Reanalyzing Zero Returns to Education in Germany

Pischke and von Wachter (Review of Economics and Statistics 2008; 90 (3): 592–598) find zero earnings returns to compulsory schooling in the basic school track in Germany. We reanalyze their study using a different dataset. In an extension, we use additional instruments which allow estimation of heterogeneous effects for different groups of compliers. We can confirm the previous result and also find zero returns for other compliers in higher track schools. Moreover, we do not find a causal effect of schooling on cognitive skills. This is in line with a potential reason Pischke & von Wachter (2008) give for their result, namely that basic skills are learned earlier in Germany and additional years of schooling are no longer effective. Copyright © 2015 John Wiley & Sons, Ltd.     

Revisiting the sectoral Linder hypothesis: Aggregation bias or fixed costs?

This paper reassesses and revisits the Sectoral Linder Hypothesis due to Hallak, which posits that similar tastes for quality lead to more intensive trade between similar countries at the sectoral level. First, the measure of demand similarity used in this paper is based on the distribution of income estimated from household surveys. The paper finds that a similarity measure based on the income distribution produces stronger results than the traditionally used measure based on GDP per capita. Moreover, the country/product level extensive margin is taken into account. This is important because similarity is likely to affect the fixed costs of trade and the fixed costs of alternative means of servicing a market (i.e., licensing and FDI). Fixed costs, in turn, affect the number and average productivity of firms that engage in bilateral trade and hence the overall volume of trade. This paper employs the method by Helpman et al. to control for the extensive margin. Heteroskedasticity is addressed using a feasible generalized least squares (FGLS) approach. The findings show that once controlling for the effect of similarity on the extensive margin, the Linder hypothesis holds at more aggregate levels. Other robustness checks suggest that results are not confined to products that are vertically differentiated.     

OPTIMAL INTERNATIONAL DEBT AND ENDOGENOUS TIME PREFERENCE IN A DEMOGRAPHICALLY DIVIDED WORLD (*)

The international transmission of shocks in population growth and technology is examined in an interdependent two-country world economy; decisions concerning the intertemporal allocation are made by social planners with an infinite horizon and an endogenous rate of time preference. Steady state shocks in population growth are shown to be negatively transmitted to the rate of time preference. In the steady state, the optimal foreign debt is determinate and it brings about a convergence of time preference. The net creditor and debtor positions in the steady state depend on the discount rate functions, the states of technology and the rates of population growth.     

Does GDP Distort Mexico's Economic Performance?

Between 1961 and 1980, Mexico's gross domestic product (GDP) per capita grew nearly 3.50% annually. During the 1980s, however, it shrank about 0.50% per year. GDP figures suggest that there was sustained economic growth for the 1960s and 1970s, changing suddenly to contraction in the 1980s. This impression may be misleading. GDP does not account for housework or informal production outside households. Further, GDP also may be distorted by transactional activities, which are expenditures to support transactions, not actual output consumed. This study recalculates output for Mexico for the 1961-1990 sample period, controlling for transactional activities and nonmarket production. We find that GDP misstates Mexico's “actual” economic growth. In the 1960s, the economy expanded more quickly than GDP suggests. But in the 1970s, growth was less than half that of the 1960s. The economy indeed slumped in the 1980s, but not as terribly as the official figures indicate. Mexico's economy did not collapse suddenly in the early 1980s; actual economic growth had slowed dramatically during the 1970s.     

Katastrophenanleihen als Risikotransfer-Instrument für Industrieunternehmen

All over the world an increase in natural catastrophes and resulting damages can be observed for entire economies as well as for individual industrial enterprises. This trend leads to extraordinary expensive traditional natural catastrophe insurance or even a lack of insurance capacities. Due to the increased threat resulting from natural catastrophes and the inefficiencies of traditional insurance solutions, it will be analyzed in the following whether catastrophe bonds (cat bonds), as an alternative risk transfer instrument, should play a role in the risk management portfolio of industrial companies. It will be discussed whether catastrophe bonds are possible risk transfer instruments for industrial companies and whether certain basic prerequisites for a confirmation of the suitability are recognizable. In a further step, the design possibilities for cat bonds will be presented and the most suitable design alternatives for industrial companies as issuers of cat bonds will be elaborated. In addition, a critical comparison between the usage of traditional insurance solutions and cat bonds by industrial companies in order to protect themselves against natural catastrophes will be conducted. The result is a first orientation and a general guideline for dealing with catastrophe bonds as part of the operational risk management for industrial companies.     

