Do Firms Provide Wage Insurance against Shocks?

Implicit contract models imply that it is Pareto optimal for risk‐neutral firms to provide insurance to risk‐averse workers against shocks. Using a matched employer–employee dataset, I evaluate wage responses to both permanent and transitory shocks in Hungary, and compare my results to similar studies on Italian, Portuguese, German, and French datasets. I find that the magnitude of the wage response differs depending on the nature of the shock. Broadly speaking, the wage response to permanent shocks is twice the size of the response to transitory shocks. Unlike previous findings, my results show that full insurance against transitory shocks is rejected.     

How Well Does the Australian Aged Pension Provide Social Insurance?

Social security plays an essential role in an economy, but if designed incorrectly, it can distort individuals' labour supply and savings behaviour. We explore how well the Australian means‐tested pension system provides social insurance by changing the settings of the system and calculating the impact on welfare. In order to exclude trivial welfare gains, we keep the cost of the programmes constant. We find that the means‐tested pension system is welfare reducing, but does provide a better outcome than a PAYG system of equivalent cost. We also find that if the benefit amount is held constant, and hence the cost of the pension programme is allowed to vary, a taper rate of 1.0 is optimal. However, once we hold the cost of the programme constant, a universal benefit scheme provides the best welfare outcome.     

Do Your Neighbors Influence Your Health?

When individuals make decisions regarding their allocation of time and income, the health investment and health that they achieve may fall short of the goals prescribed by medical guidelines and health policymakers. Instead of the oft‐observed policy responses such as additional spending on public awareness campaigns, it may be more fruitful to determine how individuals can be induced to choose behaviors that will lead to the prescribed health. That is, one must recognize the trade‐offs between health investment and consumption or leisure today in the face of factors such as social norms, job stress and advances in health technology.     

Facilitating Consumer Learning in Insurance Markets: What Are the Welfare Effects?

We model a monopoly insurance market in which consumers can learn their accident risks at a cost c . We then examine the welfare effects of a policy that reduces c . If c is sufficiently small (c  < c ^*), the optimal contract is such that the consumer gathers information. For c  < c ^*, both the insurer and the consumer benefit from a policy that reduces c further. For c   >  c ^*, marginally reducing c hurts the insurer and weakly benefits the consumer. Finally, a reduction in c that is successful, meaning that the consumer gathers information after the reduction but not before it, can hurt both parties.     

Do Incentive Rates Provide Consumer Value? An Empirical Assessment from Ontario’s Electricity Distribution Sector

Abstract:

This article discusses empirical evidence regarding the theoretical claims that Incentive Rate regulation for electricity distribution creates greater consumer value than Cost of Service in terms of consumer rates. Institutional economists have identified a problem with IR in that it gives an incentive not to reduce consumer costs but to reduce adequate spending on asset maintenance. The Ontario electricity distribution sector combines both forms of regulation which creates an unusual opportunity to test the claims of increased consumer value by comparing the unit average revenues in years in which rates were set by CoS with those in which they were set by IR. The application of a t-test to data from 2011 to 2015 results in the acceptance of the null hypothesis at a 95% confidence level. The analysis concludes that there is no support for the claim that IR results in lower revenues collected from consumers.     

Do Education and Income Really Explain Inequalities in Health? Applying a Twin Design

We apply a twin design to examine the relationship between health and education and income. The estimated associations between health and education and income, controlling for unobserved endowments, at the twin‐pair level, are lower than estimates obtained via ordinary least‐squares (OLS) on the same sample. Thus, OLS‐based effects of education and income are biased, exaggerating the contribution of education and income to health inequality. The main part of health inequality is explained by within‐twin‐pair fixed effects, incorporating family background and genetic inheritance. It appears that education and income policies have less to offer for reducing health inequality than is usually assumed.     

What Do the Elderly Do?

The most direct way to find out what elderly Americans do is to study how they occupy their time and, if they are still in the labor force, in what occupations can they be found. This essay focuses on three key issues regarding the activities of those 65 and over: their average use of time in 41 different activities, especially how they employ the greater discretionary time available to them in comparison to younger adults; the factors underlying their rising participation in the labor in the first decade of the twenty-first century; and the occupations that elderly men and women are most likely to be found and how this has changed.     

Do firms plan?

