Tests of functional form in dynamic econometric models: Some empirical experience

Econometric theory has provided several rival tests of functional form specifications in economic relations, but there is little empirical experience in using many of them. This note reports some practical applications, and compares the performance of various tests, in specifying dynamic econometric models.     

Calibration in applied general equilibrium modelling: The case of rationed households

In this paper an adaptation of the general calibration method for applied equilibrium models is proposed which takes into account excess demands or supplies as result of rationing. This adaptation is applied to a multi-level CES-type household. It turns out that the computational burden of this example stays limited as compared with calibration without rationing.     

The allocation of volatile aid and economic growth: Theory and evidence

We analyse, both theoretically and empirically, the growth effects associated with two components of volatile foreign financial assistance: ‘directly productive’ (or ‘tied’) aid and ‘pure’ aid. We find that scenarios in which aid can hurt the recipient's growth rate emerge only in cases where foreign aid is volatile. As a result, we conclude that it is only in conjunction with the presence of aid variability that aid allocation determines whether foreign aid hurts or promotes long-run growth.     

Household Adoption of Water-Efficient Equipment: The Role of Socio-Economic Factors,Environmental Attitudes and Policy

Using survey data of around 10,000 households from 10 OECD countries, we identify the driving factors of household adoption of water-efficient equipment by estimating Probit models of a household’s probability to invest in such equipment. The results indicate that environmental attitudes and ownership status are strong predictors of adoption of water-efficient equipment. In terms of policy, we find that households that were both metered and charged for their water individually had a much higher probability to invest in water-efficient equipment compared to households that paid a flat fee.     

Overlapping operations in material requirements planning

Material requirements planning (MRP) is a planning and information system that has widespread application in discrete-parts manufacturing. The purpose of this article is to introduce ideas that can improve the flow of material through complex manufacturing systems operating under MRP, and that can increase the applicability of MRP within diverse manufacturing environments.MRP models the flow of material by assuming that items flow from work station to work station in the same batches that are used in production. That is, once work starts on a batch of a certain item at a certain work station, the entire batch will be produced before any part of the batch will be transported to the next work station on its routing plan. Clearly, efficiency can be increased if some parallelism can be introduced. The form of parallelism investigated here is overlapping operations.Overlapping operations occurs when the transportation of partial batches to a downstream work station is allowed while work proceeds to complete the batch at the upstream work station. The potential efficiencies to be gained are the following:

• Reduced work-in-process inventory

• Reduced floor space requirements

• Reduced size of transfer vehicles

Additional costs may accrue through additional cost of transportation of partial batches and through additional costs of control.Some MRP software vendors provide the data processing capability for overlapping operations. However, the user is given little or no guidance on overlapping percentages or amounts. It is our intent to provide a simple, robust technique to MRP users who would like to overlap operations and gain some or all of the above efficiencies.An optimal lot-sizing technique is derived by considering a generic two work station segment of a manufacturing system. Under the assumptions of constant demand and identical production rates, a cost function that considers setup costs, inventory holding costs and transportation costs is derived. This cost function is minimized subject to the constraint that the production batch is an integer multiple of the transfer batch. We solve for the optimal production batch, the optimal transfer batch, and the integer number relating them. Solutions are obtained as closed form, easy to-evaluate formulas.By introducing more parallelism, overlapping operations can reduce lead time. However, this will not happen without modification of MRP logic to accommodate such reduced lead time. We derive a formula that shows how a significant lead time compression can easily be obtained and implemented in MRP.We consider an example to illustrate the application of the technique on typical data from the electronics industry. The outcome showed a cost savings of approximately 22.5% over the standard MRP approach.Overlapping operations allows the applicability of MRP to an increasing number of situations that are not modeled faithfully by conventional MRP logic. Three such situations that occur often are the following:

• Limited size of transfer vehicles dictate that several transfers should be planned.

• Lead time requirements prohibit nonoverlapped operations.

Our analysis suggests how to accommodate these difficult practical situations into MRP.Overlapping operations in material requirements planning provides an enhancement that allows wider applicability, shortened lead times, and lower total costs. It may be applied selectively to any two work stations where it is deemed appropriate. Due to the structure of the cost function, it is possible to make the transfer lot-sizing decisions independent of the production lot-sizing decisions. Therefore, significant improvements can be made through overlapping with minimum disruption to the existing MRP system machinery. It is our conviction that overlapping operations is an important concept that can and will impact MRP. We suggest the approach presented here as a systematic way to implement overlapping.     

Market clearing and derivative pricing

Summary. We develop a method of assigning unique prices to derivative securities, including options, in the continuous-time finance model developed in Raimondo (2001). In contrast with the martingale method of valuing options, which cannot distinguish among infinitely many possible option pricing processes for a given underlying securities price process when markets are dynamically incomplete, our option prices are uniquely determined in equilibrium in closed form as a function of the underlying economic data.Received: 14 April 2003, Revised: 7 January 2004, JEL Classification Numbers: G13, D52.This paper is dedicated to Birgit Grodal, whose strength and character we greatly admire. We are very grateful to Darrell Duffie, Steve Evans, Botond Koszegi, Roger Purves, Jacob Sagi, Chris Shannon, Bill Zame and an anonymous refereee for very helpful discussions and comments. The work of both authors was supported by Grant SES-9710424, and Andersons work was supported by Grant SES-0214164, from the National Science Foundation.     

A note on assessing the relation between CEO characteristics and stock performance: Alpha Above Replacement

Many studies examine the relation between stock performance and CEO characteristics. We approach the topic in a different way, using the alphas generated by the Fama‐French three‐factor model as the dependent variable in a CEO characteristic model. We find several traits are significantly related to alpha. CEOs who are younger, own a larger fraction of firm equity and hold a graduate degree provide greater alphas. CEOs who are also the founder of the firm deliver larger alphas. Our results provide useful information for boards assessing the performance of CEOs and considering CEO succession.     

Total factor productivity convergence in German states since reunification: Evidence and explanations

A quarter-century after reunification, labor productivity in the states of eastern Germany continues to lag systematically behind the West. Persistent gaps in total factor productivity (TFP) are the proximate cause; conventional and capital-free measurements confirm a sharp slowdown in TFP growth after 1995. Strikingly, eastern capital intensity, especially in industry, exceeds values in the West, casting doubt on the embodied technology hypothesis. TFP growth is negatively associated with rates of investment expenditures. The stubborn East-West TFP gap is best explained by low concentration of managers, low startup intensity and the distribution of firm size in the East rather than R&D activities.