Market Size, Trade, and Productivity

We develop a monopolistically competitive model of trade with firm heterogeneity—in terms of productivity differences—and endogenous differences in the "toughness" of competition across markets—in terms of the number and average productivity of competing firms. We analyse how these features vary across markets of different size that are not perfectly integrated through trade; we then study the effects of different trade liberalization policies. In our model, market size and trade affect the toughness of competition, which then feeds back into the selection of heterogeneous producers and exporters in that market. Aggregate productivity and average mark-ups thus respond to both the size of a market and the extent of its integration through trade (larger, more integrated markets exhibit higher productivity and lower mark-ups). Our model remains highly tractable, even when extended to a general framework with multiple asymmetric countries integrated to different extents through asymmetric trade costs. We believe this provides a useful modelling framework that is particularly well suited to the analysis of trade and regional integration policy scenarios in an environment with heterogeneous firms and endogenous mark-ups.     

The Interpretation of Coefficients in N-Chotomous Qualitative Response Models*

Researchers in financial accounting often use qualitative response models in choice-based empirical research. Most of this research relies on the familiar techniques of dichotomous probit or logistic regression. Only a limited amount of this research uses n-chotomous qualitative response models such as ordered probit or multinomial logistic regression. A potential explanation for this limited use is that the interpretation of model coefficients in qualitative response models with limited dependent variables (dichotomous or n-chotomous) differs substantially from OLS regression, and econometric texts do not provide a systematic approach to coefficient interpretation. This paper discusses several approaches to interpreting coefficients in n-chotomous qualitative response models. These methods focus on partial derivatives, elasticities of probability, sensitivity analysis, and odds ratios. The methods are applied to the models presented in Thomas (1989) and Mittelstaedt (1989). Additional analyses of the models demonstrate that the methods of interpretation can provide different conclusions or strengthen existing conclusions. The methods provide a better understanding of the directional effects of model coefficients, the relative responsiveness of the probability of choice to changes in the independent variables, and the effects of changes in the independent variables on the probability of choice. These methods should make these models more attractive to researchers interested in choice-based financial accounting research, and allow for a broader range of decision outcomes than that provided by dichotomous qualitative response models.     

WHY HAVE SO MANY DISINFLATIONS SUCCEEDED?

Why is it that the achievements of some disinflations from low and moderate peaks are long‐lived, whereas in others the gains in the inflationary front dissipate quickly? Based on an index of the sustainability of disinflations, various competing explanations of what determines sustainability are tested. Three factors, potentially at the top of the list of many researchers, are shown to be insignificant: oil shocks, fiscal policy, and inflation targeting. Nevertheless, other important features such as the exchange rate regime, achieving low inflation rates during the disinflation, and food price shocks are shown to be important variables driving the sustainability records. (JEL E31, E32, E52, E58, F41)     

The Wealth Effects of Bank Financing Announcements in Highly Leveraged Transactions

We analyze the effect of financing announcements of highly leveraged transactions (HLTs) on the stock prices of the banks that lead HLT-lending syndicates. For our sample of 41 HLTs, we document that the first HLT and bank financing announcements result in positive wealth effects for the lending banks. We also find that these wealth effects are lower in 1985, for smaller HLTs, and for banks with a high loan loss reserve to total asset ratio. Finally, we report that Leveraged Buyout (LBO) targets gain about 2 percent, whereas leveraged recap targets lose about 2 percent, when the first bank financing agreement is announced.     

INCOME REDISTRIBUTION AND PUBLIC GOOD PROVISION: AN EXPERIMENT

We experimentally investigate the impact of income redistribution on voluntary contributions by groups of four subjects. We compare equalizing and unequalizing redistribution. Our data are consistent with the neutrality theorem: Redistribution does not affect the amount of voluntarily provided public good at the group level. However, at the individual level, subjects tend to underadjust with respect to the Nash prediction. We also observe an insignificant adjustment asymmetry between the poor and the rich: Subjects who become poorer adjust their contribution by a larger absolute amount than subjects who become richer. Finally, poor subjects tend to overcontribute significantly more than rich subjects.     

Weak Moral Motivation Leads to the Decline of Voluntary Contributions

We develop a model that accounts for the decay of the average contribution observed in experiments on voluntary contributions to a public good. The novel idea is that people's moral motivation is “weak.” Their judgment about the right contribution depends on observed contributions by group members and on an intrinsic “moral ideal.” We show that the assumption of weakly morally motivated agents leads to the decline of the average contribution over time. The model is compatible with persistence of overcontributions, variability of contributions (across and within individuals), the “restart effect” and the observation that the decay in contributions is slower in longer games. Furthermore, it offers a rationale for conditional cooperation.     

The Optimality of Arbitrary Partial Equilibrium Welfare Analysis

This paper characterizes the general equilibrium foundation of arbitrary partial equilibrium welfare analysis in second‐best economies. While prior theory recognizes the importance of market distortions affected by relative price changes, it offers little guidance about the necessary scope of Marshallian partial equilibrium analysis. The paper determines necessary and sufficient conditions for optima of Marshallian total surplus functions to characterize second‐best Pareto‐optimal allocations. While these conditions confirm much of the traditional approach to applied welfare economics, they bring doubt about its reliability for public policy and concerns over its systematic use to build conventional economic wisdom.