Model selection in random effects models for directed graphs using approximated Bayes factors

With the development of an MCMC algorithm, Bayesian model selection for the p ₂ model for directed graphs has become possible. This paper presents an empirical exploration in using approximate Bayes factors for model selection. For a social network of Dutch secondary school pupils from different ethnic backgrounds it is investigated whether pupils report that they receive more emotional support from within their own ethnic group. Approximated Bayes factors seem to work, but considerable margins of error have to be reckoned with.     

Grades as incentives

This paper examines how grade incentives affect student learning across a variety of courses at two universities, using for identification the discrete rewards offered by the standard A–F letter-grade system. We develop and test five predictions about the provision of study effort and the distribution of numerical course averages in the presence of the thresholds that separate these discrete rewards. Surprisingly, all are rejected in our data. There is no evidence that exam performance is improved for those students that stand to gain the most from additional study.     

The Macroeconomic Consequences of Financing Health Insurance

Employer-financed health insurance systems like those used in the United States distort firms’ labor demand and adversely affect the economy. Since such costs vary with employment rather than hours worked, firms have an incentive to increase output by increasing worker hours rather than employment. Given that the returns to employment exceed the returns to hours worked, this results in lower levels of employment and output. In this paper, we construct a heterogeneous agent general equilibrium model where individuals differ with respect to their productivity and employment opportunities. Calibrating the model to the U.S. economy, we generate steady state results for several alternative models for financing health insurance: one in which health insurance is financed primarily through employer contributions that vary with employment, a second where insurance is funded through a non-distortionary, lump-sum tax, and a third where insurance is funded by a payroll tax. We measure the effects of each of the alternatives on output, employment, hours worked, and wages.     

Did Hayek have a monetary theory of business cycles?

Joseph Schumpeter, a careful reader of Hayek, categorized Hayek??s theory of economic cycles as non-monetary. Almost every other source, including Hayek himself, categorized the theory as monetary. The issue turns on the concept of causality being used. The question of what causality concept to apply to complex phenomena has substantive implications for economic theory. A simple concept of causality, appropriate to the study of some physical phenomena, will mislead when applied to complex phenomena. We provide examples of errors in analysis that follow from the wrong choice of a causal paradigm.     

Are generalized call-spreads efficient?

In order to explain coexistence of a deductible for low values of the loss and an upper limit for high values of the loss in insurance contracts, we consider the exchange of risk between two rank dependent expected utility maximizers. It is shown that if the insurer (insured) takes more into account the lowest outcomes – hence maximal losses – than the insured (insurer), then the optimal contract has an upper limit (includes a deductible for high values of the loss). If furthermore, the insured (insurer) neglects the highest outcomes while the insurer (insured) does not, the optimal contract includes a deductible (full insurance) for low values of the loss.     

Hölder continuity of the policy function approximation in the value function approximation

We show that given a value function approximation V of a strongly concave stochastic dynamic programming problem (SDDP), the associated policy function approximation is Hölder continuous in V.     

Non-addictive habits: optimal consumption-portfolio policies

We formulate a model of preferences with non-addictive habits, where consumption is required to be non-negative at all times, but can fall below a “standard of living” index that aggregates past consumption. We study the consumption-portfolio problem taking account of the non-negativity constraint on consumption, and provide a constructive proof for the existence of an optimal policy on a finite time-horizon [0,T]. We show that the consumption constraint binds up to an endogenous stopping time τ∗∈[0,T], after which it remains slack until T. A decomposition of constrained consumption involving an Asian average-strike capped call-option is demonstrated.     

The information content of the Reserve Bank of Australia's inflation forecasts

In this article, the inflation forecasts produced by the Reserve Bank of Australia (RBA) and that generated by private forecasters, are used to assess whether the Reserve Bank possesses information about inflation that the private sector does not have. The results show that the Reserve Bank inflation forecasts embody useful predictive information about inflation, beyond that contained in private forecasts, over the recent inflation targeting period.     

Hedging effectiveness of fertilizer swaps

The fertilizer swaps market is a potential tool to protect against fertilizer price risk. The swaps evaluated here are cash settled using The Fertilizer Index. Hedge ratios and hedging effectiveness are calculated for urea and DAP diammonium phosphate (DAP)) swaps. Urea and DAP swaps perform poorly as a hedging tool over a one-week horizon. As the hedging horizon increases, the hedging effectiveness of swaps improves. The swaps are more effective in mitigating risk across ocean freight routes than across inland routes. The limited hedging effectiveness is due to high spatial basis risk in fertilizer markets.