The Economics of Tenancy Rent Control

We consider a rent control regime where rent increases on, and eviction of, a sitting tenant are forbidden. When apartments become vacant landlords may negotiate new rents. If inflation exists, landlords prefer to rent to short-staying tenants. Since departure-date-contingent contracts are forbidden and landlords cannot tell whether tenants are short-stayers, an adverse selection problem arises, with a Pareto inefficient equilibrium. When tenant types are determined endogenously, multiple equilibria can arise where one equilibrium is Pareto dominated. Abolition of the rent control regime, cannot only shift the equilibrium out of this inferior outcome, but also result in across-the-board lowering of rents.     

Does Economic Analysis Improve the Quality of Foreign Assistance?

The World Bank undertakes an annual expenditure of around $60million on country-specific economic analysis and advice forits member developing countries. What is the impact of thiseconomic and sector work on the quality of World Bank lending?It would be useful to know whether past analytical work hasgenerated measurable economic benefits that would justify itscontinued provision in an environment of increasingly scarceresources. This article sets out an idealized model of decisionmaking inwhich a country manager makes a broad allocation of resourcesbetween lending services and economic and sector work. Giventhat decision, the task manager for each project makes project-specificdecisions with respect to the allocation of resources betweenpreparation and supervision. The analysis indicates that economicand sector work has a significant positive impact on the qualityof World Bank loans. The results provide clear evidence of underinvestmentin economic and sector work. And the analysis shows that resourcescould be switched from preparation and supervision to economicand sector work to the benefit of both the quality of programsand level of disbursements.     

Analysis of Spatial Autocorrelation in House Prices

This article examines spatial autocorrelation in transaction prices of single-family properties in Dallas, Texas. The empirical analysis is conducted using a semilog hedonic house price equation and a spherical autocorrelation function with data for over 5000 transactions of homes sold between 1991:4 and 1993:1. Properties are geocoded and assigned to separate housing submarkets within metropolitan Dallas. Hedonic and spherical autocorrelation parameters are estimated separately for each submarket using estimated generalized least squares (EGLS). We find strong evidence of spatial autocorrelation in transaction prices within submarkets. Results for spatially autocorrelated residuals are mixed. In four of eight submarkets, there is evidence of spatial autocorrelation in the hedonic residuals for single-family properties located within a 1200 meter radius. In two submarkets, the hedonic residuals are spatially autocorrelated throughout the submarket, while the hedonic residuals are spatially uncorrelated in the remaining two submarkets. Finally, we compare OLS and kriged EGLS predicted values for properties sold during 1993:1. Kriged EGLS predictions are more accurate than OLS in six of eight submarkets, while OLS has smaller prediction errors in submarkets where the residuals are spatially uncorrelated and the estimated semivariogram has a large variance.     

Exploitation of Child Labor and the Dynamics of Debt Bondage

This paper is concerned with the institution of debt bondage and child labor employment in the context of an agrarian economy with overlapping generations. The model explores the principal-agent interaction between landlords and tenants, and identifies a set of reasons why households put children to work in response to the need to service outstanding debts, only to realize that child labor work is exploited, and households are made strictly worse off in general equilibrium. Debt bondage in one generation is further shown to leave spillover effects, and contribute to the cycle of debt, bonded child labor and poverty across generations. In this context, the effectiveness of trade sanctions as a policy response to bonded child labor is evaluated. Contrary to expectations, a trade ban can set off a sequence of increasing indebtedness among agrarian households that offset the intended (static) disincentives to employ child labor.     

Consumer Cognition and Pricing in the Nines in Oligopolistic Markets

The paper fully characterizes the Bertrand equilibria of oligopolistic markets where consumers may ignore the last (i.e., the right-most) digits of prices. Consumers, in this model, do not do this reflexively or out of irrationality, but only when they expect the time cost of acquiring full cognizance of the exact price to exceed the expected loss caused by the slightly erroneous amounts that are likely to be purchased or the slightly higher price that may be paid by virtue of ignoring the information concerning the last digits of prices. It is shown that in this setting there will always exist firms that set prices that end in nine though there may also be some (nonstrict) equilibria where a non-nine price ending occurs. It is shown that all firms earn positive profits even in Bertrand equilibria. The model helps us understand in what kinds of markets we are most likely to encounter pricing in the nines.     

Portfolio efficiency and discount factor bounds with conditioning information: An empirical study

Stochastic discount factor bounds provide a useful diagnostic tool for testing asset pricing models by specifying a lower bound on the variance of any admissible discount factor. In this paper, we provide a unified derivation of such bounds in the presence of conditioning information, which allows us to compare their theoretical and empirical properties. We find that, while the location of the ‘unconditionally efficient (UE)’ bounds of [Ferson, W., Siegel, A., 2001. The efficient use of conditioning information in portfolios. Journal of Finance 56 (3), 967–982] is statistically indistinguishable from the (theoretically) optimal bounds of [Gallant, R., Hansen, L., Tauchen, G., 1990. Using conditional moments of asset payoffs to infer the volatility of intertemporal marginal rates of substitution. Journal of Econometrics 45 (1), 141–179] (GHT), the former exhibit better sampling properties. We demonstrate that the difference in sampling variability of the UE and GHT bounds is due to the different behavior of the efficient return weights underlying their construction.     

Is product boycott a good idea for controlling child labor? A theoretical investigation

A popular form of action to curb child labor and uphold international labor standards in general is a ‘product boycott’ by consumers. There are labeling agencies that inform us if, for instance, a carpet or a hand-stitched soccer ball is free of child labor. The presence of a consumer boycott will typically mean that products tainted by child labor will command a lower price on the market than ones certified to be untainted. It is popularly presumed that such consumer activism is desirable. The paper formally investigates this presumption and shows that consumer product boycotts can, in a wide class of situations, have an adverse reaction that causes child labor to rise rather than fall. This happens under weak and plausible assumptions. Hence, there has to be much greater caution in the use of consumer activism, and one has to have much more detailed information about the context where child labor occurs, before using a boycott.     

Foreign direct investment and growth in India: a cointegration approach

The two-way link between foreign direct investment and growth for India is explored using a structural cointegration model with vector error correction mechanism. The existence of two cointegrating vectors between GDP, FDI, the unit labour cost and the share of import duty in tax revenue is found, which captures the long run relationship between FDI and GDP. A parsimonious vector error correction model (VECM) is then estimated to find the short run dynamics of FDI and growth. Our VECM model reveals three important features: (a) GDP in India is not Granger caused by FDI; the causality runs more from GDP to FDI; (b) trade liberalization policy of the Indian government had some positive short run impact on the FDI flow; and (c) FDI tends to lower the unit labour cost suggesting that FDI in India is labour displacing.     

Are target date funds the easy bake option?

Target date funds provide a simple, automated approach to retirement savings in defined contribution plans. The passing of the Pension Protection Act of 2006 has seen an increase in the popularity of these funds in the United States, becoming the default option for many plans. However, recent research findings have challenged the easy bake or ‘set-and-forget’ nature of target date funds. This study explores some of the critical design features of target date funds (which shifts an individual’s asset allocation from growth to defensive assets following a pre-set glidepath) against a simple balanced (or target risk) fund design. Using both time-weighted and dollar-weighted returns, our results suggest that there is more to achieving successful retirement outcomes than the investor simply selecting a proposed year of retirement. Our findings can perhaps be summarized by Einstein’s famous epithet, that in the murky world of retirement product design, everything should be made as simple as possible, but not simpler.