A cost function approach to the estimation of minimum efficient scale,returns to scale,and suboptimal capacity: With an application to Canadian manufacturing

This paper presents a new method for utilizing the statistical cost technique to measure minimum efficient scale (MES), returns to scale and suboptimal capacity. An application of the duality theory between cost and homothetic production functions leads to justification for ignoring poor quality or unavailable capital data and the pooling of several years observations to improve the efficiency of the estimates. The methodology is applied to 91 four-digit Canadian manufacturing industries to obtain estimates of MES, returns to scale, and suboptimal capacity. For a subsample of industries, we demonstrate that the cost function estimates of MES and returns to scale are more closely related to engineering estimates than are the ad hoc estimates usually found in the industrial organization literature.     

The marginal and average returns to schooling in the UK

We explore the possibility that different instruments may affect different margins of the schooling distribution, and consistent with recent evidence we find a large, significant downward bias in the least squares estimate of the returns to schooling and that the estimates are stable with respect to the choice of instruments. However when we remove the assumption that log wages are linear in years of schooling we find sensitivity to the choice of instrument.     

Individual heterogeneity in the returns to schooling: instrumental variables quantile regression using twins data

Considerable effort has been exercised in estimating mean returns to education while carefully considering biases arising from unmeasured ability and measurement error. Recent work has investigated whether there are variations from the “mean” return to education across the population with mixed results. We use an instrumental variables estimator for quantile regression on a sample of twins to estimate an entire family of returns to education at different quantiles of the conditional distribution of wages while addressing simultaneity and measurement error biases. We test whether there is individual heterogeneity in returns to education and find that: more able individuals obtain more schooling perhaps due to lower marginal costs and/or higher marginal benefits of schooling and that higher ability individuals (those further to the right in the conditional distribution of wages) have higher returns to schooling consistent with a non-trivial interaction between schooling and unobserved abilities in the generation of earnings. The estimated returns are never lower than 9 percent and can be as high as 13 percent at the top of the conditional distribution of wages but they vary significantly only along the lower to middle quantiles. Our findings may have meaningful implications for the design of educational policies.     

Human resources in China: the birth quota, returns to schooling, and migration

Abstract. The rural elderly in China have 40% of the income of the urban elderly, spend a larger share of their income on food, are in worse health, work later into their lives and depend more on their children, lacking pensions and public services. The birth quota since 1980 has particularly restricted the childbearing of rural, less educated, women, who therefore have fewer children to rely on for support. This inequality is reinforced by increasing returns to schooling, especially beyond secondary school. Government restrictions on rural–urban migration reduces national efficiency, adds to the urban–rural wage gap and increases inequality.     

The Cultural Revolution and returns to schooling in China: Estimates based on twins

This paper investigates the returns to schooling in China for the Cultural Revolution (CR) cohort and the non-CR cohort using a new set of Chinese twins data. Applying the fixed-effects model on twins data, which helps to control for the genetic and family background effects, this paper examines whether the CR cohort has smaller economic returns to schooling than the non-CR cohort. The empirical results in this paper indicate that the Cultural Revolution has not played a significantly adverse role in the returns to schooling.     

The Cultural Revolution and returns to schooling in China: Estimates based on twins

This paper investigates the returns to schooling in China for the Cultural Revolution (CR) cohort and the non-CR cohort using a new set of Chinese twins data. Applying the fixed-effects model on twins data, which helps to control for the genetic and family background effects, this paper examines whether the CR cohort has smaller economic returns to schooling than the non-CR cohort. The empirical results in this paper indicate that the Cultural Revolution has not played a significantly adverse role in the returns to schooling.     

A state-contingent production approach to principal-agent problems with an application to point-source pollution control

Two basic representations of principal-agent relationships, the ‘state-space' and ‘parameterized distribution' formulations, have emerged. Although the state-space formulation appears more natural, analytical studies using this formulation have had limited success. This paper develops a state-space formulation of the moral-hazard problem using a general representation of production under uncertainty. A closed-form solution for the agency-cost problem is derived. Comparative-static results are deduced. Next we solve the principal's problem of selecting the optimal output given the agency-cost function. The analysis is applied to the problem of point-source pollution control.     

