RISK‐AVERSION,OPTIMAL LEVERAGE AND THE INVESTMENT–UNCERTAINTY RELATION

We develop a partial equilibrium dynamic model in which firms are risk‐averse. We analyse the determinants of the investment–uncertainty relationship by means of numerical techniques. When firms can borrow ‘outside’ resources at the riskless rate, an increase in price volatility depresses investment for realistic parameter values. In our model, portfolio considerations play an important role. When the marginal revenue of capital becomes more uncertain, the risk‐averse firm's owners reduce their ‘short position’ in the risk‐free asset, thus diminishing the firm's debt level. The contraction in leverage reduces the expected returns on investment because the expected marginal revenue product is higher than the user cost of capital. In turn, the reduction in expected yields tends to depress investment.     

Health Systems and Health Reform in Europe

The organisation of health care differs widely across Europe. Access to services, financing schemes, incentives for better care, and administrative efficiency are challenges that are being dealt with in a variety of ways. Are insurance-based systems the best solution for balancing resources and services or are national health funds preferable? Does the introduction of competition fulfil high hopes for better service at lower costs? What are the relative advantages and drawbacks of central and local management of health care?     

Cost-effectiveness modeling for neuropathic pain treatments: investigating the relative importance of parameters using an open-source model

Aims: The study objective was to develop an open-source replicate of a cost-effectiveness model developed by National Institute for Health and Care (NICE), in order to explore uncertainties in health economic modeling of novel pharmacological neuropathic pain treatments.

Materials and methods: The NICE model, consisting of a decision tree with branches for discrete levels of pain relief and adverse event (AE) severities, was replicated using R, and used to compare a hypothetical neuropathic pain drug to pregabalin. Model parameters were sourced from NICE’s clinical guidelines and associated with probability distributions to account for underlying uncertainty. A simulation-based scenario analysis was conducted to assess how uncertainty in efficacy and AEs affected the net monetary benefit (NMB) for the hypothetical treatment at a cost-effectiveness threshold of £20,000 per QALY.

Results: Relative to pregabalin, an increase in efficacy was associated with greater NMB than an improvement in tolerability. A greater NMB was observed when efficacy was marginally higher than that of pregabalin, while maintaining the same level of AEs than when efficacy was equivalent to pregabalin, but with a more substantial reduction in AEs. In the latter scenario, the NMB was only positive at a low cost-effectiveness threshold.

Limitations: The replicate model shares the limitations described in the NICE guidelines. There is a lack of support in scientific literature for the assumption that increased efficacy is associated with a greater reduction in tolerability. The replicate model also included a single comparator, unlike the NICE model.

Conclusions: Pain relief is a stronger driver of NMB than tolerability, at a cost-effectiveness threshold of £20,000 per QALY. Health technology assessment decisions which are influenced by NICE’s model may reward efficacy gains, even if they are associated with more severe AEs. This contrasts with recommendations from clinical guidelines for neuropathic pain, which place more equal weighting on improvements in efficacy and tolerability as value drivers.     

The distribution of technological progress

The size distribution of the domains of US-patented technological knowledge obeys an exponential law, revealing a disproportionable concentration of progress among larger domains. Our analyses suggest that this phenomenon is explained by a combination of two factors. First, domains’ trajectories of growth have inherently different potentials. Second, differences in domains’ potentials are magnified by a mechanism—domains’ self-hybridization—endogenous to the process of knowledge growth. Our results show that in addition to being stable, the observed distribution of technological progress is likely to arise under very general conditions.     

Price Stability in Open Economies

This paper studies the theoretical conditions under which price stability is the optimal policy in a two-country open-economy model with imperfect competition and price stickiness. Special conditions on the levels of country-specific distortionary taxation and the intratemporal and intertemporal elasticities of substitution need to be satisfied. These restrictions apply to both cooperative and non-cooperative settings. Importantly, we show that cooperative and non-cooperative solutions do not coincide despite market completeness and producer currency pricing. We study the conditions under which quadratic approximations of single countries' welfare can be correctly evaluated by relying only on log-linear approximations of the equilibrium conditions.     

Manipulation of profits in Italian publicly-funded healthcare trusts

ABSTRACT

This paper examines earnings management in state-funded Italian healthcare trusts. Italy is unique in requiring trusts to have balanced budgets by law. Small negative and positive deviations from a balanced budget had quite different consequences. The authors found no evidence of accounting manipulation when trusts posted small losses. However, trusts were found to manipulate discretionary accruals, provisions and non-operating expenses to reduce small positive deviations from zero-profit.     

The Financial Resource Curse*

In this paper, we present a model of the financial resource curse (i.e., episodes of abundant access to foreign capital coupled with weak productivity growth). We study a two‐sector (i.e., tradable and non‐tradable) small open economy. The tradable sector is the engine of growth, and productivity growth is increasing with the amount of labor employed by firms in the tradable sector. A period of large capital inflows, triggered by a fall in the interest rate, is associated with a consumption boom. While the increase in tradable consumption is financed through foreign borrowing, the increase in non‐tradable consumption requires a shift of productive resources toward the non‐tradable sector at the expenses of the tradable sector. The result is stagnant productivity growth. We show that capital controls can be welfare‐enhancing and can be used as a second‐best policy tool to mitigate the misallocation of resources during an episode of financial resource curse.     

Common serial correlation and common business cycles: A cautious note

This paper examines the frequency-domain implications of the serial correlation common feature in order to evaluate its merits as an indicator of common business cycles among economic variables. It is shown that the presence of the serial correlation common feature in the first differences of a set of I(1) time series is not informative for the degree and the lead-lag structure of their comovements at the business cycle frequencies. First version received: October 1997/Final version received: December 1998