War, peace, and the size of countries

This paper studies the relationship between international conflict and the size distribution of countries in a model in which both peaceful bargaining and nonpeaceful confrontations are possible. We show how the size distribution of countries depends on the likelihood, benefits, and costs of conflict and war. We also study the role of international law and show how better defined international ‘property rights’ may lead to country breakup and more numerous local conflicts.     

Innovation management in organizations

This paper poses the question of how a firm should optimally choose both its organization and its compensation in the pursuit of innovation. One key result is that incentive pay arises as a robust instrument of innovation management both with and without delegation, although in the present model its primary purpose is not to elicit more effort for the creation of new ideas, but to ensure that new ideas are implemented if and only if this is efficient. While without delegation, the firm may “underinvest” in innovation, with delegation the opposite bias may arise as new ideas may be implemented too often (“overinvestment”). The optimal organizational choice trades off these two biases.     

Can money buy EU love?

We explore the role played by Cohesion Policy in the Brexit referendum and the subsequent 2017 general election. Although the UK has been a net contributor to the EU, some regions receive significant amounts of regional aid funds. We find that while Cohesion Policy is positively correlated with the remain vote, this relationship is weak. Most of the variation in the remain vote is explained by economic factors. In contrast, there is a robust negative correlation between Cohesion Policy and voter turnout. We estimate that had there not been this negative relationship, some 2 million more voters would have participated in the referendum, which is more than the winning margin between the remain and leave votes. Our analysis of the 2017 election suggests that Conservatives lost and Labour gained votes in the regions that benefited from Cohesion Policy, while remain-supporting regions showed gains for the Liberal Democrats.     

North–South technology transfer in unionised multinationals

We study how incentives for North–South technology transfers in multinational enterprises are affected by labour market institutions. If workers are collectively organised, incentives for technology transfers are partly governed by firms' desire to curb trade union power. Higher union bargaining power in the North leads to more technology transfer along two different dimensions – skill upgrading of Southern workers and quality upgrading of products produced in the South – possibly to the extent that the utility of Northern workers decline. Policies to raise the wage levels of Southern workers might spur technology transfer if wages are initially very low, but have a dampening effect on North–South technology transfer once the Southern wage level has surpassed a certain threshold level. These conclusions are reached in a setting where a unionised multinational multiproduct firm produces vertically differentiated products in Northern and Southern subsidiaries.     

Unequal opportunities and human capital formation

This paper develops a tractable, heterogeneous agents general equilibrium model where individuals have different endowments of the factors that complement the schooling process. The paper explores the relationship between inequality of opportunities, inequality of outcomes, and aggregate efficiency in human capital formation. Using numerical solutions we study how the endogenous variables of the model respond to two different interventions in the distribution of opportunities: a mean-preserving spread and a change in the support. The results suggest that a higher degree of inequality of opportunities is associated with lower average level of human capital, a lower fraction of individuals investing in human capital, higher inequality in the distribution of human capital, and higher wage inequality. In particular, the model does not predict a trade-off between aggregate efficiency in human capital formation (as measured by the average level of human capital in the economy) and equality of opportunity.     

The Distributional Effects of International Fragmentation

Economic globalization causes an increasing international fragmentation (disintegration) of value‐added chains, whereby firms outsource components of production to foreign markets. There is a high level of concern about unwelcome distributional effects. This paper provides a theoretical treatment of this issue within a general Heckscher–Ohlin framework, allowing for an arbitrary number of goods, factors, and fragments. It shows how a fragmented production equilibrium is disturbed by lower costs of fragmentation, and it introduces the concept of effective prices of fragments to derive general results that characterize the distributional consequences of an increase in international fragmentation occurring simultaneously in several industries.     

The role of boundary solutions in principal-agent problems of the Holmström-Milgrom type

The paper extends the Holmström-Milgrom [B. Holmström, P. Milgrom, Aggregation and linearity in the provision of intertemporal incentives, Econometrica 55 (1987) 303-328] analysis of intertemporal incentive provision to allow for the implementation of actions on the boundary of the feasible set. Boundary actions provide the principal with some freedom in choosing incentive schemes. This can be used to reduce premia. The paper characterizes optimal incentive schemes for the continuous-time Brownian-motion model and its discrete-time approximations. Linearity of incentive schemes in “accounts” is confirmed. However, for models with effort costs depending only on mean returns, the availability of boundary actions destroys the linearity of optimal incentive schemes in profits.     

ROLE OF RELATIVE AND ABSOLUTE PERFORMANCE EVALUATIONS IN INTERGROUP COMPETITION

We investigate the moral hazard problem in which a principal delegates multiple tasks to multiple workers. The principal imperfectly monitors their action choices by observing the public signals that are correlated with each other through a macro shock. He divides the workers into two groups and makes them compete with each other. We show that when the number of tasks is sufficiently large, relative performance evaluation between the groups accompanied by absolute performance evaluation results in eliminating unwanted equilibria. In this case, any approximate Nash equilibrium nearly induces the first‐best allocation.     

International status seeking, trade, and growth leadership

Abstract .  We study a two-country endogenous growth model where the utility of agents in developing countries is affected by consumption gaps with advanced economies. International status seeking tends to revert growth differentials in favour of the developing country. Preferences with endogenous status desire generate convergence in growth rates in the presence of structural gaps and convergence in income levels if productivity differences disappear. This process is driven by declining terms of trade and faster capital accumulation of the status seeker. The model predictions are shown to be consistent with the stylized facts that characterized the growth performance of East Asian economies.     

FINANCIAL CONSTRAINTS, GLOBAL ENGAGEMENT, AND FIRM SURVIVAL IN THE UNITED KINGDOM: EVIDENCE FROM MICRO DATA

Financial constraints have been found to play an important role on various aspects of firm behavior. Yet, their effects on firm survival have been largely neglected. We use a panel of 61,496 UK firms over the period 1997–2002 to study the effects of financial variables on firms' failure probabilities, differentiating firms into globally engaged and purely domestic. Estimating a wide range of specifications, we find that lower collateral and higher leverage result in higher failure probabilities for purely domestic than for globally engaged firms. This can be seen as evidence that global engagement shields firms from financial constraints.     

Mutual supervision in preshipment inspection programs

Preshipment inspection (PSI) programmes are implemented in many developing countries to assist governments in the collection of revenue at their borders. These programs consist of the delegation of the inspection of imports to a private firm. To study these PSI programmes, we develop a hierarchical agency model in which the government authority can rely on two supervisors, namely the private inspection firm and the customs administration, to control importers' declarations. The government's optimal contract is fully characterized. We devote some attention to the inspection policy and its comparative statics properties. In particular, we identify the situations in which PSI programmes are revenue enhancing. We also discuss the reconciliation policy, i.e. what to do in case of conflicting inspection reports by the inspection firm and the customs administration. In the optimal mechanism, mutual supervision between the inspection firm and the customs administration is used to provide adequate incentives to all parties.