On optimal unemployment

Some unemployment may be optimal in all states of nature for certain production and utility parameters and firm-provided insurance. For other specifications, uniformly varying hours for all workers is optimal.     

Contingent valuation: A new perspective

After several decades of academic research on the contingent valuation (CV) method a consistent behavioral explanation of ‘hypothetical bias’ is still lacking. Based on evidence from economics, economic psychology and the political sciences, I propose an explanation that is based on two simple working hypotheses about respondent behavior in contingent valuation surveys. The first hypothesis is that survey respondents are unable to form consistent preferences about unfamiliar goods unless the choice context offers reliable, informative cues which can be rationally exploited in simplified heuristics. The second hypothesis is that the probability and impact of strategic responses in dichotomous-choice questions about public goods depends on the extent to which the presented hypothetical costs differ from the actual costs. The literature on hypothetical bias is revisited in the light of these behavioral hypotheses. I find that the hypotheses are generally supported by the empirical data. Moreover, the hypotheses are able to explain several important empirical phenomena that previous research has not been able to explain. In particular, they solve the puzzle that pre-election polls, but not CV surveys, are able to predict actual referendum outcomes, and they explain why income effects on willingness to pay are lower in CV responses than in actual votes. If confirmed by further studies, the hypotheses will have important implications for future research and practice. First, the hypothetical costs presented in the dichotomous-choice question should to be close enough to the actual costs to be credible to all respondents. This can be achieved by specifying the costs as a percentage (rather than absolute) change in taxes. Second, the respondents should be given the option to answer based on information about the positions of large parties and interest groups with known political orientation rather than based on the raw policy information. Theory and evidence suggest that this new survey paradigm largely eliminates the fundamental problems of the conventional stated preference methods.     

Die ökonomischen Grundbegriffe

Ohne Zusammenfassung     

The value of commitment in contests and tournaments when observation is costly

We study the value of commitment in sequential contests when the follower faces small costs to observe the leader's effort. We show that the value of commitment vanishes entirely in this class of games. By contrast, in sequential tournaments—games where, at a cost, the follower can observe the effectiveness of the leader's effort—the value of commitment is preserved completely provided that the observation costs are sufficiently small.     

ESG in credit ratings and the impact on financial markets

This study examines environment, social, governance (ESG) consideration in rating reports published by credit rating agencies. 3,719 Moody's credit rating reports between 2004 and 2015 are examined and the ESG consideration is analyzed using a latent dirichlet allocation (LDA) approach. We further analyze the stock returns and credit default swap (CDS) spread changes to check whether ESG consideration has an effect on the capital market reactions. We find a small but present consideration of ESG in rating decisions. Within ESG, corporate governance plays the most important role. Moreover, the results reveal that ESG consideration is a significant determinant in the stock return and CDS spread around the rating announcement. We find that all ESG criteria are important for equity and debt investors.     

Is Director Industry Experience Valuable?

We investigate whether investor reactions to the announcement of a new outside director appointment significantly depend upon the director's experience in the appointing firm's industry. Our sample includes 688 outside director appointments to boards of S&P 500 companies from 2005 to 2010. We find significantly higher announcement returns upon appointments of experienced versus inexperienced directors. To alleviate endogeneity concerns, we use the deaths of 200 directors holding 280 outside directorships as an identification strategy and find significantly more negative announcement returns associated with the deaths of experienced versus inexperienced directors. However, while our results are robust to accounting for time‐fixed unobservable director and firm characteristics, we still cannot completely rule out endogenous firm‐director matching driving our results.     