Timing the Start of Material Substitution Projects: Creating Switching Options under Volatile Material Prices

Firms developing new products often face the challenge of making investment decisions under uncertain input–cost conditions due to the price volatilities of the materials they use. These decisions need to be made long before the final products are launched on the market. Therefore, firms that invest in the opportunity to switch materials in a timely manner will have the flexibility to react to material price changes and realize competitive advantages. However, volatile material prices may also cause a firm to delay investment. Using real‐options reasoning, this paper studies the influence of input‐cost fluctuations on the timing decision to start new product development (NPD) and thus create the follow‐on opportunity to later replace an existing product. A model that combines waiting and switching options to derive influencing factors of the flexibility value that triggers the investment is developed and tested on a sample of material substitution projects from manufacturing firms. The results show how price uncertainty of the new and the old material, their joint price development, the expected project duration, and competitive preemption are related to the propensity to delay the start of NPD. The findings provide new insights on how timing in adopting materials can be used to hedge exposure to volatile material prices. The insights are relevant for adopters and producers of new materials, as well as for policy makers who strive for supporting the diffusion of new materials.     

Jensen's alpha and the market‐timing puzzle

Theory predicts that market‐timing activities bias Jensen's alpha (JA). However, empirical studies have failed to find consistent evidence of this bias. We tackle this puzzle in a nested model analysis and show that the bias contains an exogenous market component that is unrelated to market‐timing skill. In a comprehensive empirical analysis of US mutual funds, we find that the timing‐induced bias in JA is mainly driven by this market component, which is uncorrelated with measured timing activities. Measures of total performance that allow for timing activities are virtually identical to JA, even if timing activities are present in the evaluated fund. Hence, we conclude that JA is a sufficient measure of total performance.     

Is the Dutch consumer a true ricardian?

Summary In this paper the intertemporal optimization approach is adopted in order to estimate an empirical version of Blanchard's (1985) overlapping generations model. The observed sluggishness in consumption is incorporated into the model by recognizing both durability and habit formation as relevant determinants of total consumption. The model is estimated using quarterly data for The Netherlands from 1969:I to 1990:IV. The empirical estimates suggest that the status of the Dutch consumer as a true Ricardian is unambiguously rejected. The results furthermore suggest that this rejection is due to the existence of both liquidity constraints and finite planning horizons.Comments by Peter Broer, Jeroen Kremers, Debora Molenaar, Rick van der Ploeg, Frans Spinnewyn, Casper de Vries, Ed Westerhout and two anonymous referees are very much appreciated. Elbert Dijkgraaf has provided invaluable research assistance. We also thank participants of the OCFEB workshop and the CES seminar at the K.U. Leuven for their comments.     

Transactional activities and total factor productivity growth in Taiwan

Total factor productivity (TFP) growth shows how rapidly an economy is enhancing technology and the efficiency with which it allocates resources. It has been argued that “miraculous” growth in East Asian economies may not be sustainable, due to relatively low rates of TFP growth. Among these economies, it appears that Taiwan has indeed exhibited substantial technological progress. Failure to control for transactional activities, however, can distort the impression of TFP growth. This study recalculates Taiwan's TFP growth for the 1957–1993 sample period, adjusting for transaction costs in the government and private sectors. For the early years of the sample, 1957–1973, the economy's technological progress is better than GDP-based calculations suggest. In recent years, 1983–1993, productivity improvement has been overstated, but the economy has still exhibited relatively fast TFP growth.