Some regulatory lessons to be drawn from the financial crisis

The article briefly outlines how the two major structural causes of the financial crisis have been a massive underestimation of the negative externalities potentially arising from malfunctioning of financial markets, and the policy decision to assign the production of an eminently public good, financial stability, to private parties. Both ideas have been a tenet of the so-called Greenspan doctrine. The crisis also shows that all regulators tend to be captured in the end, and thus any new legislation should contain bright-line rules, that might look inefficient when assessed with reference to the market they regulate, but are socially efficient, because it would be politically costly to alter them. Criminal sanctions, which after all are a social form of regulation, should also be strengthened.

Can labour market institutions explain high unemployment rates in the new EU member states?

This article studies the question whether labour market institutions can explain the large differences in unemployment rates in the new member states. It investigates several labour market institutions and concludes that they are on average no more rigid in the new member states than in the old ones. However, there is a lot of heterogeneity both in terms of institutions and unemployment rates. The impact of labour market institutions on performance is empirically examined for a panel of European countries. These results are used to assess to what extent labour market institutions are responsible for the diverse unemployment experiences in the new member states. Labour market institutions can explain only a small part of these differences. Other causes of unemployment seem to be more important.

Transaction tax and stock market behavior: evidence from an emerging market

This study examines the impact of a stamp tax rate increase on market behavior, using data from two stock exchanges in China. We find that when the tax rate increases from 0.3 to 0.5% (which implies that the transaction cost increases by about 1/3) trading volume decreases by 1/3. This implies an elasticity of turnover with respect to a stamp tax of −50% and an elasticity of turnover with respect to transaction cost of −100%. The markets’ volatility significantly increases after the increase in the tax rate. Furthermore, the change in the volatility structure indicates that the markets become less efficient in the sense that shocks are less quickly assimilated in the markets.

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How large is liquidity risk in an automated auction market?

We introduce a new empirical methodology that models liquidity risk over short time periods for impatient traders who submit market orders. Using Value-at-Risk type measures, we quantify the liquidity risk premia for portfolios and individual stocks traded on the automated auction market Xetra. The specificity of our approach relies on the adequate econometric modelling of the potential price impact incurred by the liquidation of a portfolio. We study the sensitivity of liquidity risk towards portfolio size and traders' time horizon, and interpret its diurnal variation in the light of market microstructure theory.

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Constitutional interests in the face of innovations: how much do we need to know about risk preferences?

In constitutional political economy, the citizens’ constitutional interests determine the social contract that is binding for the post-constitutional market game. However, following traditional preference subjectivism, it is left open what the constitutional interests are. Using the example of risk attitudes, we argue that this approach is too parsimonious with regard to the behavioral foundations to support a calculus of consent. In face of innovative activities with pecuniary and technological externalities in the post-constitutional phase, the citizens’ constitutional interests vary with their risk preferences. To determine what kind of social contract is generally agreeable, specific assumptions about risk preferences are needed.

Liberalisation,competition and ownership in the presence of vertical relations

This contribution analyses a market with an upstream bottleneck monopoly and a downstream activity that may either be vertically integrated or separated. Separation always reduces the consumer surplus, and the total surplus unless there are large cost reductions. Downstream competition from a public or private network monopoly would crowd out other firms, also when public ownership is associated with more modest objectives than welfare-maximisation. A market is therefore less likely to remain a mixed oligopoly than without vertical relations. However, private firms would survive in a moderately welfare-improving mixed oligopoly with cross-subsidisation and access charges equal to marginal costs.

A critique of the new comparative economics

We examine the “new comparative economics” as proposed by Djankov et al. (2003) and their use of the concept of an institutional possibilities frontier. While we agree with their general argument that one must consider a variety of institutions and their respective social costs, including legal systems and cultural characteristics, when comparing the performance of different economic systems, we find various complications and difficulties with the framework they propose. We propose that a broader study of clusters of institutions and such newly emerging forms as the new traditional economy may be better suited as ways to approach the study of comparative economics in the era after the breakdown of the old comparison of market capitalism and command socialism that came to an end with the breakup of the Soviet Union.

