Non‐linear Dynamics in the Infinite Time Horizon Model

Using results from the theory of non‐linear dynamical systems, it has been shown that optimal growth theory can provide new explanations for business cycles and for international differences in growth and development. The present survey concentrates on this aspect of optimal growth theory, that is on the possibility of fluctuations and non‐uniqueness in models of optimal capital accumulation. It is a selective survey on non‐linear dynamics in infinite time horizon models of optimal growth.     

Testing for Linearity

The problem of testing for linearity and the number of regimes in the context of self‐exciting threshold autoregressive (SETAR) models is reviewed. We describe least‐squares methods of estimation and inference. The primary complication is that the testing problem is non‐standard, due to the presence of parameters which are only defined under the alternative, so the asymptotic distribution of the test statistics is non‐standard. Simulation methods to calculate asymptotic and bootstrap distributions are presented. As the sampling distributions are quite sensitive to conditional heteroskedasticity in the error, careful modeling of the conditional variance is necessary for accurate inference on the conditional mean. We illustrate these methods with two applications — annual sunspot means and monthly U.S. industrial production. We find that annual sunspots and monthly industrial production are SETAR(2) processes.     

Programme Evaluation with Multiple Treatments

Abstract.  This paper reviews the main identification and estimation strategies for microeconometric policy evaluation. Particular emphasis is laid on evaluating policies consisting of multiple programmes, which is of high relevance in practice. For example, active labour market policies may consist of different training programmes, employment programmes and wage subsidies. Similarly, sickness rehabilitation policies often offer different vocational as well as non‐vocational rehabilitation measures. First, the main identification strategies (control‐for‐confounding‐variables, difference‐in‐difference, instrumental‐variable, and regression‐discontinuity identification) are discussed in the multiple‐programme setting. Thereafter, the different nonparametric matching and weighting estimators of the average treatment effects and their properties are examined.     

Economic Efficiency and Frontier Techniques

Abstract. Most of the literature related to the measurement of economic efficiency has based its analysis either on parametric or on non‐parametric frontier methods. The choice of estimation method has been an issue of debate, with some researchers preferring the parametric and others the non‐parametric approach. The aim of this paper is to provide a critical and detailed review of both core frontier methods. In our opinion, no approach is strictly preferable to any other. Moreover, a careful consideration of their main advantages and disadvantages, of the data set utilized, and of the intrinsic characteristics of the framework under analysis will help us in the correct implementation of these techniques. Recent developments in frontier techniques and economic efficiency measurement such as Bayesian techniques, bootstrapping, duality theory and the analysis of sampling asymptotic properties are also considered in this paper.     

Non‐Mandatory Approaches to Environmental Protection

The approach to environmental protection has been evolving from a regulation‐driven, adversarial 'government‐push' approach to a more proactive approach involving voluntary and often 'business‐led' initiatives to self‐regulate their environmental performance. This has been accompanied by increasing provision of environmental information about firms and products to enlist market forces and communities in creating a demand for corporate environmental self‐regulation by signaling their preferences for environmentally friendly firms. This paper provides an overview of the non‐mandatory approaches being used for environmental protection and surveys the existing theoretical literature analyzing the economic efficiency of such approaches relative to mandatory approaches. It also discusses empirical findings on the factors motivating self‐regulation by firms and its implications for their economic and environmental performance. It examines the existing evidence on the extent to which information disclosure is effective in generating pressures from investors and communities on firms to improve their environmental performance.     

Habit Formation and the Theory of Addiction

In the light of repeated rejections of the Hall (1978) version of the life cycle‐permanent income hypothesis and other empirical puzzles, the habit formation hypothesis has increased in popularity since the 1980s. However, existing formulations of habit persistence do not always perform well empirically. This paper pursues two objectives: (i) to outline the habit persistence hypothesis, and (ii) to review the theory of addiction with a focus on issues of relevance to the theory of consumption. In the literature on addiction, two research traditions are discernible: rational addiction and myopic addiction. The former approach emphasises forward‐looking behaviour and defines memory loss as a univariate process. The latter relies on multiple objectives and highlights the role of contractual behaviour. The paper argues that future research in consumption with habits ought to pay more attention to non‐separabilities, allow for multivariate processes when modelling memory loss and consider rational habit modification.     

Costly State Verification with Varying Risk Preferences and Liability

Abstract.  In the scenario of loan contracts with costly state verification, we examine how the properties of the set of states, different risk preferences of debtors and varying liability of lenders affect the structure of optimal repayments. In particular, we show that with risk‐averse debtors, a general set of states, a constant observation cost and both unlimited and limited lender liability, the debtor is strictly better off revealing the true state of nature when his realized revenue is low, which implies that optimal debtor consumption has a downward jump around the single switch from observed to unobserved states. If the debtor can destroy revenue or if the debtor is risk neutral, this non‐monotonicity of consumption disappears. Moreover, given the loan size, there is more monitoring under debtor‐risk aversion than risk neutrality. We present simulations showing that a contract with unlimited lender liability and debtor‐risk aversion has a higher expected observation cost but a lower variance of consumption than a contract with limited lender liability. Finally, we discuss the problems of commitment to verification and contract renegotiation in this framework.     

