Regret and Regulation

We analyse the welfare effect of governmental regulation for individuals who consider anticipated regret in their decision-making process. Although governmental policies by directing choice, distort individual decisions in the private market, they can alleviate individuals’ pain associated with the feeling of regret. We analyse this trade-off and provide conditions under which the implied reduction of regret justifies regulation. Furthermore, we demonstrate our findings on tax deduction for non-insured losses, a well-studied social policy in insurance. Last, we consider heterogenous individuals and alternative social welfare functions and show that our results hold in these extended settings.     

Industry concentration,excess returns and innovation in Australia

This paper examines market concentration and stock returns on the Australian Securities Exchange. We find that dominant companies operating in concentrated industries in Australia are able to generate significant risk‐adjusted excess stock returns. Our results for Australian data are opposite to that found by Hou and Robinson (2006) for United States market data. Hou and Robinson reason that United States firms which operate in concentrated industries are insulated from competitive pressures, have lower levels of innovation (Arrow, 1962) and therefore experience lower profitability and stock returns. By contrast, the Australian data show a significant and positive relationship between concentration and innovation expenditure. Therefore, the excess stock returns of dominant companies in Australia are consistent with previous research linking innovation expenditure with excess stock returns. We hypothesize that the apparent contradiction of our results compared with Hou and Robinson (2006) for the United States market is resolved by an examination of the differences in size and competition in United States and Australian industries and the consequent differential ability of dominant companies in the two countries to generate monopoly rents and invest in ‘Schumpeterian’ (Schumpeter, 1942) innovation.     

WHOM YOU CONNECT WITH MATTERS: DIRECTOR NETWORKS AND FIRM LOCATION

We examine whether board members serve as a channel for remotely located firms to access the benefits from business‐dense areas due to economies of agglomeration. We find that geographically remote firms benefit from connections to firms in top metropolitan statistical areas (MSAs) for business density. After controlling for director compensation, we find connections to top MSA firms mitigate the negative effect of increased distance from business‐dense areas. We address concerns of endogeneity by exploring a sample of firms whose directors gain board seats at top MSA firms and find a similar positive impact of connections to top MSA firms.     

The effect of accounting firm mergers on the market for audit services: New Zealand evidence

This article examines the outcomes of accounting firm mergers using data about the frequency of audit switches, the numbers of partners in the respective firms, and perceptions revealed in interviews with partners. Evidence from client switches does not show any evidence that the mergers were followed by cost reductions, or of collusion to force prices up. The effects of the mergers appear to have been elsewhere—the merging firms reduced partner numbers substantially, increasing partner leverage so that individual remaining partners were better off. Data from interviews confirm these findings, and show that the culture of individual firms had a significant effect on determining which group of partners controlled the merged firm.     

Measuring the Cost‐Effectiveness of an R&D Tax Credit for the UK

This paper investigates the economic impact of the government's proposed new UK R&D tax credit. We measure the benefit of the credit by the effect on value added in the short and long runs. This is simulated from existing econometric estimates of the tax‐price elasticity of research and development (R&D) and the effect of R&D on productivity. For the latter, we allow R&D to have an effect on technology transfer (catching up with the technological frontier) as well as innovation (pushing the frontier forward). We then compare the increase in value added to the likely exchequer costs of the programme under a number of scenarios. In the long run, the increase in GDP far outweighs the costs of the tax credit. The short‐run effect is far smaller, with value added only exceeding cost if R&D grows at or below the rate of inflation.     

The impact of governance and transparency on firm investment in Vietnam

A large literature asserts a causal relationship between the quality of economic governance and economic performance. However, attempts to establish such a link at an aggregate level have met with considerable methodological criticism. This paper seeks to overcome this limitation. We match a panel of Vietnamese enterprises from 2006 to 2010 with a unique panel dataset measuring sub‐national economic governance to estimate a relationship between local governance and private investment. We do not find a significant relationship between investment and most traditional forms of governance. However, there is one important exception – transparency, especially the public posting of planning documents, is strongly associated with higher investment across a range of different specifications. Our results have significant implications for policy, given the prevailing theory that changes in the quality of local economic governance will spur improved economic performance.     

TACKLING THE ENDOGENEITY OF FERTILITY IN THE STUDY OF WOMEN'S EMPLOYMENT IN DEVELOPING COUNTRIES: ALTERNATIVE ESTIMATION STRATEGIES USING DATA FROM URBAN BRAZIL

Abstract

Opinions differ about whether family structure, especially fertility, should be considered endogenous in models of behavior in developing countries. Faced with a dearth of good instruments, mainstream researchers often urge working in reduced form and, therefore, losing variables of policy interest or limiting the type of questions they ask to those where good instruments are available. Rather than treating endogeneity as a yes or no characteristic, we suggest instead that researchers consider the likely magnitude of endogeneity bias before moving to reduced form. Facing a situation where endogeneity bias is often presented as a concern but where we expect little endogeneity bias, we tackle endogeneity using multiple econometric techniques not available to the average researcher. We find support for our hypothesis that little bias arises due to the assumption of exogeneity of recent fertility in a model of women's employment.     

Interest-risk sensitive deposit insurance premia: Stable ACH estimates

The parameters of interest rate uncertainty are estimated by maximum likelihood for the period 1952–1982, and used to evaluate bank or thrift deposit insurance as a function of duration mismatching, capital/asset ratio, and the recent history of interest rate forecasting errors. Homoskedasticity is overwhelmingly rejected in favor of adaptive conditional heteroskedasticity (ACH). Even after removing this heteroskedasticity, normality gives much lower likelihood than Paretian stable distributions with characteristic exponent in the range 1.614 to 1.714. The conditional deposit insurance values fluctuate by factors in excess of 300 for some duration gaps over the past three decades.     

Trade adjustment in the WTO system: are more safeguards the answer?

For countries to engage successfully in the international tradingsystem, their industries, firms, and workers must respond continuallyto new conditions of competition. The continuing need to adjustarises both from policy changes approved in multilateral negotiations—e.g.implementation of trade liberalization commitments, preferenceerosion, or adverse terms-of-trade consequences of export subsidyelimination—and from ongoing changes in competitive pressuresinherent in a liberal trading system—e.g. effects on comparativeadvantage of changes in technology or factor supplies. But thepolitical response to a situation calling for adjustment isoften a call for ‘safeguards’—whether as anex ante provision in negotiated agreements or as an ex postmeasure once the agreement has been signed and the reality ofnew conditions takes shape. This paper examines the range ofadjustment problems confronting the current and future internationaltrading system, the economic arguments for intervention to dealwith these problems, the adjustment environment as set out inthe current World Trade Organization (WTO) Agreements, and proposalsfor reform. While the adjustment problems we discuss apply toboth rich and poor WTO member countries, we highlight the issuesof adjustment especially relevant for developing countries.     

Book reviews

Journal of Consumer Policy -