Toward Transparency: New Approaches and Their Application to Financial Markets

The Asian financial crisis in the late 1990s not only highlightedthe welfare consequences of transparency in the financial sectorbut also linked this relatively narrow problem to the broadercontext of transparency in governance. It has been observedthat objections to transparency, often on flimsy pretexts, arecommon even in industrialized countries. This article arguesthat transparency is indispensable to the financial sector anddescribes its desirable characteristics: access, timeliness,relevance, and quality. The authors emphasize the need to weighthe costs and benefits of a more transparent regulatory policy,and they explore the connection between information imperfections,macroeconomic policy, and questions of risk. The article arguesfor developing institutional infrastructure, standards, andaccounting practices that promote transparency, implementingincentives for disclosure and establishing regulations to minimizethe perverse incentives generated by safety net arrangements,such as deposit insurance. Because institutional developmentis gradual, the authors contend that relatively simple regulations,such as limits on credit expansion, may be the most reasonableoption for developing countries. They show that transparencyhas absolute limits because of the lack of adequate enforcementand argue that adequate enforcement may be predicated on broaderreforms in the public sector.      

The roots of inequality: estimating inequality of opportunity from regression trees and forests*

We propose the use of machine learning methods to estimate inequality of opportunity and to illustrate that regression trees and forests represent a substantial improvement over existing approaches: they reduce the risk of ad hoc model selection and trade off upward and downward bias in inequality of opportunity estimates. The advantages of regression trees and forests are illustrated by an empirical application for a cross-section of 31 European countries. We show that arbitrary model selection might lead to significant biases in inequality of opportunity estimates relative to our preferred method. These biases are reflected in both point estimates and country rankings.     

Searching for the sunk cost fallacy

We seek to isolate in the laboratory factors that encourage and discourage the sunk cost fallacy. Subjects play a computer game in which they decide whether to keep digging for treasure on an island or to sink a cost (which will turn out to be either high or low) to move to another island. The research hypothesis is that subjects will stay longer on islands that were more costly to find. Eleven treatment variables are considered, e.g. alternative visual displays, whether the treasure value of an island is shown on arrival or discovered by trial and error, and alternative parameters for sunk costs. The data reveal a surprisingly small sunk cost effect that is generally insensitive to the proposed psychological drivers. Electronic Supplementary Material Supplementary material is available in the online version of this article at . Jel Classification C91, D11     

The optimal portfolio for the two-pillar mandatory pension system: the case of Poland

In the recent decade, there has been observed across the Central and Eastern European states the regulatory trend towards the increase of the non-financial (first) pension pillar size at the expense of the financial (second) pillar. It tends to question the consequences of this shift for the future retirement benefits. Applying the portfolio approach we address this issue by running a series of simulations to find out how to allocate pension contributions between both pillars in an optimal way. Our study contributes to the existing literature as follows. First, we do not perform the assessment of the predetermined regulatory solutions, but we look for an optimal one. Moreover, we allow our optimal rule to be time-varying, if necessary, which would be a true novelty in this research area. Second, we do not base our estimates on historical trends; rather, we apply the long-term economy’s projection to account for the society’s ageing impact, which is a crucially important factor for the solvency of the pension system. Adapting some of the simulation assumptions to fit the Polish case, our results confirm that current regulations underestimate the role of the capital pillar and the optimal allocation between both pillars should be time-varying.     

Foreign aid preferences and perceptions in donor countries

We present original survey data on preferences for foreign aid in 24 donor countries from 2005 to 2008. On publicly-funded foreign aid (Official Development Assistance, or ODA), we find patterns that are consistent with a standard model of democratic policy formation, in which donations are treated as a pure public good. Controlling for perceptions of current ODA, we show that individual preferences for ODA are (i) negatively correlated with relative income within a country-year; and (ii) positively correlated with inequality at the country level. We extend the analysis to explain variation in the gap between desired aid and actual ODA, arguing that lobbying by high-income special interest groups can divert resources away from the median voter’s preferred level of aid. Consistent with this, we observe that ODA is significantly lower where policymakers are more susceptible to lobbying. Finally, we present a novel test of competing “crowding out” hypotheses. Self-reported private aid donations are negatively correlated with actual ODA, and positively correlated with perceived ODA. This finding is consistent with an emerging argument in the literature, whereby ODA crowds out private aid by enabling charities to forego fundraising activities and crowds in private aid through a signaling channel.     

Attitude Sophistication and Effective Teaching in Economics

Little attention has been given to the measurement of changes in attitudes and beliefs resulting from instruction in economics. This deficiency is met by Mann and Fusfeld who relate attitude changes to growth in students' knowledge (cognition) and to characteristics of both students and instructors. The findings from this research suggest a conflict among the goals of instruction. They also imply greater persistence of changes in attitude than of changes in knowledge.     

Coping with Technological Change: The Role of Ability in Making Inequality so Persistent

This study provides an explanation to the evolution of wage inequality over the last 30 years and supports this explanation with evidence. A faster rate of technological progress introduces new unknown elements at the workplace. The need to cope with the unknown accentuates the role of ability and thus increases wage inequality within and between education groups. Inasmuch as education is an irreversible investment project the rise in within group inequality BOOSTS UP the rise of between group inequality. Guided by this theory we turn to the PSID for evidence. Using parents' education to approximate child's ability we show the following set of results: (a) Controlling for education of the child, parents' education contributed much more in the 1980s to his wage growth than in the 1970s. (b) The correlation between the parents' and the child's education increases from the 1970s to the 1980s. (c) The return to college education for an individual with no ability rents did not change—it remains steady at the 23 percent. (d) Facts (a)–(c) CANNOT be attributed to the impact of parent's income. It is parents' education and not parents' income that is more relevant for son's economic outcomes in the 1980s.     

Buyer search and price dispersion: a laboratory study

We study markets with costly buyer search in which sellers simultaneously post prices. Buyers costlessly observe one or (with probability 1−q) two of the posted prices, and can accept one or pay to search again. The experiment varies q, the search cost, and the number of buyers. Equilibrium theory predicts a unified very low (high) price for q=0 (q=1) and predicts specific distributions of dispersed prices for q=1/3 and 2/3. Actual prices conform closely to the predictions in some treatments. Buyers’ reservation prices are biased away from the extremes, however, and sellers’ prices have positive autocorrelation and cross-sectional correlation.