The late F. A. Hayek is remembered for the argument that the decentralized price system has enormous advantages over planned systems in the critical areas of information transmission and the use of knowledge. In many minds, the recent fall of the Soviet-style economies in Eastern Europe has decisively made that case. But not all are persuaded. The model of central planning that originally impressed Lenin—the modern business corporation—remains in many minds a formidable piece of empirical evidence in favor of the possibility and desirability of centralized administrative control. This paper argues that Hayek's theory of spontaneous order can in fact include the case of such apparently purposive and extramarket forms as the business firm. It picks up a number of suggestions in Hayek's evolutionary theory of social institutions and uses them to draw a picture of the firm that is somewhat different from what one finds on the easel of neoclassical transaction-cost analysis. In the Hayekian picture, firms and markets are both systems of rules of conduct. And both are systems for economizing on knowledge in the face of economic change, albeit quite different kinds of knowledge and change. In the end, the firm is not a model for political planning for one very simple reason: the firm does not plan.When uncertainty is present and the task of deciding what to do and how to do it takes the ascendancy over that of execution, the internal organization of the productive group is no longer a matter of indifference or a mechanical detail. Centralization of this deciding and controlling function is imperative, a process of cephalization, such as has taken place in the evolution of organic life, is inevitable, and for the same reasons as in the case of biological evolution.There is no reason why a polycentric order in which each element is guided only by rules and receives no orders from a centre should not be capable of bringing about as complex and apparently as purposive an adaptation to circumstances as could be produced in a system where a part is set aside to preform such an order on an analogue or model before it is put into execution by the larger structure. In so far as the self-organizing forces of a structure as a whole lead at once to the right kind of action (or to tentative actions which can be retracted before too much harm is done) such a single-state order need not be inferior to a hierarchic one in which the whole merely carries out what has first been tried out in a part. Such a non-hierarchic order dispenses with the necessity of first communicating all the information on which its several elements act to a common centre and conceivably may make the use of more information possible than could be transmitted to, and digested by, a centre.     

Do economies stall?

A ‘stalling’ economy has been defined as one that experiences a discrete deterioration in economic performance following a decline in its growth rate to below some threshold level. We examine the international evidence for stalling in a panel of 51 economies using two different definitions of a stall threshold (time-invariant and related to lagged average growth rates). We find that the evidence for stalling is limited: only 7–12 of the economies in our sample experience statistically significant stalls at the 5% level based on any one definition.     

How Does FDI Affect Health?

This paper investigates the impact of foreign direct investment (FDI) on population health using panel data for up to 179 countries for the period between 1980 and 2011. Our main finding is that the relationship between FDI and health is nonlinear, depending on the level of income: FDI has a positive effect on health at low levels of income, but the effect decreases with increasing income, then changes sign and becomes increasingly negative at higher levels of income.     

Do Irrational Investors Destabilize?

In a financial market where all investors have valuable private information, full rationality requires that investors have an unlimited ability of figuring out the equilibrium model. Instead, I assume that due to a lack of knowledge or experience, some investors do not know the equilibrium model and use only their private information in forming their demand. By investigating the investment behavior of these “boundedly rational” investors and contrasting it with that of the rational ones, I find that in a market where the two kinds of investors coexist, it is the boundedly rational investors who contribute to price stability. The welfare implication is that, although each investor benefits from conditioning his asset demand on the information transmitted by the equilibrium price, it can happen that all investors lose by doing so because the equilibrium price becomes too volatile.     

Do dictatorships redistribute more?

This paper examines the effect of political institutions on fiscal redistribution for a country-level panel from 1960–2010. Using data on Gini coefficients before and after government intervention, we apply a measure of effective fiscal redistribution that reflects the effect of taxes and transfers on income inequality. Our findings clearly indicate that non-democratic regimes demonstrate significantly greater direct fiscal redistribution. Subsequently, we employ fiscal data in an attempt to enlighten this puzzling empirical finding. We find that dictatorial regimes rely more heavily on cash transfers that exhibit a direct impact on net inequality and consequently on the difference between market and net inequality (i.e., effective fiscal redistribution), whereas democratic regimes devote a larger amount of resources to public inputs (health and education) that may influence market inequality but not the difference between market and net inequality per se. We argue that the driving force behind the observed differences within the pattern on government spending and effective fiscal redistribution is that democratic institutions lead survival-oriented leaders to care more for the private market, and thus to follow policies that enhance the productivity of the whole economy.     

Do Government Purchases Affect Unemployment?

We estimate the effect of government purchases on unemployment in 20 OECD countries, for the period 1980–2007. An increase in government purchases, equal to 1 percent of GDP, is found to reduce unemployment by about 0.3 percentage points in the same year. The effect is greater and more persistent under less “employment‐friendly” labour‐market institutions, and it is greater and more persistent under a fixed exchange rate regime than under a floating regime. The effect is also greater in downturns than in booms. The effect on unemployment reflects a corresponding positive effect of increased government purchases on the employment‐to‐population rate.     

Do trade missions increase trade?

Abstract In an effort to stimulate trade, Canada has conducted regular trade missions starting in 1994, often led by the Prime Minister. According to the Canadian government, these missions generated tens of billions of dollars in new business deals. This paper uses bilateral trade data to assess this claim. We find that Canada exports and imports above‐normal amounts to the countries to which it sent trade missions. However, the missions do not seem to have caused an increase in trade. In the preferred specification, incorporating country‐pair fixed effects, trade missions have small, negative, and mainly insignificant effects.     

Do short sellers outperformthe market?

During the current financial crisis, short sellers have been blamed for causing or at least accelerating the crash of the financial market. They have been accused of manipulating stock prices so that they would fall and getting rich at the ‘naive’ investors' expense. This study investigates the validity of these accusations by following the TA100 Index and four designed portfolios during the period 2006 to 2008. The designed portfolios were constructed in accordance with the weekly report on short selling activity issued by the Tel Aviv Stock Exchange. The results show that short sellers did not succeed in outperforming the market during that 3-year period. Moreover, the portfolios that did not include the stocks picked by the short sellers performed more poorly (they should have been sold short) than the portfolios that included stocks chosen by the short sellers. These results contradict the hypothesis that short selling disrupts market efficiency.