Policy Discrimination with and without Interpersonal Comparisons of Utility

Can the Pareto criterion guide policymakers who do not know the true model of the economy? If policymakers specify ex ante preferences for agents, then Pareto improvements from a distorted status quo are usually possible, and with more commodities than states, one can implement almost every Pareto optimum. Unlike the standard second welfare theorem, planners cannot dictate allocations: agents must trade. Unfortunately ex ante preferences impose interpersonal comparisons. If policymakers merely aim to maximize some social welfare function then optimal policies form an open set; hence small changes in the environment do not necessitate any policy response. Planners with symmetric information about agents can sometimes intervene without making interpersonal comparisons.     

What is unemployment in Europe? Concepts and measurement in the European community household panel

The purpose in this article is to evaluate the consistency between two measures of unemployment in a cross-country context. We use the European Community Household Panel to identify unemployment at an individual level based as well on the ILO criteria for being classified as unemployed as on the individual respondent reporting to be unemployed. This opens a unique opportunity to compare unemployment measured in two different ways based on a cross European Union panel study covering the years 1994 to 2001. The two main questions addressed in this article are to which extent the two unemployment measures differ and whether transition rates out of unemployment depend on which concept we use. Both questions are answered in the affirmative. The overall conclusion is that it is important, especially in some of the EU countries, to include both measures of unemployment as guidelines and indicators for policy.     

Social status,human capital formation and the long-run effects of money

This study examines the effects of monetary policy in a two-sector cash-in-advance economy of human capital accumulation. Agents concern about their social status represented by the relative physical capital and relative human capital. We find that if the desire for social status depends only on relative physical capital, money is superneutral in the growth-rate sense. However, if the desire for social status depends on relative human capital, the money growth rate will have a positive effect on the long-run economic growth rate. Furthermore, an increase in the desire to pursue human capital will raise the long-run growth rate, but an increase in the desire to pursue physical capital will lower it.     

Component efficient solutions in line-graph games with applications

Recently, applications of cooperative game theory to economic allocation problems have gained popularity. We investigate a class of cooperative games that generalizes some economic applications with a similar structure. These are the so-called line-graph games being cooperative TU-games in which the players are linearly ordered. Examples of situations that can be modeled like this are sequencing situations and water distribution problems. We define four properties with respect to deleting edges that each selects a unique component efficient solution on the class of line-graph games. We interpret these solutions and properties in terms of dividend distributions, and apply them to economic situations. This research has been done while the third author was visiting Tinbergen Institute at the Free University, Amsterdam. The research is part of the Research Programme “Strategic and Cooperative Decision Making” at the Department of Econometrics. Financial support from the Netherlands Organization for Scientific Research (NWO) in the framework of the Russian-Dutch programme for scientific cooperation, is gratefully acknowledged. The third author also appreciates partial financial support from the Russian Leading Scientific Schools Fund (grant 80.2003.6) and Russian Humanitarian Scientific Fund (grant 02-02-00189a). We thank three anonymous referees for their valuable comments.     

Do casinos pay their customers to become risk-averse? Revising the house money effect in a field experiment

The house money effect predicts that individuals show increased risk-seeking behavior in the presence of prior windfall gains. Although the effect’s existence is widely accepted, experimental studies that compare individuals’ risk-taking behavior using house money to individuals’ risk-taking behavior using their own money produce contradictory results. This experimental field study analyzes the gambling behavior of 917 casino customers who face real losses. We find that customers who received free play at the entrance showed not higher but significantly lower levels of risk-taking behavior during their casino visit, expressed through lower average wagers. This study thus provides field evidence against the house money effect. Moreover, as a result of lower levels of risk seeking, endowed customers yield better economic results in the form of smaller own-money losses when leaving the casino.     

Environmental Policy and the International Diffusion of Cleaner Energy Technologies

Technology transfer is an important channel of technological change and sustainable development for countries with less innovative ability than technological leaders. This paper studies whether domestic environmental policies affect the inward technology transfer of cleaner innovation from abroad. We focus specifically on the power sector, for its important role in the decarbonization process, by looking at zero-carbon (renewable) and carbon-saving (efficient fossil) technologies for energy production. Using data on cross-country patent applications, we provide evidence that environmental policy contributes to attracting foreign cleaner technology options to OECD markets but not to non-OECD markets. We show that this is due to the nature of the implemented policy instruments. Market-based approaches positively impact technology transfer to both OECD and non-OECD economies, while non-market based approaches have at best only a weak effect in OECD countries. Domestic environmental policies may provide too weak a signal for foreign innovators in countries off the technological frontier. This calls for a strengthening of policy incentives for technology transfer in light of pressing climate change objectives.     

Poor institutions as a comparative advantage

Classic theories of comparative advantage point to factor productivity and factor abundance as determinants of specialization and trade. Likewise, geography and topography can determine trade patterns. Institutions, however, are increasingly seen as important sources of comparative advantage. A global drug prohibition regime implies that institutional quality matters more than traditional sources in the drug trade. This paper theoretically models trade patterns of illicit goods and confirms the role of institutions empirically with respect to the drug trade. In particular, illicit enterprises gain force in countries where resources are scarce, drug enforcement is uncertain, and institutions are weak in absolute terms and relative to neighboring countries. I propose several policy alternatives that emphasize economic opportunity for the poor and institutional quality that complement drug prohibition.     

Fixed versus flexible election terms: explaining innovation in the timing of Canada’s election cycle

This paper argues that there is an efficiency gain underlying the recent adoption of legislation calling for a fixed 4-year governing term by the federal and most provincial governments in Canada. The efficiency gain arises from foreclosing an externality produced by the Canadian constitutional provision that sets a maximum length for a legislative term (5 years) while allowing the governing party (through the Governor General) to dissolve the House early. Because the opportunistic use of surprise can improve the governing party’s probability of winning, strategic choice can lead to elections being held at times that most disadvantage the incumbent’s rivals. Evidence from Canada is introduced suggesting that federal elections became less predictable through successive reductions in the campaign time given to competitors, thus raising the cost of this externality. The same reasoning suggests that the party most likely to propose this legislative innovation will be the party in opposition rather than in power and/or the new leader of an established party facing loss in the upcoming election. By fulfilling the fixed term even when it could benefit by calling the election early, the party establishes a precedent that raises the political cost to others of cancelling the fixed term legislation.     

Specialisation,localisation, and trade value in the wake of cross-border production sharing. The Central Eastern European Countries' case

We focus on five among the sectors in which most of the CEECs’ trade in middle products with EU-15 is concentrated. Over the second half of the 1990s, we observe remarkable changes in both production and trade specialization as well as a significant relocation of industries within CEECs. Using jointly trade and production data we outline co-movements in the adjustment of specialisation patterns. We also show that the redistribution of activities at the regional level reflects the relocation of industries at the global level. Finally, we try to detect the scope of fragmentation of production characterizing each industry and the ways in which CEECs are moving along the “internationally sliced-up value chain”. (JEL: F10, F14, F15)