Investments in education and welfare in a two-sector,random matching economy

We consider a random matching model where heterogeneous agents choose optimally to invest time and real resources in education. Generically, there is a steady state equilibrium where some agents, but not all of them, invest. Regular steady state equilibria are constrained inefficient in a strong sense. The Hosios (1990) condition is neither necessary nor sufficient for constrained efficiency. We also provide restrictions on the fundamentals sufficient to guarantee that equilibria are characterized by overeducation (or undereducation), present some results on their comparative statics properties, and discuss the nature of welfare improving policies.     

Technological change and timing reductions in greenhouse gas emissions

In 2007 Nicholas Stern’s Review (in Science 317:201–202, 2007) estimated that global GDP would shrink by 5–20% due to climate change which brought forth calls to reduce emissions by 30–70% in the next 20 years. Stern’s results were contested by Weitzman (in J Econ Lit XLV(3):703–724, 2007) who argued for more modest reductions in the near term, and Nordhaus (in Science 317:201–202, 2007) who questioned the low discount rate and coefficient of relative risk aversion employed in the Stern Review, which caused him to argue that ‘the central question about global-warming policy—how much how, how fast, and how costly—remain open.’ We present a simulation model developed by Färe et al. (in Time substitution with application to data envelopment analysis, 2009) on intertemporal resource allocation that allows us to shine some light on these questions. The empirical specification here constrains the amount of undesirable output a country can produce over a given period by choosing the magnitude and timing of those reductions. We examine the production technology of 28 OECD countries over 1992–2006, in which countries produce real GDP and CO₂ using capital and labor and simulate the magnitude and timing necessary to be in compliance with the Kyoto Protocol. This tells us ‘how fast’ and ‘how much’. Comparison of observed GDP and simulated GDP with the emissions constraints tells us ‘how costly’. We find these costs to be relatively low if countries are allowed reallocate production decision across time, and that emissions should be cut gradually at the beginning of the period, with larger cuts starting in 2000.     

Variety in the innovation process of UK research and development service firms

Research and development service firms (RDSFs) are a particular type of technology-based knowledge-intensive business services (KIBS). RDSFs provide clients with R&D services on a contract basis, and operate as knowledge intermediaries linking research and market. They are innovative in their own right, as well as supporting innovation efforts by their clients; they rely on their own innovation efforts to be competitive and to develop new value propositions for their clients. The present paper explores the innovation process in RDSFs, drawing on semi-structured interviews with founders and senior managers of 32 companies in the United Kingdom. Our findings suggest that RDSFs vary considerably in terms of their primary innovation drivers (i.e. whether they are mainly driven by market demands or by technological opportunities) and the outcomes they pursue (i.e. whether their outputs are mainly services to clients or a mixture of services and products and/or intellectual property). Four major orientations of RDSFs were identified: (i) technology-based innovation exploiters; (ii) science-focused innovation explorers; (iii) client-driven innovation integrators; and (iv) open innovation translators. This variety among firms normally belonging to the same, small subsector of KIBS, suggests the need for caution in generalising about behaviour in terms of such statistical groupings.     

U.S. productivity in agriculture and R&D

This paper examines the impact of R&D on multifactor productivity in the U.S. agricultural sector over the 1910–1990 period. We use the Bennet–Bowley indicator to measure agricultural productivity based on a multiple output-multiple input technology. We demonstrate the relationship between the price dependent Bennet–Bowley indicator and the Luenberger productivity indicator which is constructed from directional distance functions without requiring price information. These performance measures are dual to the profit function which arguably makes them especially useful in the agricultural setting. We employ time-series techniques to investigate the effect of R&D on the pattern of productivity growth. We find that we cannot reject the presence of a cointegrating relationship between the two series and that productivity growth in the U.S. agriculture responds positively to R&D expenditure with a lag of between four and ten periods.

Profit efficiency in the European Union banking industry: a directional technology distance function approach

We employ the directional technology distance function approach and present estimates of profit efficiency in the 25 European Union (EU) member states over the period 1998–2008. This method decomposes profit efficiency into its technical and allocative components. We investigate potential efficiency differences across the old EU region and the new EU member states, across countries and across banks of different size. Our results indicate a significant level of profit inefficiency for the EU region, which is predominantly attributed to allocative inefficiency. Our findings also suggest that banks operating in the old EU region are, on average, more profit efficient than credit institutions in the new EU member states. Overall, we observe considerable variation of efficiency scores across countries and different patterns in efficiency change over time, as well as a negative relationship between bank size and efficiency.     

Asymmetric information and price competition in small business lending

This paper examines the relationship between bank lending rates and their cost of funds in New Zealand. Our results show that on average mortgage rates respond more quickly to changes in the cost of funds than base business lending rates. We also find an asymmetry in the initial (short-run) response of banks to changes in funding costs; in particular, our results show banks adjust mortgage rates downwards faster than upwards. The speed to which lending rates revert back to their equilibrium relationship with funding costs varies across the lending markets. We find the adjustment speed is faster when mortgage rates are below equilibrium, whereas it is slower when business lending rates are above long-run levels in relation to funding costs. Our analysis suggests that banks prefer the plain-vanilla type of lending such as mortgages in comparison to small business lending consistent with asymmetric information associated with business loans.     

The Economic Contributions of Hyman Minsky: varieties of capitalism and institutional reform

The work of Hyman Minsky represents an important link between Post Keynesians and Institutionalists. This essay begins with a brief summary of Minsky's early work, including his well-known financial instability hypothesis and his policy proposals designed to reform the financial system. It then moves on to discuss other proposals that are less well known, and developed after the publication of his Stabilizing an Unstable Economy (1986) book. One of them in all the work of Minsky is his demand that theory be institution-specific. Because there are a variety of possible types of economies, theory must be appropriate to the specific economy under analysis. His analysis concerned an evolving, developed, big-government capitalist economy with complex and long-lived financial arrangements. His policy recommendations were designed to promote a successful, democratic form of capitalism given these financial arrangements. These policies would have to ‘constrain’ instability through creation of institutional ‘ceilings and floors’ while at the same time addressing the behavioral changes induced by reduction of instability. The policies would also have to promote rising living standards, expansion of democratic principles, and enhancement of security for the average household.     

Strategic Trading and Welfare in a Dynamic Market

This paper studies a dynamic model of a financial market with N strategic agents. Agents receive random stock endowments at each period and trade to share dividend risk. Endowments are the only private information in the model. We find that agents trade slowly even when the time between trades goes to 0. In fact, welfare loss due to strategic behaviour increases as the time between trades decreases. In the limit when the time between trades goes to 0, welfare loss is of order 1/ N , and not 1/ N ² as in the static models of the double auctions literature. The model is very tractable and closed-form solutions are obtained in a special case.     

The EU-Turkey Customs Union and Greece: Who is the loser?

The purpose of this paper is to first apply the theory of trade in vertically differentiated products in a Customs Union context and second to find out the effects of the Customs Union between the European Union and Turkey. This is done both at a theoretical and at an empirical level. Based on these assumptions, the theoretical analysis indicates that the benefits of admitting Turkey into the Customs Union will be unevenly spread between Germany and Greece. In particular, Germany will definitely benefit, whereas Greece may suffer losses. In the empirical part of the paper, it is examined whether the predictions emanating from the theoretical analysis find any empirical support. For this purpose, the behavior of Greek and Turkish exports to the European Union is examined using desegregated data. The evidence is supportive of the theoretical predictions.