Optimal delegation implications of central bank transparency

The interrelationship between monetary regime design and central bank transparency is examined. We find optimal delegation requires the central bank be either: ‘representative’, not choosing to publicly reveal its private information; or ‘ultraconservative’, deciding to be fully transparent.     

Employment protection, international specialization, and innovation

We develop a model to analyze the implications of firing costs on incentives for R&D and international specialization. The key idea is that countries with a rigid labor market will tend to produce relatively secure goods, at a late stage of their product life cycle. Consequently, their researchers tend to specialize in ‘secondary innovation’ which improves existing products, rather than ‘primary innovation’ which introduces new products. This is roughly consistent with the observed pattern of R&D in Europe versus the U.S. Employment protection does not necessarily harm the country where it prevails, but typically reduces world welfare and the world number of goods.     

Raising juveniles

This paper investigates how families decide how juveniles use their time. The problem is analyzed in three variations: (i) a ‘decentralized’ scheme, in which parents control the main budget, but their children dispose of their time as they see fit, together with any earnings from work on their own account; (ii) ‘hierarchy’, in which parents can enforce, at some cost, particular levels of schooling and supervised work contributing to the main budget; and (iii) the cooperative solution, in which resources are pooled and the threat point is one of the non-cooperative outcomes. Adults choose which game is played. While the subgame perfect equilibrium of the overall game is pareto-efficient, it may yield less education than ‘hierarchy’. Restrictions on child labor and compulsory schooling generally affect both the threat point and the feasible set of bargaining outcomes. Families may choose more schooling than the legal minimum.     

Testing the growth effects of structural change

Against the backdrop of Baumol's model of ‘unbalanced growth’, a recent strand of literature has presented models that manage to reconcile structural change with Kaldor's ‘stylized fact’ of the relative constancy of per-capita real GDP growth. Another strand of literature goes beyond this, arguing that the expenditure shifts toward Baumol's ‘stagnant’ sector stimulate rather than dampen long-term economic growth because of the human capital-accumulating nature of major ‘stagnant’ services (like health care and education). This paper tests the relationship between structural change and economic growth empirically by means of a Granger-causality analysis of a panel of 18 OECD countries.     

Bidding for brains: Intellectual property rights and the international migration of knowledge workers

We introduce international mobility of knowledge workers into a model of Nash equilibrium IPR policy choice among countries. We show that governments have incentives to use IPRs in a bidding war for global talent, resulting in Nash equilibrium IPRs that can be too high, rather than too low, from a global welfare perspective. These incentives become stronger as developing countries grow in size and wealth, thus allowing them to prevent the ‘poaching’ of their ‘brains’ by larger, wealthier markets.     

Firm performance and labour turnover: Evidence from the 2004 workplace employee relations survey

We explore the impact of labour turnover on firm performance by analysing the predictions of an extension of the efficiency wage model of [Salop, S., (1979) ‘A Model of the Natural Rate of Unemployment’, American Economic Review, 69, 117–125.] developed by [Garino, G. and Martin, C., (2008) ‘The Impact of Labour Turnover: Theory and Evidence from UK Micro Data’, Quantitative and Qualitative Analysis in the Social Sciences, 1(3), 81–104.], which separates incumbent and newly hired workers in the production function. Within this theoretical framework, an exogenous increase in the turnover rate can increase profits if firms do not choose wages unilaterally. We test the theoretical predictions of the model using UK cross-section establishment-level data, the 2004 Workplace and Employee Relations Survey. In accordance with our theoretical priors, the empirical results support the standard inverse relationship between the quit rate and firm performance where firms unilaterally choose the wage and generally support a positive relationship between firm performance and the quit rate where trade unions influence wage setting.     

Exploring the big jump in the Spanish unemployment rate: Evidence on an ‘added-worker’ effect

Spain is destroying more jobs than any other European country. In the third quarter of 2009, the unemployment rate stood at 17.9%, the second-highest rate in the 27-nation EU and the highest rate in the euro area (EA-16). The exponential growth of the Spanish unemployment rate is the by-product of falling employment rates. However, there is a second explanation which is often overlooked by unemployment forecasters: changes in labour force participation rates. On the one hand, in times of recession participation rates tend to increase in order to safeguard sustainable household incomes. This phenomenon is known as the ‘added-worker’ effect. On the other hand, there is also an opposite effect in that individuals leave the labour force in recessions because chances to find employment are low. This is the ‘discouraged-worker’ effect. Applying a threshold cointegration model to Spanish quarterly data over the period 1976-2008, we find that the added-worker effect dominates the discouraged-worker effect, but only when unemployment is below 11.7%. Above this threshold, the two effects cancel each other out so that the participation rate is not influenced by further deteriorations of economic conditions. Since Spain recently passed the 11.7% unemployment threshold, our model predicts that there will be no further increases in the participation rate in the near future.     

