Information Acquisition in Financial Markets

Previous work on information and financial markets has focused on a special set of assumptions: agents have exponential utility, and random variables are normally distributed. These assumptions are often necessary to obtain closed-form solutions. We present an example with alternative assumptions, and demonstrate that some of the conclusions from previous literature fail to hold. In particular, we show that in our example, as more agents acquire information, prices do not necessarily become more informative, and agents may have greater incentive to acquire information. Learning can therefore be a strategic complement, allowing for the possibility of multiple equilibria.     

The Financial Resource Curse*

In this paper, we present a model of the financial resource curse (i.e., episodes of abundant access to foreign capital coupled with weak productivity growth). We study a two‐sector (i.e., tradable and non‐tradable) small open economy. The tradable sector is the engine of growth, and productivity growth is increasing with the amount of labor employed by firms in the tradable sector. A period of large capital inflows, triggered by a fall in the interest rate, is associated with a consumption boom. While the increase in tradable consumption is financed through foreign borrowing, the increase in non‐tradable consumption requires a shift of productive resources toward the non‐tradable sector at the expenses of the tradable sector. The result is stagnant productivity growth. We show that capital controls can be welfare‐enhancing and can be used as a second‐best policy tool to mitigate the misallocation of resources during an episode of financial resource curse.     

Cost-effectiveness modeling for neuropathic pain treatments: investigating the relative importance of parameters using an open-source model

Aims: The study objective was to develop an open-source replicate of a cost-effectiveness model developed by National Institute for Health and Care (NICE), in order to explore uncertainties in health economic modeling of novel pharmacological neuropathic pain treatments.

Materials and methods: The NICE model, consisting of a decision tree with branches for discrete levels of pain relief and adverse event (AE) severities, was replicated using R, and used to compare a hypothetical neuropathic pain drug to pregabalin. Model parameters were sourced from NICE’s clinical guidelines and associated with probability distributions to account for underlying uncertainty. A simulation-based scenario analysis was conducted to assess how uncertainty in efficacy and AEs affected the net monetary benefit (NMB) for the hypothetical treatment at a cost-effectiveness threshold of £20,000 per QALY.

Results: Relative to pregabalin, an increase in efficacy was associated with greater NMB than an improvement in tolerability. A greater NMB was observed when efficacy was marginally higher than that of pregabalin, while maintaining the same level of AEs than when efficacy was equivalent to pregabalin, but with a more substantial reduction in AEs. In the latter scenario, the NMB was only positive at a low cost-effectiveness threshold.

Limitations: The replicate model shares the limitations described in the NICE guidelines. There is a lack of support in scientific literature for the assumption that increased efficacy is associated with a greater reduction in tolerability. The replicate model also included a single comparator, unlike the NICE model.

Conclusions: Pain relief is a stronger driver of NMB than tolerability, at a cost-effectiveness threshold of £20,000 per QALY. Health technology assessment decisions which are influenced by NICE’s model may reward efficacy gains, even if they are associated with more severe AEs. This contrasts with recommendations from clinical guidelines for neuropathic pain, which place more equal weighting on improvements in efficacy and tolerability as value drivers.     

Deep Integration and Production Networks: An Empirical Analysis

This paper investigates the two‐way relationship between deep integration and production networks trade. We capture deep integration with a set of indices constructed in terms of policy areas covered in preferential trade agreements. We estimate an augmented gravity equation to investigate the impact of deep integration on production networks trade. The results show that on average, signing deeper agreements increases production networks trade between member countries by almost 12 percentage points. In addition, the impact of deep integration is higher for trade in automobile parts and information and technology products compared with textile products. To analyse whether higher levels of network trade increase the likelihood of signing deeper agreements, we follow the literature on the determinants of preferential trade agreements. The estimation results show that, after taking into account other PTA determinants, a ten percentage increase in the share of production network trade over total trade increases the depth of an agreement by approximately 6 percentage points. In addition, the probability of signing deeper agreements is higher for country pairs involved in North–South production sharing and for countries belonging to the Asia region.     

RISK‐AVERSION,OPTIMAL LEVERAGE AND THE INVESTMENT–UNCERTAINTY RELATION

We develop a partial equilibrium dynamic model in which firms are risk‐averse. We analyse the determinants of the investment–uncertainty relationship by means of numerical techniques. When firms can borrow ‘outside’ resources at the riskless rate, an increase in price volatility depresses investment for realistic parameter values. In our model, portfolio considerations play an important role. When the marginal revenue of capital becomes more uncertain, the risk‐averse firm's owners reduce their ‘short position’ in the risk‐free asset, thus diminishing the firm's debt level. The contraction in leverage reduces the expected returns on investment because the expected marginal revenue product is higher than the user cost of capital. In turn, the reduction in expected yields tends to depress investment.     

Emission permits and the dynamics of clean and dirty firms in an evolutionary competition model

Emission Trading Systems (ETSs) are today regarded as the pillar of market‐based environmental policies in many countries. This paper studies the impact of an ETS on the dynamics of the market made up of two types of firms: clean and dirty. Using an evolutionary context, we study how the share of clean firms evolves at different parameter values, such as increasing values of the permits’ price floor, and show that an ETS can have positive effects on the diffusion of the clean technology. However, numerical simulations show that under specific parameter values the opposite result may emerge with clean firms leaving the market.     

Price Stability in Open Economies

This paper studies the theoretical conditions under which price stability is the optimal policy in a two-country open-economy model with imperfect competition and price stickiness. Special conditions on the levels of country-specific distortionary taxation and the intratemporal and intertemporal elasticities of substitution need to be satisfied. These restrictions apply to both cooperative and non-cooperative settings. Importantly, we show that cooperative and non-cooperative solutions do not coincide despite market completeness and producer currency pricing. We study the conditions under which quadratic approximations of single countries' welfare can be correctly evaluated by relying only on log-linear approximations of the equilibrium conditions.