Endogenous Transport Coefficients: Implications for Improving Water Quality from Multi-Contaminants in an Agricultural Watershed

The effectiveness of imperfect pollution control instruments is examined for a diffuse source, multi-contaminant problem in which the transport coefficients for sediment-bound residuals are endogenous. Similar evaluations fix the percentage of sediment deposited and optimize either for a single firm managing the whole watershed or on a firm by firm basis. This study shows that ignoring the dependence of the transport coefficients on intervening land uses creates a positive externality. The filtering potential of activities conducted by firms close to the receptor permits firms further away to undertake more profitable but erosive practices. Optimizing management choices, and consequently endogenizing the transport coefficients, for all firms simultaneously removes the externality. An empirical application combines hydrological simulation models with an economic optimization model for nutrient pollution of surface and ground water within an agricultural watershed. Although firms are homogeneous in abatement costs, differences in spatial location leave uniform instruments unable to achieve the water quality goal efficiently. An ambient tax/subsidy scheme can achieve the water quality goal efficiently but the informational requirements will be excessive in most situations where the transport mechanisms for residuals are dependent upon the practices of independent decision making units.     

Estimating panel data models in the presence of endogeneity and selection

We consider estimation of panel data models with sample selection when the equation of interest contains endogenous explanatory variables as well as unobserved heterogeneity. Assuming that appropriate instruments are available, we propose several tests for selection bias and two estimation procedures that correct for selection in the presence of endogenous regressors. The tests are based on the fixed effects two-stage least squares estimator, thereby permitting arbitrary correlation between unobserved heterogeneity and explanatory variables. The first correction procedure is parametric and is valid under the assumption that the errors in the selection equation are normally distributed. The second procedure estimates the model parameters semiparametrically using series estimators. In the proposed testing and correction procedures, the error terms may be heterogeneously distributed and serially dependent in both selection and primary equations. Because these methods allow for a rather flexible structure of the error variance and do not impose any nonstandard assumptions on the conditional distributions of explanatory variables, they provide a useful alternative to the existing approaches presented in the literature.     

Jumping over a low hurdle: personal pension fund performance

This paper provides a comprehensive analysis of the annual and of the long-term performance of personal pension funds relative to their Primary Prospectus Benchmarks (PPBs) and T-bills. The study covers 9659 personal pension funds from across all 30 ABI investment sectors that operated in the UK in the 1980–2009 period. Of these, 4531 pension funds are compared against their PPBs. The performance measured by ordinary excess returns over the UK T-bills and over PPBs, as well as the Sharpe ratio, Sharpe ratio adjusted for skewness and kurtosis, Sortino ratio in relation to the UK T-bills and PPBs, and the Modigliani–Modigliani measure are calculated for arithmetic, geometric and log returns. We find convincing evidence that pension funds lack challenging long-term performance targets. We argue that the existing PPBs are easy to outperform given that funds are allowed to diversify in assets not included in their PPBs. We discuss policy implications of our findings.     

Estimating the speed of adjustment of European banking efficiency under a quadratic loss function

This paper investigates the speed of adjustment of cost efficiency to equilibrium level in the European banking industry. Our analysis provides for the first time insights into the process of convergence across European banking markets as measured by the speed of adjustment of cost efficiency. In particular, we employ a quadratic loss function specification based on forward-looking rational expectations to model the underlying dynamics of efficiency scores in the banking industry of the EU-15 region over the period 1998–2005. Results show that there is considerable variation in the speed of adjustment across banking systems, while over time it appears that continuing efforts to advance financial integration have led to some improvement in the speed of adjustment to the long-run equilibrium.