Loafing or learning?—the demand for informal education

Using detailed time use data for Germany a positive correlation is found between the level of schooling and time investments in informal education. Two hypotheses explain this observation: (1) highly educated people have higher opportunity costs of their leisure time and thus prefer leisure activities which add to their market productivity (wage effect) and (2) highly educated people have a preference for ‘high quality’ leisure (taste effect). The demand for informal education is derived in a household production model accounting for both explanations. An empirical investigation finds evidence for both effects with the taste effect being more important.     

Does immigration affect the Phillips curve? Some evidence for Spain

The Phillips curve has flattened in Spain over 1995-2006: Unemployment has fallen by 15 percentage points, with roughly constant inflation. This change has been much more pronounced than elsewhere. We argue that this stems from the immigration boom in Spain over this period. We show that the New Keynesian Phillips curve is shifted by immigration if natives’ and immigrants’ labor supply elasticities and bargaining power differ. Estimation of this curve for Spain indicates that the fall in unemployment since 1995 would have led to an annual increase in inflation of 2.5 percentage points if it had not been largely offset by immigration.     

Competition, human capital and income inequality with limited commitment

We develop a dynamic model with two-sided limited commitment to study how barriers to competition, such as restrictions to business start-up and non-competitive covenants, affect the incentive to accumulate human capital. When contracts are not enforceable, high barriers lower the outside value of ‘skilled workers’ and reduce the incentive to accumulate human capital. In contrast, low barriers can result in over-accumulation of human capital. This can be socially optimal if there are positive spillovers. A calibration exercise shows that this mechanism can account for a sizable portion of cross-country income inequality.     

Agglomeration and tax competition

Tax competition may be different in ‘new economic geography settings’ compared to standard tax competition models. If the mobile factor is completely agglomerated in one region, it earns an agglomeration rent which can be taxed. Closer integration first results in a ‘race to the top’ in taxes before leading to a ‘race to the bottom’. We reexamine these issues in a model that produces stable equilibria with partial agglomeration in addition to the core-periphery equilibria. A bell-shaped tax differential also arises in our model. Therefore, the ‘race to the top’ result generalises to a framework with partial agglomeration.     

Why the marriage squeeze cannot cause dowry inflation

An influential explanation for rising dowry payments is the “marriage squeeze”. The present paper shows this explanation to be internally inconsistent. The marriage squeeze argument for inflation relies on the fact that population growth leads to an excess supply of brides in the marriage market. This excess supply is resolved by some women postponing marriage, so that the average age of brides increases. In previous studies the argument is stated informally. Here, a matching model of marriage is developed to formally analyze the link between dowry payments and population growth. It is shown that a marriage squeeze cannot yield dowry inflation. In fact, when women who do not find matches at the ‘desirable’ marrying age re-enter the marriage market as older brides, a marriage squeeze is shown to imply dowry deflation. Population change is therefore not a promising explanation for the observed increases in dowry payments.     

An efficiency and welfare classification of rationing by waiting in the presence of bribery

Governments often allocate commodities at low prices and on a first-come-first-served basis (rationing by waiting), while bureaucrats who distribute the commodities usually take bribes. A model is developed to classify the efficiency implications of bribery, and socially optimal pricing schemes in rationing by waiting. If the rationed good and individual income spent on other goods (‘other’ income) are ‘complements’, then bribery may enhance allocative efficiency, and a ‘dual pricing’ scheme can augment social welfare. However, if the rationed commodity and ‘other’ income are ‘substitutes’, then bribery may not improve allocative efficiency, and distributing the rationed commodity free is socially optimal.     

Volatility equicorrelation: A cross-market perspective

This paper contains the first empirical application of the Dynamic Equicorrelation (DECO) model to a cross-market dataset composed of equities, bonds, foreign exchange rates and commodities during 1983–2013. The originality of our approach consists of examining the volatility equicorrelations, by updating the concept of ‘volatility surprise’. We document that the average volatility equicorrelation across markets is around 15%, while being time-varying with regime shifts before/after September 2005 and with a low mean-reversion level.     