Overeducation in the Labour Market

Abstract.  This paper presents a review of the literature on overeducation. The paper assesses the consistency of overeducation within the context of a number of theoretical frameworks including Human Capital Theory (HCT) and Assignment Theory. The analysis goes on to discuss the various measurement controversies associated with the study of overeducation in order to provide an assessment of the extent to which the impacts of the phenomenon represent an economic reality as opposed to a statistical artefact. After reviewing the literature, it is concluded that the impacts of overeducation are likely to be non‐trivial and that the phenomenon may potentially be costly to individuals and firms, as well as the economy more generally. The existence of overeducation also raises some doubts with respect to the validity of some of the central assumptions and predictions of HCT that are unlikely to be fully explained by gaps in the standard wage equation framework.     

Games Economists Play: A Survey of Non‐Computerized Classroom‐Games for College Economics

The bulk of this unusual paper consists of an extensive online annotated compilation of 113 non‐computerized classroom‐games, most of which can be played within one class period, to assist in the teaching of college‐level basic micro and macroeconomic concepts (see http://www.aug.edu/~sbajmb or http://www.marietta.edu/~delemeeg ).
The paper itself consists of three major sections. The first catalogues, summarizes, and provides sample annotations of the games we collected. Section two makes a number of observations about the games. For instance, we notice an imbalance between games for microeconomics (many) and games for macroeconomics (few). We also detail which standard introductory economics topics are covered well and which are not covered well or missing altogether. For example, we observe that few games exist to present the proper economic role of government in economic affairs. The third section surveys the available literature on the costs and benefits of playing games in the classroom. In particular, our survey reveals that existing studies consider costs and benefits to students and instructors only partially, and we lay out a matrix that should help in the design of improved studies on the efficacy of gaming in the classroom.     

The Effectiveness of Anti‐Smoking Legislation: A Review

Abstract.  This survey focuses on government efforts to curb the use of undesirable goods, notably tobacco products. We synthesize the economics literature and examine the effectiveness of government curbs on tobacco consumption through non‐price controls (such as bans on cigarette advertising, health warnings, and workplace smoking bans) and price measures (or higher prices through higher taxes). This literature review is unique in that we do not merely aim to provide a summary of the literature. Rather, our main focus is to draw conclusions from the literature regarding the effectiveness of alternate policy measures across countries in checking smoking and to provide directions/suggestions for extending the scope of government intervention to other tobacco products.     

Empirical Studies of Self‐Employment

This paper presents a review of empirical studies of self‐employment for the Australian, Canadian, Dutch, UK and US labour markets. Both cross‐sectional and longitudinal studies are analysed. Analyses using cross‐sectional data examine the propensity to be self‐employed at any one point in time, whereas longitudinal studies focus on the transition into self‐employment from wage/salary employment and the survival rate in this state over time. Various hypotheses advanced in the economics and sociology literatures on self‐employment are tested. These include the relationship between managerial ability and the propensity to be self‐employed and the impact of financial constraints on entry into self‐employment stressed in economic models of entrepreneurship, and the relationships between self‐employment choice and the nature of the work and group characteristics (e.g., ethnic enclaves) stressed in sociological models of entrepreneurship. The evidence shows that self‐employment outcomes are significantly affected by factors such as individual abilities, family background, occupational status, liquidity constraints and ethnic enclaves.     

The Distribution and Redistribution of Opportunity

Recent theories of distributive justice focus on individual opportunities as the appropriate standard for distributive judgements. To translate this philosophical view into concrete public policy, three branches of economic literature have arisen, which we draw together here and critically assess. These concern ( i ) the measurement of individuals' opportunity sets, ( ii ) the measurement of the degree of inequality present in a distribution of opportunities, and ( iii ) the design of redistribution mechanisms intended to increase the degree of 'opportunity equality'. The purpose of the exposition is to unify the three themes, to give a flavour in non‐technical terms of what is going on in these very active literatures, and to indicate areas which remain open for research.     

Models of Quality‐Adjusted Life Years when Health Varies Over Time: Survey and Analysis

Abstract.  Quality‐adjusted life year (QALY) models are widely used for economic evaluation in the health care sector. In the first part of the paper, we establish an overview of QALY models where health varies over time and provide a theoretical analysis of model identification and parameter estimation from time trade‐off (TTO) and standard gamble (SG) scores. We investigate deterministic and probabilistic models and consider five different families of discounting functions in all. The second part of the paper discusses four issues recurrently debated in the literature. This discussion includes questioning the SG method as the gold standard for estimation of the health state index, re‐examining the role of the constant‐proportional trade‐off condition, revisiting the problem of double discounting of QALYs, and suggesting that it is not a matter of choosing between TTO and SG procedures as the combination of these two can be used to disentangle risk aversion from discounting. We find that caution must be taken when drawing conclusions from models with chronic health states to situations where health varies over time. One notable difference is that in the former case, risk aversion may be indistinguishable from discounting.     