Nonparametric measures of returns to scale: an application to German water supply

The evaluation of market structures and the quantification of returns to scale in network industries usually are of high interest for researchers and policy makers. Regarding the debate on optimal market structures in German potable water supply, we use a cross-sectional sample of 364 German water utilities observed in 2006 to derive a nonparametric measure of scale elasticity for the water industry. The data sample is validated by applying a super-efficiency approach and a statistical testing procedure for outlier detection. Besides using a standard data envelopment analysis approach, a conditional efficiency approach is applied to account for the water utilities’ operating environments. The results indicate non-decreasing returns to scale for the majority of water utilities and constant or non-increasing returns for larger utilities. Optimal firm size is found to be generally larger than the current sample median firm size. Efficiency improvements could be realized by increases in firm sizes and through a consolidation of the industry.     

Parental background,educational attainments and returns to schooling and to marriage: the case of Israel

This paper investigates the effect of family background attainments and on returns to own and wife's schooling, for Jewish males Israel. Three dimensions of paternal background are referred to: father's education, the prestige of the father's occupation, and whether the father is of a western origin (an advantage in the western-oriented Israeli society). For each of these types of segmentation it is found that both the level of and the returns to own and wife's schooling (after some years of marriage) are higher for those coming from a more favourable background.

These empirical findings are consistent with an investment in schooling model in which differences in demand (productivity of own and wife's schooling) vary more than differences in supply of investment funds.     

Estimating returns to education in urban China: Evidence from a natural experiment in schooling reform

Whereas there is a large literature on estimating returns to education in China, few studies have attempted to address the endogeneity of schooling choices. We explore the arguably exogenous changes in the duration of secondary education as the instrumental variable to identify the causal effect of years of schooling in urban China. The schooling years in most middle schools were reduced from three years to two years during the Cultural Revolution. The Chinese government gradually restored the middle school education years from two years to three years after 1978. An important feature of these policy changes is their large geographic variations. From local gazetteers, we find out the exact years when education years were reduced from three to two and when they were restored from two to three. Using the exogenous variation in schooling reform, we estimate that the returns to education are 12.7% for both monthly wage and disposable income.     

Lower and upper bounds of returns to schooling: An exercise in IV estimation with different instruments

Several recent studies based on `exogenous' sources of variation in educational outcomes show IV estimates of returns to schooling that are substantially higher than the corresponding OLS estimates. Card (1995a, Earnings, schooling, and ability revisited. Research in Labor Economics 14, 23–48) suggests that these results are explained by the existence of heterogenity in individual returns and by the fact that these studies are based on instruments that influence only the educational decision of individuals with high marginal returns due to either liquidity constraints or to high ability. This conclusion is consistent with the local average treatment effect (LATE) interpretation of IV (Imbens and Angrist (1994, Identification and estimation of local average treatment effects. Econometrica 62, 467–475) according to which IV identifies only the average returns of those who comply with the assignment-to-treatment mechanism implied by the instrument. We show evidence for Germany suggesting that returns to schooling are heterogeneous, instruments matter and the LATE interpretation of IV makes sense. With an appropriate choice of instruments we also show how IV can be used to approximate the range of variations of returns to schooling in Germany.     

Modelling the distribution of returns on higher education: A microsimulation approach

Cost-sharing policies for higher education have been implemented in several countries in various ways. We argue that to assess their appropriateness and facilitate their implementation it is necessary to develop statistical indicators of the distribution of returns. When starting a higher education programme, the return on a particular degree is uncertain, and risk-adverse students or those from low-income families may be reluctant to enrol if this means taking out a loan. These statistical indicators would therefore be natural inputs of cost-sharing policies intended to preserve the individual economic incentives to go to university and simultaneously provide an insurance role. We present a dynamic microsimulation model of individual lifetime educational output in the French labour market which uses econometric modelling of individual wages, labour market transitions, social security contributions and benefits. It relies largely on labour force survey data and mortality tables. In the standard internal rate of return framework, the model is used to compute the distribution of returns to higher education, for a given generation. The results show that the percentage of negative returns is close to 3.5%.     

A panel cointegration approach to estimating substitution elasticities in consumption

This paper investigates the relationship between government spending and private consumption. The general framework is a cointegration approach of Ogaki (1992) used to estimate the intratemporal elasticity of substitution between government and private consumption in a panel of 15 European countries. Recently developed non-stationary panel methodologies that assume cross-section dependence are applied. Results indicate an Edgeworth substitutability between private and public spending.     

Blue Beijing: estimating the effects of temporary emissions restrictions on air quality

The article uses a quasi-experimental regression discontinuity approach to estimate the effect of temporary emissions restrictions on air quality in China. While temporary emissions control is an effective strategy in response to high-pollution events, China has been using this temporary policy instrument to improve air quality during events of international exposure. We find that post-restrictions peak levels of fine particulate matter are extremely high. This finding uncovers unintended consequences of temporary polluting restrictions.     

