Is econometrics useful for private policy making? A case study of replacement policy at an auto rental company

The goal of this paper is to illustrate the potential usefulness of econometrics as a tool to assist private policy makers. We provide a case study and detailed econometric analysis of the automobile replacement policy adopted by a large car rental company. Unlike public policy making–where the benefits from using econometric models and “science-based” approaches to policy making are hard to quantify because the outcomes of interest are typically subjective quantities such as “social welfare”–in the case of firms there is an objective, easily quantifiable criterion for judging whether policy A is better than policy B: profits. We introduce and estimate an econometric model of the rental histories of individual cars in the company’s fleet. Via stochastic simulations, we show that the model provides a good approximation to the company’s actual operations. In particular, the econometric model is able to reproduce the extraordinarily high rates of return that the company obtains on its rental cars, with average internal rates of return between purchase and sale of approximately 50%. However, the econometric model can simulate outcomes under a range of counterfactual vehicle replacement policies. We use the econometric model to simulate the profitability of an alternative replacement policy under pessimistic assumptions about the rate maintenance costs would increase and rental rates would have to be decreased if the company were to keep its rental cars longer than it does under the status quo. Depending on the vehicle type, we find that the company’s expected discounted profits would be between 6% to over 140% higher under the suggested alternative operating strategy where vehicles are kept longer and rental rates of older vehicles are discounted to induce customers to rent them. The company found this analysis to be sufficiently convincing that it undertook an experiment to verify the predictions of the econometric model.     

Expert opinion versus expertise in forecasting

Expert opinion is an opinion given by an expert, and it can have significant value in forecasting key policy variables in economics and finance. Expert forecasts can either be expert opinions, or forecasts based on an econometric model. An expert forecast that is based on an econometric model is replicable, and can be defined as a replicable expert forecast (REF), whereas an expert opinion that is not based on an econometric model can be defined as a non-replicable expert forecast (Non-REF). Both REF and Non-REF may be made available by an expert regarding a policy variable of interest. In this paper, we develop a model to generate REF, and compare REF with Non-REF. A method is presented to compare REF and Non-REF using efficient estimation methods, and a direct test of expertise on expert opinion is given. The latter serves the purpose of investigating whether expert adjustment improves the model-based forecasts. Illustrations for forecasting pharmaceutical stock keeping unit (SKUs), where the econometric model is of (variations of) the autoregressive integrated moving average model (ARIMA) type, show the relevance of the new methodology proposed in the paper. In particular, experts possess significant expertise, and expert forecasts are significant in explaining actual sales.     

Evaluating Californian under‐age drunk driving laws: endogenous policy lags

When evaluating the effectiveness of a policy, most studies assume that the policy effect begins with the date of enactment. However, there often exists an endogenous policy lag, due to information acquisition and the cost of adjustment. Meanwhile, the policy impact may be a gradual implementation from one level to another, instead of a one‐time shift behavior. To account for these issues when evaluating the Californian under‐age drunk driving laws, this paper adopts two econometric techniques: the multiple structural change methodology and the smooth transition method. The methods detect two effective policy changes and also reveal the existence of policy lags. In addition, ignoring these lags leads to severely biased estimates of policy effects. A long transition period is identified for the first under‐age drunk driving policy, while an abrupt transition is found for the other. In summary, the paper shows that the two econometric techniques complement each other and will be useful for policy evaluation. Copyright © 2011 John Wiley & Sons, Ltd.     

Subjective evaluation of composite econometric policy inputs

Studies have suggested that a composite forecast may be preferred to a single forecast. In addition, forecasting objectives are often conflicting. For example, one forecast may have the smallest sum of absolute forecast errors, while another has the smallest maximum absolute error. This paper examines the appropriateness of using multiple objective linear programming to determine weighted linear combinations of forecasts to be used as inputs for policy analysis. An example is presented where the methodology is used to combine the forecasts for several policy variables. The forecasts are selected from large econometric, consensus, and univariate time series models.     

Model Selection for Monetary Policy Analysis: How Important is Empirical Validity?*

We investigate the economic significance of trading off empirical validity of models against other desirable model properties. Our investigation is based on three alternative econometric systems of the supply side, in a model that can be used to discuss optimal monetary policy in Norway. Our results caution against compromising empirical validity when selecting a model for policy analysis. We also find large costs from basing policies on the robust model, or on a suite of models, even when it contains the valid model. This confirms an important role for econometric modelling and evaluation in model choice for policy analysis.     

Econometric Causality

This paper presents the econometric approach to causal modelling. It is motivated by policy problems. New causal parameters are defined and identified to address specific policy problems. Economists embrace a scientific approach to causality and model the preferences and choices of agents to infer subjective (agent) evaluations as well as objective outcomes. Anticipated and realized subjective and objective outcomes are distinguished. Models for simultaneous causality are developed. The paper contrasts the Neyman–Rubin model of causality with the econometric approach.     

