The transmission of economic activity : Evidence for the U.S. and its trading partners

This paper assesses empirical evidence bearing on the nature of the mechanism by which economic activity is transmitted from the US to its small trading partners. The cross-spectral analysis gives mixed results, but provides some support for a ‘Keynesian’ view.     

Happiness, freedom and control

How do people value freedom of choice? Drawing on economics and psychology the paper provides an hypothesis and empirical evidence on how individuals may value freedom of choice and derive utility from it. It is argued that the degree of perceived control that individuals have over choice – a construct known as the locus of control in psychology – regulates how we value freedom of choice. People who believe that the outcome of their actions depends on internal factors such as effort and skills (the ‘internals’) have a greater appreciation of freedom of choice than people who believe that the outcome of their actions depends on external factors such as fate or destiny (the ‘externals’). We find some evidence in support of this hypothesis using a combination of all rounds of the World and European Values Surveys. A variable that measures freedom of choice and the locus of control is found to predict life satisfaction better than any other known factor such as health, employment, income, marriage or religion, across countries and within countries. We show that this variable is not a proxy of happiness and measures well both freedom of choice and the locus of control. ‘Internals’ are found to appreciate freedom of choice more than ‘externals’ and to be happier. These findings have important implications for individual utility, social welfare and public policies.     

Some empirical evidence on the ‘discouraged worker’ effect

This note produces empirical evidence on the existence of a significant ‘discouraged worker’ effect in US data–namely, on the tendency for groups of secondary workers to move in and out of the labor force with the business cycle, looking for jobs when these are available, while giving up job search during recessions — by focusing on the behavior of the ‘not in the labor force’ series, as well as of two of its segments (‘going to school’, and ‘keeping house’), at the business-cycle frequencies. Both in the aggregate, and for a number of age–sex groups, the series display a clear counter-cyclical pattern, thus lending support to the discouraged worker notion.     

The knowledge production of ‘R’ and ‘D’

Many studies investigate the relationship between R&D and patents applying knowledge production functions. Using aggregated R&D may underestimate the productivity of ‘R’, as mainly ‘R’ but not ‘D’ leads to patents. Disaggregating ‘R’ and ‘D’ shows a significant premium of ‘R’ towards patenting.     

An ‘oil’igopoly theory of exploration

This paper develops a theory of ‘oil’igopoly exploration of an exhaustible resource. Strategic exploration and production are jointly derived in a three period subgame perfect equilibrium. While the ‘oil’igopoly theory of exploration shares many features with non-strategic models of exploration and production, there is one important difference. The ‘oil’igopoly theory of exploration predicts that firms who exhaust their proved reserves before they can convert their unproved reserves into proved reserves have an incentive to over-explore, relative to the Nash equilibrium level of exploration. A simple empirical prediction is that firms holding smaller proved reserves should be observed doing more exploration. This prediction is consistent with country-level production and reserve data in the post-World War II era.     

The impact of speculation on house prices in the United Kingdom

When house prices are expected to rise, the representative house mover has an incentive to secure his purchase price (i.e. exchange contracts) on the ‘new’ house before exchanging contracts on the sale price on his ‘old’ house. If all house-movers adopt this stance, the imbalance between buyers and sellers causes a self-fulfilling speculative price bubble. Transactions costs do not represent a barrier to such speculation in the house market, as such costs can be considered as being sunk costs for first-time buyers and owner-occupiers intending to move for non-speculative reasons. This idea is formalised and empirical evidence is presented which suggests that speculation is a significant determinant of house prices in the United Kingdom.     

The allocation of volatile aid and economic growth: Theory and evidence

We analyse, both theoretically and empirically, the growth effects associated with two components of volatile foreign financial assistance: ‘directly productive’ (or ‘tied’) aid and ‘pure’ aid. We find that scenarios in which aid can hurt the recipient's growth rate emerge only in cases where foreign aid is volatile. As a result, we conclude that it is only in conjunction with the presence of aid variability that aid allocation determines whether foreign aid hurts or promotes long-run growth.     

Limited asset markets participation, monetary policy and (inverted) aggregate demand logic

This paper incorporates limited asset markets participation in dynamic general equilibrium and develops a simple analytical framework for monetary policy analysis. Aggregate dynamics and stability properties of an otherwise standard business cycle model depend nonlinearly on the degree of asset market participation. While ‘moderate’ participation rates strengthen the role of monetary policy, low enough participation causes an inversion of results dictated by conventional wisdom. The slope of the ‘IS’ curve changes sign, the ‘Taylor principle’ is inverted, optimal welfare-maximizing discretionary monetary policy requires a passive policy rule and the effects and propagation of shocks are changed. However, a targeting rule implementing optimal policy under commitment delivers equilibrium determinacy regardless of the degree of asset market participation. Our results may justify Fed's behavior during the ‘Great Inflation’ period.     

Exchange rate models and innovations : A derivation

An explicit relationship between innovations in the spot exchange rate and innovations in its driving variables is derived in the context of the ‘asset market theory’ of the exchange rate. The relationship forms a theoretical basis for regression results in ‘news’ form that have been reported in the literature.     

