THE MAKING OF ECONOMIC POLICY

Books reviewed in this article:
Rosalind Levacic (1987) Economic Policy-Making: Its Theory and Practice.
Paul Whiteley (1986) Political Control of the Macro-Economy.
Douglas A. Hibbs Jr. (1987) The Political Economy of Industrial Democracies.
Wyn Grant with Jane Sargent (1987) Business and Politics in Britain.
Michael Moran (1986) The Politics of Banking     

POLICY MAKING FOR INDUSTRIAL COMPETITIVENESS IN PORTUGAL - Patterns of change in a traditional bureaucracy

In Portugal the EEC membership represented a major change in Portuguese Administration functioning. This article uses the new institutionalism approach and the concept of path-dependence to analyse the change in the functioning of a central directorate reponsible for industrial policy. It argues that despite the external pressures for change has altered the directorate operations, there are patterns of continuity which are path-dependent. The response to change shows institutional reproduction in traditional features which is partly due to the reluctance to change traditional methods and partly because of the routines, procedures and norms embedded in the culture.     

JUSTIFYING A POLICY MIX FOR POLLUTION CONTROL: A REVIEW OF ECONOMIC LITERATURE

Abstract This paper provides a review of economic studies analysing the use of multiple policies – a so‐called policy mix – to cope with single pollution problems. To guide and structure the review, an analytical framework is developed and applied. The framework integrates transaction costs into the analysis of pollution problems and policies to overcome them. Moreover, it understands a pollution externality not only as a market failure but more generally as the failure of private governance structures. Based on this insight, two rationales for using a policy mix are identified. First, a policy mix may help to correct for multiple reinforcing failures of private governance structures, such as pollution externalities and technological spillovers. Second, a policy mix can be employed if the implementation of single first‐best policies brings about high transaction costs, e.g. when marginal pollution damages are heterogeneous or polluters are unlikely to comply with the policy. For each rationale, the relevant literature is presented. Based on the review, avenues for future research are identified.     

REPETITION AND FINANCIAL INCENTIVES IN ECONOMICS EXPERIMENTS

Abstract While experimental methods have been an effective tool for economic research, there have been controversies on the methodological aspects. The reason why we need to care about it is clear: if the method in an experiment is not valid, the results from that experiment cannot be valid too. Among other things, the methodological issues of financial incentives and repetition, which are norms in experimental economics, have been at the centre of many debates. While there are previous reviews that investigate financial incentives and repetition separately, our view is that the effects of these two factors are interdependent rather than independent. Thus, our review here is more specific and more conditional, that is, we are interested in the answer to the question, ‘Do we need to use financial incentives conditional on the use of repetition?’ After we discuss the relationship between financial incentives and repetition, we argue, from a review of 44 experimental studies, that using financial incentives would be more necessary to improve the validity of experimental results if an experimenter needs to use repetition.     

TOWARDS AN ALGORITHMIC REVOLUTION IN ECONOMIC THEORY

Abstract This is an attempt to tell a coherent story of a possible path towards an algorithmic revolution in economic theory, based on foundational debates in mathematics. First, by exposing the non‐computational content of classical mathematics, and its foundations, it is shown that both set theory and the tertium non datur can be dispensed with, as foundational concepts. Next, then, as a natural sequel, it follows that every kind of economic theory that bases its theoretical underpinning on classical mathematics can be freed from these foundations and can be made naturally algorithmic. This will make the subject face, in an all pervasive way, absolutely (algorithmically) undecidable decision problems. The thrust of the path towards an algorithmic revolution in economics lies, then, in pointing out that only a radically new mathematical vision of microeconomics, macroeconomics, behavioural economics, game theory, dynamical systems theory and probability theory can lead us towards making economic theory a meaningfully applied science and free of mysticism and subjectivism.     

INCENTIVES AND SOCIAL NORMS: A MOTIVATION‐BASED ECONOMIC ANALYSIS OF SOCIAL NORMS

Abstract It is now commonplace to regard social norms as a subject of growing interest in the economic literature (e.g. game theoretical approaches based on ‘other‐regarding’ individual preferences, the analysis of the impact of rewards or punishment on individuals’ behaviour through experimental economics as well as field experiments, the revival of the institutionalist tradition spurred on by the influential work of Douglas North and followed by many others and the growing influence of neuroeconomics). In this paper, we focus on the relationship between incentives and social norms and survey the literature that could constitute the foundations of a motivation‐based economic analysis of social norms. Our main findings are that (1) the interaction between incentives and social norms is far from obvious since taking social norms into account involves the introduction of supplementary motives, in addition to self‐interest, into the economic analytical framework; (2) the analysis of the interaction between incentives and social norms resists an approach exclusively in terms of crowding‐in and ‐out effects because it is sensitive to whether it concerns behaviours driven by honour or by social stigma; (3) as a result, it is difficult to precisely evaluate the policy implication of the interactions between incentives and social norms.     

