely to play a role even in a multi-period analysis.     

Piece rates for professors

Using panel data, we demonstrate a 50% increase in research productivity following a dramatic increase in the piece rate paid for articles by a major Chinese University. The increased productivity comes exclusively from those who were already research active.     

Uniqueness of stationary equilibria in bargaining one-dimensional policies under (super) majority rules

We consider negotiations selecting one-dimensional policies. Individuals have instantaneous preferences represented by continuous, concave and single-peaked utility functions, and they are impatient. Decisions arise from a bargaining game with random proposers and (super) majority approval, ranging from the simple majority up to unanimity. We provide sufficient conditions that guarantee the existence of a unique stationary subgame perfect equilibrium, and we provide its explicit characterization. The uniqueness of the equilibrium permits an analysis of the set of Pareto optimal voting rules. For symmetric distributions of peaks and uniform recognition probabilities unanimity is the unanimously preferred majority rule.     

Adult nutrition and growth

We provide microeconomic foundations for the commonly assumed subsistence constraint on consumption and demonstrate that the theory is consistent with several important features of development. In principle, subsistence is consistent with different combinations of food consumption, energy expenditure, body weight, and health. In practice, caloric intake has remained remarkably constant over the course of development, giving the appearance of a minimal subsistence constraint in consumption alone. We argue that the trendless nature of caloric intake results from a positive income effect on food consumption being offset by a reduction in the need for food as the energy requirements of work decrease with development. The theory helps explain the observed patterns in body mass, fertility, and economic growth rates for more than two centuries.     

Stochastic evolutionary selection in finite populations

We primarily focus on a wide range of stochastic evolutionary game dynamics between two strategies which are characterized by a condition we call monotonicity: the sign of the difference between the probabilities of increasing and decreasing an A-individual completely depends on the difference of payoffs based on different strategies. When mutations are excluded, we provide sufficient conditions for selection to favor one strategy over the other and necessary conditions for selection to favor or oppose change, respectively. Moreover, we discuss which strategy will be favored in case of rare mutations and give a simple rule to determine evolutionary selection of strategies for large populations under some specific stochastic mutation–selection dynamics.     

Non-cooperative solutions for estate division problems

In an estate division problem an estate has to be divided among several players whose total entitlement to the estate exceeds its size. This paper extends the non-cooperative approach through a claim game, as initiated by O?Neill (1982), by allowing players to put multiple claims on the same part of the estate, and by considering the case where individual entitlements may exceed the estate. A full characterization of the set of Nash equilibria of the claim game is obtained both for restricted estate division problems, where individual entitlements do not exceed the estate, and for the general case. Variations on the claim game are considered, which result in proportional division in equilibrium.     

“Burden sharing” in sovereign debt reduction

We examine a concerted debt reduction deal between a sovereign debtor, a private creditor, and an official creditor, who insures the deposits of the commercial bank. Our results show that a weakening of the financial position of the commercial bank reduces the contribution of the commercial bank and increases that of the official creditor, without affecting the net terms faced by the debtor. This result is robust to changes in seniority. Moreover, leaving both creditor values unchanged requires that commercial banks retire debt at “unfairly” high prices, while official creditors make a net contribution.