Model Uncertainty,Political Learning,and Institutions: A Broader View on Mancur Olson's Theory of Institutional Sclerosis

In his Rise and Decline of Nations, Mancur Olson argues that politically stable countries suffer from declining growth rates caused by the growing influence of distributional coalitions that accumulate over time. The empirical literature supports the notion of a negative relationship between a country's duration of political stability and its growth rates but finds only weak support for a negative influence of distributional coalitions on growth. This paper sketches a simple model of party competition under model uncertainty, which may explain this mixed empirical picture. It shows that politically stable democracies are less well equipped to adjust to shifts in their economic environment than democracies with a shorter history of political stability. In a further step, the paper relates the major theme of this theory and Olson's theory to the more recent literature on institutions and growth. Directions for further research are discussed.     

About handy, handmade and handsome models

Statistical inference deals with natural variation between units and with uncertainty due to sampling, measurement error and random assignment to treatments. Almost always it does so within one model, assumed fixed and valid. Here, however, variation of conclusions due to variation in model choice will be discussed. Heuristics to find appropriate models are seldom taught, and model fit tests and model fit diagnostics are far from optimal. The use of more than one model for the same data is illustrated by examples from Item Response Theory.     

THE DISTRIBUTION OF YUGOSLAVIA'S NATIONAL INCOME BY SOCIAL CLASSES IN 1938

This paper presents the results of an investigation of the distribution of Yugoslavia's national income by social classes in 1938. The population in mid-1938 was apportioned among social classes as follows: proletariat 34.6 per cent, middle classes 59.2 per cent, bourgeoisie 5.3 per cent, 0.9 per cent unallocated. About three-quarters of the population was rural. The proletariat amounted to 5.2 million persons, of which 3 million were peasants living on dwarf holdings and 2.2 million were rural and urban wage earners. Unemployment in the non-agricultural sector was 10 per cent; if the agricultural sector is added, overall un- and under-employment amounted to 31 per cent. The bourgeoisie consisted of 0.8 million persons, of which two-fifths were rich peasants. Of the 9 million persons in the middle classes, 7 million were peasants with small and medium holdings. The remainder were mainly minor entrepreneurs in the non-agricultural sector. The proletariat accounted for 35 per cent of total population but only 18 per cent of aggregate income, whereas the bourgeoisie with 5 per cent of the population received 26 per cent of aggregate income. The distribution of income among the various groups of the non-agricultural population was more unequal than among the groups of the agricultural population. Estimates are preesented of the distribution of income by various types and sources, for agricultural and non-agricultural population, together with income per capita, average earnings per employed worker, labor productivity, and capital intensity, the last by industrial branches as well as social classes.     

On the Evolution of Overconfidence and Entrepreneurs

This paper explains why seemingly irrational overconfident behavior can persist. Information aggregation is poor in groups in which most individuals herd. By ignoring the herd, the actions of overconfident individuals ("entrepreneurs") convey their private information. However, entrepreneurs make mistakes and thus die more frequently. The socially optimal proportion of entrepreneurs trades off the positive information externality against high attrition rates of entrepreneurs, and depends on the size of the group, on the degree of overconfidence, and on the accuracy of individuals' private information. The stationary distribution trades off the fitness of the group against the fitness of overconfident individuals.     

How behavioural science can improve financial advice services

Evidence from the behavioural sciences, notably economics and psychology, has profoundly changed the way policymakers and practitioners view expert advice to consumers. In this article, we take stock of the behavioural science evidence on financial advice and explore its implications for the profession. We organise the evidence in a comprehensive theoretical framework that also serves a practical purpose: the design of behaviour change interventions. We suggest various ways in which financial advisers can use the insights from behavioural science to improve the take-up and effectiveness of their advice. Finally, we discuss ethical and practical considerations for the financial advisor wishing to put behavioural science knowledge to use.     

The Informativeness of Relative Performance Information and Its Effect on Effort Allocation in a Multitask Environment

Prior research documents that providing relative performance information (RPI) motivates employees to increase effort; however, a potential downside of RPI is that it also motivates employees to distort their effort allocations between tasks such that it can be detrimental to overall firm performance. This study investigates via an experiment how the informativeness of RPI affects employees' effort allocations and performance in a multitask environment. We investigate the informativeness of two RPI design choices that are observed in practice: detail level and temporal aggregation. Regarding detail level, firms may provide each employee's performance ranking on tasks, which is less informative than providing the actual performance score of each employee. Regarding temporal aggregation, firms may provide RPI that is reset each period, which is less informative than RPI that is based on cumulative performance. We find RPI detail level and temporal aggregation interact to influence effort distortion. Specifically, we find that, compared to reset RPI, cumulative RPI leads to greater distortion of effort away from firm‐preferred allocations and that this effect is magnified when RPI provides actual performance scores rather than performance rankings. Finally, high levels of effort distortion hurt overall performance, thereby demonstrating the potentially detrimental effect of effort distortion on performance. Results of our study enhance our understanding of how firms can use their control over the design of RPI to enhance its usefulness in directing employees' effort in multitask environments by highlighting the role that informativeness of information can have on employee behavior.     

One index fits none: the conundrum of euro area inflation-linked bonds

Recent empirical research has questioned the added value of inflation-linked bonds (ILBs) in a diversified portfolio, especially in the euro area. This paper relates this finding to the choice of price index. Euro area issuers of ILBs can choose between linking to a euro area or a national price index. We theoretically show that bonds linked to euro area inflation are less useful for diversification purposes than nationally ILBs. We also show that bonds linked to national price indices are imperfect hedges for national inflation. The latter finding is counterintuitive and arises because of monetary union. Our findings suggest that euro area governments may better service international investors with ILBs linked to their national price indices.     

Classroom Game on the Theory of Rent Seeking: Some Practical Experience

On the basis of our practical experience in applying the classroom game on rent seeking proposed by Goeree and Holt, we suggest two setup modifications and one extension to the original game. The modifications are intended to increase the teaching value of the classroom game by enlarging the choice space of the teams and further clarifying the welfare consequences of rent seeking. The extension is introduced to show that teams' high risk preference does not result from a misperception of the decision-making problem. Instead, this preference is argued to be the consequence of the rivalrous nature of the game.     

A Regional Analysis of German Money Demand Around Reunification with Implications for EMU

This paper employs regional data to analyze German money demand before and after reunification. The data show that a cointegrating relationship between real per capita deposits, real per capita income and the short-term interest rate can be found in the Western states, suggesting that reunification has not destabilized monetary relationships within West-Germany. In the Eastern states, the large monetary shock following reunification precludes finding a co-integrating relationship, although in the second half of the 1990s East-German velocity growth seems to have converged to the West-German pattern. The behavior of regional monetary aggregates inside Germany also offers a preview of how in the future monetary aggregates may behave inside Europe's monetary union.