A new approach to bad news effects on volatility: the multiple-sign-volume sensitive regime EGARCH model (MSV-EGARCH)

In this paper, using daily data for six major international stock market indexes and a modified EGARCH specification, the links between stock market returns, volatility and trading volume are investigated in a new nonlinear conditional variance framework with multiple regimes and volume effects. Volatility forecast comparisons, using the Harvey-Newbold test for multiple forecasts encompassing, seem to demonstrate that the MSV-EGARCH complex threshold structure is able to correctly fit GARCH-type dynamics of the series under study and dominates competing standard asymmetric models in several of the considered stock indexes.

Intra-industry differences in vertical integration, heterogeneous costs and pricing: the case of web hosting

In many differentiated product industries, both traditional and “new economy” activities, vertically integrated firms also supply inputs to apparent rivals in the downstream business. This generates heterogeneity between low- and high-sunk cost suppliers with implications for entry and competitive conduct. The web hosting market is typical with primary suppliers operating alongside resellers who rent server space from them. We explore the impact of competition in US hosting using a unique dataset covering 15,000 packages offered by 3,500 firms. The results suggest price is sensitive to competitor clustering in quality space; an outcome consistent with easy entry for resellers with ultra-low fixed costs.

What drives idiosyncratic volatility over time?

We document the patterns of market-wide and firm-specific volatility in the Portuguese stock market over the 1991–2005 period and test several explanations for the behavior of firm-level idiosyncratic volatility. Unlike previous studies we find no evidence of a statistically significant rise in firm-specific volatility. On the contrary, the ratio of firm-specific risk to total risk slightly decreases. We show that this result stems from new listings of large privatized companies that display lower firm-specific risk. Our findings are consistent with the idea that changes in idiosyncratic volatility are related to changes in the composition of the market.

Demand,innovation, and the dynamics of market structure: The role of experimental users and diverse preferences

The history of a number of industries is marked by a succession of eras, associated with different dominant technologies. Within any era, industry concentration tends to grow. Particular eras are broken by the introduction of a new technology which, while initially inferior to the established one in the prominent uses, has the potential to become competitive. In many case new entrants survive and grow, and the large established firms do not make the transition. In other cases, the established firms are able to switch over effectively, and compete in the new era. This paper explores a model which generates this pattern and has focused on the characteristics of the demand. We argue that the ability of the new firms exploring the new technology to survive long enough to get that technology effectively launched depends on the existence of fringe markets which the old technology does not serve well, or experimental users, or both. Established firms initially have little incentive to adopt the new technology, which initially is inferior to the technology they have mastered. New firms generally cannot survive in head-to-head conflict with established firms on the market well served by the latter. The new firms need to find a market that keeps them alive long enough so that they can develop the new technology to a point where it is competitive on the main market. Niche markets, or experimental users, can provide that space.

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Franco MalerbaEmail:

     

Niches in evolutionary theories of technical change

In this article, the use of the niche concept for explaining radical technical change is explored. Contributions of various strands of literatures are elaborated and systematized in a taxonomy. Radical change or technological discontinuity is defined as the establishment of a new sociotechnical regime. Sociotechnical regimes carry and store rules for how to produce, use and regulate specific technologies. They perform the task of genes and define the boundary between technological species. It is proposed that radical change is generated by four different evolutionary mechanisms and patterns: natural selection, punctuated equilibrium, market niche selection, and technological niche selection. In each pattern, a different type of niche is implicated in the change process. The difference between niches results from differentiating between two dimensions: (1) whether niches are internal or external to the prevailing sociotechnical regime; (2) whether rules for design and use of a specific technology are stable or unstable within the niche.

