Unbalanced Growth and the Sustainability of the Current Account Deficit

In an endogenous growth framework, a two‐country economy is modeled with an integrated product and asset markets. The countries differ with respect to the share of their GDP that is redistributed through the fiscal system, and the country where this share is smaller tends to grow faster. This high‐growth country finances a portion of its investment expenditures by attracting funds from the low‐growth country, whose growth rate is depressed by this outflow. The high‐growth country runs ever‐increasing current account deficits and its negative net international investment position rises without bounds. This notwithstanding, sustainability is guaranteed.     

Lipschitz continuous policy functions for strongly concave optimization problems

We prove that the policy function, obtained by optimizing a discounted infinite sum of stationary return functions, is Lipschitz continuous when the instantaneous function is strongly concave. Moreover, by using the notion of α-concavity, we provide an estimate of the Lipschitz constant which turns out to be a decreasing function of the discount factor.     

A generalization of an inequality on binomial coefficients

A generalization of an inequality on binomial coefficients solved by E. L. Johnson, D. Newman, K. Winston [1] is analyzed and at the worst the problem is reduced into the choice between two alternatives for the solutions. Supported by G.N.A.F.A. of the Consiglio Nazionale delle Ricerche.     

Do the Retired Elderly in Europe Decumulate Their Wealth? The Importance of Bequest Motives,Precautionary Saving,Public Pensions,and Homeownership

We use microdata on a large number of European countries from the Survey of Health, Ageing and Retirement in Europe (SHARE) to examine the wealth accumulation (saving) behavior of the retired elderly in Europe. We find that less than half of the retired elderly in Europe are decumulating their wealth and that the average wealth accumulation rate of the retired elderly in Europe is positive though relatively moderate (6.6 percent over a 3-year period). These findings suggest that the Wealth Decumulation Puzzle (the tendency of the retired elderly to not decumulate their wealth or to decumulate their wealth more slowly than expected) applies in the case of Europe. Moreover, our regression results suggest that bequest motives, generous public pension systems, and the reluctance of retired elderly homeowners to sell or borrow against their owner-occupied housing are the primary explanations for the existence of the Wealth Decumulation Puzzle in Europe.     

An analytic hierarchy process for ranking operating costs of low cost and full service airlines

This paper develops an application of the analytic hierarchy process to rank the operating cost components of full service and low cost airlines. It takes into account the financial balance sheets and answers to a questionnaire submitted to the managers of selected airlines. The results suggest that the analytic hierarchy process can be appropriately used to obtain the ranking of the costs taking into account different views: financial, management and operative. Rental, office equipment and other supplies costs show the highest importance in the cost ranking, both for full services and low cost airlines. The robustness of the results is tested by Monte Carlo analysis.     

Why Do Companies Go Public? An Empirical Analysis

Using a large database of private firms in Italy, we analyze the determinants of initial public offerings (IPOs) by comparing the ex ante and ex post characteristics of IPOs with those of private firms. The likelihood of an IPO is increasing in the company's size and the industry's market-to-book ratio. Companies appear to go public not to finance future investments and growth, but to rebalance their accounts after high investment and growth. IPOs are also followed by lower cost of credit and increased turnover in control.     

WHICH CAPITALISM? LESSONS FORM THE EAST ASIAN CRISIS

As a result of the Asian crisis, relationship-based economic systems are now under attack for corruption and inefficiency. Yet, until recently, they were held up as an alternative (and in some respects superior) form of capitalism to the arm's-length, market-based, Anglo-Saxon systems of the U.S. and the U.K. What went wrong? This paper suggests that relationship-based systems work well when contracts are poorly enforced and capital is scarce. Power relationships substitute for contracts, and can achieve better outcomes than a primitive contractual system. But a relationship-based system suppresses the price system and the signals it provides. As a result, relationship-based systems are likely to misallocate capital when presented with large external capital inflows. Since the external capital comes from arm's length investors who typically have few contractual rights or little power in a relationship system, and since these investors are aware of the potential for misallocation, they rationally choose to maintain control over borrowers by keeping their claims short term. Thus, the contact between the two systems creates a fragile hybrid that, while mutually beneficial to relationship borrowers and arm's length investors in normal times, is excessively prone to shocks. Where do we go from here? The authors suggest that while there may be some short-term benefits for emerging economies from reverting to the pure relationship-based system, in the long run such economies will be held back unless they develop the greater disclosure, contract enforcement, and competition of the arm's-length system. The current Asian crisis may be the most opportune moment for these economies to effect the transition between systems.     

Strategic Price Discrimination in Compulsory Insurance Markets

This paper considers price discrimination when competing firms do not observe a customer’s type but only some other variable correlated to it. This is a typical situation in many insurance markets—such as motor insurance—where it is also often the case that insurance is compulsory. We characterise the equilibria and their welfare properties under various price regimes. We show that discrimination based on immutable characteristics such as gender is a dominant strategy, either when firms offer policies at a fixed price or when they charge according to some consumption variable that is correlated to costs. In the latter case, gender discrimination can be an outcome of strategic interaction alone in situations where it would not be adopted by a monopolist. Strategic price discrimination may also increase cross subsidies between types, contrary to expectations.JEL Classification No.: L13, G22     

Persistence of innovative activities, sectoral patterns of innovation and international technological specialization

In this paper, we focus on the role of persistence and heterogeneity of innovative activities at the level of the firm in determining the patterns of technological change in different industries and countries. We ask: are persistence and heterogeneity associated with higher degrees of concentration in innovative activities, stability in the ranking of innovators, and lower degrees of entry and exit in the population of innovators? Or, do the patterns of innovation depend on other variables like firm size and industrial concentration? Moreover, what are the relationships between the patterns of innovative activities, their determinants, and the technological specialization of countries? We compute indicators of persistence and heterogeneity using the OTAF-SPRU patent database at the firm level for five European countries over the period 1969–1986 for 33 technological classes. Then, we estimate the relationships between our indicators of the sectoral patterns of innovative activities and international technological specialization on the one hand, and our indicators of persistence, heterogeneity and market structure on the other. Results show that persistence and asymmetries are important (and strongly related) phenomena that affect the patterns of innovative activities across countries and sectors, while the role of market structure variables is less clear. Finally, international technological specialization is associated to a competitive core of persistent innovators.