DESIGNING EXPERIMENTS TO FIT AND VALIDATE REGRESSION MODELS

A graphical procedure is proposed for selecting designs suitable for estimation and validation of linear regression models. The procedure is exemplified with polynomial regression involving one and two explanatory variables.     

THE APPLICABILITY OF THE TRADITIONAL THEORY OF ECONOMIC POLICY

Abstract. The traditional theory of economic policy requires targets, instruments, an empirical economic model, and a social welfare or criterion function to be specified in order to derive the optimal economic policy. Empirical studies of reaction functions suggest that economic policy is carried out in some systematic manner, subject to interference from political factors. This survey addresses the problems of specifying, estimating and applying an economic model when economic policy is following a path specified by a reaction function. Attention is paid to rational expectations, the Lucas'critique, and the policy neutrality proposition. Lack of knowledge of the policy maker's objective function poses the most serious difficulty when applying the theory of economic policy. Various methods of determining this function are reviewed, and the possibility that policy makers might be satisficing is discussed. The role played by political factors is considered in the light of the public choice literature.     

CO‐INTEGRATING VAR MODELS AND ECONOMIC POLICY

This paper surveys some relevant contributions to the economic literature on co‐integrating vector autoregressive (VAR) models [vector error correction mechanisms (VECMs)], emphasizing their usefulness for economic policy. It further discusses some theoretical aspects that are necessary for a complete understanding of their potential. The theoretical introduction of the co‐integrating VAR model is followed by an illustration of its applications to monetary policy, fiscal policy and exchanges rates as well as in establishing the effects of structural bilateral shocks between countries (the so‐called global VAR, or GVAR, models). Special attention is paid to the VECM capacities of being used in conjunction with dynamic stochastic general equilibrium models and of jointly specifying the short‐ and long‐run dynamics, thus representing the steady‐state of economic systems (by means of the co‐integration relations) and the short‐run dynamics around it.     

Experiments in Environmental Economics and Some Close Relatives

Abstract.  It is not only the great number of papers written on environment economics that make it worth dealing with this special branch of experimental research, but the environmental problem in all its facets seems to serve as a catalyst for identifying some methodological problems of the experimental method. For this reason, we will not only try to give an overview of recent experiments in environmental economics but also add some thoughts on the methodological implications of this work. We identify three direct connecting factors for the experimental method and environmental economics. First, social dilemmas are, in many cases, at the core of environmental problems. Experiments are able to test theoretical hypotheses for individual behavior in such social dilemma situations. The second connecting factor comes from the field of applied experimental work and can be characterized as the testbedding of institutional arrangements for the solution of environmental problems. The last direct application of experimental methods to environmental economics concerns the individual evaluation of environmental resources.     

LABOUR SUPPLY ESTIMATION AND PUBLIC POLICY

Abstract. Economists devote considerable energies towards refining their econometric techniques to overcome difficulties connected with conducting empirical research. Despite advances in technique. it is not clear whether further refinement in this direction is worthwhile for policy purposes. It may be that no further amount of statistical adjustment of inadequate data will increase understanding, and that better data is simply necessary to add to our knowledge. But rarely is sufficient credit paid to new forms of data. In short, econometric technique is emphasized to the neglect of data innovation, as if new data were merely lying about waiting for an ingenious suggestion for use. This paper surveys advances of the last twenty five years in estimating labour supply for policy purposes with a view towards appreciating the relative contribution of both improvements in econometric technique as well as developments of new data.
After briefly detailing the key parameters which economists have sought to estimate, we describe the early 'first generation' research (circa 1970), which is plagued by problems of unobservable variables, measurement errors, truncation and selectivity bias, and non linear budget constraints. 'Second generation' research constitute attempts to resolve one or more of these difficulties, and the respective contribution of econometric technique and new data is acknowledged and assessed, including the contribution of data generated by large scale social experiments in which participants are randomly assigned to different guaranteed income plans and their labour supply behaviour measured.     

FLEXIBLE ACCELERATOR ECONOMIC SYSTEMS AS COUPLED OSCILLATORS

Abstract In this paper, the capacity of a particular type of a formal theoretical model to generate‐compute non‐trivial economic dynamics is studied. The model chosen is the flexible accelerator and the classification of the attractors is made in terms of Wolfram four classes. The model at the origins of mathematical business cycle theories ( Frisch, 1933 ) generates class 1 limit points. The model by Goodwin (1951) generates class 2 limit cycles. We construct a class 3 basin of attraction, strange attractors, by coupling through trade variants of the oscillators present in Goodwin (1951) . It is shown that coupled oscillators may generate non‐stochastic irregular dynamic behaviours of the Goodwin (1946) type. The irregularity is shown through the computation of very rugged devil staircases. Whether the system of coupled nonlinear oscillators presented here belong to the class 4 type is still an open question. The analogy with the system of coupled oscillators and the well‐known Fermi–Pasta–Ulam experiment is also explored.     

