ON FINANCE AS A THEORY OF TFP,CROSS‐INDUSTRY PRODUCTIVITY DIFFERENCES,AND ECONOMIC RENTS*

We develop a theory of capital‐market imperfections to study how the ability to enforce contracts affects resource allocation across entrepreneurs of different productivities, and across industries with different needs for external financing. The theory implies that countries with a poor ability to enforce contracts are characterized by the use of inefficient technologies, low aggregate TFP, large differences in labor productivity across industries, and large employment shares in industries with low productivity. These implications are supported by the empirical evidence. The theory also suggests that entrepreneurs have a vested interest in maintaining a status quo with low enforcement.     

Using a Bootstrap Approach to Rate the Raters

This paper compares the accuracy of credit ratings of Moody's and Standard and Poor's. Based on 11,428 issuer ratings and 350 defaults in several datasets from 1999 to 2003 a slight advantage for the rating system of Moody's is detected. Compared to former research, the robustness of the results is increased by using nonparametric bootstrap approaches. Furthermore, robustness checks are made to control for the impact of watchlist entries, staleness of ratings, and the effect of unsolicited ratings on the results.     

Quota Bonuses as Localized Sales Bonuses

In this article, we compare quota bonuses to profit‐based evaluation and sales (quantity) bonuses in a duopoly setting with independent demand shocks. Contrary to the previous findings, we find that under certain circumstances, either quota bonuses or sales bonuses may be optimal compensation plans. This may explain the coexistence of different bonus schemes in situations where the strategic aspect of the incentive problems is relevant. Copyright © 2017 John Wiley & Sons, Ltd.     

A theory of capital gains taxation and business turnover

We present a theory concerning the realization of capital gains where ownership and control are linked as in Holmes and Schmitz (J. Pol. Econ. 103: 1005–1038, 1995). The model developed is a version of a Lucas-tree economy in which the productivity of a technology depends on the ownership of the technology. The existence and uniqueness of equilibrium follow from the Contraction Mapping Theorem. The theory implies that impediments to asset trading, such as capital gains taxation, negatively affect production efficiency. Moreover, we calibrate the model economy to U.S. data on small-business turnover and find that indexing deductions for inflation is capable of increasing capital-gains tax revenues. We thank an anonymous referee for helpful comments, and well as Tom Holmes, Ed Prescott, Jim Schmitz and Neil Wallace for insightful conversations. Cavalcanti is grateful for financial support from CNPq, as well as the hospitality from the University of Toronto during his visiting appointment at the Department of Economics in 2006. Erosa acknowledges the support from the Institute for Policy Analysis at the University of Toronto and the Social Sciences and Humanities Research Council of Canada.     

On the Dynamics of Recycling and Natural Resources

We study the dynamic impact of recycling through its effect on the production set of the economy and its relationship with natural resources. The contribution of renewable and recyclable resources for sustainability is studied. Although in the short run recycling may alleviate resource scarcity, in the long run it is not enough to compensate for the exhaustibility of non-renewable resources and the possibility of obtaining non-decreasing output paths crucially depends on the extent to which production rests on renewable resources. Furthermore, recycling interacts with natural resource growth, surprisingly not always favoring sustainability. The Production and Recycling Function is a generalization of the traditional production function, providing an integrated view of regular production and recycling and representing the production set of the economy when a recycling technology is available.     

Real exchange rates and target interest rates in a simple VAR model

This paper proposes a simple vector autoregressions (VAR) model with (real) output and exchange rate shocks on interest rates. Rather than assuming non-recursive identification schemes, we test the identifying assumption of the error term decompositions. Applying the model to quarterly data on major currencies against the U.S. dollar (USD) from 1974 to 1997, interest rate shocks explain - after 3 years - 16% of Canadian dollar/USD (CAD) real exchange rate variations and less than 2% for the mark/USD and yen/USD. Positive innovations of interest rates bring about (transitory) CAD real appreciations in differences and (permanent) appreciations in levels. Canadian real output is more explained by domestic interest rate shocks (19%) than Germanys (5%) or Japans (0.2%). Canada is smaller than the other economies and CAD has been shown to suffer from fear of floating. Our findings support the proposition that domestic shocks dominate output variance under fixed exchange rates. They are also consistent with structural interpretations of the VAR.     

Expected shortfall assessment in commodity (L)ETF portfolios with semi-nonparametric specifications

ABSTRACT

This paper studies the risk assessment of semi-nonparametric (SNP) distributions for leveraged exchange trade funds, (L)ETFs. We applied the SNP model with dynamic conditional correlations (DCC) and EGARCH innovations, and implement recent techniques to backtest Expected Shortfall (ES) to portfolios formed by bivariate combinations of major (L)ETFs on metal (Gold and Silver) and energy (Oil and Gas) commodities. Results support that multivariate SNP-DCC model outperforms the Gaussian-DCC and provides accurate risk measures for commodity (L)ETFs.     

Analyzing the determinants of entrepreneurship in European cities

This study investigated the determinants of business creation as a measure of entrepreneurship in European cities. It examined supply- and demand-side elements, actual and equilibrium rates of entrepreneurship, institutions and culture. These components were characterized using a dataset consisting of 21 indicators drawn from 184 cities in 20 European countries during the years 1999–2010. The study found that city size, self-employment, and tertiary education have a significant and positive impact on the number of new businesses registered. The implications of these findings are discussed in view of the European Commission’s Small Business Act, which provides guidelines for the conception and implementation of entrepreneurship policies in the European Union. This paper’s main contribution lies in the differentiation of factors that are context-specific (e.g., city-size) and others that can be influenced by policy (e.g., tertiary education).     

Prices and real wages in seventeenth‐century Madrid

This article focuses on the evolution of real wages earned by building labourers and craftsmen in Madrid during the seventeenth century. After a substantial rise brought about by the arrival of the Court in 1561, real wages experienced a remarkable fall from 1621–30 onwards. Our thesis is that the fiscal and monetary policies pursued by the Crown to fund its ambitious imperial policy exerted a clear influence on this decline. The currency manipulations of the low‐value petty coin (maravedí) drove serious losses in the real wages of building labourers and craftsmen between 1621 and 1680. In the years around 1665 the real wages of both groups had fallen below the levels of 1561–1600, and the indirect taxes levied by the Crown and the town council contributed to keeping real wages stagnant at around the low levels of 1665–80 between 1681 and 1700. Although this issue merits further research, it seems unlikely that building labourers and craftsmen could have offset the decline in their real wages through an increase in the number of hours worked or a rise in the number of work days.