Waste, recycling, and “Design for Environment”: Roles for markets and policy instruments

Households sometimes have two recycling options. Curbside recycling collections are convenient, but do not provide payment. Alternatively, payment might be available from ‘reverse vending machines’ or drop-off centers, but some transaction costs would be incurred. We examine policies to encourage efficient product design and recycling in a setting with these two recycling options plus the option of putting recyclables in the trash. We find value in having two parallel recycling options. Constrained optimal outcomes can be attained by combining a ‘deposit–refund’ with a modest disposal fee. Furthermore, producers should not be permitted to keep deposits, that are not claimed by consumers.     

Using justice principles to resolve the ‘Impossibility of a Paretian Liberal’

A simple, but general, possibility result is presented showing how ‘justice’ principles can be effectively used to resolve Amartya Sen's ‘The Impossibility of a Paretian Liberal’ (1970a).     

Sentimental fools: a critique of Amartya Sen’s notion of commitment

Commitment is problematic because one sometimes pursues it against one’s interest. To solve it, the paper proposes a distinction between ‘non-binding’ and ‘binding’ commitments. Non-binding commitment is about ambition, such as becoming a great chef, which bolsters welfare in the pecuniary sense as well as self-respect. In contrast, ‘binding commitment’ is about honesty. While it diminishes welfare, it augments self-integrity. The neoclassical view reduces both commitments to interest, while the multiple-self approach separates both commitments from interest. The separation permits the confusion of sentimental fools, who enter commitments without regard to interest, with rational sentimentalists, who take interest into consideration.     

Corporate venture capital in Germany: A comparative analysis of 2000 and 2003

Established corporations are often at a disadvantage vis à vis technology-based entrepreneurial firms when it comes to generating and adapting to radical technological and business-model innovation. Consequently, industrial corporations increasingly wanted to participate in the financial or strategic success of start-ups. The tool of choice for many corporations was Corporate Venture Capital (CVC). CVC had already seen two waves of popularity in the USA when it was introduced in Germany in the early 1990s. This development is often assumed to have come to a halt in 2001, when so-called ‘New Economy’ spiraled into decline.This paper analyzes central attributes of strategy, investment and organization of the CVC units active in Germany in 2000 and 2003. We find evidence for a continuation of strong CVC activity in Germany. We differentiate between CVC units that were a) active at both points in time, i.e. ‘survivors’ b) those that have closed down since 2000, i.e. ‘losers’ and c) those that were founded after 2000, ‘new entrants’. The comparison of the characteristics allows us to make inferences for the use of CVC.     

Professor Bauer on development : A review article

Bauer's views on vicious circles, the ‘widening’ gap between rich and poor countries, central planning, foreign aid and the appeal of Marxism in less developed countries are summarised. There is a discussion and summary of an appropriate analysis of the issues raised by Bauer. Attention is concentrated on the evidence related to a ‘widening’ gap, the potential failures of the price mechanism and the effects of foreign aid. It is suggested that Bauer's analysis is superficial, even though this may also be true of some he criticises, and that the case for aid remains strong.     

Vertical trading and uneven development

The phenomenon of vertical trading, in which the center exports a good involving a high degree of processing which leads to economy-wide learning and the periphery exports a good which does not generate such effects, is formalized in a simple dynamic model of trade. It is shown that the periphery can ‘lose’ from such trade relations. Conditions under which this can occur are shown to involve parameters of the learning functions, and the ‘sizes’ of the two countries.     

Asynchronized multiperiod commitments and cycles

We consider a game where agents can synchronize or stagger their decisions. We compare the outcomes of both timing patterns, and show that spillovers and strategic interactions are crucial for such a comparison. A typology used in industrial organization, distinguishing four cases (‘Fat-Cat’, ‘Top Dog’, Lean and Hungry’, ‘Puppy Dog’), allows us to compare the actions taken in the staggered variant and in the synchronized one. The staggered variant exhibits cycles and players are both better-off when there are strategic complementarities between them. A timing game is then set-up so as to endogenize the choice between the two variants we study.Two examples are developed: (i) Bertrand competition and (ii) a wage setting game when there are two monopoly unions in two interrelated firms. We show that the staggering of price decisions generates counter-cyclical mark-ups in the first example, and the staggering of wage decisions generates cycling output in the industry in the second example.     

Growth dynamics in a model of endogenous time preference

We incorporate endogenous time preference in a simple Diamond-type economy with production and analyze the resulting dynamics both for the competitive and command equilibrium. We assume an individual's rate of time preference is decreasing in consumption (decreasing marginal impatience) and show that this intuitively more appealing assumption is consistent with a stable, non-trivial competitive equilibrium. Analysis of the competitive equilibrium indicates that the observed ‘non-convergence’ of cross-country per capita income could partially be explained by cross-country differences in ‘innate patience’. Examination of the local dynamics around the ‘optimal’ solution suggests that this particular preference structure exhibiting diminishing marginal impatience may generate endogenous business cycle phenomenon.     

General instrumental variables estimation under stochastic linear restrictions

This letter extends the Theil-Goldberger ‘mixed’ regression estimator, for models subject to stochastic linear restrictions, to the case of stochastic regressors. A general instrumental variables ‘mixed’ estimator is discussed. The asymptotic distribution of the estimator is obtained, and an asymptotic test of the compatibility of the sample and prior information is presented.