WHAT MOTIVATES TAX COMPLIANCE?

In this paper, I review and assess what we have learned about what motivates individuals to pay – or to not pay – their legally due tax liabilities. I focus on three specific questions. First, what does theory say about what motivates tax compliance? Second, what does the evidence show? Third, how can government use these insights to improve compliance? I conclude with some suggestions – and some predictions – for future research.     

Behavior in operations management: Assessing recent findings and revisiting old assumptions

In this paper, we provide a perspective on why behavioral research is critical to the operations management (OM) field, what prior research exists, and what opportunities lie ahead. The use of human experiments in operations management is still fairly novel despite a small stream of publications going back more than 20 years. We develop a framework for identifying the types of behavioral assumptions typically made in analytical OM models. We then use this framework to organize the results of prior behavioral research and identify future research opportunities. Our study of prior research is based on a search of papers published between 1985 and 2005 in six targeted journals including the Journal of Operations Management, Manufacturing and Service Operations Management, Production and Operations Management, Management Science, Decision Sciences, and the Journal of Applied Psychology.     

MONETARY POLICY AND ECONOMIC IMBALANCES: AN ETHNOGRAPHIC EXAMINATION OF CENTRAL BANK RITUALS

We apply the ethnographic tools of economic anthropology to analyse a particular ritual performed by the high priest of the Arbee sub‐tribe in the South Pacific island group of Aotearoa. (In other island groups, this high priest is sometimes known as the Governor of the Reserve Bank of New Zealand.) The ritual is considered by many within Aotearoa to be the cause of The Imbalance in The Economy. We analyse this claim and show that it has similarities (and equal validity) to claims of other cargo cults within the South‐West Pacific region.     

NONPARAMETRIC AND SEMIPARAMETRIC METHODS FOR ECONOMIC RESEARCH

Abstract. Developments in the vast and growing literatures on nonparametric and semiparametric statistical estimation are reviewed. The emphasis is on useful methodology rather than statistical properties for their own sake. Some empirical applications to economic data are described. The paper deals separately with nonparametric density estimation, nonparametric regression estimation, and estimation of semiparametric models.     

CHILD LABOUR: A REVIEW OF RECENT THEORY AND EVIDENCE WITH POLICY IMPLICATIONS

In recent years, a growing number of authors have turned their attention to the question of why children work. The purpose of this paper is to review some of the more recent theoretical and empirical research into the topic of child labour, and to illustrate the fact that no one factor on its own can account for the phenomenon of child labour. Therefore, policies aimed at eradicating child labour will need to address the broad range of underlying factors that contribute to the incidence of child labour, such as poverty, market imperfections and access to education.     

CORPORATE SOCIAL RESPONSIBILITY: A MICROECONOMIC REVIEW OF THE LITERATURE

This paper provides a review of the theoretical and empirical literature on Corporate Social Responsibility (CSR). Depending on whether an individual can be considered as selfish, or whether she has also social preferences, motives for CSR, can be explained in different ways. Furthermore, we explicitly highlight the influence of different Corporate Governance System on CSR as well as the relationship between firms' size and social commitment. Because it is difficult to distinguish between different theories in empirical studies, we argue that an experimental approach might be suitable to test theories of CSR.     

STOCK‐FLOW INTERACTIONS,DISEQUILIBRIUM MACROECONOMICS AND THE ROLE OF ECONOMIC POLICY

This paper presents the ‘KMGT’ (Keynes–Metzler–Goodwin–Tobin) portfolio model and studies its stability properties. The approach to macrodynamic modelling taken here extends the KMG model of Chiarella and Flaschel (2000) , focusing in particular on the incorporation of financial markets and policy issues. The original KMG model considered three asset markets (equities, bonds and money) but depicted them in a rudimentary way so that they had little influence on the real side of the model. The only financial market influencing the real side of the economy was the money market (via an LM curve theory of interest). Here Tobin's portfolio choice theory models the demand for each asset in such a way that the total amount of assets that households want to hold equals their net wealth, which is a stock constraint attached to portfolio choice. There is also a flow constraint, that the net amount of assets accumulated (liabilities issued) by one sector must equal its net savings (expenditures). The Tobinian macroeconomic portfolio approach characterizes the potential for financial market instability, focusing on the interconnectedness of all three markets. The paper goes on to study the potential for labour market and fiscal policies to stabilize unstable macroeconomies.