Market power versus efficiency under uncertainty: conventional versus Islamic banking in the GCC

In this article we estimate the effect of concentration on intermediation margins in Gulf Cooperation Council's (GCC) Islamic and conventional banking under the assumption that margins are uncertain. The empirical model, which we formally derive from an expected utility maximization problem, allows us to test for risk aversion as well as competitive conduct in loan and the deposit markets. The model also yields an expression showing that the effect of concentration on margins is the sum of its respective effects on market power, marginal cost of intermediation and marginal cost of uncertainty. The expression allows us to test whether concentration is welfare enhancing, reducing or neutral. We find Islamic banks to be risk-averse and conventional banks to be risk-neutral. We also find that concentration is welfare-neutral in Islamic loans and deposits, welfare-enhancing in conventional loans and welfare-neutral in conventional deposits. We used Nonlinear Two-Stage Least Squares (N2SLS) and Nonlinear Three-Stage Least Squares (N3SLS) to check for robustness.     

THE MEASUREMENT OF INEQUALITY OF OPPORTUNITY: THEORY AND AN APPLICATION TO LATIN AMERICA

Building on the existing literature, this paper constructs a simple scalar measure of inequality of opportunity and applies it to six Latin American countries. The measure—which captures between‐group inequality when groups are defined exclusively on the basis of predetermined circumstances—is shown to yield a lower‐bound estimate of true inequality of opportunity. Absolute and relative versions of the index are defined, and alternative parametric and non‐parametric methods are employed to generate robust estimates. In the application to Latin America, we find inequality of opportunity shares ranging from one quarter to one half of total consumption inequality. An opportunity‐deprivation profile that identifies the worst‐off types in each society is also formally defined, and described for the same six countries. In three of them, 100 percent of the opportunity‐deprived were found to be indigenous or Afro‐descendants.     

SIZE,OPENNESS, AND MACROECONOMIC INTERDEPENDENCE

One common, simplifying assumption in open economy macroliterature is that the rest of the world can be thought of as a representative economy. This article formally investigates conditions under which this assumption can be justified using a multicountry general equilibrium model as a laboratory. We derive the conditions that ensure the existence of the equilibrium and study the properties of the equilibrium using large N asymptotics. Thereby, we show that the two‐country framework is a valid approximation only for economies that have diversified trade linkages and only when there is no globally dominant economy among the foreign economies.     

IV threshold cointegration tests and the Taylor rule

The usual cointegration tests often entail nuisance parameters that hinder precise inference. This problem is even more pronounced in a nonlinear threshold framework when stationary covariates are included. In this paper, we propose new threshold cointegration tests based on instrumental variables estimation. The newly suggested IV threshold cointegration tests have standard distributions that do not depend on any stationary covariates. These desirable properties allow us to formally test for threshold cointegration in a nonlinear Taylor rule. We perform this analysis using real-time U.S. data for several sample periods from 1970 to 2005. In contrast to the linear model, we find strong evidence of cointegration in a nonlinear Taylor rule with threshold effects. Overall, we find that the Federal Reserve is far more policy active when inflation is high than when inflation is low. In addition, we reaffirm the notion that the response to counteract high inflation was weakest in the 1970s and strongest in the Greenspan era.     

Monte Carlo simulation of macroeconomic risk with a continuum of agents: the general case

In large random economies with heterogeneous agents, a standard stochastic framework presumes a random macro state, combined with idiosyncratic micro shocks. This can be formally represented by a random process consisting of a continuum of random variables that are conditionally independent given the macro state. However, this process satisfies a standard joint measurability condition only if there is essentially no idiosyncratic risk at all. Based on iteratively complete product measure spaces, we characterize the validity of the standard stochastic framework via Monte Carlo simulation as well as event-wise measurable conditional probabilities. These general characterizations also allow us to strengthen some earlier results related to exchangeability and independence. Parts of this work were done while Yeneng Sun was visiting Stanford University in July 2003, March–May 2005 and July 2006, and while Peter Hammond was visiting the National University of Singapore in March–April 2004. An early version was presented at the World Congress of the Econometric Society in 2005.     

NEW LIGHTS ON THE ROBBINSIAN THEORY OF WORK SUPPLY

We assess the actual relevance of Robbins' paper ‘On the elasticity of Demand for Income in terms of Effort’ to the theory of work supply. First, we show that the paper is the first application of income and substitution effects to this branch of economic research. Next, we analyse Robbins' economic terminology, especially his definition of work. We find that the concept of work he uses could seem vague as he may be considering both the length and intensity dimensions of this activity. To verify this possibility, we formally reassess Robbins' original proposal by introducing this wider definition of work into the mathematical framework he proposes. The resulting model shows that this reading (i) is compatible with his diagrammatic analysis; (ii) clarifies the meaning of the other vague economic concepts the author uses; and (iii) illuminates his verbal explanations. Additionally, we derive all the relevant results of both the income‐leisure and the more recent effort‐extraction models from this Robbinsian model of work supply. This last outcome allows us to state that Robbins' model comprises current theories of work supply.     

