Public pensions and growth

This paper investigates the relationship between the size of an unfunded public pension system and economic growth in an overlapping generation economy, in which altruistic parents finance the education of their children and leave bequests. Unlike the existing literature, we model intergenerational altruism by assuming that children's income during adulthood is an argument of parental utility. Unfunded public pensions can promote growth when families face liquidity constraints preventing them from investing optimally in the education of their children. We consider two alternative ways of financing a public pension system, either by levying social contributions in a lump-sum manner or in proportion to labour income. We find that there is no case for unfunded public pensions in economies where bequests are operative. By contrast, there exists a growth-maximising size of the public pension system in economies where bequests are not operative and individuals are sufficiently patient.     

Construction of a state space for interrelated securities with an application to temporary equilibrium theory

Summary We construct an endogenous state space in an exchange economy with possibly infinite horizon. Every period agents trade securities whose payoffs depend on future dividends and asset prices. We reject the perfect foresight assumption on the ground that agents have not only limited knowledge of other individuals' endowments and preferences, but also limited capacity to compute equilibria. We choose instead absence of arbitrage as the principle which allows agents to determine if a system of future prices is possible. We give an alogrithm to compute the set of nonarbitrage prices every period, with both finite and infinite horizon. We then apply this endogenous structure of uncertainty to an infinite horizon temporary equilibrium model.I would like to thank Professor Donald Brown for his constant help and guidance. I have also greatly benefited from helpful discussions with Professors Jacques Drèze, Bernard Dumas, Mordecai Kurz, Carsten Nielsen, Jan Werner, and Ho-Mou Wu.     

A sequential approach to regional integration: The European Union and Central and Eastern Europe

This paper develops a theory of optimal sequencing of regional integration and applies it to the specific question of Central and Eastern European countries (CEECs) and the EU. We show that the timing of transition and integration has implications for the long-term trade structure of Europe. In this model the interest to integrate the CEECs comes from harmonization of policies to attract industries. Without integration, European countries will try to inefficiently protect their industries. Because of the transfers implied by the CAP and the Structural Policies, the EU delays enlargement until the CEECs have sufficiently converged. CEECs might at this point prefer to stay outside the EU and attract industries by offering them more generous protection than the EU. Such timing may be inefficient ex ante for all countries because it may prevent full European integration in the long run, inducing firms to relocate outside of the EU and governments in the EU and the CEECs to inefficiently protect industry. During the transition, all countries benefit from regional integration among the CEECs.     

Productivity,technical efficiency and technological change in French agriculture during 2002-2015: a Färe-Primont index decomposition using group frontiers and meta-frontier

The objective of the article is to assess productivity change in French agriculture during 2002–2015; namely, total factor productivity (TFP) change and its components – technological change and efficiency change. For this, we use the Färe-Primont index which verifies the multiplicatively completeness property and is also transitive, allowing for multi-temporal and -lateral comparisons. We investigate the extent of heterogeneity within each type of farming sub-sample in terms of TFP change, with the help of the Herfindahl-Hirschman index (HHI). In addition, to compare the technologies among the five types of farming considered, we extend our analysis to the meta-frontier framework. Results indicate that during 2002–2015, all farms experienced TFP progress. The smallest average increase was experienced by the dairy farms and the largest by the field crop farms and the beef farms. The latter had the strongest technological progress but a deterioration in efficiency, while the opposite was found for field crop farms. The analysis of HHI reveals that sheep or goat farms are the most homogenous in terms of the direction of TFP change experienced over the period 2002–2015. The meta-frontier analysis shows that field crop farms’ technology is the most productive of all the types of farming.     

Relative standing and the performance of recently acquired European firms

This study draws on the concepts of relative standing to explain the post-merger performance of recently acquired European firms. We used a 2 × 3 sampling design where we surveyed top managers of British and French firms that were acquired by British, French, and U.S. firms as to their perceptions of cultural compatibility with the buying firms, their sense of loss of autonomy since the merger, and post-merger performance. While we found that the theory adequately explains the post-merger performance of both British and French firms, suggesting that this primarily ‘made-in-the-United States’ organization theory extends beyond the cultural domain of the United States, we also found an aspect of the theory that reflects a possible cultural bias. © 1997 by John Wiley & Sons, Ltd.     

Volatility and growth: Credit constraints and the composition of investment

How does uncertainty and credit constraints affect the cyclical composition of investment and thereby volatility and growth? This paper addresses this question within a model where firms engage in two types of investment: a short-term one; and a long-term one, which contributes more to productivity growth. Because it takes longer to complete, long-term investment has a relatively less cyclical return; but it also has a higher liquidity risk. The first effect ensures that the share of long-term investment to total investment is countercyclical when financial markets are perfect; the second implies that this share may turn procyclical when firms face tight credit constraints. A novel propagation mechanism thus emerges: through its effect on the cyclical composition of investment, tighter credit can lead to both higher volatility and lower mean growth. Evidence from a panel of countries provides support for the model's key predictions.     

Governors' Party Affiliation and Unions

Employing a regression discontinuity (RD) approach on gubernatorial elections in the United States over the last three decades, this paper investigates the causal effects of governors' party affiliation (Democrat versus Republican) on unionization of workers, and unionized workers' working hours and earnings. Surprisingly, we find no significant impact from the party affiliation of governors on union membership and union workers' labor‐market outcomes.     

A Note on Risk Aversion,Prudence and Portfolio Insurance

This paper examines some properties of portfolio insurance that are linked to the risk aversion and the prudence of the investor. We provide explicit conditions to measure portfolio sensitivity to downside risk. We also characterize the degree of portfolio insurance by means of the ratio of absolute prudence to absolute risk aversion.     

Background filtrations and canonical loss processes for top-down models of portfolio credit risk

In single-obligor default risk modeling, using a background filtration in conjunction with a suitable embedding hypothesis (generally known as ℍ-hypothesis or immersion property) has proven a very successful tool to separate the actual default event from the model for the default arrival intensity. In this paper we analyze the conditions under which this approach can be extended to the situation of a portfolio of several obligors, with a particular focus on the so-called top-down approach. We introduce the natural ℍ-hypothesis of this setup (the successive ℍ-hypothesis) and show that it is equivalent to a seemingly weaker one-step ℍ-hypothesis. Furthermore, we provide a canonical construction of a loss process in this setup and provide closed-form solutions for some generic pricing problems. Financial support by the National Centre of Competence in Research “Financial Valuation and Risk Management” (NCCR FINRISK) is gratefully acknowledged. NCCR FINRISK is a research program supported by the Swiss National Science Foundation (SNSF). The authors would like to thank Monique Jeanblanc and two anonymous referees for their helpful comments and suggestions. Parts of this paper were presented at RiskDay 2006, Zurich. All remaining errors are our own. Comments and suggestions are very welcome.     

Education and growth with endogenous debt constraints

When future human capital cannot be alienated, households are allowed to borrow up to the point where it is in their own interest not to default. In such a framework, endogenous borrowing limits arise as the outcome of individual rationality constraint. In a model where education is the engine of growth, we show that endogenous borrowing constraints imply global indeterminacy. Comparing outcomes across the various equilibria we show that the relation between growth and yields is hump-shaped. Maximum growth can arise in an equilibrium with binding borrowing constraints, specially if the elasticity of human capital to education spending is large. Deepening financial markets promotes long-run growth in the case of a poverty trap, but not necessarily otherwise. On the methodological side, our approach stresses the importance of studying borrowing limits in general equilibrium, not only in small open economies. Philippe Michel passed away on July 22, 2004. His death is a great loss for his friends and for the overlapping generations and optimal control community.