A semi-parametric approach to estimating the operational risk and Expected Shortfall

In this article, we propose improvements to the peak-over-threshold (POT) method and apply this improved method for modelling US business operational losses and estimating operational risks (ORs). In the widely used traditional POT method, the generalized Pareto distribution (GPD) is fitted to severity losses, while an empirical distribution is fitted to small to medium losses. Then, the Expected Loss and the 99.9% operational value-at-risk (OpVaR) are estimated. Additionally, the Expected Shortfall (ES) – a coherent risk measure – is estimated in this article as an alternative to OpVaR. These risk measures constitute the levels of regulatory and economic capitals to cover risks. With the improved POT method, the risks can be estimated more accurately than with the traditional POT method. The results indicate that the OpVaR are much lower than the ES and that the larger the tail losses the greater the difference between these two risk measures. Our findings imply that the ES would provide higher levels of capitals to cover risks than would the OpVaR, particularly during crises, and they have implications for the efficient OR management and regulators.     

The gender difference in wages and the returns to schooling over the great recession in the U.S.

This paper examines the effects of the Great Recession on the gender difference in hourly wage and the rate of return to schooling in the United States. Using data from American Community Survey 2000–2015, we find that the male-female difference in hourly wage declined during and after the recession. The Great Recession decreased earnings for both men and women, especially for those with more education. We also find there is a significant gender difference in the effects of the Great Recession on the returns to schooling. The Great Recession increased the rate of return to schooling for both men and women, and the female-male difference in the returns to schooling decreased by 0.4 percentage points in the post-recession period. The change of the gender difference in the returns to schooling can be explained by the wage structure change for men and women over the recession.     

A nonlinear approach to testing the unit root null hypothesis: an application to international health expenditures

In this article, we examine the unit root null hypothesis for per capita total Health Expenditures (HEs), per capita private HEs and per capita public HEs for 29 Organization for Economic Co-operation and Development (OECD) countries. The novelty of our work is that we use a new nonlinear unit root test that allows for one structural break in the data series. We find that for around 45% of the countries, we are able to reject the unit root hypothesis for each of the three HE series. Moreover, using Monte Carlo simulations, we show that our proposed unit root model has better size and power properties than the widely used Augmented Dickey–Fuller (ADF) and Lagrange Multiplier (LM) type tests.     

A dual theory approach to estimating risk preferences in the parimutuel betting market

This paper introduces an alternative empirical approach to estimating risk preferences in the parimutuel betting market using a dual theory model which is amended to include bettors’ misperceptions of probabilities. We replicate previous empirical results and test our alternative empirical approach using parimutuel horse race betting data. Our results suggest that while bettors are risk-averse, they are also prone to misperceiving probabilities by overweighting low probabilities and underweighting high probabilities. As an application, these results replicate the choice patterns consistent with the Allais paradox.     

A regime-switching approach to estimating the nonlinear quantity-based monetary policy rule in China

This article focuses on the quantity-based monetary policy rule in China. The article applies a Markov regime-switching approach to estimate the nonlinear policy rule using quarterly data from 1997Q1 to 2015Q2. Overall, the performance of the estimated two-state rule is significantly better than the performance of the linear rule. The regime-switching estimation suggests that the quantity-based policy tool displays a countercyclical response to the inflation gap but a pro-cyclical response to the output gap during recessions. In addition, this article provides notable evidence of the fact that China’s central bank has been targeting inflation over the gradual course of financial liberalization.     

Polynomial approximation of distributed lags and linear restrictions: A Bayesian approach

In this paper, the polynomial approximation of distributed lags is investigated within the framework of linear restrictions in linear regression models. In the first part, the polynomial approximation is analysed assuming well known the truncation point and the degree of the polynomial. The polynomial approximation is shown to involve linear restrictions on regression coefficients; two equivalent representations of these restrictions are used to clarify relationships between previous works byAlmon and byShiller. The difficulties related to the treatment of exact restrictions in a Bayesian framework are then tackled in the present context and alternative procedures are presented. In the second part, the analysis is extended to the case of unknown truncation point and/or unknown degree of the polynomial. This leads to consider mixed prior distributions as for the problem of choosing among different models. The paper ends by investigating the sensitivity of a particular set of data w.r.t. changes in the truncation point, in the degreee of the polynomial and in the prior tightness of the polynomial approximation.