A simultaneous-equations analysis of urban development: migration and industrial growth in Israel's new towns

A simultaneous-equations econometric model is used to analyze the recent development of new towns in Israel. The focus is on the relationships among migration, industrial investment, employment, and other structural and policy variables affecting urban development. "Our results affirm the importance of economic opportunity, agglomeration effects, population socioeconomic and ethnic composition, and access in determining migration flows. At the same time, unemployment and investment indices are affected by local labor-market conditions, government incentives, and regional development effects as well as by population composition and migration flows. Policy implications of the analysis are considered."     

The Asymmetric Effects of Monetary Policy

Abstract.  The paper deals with the asymmetric effects on output of tight and easy monetary policy: the output reduction following a negative monetary policy shock appears bigger than the expansion induced by similar sized positive shock. The paper first reviews historical evidence of asymmetry, focusing on the United States, Japan and Italy. This is followed by a review of the econometric literature on monetary policy asymmetry and consideration of the theoretical reasons that can explain this asymmetry.     

Screening the impacts of municipal service policy changes

The planning of municipal service delivery systems requires accurate forecasts of demand, and particularly of the effects the quality of service delivery has on demand. A metholology for this problem should meet three criteria, if it is to be useful for municipal planning: it must be low-cost and use generally available data; it must be based on user behavior, so that the effects of policy changes can be correctly attributed; and it must allow testing of the transferability of the results, since this is required for general forecasting use. This paper develops such a methodology, based on econometric analysis of data from a number of service areas within a number of regions, forming a double cross-section. Empirical tests of the methodology were performed for two local government services where the effect of service quality on demand is important: sewer and highway construction, which have been hypothesized to affect the patterns of development within regions; and solid waste collection, where the level of service provided affects how much waste enters the collection system and how much is littered, burned or recycled. The two case studies and other analyses suggest that the methodology is a useful tool for testing whether policy changes have an effect on the demand for service, but not for accurate demand forecasting. Thus, these simple models are relevant for the role of screening the effect of policy changes, but more detailed and localized approaches are necessary for system design.     

Fiscal and monetary policy co-ordination: A differential game approach

In this paper the interaction between the Treasury and the central bank is examined in the case of both cooperative and non-cooperative behaviour. Differential games are used in the framework of a continuous-time econometric model of the Italian economy. The Nash and the Stackelberg non-cooperative equilibrium solutions are computed, and the case for cooperation is analysed by considering the Nash and the Kalai-Smorodinsky bargaining models. It is shown that, in the Italian case, the government has a stronger bargaining position than the central bank. A comparison is then made between the different solutions to show that the drawbacks that emerge from non-cooperation are not simply those depending on the players' payoffs. Other features are in fact considered which constitute a further argument for policy co-ordination.     

ECB Monetary Policy Surprises: Identification Through Cojumps in Interest Rates

This paper proposes a new econometric approach to disentangle two distinct response patterns of the yield curve to monetary policy announcements. Based on cojumps in intraday tick data of short‐ and long‐term interest rate futures, we develop a day‐wise test that detects the occurrence of a significant policy surprise and identifies the market perceived source of the surprise. The new test is applied to 133 policy announcements of the European Central Bank (ECB) in the period from 2001 to 2012. Our main findings indicate a good predictability of ECB policy decisions and remarkably stable perceptions about the ECB's policy preferences. Copyright © 2015 John Wiley & Sons, Ltd.     

EVIDENCE ON THE IMPACT OF TARIFF REDUCTIONS ON EMPLOYMENT IN DEVELOPING COUNTRIES: A SYSTEMATIC REVIEW

This paper analyses the evidence on the impact of tariff reductions on employment in developing countries. We carry out a systematic review of the existing empirical literature, and include both, ex post econometric evidence and ex ante Computable General Equilibrium (CGE) simulation studies. The synthesis of results suggests that the effects of tariff reductions on employment are country and trade policy specific. When looking across higher quality econometric studies that control for the endogeneity of tariffs, only a couple of studies have statistically significant results, and these suggest that employment is likely to decrease slightly in the short run following trade liberalization. This is consistent with the notion that there are winners and losers from trade policy reform. These results are in contrast with the CGE findings, which by design incorporate projections of the medium‐run economy‐wide knock‐on effects suggested by economic theory. The synthesis of CGE studies suggests non‐negative effects of trade liberalization on aggregate employment and moderate inter‐sectoral labour reallocation effects.     

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.     

