PRICE AND EXCHANGE RATE DETERMINATION DURING THE GREENBACK SUSPENSION

The editors of the Special Issue Quantitative Economic Historywish to point out that in the article by C. W. Calomiris, ‘Priceand Exchange Rate Determination During the Greenback Suspension’,the results of the F tests reported in the upper part of Table7 on page 215 are p-values and not F statistics. In addition,the reference to the low level of significance of F tests onpage xvi of the Introduction should be deleted. The editorsapologize to readers for any misunderstanding which may havearisen on this account.     

Management Practices, Work--L ife Balance, and Productivity: A Review of Some Recent Evidence

Increasing product-market competition is believed to be a drivingforce behind higher productivity. However, even those criticsof globalization who accept this argument claim that there isa hard trade-off because tougher competition comes at the priceof reducing work—life balance (WLB). Optimists, by contrast,argue that competition can spur better WLB practices and thereforehigher productivity, so there is a ‘win—win’situation. To address this issue we use an innovative surveytool to collect the first international data on management practicesand WLB practices, surveying 732 medium-sized manufacturingfirms in the USA, France, Germany, and the UK. We find thatthe USA has the best management practices but the worst work—lifebalance. When we look within countries, however, we reject thepessimistic ‘trade-off’ model. First, WLB outcomesare significantly associated with better management, so thatwell-run firms are both more productive and offer better conditionsfor their employees. Second, tougher competition increases averagemanagement quality but does not negatively affect employees'working environment. As with many other studies, better WLBpractices are associated with significantly higher productivity.This relationship disappears, however, after controlling forthe overall quality of management. Footnotes ¹ E-mail addresses: nbloom{at}stanford.edu; j.vanreenen{at}lse.ac.uk     

Active citizen's income, unconditional income and participation under imperfect competition: a welfare analysis

Various types of basic income schemes are considered to compensatethe allocative inefficiencies induced by unemployment benefits.A dynamic general equilibrium model of a unionised economy isdeveloped in which participation to the formal labour marketis endogenous and the budget of the State has to balance. Itis shown that basic income schemes reduce the equilibrium unemploymentrate. Assuming that job-search is costly to monitor, the normativeanalysis suggests that only the active population should beeligible to the basic income. Introducing such an ‘activecitizen’s income’ can be a Pareto-improving reform.     

'Successes' and 'Failures' in the Markets for Technology

Market-mediated contracts for technology trade are bound byseveral transaction costs. This paper argues that as these transactioncosts become less severe, markets for technology can help improvethree market failures: (i) R&D duplications; (ii) externalitiesin potentially public R&D outcomes; and (iii) deviationsfrom marginal cost pricing in the downstream product markets.In addition, with larger markets of potential users, the technologysuppliers will have incentives to produce more ‘general’technologies which span a wider number of firms or industries.Markets for technology also produce new failures. In particular,they induce deviation from marginal cost pricing in the saleof the technology, and they generate externalities associatedwith complementary R&D and other investments made by theindependent buyers and suppliers that operate in them. The paperconcludes by discussing policy implications.     

Redesigning Regulation of Pensions and Other Financial Products

We observe that financial regulation is ever-growing, with thelatest area to experience increased supervisory attention beingpensions. Yet this has not made the financial world or consumerssafer, and for pensions in particular there are unexpected andundesired consequences. We explore the current policy approachto supervision, which is ‘bottom up’, i.e. assessmentand regulation of individual institutions, with the aim ofmakingthe financial system safe by making each institution safe. Weshow that this is both damaging (because it stifles innovation)and does not work (because risk will always be squeezed fromthe regulated institutions to the less regulated and less seen).Instead, we advocate a ‘top-down’ approach, whichfocuses on making the system safe first. We conclude that onceyou have made systems safe, detailed supervision of individualinstitutions is less necessary, thus reducing the burden ofsupervision. We believe that this approach will lead to a moresuitable and diverse treatment of different risks that willincrease both systemic and consumer safety. ‘If you haveten thousand regulations you destroy all respect for the law’,Winston Churchill (1931). ‘The ultimate result of shieldingmen from the effects of folly is to fill the world with fools’,Herbert Spencer (1891). Footnotes ¹ E-mail addresses: n.barr{at}lse.ac.uk; john_nugee{at}ssga.com     

Green and Brown? Globalization and the Environment

Globalization—viewed as a process of economic integrationthat embraces governance as well as markets—could leadto worldwide convergence toward higher or lower environmentalquality, or to environmental polarization in which the ‘greening’of the global North is accompanied by the ‘browning’of the global South. The outcome will not be dictated by aninexorable logic. Rather it will depend on how the opportunitiescreated by globalization alter balances of power within countriesand among them.     