On delayed technological shifts

When a new technology capable of superseding an existing one appears, we sometimes observe the so-called sailing-ship effect, which consists of the old technology's improvements in response to the emergence of the new one. This helps explain why the old technology does not disappear quickly. However, some more aspects contribute to slowing down the process of substitution of the new for the old technology, such as users’ reluctance to switch to the new one, the degree of diffusion of the old technology, and other forces. In this work, we provide a formal model which takes into account both the technical improvements of the old technology as well as the other forces, where the latter are synthesised in what we define as a memory effect.     

The role of technology in the creation and capture of value

We use Adam Smith's pin factory to examine how people and things interact in the process of value creation. We introduce the concept of the market efficient unit of interaction to help us understand how technology connects to the processes of value creation and capture. Finally, we draw these strands together into a model which shows how changes in technology impact the market efficient unit of interaction, and how this in turn affects the distribution of exchange value.     

Innis Lecture: Inference on income distributions

Abstract This paper attempts to provide a synthetic view of varied techniques available for performing inference on income distributions. Two main approaches can be distinguished: one in which the object of interest is some index of income inequality or poverty, the other based on notions of stochastic dominance. From the statistical point of view, many techniques are common to both approaches, although of course some are specific to one of them. I assume throughout that inference about population quantities is to be based on a sample or samples, and, formally, all randomness is due to that of the sampling process. Inference can be either asymptotic or bootstrap based. In principle, the bootstrap is an ideal tool, since in this paper I ignore issues of complex sampling schemes and suppose that observations are IID. However, both bootstrap inference and, to a considerably greater extent, asymptotic inference can fall foul of difficulties associated with the heavy right‐hand tails observed with many income distributions. I mention some recent attempts to circumvent these difficulties.     

Forecasting emerging technologies: Use of bibliometrics and patent analysis

It is rather difficult to forecast emerging technologies as there is no historical data available. In such cases, the use of bibliometrics and patent analysis have provided useful data. This paper presents the forecasts for three emerging technology areas by integrating the use of bibliometrics and patent analysis into well-known technology forecasting tools such as scenario planning, growth curves and analogies. System dynamics is also used to be able to model the dynamic ecosystem of the technologies and their diffusion. Technologies being forecasted are fuel cell, food safety and optical storage technologies. Results from these three applications help us to validate the proposed methods as appropriate tools to forecast emerging technologies.     

SAVING ENERGY THROUGH BETTER INFORMATION: A NEW ENERGY PARADIGM?

For the past 40 years, governments, utilities, and private companies have developed increasingly efficient appliances for household use and governments have initiated policies to encourage the deployment of these technologies. To the credit of these activities, we have improved the efficiency of electricity use in the United States, but it has not been enough to overcome the increasing demand from proliferation of electricity‐using devices. In addition, penetration rates for some types of efficient equipment have remained relatively low in certain regions. U.S. electricity demand thus continues to grow. In this paper, we argue that to achieve significantly greater efficiency improvements needed to meet future demand for energy services, we should provide more information to consumers about their energy use and give them more control over this use. While more studies are needed to assess just how far these types of measures can take us, there is enough evidence to show that with better information, consumers often make choices that reduce energy use.     

R&D-expenditure in an endogenous growth model

The aim of this paper is to analyze the role that aggregate R&D-expenditure plays in economic growth. We introduce a technology of innovation based on expenditure that generates endogenous sustainable growth in absence of any scale effect. This R&D-model permits us to study the effects of some fiscal policies. In particular, we analyze how subsidies to R&D-investment and physical capital accumulation affect the long-run growth rate. For the empirical cross-country analysis we directly derive a structural econometric model.     

Monitoring and forecasting annual public deficit every month: the case of France

In this paper we forecast annual budget deficits using monthly information. Using French monthly data on central government revenues and expenditures, the method we propose consists of: (1) estimating monthly ARIMA models for all items of central government revenues and expenditures; (2) inferring the annual ARIMA models from the monthly models; (3) using the inferred annual ARIMA models to perform one-step-ahead forecasts for each item; (4) compounding the annual forecasts of all revenues and expenditures to obtain an annual budget deficit forecast. The major empirical benefit of this technique is that as soon as new monthly data become available, annual deficit forecasts are updated. This allows us to detect in advance possible slippages in central government finances. For years 2002–2004, forecasts obtained following the proposed approach are compared with a benchmark method and with official predictions published by the French government. An evaluation of their relative performance is provided.      

Half empty, half full and why we can agree to disagree forever

Aumann [Aumann R., 1976. Agreeing to disagree. Annals of Statisitics 4, 1236–1239] derives his famous we cannot agree to disagree result under the assumption that people are expected utility (=EU) decision makers. Motivated by empirical evidence against EU theory, we study the possibility of agreeing to disagree within the framework of Choquet expected utility (=CEU) theory which generalizes EU theory by allowing for ambiguous beliefs. As our first main contribution, we show that people may well agree to disagree if their Bayesian updating of ambiguous beliefs is psychologically biased in our sense. Remarkably, this finding holds regardless of whether people with identical priors apply the same psychologically biased Bayesian update rule or not. As our second main contribution, we develop a formal model of Bayesian learning under ambiguity. As a key feature of our approach the posterior subjective beliefs do, in general, not converge to “true” probabilities which is in line with psychological evidence against converging learning behavior. This finding thus formally establishes that CEU decision makers may even agree to disagree in the long-run despite the fact that they always received the same information.     