Market integration between conventional and Islamic stock prices

The paper assesses the market integration between conventional and Islamic stock prices from the long- and short-run perspectives for France, Indonesia, the UK and the US from September 8, 2008 to September 6, 2013 using various econometric approaches. The results show long-run relationships for all countries, except for the UK where there is no cointegration between conventional and Islamic stock prices. These findings suggest that the Islamic finance industry in the considered economies (except the UK) does not seem to be compliant to Islamic law's maxims, which hinders portfolio managers and market participants to benefit from the opportunities of international diversification and hedging effectiveness. From the correlation perspective, there is evidence of weak linkages between the Indonesian market and the developed markets for both conventional and Islamic stock prices, thus suggesting that investors can diversify their portfolios at the international level to minimize risk. However, there is high connection between the developed markets for both conventional and Islamic indexes. In addition, for each economy, the Islamic index is found to be strongly linked with its conventional counterpart. The structural change analysis reveals common break dates for several cross correlations, thus reflecting the similar time-paths of the interactions between markets. The presence of breaks in the inter-market linkages has important implications for international investors as regards portfolio diversification benefits and for financial policy makers regarding contagion risks and market policies.     

货币政策和财政政策、市场情绪与大类资产收益——基于隐性知识传播视角的解读

以货币政策和财政政策为主的宏观经济政策松紧程度不仅对大类资产收益产生直接效应,还会通过市场情绪对大类资产收益产生间接效应。通过构建基于隐性知识传播的概念模型,探究了宏观经济政策、市场情绪和大类资产收益之间的内在逻辑关系,并提出三个研究假说：宏观经济政策紧缩程度的提高会降低大类资产收益;宏观经济政策紧缩程度的提高会促进市场情绪高涨;宏观经济政策紧缩程度的提高会通过市场情绪高涨,进一步降低大类资产收益。在采用多种计量检验方法并进行稳健性检验后,检验结果都能很好地验证所提出的三个研究假说,研究结论能为我国政府制定相关宏观经济政策提供决策参考。     

Decisionmetrics: A decision-based approach to econometric modelling

An approach to developing a possibly misspecified econometric model that will be used as the beliefs of an expected utility maximiser is proposed. This approach builds on a novel objective function that measures the value of predictive distributions in decision-making and is used in model estimation, selection and evaluation. The methods proposed also provide an econometric approach for developing arbitrary parametric action rules such as technical trading rules. The approach is compared in detail with existing methods and is applied in the context of a CARA investor's decision problem where analytical and empirical results suggest it is very effective.     

Stochastic optimal growth with nonconvexities

This paper studies optimal investment and dynamic behavior in stochastically growing economies. We assume neither convex technology nor bounded support of the productivity shocks. A number of basic results concerning the investment policy and the Ramsey–Euler equation are established. We also prove a fundamental dichotomy pertaining to optimal growth models perturbed by standard econometric shocks: either an economy is globally stable or it is globally collapsing to the origin.     

A multiobjective interval programming model to explore the trade-offs among different aspects of job satisfaction under different scenarios

The need for greater concern about job quality/satisfaction seems clear, due to its potential link with workers' productivity, to the extent it affects employees' quitting behaviour, absenteeism, turnover, and firms' productivity. In order to guide managers and policy makers when making decisions related to future hiring of human resources, a multiobjective interval programming model, based on the results of an econometric estimation, is suggested where different (and conflicting) aspects of job satisfaction are considered. The modelling framework thus obtained allows assessing the trade-offs among the different aspects of job satisfaction under different scenarios herein given within interval ranges. Data obtained from Spain are used to carry out the model's instantiation. Possibly efficient solutions are then generated with the help of scalarizing problems relying on reference point-based methods. The solution approach herein proposed allows computing with a lower computational effort the closest “possibly” efficient solutions attainable regarding their corresponding interval ideal solutions. Overall, the results obtained highlight the trade-off between earnings and quality of life, particularly under a pessimistic scenario, with the maximization of earnings leading to the lowest value of the working times. Conversely, the lowest value obtainable for earnings is reached with the consideration of both scenarios when the maximization of the satisfaction of the quality of life seekers is attained. Finally, the trade-off between less prone to risk workers and quality of life seekers is also revealed, with the lowest job security levels found in the solution that maximizes working times.     

Regional policy handles in econometric models : Evidence from U.S. development outlays

Our econometric model of growth in state employment includes outlays for 56 Federal programs in the model structure. We found that: (1) there are positive, significant coefficients for most grant and loan guarantee outlays in most industries; (2) outlays do act with a lag of one to three years and possibly longer, (3) disbursements (i.e., cash outlays) are an important explanatory variable which follow obligations (legally binding commitments) with a lag. These findings support our contention that lagged policy handles should be included in the structure of regional econometric models and that disbursements should replace the commonly-used variable, obligations.