Tactical Coordination in Plurality Electoral Systems

Simple plurality election systems (commonly known as ‘firstpast the post’) are often associated with the dominanceof two political parties. Such systems tend to reward leadingparties with a disproportionately large number of seats (the‘mechanical’ effect) and provoke tactical voting,where voters switch away from trailing parties (the ‘psychological’effect). We view tactical voting as a coordination problem.A group of voters wish to prevent a win by a disliked party(such as the Conservatives in recent UK elections) and mustpartially coordinate behind a single challenger (such as Labouror the Liberal Democrats) in order to do this. Crucially, votershave limited information on the situation within their constituencyand hence there is no common knowledge of the game being played—tacticalvoting is a global game. We show that in this setting, voterswill only partially coordinate. Furthermore, tactical votingexhibits negative feedback—tactical voting by others reducesthe incentive for an individual to vote tactically, since theybecome concerned that they may switch in the wrong direction.We calibrate our model, and apply it to the UK General Electionof 1997. Throughout England, we find that the ‘mechanical’and ‘psychological’ effects tend to offset eachother: tactical voting serves to reverse the Conservative biasthat results from the geographic distribution of preferences.     

Equilibrium Selection and Public-good Provision: The Development of Open-source Software

Collective-action problems arise in a variety of situations.Open-source software is a recent and important example. Copyrightrestrictions on open-source projects stipulate that any usermay modify the software so long as any resulting innovationis freely available to all. In economic parlance, the innovationis a public good. The economic theory of public-good provisionraises a number of important questions. Who contributes to sucha project, and who free rides? How might a social planner exploitthe interdependence of project components to encourage contributions?Under what conditions will such actions result in successfulprovision? Using a simple game-theoretic framework and recentresults from the study of equilibrium selection, we attemptto answer these questions. Under reasonable assumptions of asymmetryand less than complete information, the most efficient providerswill contribute. Contributions can be elicited by ‘integrating’the provision process when providers are sufficiently optimisticabout the success of the project. Otherwise, the social plannermay be better off ‘separating’ the components sothat individual contributions are independent of each other.The analysis yields recommendations for the leaders of open-sourceprojects and other similar collective-action problems.     

THE CAMBRIDGE CONTROVERSIES: OLD WAYS AND NEW HORIZONS--OR DEAD END?

‘[T]he established critics of a theory have nearly asmuch interest in the survival of the theory they criticize asits supporters; for when it is abandoned they are transportedfrom the exciting forefront of current scientific debate toa dignified but unexciting position in the museum of the historyof the subject’ (Nuti [1974, p. 364]). ‘If anything explains the heat of debates in growth [andcapital] theory, it is the difficulty thinkers in the scholastictradition have in appreciating that, for workers in the scientifictradition, it makes sense to entertain a model and use it withoutbeing committed to it; while the scientists cannot imagine whymere models should be the object of passion’ (Mirrlees[1973, p. xxi]).     

The Evolving Accidental Information Super-Highway

The technology of the Internet is not static. Although its ‘end-to-end’architecture has made this ‘connection-less’ communicationssystem readily ‘extensible’, and highly encouragingto innovation both in hardware and software applications, thereare strong pressures for engineering changes. Some of theseare wanted to support novel transport services (e.g. voice telephony,real-time video); others would address drawbacks that appearedwith the opening of the Internet to public and commercial traffic—e.g.the difficulties of blocking delivery of offensive content,suppressing malicious actions (e.g. ‘denial of service’attacks), pricing bandwidth usage to reduce congestion. Theexpected gains from making improvements in the core of the networkshould be weighed against the loss of the social and economicbenefits that derive from the end-to-end architectural design.Even where technological ‘fixes’ can be placed atthe networks' edges, the option remains to search for alternative,institutional mechanisms of governing conduct in cyberspace.     

Building Programme Evaluation into the Design of Public Research-Support Programmes

There is wide agreement that the high social rate of returnto research and innovation justifies government support forresearch. There is, however, only limited evidence on the effectivenessof different public research programmes. Reliable measurementof programme effectiveness is hampered by the ‘selectivity’problem (public funding goes to proposals judged in advanceto be likely to succeed) and the question of ‘additivity’(whether public funding increases total spending on researchor merely displaces funding from other sources). The selectivityproblem can be mitigated by building evaluation into programmedesign, either by partial randomization of the grant process,or by recording the rankings used in grant evaluation and makingthis information available to researchers. The additivity questionreflects the more fundamental problem that the ultimate objectiveof these programmes is to have long-term effects that are inherentlyvery difficult to measure and attribute to particular programmes.     

INVESTMENT AND GROWTH: PART 1: THE MAIN CONCEPTS AND THEIR IMPLICATIONS

‘Change is not made without inconvenience, even from worseto better.’(Richard Hooker, quoted by Samuel Johnson inthe Preface to the English Dictionary.)     