Employment,entrepreneurship and 1992: Microeconomic policy and European problems

Policy conclusions This essay has covered several areas which are not usually regarded as closely interrelated. Policy conclusions have been discussed briefly at various points, and will now be developed more fully in this final section. As evidence for the interrelatedness of such disparate fields as corporate finance and employment policy, we start from the observation that many large firms are relatively inefficient, particularly at product innovation and flexible organization and employment policies, in part because top managerial compensation depends mainly on size. This creates an incentive for excessive growth and empire building, rather than payment to shareholders of the free cash flow which cannot be profitably invested internally. More appropriate incentives for top management would increase dividend payments, and hence the flow of funds into the capital market available for financing new start-ups and small firms as venture capital. Even in the U.S. the cost of obtaining external capital often constrains small firms to invest only their internal cash flow (Fazzari et al., 1988).Increased entry of new firms would also be encouraged by labour market flexibility and deregulation, as well as reduction of excessive state subsidies and other support for large existing corporations. Enlargement of the small firm sector, in turn, would enhance competition, increase the overall rate of return on capital, and above all expand employment, following experience in the U.S. An exclusive focus of employment policy on aggregate demand or on wages and the labour market will thus miss important avenues through which welfare, competitivity and employment can all be influenced simultaneously without additional public expenditure (FitzRoy, 1989).The integrated view espoused here is also important in assessing the consequences of removing direct barriers to trade within the EC by 1992. Much official thought assumes that competitiveness and efficiency will automatically be increased by these developments, with consequent employment gains to follow. However, as usual in economics, there are countervailing tendencies which deserve emphasis (Kay, 1989). In particular, liberalization of capital markets without improvement of the incentives provided to top management of large corporations is likely to generate a substantial increase of takeover activity. The experience in the U.S. in recent years summarized above casts doubt on the efficiency-enhancing effects of unrestricted takeovers. Pursuit of speculative capital gains, insider trading, which is scarcely sanctioned in many contexts in Europe, and excessive growth by the manager of free cash flows are likely results. The LBO operations which are most likely to increase efficiency are inhibited in Europe by the risk-aversion of senior managers. Top-heavy conglomerates, ultimately increased market power, and negative effects on employment, and consumer welfare are by no means implausible unless policy makers abandon their cherished but unrealistic faith in economies of scale, and institute a throughoing reversal of current policy towards large firms, preferably coupled with support for venture capital for new start-ups and small firms.Tax policy is a traditional method for achieving specific allocative goals, but one which is currently providing perverse rather than positive incentives for employment growth. The rapid increase of non-wage labour costs in the form of payroll and other related taxes, largely to fund a pay-as-you-go system of social security benefits, represents a tax on employment which accelerates the substitution of labour by capital equipment. The major obstacle to replacing these perverse taxes by less distorting consumption or value-added taxes (VAT) is the distributive consequence of such change. Similar arguments are advanced against abolition of the double taxation of dividends, which encourages wasteful investment by large corporations, and against introduction of urgently needed environmental taxes on energy use and toxic emissions. A simplified negative income tax or support for low income recipients would in fact remove the hardship from the redistributive consequences of tax reform, but the political obstacles seem to be currently insurmountable. At the very least, however, these problems deserve much more intensive discussion and wider recognition than they have hitherto received.A major extension of adult retraining schemes following the example of Sweden seems to be the policy measure with the highest chances of realization, in part because the direct costs in the short run are relatively small, and also involve job creation. Removal of tax penalties for part-time work should also be feasible without substantial distributive effects, and would represent a first step towards general flexibility of working according to individual preferences. Clearly the state sector, still a major employer, could usefully lead the way instead of generally lagging behind the private sector. Overcoming ideological and sectarian opposition by organized labour leaders offers a challenge to public authorities and educational channels.A move to more flexible, decentralized wage bargaining and deregulation of the more archaic institutions of labour markets to facilitate entry by the self-employed and new firms should arguably be the ultimate goal for policy towards noninflationary full employment. While benefits from centralized or corporatist bargaining structures are sometimes claimed, the importance of new firm entry for employment and competition would appear to shift the weight of the evidence in favour of decentralization. However the political obstacles in most European countries are formidable, and promise only glacially slow progress.In view of evidence for failure of the capital market for small business in the U.S. noted above, a case could be made for state support and extension of the much less developed European venture capital market. Existing state grants and other systems, designed to encourage new investment and employment, are usually too cumbersome and bureaucratic. The paperwork involved often represents a major deterrent for small enterprises or new start-ups, and the time lags involved are particularly damaging to high-tech prospects where new ideas can quickly become obsolescent. It is quite conceivable that state funded venture capital suppliers, efficiently organized as independent local units, could develop into profitable going concerns able to repay their loan capital in the long run. To maximize the employment impact it is important to go beyond high tech, and offer funds in any promising service or manufacturing area, according to the available expertise of specialized personnel and institutions. A precondition for success is that staff should be profit sharing professionals rather than salaried civil servants. Similarly, employees should be encouraged to accept shares in future profits rather than initially high wages, to reduce the liquidity constraints on new businesses.It has been argued here that employment and industrial policy are closely interrelated, and should thus be coordinated in the light of recent research in these fields. This requires both academics and policy makers to cross conventional boundaries and take a broader view of the economy than is customary under the specialization that severely restricts much of the relevant debate. Current piecemeal policies, even with the help of the longest postwar boom, have hardly dented the problem of long run unemployment to date, and are unlikely to do so after 1992 without fundamental reorientation.     

MAKING CARBON TAXATION A GENERATIONAL WIN WIN

Carbon taxation is mostly studied in social planner or infinitely lived‐agent models, which obscure carbon taxation's potential to produce a generational win win. This article's large‐scale, dynamic 55‐period, overlapping generations model calculates the carbon tax policy delivering the highest uniform welfare gain to all current and future generations. Our model features coal, oil, and gas, increasing extraction costs, clean energy, technical and demographic change, and Nordhaus' carbon/temperature/damage functions. Assuming high‐end carbon damages, the optimal carbon tax is $70, rising annually at 1.5%. This policy raises all generations' welfare by almost 5%. However, doing so requires major intergenerational redistribution.     

STATED PREFERENCES FOR PUBLIC SERVICES: A CLASSIFICATION AND SURVEY OF APPROACHES

The wider range of stated preference approaches to value public goods has not been systematically reviewed in recent years. The objective of this paper is to provide an overview of this literature and to evaluate the strengths and limitations of alternative approaches. Since the public referendum has served as a ‘blueprint’ for survey design, two key dimensions by which many surveys differ from the public referendum are used for a simple classification of approaches. This yields eleven approaches, including different variants of micro-based demand surveys, referendum surveys, budget allocation surveys and contingent valuation surveys. Their evaluation in terms of the preference information they produce and the assumptions they require suggests there is no single preferred approach. Instead, each approach has its characteristic profile of strengths and limitations which follow from how it strikes the balance between the conflicting goals of measuring entire willingness-to-pay distributions and presenting manageable, credible and incentive compatible questions. Ultimately, judgments about the suitability of alternative approaches for specific objectives should rely on empirical evidence. Progress in the field could greatly benefit from a routine implementation of powerful experimental validity tests in applied work.