Testing the ‘brain gain’ hypothesis: Micro evidence from Cape Verde

Does emigration really drain human capital accumulation in origin countries? This paper explores a unique household survey designed and conducted to answer this research question. We analyze the case of Cape Verde, a country with allegedly the highest ‘brain drain’ in Africa, despite a marked record of income and human capital growth in recent decades. We propose the first explicit test of ‘brain drain’ arguments, according to which the prospects of own future migration can positively impact educational attainment. Our most conservative estimates using individual specific variation in economic conditions at the destination indicate that a 10 pp increase in the probability of own future migration improves the probability of completing intermediate secondary schooling by nearly 4 pp for individuals who do not migrate before age 16. These findings are robust to the choice of instruments and econometric specification. Counterfactual simulations point to significant human capital gains from lowering migration barriers.     

Internal rationality, imperfect market knowledge and asset prices

We present a decision theoretic framework in which agents are learning about market behavior and that provides microfoundations for models of adaptive learning. Agents are ‘internally rational’, i.e., maximize discounted expected utility under uncertainty given dynamically consistent subjective beliefs about the future, but agents may not be ‘externally rational’, i.e., may not know the true stochastic process for payoff relevant variables beyond their control. This includes future market outcomes and fundamentals. We apply this approach to a simple asset pricing model and show that the equilibrium stock price is then determined by investors? expectations of the price and dividend in the next period, rather than by expectations of the discounted sum of dividends. As a result, learning about price behavior affects market outcomes, while learning about the discounted sum of dividends is irrelevant for equilibrium prices. Stock prices equal the discounted sum of dividends only after making very strong assumptions about agents? market knowledge.     

Regular Effective Demand Systems (REDS)

Empirical demand analysis is usually conducted on the basis of either ‘regularity’ or ‘flexibility’. This paper takes a middle ground between ‘regularity’ and ‘flexibility’, offering a compromise in the form of a new specification termed ‘REDS’.     

Occupational choice, incentives and wealth distribution

We consider a model of occupational choice in large economies where individuals differ in their wealth endowment. Individuals can remain self-employed or engage in productive matches with another individual, i.e., form firms. Matches are subject to a moral hazard problem with limited liability. The division of the gains from such matches is determined by competitive forces. When the incentive problem is asymmetric, matches are typically wealth-heterogeneous, with richer individuals choosing the occupation for which incentives are more important. The utilities attained within a match depend on the wealth distribution and changes in the latter give rise to ‘trickle down’ effects.     

A bibliometric account of the evolution of EE in the last two decades: Is ecological economics (becoming) a post-normal science?

In ecological economics the debate on formalism and formalization has been addressed in the context of a lively discussion on ecological economics as a ‘post-normal’ (versus ‘normal’) science. Using ecological economics (EE) as a ‘seed’ journal and applying bibliometric techniques to all (2533) the articles published in EE from January 1989 to December 2009, we analyze the evolution of the field of ecological economics aiming to shed light on this debate. We observe the predominance (and increased relevance) of certain research topics: ‘Methodological issues’, ‘Policies, governance and institutions’ and ‘Valuation’. Moreover, ‘Collective action’, ‘Technical change and the environment’ and ‘Values’ stand as emergent themes of research. Finally, we note that ecological economics experienced an ‘empirical turn’ reflected in a shift away from exclusively formalized papers towards exclusively empirical and, to a larger extent, ‘formal and empirical’ ones. The combination of the prominent and emergent topics and the ‘empirical turn’ mirrors the increasing awareness among researchers in the field of the need to address a key specificity of ecological economics — the interdependence of the economic, biophysical and social spheres. On this basis, we argue that at least through the lens of EE, ecological economics has evolved towards a post-normal science.     

Migration,Unemployment, and Skill Downgrading

In this paper, we analyze the labor market impacts of immigration under flexible and rigid labor market regimes. A general equilibrium framework is developed, accounting for skill heterogeneity and labor market frictions, where unemployed medium‐skilled manufacturing workers are downgraded into low‐skilled service jobs, while low‐skilled service workers might end up unemployed. The analytical analysis shows that medium‐skill immigration decreases low‐skilled unemployment under the flexible regime, indicating a complementarity effect, while the rigid regime induces a substitution effect, leading to low‐skilled unemployment. Moreover, it leads to wage polarization. In a numerical analysis, the economic effects of different migration scenarios are quantified.