Demand by product characteristics: measuring solar cell quality over time

The purpose of this paper is to investigate the impact of innovation quality as a success factor of companies that satisfy demand in government-subsidized science-based markets. This paper focuses on the Photovoltaic market in Germany as a case study. It carries out the analysis in three stages. First, the efficiency of photovoltaic product characteristics is examined using data envelopment analysis (DEA). Second, by means of a metric re-scaling approach, the technical improvement of solar modules offered on the German market is analyzed over time. Next, the results of the second stage are compared to demand growth (evolution of market shares). In conclusion, it can be shown that innovation quality in science-based markets is often an explanation of long-term growth, but occasionally a reduction of performance characteristics meets demand.

Localized innovation, localized diffusion and the environment: an analysis of reductions of CO2 emissions by passenger cars

We investigate technological change with regard to CO₂ emissions by passenger cars, using a Free Disposal Hull methodology to estimate technological frontiers. We have a sample of cars available in the UK market in the period 2000–2007. Our results show that the rates of technological change (frontier movement) and diffusion (distance to frontier at the car brand level) differ substantially between segments of the car market. We conclude that successful policies should be aimed at the diffusion of best-practice technology, and take account of the different potential for further progress between different segments of the market (e.g. diesel vs. gasoline engines and small vs. large engines).

On good government

Besley’s treatment of principled agents is a major contribution to public choice and political economy. By focusing on politics as an agency problem, he has shown the way to a new generation of research on the interface of politics and economics.

Locational choice and price competition: some empirical results for the austrian retail gasoline market

Using data from the Austrian retail gasoline market we find that a higher station density reduces average prices. Market (i.e. ownership) concentration does not significantly affect average price, however is negatively related to the density of stations. Estimation of the pricing and entry equations as simultaneous equations does not alter our conclusions, and suggests causality running from station density to price. We argue that the spatial dimension of markets allows the identification of market conduct, which is particularly relevant for competition policy.

Econometric estimation of PCAIDS models

This paper presents a version of the proportionally calibrated almost ideal demand system (PCAIDS) model, useful for merger simulations, which can be econometrically estimated using price data for two firms in a market. PCAIDS is therefore seen as a set of restrictions to be imposed in an econometric estimation, and not only as a pure calibration method. The proposed model is applied to a database of the Argentine gasoline market, and its results are compared to the ones obtained with other alternative specifications.

An econometric analysis of the effects of market liberalization on price dynamics and price volatility

The paper investigates price dynamics under market liberalization, with a focus on the effects of lowering price floors. We analyze price dynamics by specifying and estimating a dynamic Tobit model under time-varying volatility, where the market price is censored by a government-set support price. The model is applied to the U.S. butter market over the last three decades. The econometric results show how the price support program affects both expected prices and the volatility of prices. It is found that the censoring effects of a price support program can be significant and large even if the price support is set relatively low.

Output dynamics,flow equilibria and structural change—A prolegomenon to evolutionary macroeconomics

In an evolutionary approach to macroeconomics, the market disequilibrium dynamics resulting from structural change need to be properly represented at the aggregate level. As suggested by the late F.A. Hayek, a suitable equilibrium concept required to this end as a frame of reference, is that of a flow equilibrium. The paper explores the corresponding flow dynamics that draw attention to variables not usually considered in macroeconomic theorizing. Using statistical estimates for these new variables for the West German manufacturing sector during the German unification process allows some important new insights on the relationships between structural change and macroeconomic performance.

Unemployment disparities and regional wage flexibility: comparing EU members and EU-accession countries

This paper provides empirical evidence on regional labor market flexibility in Europe and, in particular, in the EU-accession countries in Central and Eastern Europe. Whereas substantial regional disparities in unemployment are found for pre-accession EU member countries as well as for accession countries, an empirical analysis taking account of spatial effects shows that regional wage flexibility is significantly higher for accession countries. Moreover, unemployment disparities are found to be less persistent in the accession countries.