The Welfare Effects of Incentive Schemes

This paper computes the change in welfare associated with the introduction of incentives. We calculate by how much the welfare gains of increased output due to incentives outweigh workers' disutility from increased effort. We accomplish this by studying the use of incentives by a firm in the check-clearing industry. Using this firm's production records, we model and estimate the worker's dynamic effort decision problem. We find that the firm's incentive scheme has a large effect on productivity, raising it by 12% over the sample period for the average worker. Using our parameter estimates, we show that the cost of increased effort due to incentives is equal to the dollar value of a 5% rise in productivity. Welfare is measured as the output produced minus the cost of effort; hence, the net increase in the average worker's welfare due to the introduction of the firm's bonus plan is 7%. Under a first-best scheme, we find that the net increase in welfare is 9%.     

Financial Constraints, Competition, and Hedging in Industry Equilibrium

We analyze the hedging decisions of firms, within an equilibrium setting that allows us to examine how a firm's hedging choice depends on the hedging choices of its competitors. Within this equilibrium some firms hedge while others do not, even though all firms are ex ante identical. The fraction of firms that hedge depends on industry characteristics, such as the number of firms in the industry, the elasticity of demand, and the convexity of production costs. Consistent with prior empirical findings, the model predicts that there is more heterogeneity in the decision to hedge in the most competitive industries.     

FOREIGN EXCHANGE INTERVENTIONS UNDER INFLATION TARGETING: THE CZECH EXPERIENCE

This article discusses the role of foreign exchange interventions in the inflation-targeting regime, focusing on the Czech experience since 1998. We find some evidence that the interventions had a statistically significant, but short lived and economically not very important, impact on the koruna's exchange rate and its volatility. We also discuss consistency of the interventions with the inflation-targeting framework. All the Czech intervention episodes are judged to be consistent with the inflation targets and output developments, but for two episodes not fully consistent regarding the mix of monetary conditions. (JEL E42, E44, E52, E58, E65, F31 )     

Sir William Petty,Ireland, and the making of a political economist, 1653–871

This paper offers a reassessment of the origins and derivation of many of Sir William Petty's economic ideas, based on an analysis of his unpublished papers. Petty's archive makes clear what a large part Ireland played in his writings, and it is suggested that this preoccupation is essential to an appreciation of him as an economist. It also demonstrates the point that Petty was not principally a theorist but rather a practical political economist whose schemes for the enrichment of the king's dominions were inspired by the underdevelopment which he experienced at first hand in Ireland.     

Are Bank Holding Companies a Source of Strength to Their Banking Subsidiaries?

I document evidence that a bank affiliated with a multi-bank holding company (MBHC) is significantly safer than either a stand-alone bank or a bank affiliated with a one-bank holding company. Not only does MBHC affiliation reduce the probability of future financial distress, but distressed affiliated banks are also more likely to receive capital injections, recover more quickly, and are less likely to fail over the next year. Moreover, the measured benefits of affiliation are much larger than those that existed before recent reforms of bank holding company regulation, suggesting that much of the observed benefit can be attributed to regulation and not the market.