The Assessment: EMU, Four Years On

This paper reviews the functioning of the Economic and MonetaryUnion over the first 4 years of its existence. Monetary policyis viewed as having been of the ‘inflation-targeting’type, but with a tendency towards delay and conservatism inadjustment, which may also reflect over-optimistic output growthforecasts. The resulting pressure on the Stability and GrowthPact (SGP) illustrates the weakness in the ‘consensusview’ of the harmonious interaction of monetary, fiscal,and supply-side policies, which requires policy in all threeareas to be ‘correct’. In discussing reform of theSGP, a looser but still constraining form of fiscal agreementis advocated. The supply-side and balance-of-payments issuesinvolved in inter-country adjustment also interact importantlywith the SGP and are identified as key areas of difficulty ina still ‘immature’ monetary union, with separatelabour-market structures. Here the mechanisms for coordinationare more or less absent.     

The Financing of Research and Development

Evidence on the ‘funding gap’ for R&D is surveyed.The focus is on financial-market reasons for under-investmentin R&D that persist even in the absence of externality inducedunder-investment. The conclusions are that (i) small and newinnovative firms experience high costs of capital that are onlypartly mitigated by the presence of venture capital; (ii) evidencefor high costs of R&D capital for large firms is mixed,although these firms do prefer internal funds for financingthese investments; (iii) there are limits to venture capitalas a solution to the funding gap, especially in countries wherepublic equity markets are not highly developed; and (iv) furtherstudy of governmental seed capital and subsidy programmes usingquasi-experimental methods is warranted.     

THE BEHAVIOUR OF CERTIFICATE OF DEPOSIT RATES IN THE UK

Using a number of maturities of up to one year and weekly highquality data on UK, CD rates, 1975–92, we provide a varietyof tests of the expectations hypothesis (EH) of the term structure.Our results appear to give more support to the EH than do earlierstudies, which often use longer maturities and data of a lowerfrequency on coupon paying bonds and yield data on ‘bundlesof bonds’. If one is willing to assume that noise traderspredominate in the bond market at very short horizons, we canprovide some insights into empirical results, found in the literature.     

Can non-renewable resources alleviate the knife-edge character of endogenous growth?

Standard endogenous growth models rely on the arbitrary assumptionthat the technology has exactly constant returns with respectto producible inputs. Can this knifeedge restriction be relaxedby including non-renewable resources as necessary inputs inproduction? In a one-sector optimal growth model, we find thatthe strain on the economy imposed by the need to extract successivelysmaller amounts of the nonrenewable resource can offset thepotentially explosive effects of allowing for increasing returnsto producible inputs. However, growth in per capita consumptionwill be unstable unless there is population growth. Thus, theknife-edge problem of (strictly) endogenous growth reappearsas an instability problem. But a ‘semi-endogenous’growth framework turns out to be an attractive alternative,relying on less restrictive parameter values, maintaining stability,and allowing a rich set of determinants of longrun growth.     

Product quality, lender liability, and consumer credit

Under ‘linked credit’ (also known as ‘connectedlending’), the buyer obtains a loan from a lender withthe specific purpose of purchasing a certain product. Creditis arranged directly by the seller, who acts as an intermediaryfor the finance company. Within this form of financing, thelender often accepts a measure of liability for defective products.We show that ‘connected-lender liability’ can workas a signalling device for the reliability of sellers, so asto alleviate the market failure that arises when sellers arebetter informed than consumers about the quality of their products.     

Trade adjustment in the WTO system: are more safeguards the answer?

For countries to engage successfully in the international tradingsystem, their industries, firms, and workers must respond continuallyto new conditions of competition. The continuing need to adjustarises both from policy changes approved in multilateral negotiations—e.g.implementation of trade liberalization commitments, preferenceerosion, or adverse terms-of-trade consequences of export subsidyelimination—and from ongoing changes in competitive pressuresinherent in a liberal trading system—e.g. effects on comparativeadvantage of changes in technology or factor supplies. But thepolitical response to a situation calling for adjustment isoften a call for ‘safeguards’—whether as anex ante provision in negotiated agreements or as an ex postmeasure once the agreement has been signed and the reality ofnew conditions takes shape. This paper examines the range ofadjustment problems confronting the current and future internationaltrading system, the economic arguments for intervention to dealwith these problems, the adjustment environment as set out inthe current World Trade Organization (WTO) Agreements, and proposalsfor reform. While the adjustment problems we discuss apply toboth rich and poor WTO member countries, we highlight the issuesof adjustment especially relevant for developing countries.     

MONEY AND THE WALRASIAN UTILITY FUNCTION

There is a conflict in Walras' ‘Elements of Pure Economics’between the literary and mathematical treatment of the utilityof money. This paper outlines this conflict and suggests thatthe clear cut treatment of Walras which may be found in muchof the literature is in fact too simplistic to represent Walras'views.