Civil war,public goods and the social wealth of nations

This paper establishes and explores the implications of a somewhat surprising empirical finding. Although civil war adversely affects the performance of social indicators in general, poorer countries lose less, in absolute and relative terms, than richer countries. It is argued that the explanation may lie in the extent to which richer countries have better social (and economic) indicators because of more public goods, and adaptation of economic and social mechanisms to the greater abundance of public goods such as physical infrastructure. Civil war destroys public goods, and therefore damages disproportionately the countries most dependent on them. A further implication of this framework is that the post‐conflict rebound in social indicators should be relatively stronger in poorer countries. The data bear out this prediction. Our results should not of course be read as implying that poorer countries need less support to avoid civil war and to cope with its aftermath. Although their losses are less, they start from a lower base; so even small declines severely impact human well‐being. Properly understood, our results highlight the central role that public goods play in underpinning the social (and economic) wealth of nations.     

Informality: Causes,consequences and policy responses

A stylized prediction of the development economics discourse is that informality will disappear with development, and yet in the last 20 years conventional measures of informality, far from declining, have either remained stagnant or have actually increased. This includes countries such as India where economic growth has been at historically high levels. What exactly is informality and what are its magnitudes and trends? What are the causes of informality and why is it not decreasing as predicted by standard theories of development? What are the consequences for inclusive economic growth of a large and increasing informal sector? What are feasible and desirable policy responses to informality? These are the questions that motivate this broad based overview of informality. The questions will be addressed based on recent and ongoing research on India and globally.     

International Capital Mobility and Free Trade Once Again*

Using a Heckscher–Ohlin model, this paper re‐examines Robert Mundell's famous thesis that free trade and unimpeded capital mobility are perfect substitutes. Under very general conditions which, according to many economists, have caused international convergence of factor rewards, we show that in a polluted environment free trade is inferior to free international investment. This happens even though commodity prices and factor rewards are the same with both policies. The practical side of our thesis is that the world will be better off by reducing the volume of trade while removing all barriers to foreign direct investment that at present hamper the service industries.     

On extremes of mixtures of distributions

In this article we study the max domains of attraction of mixtures of distributions belonging to the max domain of attraction of max stable laws.     

An Entrepreneur's Guide to Understanding the Cost of Venture Capital

Entrepreneurs who deal with a venture capital firm (VC) for the first time often find themselves unprepared for the experience. The deal structure language used to describe financing terms, and the methods used to value the investment, are unique to the VC world. The authors have two objectives in preparing this entrepreneur's guide to venture capital finance: First, they explain why VCs require rates of return that are considerably higher—even after adjusting for difference in risk—than the returns required by the shareholders of established companies. Their explanation focuses on differences of opinion between overly optimistic entrepreneurs and less sanguine VCs. Second, the authors discuss the difficulty faced by entrepreneurs when trying to understand the actual cost of VC financing (including the dilution of value that occurs when entrepreneurs fail to meet targets or milestones). The problem can be traced to deal structure terms that typically call for the VC to receive preferential treatment in the event the entrepreneur's scenario does not turn out to be accurate. More specifically, entrepreneurs often grant VCs control rights as well as liquidation rights that, when things go wrong, dramatically increase the effective cost to entrepreneurs of venture financing.     

Productivity growth and welfare in a model of allocative inefficiency

We develop a model of learning-by-doing in human capital formation in the presence of allocative inefficiencies. The inefficiencies are a result of lobbying by firms to establish, or prevent, barriers to the perfectly competitive allocation of factors of production (labor). It is shown that lobbying may lead to a static welfare loss depending upon the elasticity of substitution between goods, and the relative lobbying power of firms. Further, productivity growth, via learning by doing, changes the relative lobbying power over time. This may magnify or diminish the static welfare loss in the long-run depending on the level of initial misallocation. Therefore, differences in initial lobbying power and rate of productivity growth between sectors determine the long-run effects of lobbying.     

The relationship between mixed strategies and strategic groups

This paper identifies a theoretical basis for the existence of strategic groups. We represent the competitive marketplace by means of a game-theoretic model and motivate the existence of markets wherein the only Nash solution may be in mixed strategies. Given deterministic behavior on the part of the firms, we interpret this solution in terms of a strategic groups equilibrium. The major implication of this analysis is that strategic groups can exist even if there is no inherent asymmetry (in terms of skills) between firms.     

Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles

We model consumption and dividend growth rates as containing (1) a small long‐run predictable component, and (2) fluctuating economic uncertainty (consumption volatility). These dynamics, for which we provide empirical support, in conjunction with Epstein and Zin's (1989) preferences, can explain key asset markets phenomena. In our economy, financial markets dislike economic uncertainty and better long‐run growth prospects raise equity prices. The model can justify the equity premium, the risk‐free rate, and the volatility of the market return, risk‐free rate, and the price–dividend ratio. As in the data, dividend yields predict returns and the volatility of returns is time‐varying.     

Male wages and female welfare: private markets, public goods, and intrahousehold inequality

We show how an apparently welfare improving phenomenon likean increase in the wage of the male member of a family can resultin a seemingly paradoxical result where the entire family isworse off. There is male and female specialization in activitiessuch that the female member is involved in a community levelpublic good. A rise in the male wage leads to adjustment ofhousehold time allocation with the male working more in themarket and less on household activities. In turn, the femaleworks more on household activities and less on the communitypublic good, failing to internalize the negative externalityimposed on other members of the community. Under quite generalconditions the implied negative effect can more than offsetthe positive effect of the male wage raise, and the entire familyis worse off. The theoretical results are consistent with empiricalfindings in the literature.     

Strategic groupings as competitive benchmarks for formulating future competitive strategy: A modelling approach

Previous studies on strategic groups have examined issues such as the identification of strategic groups, the relationship between strategic groups structure and industry performance, and the movement of strategic groups over time. In contrast to previous studies, this paper uses the analytical concepts of game theory to explore the question of what strategic groups will exist in the future. These benchmark (future) strategic groups represent long-run strategic positions available within an industry and thus reference points for firms in developing sustainable competitive strategies. The benchmark strategic groups are discussed and comments are offered to illustrate how firms can use the benchmark information to redirect their strategic positions in order to survive and remain competitive in the long run.