The human development index—A new development indicator?

“Development” can be defined and measured in a great variety of ways. The human development index used by the United Nations Development Programme represents an attempt to place the emphasis on human welfare rather than on the progress of the national economy. This index, however, contains a number of conceptual flaws, which are discussed in the following article. The author proposes a modified version of the index to circumvent the problems.     

Do Vietnamese upland farmers benefit from high world market prices for maize?

For rural households in the north of Vietnam, maize cropping is the main source of income. In the face of the world market price increases of the recent past, we analyze the regional marketing chain of this commodity qualitatively and econometrically investigating to what extent smallholder farmers in developing countries are affected by international price movements. Vietnamese maize markets are found to be well integrated. Recent price hikes have fully transmitted along the regional supply chain so that farmers profited. Nevertheless, adverse factors such as increasing input prices have neutralized these benefits resulting in a decline in real income of smallholders.     

Default and Recovery Risk Dependencies in a Simple Credit Risk Model

This paper provides evidence for the relationship between credit quality, recovery rate, and correlation. The paper finds that rating grade, rating shift, and macroeconomic factors provide a highly significant explanation for default risk and recovery risk of US bond issues. The empirical data suggest that default and recovery processes are highly correlated. Therefore, a joint approach is required for estimating time‐varying default probabilities and recovery rates that are conditional on default. This paper develops and applies such a model.     

Has the EU's Single Market Programme Fostered Competition? Testing for a Decrease in Mark‐up Ratios in EU Industries*

We use a panel approach, covering 10 EU Member States over the period 1981–99, for each of three major industry groups (manufacturing, construction and services) and 18 more detailed industries to test whether the EU's Single Market Programme has led to a reduction in firms’ mark‐ups over marginal costs. We address explicitly the uncertainty with respect to the timing of the changeover and allow for a possibly continuous regime shift in a smooth transition analysis. Where regime shifts can be found, the velocity of transition is extremely high, making the linear model a justifiable approximation. We also test for discrete structural breaks in the time window from 1986 to 1996, taking up endogeneity concerns in a generalized method of moments framework. Mark‐up reductions are found for aggregate manufacturing (although it is also suggested that mark‐ups increased in some manufacturing industries in the precompletion period at the end of the 1980s) and also for construction. In contrast, mark‐ups have gone up in most service industries since the early 1990s, which confirms the weak state of the Single Market for services and suggests that anti‐competitive defence strategies have emerged in EU service industries.     

Competitive risk sharing contracts with one-sided commitment

This paper analyzes dynamic equilibrium risk sharing contracts between profit-maximizing intermediaries and a large pool of ex ante identical agents that face idiosyncratic income uncertainty that makes them heterogeneous ex post. In any given period, after having observed her income, the agent can walk away from the contract, while the intermediary cannot, i.e. there is one-sided commitment. We consider the extreme scenario that the agents face no costs to walking away, and can sign up with any competing intermediary without any reputational losses. We demonstrate that not only autarky, but also partial and full insurance can obtain, depending on the relative patience of agents and financial intermediaries. Insurance can be provided because in an equilibrium contract an up-front payment effectively locks in the agent with an intermediary. We then show that our contract economy is equivalent to a consumption-savings economy with one-period Arrow securities and a short-sale constraint, similar to Bulow and Rogoff [1989. Sovereign debt: is to forgive to forget? American Economic Review 79, 43-50]. From this equivalence and our characterization of dynamic contracts it immediately follows that without cost of switching financial intermediaries debt contracts are not sustainable, even though a risk allocation superior to autarky can be achieved.     

Information Pricing: The Evidence From Equity Mutual Funds

The theory of information pricing implies that the benefits from obtaining costly information should be offset by the costs. In the case of mutual funds, this theory suggests that trades by fund managers should take place at prices that compensate their clients for the managers' costs of becoming informed. This paper controls for risk, fund size, and age to assess the relationship of a fund's information costs to its performance. The findings show that stock funds charging the highest expenses generally earn returns insignificantly different from funds charging the lowest expenses. This lends support to the theory of information pricing. The findings are also indicative of an efficient market, given that information is costly.