The notion of private information in a modern perspective: a reappraisal of Hayek's contribution

Hayek's critical attitude towards Walrasian modelling was based on informational considerations. In his view, a meaningful notion of equilbrium has to deal with the consistency of agents' plans which information is dispersed throughout the economy. He emphasized that only in this context could the role of market prices as aggregators of information be correctly analysed. Recent developments in general equilbrium theory with rational expectations have taken up the issue formally. In this paper, Haek's main ideas about the competiitive mechanism are compared with these recent results. It is argued that Hayek's notion of private information is different from that used in modern equilibrium theory, not only because of its dynamic content, as many critics observed ex post, as is usually in a general equilibrium framework. This issue of whether modern notions of private information, namel that used in conract theory, are good substitutes for Hayek' notion of personal knowledge is also examined in detail. From this analysis, it is possible to conclude that Hayek's notion of equilibrium neither entails Pareto optimality prperties nor full informational efficiency.     

On Lionel McKenzie's 1957 intrusion into 20th‐century demand theory

In this essay, we read McKenzie's 17 paragraphs of 1957 on “Demand Theory Without a Utility Index” as an opening to the narrative of 20th‐century demand theory and as a lever for the understanding of what has now reached culmination as the neoclassical theory of demand. In tracking the influence of these paragraphs on both theoretical and applied work, we also use them as a foothold for reflection on the process of theorizing to argue for the view that one cannot neglect the (changing) problematic that the theory is adduced to address, that the historical narrative behind a particular theorem is indispensable in understanding the theorem itself. This implicit theorizing of the process of theorizing then forces us to consider Stigler's distinction between textual and scientific exegesis and confront it to a second‐order level of theorizing, and thereby bring out the continuity, possibly not quite seamless, between a theorem and its history.     

Technology clubs, R&D and growth patterns: Evidence from EU manufacturing

This paper investigates the forces driving output change in a panel of EU manufacturing industries. A flexible modeling strategy is adopted that accounts for: (i) inefficient use of resources and (ii) differences in the production technology across industries. With our model we are able to identify technical, efficiency, and input growth for endogenously determined technology clubs. Technology club membership is modeled as a function of R&D intensity. This framework allows us to explore the components of output growth in each club, technology spillovers and catch-up issues across industries and countries.     

Cutting-edge technology

In recent years there has been a growing belief that materials constitute a generic technology of revolutionary significance, ranking alongside information techno- logy and biotechnology. Our main aim is to examine the plausibility of this claim. In so doing we indicate what is distinctive about changes i n materials science and technology, and report on recent forecasts of potential change. Our second aim is briefly to discuss corporate and public policy on materials innovation i n a number of advanced countries. We present some preliminary jindings from interviews conducted with prominent UK materials producers and users. We conclude that there have been some important incremental and radical innovations i n materials technology. But because the diffusion of innovative materials and processes into different industry sectors and products has been uneven, i n terns of their current and likely future impact on the economy as a whole these changes cannot yet be described as revolutionary. The future impact of materials technology will depend not just on the materials innovation strategies of companies and governments, but on their ability to overcome users' conservatism and to convince them of the design and quality improvements that are possible.     

Gender differences in occupational mobility – evidence from Portugal

In this paper we evaluate if gender influences the pattern of upward and downward occupational mobility. With data for Portugal in the period 1998–2009, we find that women have a lower probability of upward mobility and a higher probability of downward mobility. The results also reveal the importance of some other determinant factors, especially education and initial occupation. Additionally, considering an analysis in which we group occupations into four ranked categories (low, medium-low, medium-high, and high level occupations), we confirm that the determinants of occupational mobility depend on the ranking of the initial occupation. This analysis allows us to conclude that the unfavorable pattern of occupational mobility in the case of women is due, essentially, to the disadvantage they have at the bottom of the distribution. On the contrary, in the top occupations, the results suggest the existence of equality between genders.     

The <Emphasis Type="Italic">Acting</Emphasis> Person: Social Capital and Sustainable Development

Ron Stanfield has had a long and distinguished career as a social economist and commentator on the social economy. Of special concern to us in this article are Stanfield’s interests in social capital, sustainable development, and nurturance which we refer to as caring. We also take up several other virtues including sympathy, benevolence, and generosity that have been part of the economics literature from the time of Smith’s Moral Sentiments along with the associated vices of heartlessness, insensitivity, meanness, greediness, and others. This article attempts to show that (1) adding social capital to the machine-like individual of mainstream economics results in the acting person of personalist economics who becomes more fully a human person through social interactions that foster the development of several virtues or less fully a human person through other interactions that instill certain vices; and that (2) in matters relating to sustainability, becoming more fully a human person calls especially for the practice of the virtues of justice and moderation. In addition we have suggested a framework for thinking about sustainable development in terms of actuating and limiting principles and for developing critical values or performance standards for sustainable development that are person-centered.