An Exegesis on Currency and Banking Crises

Abstract.  This paper reviews the literature on currency and banking crises. Currency and banking crises are characterized according to some standards in the literature and their historical record summarized. The development of the literature from first through fourth‐generation, or so‐called 'institutional' models is reviewed. A digression on institutions is provided along with some sidebars on the development of the literature on institutions as it relates to economic growth. The empirical research on third‐generation (or twin crises) models and on institutional models of currency and banking crises, which are so far scarce, is covered too. A summary of the main policy issues for dealing with financial crises is presented. The paper closes with an emphasis on institutions and a call for more research directed at institutions and their role in the financial system.     

Where Are We Now On Cultural Economics

A survey of progress in cultural economics since its virtual birth in 1966 with the publication of Baumol and Bowen, Performing Arts: The Economic Dilemma , distinguishing between 'theoretical progress' and 'empirical progress'. Following in the footsteps of Towse's recent anthology of classic papers in cultural economics, I address nine topics that between them cover the subject, namely, (1) taste and taste formation, (2) demand and supply studies, (3) the media industries, (4) the art market, (5) the economic history of the arts, (6) the labour market for artists, (7) Baumol's cost disease, (8) non‐profit arts organisations, and (9) public subsidies to the arts. I conclude that there has been some theoretical and empirical progress in the treatment of almost all these topics.     

The Long‐Run implications of Growth Theories

This paper draws attention to some possible misunderstandings concerning the place of long‐run outcomes in growth theory. It argues that the traditional emphasis on these outcomes is often misguided. As a result of this emphasis, too much attention is paid to the role of knife‐edge assumptions, and researchers may be led to interpretations of the evidence, or models of the growth process, that are not wholly sensible.     

Collective Household Models: Principles and Main Results

In the traditional approach to consumer behaviour it is assumed that households behave as if they were single decision‐making units. This approach has methodological, empirical and welfare economic deficiencies. A valuable alternative to the traditional model is the collective approach to household behaviour. The collective approach explicitly takes account of the fact that multi‐person households consist of several members which may have different preferences. Among these household members, an intrahousehold bargaining process is assumed to take place. In addition to providing an introduction to the collective approach, this survey intends to show how different collective household models, each with their own aims and assumptions, are connected.     

Beyond Publication Bias

Abstract.  This review considers several meta‐regression and graphical methods that can differentiate genuine empirical effect from publication bias. Publication selection exists when editors, reviewers, or researchers have a preference for statistically significant results. Because all areas of empirical research are susceptible to publication selection, any average or tally of significant/insignificant studies is likely to be biased and potentially misleading. Meta‐regression analysis can see through the murk of random sampling error and selected misspecification bias to identify the underlying statistical structures that characterize genuine empirical effect. Meta‐significance testing and precision‐effect testing (PET) are offered as a means to identify empirical effect beyond publication bias and are applied to four areas of empirical economics research – minimum wage effects, union‐productivity effects, price elasticities, and tests of the natural rate hypothesis.     

The Returns to Education: Macroeconomics

We offer an extensive summary and a critical discussion of the empirical literature on the impact of human capital on macro‐economic performance, with a particular focus on UK policy. We also highlight methodological issues and make recommendations for future research priorities.
Taking the studies as a whole, the evidence that human capital increases productivity is compelling, though still largely divided on whether the stock of education affects the long‐run level or growth rate of GDP. A one‐year increase in average education is found to raise the level of output per capita by between three and six percent according to augmented neo‐classical specifications, while leading to an over one percentage point faster growth according to estimates from the new‐growth theories. Still, over the short‐run planning horizon (four years) the empirical estimates of the change in GDP are of similar orders of magnitude in the two approaches. The impact of increases at different levels of education appear to depend on the level of a country's development, with tertiary education being the most important for growth in OECD countries. Education is found to yield additional indirect benefits to growth. More preliminary evidence seems to indicate that type, quality and efficiency of education matter for growth too.     

Solutions to the Moral Hazard Problem Arising from The Lender-of-last-resort Facility

The provision of liquid funds via a lender‐of‐last‐resort facility has been the chief means by which governments have chosen to prevent or stay bank runs. The introduction of such a facility, however, leads to a moral hazard problem which weakens each financial manager's commitment to sound banking, and hence may ultimately make the few bank runs which do occur more dramatic in both size and seriousness. In this paper I provide a survey of the various policy measures which have been proposed to mitigate the effects of the moral hazard problem arising from the introduction of a lender‐of‐last‐resort facility.